I have had a casual chat with some of my accounts regarding their opinion of 
the market dynamics affecting the Needles to Topock price differentials.  
Each customer focused more on the supply side dynamics of Topock gas 
supplies, rather than the incremental intra-state transport costs required to 
transport to the PG&E citygate, as the primary driving force for the Needles 
to Topock  price differential.    

Here is a recurring theme I heard from my customers:  The El Paso Merchant 
Service (EPMS) 1.2 BCF contract's Block II capacity (500 MMcf/d of Permian to 
PG&E/Topock capacity,  $.065 transport rate) has a re-callable aspect.  If 
EPMS schedules gas under the transport of Block II capacity to any other 
California delivery point other than PG&E/Topock, then other parties may 
recall the capacity for their own use to PG&E/Topock.  Currently Duke has 
recalled 100 MMcf/d and PG&E Energy Trading has also recalled 100 MMcf/d for 
their use to transport Permian gas to PG&E/Topock. (FYI - EPMC may re-recall 
this capacity, but they have elected not to).  These additional Topock 
supplies coming from Duke and PG&E Energy Trading under Block II capacity may 
be viewed as providing an oversupply of gas to PG&E at Topock.  This gas 
competes head to head with Malin gas prices.  For example, today's Malin 
price is $4.62 while PG&E/Topock price is $4.69.    Today's cash price 
differential between Needles and Topock is $.60, far larger than the 
previously assumed $.28 differential resulting from the intrastate cost 
required to bring Topock gas to the citygate.    

If anyone else had additional market information or opinions regarding these 
market dynamics, let's discuss further at our next staff meeting. CS