SOCAL

Dear Tom,

Enron would be interested in getting together with other trading partners to
discuss listing other index points at the Socal border. I think the market
requires other postings to reflect the fundamental changes in the market with
respect to transportation constraints. The market has clearly seen a
divergence in the summer spreads between PG&E and Socal interconnects. The
marginal generation load in SP-15 and Southern California this summer has
proven that Socal Gas is short delivered gas and is incapable of meeting
daily demand with flowing supplies, and will be incapable of injecting gas
during these months. Because of this, supply being transported from the
Southwest supply basins can only find a home going into PG&E. This places
downward pressure on PG&E Topock gas and upward pressure on Socal Topock
gas. Remember, Socal is an island, not because of the delivered capacity to
the border via EPNG and TW, but because of the limited capacity of Socal's
interconnects. Demand exceeds the supply interconnect capacity.

There is also a divergence between Ehrenberg and Topock because of
liquidity. Topock is a more liquid market because of the upstream transport
contracts on EPNG and downstream buying patterns of certain Socal markets.
The market is more diversified at Topock than Ehrenberg. The overwhelming
demand pressure on Socal gets exposed at Topock. Although Ehrenberg is the
marginal point for gas into Socal, there is more of an imbalance in upstream
capacity (EPNG and TW) to downstream capacity (Socal Topock 545,000/d) at
Socal Topock than at Ehrenberg. The Socal Ehrenberg interconnect has 1.1 bcf
of capacity and is primarily sourced by one market transporter. Ehrenberg
simply gets placed at "market prices" because of varying objectives. One
transporter may place gas to larger buyers to ensure flows, while smaller
buyers on Socal may not approach this transporter for supplies. This
illiquidity has led to a spread existing between Topock and Ehrenberg.

Picture the market, San Juan gas is trading well below the Permian and Waha
basins, which happen to be the marginal supply points for the west. Because
of the of the limited capacity going into Socal Topock, every transporter on
EPNG and TW wants to fill their contracts with San Juan gas first. These
molecules compete for Buyers at a limited delivery interconnect. Likewise,
all Buyers reach out for supply coming through a limited delivery
interconnect (Topock). The San Juan then trys to find an outlet going east on
the SJ east leg of EPNG. This transport leg simply displaces Permian gas
going into Plains North and allows Permian gas to head west to Ehrenberg on
the EPNG south mainline. While the Socal market peaks in the summer, so does
the EOC demand. Permian west (Keystone West meter) cannot satisfy both the
EOC demand and the Socal demand. So for the first time ever, we saw EPNG
Waha West at maximum capacity to source transport contracts on the EPNG south
mainline. This tells the entire story. When demand exceeds all available
historical supply points, and begins to reach to Waha to meet Ehrenberg
demand, you have a paradigm shift. This eliminates any correlation that may
have existed between the supply basins and the market area. When Keystone
West reaches maximum capacity, the rule of market spreads not exceeding the
max rate transport rate then dies a fast death. There is simply no available
capacity at the Keystone West meter to allow a shipper to buy max rate
transport on EPNG and ship it to Socal. If you asked the market what the
maximum interconnect capacity at Keystone West is, 9 out of 10 would not
know. This leads to blaming market participants for wide spreads that are
above historical levels. It is like Al Gore blaming "big oil companies" for
the high prices of gas, when all refineries are at maximum capacity. There
simply isn't the capacity to meet demand. The supply exists, but there isn't
enough refining capacity available to meet demand. Fundamentals rule the
market in all cases.

I would like to propose the following index points for the Southern
California border. The market would be better served with supply being
included in these index points. One, Socal CA production/Socal storage/EPNG
Ehrenberg, Two, Topock TW and EPNG, Three, KRS/Wheeler Ridge. The market
will be experiencing more changes with respect to the Socal restructuring in
the future. We will then address the different interconnects and propose an
index for the Socal citygate as well.

Call me on Monday to discuss the Enron Online download.

Sincerely,

Mike Grigsby
Director of West Trading
713-780-1022