Facing gas supply cuts, PG&E shops last-minute offers

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Published Wednesday, Feb. 7, 2001, in the San Jose Mercury News

Facing gas supply cuts, PG&E shops last-minute offers CALIFORNIA'S POWER CRISIS


Pacific Gas & Electric Co. scrambled Tuesday to keep natural gas flowing to customers as a federal order requiring suppliers to sell gas to the cash-strapped utility was set to expire at 3 this morning.

Five of PG&E's more than 20 suppliers have agreed to continue selling gas, but at least two already plan to cut off supplies. And it's unclear how many of the others will sign a last-ditch proposal the utility has been shopping around.

The prospect of natural gas shortages represents a potentially drastic turn to California's energy crisis. Since there is no equivalent of rolling blackouts for shutting off gas, running low on supplies could lead to major disruptions for businesses and homeowners.

PG&E is now down to a week's worth of supplies in storage. Normally at this time of year, PG&E would have two months' supply on hand. But it has depleted its gas supplies since it tapped into them after three suppliers stopped delivering natural gas in January.

PG&E customers have already been hit by soaring natural gas prices in California. Those high prices have begun to decline, although they remain significantly higher than the national average.

J. Aron & Co., a gas trading division of the New York investment bank Goldman Sachs, and Western Gas Resources of Denver said they will stop selling to PG&E today, according to PG&E spokeswoman Staci Homrig. The two provide about 10 percent of PG&E's gas.

Portion of supply

The five who have agreed to continue selling gas represent only a portion of the supply the utility needs for its 3.8 million customers, including 100 large industrial companies, small businesses and millions of people who use gas to heat homes and fire up stoves. PG&E doesn't know what portion of its needs the five can supply, Homrig said.

``These five couldn't simply get their hands on enough gas to serve all of our customers,'' she said, adding, ``We're very optimistic with these five, and if we get others to sign on, we can avoid any shortages.''

If it doesn't, PG&E's alternatives for maintaining supplies are grim.

It has asked the California Public Utilities Commission to direct Southern California Gas Co., a gas utility in Los Angeles, to buy gas for PG&E customers. The PUC hasn't made a decision yet, Homrig said. And Homrig said PG&E would also consider asking the governor to take emergency action to buy gas, as he is doing for electricity.

Californians aren't in immediate danger of losing their gas supply. PG&E's week's worth of storage and the five new deals buy it time to negotiate with other suppliers.

PG&E is asking gas suppliers to commit to sell for another 90 days, using PG&E's accounts receivable for gas as collateral. The arrangement is unusual in the utility industry, experts say. PG&E faxed the proposal to the suppliers Friday.

That PG&E is offering its accounts receivable as collateral is a sign of the utility's desperate position, said Daniel Scotto, utility analyst at the investment bank BNP Paribas in New York. A gas shortage ``could be the deciding blow'' for PG&E, he said.

PG&E's gas receivables -- the amount customers owe the company -- total $300 million to $400 million per month during the winter, Homrig said.

Houston-based Enron Power Marketing Inc. said it wouldn't sign the agreement because it was too far-reaching. According to company spokeswoman Karen Denne, the proposal could require Enron to continue supplying PG&E in the event of a bankruptcy. Denne said Enron will continue to sell gas to PG&E under its existing contracts. She wouldn't say when those expire.

Intentions unknown

Several other PG&E gas suppliers said they are mulling over the proposal and wouldn't indicate whether they would continue selling gas to PG&E.

``We're looking at this very closely,'' said Tom Williams, spokesman for Duke Energy North America, a major gas supplier for California. Williams said that its clients -- including PG&E -- already owe it $400 million and it wasn't certain that PG&E's accounts receivable were adequate collateral.

``We're nervous right now,'' Williams said. ``We have a fiduciary duty to our shareholders.''

The consequences of disrupting gas service would be so great that some experts are betting that it won't happen. Homrig said the resulting chaos would be worse than electricity blackouts because PG&E is required to divert gas from large industrial users such as power plants, hospitals and universities before cutting off gas to residential customers.

Frank Wolak, a Stanford economics professor and energy expert, said he'd be surprised if PG&E shut off natural gas except as a dire measure simply because of the enormous cost of relighting all the pilot lights.

``You turn the gas out, and there's going to be some really, really, really upset people,'' Wolak said. ``It's really high cost. My guess is they'll think twice.''

Gas at heart of crisis

The gas problems lurking beneath the very visible electricity shortages in California are key to understanding the energy crisis, said Wolak. A significant portion of California's electricity comes from gas-fired plants. ``If gas in California was cheap, we'd have no electricity problem,'' Wolak said. ``They're all interrelated.''

Although they have been falling in the past month, natural gas prices in California have soared far beyond the norm, Wolak said. Natural gas prices have averaged $2.60 per million British thermal units for the past two years in California, he said. In December, the price jumped as high as $60 per million units in some cases, while prices elsewhere in the country never moved above $10.

Tuesday on the New York Mercantile Exchange, the major benchmark for gas contracts, gas futures closed at $5.74 per million units. Prices in California are double that or more.

Wolak said the market has been thrown out of whack by restraints on PG&E and by what he suspects could possibly be hoarding of gas to boost its price.

``The problem is more that if you're going to let one side of the market do whatever they want and you sort of restrict what the buy side can do, it's only going to penalize consumers.''

Contact Jennifer Bjorhus at jbjorhus@sjmercury.com or (408) 920-5660.


-- Martin Thompson (mthom1927@aol.com), February 07, 2001

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