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Gas prices wreck power plans

Filed: 03/11/2001

By CHIP POWER, Californian staff writer e-mail:

Hopes are high that 20 new electricity plants approved by the state will eventually solve the energy crisis in California.

But soaring natural gas prices could put a crimp in those plans. The plants, including four approved for Kern County, would all run on natural gas and if prices stay as high as they've been this year, that could be a problem.

A fifth Kern plant, proposed by Aera Energy and Edison Mission Energy, has an application pending before the California Energy Commission, which has been recommended for approval.

The Aera plant would sell electricity to the California grid so it is poised to be an important component in the state's energy puzzle.

But Gene Voiland, chief executive of Aera Energy, said the gas price structure today threatens the viability of operating the plant profitably. And the situation threatens to greatly increase consumer electricity prices, he said.

"The idea that everyone agrees on is that we need reasonably priced power," said Voiland, whose company is the largest oil producer in the state. "But if you have extremely high gas prices, electricity prices are going to go out of sight."

Natural gas prices comprise about 95 percent of variable costs to run a power plant, experts say.

As a rule of thumb, gas that sells for $10 per million BTU, a standard measurement for natural gas, would require an electrical sales cost of 10 cents a killowatt hour, said Voiland.

The state has been entering into long-term contracts to purchase electricity for less than that. The price of gas was more than $10 this week, Voiland noted.

PGE National Energy Group, which is constructing a $500 million power plant in Kern County, is taking a long-term view of the gas price issue, said spokeswoman Sandra McDonough.

"The expectation is that as (natural gas) supplies increase, prices tend to stabilize as well," said McDonough.

Still, price increases have been dramatic.

Last November, the California Energy Commission reported the cost of natural gas to the state was nearly $15 million more per day than in June 2000, and nearly $30 million per day higher than a year ago.

And in December, the average spot price jumped to $25 per million BTUs in California, and during one week, utilities were routinely paying $60 for spot purchases of gas -- 24 times what they were paying one year ago. The California spot price has recently dropped to $13.33 per million BTUs, reports show, an easing to be sure but still twice the national average.

The most immediate result has already been seen in consumers' home energy bills, some of which have risen by more than 50 percent this winter.

Though the state Legislature recently formed two new committees to look at the issue, the problem may not be fixable through legislation. California only produces about 15 percent of its own natural gas needs keeping it at the mercy of out-of-state suppliers.

Almost 84 percent of California's natural gas supplies are obtained from sources outside the state -- 46 percent from the U.S. Southwest, 28 percent from Canada and 10 percent from the Rocky Mountain area, according to the state Energy Commission.

Because of its cheap price and cleaner burning characteristics, natural gas has become the fuel of choice within California, particularly for electricity generation, and its use is expected to grow in the coming years, according to a commission report.

Increased demand coupled with the cyclical nature of gas prices and other factors could mean this year's prices won't turn out to be an anomaly, said Jane Woodward, an upstream oil and gas expert at Stanford University.

Natural gas prices typically decline in the spring as it winter loosens its grip on the nation. That can be expected this year as well, she said. But the overall tight supply picture could easily repeat itself next year.

"Natural gas isn't something you can just go out and buy," said Woodward.

Bringing new sources of natural gas online and into distribution systems can take years, she said.

And it's not just the commodity cost that is important. The transportation cost is an issue, too, she said.

Transportation, or pipeline capacity, has been cited among a host of other factors for driving up natural gas prices. Other factors include a lack of storage, decreased U.S. gas production and market opportunism.

Some market watchers, however, think opportunism is more to blame than the other factors, particularly with pipeline capacity.

El Paso Natural Gas Co. earlier this year awarded 1,250 million cubic feet per day in pipeline capacity to an affiliate, El Paso Merchant, an award that represents about 40 percent of El Paso's delivery capacity to California.

This could be sticky because it has the potential to allow the company to keep gas prices high, a state agency contends.

The California Public Utilities Commission filed a petition with the Federal Energy Regulatory Commission, asking that the contract be rescinded and that such large blocks of space not be allowed in the future.

The utilities commission charged El Paso Energy with "unreasonable and anti-competitive practices" in awarding the contracts. It contended the arrangement allowed El Paso Merchant Energy to "artificially drive up" prices at the Southern California border.

El Paso Energy Co. issued a statement Feb. 26 denying that it was gaming the system and that in fact it was a vital player in supplying gas for the state.

"El Paso has been one of the largest suppliers of energy to California for more than 50 years," said Norma Dunn, senior vice president of communications.

Sen. Dianne Feinstein said in a statement last week that a federal experiment in February 2000 to suspend a cap on short-term prices for transporting natural gas was also partly to blame.

She declared that the experiment, which was approved on a two-year basis, "dramatically escalated the state's electricity crisis."

The potential for natural gas prices to remain high into the future could wreck political pledges that consumer price increases for electricity will be moderate.

"We don't know yet how these fuel costs will be passed along in what is supposed to be a free market," said Paul Holtberg, an analyst with the Gas Technology Institute in Alexandria, Va..

"But it's naive to assume that the higher costs won't be paid by the users," he added.

Assemblyman Dean Florez, D-Shafter, said natural gas prices have been an "overlooked player" in the energy crisis as the Assembly has been focused on keeping utilities such as Pacific Gas & Electric out of bankruptcy court.

"Since November, power plants have consumed record volumes of natural gas statewide, as their owners churned out electricity to capitalize on a runaway market for scarce megawatts," Florez said.

That increased demand "has helped crank up prices for natural gas, creating a vicious cycle in which the cost of one commodity drives up the price of another."

And the situation could have dire consequences, another lawmaker predicted.

Assemblyman Joe Canciamilla of Martinez, is pushing a bill to increase in-state production, in-state pipeline capacity and in-state natural gas storage. That could involve tax incentives for exploration and expansion of existing pipeline systems.

He warned that if nothing is done on the natural gas situation, severe consequences will follow - business closings, layoffs and a loss of prosperity.

Industry members say they are up to the task of producing more natural gas, with the right incentives.

-- Martin Thompson (, March 11, 2001

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