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CA Faces Billions of Dollars of Economic Impact from Gas Prices, Study Says

Literally billions of dollars and thousands of job can turn on how high (or low) wholesale natural gas prices go in California, the world's eighth largest economy, said international consulting firm Global Insight, Waltham, MA.

Three scenarios were examined and the consulting firm looked at what sustained higher natural gas prices might mean in each scenario -- high-, medium- and low-priced -- concluding high or medium gas prices would "accelerate the continuing loss of manufacturing jobs, produce higher utility bills, and reduce levels of household income." In contrast, lower gas prices would directly benefit customers in all classes.

Looking out 10 years (2006-16), the three scenarios are examined from the standpoint of the difference in the basis between the California-Arizona border and Henry Hub prices. The same oil price was used in each scenario ($60/barrel by 2016), the consultants said. There is about $30.4 billion less economic growth in the high-priced gas scenario in 2016, compared to the low-priced scenario.

California Energy Commission (CEC), California Public Utilities Commission and utility representatives heard a presentation by Global Insight outlining the various scenarios March 29. While the CEC hosted the meeting, it will take no specific action on the report, which was aimed at the three utilities, a CEC gas analyst said Thursday.

While the study noted that by mid-November last year, the Henry Hub price of natural gas was considerably higher than the California-Arizona border at Topock ($9.21/MMBtu, compared with $7.75/MMBtu at the border), historically there has not been that big a gap. In fact, Global Insight noted that in 1999, Topock (California border) was $2.32/BTU, and Henry Hub was $2.27/MMBtu.

"The annual Topock border price rose during the electricity crisis in 2001 and declined in 2002, but has been rising steadily since, with Global Insight projecting an annual Topock price of $6.79/MMBtu in August last year. By Nov. 15, the Topock price was $7.80/MMBtu, up 24% or $1.90/MMBtu, from prices there a year earlier.

"The price increases have cost California consumers and industries millions of dollars in increased costs to heat their homes, generate electricity and to provide energy for manufacturing. Retail and large industrial customers buying wholesale gas spent about $19.1 billion last year for natural gas," the study said.

Global Insight's report called the Topock hub "a major indicator" of natural gas prices in California because supplies from the Southwest production basins (Permian and San Juan) make up the "marginal supply of gas in the state" and the state is part of the North American natural gas market through its intercontinental pipeline network.

The report looks at the impact on given sectors of the economy, too -- residential households, manufacturing, private- and service-providing, government and electric generation sectors -- with the biggest impact falling on the electric generation industry in California where more than half of the power is generated with gas-fired facilities.

While accelerating the continued loss of manufacturing jobs, higher natural gas prices also would produce high utility bills for both natural gas and electricity retail customers, the report said. The continuing structural changes in the state's, as well as the U.S. economy, will not be impacted by the level of the natural gas prices. Those changes are being driven by broader, global economic fundamentals, Global Insight said.

The full report, which eventually will be posted on the CEC website, is available now on Global Insight's website (www.globalinsight.com/calgas).

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