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LNG, Carbon Policy to Shape U.S. Gas Future

In the long term North America will be the dominant liquefied natural gas (LNG) market, greenhouse gas (GHG) emissions control will increase demand and price pressures on gas, and end-use customers for both electricity and natural gas utilities will face ever-larger rate increases, a panel of U.S. utility executives said last Tuesday at the Goldman Sachs Eighth Annual Power and Utility Conference in New York City.

Gas will increasingly be the backup for emerging renewable energy and energy efficiency programs, said panelists Don Felsinger, CEO of San Diego-based Sempra Energy; Bill Rogers, CFO of Reno, NV-based Sierra Pacific Resources; Jim Hatfield, CFO of Oklahoma-based OGE Energy Corp.; and Gale Klappa, CEO of Wisconsin Energy (WE).

They agreed there is a "very changing natural gas market in the United States," although each of thier companies are approaching the transformation in slightly different ways and in different sectors of the overall domestic energy space.

Greater LNG imports and expanded storage and pipeline infrastructure will make $6.50-7 gas landed here economic for both the supplier and the marketer in the United States in the future, said Felsinger, who thinks the next growth spurt in global LNG will go from around 24 Bcf/d shipped today to about 36 Bcf/d, and the majority of those added supplies will land in North America. Additional storage will allow more spot cargoes to be processed and eventually marketed profitably, he said.

"I don't think any of us who are customers like what we are seeing in [natural gas] price changes," Felsinger said. He noted that when his utility people talk to customers they are concerned about global warming (as much or more than price). A proposed ballot initiative in California that might push the renewable portfolio standard to 50% is getting 60% favorable reaction from voters in the polls taken so far, he said.

"We're actually seeing our customers drive the direction that we're going, so we at Sempra in our next phase of corporate history will be a developer of renewable energy, and we're moving both of our regulated utilities and our unregulated generation businesses to establish programs to build both solar and wind in Mexico and the United States. We see where the market is going in terms of the [state regulator-determined] market referent price, and we know we can make money by putting in solar and wind.

"We're going there and it is all being supported by a fall-back position [more natural gas reliance] as all of us utilities today are entering the unknown, and I don't think any of us today understand exactly how our utility systems will operate as we have 10%, 15%, 20% and maybe even 50% renewables on the grid," Felsinger said. "That will require a lot of spinning reserves to provide higher levels of reliability, and the way we know we can get there is with gas-fired generation."

WE's Klappa said Sempra had a "very different type of customer" than his utility has in the Upper Midwest with more winter-summer peak extremes and a higher concentration of industrial customers. Thirty-eight percent of WE's sales go to industrial load customers and they have a "huge concern" about remaining price-competitive on energy. "They are concerned about being able to keep plants open and jobs here in the United States," Klappa said.

"In truth," said Klappa, "if we don't intelligently attack the issue of carbon, the net result could be massive exporting of production jobs to a much greater extent than we have seen in the last few years to countries that simply will not sign up of any type [global warming] carbon constraints."

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