SoCalGas Defends Record, Eyes Expansions

Southern California Gas Co. revealed plans last week to expand several receipt points by 150 MMcf/d despite its own claims that inadequate takeaway capacity at the Southern California border had nothing to do with the record spot price increases there this winter.

Lad Lorenz, SoCalGas' director of capacity and operational planning, said in order to maintain SoCalGas's 15-20% systemwide capacity reserve margin it is looking at some "low-cost expansions" at Wheeler Ridge where it interconnects with Kern River and Mojave, the Needles compressor station where it interconnects with Transwestern Pipeline and at a receipt point for instate production in the San Joaquin Valley. Surprisingly, however, the Topock, AZ, border delivery point for gas coming in on El Paso and Transwestern was not among the points slated for expansion.

Topock by far received the most attention this winter because prices there shot to $69/MMBtu, an all-time high for the spot market. But Lorenz said an expansion there would be too expensive and actually isn't even needed.

"First of all, it's the most expensive point on our system if we were looking at incremental expansion," he said. "Second, is that takeaway capacity [on SoCalGas, PG&E, Southwest Gas and Mojave] at Topock matches the delivery capacity at that point," he said. "A lot of that capacity does go to Northern California into PG&E's territory, but nonetheless there is no mismatch at the Topock delivery point."

There is not a physical mismatch in total capacity there, but there is a mismatch between what the market demands and what SoCalGas is physically able to provide, he conceded. "The situation is that all the shippers want to deliver their gas into the SoCalGas system [at Topock], so you could say from that perspective there is a mismatch," he said.

But Lorenz went on to say that there is no incentive for SoCalGas to expand at Topock despite the strong demand there. Takeaway capacity on its system as a whole is unconstrained, he said, and to expand that point runs contrary to existing state regulations. "We have to look at whether we should expand based on capacity utilization across our entire system not just demand at one particular point. If there are opportunities for parties to move gas to other receipt points that are underutilized," SoCalGas cannot justify an expansion at the constrained receipt point, he said.

If state regulators only would have approved SoCalGas' comprehensive gas restructuring settlement last year, California's gas market would be a much better place today, according to Lorenz. The situation would not have been nearly as dire this winter, he indicated, had the CPUC approved a pathed approach to capacity contracting as proposed in the settlement, which has been stuck in the regulatory process for more than a year. That settlement would have better aligned market demand with intrastate capacity and the LDC's economic interests, he said. As it stands currently, SoCalGas has no incentive to expand at individual receipt points when there is existing excess capacity at other receipt points on its system. The same problem plagued the El Paso Natural Gas system until shippers complained loud enough and FERC finally listened and ordered El Paso to reallocate capacity at Topock starting next month. That reallocation, which gave each shipper a certain amount of delivery point capacity into SoCalGas and the other points at Topock, undoubtedly will help relieve some of the constraints. But, according to Lorenz, the intrastate system needs restructuring as well.

"We're still interested in seeing that settlement move forward because we think it creates the right structure on the system. But it is an unbundling proposal and further restructuring, and the [CPUC] seems reluctant at this stage to move in that direction," said Lorenz.

Another factor that has been overlooked in recent market analysis is the decision by many California market participants not to make use of "fairly substantial" amounts of excess capacity on SoCalGas' system in the early part of 2000. That turned out to be their own undoing, said Lorenz.

"Even though there wasn't demand on the system at that time, the capacity was available. They could have put gas into storage at that point in time. Customers elected not to do that, principally non-core customers --- the electric generators and large industrial users. They elected not to do that at the time because that was what the forward price curve on the Nymex said. It said prices in the future are going to be lower, so there was no economic incentive to store gas early in the year. Obviously, those futures prices didn't turn out to be accurate. Those that ignored them made a great choice. During the winter period, there wasn't much gas in storage to take advantage of."

Lorenz brushed off the recent criticism against SoCalGas for the price increases this winter. FERC staff, EIA and the Interstate Natural Gas Association of America, which represents the interstate pipelines, all have suggested the intrastate capacity situation was one of the factors contributing to the record price run-up (see NGI, March 5). But until recently, Lorenz noted, everyone was focused on the overcapacity situation in California, not the constraints there.

SoCalGas has 3,500 MMcf/d of backbone transmission capacity that has become highly utilized only in the past five or six months, he said. In the last five years, there has been substantial excess capacity to California on the order of 20-25%. From 1994 through 1999, SoCalGas had 875 MMcf/d of excess capacity.

"No one could have foreseen that capacity would be utilized at the high rates that it has been lately." Capacity utilization over the past six months has grown to more than 95%. The sudden increase in utilization resulted from high gas-fired electric generation demand, relatively cold weather and the drought in the Pacific Northwest, which limited the availability of hydroelectric generation, he noted.

"We've had some very unusual conditions here in Southern California. We don't think that it is a permanent situation," he said. Rocco Canonica

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