CA Commission Nails High Prices to Capacity Cross

"An inadequate natural gas infrastructure is a major contributor to high prices for natural gas in California," according to a staff draft report of the California Energy Commission (CEC), which pin-pointed a lack of adequate in-state takeaway capacity as the major factor.

The report noted the drought-induced increase in electric generator demand for gas has eliminated the "slack capacity" necessary for competition on California pipes, and urged "a regulatory approach that encourages investment to ensure slack capacity can mitigate or prevent the price spikes experienced this past year in California."

The CEC staff report recommended the state should support expansion of the backbone systems of Pacific Gas and Electric and Southern California Gas "to eliminate bottlenecks and create the slack pipeline capacity that is necessary to promote competition." In addition, the CEC and the California Public Utilities Commission (CPUC) should undertake a joint evaluation of the design criteria for intrastate gas infrastructure, including pipelines and storage facilities, to determine specific projects that would remove bottlenecks in the utilities' gas systems."

The problem is acute in Southern California, the CEC advised, with interstate deliverability at the border 300 MMcf/d in excess of the takeaway capacity of SoCal Gas connections and 525 MMcf/d in excess of the takeaway capacity of PG&E connections.

"Market participants may have manipulated prices even higher than justified by existing infrastructure bottlenecks, but it is the inability to rely on competition between gas suppliers that contributed to higher prices in California." Underlying the infrastructure problems is the new demand for gas-fired power generation. The CEC report said it would perform an integrated assessment of forces shaping the interconnection between electricity and natural gas supply and demand in the entire western region. It also will track actual natural gas demand this summer for electric generators, both in-state and out-of-state, to identify consumption trends and to determine if expected hourly electric generator demand this summer would impact storage injection for winter gas use.

The agency said it needed to perform a number of tracking and analysis projects to promote an adequate gas supply system going forward. For instance, determining the right amount of slack pipeline capacity based on an "average" hydro-power year may not be may not be good enough when bottlenecks can raise costs by billions of dollars. With the increasing reliance of the western United States on natural gas, a risk analysis should be performed as to what standards should be employed in determining adequate capacity.

"The design criteria currently used by SoCal Gas and PG&E were adopted when there was fuel switching capability and much less upstream demand," the CEC report said. The questions that need to be answered include "how often there will be average hydro conditions, summer and winter temperatures, average output from coal and nuclear electric plants and average economic and population growth in the United States."

The report points to the large number of interstate pipeline projects proposed to serve the state, noting that sponsors have likely done the math on all the variables to determine the need for the capacity, and California needs to do the same for its in-state system.

In the area of in-state production, which has been declining, the CEC and CPUC should identify barriers to production, and recommend actions to increase in-state gas supplies.

The state agencies also should work to develop an "efficiency natural gas curtailment policy" that would curtail the least efficient (high heat rate) generators first and the more efficient (low heat rate) generators last. Also, they should investigate rebundling each gas utility's noncore storage function so utilities could use their entire storage inventory to meet peak needs. "In addition, it would allow utilities to allocate rebundled storage costs to all customer classes, which would be offset by less volatile spot market prices."

There should also be an investigation of prospects for additional independent storage facilities throughout the state, "but especially in Southern California where none currently exist."

Regarding the plethora of proposed new interstate projects to serve California, the CEC noted that California is at the end of the pipe, and many of the pipes would be dropping off supplies on their way through surrounding states. "As a result it is difficult to determine whether interstate pipeline capacity additions will increase the overall amount of natural gas supply available to California."

Access the 79-page CEC report at www.energy.ca.gov/reports/2001-05-22_200-01-001.PDF.

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