Gas Supplies, Prices at Center of CA Debates

"It's the natural gas, stupid!" That is a refrain--spoken or implied--that ran throughout California's ongoing electricity debates in both the legislature and among regulators as state officials scrambled last week to pave the way for bringing stability back to the state electricity industry.

That is why tucked into the intense power supply/price discussions are calls for mitigation measures against volatile wholesale gas prices and against too much reliance on electricity produced from that single source. Thus, in addition to severing ties to the spot market, legislators and regulators are expected to promote greater reliance on renewable energy sources.

Underscoring this is a recent report from the Los Angeles County Economic Development Corp. (LAEDC) that stressed the significant role played by natural gas in both the problems and the solutions surrounding the state's electricity woes. The nonprofit economic consulting and development unit for the state's largest county has followed the US Producer Price Index (PPI) to get a clear picture of natural gas' influence, noting the index dropped 19.1% in June, following a 7.1% decline in May, but that came after a long run upward beginning in mid-2000.

"Recent trends seem to back up our conjecture," said George Huang, a Harvard-educated LAEDC economics analyst. "The PPI for natural gas to be delivered to electric utilities began to rise significantly starting in June 2000 and finally reached its peak in January this year. The sudden rise in electricity prices also began in June 2000."

Huang said in a recent LAEDC online economic report that the natural gas index in the PPI jumped by 151.7% over the seven-month period that helped usher in California's power emergency. However, he also noted that by last month the same gas price index was 51.8% below the January level.

"January and February of this year were also the months when we had the spikes in electricity prices," Huang said. "Those who accuse power generators of price gouging should study the relationship between natural gas prices and electricity generation costs before rushing to judgment.

"Although natural gas can be stored, the cost is relatively high and storage is not available in many areas in California. Therefore, power generators end up having to pay high spot market prices for their fuel during times of peak electricity demand when natural gas is also sought by all other gas-fired power plants. That's how we could theoretically end up with a price quote of $3,900/MWh this past January."

Huang's conclusions contrast with those of John Herbert, a former economist for the Energy Information Administration who released a report in May highlighting the disconnect between gas and power prices in the West (see NGI, May 21). In a paper commissioned for the Natural Gas Supply Association and titled "The Relationship Between Natural Gas and Electricity Prices," the Virginia Polytechnic Institute Professor concludes that gas and power prices fluctuate independently of one another with little or no correlation. "No matter how one looks at the price data available for April 2000 to April 2001," said Herbert, "no consistent relationship can be found between changes in the price of natural gas -- either in the producing region or at the California border -- and changes in the price of electricity to the California market."

Huang, however, sees a direct causal relationship and his proposed solution to the energy crisis is for the gas and electric industries to work together to expand gas storage to reduce peak prices for both energy commodities. But he also realistically questioned whether sufficient "economic incentives" are present to spur the industries to make this happen.

In his analysis released last week, Huang said the current decrease in wholesale electricity prices is less tied to federal regional price mitigation or the state's long-term contracts than to the declining natural gas prices.

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