CA Commission to Vote on Recommending Excess Capacity

As part of an 111-page draft report that the California Energy Commission (CEC's) is scheduled to vote on this Wednesday, the state is urged to address its natural gas infrastructure needs from the standpoint of regional impacts of new infrastructure in surrounding western states and with an objective of creating excess or "slack capacity" for the future. Excess capacity could have saved the state billions of dollars in the premiums paid for wholesale gas supplies last year, according to the draft staff report, which doesn't represent the opinions of the appointed energy commissioners.

The report recommends an overall "risk analysis" of the state's backbone natural gas transmission pipeline system because the system was originally designed when there was more fuel switching capability among large end-users and a lot less "upstream" demand in surrounding states. Ultimately more investment than is currently planned may be needed to fully "de-bottleneck" the state's system, the report states.

While acknowledging, as California is arguing in an ongoing federal regulatory investigation, that California's wholesale gas market was manipulated last year to drive up prices to historic highs, the energy commission staff's draft study, "Natural Gas Infrastructure Issues," concludes the state "will not continue to experience the combination of high gas prices and price volatility this coming winter." It cites ongoing upgrades in the intrastate storage and pipeline system as mitigating factors.

"California border prices should be more in line with the rest of the nation," stated a conclusion of the draft report, which the CEC commissioners can approve, modify or reject. "Additional pipeline expansions should reduce the transportation premiums that California has experienced over the past year.

"Over the next several years, the U.S. and California should see natural gas prices decrease at the wellhead as drilling results bring more natural gas production to the marketplace. The efforts to accelerate this process could save billions of dollars for California consumers."

Wall Street utility analyst Andre Meade, with Commerzbank Securities, disagrees for the longer term, arguing that the milder-than-normal summer weather in most of the country most of the time this summer has "masked the fact that there is no significant change in the gas market fundamentals," which remain tight and prices should stay above historic levels (see related story).

In the report, the CEC staff noted that the state's natural gas system historically has been built and operated to serve winter peaks among mass small (core) residential and business customers, but as recent summer's with heavy reliance on gas-fired power generation have demonstrated, the state system now must be able to handle both winter and summer peaks.

Almost all of the new or re-powered baseload generation in the state is dependent on natural gas, but so are the many new power plants being building in surrounding states that are (or will be) selling into California. The state's gas planning is further complicated by this increase in new gas-fired generation in Nevada and Arizona, for example.

"Natural gas power plants in surrounding states that sell electricity into California theoretically displace natural gas-fired power plants in California," the report notes. "Therefore, the increase in upstream power plant demand may reduce the need for increased pipeline capacity to meet a lower natural gas demand for electric generation within California."

The CEC staff report's recommendation is to develop what it called "slack capacity" on interstate and intrastate pipeline systems, defining it as capacity beyond the normal gas demand that generates "the benefits of competition.

"When there is no slack capacity, customers lose the benefits of competition, and prices increase overall or spike upward," the CEC report states. "California should support cost-justified expansion on the gas utility backbone systems to meet future demand, as well as to provide for slack capacity that mitigates price impacts.

"Slack capacity is needed to meet two needs: (1) first, it is needed in conjunction with storage to ensure sufficient pipeline capacity to meet California natural gas customers' peak day-month-year demand, and (2) second, from the year 2000 experience (when demand was high and capacity was short), lack of competition caused commodity prices to exceed what would be considered normal levels for the circumstances.

"Having 15 to 20 percent of slack capacity last year would have more than been paid for through reduced commodity prices."

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