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New Gas Storage in CA Key Ingredient, CPUC Director Says

While the overall infrastructure in the state is generally in pretty good shape, additional natural gas storage is needed, along with more clarity on the issues of liquefied natural gas (LNG) and risk management, according to Sean Gallagher, the energy division director at the California Public Utilities Commission (CPUC). Gallagher made his remarks Monday during a wide-ranging interview with NGI.

The CPUC last year approved a long-awaited transmission/storage restructuring for Sempra Energy's Southern California Gas Co. infrastructure, along with some expansion at the independently-operated Lodi Storage Facility in Northern California. It also is working through rehearing and court challenges in the LNG and gas restructuring areas.

"The natural gas system is really in pretty good shape right now," Gallagher said. "There is adequate pipeline capacity into California, such that pipeline capacity rates are generally discounted from the tariff rates. We started with record levels in storage this year and that seems to be holding up pretty well.

"On LNG, while the Long Beach project appears to have died of natural causes [with the Long Beach Harbor Commission's decision to drop the project last week], we are still very interested in developing LNG in California or somewhere on the West Coast. So we will be looking at ways to facilitate the development of safe LNG facilities on the West Coast."

Gallagher said the CPUC is pushing the utilities to look further at added natural gas storage because it has "become clear over the last few years that storage is very valuable. It provides a cushion against price shocks and provides the ability to buy low and avoid having to buy too much when prices are high."

Gallagher said the state regulatory commission sees "additional opportunities" in California for more storage, and both Pacific Gas and Electric Co. and SoCalGas have indicated they are looking at possible locations. He said the CPUC is not favoring either utility or independently developed facilities.

In addition, internally at the CPUC, Gallagher said a major natural gas-related issue involved training the regulatory staff to better understand the nuances of energy hedging, which has become more and more of an operating tool for gas and electric utilities in the face of ever-volatile wholesale energy prices.

"We want our staff to better understand all the financial and ratemaking implications of hedging strategies," Gallagher said. "There is a lot more hedging activity among the utilities, and we're trying to be better able to evaluate those proposals intelligently. Risk management has become a very large driving force."

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