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CA General Services Delays State's Gas Buying

CA General Services Delays State's Gas Buying

California's natural gas purchasing program for about 120 state operated facilities, totaling more than 14 Bcf, annually has been postponed until June 7 and revised due to increasingly uncertain market conditions, according to the head of the state's buying program in the state General Services Department. Bids in the revised program are due from the state's seven pre-approved bidders by 8:30 a.m. on the 7th. Sempra Energy Trading is the current supplier.

Even with the revisions, California facilities are bracing for fuel bill increases in the range of 50% to 70% for their next fiscal year, 2000-01, according to Marshall Clark, gas buying program director. The normal "saddle" for annual gas buying provided in May and June - after the winter heating load and before heavy summer air conditioning demands - has disappeared this year with gas prices climbing steadily this spring., Clark said.

"We've come to the conclusion that the May-June period when we have traditionally bought our gas is not the best time for us anymore," said Clark, noting that the revised bids will cover the period of July 1 through March 31, 2001, giving the state the late winter period as the time to bid its next gas deals following this year's contracts.

"What we've seen over the past couple of years is a dip in February and March (warm winters, too) and after that the price moves just straight on up. If there was any dip before summer, it has disappeared. I think the market is changing so rapidly that we could be wrong about this next year. There is precious little certainty in the natural gas markets right now. So when there is this much uncertainty the best strategy is a very simple approach and recognition that you're going to have to pay more than you have last year."

California is going to seek bids on the 7th for indexed supply deals with none of the floors and ceilings that have come to be common in its annual fuel contracts. So, the state has simplified what it is asking for, in addition to shortening the terms to nine months. In retrospect, Clark said, if the state had gone ahead with the May 17 plans "it would have been the worst day of the year to go forward with those kind of contract bids. No one would have bid."

"We didn't want to stand in the middle of a train wreck," Clark said Thursday. He said the state's analysis recognizes three scenarios could happen with gas prices in the next year --- they can continue to go up; drop like a rock or "plateau" at a level above where they have risen to at the end of May. California is betting on the plateauing of prices in the $4 price range.

The General Services program is seeking three different bids: one on the Pacific Gas & Electric system in northern California for the bulk of the supplies (11 Bcf); a second one on the Southern California Gas system (4 Bcf); and a relatively minute bit of core aggregation supplies for two state facilities at the 30,000 MMBtu-per-year level.

Illustrative of California's dilemma is the fact that gas prices now are up around $4/Mcf and look to stay on that plateau through at least next March, Clark said. "If you're using natural gas as a fuel for a combustion turbine and you have 40-45% efficiency, $4 gas, still gives you a fuel cost of almost like 4 cents/kW power.

"Both gas and electricity are stepping up to a new plateau, so we have to accept that. A year ago, if your fuel component for electric generation was 3.5 cents, you didn't have a chance out on the market because that would be the total commodity cost (for electricity). At this point if your fuel costs are at 3.5 cents, you can still make money. "

Under its current contract with a ceiling and floor, Clark said, California facilities are paying $2.44 for 680,000 Dth through June 30, compared to the Henry Hub future price for June of $4.18/Mcf. "So, for June I am brilliant, but on the stroke of midnight July 1, I am naked. My customers (the state facility operators for prisons, hospitals, universities, etc.) are going to take one helluva jump (in gas prices)."

Further clouding California's future, according to Clark, is the added complications for buying and transporting natural gas under the pending SoCalGas settlement on its transmission/storage unbundling. There is no encouragement for expanding the state's core aggregation buying, which is authorized to take 10 times the volume it is now taking. Clark is discouraging any additional core buying at this time because the potential savings are practically nonexistent.

In the SoCal settlement "our crude estimates are that it is worth maybe a penny-a-therm in increased margin, but that improvement is coupled with a quantum increase in complexity in moving gas --- both core and noncore," Clark said. "So the added complexity can eat up the penny gain pretty quick. You may lose it just in trying to figure out how to deal with the complexity. The way they are proposing to do gas receipt points and the intrastate pipelines, at least in our eyes, makes it very complex. General Services represents end-use customers. Only the biggest and most sophisticated gas buyers are going to be able to figure the best way to approach this thing."

In a nutshell that is why core buying is not expanding and the state's noncore program has slowed considerably in recent years in its growth (from 20% annually down to the current less than 5% annually). And by Clark's estimates the proposed SoCalGas settlement will worsen the situation.

Richard Nemec, Los Angeles

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