Richardson Orders Gas Suppliers to Resume Shipments to PG&E

Following a warning last Thursday by Pacific Gas and Electric Co. that its gas suppliers were cutting off supplies because of PG&E's financial trouble, Energy Secretary Bill Richardson stepped in and ordered the suppliers to continue providing gas to the utility through this Wednesday.

The temporary emergency order requires suppliers who had delivered gas to the utility in the last 30 days to continue supplying PG&E with gas under terms consistent with their prior contracts. If a supplier and PG&E fail to agree on the terms of the contractual arrangement, the Secretary of Energy will set the terms.

The order, issued pursuant to provisions of the Natural Gas Policy Act of 1978 (NGPA) and the Defense Production Act of 1950 (DPA), followed a memorandum signed by President Clinton finding that a natural gas supply emergency exists in the central and northern regions of California.

"Concerns about PG&E's financial status have caused several of the utility's natural gas suppliers to cut-off or threaten to cut-off service to PG&E. I am very concerned that such supply disruptions could endanger the health and welfare of PG&E's residential and commercial gas customers and could exacerbate the already precarious condition of California's electric grid by eliminating fuel supplies to a number of generating plants," said Richardson. "I am issuing this temporary emergency order to keep the gas flowing while the State of California, utilities and generators continue to work to find a solution to the current electricity and financial crisis."

PG&E said six of its gas suppliers, accounting for 36% of its daily supply, cut off supply or could stop delivering gas by Jan. 23. Several other PG&E suppliers, accounting for another 30% of daily supplies, have told the utility that they are considering stopping deliveries because of PG&E's inability to pay on or prior to delivery.

The situation brings Northern and Central California close to the brink of natural gas shortages in the middle of winter, PG&E said, which could threaten the health and safety of millions of Californians. As a result of these withdrawals, natural gas could be cut to homes, hospitals, businesses, refineries and power plants. PG&E said it would rely on stored gas until it runs out, which is expected sometime next month depending on the amount of supply curtailments.

"As California continues to struggle with an energy crisis and the financial havoc it has created for the state's utilities, we face the very real possibility of natural gas shortages in the coming weeks," said Pacific Gas and Electric CEO Gordon R. Smith. "We have done our best to call attention to this crisis and obtain assistance to avert a catastrophe, and now we must wait to see if the state and federal governments will step in to ensure that natural gas flows to homes and businesses in Northern and Central California."

The company noted it has taken a number of steps to try and avert the looming crisis. The company informed Gov. Gray Davis of the problem on Jan. 9 and asked him to consider using his emergency powers to help avert gas shortages by providing short-term financial assistance so gas suppliers will sell to the cash-strapped utility. It met with its 25-30 key suppliers on Jan. 10 to urge them to continue to deliver gas under normal payment arrangements. Through Gov. Davis, it requested on Jan. 12 that President Clinton declare a natural gas supply emergency.

The suppliers that have withdrawn supplies as of Jan. 17, or have stated that they may pull supplies in the coming days, include two of utility's largest suppliers: J. Aron & Co., the trading arm of Goldman Sachs in New York, and Sempra Energy Trading of Stamford, CT. The other suppliers are Western Gas Resources, Duke Energy Trading, Coastal Merchant Energy and Natural Gas Exchange of Calgary, AB.

Many of PG&E's suppliers have changed payment terms on the utility, requiring that it pay in advance or on delivery rather than on credit. The company has exhausted its cash and credit because of the high wholesale electricity prices in the state.

To cover the gas supply shortfall, the utility is quickly depleting its natural gas in storage. The stored gas is expected to be depleted by early February if the current rate of withdrawal continues. If more suppliers stop their deliveries, the utility's stored gas will be consumed more quickly.

In addition to the immediate crisis created by the halt in gas deliveries, the company has been able to purchase only about 60% of the gas it expects customers to need each day in February. Therefore, an even greater crisis is expected in February once storage supplies are depleted and inadequate supplies are flowing into the state.

If the utility is not able to obtain enough gas for residential and small business customers, regulations require that it divert gas from noncore (large industrial) consumers, among which are power plants that need natural gas to generate electricity. However, the result will be an even worse electricity shortage than the state is currently suffering. Some power plant operators have stated that they will send their gas out of California to prevent it from being used by residential and small business customers, the utility said. Other noncore customers whose gas could be diverted include hospitals, military bases and universities.

"Diverting natural gas from some of our customers in order to serve others is not an acceptable solution, but we would do it in order to preserve gas for our residential customers who need heat in the middle of winter," said Smith. "What we need is for gas suppliers to continue to sell their gas to Pacific Gas and Electric Company on regular terms, and with an ordinary payment schedule."

Reliant Energy, which cut off its relatively small amount of gas sales to PG&E a couple of weeks ago, said it would comply with the order if it was subject to it. "We've got to get a look at the DOE order," said Reliant spokesman Richard Wheatley. "We're trying to be a constructive participant in solutions here and of course we are going to study it and try to be as flexible as we can. I'm not going to say 'bingo' we are going to resume it but we are going to work within the constraints we have today.

"We've provided as much available power as we can to the PX and ISO. We're continuing to bear the financial risk ourselves with no guarantee of payment," he said. "We're exposing ourselves in a very big way here. Something has to be resolved. We have hundreds of millions [of unrecovered costs in this]. The accounts receivable continue to mount for every [molecule of gas] and kWh you sell into the system."

Rocco Canonica

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