California’s natural gas purchasing program for about 120 stateoperated facilities, totaling more than 14 Bcf, annually has beenpostponed until June 7 and revised due to increasingly uncertainmarket conditions, according to the head of the state’s buyingprogram in the state General Services Department. Bids in therevised program are due from the state’s seven pre-approved biddersby 8:30 a.m. on the 7th. Sempra Energy Trading is the currentsupplier.

Even with the revisions, California facilities are bracing forfuel bill increases in the range of 50% to 70% for their nextfiscal year, 2000-01, according to Marshall Clark, gas buyingprogram director. The normal “saddle” for annual gas buyingprovided in May and June — after the winter heating load andbefore heavy summer air conditioning demands — has disappearedthis year with gas prices climbing steadily this spring, Clarksaid.

“We’ve come to the conclusion that the May-June period when wehave traditionally bought our gas is not the best time for usanymore,” said Clark, noting that the revised bids will cover theperiod of July 1 through March 31, 2001, giving the state the latewinter period as the time to bid its next gas deals following thisyear’s contracts.

“What we’ve seen over the past couple of years is a dip inFebruary and March (warm winters, too) and after that the pricemoves just straight on up. If there was any dip before summer, ithas disappeared. I think the market is changing so rapidly that wecould be wrong about this next year. There is precious littlecertainty in the natural gas markets right now. Sowhen there isthis much uncertainty, the best strategy is a very simple approachand recognition that you’re going to have to pay more than you havelast year.”

California is going to seek bids June 7 for indexed supply dealswith none of the floors and ceilings that have been common in pastcontracts. The state has simplified what it is asking for, inaddition to shortening the term to nine months. In retrospect,Clark said, May 17 “would have been the worst day of the year to goforward with those kind of contract bids. No one would have bid.”

“We didn’t want to stand in the middle of a train wreck,” Clarksaid. He said the state’s analysis recognizes three scenarios couldhappen with gas prices in the next year — they can continue to goup; drop like a rock; or “plateau” at a level above where they haverisen to at the end of May. California is betting on the plateauingof prices in the $4 price area.

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

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

“Both gas and electricity are stepping up to a new plateau, sowe have to accept that. A year ago, if your fuel component forelectric generation was 3.5 cents, you didn’t have a chance out onthe market because that would be the total commodity cost (forelectricity). 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 June30, compared to the Henry Hub futures prices for June which settledin the $4.40s. “So, for June, I am brilliant, but on the stroke ofmidnight July 1, I am naked. My customers (the state facilityoperators for prisons, hospitals, universities, etc.) are going totake one helluva jump (in gas prices).”

Further clouding California’s future, according to Clark, is theadded complications for buying and transporting natural gas underthe pending SoCalGas settlement on its transmission/storageunbundling. There is no encouragement for expanding the state’score aggregation buying, which is authorized to take 10 times thevolume it is now taking. Clark is discouraging any additional corebuying at this time because the potential savings are practicallynonexistent.

In the SoCal settlement “our crude estimates are that it isworth maybe a penny-a-therm in increased margin, but thatimprovement is coupled with a quantum increase in complexity inmoving gas — both core and noncore,” Clark said. “So the addedcomplexity can eat up the penny gain pretty quick. You may lose itjust in trying to figure out how to deal with the complexity. Theway they are proposing to do gas receipt points and the intrastatepipelines, at least in our eyes, makes it very complex. GeneralServices represents end-use customers. Only the biggest and mostsophisticated gas buyers are going to be able to figure the bestway to approach this thing.”

In a nutshell that is why core buying is not expanding and thestate’s noncore program has slowed considerably in recent years inits growth (from 20% annually down to the current less than5%percent annually). And by Clark’s estimates the proposed SoCalGassettlement will worsen the situation.

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