As part of an 111-page draft report for the California Energy Commission’s (CEC) approval next week, 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.

While acknowledging as California is arguing in an ongoing federal regulatory investigation that the state’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 will vote on Aug. 22. “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 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 summers 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 repowered baseload generation in the state is dependent on natural gas, but so are the many new power plants being built 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.”

©Copyright 2001 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.