“It’s the natural gas, stupid!” That is a refrain–spoken or implied–that ran throughout California’s ongoing electricity debates in both the legislature and among regulators as state officials scrambled Thursday to pave the way for bringing stability back to the state electricity industry.

That is why tucked into the intense power supply/price discussions are calls for mitigation measures against volatile wholesale gas prices and against too much reliance on electricity produced from that single source. Thus, legislators and regulators are expected to push ways to promote more power from renewable energy sources as part of the ongoing moves to stabilize the state’s two largest investor-owned utilities and repay the state general fund for its billions of dollars in wholesale power purchases.

Underscoring this is a recent report from the Los Angeles County Economic Development Corp. (LAEDC) that stressed the significant role played by natural gas in both the problems and the solutions surrounding the state’s electricity woes. The nonprofit economic consulting and development unit for the state’s largest county has followed the US Producer Price Index (PPI) to get a clear picture of natural gas’ influence, noting the index dropped 19.1% in June, following a 7.1% decline in May, but that came after a long run upward beginning in mid-2000.

“Recent trends seem to back up our conjecture,” said George Huang, a Harvard-educated LAEDC economics analyst. “The PPI for natural gas to be delivered to electric utilities began to rise significantly starting in June 2000 and finally reached its peak in January this year. The sudden rise in electricity prices also began in June 2000.”

Huang said in a recent LAEDC online economic report that the natural gas index in the PPI jumped by 151.7% over the seven-month period that helped usher in California’s power emergency. However, he also noted that by last month the same gas price index was 51.8% below the January level.

“January and February of this year were also the months when we had the spikes in electricity prices,” Huang said. “Those who accuse power generators of price gouging should study the relationship between natural gas prices and electricity generation costs before rushing to judgment.

“Although natural gas can be stored, the cost is relatively high and storage is not available in many areas in California. Therefore, power generators end up having to pay high spot market prices for their fuel during times of peak electricity demand when natural gas is also sought by all other gas-fired power plants. That’s how we could theoretically end up with a price quote of $3,900/MWh this past January.”

Huang’s proposed solution: the gas and electric industries working together to expand gas storage to reduce peak prices for both energy commodities. But he also realistically questioned whether sufficient “economic incentives” are present to spur the industries to make this happen.

In his analysis released this week, Huang said the current decrease in wholesale electricity prices is less tied to federal regional price mitigation or the state’s long-term contracts than to the declining natural gas prices.

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