Los Angeles Department of Water and Power (LADWP) is striking out into new gas supply ventures, looking at buying the undeveloped California portion of Questar Corp.’s converted oil-to-natural gas Southern Trails pipeline, preparing to sign its first of three pre-paid, 10-year natural gas supply deals with a Native American tribe, and joining with other Southern California munis to line up natural gas reserves behind a new power plant in Burbank, CA.

The nation’s largest municipal utility is hoping it will have better luck than Questar did with the in-state portion of the Southern Trails line for natural gas. The 210-mile portion of the crude oil line from the Arizona-California border into the Long Beach Harbor area of Southern California sits idle and is yet to be converted.

Two years ago, Questar limited its conversion of the 16-inch line to the span east of California, where it traverses some 490 miles from the northern end of New Mexico’s San Juan Basin, carrying 80 MMcf/d. While the entire 700 mile line was approved by FERC, both Southern California Gas and the California Public Utilities Commission opposed the California portion of the project, saying it would create excess pipeline capacity in the state and could result in a bypass of SoCal and other LDCs serving the area, creating stranded costs. At the time the east of California portion of the line went into service in 2002, a Questar spokesman said the company “has had a lot of regulatory problems in the state of California… California is not interested in opening up its lines to outside companies.”

A knowledgeable source with LADWP would not name the potential seller of an existing idle oil line from the border, but it was clear it is the remaining segment of the Questar pipeline. A new natural gas source would fit in with plans by the nation’s largest municipal utility to repower one of its major gas-fired generating plants, Haynes Station.

Questar in 1998 bought the abandoned oil line, which had originally been built to ship crude oil to refineries in California. A Questar spokesperson in Salt Lake City confirmed Tuesday that the company is talking with LADWP and has been for the past 18 months — initially regarding transportation and now to buy the pipeline in California.

LADWP, in its currently approved new budget for fiscal 2004-05 and the following year (see related story), collectively has $104 million earmarked for the pipeline. The muni’s overall natural gas supply strategy is getting more aggressive as a means of mitigating wholesale price volatility. The pipeline could bring 90-100 MMcf/d into the Harbor area where the Haynes plant is connected via an LADWP pipeline to another generating plant in Los Angeles Harbor.

The Haynes plant is just completing a repowering of two of its four units, and the other two are scheduled to be upgraded by 2007, so the muni is now hoping that the 1950s/60s-vintage plant will be able to run for another 30-plus years, according to the LADWP source.

“We’re looking at locking in some of the transportation (for its natural gas supply needs); that is why we are evaluating the opportunity to build a bypass pipeline,” said the source, noting that as a public-sector utility LADWP needs no federal or state regulatory approvals — other than environmental — to develop a pipeline sited fully within the state boundaries. “We’re hoping to complete most of our due diligence and discussions within the next couple of months.”

By this fall, the LADWP source said, the utility hopes to have the pipeline project approved by its city council. It could contract to have the pipeline converted and perhaps have the same company operate the line for its initial years.

In a separate supply action, LADWP is preparing to sign its first of three pre-paid, 10-year natural gas supply deals with a Native American tribe for about 20 MMcf/d of gas supplies out of the San Juan Basin, the LADWP source said.

The utility’s oversight board in a series of major approvals last week also approved an agreement with the Southern California Public Power Authority (SCPPA) to have the authority line up natural gas reserves up to 35 MMcf/d. There will be nine other smaller municipal utilities involved in the reserves that are currently involved in building a new natural gas-fired power plant in the LA suburb of Burbank. This is a done deal — not requiring city council approval — until the department has some actual reserve deals to sign. LADWP would be the project manager and seek the largest share.

SCPPA will look in the Rockies, San Juan Basin and throughout the West. LADWP, the department source noted, is different than the other munis in that it has a lot of transmission capacity locked up from all the various sources serving the southern half of California, including the Kern River, Mojave and El Paso pipelines. “What we’re trying to do is find some long-term fill for our capacity,” the source said.

LADWP’s far-reaching gas supply plans emerged as part of it obtaining approval last week from its oversight board for a five-year, $3.2 billion capital expenditure plan, including the new natural gas supply pipeline to serve its LA Basin-based generation plants now under a massive repowering program.

The action was taken as part of the LADWP water/power commission approving the multi-billion-dollar city-run utility’s 2004-2005 fiscal budget, continuing an integrated resource plan (IRP) originally formulated four years ago. On the electric side, which accounts for more than two-thirds of the city utility’s nearly $3 billion annual revenues, LADWP projects its total generation growing over the next 10 years from 7,127 MW to 7,744 MW in 2014, while peak demand increases by about 800 MW from 5,624 MW to 6,422 MW in 2014.

Outlined over the period were $1.45 billion in distribution system investment, $470 million in generation upgrades and a natural gas pipeline, $210 million in transmission investment, and $910 million for completing the implementation of the utility IRP plan. The gas pipeline budgeted amounts are $104 million spread over the next two fiscal years.

LADWP also outlines a changing generation portfolio mix in which there will be increased dependence on natural gas and renewables, while holding coal as the utility’s primary source of power over the next 10 years. While coal retains a 48% portion over the next decade, natural gas will grow from a 17% to a 28% share of the generation portfolio. Similarly renewables, including hydro, will increase from 4% to 7%. Nuclear will remain about the same (11% to 10% in 2014).

With the authorization to do more hedging in 2005-06 also, LADWP now is pursuing natural gas prepayment for what amounts to 15%, or 20 MMcf/d, of its annual gas buying in 10-year deals that carry a cost of up to $250 million. LADWP is currently negotiating with its bidding short-list of three firms on the potential gas prepayment deals.

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