The Federal Energy Regulatory Commission picked up some kudos from Wall Street last week for “providing regulatory certainty and consistency, with incentives for growth and risk-taking.” The Commission should “stay the course,” Curt Launer, veteran energy analyst for Credit Suisse First Boston testified at the Commission’s technical conference on the California Natural Gas Transportation Infrastructure.

“The existing regime is working. Stay the course. The state of California’s regulatory regime is broken and needs to be fixed,” said Launer who has been tracking the gas industry for the last 20 years. He also offered the following advice: (1) don’t try second guess the need for capacity; the market will take care of itself; (2) price caps are just negatives, if you have any eye toward access to capital; and (3) the weakest link is the California Public Utilities Commission’s inability to provide incentives to new intrastate capacity. The basic business of California utilities is upside down. They’re buying the product for more than they can sell it for.”

Launer suggested the California politicians spend some time apologizing in Houston to Enron Chairman Ken Lay and executives of El Paso, Dynegy, Duke, and Reliant, and then “discuss the ability of the merchant energy units of these companies to use their balance sheet capacity to support a long term contract market for natural gas and power in the state. The state of California does not have to finance its way out of the problem.”

The industry spent $1.8 billion annually on infrastructure between 1996 and 2000 and billions more in working capital commitments, creating an infrastructure for the market, including risk management and trading marketing platforms, Launer said. Given the right incentives he estimates it will spend $2.5 to $3 billion in the 2001-05 time frame for additional infrastructure maintenance and investment and growth in the merchant sector. Affiliated marketing units, the fastest growing segments of the energy companies, “should be part of the solution in terms of how to build additional infrastructure for California.”

The incentives are the key. Launer cited the “dynamic duo, the Fed and FERC. [Treasury Secretary Alan] Greenspan has done his part. It’s up to all of us in this room to do the rest.”

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