Along with the specter of rolling blackouts caused by powersupply shortages in California during peak-demand periods thissummer, the state’s increasingly constrained natural gas pipelineinfrastructure may be bogged down by peak load demands running asmuch as 2 Bcf/d over system capacity, an energy teleconference wastold Wednesday. At stake are billions of dollars of extra coststhat could be caused as much by natural gas constraints as byshortages of megawatts.

Overall, a combination of the uncertain summer power supplysituation, reluctance by federal regulators to help and fatal flawsin the state’s response leave California this summer at the mercyof Pacific Northwest droughts and wholesale price spikes for bothelectricity and natural gas, according to speakers at the”California Power Crisis” teleconference sponsored by Boulder,CO-based energy consultants, E-Source.

One of the lessons from California cited by several speakers, isthe fact that the newly emerging natural gas price andinfrastructure pressures have been exacerbated by electricitysupply and demand shifts.

While acknowledging that state politicians and regulators haveescalated California’s supply/demand crisis, the Federal EnergyRegulatory Commission’s reluctance to intervene in the face ofevidence of excess wholesale prices and corresponding deregulationof short-term gas transmission rates, have made the situationworse, said Peter Navarro, an economist at the University ofCalifornia, Irvine.

“There is no question in my mind that FERC is the biggestcontributing factor to the mess (the state) is in today,” Navarrosaid. “First, because it was unwilling to intervene in thewholesale market after finding unjust and unreasonable behavior,and also deregulating short-term natural gas transmission rates, sowe have a situation in California in which nickel power (5-cent/kw)is being sold for $2 in the electricity market and the cost ofnatural gas is three times the national average. FERC has to helpout on this, and it is not.”

Calling the state’s recent entering into long-term power supplycontracts a “$9 billion mistake,” Navarro said the move to signpower supply contracts more than three years out is going to “hauntCalifornia’s economy for decades” into the future when he expectswholesale rates to stabilize and go down.

Navarro cited an analysis by the San Diego consumerorganization, Utility Consumer Action Network (UCAN) thatextrapolates out over the life of the state’s long-term contractsto determine Californians will pay at least $9 billion over marketrates averaged over the entire period.

What weather-watchers are calling perhaps the worst drought inthe Pacific Northwest since 1977 promises to worsen California’selectricity crunch this summer, according to one analyst who spoke,but it also will put added price and supply pressures on thenatural gas wholesale markets.

“It is likely there will be constraints this year,” said ChrisSeiple, a consultant with E-Source affiliate RDI. “There will besignificant pressure on California’s gas infrastructure and ifthere are any outages on the pipelines coming into the state likehappened last year, you will see price spikes in the $20 to $50range.

“With the crunch on turbines and price spikes in natural gas,there is real pressure for generators to look at coal-firedgeneration”

Seiple said from his discussions with both electric generatorsand gas suppliers his analyses conclude “there is sufficientnatural gas capacity” to serve the 150,000 MW of new gas-firedgeneration scheduled to come online in the next three years,however, there could be delivery problems in localized transmissionand distribution pipeline systems.

Despite perceptions that California’s experience has renderedthe power industry deregulation dead, Jerry Pferrer, an energyattorney with Skadden Arps, said there are examples of where it ispromising to work in Pennsylvania and Texas, and that California’sexperience clearly shows you can’t shield retail customers from thevolatility of the wholesale market.

“California was clearly no exception to the traditional rules ofsupply and demand,” Pferrer said. “Demand Side Management isabsolutely crucial to effective market functioning, along with aportfolio of short- and long-term supply contracts as protectionagainst uncertainty.”

While noting that he doesn’t expect Congress or the Bushadministration “to be of much help,” Pferrer said FERC is in ano-win situation. Political pressure for caps could actuallydiscourage generation needed to solve longer term problems. “Thereclearly is a lack of empathy for California’s problems given thefact that some other states have even higher energy costs.”

More criticism of alleged monopoly market power by El PasoNatural Gas Co. and its affiliates regarding price and availabilityof natural gas at the California-Arizona border was leveled byNavarro, who noted federal regulators need to take some mitigatingactions.

“When natural gas prices tripled recently, they were 10 timeshigher when that gas went across the California border,” saidNavarro, who noted that El Paso has been accused of “engaging inanti-trust practice” before it made some of its recent pipelineacquisitions, such as buying Tenneco.

Navarro said California’s natural gas situation is so uncertainright now that he thinks there “is a high probability” there willnot be sufficient supplies to fire a half-dozen new temporarypeaking generation plants the state is trying to get online thissummer.

“In San Diego particularly, if you want to build a new naturalgas-fired power plant, you can’t – not because of environmentalcredits or anything else – but simply because you can’t guaranteedsupplies of natural gas. That situation in California is veryserious, and we are moving to where we are going to have summerpeaks (for gas) as well as winter ones. It is the undiscussed partof the whole crisis.”

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