PG&E Corp. is dropping out of the proposed Ruby natural gas interstate pipeline from the Rockies to the West Coast because of escalating costs associated with the project proposed by El Paso Corp. PG&E’s utility, Pacific Gas and Electric Co. (PG&E), will continue to work closely with El Paso and track competing proposals for a new Rockies pipeline to the West.

PG&E CEO Peter Darbee made the announcement during a conference call with financial analysts Tuesday, reporting first quarter earnings that were down compared to the same period last year due mainly to higher-than-expected operating costs from severe winter storms and a steam generator replacement and planned outage at the utility’s Diablo Canyon nuclear plant. The company is still on track to meet its earnings targets for the full year, Darbee said.

El Paso spokesperson Bruce Connery reiterated to NGI Tuesday that the pipeline should start commercial operations as scheduled in 2011, assuming that it becomes fully subscribed this year. In the meantime, Connery said the company will continue to seek other partners. The Bear Stearns Companies Inc.’s Bear Energy LP is still assessing its options for involvement in the pipeline despite the merger with JPMorgan Chase earlier this year.

Connery did not say whether El Paso is prepared to continue the project on its own, but he said the pipeline company will not move ahead with any new project without it being fully subscribed. If the line is built, PG&E’s utility still holds a 15-year contract for 375 MMcf/d of capacity on the line.

Although there was no news release on the PG&E website during the earnings call, Darbee said the utility holding company has provided an announcement that it “terminated” its participation in the proposed Ruby pipeline.

“During the recent weeks and months, we have taken the opportunity to examine very carefully the costs associated with that pipeline [proposal] in the course of our due diligence efforts,” Darbee said. “Not surprisingly and consistent with what we have said previously, we see the price of steel and pipe and construction overall rising very substantially. With this backdrop of what is happening in the industry [and comparing them to] projections for the Ruby pipeline, we found a disconnect.

“We frankly do not agree with the cost projections at the current levels being realistically achievable. So we have exercised our option to pull out, and we will no longer have any further participation at PG&E Corp. in the pipeline, but the [utility] will continue to interact with El Paso regarding this pipeline, and the decision as to whether the Ruby project will continue is up to El Paso and its board of directors.”

Darbee speculated that perhaps El Paso would decide to pull back, and that PG&E still thinks it would be “useful to have access to the Rockies” in addition to its supplies from Western Canada and the Southwest through its connection with El Paso at the Arizona border. He said PG&E will continue to seek the Rockies tie through another version of Ruby or one of the competing pipeline proposals.

Regardless, even without the Rockies connection, PG&E has no future supply worries, Darbee said, but it would like the option of supplies from a third major basin as a means of lessening natural gas price pressures on its customers.

Late last year PG&E signed a letter of intent to acquire a 25.5% interest in El Paso’s Ruby proposal, eyeing a route that would extend 680 miles from the Opal Hub in Wyoming to the Malin, OR, interconnect near California’s northern border, which is PG&E’s key place of entry for its Canadian supplies coming from the north (see Daily GPI, Dec. 28, 2007). Earlier PG&E had inked a precedent agreement for 375,000 Dth/d of long-term transportation capacity (15 years) on the proposed 42-inch diameter pipeline.

Before the deals with PG&E, Houston-based El Paso last December began partnering on the Ruby project with The Bear Stearns Companies Inc.’s Bear Energy LP, which it said might become an initial shipper on the pipeline (see Daily GPI, Dec. 4, 2007). At the time the Ruby pipeline was estimated to cost $2 billion for an initial capacity of 1.2 Bcf/d and be expandable to 2 Bcf/d.

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