Following a warning last Thursday by Pacific Gas and ElectricCo. that its gas suppliers were cutting off supplies because ofPG&E’s financial trouble, Energy Secretary Bill Richardsonstepped in and ordered the suppliers to continue providing gas tothe utility through this Wednesday.

The temporary emergency order requires suppliers who haddelivered gas to the utility in the last 30 days to continuesupplying PG&E with gas under terms consistent with their priorcontracts. If a supplier and PG&E fail to agree on the terms ofthe contractual arrangement, the Secretary of Energy will set theterms.

The order, issued pursuant to provisions of the Natural GasPolicy Act of 1978 (NGPA) and the Defense Production Act of 1950(DPA), followed a memorandum signed by President Clinton findingthat a natural gas supply emergency exists in the central andnorthern regions of California.

“Concerns about PG&E’s financial status have caused severalof the utility’s natural gas suppliers to cut-off or threaten tocut-off service to PG&E. I am very concerned that such supplydisruptions could endanger the health and welfare of PG&E’sresidential and commercial gas customers and could exacerbate thealready precarious condition of California’s electric grid byeliminating fuel supplies to a number of generating plants,” saidRichardson. “I am issuing this temporary emergency order to keepthe gas flowing while the State of California, utilities andgenerators continue to work to find a solution to the currentelectricity and financial crisis.”

PG&E said six of its gas suppliers, accounting for 36% ofits daily supply, cut off supply or could stop delivering gas byJan. 23. Several other PG&E suppliers, accounting for another30% of daily supplies, have told the utility that they areconsidering stopping deliveries because of PG&E’s inability topay on or prior to delivery.

The situation brings Northern and Central California close tothe brink of natural gas shortages in the middle of winter,PG&E said, which could threaten the health and safety ofmillions of Californians. As a result of these withdrawals, naturalgas could be cut to homes, hospitals, businesses, refineries andpower plants. PG&E said it would rely on stored gas until itruns out, which is expected sometime next month depending on theamount of supply curtailments.

“As California continues to struggle with an energy crisis andthe financial havoc it has created for the state’s utilities, weface the very real possibility of natural gas shortages in thecoming weeks,” said Pacific Gas and Electric CEO Gordon R. Smith.”We have done our best to call attention to this crisis and obtainassistance to avert a catastrophe, and now we must wait to see ifthe state and federal governments will step in to ensure thatnatural gas flows to homes and businesses in Northern and CentralCalifornia.”

The company noted it has taken a number of steps to try andavert the looming crisis. The company informed Gov. Gray Davis ofthe problem on Jan. 9 and asked him to consider using his emergencypowers to help avert gas shortages by providing short-termfinancial assistance so gas suppliers will sell to thecash-strapped utility. It met with its 25-30 key suppliers on Jan.10 to urge them to continue to deliver gas under normal paymentarrangements. Through Gov. Davis, it requested on Jan. 12 thatPresident Clinton declare a natural gas supply emergency.

The suppliers that have withdrawn supplies as of Jan. 17, orhave stated that they may pull supplies in the coming days, includetwo of utility’s largest suppliers: J. Aron & Co., the tradingarm of Goldman Sachs in New York, and Sempra Energy Trading ofStamford, CT. The other suppliers are Western Gas Resources, DukeEnergy Trading, Coastal Merchant Energy and Natural Gas Exchange ofCalgary, AB.

Many of PG&E’s suppliers have changed payment terms on theutility, requiring that it pay in advance or on delivery ratherthan on credit. The company has exhausted its cash and creditbecause of the high wholesale electricity prices in the state.

To cover the gas supply shortfall, the utility is quicklydepleting its natural gas in storage. The stored gas is expected tobe depleted by early February if the current rate of withdrawalcontinues. If more suppliers stop their deliveries, the utility’sstored gas will be consumed more quickly.

In addition to the immediate crisis created by the halt in gasdeliveries, the company has been able to purchase only about 60% ofthe gas it expects customers to need each day in February.Therefore, an even greater crisis is expected in February oncestorage supplies are depleted and inadequate supplies are flowinginto the state.

If the utility is not able to obtain enough gas for residentialand small business customers, regulations require that it divertgas from noncore (large industrial) consumers, among which arepower plants that need natural gas to generate electricity.However, the result will be an even worse electricity shortage thanthe state is currently suffering. Some power plant operators havestated that they will send their gas out of California to preventit from being used by residential and small business customers, theutility said. Other noncore customers whose gas could be divertedinclude hospitals, military bases and universities.

“Diverting natural gas from some of our customers in order toserve others is not an acceptable solution, but we would do it inorder to preserve gas for our residential customers who need heatin the middle of winter,” said Smith. “What we need is for gassuppliers to continue to sell their gas to Pacific Gas and ElectricCompany on regular terms, and with an ordinary payment schedule.”

Reliant Energy, which cut off its relatively small amount of gassales to PG&E a couple of weeks ago, said it would comply withthe order if it was subject to it. “We’ve got to get a look at theDOE order,” said Reliant spokesman Richard Wheatley. “We’re tryingto be a constructive participant in solutions here and of course weare going to study it and try to be as flexible as we can. I’m notgoing to say ‘bingo’ we are going to resume it but we are going towork within the constraints we have today.

“We’ve provided as much available power as we can to the PX andISO. We’re continuing to bear the financial risk ourselves with noguarantee of payment,” he said. “We’re exposing ourselves in a verybig way here. Something has to be resolved. We have hundreds ofmillions [of unrecovered costs in this]. The accounts receivablecontinue to mount for every [molecule of gas] and kWh you sell intothe system.”

Rocco Canonica

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