NGI The Weekly Gas Market Report
Following a warning last Thursday by Pacific Gas and ElectricCo. that its gas suppliers were cutting off supplies because theyweren’t getting paid for their gas, Energy Secretary BillRichardson stepped in and ordered the suppliers to continueproviding gas to PG&E 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 then President Clintonfinding that a natural gas supply emergency exists in the centraland northern 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.
“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The suppliers that had withdrawn supplies as of Jan. 17, orstated that they may pull supplies in the coming days, include twoof utility’s largest suppliers: J. Aron & Co., the trading armof 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 paymentterms on the utility, requiring that it pay in advance or ondelivery rather than on credit. The company has exhausted its cashand credit because of the high wholesale electricity prices in thestate.
To cover the gas supply shortfall, the utility was quicklydepleting its natural gas in storage. If the utility is not able toobtain enough gas for residential and small business customers,regulations require that it divert gas from noncore (largeindustrial) consumers, among which are power plants that neednatural gas to generate electricity. However, the result will be aneven worse electricity shortage than the state is currentlysuffering.
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,we are going to study it and try to be as flexible as we can. I’mnot going to say ‘bingo’ we are going to resume it but we are goingto work 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.”
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