-Caveat Lector- June 5, 2001 Natural Gas Prices Remain High in Southern California By RICHARD A. OPPEL Jr. New York Times Natural gas prices have plunged in the last few months — everywhere, that is, but Southern California. While gas in New York costs about $4 per thousand cubic feet, gas delivered to Southern California still costs more than $11 wholesale. That such numbers demand an explanation was about the only thing President Bush and Gov. Gray Davis could agree on when they met in Los Angeles a few days ago to discuss California's energy crisis. Mr. Bush assigned Patrick H. Wood III, a fellow Texan confirmed last month as a member of the Federal Energy Regulatory Commission, to investigate. To many experts, the woes of California's natural gas market are as profound as those of its electricity market: the state is short on pipelines, and the rules of the gas market, critics say, encourage sellers and traders — including the biggest local gas utility — to drive prices higher. At peak times, half of California's electricity is generated by gas-fired power plants, a higher proportion than in most parts of the country. And because 85 percent of the gas consumed in California comes from outside the state, the shortage of pipelines both into California and within the state has become a big handicap in fueling those plants. The strain has become especially acute as drought in the Pacific Northwest has curtailed imports of hydropower and gas-fired power plants have worked overtime to meet the demands of a booming state economy. Vice President Dick Cheney's energy policy report last month proposed initiatives to speed approval and construction of new pipelines, noting that New England and other regions faced capacity squeezes, too. The report says that the United States needs 38,000 miles of new gas transmission pipelines, almost a 20 percent increase. In the meantime, some industry executives and public officials take the argument one step further than the Bush administration, contending that today's shortage of capacity has made it possible for energy companies, intent on maximizing profits, to manipulate prices. "It really strains credulity to say this is a functioning market," said Representative Joe Barton, Republican of Texas, who as chairman of the House energy subcommittee has been leaning on the Federal Energy Regulatory Commission to scrutinize the California gas market. "Reasonable people could conclude people have gamed the system." In one significant case, California utility regulators and Southern California Edison, one of the state's struggling electric utilities, have accused the El Paso Corporation of using its control of a major pipeline into the state to inflate prices artificially. El Paso officials deny wrongdoing and accuse California officials of making the company a scapegoat for the state's failure to build more pipelines. A judge at the federal energy commission is hearing the case in Washington. But fingers are pointing in other directions, too. For example, the Southern California Gas Company, the state's largest gas utility, has reaped huge profits buying and selling gas in the last year — activity encouraged by state regulations intended to lower gas prices for consumers. But some gas marketers and electricity generators contend that the trading has contributed to price spikes, by tying up valuable pipeline space during peak times with gas shipments driven by financial deals, not power demands. At the same time, Edison says that Southern California Gas failed to put enough gas into storage last fall for residential and small-business customers. If so, that would have driven the gas company back into the market in the winter, when demand from power plant operators was high, helping push gas — and hence electricity — prices yet higher, Edison complains. Between them, El Paso and Southern California Gas were responsible for $3.7 billion in excess prices for energy in the last year, Edison contends. Southern California Gas, a unit of Sempra Energy, denies that its trading has harmed the market. Rather, its executives note that electricity generators and industrial gas consumers — which under state rules are responsible for managing their own gas supplies — put very little gas into storage last year. By one estimate, large gas consumers in Southern California had only 11 percent as much gas in storage at the end of November as they did at the same time during the prior two years. Another problem may emerge this summer, according to William L. Massey, a member of the federal energy commission. Mr. Massey said new commission rules intended to limit electricity price spikes in California will almost certainly prompt energy-trading companies — which deal in both gas and electricity — to manipulate gas prices. That is because the rules allow electricity generators to charge more if gas prices move higher. Similarly, growing attention is being paid to the role played by financial trading tied to the price of electricity and natural gas. Industry critics question whether huge trading volumes in these financial derivatives gives energy marketing companies the incentive to manipulate prices in tight markets. Federal regulators "don't seem to understand that firms are really trying to make as much money as they can," said Severin Borenstein, director of the University of California Energy Institute, a research organization on the Berkeley campus. "That's what they do for a living." Fixing the problem is simple, Mr. Borenstein said. "If you build more capacity," he said, "you reduce both the scarcity issue and you reduce the ability of people who currently own capacity to exercise market power." Regardless of whether companies are manipulating prices, the California natural gas market is fattening bottom lines. In the El Paso case, testimony has shown that pipeline capacity acquired by the company's marketing affiliate in March 2000 for $38.5 million produced profits of almost $900 million over the next 13 months. El Paso said its share of those profits was $184 million, the rest going to other companies with which it entered into hedging transactions intended to limit El Paso's exposure if gas prices fell. About half of those transactions were with the biggest energy trader, the Enron Corporation, according to people present at briefings El Paso officials have given to California officials. An Enron spokesman, Mark Palmer, said it was possible that Enron took the other side of the trades, but he said that Enron would have resold the pipeline capacity almost immediately, thus profiting little from the rise of gas prices in California. Federal regulators, concerned that the high gas prices in California may not be legitimate, have proposed requiring companies selling gas in the state to disclose extensive data about their transactions. They are also considering whether to reimpose price caps on short-term sales of pipeline capacity that were eliminated early last year. Further, regulators are scrutinizing the so-called gray market in which energy marketers bundle gas and transmission capacity and sell it to large customers, like electricity generators, for one price. Federal regulators have oversight responsibility for the interstate portion of gas shipments, but they have not looked closely at these bundled transactions, Mr. Massey said. "The whole thing has fallen through the cracks," he said. Nearly all of California's gas comes from the Southwest, the Rocky Mountain states and Canada through a few huge, highly pressurized pipelines. In California, the gas is shunted onto intrastate pipelines that deliver it to consumers and to underground storage fields for later use. Those pipelines are now largely running full, and their capacity is about 300 million cubic feet a day less than what interstate pipelines can deliver. The difference is the amount of gas it takes to continuously fuel a 1,300 megawatt power plant — enough to light more than a million homes. "It's not resources, it's straws — the straws needed to suck this gas where it needs to go," said Thom Kelly, assistant executive director of the California Energy Commission. "If the straws are full, that's a problem." Operators of interstate pipelines have proposed new construction that could double delivery to the state. Indeed, odd as it seems now, some in the industry worry that California could be "overpiped" later this decade, just as it was in the mid-1990's. Likewise, Southern California Gas plans only limited expansion of its in- state pipelines, partly because it expects demand to fall as hydroelectric power supplies return to normal levels and older, less efficient gas-fired power plants are phased out. But the gas company's intentions are regarded with skepticism by others in the industry. Some executives contend that Southern California Gas has damaged the marketplace through its enthusiastic embrace of a state program that allows it to split with customers the profits from buying, selling and lending gas. A coalition of power generators, including Reliant Energy, the Williams Companies and the Los Angeles Department of Water and Power, has complained to state officials that the program "creates perverse incentives" for the gas company. The generators say it results in extra demand for pipeline space when capacity already is at a premium, making prices more volatile. The consequences of the gas company's low storage inventories were evident in early December, according to John Stout, a senior Reliant executive. He recalled listening in on a conference call as a Southern California Gas official talked about injecting gas into storage. "I was floored," Mr. Stout said. "Prices were sky high, and they were putting more upward pressure on prices." Lee M. Stewart, president of energy transportation services for Southern California Gas, called the criticism "bogus." The utility's storage and trading practices have neither hurt the market nor curtailed gas sales to customers, he said. "To say gas prices drive electricity prices is a falsehood," Mr. Stewart added. But to many regulators, it is clear that gas prices play an increasingly important role in electricity prices. Problems in the California natural gas markets "haven't been given the prominence they deserve for the detrimental role they are playing in high electricity prices," said Linda K. Breathitt, another member of the federal energy commission. "Natural gas prices have been the stepchild of this California crisis." ANOMALOUS IMAGES AND UFO FILES http://www.anomalous-images.com <A HREF="http://www.ctrl.org/";>www.ctrl.org</A> DECLARATION & DISCLAIMER ========== CTRL is a discussion & informational exchange list. Proselytizing propagandic screeds are unwelcomed. Substance—not soap-boxing—please! These are sordid matters and 'conspiracy theory'—with its many half-truths, mis- directions and outright frauds—is used politically by different groups with major and minor effects spread throughout the spectrum of time and thought. That being said, CTRLgives no endorsement to the validity of posts, and always suggests to readers; be wary of what you read. 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