Publication Date:
Sun, 1899-12-31 18:00
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THE AGONIZING TIME in California's electric business has forever changed the relationship between natural gas and electricity. And the way the United States regulates and plans for the use of these energies now requires fundamental change also.
For 15 years, U.S. natural gas supplies were so plentiful that some saw gas as a virtually infinite resource that would remain low-cost indefinitely. Cheap gas was, as Chris Kraul of the Los Angeles Times recently reported, "an article of faith in the deregulation of California's electricity market in 1996" as were natural gas' consumer and environmental benefits.
But this year, the supply bubble burst. Gas prices spiked to all-time highs, inflating the cost of gas-generated electricity and helping to touch off California's summer power crisis. No relief is in sight, and we're letting our customers know that, at today's prices, heating bills for Southern California will increase as much as 35 percent over the same period last year, assuming the same usage as last year, and will provide a higher floor for electricity prices.
More than 800 offshore and land-based drill rigs are looking for gas across the United States - twice the number of March 1999. They're looking for a pot of gold: As this article goes to press, gas now sells for more than $5 per million Btu - three times the $1.60 futures price in March 1999.
One of the cures for California' s electricity woes is building gas-fired electric power plants. But these plants will consume such enormous amounts of fuel that experts aren't sure wells in North America can supply them all.
The United States has operated for decades with separate regulation of these two energy sources in a paradigm that placed service to electric generation as the lowest priority for the gas utility. The natural gas infrastructure has been designed to serve the cold winter day needs of the residential class, with rules that require the suspension of service to electric generation whenever residential customer loads become too large.
But the world has changed. Natural gas is now the fuel of choice for new generation projects. Of the 50 electric generation projects licensed for the western region, all will use natural gas. In addition, existing generation facilities, while capable of burning fuel oil, are as a practical matter limited to burning natural gas because of increasingly strict air-emission regulations.
Also keeping pressure on gas prices is the fact that gas demand in California is now a year-round phenomenon. Natural gas use used to peak in the winter, enabling utilities to store gas in the summertime, which calmed markets. But higher temperatures and growing air-conditioning demand have caused peak-demand day for gas this summer to exceed last winter's top peak-demand day for the first time ever.
In this new market, I believe the age-old expectations regarding the seasonal nature of gas demand have already begun to change. The production of electricity clearly is a high priority for our economy, and this will result in fundamental, desirable, market-driven changes in the natural gas system.
Policymakers must now catch up to the market by expeditiously processing and approving the needed infrastructure improvements that result from a less seasonally driven demand for natural gas. While some short-term price anomalies are to be expected, in the end a less seasonally driven gas market will result in greater efficiencies in the operation of the national transmission grid and major cost savings to natural gas consumers.
At San Diego Gas & Electric, this may mean accelerating pipeline projects that we now forecast are needed for residential service several years from now so that we can enhance service to electric generation as soon as possible. Rules on how the utilities manage the intrastate systems also will have to be updated so that each participant's responsibilities for providing reliable supplies are clearly defined and performance enforced. On the interstate transportation system, this means ensuring an adequate balance between supply and demand while avoiding over-construction, which would lead to costly inefficiencies. Natural gas industry professionals must ensure that appropriate and equitable regulatory policies exist to encourage a market environment that spurs the necessary exploration and development of natural gas supplies to meet the growth in demand.
As we have learned from the electric markets this summer, unless our gas markets are grounded in sound principles designed to promote competition and protect all market participants, the results can be most unpleasant. Now is the time to ensure there is sufficient transmission and distribution capacity so that competition can thrive and to ensure that where competition does not exist, balanced regulatory policies protect all market participants.
The San Diego electricity crisis has sounded a warning bell to those who would hear. The consequence of ignoring this warning and allowing this summer's events to be repeated in natural gas markets will be disastrous. Natural gas systems must be made ready to serve the increasing demands for electric generation; they must be able to offer generation highest priority for service; and the natural gas marketplace must be workably competitive even as this paradigm shifts.
We in California are privileged to be on the leading edge of so many things, good and bad. Deregulation is one of them.
Stephen L. Baum is chairman, president and CEO of Sempra Energy. Baum presented these comments at the Governor's Natural Gas Summit in Columbus, Ohio, in September. Reprinted with permission.
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