New Gas Rules Leave Buyers to Weigh Opportunities, Risks
New federal regulations that change the way natural gas is marketed are posing new opportunities--and risks--for natural gas utilities.
As a result of rules adopted by the Federal Energy Regulatory Commission last week, utilities are freer to buy gas directly from producers. A large number of utilities are expected to take advantage of this change and purchase cheap gas on the “spot,” or non-contract, market.
Such month-to-month gas buys represent a turnabout for an industry that used to negotiate 20-year contracts with pipeline suppliers “and then meet once a year to see how things were going,” said William H. Owens, the Southern California Gas vice president who buys the utility’s natural gas.
The purchase of large volumes of cheap gas should lower gas rates and help utilities compete with low-priced fuel oil, the alternate fuel for most large manufacturers. But utility executives and energy regulators are quick to acknowledge that spot purchases involve risks, especially if the price rises quickly or if supplies tighten.
‘Kind of a Tightrope’
In such cases, consumers could pay higher prices for gas, or industrial users could suffer temporary disruptions in service, as they did during the winter of 1976-77, when factories and schools in the Northeast and Midwest were forced to close. “It’s kind of a tightrope we walk,” said Ida Goalwin, chief of the advisory branch at the California Public Utilities Commission, which is watching the situation closely. “We want the utilities to purchase the lowest cost gas supplies, but we have to protect long-term solid sources of gas.”
Right now, there’s a glut of natural gas, and shortages aren’t likely anytime soon. The government estimates that there is between 3 trillion and 4 trillion cubic feet of gas available that’s not being produced--enough to supply California’s needs for the next two to three years.
That glut is forcing gas prices down “and down hard,” said Benjamin Schlesinger, a Bethesda, Md., energy consultant. He said spot gas prices have fallen by 20% since January. As a result, the spot market now accounts for 20% of all gas sales, he said.
The Natural Gas Supply Assn. estimates, however, that the nation’s gas reserves will run out in 10 years. Shortages are difficult to predict “because we don’t know what supplies will be available from Canada or Mexico,” a spokesman said.
Ability to Bargain
Goalwin said the California commission is reluctant to tell utilities how much spot gas they can buy because it might impair the utilities’ ability to bargain with suppliers. This leaves the utilities with “the dilemma of where to draw the line,” said Sue Ann Levin Schiff, manager of fuels policy and planning at Pacific Gas & Electric. “We have to balance the cost savings against the possibility of damaging relationships with our long-term suppliers.”
PG&E; has approached the spot market cautiously, buying only about 10% of its supplies on the spot market. Schiff said the utility is especially sensitive to possible shortages or price increases since it needs gas to power its electrical generators. Southern California Gas buys between 20% and 30% of its gas on the spot market, where prices are about 20% lower. Lee K. Harrington, Southern California Gas vice president for gas planning, said the utility “is trying to figure out right now” how much spot gas it should continue to buy.
He said the company is buying 2 billion cubic feet of gas--the amount needed to serve residential and small commercial customers--from its regular pipeline suppliers. “If we abandon too much of our dedicated supply, it may turn out that we were penny wise and pound foolish. It wasn’t too many years ago we were curtailing customers and looking for exotic sources of gas to supplement supplies,” he said.
The rush to sign-up expensive long-term gas supplies a decade ago gives California one of the highest industrial gas rates in the nation, according to Geoffrey Meloche, who oversees gas transportation issues for the California Public Utilities Commission fuels branch.
That fact has caused quite a stir among the state’s larger industrial customers, including Owens-Illinois, U.S. Borax & Chemical and San Diego Gas & Electric, which buys all of its gas from Southern California Gas. Those companies want to drop out of the utility networks and bargain with producers for their own gas. “We want to buy spot gas, but we can’t since we don’t have access to an interstate pipeline,” said Carl Funke, San Diego Gas & Electric gas planning supervisor.
New Bargaining Chip
The new federal rules have given the industrial customers a new bargaining chip. The federal rules effectively force pipelines to abandon traditional roles as wholesalers who buy gas from drillers and sell it to utilities. Instead, pipelines would transport gas for a fee, much like truckers, railroads and air freight carriers.
California’s industrial customers want the California commission to force utilities to transport gas for them, and the commission plans to issue an interim decision on the matter Oct. 17.
Meloche said the commission, which appears to be favoring some sort of transportation fee, is trying to balance several thorny issues. If the transportation fee is set too high, “industrial customers will only save money if they can buy gas less expensively than the utilities, which isn’t likely,” Meloche said. Continued high gas costs might force industries to leave the state, he said.
If the fee is set too low, a large number of industries will abandon the utilities, leaving homeowners and small businesses to pay a greater share of utility costs. “There isn’t an easy answer,” he said.
Competition From Pipelines
Transportation by utilities is allowed in a number of states, especially where they face competition from pipelines for large industrial customers. In Ohio, for example, industry was permitted to bargain for its own gas and transport it through utilities or pipelines after the 1976-77 shortage shut down many businesses in that state.
California’s utilities may soon face, for the first time, competition from pipelines. Three consortiums want federal approval to build pipelines from out of state to serve the Kern County oil fields, which need gas to fuel oil-recovery equipment. Meloche points out that those pipelines may also sell gas to other large manufacturers outside the oil fields. “If that happened, we would totally lose that customer base,” he said.
Despite access to new markets, some gas utilities around the nation say they won’t be able to buy cheap gas. Iowa Gas, based in Des Moines, said it is so small that it expects to be muscled out of the spot market by giant utilities and industrial buyers. “Unfortunately, we think the more expensive gas will be left for us,” an Iowa Gas spokeswoman said.
