SDG&E; Now Buys Cheaper Gas on the Spot Market

Times Staff Writer

To boost awareness that San Diego County lacks any proven natural gas, oil, hydro or coal reserves, San Diego Gas & Electric Chairman Tom Page constantly reminds company shareholders and ratepayers that San Diego County sits in the midst of an "energy desert."

Consequently, SDG&E; always has looked elsewhere for the natural gas that it burns to generate electricity.

During recent months, however, that energy search has been aided by changes in national energy policy that, in addition to deregulating the nation's energy producers, are allowing SDG&E; to look farther away for energy supplies.

At the same time, these policy changes have pitted SDG&E; against a growing number of other utilities that also want those gas and electric supplies.

When it comes to making spot-market gas and oil purchases, SDG&E; is recognized nationally as "one of the leaders as far as bypassing the pipelines and going out and negotiating directly with the natural gas and oil producers," said Norman Blumenthal, chief operating officer of Brumark, a San Diego-based oil and gas exploration company.

However, Blumenthal suggested, SDG&E;'s customers might benefit if the utility were to sign long-term contracts pegged to today's lower prices, instead of relying solely on spot market purchases.

And SDG&E; might better serve its customers by trimming back its dependence upon other suppliers by developing its own exploration and production company, Blumenthal argued .

Still, SDG&E; has won faint praise even from Michael Shames, executive director of the Utility Consumers Action Network, an organization that has rarely applauded the utility's management.

Although Shames credited SDG&E; with adopting an "aggressive" stance in the spot market, he said that "conflicting" predictions made by SDG&E; on the future price of gas make him wonder how well SDG&E; managers understand the volatile energy market.

"The fact is that no one really knows what's going on and no one wants to sign long-term contracts," Shames said. "Everybody's walking around in the dark very carefully, waiting until someone turns on a light" that will illuminate future price changes.

During recent months, rather than stumble around in the dark, the utility that during the past decade earned the wrath of state regulators for ill-advised oil contracts has:

Negotiated a contract that allows the utility to carry cheap electric power into San Diego along Southern California Edison power lines. The agreement, announced July 17 ended a dispute between the two utilities that seemed destined for a court confrontation.

For the first time, bypassed its longtime natural gas pipeline supplier and cut a deal with a production company for lower-cost spot-market gas.

Attracted a bid from a Canadian natural gas production company that wants to sell SDG&E; relatively cheap natural gas on the spot market.

Signed a letter of intent with Shell Canada Ltd. to enter into negotiations that could lead to a long-term natural gas supply contract for up to 50 million cubic feet a day of Canadian natural gas.

Signed a letter of intent to participate in a feasibility study of a proposed 900 megawatt hydropower facility on the Peace River in British Columbia. If the project proves to be cost-effective, it could be producing power by the mid-1990s.

Entered into discussions with a Mexican agency that has begun discussing a proposed coal-fired power plant that would burn both Mexican and imported coal. If the Mexican government decides to build the plant, it could begin generating electricity by the mid-1990s.

Such diverse energy acquisitions have been stimulated by deregulation, particularly in the natural gas industry, according to Jim Kenney, SDG&E;'s manager of gas planning.

The results of deregulation became evident earlier this year when SDG&E; bypassed Southern California Gas--the utility's sole supplier for more than 50 years and the operator of one of the state's two pipeline distribution systems--to purchase natural gas on the spot market.

SDG&E; made the deal after the Federal Energy Regulatory Commission required the nation's interstate pipeline companies to transport gas sold by producers directly to utilities. Previously, the pipeline companies had negotiated wholesale deals with producers and subsequently sold the gas to utilities such as SDG&E.;

However, although "finding cheap gas is easy right now, getting it to (SDG&E; and Long Beach) is the difficult point because we're the only wholesale customers on Southern California Gas' system," said Ralph G. Kortz II, general manager of the Long Beach municipal gas department, which like SDG&E; historically has purchased its gas from Southern California Gas.

Last month, Long Beach bypassed Southern California Gas and signed a year-long contract to purchase spot-market gas from an independent company that will ship the gas to Long Beach through the Southern California pipeline.

Although SDG&E; has not negotiated long-term agreements to buy spot market gas, it likely would be interested in that kind of arrangement, according to Mike Niggli, SDG&E;'s director of fuel power contracts.

During the past two months, SDG&E; has purchased all of the natural gas used to fire its electric generating stations on the spot market, mainly from suppliers in the Southwestern United States, according to Kenney.

Although SDG&E; has turned to the spot market for gas burned in its generating plants, gas distributed to residential and commercial customers is still purchased under a long-term contract with Southern California Gas.

So far, SDG&E; has not played the spot-market game in order to supply its residential and commercial customers. However, if the utility's negotiations with Shell Canada Ltd. succeed, SDG&E; might bypass Southern California Gas and sign long-term contracts for cheaper gas directly with Shell Canada, Niggli said.

Although Canadian gas is plentiful, Canadian export regulations have make it difficult for gas companies to offer attractive prices to U.S. utilities, according to industry observers, who explained that Canadian producers generally have been prohibited from offering gas to U.S. utilities at prices below those offered to utilities in Eastern Canada.

Even with those hurdles, SDG&E; last month expanded its pool of spot-market bidders to include a Canadian natural gas production company. However, transmission problems prevented any of that gas from being burned in San Diego, Kenney said.

The snafu underscored the complicated process of getting gas or electricity through the limited number of gas pipelines and electric transmission lines that link energy-rich areas with San Diego's energy desert.

Although SDG&E; recently signed a long-term agreement to purchase electricity from an Oregon utility, a shortage of transmission lines inhibits the utility's ability to import more power from the Pacific Northwest.

To ease that crunch, SDG&E; is engaged in planning for a new line that would carry electric power from the Northwest to San Diego.

The transmission agreement with Southern California Edison broadened even further the utility's reach, giving it access to previously unaccessible but relatively cheap electricity in parts of Arizona. In return, SDG&E; gave Southern California Edison permission to import electricity along the Southwest Powerlink, which connects California and utilities in other parts of power-rich Arizona.

For SDG&E;, which had relied on power shipped in along the Southwest Powerlink transmission line in 1984, increasing the number of incoming lines gives the utility the ability to bid down energy prices by playing one region against another, according to Bob Resley, SDG&E;'s manager of electric planning.

SDG&E; initiated the court challenge because "without access to transmission lines we can't enjoy the economies" that arise from purchasing lower-cost power from out of state, Resley said.

In order to play the same competitive game on the electric side, SDG&E; has retooled its electric generating stations to burn either gas or oil. Consequently, the utility can drive prices down by pitting spot market gas and oil suppliers against each other, Niggli said.

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