Power Plant Plans Hinge on Strained Gas Network

Gov. Gray Davis’ plan to bring on line new power plants by as early as this summer could be hampered by serious capacity problems in the vast network of pipelines that delivers natural gas to fuel these plants.

The gas distribution network has not been expanded in eight years and is already running close to capacity, experts said. Natural gas is the source for more than half of California’s electricity supply, with the state relying less and less on oil or nuclear energy because of a variety of environmental concerns.

Applications have been filed for seven new pipelines with the Federal Energy Regulatory Commission, but only two have been approved, and no one expects a significant boost in capacity for at least a year.

Davis’ plan to speed construction of a variety of gas-fired power plants is considered key to California working its way out of an electricity crisis that has kept the state on the edge of blackouts for months.

Davis is aware of the potential shortfall and is working with state regulators to keep his plan on track, said spokesman Roger Salazar.

“Obviously, it’s one of the many important parts of the puzzle we have to solve in order to get through this challenge,” Salazar said. “We should be able to [get the plants running]. But it’s going to take a lot of work.”

Davis assured Californians on Feb. 8 that an additional 5,000 megawatts would be brought on line by summer--and another 5,000 megawatts the summer after that.

But given the limited pipeline capacity, some industry experts, utility regulators and energy generators said bringing new electricity plants on line will be a tough challenge.

“The straws can’t carry any more,” said Bill Wood, natural gas forecaster for the California Energy Commission. “So it’s going to be tight. All the ducks have to line up to make it work.”

No one is sure exactly what level of capacity will be needed to carry out Davis’ plan, and the state is now trying to answer that question with a feasibility study. To boost the power supply by another 5,000 megawatts, some estimate that the existing pipelines would have to increase capacity by about 10%. Whether the pipeline can carry the extra natural gas will depend on a complex shuffling of flow schedules and the shutdown of older, less efficient plants.

State Depends on Natural Gas

Natural gas supply is a critical part of California’s energy crisis because the state relies on the commodity to generate much of its power. It is also the most expensive component in generating electricity. In the last several months, natural gas prices have tripled across the nation but skyrocketed many times more in California.

Even before California’s crisis deepened, two federal studies released last year warned of the need for more capacity as the state became more reliant on natural gas for electricity.

“As hydroelectric and nuclear power sources decrease, the gap has to be filled with a higher percentage of gas-fired operations,” said Peter Navarro, an economics professor at UC Irvine. “That alone begins to strain the transmission system because it’s not built for that. . . . We know there is a shortage of pipeline capacity.”

That view is echoed by officials from both utilities and power generators.

“I don’t think we’re going to be able to move as much additional gas as we’ll need to without doing something to the infrastructure,” said J. Stuart Ryan, an executive vice president overseeing the Western region for AES Corp., the state’s largest supplier. “We’re scrambling to catch up and we’re going to have to move faster than we’re used to.”

Burrowing underground like steel tunnels and spanning rivers like giant silver tightropes, the interstate pipelines that cross California’s borders are big enough to roll a basketball through and can carry enough gas to fuel nearly 350 power plants and heat millions of homes and businesses.

In the state, four big pipes hook up to sprawling distribution systems owned by utilities. A fifth pipe principally serves oil recovery operations and other industrial gas gluttons.

California has never had enough natural gas to meet demand and has long been a major importer.

The first gas deliveries arrived shortly after World War II, when El Paso Energy began pushing its pipeline--and its fortunes--west from Texas.

El Paso now owns two of the five major interstate pipes that export gas to California, which devours more gas than most other states but produces only 16% of its supply. Nearly half of the state’s imports come from the San Juan and Permian basins in the Southwest. Canada and the Rockies provide the rest.

The pipeline systems entering and spanning California have not been expanded since 1993, when the state was sputtering from a recession and the Internet was in its infancy.

Since then, the population and the economy have risen, both driven in part by the dot-com boom in Northern California, where giant technology firms can suck up as much power as small cities.

Furthermore, opposition over the last two decades to nuclear energy and smog-producing oil and coal plants has led California to make a deliberate shift toward natural gas, an invisible, odorless, tasteless hydrocarbon that burns cleaner than most fuels.

Eight years ago, 40% of California’s power plants could operate on either oil or natural gas. Now, more than 95% operate only on natural gas.

Before interstate pipelines are certified, companies must sign up enough customers to justify the projects.

Three Expansion Projects Abandoned

Three projects that would have expanded pipeline capacity by about 30% were cleared for construction in the 1990s. But all were abandoned.

One company, Tenneco Co., had found enough customers who wanted a share of the 700 million cubic feet a day of Canadian gas that the Altamont Pipeline would have carried. But the company dropped its plans in 1996, in what is still a mystery to federal regulators.

El Paso Natural Gas Co., which acquired Tenneco that summer, is accused in a pending antitrust lawsuit of conspiring with other energy firms to kill the Altamont project. The companies deny any wrongdoing.

Today, of the seven pipeline applications on file with the Federal Energy Regulatory Commission, only two have been approved and only one of the projects, Questar Southern Trails, is expected to add capacity by year’s end. And that project--a conversion of an old oil pipeline stretching from New Mexico to Long Beach--is not expected to give a substantial boost to capacity.

“We’re not talking about a huge amount of gas,” said Jeff Lustgarten, a Questar spokesman. Of the five other projects on deck, none is expected to be complete before the end of 2002, at best.

If the Questar project is any indication of how long the process takes, the wait could be even longer. The company filed its request in January 1999 and estimates that it will have to wait “another six to nine months before we can flip the switch on the pipeline,” Lustgarten said.

And since the interstate system can already deliver about 300 more million cubic feet of natural gas a day than California can accommodate in its distribution system, relieving bottlenecks at delivery points are also an issue. No such projects are in the works, said the state energy commission’s Wood.

Despite infrastructure concerns, state regulators have no choice but to speed up the approval periods for power plant projects. The governor signed executive orders this month directing them to do so, the aim being to meet peak demand during a summer forecast to be warmer than usual.

Under the new time frames, peaker units, which are designed to pump out 50 megawatts on a moment’s notice during high demand but have to gulp up twice as much gas as a typical plant to do so, would be approved within 21 days, down from the current four months.

Larger plants would be approved in four months instead of the average year it takes now.

Some of the projects expected to be up and running by the summer were under construction before the governor announced his plan, including Calpine Corp.’s plant in Yuba City, expected to be operating by July--a month earlier than expected.

Another fast-track proposal that may add strain to the system is being debated in Huntington Beach.

That’s where AES Corp. hopes to bring a pair of sleeping giants out of retirement by June.

Built nearly 50 years ago and sold to AES by Southern California Edison as part of deregulation, the units were slated to be demolished until the power crisis loomed and AES sought permission to retrofit the generators with state-of-the-art equipment.

Angry residents and city leaders are accusing the company of trying to reap profits at the expense of the environment.

The plant would receive its gas from Southern California Gas Co., which according to Wood of the Energy Commission is already exceeding its delivery capacity and is dipping into reserves to meet customer demand.

Wood and fellow staffers are working on a feasibility study about pipeline and storage capacity, hoping to issue a report by mid-March.

Meanwhile, some power experts argue that California should be examining ways to diversify a power portfolio that depends disproportionately on a natural resource found in such limited amounts within its own borders.

Others argue that the free-market mechanics of the deregulated natural gas industry have helped cause the crisis. Often, marketers purchase both space on the pipeline and gas itself. They then negotiate contracts with energy suppliers. A fairly recent rule allows pipeline tenants to release excess or “swing” capacity, and sell it in secondary markets. Critics suggest that this leaves much room for manipulation.

“There’s absolutely no question in my mind that policymakers are not addressing the root causes of this crisis--which is the natural gas link,” said the UC professor, Navarro. “Maybe after we get through this short-term crisis, they’ll turn their attention to it. But probably not.

“The consequences are very clear. Basically, both the electricity and gas rates will be a lot higher than they need to be.”

Delivery prices have already jumped as high as $48 per million British thermal units, a dramatic rise over the four-year average of 50 cents.

Higher gas prices mean that power generators will charge more for the electricity they sell to debt-burdened utilities. For every 10-cent increase in the price of gas at the California border, electricity costs rise at least $34.2 million per year, according to a complaint filed with the federal energy commission by lawyers for Edison.

Customers can protect themselves by hedging long-term contracts through the futures market in New York. But those who shop the open market are at the mercy of those who have it.

Houston-based Reliant Energy Co., one of the largest suppliers of electricity to California, estimates that it spends about $5 million to $15 million a day on the open market to fuel its five power plants, compared with a historical average of about $1 million a day.

“We all know the prices have gone up for gas,” said Reliant spokesman Richard Wheatley. “It’s the largest single cost component of electricity today, if you have natural gas plants like we do.”

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Web of Pipelines

The network of natural gas pipelines in Southern California has not been significantly expanded since the early 1990s, even though the clean-burning fossil fuel is a critical element in the state’s power supply picture. A look at the network of pipelines:

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Source: California Energy Commission

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