Gas and Pipeline Costs Fueled Electricity Crisis

California’s electricity crisis is also a natural gas crisis. Until this is better understood by Gov. Gray Davis, the state Legislature and the California Public Utilities Commission, any “solution” they craft will be doomed to failure. California is heavily dependent on natural gas-fired generators for its electricity supply. When gas prices or gas transportation costs rise, electricity prices must rise, too. Why, then, have natural gas prices been skyrocketing? More importantly, why are gas prices substantially higher in California?

The answer to the first question lies in a worldwide “dash for gas.” More than a decade ago, utilities around the world stopped building large coal and nuclear plants in favor of natural gas-fired generation. Gas plants can be built faster and generate far less air pollution and, up until last year, gas was dirt cheap.

Now, the bill for this global dash for gas is coming due in the form of intense pressures on gas markets. Indeed, prices have more than tripled nationally in the last year. But why are California natural gas prices significantly higher? The answer begins with this important fact: California does not have enough pipeline capacity to meet winter demand.

In the past, this wasn’t a problem. Utilities simply bought surplus gas in the summer and stored it for the winter peak. Unfortunately, in 1993, the PUC decreed that large industrial customers and power generators no longer had to help pay the bill for the utilities’ storage. So, of course, utilities began storing less gas.

Shortly thereafter, state regulators loosened the requirement that large electricity customers have backup generating capacity. Air pollution control districts also restricted the use of burning oil in backup diesel generators. Now we have much less stored gas and far fewer electricity users with backup power.

Add to this a third problem. El Paso Natural Gas Co.--a key state supplier--sold off all its surplus pipeline capacity, which meant it could be sold at an unregulated rate. Also, the Federal Energy Regulatory Commission has removed price caps on short-term gas transmission entirely. These factors set California up for the perfect electricity fall.

Last summer, gas became so expensive that the utilities put even less gas into their storage fields, hoping that gas prices would moderate. For the same reason, the state’s largest industrial customers did not buy adequate storage. When a pipeline explosion crippled El Paso Natural Gas, there was an explosion in gas prices.

This confluence of events has allowed natural gas pipelines and energy marketers to raise the California border price well above the national price. This legalized theft started with a $1 or $2 differential. But soon the price was soaring from about $6 per million BTUs, the standard measure for large natural gas trades, to $40 and beyond.

This has not only hit natural gas users very hard. It has also put extreme pressure on electricity rates. Under deregulation, California’s power generators can pass any increase in gas prices along to wholesale rates. Interestingly, the only stakeholder in the electricity debate that seems to fully recognize the critical policy link between gas-pipeline costs and soaring electricity rates is San Diego-based Utility Consumers Action Network. It has publicized the issue of “pipeline piracy” on its Web site.

However, just as Gov. Davis has talked about how federal regulators have failed to cap wholesale electricity rates, he should be castigating the same regulators for allowing natural gas pipeline costs to skyrocket. Just as the governor has talked about cracking down on unscrupulous merchant electricity generators, he should also be talking about busting the natural gas pipeline monopolists. And just as the governor has promised to build new power plants in California, he should be talking about building new gas pipelines and reimposing storage requirements on the gas utilities and their customers. When the governor talks about making our state university system electricity independent, he should be taking that excellent proposal one step further. Rather than simply have these campuses invest in “old technology” natural gas plants, he should make these universities living laboratories for the diffusion of new, gas-free technologies like flywheel systems, fuel cells, solar photovoltaics and wind.

More broadly, we all must recognize that only after California curbs its natural gas habit and puts an end to the exploitation of the pipeline monopoly will we be free of our electricity crisis.