Energy Panel May Reset Natural Gas Price Caps for State

The Federal Energy Regulatory Commission, in a limited but potentially significant policy shift, said Tuesday it is considering whether to reimpose price caps on some natural gas sales to California.

At issue is only about 1% of the 7 billion cubic feet of natural gas that California imports daily. Although that represents a tiny portion of the gas piped into the state, the political ramifications of the commission’s announcement are more substantial.

Senior California Democrats in Congress--including Sen. Dianne Feinstein and Rep. Henry A. Waxman of Los Angeles--have complained that the commission sent the wrong signal to the markets in February 2000 when it lifted price caps on certain sales of natural gas. Last year’s action was part of a commission experiment designed to expand the reach of deregulation.

But natural gas shipped to California now costs nearly five times as much as it did then, and three times more than the current going rate elsewhere in the country. For example, gas was selling for $5 per million British thermal units at the New York City limits in early May, compared with $13.54 in California at the Arizona border.

Since most of California’s power plants are fueled by gas, the high prices are being blamed for soaring electricity rates in the state.

Tuesday’s action follows the commission’s announcement Friday of a broad investigation of natural gas prices in California.

“I hope the agency moves expeditiously to reimpose the cap,” said Feinstein, who has been urging such a move for months. “Restoring the cap, coupled with making the market more transparent, could make a real difference. It’s time that FERC realizes that this huge price discrepancy has placed a dramatic burden on the people and businesses of California.”

Tuesday’s order may signal a gradual shift by the commission to a more activist stance. The agency, which functions something like a national utility commission, has been strongly criticized by California officials for its seeming aloofness.

Commission Chairman Curt Hebert remains adamantly opposed to hard price caps. But last week, President Bush’s two new nominees to the panel’s five-member governing board told the Senate that the federal government must aggressively investigate the causes of high energy prices in California. The Senate Energy Committee is scheduled to vote today on the confirmation of nominees Patrick Wood and Nora Brownell.

The commission set a 20-day deadline for comments on reimposing the cap for sales to California, or alternatively, all the Western states.

The commission said it is reopening the price cap debate in response to complaints from California. “We don’t know if this is the actual cause of high prices,” said a senior commission staff member. “But even if it is not the direct cause, people have been pointing to it. And this [order] is in response to what we are hearing from people on Capitol Hill.”

While the commission has legal authority to set wholesale prices for electricity, its powers are much more limited when it comes to the cost of natural gas.

Congress in the early 1990s lifted federal controls on the price of natural gas at the wellhead. However, the commission continued to set rates for transporting gas. Normally, transportation represents only a small fraction of the total cost of gas. The panel also continued to regulate resales of space reserved on pipelines by natural gas shippers.

Tuesday’s commission order applies only to those resales. And even if caps are reimposed, they would not set an absolute ceiling on the price of natural gas shipped to California, only on the portion of the price attributable to transportation costs.

Like travelers going on vacation, natural gas sellers reserve space--or capacity--on a pipeline in advance. But unlike vacationers, gas sellers pay a reservation fee that includes the transportation charge approved by the commission. If a seller doesn’t want to exercise its reservation, it can resell the capacity to another company that wants to ship gas.

In February of last year, the commission’s governing board lifted price caps on such resales.

Waxman said that created an opportunity for unscrupulous sellers to see how far they could push natural gas prices in California. “FERC removed the price cap, and the result has been a huge increase,” Waxman said. “These huge price increases seem to be only hitting California.”

The commission is hoping the investigation it announced Friday will identify the causes of higher natural gas prices at the California border. It costs less than $1 to ship 1 million BTUs of natural gas from producing basins in Texas to California, but recently the markup at the state border has hovered around $9. The components of that markup are nearly impossible to tease apart, since companies charge one all-inclusive rate for the gas they deliver.

The natural gas industry says the high prices in California are not due to market manipulation or the commission’s removal of the price cap on a small volume of sales. Instead, the industry cites unbridled demand from power generators, a hard winter that depleted gas storage and low rainfall that resulted in less hydroelectric power.

Meanwhile, the commission is conducting a trial-like hearing into allegations that subsidiaries of El Paso Corp. of Houston acquired monopolistic power in the Southern California gas market last year and used it to reap profits.

Those proceedings stretched into their seventh day Tuesday, with no clear resolution.

Tedious cross-examination delved into the intricacies of dueling economic models developed by experts for El Paso and Southern California Edison, one of the plaintiffs.

If El Paso is found to have engaged in market manipulation, FERC could order it to return ill-gotten gains. The company denies any impropriety.