March 19, 2003 -- State official calls gas prices result of 'a perfect storm'

www.mtdemocrat.com By JONATHAN SCHWARZBERG Staff writer

The gas supply right now may be as tight as electricity was during the peak of the electricity crisis in California.

Bill Keese, chairman of the California Energy Commission, told the El Dorado Irrigation District board that during the energy crisis the power from a 21-megawatt power facility like the Akin Powerhouse could have had an effect on the price of electricity.

Things may be the same way with gasoline right now.

"We are so strapped right now that anybody could (affect the market)," Keese said.

Keese likened the current crisis to a kind of "perfect storm" that has been created by a variety of circumstances. The impending war in Iraq has caused oil supply problems from the Middle East. A strike in Venezuela has stopped oil coming from that country.

With tight supplies, the market can become open to manipulation. So Gov. Gray Davis has charged the Energy Commission with investigating the price of gas. Keese said he will present his report to the governor on March 28.

"Is gouging occurring?" Keese asked. "I don't know."

But Keese said the commission is looking to see whether gas prices are fair. He said when supplies are tight it is difficult to determine whether prices are being manipulated.

Another "perfect storm" hit the state of California with a shock about two years ago with the electricity crisis. This storm came to a head in 2001 when rolling blackouts were experienced in El Dorado County and across the state.

In the same way that California is experiencing a lack of gas supply this year, the state faced a lack of electricity. California usually gets electricity during summer from hydroelectric facilities in Washington state and Canada. But when these areas couldn't produce electricity for California, the state was in trouble.

"They had a drought," Keese said. "We had high temperatures. We had power plants out."

California saw a power supply boon in the 1980s with nuclear power plants and hydroelectric facilities being built.

"We built so much in the '80s that we entered the '90s with a big surplus," Keese said.

So California built no major power plants in the 1990s. Basic supply and demand pushed electricity prices from $30 per megawatt hour to about $300 per megawatt hour at the highest. Since that time, California has locked in prices of between $50 and $60 with long-term contracts.

These contracts have leveled things out for now, but Keese said the state needs to build at least two large power plants per year in order to keep up with demand.

But another problem may be looming over the horizon.

All the proposed power plants will run on natural gas. This is the fuel of choice because it is clean-burning, but natural gas supplies are getting tight, too.

California produces only about 10 percent of its natural gas. The rest is imported from other parts of the country. Fortunately, California is at the end of the road for much of the piped natural gas. This means California can store, and does store, a lot of natural gas.

But more natural gas will be necessary. So companies throughout the state are looking for ways to import more gas.

Keese said one of the most promising techniques for bring natural gas in could be LNG, liquid natural gas. It is possible to take trapped natural gas and convert it to a liquid form so it can be transported more easily.

This form of gas can be obtained for about 50 cents per million BTU (British Thermal Units). Transportation costs drive this price up to about $3.80, but that is still less expensive than the $5 price the state faces right now.

California has been forced to pay these high prices due to the hard winter in the Northeast. Some states are paying over $9 per million BTU, taking most of the natural gas from Texas.

"As soon as they're willing to pay $9, it's not going to come here," Keese said.

So the market for natural gas remains unstable, which affects the electricity market. Meanwhile the oil market is bouncing around, and two "perfect storms" travel dangerously close to each other.

Jonathan Schwarzberg can be reached by e-mail at jschwarzberg@mtdemocrat.net.