July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
Fuel costs drive electric prices, but generators seem perfectly willing to pay a premium for fuel when they're getting top dollar for power.
Even as the California power crisis drew headlines in mid-winter , natural gas shot up just as much in relative terms, if not more, and the higher prices were more widespread, blanketing the country not so much with spikes as with a sustained plateau, though some signs of weakening were seen in late January and early February.
Gas prices in Southern California reached the $60 range in December, sending insiders scurrying for answers, just as when electricity prices soared in the summer and then again in the fall. But the gas question appeared more complex: Power prices responded in part to higher fuel costs, but what was driving gas prices? Was each commodity reciprocating to the other?
The facts were known to some degree:
- Below-normal rainfall out West curtailed availability of hydropower.
- The hot summer pushed plants to the limit, deferring maintenance and forcing a higher-than expected rate of outages.
- A colder-than-normal fall encouraged high use of electric space heaters.
- The Aug. 19 explosion on the El Paso Natural Gas pipeline system disrupted gas deliveries into Southern California.
- Canadian gas prices spiked as well.
Add to that an increased reliance on natural gas for generation, plus already low stocks of natural gas in storage, and the stage was set. Jim Todaro, senior natural gas analyst at the federal Energy Information Agency, summed up the gas market explosion in California: "It's just a convergence of so many things," he says.
"Clearly it's part reality and it's part perception," says Bob Linden, managing consultant at PA Consulting Group, of the volatile natural gas prices. "It's part market fundamentals and it's part trader speculation. And the cure is not obvious."
It is a generally assumed truism that in order to find a solution, you must first identify the problem-or problems. Is there one factor that can be isolated as the most important? Unfortunately, it might be one of those acts of God. "The lack of hydro is really a big issue," says Todaro.
Streamflow normally collected in reservoirs in the fall and winter for future use is being used right now to serve present needs. "There's barely enough power now, and they're eating their nest egg right now in terms of sucking all that hydropower down when they usually just let the reservoirs fill and use it to supply the Northwest," says Linden. Mother Nature just hasn't cooperated on any fronts, it seems. "There's very low snow pack, not much snow in the Rockies this year, and meanwhile, they're sucking every megawatt hour of power they can out of those reservoirs." And don't forget the environmental concerns about the salmon runs in the spring that will hurt hydropower output. "Something bad is going to come from this, I'm afraid, because there's no quick way of turning it around," Linden says with an air of doom.
Whether you're talking gas or power, the outlook is the same: positive