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News Analysis

Fuel costs drive electric prices, but generators seem perfectly willing to pay a premium for fuel when they're getting top dollar for power.
Fortnightly Magazine - March 1 2001

for the long-run, scary for the short-term.

"Long-term, I'm very sanguine about resource capacity," Linden says. "The industry fundamentals are fine, but you can drown in five minutes, and this a 24-month solution we're looking at."

Part of the reason that the power crisis and natural gas prices are tied so closely together, Linden says, is that generators are perfectly willing to pay a premium for fuel when they're getting a premium for their power. "You've got a power market now that allows the luxury of high prices," he says. "And with those high prices comes generators' confidence that they will make back the money used to purchase the natural gas. "You now have much more direct linkage between power prices and gas prices, so when power goes through the ceiling, gas is going to go through the ceiling, because it can. It's a different world. It's a unique market in North America."

Pipeline Problems

One factor cannot be ignored—the Aug. 19 rupture and resulting explosion along El Paso Natural Gas Co.'s South mainline near Carlsbad, New Mexico, which resulted in the deaths of 12 people. By all counts, the incident affected the California natural gas market. "[California] lost 500 million [cubic feet] a day of capacity into the state at that point," points out Linden, noting that while the accident is not the sole reason for the problem, "[I]t's a contributing factor." But is it still having an effect?

The explosion initially affected three lines, and now two of the three are currently operating. However, Kim Wallace, spokesperson for El Paso, minimizes the impact on the California natural gas market by saying that reports of that part of the pipeline operating at 85 percent to 90 percent are misleading. While that figure may be accurate, she says, El Paso is sending the same amount of gas into California as before the explosion, only by different routes. "Shippers are purchasing their gas other places on the system," she says. "In fact, we've been sending more to California than we have in a very long time."

The bulk of El Paso's capacity, Wallace says, is under long-term contracts, so with or without a volatile natural gas market, the company doesn't play much of a role in improving or worsening the situation. Certainly, the pipeline company does hold some interruptible contracts, freeing up a limited amount of capacity to be put up on the bulletin board, but, she claims, "It's basically been going just as it has been." Turning down shippers is a way of life at El Paso.

Wallace's next argument is that if you want to look for bottlenecks, don't bother looking in the direction of El Paso. Instead focus inside the state of California, at the distribution system. El Paso, she claims, is carrying as much gas to the California border that the utility-owned intrastate system can handle. "We're up against the distribution system," she says. "We're producing as much [gas] to the border as can be taken away."

If Linden at PA Consulting sees constraints within the intrastate system, it's