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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

increased capacity, but for maintenance flexibility—to be able to replace compression on its own parallel line with the heavy duty pipe.

But with pipeline expansion running rampant, couldn't El Paso capitalize on the increased capacity? In fact, that's basically what the Federal Energy Regulatory Commission asked El Paso in the ongoing proceeding on All American. Yes, El Paso told the federal regulators, the newly acquired line could be used for expansion. But, says Wallace, "Our initial [FERC application] was not for expansion. It was for construction."

In a phase of high demand for capacity, however, maintenance flexibility can't be the only reason for the investment. Bottom line, points out Linden, is that El Paso suddenly has some new capacity at its fingertips that must be counted when adding up overall pipeline expansion into California. "I know that the public purpose was to reduce cost, but I think if the end is near, they certainly are going to run those compressors. It's an infrastructure capability that is now available. ... They've created the capacity, one way or another." Meanwhile, El Paso is working with the Office of Pipeline Safety (the federal Department of Transportation) to return the ruptured line near Carlsbad, NM back to operation.

"Every major pipeline is expanding," notes Linden. "Clearly everybody is trying to get to the California border and get those prices."

The Fix

With a wave of pipeline expansion leading the way, the long-term outlook looks good. "You've got half the problem solved just with expansions on the table," Linden observes. That's not accounting for load growth, but on the other hand, eventually the older inefficient steam generators will be retired in favor of the combined cycle turbines that can double efficiency in terms of natural gas consumption, mirroring a trend happening elsewhere around the country: increased generation with less natural gas use.

And the buzz of new activity goes all the way to the wellhead-even right within the state of California, where drilling has been going on for a century. The Temblor Formation in the San Joaquin Basin 100 miles northwest of Los Angeles, was scheduled to start producing natural gas from a 19,000-foot well in the first quarter. And some of the same forces—i.e., technology allowing for profitable drilling to such depths—are driving new exploratory developments in both California and in Western Canada, as well.

"I think there are going to be a lot of high-risk, high-reward type formations pursued in deeper horizons within the state," Linden says. "The direction of the drilling activity [in Canada] ... [is going the same direction as California]. ... The more sophisticated players are going deeper, they're going farther North, they're looking at new horizons. ... And this Temblor play in California is an indication of that. People have been drilling for oil and gas in California for 100 years. Who would have guessed that a one to seven tcf formation could be sitting down there? That's a huge financial windfall."

But that's all in the future, and Linden expresses grave concerns about the short-term. "I think there's going to