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State Regulators: Driven By Reliability

Can natural gas supply keep up with demand for power?
Fortnightly Magazine - November 2004

STATE REGULATORS:

Can natural gas supply keep up with demand for power?

Interviews

Things are looking up for the energy industry, but tough issues remain. Regulators-forced to grapple with the mismatch between volatile natural-gas prices and years of building gas-fired power plants-have learned a thing or two. They now insist on new rate schemes and risk-management methods while promoting the use of liquefied natural gas.

And while the August 2003 blackout has faded a bit from memory, reliability and utility infrastructure development remain at the top of the list of important issues. Competition also may be resurging, as California again ponders the benefits of retail choice-this time based on a core/noncore market structure.

This year's Regulators Forum spans the different regions of the country, touching all these issues.

Arizona: Southwestern Reasoning

Questioning FERC

"Arizona utilities have not sought, and the commission has not granted, pre-approval of cost recovery for participation in infrastructure projects. The unique and extraordinary circumstances in Arizona's natural-gas infrastructure support the commission's consideration of pre-approved costs."

Marc Spitzer , Chairman, Arizona Corporation Commission

Q: What is Arizona doing to deal with volatility and increases in natural gas prices, as well as predictions of lack of gas supplies?

A: Two common ways of addressing possible concerns with gas supply reliability and flexibility are the development of natural-gas storage, particularly market area natural-gas storage, and the ability of natural gas-fired electric generation to have a backup fuel source.

The development of natural-gas storage has in recent years been widely recognized as important in enhancing the natural gas infrastructure in Arizona. The existing natural-gas storage on the eastern end of the El Paso system, such as Washington Ranch, provide system benefits, but it takes several days for natural gas to travel from west Texas to Arizona, so production area storage does not provide the same ability to quickly respond to rapidly changing local conditions. It is unclear at this time if or when natural-gas storage facilities will be constructed in Arizona. Additionally, liquefied natural gas (LNG) imports are increasingly being looked at as a substantial source of natural gas supplies in the future, though siting issues remain for LNG facilities.

In a substantial change of course, on Dec. 18, 2003, the Arizona commission proposed a "Policy Statement Regarding New Natural Gas Pipeline and Storage Costs." In this document, the commission made specific policy statements about supply/infrastructure diversity, supply/infrastructure planning, the commission's approach to new infrastructure projects, individual utility circumstances, and reporting.

In two recent decisions, the commission approved applications by Southwest Gas Corp. and Arizona Public Service for pre-approval of certain costs if those entities participate in the Silver Canyon Project, subject to a number of conditions. The Silver Canyon project is a proposed new pipeline which Kinder Morgan Energy Partners would build from the San Juan supply basin in northwest New Mexico to Phoenix and then to the California border. The pipeline would provide additional direct access to San Juan gas as well as indirect access to gas in the central Rockies area. Traditionally, natural-gas prices in the San Juan supply

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