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State Regulators: Driven By Reliability

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

policies arguably harmful to capital investment. However, recent Wall Street history reveals some unsettling developments, suggesting the "invisible hand" is not properly functioning.

The proper functioning of financial markets requires rational financial actors. Corporate management is under a microscope after some noted implosions. The financial community quite rightly calls for rational federal and state policies with regard to the regulation of utilities. I can only hope that the community examines the rationality of its own actions and decisions.

California: Western Growth

More Power Needed

"Energy efficiency and demand response are key, but they cannot meet the full need, and California's economy will depend on our ability to build new power plants where they are needed."

Michael R. Peevey , President, California Public Utilities Commission

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

A: The California Public Utilities Commission (CPUC), along with the California Power Authority and the California Energy Commission, has adopted an Energy Action Plan (EAP) that, among other things, lays the groundwork for ensuring reliable supplies of natural gas for the state. The EAP discusses the need to identify critical new gas transmission, distribution, and storage facilities in order to meet California's future needs; monitor the gas market to identify any exercise of market power and manipulation; and work to improve Federal Energy Regulatory Commission (FERC)-established market rules to correct any observed abuses.

In addition, the EAP calls for the evaluation of the net benefits of increasing the state's natural-gas supply options, such as liquefied natural gas (LNG), and supporting the electric utilities and gas distribution companies entering into longer-term contracts as a hedge against volatile and high spot market prices. As a first step in this process, the commission is currently establishing policies and rules to ensure reliable, long-term supplies of natural gas to California. Phase One of this important process included looking at issues such as interstate pipeline capacity contracts, and LNG and interstate pipeline access. Implementation of the EAP is an important step for California's energy agencies to take together to help achieve the state's overall goal of adequate, reliable, and reasonably priced electrical power and natural gas supplies.

Q: What is next on the agenda for the California PUC?

A: On the energy side of the CPUC's work, we are reviewing the long-term procurement plans of the utilities to ensure reliable supply of electricity to California while taking into consideration goals for renewable energy and energy efficiency. In January 2004, the CPUC adopted an integrated procurement process for the utilities, which requires them to achieve a planning reserve margin of 15 to 17 percent by Jan. 1, 2008. The CPUC is now looking at accelerating that deadline to 2006. The CPUC is also developing "resource adequacy" standards for proving that power is deliverable where and when it's needed. To avoid over-reliance on spot purchases, the CPUC requires utilities to show in advance that they have at least 95 percent of their needs locked up and under contract. All of these activities