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Enron Mail |
This story from today's Gas Daily doesn't help -- note the last sentence:
***Calif. gas and power prices: Joined at the hip? When gas reaches the California border, something happens to the price. The same goes for the power market. But how closely are the prices of gas and power linked? Over the past several months, it has become fashionable to declare that power prices and gas prices are dependent on one another, rising and falling in sync. In a recent FERC public meeting, for instance, transportation differentials were fingered as the main culprits for the cost of wholesale power in California (GD 4/27). At first glance, the evidence seems to support this point. From one perspective, it does appear that the two markets do indeed reach bottoms and ceilings at the same time. But on closer examination, power and gas prices over the last year were often out of sync -- even in California. When we view prices in major wholesale power markets relative to prices in major producing areas serving California, we also find little or no relationship, especially in terms of the magnitude of the change in price. For the last six months, the price of gas in California has generally stayed above the cost of gas in the major producing basins supplying gas to California. The resulting difference in price -- the basis between California gas and producing area gas -- most often exceeded the cost of transporting the gas to California severalfold. On Dec. 11, the cost of gas in California was about 10 times as great as the cost in every producing area from which it receives gas. And it was very similar to the cost of power at Palo Verde, a major wholesale power market serving California. The average index price of gas at Gas Daily SoCal Gas (large pkgs) major wholesale market on Dec. 11 was $59.42/mmBtu. Measured in Btu equivalent, the power market was almost the same. Using a heat rate of 8mmBtu/MWh to make the conversion from megawatt- hours to mmBtu, the average or index price of power at Megawatt Daily Palo Verde major wholesale power market on the same day was $61.13/mmBtu. The power and gas prices on Dec. 11 followed a steep uplift in price for both power and gas begun on Nov. 2. Those peak prices have not been exceeded since. By comparison, power prices on Nov. 2 were $7.06/mmBtu, while gas prices were $5.30/mmBtu. Thus, gas prices at $59.42/mmBtu on Dec. 11 had increased by a factor of 10 in a little more than a month. Even though gas prices increased in the major producing regions as well and behaved in interesting ways (GD 4/12, GD 12/01/00), the increase in California gas prices was so great it was as if they had not changed at all (see figure below). On 19 of the 25 trading days between the price trough on Nov. 2 and the peak on Dec. 11, gas and power prices were stepping up in sync. Increases (or decreases) in power prices were coupled with increases (decreases) in power prices. Yet the initial rate of increase was much greater for power than for gas. Between Nov. 2 and Nov. 15, power prices increased from $7.06/mmBtu to $25.75/mmBtu while gas prices only increased from $5.30/mmBtu to $8.20/mmBtu. After Nov. 15, gas prices began to take off. It was as if the initial large increase in power prices in the first 10 trading days following Nov. 2 had served as a catalyst for the subsequent large increase in gas prices. On Nov. 15, the spark spread was $17.50/mmBtu or $140/MWh, suggesting huge profits for companies obtaining gas for generating power for sale on the wholesale market. As wholesale gas prices caught up to wholesale power prices, however, the spark spread declined significantly. By Nov. 21 the spark spread was only $1.08/MmBtu. From a selective view of price such as the rise in Nov. 2000, it appears that power prices and gas prices are dependent on one another -- that is, when power prices increased gas prices increased as well and visa versa. But the variability of the spark spread for California markets reveals the lack of a simple relationship between power and gas prices (see figure below). The large volatility of the spark spread apparent from the price plot is largely determined by the volatility of the power price. Interestingly enough, it is not always clear why power and gas are well connected when they are well connected or even why they behave the way they do at these times. Most recent statistics available from the Energy Information Administration indicate that net generation of power from utility and merchant plants in California between September and October 2000 declined by 9%. Gas consumption at these power plants also declined by 9%. It is not surprising, then, that power prices declined in October 2000 from September 2000 levels. As consumption of gas at power generators fell by an additional 63 billion cf between October and November, prices of both gas and power not only rose but also rose in sync. Thus, while gas consumption for power generation was 79 billion cf, or about 50% below its September level, prices were significantly higher. Did gas prices rise in November because of an overall significant increase in gas demand by all sectors in November from October levels? According to the most recent EIA statistics, this was not the case. Deliveries to all sectors were almost even in October and November, differing by only 3 billion cf. An understanding of observed price behavior of wholesale gas and power never comes easy, but one lesson is abundantly clear: those who either hold firm rights for transportation of gas into California or are managing these rights are sitting pretty while those who don't have such rights and need gas are skating on thin ice. -- John H. Herbert, jhh1@msn.com James D Steffes@ENRON 05/02/2001 11:15 AM To: Phillip K Allen/HOU/ECT@ECT, Tim Belden/HOU/ECT@ECT, Ray Alvarez/NA/Enron@ENRON, Alan Comnes/PDX/ECT@ECT, Leslie Lawner/NA/Enron@Enron, Rebecca W Cantrell/HOU/ECT@ECT, Robert Neustaedter/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Christi L Nicolay/HOU/ECT@ECT, Jeff Dasovich/NA/Enron@Enron cc: Joe Hartsoe/Corp/Enron@ENRON Subject: Natural Gas Basis Differential - Why so Big? Joe Hartsoe received a call from Commission staff at FERC to try and understand why basis differentials into California were so big and why the large basis continues. Clearly with the new Electricity Order, natural gas is one of the primary factors on electricity prices in California. Our key fear, however small, is that FERC (or someone else) recognizes the huge implication of natural gas prices and seeks to cap natural gas sales for resale of P/L affiliates (such as ENA). There is some fear that the real monopoly is the holder of LT firm capacity, not the gas production firms. We need to develop a good story as to why the basis gas continues and messaging it quietly into the right FERC staff to keep the pressure of additional Investigations from happening. Joe is trying to get his hands on the Lukens study presented to the California study Committee on natural gas abuse to help guide our analysis. Jim
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