RE: CEC Infrastructure Report

Glen,

Please add Paul Y'Barbo and Mark McConnell to your distribution list for marketing.

Thanks, Kim.

-----Original Message-----
From: Hass, Glen
Sent: Mon 10/1/2001 4:45 PM
To: Miller, Mary Kay; Kilmer III, Robert; Brennan, Lorna; Donoho, Lindy; Harris, Steven; Lindberg, Lorraine; Lohman, TK; Lokay, Michelle; Moore, Jan; Watson, Kimberly
Cc:
Subject: CEC Infrastructure Report

The California Energy Commission has issued its final report on the California Infrastructure which is to be voted upon by the Commision on Wednesday. Below is a summary of the report that was in Inside Ferc and attached is a copy of the full report (123 pages). There's an executive summary at the beginning which is about 10 pages. Although, as stated in the summary, the Commission found a lack of sufficient capacity on El Paso as a contributor to high prices, they do not take on the issue of market power as had been suggested by the CPUC and other commenters and blame the pipeline for such prices. Instead they cite El Paso capacity problems as one of several factors which caused high prices last winter. I'll keep you advised as to what happens on Wedneday at the CEC meeting. gh

IN NEW REPORT, CEC COMMITTEE KEEPS EMPHASIS ON IN-STATE GAS CAPACITY
Constrained interstate gas pipeline capacity was just one of the factors that led to high natural gas
prices in California last fall and winter, according to a report issued last week by a committee of the
California Energy Commission. The revised final report on gas infrastructure issues notably skirted the
issue of market power as a factor in the gas price spikes that rocked the state.
After taking into consideration comments from the California Public Utilities Commission and others,
the report to the full CEC concluded that a number of factors were involved. "Insufficient receipt capacity
within California and insufficient capacity on the El Paso [Natural Gas Co.] pipeline system both contrib-uted
to the high price of natural gas in the fall and winter of 2000," the Sept. 24 report said. The CEC is
scheduled to vote Wednesday on the report.
The revised version took into account scarcity on the El Paso system but did not place the blame
entirely on that, noting the high demand for gas-fired electric generation and relatively low storage levels
during times of high gas prices. "As a result of the insufficient capacity both to and within California,
buyers were less able to force suppliers to bid against each other. Whether prices during this period were, in
whole or in part, the result of a free market's rationing of scarce suppliers through a scarcity premium, or
entirely the result of price manipulation, is beyond the scope of this report," wrote Commissioner Michal
Moore, presiding member of CEC's electricity and natural gas committee.
Pointing to the high-profile CPUC complaint (RP00-241) against El Paso Corp. pending at FERC, the
CEC added that it had "every confidence that the interests of California ratepayers will be well-represented
by the CPUC."
The report pointed to the fact that California shippers surrendered large blocks of capacity on the El
Paso system in recent years. "The shortfall in capacity was absorbed by California, and not the upstream
customers. This is due, in part, to the decision a few years ago by California to turn back part of its rights to
firm capacity on the El Paso system. It is also due to the failure by El Paso to honor its contractual commit-ment
to deliver capacity paid for by California," the report noted.
Moore's committee had postponed issuance of the report after receiving comments on a draft version
from the CPUC, The Utility Reform Network and Southern California Edison Co., which all called for
consideration of allegations that El Paso exerted market power over gas sales into California (IF, 27 Aug,
1). The draft pointed to insufficient takeaway capacity in California and called for slack capacity in the
range of 15% to 20% (IF, 13 Aug, 4).
The report went on to suggest that California "can no longer plan for the future as if we lived in a
regulated, cost-plus environment. Under price regulation, adverse hydroelectric conditions and extreme
temperatures did not lead to extreme price spikes. Under today's conditions, that is no longer the case."
Moore added that the state's "virtual complete reliance" on gas for electric generation has contributed to
the new dynamics surrounding capacity planning.
More than 100,000 Mw of gas-fired generation proposed for the Western Systems Coordinating Council
region demands expansion of the regional pipeline grid, the report continued, saying the CEC was "encour-aged"
by recently announced expansion plans by interstate pipelines and FERC's stated intent to expedite
review of such proposals. The report also noted that Southern California Gas Co. is developing 375,000 Mcf/
day of additional receipt capacity, which should be ready by the end of the year. Also, Pacific Gas and Electric
Co. plans to add as much as 600,000 Mcf/day of capacity by 2003, according to the report.
It observed that intrastate pipelines, in particular those in Southern California, ran at close to full
capacity at times this and last year, which created bottlenecks in delivering supplies from interstate
pipelines to gas consumers, including electric generators in 2000 and early 2001.
High prices in the future could be held at bay with the in-state expansions and the CPUC's recent approval
of SoCal Gas' plan to remove 37 Bcf of cushion and working gas from three storage fields in Montebello and
Aliso Canyon in Los Angeles County and La Goleta in Santa Barbara County (IF, 2 July, 3).
In addition to strongly emphasizing intrastate needs, the report recommended that the state "analyze
the consequences of the increasing upstream gas demands on the El Paso pipeline system as they affect the
flows of natural gas and electricity" between California and the Southwest U.S. and Mexico.
According to the report, the state also should: encourage in-state gas production; re-evaluate design criteria
for the intrastate system in consideration of growing power generation demand; consider gas curtailment
mechanisms; "optimize" storage; and encourage the creation of new storage facilities in the state.
The 123-page report is available on the CEC's Web site (www.energy.ca.gov/reports/index.html).

The attachment below is the final CEC Infrastructure report:

<<FinalCECInfraRpt.pdf<<