CALIFORNIA CAPITOLWEEK 3/2/01 #525
Natural
Gas Prices - Budget concerns
((Jack))
Thank
you for joining us. As Governor Davis
tries to push through his plan to save state utilities, other problems are in
need of attention .
((Melissa))
One
is the skyrocketing cost of natural gas.
While
many Californians have cut back on electricity usage, they’ve seen the gas
portion of their bill go up.
We’ll
get to that in a moment.
((Jack))
Another
issue impacting your pocketbook is how the energy crisis has slowed the growth
of our state economy.
The
state’s legislative analyst joins us later with her forecast.
((Melissa))
But
right now, the latest developments in the state’s energy crisis.
The Governor wants
the state to assume ownership of about three-quarters of the power lines across
the state to rescue cash-poor utilities and stabilize the electric market.
Southern
California Edison has tentatively agreed to sell its part of the grid for more
than 2 billion dollars.
But the Governor
is still negotiating with P-G and E and San Diego Gas and Electric.
One
sticking point could be P-G and E's debt, which could be twice as much as
Edison’s.
Begin Soundbite
((Governor Gray Davis))
On
balance, we are making progress. Like a
lot of things in life, it could be faster, but we are making progress.
End Soundbite
((Jack))
Another
essential piece of the Governor’s solution is getting Washington to sign off on
the plan.
The
federal energy regulatory commission must approve state takeover of the grid.
Earlier
in the week, while at a governor’s conference in Washington D.C, Governor Davis met with U.S. Energy
Secretary, Spencer Abraham.
He
also went to New York to meet with Wall Street analysts to seek their support.
Neither
PG&E nor the Governor have set a timetable, but Davis says it could take up
to another month to finalize the deal.
(Melissa)
As
the Governor and state lawmakers try to remedy California’s energy
situation,
another
black cloud hovers above the state, natural gas.
Natural gas
generates much of the state's electricity supply, but supplies are low and
prices are climbing.
Could creating
more storage facilities help?
NATURAL GAS
PACKAGE
One potential solution to rising gas prices
involves a deep commitment, three thousand feet deep in the ground…
((Mark Roberge, Wild Goose
Store))
Storage
is an important part of the whole supply piece. We’re like a warehouse.
We store natural gas. We’ll take
it to be restored to the pipeline system when they need it.
Wild
Goose, a private company that holds natural gas for its customers is one of the
few storing gas in the state…
When past gas prices were
low, many, including some utilities, felt stockpiling gas in a vent of price
spikes was unnecessary…
In light of recent price
hikes, storage facilities are getting some attention…
((Mark Roberge, Wild Goose
Store))
What
storage does is provide for that swing supply.
For that peaking supply or that winter supply.
A
bill to streamline the storage building process and encourage utilities ang
companies to store more reserves has been introduced by Assemblyman Joe
Canciamilla…
((Joe
Canciamilla, Assemblyman [D] Pittsburg
We need to begin to address the issue of natural gas.
Of
all the natural gas that’s need in California, only sixteen percent is
currently stored in state in facilities like this. There is legislation working to address that, but what it does
not address is why gas costs so much more when it crosses the border into
California…
Assemblyman
Canciamilla, tapped by the speaker to be the natural gas “go-to-guy” says that
his bill will help…
((Joe
Canciamilla, Assemblyman [D] Pittsburgh))
It takes a more comprehensive approach to some of the gas issues, and,
hopefully, it will spur more debate on the problems associated with gas.
But,
he admits it may take time to find answers and relief. A lot of businesses and consumers smarting
from gas bills to power plants rushing to be online by the summer. To help meet pressing summer power needs,
affordable natural gas is essential…
((Tom
Miller, Calpine))
It’s going to be imperative that we have the gas available
to fire this plant. The first fire is
actually scheduled for early April.
END NATURAL GAS PACKAGE
((Melissa))
Joining
me now to share more on natural gas issues. . .
Michal Moore with
the California Energy Commission
And Steven Hosmer,
the CEO of Royale Energy, one of the state’s largest natural gas suppliers.
Thank
you both for being with us. Steven,
we’ll start with you. It wasn’t that
long ago that natural gas was the cheapest alternative and looked like a great
idea for consumers. What happened? Prices are going through the roof.
((Steven Hosmer, CEO Royale
Energy Inc.))
Well,
it’s a balance of supply and demand.
The prices were quite low for quite some time, and, in fact, they were
below two dollars in NCF, our measurement criteria for natural gas within the
last twenty-four months, and with that kind of price, the producers cut back
their expenditures, their capital budgets, and the price—excuse me, the supply was diminished. The overall production from the state was
diminished, and the overall prices did edge up.
((Melissa))
Edge
up, I know a lot have tripled in some cases, and that’s what everybody is
seeing in a large part on their bill.
Michael, as we look at why natural gas is so expensive, prices have gone
up around the country, but that still doesn’t explain why gas that costs one
dollar in one part of the state costs elsewhere costs five dollars when it
crosses the state into California. Why
is it even higher in this state than it is nationwide?
((Michael Moore, California
Energy Commission))
Well,
I think it’s even more mysterious and, perhaps, even more nefarious than
that. If you look at the price at the
“Henry Hub” intersection where the gas prices are set on the—
((Melissa))
And
we should mention that’s like the Alaskan crude for oil?
((Michael Moore, California
Energy Commission))
Well,
in a sense it’s the equivalent of the Alaskan crude. It’s coming out of the Permian basin out in the Texas
region. Gas that’s coming off the
wellhead is around six dollars per million, and then as soon as you add
transportation costs to it, and then mysteriously as it hits the California
border, it doubles in price, at least at the Southern California border. It’s almost twelve dollars today. At the Oregon border, it’s about seven
dollars, and as Steve was just saying, the cost to produce is much lower than
that, certainly for the in-state producers.
They’re not seeing that high a price—
((Melissa))
Well,
what do you think is causing that price spike when it enters the borders?
((Michael Moore, California
Energy Commission))
Well,
you Can only speculate that someone is incurring either really high
transportation costs as they cross the border or that there are so many
constraints as you try to push the gas through a narrower and narrower pipeline
in state that those costs are going up, but as to why they have doubled, that’s
probably a question the Attorney General is going to have to ask—
((Melissa))
Something that the PUC is investigating. Steven, did you want to—
((Steven Hosmer, CEO Royale
Energy Inc.))
The
nationwide average of natural gas prices has been going up dramatically because
of the cutback in supply because of the lower expenditures and also the
tremendous increase in demand. Fifteen
years ago, when new homes were constructed, only forty-two percent used natural
gas. Today, over seventy percent of
homes use natural gas for heat. The
tremendous increase in demand has caused a price increase. The mid-continent region price has gone up
tremendously as well, and moving that gas into California, there is
transmission costs involved, but there’s not as nefarious a problem as people
might expect. The California
production—it is costing more and more to develop those reserves. As the easy
reserves have been found, it’s costing much more using new technologies. Two dimensional seismic has now evolved into
three-dimensional seismic. The costs
for that have more than quadrupled, so the cost to find and produce the natural
gas reserves has gone up tremendously as well, and I didn’t mean to say that
companies are producing gas for less than two dollars and a dollar. As those costs have gone up, we’ve seen a
need to have the price go up because it needs to cover that rise.
((Melissa))
All
right.
((Michael Moore, California
Energy Commission))
There’s
no question that the price has gone up at the wellhead, and Steve’s right. Over the last three years, the price was
around two dollars and fifty cents, lower than that two years ago, and
certainly those prices have gone up.
Demand has gone up sky high with all the new power plants that the
Governor is calling for. It’s added to
the demand, which of course in any normal market pushes the price up, but the
part that I was trying to elaborate on is that even though those costs have
gone up tremendously—and they are, in this case, almost three times as high as
what they were two years ago, and I think Steve’s company is probably finding
the same thing—to suddenly double those costs as they come across the border,
outside the wellhead costs, is mysterious to say the least, and it’s caused, at
leas the economists that I work with to look at the question of market power in
terms of the electric generators.
((Melissa))
Let’s
look at some of these costs. The
transportation costs, for instance. A
lot of people have said that we need to compress the pipelines. We need to have a better pipeline system
within the state and outside the state.
The federal government has approved two new pipelines to bring natural
gas to California, but those may not be online in time to help summer demands
and right now. Is that something we
need to look at? Is our pipeline
highway out of date as well?
((Steven Hosmer, CEO Royale
Energy Inc.))
Well,
certainly the market is putting pressure on increased demand to move gas into
the state. Currently, there’s only four
basic pipelines bringing about seven billion cubic feet of gas into the state,
and the state’s average demand is 6.4 billion cubic feet. That means on peak days we simply cannot
bring enough gas into the state to meet the demand. The in-state producer and the gas stored within the state have to
take up that shortfall, and on some days they can’t even take up the shortfall
that has occurred, so we do see price spiking.
We do see conditions that have dramatic price increases, but those price
increases are market conditions. There
is no intervention of producers or consumers or groups intervening to
artificially manipulate that price.
((Melissa))
The
piece that we watched earlier talked about storage. The incentive to store gas actually declined with the demand to
buy natural gas went down. Could
storage potentially help us cut some of those price spikes?
((Michael Moore, California
Energy Commission))
Well
storage is certainly a key issue, and as Steve was pointing out, you’ve got to
limit how much gas you can actually put through the pipes, and that means when
it’s coming through the pipes to satisfy current demand, it’s not going into
storage. So, in the low times if you’re
not re-injecting into storage, then in the high times you have only the
pipeline to draw against.
((Melissa))
Should
we require companies to store more than they’re doing now since the storage
capacity is so low?
((Michael Moore, California
Energy Commission))
We have a
proposal that’s going to go to the Governor this week, and it will go onto the
FERC as well—The Federal Energy Regulatory Commission—to ask them to require
generators who sell into the California market to have a gas position in their
generating machines that represents a certain component of storage. So, yes, we think that in a sense the market
price is prevailing against that right now, but we can turn it around with a
new set of rules.
((Melissa))
Might
be a good back-up plan. Would that be
something that companies might look into Steven?
((Steven Hosmer, CEO Royale
Energy Inc.))
Well,
certainly storage is an option, and it’s becoming more of an option as these
price spikes occur. It becomes much
more economic for companies to store gas and deliver it during those periods,
reducing that price spike or reducing the volatility, but one of the conditions
that’s occurred over the last year is that we’ve seen a storage period or an
injection period that would go from spring, it would moderate during the
summer, and it would increase during the fall to meet winter demand for the
consumer. Now, with an increasing load
of natural gas consumption by electrical generators, we’re seeing a tremendous
amount of gas used during the summer time, thereby eliminating the ability to
store gas.
((Melissa))
Which
brings us back to one of our viewer concerns.
They mentioned, “Why are we using natural gas for new plants when
there’s so little natural gas left?”
You spoke earlier about this Steve, and you think that some of the worst
may actually be behind us? Are we
looking in the next twenty-four months at the prices actually coming back down
again?
((Steven Hosmer, CEO Royale
Energy Inc.))
We are looking at a downward trend to continue for
prices, as the conditions occur as I mentioned. In the last twenty-four months, we had a price below two dollars,
and the capital expenditures for new gas exploration diminished significantly. Now, with the price increases that we’re
seeing, there’s a tremendous amount of increase in exploration activity. There are more wells working today than
there have been in the last five years, and that gas will be coming on stream. There’s a time lag involved in the capital
expenditures to the time that the gas is produced, and we’re going to see a
much greater supply coming on stream within the next six, twelve, and eighteen
months, which will probably drive prices down below their ideal market
conditions, and that will level out. As
I mentioned, it’s much like the example of putting your finger over a straw
when you put it in a glass of water.
When you let go, it will fluctuate until it finds the level. Right now, we’ve got a fluctuation that’s
above. We’re going to see it go below,
and then it’ll balance itself out.
((Melissa))
All right, in our final few moments here, Michael,
are we giving this problem the attention that it deserves? Whether we need a legislative remedy or
consumers to be more conscientious about this.
We talked about some relief that’s obviously not coming tomorrow, but is
there anything we can do in the meantime to make sure that these prices
stabilize?
((Michael Moore,
California Energy Commission))
Well, if you’re talking about if we’re getting
enough attention from the Legislature, from the administration, it’s probably
only that they’re beginning to show up right now. They’re starting to understand that there is a relationship
between the gas market and the electric market. I think the issue of whether or not all this gas-fired generation
coming online is going to potentially destabilize the gas market, keeps prices
higher than what Steve is predicting is still an issue, and, hopefully, as we
enter the crisis period where we really do need to be injecting into storage,
the Legislature going to take this topic up in earnest.
((Melissa))
And on that note, we are out of time. Steven and Michael, thank you very much for
joining us.
END DISCUSSION
((Melissa))
We would like your feedback.
Do you think the government is paying enough attention natural gas
issues?
Here’s
where to send your comments and where to find out more on complex issue
surrounding the state energy crisis.
((Jack))
Time
now for “At Issue,” your chance to hear behind the scenes commentary from
political insiders.
Straight
talk, you won’t find anywhere else
@ Issue:
The
state’s independent, legislative analyst says California's slowing economy and
energy crisis has created the most uncertain budget outlook since the recession
years of the early 1990s.
Part
of the uncertainty is because the Governor’s office will not release specific
details about its power purchases on the spot market.
Begin Soundbites
((Elizabeth Hill, State Legislative
Analyst))
It
concerns me in terms of looking at the state’s general fund’s condition, and,
as I mentioned, the state trying to develop this budget for the future.
((Governor Gray Davis))
The
reason we’re doing this is because if the generators have this information, it
will result in higher electricity prices for the people I represent.
End Soundbites
((Jack))
Other
recommendations from the independent budget analyst include:
Putting
a hold on the 2.3 billion in new one time spending proposed by the Governor,
since the strength of the economy and the state’s energy situation remain
uncertain . . .
Re-direct
money earmarked to extend the school year for middle school students, using the
money instead for block grants to low performing and low income middle schools
and high schools.
And,
modify a three-year plan to train teachers at significantly less cost.
Joining
us now for more on California’s economic outlook:
Elizabeth
Hill, the state legislative analyst, a non-partisan and independent office…
And
Democrat Tony Cardenas, chair of the assembly budget committee.
((Jack))
Liz,
let me start with you. Just for the
people who are watching this who are not familiar with the term “legislative
analyst,” how do you describe your job?
What do you do?
((Elizabeth Hill, State
Legislative Analyst))
We’re
a fiscal watchdog; an independent office, as you mentioned, established by the
legislature to advise and make recommendations on the state budget to assist
the legislature in setting its priorities on the budgetary content.
((Jack))
So
the Governor comes up with a budget, the Democrats have a budget, the
Republicans have a budget, and that’s political. You stand over in the corner as sort of a nonpartisan third party
and someone who has a neutral voice on it?
((Elizabeth Hill, State Legislative
Analyst))
I
think we’re a neutral fiscal advisor.
The legislature has asked us to call it as we see it and try to give
them independent advice so they can make the important decisions in putting the
budget together.
((Jack))
And
you’ve been doing this for more that ten years?
((Elizabeth Hill, State
Legislative Analyst))
That’s
right.
((Jack))
Tony,
when you came to Sacramento and the new session started, it looked like there
was this wonderful budget surplus out there, and it was a chance to do some
good things.
((Tony Cardenas, Chair of
Assembly Budget Committee))
Yes.
((Jack))
What
happened?
((Tony Cardenas, Chair of
Assembly Budget Committee))
Well,
we’ve had some consistent growth in California, and it is continuing, but we
have this energy crisis, and the Governor declared a state of emergency in
January of this year, and since then, we’ve tried to stabilize it, and the
Governor has taken the opportunity to infuse 2.7 billion dollars into the
problem to hopefully stabilize it, and we’re also looking at long-term solutions
to the problem as well.
((Jack))
Does
this mean I’m going to lose my job?
Does this mean there are going to be major economic problems in
California?
((Tony Cardenas, Chair of
Assembly Budget Committee))
Well,
as long as there aren’t blackouts and as long as we can get a handle on the
future, I think it will stabilize the nervousness of business, and in addition
to that, it’ll stabilize any job loss that has anything to do with the energy
crisis. You know, the economy has
slowed down across the country. In
California, it hasn’t slowed down as much, so the nervousness in California
about the economy isn’t what it is around the country, but the infusion of this
energy crisis sure does make some people more nervous.
((Jack))
It
seemed like at one point they were talking about a ten billion dollar budget
surplus in California, so it’s expensive to buy electricity. Why should I care?
((Elizabeth Hill, State Legislative
Analyst))
Well,
I think there are a couple reasons, Jack.
Both the uncertainty about supply and price, and as you mentioned
earlier in the program, we don’t know how the long-term contracts are going
yet. That’s currently being
negotiated. We also don’t know how much
the state of California is buying each day.
The national economy is slowing; we also know the California economy is
slowing as well, but we’re hoping that 2002 will be a rebound, both in the
national economy and in California as well.
((Jack))
I’ve
seen public reports that mention two million dollars an hour. The state spending that kind of money to
purchase electricity on the spot market and then making it available to
consumers through the utilities. Does
that sound about right?
((Elizabeth Hill, State
Legislative Analyst))
Well,
I think the estimate I’ve seen, and I haven’t converted it to hours, is about
fifty million dollars a day.
((Jack))
That’s
a lot of money. Tony, is there any fear
that the state of California is now in the same economic situation that the
utilities were? Meaning that, the state
has to buy the power at one price, but because of caps in the law, they can
only sell it to consumers at another price.
((Tony Cardenas, Chair of
Assembly Budget Committee))
Sure. There is some concern about how long that
imbalance will continue and at what rate it will continue. That is a real concern, but at the same
time, unlike the utility companies, we do have a strong base. Right now, when we’re working with 2.7
billion dollars, that is still not the majority of the eight billion dollars
that we have that could be utilized to stabilize this problem. Hopefully, we won’t have to touch that
money, but it is available to do so.
So, no, it’s a different animal when you look at the state of California
involved in stabilizing this. We’re
much, much larger than the utility companies that could not handle it.
((Jack))
But,
Liz, you crunch numbers for a living, that’s your business, and it’s an open
wound, is it not, economically? I mean,
we’re buying high, and we’re selling low, and Tony makes a good point. We’ve got 8 billion dollars to work with,
but couldn’t we end up just spending all that too?
((Elizabeth Hill, State
Legislative Analyst))
Well,
I think the state, as Mr. Cardenas indicated, is trying to get a long-term
plan into place as well as deal with the short-term issue, which is very real. I think, in terms of the general fund condition,
the budget condition, it’s a cash exchange at the moment. The legislature passed AB-1 acts in the first
extraordinary session that authorized revenue bonds to be sold, and once those
revenue bonds are sold, the general fund will be made whole. Both these payments and the interest that the
general fund has lost while we’ve been purchasing energy rather than investing
that money.
((Jack))
So,
we have to rethink what we want to spend our money on. What ballast do we throw out of the basket?
((Tony Cardenas, Chair of
Assembly Budget Committee))
Well,
one of the things that we’re not going to throw out of the basket, the last
thing to even be contemplated, is education.
It is the biggest issue that faces California, and we need to stabilize
our educational system with infrastructure and ongoing dollars, and that’s
something the Governor is certainly committed to, and the legislature is
supporting him on that, so that’s something that is not on the table.
((Jack))
Should
we bicycle back a little on that? The
Governor and the legislature does have a very aggressive education plan, and
most people do endorse it, but in light of where we are financially, should we
be backing off a little bit?
((Elizabeth Hill, State
Legislative Analyst))
Well, the
Governor has, in his January tenth budget, proposed overappropriating the K-12
and community college constitutional funding level. We don’t take issue with that in our analysis. We feel that that is appropriate at this
time and that there our some ways to redirect the money within that amount to
better achieve, in our view, the legislature’s objectives, particularly with
extending the middle school year. We
think that there are some other options that the legislature may want to look
at, particularly a disadvantaged school block grant is a suggestion that we’ve
made to better target the money for performance as well as poverty areas where
we've seen a number of problems as far as academic achievement.
((Jack))
What
does the legislature do?
((Tony Cardenas, Chair of
Assembly Budget Committee))
Liz
is correct. There is a lot of agreement
in Sacramento on both sides of the aisle and with the Governor that education
shall and will remain the number one issue, and we need to invest, and that’s
what Liz is talking about, that investment.
Now, exactly what the framework of that investment is is where we
negotiate with the Governor.
((Jack))
Legislators
have been here in this studio on this program and have said, in terms of the
power deal and the rescue of the utility companies, that it’s not necessary for
the state to purchase the power line system.
From the legislative analyst’s point of view, what do you think of that
deal to purchase the grid?
((Elizabeth HIll, State
Legislative Analyst))
That’s
really a policy judgement that the legislature’s currently debating, so I don’t
feel in a position to offer a comment.
((Tony Cardenas, Chair of
Assembly Budget Committee))
From
the legislature’s standpoint, we feel that if California were to get involved
with that aspect of the energy business, that the ratepayers, the taxpayers,
and everybody has something tangible that they can call part of the deal,
rather than just say, “Let’s shift over dollars and hope for the best.” That way, we have something tangible,
something we can control, and something that we have to give back to the state
of California, the people who are paying for it.
((Jack))
What’s
the best advice you can give to the Governor as far as budget rework is
concerned? And so the viewers
understand, it’s an ongoing process. In
May, there will be more detailed information on how much money is coming in or
not coming in, so basically what’s going on now is everyone’s getting ready for
that May revision of the state budget.
What would be your biggest suggestion to the Governor at this point?
((Elizabeth Hill, State
Legislative Analyst))
I
think there’s significant downside risk to his initial budget proposal, and we
will know more in the spring. Both the
revenue situation will be clearer as we know the course of California’s
economy, and also, I would hope that we’ll have better information about the
course that the state will follow in energy.
What decisions the state wants to make on where to invest in energy
versus its other priorities in the budget, and I think that’ll be clearer by
the spring.
((Jack))
Clearly,
the biggest bang for the buck on the budget dollar is education.
((Tony Cardenas, Chair of
Assembly Budget Committee))
Absolutely.
((Jack))
It
takes up half of the state budget even before we have state programs.
((Tony Cardenas, Chair of
Assembly Budget Committee))
Absolutely.
((Jack))
That’s
where the fixes are going to have to be made; is that correct?
((Tony Cardenas, Chair of
Assembly Budget Committee))
Correct,
correct. One of the things that I want
to make sure that we address is that when you talk about the energy crisis, it
isn’t a Sacramento issue, it isn’t a Los Angeles issue, it isn’t a regional
issue. It is, quite frankly, a state
issue, and everybody needs to do their part, and one of the things the
legislature’s doing is we’re trying to find ways by looking around the country
at other areas where they’re problems similar to this—not as big because other
states aren’t as big as ours—is making sure that we give incentives for homes
and businesses to retrofit and conserve.
That’s the best way to stabilize this problem.
((Jack))
All
right, on that note, Tony, thank you very much for joining us. Elizabeth, thank you for joining us.
On
now to your comments from last week’s energy summit. Melissa?
END @ ISSUE
((Melissa))
Last
week we held an energy summit to talk about the governor’s transmission take
over plan.
Frank
from the Los Angeles area wrote:
“I
was impressed by Rod Wright- here is a Democrat who understands the situation
and speaks the truth.”
John
of Hesperia wrote:
“The
ultimate approach to solving the energy crisis is the state and federal
governments’ right of eminent domain.”
Bill
from L-A wrote”
I
think Governor Davis is on the right track.
It appears the opposition has no plan.”
But
Dennis from Rocklin writes
“For
the Governor to state this solution will not require a rate increase is a
shame!”
((Jack))
Melissa that is our program for this week.
Next week, we continue coverage of our state energy crisis,
including a look at what, if any, progress has been made in the Governor’s
attempt to rescue the state utilities.
Until then, I’m Jack Kavanagh.
((Melissa))
And I’m Melissa Crowley.
Thank you for joining us.
We’ll see you next time.