The collapse of oil prices has begun driving down California utility rates, bringing good news to electric and natural gas users but threatening Southern California Gas with the loss of 25% of its market.
The gas company has asked the Public Utilities Commission for emergency permission to cut the rates it charges its two largest customers, Southern California Edison and the city-owned Los Angeles Department of Water and Power, or risk losing them both to cheaper oil.
The commission has called a special meeting for today to consider the gas company's request. Without the relief, the utility said, Edison and DWP have notified it that they would switch their boilers to burn oil instead of natural gas. A spokesman for Edison confirmed that the company has asked the gas company to reduce rates.
Rates Tied to Oil Prices
Fred John, vice president for regulatory affairs at what is the nation's largest gas utility, said the loss of both customers would cost it 600 million cubic feet of gas per day, or $6 million a month in revenue.
California gas rates charged to electric utilities have been tied to oil prices since February, 1983, as a means of encouraging the use of cleaner-burning gas. The indexing formula was set at a time of rising gas prices and gradually declining oil prices.
But the dramatic decline in world oil prices that began in December has driven the prices below the current floor established in the formula for natural gas prices, which is $3.40 per million British thermal units, John said.
According to John, oil brokers offered Edison and DWP a "fire sale" supply of Indonesian residual oil that cost no more than $17 a barrel--or the energy equivalent of $2.80 per million BTUs. The gas company is asking the PUC to permit it to charge the electric utilities a $2.80 rate.
"They told us the only way they would stay on our system is if we could match the oil prices," John said.
The electric utilities use natural gas to fire the boilers for the steam turbines that power most of their power plants. But like most utilities, they can readily switch from gas to oil to take advantage of whichever is cheaper.