The shortage of natural gas that has forced Southern California Gas to cut off deliveries to about 880 big customers was worsened by the utility's failure to meet its underground storage targets at the outset of winter, the company concedes.
Though the gas company has blamed cold weather and the effects of government deregulation for the shortfall in supplies, it also says it had just 75 billion cubic feet of gas in its storage reservoirs on Nov. 1, compared to an initial target of 95 billion cubic feet.
The storage is critical to Southern California in winter because the utility can't bring in enough natural gas from its various sources each day to meet peak demand this time of year. By design, it routinely draws from storage reservoirs to make up the difference.
When cold December weather drove Los Angeles-area residential demand to record levels and problems elsewhere restricted the amount of gas entering California through pipelines, SoCal Gas drew so heavily from its storage that the reserves fell even further below target.
Instead of a desired 50 billion cubic feet of stored gas on Jan. 1, the company had just 34 billion cubic feet, or fully one-third below the plan, according to the California Public Utilities Commission.
That prompted the utility to cut off natural gas deliveries to customers capable of switching to other fuels. And for the first time, the company activated a 9-year-old mutual-assistance pact with San Francisco-based Pacific Gas & Electric for extra natural gas to bolster supplies.
Unlike previous cases in which SoCal Gas implemented less severe curtailments of service, the current problem has occurred despite generally plentiful natural gas reserves across the country, analysts say. And while cold weather and other problems have tightened supplies in some areas, "I haven't heard of any other utilities coming up short," says Arlon R. Tussing, a Seattle-based energy consultant.
SoCal Gas continues to assure customers that there is little danger of supplies to homes being restricted, and it says a return to moderate weather over the past few days is quickly lowering daily demand for gas.
But Tussing says that even a quick return to normal and a resumption of full natural gas deliveries to all customers would leave the utility saddled with higher costs that it will seek to recover from its customers later. The costs include the higher prices it is paying for natural gas today compared to the prices it would have paid last summer for gas to inject into storage.
Last summer, natural gas cost as little as $1.50 per million British Thermal Units on the spot, or non-contract, market. It has since surged to the $2.30 to $2.40 range.
Also, by cutting off its biggest customers, the utility has lowered its sales sharply and will have to recover its fixed costs from a narrower base. Translation: potentially higher rates for those who remain on the system.
"I would expect (consumer groups) will demand that SoCal Gas not be allowed to pass through the added cost to customers, and the gas company will say that it acted prudently at the time and shouldn't be penalized," Tussing says. "How the (Public Utility Commission) comes out on it depends on their mood at the time and how they read their phone calls from legislators."
The hiccup in natural gas supplies illustrates the crap-shooting nature of the energy business, especially amid the uncertainty and confusion that surrounds the government's effort to deregulate the price of natural gas. The picture is clouded further by an especially prickly relationship between SoCal Gas and its biggest single supplier, El Paso Natural Gas Co. The two accuse each of contributing to today's shortage.
Ironically, the same SoCal Gas policy which El Paso claims has aggravated the shortage--the utility's aggressive purchase of natural gas on the spot market--has generally won plaudits from outsiders.
Southern California Gas is considered a leader among utilities in keeping natural gas costs low. The biggest purchaser of spot-market gas in the nation since deregulation created such a market three years ago, the utility boasts that it saved $146 million last year alone by making 36 % of its total gas purchases on the spot market gas instead of taking costlier, long-term gas under contract.
Until the last few months, SoCal Gas says it could buy gas on a spot, or non-contract, basis for $1.50 to $1.65 per million BTUs versus El Paso's price of $2.37. El Paso and other suppliers charge more because they paid more for it themselves to have it contractually available on a long-term basis, where as spot gas is a less secure supply.
Analysts say that among major utilities, SoCal Gas maintains one of the highest proportions of spot-gas purchases. It worked well as long as supplies were plentiful and prices low, although that situation has reversed itself since October.
Spot Prices Climbed