WASHINGTON — Federal regulators announced late Friday that they will open a broad investigation into high natural gas prices in California that are threatening to derail efforts to contain the state's electricity costs.
Calling the prices "a matter of serious concern," the Federal Energy Regulatory Commission said it will ask pipeline operators, gas sellers and utilities for extensive information on bulk natural gas sales to California. The agency also will convene a conference of experts to delve into the issue.
Last week, natural gas that sold for $4.57 per million British thermal units at Texas producing basins was marked up to $13.54 at the California border.
By contrast, gas selling for $4.56 per million BTU at Louisiana basins was marked up to only $5 at the New York City limits. A million BTU is equivalent to what a typical Southern California home uses in five to six days.
The California Public Utilities Commission has charged that gas marketers are raising prices in the state by withholding supply. The industry has responded that the problem is a combination of too few pipelines within California, an unusually cold winter that depleted gas storage and an insatiable demand for gas by power generators willing to pay astronomical prices.
Most of the state's power plants are fired by natural gas, and the cost of the commodity is responsible for as much as 80% of the prices being charged for electricity during emergencies.
"Ordinarily, in a competitive, seamless national market for natural gas--where gas can flow to wherever it can command the highest price--price disparities of the type that appear to have risen between California and the rest of the country would not be expected to continue for sustained periods of time," the FERC members wrote in an order calling for the investigation.
Natural gas prices in California shot up in November and have remained high ever since. California had been paying about the same rates as the rest of the country.
The commissioners said that by now an efficient, freely functioning market should have brought down California prices. In the classic economic model, natural gas sellers would have boosted shipments to California, seeking to profit from the higher prices that showed up last fall. That would have increased supply and brought prices into line with the national average.
"The commission is therefore concerned that the price disparity between California and the rest of the country continues," the order said.
PUC attorneys said they had not read the order and could not comment.
Sen. Dianne Feinstein (D-Calif.) said she welcomed the investigation but added that FERC needs to go further. "It sounds to me like FERC is finally getting the picture and beginning to move," Feinstein said in a statement. "We've been urging movement for months, as natural gas prices are still three times higher in California than anywhere else in the nation."
It is unclear what FERC could do if it finds a pattern of abuses, since Congress long ago lifted price controls for natural gas. But the investigation adds to pressures on the energy industry to provide a full accounting of its role in the California crisis.
This week, FERC also began conducting a trial-like hearing into allegations that subsidiaries of a Texas energy conglomerate, El Paso Corp., manipulated the Southern California gas market to drive up prices last year. El Paso Merchant Energy, which sells natural gas, obtained a contract to ship up to 1.2 billion cubic feet of gas a day to California through pipelines owned by El Paso Natural Gas Co. The PUC and California utilities allege that El Paso Merchant withheld space on the pipeline in a bid to raise prices.
Judge Curtis L. Wagner Jr., who is hearing the case, has said that internal El Paso documents raise questions as to whether there was an attempt to exercise improper influence. The documents remain under court seal despite arguments by PUC lawyers that the public has a right to see them.
El Paso has denied any wrongdoing, and it blames the price spike on other factors, such as bad weather and a lack of pipeline capacity within California.
El Paso lawyers won an admission from an expert witness retained by the plaintiffs that low gas storage levels in California also contributed to rising costs. The hearing is expected to conclude next week, and a decision is due by June 30.