This story from today's Gas Daily doesn't help -- note the last sentence:

***Calif. gas and power prices: Joined at the hip?
     When gas reaches the California border, something happens to the price. 
The same goes 
for the power market. But how closely are the prices of gas and power linked?
     Over the past several months, it has become fashionable to declare that 
power prices 
and gas prices are dependent on one another, rising and falling in sync. In a 
recent FERC 
public meeting, for instance, transportation differentials were fingered as 
the main 
culprits for the cost of wholesale power in California (GD 4/27).
     At first glance, the evidence seems to support this point. From one 
perspective, it does 
appear that the two markets do indeed reach bottoms and ceilings at the same 
time.
     But on closer examination, power and gas prices over the last year were 
often out of 
sync -- even in California. When we view prices in major wholesale power 
markets relative 
to prices in major producing areas serving California, we also find little or 
no 
relationship, especially in terms of the magnitude of the change in price.
     For the last six months, the price of gas in California has generally 
stayed above the 
cost of gas in the major producing basins supplying gas to California. The 
resulting 
difference in price -- the basis between California gas and producing area 
gas -- most often 
exceeded the cost of transporting the gas to California severalfold.
     On Dec. 11, the cost of gas in California was about 10 times as great as 
the cost in 
every producing area from which it receives gas. And it was very similar to 
the cost of 
power at Palo Verde, a major wholesale power market serving California.
     The average index price of gas at Gas Daily SoCal Gas (large pkgs) major 
wholesale 
market on Dec. 11 was $59.42/mmBtu. Measured in Btu equivalent, the power 
market was 
almost the same. Using a heat rate of 8mmBtu/MWh to make the conversion from 
megawatt-
hours to mmBtu, the average or index price of power at Megawatt Daily Palo 
Verde major 
wholesale power market on the same day was $61.13/mmBtu.
     The power and gas prices on Dec. 11 followed a steep uplift in price for 
both power and 
gas begun on Nov. 2. Those peak prices have not been exceeded since.
     By comparison, power prices on Nov. 2 were $7.06/mmBtu, while gas prices 
were 
$5.30/mmBtu. Thus, gas prices at $59.42/mmBtu on Dec. 11 had increased by a 
factor of 
10 in a little more than a month.
     Even though gas prices increased in the major producing regions as well 
and behaved 
in interesting ways (GD 4/12, GD 12/01/00), the increase in California gas 
prices was so 
great it was as if they had not changed at all (see figure below).
     On 19 of the 25 trading days between the price trough on Nov. 2 and the 
peak on Dec. 
11, gas and power prices were stepping up in sync. Increases (or decreases) 
in power 
prices were coupled with increases (decreases) in power prices. Yet the 
initial rate of 
increase was much greater for power than for gas.
     Between Nov. 2 and Nov. 15, power prices increased from $7.06/mmBtu to 
$25.75/mmBtu while gas prices only increased from $5.30/mmBtu to $8.20/mmBtu. 
After 
Nov. 15, gas prices began to take off. It was as if the initial large 
increase in power prices 
in the first 10 trading days following Nov. 2 had served as a catalyst for 
the subsequent 
large increase in gas prices.
     On Nov. 15, the spark spread was $17.50/mmBtu or $140/MWh, suggesting 
huge profits 
for companies obtaining gas for generating power for sale on the wholesale 
market. As 
wholesale gas prices caught up to wholesale power prices, however, the spark 
spread 
declined significantly. By Nov. 21 the spark spread was only $1.08/MmBtu.
     From a selective view of price such as the rise in Nov. 2000, it appears 
that power 
prices and gas prices are dependent on one another -- that is, when power 
prices increased 
gas prices increased as well and visa versa.
     But the variability of the spark spread for California markets reveals 
the lack of a 
simple relationship between power and gas prices (see figure below). The 
large volatility of 
the spark spread apparent from the price plot is largely determined by the 
volatility of 
the power price.
     Interestingly enough, it is not always clear why power and gas are well 
connected when 
they are well connected or even why they behave the way they do at these 
times.
     Most recent statistics available from the Energy Information 
Administration indicate 
that net generation of power from utility and merchant plants in California 
between 
September and October 2000 declined by 9%. Gas consumption at these power 
plants also 
declined by 9%. It is not surprising, then, that power prices declined in 
October 2000 
from September 2000 levels.
     As consumption of gas at power generators fell by an additional 63 
billion cf between 
October and November, prices of both gas and power not only rose but also 
rose in sync. 
Thus, while gas consumption for power generation was 79 billion cf, or about 
50% below 
its September level, prices were significantly higher.
     Did gas prices rise in November because of an overall significant 
increase in gas 
demand by all sectors in November from October levels? According to the most 
recent EIA 
statistics, this was not the case. Deliveries to all sectors were almost even 
in October and 
November, differing by only 3 billion cf.
     An understanding of observed price behavior of wholesale gas and power 
never comes 
easy, but one lesson is abundantly clear: those who either hold firm rights 
for 
transportation of gas into California or are managing these rights are 
sitting pretty while 
those who don't have such rights and need gas are skating on thin ice.     -- 
John H. 
Herbert, jhh1@msn.com





James D Steffes@ENRON
05/02/2001 11:15 AM
To: Phillip K Allen/HOU/ECT@ECT, Tim Belden/HOU/ECT@ECT, Ray 
Alvarez/NA/Enron@ENRON, Alan Comnes/PDX/ECT@ECT, Leslie 
Lawner/NA/Enron@Enron, Rebecca W Cantrell/HOU/ECT@ECT, Robert 
Neustaedter/ENRON_DEVELOPMENT@ENRON_DEVELOPMENT, Christi L 
Nicolay/HOU/ECT@ECT, Jeff Dasovich/NA/Enron@Enron
cc: Joe Hartsoe/Corp/Enron@ENRON 
Subject: Natural Gas Basis Differential - Why so Big?


	

Joe Hartsoe received a call from Commission staff at FERC to try and 
understand why basis differentials into California were so big and why the 
large basis continues.  Clearly with the new Electricity Order, natural gas 
is one of the primary factors on electricity prices in California.

Our key fear, however small, is that FERC (or someone else) recognizes the 
huge implication of natural gas prices and seeks to cap natural gas sales for 
resale of P/L affiliates (such as ENA).  There is some fear that the real 
monopoly is the holder of LT firm capacity, not the gas production firms.

We need to develop a good story as to why the basis gas continues and 
messaging it quietly into the right FERC staff to keep the pressure of 
additional Investigations from happening.  Joe is trying to get his hands on 
the Lukens study presented to the California study Committee on natural gas 
abuse to help guide our analysis.  

Jim