FYI  --  Another brouhaha in the making.

 -----Original Message-----
From: 	"Tracey Bradley" <tbradley@bracepatt.com <mailto:tbradley@bracepatt.com>>@ENRON [mailto:IMCEANOTES-+22Tracey+20Bradley+22+20+3Ctbradley+40bracepatt+2Ecom+3E+40ENRON@ENRON.com] <mailto:[mailto:IMCEANOTES-+22Tracey+20Bradley+22+20+3Ctbradley+40bracepatt+2Ecom+3E+40ENRON@ENRON.com]> 
Sent:	Thursday, August 16, 2001 8:48 AM
To:	jlimone@aeglobalmarkets.com <mailto:jlimone@aeglobalmarkets.com>; agold@coral-energy.com <mailto:agold@coral-energy.com>; susan.ginsberg@elpaso.com <mailto:susan.ginsberg@elpaso.com>; Cantrell, Rebecca W.; pat.cradock@huskyenergy.ca <mailto:pat.cradock@huskyenergy.ca>
Cc:	Charles Shoneman; Randall Rich
Subject:	California News -- State building natural gas reserve

FYI

State building natural gas reserve
Officials refuse to reveal details of the contracts
Bernadette Tansey, Lynda Gledhill, Chronicle Staff Writers
Thursday, August 16, 2001
?2001 San Francisco Chronicle

URL: <http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2001/08/16/MN209239.DTL>


California has quietly started buying natural gas in response to the energy crisis, forming a gas supply operation that could become one of the largest in the state.

But in a repeat of the state's tactics when it lined up $43 billion in electricity contracts, officials won't say how much they have spent so far -- or how much they plan to buy in the future.

The state is already supplying gas for one power plant this month in an attempt to keep generating costs in check, and it has signed a small contract for gas storage space, state officials said. But they refused to provide The Chronicle with records of any of the purchases.

Releasing additional details -- such as the price officials paid -- would jeopardize the state's goal of keeping electricity costs down by delivering cheaper fuel to natural gas-fueled power plants that serve California, said Ray Hart, deputy director of the state Department of Water Resources.

If private energy traders knew what the state planned to buy, Hart said, they could rush in, scoop up the supplies and demand substantially higher prices to resell them to the state, he said.

Details of the state's gas deals will be made public as much as six months after they're signed, when they no longer give traders any advantage, he said.

That stance has raised an outcry among Republicans and consumer advocates, who criticized the Davis administration earlier this year for delaying disclosure of state power contracts that locked in a huge percentage of California's power needs for more than a decade.

"If there were a competitive bidding process, then, yes, the price should be secret while it's pending," said Marcel Hawiger, a natural gas analyst for the consumer group The Utility Reform Network. "But in a situation like it is now where they're just negotiating backroom deals, we think they should be disclosing everything right away."

Critics of the Davis administration who think the state already got rooked on the power contracts are equally leery about the state's foray into the natural gas market.

'A DISASTER'

"The governor's secrecy and lack of oversight has been a disaster for the people of California over the last six months," said Republican gubernatorial candidate and current Secretary of State Bill Jones. "These are the same novices who signed those energy contracts."

Hart said the gas operation would reinforce the state's long-term power buying effort that he credits with taming the out-of-control electricity market in California. His department was pressed into service as an emergency electricity buyer in January after skyrocketing power prices drove state utilities deeply into debt.

The state's new natural gas endeavor is intended as an insurance policy to make sure power plants under long-term contracts with the state don't hike their prices by claiming steep costs for fuel, a justification used by many generators during the height of the energy crisis last winter.

Under terms of some of the state electricity contracts, if the power plants don't make low-cost deals for gas, the state can step in and deliver the fuel itself.

The plan is to stand ready to provide fuel to generators throughout the state by lining up natural gas supplies, setting up to ship gas through pipelines within the state, and arranging for temporary storage space so any state gas surplus can be saved instead of being sold at a loss, Hart said. If the state were to step in as supplier for all the contracts that give it that option, the government would become one of the largest gas purchasers in the state, he said.

Hart's agency signed a four-year, $2 million contract in May with a Livermore gas consulting firm, Interstate Gas Services. The firm was authorized in July to make short-term gas deals with four suppliers in Texas and one in California.


STRATEGY QUESTIONED
Whether the state will be a successful player in the natural gas market is already being questioned by TURN and Pacific Gas and Electric Co. They say the state is reading the future gas market incorrectly by predicting prices close to double what experienced utility gas managers say the state will see by late 2002.

Bill Marcus, a TURN energy consultant, said the state's high forecasts alone could lead to unnecessary rate increases. Ron Low, a PG&E spokesman, said state gas cost overestimates would add $300 million to consumers' bills statewide through 2002; about $140 million would be paid by PG&E customers.

Hart scoffed at PG&E's claims.

"For them to say the price of gas is going to stay the same is ridiculous," Hart said. Gas prices have dropped this summer because of the cool weather and conservation efforts, he said. But things could change rapidly when demand peaks in the future. "You're going to see prices go up again."

Mark Allen Bernstein, an analyst with RAND, said the state might be doing the right thing if it buys natural gas when prices are low in the spring and fall and socks it away in storage basins to release when demand spikes in the summer and winter.

"We need to make sure there is sufficient storage to weather demand and price fluctuations," he said.

The state has lined up a small contract with the Wild Goose storage basin in Butte County and is supplying gas to an Alliance power plant as it starts operations this month, water department officials said. It has also locked in gas supplies at a set price for Dynegy plants in Southern California. The state has still not decided whether to contract for space on the interstate pipelines that bring gas to California from out-of-state producing basins, Hart said.

Hart said critics of the state's electricity contracts who said the deals all should have locked in a fixed price had already been proved wrong. By allowing some of the contract prices to float up or down with the price of gas,

Hart said, the state has been able to take advantage of a steep drop in gas prices this spring.

"We got totally hammered by the media for those (variable) contracts," Hart said. "My God, we're saving billions of dollars."

E-mail the reporters at btansey@sfchronicle.com <mailto:btansey@sfchronicle.com> and lgledhill@sfchronicle.com <mailto:lgledhill@sfchronicle.com>.

?2001 San Francisco Chronicle   Page A - 1