Nov 16,2000

California Power Plants Get Jolt
As Natural-Gas Supplies Are Cut

By Rebecca Smith
Staff Reporter of The Wall Street Journal  

LOS ANGELES -- Southern California power plants, already stressed to their 
limits last summer, got another jolt this week as a cold snap caused a sharp 
curtailment of supplies of natural gas used to generate electricity. 

The power plants were able to switch to burning oil and continue to produce 
electricity. But the unusual curtailment of natural gas underlines concerns 
that an increased reliance on gas for power generation across the U.S. is 
putting the reliability of the nation's electricity supply at risk. 

That's because virtually all power plants now under construction in the U.S. 
burn gas and only gas. The units affected this week in San Diego were able to 
shift to oil only because they were older plants that originally were 
constructed to burn oil. Generators have been reluctant to add a dual-fuel 
flexibility to plants in recent years because oil is far more polluting than 
gas and generally has been costlier. 

In California, where gas-supply problems first surfaced on Monday in San 
Diego, there is pessimism about a Hydra-like energy crisis that seems to grow 
new heads every day. The state weathered three-dozen electrical emergencies 
last summer, caused by a shortage of electricity. Officials had hoped to 
solve the problem by speeding up construction of new generating plants. Now, 
they're finding the state may be building its way out of an electrical 
problem and into a gas problem. 

One official, who has been warning of the danger of reliance on a single 
fuel, said this week's disruption pointed out the necessity of developing a 
comprehensive energy policy that recognizes how changes in usage of oil, gas 
and electricity affect each other. "We don't just need new generating plants 
and transmission lines, we may need pipelines, too," said Terry Winter, chief 
executive officer of the California Independent System Operator, the 
organization responsible for maintaining adequate electricity supplies.  "You 
can't look at these things in isolation." 

The natural-gas problems surfaced when the local gas-distribution company, 
San Diego Gas & Electric Co., notified power-plant operators and a handful of 
industrial users that it would be restricting their gas use by about half. In 
California, residential and small businesses have first crack at natural gas, 
and industrial uses are regarded as secondary, even if they are generating 
plants. Dynegy Inc., the Houston-based energy concern that owns some of the 
older plants that serve San Diego, immediately switched to oil. But it didn't 
like doing so; its plants create three times as much pollution when  they 
burn oil and exhaust valuable air-pollution emission credits that power  
plants here need to operate. 

The San Diego units couldn't simply be shut down, because the state was short 
of power. Roughly 30% of the state's capacity already was off-line, including 
many of its nuclear units, as most of those plants are now undergoing repair 
after being run at capacity limits throughout the summer. 

What's more, the gas-pipeline system that feeds San Diego isn't big enough to 
begin with. The system was built primarily to serve residential customers and 
not big power plants. 

The problems could persist, off and on, through the winter. That's because 
gas-storage levels are down sharply from a year ago throughout the nation, 
but especially in California, because it ran its gas-fired units so hard last 
summer. This time last year, Southern California had 87 billion cubic feet of 
gas in storage. Now, it's roughly 50 billion cubic feet, or 43% less. Prices 
also have moved up sharply, from roughly $2.50 a million British thermal 
units to around $8 this week. Nationally, storage levels are down about 8% 
from a year ago. 

"Gas is trading higher in California than anywhere else in the nation," said 
John Lavorato, chief operating officer of Enron North America, a unit of 
Enron Corp. of Houston. But he said they're headed up in the Northeast, based 
on cold weather forecast for the next 10 days to two weeks.  

High prices for fuel also push up prices for the end product, electricity. In 
California the average price for electricity to be delivered Thursday was 
$228 per megawatt hour. That's double the price a week ago and five times the 
price a year earlier.