SoCal Failed to Meet Its Storage Targets for Gas

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

“They have saved their ratepayers a lot of money in the spot market,” says Richard Dobson, an analyst at the PUC’s division of ratepayer advocates.

But El Paso, a Texas-based pipeline company which delivers more than half the natural gas entering the SoCal Gas system each day, claims that the utility waited so long for more favorable spot prices last year that it ran out of time to meet its underground storage target for the winter.

Gary D. Simon, El Paso’s director of California affairs, says that the utility deferred purchases of spot-market gas because it decided that market prices were then too high. But rather than decline, spot prices continued to climb.

“They hoped that, in September and October, they would get a better spot-market price,” Simon says. “They guessed wrong. They put themselves in the position of relying on an inherently unreliable supply. Spot gas goes where the price is highest. It’s not loyal.”

El Paso isn’t a disinterested observer, of course. Every cubic foot of gas that the utility buys on the spot market is one it doesn’t buy from companies such as El Paso, which usually charge more in return for the promise of long-term supplies on contract that presumably would have averted the current shortage.

Robert Loch, the senior vice president for fuel at the gas company, denies Simon’s charges and says that, among other things, “inefficiencies” in El Paso’s complex system of pipelines prevented the supplier from delivering a full complement of gas to California last year. Some 20 billion cubic feet never arrived--much of which would supposedly have gone into SoCal Gas storage.

“They’re wrong to say we were waiting for lower prices,” Loch says. “We weren’t waiting for anything . . . all the product that was available, we bought. What El Paso is probably complaining about is that we didn’t buy at their prices.”

In fact, both companies are caught in the throes of partial deregulation.

El Paso is stuck with costly, long-term supplies of natural gas that it bought years ago from producers under so-called take-or-pay contracts. It must pay for the gas whether or not it has buyers. But the Federal Energy Regulatory Commission in 1984 relieved utilities such as SoCal Gas from the obligation to buy from such suppliers, freeing them to buy on the spot market, which has subsequently emerged.

Affected by Dry Season

Meanwhile, FERC forced the utilities into the competitive arena by encouraging natural gas customers to buy their fuel from the cheapest sources or even to produce their own. This has pressured SoCal Gas to keep prices low or lose customers--thus the impetus to buy gas on the spot market.

Loch traces the root of the current shortage to a lack of rain in the Northwest early last year.

The dry season cut back the amount of hydroelectric power available to electric utilities in this part of the country, forcing such companies as Southern California Edison to make up the difference with natural gas. That sharply higher demand, plus a resurgence of oil prices that made natural gas a cheaper alternative once again, prompted SoCal Gas to draw its storage down to what was apparently a historic low on May 1, 1987.

At less than 10 billion cubic feet, it was “as low as it’s been in my memory,” Loch says.

Questioned about this at a PUC hearing in December, Loch testified that the utility’s engineers “really welcomed the opportunity to see how the fields would perform at those very low inventory levels.” But he insisted that was “not the primary purpose” of letting storage levels drop that low.

“We ought to close the season with about 20 billion cubic feet.” But he said the alternative then was to cut off service to electric utilities temporarily to shore up storage levels, a choice he rejected in favor of “serving the market.”

In any case, the utility is capable of injecting up to 800 million cubic feet of gas per day into its six underground storage reservoirs, so it was “well within our capability” to refill the reservoirs to 95 billion cubic feet by Nov. 1, Loch says.

But he says strong summer demand and difficulty in getting all the gas it ordered made it “pretty clear we weren’t going to meet the target” without extraordinary steps. In late summer, it arranged to buy 50 billion cubic feet from PG&E; “to supplement our other supplies. . . . What I’m telling you is we recognized what was happening.” But, as of Oct. 1, there was just 74 billion cubic feet in storage, or some 21 billion cubic feet below the original target for just one month hence. In October, the utility was barely able to hold its own.

Consumption Soars

Loch says at that point the gas company was again faced with curtailing service to the electric utilities--its biggest single customers, and the ones that can most readily switch to oil instead of gas to power their boilers--in favor of injecting much higher volumes of gas into storage. On the other hand, mild weather might clear up all the problems.

“Then I might not have to curtail at all. So the obvious decision is, ‘don’t curtail, and play the possibilities,’ ” Loch says.

In mid-December, Mother Nature made the decisions. Natural gas consumption surged to record levels and the utility cut off deliveries to Edison, Los Angeles Department of Water and Power, San Diego Gas & Electric and the region’s municipal utilities. Last Monday, it drastically broadened the cutoff to include about 880 industrial and commercial customers, to whom the switch was far from routine.

“I’m not going to say we made a mistake,” Loch says. “But I do regret that the curtailments went beyond the power plants and that those other 880 customers had to be switched over. That’s very regrettable.”

Nearly one in five of those customers have reported trouble cranking up their backup systems, in disuse for years. Vendors who specialize in cleaning and refurbishing backup fuel tanks were reporting a windfall business last week as a result of the curtailment of natural gas.

But from the gas company’s point of view, it has succeeded in doing what it is supposed to do--provide natural gas to customers who have no other fuel to turn to. That is the whole point of the storage reservoirs and the backup fuel systems, spokesmen point out.

“We have two tools for dealing with this situation, storage and curtailment, and we’ve used them both,” Loch says. “It was contemplated by the regulators and the customers that we’d use them. The fact that it happened is not that extraordinary.”

But he concedes that the shortage and surge in the price of spot gas, which had been in steady decline since the market was created, will cause SoCal Gas to rethink its purchasing and storage-injection policies.

“We have now had experience with the volatility of spot gas that we didn’t have before. I think we might factor that into our plans for ’88 and ‘89, and maybe will conclude that the injection of gas in summer is even more needed,” he says.

Distrusts El Paso

That won’t necessarily patch things up with El Paso. The state of affairs reached such a low point last year that SoCal Gas demanded an audit of El Paso’s books to see whether the pipeline company sent the gas it said it did. It is awaiting the results.

An increase in the purchase of long-term gas supplies “might not mean we’ll buy more gas from El Paso,” Loch says. “I’m going to be prudent in dealing with El Paso.” He characterized the relationship between the two firms as “arms-length.”

As for SoCal Gas, analyst Tussing says:

“Clearly, somebody misjudged the market. In a sense, they took a gamble that they wouldn’t need as much from storage as they did. I don’t know that that was so unusual. This price phenomenon surprised everyone. And I don’t know that what’s happened is all that disastrous.”

From the regulatory standpoint, that won’t be determined until late this year, when the PUC conducts its normal “reasonableness review” of the utility’s actions.

Analyst Dobson of the PUC says it appears that the failure to meet storage targets may have been “the major part” of the problem that led to widespread curtailment of service, the others being cold weather and the side effects of deregulatory policies.

“I can promise that we will look at the reasons for it very, very carefully,” he says.