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Bottom Line Energy Issues - Natural Gas Deregulation Stresses Markets - Georgia Responds, Maybe

May 2002 - Part 2


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Public assurance of better service and lower gas prices that sparked unanimous approval of gas deregulation by the Georgia legislature in 1997 is now widely viewed as a flop. Prices have not been controlled, the plan is marred by customer service fiascoes, and the ranks of competitors have shrunken from 19 to only four dominant suppliers that control 95% of the market. Yet another new bill was approved by the state legislature intended to fix the situation. Again, it is being touted to bring lower prices, better service, and more competition. Some observers say maybe. Rep. Mark Burkhalter (R-Alpharetta) a pioneer in gas deregulation said, “It’s just like surgery. If you don’t go slowly and methodically, you kill the patient.” Sen. Eric Johnson (R-Savannah) called the new bill “an election year tactic by the governor to say he fixed gas deregulation when he hasn’t.” Sen. Regina Thomas (D-Savannah) said she was “very leery” that deregulation can be salvaged. PSC Chair David Burgess said failure of the present legislation could prove fatal.

Three main challenges are fixing badly flawed billing practices that brought thousands of consumer complaints, massive service terminations of low income delinquents, a check on prices that varied widely from time to time and across the state, and encouragement of more natural gas marketers to boost competition. The PSC is given authority to get results, including temporary price controls. But there is still much that could go wrong. The plan is largely funded with a $25 million surcharge to subsidize low income consumers payable by industrial users averaging about $41,000 each. Lee Lemke, Ex. V.P. of the Georgia Mining Association said, “You can’t pass along those costs on worldwide markets.” So jobs may be affected. PSC member Robert Baker is skeptical the plan will work. “If you look at the past record, I wouldn’t hold my breath,” he said.

In the Southwest, pipeline problems plague the gas market. Amid the frenzied expansion in Arizona came insatiable increasing demand for natural gas. Forgotten in the deregulation policies that caused a present crisis were the pipelines that distribute gas throughout the entire southwest. Now, the region is facing a gas shortage that threatens blackouts if electric power plants shut down, lack of gas for home heating, and escalating gas prices. The long-term solution is simple: just build more gas pipelines. But attempts to fix the problem lead to fights pitting states, local political leaders, and federal vs. state regulators against each other.

The center of attention is the major pipeline owned by El Paso Corp. It is the only one feeding gas to southern Arizona, much of western Texas, New Mexico, and southern California. Under a 1995 agreement AZ, TX, and NM were granted as much gas as they wanted by El Paso because demand was far below the pipeline capacity. Now that capacity has been absorbed, largely by new CA power plants, so deliveries to CA by El Paso have been curtailed. Adding insult, CA power plants must pay for gas they do not receive on curtailment days, when deliveries to the other states are assured by terms of user contracts with El Paso. So, CA has petitioned FERC to intervene. If the contracts are voided and gas rationing is imposed by FERC as proposed, natural gas shortages for the southwest this summer could be assured. Critics of this plan point out that CA has access to gas through other pipelines but the other states do not

When the current contracts expire in 2006, the shortage will be spread around the region without additional pipeline capacity. Gas demand in the region is forecast to double over the next decade. No plans for new pipelines have yet been announced because the financial incentive to El Paso has not been forthcoming and will not until the crisis peaks in 2006. In any event, it looks like gas shortages are needed to drive up prices before El Paso will be induced to build more pipeline capacity. FERC must balance on the razor’s edge between regulation and free enterprise. Pray for their wisdom.

Nationally, gas supplies are being stressed by increasing demand. Overall, gas producers predict that as much as 15 billion cubic feet per day of new gas will be needed by 2015, one fourth the present deliveries, if the present growth of 2 percent annually is maintained. Arctic gas, Canadian supplies, and liquefied natural gas all will be needed to balance demand by the end of this decade. Drilling deeper wells in uncharted hostile territories and adding more international pipelines will be needed to meet this demand. Annual decline rates of Canadian shallow gas wells that supply present U.S. demands are forecasted at 20 percent. If that rate of decline continues, in ten years these gas wells will be producing only one percent of present output. Offsetting the decline are uncertain offshore eastern Canadian reserves awaiting development. BP has predicted that only about one half the expected growth in gas demand can be met by increased production from traditional resources. Bottom line is that gas is likely  to cost more in the future. Possibly a lot more.

In spite of its problems and murky forecasts, FERC Chair Pat Wood still holds gas deregulation as a model for electricity, having delivered “tens of billions of dollars” in savings to customers. “That same template should be applied in the electric power industry to bring similar savings to electric customers,” he told a national energy conference in New Orleans.Go to Part Three

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