CAUTION URGED IN POWER GENERATION OUTLOOK FOR GAS

Industry observers are warning that natural gas groups may be too optimistic about the potential growth in gas fired electrical power generation in the U.S.

Those words came from Donald Santa, a member of the Federal Energy Regulatory Commission, at a New England-Canada Business Council seminar in Boston and from James Bowe Jr., a partner in the Dewey Ballantine law firm, at a Federal Energy Bar Association meeting in Washington, D.C.

GROWTH MARKET

Santa said the conventional wisdom is that power generation is the most promising growth market for natural gas in the U.S., partly because of FERC's efforts to restructure the industry.

He noted the Energy Information Administration has predicted that about 60% of planned additions to power generating capacity during the next 5 years will be gas fired, and gas consumption for power generation will grow to 4.2 tcf in 2000 from 2.7 tcf at present.

He said natural gas has environmental advantages over other competing fuels, and gas fired generating units offer high efficiency, low capital and nonfuel operating costs, and can be built faster and in smaller units than competing power plant technologies.

Santa added, "Much of the interstate pipeline capacity certificated by the commission during the past 5 years has been to serve electric generation customers.'

U.S. gas consumption has grown 25% since it hit bottom at about 17 tcf in 1986, but during the same period gas consumption by power utilities grew only 4%.

Meanwhile, 1993 output from coal and nuclear generators rose, while output from gas fired generators fell to the lowest level since 1986.

Santa said the North American Electric Reliability Council's forecasts of planned capacity additions show drops in gas fired power generation.

Weather cycles and economic recessions in some states have slowed the use of gas fired generation, but other factors may be involved.

"I think there still exists something of a cultural gap between the electric generation industry and the gas supply industry," Santa said.

"The gas and electric industries need to understand better the respective operational constraints associated with using gas for electricity generation. I think the onus is on the gas industry to close this gap.

"Second, traditional electric utilities often use natural gas to fuel peaking plants" and higher gas prices have made other fuels more economic.

"Third, uncertainty created by restructuring of the power industry has resulted in a reluctance to commit to new generation. Since gas fired generation represents much of the new generation on the drawing boards, gas is affected disproportionately by this development."

Santa said power generation still represents a market opportunity for the gas industry although "it looks like some forecasts, especially for the near term, have been a bit too rosy. As recent experience demonstrates, this market will not just fall into the gas industry's lap."

WRONG ASSUMPTIONS

Bowe said most of the gas industry's recent assumptions about the electrical power industry probably are wrong.

Rapid restructuring of the industry has made long term commitment risky.

Bowe said, "The gas industry has finally succeeded in assembling a creditable pitch urging the electric utility industry to commit to gas, just as the industry is finding it difficult to commit to much of anything.

"While it works its way through the upheavals produced by restructuring along more competitive lines, a process all too familiar to the gas industry, electric utilities-and non-utility generators, to a large degree-will be timid and tentative when it comes to making substantial new commitments to gas, particularly for new base and intermediate load capacity,.

"Once the dust has settled, gas will have its share of opportunities to fuel power generation resources. But competition is likely to force efficiencies that suppress overall demand for new generating capacity in many regions for quite some time."

Bowe said that during the restructuring period, construction or acquisition of new capacity will become the course of last resort; and the virtues of gas as a power generation fuel may not make much difference to utility planners in the short term.

"Longer term, gas could benefit from electric industry competition relative to other fuels and alternative sources of generating capacity."