Ineffective restructuring of the U.S. electricity industry might hold demand for natural gas well below expected levels, warns Nicholas Bush, president of the Natural Gas Supply Association (NGSA).
Bush last month projected gas demand in 2000 at 24.7 tcf-up 2.6 tcf from the 1996 level. The amount of increase matches the total gas volume that NGSA expects to be available from pipeline projects likely to come on stream during the period from the Outer Continental Shelf and Canada.
But flawed restructuring of the electricity industry could slow or reverse growth of the important market represented by independent power producers (IPPs). Without IPP growth, Bush said, U.S. gas demand might increase by only 2 tcf/year during 1996-2000.
Flawed proposals
The NGSA president faulted provisions in electricity restructuring proposals that would mandate use of renewable sources of energy, apply unequal environmental standards to different power generation fuels, and allow utilities to receive cash windfalls in compensation for assets hurt by deregulation.
Current proposals contain mandates for renewable energy ranging from 4% of total U.S. generating capacity to 20%, Bush noted, saying that each percentage point of mandated use of renewables places at risk 300 bcf/year of natural gas demand.
If Congress requires that 10% of nonhydro generating capacity involve renewable energy, consumer electricity prices would exceed forecast levels by 12% and capacity built to satisfy the requirement would cost at least 66% more per megawatt installed than conventional capacity, Bush said.
He also called for a leveling of the nitrogen-oxide emission rate standard for gas, oil, and coal.
Stranded cost recovery
And he opposes "securitization of stranded cost recovery," in which utilities turn noncompetitive investments into cash.
Stranded costs reflect declines in booked utility asset values that result from competition arising from deregulation. Regulators often allow utilities to recover stranded costs through surcharges in customer rates.
Under securitization of stranded cost recovery, a utility collects its recoverable stranded costs all at once by selling a bond or other financial instrument secured by future surcharge revenues.
The cash can help the utility keep in operation generating capacity that otherwise wouldn't survive competition from nonutility generators, many of which use gas as their primary fuel.
By allowing for securitization of stranded cost recovery, Bush said regulators were "picking winners and losers" in industry restructuring and "skewing the competitive environment."
He called for comprehensive restructuring of the power business at the national level but said he didn't expect Congress to vote on the issue this year.
The Federal Energy Regulatory Commission has provided for open access to electricity transmission service at the wholesale level but left retail issues to the states. Bush said a national power grid can't develop state by state.
Producers seek fairness in power decontrol
U.S. gas producers have urged the Senate energy committee to allow fair competition between fuels should Congress consider retail electricity decontrol legislation.
Witnesses testified at the committee's May 8 workshop on the effects of electricity competition on fuel use and types of power generation.
IPAA view
Brent Allen, vice-president of Alpar Resources Co., Perryton, Tex., testified for the Independent Petroleum Association of America.
"Electric restructuring will be important to both the gas and oil side of our business. On the gas side, we already face challenges, and we do not want electric restructuring to add to them.
"Natural gas imports are steadily growing, constrained only by the capacity of north/south pipelines. Gas imports have doubled in 1996 from the 1.5 tcf level of 1990 to about 3 tcf, or 13% of U.S. supply. That means that cost-cutting by independents will have to continue if they are to compete with imported gas supplies and other fuels such as coal.
"Independent producers not only produce the natural gas used to generate electricity but also consume electricity in their day-to-day operations of producing oil and gas.
"The cost of electricity is an especially crucial factor to producers operating marginal wells, given that the electric bill is often the largest single production expense. In fact, some oil wells, such as those with a high water cut and those that produce heavy oil, may expend upwards of two-thirds of their operating costs just on electricity. Therefore, if electricity costs can be reduced, our nation's marginal reserves can be used to their fullest potential."
Allen said an IPAA survey of 37 member companies last March found the 1996 median expenditure on electricity was $166,953, or 9.5% of total operating costs. He said a similar Oklahoma state survey found electricity was 12% of total operating costs and the largest single lease expense.
Allen said IPAA recommends a comprehensive approach to restructuring, fuel-neutral emissions standards, a deadline for states to adopt a competitive framework, and the preservation of existing contracts.
He said, "There are two schools of thought on the impact that restructuring will have on the gas market. One group thinks that gas will be hurt as low-cost coal captures the market and as the redundant coal capacity is more fully utilized.
"Others, however, believe that gas will be able to hold its own in the electric generation market because it is clean-burning and a very efficient fuel when used by combined cycle turbines. Both are probably right; the question is when."
Other views
Don Niemiec, vice-president of marketing for Union Pacific Resources Group, testified for the Natural Gas Supply Association and the Natural Gas Power Group.
He said Union Pacific is the largest U.S. independent gas and oil exploration and production company and the most active U.S. driller for the past 5 years.
Niemiec said electricity restructuring will not necessarily lead to increased gas use if Congress does not pass a fuel-neutral law. "Natural gas has two separate relationships with electricity: First, about 12% of all gas consumption in the U.S. is used to generate electricity. Most utilities tend to use gas primarily as a peaking fuel and for load management. Many independent power producers, on the other hand, use natural gas to generate their baseload supply of electricity.
"Second, gas competes head-to-head with electricity for applications like space heating and cooling and various industrial applications. Thus, gas competes twice-as a generating fuel against coal, nuclear, hydro, oil, and renewables and as an end use."
Niemiec urged Congress not to mandate the use of renewable energy to generate some portion of the nation's electricity needs.
"Mandating renewable fuels on the grounds that we are running out of fossil fuel is senseless. At the present time, we have sufficient reserves of natural gas to meet projected demand for the next 65 years, and more reserves are being found each year. Our domestic reserves of coal are even greater."
He said utilities should be entitled to recover legitimate stranded costs but should not be allowed to use recovered stranded costs to subsidize inefficient generation facilities.
Utility view
Frederick John, senior vice-president of Pacific Enterprises, parent of Southern California Gas Co., also testified.
He said Congress must address transmission pricing policy in federal electric restructuring legislation, since under current regulations, "the Federal Energy Regulatory Commission may not consider cost causation, equity, or economic efficiency issues that are critical to the creation of a competitive energy services marketplace.
"Congress must craft a federal electric restructuring model that supports what the states have accomplished but that also addresses issues beyond the reach of any single state, including addressing transmission pricing, customer choice by a certain date, and environmental comparability, thus ensuring competition on a level playing field for all energy service providers. It is critical that the federal model address the issue of transmission pricing."
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