NGSA says natural gas price not behind California electricity costs

By the OGJ Online Staff

WASHINGTON, DC, May 14 -- The Natural Gas Supply Association issued a report Monday claiming that natural gas prices are not driving electricity prices in California.

NGSA commissioned the paper by John Hebert, a professor at Virginia Polytechnic Institute & State University Graduate Center, Falls Church, Va., after the wholesale spot price of gas and power both increased.

NGSA sent the study to congressmen and the Federal Energy Regulatory Commission.

In an accompanying letter, NGSA Pres. Skip Horvath said, "Analysis of natural gas prices in West Texas (the major natural gas market serving California) and power prices in Palo Verde, Ariz. (the major wholesale power market serving California), shows that although something happened to cause large power price increases over one year's time, it was not natural gas, the price of which remained relatively flat.

"The results show that there is little association, let alone a causal relationship, between changes in price on wholesale natural gas and power markets. In fact, a major conclusion drawn is that while natural gas certainly is a factor in the cost of electricity, it is often a relatively small factor in the overall market price of electricity -- a key differentiation."

Horvath said, "The impact of the study is significant as lawmakers and regulators consider the best approach to helping California out of its current energy crisis. Some are touting price caps or other governmental solutions.

"It is imperative that in the frenzy to fix California's energy problems, we do not lose sight of the real problem: It took California years to reach this point; it will not be fixed overnight, or even this summer. When fashioning a solution, legislators must avoid any remedy that distorts supply and demand, which could lead to artificial shortages as market signals are masked."

Hebert, a former Energy Information Administration economist, studied 52 weeks of data regarding natural gas and California electricity prices.

His paper said, "Increases in the price for natural gas and power began a year ago on Apr. 26. On that day, a Wednesday, wholesale power prices in the Palo Verde market area nearly doubled from their level at the beginning of the week. Yet, wholesale gas prices in West Texas remained practically unchanged.

On Monday, Apr. 24, the cost of natural gas in West Texas was $3/MMbtu. Wholesale power prices at Palo Verde were $34.83/Mw-hr. By April 26, wholesale power prices in the Palo Verde market were $67.79/Mw-hr, a 95% increase from Apr. 24. Still the natural gas price in West Texas was a bit less at $2.97/MMbtu. Based on daily data, electricity prices rose substantially with no increase in natural gas prices."

He said an examination of daily, weekly, and monthly prices indicates that power prices started to increase prior to natural gas prices at the beginning of the structural change in both markets in late April 2000.

"Based on our analysis, it is evident that natural gas price increases did not cause power prices to increase. On the contrary, to the extent there is any causation at all, it appears that the increase in power prices may have kick-started the increase in natural gas prices."

Hebert said no consistent relationship could be found between changes in the price of gas, either in the producing region or at the California border, and changes in the price of electricity to the California market.

"In general, the prices do not move together at all. When, for short periods of time, there does seem to be a relationship in the movement of the prices, there is no relationship between the magnitudes of the changes. The electricity price swings are much greater than the natural gas swings.

"The inescapable conclusion is that while natural gas costs are certainly a factor in the price of electricity, they have not been a major contributing factor impacting the price of electric generation in California," Hebert said.