After CPUC Approval, LNG Is Moving Target

The California Public Utilities Commission?s recent move allowing liquefied natural gas from Mexico to flow to California has arguably given Sempra and partner Shell International?s LNG terminal in Costa Azul an edge over competing developers. However, while regulators aimed to shore up supplies of competitively priced natural gas with the September 2 decision, long-term availability at a reasonable cost from Sempra?s LNG project is not assured. Commission member Geoffrey Brown acknowledged that regulators gave Sempra?s project more of a boost than those brought forward by other LNG developers. The advantage of Sempra?s project, said Brown, is that its location in Mexico will facilitate gas deliveries over the SDG&E and SoCal Gas system. Facing regulatory hurdles, other proposed projects could be held up for several years. Brown voted with a majority of commissioners to open a joint receipt point at Otay Mesa for Mexican LNG terminals to deliver gas to SDG&E and SoCal Gas ( Circuit , September 3, 2004). With LNG on its way from Sempra and expected from other suppliers, ?there is pressure for competition and lower prices,? predicted Brown. At the same time, Brown conceded that LNG policy is ?vague? and still ?on the drawing board.? Art Larson, Sempra spokesperson, declined to provide specifics on expected prices from the Baja terminal but said they would be competitive. Not everyone is convinced that liquefied natural gas will help tame natural gas prices. LNG is a relatively expensive source of natural gas, said Michael Shames, the Utility Consumers? Action Network executive director. Shames said he ?expects that Sempra and others will require a long-term contract with some utility? as a precondition for building an LNG terminal. If so, then they are conceding that it is a risky fuel source, he postulated. Long-term contracts would dismiss competitive pressure on prices. But if LNG suppliers are willing to develop facilities without a long-term commitment, ?then there is greater likelihood that it is an economic proposition.? At the expected price of LNG, imports are unlikely to delay renewables development. Sustaining liquefied gas operations requires a lot of capital, according to Jan Smutny-Jones, Independent Energy Producers executive director. That means, he said, that gas costs will stay high to cover those expenses. ?In that market, I think renewables can compete quite well? with LNG, he added. Sempra expects the Baja California LNG terminal, which started construction in July after permitting challenges were dismissed in Mexican courts, to import 1 Bcfd once it is completed in 2007 ( Circuit , September 10, 2004). Though Sempra expects all the gas to flow to California initially, Mexico will consume ?virtually all the output by the middle of the next decade,? said the company in a May letter to Greenpeace. That statement doesn?t take into account the possibility of facility expansion to meet higher use, asserted Sempra?s Larson. ?Sempra would not anticipate a problem meeting market demands,? he said. Even if Mexico reaps all the gas in the long run, the Baja terminal helps California from a regional perspective, according to Norman Pedersen, an attorney with Hanna & Morton representing the Southern California Generation Coalition. Everyone in the region is looking for supplies, said Pedersen, so if Mexico?s natural gas picture improves, competition could be dampened. Saying consistent rates are good news, Pedersen praised regulators? adoption of rates to move LNG over the SDG&E and SoCal Gas system that match rates already in place for the utilities. However, he said a joint proposal by SDG&E and SoCal Gas to develop a Sempra systemwide gas transportation rate is troubling because it could mean gas transportation rates ?going up substantially? for generators. Pacific Gas & Electric also is casting a wary eye on the SDG&E and SoCal Gas proposal for Sempra systemwide rates, which the utilities are required to file in three months. Overall, PG&E sees the adopted LNG policies as enhancing the supply picture but said it?s too soon to tell whether these supplies will flow into Northern California, according to Eric Eisenman, PG&E chief of regulatory relations. Despite a stated ban on affiliate transactions, the commission adopted policies encouraging development of an LNG project among Sempra and affiliates SDG&E and SoCal Gas. UCAN?s Shames said he ?expects the CPUC will effectively rescind the ban.? He said regulators have already done so by allowing the Palomar sale from an affiliate to SDG&E. ?LNG was another effective rescission,? he added. ?The new CPUC doesn?t appear to place much import on the potential for insider dealing,? said Shames.

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After CPUC Approval, LNG Is Moving Target

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