LADWP Sees Lower Gas, Goldman Sachs Predicts Super Spike, SMUD in Between

In spite of rising concern about natural gas prices, the Los Angeles Department of Water & Power adopted a five-year gas budget this week that projects declining expenditures annually through fiscal year 2009-10. The department?s budget comes just days after the investment banking firm Goldman Sachs forecast that gas prices could double by 2007. ?The default assumption is that prices will return to normal,? said Mark Bolinger, a research associate at the Lawrence Berkeley National Laboratory specializing in energy economics. Utilities such as LADWP, and the U.S. Energy Information Administration, project price decreases based on new supplies in the years ahead, such as liquefied natural gas terminals and a gas pipeline from Alaska. However, Cambridge Energy Research Associates and others expect a sustained period of high and volatile gas prices. New gas-fired power plants across the nation are increasing gas demand as domestic supplies dwindle. The gas market may even remain ?constrained? after new LNG terminals open in 2008 or 2009, according to Michael Zenker, Cambridge senior director. Late last week, Goldman Sachs outlined an energy price ?super spike? scenario in which natural gas could rise to $13/MMBtu as early as 2007. Despite such forecasts, LADWP said it expects to contain its gas costs through long-term contracts and hedging. LADWP said it will burn 61.2 MMBtu of gas, at a cost of $465.9 million, for electricity in fiscal year 2005-06, which begins July 1. The department expects its gas costs to decline by 21 percent to $369.3 million in fiscal year 2009-10 and gas usage to decline by 4 percent to 58.7 million MMBtu. LADWP officials were unavailable to elaborate on their cost-containment strategy, but the department?s gas budget stands in contrast to the Sacramento Municipal Utility District?s. SMUD?s board voted to raise electricity rates by 6 percent because of higher gas prices last month. The district expects to contain its gas cost increase for 2005 to $45 million through hedging. Without it, the muni would pay an estimated $112 million more for gas than in 2004. SMUD expects gas prices to remain high over the next three years but has hedged two-thirds of its supply needs through 2008 at between $4.50 and $4.75/MMBtu, according to Todd Peterson, a muni energy-trading specialist. SMUD then expects the price of gas to fall. The district gets one-third of its gas from a field in New Mexico that it bought after the energy crisis at a cost of $1/MMBtu. It also uses long-term contracts, financial hedging, and storage to help moderate costs. SMUD expects to pay up to $8.50/MMBtu to meet the remainder of its needs through spot-market purchases or monthly contracts. The Southern California Public Power Authority also is planning to acquire gas wells to contain its costs ( Circuit , Nov. 12, 2004). Hedging can offer some insulation from price volatility, although less than in the past, Bolinger said. Since Enron?s demise, hedge terms have been cut from up to 10 years to a maximum of 5 years. The longest fixed-price gas contract now available is generally no longer than two months, he said. Longer-term contracts usually are indexed to market prices. Eventually, rising gas prices will catch up with power producers and utilities, he said. Wind power may be the best gas price hedge, he added, because of its price stability. Cambridge Energy Research Associates also recommends resource diversification, including renewable energy and more coal plants.

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LADWP Sees Lower Gas, Goldman Sachs Predicts Super Spike, SMUD in Between

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