LNG Contracts and Price Prick Regulation

As the Pacific Coast’s first liquefied natural gas terminal nears completion, significant policy debates over the state’s new fuel are erupting. The California Public Utilities Commission is grappling with whether to allow the utilities to enter long-term contracts for the imported gas. If so, other issues arise, including deciding upon the conditions the state should set for those agreements. Also in play are the imported fuel’s air pollution and climate change impacts. Utilities claim long-term contracts would drive down energy prices by creating “gas-on-gas” competition with traditional pipeline suppliers. Long-term deals, they add, also would signal investors to build additional liquefied natural gas import capacity on the West Coast, which would put further downward pressure on energy prices. An analysis by Wood Mackenzie for Pacific Gas & Electric “demonstrates that California stands to reap substantial benefits in terms of lower gas prices--$1 to $4 billion annually--if LNG can be attracted,” the investor-owned utility told the commission at the end of January. However, consumer advocates said they fear utilities may lock in overpriced contracts that would drain ratepayer pockets. They point to potential growth in gas production in the Rocky Mountain region that could drive prices down beginning in the next decade if shipped to the state. “LNG is expensive and unnecessary,” Bill Powers, an engineer for Ratepayers for Affordable, Clean Energy, told the commission. He cited a Sempra Energy estimate that long-term LNG contracts are likely to peg gas at $12/MMBtu, compared to a projected decline in the price of domestic gas from $9/MMBtu to $7/MMBtu by 2014. Meanwhile, Powers said, demand for gas in California is level or even declining as renewable power plants come on line and energy users become more efficient. Other organizations, including air quality regulators and those backing renewable energy, warn that LNG could worsen air pollution in smoggy Southern California. It could, they add, also frustrate the state’s effort to reduce greenhouse gas emissions attributable to energy use. Ratepayers for Affordable, Clean Energy, for instance, noted that the life cycle greenhouse gas emissions from LNG would be 25 percent higher than those attributable to domestic gas. The South Coast Air Quality Management District warned that burning more LNG could boost emissions of smog-forming nitrogen oxides. The agency urged the commission to require public health protections in any utility purchase agreements for liquefied natural gas. The contentious rulemaking comes as Sempra Energy puts the finishing touches on its Costa Azúl LNG import facility in Baja California, which is slated to open in the months ahead. Other terminal projects are wending their way through the permitting process too. Sempra’s terminal--designed to import up to a billion cubic feet a day of gas--is being tied into California through pipelines. Thirty to 50 percent of its initial contracted deliveries of up to 500 million cubic feet a day is pledged to Mexico’s Electricity Commission, but the rest could be sent to California. The terminal is set to import liquefied natural gas--frozen into a compact size and shipped via ocean-going tankers--from countries like Indonesia to Baja. Once there, it would be re-gasified and sent through pipelines for distribution. In joint comments filed with the CPUC January 24, Sempra utilities, SoCal Gas and San Diego Gas & Electric, said that authorizing utilities to issue requests for proposals aimed exclusively at entering liquefied natural gas supply contracts could bring “substantial potential benefits.” Should utilities be able to enter supply contracts at favorable prices, the Sempra utilities said that they may need to issue such contract requests only “every 10-15 years.” The utilities suggest they follow the same procedures used for entering pipeline gas supply contracts, in which they disclose the terms to representatives of core customers, including two consumer groups, the Division or Ratepayer Advocates, and The Utility Reform Network, as well as the CPUC Energy Division. After that, they would file advice letters with the commission for pre-approval. Pacific Gas & Electric advised the commission to allow utilities to open discussions with liquefied natural gas providers on supplies as soon a possible. Southern California Edison voiced support as well, telling the commission that utilities should be allowed to enter into long-term supply contracts for gas from any source and that liquefied natural gas should be treated no differently than pipeline supplies. The Division of Ratepayer Advocates cautioned against allowing utilities to rush into long-term gas procurement agreements. It cited both completion of Sempra’s terminal and two pipelines proposed from the Rocky Mountains to the California-Oregon border that are expected to bolster gas supplies. “With no prospective shortage of the gas commodity, there is no need for California ratepayers to enter into long-term procurement contracts,” wrote Gregory Heiden, Division of Ratepayer Advocates attorney. He suggested that the commission specifically prevent utilities from negotiating any contract in which they would pledge a price “premium above index” for liquefied natural gas. One reason utilities might do so is to increase the reliability of their liquefied natural gas supplies, suggested the Sempra utilities. They urged the commission to allow utilities the flexibility to contract for LNG supplies with differing levels of reliability. Doing so could protect against political risk and potential diversion of deliveries by suppliers to other nations unless they could provide replacement gas. The Utility Reform Network asked the commission to not authorize utilities to enter into long-term liquefied natural gas contracts, urging instead that requests for proposals for gas supplies be open to pipeline as well as LNG suppliers. TURN also urged the commission to avoid letting utilities tie any liquefied natural gas contracts to international LNG price indices due to the growing demand for LNG in other nations.

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LNG Contracts and Price Prick Regulation

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