SoCal Munis Plan to Buy Gas Fields to Control Costs

By Published On: November 13, 2004

To even out volatile fuel costs for power plants, the Southern California Public Power Authority plans to negotiate the purchase of natural gas reserves early next year for the exclusive use of six of its member utilities, plus three nonmember public power agencies. Late last month, the authority?s board approved the program, but it also must be approved by the city councils that oversee the various public power agencies. Once those councils act, the authority plans to begin purchasing properties in a variety of Western states and potentially Canada. Authority members participating in the project include the municipal utilities of Los Angeles, Anaheim, Burbank, Glendale, Pasadena, and Colton and nonmember public power agencies in Redding, Turlock, and southern Nevada. Bill Carnahan, executive director of the authority, said the organization is looking at properties. ?Our goal is to be 10 percent below [market prices], but more importantly to control the gas price volatility,? he said. The authority?s move is in response to its members bringing some 2,000 MW of new gas-fired generation capacity on line. In recent weeks, gas prices have soared, and the financial firm Raymond James warns that domestic gas production declined by 3.3 percent over the last year. The drop occurred despite a surge of new well drilling. The Southern California agencies ultimately hope to purchase enough gas reserves to provide for about 15 percent of their needs over the next 10 to 20 years, Carnahan said. It will take a couple of years to acquire those reserves through perhaps a half-dozen purchases in ?geographically diverse areas,? he added. To aid in its purchase negotiations, Carnahan said, the authority is developing natural gas price projection models and will have an independent gas reservoir engineer determine the projected production volume for prospective properties. The authority will coordinate the negotiations and acquisitions with many of the utilities that are independently financing acquisitions. However, the authority also will offer pooled financing to interested agencies. Changes in the federal tax code a couple of years ago allow public power agencies to use tax-free bonds for such purchases, Carnahan noted. Typical of participants in the authority?s gas acquisition project is Anaheim Public Utilities, which will seek to purchase enough reserves to supply some 2 bcf/year of gas over the next 20 years. It will be used to supply its share of the Magnolia Power Plant when it opens next spring, said Mike Ebbing, spokesperson for the agency. Currently, the muni buys gas on the short-term market to supply its 45 MW peaking unit. The 310 MW Magnolia plant is owned by a consortium of authority members. Colton, another Magnolia project participant, has been purchasing all of its gas for a peak production unit on the spot market. ?We hope to stabilize or lower the cost of our fuel through physical or financial hedges,? said Jeanette Olko, electric utility manager for Colton. The Southern California authority?s move to purchase gas reserves is not unique. Last year, the Sacramento Municipal Utility District spent $135 million to purchase gas reserves from El Paso Production Oil & Gas Co. in northern New Mexico. That property supplies about one-third of the 60,000 MMBtu/day that SMUD needs. The muni?s gas demand is expected to double next year when the Cosumnes plant goes on line. Nationally, other public power agencies are weighing the purchase of their own gas reserves, said Madalyn Cafruny, communications director for the American Public Power Association in Washington. They include Memphis Light, Gas & Water, the Florida Municipal Power Agency, and the Municipal Electric Authority of Georgia.

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