Six New Gas Agreements Only Go So Far, PG&E Warns Many other suppliers remain wary of utility. Carolyn Said, Chronicle Staff Writer Thursday, February 8, 2001 ©2001 San Francisco Chronicle

URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2001/02/08/MN150945.DTL

Staving off the threat of widespread gas shortages, PG&E has lined up six natural gas suppliers, enough to keep the furnaces on -- for now. But the utility is still scrambling to secure deals with more gas companies, or it will exhaust its backup reserves by the end of the month.

"The fact that these six suppliers have agreed to continue doing business with us is good news, but we're not out of the woods yet," said PG&E spokeswoman Staci Homrig. "We need additional suppliers to keep gas flowing because these six cannot provide all the gas that our customers need."

PG&E is still working out details with the suppliers; it is unclear what percentage of the utility's daily needs the six companies will be able to meet.

Other gas firms are continuing to sell to PG&E but are reluctant to lock in contracts because they fear the troubled company may go bankrupt, leaving them with millions of dollars in unpaid bills.

PG&E is still "in a dire situation," said Kelley Doolan, editor of Inside FERC's Gas Market Report.

Two companies, accounting for 10 percent of PG&E's daily natural gas supply, cut off delivery at the stroke of midnight Tuesday when the federal emergency order compelling them to sell to PG&E expired.

The six suppliers that have agreed to keep delivering gas are BP Energy Co., Texaco Natural Gas, Dynegy Marketing and Trade, and El Paso Merchant Energy Co., all of Houston, and two Canadian companies: Texaco Canada Petroleum and Dynegy Canada Marketing and Trade.

The rest of PG&E's 25 to 30 suppliers are still in negotiations with the utility.

Natural gas suppliers have balked at selling to PG&E since the electricity crisis turned the utility into a bad credit risk. Suppliers have asked for cash in advance, but PG&E can pay only after its customers pay their energy bills.

PG&E typically spends $300 million to $400 million a month in winter for gas supplies.

Last week, PG&E bolstered itself with a new emergency order from the California Public Utilities Commission allowing it to offer collateral -- warrants on customers' gas bills and its own reserves -- to persuade the reluctant gas companies to continue doing business with it. That's the ammunition PG&E is using to secure new gas contracts.

But some gas firms said it's not enough.

"We have no intention of signing the securitization (collateral) agreement, " said Eric Thode, a spokesman for Enron Corp. in Houston, which PG&E said is a major gas supplier. "If PG&E went bankrupt under that agreement, we believe it would still require us to continue selling new supply to them."

Enron is still selling to PG&E under some existing agreements, he said.

The loss of two suppliers -- J. Aron & Co., a subsidiary of investment banker Goldman Sachs, which was providing about 9.5 percent of PG&E's daily supply, and Western Gas Resources of Denver, which accounts for 0.5 percent -- has already forced PG&E to double the amount of gas it takes daily from its storage reserves, Homrig said.

The utility's standard practice is to stockpile natural gas during the summer, then draw from its reserves in the winter, to supplement the gas it buys on the open market.

"Obviously, storage won't last forever," Homrig said. If PG&E can't make up the 10 percent shortfall from an outside source, it will empty its gas reserves by the end of the month, she said.

Once storage is depleted, "widespread gas curtailments that affect residential and business customers become more likely," PG&E said in a news release.

By law, the company would first cut off gas to large industrial customers, including power plants, which would stop generating electricity; and refineries, which would stop producing gasoline, diesel and jet fuel.

Also affected first would be hospitals, military bases and universities. PG&E has described an eventual "doomsday scenario" with hundreds of thousands of customers lacking heat, hot water or working stoves.

PG&E hopes to persuade the state PUC to approve another bailout measure to supplement whatever contracts the utility lines up.

It wants the PUC to compel Southern California Gas Co. to buy extra natural gas and sell it to PG&E. Southern California has separate utilities for gas and electricity so its gas company remains financially stable.

But SoCalGas has threatened court action to block that plan. Just like the outside gas suppliers, SoCalGas is leery of extending credit to PG&E.

The PUC is expected to discuss PG&E's SoCalGas proposal at its meeting this morning. Another strategy PG&E might use is to ask Gov. Gray Davis to back up its credit.

Even if PG&E secures enough deals to cover its gas needs, customers won't see any relief from soaring gas bills. PG&E passes along the wholesale cost of gas, adding on a delivery fee. Tight supply, increasing demand and California's limited pipeline capacity have conspired to propel gas prices in the state to record levels.

E-mail Carolyn Said at csaid@sfchronicle.com.

©2001 San Francisco Chronicle Page A10

-- Swissrose (cellier@azstarnet.com), February 08, 2001

Answers

There is going to be heavy duty TRIAGE, and soon. Will the natural gas curtailments be directed at industral-commercial users, harming the economy? Or will they be directed at reducing electricity generation, inducing widespread daily rolling blackouts?

Also: Where is Gov. Davis's sudden new power generation going to use as the source? Natural gas simply won't be available. What will they use? Oil's the only fast alternative, or is there even enough pipeline capacity remaining to even accomplish THAT?

-- Robert Riggs (rxr.999@worldnet.att.net), February 10, 2001.