Tuesday, June 10, 2003 | 11:04 a.m.
SUN STAFF AND WIRE REPORTS
An acute shortage of natural gas is increasing concerns that consumers may see heating prices soar next winter and that higher energy costs could thwart economic recovery, lawmakers were told today.
"An abnormally hot summer, followed by a cold winter, could push natural gas deliverability to the limit and cause record-high prices," Guy Caruso, head of the government's Energy Information Administration, told a congressional hearing.
Because of supply shortages, he said, the current price of natural gas, hovering around $6 per thousand cubic feet, is not expected to ease this year and could remain at that level into early 2004 even if weather conditions are normal.
Southwest Gas Corp. of Las Vegas recently asked Nevada regulators to consider a $26.2 million rate increase request to recover its higher costs for fuel and purchased power through the end of next month.
The rate case is built on projected gas costs over the next six weeks. Continued price increases could require an upward adjustment to the request, said Thomas Armstrong, vice president for gas resources and energy services.
Armstrong warned that rising gas prices could create a larger rate case next year.
Higher natural gas prices will also affect the price of electricity, said Tim Hay, Nevada's consumer advocate.
"Most of the new generation capacity we have added in the West is natural gas fueled," he said. "Upward pressure on natural gas also puts upward pressure on electricity prices."
Michael W. Yackira, executive vice president for strategy and policy with Nevada Power Co.'s parent company, Sierra Pacific Resources, said the Las Vegas utility already has purchased the gas it needs to fuel its plants through September.
"We're in good shape for this summer," he said. Should demand increase or a Nevada Power-controlled plant shut down, causing the utility to purchase power on the open market, "higher gas prices could push the cost higher," he said.
If load remains normal, the current rates set by the state Public Utilities Commission to cover fuel and power costs should come within $5 million of covering purchases made to serve customers between October 2002 and September 2003, Yackira said.
Those costs serving customers during that period will be reviewed by the PUC in a rate case next year. In total, Nevada Power expects to spend about $800 million on fuel and power during that period.
The company is now buying fuel for use this winter, Yackira said. By buying over the next several months, he said, the company expects to average out spikes in the market.
"I'd like to think this is a blip," Yackira said.
The emerging gas supply problems recently prompted a warning from Federal Reserve Chairman Alan Greenspan that not enough attention was being paid to the issue which, he said, already was putting pressure on some key industries trying to bounce back from the anemic economy.
Greenspan was to expand on his concerns when he testified before the House Energy and Commerce Committee later today.
"If the train wreck occurs and natural gas prices skyrocket and shortages occur, who will be at fault?" Rep. Billy Tauzin, R-La., the committee's chairman, asked. "We see a storm brewing on the horizon. We need to prepare for it."
But a panel of industry officials provided little insight on what might be done to increase supplies dramatically in the short term, or head off higher prices this summer and winter.
Richard Sharples, a vice president of Anadarko Petroleum Corp., said a chronic gap between supply and demand needs to be addressed by removing regulatory barriers to exploration and development, and providing industry with greater access to gas reserves on federal lands.
That won't help consumers this year in Ohio where Donald Mason, head of the state Public Utilities Commission, predicted that the average residential heating bill next winter will be $220 higher per household than it was last winter. He said he's trying to find a way to "prepare (people) for the sticker shock."
"It's already impacted us," Greg Lebedev, president of the American Chemistry Council, said in an interview. "And with the domino effect when you have an industry our size, it will by definition have a cascading effect on the entire economy."
Robert Liuzzi, president of CF Industries Inc., speaking on behalf of the fertilizer industry, said high fuel prices already have forced one-fifth of the industry production capacity to shut down. "This situation threatens to destroy an efficient U.S. industry and displace thousands of workers," he said in remarks prepared for the hearing.
The Bush administration also is worried.
Energy Secretary Spencer Abraham has asked the National Petroleum Council to provide a game plan before the end of this month on how to deal with "the looming challenges we face" because of the short-term natural gas supply crunch.
This spring, natural gas in storage dropped to 623 billion cubic feet, the lowest it has been since the government began keeping records in 1976. Stocks have increased somewhat, but remain 38 percent below last year, and 28 percent below the five-year average, according to the department's Energy Information Administration.
By next fall, the government would like to see about 3.5 trillion cubic feet of gas in storage to be ready for the winter heating season, or about three times the amount available now. The average natural-gas fueled home uses about 80 thousand cubic feet a year, according to the American Gas Association.
"The natural gas industry is at a critical crossroads," says Carl English, president of Consumers Energy in Jackson, Mich. He said while the federal government encourages increased use of natural gas to improve air quality and other reasons, it also makes it difficult to get it to meet the increased demand.
A group of 29 Democratic senators recently wrote Abraham urging him to take steps to promote increased conservation to try to curtail gas demand this summer. Abraham agreed to push for conservation measures.
There will be enough gas to go around, but "we're trying to prepare customers for higher prices this winter regardless of the weather," says Peggy Laramie, a spokeswoman for the American Gas Association. The group represents 191 utilities that deliver natural gas to more than 53 million homes.
The spot price on Monday for natural gas was $6.25 per 1,000 cubic feet at the Henry Hub transit center in Louisiana. The average price was about $3 per 1,000 cubic feet last year, and $2.46 per 1,000 cubic feet from 1996-2000, according to the Energy Department.
Despite the high prices, there is little sign that the amount of gas being developed will increase significantly this year with the government expecting an overall 2 percent decline in production compared with last year. The number of drilling rigs has increased about 22 percent from a year ago, but remains below the number in operation in 2001 when surging prices caught the industry's attention.
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