FERC Filings
COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION ON METHOD FOR DETERMINING NATURAL GAS PRICES FOR PURPOSES OF CALCULATING REFUNDS
EXECUTIVE SUMMARY
As a starting point, EPSA believes that Staff’s recommendations attempt to approximate a cost-based gas component of the mitigated market clearing price (MMCP) for power that does not reflect a true or meaningful natural gas market price. It does not recognize that, during times of shortages, prices must and do derive from the customer’s value, not the supplier’s costs, if adequate supplies are to be available. High prices occurred in California’s gas market during the refund period for several reasons – supply and demand imbalances, the volatile electricity market and a lack of sufficient in-state generation sources – which interlinked to cause natural gas price spikes based on acceptable but admittedly volatile market forces. The Staff report also overlooks the physical factors in the southern California market that led to such an unprecedented demand for natural gas. During that time, there was a severe hydro power shortage in the Pacific Northwest, a major exporter to California; El Paso Natural Gas experienced a major rupture on its natural gas pipeline delivering to California; intrastate natural gas storage was at an all time low; and the pipeline constraints within the state were inadequate to meet the increased demand.
Due to the natural gas supply squeezes and the high power prices during the period in question, there was an increased demand for electricity from gas-fired plants – including some of the most inefficient units – which created a situation where natural gas buyers had to offer price bids on the spot market high enough to ensure that they obtained the necessary natural gas commodity. These natural gas prices reflect a bundled delivered price to the California border that reflected the value of the commodity at the California delivery point. It may not be feasible to disaggregate this bundled delivered price into commodity and transportation costs, especially considering that most of the interstate transportation available at that time was via released capacity. Without interruptible service available during this time of shortage, buyers bought natural gas supplies via capacity releases, which were not capped. Then, once gas reached the California border, an inadequate intrastate takeaway capacity system forced prices up in order to allocate resources to those buyers that valued it most.
Because of the complexity of the market forces at work, the well-documented physical factors severely affecting the California market, the lack of concrete findings of price manipulation by the Commission or Commission Staff and the advanced stage of the California refund proceeding, EPSA urges the Commission to retain its initial method used to determine the cost of natural gas to be used to calculate refunds in this proceeding. Otherwise, the Commission will be penalizing power suppliers merely because of the perception that natural gas markets did not work properly, a perception that has no basis in reality.