western market crisis gas joins power cera alert forwarded lorna brennan et accident limited pipeline capacity california two week period time market drew heavily storage inventories weakened storage positions hydroelectric generation declined summer price strength extended northern california malin pricing near parity henry hub summer began trading 0 50 per mmbtu premium henry hub september summer early fall market set stage continued intense spikes winter following factors driving market continuing surges gas demand gas demand levels remained high since early summer driven higher overall demand electricity lower hydroelectric output demand levels third quarter us west averaged 10 7 billion cubic feet bcf per day 8 7 bcf per day third quarter 1999 persistently strong gas fired generation production fall months diverted gas power production frustrating efforts fill storage pressure continue year year demand increases power sector compounded evidenced november swings upward residential commercial heating demand 800 million cubic feet mmcf per day overall cera expects nearly 1 6 bcf per day increased demand west winter critical california pacific northwest regions showing 1 2 bcf per day increased demand key power sector drivers including strong economy colder weather lower hydroelectric generation continue push gas fired generation pipeline utilization nears capacity strong western demand gas pushed utilization rates western pipes high levels flows british columbia northwest pipeline remained high levels since summer flows rockies northwest remained pipeline capacity flows pgt kingsgate remained near capacity although approximately 300 mmcf per day excess capacity exists pgt california malin likewise flows rockies kern river pipeline consistently remained capacity slack pipeline capacity remaining west coast gas markets southwest pipes past months pipelines operated highest utilization rates since addition capacity canada early last decade high utilization western pipeline capacity reminiscent power plant capacity constraints helped propel power prices time highs west summer leaves little slack capacity provide relief valve demand spikes exactly driven prices past weeks see figure 1 given level storage inventories expected gas demand flows el paso transwestern pipelines reach even higher flow levels december march averaged november deteriorating storage position start november california storage inventories held 154 bcf full 32 bcf five year average inventory level strong state withdrawals november weakened position 128 bcf deficit swelled 62 bcf inventories california never fallen 60 bcf deliverability end winter likely less 700 mmcf per day storage inventories california low utilities ability balance withdrawals storage purchases demand sensitive price points severely limited cold weather blast anticipated mid december materializes effort balance even compromised remainder winter see figure 2 short term contracting significant amount western gas purchased indexed spot market shift term contracts gas pipeline capacity spot transactions many cases response gas power industry deregulation left west much exposed spot market volatility areas country utilities significant firm pipeline capacity extending supply regions citygate forward purchased gas previous lower prices least portion winter supplies result unlike eastern markets much larger proportion supply portfolio california utilities exposed current price spikes alternatives lack fuel switching capability prevents meaningful demand response higher gas prices power prices continue move lockstep increase gas prices surprisingly gas prices pushed cost gas fired generation beyond federal energy regulatory commission ferc proposed price cap 150 per megawatt hour setting stage reassessment price limit small declining portion power generators liquid fuel capable significantly air emissions restrictions already plaguing power markets much higher emissions credit costs year make switching liquid fuels crucial california market highly unlikely winter recent meeting south coast air quality management district jurisdiction los angeles area concluded relief granted generators running short emissions credits market forces unite price spikes november first cold weather related demand spike demonstrated combined power forces vulnerability western markets cold weather system mid november brought temperatures averaging 47 percent colder normal temperatures actually averaged 14 percent colder normal january week provided additional demand boost taxed gas delivery systems west coast capacity constraints moving gas california appeared summer extended north pacific northwest heating loads climbed core demand compounded effects continued strong demand gas power generation high power demand result intersection annual low point hydroelectric generation series planned unplanned nuclear coal power plant outages gas demand us west last two weeks november boosted approximately 15 5 bcf per day driven heating demand increases 2 8 bcf per day normal levels power plant outage related demand increases 1 0 bcf per day demand spikes caused buyers already dependent spot market bid citygate prices record high levels last two weeks november december since demand outstripped supply prices rose dramatically western price points flows natural gas western markets increased high summer levels citygate prices surged beyond 40 00 per mmbtu daily spot markets averaged nearly 15 00 per mmbtu december bidweek topock daily spot gas prices reflected imbalance penalty prices many western market regions west coast remain disconnected winter although week november 13 could prove peak demand week west winter cera expect significant retreat gas prices west coast time soon storage inventories low ability beat back demand spikes high storage withdrawals option gas utilities generators already rely heavily spot market supplies faced bidding war scarce supplies colder normal weather would likely keep west coast prices 20 00 40 00 per mmbtu range normal weather would allow slow decline current levels 20 00 per mmbtu 15 00 20 00 per mmbtu range however storage situation underlying demand strength mean return lower pricing range unlikely early january winter prove critical test western gas markets end heating season likely provide first opportunity lower price levels west coast market heating loads diminish significantly march storage deliverability longer critical issue premiums retreat back 1 00 2 00 per mmbtu range hydroelectric generation begins increase pressure could subside even storage injections spring shoulder season likely limit price declines even spring unique vulnerability pacific northwest west coast price pressure limited california high demand pacific northwest indirectly california keep upward pressure prices sumas stanfield northwest pipeline capacity rockies already fully utilized onset cold weather even provide gas far pacific northwest combined california pacific northwest demand pushed stanfield spite limited volumes bidirectional supply source load centers southern british columbia even northern pacific northwest seattle westcoast sumas westcoast mainline producing fields northeast british columbia also operating capacity bidding forces felt california evident western canadian price points pushing sumas prices 20 per mmbtu forces persist keeping sumas premium aeco winter much closer relationship california prices customer response another log backlash bonfire power plants gas utilities paying current high spot prices consumers bills vancouver san diego ultimately reflect high commodity prices gas industry preparing rate shock winter warning regulators customers alike however price spikes west sustained premiums western markets move beyond alarming capacity holders reaping significant rewards investments capacity positions resulting substantial transfer wealth consumers capacity holders market power market gaming accusations hit power markets find easy application gas market counterpart matter merits level investigation natural gas markets following challenging winter expected occurred power markets turn attention gas purchasing practices particularly california likely outcome process shift away heavy reliance spot purchases toward flexible portfolio approach end follow url pdf version alert associated graphics come shoot rapids us ceraweek 2001 shooting rapids strategies risks energy future houston february 12 16 2001 information register please visit http www cera com ceraweek electronic message attachments contain information cambridge energy research associates inc cera confidential may privileged unauthorized disclosure copying distribution use contents message attachments whole part strictly prohibited terms use http www cera com tos html questions comments webmaster cera com copyright 2000 cambridge energy research associates