LIQUID NATURAL GAS:

ROADBLOCK TO A CLEAN ENERGY FUTURE

Paul Fenn 

Local Power, RACE Coalition 

Briefing, State Capitol 

Sacramento, CA 

September 27, 2004

The RACE Coalition is working primarily on the electricity side of the Liquid Natural Gas (LNG) debate, which is really a secret side of the process that the California Public Utilities Commission (CPUC) has chosen to take -- specifically, that the LNG proceeding it is now undertaking, while entirely predicated on the electrical sector, not the gas sector, has sequestered the discussion of electrical procurement under a separate proceeding.

RACE and Sierra Club have talked about a presumption of need for LNG in California and how a presumption without evidence of need leads to a rate basing of LNG investments that prejudices the electricity policy of the state. That's what I really want to talk about.

[Holds up front page of Oakland Tribune] I'm from Oakland and whereas the Bay Bridge replacement project, the latest fiasco in the Bay Area, is a bridge initially budgeted at a billion and a half dollars, it is now at five billion, and the state of California is on the hook for this increase rather than the developer. That's something reminiscent of the energy crisis, when under the electric deregulation law (AB1890) the legislature promised a 5% rate reduction followed by a 10% rate reduction but never delivered - and even the 5% reduction had to be repaid by rate payers in a litany of customer surcharges that appear on their electric bills to this day. The danger of blank check regulation in California has been proven again and again, not only in the Bay Bridge case but in electricity as well. If policymakers or regulators put public agencies and rate payers on the hook for investments provided by private corporations, particularly weakly regulated corporations, the outcome is very predictable.

In the electricity sector in California, we have formally, especially at the state level, a radical commitment to energy efficiency and renewable energy. We have a governor who is committed to not only the 20% Renewable Portfolio Standard (RPS) by 2017 but to acceleration of that standard to a 2010 on-line date. As it is, the California Energy Commission (CEC), the Power Authority, and CPUC have all signed on to the Action Plan for that acceleration. But as we all know, that's not law, it is merely policy, which can amount to a political promise with no substance unless it is enforced, when the rubber meets the road, in all manner of details.

Now, among all of these agencies, the integrated Energy Policy Report (IEPR) last year, as well as the California ISO, have indicated that the leading cause of capacity curtailment in the energy crisis of 2000-2001 - the so called shortages of the crisis - was not a physical shortage of capacity. The California Attorney General has confirmed this and everyone knows about this investigation. The fact of the matter is, the first cause of capacity curtailment and shortages in California was manipulation by natural gas suppliers, particularly those that also owned power plants.

The second largest cause of the so called shortages of the energy crisis was Federal Clean Air Act violation shut-off orders, because our electrical grid contributes enormously to air quality violations in this state, as we are depending on natural gas for 36% of our generation.

As CPUC Commissioner Lynch indicated, repowering of existing capacity will result in a decline in demand for natural gas because of the higher efficiency of the plants. Therefore, while within the CEC and ISO 2003 IEPR document, the need for new gas is entirely attributed to the presumption of need for new natural gas-fired generation in California, in fact there is no need for the gas within the core/non-core gas customer sector. There is none, zero. The entire cause of this debate in the LNG discussions is the presumption that we must have new gas-fired natural gas power plants.

On the other hand, given the fact that the energy crisis of 2000-2001 was primarily caused by our over-dependence on natural gas for electricity generation, it is illogical to assume that a higher level of dependence -- say from 36% to 43% -- would result in any greater degree of energy security. Rather, the result would be greater exposure to price volatility and a repeat of the 2000-2001 scenario.

So what's the alternative? You have in the implementation of the Renewable Portfolio

Standard (RPS) law utilities being generally resistant, kicking and thrashing, to the investment in renewables under CPUC pressure. But then you have another development -- independent entities resulting from the Community Choice Law (AB117) passed by the legislature and signed by the governor in 2002. Under that law, currently, the CPUC is completing regulations that would allow regionally contiguous communities to solicit competitive suppliers to serve them and condition the terms of their service.

Currently, right now, there are 40 cities and counties in California that are implementing Community Choice (CCA) -- this amounts to 25-20% of California moving toward CCA. Within that group, there are 22 cities and counties that are all participating in the Navigant-local government commission study. Those cities have committed to a 40% renewables standard within their service. They will double the state mandated level every year of their contract and increase current levels by 26% rather than merely the 7% required by the state law. Recently these cities and counties have completed a study by Navigant that indicates that if they finance the project themselves in themanner now being pursued by San Francisco -- the new wind, solar, efficiency technologies and so forth -- that there will be no rate increase associated with the fact of renewables: a radical potential indeed.

Furthermore, there is the City of San Francisco, which has already approved an Energy Independence ordinance setting a minimum renewable standard at 360 MW out of a combined base load of 650 MW. In other words, San Francisco is preparing to use Community Choice Aggregation to take 25% of the baseload of the city off grid in just a few years of Community Choice Aggregation.

If you take the natural gas demand reduction associated with such radical implementation of renewables in California, as would be the official goal of the state, two governors and the legislature, what you have is a significant reduction in gas demand statewide, one that would virtually offset in just its first few years, with the first round of communities, four to five years of forecasted gas demand increases.

In other words, if the 2010 RPS standard is implemented, if Community Choice cities are not blocked by the utilities from implementing their current plans, the state of California will in fact not need any new natural gas power plants to serve it - and therefore no need for LNG.

On the other hand, you have utilities, which have been bailed out during the energy crisis virtually to their blue book value, now aggressively attempting by AB2006 to re-establish themselves as monopolies. These utilities have an inherent interest in maximizing the ratebase of their investments associated with generation to erect barriers to exit by Community Choice Aggregators. To the extent they are allowed to do so, either through over-procurement or over-investing in new generation, they will indeed succeed in blocking acceleration of the RPS. LNG is the fuel component of this conspiracy to lock Californians into a new dependency on foreign gas and restored electric monopolies.

Therefore -- there is a choice to be made in California. You cannot argue that somehow we need both the RPS acceleration and Liquid Natural Gas (LNG). They are inconsistent choices. The state must acknowledge that a choice has to be made between the two. This choice must be made deliberately, and clearly, and correctly.