Katrina to Cause Natural Gas and Electricity Bills to Rise

Sep 04 - Contra Costa Times (Walnut Creek, Calif.)

The devastation of Katrina is already pushing up gasoline prices, but the bigger hit to Californians could be months from now when natural gas and electricity prices rise because of the hurricane, experts said this week.

Predictions of rate increases come on top of already high prices: Pacific Gas & Electric Co. announced Thursday its intention to seek rate hikes of more than 10 percent next year for electricity.

And earlier in the week it received approval from regulators for a 28 percent increase in natural gas rates over last month to cover high costs that pre-date the hurricane.

"This (impact of Katrina on California energy supplies) really isn't a major disaster. What's going on in New Orleans is a major disaster," said Severin Borenstein, director of the University of California Energy Institute.

Nevertheless, Borenstein said the reduction in natural gas supplies is "potentially quite serious."

Not only will that shortage further drive up the natural gas portion of Bay Area residents' PG&E bills, it is also likely to increase electricity rates. That is because much of California's electricity comes from natural gas-fired power plants via contracts whose rates are tied to natural gas prices.

The Gulf Coast produces about 20 percent of the nation's natural gas, and more than three-fourths of that was shut down by the hurricane, according to the Energy Department.

In addition, 90 percent of that region's gasoline production was off-line. Borenstein predicted California gasoline prices would go up as much as 50 cents a gallon over the next several weeks before coming back down to pre-Katrina levels in the next couple of months.

But he said the hurricane's effect on natural gas prices could be more severe.

That is because California is more interconnected to the rest of the nation when it comes to natural gas, importing about 85 percent of what it needs, said Claudia Chandler, assistant executive director of the California Energy Commission.

"Gas prices are going up dramatically," Chandler said.

A year ago, natural gas was trading for a little more than $5 per million cubic-feet. Last week, before the hurricane hit, gas prices were nearly twice as high at just under $10.

Since then, prices have gone up and were trading at more than $12 this week. There were indications that prices could go as high as $15, according to Oscar Hidalgo, a spokesman for the California Department of Water Resources, which manages the state electricity contracts.

Earlier this week, the U.S. Department of Energy reported futures prices for October deliveries hit an all-time high on one exchange.

It was unclear how long the Gulf Coast's energy production would be diminished, but at least some refineries and gas production facilities could be back within weeks.

"If they (natural gas facilities) are fixed in a relatively short period of time, prices would come down fairly fast," said Jason Alderman, a PG&E spokesman, adding, on the other hand, "It could have very serious consequences."

Alderman said the higher natural gas prices due to Katrina would not show up in customer bills for a couple of months. A short disruption might be offset by reserves the utility stores for use during high- price winter months, he said.

But sustained high prices for natural gas could also affect electricity prices. The state water department purchases about one-third of the electricity used by California's three major utilities, including PG&E, based on contracts it signed toward the end of the 2000-2001 energy crisis.

About 60 percent of the power in those contracts comes at a higher cost when gas prices rise, although the state does not necessarily have to actually buy all of that electricity. In addition, the state has "hedged" against gas price fluctuations by securing lower-cost gas contracts, Hidalgo said.

"It really depends how long the prices stay above normal," he said. "Any sustained increase is going to affect everybody, including us."

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