Forecast for Southland’s Winter: Higher Gas Bills

The onset of the first cold weather of the year serves as a grim reminder to Orange County residents and other Southern Californians that energy inflation is about to hit them in the form of higher bills for natural gas, the heating fuel of choice for 90% of the region’s residents.

This winter, monthly gas bills will average $70, a 40% increase over last year, reflecting the doubling of natural-gas prices on commodity exchanges in the last 12 months. The brunt of the increases won’t hit until December, but bills now arriving in the mail for October are showing an average $10 increase, Southern California Gas Co. said Monday.

The higher natural-gas prices will be passed directly through to consumers this winter, unlike with this year’s other example of energy inflation: electricity. Despite the summer spike in wholesale generation costs, retail electricity rates are frozen in the coverage areas of the state’s three investor-owned utilities; prices have generally remained stable in areas served by municipal utilities.

Consumers had better become accustomed to higher gas prices because forecasters are warning that they could be with us for some time--that the market will take three to five years to regain its former equilibrium. Sempra Energy, the San Diego-based corporate parent of Southern California Gas, and Pacific Gas & Electric in Central and Northern California are running a slew of public-service ads to prepare ratepayers for sticker shock.

Pessimism continues to prevail in the industry despite last week’s 8% drop in gas futures after an American Gas Assn. report said mild weather had led to 60% more gas being put into storage so far this month than the five-year average. High storage inventories are considered a harbinger of lower prices.

“We are in a period of significant inflation in the price of energy,� said S. David Freeman, general manager of the Los Angeles Department of Water and Power. “The only good thing about it is it makes investments in energy efficiency dramatically more cost-effective.�

Prices are up quite simply because the booming economy has forced demand for natural gas--among businesses, consumers and the growing crop of natural-gas-fired electric power plants--far ahead of producers’ ability to provide it. Consumption is growing at an annual pace of 3% to 6%, whereas supplies are flat, even declining.

Although gas demand has been creeping up for the last several years, its full effect was blunted by mild winters since 1997. But analysts expect a harsher winter this year. And that, combined with unusually high summer demand that reduced seasonal storage levels, has created the current price pressures.

“It’s going to be tight,� said Bill Wood, chief natural-gas forecaster with the California Energy Commission in Sacramento. “Bills coming for October could hold some surprises. As consumers, we need to do things to reduce demand: turning down thermostats, reducing the temperature of hot-water heaters.�

Wood and others warned that prices could rise dramatically if a natural disaster or an unforeseen supply interruption should occur.

On top of already high prices for gasoline and electricity, the prospect for higher home heating bills could create a painful “three-ring circus� for consumers this winter, to use Freeman’s phrase.

“Whoever is elected president, Gore or Bush, is going to have a big energy issue on his hands,� he said.

The 1.2 million customers of San Diego Gas & Electric, another Sempra Energy unit, will see their average utility bills rise to $128 next month, of which $56 will be for gas. In October 1999, the average SDG&E; bill was $94.65, of which $39 was gas, a spokesman said Monday. The 5 million customers of Southern California Gas will see an average $20 tacked on the typical $50 bill from last December through February.

The demand growth for gas is creating a classic market response to scarcity: higher prices. But the classic industry reaction--the development of new supplies through more drilling and additional pipelines--is taking longer to come about because of the reduction in personnel and drilling rigs at producers’ disposal.

Since mid-1999, gas producers have doubled the number of onshore and deep-water rigs exploring for gas to more than 1,000 in the U.S. But it will be spring before significant new supplies come online--and even then supply will still lag demand, Wood of the Energy Commission said.

“It could take one, two or three years for production to catch up to demand,� he said. “Prices will stay high this year, drop off a little bit until 2003, but take until then before supply catches up with the long-term trend.�

Ed Morse, executive advisor at Hess Energy Trading in New York, is one of many analysts who are even more pessimistic.

“Major pipelines from Alaska and northern Canada will help, but those are three to five years away, assuming the investors decide to go ahead,� he said.

Michael Heim, energy analyst with A.G. Edwards & Sons in St. Louis, said annual natural-gas consumption will increase to 30 trillion cubic feet by 2010, or a 30% increase from current levels. Driving much of that growth is the number of natural-gas-fired power plants coming online.

The share of power generation represented by relatively clean-burning gas turbines will grow from 15% in 1998 to 30% by 2020, a trend that helps the environment but puts additional pressure on supplies.

The commodity futures market for gas provides a chilling glimpse of what consumers can expect. Prices on the New York Mercantile Exchange for gas to be delivered in December 2002 are priced at $3.89 per million British thermal units.

That’s an improvement over the most recent December 2000 contract price of $4.485 on Monday, but far above the $2.329 of last year and $1.60 two years ago.

To some extent, the high market prices are a function of boom-and-bust energy cycles, wherein market surpluses and low prices are inevitably followed by scarcity and price spikes. Two years ago, natural-gas prices were so low that producers had no incentive to drill. The shortages of today are the result of that drop-off in exploration.

But Michael Shames, executive director of the Utility Consumers Action Network, a San Diego consumer watchdog group, said the cyclical shortages are being exacerbated by “a number of anomalies,� including poor regulatory oversight of natural-gas pipelines, such as problems in getting pipelines built and approved in Southern California.

California drivers don’t have to be told about energy inflation. But they might be disappointed to hear that it’s not going away. Tom Glaviano, petroleum analyst at the California Energy Commission, said that, barring lower crude oil costs, gasoline prices will likely remain in the $1.70-per-gallon range statewide, up nearly 25% from the $1.37 average a year ago.

The inflation in electricity costs is not so evident in California’s deregulated market. Although wholesale electricity costs have doubled in the last year, consumer costs in the Southern California Edison and PG&E; customer areas have remained frozen at about half the wholesale cost.

San Diego Gas & Electric retail customers, the first to feel the brunt of electricity deregulation, briefly paid skyrocketing power bills until the state Legislature stepped in to cap them in August.