An $815 Million Snafu Spawned by One of Wildest Gas Markets

(Bloomberg) -- One corner of America’s natural gas market has gotten so volatile, it’s already led to a nearly $1 billion mistake by the region’s biggest utility.

Southern California Edison will have to charge customers an extra $815 million after failing to predict a West Coast heat wave that sent prices soaring to a record in July. The market turmoil hasn’t let up: Gas for delivery to Los Angeles traded at almost 10 times the U.S. benchmark in February as a winter chill dusted Pasadena with snow.

It’s not the first time southern California has faced extreme weather. But this year, the temperature swings are straining a gas system already hobbled by pipeline disruptions and the partial shutdown of a major storage field. With so many pinch points in the network, cold snaps and heat waves alike can send prices flying in a state that relies heavily on gas to fuel power plants.

“If you looked at the map of southern California as a human body and those pipelines as arteries, there are certain days when that body wouldn’t be able to get out of bed,” said Jan Smutny-Jones, chief executive officer of the Independent Energy Producers Association, speaking in January at a state government workshop on the gas market’s problems.

One major conduit to the region remains closed for repairs, more than a year after a segment in the desert ruptured and caught on fire. Two others, also undergoing work, are operating at reduced volumes. And California regulators are still restricting use of the Aliso Canyon gas storage field on Los Angeles’ northern border, three years after it sprang the nation’s largest gas leak.

The gas market’s wild gyrations quickly ripple into wholesale electricity markets, sometimes catching utility companies by surprise. Edison ended up spending far more than expected buying electricity during last summer’s heat waves and must now collect that money from customers, raising their bills as a result.

Southern California’s gas market has become so unpredictable that it’s starting to resemble trading in the Northeast, where pipeline bottlenecks can lead to the world’s highest prices when demand for the heating fuel surges during the winter. Trading at the SoCal Citygate hub over the last 30 sessions has been 10 times as volatile as at the Henry Hub national benchmark in Louisiana, though Boston and New York still see bigger swings.

“The West has the potential to be the most constrained region in the country, leading to the biggest price spikes,” said David Hoy, an energy trader at Dynasty Power Inc. in Calgary. “I wouldn’t want to be caught short.”

Gas at SoCal Citygate closed at $6.57 per million British thermal units on Friday, compared with $3.19 at Henry Hub.

The fact that February in southern California was “one of the coldest gas furnace demand months ever in that market is adding to the volatility,” said Stephen Schork, president of Schork Group Inc., a consulting group in Villanova, Pennsylvania.

The region’s ongoing supply woes date back to Oct. 2015, when employees at Aliso Canyon -- the largest storage facility for Sempra Energy’s Southern California Gas Co., which supplies 21.8 million customers across the region -- found gas spewing from one of the facility’s wells.

Though the leak was plugged a few months later, the utilities commission imposed strict rules governing how and when SoCalGas could use the field, rules that remain in place.

The restrictions on Aliso Canyon, by themselves, would have posed a challenge for SoCalGas. But starting in August of 2016, the company also had to cut pressure in one of its pipelines -- Line 3000 -- after inspections found safety issues that needed immediate work. The company would eventually decide to replace more than 10 miles of the line.

Then, on Oct. 1, 2017, another SoCalGas pipe -- Line 235 -- ruptured in a remote desert stretch of San Bernardino County, triggering a fire. Given their similar age, the company also took out of commission nearby Line 4000 for inspections.

Both lines 3000 and 4000 have since resumed operations, but at reduced capacity. Line 235, still closed, could return to service in April at lower pressure, according to the company. Until then, the SoCalGas pipeline system is functioning without roughly 20 percent of its usual capacity, according to the California Energy Commission.

With persistent cold weather still lingering in southern California, SoCalGas has repeatedly called on power plant operators this year to cut back on their use of gas. The company has also stepped up withdrawals from Aliso Canyon, telling regulators that the move is necessary to maintain the electric system’s reliability.

The strain should ease as temperatures moderate in spring. But Rodger Schwecke, senior vice president for transmission, storage and engineering at SoCalGas, warned the January state workshop that his company could find more problems once it runs an inspection device through the reopened pipeline.

“Any time we run one of those, it worries me that we’ll find an immediate condition for which we’ll have to take that line out of service,” he said.

As repairs continue, state regulators have looked for other ways to prevent -- or at least lessen – the impact of the price volatility.

Edison and others are asking California to temporarily reduce penalties against gas users who take too much (or too little) of the fuel out of a pipeline system when it’s constrained. The line repairs and limited storage, they say, make it difficult for them to change their daily gas supplies, while the penalties exacerbate price spikes.

Edison said in an emailed statement that the penalties should be reduced “until such time that the SoCalGas system capacity is returned to normal conditions.”

But so severe are the supply constraints in southern California that even after current pipeline repairs wrap up, the system may remain vulnerable to similar disruptions, according to Martha Guzman Aceves, a member of the California Public Utilities Commission.

“There’s nothing to say we’re not going to have the same situation in other lines,” she said.

--With assistance from Naureen S. Malik.

To contact the reporter on this story: David R. Baker in San Francisco at dbaker116@bloomberg.net

To contact the editors responsible for this story: Lynn Doan at ldoan6@bloomberg.net, Catherine Traywick

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