Attachment B – Quarterly Gas Issues Update

QUARTERLY GAS ISSUES UPDATE
May 2005
  1. Supply Issues

Wholesale Natural Gas Prices

Skyrocketing crude oil prices have caused a significant increase in wholesale natural gas market prices. The average projected price at PG&E Citygate over the next twelve months was $8.05 per MMBtu as of April 5, 2005. Prices have increased approximately 50% since January 2004 and 25% since January 2005. Figure 1 below provides historical monthly bidweek index prices and projected future natural gas prices at PG&E Citygate.

Figure 1

Supply Acquisition

In June 2000, staff began to implement the “laddered” gas procurement strategy to lock in gas costs for pool customers (customers not eligible for direct access). The laddering strategy was revised in January 2004 and presented to the City Council in March 2004 [CMR:167:04].

Approximately 75% of the expected pool load is hedged for the remainder of FY 2004/05 with a total expected pool cost of $13.7 million. The expected cost for the City’s entire portfolio (pool customers plus large customers either on the G-3 rate or a contract rate) is $18.4 million. Approximately 88% of the expected pool load is hedged for FY 2005/06 with an expected cost of $15.5 million and a cost of $21 million for the entire portfolio. Figure 2 shows the expected pool load for the next 36 months and the status of the laddering strategy.

Figure 2

Because of the fixed-price purchases, the City’s weighted average cost of gas (WACOG) differs from the monthly market price. The City’s estimated WACOG for the pool is $5.31 for FY 2004/05, approximately 17% below the weighted average market price for that same period of approximately $6.38 per MMBtu. The City’s estimated WACOG for the pool is $5.89 for FY 2005/06, compared to the current weighted average forward market price of approximately $8.03 per MMBtu, a savings of approximately 27%. In the months close to the end of the laddering time horizon, the City’s WACOG is closer to the forward market price since purchases were done more recently and because a smaller fraction of the total gas needs have been purchased for this period (as shown in Figure 2).

Figure 3 below illustrates the difference between market prices and the City’s estimated WACOG.

Figure 3

II.Regulatory Issues

Gas Supply Order Instituting Rulemaking (OIR)

Key issues in this proceeding include: gas quality, infrastructure and gas supply adequacy for generators, at-risk ratemaking, direct connection of independent storage, and some SoCal items. Staff attended a pre-hearing conference (PHC) where parties discussed how best to address the key issues.

Gas quality issues are pointed primarily to prospective new liquefied natural gas (LNG) facilities to be located adjoining the SoCal Gas system. Since no LNG facilities have been proposed for Northern California, the issue is of consequence to Palo Alto only in a global sense.

The issue of gas supply adequacy for generators were generally agreed to be a subset of the wider gas supply adequacy issues for the Investor Owned Utilities (IOUs). Direct connection for the independent storageoperators was a matter between PG&E and the two Northern California independent storage operators (Lodi & Wildgoose) and is better left to resolution by the parties by themselves.

Palo Alto’s focus is the appropriate pipeline capacity reserve levels to be held by the core and non-core on PG&E’s system and costs associated with such and the provisions to provide access to new supply by PG&E, including LNG. No other issues are of concern for Palo Alto in this proceeding.

PG&E Biennial Cost Allocation Proceeding (BCAP) Application

Palo Alto does not have any outstanding issues in this settlement. Palo Alto will be allocated $87,000 per year compared to today’s cost of about $74,500 through the Customer Class Charge that will account for about 9% of Palo Alto’s total transportation payment of $990,000 to PG&E in 2005. This slight increase reflects PG&E’s cost increase. Staff and Palo Alto’s consultants have checked PG&E’s cost allocations and it appears that PG&E has properly applied existing CPUC policies to compute Palo Alto’s rate. The new rates are proposed to be effective July 1, 2005 for a two-year period.

III.Operational Measures

The attached graphs provide information on operational measures for FY 04-05 through March 2005:

Gas System O&M – Mainline Leak Repairs

Gas System O&M – Service Installations

Gas Main Leaks By Type of Pipe

Gas Meter Exchange Productivity Measurement

Gas Main Shutdowns & Customers Affected

Unplanned Gas Service Disruptions

______Item 6: Utilities Quarterly Report Update Attachment B: Gas Page 1 of 10

Attachment B – Quarterly Gas Issues Update





Item x: Utilities Quarterly Report Update Attachment B: GasPage 1 of 10