The natural gas "crisis" is official. Both Federal Reserve Chairman Alan Greenspan and Energy Secretary Spencer Abraham have said so. They are predicting further sharp rises in natural gas prices due to short-term tight natural gas supplies. When asked by curious congressmen what could be done to cure the problem before this coming winter, the Fed Chairman said he did not know.
Here's what I know: If we rely on a big national program as the only means of progress, there will be no cure soon. Our federal system allows for the states to cobble together partial solutions to national problems and achieve, at the very least, incremental progress. That's the case with the current natural gas problem. But there is a win-win solution crying out to be tapped -- with just a bit of state-based creative thinking.
State utility regulators, working cooperatively with electric power producers can accelerate the displacement of older, less efficient power plants with new gas-fired plants that employ modern technologies that nearly double the electricity output for the amount of gas used. By undertaking this task with a modest sense of urgency they could be in place to free up gas to the market to ameliorate any shortage this winter.
Ten years of government policies encouraging the use of natural gas have succeeded too well. As a former utility regulator in Illinois, the nation's largest user of gas for residential heating, I am familiar with the roller-coaster nature of our public policies on natural gas and the endless possibilities for unintended consequences of those policies.
Natural gas fuels about 20 percent of the electric power plants in this country and according to the Energy Information Association, it is the fuel of choice for 93 percent of all new generation capacity scheduled to come on line through 2004. As a consequence, demand is temporarily outstripping available supply and we face the prospect of ever-unpopular increases in prices.
Supply-siders, including Dr. Greenspan, are pushing new gas source development, conservationists are advocating more conservation, and some industrial users are petitioning for relaxation of clean air standards to permit a fuel shift to oil and coal. Others, such as Texas Railroad Commissioner Charles Matthews point to substantial supplies in Mexico, which could be developed to enhance cross-border trade. Nonetheless, these resolutions require long-term changes in policies or technologies with no immediate way to mitigate current supply shortages.
In New England and Texas, however, state utility regulators and electric power producers have been mothballing older, less efficient electric generating plants and replacing them with new plants that employ more efficient gas-fueled technologies. The new technologies are so much more efficient they permit the generation of about twice the amount of electricity for the amount of gas burned. This translates into lower per unit costs to the electricity consumer, which in turn also helps to suppress gas prices for commercial, industrial and residential users as more gas is released into the market.
If this approach were adopted in other states, substantial amounts of natural gas would be freed-up for the market and the large cost savings produced would be more than ample to compensate the local utilities for the retirement or mothballing of older, inefficient power plants and to provide for attractive early retirement incentives and severance payments to any displaced utility employees.
Not to pick on any one state or one company, but the situation in Louisiana offers a striking opportunity in this respect. Entergy Corporation is Louisiana's largest electric utility company. Entergy's utility subsidiaries also operate in Mississippi and Arkansas. Embedded in Entergy's generation system are approximately 30 older gas-fired generating units primarily used to meet the state's summer peak demand. According to data submitted to the EPA, these plants generated 42,500 gigawatt hours of electricity during the summer of 2001. That's enough electricity to run 17 million average home air conditioners during the hot and humid summer in the Mississippi Delta.
To generate that power again this summer, Entergy will have to burn almost 485 million BTUs of gas, which at today's price would cost $1.8 billion on an annualized basis. If instead the Louisiana Public Service Commission would direct Entergy to displace the older plants with recently built, on-line plants utilizing new combined-cycle technology, Entergy could provide the same amount power to its customers, but do so with 40 percent less natural gas being burned.
That means that nearly 200 million BTUs of natural gas would be freed up for the market to serve two million of homes in the chilly Midwest this coming winter. And because there would be more overall supply, it would help to hold down gas prices generally. A recent study conducted at Louisiana State University concluded that Entergy customers, who pay the market price for the gas Entergy uses, could see savings of between $600 million and $1 billion per year.
So what's the problem? In the crazy world of old-fashioned utility regulation, Entergy is rightfully fearful of losing the $500 million in remaining undepreciated investment in these old plants if they are taken out of service. But this fear can be alleviated if just a modest portion of the savings from the efficiencies of the new plants were used to pay off Entergy's investment in one or two years rather than the ten or so that would be required if traditional utility accounting were used. There is ample precedent for compensating utilities for "stranded costs" of obsolete assets.
A prompt meeting of the minds in Louisiana and a number of similarly situated states in the Midwest and East would help the entire country. Electric customers in Louisiana, homeowners in the Midwest, utilities and power plant owners in the South can all do well -- making this a win-win-win result.
Terrence Barnich, an adjunct fellow of the Hudson Institute, is president of the Chicago research firm New Paradigm Resources Group, Inc., and is a former Illinois chief utility regulator.