California regulators look into natural gas price spikes, power market impacts

Record high natural gas spot prices in recent months will mark the most consequential prices for customers in decades and regulators are looking into the root cause, as the governor has requested the Federal Energy Regulatory Commission investigate whether market manipulation was involved.

The persistent high prices prompted the California Public Utilities Commission to convene an en banc meeting with the California Energy Commission, California Independent System Operator and market experts from across the country to explore what was driving price spikes and to look into how to protect electric and gas utility customers.

"This is going to result in the most consequential prices for customers since the power crisis two decades ago," said Fred Heutte, senior policy associate with NW Energy Coalition. "But it was not an unprecedented event. ... We have an elevated risk of this going forward."

CPUC commissioner Darcia Houck said it is a critical issue state regulators are taking seriously.

"This is just the beginning of what we're looking into," Houck said.

Price spikes

PG&E city-gate spot prices reached a record high of $57.065/MMBtu Dec. 22 and averaged 432% higher year over year for the month, while SoCal city-gate spot gas averaged 334% higher year over year in December, according to S&P Global Commodity Insight pricing data. Prices eased in January, but remained elevated with PG&E city-gate 211% higher than a year ago and SoCal city-gate 232.5% above January 2022 prices.

Gas prices pushed up power prices.

In California, SP15 on-peak day-ahead locational marginal prices averaged 316% higher year on year in December and 170% higher in January, according to CAISO data. In the Southwest, Palo Verde on-peak day-ahead averaged 417% above year ago levels in December and 260% higher in January, according to S&P Global Commodity Insight pricing data.

Power markets are regional, while gas markets are impacted by national and even global issues, such as LNG markets impacted by international prices. It's a thin market, which means it's easy for a small number of traders to move the market, Heutte said.

"This is a Pacific or Western states problem," Heutte said, adding the root cause is an overdependence on gas.

Dependent on natural gas

December was the single highest month of wholesale power costs observed in the last five years, said Molly Sterkel, the program manager of the CPUC's Energy Division. Western electricity markets are heavily interdependent on the gas market with gas generators providing about half of the electric generation, which means record high gas prices lead to high wholesale power prices.

"We really do have to take action now to deal with some structural issues, both in the markets and in the resource mix on the power side," Heutte said.

CAISO imported generation was down 43% year on year in January and was down 47% year on year in December, according to ISO data.

Fewer imports caused gas to be the substituted resource, despite high prices, said Amelia Blanke, the manager of monitoring and reporting with the CAISO Department of Market Monitoring, adding storage and solar also helped fill in for the drop in imports.

Generation retirements in recent years, such as coal in the West, means there are fewer resources to switch to when gas prices rise, which underscores the interrelatedness of power and gas markets, CAISO Principal Economist Becky Robinson said.

It's not an issue that has to do with the alignment of the gas and power markets, Blanke said, but rather the expectation of the use of gas in storage to mitigate gas price spikes.

FERC investigation requested

California Governor Gavin Newsome sent a letter Feb. 6 to FERC asking for an immediate investigation on "whether market manipulation, anticompetitive behavior or other anomalous activities" led to the elevated gas prices.

"These wholesale natural gas price increases were exacerbated by early cold weather in the western states, but those known factors cannot explain the extent and longevity of the price spike," Newsome said in the letter. "It is clear that the root causes of these extraordinary prices warrant further examination."

The nonprofit Consumer Watchdog said in a Feb. 7 statement, "Something is clearly wrong with the natural gas market in the West, and in particular the Southwest." It claimed SoCal Gas and its parent company Sempra "may have wrongfully profited on the gas price spikes"

After the investigation request, gas prices dropped to near normal levels, said Marlon Santa Cruz, the manager of fuel and purchased power with the Los Angeles Department of Water and Power, adding it was "a little convenient" how the market responded to the news.

The persistent high gas prices indicate "something has happened structurally in the gas market that enables that to occur, and we really got to look at it," Heutte said. "It's not a matter of gaming, necessarily. It may just be market structure."