The 1990's was the decade that transformed natural gas from a bit player in the power generation world to a star performer. A beneficiary of the 1990 Clean Air Act, natural gas took center stage as the one fossil fuel that all industry stakeholders, even environmental groups, could get behind. Here was a fuel that could power everything from 30 kW microturbines to 1,000 MW central station plants withoutreleasing sulfur dioxide and mercury into the environment.

Here was a fuel, some argued, that could hasten the shutdown of the nation's most inefficient and environmentally harmful coal plants. Finally, here was a fuel, others said, whose infrastructure could be used to bridge today's fossil fuel-dominant energy economy with tomorrow's Hydrogen Economy. All of that seemed possible as long as gas remained cheap and plentiful.

Inevitably, greater and greater expectations were placed on the resource Worldwatch Institute labeled the "Prince of Hydrocarbons," leading to a development stampede of staggering proportions. By mid-year 2000 the amount of proposed new generating plants had risen to 250,000 megawatts (MW)--20 times Wisconsin's current generating capacity--practically all of it powered with natural gas.

While it is obvious that this development wave cannot be accommodated without a significant supply response--a 30% increase by 2010--it is looking increasingly doubtful that North America has enough reserves to handle this anticipated demand surge.

So far the new millennium has not been following the script that was to be for natural gas. Each day brings fresh indications that the wonder fuel of the 1990's may be in short supply relative to this country's energy appetite.

This week William Wise, the Chairman and CEO of one of the world's largest energy companies, El Paso Corp., said that his company's has not seen any growth in natural gas volumes since January 1998, even though the North American rig count stands at a 10-year high. "We're just kind of treading water, holding our own," Wise said.

Earlier this month, the Energy Information Agency (EIA) conceded that low supplies will continue to put upward pressure on wholesale natural gas prices. In its most recent Short-Term Energy Outlook, EIA stated that:

"[S]easonal injections of 2,310 billion cubic feet would be required from April through October to reach 3 trillion cubic feet (the approximate average end-October level between 1995 and 1999) before the next heating season. That kind of build would be about 500 billion cubic feet (25 percent) above average (1995-1999). Consequently we expect the industry to fall well short."

Even though coal combustion accounts for 70% of the electricity sold in Wisconsin, natural gas has been the fuel of choice in Wisconsin for a decade and a half. Since the completion of Edgewater 5 in 1985, all of the fossil fuel capacity added in Wisconsin--more than 2,000 MW in all--is gas-fired. But they are all either intermediate or peaking plants, which require significantly fewer capital dollars per kilowatt to build than baseload units. Due in large part to the regulatory uncertainties posed by industry deregulation, not a single baseload unit has been placed in service since Edgewater 5. But as long as natural gas prices were expected to hover between $2.00 to $3.00 per MMBtu in the coming decade, it didn't seem to matter.

Over the last year the floor price for natural gas has doubled, and is now thought to be in the $4.00 to $4.50 per MMBtu range. At those prices, coal generation becomes a financially attractive baseload option for utilities, so long as cost recovery is guaranteed.

For proof one need look no further than Wisconsin Electric's Power the Future plan and Alliant Energy's response to it. Both utilities propose building a combined 3,600 MW of new generation over the next 10 years, of which four of the units, amounting to 2,300 MW, would be coal-fired. It is significant that both utilities propose treating the new power plants as regulated assets.

Wisconsin Energy, which is proposing to build three 600 MW coal plants, estimates a savings of more than $1.6 billion in electricity costs over the 25-year lifetimes of these plants. Presumably this figure represents the avoided fuel costs from not operating three gas-fired units of the same size and vintage.

This new-found willingness to invest billions of dollars in rate-based generation stands in stark contrast to the utilities' attitudes six months ago, when Wisconsin Energy and Wisconsin Public Service filed plans to form unregulated generating subsidiaries. Their aim was to enter into lucrative wholesale power markets on the same terms as Duke Power and Dynegy, to name two companies that have profited immensely from California's botched attempt at restructuring its power industry. Wisconsin Energy has since recast its filings so that the capital invested in its new power plants would fully recoverable, subject to prudency review. This would seem to signal nothing less than a full-blown retreat back to the regulatory paradigm of yesteryear, the status quo ante so detested by the state's three largest utilities six months ago.

But there is one key difference: integrated resource planning is no longer a requirement on Wisconsin utilities as it was 10 years ago, which makes it considerably easier for them to pursue large-scale asset-building projects in isolation of their cumulative effects. Even though Wisconsin Energy ceo Richard Abdoo touts Power the Future as "the largest construction project in the history of the state of Wisconsin," it is just one initiative among several that would expand and reinforce the statewide grid. Among the other initiatives in play are a 345,000-volt transmission line through northern Wisconsin, dozens of independently owned gas-fired generators situated in Wisconsin and northern Illinois, and Alliant's recently announced capital projects.

Approval of all of these projects in individual siting cases would commit an unprecedented level of customer dollars into Wisconsin's electric infrastructure.

There is no venue right now for examining the proposed improvements in the aggregate, for sifting through and sorting out the options and energy resources that would provide the greatest value to Wisconsin ratepayers, while at the same time identifying projects that would be redundant or poorly configured if load growth subsides. Such an integrated perspective does not come out in individual power plant siting cases, which makes it difficult to prove that the project in question is unnecessary or excessive. Given the quantity, expense and resource mix of these projects, there is clearly a need for a more integrated and publicly accessible review process than what we now have.

The Achilles heel of regulation has always been the tendency to allow utilities to overbuild and create more capacity than is necessary. When that happens, customers look for ways to free themselves from the high embedded costs that inevitably arise from overbuilding. We should never forget that the seeds of electric utility restructuring were sown in states (e.g., California. Pennsylvania, and Illinois) where significant capacity expansion occurred at the same time loads flattened out due to an economic slowdown.

Can we be certain that escalating natural gas prices and the current economic slump won't have a depressing effect on loads this time around?

Sources:

Energy Information Agency, U.S. Department of Energy, Short-Term Energy Outlook - March 6, 2001. Web address: www.eia.doe.gov/steo.

"North American Gas Production Flat, Despite Drilling Boom--El Paso CEO," by C. Bryson Hull, Reuters, March 26, 2001. Web address: www.biz.yahoo.com.

Power the Future, Wisconsin Energy Corporation. Web address: www.powerthefuture.net.

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Petroleum and Natural Gas Watch is a RENEW Wisconsin initiative tracking the supply-demand equation for these imported fuels, and analyzing its effects on prices, consumption levels, and the development of energy conservation strategies and renewable energy alternatives.

For more information on the global and national petroleum and natural gas supply picture, visit "The End of Cheap Oil" section in RENEW Wisconsin's web site: www.renewwisconsin.org

"So far the new millennium has not been following the script that was to be for natural gas. Each day brings fresh indications that the wonder fuel of the 1990's may be in short supply relative to this country's energy appetite."