Soaring Natural Gas Prices Idle U.S. Power Plants

January 23, 2003

NEW YORK, Jan 23 (Reuters) - High natural gas prices are putting a squeeze on power plant operators who are finding they can make more money selling the fuel to the market than burning it to generate electricity.

While heating demand typically pushes up East Coast gas prices during the winter months, this year's prohibitively high prices have been given an extra boost by a severe cold snap this month and widespread power plant outages in the region.

The price of natural gas has crept so high, in fact, that AES Corp. (AES) has been paid to keep its 705 megawatt (MW) Ironwood plant in Pennsylvania mostly idle since October so the fuel could be sold elsewhere.

A similar situation exists at AES' 832 MW Red Oak plant in New Jersey, which has been mostly idle for months due, in part, to high prices for natural gas, which is used to generate about 15 percent of the Northeast's electricity.

Williams Energy Marketing, which has a 20-year power purchase agreement with AES's Ironwood and Red Oak plants, pays the Arlington, Virginia-based power provider each month for access to the plants regardless of whether they generate any electricity.

Under the power purchase or "tolling" agreement, Williams Energy Marketing, a unit of Williams Cos Inc. (WMB) of Tulsa, Oklahoma, delivers natural gas to the plants and takes back electricity.

Williams then sells the power to its customers or into the Pennsylvania-New Jersey-Maryland market.

"We are able to acquire the power we need to serve our customers more cheaply elsewhere without buying gas for Ironwood," said Brad Church of Williams, noting that this was a seasonal phenomenon affecting Williams' tolling agreements in New Jersey, California, Michigan and the Southeast.

AES officials said both Ironwood and Red Oak have been available to operate but have not been called by Williams partly because of the high natural gas prices.

SKYROCKETING GAS

Energy industry analysts have issued recent warnings that natural gas prices could hit $8 per million British thermal units (mmBtu) before the end of the winter, roughly three times what they fetched a year ago, if East Coast temperatures remain below normal much longer.

Gas prices in New York City hit a two-year high of $18.50 per mmBtu Wednesday on the coldest weather seen here in years.

Natural gas is skyrocketing because supplies are shrinking and drilling activity has not yet caught up with the rising demand linked to the cold snap.

Power plant operators typically do not discuss operations at their facilities, but energy traders generally agree gas-fired units have been dropped from the grid in favor of the usually bigger and cheaper coal-fired and nuclear units.

Until the demand for power eases or natural gas supplies increase, other plant operators may decide to idle their gas plants rather than waste the fuel by burning it.

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