On April 19, 2016 the California legislature further amended the proposed expansion of regulations on underground storage of natural gas at the Aliso Canyon facility in Los Angeles County.  Although the current draft of the legislation focuses specifically on testing of all wells at Aliso Canyon, it includes a requirement that a complete retirement be investigated and therefore presents significant risk to forward natural gas and electricity markets in Southern California.

As a result of the leak at the Aliso Canyon natural gas storage facility discovered in late 2015, the California legislature started activity to change how all natural gas storage facilities are inspected and run. Those changes, filed under Senate Bill 380 (SB-380) originally proposed a complete moratorium on all underground natural gas storage in the state, but have seen considerable revision since it was filed on January 27th.

Under the currently drafted legislation, last updated on April 19th, inspections of all wells at Aliso Canyon are required prior to allowing injection of additional gas into the facility. Any well not able to pass inspection (the exact criteria for the inspections have not been determined) will be removed from service until they can be repaired, or permanently retired within a year. With some of the wells at Aliso dating from the 1950’s (or before) there is a high probability that at least some of the capacity is in jeopardy of failing inspection.

The real risk to markets from the bill is the requirement for an investigation into the possible total retirement of Aliso Canyon which would take place in mid-2017. If that process, which will be driven by political and public sentiment, decides to close Aliso both natural gas and electricity markets in California could see much higher price volatility especially in times of high demand during extreme cold (when natural gas is used for heating) and heat (when natural gas is used to generate electricity for A/C demand).