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How Local Utilities Gamed the Natural-Gas Market

Wall Street Journal, Nov. 16, 2017 7:08 p.m. ET

By Fred Krupp


"They booked large orders and then canceled at the last minute, which pushed electric prices up by 20%."

"Innovators and entrepreneurs are transforming the energy industry. From shale gas to electric vehicles to low-cost wind and solar, so much about the way Americans make and use energy is changing for the better. Yet regulations haven’t kept pace. Today a thicket of rules too often stymies innovation and damages the economy.

For example, about a third of the natural gas in the U.S. is used to make electricity, up from 20% in 2010, according to the U.S. Energy Information Administration. But regulations preclude efficient transactions for the fluctuating gas supplies electric generators need to match the daily ebb and flow of demand. This disconnect keeps most power generators from contracting directly with pipelines for gas deliveries, which they instead obtain in secondary markets. There, legacy rules often give local gas utilities, the traditional pipeline customers, outsize leverage. And that can cost consumers and businesses billions. A new study by a team of economists from three universities and the Environmental Defense Fund shows how expensive this obscure anomaly can be.

New England regulators have assumed the region’s natural gas pipelines were being used efficiently. Not so. Valuable space was going unused on the busy Algonquin Pipeline, which supplies gas for electricity and heating, even during the coldest days when demand is highest. There was also a persistent gap between the amount of gas scheduled in advance, and the volume that flowed.

The researchers discovered that local gas utilities owned by two companies, Eversource and Avangrid, routinely booked large gas deliveries, then cut orders sharply at the last minute. By then it was too late for anyone else to use the pipeline space, enabling them to limit the amount of gas available to the generators that produce half the region’s electricity.

On 37 cold days, when demand was high, unused pipeline space resulting from the scheduling changes represented about 28% of the daily capacity typically used by gas-fired generators, a big number given the dollars at stake.

Econ 101 teaches what happened next: When supply goes down, prices go up. Increases spilled into the wholesale electricity market, boosting average prices about 20% over a three-year period, costing New Englanders an estimated $3.6 billion.

Massachusetts Attorney General Maura Healey is reviewing the findings, Sen. Richard Blumenthal (D., Conn.) asked the Federal Energy Regulatory Commission to open an investigation on the matter, and both the Connecticut Public Utilities Regulatory Authority and the Massachusetts Public Utilities Department are launching inquiries of their own.

Eversource and Avangrid say their actions were intended to ensure a steady supply to their gas customers. Yet nine other gas utility companies taking gas from Algonquin didn’t cancel at the last minute. Whatever their motive, the flawed rules left business and consumers holding the bag.

Developers point to those price spikes as justification to impose the costs of a new $3 billion pipeline on electricity consumers. So far, no electric generator or other large user wants to sign a long-term contract for this capacity, and the developers want their investment to be risk-free. The guaranteed charges to consumers for decades would also lock in gas demand even as cheaper and cleaner sources of energy are gaining market share.

Today’s system is stuck in the past. Until 1987, it wasn’t even legal for pipelines to sell gas to electric generators, and rules dating to the early 1990s still give electricity short shrift, even though the two systems are now heavily interdependent. Fortunately, conditions are starting to look ripe for reform.

In August, Energy Secretary Rick Perry released a report on electricity markets and reliability that was controversial for many reasons, but which highlighted the need for improved interaction between gas and electricity markets. And some pipeline companies now see profit opportunities in more flexible offerings to generators.

Ultimate responsibility rests with FERC, which sets the rules for wholesale energy markets. Bringing the crucial interface between gas and electric markets up to date is a huge opportunity for new appointees to the commission. Fostering contracts to fit generators’ operational needs and improving overall transparency will nurture competition and innovation in the industry, and go a long way toward creating an energy grid that is cleaner, affordable and more reliable."

Mr. Krupp is president of Environmental Defense Fund.

https://www.wsj.com/articles/how-local-utilities-gamed-the-natural-gas-market-1510869318

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