STUDY: New England Customers Paid $3.6 Billion in Inflated Electric Bills Due to Regulatory Disconnect Between Natural Gas, Electricity Markets

Outdated rules give some utilities excess leverage, disadvantage cleaner generators; researchers find crimped supply, higher prices and unused pipeline capacity

October 11, 2017
Anne Marie Borrego, aborrego@edf.org or 202-572-3508
Jon Coifman, jcoifman@edf.org or 917-575-1885

FOR IMMEDIATE RELEASE     

(Boston, MA – October 11, 2017)  As the U.S. depends more on natural gas to produce electricity, the little-known wholesale marketplaces where generators buy their fuel are an increasingly vital link in the energy system. But a team of economists from Environmental Defense Fund and three top universities shows the misalignment between the gas and electric markets has become a costly problem. In a new analysis released today, they say that families and businesses in New England, where the national issue is most acute, shelled out an estimated $3.6 billion in artificially inflated bills over just three years due to the disconnect.

“Markets have not kept up with the needs of a dynamic energy system. Legacy gas contracts give some utilities excess leverage, while new innovators are often placed at a disadvantage,” said EDF Senior Economist Kristina Mohlin, one of the authors. “Out-of-date trading systems risk saddling ratepayers with expensive new pipelines the market might not actually need, and they stifle fair competition from cheaper, cleaner, more efficient solutions.”

Economists looked at ISO-New England, the regional wholesale electricity market for Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont, where about half the electricity comes from gas. Electricity prices are closely tied the fuel cost. One challenge: Primary wholesale markets don’t efficiently price gas contracts in the flexible increments generators need. As a result, they’re pushed into less transparent spot markets where large gas sellers can have undue impact on prices, particularly when pipeline capacity is tight. 

Analysis showing how inflated prices rippled through New England gas and electric markets is here.

The researchers examined three years’ worth of public data on natural gas flowing to dozens of delivery nodes on the Algonquin Pipeline, about 8 million data points in all. What they uncovered was a distinctive pattern in which local gas utilities owned by two companies – Eversource and Avangrid – routinely ordered day-long large deliveries, then sharply reduced those orders at the last minute. This “down-scheduling” consistently came too late for anyone else to buy or utilize that capacity, thus limiting available gas supply in the wholesale market.

“We noticed there was a difference in the data between the amounts of gas being reserved a day ahead of time and the volumes that were actually delivered, said Matthew Zaragoza Watkins, Assistant Professor of Economics at Vanderbilt University and another of the authors. “We wanted to know why, and, what it meant for pipeline capacity. What we found shows the outsize impact that corporate behavior can have on crucial energy markets under the current rules.”

Last-minute scheduling changes by Eversource and Avangrid reduced effective capacity on the Algonquin pipeline by an average of roughly 50,000 MMBtu over the study window (August 1, 2013 to July 31, 2016). That’s about 14% of the daily volume typically used to supply gas-fired generators on the pipeline. On 37 cold days, when demand was high, unsold capacity due to scheduling changes represented about 28% of the daily capacity typically used by gas-fired generators (and about 7% of total pipeline capacity).

The analysis found that wholesale electricity prices in ISO-New England were about 20% higher on average over our study period due to higher gas prices resulting from the unused pipeline capacity tied up by the two companies’ repeatedly down-scheduling their gas orders.

“It would be all but impossible for changes in supply of this magnitude not to impact wholesale gas prices, or for those increases not to spill over into wholesale electricity market,” said Levi Marks, PhD. Candidate at the University of California - Santa Barbara. ‘It’s a simple matter of supply and demand, economics 101.”

Reasons for Eversource and Avangrid are unknown. The study does not assess whether they broke any laws or contracts. What matters more is reforming the rules that allow such behavior to distort prices in the first place. Updated policies to ensure that gas and electric markets are more efficiently aligned will go a long way to preventing unnecessary occurrences in the future.

“The growing interdependence of the electric and gas industries requires new analyses of behaviors across the industries to ensure the proper functioning of both,” said Sue Tierney, former Massachusetts public utility commissioner and ex-U.S. Department of Energy official, who reviewed the analysis. “This study underscores the need to ensure that federal market rules and energy standards affecting use of pipeline capacity by power plants and gas companies keep up with the dynamic changes happening across the U.S. electric industry.”

While strong, sensible regulations are important, EDF also believes in the power of well-designed markets to deliver needed results at the lowest overall cost to everyone. The group is proposing a list of reforms that would make wholesale gas and electricity markets more efficient, more competitive, and also more effective at reducing pollution. Their recommendations for improving these important markets is available here.

“Improved transparency, new pricing structures, and better alignment of risks and rewards will improve competitiveness and help drive new innovation in energy technology,” said N. Jonathan Peress, EDF Senior Director of Energy Market Policy. “It will also provide a more honest picture of the true need for new gas supply capacity, and the most cost-effective ways to meet it.”

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