Northeast pipeline controversy exposes gas markets as 'a recipe for chaos,' researchers say
Contention over Eversource and Avangrid's pipeline scheduling practices shows that natural gas markets are "at odds" with reality, according to EDF.
In recent weeks, the gas scheduling practices of Northeast utilities have come under increasing scrutiny.
On Oct. 11, the Environmental Defense Fund published a working paper arguing that the gas utility subsidiaries of Eversource and Avangrid artificially constrained pipeline capacity in Connecticut and Massachusetts for years — costing consumers an estimated $3.6 billion in higher power prices from 2013 to 2016.
The utilities would regularly schedule more gas than they needed on the Algonquin Pipeline, the researchers found, only to cancel some of the orders later in the day — too late for the pipeline space to be resold.
This practice, labeled down-scheduling, “essentially locks up some pipeline capacity,” Matthew Zaragoza-Watkins, an assistant professor at Vanderbilt University and co-author of the report, told Utility Dive in an interview.
The result? Higher power prices and a pipeline system that appeared more constrained than it actually was — particularly on the coldest days.
The study startled veterans of the power and gas industries. If the findings are true, “this isn’t a whole lot short of Enron,” said Andy Weissman, senior counsel at the Washington, D.C., law firm Pillsbury. Former Maine utility regulator David Littell said the “whole thing is troubling.”
Key policymakers appear to agree. The Attorney General and Department of Public Utilities in Massachusetts have both opened inquiries into the findings, while the Connecticut Public Utility Regulatory Agency has launched a full-blown investigation. Sen. Richard Blumenthal (D-CT) has also asked the Federal Energy Regulatory Commission to look into the matter.
Those responses have inspired spirited defenses by both the companies and their allies. Eversource attacked the pipeline paper in a written statement, saying it is “not only false and misleading, but concerningly irresponsible as it lacks any understanding of how gas procurement actually works.”
The utilities don’t deny that they engaged in the down-scheduling practice, but argue they did so to ensure they had adequate pipeline capacity available if weather conditions or other factors unexpectedly increased gas demand.
The utilities and their allies also claim the EDF report is biased — that it “appears to be fabricated by anti-pipeline proponents who are trying to make the case that pipeline shortages in New England are due to capacity withholding,” an Eversource communications manager wrote to Utility Dive.
The university researchers who wrote the report acknowledged those arguments in a subsequent blog post explaining their methodology. But if Eversource and Avangrid were simply being conservative with their gas supplies, they wrote, it would raise the question of why nine other gas firms that the researchers studied did not exhibit the same behavior.
Determining why the utilities withheld pipeline capacity could have legal ramifications under federal antitrust law or the Energy Policy Act of 2005, which prohibits “conduct in connection with jurisdictional transactions that would be intended to manipulate markets.” But if you talk to the researchers themselves, they say they’re less concerned about naming and shaming individual actors — or preventing pipeline development — than they are about correcting the underlying issues in the gas market.
“The solution in this lies less in pursuing particular actors in the marketplace and more in getting the kind of rules and policies and parameters of the market right,” N. Jonathan Peress, senior director of energy market policy at the Environmental Defense Fund, who worked with the authors on the new paper, told Utility Dive in an interview. “That's how you stop this from happening again.”
“We would like there to be more pipelines,” said study co-author Levi Marks, a Ph.D candidate at the University of California, Santa Barbara, “if we can set up a market for the right price signals to get to pipeline development.”
Market design ‘at odds’ with reality
Alongside the Eversource-Avangrid report, EDF released a new policy paper outlining how market structure flaws create incentives for utilities to withhold pipeline capacity.
“The key takeaway from [the Eversource-Avangrid] study is that commercial incentives in the gas market are misaligned in a way that diminishes efficient and full utilization of pipeline capacity, leading to behavior by pipeline capacity contract holders that is adverse to the economic interests of utility customers," Peress wrote in the policy paper. “In other words, flaws in the current natural gas market design can lead to exertion of market power, systemic inefficiencies, diminished electric reliability and ultimately increased costs.”
At its core, the issue is that the gas markets primarily rely on a single daily “index” price that is “established assuming that end users and power plants use a steady, non-varying (i.e., 'ratable') quantity of gas each hour,” Peress wrote.
Gas generators, however, largely do not use non-varying supplies of gas. Rather, they ramp their generation — and thus their fuel consumption — up and down depending on demand for electricity.
"[F]laws in the current natural gas market design can lead to exertion of market power, systemic inefficiencies, diminished electric reliability and ultimately increased costs.”
N. Jonathan Peress
Senior director of energy market policy, Environmental Defense Fund
“Put another way,” Peress wrote, “the fundamental design assumption of 'ratable' flow upon which transactions in the market are premised, is at odds with the reality of how natural gas-fired power plants, the largest gas customer, use natural gas and pipelines.”
This design flaw pushes generators to “divvy up non-ratable capacity” into smaller, hourly chunks that correlate to generation needs throughout the day, he continued. Though hundreds of those transactions occur each day, “the price for obtaining hourly gas supply is opaque at best,” and there is no organized structure to formulate “a common understanding of the value of hourly flows.”
The result is a “hidden, sub-day” fuel market for gas generators that lacks transparency — potentially exacerbating supply issues when demand for gas is highest.
“When demand is high, the hidden sub-day market becomes stressed and illiquid such that there are not enough sellers and/or buyers in the market,” Peress wrote. “On the coldest days when heating customers are in need of supply, prices tend to skyrocket but without collective market participant knowledge of whether there is available pipeline capacity and its value.”
“It's a bilateral trading market with lots of secrecy and that's problematic for the efficient operation of markets,” Zaragoza-Watkins said.
That market construction is a “recipe for chaos,” Peress wrote. “Reliability is threatened on the coldest days because the market does not efficiently reconcile supply and demand.”
New gas market design
To correct the disconnect between the gas and electricity markets, the EDF team advocates making the former more like the latter — a system where gas capacity is contracted more often throughout the day, putting a more exact value on pipeline capacity and ramping needs for gas plants.
“Generators should be able to buy in hourly or even 15-minute blocks, in standardized markets, with transparent prices,” Peress wrote. “Along with much greater efficiency, this limits opportunity for abuse and helps ensure pipelines are better utilized.”
Such a system could help ensure any questionable scheduling of pipeline capacity would be visible to all market participants, researchers said.
“If we did have an hourly trading market ... all of the market players here would be noticing that the price of gas drops substantially in the last 2 or 3 hours of the gas day,” Marks said. “This kind of scheduling practice would not be something that could go unnoticed.”
Identifying shorter-term values for natural gas pipeline capacity could also help New England make better decisions about pipeline siting, researchers said. Utilities and ISO-New England have argued for years that more pipeline construction is needed in the region, and earlier this year Eversource pulled out of construction for the controversial Access Northeast pipeline after a court ruling in Massachusetts prevented it from charging electric ratepayers for its construction.
“If we did have an hourly trading market ... [t]his kind of scheduling practice would not be something that could go unnoticed.”
Ph.D candidate, University of California, Santa Barbara
The point, Zaragoza-Watkins said, is that the pipeline proponents are “using the wrong prices” — basing their arguments off the opaque signals of the gas market today, rather than using a more exact value of pipeline capacity that could be revealed through more frequent pricing.
“If they wanted to do an analysis of whether Access Northeast or any other pipeline is necessary, the first thing to do is to make sure that the institutions are functioning well,” he said. “Once you’ve got that right it makes sense to start thinking about whether there's scarcity or not, but they're using the wrong data.”
Due to the flaws in the market design, the need for new pipelines in the Northeast remains “an open question,” Marks said. “There definitely is actual scarcity in New England in addition to the scarcity that's induced by these scheduling practices, and perhaps it warrants new pipeline developments, but we want the right price signals to be going into that decision, instead of price signals that are artificially high.”
In particular, Marks pointed to the plan by owners of the proposed Access Northeast pipeline to charge electric utility ratepayers for the $3 billion project. Under that strategy, “it would seem that Eversource and the other investors in Access Northeast are suggesting there's not sufficient demand from electricity generators to warrant new pipeline capacity development, which is why they need this different rate structure that kind of puts the risk onto the consumers and guarantees the utilities a rate of return on their equity.”
Without a better understanding of the actual market value of gas capacity day to day, New England risks making investments in pipeline capacity it does not need, the researchers said.
“Long term contracts for pipeline capacity which is unneeded from a market rationale standpoint is a prescription for uneconomic fossil fuel lock-in and stranded costs being imposed on energy consumers paying for excess capacity,” Peress wrote.
Valuing flexibility, improving resilience
The markets currently do not spur innovation in “methods to provide the most valuable attribute of a cleaner, more dynamic grid: flexibility,” Peress said.
More frequent pricing of pipeline capacity for generators would allow a more exact value of the ramping and flexibility benefits that gas generators offer to the grid. That could enable a cleaner comparison to alternative technologies like storage or demand-side management, which can offer many similar grid benefits, but cannot be directly compared to gas flexibility under the current market structure.
Greater information and price transparency would lead to “the formation of markets for services that provide the electric generation industry with the products it needs,” Zaragoza-Watkins said.
"[R]ight now there isn't price transparency into what people pay on an interday basis or where firms may be able to procure gas.”
Assistant professor, Vanderbilt University
“You would expect that if you had good information and it was clear and electric generators had a high willingness to pay for more dispatchable resource in terms of gas delivery and that was profitable to provide, then it would exist,” he said. “But right now there isn't price transparency into what people pay on an interday basis or where firms may be able to procure gas.”
Eversource and Avangrid did not comment specifically on the gas market reforms proposed by EDF. But Eversource emphasized that “it is well documented that New England pipeline demand greatly exceeds the supply on cold days.”
“We welcome and encourage a fact-based debate about what natural gas infrastructure is needed to ensure our region has a reliable, affordable energy system going forward,” the CEO of the Northeast Gas Association wrote in Utility Dive. But “the EDF report contributes instead misinformation and misdirection.”
Even so, Peress wrote that the reforms have broad support in the natural gas sector, just not among local distribution companies. EDF’s proposal is “broadly supported” by the North American Energy Standards Board (NAESB), but was not carried to fruition due to the opposition of local distribution companies, according to NAESB filings with FERC.
Presence of support for these “shaped flow transactions” should push the Federal Energy Regulatory Commission to take a harder look at gas supply issues, Peress wrote. “As there is broad industry support, including by all voting market participants on the NAESB Gas Quadrant Executive Committee (with the exception of local gas distribution utilities), [FERC] should advance and integrate into the market rules standards for shaped flow transactions."
The proposed reforms play into high-profile discussions at FERC and the Department of Energy over the resilience of the power system, particularly that of natural gas infrastructure.
One of the “main takeaways” from the recent resilience study from the National Academy of Sciences is “that we need to get a better handle on gas electric coordination,” Peress said, “including the need to both study it and to refine the markets in order to enhance efficiency within it.”
The DOE grid study, which has become the foundation of the agency’s controversial cost recovery proposal for coal and nuclear plants, also spotlighted the issue.
“One of their ... seven high-line takeaways was we need to understand and enhance gas electric coordination,” Peress noted. “So here you have it. It couldn’t be more timely.”
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