For years, New England’s high electricity prices have been blamed on inadequate natural gas pipeline capacity.
Poking a large hole in the scarce-capacity narrative is a white paper, “Vertical Market Power in Interconnected Natural Gas and Electricity Markets,” released in October by four economists – one from the Environmental Defense Fund and three academic researchers from universities.
The researchers assert that the two dominant energy companies in New England – Eversource and Avangrid – engaged in practices that hiked consumers’ gas and electric bills, raised rivals’ costs, and may have been intended to tilt public opinion toward embracing new gas pipelines.
The authors have found strong evidence that severe, simultaneous price spikes in the gas and electricity markets were caused in part by the practices of the two New England utility giants.
The study, which focused on data from 2013-2016, asserts that these two companies regularly restricted natural gas capacity to the region by scheduling deliveries without actually flowing gas on the Algonquin Gas Transmission Pipeline, one of the two major pipelines serving New England.
New England, like most of the country, has been retiring coal-powered electric generation and replacing it with natural gas. Over 50 percent of its total electric generation now comes from gas.
New England ratepayers paid $3.6 billion more for electricity due to capacity withholding
The study estimates that capacity withholding increased average gas and electricity prices by 38 percent and 20 percent respectively, during the three-year period.
During the winters, gas prices averaged 68 percent higher.
As for electricity during the three-year time frame, New England customers paid $3.6 billion more than they would have absent the capacity withholding,
About half of this increase occurred during the particularly cold winter of 2013-2014, the “Polar Vortex.”
Last year, Kinder Morgan’s proposed Northeast Direct (NED) pipeline from the Pennsylvania across New York State to the New England coast was canceled due to lack of demand.
According to the researchers, the scheduling practices tied up capacity that, in a well-functioning market, should have been released, or would have otherwise been made available, to other shippers. Instead, significant quantities of pipeline capacity went unutilized on many of the coldest days of the year, pushing up the prices of gas, which, in turn, pushed up electric prices.
The report explains that, although most gas shippers had little incentive to sacrifice revenue from gas sales by withholding capacity, the two New England energy companies that withheld capacity were not only in the natural gas business, but also own large portfolios of electric generation units in New England, giving them incentive to increase gas prices in order to raise rivals’ costs in the electric generation market.
“That is,” the study states, “by restricting sales of a necessary input to production for their downstream competitors in the wholesale electricity market, the capacity-withholding firms increased the quantity of electricity their largely non-gas units were called upon to generate and the price those units earned.”
“Clear Patterns” of withholding gas shown by analysis of “downscheduling”
The researchers examined three years’ worth of publically available data on natural gas flowing to dozens of delivery points, or “nodes,” on the Algonquin Pipeline, about 8 million data points in all.
They discovered that a subset of delivery nodes was disproportionately served by specialized types of contracts that allowed the two utilities to make last-minute changes to withhold gas deliveries without notice and without penalty. This practice – called downscheduling – results in empty pipeline space when it is too late for the pipeline to resell.
The impact was substantial. Over a three-year period, the daily average amount of gas was reduced by about 14 percent of the volume typically used to supply gas-fired generators, but on 37 winter days, including the “Polar Vortex,” “about 28 percent of the gas supply needed by gas-fired generators was withheld at those delivery points.
The publication Utility Dive states that researchers for the study analyzed hourly scheduling data for the 117 delivery nodes on the Algonquin Pipeline over three years.
One of the co-authors of the study, Matthew Zagora-Watkins, an assistant economics professor at Vanderbilt University, said, in Utility Dive, “they would essentially schedule all of the capacity they needed at the nodes, pretend they were going to use it, and then at the last moment they would down-schedule pretty substantially – in the order of 25 percent to 50 percent of the capacity that was scheduled to go to those nodes.”
Utilities address gas supply costs; are silent on electricity prices
As reported in Utility Dive, Eversource strongly disputed the report as “false and misleading.” The spokesperson for the company stated, “We do not engage in any behavior to underutilize capacity to ‘artificially constrain capacity.’” Rather, she wrote, “our focus and actions are driven by the necessity to ensure a reliable and reasonable gas supply for those customers that we are obligated to supply.”
Avangrid acknowledged that it has the ability to alter capacity with little notice, but that is “to protect customers from interruptions.”
The companies pointed out that their gas sales are strictly regulated. “The gas distribution business is carefully regulated and the gas supply we purchase for our customers is a strict pass-through cost – meaning we don’t benefit from higher prices derived from withholding,” wrote the Eversource spokesperson.
Former Maine utility regulator David Littell.
In fact, it is true that the companies cannot resell excess gas capacity on the secondary market. Connecticut and Massachusetts require nearly all of those revenues to be returned to the ratepayers, according to the report.
However, former Maine utility regulator David Littell explained to the utility publication, “Eversource’s statement on pass-through costs speaks only to their gas supply costs. It doesn’t at all speak to the income stream from electricity prices going up or the income stream from substantial investments from an affiliate in gas pipelines, which would increase their rate base.”
Mr. Littell also said, “[the Study] provides an explanation for something that hadn’t had any decent explanation despite thousands of pages of testimony, which is why during this time period the pipelines weren’t being fully utilized despite the high demand and the high prices.”
“A big time scandal [like] Enron”
Senior Counsel at the Pillsbury law firm in Washington, DC, Andy Weissman, reacted strongly to the capacity withholding report, saying “If this analysis is correct, honestly, this isn’t a whole lot short of Enron. If customers really paid $3.6 billion as a result of withheld capacity…that is a big time scandal that is going to lead to huge litigation.”
Another Senior Counsel at the same law firm, James Dick, is an expert in the federal Sherman Antitrust Act, which is designed to prevent, among other things, unfair exercise of monopoly power,
He believes the U.S. Department of Justice, which enforces the antitrust laws, should open an investigation of Avangrid’s and Eversource’s restricting of gas capacity and their apparent effort to raise their rivals’ costs in the electricity market.
“That conduct is clearly anti-competitive and anti-consumer,” he said, “and could constitute a violation of the Sherman Act.”
An opportunity for market reform
The Environmental Defense Fund (EDF) sees the possible market manipulation as an opportunity for market reform.
N. Jonathan Peres, EDF Senior Director of Energy Market Policy, said that 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.
“Improved transparency, new pricing structures, and better alignment of risks and rewards will improve competitiveness and help drive new innovation in energy technology,” he said.
Report raises fresh questions about the region’s need for gas
Both Kinder-Morgan and Enbridge Gas Transmission (formerly Spectra Energy) have cancelled pipeline projects that would have crossed Massachusetts.
The Northeast Energy Direct project failed to attract enough customers.
Construction of the Connecticut Expansion pipeline drew continual protests from environmental activities such as the Sugar Shack Alliance.
Enbridge, which had partnered with Eversource and National Grid, suspended the Access Northeast pipeline last June after the Massachusetts Supreme Judicial Court held that Massachusetts law did not allow electric ratepayers to be responsible for funding a pipeline project.
Ratepayer funding would not have been necessary, however, if commercial customers had entered into contracts to ship gas.
Backers of both projects had insisted that Massachusetts faced continued high gas and electricity prices without more natural gas and increased pipeline infrastructure. But if this were the case, commercial markets for gas shipping would have supported construction of both pipelines.
The utilities appear to have had an additional motive for withholding gas. Not only did the practice raise rivals’ costs in the electric generation market, but also the artificially created gas shortages and high energy prices lent credibility to the arguments for natural gas pipelines.
Attorney General, Maura Healey released a report in November 2015 that reached the opposite conclusion – that increased gas capacity was not needed in New England.
Now the economists’ report on the gas withholding of Eversource and Avangrid is on the Attorney General’s desk. The AG’s office has, so far, found the report “concerning,” and is reviewing it carefully. After review, the Attorney General may open a formal investigation.
As for a federal reaction, FERC spokesperson, Tamara Young-Allen wrote, “FERC doesn’t publicly discuss investigations, so I can’t confirm or deny any potential enforcement activity.”
Former Maine utility regulator, David Littell, put the report in context. He said, “At the same time that Avangrid and Eversource were engaging in capacity withholding, these same companies, with other affiliates, were in front of our commission asking us to approve billions of dollars of additional pipeline capacity.”
Wow. What disgusting practices by the people who already have all the money, finding new ways to squeeze more money out of the working people. Let us get this money back from the offending companies through fines to equal double or triple the industry’s profits on this monopoly collusion practice. A crime must be punished by a fine several times the potential gain, and some people might need to do real time.
Thank you, Mary, for another well written article. The thoroughness is appreciated.
Hopefully restitution will be pursued on behalf of the consumer. If may math is correct, 3.6B divided by the MA population of 6.833M is a little over $500 per person. Mailing a check for $ 2000 to a family of 4 would help out quite a few families, boost the economy (or at least allow a few bills to get caught up), and return the money to its rightful owner.
Great writing and investigative journalism Mary. Unfortunately we have little recourse and expecting a political intervention is pie in the sky. The system is calcified and meant to insure the continuation of the status quo.To follow up on Steve’s comment , It feels like a class action on behalf of the defrauded consumers merits a look. I’m not a lawyer but a suit with discovery would go a long way towards exposing the underbelly of the profit at all cost participants and mentality. The notion that a 1936 energy act still governs today is pretty mind boggling and this may be a way to push back hard on that outdated and arguably counterproductive law that grants eminent domain. The entire energy segment is changing to accept the reality of distributed energy and renewable sources and that is where the public interest resides.
This is insane. The damages would be higher than 3.6 billion since you have to account for economic activity in Massachusetts lost because of the higher prices as well. Hoping a massive suit happens.
Interesting to see how this unfolds.
If there’s any consolation, if the government ran this utility I’m sure prices for gas would be triple what they are now.
I really don’t think that’s true. If the government ran the utility then fiscal conservatives would impose limitations on how much they could charge, how much they reinvest in infrastructure, etc., precisely so they can’t compete with private enterprise, the same way they do with the post office and Amtrak. I always find it ironic/frustrating how the argument for capitalism is that it’s supposed to be so efficient and then you see things like $700K/year linemen in Puerto Rico, mandatory surcharges paid to gas companies by electricity consumers (?), and our ridiculously costly private health insurance market.
The epitome of investigative journalism. We need more of this, and less of you know what…
These companies are fined heavily if they do not supply their “firm” ie. heating customers, therefore they make sure they purchase enough pipeline capacity to supply them, with margin left in to account for errors in forecasting etc. They do not know until they day of what the actual usage is (because they do not control their customers thermostats)so if the actual usage is less than the company planned for (with margin added in) the capacity goes unused. If they didn’t do it this way and the weather was a few degrees colder than expected or there was an issue with a pipeline, they would be turning off peoples heat on 0 degree days.
But the article says they down-scheduled 25 to 50%. So either their intention was criminal or they’re incompetent at predicting demand. The prediction happens the day before so they shouldn’t be that far off.
If this proves to be true, 1) Rates need to be brought down immediately, and 2) Someone needs to go to jail.