Event Information:

  • Wed

    Natural Gas Regulatory Policy Issues Raised by Interconnected Energy Markets

    2:00 PMWebinar


    • Professor Matthew Zaragoza-Watkins, Department of Economics, Vanderbilt University
    • James S. Daly, Vice President of Energy Supply, Eversource Energy
    • James F. Wilson, Principal, Wilson Energy Economics
    • Moderator: Ken Costello, Principal Researcher – Energy & Environment, NRRI

    Local distribution companies purchase natural gas and arrange for its transportation to the city gate.  They then transport the gas to households, businesses, industrial facilities and electric power facilities.  The assumption is that the price paid for gate at the city gate reflects a competitive market for commodity gas plus a regulated price for transportation.  That is, individual providers lack the ability to raise the price of gas, for example, by holding back pipeline capacity during critical periods.

    A recent study (“Vertical Market Power in Interconnected Natural Gas and Electricity Markets,” funded by the Environmental Defense Fund (EDF), at https://www.edf.org/sites/default/files/vertical-market-power.pdf) contradicts this assumption by showing that a particular condition, namely, vertically-integrated affiliate transactions, can lead to the underutilization of gas pipelines during peak periods, and subsequently higher gas and electricity prices.  The authors laid out the rationale and opportunities for abuse, as well as provided empirical evidence that supports their hypothesis.  They used New England as a case study.

    Although the EDF study focuses on New England, its analyses and findings are relevant for other regions of the country:  It is conceivable that a single entity under certain conditions (e.g., a vertical-market presence), and current state and federal policy could hold back pipeline capacity to drive up market prices that would increase its profits and hurt energy consumers; but, of course, it is another thing to say that they would.

    The EDF study focused in this webinar provides evidence that this possibility is more than conjecture but not an absolute.  At the minimum, the study raises a “red flag” that merits closer review.

    This webinar will hear from one of the coauthors of this study, one of the utilities that was part of the case study, and a disinterested economist/energy expert who will comment on the study and its policy implications.

    This webinar will discuss what regulators can do to mitigate inefficiencies in gas transportation, focusing on the underutilization of pipeline capacity during peak periods.  These inefficiencies can deprive energy consumers, whether households, businesses or electric generators, of the potential benefits from natural gas.

    Panelists will address several questions:

    1. How does scarce pipeline capacity cause price spikes?
    2. How can we explain the oddity where high demand during peak periods causes regional gas-price spikes but yet we observe unused pipeline capacity? (FERC policy calls for the availability of unused firm-transportation capacity to interruptible service.  This should result in full utilization of the pipeline during times when the capacity is most valuable, as indicated by a substantial price differential between pipeline receipt points and delivery points.)
    3. How would the electric generating facilities owned by a vertically integrated company profit from higher natural gas prices?
    4. Why wouldn’t a gas utility resell its excess pipeline-capacity rights rather than leaving it unused? What are the reasons for gas utilities with no-notice service, for example, to hold on to pipeline capacity?
    5. What are the major policy implications of the EDF study for federal and state regulators? For example, do utility incentives for pipeline-capacity nomination, release and utilization jeopardize the public interest and need to change?
    6. What can FERC and state regulators do to mitigate the problems identified in the EDF study, especially unused pipeline capacity during high-demand periods?
    7. Should FERC or some other entity monitor pipeline flows and detect any “unusual” underuse of pipeline capacity and thereafter identify the reasons and offer a remedy?
    8. Why should regions other than New England worry about vertical market power in interconnected natural gas and electricity markets?
    9. What are the benefits and costs of one company owning electric generating facilities as well as possessing rights to pipeline capacity that can affect the regional price of natural gas?
    10. How can regulators distinguish between contrived pipeline-capacity constraints and real constraints caused by higher demand?