A Federal Energy Regulatory Commission staff inquiry has revealed no evidence of anticompetitive withholding of natural gas pipeline capacity on Algonquin Gas Transmission by New England shippers, the Commission said on Feb. 27.
In a news release, FERC noted that the inquiry arose out of allegations made by the Environmental Defense Fund in a 2017 white paper.
The white paper asserted that local gas distribution companies in New England had engaged in practices to withhold pipeline capacity on the Algonquin system in order to drive up gas and/or power prices in the region.
“Commission staff took these allegations very seriously and conducted an extensive review of both publicly available and non-public data,” FERC said. On the basis of that review, FERC staff determined that EDF’s study was flawed and led to incorrect conclusions about the alleged withholding. Commission staff found no evidence of capacity withholding.
In the news release, FERC said it will take no further action on the matter.
White paper released in October 2017
At issue is a white paper, “Vertical Market Power in Interconnected Natural Gas and Electricity Markets,” released by EDF in October of last year.
The white paper said that in recent years, New England’s wholesale natural gas and electricity markets have experienced severe, concurrent price spikes. The white paper said that during the months of extreme cold that marked the winter of 2013-14 (the “Polar Vortex”), for example, New England gas prices averaged $17.86 per MMBtu and reached a record high of $78/MMBtu on Jan. 22, 2014.
“These extreme price spikes have been commonly attributed to limited pipeline capacity serving New England, and this ‘scarce capacity’ narrative has been used in recent proposals to expand natural gas pipeline capacity serving the region,” the report said.
The paper said that limited pipeline capacity “is indeed partly responsible for these extreme prices. But we also find strong evidence that two firms that held significant shares of the contracts to flow gas on the Algonquin Gas Transmission Pipeline — one of the two major pipelines serving New England — regularly restricted capacity to the region by scheduling deliveries without actually flowing gas. These unusual scheduling practices tied up capacity that, in a well-functioning market, should have been released, or would have otherwise 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 price of gas.”
The authors of the report said that while most shippers “had little incentive to sacrifice revenue from gas sales by withholding capacity, the two firms observed to withhold capacity also own large portfolios of electric generation units located in the region, giving them an incentive to increase gas prices in order to raise rivals’ costs.”
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.”
Report analyzed three recent years of scheduling data
The paper analyzed three recent years of scheduling data on Algonquin for evidence of firms withholding pipeline capacity in this manner.
The authors of the report said they found “clear patterns of withholding at a subset of delivery nodes operated by Avangrid and Eversource,” which the paper said are “the only two firms operating on the pipeline with substantial assets and operations in both the gas distribution market and the electricity generation market.”
The paper said that the behavior it described significantly impacted both natural gas and electricity prices in New England.
“We employ an instrumental variables model to estimate a counterfactual gas price series, finding that gas prices were $1.68/MMBtu (38%) higher on average during our entire study period and $3.82/MMBtu (68%) higher during the winters,” the paper’s authors wrote.
“We proceed to construct a simulation model of New England’s wholesale electricity market and use our estimated counterfactual gas price series as an input to estimate the effect on the region’s electricity market. We find that electricity prices were about $10/MWh (20%) higher on average over our study period due to capacity withholding.”
Their simulation predicted that underutilized pipeline capacity ultimately resulted in a transfer from New England electricity ratepayers to generators -- and their fuel suppliers -- of about $3.6 billion over the course of our study period, about half of which occurred during the particularly cold winter of 2013-14.
“While the studied behavior may have been within the two firms’ contractual rights, the significant impacts in both the gas and electricity markets show the need to consider improvements to market design and regulation as these two energy markets become increasingly interlinked,” the paper said.
Eversource says report refutes paper’s findings
Meanwhile, Eversource on Feb. 27 unveiled a new analysis conducted by Levitan & Associates, Inc. that Eversource said verifies the company acted in conformity with regulatory obligations and industry practices when managing gas resources on behalf of customers in a three-year period, 2013–2016.
“Levitan’s critical assessment unequivocally disproves the inaccurate claims promoted by the Environmental Defense Fund,” Eversource said in a news release.
Eversource said that Levitan concluded that EDF failed to account for the fact that regulated gas utilities have an obligation to serve their customers with the highest level of reliability, under a range of operating conditions and that there is no avenue by which Eversource would have benefited or profited from the alleged actions.
Levitan said in the report that the assessment it performed shows that the Eversource companies did not game the natural gas market for purposes of improving the capacity factors of its generation fleet in New Hampshire, “or, for that matter, for any other reason. EDF’s claimed wholesale price effects are false because there was no inefficient or manipulative ‘withholding’ of natural gas.”
Levitan said that because Connecticut local distribution companies did not manipulate gas deliverability or otherwise withhold capacity, “we conclude that EDF’s allegations are uninformed, baseless, and quixotic.”