NATURAL GAS AND ELECTRICITY IN NEW ENGLAND/ REGULATION AND MARKETS

Sitting on the seam between free markets and regulation are public utilities.  Markets and regulation are conceptual competitors. Most agree that the best way to rationalize distribution is through markets but government, what we agree to do together, often expresses itself through regulations.  Natural gas and electricity are highly but separately regulated markets.  The abundance of gas found in America will lead to its increasing use as a fuel to generate electricity – replacing coal and oil, at least.  The struggle of markets and regulators to harmonize their roles and to accommodate the increased use of gas is a big story of our day.

UTILITY REGULATION AND ENERGY MARKETS

Unfettered markets might not deliver safe, reliable energy to all Americans.  Serving that goal is the aim of regulators from state DPUs and Attorneys General, to the Federal Departments of Energy and the EPA.  In some areas, such as New England, regional approaches to energy planning have been embraced.  State regulators oversee utility rates while private companies compete for profits in the energy supply business.

Dependence on foreign oil persists, but it will diminish as native natural gas fuels more things.  Concerns about the impacts of atmospheric carbon and about global warming will always overlay the political and scientific discussion of energy.

CURRENT MARKET METHODS

Electricity is generated by now a mix of fuels.  Due to its abundance and consequent low prices, natural gas is supplanting much of the coal and oil used for electricity generation in New England.  Renewable sources are important but they deliver only a small percentage of total energy and much of it on an intermittent basis.  Liquid natural gas from overseas was, until recently, a needed addition.  Now it is too expensive.  Nuclear energy has been a staple since the 1970’s and continues to contribute significantly to the total supply.  Peak energy demand can be shaved by demand response schemes but considered as a source of supply, this merely shaves the tip of the demand.  Electricity reliability requires that all customers get supplied during days of highest demand.

CUSTOMARY GAS CONTRACTS ARE FIRM AND FIXED

Natural Gas is delivered to New England from wells in the Central Time Zone states and from Western Canada. Competing gas companies use established pipelines to deliver supply to their ‘firm contract’ customers.  Representatives of the natural gas industry proudly state that firm contract customers have always gotten what they signed up and paid for.   There are limits to the capacity of the existing pipeline infrastructure delivering gas to New England, and as more demand for gas comes from electricity generators, we are nearing those limits.

HISTORIC GAS PURCHASING PATTERNS OF ELECTRICITY GENERATORS

Electricity generators who burn gas, do not enter firm, long-term contracts for their supplies now.  They rely on short term contracts to buy large amounts of natural gas, often on days when the demand for energy throughout New England is peaking.  While current firm fixed contract gas customers have not been impacted by electricity generators’ infrequent purchase of these large amounts of gas, the constraints of the current physical system will lead to limiting some customers as the demand for natural gas grows.

CONFLICTS AND POTENTIAL PROBLEMS

Gas sellers would like electricity generators to purchase gas on long-term fixed contracts rather than what the gas sellers now characterize as ‘interruptible’ contracts.  After gas customer contracts are fully met, on the coldest winter days over the next decade, there may not be enough gas supply capability to meet the anticipated power sector gas demand.  During the summer the supply levels should be adequate.  Scenario planning for contingencies impacting large electricity generators also supports the argument for infrastructure development to increase natural gas supplies to New England.

NEED FOR REGULATORY ALIGNMENT OF GAS AND ELECTRIC MARKETS

Pipeline operating rules will not deliver consistent reliable service to all anticipated customers if electric generators continue their pattern of purchasing large amounts of gas on an intermittent basis.  There are a number of potential solutions all of which will involve heavy regulator involvement.  How the ‘markets’ and the regulators resolve the conflicts between these adjacent but now separate markets will be interesting politics.