FEDERAL ENERGY REGULATORY COMMISSION Technical Conference

Coordination between Natural Gas and Electricity Markets

Boston August 21, 2012 Report by Chuck Cobb

Meeting to Discuss Two Industries in Six States The Federal Energy Regulatory Commission (FERC) met in Boston for a roundtable discussion of New England’s increasing reliance on natural gas to fuel electric generation and how the existing market rules may be inadequate to assure a reliable supply of gas for generating electricity.  FERC exercises regulatory oversight of the wholesale markets for both electricity and natural gas.  Dozens of parties including electric utility companies, gas pipeline and distribution companies, state utility regulators and representatives of environmental groups, sat around a table to offer the FERC their views of the problems and potential solutions.

Many See the Need for New Gas Pipes The price of gas has plunged with abundant supplies from horizontal drilling; natural gas is more often the fuel of choice for generating electricity.  Gas pipelines are adequate now to serve the existing long term customers but the gas pipeline infrastructure may not be able to supply sufficient gas when electricity generators call for it during the coldest winter days.  Even if gas capacity currently seems adequate for New England’s electric generation needs, trends point to the need for more gas pipeline capacity to the six State region.

Gas and Electricity Sell Differently FERC supports the efforts of regional electricity planning organizations (ISO’s).  New England’s ISO with strong regional planning has led coordination efforts among participants in the electricity business.  Electricity is more thoroughly regulated than is the gas business.  Gas companies are far more free market oriented.  They guarantee the availability of their product to customers who sign up for firm long term contracts.  Electricity generators make short term purchases of the least expensive fuel available.

Regulators Seek a Constructive Role  While many at the conference agreed on the need for improved gas pipeline infrastructure to New England as a long term goal, there was no consensus on how to accomplish it.  Conferees lamented that ten years have been spent talking about this physical, reliability problem without a solution on the horizon.  Utilities regulation by the separate States’ Departments of Public Utilities and by the FERC, exposes boundaries of Federalism and the proper balance between free markets and the role of government in ensuring reliable, affordable power.  The extent of the authority of any agency to order energy markets through regulation in a group of states like New England is questionable.  FERC attempted to prompt consensus and asked participants what they would like for FERC to do.

Electricity Generators Want to Buy Gas Differently Electric Utilities representatives felt that gas markets need to evolve to support the new customer base of power generators, including the seasonable variability of and peaks of demand.  Electricity generators are unlikely to purchase gas in firm fixed long term contracts because they would face credit problems and because the fuel cost might not be the lowest available.  Electricity generators want to remain fuel and technology neutral in offering power to customers. ISO NE argued that gas now lacks market penalties for failure to provide product.  ISO plans for electricity not gas.

Why Are More Gas Pipes Not Being Built?  The threat to electricity reliability is real if the electricity generators lack fuel or capacity to satisfy demand on peak days.  Price signals are not clear enough to incentivize infrastructure upgrades and to attract long term capital investment.

One suggestion was to “price gas reliability in to the cost of electricity”.  FERC could issue regulations or rulings that reliability of energy is being threatened but States would have to determine who would bear the costs of upgrading the pipeline infrastructure in the DPU rate setting rulings.

Gas Companies Urge Market Based Solutions The natural gas companies urged a free market counter-argument. Unregulated competitive markets will get product here and the influence of government planners is likely to include unintended consequences and out of market results.  Producers of gas in the Marcellus region are fully aware of the demand in New England and competitors should be allowed to privately innovate in order to devise the most economically sensible approach.  Gas business incumbents cautioned against rushing in a regulatory solution before market signals create private solutions.

Interesting Comments   The abundance of affordable gas will challenge the goals of diversifying supply.  New England’s electricity generation is getting to be based on nuclear, gas and wind.  //Over 50% of the electricity generated in Massachusetts, Rhode Island and Maine is fueled by natural gas.  Over 50% of the electricity generated in Connecticut, Vermont and New Hampshire is generated by nuclear power.  //To the extent new electric generation capacity will be developed in New England, it is expected to be over 90% fueled by natural gas. 

Chuck Cobb’s take aways –

• New England’s problems are like the European Union’s.  Sovereign entities see the need to cooperate but don’t have a mechanism or a recognized set of tools.
• The free market counter argument against regulatory reform will always have some appeal, although less in the utility “markets”.
• How permanent are recent shifts in fuel mix?