Data shows two companies stand alone in their New England pipeline practices

This blog post was co-authored with Levi Marks and Matthew Zaragoza-Watkins

Earlier this month we—a  team of economists at EDF, UC Santa Barbara, University of Wyoming and Vanderbilt University—released  a new study on the natural gas pipeline markets in New England which revealed a distinctive pattern showing that local gas utilities owned by two companies—Eversource and Avangrid—routinely ordered large deliveries, then sharply reduced those orders at the last minute. This “down-scheduling” consistently came too late for anyone else to buy that capacity, thus limiting available gas supply in the wholesale market.

One question people ask: Were these two companies acting any differently from other firms, and how can you tell?

We approached this question as we would any research project by thoroughly investigating the data. Over 18 months, we analyzed scheduled gas flows for all 117 delivery points (nodes) on the Algonquin pipeline for every hour of every day in a three-year study period from August 1, 2013 to July 31, 2016, which we downloaded from the pipeline’s public reporting web site. In total, we looked at approximately eight million data points generated from the scheduling patterns of 18 local gas utilities owned by 11 parent companies.

What we found in those public data was clear and irrefutable. Local distribution companies owned by two of those parent companies—and only utilities belonging to those parents—consistently behaved differently than all the others. We don’t know why, but there’s no question that it occurred. The pattern is clear when you visualize the data.

Pattern recognition

The figure above shows scheduling patterns for a typical Algonquin delivery node operated by a gas utility. The horizontal axis shows the 44-hour scheduling window associated with each 24-hour “gas day.” The vertical axis represents the total amount scheduled for delivery over the course of the entire gas day. The chart shows typical patterns: after initial nominations, there are some substantial adjustments mainly at or before the start of the gas day, with generally smaller changes happening close to the end of the gas day.

We constructed graphs like this for all 117 nodes on Algonquin. Most of the 95 utility-operated nodes look pretty much like the one above.

But some of the nodes are not like the others. Take a look:

This second set of figures charts scheduling patterns at one node operated by Avangrid. The pattern is quite different from the vast majority of utility-operated nodes. Here, we consistently see large, downward schedule adjustments concentrated in the final three hours of the gas day. In contrast to other utility-operated nodes where excess capacity was typically not scheduled or was released earlier in the gas day, Avangrid tended not to release excess capacity until the end of the day when it is too late for the pipeline to make it available to others.

This same pattern can be observed at six nodes on the pipeline, and to a smaller extent on four others. All ten are operated by Eversource or Avangrid.

Not like the others

On average, nodes follow the pattern observed in the first figure: modest adjustments to scheduled deliveries over the course of the day, around five to 15 percent in either direction (adjusting upward or downward), with few changes in the final hours of the gas day. These outlier nodes operated by Eversource and Avangrid, on the other hand, consistently over-order at the beginning of the day, and consistently make large, last-minute downward adjustments of 10 to 50 percent in the final hours of the gas day, when the pipeline capacity could not be reallocated.

The table below shows a ranked list of the average schedule change in the last three hours of the gas day in MMBtu over the three-year study period for all Algonquin nodes. The top six nodes are clear outliers from the rest and the four that downschedule the next most are also operated by Avangrid and Eversource.

Econ 101: Supply goes down, price goes up

By tying up pipeline space until it was too late for others to use, we estimate the last-minute scheduling changes by Eversource and Avangrid reduced effective capacity on the Algonquin pipeline by an average of roughly 50,000 MMBtu over the three-year period. That’s about 14% of the daily volume typically used to supply gas-fired generators on the pipeline. On 37 days, unsold capacity due to scheduling changes exceeded 100,000 MMBtu, which represents about 28% of the daily capacity typically used by gas-fired generators (and about 7% of total pipeline capacity).

Basic economics tells us that such large reductions in supply will increase wholesale gas prices. Furthermore, because the natural gas and electricity markets are so closely interconnected in New England (about 50% of the electricity generated in the region comes from gas-fired plants), higher wholesale gas prices translate into increased prices in the wholesale electricity. Our analysis found that wholesale electricity prices in the ISO-New England system were about 20% higher on average over our study period due to higher gas prices from the unused pipeline capacity tied up by these two companies’ scheduling habits.

All told, we estimate New England customers shelled out $3.6 billion in artificially inflated electricity bills.

The motive doesn’t matter

We don’t know the reasons behind these scheduling patterns, only that they clearly happened. The study does not assess legality. Eversource and Avangrid say they were simply making sure their customers had enough gas (which raises the question of why none of the other nine companies needed to resort to such measures). For our purposes, the reason doesn’t really matter.

The more important fact is that it could have happened in the first place. And that’s because gas and electric markets have not kept up with the needs of a dynamic energy system. For example, legacy gas contracts give some utilities excess leverage, while new innovators are often placed at a disadvantage. Out-of-date trading systems also risk saddling ratepayers with expensive new pipelines the market might not actually need, and they stifle fair competition from cheaper, cleaner, more efficient solutions.

While strong, sensible regulations are essential to protecting our health and environment, well-designed markets have tremendous power to deliver results faster, at lower cost to everyone—and with less pollution. That’s why EDF is proposing solutions that would make wholesale gas and electricity markets more efficient, and more competitive, leading to better outcomes for energy customers and the environment.

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