Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets

Transcription

1 Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets Levi Marks University of California, Santa Barbara Kristina Mohlin Environmental Defense Fund Charles Mason University of Wyoming Matthew Zaragoza-Watkins Environmental Defense Fund June 19, 2017

2 Introduction Pipeline Infrastructure in New England Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 2/38

3 Introduction Natural Gas Prices and Pipeline Capacity Utilization in New England MMBtu 1,500,000 $100 $75 1,000,000 $50 500,000 $ Operating Capacity End-of-Day Scheduled Flow Wholesale Gas Price $0 Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 3/38

4 Introduction Natural Gas Prices and Pipeline Capacity Utilization in New England MMBtu 1,500,000 $100 $75 1,000,000 $50 500,000 $ Operating Capacity End-of-Day Scheduled Flow Wholesale Gas Price Intraday 3 Scheduled Flow $0 Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 4/38

5 Research Questions 1. What explains underutilized pipeline capacity in New England? 2. What institutional conditions and firm incentives drive this dynamic? 3. What are the welfare costs and distributional implications? Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 5/38

6 Research Questions 1. What explains underutilized pipeline capacity in New England? Two gas local distribution companies (LDCs) are systematically withholding pipeline capacity 2. What institutional conditions and firm incentives drive this dynamic? Pipeline capacity constraints + congestion Operations in downstream electricity market Overpowered revenue-sharing mechanisms for LDCs 3. What are the welfare costs and distributional implications? Winter gas prices were 68% higher Electricity ratepayers experienced $3.6 billion in excess costs over the 3-year study period Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 6/38

7 Overview 1. Detecting Capacity Withholding 2. Vertical Market Power & Raising Rivals Costs 3. Gas Market Impacts 4. Electricity Market Impacts Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 7/38

8 Detecting Capacity Withholding Scheduling pattern for one day at one LDC delivery node Data: Hourly scheduled flows from Algonquin Pipeline s FERC-mandated reporting website Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 8/38

9 Detecting Capacity Withholding Scheduling pattern at a typical LDC delivery node Constructed this graph for each of the 117 delivery nodes on Algonquin Period: August 2013 through July 2016 Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 9/38

10 Detecting Capacity Withholding Scheduling pattern at a node operated by Firm A Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 10/38

11 Detecting Capacity Withholding Scheduling pattern at a node operated by Firm B Average system withholding over study period: 48,393 MMBtu/day Exceeded 100,000 MMBtu on 37 days (7% of pipeline capacity; 28% of supply to generators) Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 11/38

12 Detecting Capacity Withholding Average schedule change in last 3 hours of gas day by node (MMBtu) Rank Schedule Change Schedule Change Node Node in Last 3 Hours (Winter Only) Operator Type 1-18,444-17,865 Firm A LDC 2-10,576-9,281 Firm A LDC 3-7,116-7,766 Firm A LDC 4-3,889-2,529 Firm A LDC 5-3,808-8,426 Firm B LDC 6-2,401-4,963 Firm B LDC Firm A LDC ,645 Firm B LDC Firm A LDC Firm B LDC Firm L Generator Firm M Generator Firm C LDC Firm N Generator ,017 Firm K LDC Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 12/38

13 Detecting Capacity Withholding Average schedule change in last 3 hours of gas day by node (MMBtu) Rank Schedule Change Schedule Change Node Node in Last 3 Hours (Winter Only) Operator Type 1-18,444-17,865 Firm A LDC 2-10,576-9,281 Firm A LDC 3-7,116-7,766 Firm A LDC 4-3,889-2,529 Firm A LDC 5-3,808-8,426 Firm B LDC 6-2,401-4,963 Firm B LDC Firm A LDC ,645 Firm B LDC Firm A LDC Firm B LDC Firm L Generator Firm M Generator Firm C LDC Firm N Generator ,017 Firm K LDC Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 13/38

14 Detecting Capacity Withholding Average schedule change in last 3 hours of gas day by node (MMBtu) Rank Schedule Change Schedule Change Node Node in Last 3 Hours (Winter Only) Operator Type 1-18,444-17,865 Firm A LDC 2-10,576-9,281 Firm A LDC 3-7,116-7,766 Firm A LDC 4-3,889-2,529 Firm A LDC 5-3,808-8,426 Firm B LDC 6-2,401-4,963 Firm B LDC Firm A LDC ,645 Firm B LDC Firm A LDC Firm B LDC Firm L Generator Firm M Generator Firm C LDC Firm N Generator ,017 Firm K LDC Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 14/38

15 Vertical Market Power & Raising Rivals Costs 1. Pipeline capacity constraints + congestion enables contract holders to restrict overall gas supply 2. Operating in downstream electricity market creates incentive to raise price 3. Revenue sharing requirements distort incentives to use capacity efficiently in upstream market Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 15/38

16 Vertical Market Power & Raising Rivals Costs 1. Pipeline capacity constraints + congestion enables contract holders to restrict overall gas supply Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 16/38

17 Vertical Market Power & Raising Rivals Costs 2. Operating in downstream electricity market creates incentive to raise price Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 17/38

18 Vertical Market Power & Raising Rivals Costs 2. Operating in downstream electricity market creates incentive to raise price Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 18/38

19 Vertical Market Power & Raising Rivals Costs 2. Operating in downstream electricity market creates incentive to raise price Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 19/38

20 Vertical Market Power & Raising Rivals Costs 2. Operating in downstream electricity market creates incentive to raise price Schedule Change Schedule Change Capacity Owned Contracts for LDC in Last 3 Hours (Winter Only) in New England Pipeline Capacity (MMBtu) (MMBtu) (MW) (MMBtu) Firm A -41,506-37, ,300 Firm B -8,832-18,320 1, ,400 Firm C ,500 Firm D ,000 Firm E ,300 Firm F ,500 Firm G ,200 Firm H ,600 Firm I ,008 12,500 Firm J ,900 Firm K ,700 *not shown: 14 electricity generation firms and 2 industrial end users Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 20/38

21 Vertical Market Power & Raising Rivals Costs 2. Operating in downstream electricity market creates incentive to raise price Schedule Change Schedule Change Capacity Owned Contracts for LDC in Last 3 Hours (Winter Only) in New England Pipeline Capacity (MMBtu) (MMBtu) (MW) (MMBtu) Firm A -41,506-37, ,300 Firm B -8,832-18,320 1, ,400 Firm C ,500 Firm D ,000 Firm E ,300 Firm F ,500 Firm G ,200 Firm H ,600 Firm I ,008 12,500 Firm J ,900 Firm K ,700 *not shown: 14 electricity generation firms and 2 industrial end users Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 21/38

22 Vertical Market Power & Raising Rivals Costs 2. Operating in downstream electricity market creates incentive to raise price Schedule Change Schedule Change Capacity Owned Contracts for LDC in Last 3 Hours (Winter Only) in New England Pipeline Capacity (MMBtu) (MMBtu) (MW) (MMBtu) Firm A -41,506-37, ,300 Firm B -8,832-18,320 1, ,400 Firm C ,500 Firm D ,000 Firm E ,300 Firm F ,500 Firm G ,200 Firm H ,600 Firm I ,008 12,500 Firm J ,900 Firm K ,700 *not shown: 14 electricity generation firms and 2 industrial end users Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 22/38

23 Vertical Market Power & Raising Rivals Costs 2. Operating in downstream electricity market creates incentive to raise price Schedule Change Schedule Change Capacity Owned Contracts for LDC in Last 3 Hours (Winter Only) in New England Pipeline Capacity (MMBtu) (MMBtu) (MW) (MMBtu) Firm A -41,506-37, ,300 Firm B -8,832-18,320 1, ,400 Firm C ,500 Firm D ,000 Firm E ,300 Firm F ,500 Firm G ,200 Firm H ,600 Firm I ,008 12,500 Firm J ,900 Firm K ,700 *not shown: 14 electricity generation firms and 2 industrial end users Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 23/38

24 Vertical Market Power & Raising Rivals Costs 3. Revenue sharing requirements distort incentives to use capacity efficiently in upstream market LDCs are regulated to make a fixed rate of return on sales to gas customers They are required to return the majority of revenues from other margins (capacity release and spot market gas sales) to their ratepayers Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 24/38

25 Vertical Market Power & Raising Rivals Costs 3. Revenue sharing requirements distort incentives to use capacity efficiently in upstream market LDCs are regulated to make a fixed rate of return on sales to gas customers They are required to return the majority of revenues from other margins (capacity release and spot market gas sales) to their ratepayers Massachusetts: Must return 90% of revenues to ratepayers Rhode Island: Must return 100% of first $1 million and 80% of additional revenues Connecticut: Must return 99% of revenues to ratepayers Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 25/38

26 Vertical Market Power & Raising Rivals Costs 3. Revenue sharing requirements distort incentives to use capacity efficiently in upstream market Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 26/38

27 Effect on Gas Price 1. Recover Demand Elasticity using IV Regression First Stage: log(p ALG ) = α 0 + α 1 log(p HH ) + α 2 Temp + α 3 Temp 2 + α 4 Wknd 2 Second Stage: log(q ALG ) = β 0 + β 1 log( P ALG ) + β 2 Temp + β 3 Temp 2 + β 4 Wknd 2 Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 27/38

28 Effect on Gas Price 1. Recover Demand Elasticity using IV Regression First Stage: log(p ALG ) = α 0 + α 1 log(p HH ) + α 2 Temp + α 3 Temp 2 + α 4 Wknd 2 Second Stage: log(q ALG ) = β 0 + β 1 log( P ALG ) + β 2 Temp + β 3 Temp 2 + β 4 Wknd 2 2. Use estimated elasticity ( β 1 = -.266) to predict counterfactual price series given additional capacity Account for warm days when pipeline is not constrained Account for potential bottlenecks further down the pipeline Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 28/38

29 Effect on Gas Price Average Price Difference: $1.68 (39%) Average Price Difference (Winter Only): $3.82 (68%) $60 Actual Gas Price Estimated Counterfactual Price $40 $20 $ Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 29/38

30 Effect on Electricity Market Data: Anonymized generator supply bids and day-ahead demand from ISO New England Temperature from National Climatic Data Center Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 30/38

31 Effect on Electricity Market Data: Anonymized generator supply bids and day-ahead demand from ISO New England Temperature from National Climatic Data Center Resampling Procedure: 1. Match each day with 5% of most-similar days in temperature and electricity demand 2. From this 5% subsample, select 5% of days (3 days) that experienced a wholesale gas price closest to our estimated counterfactual gas price 3. For each of 100 iterations, randomly sample generator bid functions from those 3 matched days and clear the market 4. Recover distribution of counterfactual wholesale electricity prices Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 31/38

32 Effect on Electricity Market $/MWh Actual Electricity Price Simulation using Actual Gas Price Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 32/38

33 Effect on Electricity Market $/MWh Actual Electricity Price Simulation using Actual Gas Price Simulation using Counterfactual Gas Price Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 33/38

34 Effect on Electricity Market $/MWh Actual Electricity Price Simulation using Actual Gas Price Simulation using Counterfactual Gas Price Difference between (2) and (3) Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 34/38

35 Effect on Electricity Market Point Estimate of Cost to Ratepayers: $1.214 billion 95% Confidence Interval: $ billion Estimated transfer from ratepayers to generators (billions) Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 35/38

36 Summary and Conclusions Two New England LDCs are systematically using their excess contracts to reserve capacity without actually using it This dramatically increases winter gas and electricity prices Ownership of generation gives them incentive for higher prices Regulations distort their incentive to sell excess capacity Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 36/38

37 Summary and Conclusions Two New England LDCs are systematically using their excess contracts to reserve capacity without actually using it This dramatically increases winter gas and electricity prices Ownership of generation gives them incentive for higher prices Regulations distort their incentive to sell excess capacity Pipeline capacity constraints and vertical integration in interconnected wholesale gas and electricity markets can induce price manipulation Other problems may arise from a gas transportation market built around LDCs as gas-fired generation becomes increasingly important Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 37/38

38 Thank You Levi Marks Levi Marks Raising Rivals Costs in Interconnected Wholesale Natural Gas and Electricity Markets 38/38