Non-regulated gas markets are a lump of coal for consumers
Christmas is coming and the good folks living in certain states might want to add more-robust utility regulation to their holiday wish lists as they watch their grinchy power and heating bills spike higher.
The autumn cold snap that brought January temperatures to much of the eastern half of the United States last month also drove home the risks consumers in a non-regulated state can face when demand for natural gas inevitably squeezes limited supplies, and ratepayers have little in the way of a regulatory buffer to cushion the blow.
“This exposure to energy markets is especially problematic when natural gas prices are surging,” said Gary Meltz, executive director of Power for Tomorrow (PFT), a Washington-based association promoting the benefits of regulated utilities for consumers. “On the flip side, ratepayers living in traditionally regulated states are protected from these same natural gas price spikes because of sensible regulation.”
Much of the media coverage focused on the cold spell and the prospects for higher heating costs during the winter ahead, but the real story could be the likelihood that higher natural gas prices will also push consumer electric bills uncomfortably higher as well. “A restructured electricity market forces customers to pay the highest possible price for electricity vis-à-vis natural gas, and right now, natural gas prices have been extraordinarily high,” Meltz told Daily Energy Insider.
The “restructuring” of individual state electricity markets has been touted as a key catalyst to entice investment in expanding renewable electricity, but a report released by PFT at the end of November concluded that utility regulators should think twice about casting off too many mooring lines and exposing their constituents to potentially brutal price volatility. Based on an analysis of recent surges in gas and power prices, the report found that traditionally regulated states were able to take some of the edge off raging bull markets while customers in restructured states were left flummoxed by never-before-seen prices.
“This study is a wakeup call for other states that are considering restructuring,” Meltz said. “Ratepayers in restructured states now have higher power bills because of the volatility of energy markets; these ratepayers would benefit from having their electricity rates set by a public utility commission.”
The PFT report looked at utilities in Texas, California, New York, and also Massachusetts, where the region’s two major utilities – National Grid and Eversource – are currently in the national spotlight as the war in Ukraine has sent prices for both heating oil and liquefied natural gas (LNG) soaring.
The report concluded that price surges in the gas market tended to also send electricity rates soaring regardless of whether the power was generated by gas or by other fuels, such as coal or renewables; the reason being that electricity prices tend to more closely reflect wholesale gas prices in restructured states. As a result, a high-priced trading hub for gas, such as the Algonquin Pipeline’s Citygate in Massachusetts, has a major influence on eventual consumer costs.
“Most customers in restructured states experience these price changes in their electricity bills, often quite rapidly and without a full understanding of why this is happening,” the report said, adding that traditionally regulated states have commissions that establish customer rates for both electricity and gas and can spread those higher costs out over a period of time.
In addition, regulated states base their electricity rates on the cost of different types of fuels used. Meltz told Daily Energy Insider an example would be a state in which 40 percent of its power is generated by gas, which would mean consumer bills would reflect 40 percent of the cost of gas; by comparison, 100 percent of the cost of electricity in a deregulated state would reflect the price of gas. “If you are in a deregulated state, you have to pay the high natural gas price for 100 percent of the electricity you use because – again – customers in deregulated states are always charged for the most expensive electricity on the grid,” he said.
“In traditionally regulated states, gas price changes are only impactful to the extent of the share of natural gas-fired generation in the regional electricity generation mix,” the PFT report said. “Because natural gas generation only represents about one-third of the generation in traditionally regulated states, changes in natural gas prices are significantly blunted on consumer electricity bills.”
At the same time, the theoretical promise of lower bills at times when gas prices tumble rarely comes true in restructured states because the nature of deregulated markets is to enable independent generators to charge their highest possible price for power; prices generally fall lower when electricity supply is abundant, but the generators can throttle back their production to avoid losing money. At the same time, any savings can be quickly erased by a day or two of high demand that sends power prices soaring once again.
“In other words,” Meltz said, “ratepayers living in restructured markets accept the risks of rapid-price shocks like we are experiencing today, but no cost-saving benefits any other time.”
The lion’s share of the media coverage of this fall’s gas spike in the Northeast centered around analysts and lawmakers bemoaning the tight pipeline capacity in the region. There was little the Biden administration could do but waive the Jones Act and hope it would attract additional – and expensive – LNG and heating oil cargoes at a time when shivering Europe was competing aggressively to replace its usual flows of gas from Russia.
Northeastern utilities this fall rushed to gain approval for substantial electric rate hikes and get them on the books in time for the heart of the winter. Connecticut’s Eversource Energy announced in November it was seeking a six-month residential rate of 24.2 cents per kilowatt hour (kWh) beginning Jan. 1, 2023, double the current price and well above 11.5 cents kWh a year ago; the result will be an $85 increase in the average monthly bill. Gas and electricity are both deregulated in Connecticut.
Penni Conner, Eversource chief customer officer and senior vice president of Customer Group, said in a release that the company did not mark up its power prices, and the company would work with distressed customers. “We are here to work with our customers one-on-one on ways to reduce their energy usage and connect them with assistance programs, flexible payment plans or other resources to help them manage their monthly bill,” she said.
The weather in New England eased up in early December and sent gas prices down to seasonable levels both on NYMEX and at the Algonquin Citygate; however, spring still seems a long way away, and restructured states will remain vulnerable to gas-market volatility in the future. The situation should make other states think twice about a regulatory regime that might encourage expanded generation at the expense of consumer protections.
