Report: Eversource artificially constrained gas pipeline capacity

EVERSOURCE ENERGY and Avangrid Inc. participated in a scheme to artificially constrain natural gas pipeline capacity in New England and drive up electricity prices by $3.6 billion over three years, according to a report posted Wednesday on the website of the Environmental Defense Fund.

Eversource vehemently denied it engaged in any behavior to artificially constrain gas pipeline capacity. “This ‘report’ was published earlier this year and is a complete fabrication as evidenced by the lack of credibility it has received in the industry,” said spokesman Michael Durand. “The underlying concept is not only false and misleading, but concerningly irresponsible as it lacks any understanding of how gas procurement actually works.”

A spokeswoman for Attorney General Maura Healey said “the actions in this report are concerning. We are reviewing the report.”

The report, written by four researchers at the Environmental Defense Fund, the University of California San Diego, the University of Wyoming, and Vanderbilt, appears to undercut a central theme of the pipeline debate that has been roiling New England for close to four years.

Industry officials says a shortage of pipeline capacity in New England during winter months, when demand for natural gas to heat homes is the highest, leads to a shortage of natural gas for electricity generation.  Many in the industry say additional pipeline capacity is needed to alleviate the spot shortages and bring the price of both natural gas and electricity down.

The researchers, examining the flow of natural gas through the Algonquin Pipeline, which runs from New Jersey to Massachusetts, provided an alternative view. They discovered irregularities involving purchases by two gas utilities owned by Eversource and Avangrid. The utilities, according to the researchers, routinely placed large orders for natural gas and then sharply reduced those orders at the last minute over the three-year period from August 1, 2013, to July 31, 2016.

“This behavior blocks other firms from utilizing pipeline capacity, which artificially limits gas supply to the region and drives up gas and electricity prices,” the report said. “We estimate that capacity withholding increased average gas and electricity prices by 38 percent and 20 percent, respectively, over the three-year period we study. As a result, customers paid $3.6 billion more for electricity.”

The report, entited “Vertical Market Power in Interconnected Natural Gas and Electricity Markets,” did not name the Eversource and Avangrid subsidiaries, but Eversource owns gas distribution utilities in Connecticut and Massachusetts, while Avangrid owns gas distributors in Connecticut, Maine, and Massachusetts (Berkshire Gas).

The researchers were less clear about why Eversource and Avangrid placed orders and then sharply reduced them at the last minute. Indeed, a press release about the report issued by the Environmental Defense Fund said it was not known why the companies did what they did.

The report, however, seemed to suggest that Eversource and Avangrid wanted to drive up gas prices to raise the prices of rivals in the electric generation business, which would have the effect of steering business to company-owned power plants that didn’t rely on gas.

“The two firms observed to withhold capacity also own large portfolios of electric generation units located in the region, giving them an incentive to increase gas prices in order to raise rivals’ costs (Salop & Scheffman, 1983),” the report said. “That is, by restricting sales of a necessary input to production for their downstream competitors in the wholesale electricity market, the capacity-withholding firms increased the quantity of electricity their largely non-gas units were called upon to generate and the price those units earned.”

Durand, the spokesman for Eversource, said the allegations in the report were unfounded.

“Our gas distribution business is carefully regulated and the gas supply we purchase for our customers is a strict pass-through cost – meaning we don’t benefit from higher prices derived from withholding. Again, this is well understood in the industry and is further evidence that the report is not credible,” he said. “Eversource revenue related to the regulated electric generation facilities we own and operate in New Hampshire is the same no matter how often the power plants run. The plants would not produce more revenue for Eversource as a result of gas capacity issues, as the report falsely alleges.

He added: “The pipeline capacity we reserve is done so to meet the needs of our customers, no other purpose. We do not engage in any behavior to ‘artificially constrain capacity.’ Our focus and actions are driven by our responsibility to ensure our customers have enough gas – we can’t run the risk that they are left in the cold. “