The proposed federal investigation of this winter's high energy prices might turn up a result that would not surprise Walt Kelly's Pogo: "We have met the enemy and he is us."
Markets for natural gas and electricity have been low and quiet for five years, with the exception of this winter and last. Many consumers chose to be on market-based variable pricing, rather than locking in fixed or hedged pricing. Those who went with fixed have sailed through the winter price spikes in great shape. Those who remained with the utilities (which utilize variable pricing), or opted for variable pricing from an alternative supplier, got hammered.
Having watched this problem develop over nearly two years, and warned customers accordingly, I have a pretty good idea what the Federal Energy Regulatory Commission will find. It will find that energy producers are making a killing in this market because of market dynamics related to natural gas and electric pricing, exacerbated by the slow expansion of transmission systems.
As the Times Union has reported so well, the boom in shale gas has produced abundant supplies of a low priced and clean-burning commodity fuel for electric power. But pipeline capacity has not expanded rapidly enough to accommodate the increased demand that environmental requirements and economic savings have induced. Natural gas is traded as a commodity with prices constantly changing. When there is a natural gas supply scarcity, whether perceived or real, spot prices can increase dramatically, and did, to historically high levels this January. Electricity prices closely follow natural gas prices. And so we had the highest pricing since the dawn of deregulation more than 15 years ago.
The electrical grid has an analogous transmission capacity issue. In the 1990s, the competitive market system was superimposed onto the old utility grid. Transmission bottlenecks still restrict the flow of power during peak times between regions within New York state, forcing up prices downstream of the bottlenecks. Consumers in the Capital Region frequently pay 30 percent more for electricity than do folks in central New York, a hidden tax that can cost our local economy up to hundreds of millions of dollars in a single year.
Winter 2014 has been truly an eye-opener. Because the link between the natural gas and electricity markets grows ever closer, regulators need to be proactive in determining what needs to occur to mitigate these extraordinarily high consumer costs. Unfortunately, there is a perverse incentive for producers to maintain the status quo and reap the rewards of future high pricing events.
The interstate gas and electric transmission system is regulated by FERC, but FERC cannot order companies to build. It can only respond to transmission companies' proposals to build, then consider, evaluate, hold hearings and eventually approve.
The PSC has done an outstanding job of developing opportunities for consumers to choose effective pricing and supply options. But, like FERC, it is not authorized to order transmission infrastructure to be built in the absence of proposals from investors.
Environmental regulators are right to induce fuel switching away from coal, toward cleaner burning natural gas, and we want energy markets to work efficiently to keep choices open and costs controlled. But in order for society to benefit from both desirable outcomes, agencies at every level need to be more pro-active when it comes to infrastructure. I look forward to seeing the results of FERC's look in the mirror.
Gordon Boyd is an energy broker with EnergyNext, Inc., a Saratoga Springs firm that manages energy procurement for businesses and local governments in New York.