Vertical Market Power in Interconnected Natural Gas and Electricity Markets

Levi Marks, Charles Mason, Kristina Mohlin and Matthew Zaragoza-Watkins

No 17-27, RFF Working Paper Series from Resources for the Future

Abstract: New England is at the leading edge of an energy transition in which natural gas is playing an increasingly important role in the US electricity generation mix. In recent years, the region's wholesale natural gas and electricity markets have experienced severe, simultaneous price spikes. While frequently attributed to limited pipeline capacity serving the region, we demonstrate that such price spikes have been exacerbated by some gas distribution fi rms scheduling deliveries without actually flowing gas. This behavior blocks other fi rms from utilizing pipeline capacity, which artificially limits gas supply to the region and drives up gas and electricity prices. We estimate that capacity withholding increased average gas and electricity prices by 38% and 20%, respectively, over the three-year period we study. As a result, customers paid $3.6 billion more for electricity. While the studied behavior may have been within the fi rms' contractual rights, the signifi cant impacts in both the gas and electricity markets underscore the need to improve regulation and coordination as these two energy markets become increasingly interlinked.

Date: 2017-12-28
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Working Paper: Vertical Market Power in Interconnected Natural Gas and Electricity Markets (2017)
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