As natural gas prices have decreased in the United States, electricity market operators’ reliance on gas-fired generation to serve consumers’ needs has steadily increased. This increased reliance has sharpened the focus on significant impediments resulting from a somewhat disjointed relationship between the electric and natural gas industries. These impediments, in concert with weather events and maintenance scheduling, have resulted in generator unavailability during times of system stress due to, among other reasons, a lack of consistent fuel supply. There has been no shortage of finger-pointing on this front among system operators, natural gas pipelines and suppliers, and generators with capacity obligations.

As the regulatory body tasked with ensuring the reliable operation of the Nation’s bulk electric system, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) has initiated a coordinated effort among the Nation’s organized electricity markets to facilitate solutions to the present incongruities between the gas and electric markets. To that end, FERC convened an open meeting on May 16, 2013, to discuss efforts currently underway to improve coordination between the natural gas and electric industries. Enhanced coordination among these industries has become a key issue for FERC and regional market administrators alike—primarily to address reliability concerns, to ensure that rules are being followed, and to consider whether enforcement actions are necessary.

These efforts have already resulted in changes, and likely portend more significant changes for participants in both industries in the near future. For example, participants should expect market design changes to incentivize firm (rather than spot or interruptible) gas supply agreements, increased pipeline infrastructure in some markets, and greater attention to fuel procurement practices by generators.

The May 16th open meeting was the first opportunity for representatives from each regional transmission organization (“RTO”) and independent system operator (“ISO”) to gather and “report” on their respective efforts to address coordination between the natural gas and electric industries, as well as their individual experiences during the 2012-2013 winter/spring seasons. A similar meeting is scheduled for October 2013 to report on experiences during the summer/fall seasons.

It was apparent from the various reports that some regions face more imminent reliability concerns stemming from a lack of coordination and pipeline infrastructure concerns, while other regions are less impacted and have a better runway to any anticipated issues.

Background

Motivated by the electric outages and natural gas service curtailments that impacted the Southwestern United States during the first week of February 2011, FERC sought comments in Docket AD12-12 on the interdependency of and coordination between the natural gas and electric industries. FERC’s request for comments reflected its recognition—particularly that of Commissioners Moeller and LaFleur—of the electric industry’s increasing reliance on natural gas as a fuel source. FERC thereafter convened a series of regional technical conferences to collect more information from participants in both industries. These technical conferences focused primarily on three topics: (i) scheduling and market structure/rules relevant to both industries; (ii) communication, coordination and information sharing practices between the gas and electric industries; and (iii) overall reliability concerns.

Participants at these regional technical conferences discussed the “significant industry efforts” underway to develop and implement solutions to address predominantly region-specific gaselectric coordination issues. In several cases, these initiatives have been led directly by the ISOs and RTOs. For example, ISO New England (“ISO-NE”), which administers a region that has expressed significant reliability concerns stemming from increased reliance on gas-fired generation, has begun implementing phased market changes to address issues of resource performance and fuel procurement. Most recently, ISO-NE modified its market rules to shorten the closing time of its “day-ahead” energy market (where resources receive their expected operating schedule for the next day).1 By shortening the day-ahead market, generation resources will have more time to procure gas within the pipelines’ scheduling windows—which are significantly different from that of the electricity industry. ISO-NE will present additional intermediate and long-term market changes during the next several quarters, including plans to transform New England’s forward capacity market into a “pay for performance” market that will penalize generators that do not perform when called.

ISO-NE has also threatened that its existing market rules require more “robust” fuel procurement practices than it has witnessed among market participants that have existing resource performance obligations, including offering available capacity into the energy market on a daily basis and complying with dispatch instructions, absent unanticipated occurrences. According to ISO-NE, during certain reliability events, market participants have not followed dispatch instructions (for both energy and reserves) because of inadequate fuel supplies, implying potentially faulty fuel procurement practices. Indeed, ISO-NE has remarked that if it continues to observe a failure to follow generation dispatch instructions, it will alert its market monitor and compliance functions. Participants at several of the regional conferences discussed the role of the ISOs/RTOs in addressing gas-electric coordination issues. In particular, some participants questioned whether electric generators participating in the organized wholesale markets administered by ISOs/RTOs have sufficient market incentives to deliver firm energy, and discussed certain elements of the dayto- day operation of the wholesale electric markets that do not adequately align with the operation of the natural gas markets. It is on the basis of these discussions that FERC directed each ISO/RTO to appear before it on May 16, 2013, and again on October 17, 2013, “to share its experiences from the winter and spring, and summer and fall, respectively.”2

The May 16th Open Meeting

Representatives from each ISO/RTO reported on the specific gas-electric coordination issues affecting their respective markets, and some of the operational issues experienced during the 2012-2013 winter/spring seasons. FERC’s goal, in part, was to facilitate an open forum that could allow the various market operators to learn from their collective experiences and proposed solutions. Summary points from each of the presentations follow below.

During the presentations, certain Commissioners commented directly on the future of gas-electric coordination. Commissioner Moeller remarked that he was pleased by comments made by members of the pipeline industry at earlier technical conferences indicating their receptiveness to increased coordination with the electric industry. Commissioner LaFleur stated that future efforts will likely need to address how to value fuel security in competitive marketplaces, particularly with natural gas poised to become the predominant fuel source for electric power generation in much of the United States. Commissioner LaFleur questioned whether a “limit” exists as to the amount of gas-fired generation that should be relied upon to serve consumer needs. Commission Clark acknowledged ISO-NE’s plan for relatively “aggressive” changes for the near-term and questioned whether the parallel stakeholder process will hinder that schedule. ISO-NE responded that the consensus building process among stakeholders is always an issue, but that ISO-NE will continue to attempt to keep its stakeholder process on schedule.

California Independent System Operator Corp. (“CAISO”)

  • CAISO stated that while there is not a significant amount of new gas-fired generation being constructed in the CAISO control area, it anticipates increased reliance on existing gas-fired resources by virtue of the increased role of intermittent/renewable resources in meeting CAISO’s generation requirements.
  • Over the last several years, CAISO has embarked on significant efforts to increase coordination with natural gas pipelines, and expects to continue these efforts going forward. CAISO has adopted an operating procedure to help guide interaction between CAISO personnel and natural gas pipelines, both on immediate and longer-term issues, including maintenance schedules.
  • CAISO does not foresee transportation or supply issues for the upcoming summer months.

The Electric Reliability Council of Texas, Inc. (“ERCOT”)

  • ERCOT reported that four minor gas supply or restriction events occurred in Texas in December 2012 and January 2013. Because of the presence of sufficient alternate generation, none of these events required ERCOT to take any extraordinary operational measures.
  • The rotating outages that occurred during February 2011 were predominantly due to generating unit outages, and not fuel supply disruptions. There has been significant pipeline construction in the Barnett and Eagle Ford shale plays in the last 10 years.
  • Since 2012, ERCOT has worked with the Texas Pipeline Association and the Texas Railroad Commission to incorporate the location of significant gas facilities into ERCOT’s electric network model in order to study the potential impact of electric outages on pipelines and pipeline outages on generators.
  • ERCOT emphasized the importance of increased information exchange between ERCOT, electric generators and pipelines to ensuring adequate gas-electric coordination and situational awareness of gas supply reliability.

ISO New England Inc. (“ISO-NE”)

  • ISO-NE reported that throughout January 2013, high demand for natural gas driven by sustained cold temperatures limited the availability of natural gas from the west. As a result of higher gas prices, generators utilized re-offer provisions to reflect updated fuel prices in their offers. ISO-NE was required to commit additional generation, including from oil generators with low oil inventories, due to the failure of some gas-fired generators to perform in accordance with their generation offers.
  • ISO-NE experienced several operating issues related to gas-fired generation resources not being available due to fuel. More than 6,000 MW of gas- and oil-fired became unavailable on February 8th and 9th either due to storm-related outages or because of a failure to obtain fuel.
  • ISO-NE reported that it began information sharing with natural gas pipelines in January 2013 and will shift the close of the Day Ahead Energy Market in May 2013.
  • ISO-NE emphasized that adequate situational awareness is difficult to achieve in the context of intra-day gas procurement because of the varying flexibility of pipelines to allow generators to schedule gas deliveries. This difficulty will likely become more pronounced as intermittent/renewable generation is increasingly relied upon to meet generation requirements.

Midwest Independent Transmission System Operator, Inc. (“MISO”)

  • MISO did not experience any significant operating events during winter 2013. MISO attributes this to the fact that it is primarily served by coal and nuclear generation during the winter season (and uses natural gas predominantly to meet marginal requirements). Almost 10 GW of coal capacity will need a 1-year extension period for environmental compliance measures.
  • When considering energy contribution by fuel source in MISO, 2013 shows a trend closer to that of 2011, given an increase in gas price from 2012 levels.
  • MISO’s Electric and Natural Gas Coordination Task Force is studying the probability of loss of load as related to increased reliance on gas-fired generation resources, and is developing issue papers on gas operating day and electric operating day scheduling, and coordinated operations.
  • MISO anticipates using significantly more natural gas to generate electricity in the future and that this trend will require changes to both pipeline infrastructure and market rules.

New York Independent System Operator, Inc. (“NYISO”)

  • The NYISO control area experienced a moderate “cold snap” from January 21-26, 2013. While imports to NYISO were reduced, in part, because of de-rated gas supplies and a lack of oil inventory, NYISO met its reserve requirements and transmission security requirements.
  • Nearly 74% of the de-rates that occurred during the January cold snap were fuel-related. During the rest of January, the percentage of fuel-related de-rates was approximately 26%. For February and March, the percentage of fuel-related de-rates dropped to 20% and 9%, respectively.
  • During specific system conditions, including anticipated extreme cold weather, NYISO is monitoring: day ahead gas scheduling by gas-fired units with commitments to operate next day; alternate fuel inventories; the certainty of certain electric import transactions on cold days; and the necessity of non-gas-fired generator reliability commitments.
  • NYISO’s Electric Gas Coordination Working Group continues to hold open discussions with pipelines, gas suppliers, generators and local distribution companies on issues including: timing processes; scheduling; nomination; balancing; and gas operating day timing.

PJM Interconnection, LLC (“PJM”)

  • PJM reports that it is positioned for growth in gas-fired generation.
  • PJM states that communication between ISOs/RTOs and state and federal agencies has been invaluable in increasing situational awareness of gas supply reliability and that further cooperation and transparency among the ISOs/RTOs and state and federal agencies could promote increased harmonization between the electric and gas industries.

Southwest Power Pool, Inc. (“SPP”)

  • SPP did not experience any reliability-impacting events during the 2012-2013 winter/spring seasons with regard to gas supply. Further, SPP does not expect any significant reliability concerns for the upcoming 2013 summer season thanks to a forecast of abundant generation supply and a near-normal load pattern.
  • SPP formed a Gas-Electric Coordination Task Force in 2012 that works in cooperation with SPP member representatives, representatives from gas pipelines and various state regulatory commissions with the objective of enhancing its current situational awareness of gas supply reliability.
  • Situational awareness enhancements undertaken by SPP to date include (i) the development of coordinated communication plans during gas supply events, and (ii) the identification of any single-point-of-failure concerns in the SPP region.
  • SPP emphasized that any FERC-initiated rule or policy changes resulting from this process should be regionally tailored and flexible as opposed to a one-size-fits-all approach.