One of the biggest ignored threats to the power sector – and to electricity delivery to homes and businesses across much of the country’s most populated regions – is from a lack of natural gas pipeline capacity. A former federal regulator is warning that this issue, arcane at first glance, could prompt market failure and a crisis of reliability for some generators.

The free market is a funny thing; it works only over time and often in socially unpopular ways. The energy market in the US has been regulated, de-regulated and re-regulated over its history, but all market participants are operating in the context of rules set up to balance policy priorities and operating realities.

As those realities change, as they have with the environmental movement politically and the natural gas shale revolution operationally, market rules set up by regulators have to evolve. And no one said change was easy.

Production of shale gas has soared in recent years as hydraulic fracturing has expanded availability of the once-pricey fuel. As prices for natural gas have fallen at the same time that new environmental rules render both old but reliable coal and comparatively expensive and polluting oil-burning plants less competitive, generators have understandably leaned much harder on natural gas. Even nuclear power plants, which once set the lowest prices for off-peak power delivery at nights or other low-demand times, are now facing competition from nearly free wind power often available at the times of day nuclear used to rule.

The electric industry has not fully embraced changes to fuel supply wrought by the shale revolution.

The reliance on natural gas wouldn’t be a problem today but for the lack of delivery capacity to much of the country, but particularly the US Northeast and New England, former Federal Energy Regulatory Commissioner Marc Spitzer told Breaking Energy this week. Spitzer, now partner at law firm Steptoe & Johnson, says that current regulators face a real conundrum built into current mis-matched market structures.

Spitzer sketched out the problem this way: Power producers use short-term markets to sell their electricity under current rules in “deregulated” markets. They are reliant on natural gas sold in two ways by pipeline companies, one under long-term contracts that guarantee availability and one under “interruptible” service that is cheaper, but in times of high demand can be shut off in favor of the longer-term customers.

The ideal would be to have utilities buy the more expensive service that guarantees they can get natural gas to produce power at all times. But because of their short-term markets, and because current rules prevent them from passing costs to access “firm” natural gas supply on to customers, they are stuck with cheaper “interruptible” service.

“The business models are completely unaligned,” Spitzer said. “It may take a blackout” to resolve the issue, which is politically difficult for regulators.

New England customers are hesitant to pay more to pipeline operators, who they perceive as “rich Texans,” Spitzer said. In turn, competing pipeline infrastructure has trouble getting approved; just look at the Keystone debate for an illustration of the complexities around permitting and building pipelines. “Pipeline capacity isn’t getting built, and that situation is replicable across the country,” Spitzer warned.

Thus pipeline capacity is swiftly in turn becoming an electric reliability issue. “And the market is not signaling the correct pricing” to resolve the issue for the “social good of treating the pipeline like a big storage tank,” Spitzer said.

The problem currently is one for the New England ISO, but because that body is in turn regulated by FERC and the infrastructure in question crosses state lines where it isn’t already regulated by the federal government, the looming market failure is swiftly becoming a FERC headache.

Spitzer expects the commission to eventually resolve the issue, but observers of the organization are not holding their breath for a fast solution. The collapse of the California energy markets 13 years ago triggered years of investigation and legal wrangling as well as the bankruptcy of major local power providers. The hope this time is that FERC gets out in front of the failure before it makes headlines.