OEB pushes back on uneconomic gas expansion

The Ontario Energy Board blocked a push by the gas utilities for uneconomic expansion projects that would have raised rates for the province’s gas customers.

The Ontario Energy Board (OEB) has blocked a push by the province’s largest natural gas companies to allow an uneconomic expansion of the gas grid that would have raised rates for Ontario gas consumers. The move is detailed in the OEB’s decision in the recently concluded gas expansion hearing that examined proposals from both Union Gas and Enbridge on how to expand the gas grid to towns and other parts of the province where it is currently uneconomic to do so.

One of the key – and contentious – components to both applications from the utilities was that they charge current gas customers a surcharge to help offset the cost of building the grid out to other parts of the province. Doing so would go against nearly two decades of regulation in Ontario that has explicitly prevented gas utilities from using their monopoly power over current customers to charge more than it costs to service them and then use that extra money to lower costs for new customers.

In its decision, the OEB reinstated its belief that allowing such cross subsidies was “not appropriate” and would “distort the market” for competing energy providers, such as propane companies and new gas companies looking to enter Ontario’s gas market. The OEB also highlighted the hundreds of millions of dollars that new customers could save if they were to switch to natural gas (from electricity, oil and other forms of energy). According to evidence submitted in the hearing, the average annual savings to a household switching to natural gas is $1,600.

The OEB concluded, rightly, that those “substantial savings” should be paid for by the communities and customers that would enjoy lower energy costs for years to come. The OEB appears to have ignored or downplayed evidence from the utilities that such cross subsidies would benefit the province as a whole in the form of greater economic activity.

The one major change that the OEB did agree to was to allow the gas utilities to charge what is known as “stand alone” rates to communities or customers that want to connect to the gas grid. Currently, the utilities charge “postage stamp” rates, meaning all customers of each utility pay the same rate, regardless of where they live in the province (Union Gas is split into a North and South rate given the geographic size of its customer base, which spans from northern to southern Ontario). When either utility wants to expand to a new community or company, it must use the same rate that it charges everyone else to see if it’s economic – meaning the cost of expansion would be paid completely by new customers through rates and not require any cross subsidies.

Instead, the OEB will now allow the utilities to design a separate, higher rate for the new communities that would still allow them to lower their energy costs by switching to gas, but avoid having current customers subsidize that switch.

Download our final argument from the hearing, in which we detail why allowing cross subsidies is poor regulation and would go against the OEB’s mandate to act as an economic regulator.

Brady Yauch is the executive director and economist at the Consumer Policy Institute, a division of Energy Probe Research Foundation.

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