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Ontario Plans Some Changes to Gas Regulations

The Ontario Energy Board (OEB) announced plans last week for some changes to its natural gas regulations, including a new multi-year incentive rate plan for utilities and an examination of whether to regulate gas storage rates and services to ensure optimal service to power generators. The board issued a basic framework on Wednesday for implementation of the regulatory changes over the next several years.

The changes planned are among many issues discussed over the last year at the energy board's Natural Gas Forum, which included input from a large number of industry representatives, including utilities, marketers, associations, storage developers, consumers and others.

Among the more significant factors that will influence the province's natural gas industry over the next decade is the regulatory decision last year to shut down all of its coal-fired power generation, as much as 7,500 MW, for environmental reasons.

The OEB said it wants to "ensure the infrastructure assets, services and rates are aligned to effectively serve" the rising demand from gas-fired power. It said it intends to hold a number of hearings on the changes that are expected.

"The government is about to award the first 2,500 MW through an RFP probably about the middle of [this] month," said Rick Birmingham, vice president of marketing and regulatory affairs for Union Gas, one of the provinces two large gas utilities -- Enbridge Gas Distribution is the other. Birmingham noted that those power plants probably will go into service in 2007 and 2008.

"There will have to be an expansion of gas transportation capacity. For this first RFP, there is enough upstream capacity and we do have capability to expand our transmission system. We've already got some proposals out into the market on that basis."

One of the things regulators will want to examine in hearings is the level of firm contracting for transportation capacity by power generators. Another issue is whether to charge all storage customers market-based rates. Currently franchise utility customers pay cost-based rates and off-system customers pay market rates.

Based on industry input during the Natural Gas Forum, the board also determined that a multi-year incentive rate plan with terms of three to five years and annual rate adjustments was appropriate for the province's utilities. The board is planning a hearing process to determine the methodology for annual adjustments under the incentive rate plan. Also to be determined will be the base rates of each individual utility.

Union Gas has been advocating multi-year terms for incentive rates for "the better part of about seven years now," said Birmingham. The utility had a trial performance-based rate regulation framework in place from 2001 to 2003. "We've been advocating for the next generation of that and according to this report the board is going to set out reviews to determine the parameters of that framework, but it won't start until 2009 or later, which is a bit of a concern for us."

The regulators also said last week that utilities should continue providing regulated gas supply services, but the costs of regulated supply should be reviewed "in order to make it easier for consumers to compare their options in the marketplace." The board is not in favor of utilities entering into long-term supply agreements, but is open to long-term transportation contracts with pipeline companies.

About 60% of Union Gas's customers buy gas directly from the utility. However, 90% of the volume transported on the utility's pipeline system is purchased by someone other than the utility, which is part of the reason regulators were not inclined to allow utilities to sign long-term supply contracts.

Birmingham said he doesn't see any "immediate" impact on utilities from the board's plan. The devil, if there is one, could be in the details, which are still to be worked out. The board has set out a timetable for the different processes and review. It will start later this year and end roughly at the end of 2008.

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