May 14, 2006
Winnipeg Free Press In an effort to shield consumers from fluctuating natural gas prices, the Manitoba Public Utilities Board has inadvertently created a trap for householders that could add as much as $10 million to the gas bills of consumers.
For many years, the PUB has focused its regulatory oversight of Manitoba Hydro’s gas delivery service on preventing householders from being directly affected by volatile wholesale market prices for gas. The PUB has ordered prices smoothed using financial averaging methods. In its last major decision on gas rates, the PUB decided that charging customers the real price for the energy they were consuming would constitute “rate shock” that “would have a deleterious effect on all residential customers.”
Board-ordered price smoothing has provided Manitoba consumers with misleading price signals. Under the price-smoothing approach, consumers are not directly hit by price spikes. Instead, consumers pay for price spikes later – in one recent case for almost two years later. Of course, delaying the payment adds interest costs to the final charge.
As the graph shows, the current smoothed price is right now affected by last winter’s price spike, repeating the pattern of the previous two price spikes this decade. The current regulated price is well above the market price – consumers are once again in a danger zone created by the provincial regulator.
Manitoba consumers can purchase their gas at the regulated price, or they can buy from marketers. The marketers usually offer fixed-priced, four- or five-year contracts for customers seeking price stability.
Gas marketers selling gas at fixed prices can buy corresponding volumes of gas in the natural gas futures market. Typically, as a marketer signs a group of customers to sales contracts, the marketer simultaneously enters into futures contracts to buy equal volumes of gas on a matching delivery schedule. The spread between the futures market price and the contract sales rate to customers is then locked in. Banks earn income in a similar way from the spread between borrowing and lending rates.
For the gas market place, the spread between the futures market price at some point in time and a marketer’s contract prices available to consumers at the same time is a quantitative measure of the marketing premium embedded in contract prices. The premium marketers charge for price security is steep.
The price marketers are offering to Manitobans now are priced 27 per cent to 33 per cent above the corresponding futures market prices.
However, with the regulated price now artificially pegged well over the market price, marketer offers will seem attractive to many consumers. Low-income consumers concerned about rising natural gas costs may be particularly vulnerable.
The Public Utility Board will not adjust the price until August, although market prices for gas are now plunging. With market price plunging, the prices offered by marketers are on track to drop below the regulated price – an event that has previously occurred in Ontario causing significant harm to some consumers.
Data on consumer contracting trends from Ontario, where the regulator has created a similar trap for consumers, indicates that an unusual number of consumers have responded during episodes of artificially high regulated prices by fleeing from regulated prices to marketer offerings. During 2001/2002 when regulatory smoothing in Ontario raised the regulated price above market value, about 25 per cent more customers than usual moved to marketer contracts. Many of these customers signed very high priced contracts.
With market prices tanking, the 2001/2002 experience might be repeated. If Manitoba customers moved to marketer contracts at half the rate Ontario customers did in 2001/2002, the overall impact would mean expected Manitoba-wide gas costs for residential customers would rise by approximately $12 million.
Paradoxically, the regulatory trap was created by the Public Utilities Board following the advice of the Manitoba branch of Consumers’ Association of Canada and the Manitoba Society of Seniors but over the objections of the marketers who, to their credit, have steadfastly advocated before the board more accurate, unsmoothed regulated pricing.
The Public Utilities Board’s folly is in danger of becoming more permanent. The board’s gas pricing ideas are the basis of legislation now before the provincial legislature. Bill 11, the Winter Heating Cost Control Act, was introduced last November but has not yet passed. Energy, Science and Technology Minister Dave Chomiak’s press release Jan. 30 points out that the “legislation follows the Public Utilities Board’s suggestion that Manitoba Hydro/Centra Gas smooth price increases.” Bill 11 would freeze winter natural gas prices, with the costs to be recovered either later, or from profits on electricity sales.
Increasing expected home heating costs is not the only consequence of the board’s folly – by suppressing prices to consumers during times of constrained continental natural gas supplies, it is also suppressing the energy conservation efforts of consumers. The board appears to have recognized this unfortunate anti-conservation impact. To remedy the harm, the board recorded in its Jan. 31 order on gas prices that it “is repeating its plea for these consumers to undertake energy efficiency initiatives as soon as possible.” Who knows how many customers closely observe the board’s decisions? Probably not many but more than the number so moved by its plea as to take conserving actions while being signalled not to.
Tom Adams is the executive director of Energy Probe, a national consumer and environmental think-tank.