Hydro hijinks in Ontario come to natural gas

(June 8, 2018) Regulatory principles in Ontario’s gas sector are being eroded and the costs will start to mount for customers.

This article first appeared in the National Post.

A lack of accountability, little transparency and a rush to support “renewable” investments at any cost has decimated Ontario’s electricity sector — leading to soaring bills, consumer backlash and a policy designed solely to kick billions of dollars of today’s costs to our children and grandchildren. Now, the province’s gas sector appears to be next in line for Queen’s Park’s energy transformation agenda. Gas consumers should be nervous.

To date, Ontario’s gas utilities have been a positive counterpoint to the electricity utilities in how to manage an energy sector and avoid the ignominy of scathing headlines, public outrage and soaring monthly bills. They did so largely because regulatory principles enabled them to maintain a competitive, financially viable and customer-oriented utility and the regulations were upheld at the same time as they were torn down in the electricity sector. But those principles are quietly being eroded and the costs of that erosion will start adding up.

The first knock to customers came from the Ontario Energy Board (OEB), which decided to bury the cost of the province’s recently implemented cap-and-trade system in the “delivery” line of customers’ monthly bills. Groups — ranging from large, industrial customers to low-income organizations — argued that customers have a right to fully understand the monthly bill impact of Ontario’s cap-and-trade policy. They argued that the cost should be just as clearly visible on monthly bills as that of charges like the Debt Retirement Charge and provincial handouts like the Clean Energy Benefit, the scrapping of the provincial sales tax rebate and, more recently, the Fair Hydro Plan.

If consumers get to clearly see what kind of handouts Queen’s Park offers them, they have just as much of a right to see what costs the legislature imposes on them. Unfortunately, the OEB directed the utilities to bury that charge among other delivery costs, hiding the monthly cost of a provincial policy.

The second, much larger knock comes from the province, which has encouraged the utilities to procure uneconomic supplies of “renewable natural gas,” which is an upgraded form of bio-gas. Ontario issued that directive in its Long-Term Energy Plan (LTEP), a Ministry of Energy-led document that lays out the legislature’s vision for the future of the energy sector. The utilities currently buy natural gas on the open market and pass that cost — with no markup — to consumers. As a result of the fracking that has revolutionized North America’s energy sector, natural gas prices are at some of their lowest levels in decades. Consumers in Ontario have directly benefited from those falling prices, as the gas utilities have directly passed those benefits on.

So-called renewable natural gas, in contrast, is wildly expensive. Early estimates from the utilities show that it’s more than five times more costly than buying natural gas at market rates. Given that the “renewable” natural gas business is in its infancy, those costs could turn out to be much higher.

Who will be on the hook for paying that significant premium?

The gas utilities maintain that their customers will be held “harmless” because the difference between the cost of traditional and renewable natural gas will be covered by funds from the province’s cap-and-trade program. Yet, it’s natural gas customers that will be paying a large portion of those cap-and-trade proceeds through their monthly bills.

Between Union Gas and Enbridge — which are applying to merge their operations — natural gas customers will be paying more than $650 million this year alone in cap-and-trade costs. This excludes the millions of additional administration costs needed to oversee the cap-and-trade, but will also eventually be paid for by ratepayers through their monthly bills.

That means a significant chunk of the cap-and-trade money used to cover the high costs of renewable natural gas will be coming from a fee paid by all gas customers. This is little more than robbing Peter to pay Paul.

Worse still is that it is an incredibly expensive way to lower carbon emissions. Early estimates from the utilities suggest that each tonne of carbon reduced through using renewable natural gas will cost more than $327 — or more than 18 times the current cost of carbon credits in the province’s cap-and-trade system. There is no economic justification for this program based on the province’s climate-change policies.

But economic efficiency and cost-effectiveness — two policies that have been in short supply in the electricity sector — play no role in this policy. Unfortunately for gas customers, that’s a break from the past.

Brady Yauch is the executive director and an economist at the Consumer Policy Institute. bradyyauch@consumerpolicyinstitute.org

This entry was posted in Natural Gas Utility Regulation and Commodity Deregulation and tagged , , , , . Bookmark the permalink.

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