Canada: Review Sought Of Board’s Decision To Forbear From Regulating Gas Storage

The Ontario Energy Board (the Board) has received three motions to review its November 7, 2006 decision on regulatory forbearance in the Natural Gas Electricity Interface Review Proceeding, EB-2005-0551 (the NGEIR Proceeding). The Board’s decision in the NGEIR Proceeding is significant because it is the first time the Board has considered regulatory forbearance under subsection 29(1) of the Ontario Energy Board Act and the decision could set the course for future forbearance applications.

The NGEIR Proceeding was the culmination of a comprehensive sector review dealing with the convergence of the natural gas and electricity markets through the expansion of dispatchable gas-fired power generation. The storage requirements for dispatchable gas-fired power generators are very different from those of existing customers. While existing customers use storage for seasonal or daily balancing, generators want to use storage for intra-day balancing. Further, unlike existing customers, whose needs can be met with the standard deliverability service (daily delivery of 1.2% of storage space allocation), generators require daily deliverability as high as 10% of their storage space allocation

After settling a majority of the issues, the parties in the NGEIR Proceeding asked the Board to determine whether regulatory oversight was necessary to set storage prices and approve storage contracts with the two utilities that own and operate all of Ontario’s current gas storage facilities – Union Gas Limited (Union) and Enbridge Gas Distribution Inc. (Enbridge). The utilities argued the Board should forbear from regulating the gas storage under subsection 29(1) of the Ontario Energy Board Act, which provides that the Board "shall make a determination to refrain, in whole or part, from exercising any power or performing any duty under this Act if it finds as a question of fact that a licensee, person, product, class of products, service or class of services is or will be subject to competition sufficient to protect the public interest."

Consequently, the key issue in the proceeding was whether a competitive market for gas storage existed in Ontario, or if Union and Enbridge enjoyed "market power" (the ability to exert significant influence over the price or quantity of storage services available). In undertaking its analysis, the Board determined that the statutory test for forbearance under subsection 29(1) requires a "workably competitive" market and not perfect competition. The Board also pointed out that subsection 29(1) uses the words "is or will be," and the test is therefore a dynamic one that requires qualitative evidence to estimate the direction in which the market is moving.

Relying upon the approach to forbearance developed by other regulators in Canada and the United States, and on the Merger Enforcement Guidelines used by the Competition Bureau, the Board concluded that the storage market in Ontario is workably competitive. The panel’s conclusion was based on two key findings: first, there are non-storage products and services that provide reasonable substitutes for storage; and second, the geographic market for gas storage extends beyond Ontario and includes Michigan, northern Illinois, northern Indiana, and the National Fuel Gas territory in western New York and Pennsylvania. Using the measures of working gas capacity and maximum daily deliverability, the Board concluded that neither Union nor Enbridge have market power in this broader gas-storage market, even though they own and operate all of the gas storage in Ontario.

The Board then proceeded to consider whether forbearance was warranted under subsection 29(1). In doing so, the panel rejected the utilities argument that the existence of competition alone was sufficient to meet the test under subsection 29(1), and referred to this as "an inappropriate narrowing" of the concept of public interest. In the Board’s view, it was also necessary for it to consider other relevant legislative objectives, such as the facilitation of competition in the sale of gas to users, the protection of the interests of consumers with respect to prices and the reliability, the quality of gas service, and the facilitation of the rational development and safe operation of gas storage.

After examining these objectives, the Board concluded that they were best achieved through forbearance from regulation of contracts with Union and Enbridge within certain parameters. In particular, the Board concluded that competition for the storage market serving "ex-franchise" customers (those located outside the utilities’ franchise area that are generally considered to constitute the wholesale market) was warranted for both short-term (less than two years) and long-term contracts. The Board expects that competition will stimulate the development of new innovative services required by gas-fired generators, such as "high deliverability" storage. It also expects that generators will be able to acquire and sell excess capacity through the competitive market because there is demand for these new services from marketers.

However, the Board stated that this competition had to be coupled with effective regulation for the "in-franchise" market (which consists predominantly of residential customers and was historically considered the retail market). In addition, the Board acknowledged that the interests of electricity customers who use the services of the gas-fired generators could be adversely affected by developments in the competitive gas-storage market. To ensure that generators receive quality service from Union and Enbridge, the Board indicated that it would initiate a process to develop a Storage and Transmission Rule addressing non-discriminatory access, reporting requirements and the creation of a complaint mechanism for customers.

In reaching its conclusion to forbear, the Board also examined the impact of its decision on customers and concluded that there would virtually no effect on customers’ bills in 2007. The expected impact in future years will depend on future storage prices, the profit on ex-franchise storage sales, and the amount of gas consumed. While the Board acknowledged a precise forecast is not possible, its view was that bills for the typical residential consumer were likely to increase by around 1% by 2011.

Motions for review and variance of different aspects of the Board’s decision in the NGEIR Proceeding were filed by the City of Kitchener, the Association of Power Producers of Ontario and jointly by the Industrial Gas Users Association, the Vulnerable Energy Consumers Coalition and the Consumers Council of Canada. Amongst other things, the moving parties argue that the Board incorrectly concluded that there are competitive alternatives to gas storage and that the gas storage market extends beyond the borders of Ontario. The parties also claim that a review is warranted due to the significance of the decision and its impact on the prices consumers will pay for natural gas service. The Board has ordered the parties to make written and oral submissions on the threshold question of whether to conduct a review of its decision. A hearing of the motion on the threshold question is set for March 5, 2007.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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