In continued response to a December 2023 decision of the Ontario Energy Board (OEB), the Ontario Minister of Energy has now introduced an act politically entitled the Keeping Energy Costs Down Act. The legislation would not, however, reduce overall energy costs. Rather it would empower the government to determine who should pay those costs. In that respect, the legislation would empower the government to reverse not only the recent OEB decision, but also the next one.
The continuing political/regulatory tension reflected in the proposed legislation arises from a comprehensive decision issued on December 21st, 2023 by the OEB on an application by Enbridge Gas Inc. for approval of gas distribution rates commencing January 1, 2024.
The Minister of Energy's initial response
Early the following day Ontario's Minister of Energy released a statement expressing that he was "extremely disappointed" with the OEB's decision regarding a new policy on recovery of the costs of new gas connections (referred to as the "revenue horizon"), and that he was concerned that the OEB's determination on this point "could lead to tens of thousands of dollars added to the cost of building new homes, and…would slow or halt the construction of new homes, including affordable housing."
That concern is reiterated in the backgrounder issued by the Ministry with the proposed Keeping Energy Costs Down Act. That backgrounder states:
"… the OEB made the decision that for small volume customer connections, such as homes and small farms and businesses, the revenue horizon over which gas utilities use to calculate the upfront cost of new connections for customers would be reduced from forty years to zero, effective January 1, 2025. As a result, new customers would have to pay 100 per cent of the cost to connect up front, costs that would have otherwise been paid over forty years. This change could increase the cost of new homes in the province by tens of thousands of dollars, particularly in rural areas, and would limit customer heating choices in Ontario."
The Minister also doubled down on his criticism of the OEB in publicly referring to the December decision as rushed and irrational. It was neither.
The OEB process and decision
The decision was the result of a thorough public hearing process which involved more than a year of review, thousands of pages of company and expert evidence, a comprehensive oral hearing and a thorough process for submissions by Enbridge Gas, OEB Staff, and a number of informed and expert customer and public interest intervenor representatives. The comprehensive, well-written and fully reasoned decision is 147 pages long (including a three page partial dissent).
The uncontested evidence before the OEB was that the average cost to connect new homes to the gas distribution system is $4,200 (though this would be higher, as the Ministry backgrounder notes, in rural areas). Not publicly noted by the Minister is the companion direction in the same OEB decision that Enbridge Gas develop a rate credit to ensure that customers who buy houses where the connection costs have already been paid will have their gas rates reduced, resulting in what the OEB determined should be "a wash" for customers. While the total home ownership cost would not be increased for these customers, the up-front payment of these costs does do three things:
- It means that builders no longer get new gas hookups for free, thus encouraging them to make an economic choice regarding whether to hook houses up to gas, or not (depending on the availability of electricity to run now cost effective electric heat pump alternatives).
- It means that whether builders opt for new gas hookups or not, Enbridge Gas does not add the cost of new gas hookups to its asset base on which it earns a return, thus slowing the growth of that asset base by a range of a billion dollars over the course of the next five years.
- In so doing, it reduces to zero the risk to all gas customers of stranded assets for new connections made in 2025 and beyond.
Enbridge Gas in its motion to the OEB for review of the decision has raised the question of why its shareholder would bother to engage in tens of thousands of new gas hookups a year if it could not earn any profit from that activity. That is a good question, and one that the Ontario government might well be concerned about. Being clear about the real question would certainly assist in considering the appropriate government policy response.
The Minister's further response; the Keeping Energy Costs Down Act
One of the main features of the Keeping Energy Costs Down Act is to allow the government to reset the way that the costs for new gas connections are recovered. The accompanying backgrounder indicates that the Minister intends to legislate a return to the current 40-year period over which these costs, and the return on investment that Enbridge makes in incurring them, would be paid, and then to ask the OEB to review the issue again in light of clearer government policy direction on the role of natural gas in Ontario's energy transition.
Concern has also been expressed that some key stakeholders on the topic – including the Independent Electricity System Operator (to speak to the impact of energy consumers moving en masse from gas furnaces and water heaters to electric heat pumps) and new home builders – did not have their say in the proceeding that led to the OEB's December decision (though the IESO was a registered party). The legislation would empower the Minister to direct who should be involved when the OEB next considers the issue.
The Keeping Energy Costs Down Act would, however, go much further. It is written to empower the Minister to directly intervene in more OEB cases, including in particular a case which is currently before the OEB regarding an Enbridge project in the Leamington-Windsor area called the Panhandle Regional Expansion Project (PREP).
There was a vigorous debate in the hearing for that project regarding – once again – who should pay the $290 million forecast cost for the project. Enbridge argued that the evidence is clear that the project will serve customers across the entire Panhandle gas transmission system in southwestern Ontario, and its cost is appropriately recovered from all customers. That would mean that customers served by other, separate transmission pipelines – such as the Sarnia Industrial Line – who Enbridge concedes would see no benefit from the project, would also pay, to the tune of millions of dollars a year. Others argued that the evidence is clear that the project is being built for 34 specific industrial size greenhouses and two specific gas-fired power generators, and those businesses should pay the cost of the project from which they, and only they, will directly benefit.
In the normal and appropriate course, the OEB would decide what the evidence clearly reveals, and it may yet. In the interim, however, the Keeping Energy Costs Down Act includes very particular proposed provisions under which the Minister could direct the OEB on who will be required to pay the $290 million cost of the PREP. Again the Backgrounder is helpful in interpreting the Minister's intention. It states:
With the proposed legislation, the government would also ensure new customers do not have to incur upfront contributions toward the construction of certain gas transmission projects that are critical to the province's economic growth. This would preserve the historical treatment of these transmission projects that provide broad energy benefits and serve many customers in different areas. Preserving this treatment will help ensure the province can continue to attract critical investments in sectors like greenhouses and automotive in southwestern Ontario.
This statement may belie acceptance of Enbridge Gas' view of what the evidence indicates regarding the benefits of the PREP project. It certainly reflects a policy decision that subsidy from other gas customers in support of greenhouse expansion, lower cost electricity generation and potentially new automotive industry investors is the right economic development policy for southwestern Ontario.
Either way, the proposed legislation would transfer to politicians the authority to set natural gas delivery rates so as to support government economic development initiatives, rather than leaving authority with the province's heretofore independent energy regulator to set rates to generally match customer costs to customer benefits.
So let's be clear, this legislation is not about reducing energy costs.
Rather it is about transferring to the government authority to determine what subsidies are appropriately embedded in natural gas delivery rates. Funding provincial economic development initiatives has traditionally been a government (i.e. taxpayer) responsibility, while setting rates for energy delivery to recover from customers the costs to serve them has traditionally been the purview of our expert independent energy regulator. This legislation would change that, and result in governmental authority to direct that gas delivery rates be set so as to subsidize the government's economic development priorities.
Energy policy vs. rate regulation; the government's role
There is no doubt that the government has a legitimate and important role in making energy policy, including energy policy made to support broader political and socio-economic objectives. As the energy transition proceeds that role will become both increasingly important and increasingly complex. The Keeping Energy Costs Down Act contemplates the issuance by government of clear policies on the development and use of energy sources for Ontario, so that the OEB can exercise its authority with due regard to those policies, and thus in step with government. These provisions are a welcome development.
At the same time, however, other provisions in the Keeping Energy Costs Down Act provide for more direct government intervention in the setting of regulated gas delivery rates. Gas delivery rates have traditionally been set independently by the OEB to recover costs to serve from customers benefiting from that service.
The Keeping Energy Costs Down Act would directly imbue the setting of gas delivery rates with political objectives, resulting in subsidies for politically favoured investments. Influential stakeholders would, in the future, take their case for preferential rate treatment to the government. The not so powerful customer and public interest organizations that have historically made their cases based on evidence and public deliberations would have to consider doing the same, though at a disadvantage to the utilities and their (customer funded) resources.
Politically setting regulated energy rates undermines certainty, predictability and transparency, features that investors value. Such a potential outcome begs the question; how much tightening of control on the heretofore balanced, accessible and independent rate setting work of the province's energy regulator is ultimately in the best interests of both the public and the government.