FAQ: Natural Gas Market Overview

What is the role of the Board in the regulation of natural gas?
How are natural gas prices determined?
Where does the natural gas come from?
What companies in Ontario distribute natural gas?
Why do the distribution companies have a monopoly in a certain franchise areas to distribute or deliver natural gas?
Does the Board set the price of natural gas?
Do the utilities make a profit on the price of natural gas?
Does the Board regulate the water heater rental rates charged?
How is expansion of the natural gas distribution system financed and regulated?
Who should I call for more information?

What is the role of the Board in the regulation of natural gas?

The Board approves natural gas rates charged by the gas utilities, as well as approving pipeline construction, the terms and conditions of franchise agreements, certificates of public convenience and necessity, storage facilities and utility ownership changes. The Board also licenses gas marketers wishing to retail natural gas to residential and small commercial consumers.

The Board regulates Ontario’s natural gas utilities, which are required by legislation to submit the rates they propose to charge their customers to the OEB for review and approval. The Board establishes rates for each natural gas utility typically following an oral or written hearing. The rates cover transportation costs to Ontario, and delivery costs in Ontario, as well as storage. For those customers who purchase their gas directly from the local gas distributor, rates also cover the commodity cost of gas passed through to the customer without markup.

Where users purchase gas directly from producers or marketers, the OEB controls the rates that the utilities may charge for transporting gas to Ontario, storing and distributing the gas in Ontario. The price paid for the gas commodity is determined by the contract signed with the gas marketer or producer.

OEB approval is required to construct a natural gas transmission line in Ontario. The Board assesses whether the proposed construction is in the public interest by considering need, safety, economic feasibility, community benefits, security of supply and environmental impact. The Board’s Environmental Guidelines set out the Board’s expectations for locating, constructing and operating pipelines in Ontario.

Each municipality may grant a gas utility the right to deliver gas and use road allowances or utility easements within its borders. The specific terms and conditions of the Municipal Franchise Agreement require OEB approval. The Board originally approved a model franchise agreement in 1987 which had been the basis for franchise agreements entered into by gas utilities and municipalities since that time. The Board issued an updated Municipal Franchise Agreement in December 2000.

Board approval, in the form of a Certificate of Public Convenience and Necessity, is required to construct any works to supply gas in Ontario. Approval is granted only where public convenience and necessity support the extension of the service.

Natural gas may be injected into a geological formation in Ontario only where land is designated by the Lieutenant Governor in Council (LGIC). The Board recommends areas that are suitable for designation. Once the LGIC has approved designation, the Board may authorize a storage area’s use.

The Board also determines the compensation payable to land owners where storage pools are situated, if the parties cannot agree among themselves.

In addition, applications for drilling permits for wells within a designated storage area are referred to the Board for a report to the Minister of Natural Resources.

A natural gas utility must obtain approval from the Ontario Energy Board to sell its system or amalgamate with another company. Board approval is also necessary when any person wishes to acquire or hold more than 20 per cent of any class of shares.

Effective March 1, 1999 companies wishing to sell natural gas to low-volume consumers (residential and small commercial customers consuming less than 50,000m³ of gas per year) or to act as an agent in the sale of natural gas in Ontario are required to obtain a licence from the Ontario Energy Board.

How are natural gas prices determined?

Natural gas prices in the producing regions of North America are determined by the competitive forces of supply and demand. The short-term, or spot price, fluctuates daily due to several factors including weather and short-term disruptions. For instance, a hurricane in the Gulf of Mexico, or a snap deep freeze in Western Canada, two of the largest gas producing regions, can affect the short-term price of natural gas.

Longer term gas prices are determined by population and economic growth, and by factors such as environmental policies. For example, greater demand for gas as an environmentally-preferred fuel for electricity generation could result in increased gas prices.

Where does the natural gas come from?

Ontario obtains some 93 percent of its gas supplies from the western Canadian provinces through the TransCanada PipeLine Limited interprovincial pipeline system and related systems. The province also imports about 5 per cent from the United States and produces approximately 2 per cent itself.

What companies in Ontario distribute natural gas?

The three local distribution companies distributing natural gas in Ontario that are regulated by the Ontario Energy Board are: Enbridge Gas Distribution Inc., Union Gas Limited and Natural Resource Gas Limited.

Enbridge Gas Distribution Inc. is a privately owned utility that serves approximately 1.3 million customers in central and eastern Ontario including the Greater Toronto Area, the Niagara Peninsula and Ottawa, as well as a number of other communities. It also provides a wholesale service to gas distribution companies outside its franchise area.

Union Gas Limited is a privately owned utility that serves more than one million residential, commercial and industrial customers in southwestern, northern and eastern Ontario. It also provides natural gas storage services for other utilities and energy market participants in Ontario, Quebec and the United States.

Natural Resource Gas Limited is a privately owned utility serving about 4,000 customers in the Aylmer area.

In addition to the three that the Board does regulate, there are five small gas companies that are exempt from rate regulation under the OEB Act, as well as two municipally owned gas utilities (City of Kitchener and City of Kingston) that are not regulated by the Board.

Why do the distribution companies have a monopoly in a certain franchise areas to distribute or deliver natural gas?

The distribution of natural gas involves an extensive network of pipelines and storage facilities requiring substantial capital investments. A monopoly arrangement is used to avoid costly duplication of services which would result in higher gas bills.

Does the Board set the price of natural gas?

No. Although the Board approves the commodity cost of gas that may be included in rates for those customers purchasing gas directly from a local gas distributor, the Board does not set the price at which the utility purchases its gas supply. This price is determined in a competitive market and, if the Board determines that the utility’s purchasing strategy is appropriate, the gas costs are passed through in the rates charged to customers.

Do the utilities make a profit on the price of natural gas?

It is important to note that the Board does not allow the utility to profit on its gas purchases with the result that the utility has no profit incentive to increase the cost of gas to its customers. The utility charges its customers the price that it pays to secure the gas for the customers’ consumption. The commodity cost of the gas represents approximately 50 per cent of the total bill.

Does the Board regulate the water heater rental rates charged?

Water heater rentals are not provided by the regulated utility but rather by an unregulated affiliate. Water heater rentals are not regulated by the Ontario Energy Board.

How is expansion of the natural gas distribution system financed and regulated?

When assessing a utility’s application to extend gas service to a new area, the OEB considers whether the expansion project is financially viable. There may be instances where new customers might have to pay an additional fee (called a grant in aid of construction) to make a project economically feasible for the expansion. The Board has ruled that all system expansion projects must be economically feasible and not cross-subsidized by existing consumers. If the project is not financially viable, according to Board guidelines, the project will not be approved. You should contact your local distribution utility for further information.

Who should I call for more information?

Contact the Ontario Energy Board