Ontario Energy Board Decision Introduces Competitive Bidding for Natural Gas Franchises

On November 17, 2016, the Ontario Energy Board (the “OEB”) released its Decision with Reasons (the “Decision”) following a generic hearing commend on January 20, 2016 to establish a common framework for the expansion of natural gas service to Ontario communities not currently serviced by natural gas (the “Generic Proceeding”).1

In its Decision, the OEB determined that the existing framework under which utilities are required to charge customers that are in the same rate class the same rate (sometimes referred to as “postage stamp” rates) was one of the primary barriers to natural gas expansion.  Following the Decision, the OEB will allow utilities to charge “stand alone” rates to new expansion communities. At the same time, the OEB rejected requests from various parties to subsidize the development of natural gas infrastructure into expansion communities by requiring existing ratepayers to shoulder a portion of the costs.


The expansion of natural gas distribution systems has been a key issue for rural and remote Ontario communities without access to natural gas for many years.

For example, most residents in the municipalities of Kincardine, Arran-Elderslie and Huron-Kinloss (collectively, “South Bruce”) do not currently have access to natural gas, even though bringing natural gas to these municipalities was estimated to save consumers $27 million annually in lower energy costs.2

Despite these cost savings, Union Gas Limited (“Union Gas”) submitted a proposal that would have required the South Bruce municipalities to pay an upfront contribution in aid of construction of $86 million (based on forecast 2012 costs). As might be expected, the South Bruce municipalities did not have this capital readily available and progress stalled.

To overcome these obstacles, South Bruce decided to conduct a competitive Request for Information (RFI) process to canvass the market for potential suppliers of natural gas distribution services in March of 2015.

After receiving proposals from a number of respondents, South Bruce selected EPCOR as the preferred proponent and entered into franchise agreements with EPCOR on February 22, 2016.  EPCOR filed applications with the OEB on March 24, 2016 seeking approval of these franchise agreements, which was placed on hold pending the outcome of the Generic Proceeding.

An innovative aspect of the EPCOR proposal was the use “stand alone” rates rather than imposing an onerous capital contribution requirement on the municipalities. This innovation would later be adopted by the OEB to form the basis of the Decision in the Generic Proceeding.

The old framework didn’t work

Prior to the Decision, the framework governing the assessment of the economics of natural gas distribution expansion projects, known as E.B.O. 188, had been in place since January 30, 1998.3

Under this framework, utilities could only expand to communities where the incremental revenues generated from the expansion would, over time, cover the costs of the expansion. Where revenues were insufficient to recover the long-term costs, an up-front payment in the form of a capital contribution was required from new customers. The capital contribution was put in place based on a principle that existing customers should be protected from having to pay higher rates to subsidize the extension of natural gas service to new communities.

As the example of the South Bruce municipalities illustrates, the $86 million capital contribution required under the E.B.O. 188 framework proved prohibitive for many rural and remote communities. And the expansion of natural gas distribution into these communities stalled.

A new approach was needed

In 2013 the Government of Ontario committed in its 2013 Long-Term Energy Plan (the “LTEP”)4 to work with gas distributors and municipalities to pursue options to expand natural gas infrastructure to service a greater number of rural and northern Ontario communities.

In April of 2015, the Government of Ontario announced the creation of a $200 million Natural Gas Access Loan and a $30 million Natural Gas Economic Development Grant.

And in February of 2015 the Government wrote to encourage the OEB to move forward on its plans to examine opportunities to facilitate access to natural gas services to more communities, and the OEB invited parties with the appropriate technical and financial expertise to apply for approvals for expansion projects, and to propose, within those applications, the regulatory flexibility or exemptions from current requirements that would facilitate these expansions.

In response to this invitation, Union Gas filed an application for approval to provide natural gas service to numerous unserved communities on July 23, 2015.5 In its application, Union Gas proposed alternative approaches to recover the revenues required to fund the capital investment for these expansions, submitting that they are uneconomic under existing criteria.

During a pre-hearing conference, the OEB determined that the issues raised in the proceeding had broader implications and were common to all gas distributors and new entrants seeking to provide gas distribution services, and it was at this point that the OEB established the Generic Proceeding and adjourned Union Gas’ application.

The Generic Decision

The Generic Proceeding (EB 2016-0004) was heard orally from May 5th to May 13th, 2016.6  Tasked with the challenge of reviewing a vast record of evidence from the over 40 parties that participated in the hearing, the OEB released its Decision on November 17, 2016.

Most involved would agree that the Decision is clear, cogent, concise and well written.

In its Decision, the OEB considered a variety of measures proposed by EPCOR, Enbridge Gas Distribution Inc. and Union Gas (collectively the “Gas Utilities”) and representatives of various other interests (including municipalities, ratepayers, first nation communities, environmental advocacy groups, and suppliers utilizing competing energy sources) to implement expanded gas service. The measures considered included imposing surcharges for new customers, requesting financial contributions from municipalities, collecting subsidies provided by existing customers, and accounting for funding from other levels of government.

Overlaying all of this, the OEB was concerned with facilitating competitive market outcomes where possible, whether by permitting new entrants into the gas distribution business, like EPCOR, considering new delivery methods like liquefied or compressed natural gas, or by helping customers make economic decisions when choosing between different energy supply options such as natural gas, propane, fuel oil, electricity or geothermal.

The OEB ultimately denied requests to subsidize the expansion of new natural gas infrastructure by requiring existing ratepayers to shoulder a portion of the cost.  The Decision held that:

The other chief measure proposed to enable more expansions was a subsidy from existing customers. The OEB has determined that this is not appropriate. As noted above, the economic benefits of expansion to many communities are much greater than the costs. This approach would also distort the market to the detriment of existing energy services that compete with gas, such as propane, and new gas distributors who do not have an existing customer base. Under these circumstances, it would not be appropriate to require existing customers to pay for a portion of any expansion. The communities that receive the benefit will be the ones paying the costs.7

In turn, the OEB acknowledged that the existing framework which requires customers in the same rate class to pay identical rates created barriers to natural gas expansion by preventing utilities from being able to charge customers in potential expansion communities a higher rate than existing customers in the same rate classification.

With EPCOR and the South Bruce municipalities as a case study of a solution that could work in practice, the OEB allowed utilities to create “stand alone” rates for services provided to expansion communities based on the higher costs associated with connecting natural gas service. The OEB stated that:

The evidence shows that for many communities a higher gas distribution rate would be more than offset by the savings these customers would realize over time by converting to natural gas. This is true even when one considers the costs of conversion, such as a new or modified furnace.8

Next Steps: Natural Gas Expansion Plans

With the conclusion of the Generic Proceeding, we anticipate increased activity regarding new natural gas expansion projects to continue throughout 2017 and 2018.  There is already some evidence of this.

For example, on November 17, 2016, the OEB issued a procedural order for Union Gas’ application concurrently with its Decision,9 requesting that Union advise the OEB of how it proposes to proceed with its application in light of the OEB’s Decision in the Generic Proceeding. In a letter dated December 22, 2016, Union advised the OEB that it will update its application and evidence to reflect the OEB’s findings in EB 2016-0004 and expects to file its updated application and evidence with the OEB by the end of March 2017.  One might expect that Enbridge will file a similarly re-framed application, based on the projects the initially identified during the Generic Proceeding.

In addition, while the Decision opens the door for new expansion opportunities that were previously uneconomic, whether the Decision will actually result in a level playing field for potential new entrants and existing gas utilities in Ontario remains to be seen. On January 5, 2017, the OEB issued the first procedural order in the EPCOR application for approval of its franchise agreements with the South Bruce communities. In it the OEB canvassed whether any other parties to the Generic Proceeding were interested in serving the areas covered by the EPCOR Applications. Union Gas responded, filing a letter on January 19, 2017 notifying the Board of its interest in serving the areas covered by the EPCOR applications.

*John Vellone is a partner in the Toronto office of Borden Ladner Gervais LLP and is a member of the Electricity Markets and IT Groups. Mr. Vellone acted for the South Bruce municipalities during the natural gas expansion hearing.
**Jessica-Ann Buchta is an associate at Borden Ladner Gervais LLP in the Electricity Markets Group, practicing corporate/commercial and regulatory law with a focus on energy law and matters relating to the electricity sector.

  1.   Ontario Energy Board Generic Proceeding on Community Expansion (17 November 2016), EB-2016-0004.
  2.   The author acted for the South Bruce municipalities during the Generic Proceeding.
  3.   Ontario, Report of the Board in the matter of a hearing to inquire into, hear and determine certain matters relating to natural gas system expansion for The Consumers’ Gas Company Ltd, Union Gas Limited and Centra Gas Ontario Inc, EBO 188 (Toronto: Ontario Energy Board, 1998).
  4.   Ontario, Achieving Balance: Ontario’s Long-Term Energy Plan (Toronto: Ministry of Energy, 2013) at 77, online: <http://www.energy.gov.on.ca/en/ltep/achieving-balance-ontarios-long-term-energy-plan/>.
  5.   Union Gas Limited, Application for approval to expand natural gas service to certain rural and remote communities in Ontario; for certain exemptions to meet revenue recovery requirements that apply to pipeline projects and approval to construct facilities to serve the communities of Milverton, Prince Township and the Chippewas of Kettle and Stony Point and Lambton Shores,  EB-2015-0179.
  6.   EB 2016-0004, supra note 1.
  7.   Ibid at p 4.
  8.   Ibid.
  9.   Supra note 5.

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