Through The Roof

B.C. has an abundance of natural gas. So why do we pay so much for it?

By STUART HERTZOG
Monday Magazine, Victoria, B.C., January 25-31, 2001

Unless you're one of the original 24,000 residential users who signed up with Centra Gas before February, 1996, be prepared for a shock when your next gas bill arrives.

For those lucky pioneers, the cost of natural gas is fixed at 67 percent of the price of electricity. But the majority of Centra's 70,000-plus natural gas customers are out of luck. On January 1, 2001, the price of natural gas on Vancouver Island and the Sunshine Coast was hiked by 14 percent. For the average household, that means an extra $120 per year for home heating.

Consider yourself fortunate: residential customers of BC Gas in the Lower Mainland and southern area of the province are faced with a 27 percent increase. Pacific Northern Gas users in northwestern B.C. have to pay 28 percent more, while PNG's northeastern users are looking at a stiff 32 percent hike that will add up to $430 to each household's energy bills each year-and that's in the heart of B.C.'s gas country, where the rigs stand tall and the winters get mighty cold.

Natural gas prices have doubled in the past two years. And Bill Grant, executive director of the B.C. Utilities Commission (BCUC), which regulates Centra and all other provincial gas suppliers, says more gas price shocks may be coming down the pipe as early as next June. What's going on?

Grant explains that B.C.'s gas companies must submit a forecast of gas prices to the commission, which accepts or modifies them according to its own information. The commission then issues a rate for the next six months, and the company tracks its gas purchases against this. The problem is that over the last two years the commission has taken the view that gas prices won't remain high, so it hasn't been granting rate increases according to the full amount of the gas companies' cost projections.

"The lower rates built up a large deferral balance, up to $150 million in one [company's] case," says Grant. By law, the commission must allow the companies to eventually recover these costs. With the high gas prices of last November and December still to be accommodated, there's little room for the commission to pull back the companies' projected rate increases in the next adjustment, scheduled for June of this year.

Grant says the commission can't do anything to protect low or fixed-income gas consumers who have been hit hard by the increased rates. "We're not a social agency," he explains. "The [B.C.] Utilities Act doesn't allow us to charge one group of customers more than another."

Mark Jaccard, a former chair of the BCUC, disagrees with Grant's approach, although he too admits that the commission is limited in what it can do. He tried to get the gas companies to include environmental considerations in their rate designs, for example, but that was thrown out by a challenge in court.

"You can redesign the schedule somewhat so there's a 'lifeline rate' where low levels of consumption are priced lower, and you can have demand-side management programs, such as energy efficiency assistance, as we've had in the past," claims Jaccard. "As long as they don't affect industrial customers, it's OK." Of course, B.C. could also change its Utilities Act-if it wanted to. "When I helped Quebec write its Act, we wrote environmental and social factors right into it" says Jaccard.

But so far, that hasn't happened here, and nor has any government assistance been forthcoming for low-income groups or for B.C.'s greenhouse industry. The government has enjoyed huge windfalls from the high cost of natural gas-up to $15 billion last year, if all the extra revenues from BC Hydro's lucrative electricity exports are factored in. But once it starts paying subsidies to one group or industry, the government's reasoning goes, it's starting down a very slippery slope to subsidy demands from others. Besides, as B.C. minister of small business Gerard Janssen argues, high gas prices are a world-wide problem, and not something the province can fix with rebates.

Although the current gas price crunch is essentially a North American phenomenon, Janssen is at least pointing in the right direction. Without public input or approval during the 1980s Canadian natural gas was deregulated and rolled into one giant North American market. It's this-plus the unprecedented demand for natural gas to generate electricity-that's causing our natural gas bills to go through the roof

From 1973 to 1985, Canada's National Energy Program kept gas prices artificially low, and the National Energy Board was set up to protect Canadian energy reserves. Energy utilities were regulated by governments. But Alberta's energy industry pushed to move to world prices and an open market - and it achieved these goals once the Trudeau Liberals had finally been pushed off the national stage.

On October 31st, 1985, Prime Minister Brian Mulroney persuaded the three gas-producing western provinces to sign a deal. Fittingly called the "Hallowe'en Agreement", it deregulated natural gas in Canada. Customers of all sizes could negotiate directly with producers and marketers to buy gas, which would then be delivered by regulated monopoly pipeline operators such as Westcoast or TransCanada, and local distributors such as Centra Gas.

As a sweetener to the Free Trade Agreement, Mulroney threw in Canada's gas supplies, which we would make available to the Americans on the same terms as our own consumers. The National Energy Board moved to adopt "market-based procedures" to ensure that there was no restriction on the trade of natural gas, and moved its entire operation to Calgary. (Might as well be where the action is, especially if you're an industry lapdog.)

"The effect of this was to move harmonize our gas price to the American price," says David Suzuki Foundation policy analyst Dermot Foley. "This works in favour of Canadian and U.S. gas producers and for consumers in the U.S., but not for Canadian consumers."

By stages, an interconnected, continent-wide energy market evolved. Canadian gas flowed east and south, but its price stayed stubbornly low-until U.S. electricity utilities discovered that burning low-cost Canadian gas was cheaper than nuclear power and cleaner than burning coal. U.S. power companies went into a frenzy of planning new gas-fired generation. The price of natural gas started to rise.

According to Foley, the Americans quickly came to regard Canadian gas as their own. "In 1992-93 I met the chair of the California Energy Commission, who stated that their objective was to meet California's energy needs from domestic sources only - and that domestic sources include Canada! I was stunned and amazed. Mulroney gave away our gas and made it impossible for us to establish our own energy prices."

Another consequence of gas deregulation and free trade was that energy conservation programs were thrown aside. "If you're just looking at short-term profits, conservation just doesn't figure," says Foley. "And as the NEB's role is now one of promoting the gas industry, there's no one out there protecting the consumer. Everything is just left to market forces-it's brutal."

The view that deregulation is fundamentally biased against the consumer and energy conservation is not echoed by energy industry supporters. Their mantra is that current high gas prices are simply an case of low supply meeting high demand. What we are suffering is a simple market adjustment.

This view is expressed by B.C. Liberal energy critic Richard Neufeld. "Demand has gone up but gas supply hasn't risen to match it," he says. "There's been a constriction in getting gas from Alberta and northeastern B.C. to market," he says, referring to the finite ability of Westcoast's system to deliver gas to the Sumas hub in lower mainland, and the failure of BC Gas to extend to Sumas its new Southern Crossing line, which connects southern Alberta to the Kelowna region.

Completion late last year of the new Alliance pipeline, which runs from northeastern B.C. directly to Chicago, and its extension via the Vector line to southern Ontario, also means that less B.C. gas will be available at Sumas.

Neufeld believes that British Columbians and North Americans generally are going to have to get used to higher natural gas prices. "It's pretty hard to get a dam built any more. Nuclear power is scary. So as people need more electricity, we are going to see more generation from natural gas. It's going to keep the cost up. You need money to go out and explore, and until those supplies come on stream, we're going to see prices in the $5 [per million BTus] range."

Neufeld acknowledges that as energy costs rise, governments and utilities will have to start encouraging conservation of natural gas. "It's been a cheap resource for so long that we've become accustomed to using lots of it. Energy conservation is something we should be looking seriously at," he says.

"But there are alternatives, such as generating electricity from coal-the technology has improved and there's different kinds of coal in B.C. Then there's coal-bed methane, which I understand we have a good supply of in B.C. You have to weigh-all kinds of concerns," Neufeld concludes.

The energy industry and BC Hydro, with its current proposal for the GSX pipeline to supply gas-burning electricity plants on the Island, all support increased supply as the way to meet our future energy needs. But with increased fossil-fuel burning comes increased global warming and more local pollution, which environmentalists and citizens' groups oppose. Brace yourself an increasingly fractious and polarized argument over North American energy policy is coming, and one with the consumers caught right in the middle.

Copyright Stuart Hertzog, 2001

-30-