On December 21, 2023 the Ontario Energy Board (OEB) released its Phase 1 Decision and Order in the Enbridge Gas Inc. (Enbridge) 2024 Rebasing proceedings. A primary focus of the proceeding was the energy transition and its implications both for Enbridge’s capital spending plans and the future of the province’s natural gas distribution system.
With the respect to the energy transition, the first three key findings of the OEB (the case is being heard by a panel of three commissioners) are the most significant:
1. The energy transition poses a risk that assets used to serve existing and new Enbridge Gas customers will become stranded because of the energy transition. Enbridge Gas has not provided an adequate assessment of this risk to demonstrate that its capital spending plan is prudent. The stranded asset risk affects all aspects of Enbridge Gas’s system and its proposals for capital spending on system expansion and system renewal.
2. The OEB is reducing the overall proposed capital budget for 2024 by $250 million. Enbridge Gas is expected to utilize its project prioritization process to accommodate this envelope reduction. The current Asset Management Plan is not accepted as a basis to support the proposed capital investments.
3. For the proposed system expansion capital spending plan, the OEB has determined that for small volume customer connections, the revenue horizon that Enbridge Gas uses to determine the economic feasibility of new connections is to be reduced to zero, thus reducing stranded asset risk to zero, effective January 1, 2025. Projects under the current phase of the Natural Gas Expansion Program are excluded from this requirement.
Reducing the revenue horizon for new connections to zero would require new residential developments to pay the full cost of their connection up-front, rather than over a defined time-period as developed through the OEB’s E.B.O. 188 proceeding, which concluded in 1998.
Of the three commissioners (Commissioners Moran (Presiding), Elsayed, and Duff), one dissented in part, specifically on the determination to reduce the revenue horizon to zero for new small-volume connections. The dissenting Commissioner Duff noted she did not support the zero-year revenue horizon, arguing “I do not find the evidentiary record supports this conclusion […] Zero is not a horizon. It is fundamentally inconsistent with the intent of E.B.O. 188 by requiring 100% of connection costs upfront as a payment, rather than a contribution in aid of construction.” She observed that no housing developers intervened or filed evidence in the proceeding, setting out their views on the revenue horizon (and the impact of potential changes to it) for the OEB to assess. She also argued that it was not clear whether a “no-new-gas-connections” scenario was feasible, concluding that a 20 year revenue horizon would be more appropriate.
A dissenting opinion from an OEB Panel member is rare with few occurrences over the last 20 years.
The Ontario government intervened quickly, with the Ontario Minister of Energy releasing the following statement the day after the OEB decision:
I am extremely disappointed in yesterday’s split decision by the Ontario Energy Board to reduce the amortization period for the cost of installing new natural gas connections for homes. This decision, which would mean costs that are normally paid over 40 years would be owed in full up front, could lead to tens of thousands of dollars added to the cost of building new homes. At a time when Ontario, like the rest of Canada, is already dealing with the difficult headwinds of high interest rates and inflationary pressures, the Ontario Energy Board’s decisions would slow or halt the construction of new homes, including affordable housing. We will not stand for this.
In response, I will use all of my authorities as Minister to pause the Ontario Energy Board’s decision. At the earliest opportunity, our government will introduce legislation that, if passed, would reverse it, so that we protect future homebuyers and keep shovels in the ground.
Enbridge has commented that it will “consider any and all avenues to challenge the order [including] a motion for review at the OEB or an appeal to the courts.”
At this time, the OEB has not commented on the Minister’s statement on reversing the decision or Enbridge’s statements on potentially challenging the decision.
The decision from the OEB was based on “Phase 1” of Enbridge’s rate application. The application includes a “Phase 2 and Phase 3” to review cost allocation, rate design and other matters on setting rates over the 2025 to 2028 time period for natural gas customers. Enbridge has a near monopoly on gas distribution and transmission in Ontario, with its rates impacting over 3 million customers across the province.
Commentary
The OEB’s decision, the partial dissent, the Minister’s quick announcement of his intent to pause and overturn the decision, and any challenge of the order by Enbridge, will be debated hotly across Ontario’s energy sector for the immediate future. The ultimate outcome and implications of these events cannot yet be assessed fully. In any case, the debate on how to manage the energy transition and its impact on province’s extensive natural gas delivery network has kicked off.
It is clear that there appears to be misalignment between what some OEB Commissioners (and even among Commissioners as seen by the partial dissent) interpret their responsibility on how to best protect consumers’ long-term financial interests in relation to the energy transition and related government policy versus the provincial government’s approach on how to ensure that housing development and affordability is not impeded by costs related to energy infrastructure.
This disconnect is partly a result of the divergent environmental policies of the provincial and federal governments. In particular, the federal government has a legislated target to reach net-zero GHG emissions by 2050 through the Canadian Net-Zero Emissions Accountability Act as well as its 2030 Emissions Reduction Plan and associated progress reports. In contrast, the provincial government currently has a non-statutory target of reducing GHG emissions 30% below 2005 levels by 2030, and does not have any legislated net-zero targets or plan related to 2050.
The OEB decision is premised on its understanding that “the energy transition is underway, underpinned by the totality of current government policy.” However, in making this statement the OEB Commissioners appear to be giving significant weight to federal government policy while discounting the provincial government’s prioritization of energy affordability and, more importantly, its clear and consistent support for the continued role of natural gas as Ontario’s primary heating fuel.
The OEB’s decision is a departure from its long-standing approach to natural gas system expansion that was established in its 1998 report E.B.O. 188. E.B.O. 188 established a maximum revenue horizon of 20 years for large volume customers and 40 years for others (residential and small commercial). That is, the costs associated with connecting a customer is collected over the term of the revenue horizon. Were the customer to elect to terminate their gas supply sooner than 20 or 40 years (as applicable), the remaining unrecovered capital costs of their connection are recovered from remaining customers or borne by the utility’s shareholders.
However, during Phase 1 of the Enbridge proceeding, many intervenors, OEB staff, and ultimately the OEB Commissioners concluded that assumption to no longer be reasonable for small volume customers. Several of the more than a dozen participants in the proceeding, proposed that Enbridge adopt a new, shorter revenue horizon. Of these participants, two parties supported the zero-year proposal, while OEB staff supported a 20 year horizon (as did Commissioner Duff in her partial dissent).
The OEB Panel’s majority decision to select zero years for small volume customers has the effect of requiring a connecting customer to pay for the entire connection cost upfront rather than over 40 years. The zero-year proposal is highly conservative, ensuring there is no possibility of stranded assets. However, it is clear from the Energy Minister’s statement that he does not view the decision as compatible with current provincial housing and energy policy.
In a subsequent interview, the Minister further advanced his views, commenting that “Essentially, what this decision does, I believe, is eliminates that choice for customers who are looking at natural gas and really pushes them in one direction, and that is electrification. While we are moving to a more electrified province, again, we’re doing it in that measured way,” while also stating “This was really an irrational decision […] going from 40 years amortization down to zero is anything but a measured decision.”
The Minister’s reaction to the decision is consistent with Power Advisory’s previous commentary on the Minister’s most recent letter of direction to the OEB. The November 29, 2023 letter was unambiguous in indicating that government policy was supportive of maintaining and expanding the natural gas system to meet future energy needs (specifically referencing the government’s plan to build 1.5 million new homes over the next 10 years). There was no direction to the OEB to facilitate electrification and fuel-switching of space and water heating or curb expansion of the natural gas system. In fact, the letter sets out a clear expectation that the new homes should have access to and be connected to the natural gas system.
Also, while the provincial government’s Powering Ontario’s Growth plan places much focus on electrification and the energy transition, it says “Natural gas will continue to play a critical role in providing Ontarians with a reliable and cost-effective fuel supply for space heating, industrial growth, and economic prosperity.”
Further, on December 20, 2023, the day before the release of the OEB decision, the government published a proposal that, if passed, would allow the government “to prescribe conditions in regulation to fast-track energy infrastructure project (hydrocarbon [i.e., natural gas] and electricity lines) through the Ontario Energy Board’s Leave-to-Construct (LTC). If passed, government may propose regulations to exempt energy projects costing between $2 million and $10 million from LTC, if duty-to-consult (DTC) is met.” The proposal also stated that “Such exemptions would seek to support the government-wide efforts to address timelines related to transit project construction and the need for additional housing stock across the province.”
Looking ahead, it remains uncertain to what extent the OEB’s Phase 1 decision and the Minister’s intervention will factor into the future of Enbridge’s rate proceeding as well as the more recent proceeding regarding the 2023 Panhandle Regional Expansion Project (Panhandle Project), which is being built to supply gas to new and expanded gas-fired generation, as well as service the growing greenhouse sector.
The type and timing of additional actions the Minister may take toward the OEB more generally is uncertain. The Ontario legislature is adjourned until February 20, 2024, so it remains to be seen when and what actions the Minister will take to “pause” the decision prior to introducing any legislation to reverse the decision.
Additionally, the Presiding OEB Commissioner (Commissioner Moran) for Enbridge’s rebasing proceeding, who has had his Phase 1 decision characterised as “irrational” by the Minister of Energy, is also the Presiding Commissioner for the Panhandle Project.
Overall, this case presents the first significant test of the OEB’s new corporate structure (implemented in 2020), which was intended to, among other things, “strengthen the independence of the adjudicative function” of the OEB by separating the management, administrative, and adjudicative functions of the organization. How the new structure reacts and responds to the Minister’s statements, and subsequent actions to pause and reverse the Enbridge Phase 1 decision, will be watched closely as will any other potential steps taken by the Minister on the energy transition, the natural gas system, and the role of the OEB.
The energy transition is posing complex challenges for Ontario’s energy sector, policy makers and regulators to navigate as they attempt to manage and align on competing and conflicting priorities, including energy affordability, stranded asset risks, emissions reductions, and broader policy objectives, such as housing and economic development. However, the report from the government appointed Electrification and Energy Transition Panel is expected to be released in early 2024 and will provide recommendations to the Minister. Therefore, as the dust settles regarding Enbridge’s rate application, further clarity on the future of the natural gas system and the energy transition in Ontario will emerge.
Please contact Power Advisory if you have any questions or would like additional information.