Freezing Gas Rates Risks Long-Term Pain

Commentary, Energy, Tom Adams

Already overseeing arguably the world’s most inefficient electricity-consuming economy, Manitoba’s NDP government last week set a course to promote natural gas wastage as well.

In its speech from the Throne which kicked off this session of the legislature, the government committed to introduce legislation to end Manitoba’s longstanding and wise practice of offering natural gas to distribution customers of Centra Gas Manitoba at floating market rates. Instead, the legislation will allow the provincially-owned gas utility to defer rate increases it that would otherwise implement to capture increases in the commodity cost of natural gas in the continental market.

The government’s policy follows a recent decision of the Manitoba Public Utilities Board. In deciding the most recent rate adjustment to reflect rising continental gas prices, the Board decided to shield residential consumers from the full effect of higher costs. Other classes of customers like businesses will continue to pay the real cost.

Noting the hardship energy bills represent for low-income households, the Board decided to confer rate relief upon all households, including the well-to-do. At best, this is an inefficient method of protecting the poor.

Selecting one rate class over others for relief sends the regulatory process down a slippery slope. Having established the precedent of considering the relative degree of hardship, the Board may in future find itself inundated with businesses making their own pleas of special need.

The utility’s losses associated with residential underpayment will be paid by borrowing. Business customers not benefiting from subsidized rates might be at risk when payback time rolls around, because payback time could be painful for vote-rich households.

The regulator and the government are gambling that gas prices will fall. If prices do not fall, consumers could be facing a massive payment imbalance. Interest costs will make the pain worse.

Even Saskatchewan, whose government has historically encouraged wasteful consumption by underpricing natural gas from its Crown gas utility, SaskEnergy, often with disastrous consequences for the provincial government budgets, is waking up to the problem s this creates. SaskEnergy has been underpricing gas most of the time over the last decade. Its losses on commodity sales to distribution customers in the period 2001-2003 alone totaled $430 per customer. Losses slashed dividend payments to the provincial government. SaskEnergy’s rates, though still less than current market prices, are 29% higher than those the Manitoba Public Utilities Board has approved for Centra Gas Manitoba.

The initiative by the regulator and the government to subsidize gas rates will exacerbate the already negative economic and environmental implications of Manitoba’s current electricity pricing policies for pricing electricity. This winter, even under the subsidized rates to be implemented November 1, it will be cheaper for Manitoba households to turn off their furnaces and plug in electric baseboard heaters. Power usage in Manitoba, identified by Energy Probe in a 2003 study for the Frontier Centre as the highest electricity consumption in the world per unit of economic output, is likely to soar to new records.

Manitoba and all the jurisdictions around it rely on coal and gas to supply electricity during the winter. Gas furnaces are typically three times as efficient as gas-fired electricity in delivering home heat. Through their baseboard heaters, Manitobans will be throwing away a fortune this winter that the province and its citizens could be earning by charging all customers market prices for electricity, drastically cutting power usage, eliminating Manitoba Hydro’s gas and coal usage and selling the surplus power to neighbors. Efficiently pricing electricity, particularly when the competing sources are becoming more expensive, provides Manitoba with an opportunity to leave behind its status as an economic “have not” region.

Subsidizing natural gas and electricity prices curtails the potential for the province to develop renewable heating options. Manitoba has some of the lowest hay prices in North America, reflecting its vast agricultural capacity to produce crops suitable for low-cost home heating, such as switchgrass and other prairie grass species. Combined with Manitoba large demand for heating fuels, the province could be leading a transition away from conventional heating fuels.

Manitoba’s NDP government appears to be cribbing its gas pricing policy from Ontario’s former Tory Premier Ernie Eves, who slashed and froze electricity rates three years ago. While under a market regime, the continental shortage in natural gas has led to stable or even falling gas demand, Ontario’s electricity policies have led to rising demand, with potentially disastrous consequences given Ontario’s supply shortage.

Manitoba has the potential to make vast economic and environmental gains by charging customers energy prices that reflect real costs. In the case of electricity, the real cost should reflect the costs of forgone electricity export sales. The government’s Throne speech sets a course in the opposite direction.