OEB Issues Staff Report on the 2014 Natural Gas Market Review

On March 31, 2015, Ontario Energy Board staff issued a report to the OEB about the 2014 Natural Gas Market Review (NGMR). The OEB staff report summarizes what was presented and discussed through the NGMR consultation, and makes recommendations for next steps. A key suggestion from OEB staff is for the OEB to initiate a proceeding in relation to utility gas procurement practices, including the manner in which distributor gas supply plans should be assessed and approved. OEB staff also recommend that the OEB consider enhancements to current requirements for gas distributors to disclose information about aspects of pipeline and storage operation as needed to support gas/electric market coordination. The OEB staff report is found here.

The NGMR was convened by the OEB in September 2014 to examine changes in North American and Ontario natural gas markets since 2010 (when the last review was completed), and to forecast natural gas supply, demand and prices in coming years. The NGMR was also intended to look at the natural gas market conditions in winter 2014, when demand and prices were both higher than forecast. Finally, the NGMR was intended to examine the cost/risk tradeoffs inherent within different gas supply planning parameters. A two-day stakeholder conference was held in December 2014, which included the presentation of two expert reports from Navigant Consulting Ltd. on behalf of OEB staff. Subsequently, written comments were provided by 16 stakeholders.

With respect to expected future market conditions, the OEB staff report finds that the continuing growth of shale gas production will moderate prices and there will be a continuing increase in the proportion of Ontario natural gas demand that is met through supply from the northeast United States (especially the Marcellus region). This means that there will be a corresponding decline in the gas flows into Ontario from Western Canada on the TCPL system. Based on the expectation that less gas supply will emanate from Western Canada, the OEB staff report recommends that the OEB consider modifying the exclusive use of a Western Canada "reference price" for gas supply cost calculations within the Quarterly Rate Adjustment Mechanism (QRAM) process.

The OEB staff report concludes that there will be a rise in Ontario natural gas consumption in coming years, and an increased shift towards gas-fired electricity generation. These trends will lead to gas storage playing an increasingly important role. OEB staff agreed with the stakeholder comments that greater access to information about pipeline capacity and storage availability would help ensure improved market transparency. As a result, OEB staff recommends that the OEB consider reviewing and providing further direction about the OEB's regulatory instruments (such as the Storage and Transportation Access Rule) related to disclosure from gas distributors about their pipeline and storage operations.

Further, the OEB staff report describes the contributing factors that led to high natural gas prices during the 2014 winter, and observes that different gas supply planning parameters (such as design day assumptions and storage level targets) influence the level of incremental gas supply that must be acquired by gas distributors where demand exceeds forecast. The OEB staff report recognizes that there are costs associated with more conservative gas supply planning parameters, and that Enbridge Gas Distribution and Union Gas each have different approaches in this regard. Consequently, OEB staff recommend that the OEB initiate a proceeding related to appropriate gas procurement approaches, and to set out the manner in which individual utility gas supply plans should be assessed and approved in the future.

According to OEB staff, the issuance of their report marks the end of the 2014 NGMR. It is now in the OEB panel members' hands to determine what next steps should be taken. If further proceedings are to be undertaken to look at gas procurement issues (either on a generic or utility-specific basis), this should presumably happen soon. Otherwise, any conclusions reached will not be implemented until 2017, because the gas distributors are already in the process of preparing and presenting their 2016 gas supply plans to stakeholders, and implementation of those plans will begin by Fall 2015.