Ontario Gas Utilities to Include Cap and Trade Costs in Their Delivery Rates

On July 28, 2016, the Ontario Energy Board (OEB) released a decision providing some details about how Ontario's gas utilities are to implement billing and provide customer information when the Cap and Trade program comes into effect on January 1, 2017. The key determination in the OEB's decision is that the cap and trade costs will be passed on to gas utility customers as part of their overall delivery charges, not as a separate line item.

The OEB's decision is a first determination in the Consultation to Develop a Regulatory Framework for Natural Gas Distributors' Cap and Trade Compliance Plans that the OEB commenced in March 2016. As we discussed in a previous post, the consultation is intended to develop a regulatory framework to guide the OEB's assessment of natural gas distributors' Cap and Trade "Compliance Plans," including the cost consequences of those plans and the mechanism for the recovery of costs.

As explained in the OEB's decision, under the Climate Change Mitigation and Low-Carbon Economy Act, 2016 and the Cap and Trade Program Regulation, Ontario's natural gas utilities will have greenhouse gas (GHG) emission compliance obligations for:

• Residential, commercial and industrial customers (excluding Large Final Emitters (LFEs), defined as emitting > 25,000 tonnes CO₂e per year) and natural gas generators
• Facilities owned or operated by natural gas distributors

The gas utility "Compliance Plans" intended to achieve their Cap and Trade obligations will include costs of:

• Facility-related obligations for measures related to GHG emissions from facilities owned or operated by the utilities
• Customer-related obligations for measures related to GHG emissions from natural gas-fired generators and residential, commercial and industrial customers who are not LFEs or voluntary participants
• Administration to meet compliance obligations

In a letter dated May 25, 2016, the OEB provided parties with a Staff Discussion Paper addressing proposals for the Cap and Trade Regulatory Framework for the Natural Gas Utilities (see our previous post). The OEB invited comments in response, and indicated that there are two issues that require early determinations - billing questions and customer outreach. The need for an early decision on the billing requirements is because the gas utilities require time to develop and implement billing system changes in advance of the January 1, 2017 effective date for Cap and Trade.

The OEB's July 28, 2016 decision provides direction on these items.

First, the OEB has determined that the facility and customer related cap and trade costs will be recovered from all customers except LFEs and voluntary participants, who are responsible for managing their own compliance obligation. This recovery will be on a volumetric basis (based on consumption). The gas utilities will create rates for facility-related costs and customer-related costs, which rates will be separately identified on the utility tariff sheet. According to the OEB, this approach will allow customers to "easily identify these costs" and it will "facilitate tracking and updating as needed."

Second, the OEB has determined that the administrative costs relating to the implementation and ongoing operation of the Cap and Trade program will be allocated and recovered from all customers in the same manner as existing administrative costs. It is not clear how this will be done in the context of existing incentive regulation plans for Enbridge Gas Distribution and Union Gas which have already set and approved the level of recovery of the utilities' operating and capital costs for 2017 and 2018.

Third, notwithstanding that the facility and customer related cap and trade costs will have separate rates, the OEB had directed that the charges related to the recovery of Cap and Trade program costs will be included in the delivery charge on the bill. In other words, there will be no separate identification of these costs (or the underlying rates) on a customer's bill. As pointed out in a news article about the OEB's decision, this means that the cap and trade costs will be subject to HST.

Finally, the OEB has indicated that it will provide utilities with "key messages" to be included in customer communications about the Cap and Trade program and related costs. While the OEB will not require pre-approval of the utilities' communications to customers, the OEB's decision indicates that "[t]he OEB will expect the Utilities to provide their customer communication materials to the OEB prior to any Cap and Trade-related information being delivered to customers."

According to the OEB's decision, the balance of the Regulatory Framework for Natural Gas Distributors' Cap and Trade Compliance Plans will be finalized and issued in the fall of 2016.