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Posted in: Ontario | Practice & Procedure | Ratemaking

Apr 28, 2015

OEB Decides to Forebear From Regulating Union Gas LNG Sales

By David Stevens

On April 9, 2015, the Ontario Energy Board issued a decision declining to regulate Union Gas Limited's production and sales of liquefied natural gas (LNG). The OEB decided to forebear from regulating this activity because a competitive market already exists for LNG as a transportation fuel.

Union operates an LNG facility in its northern service area for winter peaking purposes. The LNG facility allows natural gas to be cooled and liquefied and stored. When it is needed for system integrity purposes, the LNG is vapourized back into a gas. Union has identified that this LNG facility is underused, and that with some additional investment the facility could supply LNG to transportation customers on an interruptible basis. Union asked the OEB to establish a rate for its sales of LNG. In response, Northeast Midstream LP, an independent company involved in providing LNG services, asked the OEB to exercise its power under section 29 of the Ontario Energy Board Act, 1998, and forebear from regulating the provision of LNG.

The OEB used the same approach to evaluate Northeast's forbearance request as had been applied in the NGEIR proceeding (EB-2005-0551). In the NGEIR case, the OEB decided not to regulate the prices and revenues from new gas storage developed in Ontario. The approach used in each case is to determine whether there is competition sufficient to protect the public interest. If that is found to be the case, then section 29 of the OEB Act directs that the OEB must refrain from regulating the subject activity. To assess whether sufficient competition exists, the OEB will consider the relevant product market, the relevant geographic market, the existing market share and market concentration of market participants, whether there are barriers to entry and whether there are other public interest factors to consider.

In this case, Northeast provided evidence about the existing competitive market for LNG as a transportation fuel which competes with diesel fuel, and Union did not file any responding evidence. The OEB agreed with Northeast that there is a sufficiently competitive market for transportation fuels in the relevant market, and that if Union was allowed to operate a regulated LNG service this could harm the existing competitive industry and prevent new entrants. In the result, the OEB decided to refrain from regulating Union's provision of a new LNG service. The OEB will require Union to allocate the costs of the LNG facility between regulated (system integrity) and unregulated (LNG sales), and ensure that the costs of the unregulated service are not included in Union's regulated rates.

It will be interesting to see whether this decision signals a growing openness to forbearance by the OEB. There is a variety of business opportunities being pursued by or available to regulated utilities in product markets that already include some competitors. Examples include suite metering, energy management services and CDM activities. The OEB's analysis in this case could support removing such activities from regulation. Importantly, there is now a precedent for market participants, rather than the regulated utility or the OEB itself, to initiate the process to consider whether forbearance is appropriate.

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