Mr. Paul Pudge Assistant Secretary Ontario Energy Board 2300
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November 28 2003 Mr. Paul Pudge Assistant Secretary Ontario Energy Board 2300 Yonge Street, 26th Floor Toronto, Ontario M4P 1E4 Dear Mr. Pudge: Union Gas is pleased to be able to provide comments on the challenges facing the energy industry and the Board’s priorities in response to Howard Wetston’s October 17, 2003 letter. 1. What are the key challenges for the electricity and gas sectors in the short and long term? The major challenge for the electricity and natural gas sectors is restoring consumer and investor confidence. That confidence can only be restored if there are predictable, stable, and transparent political and regulatory energy policies in place in the Province of Ontario that will: i. Provide clear market rules to all participants; ii. Ensure reliable energy supplies are available; iii. Support and encourage economic investment in electricity and gas infrastructure; iv. Result in energy prices for consumers that are relatively stable and reflect the true delivered cost of the commodity; v. Let the energy markets operate with minimal regulatory and political intervention; vi. Support a regulatory framework that is fair, efficient and effective; vii. Protect the environment; and viii. Align with federal energy policy where appropriate. Consumer and investor confidence is lacking most in the electricity sector. However, Union believes there should be general alignment in the above referenced energy policy attributes between the electricity and natural gas sectors. Union also believes that there is the potential for severe price impacts on energy consumers over the medium term. These price impacts could arise due to price and demand uncertainty for energy producers, and inadequate returns and contractual terms for infrastructure investors. These circumstances apply to natural gas as well as electricity. It is critical that the Board, with support from the Ministry of Energy, immediately undertake an assessment of the future demands and infrastructure needs for the Province to provide context for the assessment of their policy requirements. Union has already completed substantial work in this regard, and would be pleased to assist the Board as required. 2 2. What should the OEB do to respond to these challenges? Are there existing activities in which the OEB is engaged that should be given greater or lesser priority? What do you think our first priority should be? The first priority of the Board should be to complete its transformation to a self-funding crown corporation, including new Board appointments and hiring more qualified staff, and completing the memorandum of understanding between the Chair of the Board and the Minister of Energy. The Board’s website identifies a number of key projects and initiatives for 2003-04. In Union’s view, the Board needs to take a disciplined and orderly approach to prioritizing its projects and initiatives. It would be most efficient for the Board to establish and communicate its policies in advance of dealing with many of the identified projects and initiatives. A significant number of the projects and initiatives relate to how the Board’s policies will be put into practice. Establishing policy first would assist parties in addressing specific projects or initiatives and minimize the need to revisit them at a later date. Many natural gas sector issues that lend themselves to Board policy direction were discussed at the Board’s November 12, 2003 Natural Gas Forum. In general, these issues have historically been addressed by the Board during utility specific proceedings. As a result, they are frequently revisited and inconsistencies in approach between utilities may have evolved. Issues that lend themselves to Board policy direction include regulatory process related matters such as the regulatory framework within which the Board plans to regulate natural gas and electricity distributors and the Board’s approach to intervenor funding. i.e., the Board needs to clearly identify whether their objective is to achieve incentive outcomes or cost of service outcomes and then select the most suitable regulatory framework to achieve the desired outcomes. The Board should also consider ways to apply more rigour to requests for cost awards and ways to reduce the number of interventions. In Union’s view, the Board should be striving for streamlined ratemaking and facilities approval regulatory processes that minimize the amount of time required to set rates or approve facilities. For instance, if rates are being set for a year, the regulatory process should be much shorter than a year. The Board should also be pursuing approaches that make it possible to set rates for more than a year at a time. In addition, the Board should critically assess the circumstances in which a facilities hearing is required and identify opportunities to eliminate the need for a hearing if there is no dispute about the facility being in the public interest. Gas sector issues that lend themselves to Board policy direction include the costing and pricing of utility: i) system gas supply services (i.e., whether it would be appropriate to allocate costs to system gas supply service as if it was managed as a “stand-alone” entity, whether utilities should have the option to provide a fixed price offering and what form of regulation, if any, should the system gas supply service be subject to), ii) transportation services provided to merchant storage developers, and iii) distribution services provided to power generators. The Board needs to assess the current retail market structure in Ontario and determine how much effort it wants to expend trying to evolve the competitive market for the sale of natural gas further. Approximately half of the retail natural gas commodity market in Ontario currently buys their gas supply through a direct purchase arrangement. Virtually all direct purchase supply is provided by two marketers. Policy direction on the role of the utilities in contracting for upstream transportation capacity on behalf of customers would also be beneficial. 3 In Union’s view, standardizing regulatory approaches and reporting requirements between the natural gas and electricity sectors should be a low priority for the Board. The differences that exist between natural gas and electricity mean that different regulatory approaches and solutions may be appropriate for each sector. 3. What new initiatives should the OEB undertake and what priority should they be given? Union is not aware of any additional high priority initiatives that haven’t been discussed above or on the Board’s website. Sincerely, M. Richard Birmingham, C.A.