Manitoba Electricity Exports to Subsidize Residential Natural Gas Costs

November 14, 2005

In its October 27, 2005 speech from the throne, the Manitoba Government announced a plan to subsidize residential natural gas consumers, a move that may have a significant impact on the province's retail market. Since the late 1980s, Manitoba, like most other provinces, has permitted active retail competition in the sale of natural gas, and marketers have captured about 20 per cent of the residential market. To ensure that the utility's default supply rate tracked market prices for gas, over the last five years the Manitoba Public Utilities Board (the PUB) has administered a quarterly natural gas rate adjustment mechanism similar to that used by the Ontario Energy Board. Under the RSM, or Rate Setting Methodology, default supply gas commodity rates charged by Manitoba Hydro/Centra Gas were adjusted quarterly to reflect one-year gas forecasts, with variances between forecast and actual costs tracked and flushed out every quarter for recovery over a twelve-month period.

When the PUB released its decision on Centra's annual rate application in early October, the Board voiced its concern about rising natural gas prices and encouraged Centra Gas/Manitoba Hydro to consider some form of rate smoothing for its November 1 quarterly rate adjustment application. When Centra filed its application a week later, it proposed effectively to cap the increase in default supply gas rates at 10 per cent and to accumulate uncollected costs in a variance account to be disposed of in an unspecified manner. A 10% per cent rate increase would fall significantly below the rate increase that would otherwise result from the application of the quarterly RSM mechanism. Despite vigorous objections from the retail broker community that Centra's proposal radically departed from existing PUB jurisprudence based on principles of price transparency and market responsiveness, on October 26 the PUB approved Centra's rate cap proposal.

One day later, in its speech from the throne, the Manitoba government announced that it planned to introduce legislation restricting Centra Gas/Manitoba Hydro to one increase in its primary natural gas rate during the winters of 2005 and 2006. As a result, the quarterly RSM rate adjustment scheduled for February 1, 2006 has been cancelled. Arguing that gas hedging programs would allow Manitoba Hydro to absorb increases in natural gas prices without passing them on to consumers, the Manitoba Energy Minister stated that should Manitoba Hydro end up losing money on its natural gas operations, the Crown corporation could use its profits on electricity sales, especially exports to the United States, to make up for losses on domestic gas sales. It was unclear from the throne speech whether this government cross-subsidization program would benefit only residential natural gas customers, or whether the price protection would be extended to Manitoba businesses.

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