PIAC submission on security deposits
PIAC’s submission on security deposits, on behalf of a coalition of low-income energy consumers, to the Ontario Energy Board.
The Ontario Energy Board (OEB) is currently considering changes to the rules governing the customer security deposit policies of electricity distributors. For more information on this topic, visit the the OEB website
ONTARIO ENERGY BOARD
NOTICE OF PROCEEDING TO AMEND THE DISTRIBUTION SYSTEM CODE AND RETAIL SETTLEMENT CODE CONSUMER SECURITY DEPOSIT POLICIES
Submissions of the Vulnerable Energy Consumers’ Coalition (“VECC”) With Respect to the Notice of Proceeding Concerning Consumer Security Deposit Policies
These submissions, made on behalf of the Vulnerable Energy Consumers’ Coalition (“VECC”) are in response to the Ontario Energy Board’s own motion of June 10, 2003 to initiate a proceeding concerning proposed changes to the Distribution System Code (the “Code”) to provide for rules with respect to the consumer security deposit policies of electricity distributors. The Board has also noted that consequential changes to the Retail Settlement Code are also being proposed, as a result of the changes to the Distribution System Code.
VECC has a particular interest in this proceeding because it touches on issues that are of concern to the groups that constitute this coalition. VECC represents the Ontario Coalition of Senior Citizens (“OCSCO”), the Ontario Coalition Against Poverty (“OCAP”) and the Federation of Metro Tenants Association (“FMTA”). OCSCO is a coalition of over 120 senior groups, as well as individual members across Ontario and represents 500,000 senior citizens. OCSCO’s objective is to improve the quality of life for Ontario Seniors. OCAP is an umbrella organization of regional and locally based anti-poverty groups throughout the province. The FMTA is a non-profit corporation composed of over ninety-two affiliated tenants associations, individual tenants, housing organizations, and members of non-profit housing co-ops.
These organizations have longstanding concerns associated with the provision of public services and utilities and their client groups, who are low income and fixed income consumers, are particularly affected by security deposit policies of utilities. VECC’s submission, therefore, focuses on the proposed changes that will affect the residential customer rate class.
Overall, VECC supports the Board’s proposal, following upon the recommendations of the working group, to standardize consumer security arrangements among electric Local Distribution Companies (“LDCs”). The current provision in the Retail Settlement Code places too much discretion in the hands of LDCs to impose security deposits on consumers without any specific guidelines as to terms or amounts. This has resulted in inconsistent approaches, which has resulted in uncertainty and unfairness for residential consumers across the province. VECC therefore supports the requirement for LDCs to adhere to a set of minimum requirements in preparing their consumer security deposit policies.
VECC’s concern, however is that even the adoption of uniform guidelines will have a disproportionate impact on low and fixed income consumers, given the maximum amount of security deposit that may be charged under the proposed amendments. VECC’s position is that low-income residential customers should receive an exemption from LDC security deposit obligations, based on the definition of “low-income consumer”, proposed by the Advocacy Centre for Tenants Ontario. It is VECC’s submission that the Board has the authority under its enabling legislation, the Ontario Energy Board Act1, to grant such an exemption.
The Board has the legislative authority to grant mandatory exemptions
The Board has a clear objective under Section 1 of the Ontario Energy Board Act to provide consumers with non-discriminatory access to electricity distribution systems in Ontario and to protect the interests of consumers with respect to prices.
The recent amendment to Section 88. (1) (z.4) of the Ontario Energy Board Act states that the Lieutenant Governor in Council may make regulations governing the amount of deposits charged by distributors as a condition of distributing electricity to consumers. We argue that this provision gives the authority to the Board, through the regulatory instrument of the Distribution System Code, to mandate exemptions to the requirement of a security deposit.
Residential customers do not present the greatest non-payment risk to LDCs
The Board has recognised that the residential customer rate class does not post the greatest degree of non-payment risk, as acknowledged in its June 10, 2003 Notice of Proceeding: “…large customers (> 50 kW), representing the greatest degree of non-payment risk, would have their deposit refunded after 7 years of GPH”.
We also note that research on payment patterns of utility customers indicates that residential consumers tend to pay their utility bills before paying nearly any other obligation, other than rent or mortgage.2 This supports the argument that distributors may exempt a certain portion of residential customers, without undue financial risk or risk of being held imprudent by the Board. The Board, in its August 14, 2002 letter reiterated that LDCs “are not intended to be held generally accountable or at risk for uncollected commodity costs from consumers.”
The proposed formula for determining a consumer security deposit is prohibitive for low- income residential consumers
The proposed Code amendments set out a formula for calculating the maximum amounts of a security deposit which a distributor may require of a residential consumer, based on a an average billing multiplied by a billing cycle factor. VECC’s concern is that the formula allows maximum amounts that may be prohibitive for some consumers. For residential customers with an average monthly electricity bill of $100, the maximum security deposit that could be charged would range from $250 to $450, depending upon the customer’s billing cycle. These amounts could be prohibitive for many low and fixed income customers, as even a cursory analysis of income levels of those in the lower income brackets and the financial challenges they encounter reveals.
The overall impact of paying higher utility costs is much greater upon lower income residential consumers than any other class of consumers. The demand for utilities by residential consumers is virtually inelastic. A consumer’s dependence upon these utilities is such that the consumer will continue to demand almost the same amount of service even if the price increases. Residential consumers who are also poor have an even more inelastic demand, being less able to choose between alternate suppliers of electricity than any other class of consumers.
Statistics confirm this assertion. A recent Statistics Canada analysis of the widening gap between rich and poor Canadians strongly suggests the difficulties low-income families, who would not qualify for social assistance utility supports would face in having to pay a security deposit. The typical low-income family in 1999 had only $300 in savings to protect it against unexpected financial hardships.3
In 1999, the lowest household income quintile (those earning less than $20,520 per year) in Canada, spent, on average, more than twice the amount of their income on utilities (water, fuel and electricity) than the highest income quintile (those earning $79,964 and over).4
There has been some judicial consideration of the constitutionality of charging security deposits to low-income residential consumers, which is leaves open the possibility that the imposition of a security deposit on low-income customers may be found to be unconstitutional. Although the court in Clark v. Peterborough Utilities Commission5 found that the requirement of a security deposit upon the applicants, who were persons of limited income, was constitutional, we argue that the court was inconclusive on the issue of the constitutionality of effect of consumer security deposit policies on certain income groups.
We take issue with the working group’s interpretation of this case, based on their meeting notes of October 9, 2002, page 3, which suggest that this case affirmed the legality of the requirement of a security deposit upon low income consumers by a distributor. It is our view that the decision cannot be so broadly interpreted and that it stands for the narrower proposition that, on the facts before this court, a constitutional argument could not be made. The court stated:
In conclusion, then, I find that the applicants have not proven that the P.U.C. policy violates s. 15(1). It may well be a provable proposition, using the P.U.C.’s records or by a statistical survey of those of whom deposits are required or in other ways, but it has not been shown in close to any satisfactory way in this case. Strangely, the expert in utility practices retained by the applicants and the coalition, Roger Colton, was based in the United States…However, he did not analyze or have any knowledge of the Ontario or Peterborough situation nor did he have any knowledge of social welfare legislation in Ontario. Mr. Anand was unable to traverse the resulting evidentiary gap with law alone, impressive though the attempt was.6
The court’s inconclusive approach to the issue of the legality of security deposits imposed by distributors upon low-income consumers in Clark, does not constrain the authority of the Board to exempt low income consumers from security deposit policies of LDCs.
The proposed amendments fail to address the relationship between non-payment of a security deposit and termination of serviceThe proposed amendments fail to address an important issue concerning consumer security deposits, whether non-payment of a security deposit is grounds for termination of service pursuant to section 31 of the Electricity Act, 1998. We note the comments by the Board in their August 14, 2002 letter regarding the co-ordination of a working group on consumer security deposits, that the Board had not “made a determination on whether non-payment of a consumer security deposit is grounds for termination of service pursuant to section 31 of the Electricity Act, 1998.” We are very concerned about this omission, particularly in light of the position taken by the working group in their Options Paper (April 10, 2003) that the LDC be given the ability to limit or disconnect service for a consumer’s non-compliance with a security deposit requirement.
If the Board proceeds with the proposed amendments to the Code which would impose a security deposit requirement on all residential consumers, we propose that the Code be amended to state that non-payment of a consumer security deposit by a residential consumer be specifically exempted from distributor’s power to terminate service under section 31 of the Electricity Act, 1998.
VECC recognizes that the rationale for applying a security deposit by a utility is to protect a utility from those customers who fail to pay their bills and protect other ratepayers who would be required to make up the loss of revenue from non-paying customers. This argument, however, must be weighed against other, equally compelling arguments. These include the actual financial capability of low and fixed income residential consumers to meet the obligation represented by a security deposit, the relatively low level of financial risk that would be posed by exempting consumers who met the required definition of low-income, and the ultimate impact of the inability to access electrical service by residential consumers.
Despite comments by some members of the working group that provided stakeholder input to the Board on this issue, that “Electricity is not defined as a necessity of life (not an essential service)”7 the provision of electrical service is well recognized as a necessity of modern urban life. In Clark v. Peterborough Utilities Commission,  O.J. No. 1743 (Gen. Div.) the court, in considering the issues raised by the imposition of security deposits on low income customers, affirmed this:
“I recognize that the issues raised by these applications are of importance to all parties. They remain of importance to others in the position of these applicants in 1991, faced with a threatened denial of what is now a necessity of life in urban Canada.”
The U.S. Supreme Court has also affirmed this view by stating that “utility service is a necessity of modern life; indeed, the discontinuance of water or heating for even short periods of time may threaten health or safety.”8
VECC recommends that the Board amend the Distribution System Code as follows:
- Section 1.2 is amended to add the following definition: “low-income residential consumer” is a person with a household income level at or below the Low-Income Cut-offs (“LICOs”) defined by Statistics Canada, using pre-tax, post-transfer household income.
- The proposed Section 22.214.171.124 is amended by adding after the last bullet “Where a security deposit is not paid by a residential consumer, a method of enforcement may not include termination of service.”
- Add Section 126.96.36.199.1 – “A distributor shall waive all security deposit provisions of its Conditions of Service in favour of a low-income residential consumer.”
- The proposed Section 2.4.11 is amended to add the following: – (c) verification that the consumer is a low-income residential consumer.ALL OF WHICH IS RESPECTFULLY SUBMITTED this 10th day of July 2003.
Sue Lott, Counsel for VULNERABLE ENERGY CONSUMERS’ COALITION (“VECC”)
- Ontario Energy Board Act, 1998, S.O. 1998, c. 15, Sched. A.
- National Consumer Law Centre, Access to Utility Service (2nd ed. 2001) at 76
- Statistics Canada, The Daily (July 18, 2002) at 13.
- Statistics Canada, Spending Patterns in Canada, 1999 (Ottawa: Industry Canada, August 2001) at 57.
- 24 O.R. (3d) 7.
- Ibid. per Howden J.
- Consumer Security Deposit Working Group, Meeting Notes – #3, (October 9, 2002) at 3.
- Memphis Gas Light and Water Division v. Craft, 436 U.S. 1, 18 (1978).
Utility Reconnection Services
Utility Reconnection Services: A New Threat to Vulnerable Consumers?
Public Interest Advocacy Centre
1204-ONE Nicholas St.
With Funding from Industry Canada
Copyright 2002 PIAC Contents my not be commercially reproduced, But any other reproduction with acknowledgments is encouraged.
The Public Interest Advocacy Centre (PIAC)
ONE Nicholas Street
Canadian Cataloguing and Publication Data
Utility Reconnection Services: A New Threat to Vulnerable Consumers? ISBN 1-895060-56-7
This report examines the current status of utility deregulation or restructuring in the energy and telecommunications sectors in Canada and the U.S. and its impact upon low-income consumers. It focuses on three major utility sectors that have the greatest impact on residential, low-income consumers: electricity, natural gas and telephone services. Specifically, the report examines to what extent reconnection services, or services targeted specifically to consumers who have lost service or have been unable to maintain utility service as a result of deregulation or restructuring, have emerged in Canada and the U.S.
The key characteristic of restructuring or deregulation is that investment and pricing decision-making are increasingly guided by market forces and competition. To enable this to occur, the core functions of the utility – the generation, transmission and distribution functions are separated or unbundled and a portion of these functions is subject to competition. The obvious and most significant impact upon the residential consumer is that their source of supply may change. It is no longer just the incumbent utility providing the service. The result has been the entry of reconnection companies into utility markets.
Utility restructuring in Canada has varied in its development and impact between utility sectors. Deregulation in the natural gas industry has been under way since the 1980s. There is some evidence that market segmentation has resulted as a result of restructuring in the gas industry. Market segmentation means that there is a differing impact of prices of natural gas upon different sectors of consumers, with higher prices for residential consumers than for other consumers, such as commercial or industrial consumers.
Deregulation in the electricity sector in Canada, has been a very recent development. It has mainly taken place in Alberta and Ontario. In those provinces, there is already some limited evidence of price increases for residential customers. In the telephone industry, the federal government has jurisdiction and has set out the framework for deregulation through its amendments to federal legislation, which took place in 1993. The major effect of deregulation of the telephone industry has been reductions in long distance rates but increases in local phone service. There is also some limited evidence of telephone reconnection services being offered in Canada.
A significant part of the report examines utility restructuring and its effects in some specific jurisdictions in the U.S. This emphasis comes because utility deregulation in certain U.S. jurisdictions has been significant in its scope and depth. As a result, there is more evidence of market segmentation and growth of reconnection services targeting vulnerable consumers. The report examines some of the regulatory responses to telephone reconnection services and the impact of market segmentation in the energy sector creating the phenomenon of Providers of Last Resort Services.
With this background, the report offers some initial assessment of the overall impact of utility restructuring on vulnerable consumers in Canada and the U.S. Utility price increases have a greater impact on vulnerable consumers because a greater proportion of their income is spent on utilities.
The report assesses how the U.S. experience of deregulation may relevant for Canada. It suggests that there may be a significant impact of Canada’s increasing exports into U.S. energy markets. There may be strong pressure on Canada to conform to the U.S. deregulatory environment. The examination of the effect of utility deregulation in the U.S. also points up very clearly the information deficit in this area in Canada. We have very few government and non-governmental resources dedicated to tracking deregulation and its impact in Canada.
Finally, the report focuses on Canada’s existing legal/legislative framework to protect vulnerable consumers. It looks briefly at the federal regulatory role in telecommunications and in energy and the provincial role, using Ontario as an example. It also looks at consumer protection legislation in Ontario and its applicability and the status of the common law notion of ‘duty to serve’ under deregulation. The report makes some specific recommendations concerning measures to assess status of restructuring, to address effects of restructuring on vulnerable consumers, and recommendations concerning utility reconnection services in the telephone and energy sectors.
This report is available in PDF format. [pdf file: 0.2mb]
Keeping the Lights On: Maintaining Universal Access to Electricity
The Public Interest Advocacy Centre (PIAC), a Canadian non-profit organization specializing in utility law and regulation released a study today that suggests that the restructuring of the electricity industry in Canada may create results which disproportionately burden low-income customers. Michael Janigan, Executive Director and General Counsel of PIAC and co-author of the study stated,
” While it is difficult to predict outcomes based upon the current experience with restructuring in the electricity industry in other jurisdictions, there is reason to believe that small volume customers will suffer a detrimental impact as a result of electricity restructuring.”
Several provinces, including Alberta and Ontario have moved towards the creation of a competitive retail market for electricity. Others including New Brunswick are committed to studying the prospect.
The PIAC report Keeping The Lights On: Maintaining Universal Access To Electricity looks at possible policy solutions for financial hardship to low-income consumers. The report surveys various programs that have been put in place by US jurisdictions to deal with problems in maintaining utility access, but does not recommend an immediate move to US style programs.
“Prolonged and sustained electricity increases as a result of restructuring would be a likely result of poor market design,” Janigan said. “This shouldn’t be fixed by subsidizing low-income customers but by fixing the market design.”
Conversely, the report concludes that the problem of short-term electricity price spikes may justify the implementation of a program to mitigate the impact of such price increases.
The Public Interest Advocacy Centre provides legal representation, research, and advocacy services on behalf of consumers, particularly vulnerable consumers of important public services.
A hard copy of the report may be obtained at a cost of $8.00.
To order your copy today please contact the Public Interest Advocacy Centre
(613) 562-4002 ext. 60(phone)(613) 562-0007 (fax) or by e-mail email@example.com
Standard Offer By Utilities: Making Competition Work For All
The introduction of competition into the utility industry is intended to afford consumers a right to choose among different suppliers of a utility product such as natural gas or electricity. What happens to those consumers for whom no choice exists, or who are satisfied with their current utility service? How will they receive utility service and the benefits of competition? This study looks at how it might be possible to protect the inert customer market and afford it some of the benefits from competition through the use of a standard offer or standard supply service provided by the utility.
60 pages $15.00
Since the 1980s, there has been a general trend towards deregulation and privatization in North America. Canadian public utilities such as telecommunications, energy and transportation have been greatly affected by this trend. Change has been brought about through both legislation and regulation. Regardless of the source of change, the introduction of competition into historically regulated areas will continue to have a significant impact on Canadian consumers. Changes made now will determine how consumers are supplied with commodities which are essential to sustaining their standard of living in the future.
The experience with natural gas deregulation in North America shows that once competition is introduced into one sector of the industry, it almost inevitably flows into other sectors. Once competition is introduced at the wholesale level, plans are made for a transition to retail customer choice. Electricity restructuring has exhibited the same trend. In many jurisdictions, energy marketers have been, or will be, permitted to sell natural gas and electricity directly to retail consumers.
All energy industry players and types of consumers will encounter changing circumstances. Both low income residential and large industrial energy consumers will be faced with choice concerning who to buy their energy from, and under what terms. The number of players involved in the industry will increase, with potentially confusing results. Regulators will need to change how they regulate in accordance with the altered environment. Existing utilities will have to come to terms with a changed role, and in many instances, new corporate structures.
Deregulation is premised on the notion that competition will provide consumers with a wider variety of ‘unbundled’ energy options at lower prices than exist under regulation. Only monopoly functions will remain regulated. Competing energy marketers will supply consumers with energy, and utilities will simply transmit and distribute the commodity. Thus, following a transition period, utilities will exit the ‘merchant’ function; they will no longer sell energy directly to the end user. Monopoly and competitive services will be separated, thereby decreasing the potential for market power abuse. The utilities’ traditional obligation to serve must therefore be redefined, as system supply will be largely dismantled.
The assumption that all consumers will benefit by making choices within the competitive marketplace itself assumes that consumers will make choices. This line of thinking does not recognize that consumers may choose not to choose a competitive supplier. Preliminary study in energy, (and in other deregulated industries), illustrate that consumers often do not want to ‘switch’ to competitive suppliers, especially in the short term. They are satisfied with traditional regulated service and unsure of how the new environment operates. A “wait and see” attitude is adopted.
Given the restructuring agenda, the question then becomes: who should supply consumers who have not chosen an energy supplier, and how? The following discussion proposes to answer such questions. In doing so, an emphasis is placed on ensuring that the positive benefits of competition are passed on to all users, including the low volume residential consumer.
Chapter One discusses the existence of consumer inertia, its potential explanations, and why an inert market is problematic. Chapter Two describes alternative means of dealing with consumer inertia through the facilitation of consumer mobility. In this respect the Ontario Standard Supply Draft Code will be examined and the implementation of a standard offer supplied by a competitive bidding process will be recommended. Chapter Three will compare and contrast the competitive bidding processes envisioned and implemented in Maine, Ohio, and Massachusetts. Chapter Four will discuss insights which may be drawn from the case studies, as well as from competitive bidding in other industries and the traditional activities of municipal governments. The study will conclude with ‘best priority’ recommendations for the design and implementation of a standard offer supplied through a competitive bidding process.
Utility Shopping: Are Consumers Ready?
While competition promises many benefits in utility markets, in practice consumers have to be knowledgeable to do well in deregulated markets. The report evaluates the level of consumer sovereignty that exists in Canadian deregulated utility markets by examining the results of a national survey on consumer knowledge and attitudes towards the long distance, natural gas, and future electricity markets. The report concludes with five key recommendations about making utility deregulation more friendly for consumers.
78 pages $15.00
The introduction of competition into formerly regulated utility markets is a double-edged sword for residential consumers. While competition promises important benefits, it often fails to live up to its promises, and delivers mixed results instead. Lower prices may be accessible to only part of the market; questionable marketing strategies may be used; confusing pricing structures may make informed choice difficult. Consumers must be aware and knowledgeable to manage in this environment. Yet, as this study shows, not all consumers are actually knowledgeable enough to function well, even in well-established utility markets.
Deregulation has taken place in Canadian utilities such as transportation, telecommunications, and natural gas, and is imminent in electricity. Generally, utility deregulation means the relaxation of government oversight of prices and performance, and the entry of one or more competitors into the market. Once the market is functioning, consumers can switch from the former monopolist to another company. But are residential consumers actually ready for the utility shopping that is brought about by deregulation of utility services?
This report provide an overview of the deregulation debate, which shows that residential consumers have reason to be wary of deregulation. Residential consumers do not automatically benefit from deregulation of a utility market. In some cases, consumer choice is slow to emerge, and when it does emerge choice is limited. Deregulation can lead to price increases and quality decreases in practice, even though competition theory stipulates that the opposite should be true. Some or all of these factors can compromise social values, such as affordability and accessibility.
This report also contains a discussion of “workable” competition, the type of competition that residential consumers usually encounter in real deregulated markets. The examples of airline and long distance telephone deregulation show that workable competition may offer some benefits for consumers, but market flaws, such as market segmentation and inadequate consumer knowledge levels, may also impose disadvantages. Typically, market flaws arise when there is single firm dominance, which is often the case in deregulated markets.
The report then evaluates the level of consumer sovereignty that actually exists in Canadian deregulated markets, by examining the results of a national survey on consumer knowledge and attitudes towards the long distance, natural gas, and future electricity markets. Key findings include:
- 91% of respondents correctly believe that they have a choice between competing companies for long distance service, while only 50% of respondents in Ontario and Alberta correctly believe that they have a choice in natural gas suppliers;
- 20% of respondents do not find it easy to compare long distance prices (while 79% find it easy), and 50% of Ontarians and Albertans do not find it easy to compare natural gas prices (while 50% find it easy);
- Canadian consumers clearly favour receiving marketplace information from the competing companies, supplemented by information from consumer organizations, and, to a lesser extent, from regulatory agencies (46% wanted to receive information from companies, 23% wanted to receive information from consumer organizations, and 15% wanted to receive information from regulatory agencies).
In the long distance market, the survey shows that consumer knowledge and confidence has developed over the seven years since competition was introduced. There is still a significant inert segment of the residential long distance market, but it is quite a bit smaller than it was three years ago. From a consumer perspective, it is not acceptable that there be such a long lag in the development of consumers’ ability to participate in a deregulated market. Utility services are essential, and it is important that consumers be able to make informed decisions about new options as soon as the regulatory protections are removed.
Local telephone competition is beginning to emerge. There could be the same lag in consumer knowledge and confidence in dealing with the new local market, unless public education is taken more seriously. As with residential long distance, this consumer inertia will limit competition, and mean that the market is less responsive to consumers than it should be.
Consumer knowledge and confidence is still low in the residential natural gas markets of Ontario and Alberta. In fact, consumers’ ability to understand and make choices about natural gas is so low that real competition is not possible in a large segment of the market. In addition, ancedotal evidence suggests that abusive marketing practices have been widespread in Ontario, further discouraging consumers from participating in this market.
The report concludes with recommendations for decision-makers in implementing future deregulation of utility markets, aimed at ensuring that real consumer sovereignty in these markets materializes, and is established early on.
Summary of Recommendations
- “Workable” competition should work for residential consumers: Problems with market structure, such as single firm dominance, need to be carefully considered by regulators, and addressed in deregulation strategies. If necessary, deregulation needs to be slowed down in the residential portion of the market, to lay the groundwork for robust competition in the future. A standard offer should be seriously considered in any utility deregulation where there is apt to be significant consumer inertia in the residential market.
- Advertising needs to be more than just celebrity spots: Regulators should develop strategies to increase the information content of advertising as competition is getting underway in deregulated markets.
- There should be sources of independent information: When there are low levels of consumer knowledge about a new utility market, regulators should take steps to actively promote consumer education. Since the public would like consumer organizations to be involved in information dissemination, consumer organizations should be involved in public education strategies. For on-going information needs, regulators should consider developing, or foster the development of tools by consumer organizations for consumers to compare prices and quality of services in deregulated environments. Also, Canadian regulators should collect more information about service quality, and share this information more openly with consumers.
- Basic consumer protections are still needed in a deregulated environment: Codes of conduct for companies in newly competitive markets should be developed before competition starts; consumers should not have to experience widespread deceptive and borderline marketing practices before such codes are introduced. Rules on disclosure need to be in place before competition begins, particularly with respect to price. The way price will be disclosed should be tested with focus groups to ensure that most consumers readily understand it.
- Just because it is deregulated doesn’t mean it never needs to be monitored: Canadian decision-makers should ensure that monitoring of deregulated utility markets is undertaken while the market is in transition from monopoly to competition, to ensure that the deregulation strategy is meeting its original goals. Also, any self-regulatory initiative should include monitoring and full public reporting before government endorses it.
Utility Shopping Resources
As a result of our findings in this study, PIAC decided to launch a Utility Shopping Webpage, which is available on the PIAC site at www.piac.ca The page contains charts comparing long distance telephone prices by province, an update on local telephone competition, and links to resources on comparing Internet service providers, natural gas companies, and financial services.
This information is also available on paper for free from PIAC; send us a stamped self-addressed envelope or fax number with your request. If you do not have access to the Internet, and would like to, call 1-800-268-6608 to see if there is an Internet public access point in a library, community centre or school near you.
Deregulation of the Canadian Natural Gas Market
The Deregulation of the Canadian Natural Gas Market: A Consumer Progress Report
This report examines the ongoing process of gas deregulation in Canada and evaluates the results from a consumer perspective. The report finds that while deregulation has the potential for efficiency gains and increase customer choice, the changes have brought about unanticipated results that have compromised the achievement of the sought after efficiency gains.
60 pages $20.00
The international trend to introducing competition into industries such as energy and telecommunications that have traditionally operated as regulated monopolies, has been driven by numerous factors. Potential new entrants have recognized that regulatory change is a prerequisite for expanding their opportunities in regulated businesses. As a result, they have been prepared to invest heavily in reducing regulatory barriers to their activities. The incumbent regulated companies also have realized that deregulation creates significant opportunities, as well as risks, for them. Large customers often see deregulation as a means of enhancing their ability to exploit their “buying power” to obtain better prices in marketplace.
Regardless of the potential benefits motivating each interest group, the central theme of most of the arguments in support of deregulation is the potential for efficiency gains and increased customer choice. With these objective in mind, the regulatory environment within which these industries operate has been restructured, leading to significant transformations of the markets they serve. These changes, however, have brought with them unanticipated results that have compromised the achievement of the sought-after efficiency gains. It is now clear that deregulation can create a wide range of problems for industry players, regulators and consumers. The success of deregulation initiatives is therefore dependent on the ability of the deregulated or re-regulated industry to address the problems that arise.
Deregulation of the Canadian natural gas industry began with the elimination of the regulated well-head price for natural gas more than a decade ago. This change has led to increasing pressure for change in all sectors of the natural gas business, from transportation and distribution, to storage, and to retail services.
In order to anticipate the potential impacts of further deregulation, it is useful to consider the nature and historical evolution of the natural gas industry in Canada. Exploration of the US and Australian experiences are also helpful in this respect. Benefits of further change must be examined in light of potential adverse affects on sub-categories of consumers. In particular, low volume residential users may find further natural gas deregulation detrimental, especially if there are no practical mechanisms implemented to provide vital public goods that the competitive marketplace may not be able to provide effectively.
The Halloween Agreement of 1985
Prior to 1985, the commodity price of natural gas in Canada was set by agreements between the federal government and the Province of Alberta. Canadian gas prices were based on crude oil prices; local gas distribution companies (LDCs) in those provinces which had a gas supply had their rates and terms regulated by provincial regulatory boards.
A variety of political and economic reasons led to the formulation of the 1985 Western Accord on Energy Pricing and Taxation. The Accord led to the October 31st, 1985 Agreement on National Gas markets and Pricing (the Halloween Agreement). The Halloween Agreement was signed by the Government of Canada and by the Governments of the three major gas producing provinces in Canada namely, Alberta, British Columbia and Saskatchewan.
The differences in views on gas pricing between the federal government and the gas producing provinces prior to 1985, were considerable. At the centre of those differences was the Western Canadian opinion that gas pricing linked to crude oil not only deprived gas producers of the perceived price benefits of a competitive market, but distorted the economics of increased gas production. On the other hand, in the wake of the oil shocks of the mid-70’s the federal government was keenly aware of the interests of the large consuming provinces in market price of gas that was determined by the economics of natural gas in Canada rather than the economics of oil internationally.
Despite these conflicting motives, the four governments involved agreed that the creation of a more flexible, market-oriented gas price system would be in the interests of both the producing and the consuming provinces. The agreement eliminated regulation of gas commodity prices; the price would be determined instead in the competitive gas market that would develop as a result of the changes introduced by the Halloween Agreement.
The major participants in this new market were familiar; the gas producers in Alberta, BC and Saskatchewan; NOVA and Transgas still operated their intra-provincial pipelines and Trans-Canada Pipelines Ltd. (TCPL) still operated the major interprovincial pipelines. New players referred to as gas agents, brokers and marketers (or the acronym ABMs) entered the market, however.(1)
Prior to the Halloween Agreement, LDCs in Canada obtained the bulk of their gas supplies through long term contracts with TCPL. These contracts involved both the supply and transportation of gas from Western Canada to the LDC’s franchise areas. In that pre-1985 market no end user of natural gas, from industrial companies to individual residential customers, was able to arrange for and procure their own supplies of gas.
Thus, before the Halloween Agreement was struck, TCPL was the prime long-term supplier, transporter and seller of natural gas in Eastern Canada; the LDCs were under long term contractual obligations to TCPL both for their gas supply and their transportation requirements. Following the Halloween Agreement, gas customers in Eastern Canada had the ability to displace the LDCs’ volumes by purchasing their supplies directly. Initially, the financial penalties known as unabsorbed demand charges (UDCs) were levied by TCPL on LDCs’ short falls in the previously contracted long term contracts resulting from this displacement. In addition direct purchasers holding transmission capacity on TCPL were also liable for UDCs in respect of their short falls. Various decisions by the National Energy Board (NEB) and provincial regulatory boards alleviated this problem so as to enable direct purchases to displace LDC gas and transportation contracts without undue penalties.
Development of the Direct Purchase Market
Two principal forms of direct purchase have developed in the Post-Halloween Agreement phase. These are Transportation Service (T-Service) and buy sell agreements (buy-sell).
T-Service is generally used by larger users of natural gas such as industrial or large commercial companies, frequently with the assistance of consultants or agents who arrange for the direct customer to acquire gas, matching transportation over TCPL, and delivery to the customer’s premises by an LDC. Large customers utilize both “unbundled” T-service, by which the customer contracts for only for transportation of gas on TCPL and “bundled” T-service by which customers pay a transport rate with the addition of a bundled charge for all of the LDC’s service (including storage and load balancing) in connection with the transaction. In neither service is LDC gas is supplied to the customer. The availability of T-service has been of considerable economic importance in that it has allowed many large industrial customers to significantly reduce the prices they pay for natural gas.
Buy-sell arrangements involve customers, or their agents, purchasing gas in a producing province and selling it to their LDC at the LDC average cost of gas (the “buy-sell reference price”). By buying gas on shorter term supply arrangements than those of the LDCs, buy-sell customers were able obtain a better price in the market than was paid by the LDCs. The difference would cover the agents and provide a rebate to the buy-sell customer.
Buy-sell customers pay the same charges as all system (non-direct) customers of the LDC. However, their effective gas cost would be reduced by the rebate earned through the buy-sell transaction (i.e., a buy from a producer, combined with a sell at a higher price to the LDC).
Buy-sell arrangements are used by industrial and commercial customers who consider the requirements of T-service contracts to be too onerous for their circumstances. In addition, the near-universal arrangement for the aggregators serving small residential and commercial customers was the buy-sell. These arrangements, however, have had difficulties such as:
- aggregation through less than ethical door-to-door, telephone or direct mail techniques,
- reliance on misleading or insufficient information in signing up customers to contract terms that were typically five years or longer, and
- inefficient or insufficiently financed direct sellers.
These difficulties (and others) have been a source of concern to provincial governments and regulators. Regulators for example have required that certain consumer protection practices be incorporated into contracts to reduce irregularities in this area of direct selling.
From 1997 on, Ontario LDCs obtained approval from the OEB to operate a form of T-service that was practical for use in the small volume market. This service, known as ABC (agent billing and collecting) T-service has enabled ABMs to offer contracts that fix the price of gas at a level that is not related to the LDC’s cost of gas. The ABM pays a transaction fee in respect of the billing service to the LDC which identifies the direct seller by name and telephone number on the LDC portion of the bill in respect of gas costs. The LDC collects a gas charge that is set by the ABM from its customer and remits it to the direct seller. ABC service obviates the need for two bills (LDC for delivery & ABM for the commodity) being sent to a direct customers.
Regulatory bodies have used the introduction of ABC service to require increased customer protection measures and the inclusion of enhanced information about direct selling inserted in monthly gas billings.
The Challenges Ahead
The changes described above have allowed an increased degree of choice and flexibility within the market. Simultaneously however, they have resulted in the creation of a new set of problems for industry participants, regulators, and consumers. Change has therefore contributed to calls for more change which in turn will lead to a greater need for mechanisms to study and cope with the affects of shifting industry structure.
In particular, the shift from system supply to direct supply has given rise to the concern that a secure gas supply system might be compromised and that system benefits such as low income protection, universal access to service, environmental protection and energy efficiency will not be provided for within a competitive environment. This is a particularly thorny issue in light of calls for the exiting of LDCs from the merchant function, which would result in LDC’s no longer supplying gas (in addition to distribution services) as they do presently. Gas supply could be wholly competitive, with non-regulated affiliates of the LDC competing with other marketers following the LDC’s exit from its merchant function. There is a fear that the new industry participants lack the ability and the desire to work together so as to provide the public goods and services that the LDCs have maintained within a regulated environment. The potential LDC merchant exit and the proliferation of affiliate marketers also bring into play potential abuse of market power concerns. While the potential for LDCs to engage in cross subsidization, predation, cost shifting, and discriminatory self-dealing can be dealt with by regulators, the LDCs’ informational advantages such as brand name recognition, possession of customer databases and basic organization still give them that the advantages for the moment. Thus, even if the maximization of competition within the marketplace is viewed as a good in and of itself, the residual power of the LDCs raises the question as to whether a competitive environment can be created and sustained.
Even given the existence of effective competition, considerable doubts exist as to whether customers will have the ability to make informed choices in the marketplace. Available options are technical and confusing and there is a lack of effective consumer education programs which serve to deal with these problems. This basic problem raises issues concerning the need for marketing oversight agencies, codes of conduct, transparency and dispute resolution procedures.
These are not issues unique to Canada or specific to the natural gas industry. Deregulation of energy sectors is occurring in many countries. Indeed, it is impossible to study the course of industrial change with regard to natural gas without looking at developments within the electricity sector. After all, there is much talk of the idea of ‘convergence’, meaning that in the future energy and other services may be provided by mega-distributors using parallel networks. The rise in the number of mergers between energy marketers within North America may be viewed as a foreshadowing of this trend. Government regulators, industry groups, consumer organizations and individual consumers are all grappling with past change and the potential for more. This has led to the adoption of a variety of approaches in different countries, states and provinces. It is instructive to compare these approaches when assessing and evaluating options for the future.
Section One of this study examines how the industrial pressures created by pipeline access and pricing changes have been dealt with by different jurisdictions within Canada. In particular, experiences in Ontario and British Columbia are compared and contrasted. Section Two explores the federally mandated open access regime in the US as well as subsequent state unbundling and aggregation initiatives. The specific experiences of California, Ohio and New York are examined. Section Three provides a case study of the Australian natural gas industry, highlighting the implementation of a Commonwealth framework and the unbundling initiatives in the state of New South Wales.
The remainder of the paper focuses on consumer protection issues which are implicitly raised within Sections One – Three. In particular, problems surrounding the potential LDC exit from the merchant function are examined and the mechanisms for redress suggested by various jurisdictions examined and evaluated. Section Four focuses on the potential for market power abuse by industry ‘incumbents’ through cross-subsidization, cost shifting, discriminatory self-dealing and the exploitation of informational advantages. Section Five examines threats to system integrity through a discussion of the obligation to supply, non-discriminatory access, and supplier of last resort issues. Methods for the provision of demand side management and the maintenance of system benefits are explored. In light of these risks, predictions of consumer savings are examined and assessed. Section Six focuses on the protection of meaningful consumer choice within a more devolved natural gas industry. In particular, informational challenges and the control of ABM practices are examined. The impact of marketing oversight agencies, industrial codes of conduct, and standard form contracts are explored. Section Seven sets out the report’s conclusions in light of stakeholder views on future developments.
1. The term ‘agent’ refers to companies that arrange contracts on behalf of customers (i.e., acting as their agents). Brokers act as a middle-man, facilitating transactions between buyers and sellers for a brokerage fee. Marketers seek customers for producers or on their own behalf, to purchase gas. ABM’s frequently act as “aggregators”, so named because they aggregate either gas producers (supply aggregator) or gas end users (demand aggregator). In the present stage of development of the gas market, parties or companies supplying gas directly are often referred to as the ‘ABM’ sector of the market.