Emphasis on local consumption of gas misguided; focus should be on creating
best value for Atlantic Canadians from the gas sector as a whole

HALIFAX — The Atlantic Institute for Market Studies (AIMS) today released the most recent of its Oil & Gas Papers series entitled, “Having Our Gas and Selling It Too: Natural Gas Distribution in Atlantic Canada” (Requires Adobe Acrobat Reader). This study provides an overview of the gas industry, its history and development as well as a primer on the economic forces driving the industry. “Having Our Gas and Selling It Too” debunks widespread but misguided thinking on how the region can best benefit from natural gas, and it recommends a regulatory framework that will provide gas to the maximum number of consumers at the lowest possible price.

The top 10 misconceptions include:

The biggest benefits of natural gas come from consuming it locally.
We can sell the gas to ourselves at discount prices and to the export market at a premium.
American consumers need our gas more than we need them to develop it.
Subsidizing the distribution of gas creates more jobs and other benefits than it destroys.
Communities who don’t have access to gas are at an economic disadvantage relative to those who do.
Natural gas distribution is a dangerous monopoly.
Government is the public’s best protection from predatory gas distributors.
The industry’s pursuit of profits conflicts with the public interest.
Regulations appropriate for mature gas markets elsewhere in Canada are appropriate for greenfield markets such as Atlantic Canada’s.
Government policy is no longer an impediment to developing the natural gas industry.
According to the author, who holds a Ph.D. in Natural Resource Economics, even if Atlantic Canadians never consume their own natural gas, the royalties, economic growth, economic diversification and a new addition to the energy mix will generate benefits far greater than those which could come from local consumption alone. In a similar vein, he shows how dependent Atlantic Canadians are on US consumers and investment, without which our offshore gas would remain in the ground, benefiting no one.

On the question of the power natural gas distributors might exercise over consumers, Dr. Tucker notes, “The fledgling natural gas distribution industry in Atlantic Canada does not have the clout to control prices or to generate excess profits and it competes against well-entrenched electrical utilities and fuel oil distributors. This lack of market power means that gas-specific provincial regulations to protect the public interest are not required. The best course for the provinces is to choose a gas distributor and let them get on with the business of building the infrastructure and attracting customers.”

As a start-up industry, gas distributors will NOT be generating excess profits, they will, in fact, lose money for a number of years. When Atlantic Canada’s gas distribution system has matured — i.e., when the distribution system is built, profits begin to be generated, and significant market share is acquired — then regulators should consider more wide-ranging regulations, if and when circumstances warrant. Dr. Tucker proposes a performance-based regulatory framework, which is designed to encourage system efficiencies and squeeze out excess profits, as the most appropriate regulatory structure for such a mature industry. This approach properly balances the needs of both distributors and consumers.

The false start to gas distribution in Nova Scotia is largely due to the province’s initial insistence that gas be delivered to communities regardless of the economics. Whatever the political advantages of such a strategy, it was bad business, as the government has now come to acknowledge.

New Brunswick’s regulatory approach has been somewhat sounder, but is hobbled by a major policy error. Separating the marketing and distribution of gas is a policy that may make sense in a mature market, but is ill-suited to a brand new gas market such as New Brunswick.. Prohibiting the distributor (Enbridge Gas New Brunswick) from marketing gas has slowed to a crawl the signing up of new gas customers and has proven a disservice to the public.

The regulatory model and accompanying policies recommended in this study will, according to the author, “harness competitive economic forces, which will help ensure that the maximum number of Atlantic Canadians have access to natural gas at the lowest possible price. However, competitive forces cannot guarantee that the gas market will grow rapidly, only that it will grow efficiently. Therefore, governments will need to resist politicizing the regulatory process to ‘encourage’ rapid access.”

According to one of Canada’s leading experts in public policy governing natural gas, Tom Adams, Executive Director of the Toronto-based Energy Probe: “Dr. Tucker makes several major contributions to the debate over Atlantic Canada’s natural gas future in the area of market pricing and rationalized regulation. His recommendations hold significant promise for getting the region’s faltering natural gas distribution sector back on track. As the clock ticks down for Nova Scotia and New Brunswick to take advantage of favourable pipeline transmission arrangements, energy consumers can only hope that policy makers move quickly to get his recommendations implemented.”

Read Having Our Gas and Selling It Too: Natural Gas Distribution in Atlantic Canada

For further information, contact:
Brian Lee Crowley, President, AIMS, 902-499-1998
Tom Tucker, 902-835-7069