Who's making money on natural gas prices?

January 25, 2001

Baby its' cold outside and natural gas is expensive. British Columbians face massive increases in the cost of natural gas, and there may be further large increases on the way. Especially for those with low incomes, it's a cold winter indeed.

So where is all the money being shelled out by consumers going?

BC's three gas distribution companies (BC Gas, Centra Gas and Pacific Northern) are not racking up huge profits from the current price spike. Neither are the pipeline companies, who's rates, like the distribution companies', are regulated. There has been much finger pointing by industry at the provincial government, which is bringing in large royalties as a result of higher prices. However, the province is also a big consumer of gas and faces its own cost increases throughout the public sector. Government royalties account for only about 25% of prices, and the price of natural gas is not affected by royalty rates (which are a percentage of the wholesale price set by the producer at the wellhead).

Curiously absent from public scrutiny have been the gas producers. If we follow the money trail, it turns out that these companies are, in fact, the greatest beneficiaries of the current situation. BC's top ten gas producer companies--who account for about one third of the province's gas production--stand to make over $1 billion in profits from gas pumped in BC over the next year, and possibly much more. That's an increase of more than 25% over the past year. Not one of these top ten companies has a head office in BC.

Why the huge increase in profits? Since our federal and provincial governments jointly deregulated natural gas in 1986, the wholesale price for natural gas has been determined by supply and demand in the market. Today it is essentially a continental market. While prices remained low immediately following deregulation, this was largely due to limited pipeline capacity from Canada to the US. As a result, prices were determined by local market conditions. Pipeline expansion and new pipelines have altered this equation. Ironically, the larger the pipeline we build to export gas to the US, the higher the price in our local market because of more direct competition with US purchasers.

After fifteen years of deregulation, it has become clear that government must do something to soften the blow of price increases for consumers. After all, we live in a cold climate and heating our homes is hardly a luxury. Low income British Columbians are especially hard hit. They face serious hardship this winter, while the gas producer companies rake in huge profits. This windfall is pure luck for these companies, the result of a hot continental energy market. British Columbians--in particular those unable to afford it--should not have to foot the bill.

Even though our governments have already deregulated natural gas, there are a number of things they can do in the short and long term to improve the situation. The federal government should impose an excess profits tax on oil and gas companies that are realizing windfall profits because of market conditions in the US. This money could be used to fund a consumer relief program in conjunction with the provinces. The federal government took such a step in 1995 when it imposed an excess profits tax on Canada's big banks. Governments' high royalty revenues and a share of revenues from the excess profits tax should also fund conservation and energy retro-fit programs.

In the longer term, we have to address the problem of a deregulated continental market. The federal government needs to put a lid on any new pipeline expansion to the US to create a better market for Canadian consumers. It also needs to re-regulate the gas market, which may mean revisiting NAFTA. We should not allow an essential service--energy, hot water and home heating--to be subject to an unstable market that is so clearly failing British Columbians.