An Ontario Energy Board decision on who pays for gas infrastructure in new developments has sparked a legal skirmish—and prompted the province’s energy minister to launch a mission aimed at reversing it.
The crux of the uproar is the OEB’s late December decision on Enbridge’s new rate application. That proceeding played into an argument over who should bear the financial burden for installing new gas connections that may become useless as the province electrifies and decarbonizes. The OEB told Enbridge Gas that housing developers should pay for the new equipment in full starting 2025, providing an incentive for builders “to choose the most cost-effective, energy-efficient choice.”
Currently, homeowners foot the cost of installing new gas hookups over 40 years, as part of the regulated rate that sets their monthly utility bill. Enbridge is taking the OEB to court over the recent change, saying it will increase costs for their customers. In an email to The Narwhal, a company spokesperson said Enbridge Gas believes the board’s decision “conveys strong bias” against gas and “sets a course to eliminate it from Ontario’s energy mix.”
Meanwhile, just 15 hours after the OEB decision, provincial energy minister Todd Smith initiated his own battle with the board, declaring in a statement that he was “extremely disappointed” with the decision to transfer the hookup cost to developers as it would “slow or halt the construction of new homes, including affordable housing.”
“I will use all of my authorities as minister to pause the Ontario Energy Board’s decision,” he said. “At the earliest opportunity, our government will introduce legislation that, if passed, would reverse it, so that we protect future homebuyers and keep shovels in the ground.”
But environmental groups have praised the OEB’s decision, saying it protects homebuyers from being saddled with the financial fallout after gas infrastructure becomes a stranded asset amid Ontario’s decarbonization plans. If Smith succeeds in reversing the decision, home buyers will be left with a market in which “the developer makes the decision on how to service the development and the purchasers pay the energy bills,” the OEB said.
“In effect, [in choosing to install gas,] the developer is making a choice that does not require the developer to consider the cost consequences that will be faced by the buyers of the properties.”
Enbridge Overlooks the Energy Transition
The OEB said in its decision that Enbridge had failed to address the risk of stranded asset costs resulting from an energy transition that is well under way.
“This is just one of the reasons why this case was so significant, because of just a huge contradiction in what Enbridge was asking for and the direction that the world, including Ontario, is heading towards,” lawyer Kent Elson, who represented Environmental Defence Canada when it intervened in the case before the board, told The Narwhal.
The gas company also neglected to consider how the looming transition will change the way people heat their homes. In doing so, Enbridge “unreasonably” assumed that almost all new homes would connect to the gas system and remain connected for at least 40 years. That assumption has also driven Enbridge’s advocacy for a gas pipeline expansion in Ottawa, prompting the OEB into what was believed to be an unprecedented refusal of the gas utility’s construction application in May, 2022. Enbridge is now preparing to refile that request.
The OEB instead anticipates that many homes will soon switch to some form of electric heating. When that happens, any new gas hookups that go out of service before clearing their 40-year repayment period will become “stranded assets” that are decommissioned before realizing the full value of the investment. “The OEB is not satisfied that Enbridge Gas’s proposal will not lead to an overbuilt, underutilized gas system in the face of the energy transition,” the board wrote.
That assumption points to a problem for future homeowners, who would be committed to paying installation costs to the utility over the full 40-year span. The decision to construct a new development with gas infrastructure would be the developer’s, but would saddle homeowners with the financial burden, even if some of them later decided to adopt some other heating option, like a heat pump.
In such a system, nearly all developments would include gas servicing that posed little or no cost to the developer, who would have no responsibility for future energy bills and no exposure to the future stranded asset cost risk—“and therefore, no incentive to consider any of those impacts or alternatives that would avoid or reduce those impacts,” writes OEB.
As the OEB notes, Enbridge maintains that ratepayers should bear the risk of stranded asset costs. “What Enbridge Gas means by this, is that when ratepayers leave the gas system, and assets become underutilized, or no longer used or useful, it would still be entitled to recover any remaining undepreciated value for those assets and a return on the remaining undepreciated value from remaining ratepayers until those assets are fully depreciated.”
That position “is inconsistent with the rational development of the gas system and does not sufficiently protect gas customers,” the board ruled.
One board member dissented to the OEB decision, citing uncertainty about whether Ontario’s electricity systems were ready to feasibly meet heating demand without any new gas infrastructure. Instead of requiring the entire cost for gas hookups to be paid up front, the board member said the amortization period should be shortened from 40 years to 20, at which point “the risk should be fully mitigated by adding the contribution received upfront to the rate revenue received over 20 years from new customers.”
Ontario Pushes Back
The big OEB decision came days before the winter holidays, stunning the province’s energy industry and eliciting “a fiery response” from Smith, The Narwhal wrote.
Smith said the OEB had strayed “out of their lane” and reframed the amortization period as an issue of housing policy, rather than energy. His statement claimed the decision would increase the costs of building new homes by “tens of thousands of dollars” because costs that are normally paid over 40 years would be fully owed by the developer, in full and up front.
The spike in homebuilding costs, he added, would slow home construction at a time when the government is trying to address an ongoing housing crisis.
The statement did not explain how the decision would have such a dramatic impact on housing prices, given that Enbridge places the initial cost for a 20-metre connection for an infill project at “approximately $6,000”—not tens of thousands of dollars.
Smith’s office had not responded to The Energy Mix’s request for clarification as Heat & Power went to virtual press Thursday evening.
Price Impact Overstated
In January, Environmental Defence wrote Smith a letter asking him [pdf] to reconsider his plans to override the decision. The group said housing construction would not be slowed, and that “costs can be lowered and building timelines sped up” by leaving gas pipelines out of new developments and using heat pumps and induction stoves instead.”
“Developers can simply forgo gas connections,” the group said. “This totally eliminates the cost and time of bringing gas pipes to the development and to each home’s gas meter.”
The OEB had concluded its decision would not have a marked effect on housing prices, contending that housing is made affordable by combined measures that reduce the cost of buying and operating the home. The board said gas will likely become more expensive than clean energy in future years, driven in part by Canada’s escalating carbon price.
Every new home built with gas heating will also likely increase the cost of future energy infrastructure, the OEB ruled, since it costs more to retrofit a home that was built for gas heat than to rely on some other heating system in the first place. Those additional costs would affect homeowners, as well as the province—to the extent that it offers rebates for retrofits, as it currently does, the OEB said.
Enbridge has responded to the OEB’s ruling with a notice of appeal in Ontario’s Divisional Court, and more information on Smith’s plans is expected after the provincial legislature resumes in February.