The Alberta government has a big problem: a law that says Albertans “may” receive rebates when natural gas prices rise.
Energy Minister Murray Smith has said roughly half of us support such rebates. But Smith is learning, as he tries to conceptualize how it will work in real life, that the practice of implementing such a program is fraught with danger, and the law is almost self-defeating – the Natural Gas Price Protection Act (NGPPA) could well become the Natural Gas Price Exacerbation Act.
I’m not sure the people who demand natural gas pricing relief even know exactly what they want. It’s a simple matter to ask for a rebate, but any practical implementation peeves off one constituency or another. Beyond that, a rebate program has the inherent danger that will worsen the thorny problem it is meant to solve, namely high prices.
After all, the worst thing the government could do would be the simplest: crediting businesses and consumers for the difference between what they pay and some fixed trigger price.
If that were the case, no one would sign long-term contracts, and the deregulated, competitive marketplace would stagnate. It would be impossible for new entrants. Usage would be insensitive to price spikes, and conservation would not happen when it is needed most – namely, during shortages. So we need a complex set of regulations: NGPPA, soon to be revised.
One of the problems with the current law, or any such act, is the uncertainty it sows in the market. No one really knows what the rebates will look like.
When Epcor recently announced that it would no longer offer long-term contracts (both natural gas and electricity) to the small businesses and consumers here, the company’s public line was that the market was inadequate to support that business.
But this may have been because small gas consumers are now content to let the NGPPA do the protecting for them (no one from Epcor has explicitly blamed the NGPPA). It’s hard to sell expensive contracts (about $7 per gigajoule right now) when the government is covering our behinds. Why pay more now, if we know we won’t have to pay more tomorrow?
The recent hubbub surrounding changes are only making this problem worse.
To date, no rebates have been awarded under the NGPPA, so no one knows what they will look like. The legislation has no specific mechanism to compensate users: flat rate, per gigajoule or some other formula. So the government wants to be more specific, and has announced that it is currently revising the regulations.
Last time we received rebates, before the current NGPPA came into effect, consumers and small businesses received a flat $150 on each of four consecutive bills. Medium-to-large commercial and industrial consumers had a per-gigajoule, but capped, compensation package.
Lately, Smith has floated the idea that rebates would not depend on the Alberta Reference Price (as stipulated in the NGPPA) but just the price between the easier-to-understand regulated rate (set by the Alberta Utilities Board) and what the trigger price might be. He has also said it would only apply in the winter months.
Sounds good, in theory. And it’s easier to understand. But there is still the issue of the flat rates. Flat rates make sense for homes, but not residential complexes, industrial plants or any commercial operations. So Smith has posited that we simply offer to cover users on a consumption basis (per gigajoule), whether or not they are on a long-term contract.
If so, there is a big downside to Smith’s idea, because it is theoretically possible that someone with a long-term contract could actually make money if the rebate should exceed their contract rate.
In such cases, there would be an incentive to ramp up gas usage – especially when prices were spiking – in order to accumulate rebate credits. Nobody wants usage to actually increase when prices spike, but it’s theoretically possible if the government simply covers a spread in price.
So (and Smith and Ralph Klein are smart enough to realize this), there must be a cap or limit on the rebate, just as there was for the large businesses when we had the rebate in early 2001– although the industrial users still had the door open for special consideration.
Are you confused yet?
On Sept. 4, Klein said caucus had decided it would be a flat-rate rebate. Last week, Murray Smith was floating the idea that perhaps the rebate should “decrease as consumption rises.” Smith said the flat-rate solution was too much of an administrative burden.
But Smith’s alternative raises the complex question of how to measure comparative consumption. Should it per capita? Per furnace? Compared to last winter? How will businesses that have expanded, or are expanding, measure whether consumption has risen?
Even Smith’s alternative to Klein’s flat rebate opens a frightening can of worms, and a pretty heavy regulatory burden too. The complexity of these scenarios illustrates how rebates are a no-win proposition, and it’s time we face the fact that rebates, while seductive, do not work.
We own this resource, so we have the biggest stake in conserving it. Some economists think that the productivity losses Canada faced compared to the United States in the 1980s may have been largely due to the subsidized gas and oil prices that our provinces, especially manufacturing-heavy Ontario, received from Alberta in the 1970s and 1980s.
Such subsidies hurt Canada in the long-run because we did not feel reality. The subsidies delayed needed innovation in business. They encouraged complacency among both consumers and businesses. And in the end, such practices actually ended up consuming more of a resource we will eventually exhaust.
The NGPPA is like the severed nerves in my brother’s finger. He once cut them with a kitchen knife, and he showed me how he can drive a nail into his finger without feeling any pain. With behaviour like that, it won’t be long before he loses that finger to infection. The same for us. The pain of high prices is keeping us from depleting our own resource and wasting our natural gas.
Why there is no political party in the legislature defending this position baffles me. Nearly half of us find rebates odious and harmful, but none of the three mainstream parties have taken that position. Rebate legislation is a bad idea, and rebates themselves are worse.
