Ready to Unplug the Gas? Not Too Fast, Says the Ontario Government

On February 22, 2024, the Ontario government introduced legislation to reverse a decision made by the Ontario Energy Board (OEB) in December 2023. The OEB's December decision had reduced the amortization period for new small-volume customer connections to zero years, requiring Enbridge Gas Inc. (rated “A” with a Stable trend) to recover costs upfront rather than spreading them over the typical 40-year revenue horizon. This decision was prompted by concerns about the risk associated with the energy transition, where gas assets might become stranded due to electrification.

This case sheds light on broader issues in the natural gas distribution industry amid the energy transition. Regulatory scrutiny is increasing as policies evolve around environmental concerns and stranded assets. Political risks, including interference with regulatory processes and climate policies, pose challenges for gas utilities. Additionally, caution is advised regarding new growth opportunities, with the industry exploring alternatives beyond traditional models.

“We believe the ongoing energy transition does not present an immediate or material credit risk. However, we caution the industry is increasingly susceptible to potential unfavorable regulatory and political decisions, along with expansion risks in noncore business, amidst the evolving landscape of energy transition and rising energy costs,” said Steven Lin, Assistant Vice President of Corporate Ratings, Energy & Natural Resources at Morningstar DBRS.