I. INTRODUCTION Until 1971 the Pricing of Natural Gas in Canada Had Been a Relatively Uncomplicated Matter

120 A(l,BERTALAW REVIEW [VOL. XVII NATURAL GAS PRICING IN CANADA MARVINV. McDILL* Setting out the historical developments which led to govemment contf'ol of natural gas pricing, this papef' reviews the current legislativP mechanisms and regulatory issues. It includes an examination of net-back pricing undef' the Petroleum Adminis tration Act and Alberta's Natural Gas Pricing Agreement Act. Issues raised in the Alberta Public Utaities Boanl.'s Cost of Service Inquiry at"e analyzed, along with the special position of Alberta Gas Trunk Line Com'P"ny. I. INTRODUCTION Until 1971 the pricing of natural gas in Canada had been a relatively uncomplicated matter. During the past eight years, and particularly the past five, many dramatic changes have taken place. These changes have been caused by social and economic events, and have resulted in increased involvement in the pricing process by both the provincial and federal governments. Government involvement has created a body of legislation and· regulations designed to meet current conditions and to regulate and control the price of natural gas. Because of the rapidity of the changes and the necessity of swift government action, much of the legislation was hurriedly drafted. Consequently, it was sometimes confusing and incomplete. The oil and gas industry is beginning to learn to live under these new rules and regulations, and the inevitable problem areas are beginning to surface. Recent hearings of the National Energy Board, the Alberta Public Utilities Board and the newly formed Alberta Petroleum Marketing Commission have served to underscore the problems. Undoubtedly, many of the difficulties will be resolved over time. In the meanwhile, the industry should upderstand the problem areas that exist, while participating in the changed pricing environment. It is the purpose of this paper to briefly trace the historical events which have given rise to the existing pricing machinery, to examine the existing legislation and the problems it has created, to identify some of the more important and unresolved problem areas and to re view current matters pending before regulatory boards which could have a significant impact on the pricing machinery. II. HISTORY Natural gas has nearly always been purchased from the producer under long term contracts commonly referred to as gas durchase contracts. These contracts have evolved over the years an contain many interesting features such as prepayment clauses, favoured nation clauses and take or pay provisions.• The price paid under such con tracts depended upon many factors resulting from the negotiations of the purchaser and the producer. The price arrived at for the initial period of the contract was referred to as the base price. Most gas purchase contracts contained price escalation provisions, and many contained price re-determination provisions and favoured nation *Barrister and Solicitor, Ballem, McDill and Maclnnes, Calgary, Alberta 1. See Holland, Com'JK'rative Analysis of Gas Purchase Contracts, (1971) 9 Alta. L. Rev. 479. 1979] NATURAL GAS PRICING 121 clauses. All these were designed to increase the base price to the producer during the long period of the contract. The strongest in fluence on the amount of the base price for Canadian gas was the regulated field price in the United States. Those were the days of relatively cheap gas for Canadian customers. The number of purchasers of gas from Canadian producers has always been small. Aside from the local utility companies which buy some of their requirements in the field as well as ac9uiring reserves, the major purchaser has always been Trans Canada Pipelines Limited, purchasing for sale to Eastern Canadian customers and to the export market in the U.S. In the early years, and until 1958, Trans Canada was the only purchaser of gas for removal from Alberta. At that time, the base price was about 10 cents per Mcf. In 1958, Alberta and Southern Gas Co. Ltd. began purchasing gas for removal, and the price increased by approximately 3.5 cents per Mcf. Because the two com panies were buying in different areas of Alberta, the base prices remained fairly constant in the range of 13 to 14 cents per Mcf. This lasted until around 1969 when Consolidated Natural Gas Limited commenced contracting for larger volumes of gas in the expectancy that it would receive an export permit from the National Energy Board. This forced the base price up rather markedly: by 1972, Trans Canada's base price had increased to a provincial average of 16 cents per Mcf. The N.E.B.'s refusal of the Consolidated export application in 1971 removed the competitive element. Although it might have been expected that prices would level off, certain events, initiated by the Alberta and federal governments, caused further increases and added a new dimension to pricing considerations. The end result is that government has replaced private industry in the pricing of natural gas. The Alberta government initiated an inquiry by the Alberta Energy Resources Board into the field price of natural gas. As a result of this inquiry, in August, 1972, the Board recommended that the field price of natural gas in Alberta be based on commodity value. On November 16, 1972, the Alberta government adopted this recommendation. In January, 1973, forthcoming amendments to the Alberta Arbitration Act2 were announced with the intention of ensuring that prices fixed under price redetermination clauses in gas purchase contracts would be based on commodity value. The amendments were made in Decem ber, 1973 by passage of the Alberta Arbitration Amendment Act, 3 which became effective January 3, 1974. This Act provided that in any price re-determination under gas purchase contracts, the arbitrators would be required to use commodity value as the basis for determining the field price. In addition, it stipulated the new price would be effec tive at the earliest date under the contract, unless specifically excluded by the contract. In 1972, Pan Alberta Gas Ltd. commenced purchasing natural gas in Alberta, thus increasing competition. Pan Alberta was offering 40 cents per Mcf., approximately double the amount then offered by the other purchasers. By 1973 it was becoming clear that the field prices 2. R.S.A. 1970, c. 21. 3. S.A. 1973, c. 88. 122 ALBERTA LAW REVIEW [VOL. XVII being paid were unsatisfactory to the. government. In July, 1973, the E.R.C.B. reviewed the matter of field pricing again. It concluded that the 1973 average field price in Alberta was approximately 20 cents per Mcf., an increase of 3.5 cents over 1972, but 7-18 cents per Mcf. below the Board's estimate of a proper field price based on commodity value. Also during 1973, the government announced that there would be no further gas export permits until the price paid had increased to its proper value. During 1973 and while, with the support of the government, natural gas pricing was moving toward commodity value pricing, the Organiza tion of Petroleum Exporting Countries (O.P.E.C.) began a rapid escalation in petroleum prices. The jump in prices caused the Canadian and U.S. governments to take steps to control domestic prices. On September 4, 1973, Canada froze the average price of Alberta crude at $3.80 per barrel. The N .E.B. refused applications for crude oil exports to the U.S. because the export price, based on the frozen price, was too low. The Federal government then announced a federal export tax in an amount equal to the differential established by the N .E.B. This step touched off the well-known row between Alberta and Ottawa over control of provincial oil and gas resources and resulting revenues. In December, 1973, Alberta convened a special session of the Legis lature to deal with the many energy-related problems which had arisen during the preceding years, particularly the constitutional question of Alberta's right to control its resources. Several important pieces of legislation were enacted at this session of the Legislature, which became known as the "Energy Session". One of the major purposes of the session was to provide the machinery to keep control of the marketing and pricing of Alberta's petroleum resources within the constitutional framework of the B.N.A. Act., The Petroleum Marketing Act 5 was enacted, amendments were made to the Mines and Minerals Act, 6 and the Freehold Minerals Taxation Act7 was passed. It is not within the ambit of this paper to review the constitutional aspects and justification for this legislation. What is significant, however, is the passage of the Petroleum Marketing Act which provided for the establishment of the Alberta Petroleum Marketing Commission (A.P .M.C.). That commission was given the power to set prices, to sell and to set the terms of sale for all petroleum produced from Crown lands. Because of the preponderance of produc tion of petroleum from Crown lands in Alberta (approximately 800/o), the price and terms set by A.P.M.C. effectively control the pricing and marketing of freehold .petroleum. Throughout 1974 world petroleum prices continued to escalate. The dispute between Alberta and Ottawa also continued, with the main emphasis being the price for Alberta petroleum products. Each government seemed to agree that there should be one domestic price, but the price level was a continued source of contention. In April, 4. R.S.C. 1970, Appendices. 5. S.A. 1973, c. 96. 6. R.S.A. 1970, c. 238, as amended by the Mines and Minerals Amendment Act 1973, S.A.1973, c. 94. 7. S.A. 1973, c. 89. 19791 NATURAL GAS PRICING 123 1974, the Federal government introduced Bill C-18, the Petroleum Administration Act. Passage of this Act did not take place until June 19, 1975, because of the intervening federal election in July, 1974.

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