Introduction

On October 31, 1985, the provinces of British Columbia, Alberta and Saskatchewan signed an Agreement on Natural Gas Prices and Markets with the Government of Canada that radically changed the natural gas market. The Agreement allowed consumers of natural gas, for the first time in Canada, to contract directly with producers, marketers and agents at freely negotiated prices. The price of natural gas in Canada was effectively deregulated. The necessary conditions had been established for a competitive natural gas market to develop.

Prior to price deregulation merchant pipelines sold gas to local distribution companies (LDCs) under long-term contracts. The 1985 Agreement opened up the market to new players and the market became much more competitive. The market began to move away from the traditional long-term contracts towards shorter-term contractual arrangements. The development of an efficient spot market improved price transparency and enhanced the efficiency of the market.

While the 1985 Agreement created the conditions necessary for a competitive natural gas market, unlike the production and consumption of natural gas, the transmission sector displayed natural monopolistic characteristics that warranted continued regulation.

Distribution of natural gas by the LDCs has changed very little in Alberta and Saskatchewan since deregulation. The largest LDCs in those provinces had already been buying gas directly from a large number of producers. However, the purchasing practices by LDCs in Ontario, Quebec and Manitoba have change significantly since 1985. Until 1988 these LDCs bought nearly all their gas requirements from TransCanada under long-term contracts at the city-gate. The distribution companies now purchase gas at various points across Canada from various suppliers and transport the gas into their franchise areas. Deregulation has allowed the LDCs to build diversified portfolios of short and long-term natural gas supply contracts with numerous suppliers.