May 14, 2008 - 06:44 AM

By Ellen Roseman

TORONTO -- Utility customers could see a sharp jump in their natural gas bills starting July 1.

As oil prices hit record highs on world markets, natural gas is going along for the ride.

Enbridge customers may face a 40 per cent increase in the gas commodity price and a 20 per cent increase in the total gas bill, says Malini Giridhar, director of energy policy and analysis for Enbridge Gas Distribution.

Union Gas will probably also raise its rates on July 1, said spokesperson Andrea Stass, pointing out that market prices have been going up since January.

Enbridge has 1.8 million customers in the GTA, the Niagara peninsula and Ottawa. Union Gas Ltd. has 1.3 million customers from just west of Toronto to Windsor and across eastern Ontario from Port Hope to Cornwall.

The utilities don't make a profit on gas distribution. They pass through increases in their wholesale costs and often give retroactive credits to customers when their costs fall.

For that reason, the Ontario Energy Board usually approves requests by the utilities for quarterly changes to their commodity rates.

The average household currently pays about $1,400 a year for gas used to heat homes and water. A 20 per cent increase would add $280 to a household's annual bills – assuming gas prices stay at current levels into the fall and winter.

Enbridge's senior management is already starting to prepare the public for higher gas prices.

In a communications plan shared with the Toronto Star, Enbridge said the first step will come next week when it talks to government decision makers at Queen's Park.

In early June, Enbridge employees will be briefed on the application for a substantial rate boost.

MPPs, mayors and city councillors will receive letters, explaining the upcoming increase.

Enbridge will put out a news release in mid-June, saying it has applied for "a significant price increase." It will talk to customers on managing their costs (such as applying for the budget billing program that spreads costs evenly throughout the year).

This is taking place even before the Ontario Energy Board approves any increase – expected to be around June 23.

Both Enbridge and Union Gas raised their rates on April 1, reflecting higher natural gas prices starting last January. They currently charge 30 cents a cubic metre for gas, up from 27 cents in the previous quarter. However, both utilities have retroactive price adjustments that reduce the cost by 3 to 4 cents.

The July 1 increase should not affect customers who buy their gas from independent retailers, such as Direct Energy, Ontario Energy Savings Corp. and Universal Energy. These retailers charge a premium price in return for stability over a three-year or five-year period.

In its upcoming news release, Enbridge plans to "tie the increase to other market factors, such as price at the pumps."

This is controversial, since crude oil and natural gas prices do not usually move together. Oil is an international commodity while natural gas prices are determined by demand and supply in North America alone.

Ontario gets 93 per cent of its gas from western Canada, according to the Ontario Energy Board, and 5 per cent is imported from the United States. The province produces 2 per cent of its own supply.

So, why is natural gas following oil when the prices are not normally correlated?

"Oil trades between 6 to 12 times the price of natural gas," says Enbridge's Giridhar.

Yesterday, crude oil hit almost $127 (U.S.) a barrel and natural gas futures for June rose to $11.30 per British thermal unit.

"The price ratio is now 11 times, which is close to the upper end of the range," Giridhar said.

Commodities markets are pushing up natural gas in reaction to higher oil prices, she said, rather than to gas supply and demand.

Since natural gas futures are trading at $8.90 per BTU for mid-2012, she said, markets are showing they expect gas prices to decline.

Independent retailers are already seeing more interest in their fixed-price gas contracts.

"We're getting 20 new customers a day, up from 10 before," says Tim Nerbas, president of Canadian RiteRate Energy Corp., which sells gas online only, not door-to-door.RiteRate has raised prices twice in the past month. A five-year contract is now 35.8 cents a cubic metre (up from 33.8 cents). That's still less than the prices charged by retailers who visit customers' homes to get their signatures.

The average is 37 to 38 cents for five-year gas contracts, says Ian MacLellan of Energyshop.com, which compares prices online.

-- Ellen Roseman is a business columnist for the Toronto Star