Under "intense" and "critical" pressure from lower cost competitors, Heritage Gas is asking provincial regulators this week for permission to slash natural gas costs for its small and medium-sized business customers in Nova Scotia.

"It's dramatically important that we retain them," Heritage Gas president Chris Smith told CBC News Friday.

On Monday, the AltaGas Ltd. subsidiary is set to appear before the Nova Scotia Utility and Review Board seeking an interim order that would allow it to cut prices for some commercial customers.

Flood of defections

The company's application to regulators says, since September 2015, Heritage Gas has lost — or is in the processing of losing — 250 commercial customers at a cost of $3 million in missed revenue.

The key threat, the application says, comes from propane, which is 35 per cent cheaper than natural gas in Nova Scotia.

Since the fall, about 100 customers have actually left the system, the company said.

The company said it could lose another 500 customers in 2016, which it said would mean millions more in missed revenue.

Hotels, restaurants, apartment buildings and light industrial companies have switched from natural gas, Smith said.

"We have applied for what we call a 'customer retention program' to address the competitive challenges we are facing," he said.

Discount details

For customers who use between 500 and 4,999 gigajoules (GJ) per year, the company wants to reduce the base energy charge by 64 per cent from $8.68 per GJ to $3.10 per GJ. It also wants the ability to raise or lower rates for these customers within the same range.

The discount will not benefit its approximate 3,300 residential residential customers. Heritage Gas is not under the same pressure because its rivals are not targeting residential customers as aggressively.

Natural gas discounts are not possible under current regulations. (CBC)

Why natural gas has gone sour

The fact is, natural gas is no longer the cheapest game in town. Heating oil is now up to 45 per cent cheaper, although less of a threat because of the cost of conversion.

Natural gas from the Nova Scotia offshore industry is shrinking much faster than previously thought. The company said it will be gone entirely by 2020.

That puts Nova Scotia at the very end of the North American supply chain. Heritage Gas is paying a premium for secure contracts for natural gas bought in New England. Then, it's paying both U.S. and Canadian tolls on the Maritimes and Northeast pipeline that carries it here.

Meanwhile, lots of lower cost propane is arriving by rail and truck in Nova Scotia and New Brunswick.

"The market has been flooded with propane," Smith said. "No other jurisdiction is facing the same kind of competitive pressures."

Propane industry opposing rate change

The Canadian Propane Association is speaking out against the Heritage application and a last-minute move by the Nova Scotia Government to amend regulations to enable the regulator to hear the request to reduce rates for some but not all customers in a rate class.

It says the application "could set a dangerous precedent whereby the amortization of the discounted price would eventually have to be recovered from ratepayers, including residential customers who would not benefit from any discounts in pricing," the Propane Association said in a release.

"All too often the natural gas companies get approvals for distribution projects based on rosy assumptions that fall short and end up picking the pockets of consumers," said Andrea Labelle, executive director of the Canadian Propane Association.

It calls the Heritage Gas proposal "a continuation of a flawed business model that, in fact, proposes to subsidize some of its customers at the risk and expense of others. In this case, it's the residential ratepayers."

Dalhousie gas bill doubles

Switching to propane is not an option for Dalhousie University, which converted from oil to natural gas in 2011 with the help of a $1.4-million Nova Scotia government grant.

Dalhousie University says its monthly natural gas bill has doubled to about $800,000.

After an initial saving of between $2 million and $3 million, the monthly fuel bill has almost doubled, said Jeff Lamb, the university's assistant vice president of facilities management.

Since April 2012, the school's average gas bill has risen from $400,000 a month to nearly $800,000 each month by December 2015, he said.

"I think it was the best decision at the time," Lamb told CBC News. "We have benefits to our boilers, which require less maintenance and lower greenhouse gas emission, and measures are being taken to modify these cost increases."

Company promises lower prices coming

Heritage Gas said it has secured natural gas at a better price on the pipeline in the coming year.

It said it is counting on storing natural gas at its Alton storage project near Stewiacke, N.S., in 2019. The company said those measures will lower prices for all customers starting this summer.

Still, the company argued it will be vulnerable to propane for another three to four years, before the situation, in its word, "stabilizes."

Heritage argued its plan to retain small and medium businesses helps all customers and is in the public interest because it maintains the overall financial viability of Nova Scotia's gas distribution system, which is relatively new. The company received the distribution franchise in 2003. It has 6,300 customers, primarily in metro Halifax.

Consumer watchdog wants answers

Nova Scotia's Consumer Advocate for water, gas and electric power rate applications said a full hearing is in order to explain how Heritage got into this "predicament," what may have been done to avoid it and whether residential customers are being put at risk.

"It may be reasonable to grant the interim request to lower the rate," advocate John Merrick said.