Another market mystery: High gasoline prices in B.C.

BCUC investigation unable to explain mysterious $0.13 premium B.C. consumers pay for gas in the province

The BC Utilities Commission’s August report on B.C. gas prices concluded that while there was no evidence of collusion, the gas market in the province was not truly competitive | Chung Chow

The BC Utilities Commission (BCUC) is standing by its original assessment that high gas prices in B.C. are the result of an uncompetitive “oligopoly” that can and should be regulated.

But the fact that the BCUC says a $0.13 per litre difference in the wholesale price between B.C. and other jurisdictions is still “unexplained” suggests it failed at the task it was given: to get to the bottom of high gas prices.

Marvin Shaffer, a Simon Fraser University public policy professor, said the whole exercise has helped fuel public outrage, but otherwise hasn’t addressed the main issue: B.C. needs less American and more Canadian gasoline and more competition from small independents and co-ops.

“What Vancouver customers need is for the marginal source of supply to be more supply from Alberta,” he told Business in Vancouver.

Michael Ervin, senior vice-president for petroleum analyst firm Kent Group, said the BCUC doesn’t seem to understand the fundamentals of supply and demand.

“I don’t think they understand very clearly the fundamental nature of a commodity such as gasoline, where its price at the wholesale level fluctuates according to supply and demand, pure and simple,” he said.

And in the Pacific Northwest, from California to British Columbia, demand continues to grow in a region where supply is constrained by limited pipeline and refining capacity.

A BCUC special panel was convened in the spring, when Vancouver broke records for North America’s highest gasoline prices for the second year in a row. Its task was to find out why gas prices spike and why they are so much higher in Vancouver than anywhere else in North America.

The BCUC issued a report on gas prices on August 30. It concluded that:

•though there is no evidence of collusion, the gas market in B.C. is not truly competitive;

•there is a wholesale price difference of $0.13 per litre that can’t be explained; and

•British Columbians have therefore been paying about $490 million more than they should be.

After issuing the report, the BCUC gave the public and industry a chance to respond to it, and issued a supplementary report on November 12 that sticks to its initial conclusions.

The commission heard numerous explanations for why motorists in B.C. – and Vancouver in particular – have been paying some of the highest gas prices in North America.

Pipeline constraints are one factor. High land prices are another. Oil and gas companies also said that B.C.’s low-carbon fuel standard (LCFS) adds costs, because it requires the addition of renewable fuel blends that are not required in some other jurisdictions, like Alberta or Washington state.

The BCUC concedes in its supplemental report that the impacts of B.C.’s low-carbon fuel standards on wholesale gasoline and diesel prices were not as thoroughly canvassed as they might have been, but sticks to its fundamental conclusion that the $0.13 per litre disparity is “unexplained.”

“Due to limitations in this inquiry, the panel was not able to test the accuracy of the changes in the B.C. LCFS costs or reconcile the different approaches,” the supplemental report states.

The panel acknowledged that “there is validity to considering some of the factors mentioned by the interveners.”

However, it concluded that “the evidence is either inconclusive or conflicting, making it difficult to determine an appropriate quantum for these factors. As such, the panel’s best estimate of the unexplained difference could potentially range from a low of [$0.10] to the originally reported [$0.13 per litre].”

The panel confirmed a point Shaffer has made: though the amount of gasoline and diesel that B.C. sources from American producers in the Pacific Northwest – at a premium – is small, when it is the “marginal source of supply,” it ends up setting the price for Canadian wholesale gas prices as well.

So a very small amount of refined fuels from the U.S. has a big impact on the price Canadian wholesalers set.

“First, the cost of the most expensive 5% of the supply is driving the price of all of the gasoline sold,” the BCUC supplemental report stated.

“Given this reliance on the [Pacific Northwest] spot price, the result is that 5% of the gasoline supply is the primary driver of the wholesale prices in the Vancouver market.”

If B.C. refiners and wholesalers were not so reliant on American suppliers for the marginal source of supply, presumably the wholesale prices would be more in line with other provinces.

Parkland Fuel Corp. (TSX:PKI), which owns the only refinery in southern B.C., says the “unexplained” difference of $0.13 per litre is easily explained.

It maintains in its reply to the BCUC’s first report that higher land values alone can explain the difference.

The difference in the wholesale price in B.C., compared with other jurisdictions, is $0.20 per litre, but the BCUC deducted the cost of transportation ($0.02 per litre) and provincial and federal regulations for fuel standards ($0.05 per litre) to arrive at an unexplained difference of $0.13 per litre.

Suncor Energy (TSX:SU) says that the cost of meeting B.C.’s low-carbon fuel standard in 2019 may be higher than that – ranging from $0.05 to $0.07 per litre.

The BCUC’s supplemental report notes that the difference between the Vancouver wholesale price and Pacific Northwest spot price was only $0.05 per litre in 2015.

Parkland Fuels points to constraints on the Trans Mountain pipeline as one reason for the widening margins. Since 2015, the volume of crude oil flowing on the Trans Mountain pipeline has increased, at the expense of refined fuels.

“The increases in wholesale prices and refining margins coincided with the throughput declines on the [Trans Mountain pipeline],” Parkland said.

As for the Trans Mountain pipeline’s role in gas prices, British Columbians should not expect any relief there until at least mid-2022, which is when the expanded pipeline is expected to be in service.

Parkland says in its report the expansion could result in more access to Alberta oil and refined fuels, but cautions that “specific attention needs to be given to ensuring that some of this additional capacity is reserved to supply the B.C. market.”

In the past, however, the National Energy Board has refused to give the local refinery any preferential access to Alberta oil for local refining purposes.

The B.C. government’s response to the BCUC’s investigation suggests that it believes there is still not enough information available.

It is therefore preparing legislation that would force oil and gas companies to hand over confidential data, so that regulators can better understand why wholesale gasoline prices are higher in B.C. than elsewhere.

Shaffer said that exercise “would almost certainly be time consuming, expensive and largely ineffectual.”

If the B.C. government really wants to address the problem, it should focus on eliminating the need for B.C. to augment its gasoline and diesel supplies from the U.S., he said.

Shaffer added that the government should do what it can to promote greater competition. It could do that by trying to help co-ops and small independent operators secure pipeline capacity on the expanded Trans Mountain pipeline.

“The goal,” he said, “is to support the competition and possible expansion by co-ops and independents to force everyone in the Vancouver market to base their prices on the delivered cost of Alberta supply.”