Tuesday, November 12, 2019

On the BCUC Gasoline Pricing Inquiry Report

Though it does feed populist outrage over the high price of gasoline in the Lower Mainland, the BC Utility Commission (BCUC) fixation in its original and latest gasoline pricing inquiry report on an unexplained differential between Vancouver wholesale gasoline prices and spot prices in the Pacific Northwest (PNW) is misplaced and not very helpful.

As industry experts, most economists and the BCUC itself would agree, wholesale gasoline prices in Vancouver are not based on the actual cost of supply. Rather they are based on the delivered cost of the marginal or most expensive source of supply. For Vancouver the marginal source of supply is generally considered to be the PNW, which is why the BCUC determined that Vancouver wholesale gasoline prices should reflect delivered prices from that region. Yet apparently they don’t – they have been some 10 to 13 cents per litre higher than that this past year.

Industry counters that the marginal source of supply can be more expensive than the PNW prices the BCUC calculated. It may be the cost of PNW gasoline delivered by truck, not the less expensive cost of delivery by barge. When supply is tight, as it has been much of this past year, the marginal source of supply could be California or other more distant US refiners – again with higher costs than what the BCUC calculated for its assumed marginal source of supply.

But while the back and forth in the latest BCUC report is interesting to read (at least if you are desperate for reading material because it is too windy today to stand-up board here in central Baja), that debate misses the much larger point. The PNW spot price, even without an unexplained differential of some magnitude on top of that, is itself much higher than the cost of gasoline produced in BC or the large amount that is produced and delivered from Alberta.

The issue government can and should address isn’t whether Vancouver wholesale gasoline prices are even higher than the cost of PNW supply; the issue is why prices should be based on PNW prices in the first place. What British Columbia needs and could greatly benefit from is for gasoline prices to reflect the delivered cost of Alberta supply (adjusted for differences in carbon content standards, distribution costs and taxes) just like the rest of western Canada.

What we need, in effect, is for the marginal source of supply in the Lower Mainland to be more product from Alberta, not high cost imports from the U.S.

The government’s response to the BCUC findings appears to be a requirement for more transparency from the oil companies on the source and cost of their supply.  And the BCUC appears to suggest that some type of regulation may be called for.

But while transparency may be helpful for public shaming and perhaps some moral suasion, and BCUC regulation of pump prices would almost certainly be time consuming, expensive and largely ineffectual, there are steps government can take to move the marginal source of supply from the PNW to much lower cost Alberta supply.

More than anything, government needs to support coops and other independents to secure pipeline capacity for gasoline deliveries from Alberta, something that will be facilitated by the Trans Mountain expansion project should that go ahead as planned. And it needs to ensure that coops and independents have non-discriminatory access to the terminal and storage capacity they  need to increase purchases from Alberta.

The goal is to support the competition and possible expansion by coops and independents to force everyone in the Vancouver market to base their prices on the delivered cost of Alberta supply.  That goal should not be lost in the political effort to find out if we are currently paying even more than unnecessarily high PNW prices would suggest.

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