Gas price inquiry questions whether B.C. is a ‘functioning competitive market’

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The B.C. regulator charged with looking into the province’s high gas prices is raising questions about the competitiveness of the fuel market, after the industry’s explanation for an unexplained difference in price with the Pacific Northwest (PNW) inconclusive.

The B.C. Utilities Commission (BCUC) made the comments in a follow-up to its Aug. 30 report, which found southern British Columbians were paying an estimated $490 million per year in extra fuel costs due to an unexplained 13 cent differential to the PNW spot price.

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The BCUC accepted supplementary evidence from industry and the public regarding that finding, which was released Tuesday along with the regulators’ responses.

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Fuel companies submitted that problems with the BCUC’s methodology, transportation costs and boutique B.C. and Canadian fuel standards were among the factors behind the differential, but the commission disagreed.

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“The evidence is either inconclusive or conflicting, making it impossible to determine an appropriate quantum for an adjustment, if any,” concluded the report.

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“As such, the Panel’s best estimate is that the unexplained difference could potentially range from 10 cpl to the originally reported 13 cpl.”

The supplementary report added that the 13 cent differential is added to all gasoline sold in B.C., not just the fuel imported from the U.S.

A graphic illustrates the unexplained price differential along with margins collected by fuel companies on cheaper gasoline not sourced from the U.S. B.C. Utilities Commission

It went on to suggest that fuel companies are also collecting additional millions of dollars in margins, because while B.C. imports just five per cent of its fuel from the PNW, its prices are driven by that U.S. market, a situation it described as the “tail wagging the dog.”

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“Given this reliance on the PNW spot price, the result is that five per cent of the gasoline supply is the primary driver of the wholesale prices in the Vancouver market,” stated the report.

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“The implication of this is in those instances where the price of Alberta crude is low, it has limited or no effect on the Vancouver wholesale price.”

The BCUC concluded that every one cent of additional margin represented $37 million paid annually by B.C. drivers, in addition to the unexplained 13-cent premium on the Pacific Northwest wholesale price.

Uncompetitive market?

The unexplained price differential raises the question of whether there is a properly functioning competitive market in B.C., the BCUC concludes, though it does not accuse industry of collusion.

However, the regulator said that with just a handful of major fuel companies operating in the region, B.C. is an oligopoly that behaves as a monopoly, and that the few existing players exercise market power.

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It also argued there were significant barriers to entry in the region for would-be competitors looking to cash in on B.C.’s high margins, and rejected arguments from the industry that recent investments in a Vancouver diesel export facility and a new jet fuel facility at the Vancouver International Airport showed that barriers could be overcome.

The BCUC’s initial report opened the door to possible regulation or price transparency measures to address market failures related to competition, and Tuesday’s supplementary report addresses industry’s concerns about the idea.

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In its submission, Imperial Oil warned that economic regulation could disincentivize infrastructure investment or result in fuel shortages, while Parkland Fuel Corp. argued regulation would not address Trans Mountain Pipeline capacity issues.

The panel agreed that regulation could lead to risk and unintended consequences, but argued those must be balanced by the public interest.

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“In this case, there is an oligopoly that is exercising market power at the wholesale level. Any regulation that is introduced should not reduce investment incentives,” states the report.

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“The existing members of the oligopoly have an incentive to invest because the returns are high. Those returns are realized through higher prices for customers than they would pay in the absence of an oligopoly exercising market power.”

It also argued that addressing the Trans Mountain pipeline’s capacity issues ignores the fact that B.C. prices are driven by the PNW spot price.

READ MORE: B.C. government considering legislation to force transparency from oil and gas companies

Premier John Horgan said his government would be revealing possible responses to the BCUC’s concerns in the “weeks ahead,” and said he’d also be speaking to his federal counterparts.

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“The conclusion is the same, we’re still trying to figure out where this 13 cents goes, and why is it there. So I’m going to reinforce this with the prime minister when I meet with him,” said Horgan.

“The federal government has an ability to look at competition within markets. Clearly there’s something wrong with the gas market, in British Columbia and we want to get to the bottom of that.”

In a statement, Opposition leader Andrew Wilkinson called the review “rigged,” because it did not look at the role of provincial policies or taxes on fuel prices.

“[Horgan] promised relief for drivers in British Columbia six months ago, but we still have some of the highest gas prices and gas taxes in North America,” said Wilkinson.

“John Horgan said he had a ‘range of options’ to deal with gas prices but all we get is excuses.”

B.C. is already considering legislation that could force oil and gas companies to disclose confidential supply and pricing data to help explain the region’s high fuel costs.

Horgan called the BCUC public inquiry in May as prices reached a record-breaking $1.70 per litre.

The three-member panel was asked to explore factors influencing gas and diesel prices, not including taxes, since 2015 and actions the province could take.

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— With files from the Canadian Press

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