UARB considers oil companies’ request to raise fuel prices to cover costs of clean air regulations

Driving will be more expensive this summer. 

Nova Scotians are well aware that on July 1 a federal carbon tax of 14 cents per litre will be added to the cost of gasoline to encourage a switch to more renewable fuels and vehicles aimed at reducing carbon emissions and slowing the pace of climate change. 

What Nova Scotians may not know is today the Utility and Review Board (UARB) will consider raising the price of gasoline by an additional 1-2 cents per litre at the same time. 

Companies that produce or supply gasoline and diesel such as Imperial Oil (Esso) and Irving Oil want the UARB to increase how much money they can make to cover what they claim will be increased costs arising from new Clean Fuel Regulations that also take effect July 1. 

Essentially — and this is a very simplified version of a federal regulatory regime that involved seven years of negotiation with the industry — the new rules require wholesale fuel suppliers to gradually reduce the carbon content of gasoline and diesel by 2030, leading to a decrease of approximately 15% below 2016 carbon intensity levels. 

According to federal environment minister Steven Guilbeault, the Clean Fuel regulations should reduce the country’s total greenhouse gas emissions by 8%. Canada’s overall 2030 goal is to cut GHG emissions by 45% below 2005 levels.

Before we get to how this might affect drivers, what does this mean for producers and wholesalers of fuel who sell to gas stations? 

The Clean Fuel Regulations offer companies many choices, including blending fuels with bio-diesel and ethanol (5% for gasoline and 4% for diesel), using on-site renewable energy to reduce carbon emissions during refining, or participating in a trading system that would allow fuel suppliers to purchase carbon credits if they exceed their emissions level. 

In a blunt letter sent to the UARB on May 25, prior to today’s hearing which will set the wholesale margin price for gasoline and diesel, Environment and Climate Change Minister Guilbeault made the following comments:

Under the Clean Fuel Regulations, the July 2023 date for the first fuel intensity reduction — as opposed to the original proposal of December 1, 2022 — provided suppliers with a full year to build up credits… In addition to this flexibility, the Clean Fuel Regulations increase the stringency of their obligations gradually. As a result, it is not expected that the Regulations will result in large cost increases to refineries in the initial years.

To put this in perspective, there was a 37.5-cent increase in refinery margins in Nova Scotia between 2019 and 2022, when margins rose from 10.78 cents per litre to 48.32 cents per litre. This was the experience throughout Atlantic Canada, where refinery margins were similarly elevated, from 36 cents per litre in New Brunswick to 39 cents per litre in Prince Edward Island. Across Canada, refinery margins doubled between 2019 to 2022, climbing by 26 cents per litre on average.

It is my understanding that a recent estimate assumes that Irving will decide to comply with the Clean Fuel Regulations by relying entirely on one of the most costly of all compliance options under the new regulations, while seeking redress from regulators even before the full picture of credit prices becomes clear in the coming weeks. Obligations under the Regulations start this July, but regulated parties (including Irving) will not need to submit credits for compliance until a year later… 

Seeking immediate consumer price increases to account for estimated costs under a worst-case scenario projection could lead to a scenario where a company later chooses a lower-cost option, pockets the increased revenue from consumers, and adds it to already elevated refinery margins… In short, it is the position of the Government of Canada that the Clean Fuel Regulations will not necessarily lead to significant cost increases to refiners, particularly in the short term, and certainly not as high as those claimed by Irving.

Read Guilbeault’s entire letter here.

UARB response

The federal Environment and Climate Change department then followed up Guilbeault’s letter with a submission to the UARB titled “ECCC Analysis of Third-Party Analyses: Cost of compliance with the Clean Fuel Regulations in Atlantic Provinces using only Renewable Diesel.” 

However that submission will not be considered by the UARB during this public hearing. That’s because the UARB’s procedural rules state that a person or company that wants to participate or file evidence must first register as an intervenor.

That said, the UARB has included the “Letter of Comment” from Minister Guilbeault as part of the record. A few days after receiving it, the Atlantic premiers issued a joint statement urging the federal government to delay the implementation of the Clean Fuel regulations on the grounds they will place “an undue burden” on people in this region. 

Irving Oil is a participant in the price-setting hearing but has not filed any opening statement.

The UARB has hired as consultants Grant Thornton and R Cube Economic Consulting to advise it on the issue of increasing the profit margin for fuel wholesalers. 

Carol Montreuil, the eastern Canadian vice-president for The Canadian Fuels Association that represents wholesalers, likes their recommendations. Here’s Montreuil’s opening statement to the UARB:

The federal Clean Fuel Regulations (CFR) is arguably the most complex and costly federal regulation our industry has experienced and is expected to increase the price of transportation fuels significantly over the compliance period. It is critical that the wholesale margin approved by the Nova Scotia Utility and Review Board (the Board) fully integrates the CFR cost impacts… The Canadian Fuels Association concurs with the recommendations of the Board’s independent expert,Grant Thornton, which will allow industry to recover costs associated with CFR that will be incurred by industry starting on July 1, 2023.

The Board’s other consultant in this matter, R Cube, filed evidence indicating that the volume- weighted wholesale operating costs of regulated fuels (gasoline and diesel) have increased by 1.7914 cents a litre. The CFA accepts this recommendation and encourages timely Board approval of the increase to the wholesale margin as identified and proposed by R Cube.

So where does all this leave drivers? David Roberts is the consumer advocate. In his opening statement filed in advance of today’s hearing, Roberts argues 1.79 cents per litre is too high and should be cut to a one-cent per litre increase. Roberts says the R-Cube consultant’s report failed to factor in a previous increase the wholesalers received only six months ago. Roberts wrote:

The Board Consultant has concluded that the operating costs of wholesalers have increased by1.79 cents per litre since 2019, which was the last year of data reviewed by the Board, and recommends an increase in the wholesale margins of that amount. However, in arriving at that figure, the Board Consultant appears to overlook the fact that the last increase ordered by the Board included an amount intended to offset increases in operating costs for 2020 and 2021.

That amount, which was 0.6 cents per litre, has to be considered in the assessment of the operating costs for those years.

Roberts argues it’s premature for the UARB to consider any potential costs associated with the introduction of the Clean Fuel Regulations:

At this point, it is not clear how that will affect prices at the wholesale and retail levels, although they will most certainly increase. We presume that will be the subject of another hearing by the Board in the coming months.

Roberts’ position on that point is supported by the Board’s consultant, Vijay Muralidharan, who did the work for R Cube Economic Consulting:

The regulation is yet to start, meaning that we don’t have actual data to evaluate the precise impact of Clean Fuel Standards on regulated fuel prices in Nova Scotia. Any cost projection at this point would be an estimation with a relatively high degree of potential error. Therefore, we recommend that the Board wait and conduct a study with the primary suppliers of fuel once the new Clean Fuel Standards has been initiated to understand the realized impact on their business before amending the current regulatory framework.

The bottom line is that the result of this UARB hearing could add between one and two cents more to the 14-cents per litre increase drivers will see July 1.