Good afternoon, and thank you for the invitation to speak to this committee.
I'm Dr. Kent Fellows, assistant professor of economics and director of graduate programs with the University of Calgary's school of public policy. I oversee our master of public policy and our master of science in sustainable energy development programs. I teach graduate-level courses in economics and regulatory economics, and I maintain an active research program in energy policy, carbon pricing and economic regulation. I'm also a fellow with the C.D. Howe Institute's energy policy program.
I'd like to make two main points today. The first is on why and how governments regulate pipeline tolls and the price charged to shippers for the use of the pipeline, as this has bearing on the value of TMX to its current and future owners. Second, I'd like to comment on the wider benefits of the Trans Mountain expansion.
On my first point, the CER, Canada Energy Regulator, has a mandate to regulate just and reasonable tolls as a remedy to the natural monopoly problem that is inherent in pipeline infrastructure. Each pipeline route in Canada is best served by a single company. Competition on any route would lead to costly duplication; however, a lack of competition can also lead to economic harm, because an unregulated monopolist is able to raise prices and reduce quantities in an effort to maximize its profits.
Prior to 1996, toll regulation followed a cost-of-service model in Canada. This involved regular quasi-judicial hearings to determine specific elements of a pipeline's cost structure and to set tolls accordingly. The process, when done correctly, affords shippers the lowest possible toll while providing the pipeline a fair rate of return on its invested capital. Between 1996 and 2004, toll regulation transitioned to the use of negotiated settlements. Settlements are generally based on a cost-of-service methodology but with additional flexibility and much longer time horizons. This is the current approach to TMX toll regulation. Trans Mountain is currently charging interim tolls that will remain in place until it is ready to apply for its final tolls.
The review and approval of final tolls is the purview of the Canada Energy Regulator. The determination of final tolls is likely the biggest determinant of a pipeline's market value. Higher tolls mean higher costs for shippers, lower shipping demand and a higher valuation for the pipeline, whereas lower tolls mean lower costs for shippers, higher shipping demand and a lower valuation of the pipeline.
If the pipeline is sold before final tolls are approved, the buyer will take on the risk of higher or lower regulated tolls. If the government sells the pipeline after final tolls are approved, the federal government is implicitly assuming that risk.
Now, I will go on to my second point on the economic benefits of the Trans Mountain expansion.
In addition to several grades of crude oil, the Trans Mountain pipeline system ships gasoline and diesel from Edmonton-area refineries to B.C. for domestic use. Between 2010 and 2024, the original pipeline faced demand exceeding its physical capacity. In an unregulated market, excess demand would result in higher prices to equalize quantity demanded and available capacity. This is not possible with regulated tolls. As a result, the Canada Energy Regulator imposes rules to ration capacity across shippers. As a result of these rules, gasoline and diesel shipments on the pipeline fell by 50% between 2015 and 2019.
This led to a reduction in B.C.'s fuel supply and forced fuel wholesalers to substitute to more costly alternatives, specifically, international imports and rail shipments. In the last week of April 2024, before the Trans Mountain expansion opened, Vancouver's wholesale gasoline price averaged 45¢ higher than Edmonton's. In the last week of August 2024, after the pipeline expansion opened, that difference was 17¢. This change is directly attributable to the Trans Mountain expansion.
I will now turn to crude oil. In 2018, a local oversupply condition caused the Alberta price to fall to $44 U.S. per barrel below the benchmark Texas price. That price difference is usually in the range of $20 or less. In response to this, the Alberta government mandated production cuts to prop up the Alberta price. This oversupply was related to insufficient pipeline capacity. For every dollar increase in the Alberta crude oil price, Alberta receives an additional $600 million in annual royalty and tax revenues, with some additional revenues accruing to the federal government.
If the TMX expansion had been in service in 2018, it is likely that Alberta would not have been in an oversupply condition, and public revenues in the sector would have been billions of dollars higher than they were. TMX has almost certainly cost more than it should have, but there are very significant public benefits both to the private owner and to the general public embodied in its completion and operation.
Thank you, and I look forward to your questions.