Not So Fast: How Slower Utilities Regulation Can Reduce Prices and Increase Profits

Energy consumers are facing cost pressures from multiple directions. Wholesale natural gas prices have been climbing substantially from their record lows. Oil prices have only recently cooled slightly after reaching nearly $100 a barrel (WTI) earlier this year. That makes it that much more important to minimize costs to wholesale consumers of energy, and ultimately, retail buyers, wherever possible. There is little room in the energy network for unnecessary costs. But in a regulated system, profits for utilities must remain healthy, too, if we expect them to stay active in the market. But the way that government agencies regulate oil and gas pipelines in Canada, and elsewhere, appears to be increasing costs beyond where they need to be in order to fairly serve both utilities and customers. By relying on traditional rate-of-return regulation models — which calculate price-rates based on the regulated firm’s cost of capital (that is, how much it costs the company to finance its operations) — regulators, including the National Energy Board and the Alberta Utilities Commission, reward firms for over-investing in their operations, rather than reducing costs. Utilities are motivated to prolong the period in which they can earn a return on their capital, since it is one of the few opportunities they have to increase profits under the widely used rateof-return regulatory model. That results in utilities keeping assets on the books — and paying for them — longer than they might otherwise need to be. The end result is a distortion of the decisions made by regulated firms and higher prices for consumers than might occur under a different regulatory model. Regulators that take a more passive role in setting the rate of return for their client industries, however, are likely to see their idleness pay off. Firms with a freer hand to do so will seek to accelerate the depreciation of capital assets, reducing costs more quickly. The result may see end-consumers pay more in the short term, but substantially less over the long term

Negotiated Settlements: Long-term Profits and Costs

Over the last 20 years, utility regulators have relaxed their oversight of cost-ofservice regulation and this holds true for Alberta, where such regulation determines the fees associated with oil and gas pipeline usage. The traditional method has been for regulators to issue binding decisions on a firm’s cost of service after taking evidence at a formal hearing. Many regulators now prefer to encourage parties to settle a cost-of-service agreement through a negotiated settlement, which the regulator then approves. This process not only saves the cost of a hearing, it also permits firms and consumers to trade costs and benefits, settling on a final price more favourable to both. The author details how this arrangement can negatively impact future consumers by allowing the firm to defer the true burden of its depreciation expenses in return for inflated capital costs. Such a settlement lowers prices for the present but saddles future consumers with higher prices

Energy and Environmental Policy Trends: The Invisible Cost of Pipeline Constraints

THE INVISIBLE COST OF PIPELINE CONSTRAINTSOver much of the last decade pipeline constraints and the resulting apportionment of pipeline capacity have meant reduced returns on Alberta’s Oil Exports.There is a natural price discount between the US benchmark West Texas Intermediate (WTI) Crude oil price and the Canadian benchmark Western Canada Select (WCS) price. This differential reflects the lower quality of WCS relative to WTI and the costs associated with pipeline tolls to transport this oil from Alberta to US refining hubs. However, at present western Canada is experiencing significant pipeline capacity constraints which have dramatically increased this discount relative to historical level

Big and Little Feet Provincial Profiles: Quebec

This communiqué provides a summary of the production- and consumption-based greenhouse gas emissions accounts for Quebec, as well as their associated trade flows. It is part of a series of communiqués profiling the Canadian provinces and territories.1 In simplest terms, a production-based emissions account measures the quantity of greenhouse gas emissions produced in Quebec. In contrast, a consumption-based emissions account measures the quantity of greenhouse gas emissions generated during the production process for final goods and services that are consumed in Quebec through household purchases, investment by firms and government spending. Trade flows refer to the movement of emissions that are produced in Quebec but which support consumption in a different province, territory or country (and vice versa). For example, emissions associated with the production of a Quebec manufactured good that is exported to Ontario for sale are recorded as a trade flow from Quebec to Ontario. Moving in the opposite direction, emissions associated with the production of motor gasoline in New Brunswick that is exported to Quebec for sale are recorded as a trade flow from New Brunswick to Quebec. For further details on these results in a national context, the methodology for generating them and their policy implications, please see the companion papers to this communiqué series: (1) Fellows and Dobson (2017); and (2) Dobson and Fellows (2017). Additionally, the consumption emissions and trade flow data for each of the provinces and territories are available at: http://www.policyschool.ca/embodied-emissions-inputs-outputs-datatables-2004-2011/

Big and Little Feet Provincial Profiles: Newfoundland and Labrador

This communiqué provides a summary of the production- and consumption-based greenhouse gas emissions accounts for Newfoundland and Labrador, as well as their associated trade flows. It is part of a series of communiqués profiling the Canadian provinces and territories.1 In simplest terms, a production-based emissions account measures the quantity of greenhouse gas emissions produced in Newfoundland and Labrador. In contrast, a consumption-based emissions account measures the quantity of greenhouse gas emissions generated during the production process for final goods and services that are consumed in Newfoundland and Labrador through household purchases, investment by firms and government spending. Trade flows refer to the movement of emissions that are produced in Newfoundland and Labrador but which support consumption in a different province, territory or country (and vice versa). For example, emissions associated with the production of Newfoundland and Labrador crude oil that is exported to New Brunswick for refining and sale as motor gasoline are recorded as a trade flow from Newfoundland and Labrador to New Brunswick. Moving in the opposite direction, emissions associated with the production of a Quebec manufactured good that is exported to Newfoundland and Labrador for sale are recorded as a trade flow from Quebec to Newfoundland and Labrador. For further details on these results in a national context, the methodology for generating them and their policy implications, please see the companion papers to this communiqué series: (1) Fellows and Dobson (2017); and (2) Dobson and Fellows (2017). Additionally, the consumption emissions and trade flow data for each of the provinces and territories are available at: http://www.policyschool.ca/embodied-emissions-inputs-outputs-datatables-2004-2011/

Big and Little Feet Provincial Profiles: Saskatchewan

This communiqué provides a summary of the production- and consumption-based greenhouse gas emissions accounts for Saskatchewan, as well as their associated trade flows. It is part of a series of communiqués profiling the Canadian provinces and territories.1 In simplest terms, a production-based emissions account measures the quantity of greenhouse gas emissions produced in Saskatchewan. In contrast, a consumption-based emissions account measures the quantity of greenhouse gas emissions generated during the production process for final goods and services that are consumed in Saskatchewan through household purchases, investment by firms and government spending. Trade flows refer to the movement of emissions that are produced in Saskatchewan but which support consumption in a different province, territory or country (and vice versa). For example, emissions associated with the production of Saskatchewan crops that are exported to Alberta for processing and sale in an Alberta grocery store are recorded as a trade flow from Saskatchewan to Alberta. Moving in the opposite direction, emissions associated with the production of Alberta natural gas that is sold to a Saskatchewan utility and used to heat Saskatchewan homes are recorded as a trade flow from Alberta to Saskatchewan. For further details on these results in a national context, the methodology for generating them and their policy implications, please see the companion papers to this communiqué series: (1) Fellows and Dobson (2017); and (2) Dobson and Fellows (2017). Additionally, the consumption emissions and trade flow data for each of the provinces and territories are available at: http://www.policyschool.ca/embodied-emissions-inputs-outputs-datatables-2004-2011/

Big and Little Feet Provincial Profiles: New Brunswick

This communiqué provides a summary of the production- and consumption-based greenhouse gas emissions accounts for New Brunswick, as well as their associated trade flows. It is part of a series of communiqués profiling the Canadian provinces and territories.1 In simplest terms, a production-based emissions account measures the quantity of greenhouse gas emissions produced in New Brunswick. In contrast, a consumptionbased emissions account measures the quantity of greenhouse gas emissions generated during the production process for final goods and services that are consumed in New Brunswick through household purchases, investment by firms and government spending. Trade flows refer to the movement of emissions that are produced in New Brunswick but which support consumption in a different province, territory or country (and vice versa). For example, emissions associated with the production of motor gasoline in New Brunswick that is exported to Quebec for sale are recorded as a trade flow from New Brunswick to Quebec. Moving in the opposite direction, emissions associated with the production of Nova Scotia natural gas that is sold to a New Brunswick utility and used to generate electricity for New Brunswick homes are recorded as a trade flow from Nova Scotia to New Brunswick. For further details on these results in a national context, the methodology for generating them and their policy implications, please see the companion papers to this communiqué series: (1) Fellows and Dobson (2017); and (2) Dobson and Fellows (2017). Additionally, the consumption emissions and trade flow data for each of the provinces and territories are available at: http://www.policyschool.ca/embodied-emissions-inputs-outputs-datatables-2004-2011/

Big and Little Feet Provincial Profiles: British Columbia

This communiqué provides a summary of the production- and consumption-based greenhouse gas emissions accounts for British Columbia, as well as their associated trade flows. It is part of a series of communiqués profiling the Canadian provinces and territories.1 In simplest terms, a production-based emissions account measures the quantity of greenhouse gas emissions produced in British Columbia. In contrast, a consumptionbased emissions account measures the quantity of greenhouse gas emissions generated during the production process for final goods and services that are consumed in British Columbia through household purchases, investment by firms and government spending. Trade flows refer to the movement of emissions that are produced in British Columbia but which support consumption in a different province, territory or country (and vice versa). For example, emissions at the Port of Vancouver that are associated with goods that are subsequently exported to Ontario for sale are recorded as a trade flow from British Columbia to Ontario. Moving in the opposite direction, emissions associated with the production of Alberta crude oil that is refined in British Columbia and sold as motor gasoline to a British Columbia consumer are recorded as a trade flow from Alberta to British Columbia. For further details on these results in a national context, the methodology for generating them and their policy implications, please see the companion papers to this communiqué series: (1) Fellows and Dobson (2017); and (2) Dobson and Fellows (2017). Additionally, the consumption emissions and trade flow data for each of the provinces and territories are available at: http://www.policyschool.ca/embodied-emissions-inputs-outputs-datatables-2004-2011/

Energy and Environmental Policy Trends: Indirect Carbon Tax Costs Reduced by Policy Design

Each April, the price Canada sets for carbon emissions increases gradually. By 2030, the per tonne price will rise to $170 from its current value of$65. This creates an incentive for individuals and businesses to find ways to lower their emissions. But there are concerns that carbon pricing may unreasonably raise the price of important consumer staples like groceries. What does the evidence say

Opening Canada’s North: A Study of Trade Costs in the Territories

 　Challenged by remote locations, small populations, rugged terrain and (at times) difficult climate conditions, Canada's territories rely heavily on imported goods to maintain their standards of living. At the same time, industries in the territories are highly reliant on access to export markets – especially the large and growing resource sectors of the region. But these trade flows face significant costs that improved infrastructure may help mitigate. A northern transportation corridor could help, and has recently gained prominence following recent reports and hearings by the Senate of Canada. The potential gains are large. This paper estimates trade costs in Canada's North. We find policy-relevant trade costs (those trade costs that policy changes may help lower) are substantial. The regulatory differences, time delays and lower infrastructure quality that inhibit trade add between 20 to 30 per cent to the cost of a delivered good for Yukon and Northwest Territories and over 60 per cent for Nunavut. Infrastructure may be a large cause of higher trade costs. We find that distance-related costs are 45 per cent higher per kilometre for trade with a territory than for trade between two provinces.The region’s economy, productivity, income and investment are significantly lower as a result. Using a detailed model of the Canadian economy, we find that lowering these barriers – such as through improving northern transportation infrastructure – could add up to $6.5 billion to Canada’s GDP, with most of that gain occurring in the territories. For the Yukon, Nunavut and Northwest Territories the gains equal about$40,000 per person, which is a 50 per cent increase in productivity.The Senate’s advocacy for reducing trade barriers is encouraging and the federal government broadly supports knocking down these barriers. It is time for all three levels of government to work together to create policies on, and funding for, improved infrastructure in Canada’s North and near-North