Oil companies In N.B. being overcompensated for federal clean fuel costs, experts say

New Brunswick has been overestimating the cost of federal clean fuel regulations on oil companies and have allowed consumers to be overcharged by millions of dollars since last July as a result, two expert witnesses told an Energy and Utilities Board hearing this week.

Timothy Auger of the group Advanced BioFuels Canada and Vijay Muralidharan of Calgary-based R Cube Economic Consulting Inc. are each challenging a formula adopted last year by the EUB to calculate the cost of federal clean fuel rules on oil companies.

This week, that formula is allowing oil companies to add 5.22 cents per litre to the price of gasoline and 5.82 cents to the price of diesel in New Brunswick to pay for the cost of regulations that took effect nationally in July.

Every one cent added to petroleum prices in New Brunswick costs consumers about $1 million per month at the pumps.

Calgary energy consultants Vijay Muralidharan said his figures show New Brunswick consumers have been charged more than double for clean fuel costs since July than is necessary. (Ian Bonnell / CBC)

In testimony Monday, Auger argued consumers in New Brunswick are compensating companies for costs that do not exist yet.

"The net effect is simply passing on additional profits to the primary supplier at the cost of consumers in the province," he told the board.

Federal clean fuel rules are separate from carbon charges and are aimed at forcing oil refineries and fuel importers to lower the "carbon intensity" of the products they sell and the methods they use to refine them.

The policy sets targets for emissions and establishes financial rewards and penalties for oil companies to reach them.

The regulations do not apply to heating fuels or to petroleum products exported from Canada.

Refiners can comply with the new rules in different ways, including putting more ethanol in domestic gasoline, selling biodiesel products or finding ways to reduce their own refining emissions.

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Environment Minister Steven Guilbeault said last June that his department would be happy to show the EUB why it should set costs for clean fuel regulations lower. The department failed to register for this week's hearing. (Justin Tang/The Canadian Press)

Companies that come in below the federal government's emissions intensity ceiling earn credits they can sell on a market being set up for that purpose. Other producers can buy those credits if their fuels fall short.

It's also possible to earn credits through investments in things unrelated to refining, such as electric vehicle charging stations.

The New Brunswick government passed legislation in 2022 to allow oil companies to pass clean fuel charges onto consumers and instructed the Energy and Utilities Board to determine what those costs might be.

The EUB is now reviewing the controversial formula it adopted for that purpose last year after agreeing to the recommendation of a single consulting firm, Grant Thornton.

Angela Brown, a partner in Grant Thornton's office in Newfoundland and Labrador, consulted with oil companies. Based  on their claims that they would eventually have to comply with clean fuel regulations by importing high-cost "renewable diesel" into New Brunswick to reduce the carbon content of fuels they sell, Brown developed a formula to estimate that cost.

"On the basis of that we did use that as our starting position for our calculation," Brown said Monday during testimony where she defended the formula.

"I did discuss with industry participants what their most likely pathway to compliance would be … and for the most part they all acknowledge … the renewable diesel pathway would be the most likely."

The EUB hired consulting firm Grant Thornton to recommend a way to estimate the costs of federal clean fuel rules. The result has meant higher prices to consumers in New Brunswick than most provinces. (PATRICK BOLGER/BLOOMBERG NEWS)

But in his testimony, Auger said meeting clean fuel requirements in the less stringent early years can be done mostly through much cheaper alternatives, such as mixing more ethanol with gasoline.

That involves little to no cost since ethanol is less expensive than gasoline

Despite what oil companies may have told Grant Thornton, Auger said, he expects they will use the cheapest options available to them first. He argued that allowing companies to charge for the cost of importing renewable diesel now, when it's not even being used, is a disservice to consumers.

"What Grant Thornton's calculator misses is including a proxy for the lower-cost options that exist," said Auger.

"It simply takes the highest cost option and applies it across the board in the entire fuel pool, and that misses the point we are trying to make here — that that is not a likely scenario."

In his evidence, Muralydharan also criticized Grant Thornton's estimate of the cost of clean fuel regulations, saying they exaggerate expenses faced by oil companies.

Christopher Stewart, who chaired the board hearing, expressed frustration that the federal government was not participating. (Ian Bonnell / CBC)

He suggested amounts allowed in New Brunswick since July were consistently more than double what consumers should be charged and recommended Grant Thornton's formula be reined in.

"In our view, it is unnecessarily complex and does not accurately represent the costs likely incurred by Canadian suppliers to comply with the new regulations," Muralydharan wrote.

A notable absence at the hearing is the federal department behind the clean fuel regulations, Environment and Climate Change Canada. 

Its minister, Steven Guilbeault, heavily crticized the EUB's original decision and pledged to have his officials show up at the first opportunity to prove clean fuel regulations involve little cost to oil companies in the early years.

"We're confident that we'll be able to demonstrate to the utility board that it shouldn't happen," he said last June of adding millions of dollars of charges onto consumers.

"There's no reason for it."

However, the department missed the Dec. 5 deadline to register to participate in the hearing.

Last week, the department did submit a report by Energy Super Modelers and International Analysts via email to the board. It suggested the true cost to oil companies in New Brunswick of clean fuel rules in 2024 would be two-tenths of a cent for gasoline and one-tenth of a cent for diesel. 

But without the federal government formally participating in the hearing and subjecting its report to examination and cross-examination, it could not be entered as evidence or used to help decide the matter, according to a clearly frustrated Christopher Stewart, who chaired the board hearing .

"Unfortunately, Environment [and] Climate Change Canada, despite being given certainly every opportunity to do so, has not come forward to participate in this proceeding or actually to present any evidence," Stewart saidi at the beginning of proceedings.

"Accordingly, the report will be received by the board as a letter of comment only and will not form part of the evidentiary record in this proceeding."