Gas and diesel price setting explained by Utility and Review Board
Formula for calculating prices each week
There was no change in the gas price overnight, but diesel prices jumped by nearly seven cents a litre in Nova Scotia. It's now selling for 112.2 cents a litre in the Halifax area.
Earlier this week, the Utility and Review Board invoked the interrupter clause and the price of gas was pushed up.
We asked Paul Allen, the executive director of the Nova Scotia Utility and Review Board, to explain how gasoline and diesel prices are set each week to dispel the confusion about how it's done:
The formula — in 8 steps
First, there is a formula for calculating the price each week. The formula components are set out in the Petroleum Product Pricing Regulations and were the subject of a public hearing in 2006.
Briefly, the formula to arrive at the pump price is:
- The five-day average cost of a litre of gas/diesel oil from the NYMEX (New York Merchantile Exchange) converted from U.S. to Canadian dollars. This is the benchmark price.
- Plus or minus any corrections for differences that occur between the benchmark price and the actual NYMEX prices. This is the forward averaging correction.
- Plus an allowance for moving the product to the retailers in each zone. This is the transportation allowance.
- Plus an allowance for wholesalers' expenses and a reasonable profit. This is the wholesale margin.
- Plus Federal Excise Tax, which is currently 10 cents per litre.
- Plus the Provincial Motive Fuel Tax, which is currently 15.5 cents per litre.
- Plus an allowance for the retailers' costs and a reasonable profit. This is the retail margin and there is a maximum and a minimum markup set.
- Plus HST on the above at 15 per cent.
The benchmark price
The benchmark price is likely the least understood part of pricing.
To explain that further: the actual average price for gasoline and diesel oil is obtained from the NYMEX daily, and converted into Canadian dollars using the Bank of Canada noon rate.
The NYMEX is a commodity exchange and is considered the most relevant and independent source for pricing of gasoline and diesel.
Each day's information is then averaged for the week. The pricing cycle for Nova Scotia runs from Thursday to Wednesday.
Said another way, the board sets the benchmark price on Thursday using all of the information from the previous five business days.
Forward averaging correction
Of course, when you use last week's NYMEX information to set the price for the coming week, you can unfairly penalize either the consumer or the industry.
To fix that, there is a correction or "trueing up" called the forward averaging correction.
The difference between the benchmark used to set the price for the current week and the actual NYMEX prices (in Canadian dollars) for the same week is calculated and applied to future price setting.
That way, in a time when NYMEX prices are falling, the consumer will get the benefit of the correction. If NYMEX prices are rising, the retailer will get the benefit.
Both sides are treated fairly using the same calculation.
The board may choose to spread out the correction over more than one week but the whole difference will be applied over time.
It is reasonable for both the wholesaler and the retailer to recover their costs of operation and to make a reasonable profit.
The margin for wholesalers was set based on historical information presented during a public hearing in 2012 and was set as 6.65 cents per litre.
Similarly, the retailer's margin was set at a public hearing in 2011 and is currently 4.8 cents to 6.6 cents per litre.
Note that for retailers, there is both a minimum and a maximum margin.
Imposing a minimum margin allows independent and smaller retailers in rural areas or small communities enough revenue to stay in business, thus helping to ensure reasonable access to a supply of gasoline and diesel oil throughout the province.
Having a range also allows for some pricing competition where there are multiple stations.
There is a cost to moving gasoline and fuel oil from distribution centres, such as refineries or tank farms.
The greater the distance, the greater the cost.
The province is currently split into six zones, roughly based on distance from the distribution centre and a transportation allowance set for each zone.
Transportation allowances were last set at a public hearing in 2011.
Occasionally the NYMEX prices for gasoline, or the value of the Canadian dollar — or both — will change sharply during the week. That affects the benchmark price as noted above.
If the change reverses itself, then it is not a concern.
However, if the change is sustained for more than a day and is greater than six to eight cents per litre, the board will consider changing the price early by "interrupting" the pricing cycle.
If the benchmark price is falling, then any interruption will benefit the consumer. If it is increasing, then it would benefit the industry.
Including the most recent interruption, the Utility and Review Board has applied the interrupter a total of six times since 2009. The price was decreased four times and increased twice.
If the change is not sustained, or occurs the day before a regular price setting, then any differences will be included in the regular weekly pricing.
A note on crude oil prices
Pricing is based on the NYMEX price for gasoline and diesel oil, not crude oil.
There is no doubt that crude oil prices affect gasoline and diesel prices and they do, on the long term, move in the same way.
However, on a day-to-day basis, they can move quite differently — or even in opposite directions — for a variety of reasons.
Also, crude prices are generally reported in U.S. dollars, which ignores changes in the value of the Canadian dollar.
You can find more information on the board's website, which includes the zone map, the most recent and historial prices and additional information on specific topics.
Paul Allen is the executive director of the Nova Scotia Utility and Review Board, which regulates the gas and diesel price each week in the province.