Alberta should fund AER through general tax revenue

Due to COVD-19 and the massive decline in economic activity worldwide, global oil demand has dropped dramatically. According to Russell Hardy, CEO of Vitol Group (the world’s largest independent oil trader), global crude demand will be down 15-20 million barrels a day over the next few weeks. Annualized, this would represent a five million barrels per day decline in 2020, a five per cent drop from 2019.

While markets were expecting supply cuts from OPEC, we experienced instead supply increases due to an oil price war between Saudi Arabia and Russia. Markets are reacting to this unprecedented double-shock.

Western Canadian Select, the Canadian oil price benchmark used for heavy blended crude oil, was at $38 a barrel in February 21 of this year. Less than a month later, on March 18, the per-barrel price had crashed to $5. This collapse in oil prices will have a significant impact on Alberta’s economy, which relies heavily on the oil and gas industry. Industry cost-saving initiatives are now more important than ever, given that Alberta’s energy sector supports more than 500,000 jobs across Canada.

In a statement released last week, the government of Alberta said that they will be funding the industry levy for the Alberta Energy Regulator (AER) for a period of six months.

In a recent report, we reviewed and evaluated the broad model of regulatory excellence that the AER implemented after a major review it initiated several years ago. The AER, as the sole energy regulator of natural resource development in the province, receives its funding through administration fees levied on the industry subject to the Treasury Board’s authorization of the regulator’s spending limit and the approval of its budget. The AER must submit its annual financial report and budget to the Department of Energy and the Department of Environment and Parks for review and input before it is sent to Treasury Board.

So, essentially, the government calls all the shots by approving the AER’s budget and appointing its board members. Yet the AER is an industry-funded government agency. This is equivalent to food and drug companies being required to fund the Food and Drug Administration (FDA) in the U.S. or requiring investment dealers in Canada to fund securities regulators. These types of funding arrangements make no sense from a public policy perspective. Since regulators are ostensibly working to promote the public interest, they should be publicly funded, i.e. paid for with taxpayer money.

This is why we hope Alberta Premier Jason Kenney’s recent decision to fund the AER through general tax revenue becomes permanent. It is the right call, given that the AER’s operations, which include conducting environmental assessments, approving or rejecting resource development projects, granting licenses, implementing safety guidelines, and leading stakeholder consultations, (just to name a few) are meant to be in the public’s interest. If the AER’s stakeholders are, as AER’s management puts it, “all Albertans”, then all of the regulator’s activities should be paid for through tax revenues.

A concern that might be raised is that oil and gas companies might bring more investment proposals forward, at the margin, if they do not pay for the activities of the AER. That is, the companies might “free ride” off other Alberta taxpayers. Of course, oil and gas companies pay corporate income taxes, so they would still contribute to the costs of running the AER. Also, it costs energy companies money to develop and support proposals brought to the AER, and it seems unlikely that “frivolous” proposals would be brought forward simply because companies are paying less money directly to operate the AER.

As we showed in our study, and reproduce in the table below, oil and gas companies have paid over $1.2 billion in total administration levies since 2013. The levies, if resumed, therefore represent a substantial financial burden on the industry going forward, especially if oil prices remain at their currently depressed levels. But of even greater relevance, requiring oil and gas companies to directly fund the AER is not good public policy.