HALIFAX, THURSDAY, AUGUST 19, 2004
SELECT COMMITTEE ON PETROLEUM PRODUCT PRICING
9:15 A.M.
CHAIRMAN
Mr. William Dooks
MR. CHAIRMAN: Gentlemen, the committee is now open. Answer your questions at will, and if you would like to express your opinion outside of the room, then that's okay as well. I'm going to just open it up and take anyone's name who would like to ask Mr. Conrad a question. Mr. Taylor.
MR. BROOKE TAYLOR: I was wondering if our guests were going to elaborate on our questions that we presented them, the written questions, perhaps previous to opening up for Q & A, because we did send some over and I think our guests are probably prepared to respond to those. Maybe we could begin, if it's okay, Mr. Chairman, in that fashion.
MR. CHAIRMAN: Do you have a copy of the questions that we sent?
MR. GRAHAM CONRAD: Yes, I do, Mr. Chairman.
MR. CHAIRMAN: Maybe we could, just to liven the committee up a little bit this morning, go down the road on the questions a little bit.
MR. CONRAD: I'm pleased to. Again, let me express my appreciation for being here and having the opportunity to convey to you the issues that are impacting the retail gasoline industry in the province related to pricing. To respond to the questions that were in your letter, the first question: "Should regulation be a consideration, what is your perspective on oil companies and others that prices may increase at the pump, keeping in mind that the oil companies had told the committee the prices would increase?"
1
I guess my response to that is that, first of all, that's not an automatic, there's no way for sure that you can say that prices are going to increase right across the board with the introduction of any kind of regulation. In terms of the oil company response, that's the standard response, that regulation automatically means higher prices. In our experience and in the evidence that we presented not only to the hearing but to Minister Barnet in our research back in May, our experience is such now that the clarity of that comment is no longer as accurate as it might have been in the past.
Oil company responses, that regulations actually mean higher prices and that in a free, non-regulated market, over time, prices will be lower, at one point in time we accepted that argument as well, but I guess, as I've said, the clarity of that is not what it used to be, because I'm not sure what over time means anymore, because the evidence that we submitted indicates that over the past year, when you compare Nova Scotia to P.E.I., in spite of the difference in tax arrangements, Nova Scotia prices, in fact, were not necessarily lower than P.E.I. So that was one comment we wanted to make.
Also, to express the obvious, the price of gasoline is not dictated only by the retail margin, there are other components that go into the price of gasoline. So it's not an automatic that prices would go up at the pumps should regulation be introduced. I think industry experts are saying now that crude has pretty well peaked. They've said this before, but as of today it's up again, over $47 a barrel, and experts are saying that it has pretty well peaked and that we should shortly see some decline in the cost of crude. Well, if that does happen, then, again, depending on the timing of regulation - if and when regulation might be introduced - we could end up in a situation where retail margins, a minimum margin system be put in place, and in fact the price of gasoline comes down because crude prices are going down. So that's a scenario that's a possibility and should be.
I guess the other point that I would make in response to that question is that we don't think that the sensitivity of rising prices, as long as there are explanations there, are the big deal that some make it out to be. We've seen two recent increases, both 5 cents a litre, in the last month, with minimum reaction from the public. The reaction is usually all the same, it's the concern about why is it going up by 5 cents a litre, in this case, why was it 5 cents a litre the last time. It's the misunderstanding or the lack of understanding about why prices are changing that is so difficult for the consumer to accept.
If, in fact, the introduction of a regulated system and a minimum margin installed did result in the price of gasoline going up, I'm not saying for a moment that the motorists or the public would be opposed to that, as long as they understood the reasons and the rationale for why. That would be my response.
Again, my final comment related to question one is that the oil companies always have the authority and the opportunity to reduce their margins, so if within Nova Scotia there are so many different prices, community by community, and they're so difficult to understand
why prices are the way they are, community by community, if you did have a system in place, a regulated system, which enabled you to look at how prices are established, you might find that by the time everything was all flushed out, some markets may go up, some markets may go down, and oil companies still have the opportunity to reduce their marketing margins, too, if they wanted to. So that opportunity is there, too.
The bottom line is, in response to your first question, it's not an automatic across-the-board increase in the retail price of gasoline that would result by introducing any kind of a system of regulation. That's our position on that. Do you want me to move on to the next one?
MR. CHAIRMAN: Yes, you certainly can. (Interruptions)
MR. CONRAD: I said that in our opinion it is not an automatic that by introducing regulation, which would have a minimum margin component to it, it's not an automatic that prices across the province are going to go up.
MR. CHAIRMAN: So you're saying that regulation doesn't necessarily lend itself to an increase in pricing.
MR. CONRAD: Not automatically. As I say, the standard argument by the oil company - and has been in the past, and to some extent correctly so, years ago that was correctly so - is that when you compared a regulated market to an unregulated market four or five years ago there was evidence to suggest that over time prices would be lower in a non-regulated market. Nova Scotia prices were consistently lower than P.E.I. But in the last year or so, there have been some phenomena taking place within the industry that begs to question the validity of those statements now.
Some of the phenomena are these rapid increases that are not associated with anything, like a 5-cent-a-litre increase, it goes up 5 cents in one shot and then slowly comes down. Over a period of time Nova Scotians are paying far more for gasoline than they are in Prince Edward Island. That has happened with so much frequency, and that's one of the irritants that we hear from motorists, these huge unexpected price increases.
Then, in addition to that phenomenon, we have these other situations that occur, sort of outlet by outlet or market by market, where prices go up and everybody follows, and then they come down, some go up and some don't. I drive by to buy my gasoline, I'm in a hurry and the price is at whatever, and I come back an hour later to finally get my gasoline when I have time and the price has gone up. Those kinds of pricing activities are more common, and have been more common in the last year and a half or two years, than ever. We think it goes to support our argument that you just can't simply say, anymore, that a deregulated market produces lower prices. You can't say that anymore. That can't be substantiated.
MR. CHAIRMAN: Are you clear on that, Gerald?
MR. GERALD SAMPSON: I would like to ask you then, are you in favour of regulation?
MR. CONRAD: We are in favour of a minimum margin for retailers. We are in favour of some government response that will instill some level of competition in the industry. The word regulation is synonymous with regulating the entire industry. We're not suggesting for a moment that the industry needs any more regulation other than a retail spread between what a retailer buys his product for and what he sells it for, and that decision making should be made by the retailer.
MR. GERALD SAMPSON: What about a guaranteed price or a regulated price for wholesalers, so that I sell you the gas - just say, for argument's sake - for 40 cents a litre, but this gentleman here is better at dickering, so he winds up getting it for 38 cents, and he figures he got a good deal, until three weeks time when he finds out that the guy over there, he bought a bunch of it and he wound up getting it for 37 cents a litre. So it seems that they're playing one off against the other all the time.
MR. CONRAD: And indeed they are.
MR. GERALD SAMPSON: If I can, Mr. Chairman . . .
MR. CHAIRMAN: Gerald, we're going to deal with the answers to the questions first, but you're going down a path and I understand where you're going, but what I would ask is, are you clear on the answer to the first question?
MR. GERALD SAMPSON: Yes.
MR. CHAIRMAN: To clarify that, regulation does not necessarily mean an increase in fuel price.
MR. CONRAD: Absolutely. That's across the board.
MR. CHAIRMAN: That's just that statement that we want to make to that question. Now, everyone's clear on that one. Now we will go down to Question 2, please.
MR. CONRAD: Question 2, Mr. Chairman, "What would you consider to be a fair margin of profit between the wholesaler and the retailer?" All I can do is summarize, probably, the information you've received already from participants in the legislative review process. Based on the experience that we all know about in Prince Edward Island and based on our own experience here in Nova Scotia, it's clear that a minimum of 4 cents a litre for
a self-serve outlet is required to stay in business, a minimum of 5 cents a litre for full-service is required to stay in business.
If I can help explain, very quickly, the economics of how these numbers are derived, as we get closer to $1 a litre and as retailers are required to accept credit cards, by contract, and the average oil company charge to a retailer is 2 per cent for the use of credit cards, so 2 per cent on $1 litre of gasoline is 2 cents a litre. So the average retailer pays an average of 2 cents a litre to sell his product on credit cards. The oil company gets that money. The oil company, of course, pays something far less than that to the bank, or it doesn't pay anything at all if it's branded, their own oil company-branded card.
So right off the bat you have 2 cents just to sell the product, and I don't have to explain to you what has happened to minimum wage in the last x number of years, I don't have to explain to you what has happened with insurance, I don't have to explain to you what has happened to other costs of doing business. Four cents a litre on a self-serve arrangement is barely enough to break even. You cannot make money unless you're into a huge high-volume location. You cannot make money. The average self-serve location in Nova Scotia is around 3 million litres a year. There are some that are 9 million and there are some that are 1.5 million, but the average is such that you can't make money on 4 cents a litre, but you won't go broke.
For a full-service location, you add that person or persons to pump gasoline, again, do the math, if you pay somebody $20,000 a year on 1 million litres, that's 2 cents. So it's 2 cents for credit cards, 2 cents to pump the gasoline, and there's a penny left on a full-serve basis. There's a penny left to cover everything else. The numbers don't add up. So to respond to the question, what would be a fair margin of profit? Minimum would be 4 and 5 cents, self-serve and full-serve.
MR. CHAIRMAN: Are there any comments on Question 2? You're very clear on that. Mr. DeWolfe.
MR. JAMES DEWOLFE: You said the average self-serve garage pumps 1 million litres.
[9:30 a.m.]
MR. CONRAD: The average self-serve would be 3 million.
MR. DEWOLFE: Three million and the full-service 1 million, was it?
MR. CONRAD: No, I say some would be pumping as high as 9 million and some would be pumping as low as 1 million, but if you take the average, the numbers that we have seen, the average volume per outlet, self-serve is 3 million litres.
MR. CHAIRMAN: Any other questions?
MR. DANIEL GRAHAM: Mr. Chairman, I'm just wondering if we could, at the end, because some of these things are sort of related, whether there would be an opportunity to have a discussion on a variety of issues that sort of bridge together.
MR. CHAIRMAN: Yes, indeed, we're simply just answering the three that we've sent him.
MR. CONRAD: If I could comment on the second part of Question 2, "Do you favour a guaranteed margin?" We're not asking for a guaranteed margin. There are no guarantees and what we're asking for is a minimum margin. The reason why we're asking for a minimum margin is not related to some sort of guaranteed income we're looking for. We're looking for a level of competition that currently doesn't exist and is very, very rapidly deteriorating. There is no competition at the retail end of our industry anymore, when the wholesaler tells you how much you pay for your product and the wholesaler then - because all of this is done electronically, they have all the information instantaneously, the wholesaler tells you how much you paid for your product and then - the wholesaler dictates to you what you will sell it for.
MR. CHAIRMAN: Why is he able to dictate, is it because they own their own garage/stations?
MR. CONRAD: No, the electronic equipment that processes the data that most retailers have with most oil companies indicates the transaction time, date, volume, amount, the price of the product at the time.
MR. CHAIRMAN: But that's how it done. I know how it's done. But to substantiate why they're able to do it, is it because the wholesalers own their own garage/stations and the bigger garage/stations are able to dictate or is it just the product?
MR. CONRAD: I think, and this is one of the reasons why I asked Roy to come along because he can speak first-hand about it, but the feedback that I get from retailers and much of that was conveyed at the various hearings, is that there are things that are happening that are not explainable. There are things that are happening where a retailer says that I can't live on 2 or 3 cents a litre, I have to put my price up by another 2 cents to balance my books and the very next delivery, his price is up by another 2 cents. So, therefore, he's still no further ahead. I can't tell you why that happens or how it happens . . .
MR. CHAIRMAN: That's the reason why I asked the question.
MR. CONRAD: . . . it just happens. They're doing it.
MR. CHAIRMAN: I'm trying to get to the bottom of that, for sure.
MR. BROOKE TAYLOR: Graham, I was talking to a retailer a couple of days ago - and we'll get into the invoices a little later on - and he was telling me that he simply picks up the phone when his inventory is getting down and calls his carrier, in this case it's Seaboard Liquid Carriers, he doesn't deal with the wholesaler at all. He is told to call the trucking company. He calls the trucking company and he is charging the same price for that gas, in this case we're talking about regular self-serve, he's charging the same price per litre - and I'll provide members with a copy of these two invoices for the same price - but he has seen his margin shrink from 3.26 cents to 1.51 cents. So when you're talking about you needing 2 cents to even process cards, his margin is 1.5 cents.
AN HON. MEMBER: He's losing.
MR. TAYLOR: Well, yes. So I'm just wondering, in fact, the dealers, I thought maybe you had to work through your wholesaler but basically the wholesaler, in this case Wilson Fuels, acts more like a middle man, somebody who's in there doing the administrative side of it. Besides, it almost seems from this guy's perspective, on their desire or whim or whatever it happens to be, they adjust the margin. This time the guy is squeezed so low he says he is operating at a loss, but this is my business. He runs some other merchandise and things of that nature to help him sustain, but it's in black and white that this is being done.
MR. CONRAD: Well, our conviction is such that if there was the desire to pursue further investigation into the industry about the predatory practices of the oil companies, it would be a very enlightening experience. It would be a very expensive, time-consuming experience and my suggestion is by the time you reached a conclusion, whatever that conclusion might be, 30 per cent of the retail network in Nova Scotia would be gone. With a regulated pricing system, where the price of gasoline is regulated to the point that there is a rack price from the one and only refinery we have, and whatever the components of the cost to get it up to that point are, fine, as long as they're explainable, but somebody within government would have some understanding of how that price is set.
So there's your starting point and the geographic area of Nova Scotia is not that great. So the cost of transportation between Ingonish and Yarmouth can be worked out very, very easily and if a minimum margin is established for people who retail gasoline, it is very easy to understand how the price of gasoline is calculated. It is so simple, your posted price could be there for a month at a time, or in P.E.I.'s case, I believe it's two months, or perhaps longer. So that the public has some understanding of, first of all, they know that somebody is looking at pricing to make sure that, in fact, these increases are legit, they're related to something; and secondly, they have some time to prepare for price changes, whichever way they may go.
That's essentially our view on it. I think you've seen and heard all kinds of evidence about - I'll call them predatory practices or abuse of dominant position by the oil companies, call it whatever you want. I guess my only concern is that if you decide to pursue that to the nth degree, I'm not sure what you're going to get out of it when you're there and, in the long run, nothing will change other than the fact that an awful lot of retailers in Nova Scotia will not be able to hang on long enough for that to take place.
MR. CHAIRMAN: Question 3, I believe.
MR. CONRAD: "In regard to the benefits of a margin management system, how do you substantiate a regulated business?" I would just like to qualify that my understanding of that question, a regulated business perhaps is an overstatement. You're not regulating anybody's business, you may regulate a product that a business sells. To be successful as a retail gasoline dealer requires a huge number of skills, as it requires in any business that you manage, probably even more so now when you're trying to survive on the biggest product that you sell where you lose money. So that means you have to make money on the other products that you sell. That's pretty challenging for anybody. But we're not looking for and we don't interpret this as regulating a business, it's just one product, which is one component of a business and people can survive or fail for other reasons.
MR. CHAIRMAN: Yes, we understand that.
MR. CONRAD: But I think that the public deserves more information - and when I say I, I'm not talking a personal opinion here now, this is the view from retailers that are echoed time and time again and we've heard them through the hearings as well - about how gasoline pricing takes place.
The last two explanations from oil companies, they're both from the same company, about why prices have increased. Like two nights ago, the explanation was so complicated as to why this 5-cents-a-litre increase took place when it was all said and done - Dave Collins made the explanation - I didn't have a clue what he said about why the price went up by 5 cents a litre. The previous 5-cents-a-litre increase that took place, the oil companies' spokesperson in the media was Ian Wilson and Ian Wilson's explanation for why that 5-cents- a-litre increase occurred was because it was a crap shoot. He was talking about the impact of the global economy and the worldwide factors that are affecting the cost of crude and we don't know for sure how it going to shake out and we don't know for sure how much it's going to cost us on a cents per litre basis, it's really a crap shoot. That was his quote. I thought my goodness, a crap shoot, to explain why the price of gasoline goes up by 5 cents a litre in one fell swoop.
MR. CHAIRMAN: Basically, I guess, the answers we have been hearing as a committee as well.
MR. TAYLOR: It just went up in the Truro area 6 cents per litre on Monday. There really wasn't any explanation except it was all over the radio station that the gas prices have jumped 6 cents per litre and some of the other stations in the area were trying to catch up with Truro and you get so far then they stop. It would go back down into Colchester County, and you get into Halifax and Hants Counties, the prices remain the same. It's unexplainable it seems. Well, it's explainable but . . .
MR. CHAIRMAN: We would like to open up now, if you're through, Brooke, for general questions.
Danny, I don't know if you wanted to go first and then Gerald.
MR. GRAHAM: I will, Mr. Chairman, there may be other things that I loop back to.
MR. CHAIRMAN: Yes and we're going to spend considerable time to make sure that the questions are answered today.
MR. GRAHAM: Thank you, I appreciate it. Thank you, gentlemen, for coming in. I didn't have the benefit of sitting through your testimony at, I believe, the Legislature on the first occasion and I apologize for catching up with respect to some of this. I should say at the outset that I have expressed in these hearings empathy for the retailers, the people who you represent. I continue to believe that there has been evidence placed before this committee that is suggestive of predatory practices on the part of larger companies in relation to retailers. I'm not yet convinced that there is enough before us that can allow us to draw conclusions but there is enough for us to raise questions and I think, file complaints, frankly, about what we've heard. I think it is important for us to keep that in mind.
I want to loop back to a number of the assertions that you've put before us. You've indicated, and I'm just at the place in your testimony from your earlier presentation to the committee, you referenced a 2003 report from MJ Ervin about the before-tax cost of gasoline in a regulated environment versus a non-regulated environment. I don't have that document in front of me, what I do have, instead, is something that I've shared with other committee members and I would like to share with each of you and I'll refer to it, it's the chart that committee members will recall, we've referenced on a number occasions with the 1.8 cent figure, one corner, et cetera. It is the page that I'm opening to that is the one that I would like to reference mainly.
It goes right to the heart of the assertion that, as you put it, it's not an automatic that a regulated industry will lead to increased prices. The line that I'm going to refer to is the one that has, if we could go to the furthest right margin and there is just up from the last sort of bunching of things, there is the figure of 1.8 in parentheses. Okay, as you move back from that, all the way back to 1991, and I think it's only relevant really to go back to 1992 because that's the first full year that we've had a comparison between Charlottetown and Halifax, and
you do an averaging and Mr. Epstein was astute in pointing out when we had referenced a 2 cent or so average that was between 2000-01 forward to 2004 that if you go back further to 1999, it's less than 2 cents, for example. But I've taken the time to stretch back to the year 1992 and just on a mathematical average of the difference in the before-tax cost in Charlottetown and the before-tax cost in Halifax and it would appear from this that there is about a 2.5 cent difference between Charlottetown and Halifax, to Halifax's favour.
I appreciate what you said in your comments about how there may have been a greater difference, and I think that's substantiated in part by what we see happening in the mid-1990s and the difference in the retail prices in this document that you see, I don't know if we yet have an explanation as to why there is that difference, and you made reference to four to five years ago it was clear that there is an advantage in regulated versus non-regulated industries. I would suggest that the time frame may be a little off in your earlier comments, based on this, if we accept this to be accurate, because four or five years ago, in fact, the regulated industry seemed to be getting a better deal from industry than non-regulated ones but if you go back 10 years, then it was clear that the advantage went to the non-regulated industry.
[9:45 a.m.]
I don't think much has changed over that period of time in terms of industry factors and unless my math is wrong or unless Mr. Epstein finds a new way of suggesting that I didn't do this properly, and I hope that I have, it's done in good faith, it would suggest that there is, in fact, a 2.5 cent difference and on 1.2 billion litres of gasoline, that's a $30 million cost to Nova Scotians. I don't have the benefit of any other document to refute that except for the testimony that I see here in relation to 2003 but, frankly, I'm a lot more comfortable taking a longer horizon than a snapshot from 2003. I'm just inviting you to respond to that.
MR. CONRAD: My first response is that these numbers that you're looking at are a snapshot in time. You have one number that represents 1991, 1992, 1993, 1994 and so on.
MR. GRAHAM: But stretched over time it would be an average of each of those years, I assume.
MR. CONRAD: But I guess there is another way to look at this that could shed some additional light on the conclusion that you're coming to. If, for example, we take any one of those years, and this company, MJ Ervin, produces numbers on a weekly basis, if you took a look on a week-by-week basis, the price of gasoline in Charlottetown versus the price of gasoline in Halifax, adjusted for the tax, then you could determine how many weeks during the year was Charlottetown priced higher or lower than Nova Scotia. That will reveal some information to you.
You might find that over a snapshot period of time, December 31st or whatever the period of time or however you calculated this average, I don't know, you might find that you've got two different pictures here because what this picture may or may not show is this business that we refer to of prices up like a rock and down like a feather. If prices go up by 5 cents a litre today and then they go down a penny tomorrow, a penny the day after, a penny the day after and then when MJ Ervin does their survey on Friday, the prices have come down again. So now you're comparing what happened on Friday in Halifax with what's going on in Charlottetown on a Friday. What the surveys don't pick up is what about that period of time, Monday, Tuesday, Wednesday and Thursday when the prices were up by 5, 4, 3, and 2 cents a litre?
MR. GRAHAM: I frankly don't accept that as a response that is in any way compelling because this document was prepared by government officials who we have to presume don't have an axe to grind and who are providing these averages in an independent way and to think that they would selectively go to years and skew the figures to the extent that these appear to be skewed, it would almost imply bad faith on the part of government officials or incompetence in their inability to provide us with an average. They've provided us with statistical data that we have to rely on where they're saying that the average price during that year, presumably not a snapshot in that year, is different to this extent from one year to the next. I appreciate that there are variations from week to week but when they give us a figure that says 1994 and it doesn't say February 10, 1994 or March 21, 1994, we have to assume that this is based on a stretch of the year and not something that's happening moment to moment or week to week. I welcome any evidence, any analysis, any mathematical analysis that responds to this in some way, and MJ Ervin seems to be the group that is relied on, not just by government but by you in doing this. I welcome, in the time that we have left to do our deliberations, perhaps a recalculation by your organization, that may respond to what we've received from government. If we receive that, that would be more than welcome from our perspective.
MR. CONRAD: If I could just - I'm not trying to be critical . . .
MR. GRAHAM: No, not at all, I'm here to just try to figure it out.
MR. CONRAD: I just want to bring to your attention again, it's the old adage that numbers don't lie (Interruptions) Figures don't lie but liars can figure. If you took an average, like how this is calculated, I would have to assume it's calculated the same way on the same basis because this company produces the same information for everybody, and there's a date at which these surveys take place every week. So, if, for example, the average that we're talking about would be to take all of the prices for the year and divide it by 52, that would give you an average.
MR. GRAHAM: If that's the way they do it.
MR. CONRAD: If that's the way this is done. I don't know. These numbers, I'm just assuming that they're from the MJ Ervin report, I can't tell. I'm just saying that would produce an average, wouldn't it, if that's the way this document is prepared. Then what I'm saying is that during the times that the numbers are tabulated, when the calculations and surveys are taking place, we have seen ample evidence - I mean, if you drive from Halifax to Charlottetown, people who do . . .
MR. GRAHAM: But we're talking about before-tax differences.
MR. CONRAD: I know, I'm adjusting for taxes. I'm saying that the spikes that take place in Nova Scotia don't take place in P.E.I. The price of gasoline does not go up by 5 cents a litre.
MR. GRAHAM: That's a question of stability, though. That's not a question of the overall average.
MR. CONRAD: But I'm saying that in terms of the cost to the consumer, if on Monday, Tuesday, Wednesday, Thursday of every week you're paying more for your product in Nova Scotia, that doesn't enter into the average. Consumers in Nova Scotia are paying more for their product.
MR. GRAHAM: Mr. Conrad, you're asking us to accept an assumption that perhaps, or in fact, the price is higher Monday, Tuesday, Wednesday, Thursday and not on the day of calculation without supporting it with any kind of evidence whatsoever. I'm just inviting you to provide some - rather than anecdotal comments or quips from the quote book about figures and liars, I think it's important for us to have data before us that is substantiated.
MR. TAYLOR: Can I ask a question? (Interruptions) On a point of order. Does the information you have, and I have the same information, include the community of Amherst, Nova Scotia, in terms of prices?
MR. GRAHAM: There is a comparison, Mr. Chairman, in the material that we've received that draws a comparison between Halifax and the rest of the province in what the retail price is. The best data that I've been able to locate in the information we have suggests that there's less than 1 cent difference between the Halifax price and the provincial average. Yarmouth is the place that is hardest hit, it would appear, in Nova Scotia, substantially harder hit than other places, but I'm not sure if Amherst is part of it.
MR. TAYLOR: The point I was trying to make, Mr. Graham, when we had those same government officials in, they did admit that they look at the average on a regional basis, and those regions include five centres in the Province of Nova Scotia. When you mentioned Amherst and some of the hundreds of communities in the province are not represented, and I've been told, and it may be anecdotal or not but I tend to believe it, that, frequently, folks
in Amherst drive over to the Island, and that's quite a drive, to fill up with gas, but vice versa just does not happen.
I'm making that point in support of Mr. Conrad's contention. I was just trying to point out that we have some information but I don't feel that the information we received from the government officials is as complete as it could be as well. There's a divergence of opinion on this, but when the folks in Amherst are making the trek over to P.E.I. (Interruptions) I'll step out of this.
MR. CHAIRMAN: If I could - it's Danny's time, but I did recognize Brooke. Mr. Conrad, it's very important for you to take considerable time to explain this to Danny to make sure that he understands it, and just speaking on your behalf, for the amount of time that we're taking, because it's going to help us out in the deliberations. You have the floor.
MR. GRAHAM: Just to respond to Mr. Taylor's remarks, I think it's highly likely that people would be stretching to Prince Edward Island because they enjoyed, while we had a 2.5 cent industry advantage, they had a 7 cent tax advantage, and it would make sense, because it's cheaper at the pumps.
MR. CONRAD: Seven per cent, not 7 cents.
MR. GRAHAM: A 7 per cent advantage.
MR. CONRAD: Yes, that equates to about 3 cents or 4 cents.
MR. GRAHAM: At $1 it's 7 cents, but hopefully we won't be there as much as we've been there lately. I would like to turn - I think I've made the point and if there is some way that you could provide us with some type of analysis that is statistical and analytical and not anecdotal it would be very welcome. I know that in the time that we have that may put a burden on you, but it would be very helpful because all we have is the MJ Ervin stuff that's been referenced, from government.
MR. CONRAD: If I could, and if it would be helpful, I will send you a copy of the correspondence that I sent to Minister Barnet in May, where we had done a review of the past year.
MR. GRAHAM: Here's what I would say to that, and I think I made a point about that before, one year is less persuasive than the stretch of time, because we see, in this industry, great volatility from one year to the next, and I think this document alone would concede that in 1999 and 2000, there is an advantage, from the industry, if you lived in Prince Edward Island as opposed to Nova Scotia. So it just may vary from month to month, but the broader stretch, I think, is the one that at least I'm persuaded by.
I would like to deal with the question of regulating wholesales only, and the concern I have about regulating just the wholesale to retail price is that it could dry up at either end, that it might not be worth it for Wilson's or somebody like that. They could buy it for whatever price, but if there's a guaranteed margin that they have to sell within and they have to sell it for a loss, they might not sell it and places may dry up. So I'm just wondering whether or not you believe that it would make more sense to regulate in an integrated way, in the P.E.I. kind of fashion, if one were to regulate as opposed to just splicing out that one margin, because the concern I would have is that we're not catching it all and we end up with some serious problems and potential closures. Either Wilson's doesn't sell to somebody or the margins don't make sense and we end up with no gas stations in some places. Thoughts on that?
MR. CONRAD: I understand what you're saying. I guess the feeling of gasoline retailers is that we're trying to keep our recommendations effective and simple. What takes place in the wholesale component of gasoline, that's where Wilson's and other oil companies make their marketing margins, we're not even attempting to address that. We think that it's an area of opportunity for the government to better understand how these numbers are arrived at.
Our initial recommendation is keeping it simple, and in the interest of just keeping it simple, if a retailer was assured of a minimum margin, then that would keep some stability within the industry, especially at the rural level, that would keep some stability within the industry to encourage people to stay in the business and provide a level of competition. Whether you want to take the minimum margin and go for a minimum and maximum, as they've done in P.E.I. so you have both ends sort of covered, that's fine. We think that's great. We envy the P.E.I. model.
MR. GRAHAM: You indicated, and I just want to be clear that I understand the distinction that you may have been trying to draw and I'm not clear yet, you said that you're looking for a guaranteed minimum but not a guaranteed margin. I'm having trouble understanding the difference between those two things.
[10:00 a.m.]
MR. CONRAD: In P.E.I. for example, they have a guaranteed minimum and a guaranteed maximum. There's a point of view out there that if you just have a guaranteed minimum, then retailers - some retailers - could abuse the system and charge far more because of this umbrella of protection, as some would call it, that might exist. In the interest - and this is not my personal opinion here but this is the viewpoint that has been expressed - of providing some protection to the consumer, if the government is going to regulate one side of it, then the government should regulate the other side of it, so that there's a minimum but at the same time the consumer has the assurance of knowing there's a maximum, so retailers
can't go beyond that. That's the logic that goes into the minimum/maximum margins, and we're quite in favour of that, for sure.
MR. GRAHAM: Just on the question, and I'm going to adopt the argument, not necessarily as my own but just to get it on the table, about Wilson's or anybody else selling their wholesale commodity to different retailers for different prices. The principle behind - like it or not - big-box locations and people's acceptance of big box is that you get volume discounts; they get volume discounts, they pass those savings along to consumers. The argument that Wilson's or some other wholesaler might try to make is that big volumes get cheaper product at the end of the day and isn't that the way that the economy should work, is the argument they would put. What's your response to that?
MR. CONRAD: We're certainly not opposed to that. That's normal business practice, volume generates discounts.
MR. GRAHAM: So the fact that a large-volume retailer gets a lower price from Wilson's than a low-volume retailer doesn't trouble you?
MR. CONRAD: We recognize the fact that the big-box stores are the way of the future, and we recognize the fact that consumers want big-box stores. There's no argument there. But what we want addressed is the fact that the retailer who is in this community where the big-box store is coming in has his margins dictated. There's nothing wrong with a retailer making a margin of 5 cents, 6 cents or 7 cents a litre as far as we're concerned, and he can compete head-on with the big-box stores. He obviously won't have the volume, but he can certainly stay in business if he wants to and provide a level of service to the community if he wants to. That scenario doesn't exist now. The oil companies do not let that happen.
If I could just make a comment, really, to a point that you had made earlier, about not sufficient evidence out there to draw any conclusions or pursue the investigation any further, that in itself begs the question, why is there such selected deviate behaviour going on out there? Why is it that retailers in Amherst are subject to marketing conditions that are so different than retailers, the same company, in Cheticamp, the same retailer in Digby? It's almost as if there are no rules of the game anymore, company by company to their retailer by retailer.
MR. GRAHAM: What I said earlier is that there is evidence to pursue an investigation, I don't think that there's sufficient evidence to draw conclusions yet, in terms of the predatory practices. If I could come back to the question, narrowly, that I was asking, you seem to accept the principle that big-box stores and the volume discount is an appropriate thing with other retail products, and you said that volume discounting from wholesaler to retailer is an acceptable practice in the gasoline industry as well.
MR. CONRAD: Yes.
MR. GRAHAM: Okay. So the fact that there might be a difference in price from one retailer to another, in terms of what they buy perhaps from the same wholesaler, is something that the market and the cut and thrust of the economy will ultimately decide.
MR. CONRAD: I don't want to make this any more complicated than I have to. Again, how transparent is all of this stuff you're talking about? At what volume do these big-box stores get that particular discount? Why can't we find that out? How can Superstore give a 3.5-cent-a-litre discount? We know how it's all happening, but if they're getting a 3.5 cent volume discount from their supplier, oil company, then why can't individual independent retailers combine their volumes and get into buying clubs, as we've talked about time and time and time again, so that they consolidate their volume, and then go deal with a wholesaler and ask for the same discount? The oil companies won't let that happen.
MR. GRAHAM: I think it's a great idea, buying clubs, more transparency, but it's short of regulation that you would take those actions, potentially.
MR. CONRAD: But our feeling is that regulation gives you that information, that's all we're saying.
MR. GRAHAM: I appreciate that regulation is a guarantee that you're not going to have any concerns. One final issue - I was in the process of trying to sift through where we have this information that I would like to touch on - the question of what Nova Scotia margins are. We've been given evidence that suggests that the margins in a place like Yarmouth fluctuate, and in many places the retail margin fluctuates tremendously. It can be as low as 2 cents or less, and it can be as high as 16 cents, it's suggested in some of the data that we've received.
One of the things that we need to be mindful of is that when people come before this committee and say that my margin was zero last month and my margin was zero, again, over the stretch of time, there are suggestions that the retail margin may be close to that healthier average but for some it's lower and it may be because of those predatory practices that we are concerned about for some particular retailers that create problems. So, do you have any data that is quantifiable, that can tell us what you believe to be the average margins in the regions or across the province, or something like that?
MR. CONRAD: My data tells me that it varies delivery by delivery, gasoline delivery by delivery. My data also tells me that the amount of money in the bank account at the end of the month is what's driving this concern by retailers. I'm talking retailers who have lost - well, couldn't possibly recover, thousands and thousands and thousands of dollars in the last year. We're now, honestly, I'm talking a large number of retailers, it could be 100 retailers in Nova Scotia, that are anxiously awaiting the results of the recommendations from this review committee. You know yourselves, you've heard the testimony from large-volume
retailers, that they're so far in the hole now that if they don't see any light at the end of the tunnel really soon, they're gone.
MR. GRAHAM: Are you able to provide us with that data?
MR. CONRAD: That data would have, should have, come to you from the individual retailers. Roy Pettigrew can speak for himself, he's here.
MR. GRAHAM: It's just that one of the challenges that the committee has been faced with, and we've been reminded - I don't mean to speak for the committee, Mr. Chairman, but I think it has been said by almost every member - that we find the stories of individual retailers to be ones that we are naturally sympathetic to. Our responsibility is to all Nova Scotians, including consumers, and to make sure that we do something in the best interests of everyone. Remote communities are a particular concern of mine, and the sustainability of remote retailers.
When we do this, we need to make sure that there isn't a cherry-picking of the worst stories that we end up hearing, and we have a sense of what the average is, what's the common story out there, not just the worst-case scenarios. Those are my questions and comments, Mr. Chairman.
MR. CHAIRMAN: Gerald has stepped outside. We will go to Brooke.
MR. TAYLOR: Mr. Conrad, I wonder if you would be kind enough to perhaps walk through these invoices. I had Mora kindly provide all members with a copy of these invoices. They're from the same dealer, and I just wondered if Mr. Conrad - and I know you haven't seen these particular invoices before, but this is from the same dealer, a Nova Scotia dealer, a long-time dealer in this province, and as you can see, when I look at it at first blush, I see where the margins varied and, you know, the maximum suggested price has, at least as far as two of the invoices go, remained the same, but there are terms there like net back mail-in price and, of course, the dealer margins, some are more discernible than others. I'm just wondering what your take would be on these invoices and if you could perhaps just tell us what your observations are based on this type of information which I take to be factual?
MR. CONRAD: I have never seen invoices like this before so I'm not sure how accurately I can comment on it, but my first reaction is that it appears to be full-service product, the maximum suggested price, just looking at the price, I'm guessing, and if that is the case, then the dealer margin column is, well, it speaks for itself, 6 cents, 4.26 cents, 6.50 cents, on average, whatever that works out to. (Interruptions)
MR. TAYLOR: If we just looked under the regular self-serve column, if we could, and perhaps you can correct me then as I go along because I had a chance to speak with this dealer quite extensively and, as you can understand, this is quite a learning curve for me on
this committee, but I went in and was speaking with the dealer. In the correspondence, Number 1, if we look under regular self-serve, we see the maximum suggested price was 92.90 cents and the dealer margin was 4.26 cents.
MR. CONRAD: Yes.
MR. TAYLOR: The dealer told me that on the regular self-serve he could live with that price, but his next load of fuel, or at least one of his next loads of fuel, saw the maximum suggested price go to 88.90 cents for the same product and then his margin shrank a little bit to 3.26 cents. Can you tell from that what that particular dealer is actually paying for his product? What's his net back? Do you know what that means?
MR. CONRAD: No.
MR. ROY PETTIGREW: If I could.
MR. TAYLOR: Yes, please.
MR. PETTIGREW: I've been in the business 35 years. I've never seen an invoice like this, never ever. I faxed invoices to you, I believe, as well as some of the other members of PetroCanada.
MR. TAYLOR: Yes.
MR. PETTIGREW: They're hard to understand, but this is . . .
MR. TAYLOR: Well, you know, this is what I was trying to discern.
MR. PETTIGREW: Yes.
MR. TAYLOR: The dealer told me, for example, between invoices two and three, if we just focused on two and three, and the dates are August 5th and August 14th, he claims that some of the fuel that would be in those tanks, for example, from his wholesaler, in this case Wilson Fuel Company, saw his margin operate at 3.25 cents regarding the August 5th invoice and then when he received the August 14th load of fuel, his margin was shrunk to 1.5 cents.
He seemed very perplexed and quite confused, you know, and, frankly, he named Dave Collins, he said what is Dave Collins trying to do to me. He said I have invested a lot of capital and, this may be anecdotal but, this guy is a long-time pillar of our community who has been supporting every imaginable charitable organization in our community and he said now I'm asked to operate at essentially what is a loss. Right now he's selling, this is what the man told me, he said I'm selling my fuel and he said the majority, over 70 per cent, of my
gasoline and petroleum product sales are at the self-serve pump and he said, if this is going on, I'm just told that when I get low on inventory, call Seaboard Liquid Carriers and he gets a phone call when to raise his prices up and to lower his prices. I thought maybe, Mr. Conrad, you might . . .
[10:15 a.m.]
MR. CONRAD: I've never seen anything like this.
MR. TAYLOR: Okay, well, you know, he couldn't explain what this was either. All he knew was the bottom line and this is the type of invoice that they're getting, Mr. Chairman.
MR. CONRAD: And both retail prices are the same - 88.9 cents.
MR. TAYLOR: Yes.
MR. CONRAD: And the margin in one week is 3.26 cents and the margin the next week is 1.51 cents.
MR. TAYLOR: Yes.
MR. DEWOLFE: Put a credit card on and you've lost.
MR. CONRAD: I can't figure out what he pays.
MR. TAYLOR: I have another invoice that shows what a dealer would pay.
MR. CONRAD: If I go to the bottom line which is this pump price excluding tax, it would be 51.8 cents. If you add 25.5 cents to that, which is the two taxes, it comes to 77.30 cents and I don't see that in here anywhere, no.
MR. TAYLOR: And if you notice, it says pump price exempt tax price, it's 53.54 cents on two invoices and on another one it's 57.02 cents, there's a difference.
MR. CHAIRMAN: It's the confusion of the information that's supplied by the big companies.
MR. TAYLOR: Before I forget, I should tell my colleague, MLA Graham, that I did vote against the HST when your government brought it in. I wanted to be clear, I'm on record. You weren't even in the House, I know that. (Interruptions)
MR. CHAIRMAN: Order, please. (Interruptions)
Brooke, are you finished? We're in sort of a hurry.
MR. TAYLOR: I guess what we're trying to do, much to the chagrin of the big oil companies, sometimes we make allegations that there seems to be discriminatory pricing. I don't say predatory pricing, but this is the very same dealer who has product, you know, a truck comes in and brings in a load of fuel and he's selling it for 88 cents and then he got a phone call, that's already in the ground, already in the storage tank, he got a phone call on Monday of this week to raise it, I think it was 6 cents a litre, but the product is, and I said, well, that means your margin. Oh, no, he said my margin is 1.5 cents when that goes up. Now, until I get invoiced for my next load there may be some adjustment in it, but this is clearly what he tells me is happening.
MR. CHAIRMAN: Through the whole run of the committee, this is the information we've been receiving. There's so much confusion surrounding the issue it's hard to determine what exactly is going on.
MR. TAYLOR: Yes, Mr. Chairman, he doesn't pay for it by truckload. Some dealers do pay when it's delivered and in the ground. He pays when it's pumped, when it goes through the pump, but he said the point that he . . .
MR. CHAIRMAN: Yes, their product in the ground.
MR. TAYLOR: Yes, the point he wanted to make, Mr. Collins or Wilson Fuel Company's product is in the tank when he pumps it, but now, come on, you know, what possible input would lead to that price that's already in the ground going up other than the greed, as far as I'm concerned, of that wholesaler? You know, maybe I'm missing something.
MR. CONRAD: Well, if I could just make a comment. I guess that's what has certainly got us involved to the extent that we are, that there have just been so many complaints from so many retailers about the confusion taking place within the industry and the reactions of the motorists, the consumers, to explanations that retailers cannot give, that it has just become bizarre retailing gasoline in Nova Scotia. You can't explain to people why you're charging them more and people think you're making more money because they're giving you the cash. (Interruptions)
MR. TAYLOR: Mr. Chairman, of course, if you watch the price of crude because when you see it going up, you automatically think that the price at the pump is going up and then, you know, you may go a few days where the price remains consistent and then all of a sudden it jumps up. Some people equate that with the world price of crude and others say, oh, this is the guy, the dealer. Well, the dealer isn't receiving an adjustment. If he is, I'm not aware of it anyway. I just thought I would bring those in and I think they might need further clarification.
MR. CHAIRMAN: Now, Gerald is on hold and Jim is on hold so we'll switch now to Howard.
MR. HOWARD EPSTEIN: Mr. Conrad, I have a number of questions for you, but I think I better start by pointing out to you that a lot of us have a very skeptical approach to the possibility of including a built-in margin and you started out saying that a lot of your members are watching this committee in high hopes that there's going to be a recommendation for a built-in margin.
This committee was set up because of consumers' concern with the price at the pump and a recommendation that essentially adds to the cost of the product isn't going to be very welcome by the general public. I know you tried to suggest that there wouldn't necessarily be that result, but in doing so you invited us, I think, to consider two points of view that are inconsistent. The one point of view that you suggested to us when you were discussing margin is that you pointed out that the oil companies essentially are in the dominant position and they tend to dictate the price and you gave the example that your members would experience a situation in which they tried to increase their margin by putting up the price to the customers and then they found that the oil companies ate up that increase in their next deliveries.
So essentially you're painting that picture for us, but then earlier on you were saying to us that an increase in price in the sense of a guaranteed margin is only going to be one of the factors that goes into the price and, as you put it, the oil companies have lots of room to reduce their margins. I don't disagree with that as an abstract statement. The oil companies do have lots of room to reduce their margins. The problem is they don't and the problem is they're in a completely dominant position vis-a-vis your members which leads me to the conclusion that any built-in margin for your members is likely to be eaten up by the oil companies that are already making lots of money anyway.
So I've got to say that I start with a huge amount of hesitation about this plus I tend to think that the case for the retail outlets not being able to make a living is not even close to being made. For example, there is no documentation through Revenue Canada returns to show us what your members are actually making. This is, you know, perhaps that might be better documentation, I don't see it and, in fact, when we've tried to track this down through Revenue Canada, it doesn't seem to be available. They don't seem to keep stats according to your industry group so that's problematic and the evidence just isn't there, but I'm looking for other ways in which we can kind of address the problem.
The concern I have focuses really on the remote areas, either the very remote areas of the province or smaller communities. So I'm wondering if you have any suggestions to us about smaller communities or remote areas because I think that not all retail outlets are in the same position around the province, but I am concerned about rural areas in the province and I'm concerned to make sure that product is available in those communities at
a reasonable price. So let me start with this, when you suggested that we kind of think about the P.E.I. model, I take it part of the implication is that there would be a province-wide price. Is that essentially the model you have in mind?
MR. CONRAD: No, no, there would be a province-wide rack price from the refinery. Then you would add transportation to wherever the product is going. It would obviously be more expensive in the farther areas from the refinery than those areas close by. So there would be a different price throughout the province as I would see it - the same as in P.E.I.
MR. EPSTEIN: Have we misinterpreted, have I misunderstood what it is that P.E.I. does? I thought that the variation was only within the penny and a half?
MR. CONRAD: Yes, that's true in P.E.I. because P.E.I. I guess is one market, that's right, their wholesale price, one market, yes, right, and that's basically what I was thinking.
MR. EPSTEIN: So you're thinking of a system in which there would be a province-wide price in Nova Scotia with some kind of little variation?
MR. CONRAD: Exactly.
MR. EPSTEIN: And do you have a number in mind for that? You gave us a number when you were talking about what your ideal would be for a retail margin or your minimum would be for retail margin. Is 1.5 cents what you think is the right range or is there some other range that you have in mind?
MR. CONRAD: We were recommending following the P.E.I. model. We were looking at 4 cents self-serve minimum and if we were going with the maximum, then 5.5 cents as they have in P.E.I. and a maximum of 5 cents for full-serve, or a minimum of 5 cents to a maximum of 6.5 cents for full-serve as they have in P.E.I.
MR. EPSTEIN: So 1.5 cents is the kind of range you're thinking about for variation?
MR. CONRAD: Yes, that's correct.
MR. EPSTEIN: Okay, that's fine but, again going back to this question of, you know, smaller or remoter areas, is there anything you might want to suggest to us. If we were focused on those areas, is there anything in particular that you might want to suggest to us about those areas?
MR. CONRAD: Well, in an ideal environment, retailers in rural Nova Scotia or in smaller communities should be able to price their product whatever way they have to to stay in business. That's the way it should be done and if they want to price their product high, consumers have to make a decision - do they want to pay the extra price to have service
locally or do they want to drive to the nearest community where prices are less expensive? In an ideal environment that's the way it should work, but it won't work that way.
MR. EPSTEIN: When it came to regulation, you really focused on the retail margin. Can I ask you, however, about the point I guess Brooke Taylor brought up - the peculiarity of the fluctuation in the price of gasoline that's already in someone's tanks. Have you any views on the first-in, first-out, or variation on that, that is should there be any regulation that essentially says that the price of product already in the tank has to be the price that it already was at the day it was delivered or should there be any regulation of that at all?
MR. CONRAD: My personal opinion is that I think that all balances out over a period of time, you know, what you lose when prices are going up, you gain when prices go down. I don't know how you could regulate the price of product in the ground if that's what you're asking.
MR. EPSTEIN: So essentially you're saying that regulation should be, I guess this question is subsumed in the P.E.I. model by just doing it once a month and not by allowing variations, okay.
MR. CONRAD: Yes.
MR. EPSTEIN: What about retail divorcement? What position would that put your members in?
MR. CONRAD: Ideally that would be the ultimate, but that would be a major effort and we just don't see that as being very likely. No other province in Canada has functional divorcement so I find it difficult to believe that Nova Scotia would tackle that. That's the ultimate arrangement, but that's my point of view. There are other points of view, of course, but when, in this case, the oil companies are so dominant and fully integrated and participating in all levels of the process, you know, the only way to really instill competition is to get them out of the retail end of it and that's not going to happen. It would be ideal, but I don't think it's going to happen.
MR. EPSTEIN: Is there a marker? I want to write something on the board behind there. Okay, I want you to think about the following in terms of price. I want you to look at a situation like this. You contemplate an 85 cent litre and an 85 cent litre is made up maybe of 30 cents for the crude, 16 cents for refineries, 15 cents federal tax, 15 cents provincial tax, 4 cents for the retailers and on what's an 80 cents subtotal, maybe a nickel on the HST, giving 85 cents at the pumps, okay. Now, this is probably a typical kind of picture. As I understand current prices, something like this is more or less what's going on.
MR. CONRAD: And understand, Howard, transportation might be a factor in there somewhere.
MR. EPSTEIN: All right, someone has got to pay that in there and this, you know, it will come out of here, there's a subset number here of say 46 cents, and then if you contemplate this in the P.E.I. context, essentially what P.E.I. regulators say is, okay, we accept the 46 cents that is built in here. We accept all these taxes, we are building in 4 per cent - 4 cents here for the retailers. They don't have the HST but, essentially, they have turned their mind to this price and they say, okay, this is what the price is going to be and there is a penny and a half variation up and down. Now, in my mind, that is not much of a regulatory system.
[10:30 a.m.]
I want you think about a different kind of regulatory system similar to what goes on right now in Nova Scotia for electricity, in which the URB looks at the price and decides what's a fair return for the company and a fair price for the customers. So look at this.
Suppose they look at this and we have a different regulatory system. They looked at the crude price and they said, really, a fair price for crude is going to be more like 20 cents rather than 30 cents, as an element of the price; 12 cents is probably, historically, a more realistic kind of number for the retailers. It is still going to be 15 cents for that, 15 cents for this. They built in 4 cents for that and the HST - since this number would be slightly lower - would be, maybe, 4 cents. You're up to 70 cents there.
Suppose they looked at it and they said, okay, well, you know what, even though we think these are fair prices for the international price of crude and a refinery, we can't directly control those. But what we can do is we can set the price that the customers pay. We can try to say what the price ought to be. So we look at the Canadian average and we say, okay, well, you know what, maybe Nova Scotians should pay 80 cents.
So instead of the kind of regulatory system of P.E.I. in which, essentially, they're accepting whatever the price is, they turned their minds here and they say, okay, fair price to the customer would be 80 cents. Somewhere in here, 5 cents, they are saying, is lost. What I want you to do is tell me, what would happen in the system if we tried to set up a regulatory system like this, okay, in which the regulators were able to turn their minds to what they thought was a fair return for these earlier, up-stream elements in the production cost of the product, even though they didn't have the regulatory authority to order them to take less because, unlike Nova Scotia Power, they are not here, they are not a company that they can control?
So what I want to know is, what would happen in that system? Would we still have product here, would product simply go somewhere else or would someone have to absorb that nickel back through the system?
MR. PETTIGREW: Well, I would hate to see us take minus one. (Laughter) There's no room there.
MR. EPSTEIN: Well, that's exactly the point. Furthermore, although some of you might be forced out of business, ultimately, the oil companies, if they are going to sell product here at all, do need an outlet. They need an outlet somewhere. They may not need as many outlets as there are. But that is the only leverage you really have, isn't it, that if you all go out of business, they are not going to be selling any of their product which is clearly not what they want.
So I guess what I am asking you to do is contemplate this possibility and tell me, what would happen?
MR. CONRAD: There are two thoughts that I have. First of all, is that you would certainly gain the insight into how crude prices and refinery margins are established. That system you are referring to would give you the information, the factual information from the oil companies to explain how they set those prices.
MR. EPSTEIN: Well, let me tell you. . .
MR. CONRAD: Even though you can't regulate it. . .
MR. EPSTEIN: In a rough way, we know this. We may not know it in exactly the same detail that the URB gets to know it about Nova Scotia Power when it has to come before it and open up their books. But everyone knows that it doesn't cost the oil companies $45 U.S. a barrel to find and extract a barrel of oil. It costs them $5 to $10 a barrel to find and extract a barrel of oil. The difference between $10 and $45 is, essentially, a, (Interruption) Well, it's a big profit and it's speculation. It's a whole variety of things. So we know this already.
About the refineries, we know that they're hugely profitable businesses because a number of them - you know, most of them are trading publicly on the stock exchange and we know who owns them. You can see that they are hugely profitable businesses, even though the URB - and no one in Nova Scotia, actually, has control over it. You know, in a rough way, we already know this.
MR. CONRAD: Yes. When I look at the marketing margins, not refining margins, the marketing margins in Prince Edward Island that the oil companies enjoy are astronomical. They are double digit - and that is not refining margin, that is double digit too,
but the MJ Ervin reports that I have, within the last report or two, there was 14.7 cents a litre as marketing margin. So if that scenario you are describing was to be imposed on Prince Edward Island, that would mean that their marketing margin would be reduced by 5 cents a litre. That's fine.
Oil companies are opposed to regulation, period, normally, so obviously they wouldn't be in favour of anything that stymies the way they want to do business. But at what point in time does the squeeze become so great that the oil companies wouldn't want to participate? My feeling is that the first thing that might happen is that you might drive the oil companies out of the retail side of the game if you adopted the system that you're describing. They may look at it and say, it's just not worth our while to participate at the retail side of it. So, in fact, it might produce the same results as functional divorcement would, so that they would stay behind the scenes, wholesaling, refining and delivering product. That would be their game, not retailing it. That could be a fallout from that.
MR. EPSTEIN: Okay. I want to ask you just a slightly different variation on an earlier question. It has to do with the negotiation advantage of the retail outlets, vis-a-vis the oil companies. What I am wondering is if there is anything that can be done, either by government or by you as an industry, or an industry sector, to change the negotiating balance.
The picture that seems to be have emerged from what we heard from your members, to give it credibility, is that a number of them have signed on to long-term contracts that really seem to contain clauses that allow the company such a hugely dominant position, vis-a-vis the retailer, that essentially, your members have allowed themselves to be victimized but they have done it willingly. They have signed on and signed contracts which they hoped were going to provide them with a good living and maybe in some circumstances aren't because they have signed these contracts.
So what I am wondering is whether there is something else at work here. Is there something else we can do, other than try to build in this margin? I don't see, I have to say, how that is going to help your members if you're in such a weak position under the contracts that you have. What on earth is to prevent the companies from coming along and saying, and we want that 4 cents as well, or we want - because, right now, there is no built-in 4 cents. There is only what you have got under your contract. For those individuals who are really victimized, they're already taking a portion of that.
If we were just to kind of codify what, in some circumstances, is, maybe, the going margin that your members hope for, what is to prevent them from, week to week, continuing to eat into it if they feel like it? I don't see why your members are any farther ahead.
[10:39 a.m. Mr. Brooke Taylor took the Chair.]
MR. CONRAD: Well, as I understand, the minimum and maximum margin legislative requirements, that would be carved in stone.
MR. EPSTEIN: But in P.E.I. there is nothing that says that that 4 cents has to be kept in the pocket of the retailers. It is built into the price to the customers and it seems to be, notionally, that the idea is that it is there for the retailers. I don't think they reach inside the contracts that are signed by the retailers with their suppliers and say, that 4 cents has to be kept by the retailers and it is sacrosanct. You can't take anything off for credit card charges, you can't take anything off for repairs, you can't take anything off for anything. I don't think they say that.
MR. PETTIGREW: I didn't like that comment. (Laughter) Actually, I was talking to Graham this morning over coffee about that and, believe it or not, I totally agree with you in the sense that if we are going to do something here, I feel we have to build something in that says, you cannot come back and take one more per cent on credit cards or up my rent by another $100 or whatever, to get back this 4 cents. By all means, if you can come up with a solution, as Graham suggested, that covers all of that, that's the ultimate.
MR. EPSTEIN: Well, in a way it is but, Mr. Pettigrew, here's the problem. Once we take that step and try to get involved in the contractual arrangements that you and your fellow retailers have with the oil companies, we have to buy the whole ball of wax. Essentially we have to say we're prepared to set all the terms and conditions of your agreements. It kind of puts us in the same position as we are dealing with nurses and lab techs working in the hospitals. We have to say, okay, we're going to set up all the terms and conditions of the contract that you enjoy because unless there's someone with complete control over it, it's impossible to provide a mechanism that won't allow the bargaining to continue to go on in a way that we can't control and that doesn't make your members happy, it doesn't make the public happy. I predict it will mostly just make the oil companies happy.
I don't hear any of your members coming and saying, we all want to be part of the Public Service for the Province of Nova Scotia.
MR. PETTIGREW: Well, there might be something said for that.
MR. EPSTEIN: Well, I mean, if you want to say it, say it, but I haven't heard it yet.
[10:41 a.m. Mr. William Dooks resumed the Chair.]
MR. PETTIGREW: That's just a comment. While you've addressed me, however, in my speech in Truro, I did say that I did have records and I did have financial statements to back up my comments. If any member wanted them on an individual basis, I would make them public - I don't want them made public, but I would give them to an individual. In the minutes of that meeting, I looked through the minutes here and it is documented that I did
say that. I have a letter with me from the bank and I also have my financial statement. I will make that available to you. I don't want it public because I don't want my competition and everybody else knowing that there is a problem. But these are both available. This has to be acted on by the end of this month so I will make those available to you.
MR. EPSTEIN: This is a big help, but in a way, it still doesn't tell us the picture of everybody in the province.
MR. PETTIGREW: I can't do that for everybody in the province.
MR. EPSTEIN: No, I understand you can't. No, no, I understand.
MR. PETTIGREW: I am sure that there are other dealers out there though who would, upon request, make at least their banker or somebody available to you. This financial statement shows you that Roy Pettigrew is far from getting rich and Roy Pettigrew is not taking money out of the business like a person who invested the kind of money I have should be.
MR. CHAIRMAN: Obviously, there's a strong request from the committee to have this information and data from the retailers across Nova Scotia. This is not a request, but I'm just saying, the member from the Liberal caucus and I believe a member from the Progressive Conservative caucus and now NDP are saying, listen, fellows, give us something so we can substantiate ourselves in our deliberations. Quickly, if people haven't independently sent it - although I do remember you offering it and I thought that we had asked through the clerk for that information, but maybe I'm mistaken. But it's your future, you're telling us it's the future of the retail business. I would say that you should quickly get this information to the committee.
MR. TAYLOR: Mr. Chairman, I agree with the presenter. That's personal financial information, it must remain confidential to the committee members only.
MR. CHAIRMAN: We would have to discuss that as we did with the last . . .
MR. TAYLOR: Unless we give clear assurances to any given business in Nova Scotia, I would trust that they're not going to share that information with us. That's something that should remain confidential and generally does before any committee.
MR. CHAIRMAN: Yes, and we would have to bring that up in committee business, but we could get back to you and say that any information that's forwarded, it would be kept confidential and maybe we do not wish to take that direction and we would tell you that as well. That would be a committee business thing and we could inform you.
[10:45 a.m.]
MR. CONRAD: What information or what evidence or what documents do you want? Are you looking for financial statements, or are you looking for just letters?
MR. CHAIRMAN: Yes and we're going to respond. Danny, you were very strong in that.
MR. GRAHAM: In response to that, I think I made it fairly clear in my questions what we were looking for. I can reiterate those points if necessary. It wasn't individual data from - although I think I'd find it helpful if that were available. Mine were broader questions that responded to the question of the difference between a regulated and non-regulated industry for example, the industry price.
MR. CHAIRMAN: Well, how we'll address this, Danny, what we'll do, after we're finished our questions with you today, then we'll go in camera and we'll discuss the questions that we want to forward to you and send the questions over and then you can do as you will with them. We'll also guarantee you whether or not we're going to give you certain protection on financial matters. Okay? Good.
So, Howard, I did sort of jump in - you're finished here?
MR. EPSTEIN: I'm finished, thank you very much.
MR. CHAIRMAN: Good, thank you. I think we've covered a lot of ground there. Gerald, you're next please. I had waited for you, but you were out getting some information.
MR. GERALD SAMPSON: Yes, thank you, Mr. Chairman. I just wanted to verify some information prior to releasing it here to the committee and having it correct at Hansard. Anyway, I was out of the room when everyone probably introduced themselves. My name is Gerald Sampson, the member for Victoria-The Lakes.
What I'm going to reference is a letter from S.J. MacRae & Son from Baddeck. I've spoken with David MacRae from that service station and just called him again this morning. It's his opinion that it seems since this committee was formed and the media attention that it caused, he said either that was the reason why the market tended to soften or the suppliers softened up a bit. He did have a discussion with Wilson Fuels and he told them that if he could not make a living or make money at selling gas, regardless of his contract, then he was out of the business effective the end of December. Wilson's said they would not hold him to that contract, so I guess there's no care or worry whether he's in business for the numerous amount of years he was there or whether somebody new took over the station or what.
But since that time, immediately his margin went up to 5 cents a litre on the self-serve and 7 cents a litre on the full-serve. He said - I have some documentation here in front of me - that as of today's date, he is making 4.39 cents on self-serve. The full range, he said, fluctuates between 6 cents to 7 cents on the full and between 4 cents and 5 cents on the self-serve. He said, I don't know if it's because of the conversation I had, I feel like it's more because of the publicity that this committee has caused - every day you opened the paper, there was something in the written media about gasoline prices, the suffering of the independent dealers and whether it put some kind of a ripple effect or fear or whatnot into the suppliers, but he said it seems to have gotten a lot better.
He also said this morning that in the old days, the companies would pay you in a cross lease to fly their flag and that's not the case anymore. You fly their flag, they give you a little bit, but very little. It's up to yourself, if you want to fly their flag or not, there's no incentive to do that.
So, he figures that the publicity caused the margin to increase. Old-fashioned competition, he would rather see than regulation, but he also is cognizant of the fact that the old-fashioned regulation is not going to return. There just aren't enough dealers anymore as there were at one time.
What I want to do is read a letter from Bill Simpkins, Canadian Petroleum Products Institute. It was in The ChronicleHerald on Tuesday, August 17th. I reference it simply because it kind of puts a little different perspective on what we've been hearing. Take it for what you will, but he quotes a Clare Mellor in an article that says, "'Don't box yourselves in,' provided excellent insight into the competitive nature of big-box stores, and the effects of their actions on the marketplace and benefits to consumers. Andrea Beckingham, provincial director of the International Council of Shopping Centres, said in the article, 'In order to compete, traditional malls are going to have to re-evaluate their products and services. Malls are going to have to excel at customer service, better efficiency . . . and just (provide an) improved overall shopping experience.'
The Canadian Petroleum Products Institute made a similar point to the Nova Scotia Select Committee on Petroleum Product Pricing that recently held public meetings into industry practices. The gasoline marketing business is changing through a new breed of competitor offering the lowest prices on the full range of products and services. The complexion of the business has changed from the notion of the traditional service station to a convenience operation with multi-offerings demanded by the consumer. The committee heard a lot from (independent) retail gasoline marketers whose markets are changing rapidly. Consumers are demanding low prices, excellent service and the one-stop shopping experience. It's time to get on board or miss the opportunities." That's signed by Bill Simpkins, Halifax, Canadian Petroleum Products Institute.
I find myself, in my travels to and from Halifax, wanting to make one stop where I can fuel up and pick up a snack, rather than go to a restaurant and eat and then have to stop again for fuel and stop somewhere else to pick up a newspaper. You tend to do that, it's an automatic thing. You only have one stop, and when you leave you're ready to roll, to continue on your way. You automatically become a victim of that. I don't know if that changes the perspective at all on the old-fashioned service station doing what it's doing. But
I bring that forward just as an aside to broaden our perspective, and I referenced David MacRae.
I don't know if you're the right person to answer this question, but I want to go to XTR. The gentleman, when he made his presentation, seems to be the person who I guess appears to be the white knight, the saviour for some rural gas stations, because they cannot exist any longer, dealing with the big suppliers, and stations that are on the verge of closing or credit-wise are poor or whatever, he seems to be slowly and steadily building those stations and allowing them to remain in existence. I'm just wondering - his comment at the time was if we created regulation, it would kill him or put him out of business. I'm just wondering, can you shed any light on that? Or is he just willing to take less of a profit and supply these rural dealers with product and is a little more gentle on getting his money back or whatever?
He does seem to be expanding on a continual basis. He said he's up in the vicinity of about 78 service stations across the province, or maybe across Canada, I'm not sure on that one. But he was in the vicinity, then, of 21 stations in Nova Scotia - 20, and he said the following week we'll have 21. He quoted the fact that around the Cabot Trail he has a couple of stations there on the go now that he can send a tanker full of fuel around and get rid of the whole tanker of fuel, which is in turn profitable for him. Can you shed any light on that, why he can do that and the big companies can't? Or is he just willing to be more lenient or flexible?
MR. CONRAD: Mr. Chairman, to respond to that, I know Ken Wootten very well, and we work very closely with his company. He's a great supporter of the work that the association in Nova Scotia does, too. His opposition to regulation, based on his understanding, was, I think, related to the regulation that exists that an oil company in Nova Scotia is required to have storage capacity. To be registered in Nova Scotia as a wholesaler, you have to have storage capacity. He wasn't interested in that at all.
The way he works, he buys his product from the refinery, he negotiates the best deal he can get, and then passes that on to a retailer, and then does not interfere with the retailer in terms of setting retail price. Retailers are free to set whatever price they want, and they buy it at the best price that XTR can provide them. The feedback that we get is that XTR retailers do quite well, on average. There are times when the margin is squeezed, but then there are times when they make very good margins. So on balance, it's a good deal.
That's the kind of competition that we see is needed in this province. If more retailers were able to take advantage of the XTR-type companies or if there were more companies like XTR, then you wouldn't have the erosion taking place that we do have.
MR. GERALD SAMPSON: So he purchases it from the refinery, fills the tanker, and ships directly to the retailer.
MR. CONRAD: That's correct. He's low cost, and he's efficient. That's how he generates that spread between what he pays for it and what a retailer can sell it for.
MR. GERALD SAMPSON: Just to go back to the large suppliers, Mr. Chairman, I've always felt that if you or I as an end dealer purchased that fuel, once that fuel goes into our tanks and we've paid for it, that's mine, I should be able to sell that for whatever price, as an independent dealer. I should be able to tack on another cent or half a cent if I require it because I'm in a large rural area, to make the same level of profit as somebody in a large urban area with more litres.
MR. CONRAD: Absolutely.
MR. GERALD SAMPSON: There's that dominant interference from the large companies that prevents that.
MR. CONRAD: That's right.
MR. GERALD SAMPSON: So a solution that you would suggest, that would benefit the dealers, is a regulated - not a guaranteed but a minimum return. When I suggested 4 cents to David MacRae he said you need 5 cents to make a profit, Gerald. I said no, you had referenced 4 cents, almost as the bare minimum to break even.
MR. CONRAD: That's the only quick solution.
MR. GERALD SAMPSON: And what about the regulation of the wholesaler?
MR. CONRAD: That wasn't one of our recommendations.
MR. GERALD SAMPSON: No, but it did come through in the hearings that we had, somebody said if you decide to go with regulation, you have to regulate the wholesaler also, so that we all buy at the same competitive price rather than dealing on an individual basis, you dicker and get a better price than I can, and it all affects the bottom line.
MR. CONRAD: It's been our recommendation all along that the simplest, quickest, easiest pill to swallow would be to adopt the P.E.I. model. It's there in place.
MR. GERALD SAMPSON: In its entirety, exactly the way it is, or with variations to suit Nova Scotia?
MR. CONRAD: To be honest with you, we were only thinking of the pricing on gasoline as it related to the terms of reference of the study, the review. That's what we were thinking about at the time. To extend it beyond the pricing of gasoline into what other areas or what other aspects of the regulation . . .
MR. GERALD SAMPSON: Furnace oil came into that, diesel.
MR. CONRAD: We would certainly be supportive of that.
MR. CHAIRMAN: Jim.
MR. DEWOLFE: Thank you again for your enlightening comments. Mostly what I had in mind has been dealt with. One thing that piqued my interest was your concern that if we did put a minimum margin in that the oil companies would come back and grab some of that back, in one way or another, as you indicated before. I would like to put to you that there's this sort of 4 per cent margin in P.E.I., and we were told by a representative of P.E.I. that there seem to be no garages, no stations going out of business over there, so that would sort of indicate that there is some stability and fairness there, and they're not coming back and taking that from the retailer. Would you agree with that scenario?
MR. CONRAD: I would, Jim.
MR. DEWOLFE: Having said that, if it doesn't take place there, there's no reason to believe that it might take place here.
[11:00 a.m.]
MR. CONRAD: That's correct. The degree of control that the oil companies have over a retail outlet that is owned by an independent is not as great as a retail outlet that is owned by the company itself. They can't do things like increase your rent when you own your own outlet, and they can't do things like increase the cost of your credit cards because that's a regional policy. They may have areas where they could put the squeeze on in terms of other negotiations that take place. By and large, there's a strong degree of stability for a retailer who owns his own outlet, in terms of negotiating with the oil company - stronger - so that if for example a minimum margin system was put in place, I don't think that the oil companies could take that or touch that too much. I just can't see how they could do it. If it's a legislated thing, I just can't see how they could do that, when they don't own the outlet.
One of the other problems too - and we're getting a little away from the terms of the review - is that this contractual agreement that exists with the average retailer and the supplying oil company, they're tied up so tight that they can't move. They can't leave. They can't do anything without oil company approval. The opportunity for retailers to switch companies, to take advantage of the XTRs, the opportunity for retailers to form buying groups, the opportunities for retailers to negotiate on their own from the refinery rather than going through the transportation system that the oil companies supply, none of those opportunities are there. They won't let them.
MR. DEWOLFE: You indicated that there's nothing we can do about the credit card charges, but when you used to be able to fill the car for $30, now it costs $45, they're making a big bunch of bucks off these credit cards right now.
MR. CONRAD: Absolutely.
MR. DEWOLFE: Why can't some sort of control be put on that? That's an immense profit that the companies are getting and the poor retailer's not getting any of that at all. Is there anything that could be done about that?
MR. CONRAD: There are options out there that are not very practical like some retailers who have the negotiating skills and who are in good standing with their oil company have said they refuse to go along with this. I can negotiate my own deal with my own bank based on my own volume of business for VISA or MasterCard and I can get a preferred rate for my own bank instead of paying you 2 per cent, the bank would charge me 1 per cent. But then of course, you have to take the credit card and then the oil companies refuse to take the credit cards then, then what happens is you have to take the credit cards to the bank and then you're into a whole different system of getting your money back, whereas the system that exists now is very quick, very convenient. You just give the credit cards as they are to the oil company when you pay for your next delivery of gasoline. It's quick, clean, gone, but you pay for that.
It just goes to show you the kind of range, the differential between what the oil company would be paying a bank and what they charge the retailer. I used to work with Imperial Oil many years ago. They're charging as much or more to the retailer than they pay to the banks. There's no question about it.
MR. DEWOLFE: Mr. Pettigrew, I notice you had some interest there. Is there something you'd like to comment on with regard to this topic?
MR. PETTIGREW: Just for the heck of it, when you were talking about credit card charges I looked at my credit card commissions last year to PetroCanada, it was $28,823.
MR. DEWOLFE: That would be nice in your bank account.
MR. PETTIGREW: Well, it would change this financial statement greatly. (Interruptions)
MR. DEWOLFE: I don't think the public realizes the impact at all on service stations.
MR. PETTIGREW: No, they do not.
MR. DEWOLFE: I have to admit, I didn't realize that it was such a big chunk out of your bottom line, and I'm not doing it anymore. That's all I have right now, thank you.
MR. CHAIRMAN: Thank you. Charlie Parker, please.
MR. CHARLES PARKER: Thank you, gentlemen, for coming in. We're going for two hours now and got some good information that you've been giving us so far.
I guess when we heard the presentations around the province from Sydney to Yarmouth and points in between, we heard a lot from independent retailers. They were hurting, they were not making a living, that some of them were probably going to go out of business. Some we heard have already left this year in various areas of Nova Scotia. I think you mentioned, Graham, something about maybe 30 per cent of the independents will be out of business within a short period of time if nothing changes, up to 100 retailers, I think you also mentioned here at some point.
On the other side of the coin we heard from others that the margin was good for retailers. The average was 7 cents or something, as high as 16 cents or 17 cents by times. So we're getting conflict in information and we've heard some members say that we just don't have concrete evidence, that it's absolutely true that retailers are not making a fair margin. I'd just like you to confirm what your association and yourself as a retailer, Mr. Pettigrew, to put it on the record again, I guess exactly what the position is of the 370 independent retailers that are out there. What is the actual situation?
MR. CONRAD: Well, if I could comment first. At our annual conference this past May, held at Oak Island, there were 79 retailers there. They were absolutely unanimous in their frustrations and grief and agony that they are experiencing in terms of being a business these days and the lack of money that they're making, and the crisis and magnitude of the problem. I spoke to one of the participants in the hearings held just a few days ago in Cheticamp. This couple, she was making 2.8 cents a litre at that point in time, and she's calling me for an update because she wants to know now, how far do I let this go? We're talking perhaps the biggest retail outlet in Inverness County closing the doors within the next couple of weeks. Roy can speak for himself.
MR. CHAIRMAN: Okay, Mr. Pettigrew.
MR. PETTIGREW: As I said, I have a letter from the bank that tells me that I'm in default and that I have until the end of the month to do something about it, and as I said, I'm willing to share that with you, and I have my financial statement here. Like I said, I'm driving my same truck, I'm living in a rented house and I'm walking to work. I'm not taking the money out of the company or bleeding the company. I'm trying to survive.
I have a group of people who have invested in my business, who have kept me alive and at the state that we're in now, we won't be there, and it's sad because I went from a little station and I've heard comments about us going into the contract. I paid a consultant $20,000 to tell me that this was going to work. I mean I didn't go into this thing blind. I had hired a consultant who is very well recognized in the industry. I had an appraisal done, all of this stuff was done before we built our station. It was all put together with industry records and whatnot, as to how well it would work and it's all done on 5, 6, 7 cents a litre and all these consultants, including the industry consultants said, yes, this is doable and this is going to work. So we didn't go into this blind. We didn't sign an oil company contract thinking that this isn't going to work. I mean, I've been in the business 30 years, I'm not silly. I'd have been better off to stay where I was.
Every time I talk to friends, like I say I've been in the industry for 30 years. I know the Graces in Bridgewater on a personal basis and I know what they've done over the years, and they didn't build their service station thinking that they were going to be looking at having to give it up in a few years. That's been built by families. Gentlemen, this is sad. My situation is bad but it's sad when you see a family farm go, and that's what we're talking about.
MR. PARKER: Okay, I just wanted to confirm what I thought I'd heard all around Nova Scotia.
MR. PETTIGREW: I'll give you these, as I said.
MR. PARKER: I'll certainly take your word that things are not good for retailers in Nova Scotia, the independent retailers. Certainly the volume that you're doing doesn't seem to reflect your bottom line. We heard from Mr. Grace in Bridgewater that he was doing 8 million litres of volume there, and still not making ends meet because his margin was so low. Some others are doing 1 million, 2 million and they're in just as bad a situation. You would think that when your volume goes way up that you would make more money, but not so when the margin is too small to begin with.
The idea of regulation or a minimum/maximum margin is what's been talked about considerably by this committee, and the P.E.I. model as a possible solution. We talked about numbers, 4 cents and 5 cents and so on. Another option that has some merit that was talked about a little bit and may be one you haven't heard before - again, there are some retailers doing a lot more volume than others. Would there be any benefit in having a
minimum/maximum only for a certain volume? Then, if you did above that volume, you're back to a negotiated level. For example, would you add 1 million litres or 2 million litres, I don't know where you would cut it off, but would you say that up to that level you would have minimum/maximum pricing of 4 cents, 5 cents, whatever, and then above that it would be back to the system we have now, perhaps, where it's negotiated. Any thoughts on that?
MR. PETTIGREW: Well, it hasn't worked for Rodney Grace. Graham and I may disagree on this, I'm not sure. My personal feeling is that you shouldn't be penalized for doing well. What you're saying is if I'm getting 5 cents a litre up to 4 million litres, and then at 4 million litres, I have to drop back to 4 cents a litre, or as argument figures, I don't know how you would adjust that or how you would justify that, I guess. In my mind, if I'm doing well and I'm working hard at my station to get it up to another level, should I be penalized for doing that?
MR. PARKER: I guess the idea was just that it would guarantee you at least a minimum amount of dollars per year coming in on the first million or 2 million. You know you're going to make enough to pay your taxes for the year and hopefully your lights and your wages and so on, and then if you did above that, then it's gravy. But at least you know you're going to stay in business, you're going to make a living, and your basic costs would be covered because you're doing a certain volume at a certain profit.
MR. PETTIGREW: It's certainly probably better than what we have now.
MR. CONRAD: It might be a very administratively difficult thing to put in place, to try to determine what volume you're going to sell for the year, which will determine what your margin will be. That could be a very difficult thing to administer. That's my first reaction. With respect to a minimum/maximum on the first million, again, it doesn't make much sense if you make enough money to pay your taxes on that first million and then you lose it all on the second million. So at the end of 2 million litres, you're still broke.
MR. PARKER: Would there be any merit in rural, remote locations, looking at something like that, that would guarantee a station in Cheticamp or Canso or wherever they would have a minimum guarantee or a minimum margin, again maybe on a certain volume, 1 million litres or whatever, to ensure that there's a station remaining in that community? Or would you prefer to see the full minimum margin on all . . .
MR. CONRAD: The simplest way to do it is the full-meal deal, the minimum/maximum, as they have it in P.E.I. That's the only way that you're going to - as we see it anyway - get any kind of stability in the industry.
MR. PARKER: I have a couple of other short questions here, Mr. Chairman. Earlier we talked about the price being the same across all of P.E.I. and then perhaps being the same all across Nova Scotia. There certainly is some transportation cost to take it from Dartmouth
to Middleton to Yarmouth, and then the other way, to Truro and on through to Sydney. I don't know what the cost is per litre. It's probably not a lot on a per litre basis, from an extra 50 miles or an extra 100 miles or whatever. If we did come to a minimum/maximum in Nova Scotia with that variance of a penny and a half or whatever, do you think it should be the same right across the province, or should there be zones, or how should it be held in Nova Scotia?
[11:15 a.m.]
MR. CONRAD: The penny and a half differential in the margin, I always thought that's where the competition can take place. So an efficient retailer may not need the 5.5 cents on self-serve, maybe 4 cents is all they need, and if they want to have a price advantage, that spread of 1.5 cents is a big spread in the industry. People will drive a long way out of their way to save 1.5 cents a litre. So the element of competition works very well with that range in your margin. In terms of transportation, my own personal opinion is that there should be a cost for transportation based on the actual cost.
There's a theory that maybe it could be a blended price, but, again, that's just more work, more complications, to administer. Whatever the tank wagon price is out of Dartmouth, and then the cost of shipping it anywhere in the province would be added to it, right off the bat you have different prices, and then with that range with your margin of 1.5 cents, again you have another opportunity for different prices based on those retailers who want to take the full 5.5 cents and those retailers who can live on 4 cents.
Again, that goes to a point I was trying to make earlier in response to the statement that regulation automatically means higher prices. There are markets in Nova Scotia where they are unexplainably high right now, that if there was a rule in place about transportation, I suspect that there are inflated transportation charges in these markets right now that would be reduced, so that if in fact the retailer's margin went up by whatever, a penny or two, it wouldn't result in an increase at the retail level, because whatever formula you would put in place for the transportation, which logic says is whatever the cost of shipping the product is, in those markets where they're inflated now, that would be offset.
MR. PARKER: So you're suggesting that a retailer in Amherst, for example, would pay a little bit more than a retailer in Halifax?
MR. CONRAD: Yes.
MR. PARKER: Because of the transportation from Dartmouth.
MR. CONRAD: Yes.
MR. PARKER: Just one final question. Gerald Sampson had brought it up, about XTR. Mr. Wootten, I remember, in his presentation, had indicated that if regulation came in, he would have to go out of business. You had indicated the idea of storage tanks in Nova Scotia might have been his reason for that. He seems to be meeting a niche in the market, and I guess we would hate to see those retailers lost, especially in some remote areas of the province. Was that his only concern, I wonder? Maybe you can't answer for him, but if we were to bring something in, we don't want to see a good new business go out. Do you think that there's some way he could be satisfied that regulated margins would still appeal to him, or he would be allowed to work under that system?
MR. CONRAD: My assessment isn't based on conversations that I've had with Ken, the local representative. We have spoken on this on more than one occasion. My understanding is that his concern would be that if he was to get a wholesaler licence for the Province of Nova Scotia, the existing regulations right now require him to have storage capacity, and that's the concern he had about regulation. I don't think he's concerned about the minimum/maximum retailer margin, because, again, that's beyond where he comes into it. He would still be selling the product to retailers at whatever price he wants to sell it at, and then the margin would be tacked on top of that.
MR. PARKER: So a way would have to be found to satisfy his need then, or take that regulation out, whichever.
MR. CONRAD: Yes. That might encourage other companies that value a retail outlet that sells 1 million or 1.5 million litres a year. That's a good outlet for XTR. They're quite pleased to negotiate a deal with companies like that, whereas the major oil companies won't even supply them anymore.
MR. PARKER: So you're saying, again, that if that rule or whatever it is around having storage tanks in Nova Scotia, as a wholesaler, if that was taken out, that would allow more competition to come in for other people to set up a wholesale business that would therefore let more competition . . .
MR. CONRAD: I do believe that.
MR. PARKER: Okay, thank you. That's interesting.
MR. CHAIRMAN: Thank you, Charlie. Danny has a couple of questions.
MR. GRAHAM: Some brief ones. First, with respect to Mr. Wootten's action, he hadn't spoken about the storage tank issue and he had said that he's not big enough to carry the load of the price fluctuations for the month while the regulation is in place. That's what he suggested to us to be the issue.
Following up on what Mr. Parker said about transportation costs, we have received data from the provincial government suggesting that the price from industry in Kentville was actually lower on average than it is in Halifax. This is a complicated area and I'm just trying to reconcile that with the issue of transportation costs. Kentville, on average, is cheaper than Halifax. Any explanation? Any thoughts as to why that would be the case? (Interruption)
MR. CONRAD: Sorry to interrupt you, but I do know of examples where invoices are available that have no delivery charge at all on them.
MR. GRAHAM: Okay. Do you know if that's more prevalent in the Valley as opposed to other areas?
MR. CONRAD: No, I don't know that.
MR. GRAHAM: The P.E.I. marketer margin - we actually received some information concerning that. In June 2004, the figures were as you indicated, very high - in the range of 16 cents or something like that - but, on average over 12 months, it appears to be more in the range of 7 or 8 cents as the Charlottetown margin. It's very close to the Halifax margin, at least according to the Service Nova Scotia and Municipal Relations material that we received. I'm not sure if you have any response to that while you're still here.
Why don't I just put out one final thing - we've received a lot of comment from the retailers who have appeared before us about the margin that they're feeling. I don't doubt the validity of the comments that have been brought before us when people say they have no margin or a 2-cent margin or less than a 2-cent margin, but I note with some interest some of the materials that have been provided and I'll add this caveat - there are two sources: one for Halifax that is more independent as I recall, I don't have it directly in front of me; and another from Wilson's that needs to be taken, obviously, with some consideration that they have an interest in how we would read this information. It suggests that the margins in Yarmouth fluctuate from less than 2 cents up to 16 cents, but they seem to be pretty good margins.
I would argue, based on what we've been provided, that they are typically above 6 cents lately and sometimes well above that. In suburban Halifax, where we appear to be in the 4- to 5-cent range - adjacent to Native reserves where it is suggested that the margins are tighter and in Cape Breton, the margins seem to be consistently above 4 cents.
I have two questions and comments. First is a question and that is, does this surprise you, does that seem consistent with what you would think is out there? Secondly, there appear to be some very abrupt fluctuations in some regions more than others. I note that it seems to be more level in some parts of the province whereas in other parts there seem to be rapid spikes in different directions. In the metro area, it seems to be more even and in places
outside metro, the price seems to rise and fall more steeply. Do you have any thoughts on that? Do you agree with any of that? Perhaps you can enlighten us.
MR. CONRAD: I'm not sure what the time frame was that you used.
MR. GRAHAM: It's a shorter time frame. It's about a year, year and a half.
MR. CONRAD: I can certainly comment and confirm what Mr. Sampson said about David MacRae's comments. I heard that from other retailers as well, that for whatever reason, the last month or so, margins have been getting stronger and stronger. Why? We don't know for sure. I think Roy can attest to that as well. That's just the last month or so.
As you probably realize, the Halifax City proper, just about all of the retail outlets are company owned and company operated. There are only three independent retailers in Halifax-Dartmouth that I'm aware of: one on Pleasant Street, one on Prince Albert Road and one on Windmill Road; there are none in Halifax. So, all the retail outlets in HRM, maybe not HRM because HRM goes outside the city proper, but they're all company owned, company operated. They're all managed by individuals who get paid to open, run the business, close the business. It has nothing to do with volume, nothing to do with profitability. It's just to provide levels of service to the motorist and do a good job and that's how they make their living.
Once you get outside of metro, then the population of independents is greater. Community by community, around the province, there is an oil company-owned or operated outlet in every community, there is an oil company-owned and operated outlet, whichever brand it might be. In some cases, they're all there. But every community in Nova Scotia has one oil company-operated outlet. That is generally the pace setter.
MR. CHAIRMAN: Thank you. I'd like to recognize Brooke but he's outside just for a second. It is important that we wait for him. Does anyone else have any further questions while we're waiting for Brooke? Charlie.
MR. PARKER: Maybe I have one or two questions. Do you know the volume of gasoline that is sold percentage-wise in Nova Scotia outside of metro? What percentage of the volume of gas is outside metro?
MR. CONRAD: It's 65 per cent.
MR. PARKER: It's 65 per cent outside of Halifax-Dartmouth-Bedford?
MR. CONRAD: Outside of Halifax County.
MR. PARKER: Outside HRM?
MR. CONRAD: Halifax County.
MR. PARKER: Okay, so 35 per cent is sold in HRM.
MR. CONRAD: Actually, 36 per cent of all the volume in Nova Scotia is sold in HRM.
MR. PARKER: Okay. Thank you.
MR. DEWOLFE: That includes the municipal area?
MR. CHAIRMAN: Yes. That would be from Ecum Secum to Hubbards.
MR. DEWOLFE: A big area.
MR. CHAIRMAN: It's a big area, but the population outside is low. You could say 65 per cent is in metro, so to speak, because in Ecum Secum the volume would be very low down there.
MR. CONRAD: I think that number lines up closely with the population of Nova Scotia.
MR. CHAIRMAN: We're just going to take a few moments, wait for Brooke. Maybe you can just stand up and relax. Has someone notified Brooke that we're waiting for him?
MS. MORA STEVENS (Legislative Committee Coordinator): He's on the phone.
MR. CHAIRMAN: He's probably getting some information, I would think. We're not going to keep you too much longer.
[11:28 a.m. The committee recessed.]
[11:30 a.m. The committee reconvened.]
MR. CHAIRMAN: Order, please. I call the committee back to order.
We knew that the information you had would be important, so go ahead.
MR. TAYLOR: I don't know if it's important, Mr. Chairman, or not, but I did have a chance to speak with the dealer who provided us with these invoices. This is just a snapshot of how one particular dealer is being impacted. But the mail-in price is the price, according to the dealer, pre-HST. If you do the HST you will come up with the price that he is being charged by Dave Collins. In the case of the 1.5 cents, which is his present margin, 1.51 cents,
he is actually required, out of that 88.90 cents, to give Mr. Collins 87.16 cents, so that's what that's reflective of. On the net back, he said, he's trying to find out, he's not 100 per cent sure on that. He trusts that Wilson's will further explain. But this has been around for awhile, this invoice.
Further to that, from talking with some of his colleagues in the area - and he is in the Truro vicinity - he claims that some dealers are receiving a margin of 3 to 4 cents and, again, this is hearsay we do have this so-called exhibit. I don't have other invoices but some of his colleagues just a stone's throw away are literally selling the same product for a 3- to 4-cent margin. They may find at any moment that their margin has changed, by way of a phone call. But the product is in the storage, for now, at least, until the next fill-up is in the ground.
Anyway, I was wondering - I think maybe it was Charlie who was talking about that margin of 1.5 cents, where, obviously, Prince Edward Island is smaller geographically, you know, if there would be any merit, if we looked at something like a margin, if we ever get that far, of a 2-cent margin in the Province of Nova Scotia, would that just skew things too far, a minimum/maximum margin of 2 cents? It would certainly allow for a little more competition, perhaps, but what would be the negatives, winners and losers in that particular scenario?
Just to go further, Mr. Chairman, I believe during our meeting with the gentleman from - that was actually in camera so I can't say it. (Laughter) Anyway, I think we were told, everybody around this table, that there is a very low turnover of independent dealers on Prince Edward Island. In Nova Scotia, we were told the numbers were - what was it, around 900, or something like that, and now we're down to, what, a little over 500?
MR. CONRAD: Less than 500.
MR. TAYLOR: Yes. So, anyway, I just want to say from where I sit, it certainly looks like, yes, we're worried about the consumers. That is our mandate. We have been out on the road to provide some stability to them but we can't sit here - and I know we're not - oblivious to the plight of the retailer, the dealer, out there. Some of the evidence, or some of the presentations, I just want you to know, are very compelling. I don't think everybody around this table thinks that every retailer in the province should have to submit their personal income tax statement. I don't think we're asking that but some would help, yes.
I notice that my legal friends around the table, my very learned friends, are being very meticulous and sagacious, some might say, but I still believe that these Nova Scotians in each and every community are really hurting out there. We are cognizant of that. Thank you, Mr. Chairman.
MR. CONRAD: Could I just make a comment on the margins in Prince Edward Island based on the information that I have?
MR. CHAIRMAN: Yes.
MR. CONRAD: Margins on self-serve and full-serve product in P.E.I. generally cluster around the minimum rather than the maximum, the exceptions are at the maximum. Self-serve product in P.E.I., very few retailers are at 5.5 cents a litre. The majority of them are 4, 4.1, 4.2. In terms of the full-serve, the majority of them are at 5.5. Very few are at the maximum end of the range. Again, that is the competition at work, as I understand it.
MR. GRAHAM: I'm not sure if that is consistent with the testimony that was given by Mr. Rodgerson. I think he had indicated that, particularly recently, people were at the higher end but I will double-check that just to be sure.
MR. CHAIRMAN: Okay, very good. Gentlemen, we do thank you for coming. It has been a lengthy exercise but a very necessary one. We are going to ask you to wait outside so that the committee can discuss, in camera, the issue of the confidentiality with the information you are going to supply to us.
MR. CONRAD: Okay.
MR. CHAIRMAN: In doing that, the way to work this out is that I would ask each caucus, before the end of the day or as soon as possible, to provide me with your questions. So rather than us sit down and decide what questions, because we can get into that for an hour, Danny, I know you have questions, Howard, you have questions, Brooke, you may have questions. So go back to your caucus at some point, put your questions together, give them to the clerk and then we are going to send them to you. Then you can answer them as quickly as possible for us. When I say quickly, sir, you know at the end of the month we have to have our recommendations in.
MR. CONRAD: We're aware of that.
MR. CHAIRMAN: So if it takes all night on your part, maybe it will be worthwhile. So we would ask you to excuse us. We, once again, thank you very kindly for coming in. I will be with you in one moment.
[The committee moved into an in camera session at 11:36 a.m.]
