HALIFAX, FRIDAY, JULY 16, 2004
SELECT COMMITTEE ON PETROLEUM PRODUCT PRICING
2:00 P.M.
CHAIRMAN
Mr. William Dooks
MR. CHAIRMAN: Good afternoon, ladies and gentlemen. My name is Bill Dooks, and I am the Chairman for the Select Committee on Petroleum Product Pricing. We are ordered, under Resolution No. 1676, to travel throughout Nova Scotia and to gather information and solutions on the spiking of prices of petroleum products. I have a few procedural rules to go through, it won't take too long, so I might as well start. First of all I would like to introduce Kim. She's very busy this afternoon. If anyone would like to make a presentation, you would speak to Kim, and Kim will forward your name to the chairman. Even though you haven't scheduled, you are still permitted to make a presentation to this committee this afternoon. Kim also has informed me to tell you folks that everything said in the Chamber here this afternoon is recorded. So I will remind you, from time to time, of that rule.
With me, I have the select committee, members from all Parties. At this time I would ask the committee members to introduce themselves.
[The committee members introduced themselves.]
MR. CHAIRMAN: Good afternoon, committee. I will also inform the presenters, you will seat yourself at any one of the four benches here to my right. Before you speak, you must look down to make sure that your light is on so that everyone can hear you and your message can also be recorded. Also, we welcome the media with us this afternoon. We would like to welcome all the viewers in the gallery who are with us as well.
1
Usually the presentation is 15 minutes in length. At that time, I will ask the presenter or group if they are open to questions, and you will simply say yes or nod, and then I will open up the committee to ask you questions. Of course it's up to the presenter if you should answer the question or not. I think we're very clear on the rules and the procedures, so I would ask the first presenter this afternoon, from the Canadian Petroleum Products Institute, Bill Simpkins and his group to come. Bill, good afternoon to you. I would ask for you to introduce your colleagues.
MR. BILL SIMPKINS: Mr. Chairman, members of the select committee, thank you for this opportunity to be here today to provide you with some insight into our business, the petroleum products industry, and to address the specific interest in your mandate. I have two colleagues with me today. I have Carol Montreuil on my left, who is Vice-President of the Canadian Petroleum Products Institute, and Tom Lawson on my right, who is the National Pricing Manager for PetroCanada, one of our member companies.
I've distributed my speaking notes, copies of FuelFacts and a few charts for your reference. I plan to respond to all issues raised in your mandate and provide some suggestions for recommended actions. My colleagues and I will participate in the discussions and, hopefully, together, we'll be able to answer your questions, even though the complexity of the issues warrants a more detailed consultation process.
The petroleum products industry is mature and complex, pricing is determined and influenced by the commodities markets, and the industry is highly regulated. CPPI and some of our members plan to separately provide you with a more detailed report that includes specific company interests by your end of July deadline. We're also available for further consultations, if you so choose.
I would like to begin just by giving you a little bit of background into CPPI. It's an association of major companies involved in the refining, distribution and marketing of petroleum products for transportation, home energy and industrial uses. Collectively, CPPI member companies operate 17 refineries, representing 80 per cent of Canadian refining capacity, and they supply 10,000 branded retail outlets with transportation fuels. CPPI and its members appreciate the concerns raised over retail pricing practices across Canada, and particularly those of Nova Scotians. Those raising the concerns are also our customers. We try to assist those interested in understanding the factors and the facts that affect volatile price movements through FuelFacts, which is an independently-produced publication, but it's paid for by the industry.
We welcome this opportunity today to explain our industry. I've looked at the mandate, and I've found that there are eight issues that you're being asked to address in your mandate, and I want to address each one of those briefly. You have a copy of my presentation, so if there is anything you would like us to elaborate on, we're happy to do that. The supplement at the back of FuelFacts - this is a current issue - deals with volatile
wholesale gasoline prices. So you might want to have a look at that at some point, but I will refer to some things in there.
I would like to mention that this information has been prepared independently by Pervin & Gertz with data from MJ Ervin and the Energy Information Administration in the U.S. I would like to also draw your attention to a number of charts I've provided you, there are three, and reference the first one, which is rather interesting, from the U.S. Energy Information Administration. It shows the line of crude oil since 1970, as it moves erratically based on a lot of geopolitical factors. Factors contributing to product prices today include high crude prices, low inventories, growing demand, and new fuel specifications. You will find that Canada is a price-taker because product prices are highly correlated with U.S. prices in a continental market.
Taxes are the largest component in the retail price of gasoline, and when taxes are removed the Canadian price for gasoline is less than that sold in the United States. The facts indicate that the industry is influenced by external factors beyond its control. The industry is also faced with major investments required to meet new environmental regulations. I will also reference the second chart, which is Canada average prices versus Halifax. The second chart, you'll notice that there are two sets of lines, the first one includes taxes and the second one excludes taxes. You can see that there is a reference to those, that Halifax prices do match the national prices.
That kind of addresses your overall mandate, which is to examine the petroleum product markets and the current factors that determine existing prices, and certainly whether they're justified. There are a number of facts in here that show that they are justified. Some of the key conclusions of the exhaustive Conference Board study of 2001 include that Canadians pay among the lowest prices in the world because Canada has one of the most intensely competitive retail markets for gasoline anywhere. Excluding fuel taxes, Canadian retail prices compare to the prices in the U.S., despite the fact that Canada has smaller refineries operating in a smaller market with a higher cost of doing business.
Number two we looked at were the reasons you're exploring for the current level of product prices. Again, that EIA chart shows the price of crude oil and how it's affected by geopolitical issues that amplify those pricing fluctuations. Both crude oil and our refined products are commodities like steel, coffee and sugar, and that's where there's always some confusion around how pricing is determined in the marketplace.
On top of that, there are three sets of market factors and their dynamics that interact to determine the final consumer price. The first being international crude markets that fluctuate regularly, the next is the continental wholesale refined products market, and we'll talk further about that, and you might have some questions about how wholesale prices are determined, and they fluctuate, as well, based on a number of factors, and then the third market that interacts is the local retail market dynamics, and that's the one that's even more
confusing, because you can have gasoline prices going up at your local service station while crude oil is going down, and vice versa.
The third point that you had was product supply. Product supply is hampered by the items noted earlier, such as high crude costs, low inventories, product specifications and environmental requirements and we can deal with those in questions if you would like to question some of those items.
Fortunately for Canadians and Nova Scotians, we enjoy a preferred position as the industry has provided a reliable supply of product. The industry is not often recognized for its reliable supply of quality products and Canada is a net exporter of crude oil and refined products. So we enjoy a very good position in Canada. Canadian and U.S. markets are fully integrated. Product flows freely across the border in both directions and imports are available to serve market needs and under NAFTA that's the case. It's important to note that if product is regulated at price levels lower than the U.S. market, our biggest market next to us, Canadian product will flow to that market as wholesalers seek out low cost supplies that could possibly generate supply problems here at home. A refiner could also opt to export product rather than supply at lower wholesale returns locally.
The fourth point you have in your mandate is reasons for volatility in product prices. Again, the EIA chart that I showed earlier demonstrates product price volatility as well because I mentioned that that is one of the factors. Continental and local wholesale market price fluctuations are another factor and you can see that in FuelFacts and in FuelFacts, if you have a look at figure three which we can discuss in more length when we're talking about that, we have a chart that shows Halifax rack, Boston rack and New York spot price, and you can see that all of those markets flow together. Sometimes we're a little higher and sometimes we're a little lower than Boston racks.
Stock market speculation is another factor. Remember that these are commodities and traders trade these products and that is a determinant of the final price. Retail market dynamics and local competitive conditions also add to price fluctuations and local competitive conditions are different and that's why you see different prices across the country and across the province and probably across the city. We believe the market is highly competitive as examined many times by the Competition Bureau and special federal and provincial committees like this one. Price remains a competitive lever.
The fifth point you have is the rationale for the difference in prices across different regions in the province. There is not one retail price for gasoline across Canada, the province, or around the city. Price variability is an indication of local market conditions as well as competitiveness. Retail markets can be as small as street corners, a neighbourhood, or a small town. Factors for regional differences include distribution costs, the nature of competition and throughput deficiencies. Even in regulated environments, there is a price variability based on geography. Retail prices also cycle and spot comparisons may not be valid and we
see that all the time. Well, the price today is this here and the price there is different. They might not be valid because prices change regularly and we believe that it's those long-term pricing trends that provide a more equal and revealing comparison for you.
It is interesting to note that when you remove taxes and account for the value of the dollar, Canadian pump prices over the past few years have been lower than U.S. markets by 2 cents to 3 cents per litre and I will reference the chart of Nova Scotia pump prices, which is your last chart here, and that shows Halifax versus Sydney, versus Yarmouth, versus Truro, and you can see the long-term trends show that the prices do track each other, but they do have some fluctuations and variations over time, but overall, long-term trends show that they do track together and FuelFacts will show as well that they track with wholesale price and they track with crude.
Number six, factors that affect the viability of low volume outlets in the rural and urban marketplace. The retail business is characterized by low margins requiring high volumes and this ongoing trend has led to rationalization of facilities. We've seen that everywhere across Canada, the U.S., and in Europe. The amount of product sold and sales margins are linked to profitability. Lower margins can still be profitable where there are high volumes and low density and highly competitive situations; ancillary services and products, such as a car wash, convenience store and fast food are required to remain viable and competitive. I don't think you can be in business and expect that gasoline will pay all of your costs.
[2:15 p.m.]
Rural populations are declining as people migrate to larger centres and that's a challenge for all businesses, not just ours. A regulated environment has the effect of supporting the least efficient operator and some we have heard would like 5 cents per litre, others 7 cents per litre, some want even more for full-serve. Fewer but larger operations with more services and products is the natural outcome of a low margin and highly competitive business - a natural market evolution to meet customer needs and demands. So we don't do this on our own, we do this based on customer needs.
The seventh point was factors that affect the viability of independent retail operators in the province. It's important to define who are independent operators. The complexion of our business is changing and the new independent operators and our competitors are large, big-box stores, such as Wal-Mart, Sobeys, Superstore and others that are including gasoline in their offerings. It's important to understand that the viability realities and business pressures affect everyone in the business. There are no barriers to our business at all. New entrants have a different business model. They operate on razor-thin margins where gasoline is only one of thousands of products in their low cost/low pricing strategies. Successful independent operators, both large and small, are following the business trends to remain viable. Gasoline sales are a low margin and high volume business. Return to the industry is
on average 1.5 cents to 2 cents per litre of profit - a very, very small margin business for us as well. To remain viable, operators must add those other services and products and they must invest in technology and site improvements.
Number eight, you were asked to look at any evidence of predatory pricing practices at the wholesale and retail level of the market. This is an extremely serious issue for us in this industry and it is not taken lightly. Pricing practices is a topic that has been explored many times through examinations by the Competition Bureau. There is no predatory pricing by our members. The industry is the most transparent of industries and the most studied of any industry and there are many resources available at the federal government level and I would suggest that this is the best place for this information and for enforcement.
Another of the key conclusions of the exhaustive Conference Board of Canada 2001 study includes that there is no gouging, collusion, or predatory pricing practices among gasoline companies. The conclusion was also confirmed by the most recent study of 2003, a study by the federal government's Standing Committee on Industry, Science and Technology, and that report stated that there is no evidence of a conspiracy to raise and fix prices or any abusive behaviour to discipline independent retailers. These are criminal issues and I want to underscore that these are criminal issues. We take any accusations in that area seriously.
Finally, I said that we would have some suggestions for you for some recommended actions. We like to be positive and all are dealing with providing more factual information for consumers to be better informed and provide assurance that they are paying reasonable retail prices under these circumstances for their petroleum products. The recommendations that I have, the first one is that it's important for your committee to understand if there is an issue, it is incumbent upon you to define that issue carefully and to explore solutions that do not create unintended consequences as we saw with the 48-hour notice suggestion and any short-term political solution that does not benefit consumers in the long term.
Number two, the Web site that the Nova Scotia Government has is good. It could be improved. It could be added to and I would suggest that developing that further would be helpful for people to understand this complex issue. The third one - and I really want to stress this one because I think it's very important - is to put pressure on the federal government to create a national petroleum information agency based on the highly effective U.S. model to ensure that consumers do not get caught in the misinformation and rhetoric we hear around gasoline pricing. This action was also a recommendation in the 2003 report from Industry Canada's standing committee.
The fourth point in my recommendation is to ensure that the petroleum industry is involved in a consultative process to ensure there are no unintended consequences of any suggested actions such as with the regulations in P.E.I. and Newfoundland and Labrador,
where consumers pay more for their petroleum products than they would in a market-based system.
I thank you for your interest for allowing us to be here today and now we're happy to respond to your questions.
MR. CHAIRMAN: Thank you, Bill, for your presentation. We will open up the questioning, and I recognize Mr. Danny Graham for the first question.
MR. DANIEL GRAHAM: Thank you very much, Mr. Simpkins, and to your presenters. What you have provided us with is a thorough overview. I suspect that we're going to run over our 15 minutes worth of time with your presentation. You were present for the presentations on the last two evenings when we were in Yarmouth and Bridgewater and I think that you heard the case that has been put before this committee. You've spoken to all eight issues that this committee has to hear but, interestingly, the committee has only heard from one individual Nova Scotian who spoke from their own personal perspective, and that person was speaking about the need for us to move to more fuel-efficient vehicles - a valid issue and one to be explored.
The central issue that has been before this committee has to do with the treatment of the so-called independent retail businesses and, in the interests of, I guess, providing some foundation for these remarks and to provide anyone present with a sense of what has been put before this committee, I will summarize at the risk of sounding like it's going on too long - and I apologize for this because I haven't been there for all of the time of those hearings - but only the families who have been operating these businesses for decades and perhaps generations can do justice to the commitment they've made to their communities and the hard work that has gone into eking out a living, often in rural parts of Nova Scotia.
What they described for this committee is that, principally after deregulation in 1991, there was a significant power shift in the relationship between the independent retailers and the big oil companies. The squeeze began back then and it has continued to this day, and it appears to have become even more acute in the last short while. The consistent story we have heard has been one of the oil companies - in some respects it's the opinion so far and we're interested in your response - that they have been oppressive in the way that they have shrunken the margins of the independent retail business person.
You heard the case last night of Mr. Publicover from Wileville who indicated that in May of this year, on $83,000 worth of sales, he had a gross profit of $2,422 and then he had to pay $703 on a credit card fee, leaving him with $1,719 for the month in gross profit before he paid a single employee - and he was required to have his business open for 465 hours. He hadn't paid his employer contributions, his power, lights, land, and all of those costs inevitably put him in a deficit situation for that month. It was a story that was consistent with everyone else.
I would suggest to you and to your colleagues that a compelling case has been made, individually and collectively, by the people who have appeared before this committee that there is an oppressive relationship that has grown up between the oil companies who now enjoy a shrunken margin at the retail level. At one time the margins, we were told, before regulation were in the range of 7 cents to 8 cents per litre. They're now down in some cases to almost 2 cents a litre and, even in high volume businesses like the one that was cited by Mr. Grace, they can't make a living.
So I know you're going to say something to the effect, well if you increase the margins for the independent retailers the prices will inevitably go up. The response from us would be that the onus is on you to show that that's not going into your pocket instead of going into the pockets of consumers when you talk about shrinking the margins of retailers. So I think there are two issues that I would like to put to you. One is the general one with respect to the complaint on the part of retailers in an emotional way that they have been squeezed in every way possible by you - not by you personally, of course, the big oil companies - into a situation where they've had to close down or they've consistently lost businesses and the number of stations are shrinking.
That's the first question that I think you need to respond to. You begin to address it in number seven, but frankly I don't believe that you've discharged that onus or you've given us any compelling reason to suggest that their case is not a good one and that perhaps some regulation should be considered.
The second and more specific issue that I wanted to have you answer relates to the comments that came from Mr. Grace - and there seemed to be some agreement from others in the audience - about a specific issue about them trying to increase their margin by raising prices and Mr. Grace said to us, and I'm paraphrasing from my notes, that if we increase the pump price the oil company will increase their price, and they will do it to ensure that their price reflects the prevailing full-service pump price in the market area. When I asked him about that, he said this isn't written into our contract, but this is something that we're being told by the local representatives - and that, frankly, is a disturbing suggestion, that if they are trying to make a living and try to increase their margins, that automatically the oil companies are creeping in and trying to squeeze that margin down again. So the general onus I think is on you, and the specific question with respect to Mr. Grace's problem is also there.
MR. SIMPKINS: I'm happy to respond and I think because some of these issues are not industry in the sense that they are contractual issues among companies and individuals, we will allow PetroCanada to maybe offer some insight into those contract issues, but of course you can't divulge specific information.
First of all, I guess I want to note that - and I said this and I will say it again - the profit to the oil companies in this marketplace is 2 cents per litre, 2 cents per litre maximum
average over time. The second point is I would caution you on assumptions and generalizations where there is no fact but emotion, in terms of squeezes and oppressive nature. I don't think that occurs among our members, and these are specific company issues, so I think I will ask Tom just to address those thoughts that also occur in his company.
MR. TOM LAWSON: Thank you, Bill. Let me just start with the first point here. I hope that we're not characterized as being oppressive to our dealers; our dealers are considered customers to our company. We have about 1,400 retail sites across the country, of which we manage prices of about 820 of them. We have about 600 branded PetroCanada sites that are dealer locations and, as Bill mentioned, I can't get into business-sensitive information, but our pricing mechanism to our dealers is very simple. It is a differential to the posted rack price. They buy their product based on that differential. They set their own price. We do not influence the way they set their price, up or down, their buy prices aren't changed and move with the rack, which is changed daily.
MR. GRAHAM: But the specific allegation is that their margin was in the range of 7 cents to 9 cents per litre before regulation, and that was at a time when prices were substantially lower than they are right now, and the prices - consistently when presenters have come before the committee they've said that their margins are now in the range of 2 cents to 3.7 cents, depending on whether they're full-serve it might be up as high as 4 cents, but it's significantly lower. In terms of ferreting out the fact versus emotion, I think it's imperative on you to confirm whether or not what they're suggesting is a fact or whether this is an emotional piece of hyperbole.
MR. LAWSON: So we did take a look at retail margins here in recent years and they are about half a cent lower so far on your data basis in Nova Scotia than we saw in the previous two years. So they are down about half a cent. The margin over the posted rack level is around 6.7 cents versus last year's 7.1 cents and the year before about 7.5 cents, so we are seeing a reduction in the retail margins
[2:30 p.m.]
In behind that, there are a couple of things leading to it. One is, as Bill mentioned earlier, a rise in gasoline prices being driven really by crude oil prices and world commodity, gasoline commodity prices. When that happens, we see the gasoline commodity prices shoot up as they did earlier this year in that April/May time frame, you will see the retail margins compress. It's really a pass-through thing, it happens, it's difficult to actually move those prices up at the retail side. It results in the retail margins coming down for a period of time.
The same situation occurs when the gasoline commodity price comes down. We've seen that in June when the gasoline commodity prices came down and the retail margins have actually expanded. This phenomenon was studied very closely by the conference board in 2000. It was shown to exist, that there is a squeezing in the retail margin for a while when
commodity prices are going up, retail margins will go up for a while when they come down. This phenomenon does exist - it exists in a symmetrical fashion, both on the upward side and the downward side. We've seen that event take place so far in 2004. The retail margins as a result have been squeezed down a little bit.
That is the shorter term of events that have taken place here in April and May. Longer term, what we're seeing are retail margins coming down. That's been happening for 20 years. Very intense competition in the marketplace out there - we're seeing new competitors come in that are very, very efficient in their operations. We've had to make changes in our operations in order to compete in this retail market. We have rationalized a significant number of our sites throughout Canada to get our throughputs up.
Retailing is very much a fixed-cost business so the amount of volume you put through a site is very important. We've made capital investments to put c-stores in the back, car washes - as Bill says, it's getting very difficult to run a profitable retail site on gasoline alone. We've had to do that based on new competitors entering the market, the Wal-Marts, Costco, grocers here in town - I believe a Superstore opened up just recently and they're very good, efficient operators. That's the changing landscape in the retail business. For us, PetroCanada, it has been very important that we get our operating costs down. We've become very efficient and that's the longer-term trend in the industry.
MR. GRAHAM: I don't want to take up too much of the committee's time on this, but I just want to follow up on the response that you just gave, Mr. Lawson, and come back to something that I asked about a little earlier.
First, with respect to the last two years or so. You say that the margins appear to have shrunk by about a half cent. I think you'd agree with me, given the margins that we know of right now, that's more than 10 per cent of their profit margin that has been shrunk in that two years. You say that there may have been a more significant shrinkage over the last 20 years. The period of time that I think the committee would be most interested in knowing about is the last 15 years.
The case they have made is that it has shrunk from 7 to 9 cents over the last 13 years or so to somewhere in the range of 2 to 4.5 cents. Most typically, between 2 and 3.5 per cent, it would appear. Nothing you've suggested so far specifically contradicts what they have said about how much it has shrunk. They've extended it one step further and said the extension of that is that the smaller operator - the family business that is growing up, the people who provide service to the volunteer fire department, that help the lawn mowers in the middle of the province - end up shutting down. We've obviously had a reduction in the number of service stations that we have, so I just want to be clear that what they've suggested factually as the central part of their case about the margins being squeezed down and they have done it better than I have, is in fact true.
The second is whether or not you, as a representative of your company, can speak to the issue that Mr. Grace had put before us yesterday. I can't remember which company Rodney Grace was with - perhaps it is with PetroCanada - but he said that if he tries to increase his price to improve his margin, then the oil companies increase their portion of that to shrink his margin down again. That will be my last question.
MR. LAWSON: I understand that this gentleman is not with PetroCanada. I can't speak to the pricing practices of other companies. I don't know how they do prices with their dealers.
MR. GRAHAM: I believe he is with Shell.
MR. LAWSON: Okay, again, I can say that PetroCan pricing is business sensitive but is a very simple and transparent process and it is the posted rack, plus a differential. That differential is set in the . . .
MR. CHAIRMAN: I believe you were going to address that. Oh, I'm sorry sir.
MR. CAROL MONTREUIL: Just, if we talk about the very issue of this margin, the reducing margin is not an issue between majors and independents. It's an issue between how the world has changed over the last 15 years and what the world has allowed this margin to be. If you took all of the 1990s' combined margins, marketing and refining, you would have seen that margin would have been reduced by about 6 or 7 cents from 16, 17 total to around 10 cents. Over the same period, that reduction of margin was replaced by an equivalent amount of increase in terms of taxation.
But, let's stick to the reduced margin. This has brought to this industry huge restructuring. If I were to ask you the question, in this restructuring, who has shut down these service stations? People would be surprised to hear that over that 10-year period, all throughout the 1990s where the bulk of this restructuring took place, the majors saw 50 per cent of their service stations shut down whereas independents shut down 10 per cent of their service stations.
So it seems that this changing world - the same thing is happening in France and in England where mass merchandisers, the Costcos, Safeways of this world came into this business increasing competitiveness - again, to the benefit of consumers - reducing from 30,000 outlets to close to 13,000 today. Who has shut down these service stations to improve efficiencies and bring these efficiencies in terms of reduced margins as benefits to consumers? It was mostly the majors.
Have people suffered throughout that period? Of course. It's been a very difficult period where we have seen these thousands of sites shut down because of these new entrants coming into the market.
MR. CHAIRMAN: Thank you. Gentlemen, both questions and answers are to be directed through the Chairman. I just caution you about that. At this time, I recognize Mr. Brooke Taylor.
MR. BROOKE TAYLOR: Thank you, Mr. Chairman. Mr. Simpkins, you've had the pleasure of attending the hearings in Yarmouth and in Bridgewater. You've witnessed first- hand dealer after dealer claiming, maintaining and providing evidence that they are on the brink of bankruptcy in many cases. As I said last evening, I felt when we started on this mission as an all-Party committee that many concerned consumers - motorists, truckers, et cetera - would be complaining because they surely are.
However, I think before we can find fairness at the pump we have to find fairness at the retailers' storage tanks. I question how you would respond to the fact that some of the independents are able to purchase fuel - according to this invoice - regular unleaded for 84.7 cents, that's the selling price, to an independent of perhaps a shorter distance, but not by much, than the individual that Mr. Graham was talking about in Bridgewater. The distances are somewhat similar yet Rodney Grace was paying 90.16 cents for that same product - regular, unleaded - and a different price for the diesel fuel.
It seems to me that where you have the refinery - and we only have one in this province supplying our petroleum needs and you have a divergence of prices being thrust upon the retailers, that somewhere along the line, the wholesalers - granted, there are factors and inputs that have to be considered, I know that. There may be different situations and circumstances, but surely to goodness, there shouldn't be that big a spread in the selling price that the wholesalers are charging to the retailers out there.
MR. SIMPKINS: At the beginning I think you said there was evidence that a number of retailers were on the brink. I don't think that's the case. There was anecdotal information that wasn't fact. We don't have any background in how these people operate their business and so I think it would be unfair to really address that without adequate information.
As to your second point, which I would like to allow Tom to respond to, we really don't know the numbers that you're suggesting, what days, et cetera, so unless we had some facts - we might be able to, however that information is with different companies and we certainly don't deal in the business of other companies. I will allow Tom to respond from a PetroCanada perspective.
MR. LAWSON: Again, the numbers you quoted, I believe it was a Shell dealer and I really don't what the Shell pricing mechanism is, the dealers or any of the other competitors' pricing mechanisms. Ours is, again, the posted rack and the rack price changes daily. Again, to Bill's point, it's important to understand the component parts, that the crude prices are developed in global markets, and I think people understand that well. There is that second market of gasoline commodity prices that are developed in world markets, and are
reflected in those rack prices. So when those prices go up in Halifax and that posted rack there, they are reflecting prices that are consistent with New York Harbour and Europe - it's a large market.
The dealers then buy from us, they in turn set their own selling price, which we don't influence. We know that the retail margins have been reduced, and it has been tough. Again, we operate 820 sites and price manage, and we know it has been a tough environment the last few months. As I mentioned earlier, part of that is that rising profile which we think will get better, and has in June, but that doesn't solve the longer-term phenomenon of these new competitive entrants coming in. Margins have been going down for years, and we do believe, going forward, that will continue.
MR. TAYLOR: Mr. Chairman, on the first point, that we don't have evidence as a committee - granted we may not have, if you will, the submissions confirmed by other bookkeeping evidence that Revenue Canada would accept, but we certainly have more than circumstantial evidence. If we're going to use the fact that the oil companies aren't satisfied that the retailers, the dealers that are stepping up to the plate are telling the truth, we have people coming before us, giving us numbers in writing and making compelling testimony to this committee that they're really hard-pressed; in fact they don't know how they're going to make ends meet, now I don't consider that, taking their word, as being naive, and I don't think you do either.
I don't know what else you want, but I'm telling you that if you look at the study - the copies I know you have - that was carried out by the Ontario Gas Prices Review Task Force, Fairness at the Pump, June 29, 2000, one of the recommendations that that committee made to the federal Government of Canada was that they consider divorcement legislation to remove the refiner/marketers and separate them. You know darn well that if a wholesaler is selling a product to me and he's selling the product to you at a 10-cent-a-litre differential or a 6-cent differential, whatever the case might be, and we're essentially running the same type of businesses, with the same type of financial considerations and impacts and contractual obligations, then there's something amiss there.
MR. CHAIRMAN: Are you finished with your question?
MR. TAYLOR: Yes, I am. I want a response.
MR. MONTREUIL: Mr. Chairman, two points on your question. We would all agree, in this room, if indeed it's a changing world out there and that margins are getting smaller, well obviously if you're in a business relationship where you're actually sharing that margin and that margin is shrinking, one would have to agree that over time, because of new entrants coming into the market, there's going to be less to share. What we're alluding to in saying well let's bring the facts on the table is that it's okay to bring the issues around dollars on gasoline, as we've explained through Bill's presentation, a corner of a street now is
composed much more of gasoline revenues and, long term, if one is to survive in this business, more revenues that are only on fuel will have to be brought to the bottom line.
It's okay to bring issues and how contracts, personally, are managed for one player, but one has to take these issues into the context of if we are in a world where margins are shrinking because of new entrants, because the market is getting more efficient and consumers are getting better prices on the lower margin, well obviously there's going to be less of a margin to share.
[2:45 p.m.]
On your issue of divorcement, let's be very careful, this has been proven, again, in areas where they have tried that. What you're doing is removing a player from the market, removing a refiner who's also a marketer from potentially being a marketer. So what does that do to competition? You reduce the number of players in the market by bringing forward a divorcement type of regulation where, for example, you wouldn't allow a refiner to be a marketer. By doing that you're reducing the number of competitors, you're reducing competition, not improving it. This has been proven over and over again, it's clearly not the way to go.
Again, if your objective is to bring the best prices to the consumers, if your objective is to protect some competitors instead of protecting competition, now that's a different set of rules, but if your objective is to bring the lowest prices to the consumers, it's clearly not the way to go.
MR. TAYLOR: Mr. Chairman, I'm referencing the Prince Edward Island model and, granted, it is dated 2000 - and Mr. Simpkins and I have had some informal discussions about this and apparently it has been amended - but in 2000, wholesalers on Prince Edward Island are normally given six opportunities each year to file for pricing adjustments that are crude oil cost-related and, not to read through this but, I want to point out that in conclusion the Ontario gas pricing committee find that "'Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada.' Despite this trend, over the last year gasoline prices in PEI have been lower than the national average." They claim that this may be due to wholesaler regulatory structure.
MR. CHAIRMAN: Response? Are you looking for a response to that?
MR. TAYLOR: I would appreciate one, Mr. Chairman.
MR. SIMPKINS: I'm not sure what the question was. It sounded like a statement, but maybe I missed the question.
MR. TAYLOR: The question is, on Prince Edward Island they have had very competitive prices, the motorists, the truckers haven't had to deal with price shock, the retailers are guaranteed a fair margin - I don't know if it's 4 cents or 5 cents - and I guess the point I'm trying to make is, if it works in Prince Edward Island, why won't it work in Nova Scotia?
MR. SIMPKINS: Your information is somewhat dated. What P.E.I.'s regulation right now is that there is one price across the province and you're allowed to compete at 1.5 cents a litre. What that has done is essentially mimic the markets elsewhere, where you have a lower price in Charlottetown versus in the rural areas. That's simply a matter of more dealers competing and more throughput. As to your question of whether P.E.I. is the highest or the lowest, remember there's a huge difference in taxation between these two provinces. I would suggest if you wanted to bring your prices down to P.E.I., that you have an opportunity to look at your tax structure, but in the meantime P.E.I. has also increased theirs by 3 cents a litre. I think, on a go-forward basis, you're going to see a much more even comparison to P.E.I.
Now what occurs in P.E.I., that never gets reported of course, is that on the way up, because of the lag time, consumers are protected; on the way down, as prices come down, consumers pay more. That never gets into the newspapers. I would suggest that when you look at those prices over time, as all studies have, P.E.I., and Newfoundland and Labrador pay more for their product than in unregulated markets.
MR. TAYLOR: In this same report - and I'm having difficulty finding the exact article at this particular time - it is written in here that in 1995 the federal government added 1.5 cents to the excise tax. Actually I do have it, Mr. Chairman, and the oil companies increased the price of gasoline and petroleum products at the same time - now this in Ontario - as the tax was increased, and made millions and millions of dollars, until they were caught. We may not have a response for that, but it's in the report.
I would have thought that possibly Mr. Simpkins, with all respect, that possibly if taxes were lowered the oil companies would at least pass it on the consumer. But the evidence, I guess you don't consider it evidence - in this report, at least, it states that wasn't the case.
MR. SIMPKINS: Mr. Chairman, I believe it's not true. There was also the same criticism laid when New Brunswick reduced its tax on gasoline. As a very simple way of tracking it, you can track the components over time, and you will see who gets the take, whether it would be increased margins or whether it would be an increase or a reduction in taxes. I would suggest that if you wanted to try it here in Nova Scotia, there would be a very
simple test to do that, to look, historically, at who takes what piece of the price at the pump and track it.
You will find the same results as Shane Walsh, the economist at the New Brunswick Government, the same as Minister Bruce Fitch, the Energy Minister in New Brunswick, and also the Finance Minister, who were asked this question just this Spring, that exact question about who would take the taxes. They will have said to you that yes, you can see it, the problem is, over time, even if you would reduce the price here tomorrow on taxes, you could have an increase in price at the pump, like we've seen just in the last few days. If you track it and you look at the components, you will see it there. But sometimes it's difficult for people to understand at the retail level, just because of the fluctuations in pricing.
MR. CHAIRMAN: Tom, you had a comment, and I didn't pick up on it last session. Are you okay with that?
MR. LAWSON: I just want to go back on P.E.I. As Bill mentioned, I think the information was a little outdated. P.E.I. did change their pricing mechanism and has changed it quite a bit over the years. They do move their prices much more frequently, and they do reference external commodity prices. It's not a reference to an over-crude. So that has changed in the last few years.
MR. TAYLOR: Mr. Chairman, I'll just conclude by saying - and I apologize if it gets your hackles up - I really believe, from listening to the dealers and the retailers, that there is price discrimination. I won't say there's predatory pricing taking place, and you know the distinction very well. It certainly seems that when you have what I consider to be evidence that one particular dealer is paying this price and somebody else is paying much more down the road, without knowing all the details, certainly based on the information we have, it seems like the wholesalers are taking some liberty there. I'll leave it at that.
MR. CHAIRMAN: Gentlemen, I have to move on to the next speaker. Mr. MacKinnon.
MR. RUSSELL MACKINNON: Mr. Chairman, I was listening to our distinguished guests here make reference to the fact that the number of independents, they only reduce by 10 per cent, and the oil companies reduce by a substantially larger number. Perhaps that may be because the oil companies have deeper pockets for upgrades, whereas the small retailers don't. I know one thing for a fact, in 1991 when the bill that was brought before this Assembly to deregulate the price of fuel in Nova Scotia, it was on the explicit commitment from government that the price of fuel for Nova Scotians would go down. At that time, on average, it was 45.9 cents per litre. Now it is 90.5 cents per litre.
My question to the witnesses, through you, Mr. Chairman, is, how have the oil companies benefited by deregulation in Nova Scotia?
MR. LAWSON: I would like to address the issue of the deeper pockets. We have rationalized a number of our sites, and just to personalize it for a second, I joined Hydro and Gulf in 1981, which subsequently became PetroCanada. It was a terrific year in 1981. The oil industry was very profitable, things were great. That changed by 1982. The market had changed drastically. We had a very difficult time for a number of years. Looking back at 1981 at our predecessor companies, which included Fina, BP, Gulf, Pacific 66, I would estimate that we probably had somewhere in the order of 20,000 to 25,000 employees at that time.
We, as a company, worked very hard, working within the margins of a provider in a competitive marketplace to become efficient and cost-effective, to return back to profitability, just in the last two or three years. We're currently operating the company with around 4,000 employees. I watched annual downsizing of people. Again, margins are determinant in a competitive market that did not allow us to operate the way we were operating. We worked hard and got our operating costs down, became more efficient and have returned to profitability.
So it has been hard-fought. The Conference Board, in 2000, actually acknowledged this, and there's a quote in there about, industry has returned to profitability but it's not through margin improvement, it's through efficiencies over those years. I know, I lived through those - very important.
In terms of the price differences, the information, if we look at it over the last 20 years, the price of gasoline excluding taxes has not gone up by the rate of inflation. The few months, certainly, have been high, but over time, the last 20 years, the price of gasoline has not gone up by inflation, even meeting the index. It has, when you overlay the government taxes. Government taxes have gone up significantly during that period of time. Government taxes have gone up far in excess of the inflation rate. So, net, the gasoline price has gone up, certainly, but if you take a good look at what's behind that, the margins have come down, generally, on the retail side and on the refining side. That was forced by a very competitive marketplace.
MR. MACKINNON: Mr. Chairman, the witness has not answered my question. My question was, how have the oil companies benefited by deregulation, by that legislation from 1991?
MR. LAWSON: Frankly, my experience doesn't go back prior to 1991.
MR. MACKINNON: Is there anybody on the witness panel who can answer that question?
MR. MONTREUIL: Mr. Chairman, in the submission we will make by July 30th, there will be a chart in there that clearly shows that until 1991, Nova Scotia was consistently above Canadian average prices. Now, the danger of comparing different periods, when you take absolute prices, is you have to compare it to something to see if Nova Scotians are better off today than they were before 1991. What I submit to you is that until 1991, the average prices in Nova Scotia were consistently above Canadian averages, and since the end of regulation, in 1991, Nova Scotia prices have been on the Canadian average, consistently. We will put a curve in our submission, by July 30th, that clearly shows that.
At the end of the day, whether prices are at 60 cents at the pump or 90 cents at the pump, we operate on a margin. Evidence shows that over the years that margin has been decreasing due to efficiency, like Mr. Lawson was saying. There are fewer refineries, there used to be 40 and there's 18 left. There used to be 30,000 service stations, like I said, there's less than 13,000. Those efficiencies have been passed along to consumers. Margins, if something, have been decreasing.
Now, we've become more efficient, we've become more profitable because what we had at the time was not sustainable. We ended up shutting half of our refineries. We shut 50 per cent of our service stations to become more efficient and be able to compete in this world, which is why, today, we can say, proudly, that despite a much smaller market, compared to our neighbour the Americans, we have lowered prices, ex-taxes. We bring this commodity, at the pump, at a lower price - even though Americans are much bigger - than they can.
MR. MACKINNON: That's a bit of a shift from what your colleague, Mr. Lawson has indicated. He has indicated that competition is more fierce, there's more competition here today. How can you have more competition when the total number of service outlets has been decreased by more than 50 per cent?
MR. MONTREUIL: This goes to saying how inefficient, Mr. Chairman, this market was. Now, you're going to tell me that going from 30,000 to 15,000 service stations makes a market less efficient - I don't think so.
MR. MACKINNON: But doubling the price of gasoline doesn't justify the efficiency. If you're going to reduce the competition and you double the price . . .
MR. MONTREUIL: But the issue is not around prices.
MR. CHAIRMAN: Order. Order, please. Please wait until the member is finished with his question.
MR. MACKINNON: I appreciate the fact that the witness is very protective of his corporate interests, but there are a lot of other factors in there as well. Has consumption gone
up? Have the regulatory matters surrounding emission controls, the environmental standards, all these? All these small retail outlets in the province, hundreds of them, that have been left with obsolete pieces of equipment from the oil companies, because the oil companies wanted to download all the environmental costs on the backs of these retailers which, in turn, would come out at the price for the consumer.
[3:00 p.m.]
In short, Mr. Chairman, because I know everyone else wants to have an opportunity to question the witnesses here, isn't this what it's all about? Isn't this what the essence of this task force was - to find out if, in fact, there are ways to reduce the cost to the consumers on various fuel products in the Province of Nova Scotia? I applaud the witnesses for so elaborately justifying their corporate interests and their profitability and their efficiency, but I believe, equally, they can appreciate the obligation that we as public policy makers have, and somewhere in between is the truth.
MR. CHAIRMAN: Honourable member, would that be your last question?
MR. MACKINNON: Yes.
MR. CHAIRMAN: And you're looking for a response to that comment? We will allow a quick response because we have to move on.
MR. LAWSON: You raised the question of profitability, and I think that's important. What's not well understood is the amount of money that is being invested by the petroleum industry and I think a lot of it is on the environment regulations that you've mentioned. Billions of dollars have been invested by the industry. We made good money last year, our downstream business made $264 million, our refineries and our retail. Our capital investments were $424 million. Looking forward, the federal government has legislated low-sulphur gasoline which is currently going into place, low-sulphur diesel products, and our estimate for the Canadian industry is that is going to cost in excess of $5 billion to comply with that in our refineries, the industry refineries, and probably cost about $0.5 million a year more to operate. The industry has made massive investments and that needs to be taken into account when the profits are announced as well.
MR. MACKINNON: And tax deductible, of course?
MR. LAWSON: I think . . .
MR. CHAIRMAN: That's fine, thank you very much, and thank you, member, for your question.
I would like to recognize Charlie Parker, please.
MR. CHARLES PARKER: Thank you, Mr. Chairman, and witnesses. We're certainly glad to have you here this afternoon. We've had some tough questions for you and I'm going to continue along the same line probably. As our select committee has travelled around and I guess originally our mandate was certainly to look at why the price of gasoline and heating fuel and so on was high in this province and to see what perhaps we could recommend to do about that. As you know, as we travelled, the onus was not really coming from the consumers, but really from the retail gasoline owners and operators.
I think 11 out of our 12 presenters actually had been retailers and they've been telling us, as you've already heard, yourselves, that they're having some real tough times, they're struggling to survive and it's mainly because their margins have gone down considerably. So I guess I would like to ask, first of all, what are the margins in the industry - starting with the refinery level, the wholesale level and the retail level, could you give us what you know of those three levels as far as margins?
MR. CHAIRMAN: Thank you for the question and looking for a response.
MR. SIMPKINS: Mr. Chairman, I think Mr. Lawson will respond.
MR. LAWSON: I did put together some information yesterday on what makes up the current retail price. Halifax, yesterday, was 93.9 cents and basically it's made up of the crude oil price, 34.07 cents per litre; commodity price for gasoline of 12.93 cents per litre; retail margin of 9.35 cents per litre; and government taxes of 37.55 cents per litre. So the government taxes do represent 40 per cent of that retail price. Now, that retail margin is off the posted rack so that's the posted rack to the retail pump price, those are the margins. Now, as I mentioned earlier, you need to be careful with retail margins because the prices do cycle up and down. A daily snapshot can be deceiving. It could be quite low on a Monday and quite high on a Thursday if the prices change. So it is better if you do take margins over a more reasonable length of time, but that was a snapshot from yesterday.
MR. PARKER: So again, Mr. Chairman, to our witness, what is the breakdown for the wholesaler and for the retailer? You mentioned 9.35 cents, was that for the retailer?
MR. LAWSON: The 9.35 cents is the posted rack, the commodity price, Halifax, posted rack for regular unleaded gas to the pump price, the retail pump price in the city. That's the margin between those two things.
MR. PARKER: And to clarify, Mr. Chairman, 9.35 cents is the margin that the retailer is making?
MR. LAWSON: Again, I don't know how the other companies set their price to their dealers. In our case, basically we do set the price on the posted rack plus a premium and their margin would be that buy price to the pump price. That would be their margin. It's not their
profit, that would be their margin. I don't know how the other competitors set their prices to dealers.
MR. PARKER: Okay, so you're telling us, Mr. Chairman, that the retailer is making 9.35 cents per litre?
MR. LAWSON: No, I'm saying our - again this is posted rack to the retail pump price, 9.35 cents - PetroCanada branded dealers are buying at the posted rack plus a premium, a couple of cents, that would be their buy price. So if they were buying in around that as a ballpark, again this is commercially sensitive information, but in around that the balance would be their retail margin.
MR. PARKER: Perhaps I can ask Mr. Simpkins, on the average in the industry, regardless of which company, what is the average retail margin in Nova Scotia for gasoline retailers?
MR. SIMPKINS: Yes, it's in FuelFacts, published twice a month, and you can see the margins are there under Figure 1. The white box right under Pump Taxes is called Marketing Margin and that's 9.3 cents per litre - and again I want to stress that that is margin. So that's what's required to take the product from the refinery, to transport it, to hold it in inventory, to pay for our heat, light and power, all of those things, all of those costs that are built into that marketing margin and you're left then, hopefully, with some profit.
MR. PARKER: So that includes their transportation costs from the refinery to their individual site?
MR. SIMPKINS: That's correct.
MR. PARKER: But most retailers - and I think we heard from, like I said, 11 of them, plus there were others in the room who didn't come forward - were saying their margins are 2 cents, 3 cents, 3.5 cents, whatever. So the difference between that and 9.3 cents is their transportation costs primarily?
MR. SIMPKINS: No, you have to understand, Mr. Chairman, that that's the available marketing margin, and that can grow and shrink and depending on the company and depending on the individuals, depending on their costs, that's up to each company and to each retailer to really determine what they need in there.
MR. PARKER: Okay, I will leave that one then, Mr. Chairman, and I've got another question and I guess it was asked earlier by a previous member here. I want to know, the practice that was mentioned to us by one of the retailers of him deciding he's not having enough margin, 2 cents was not enough to pay his costs, so he decided to put the price up and almost immediately his wholesaler told him that you're going to be charged the equivalent
amount again. Now, is that a normal practice in the industry? I'm not asking specifically of PetroCanada, but does that occur on a regular basis within the industry?
MR. SIMPKINS: I think Mr. Lawson is best to answer that one.
MR. LAWSON: Again, that was a normal practice in the past. I don't know how competitors are setting their prices today. In our case, I explained how we do it. In the event that a dealer put their price up, under our pricing process, if they put their prices up 5 cents, they would enjoy 5 cents more margin. That is our pricing practice at PetroCanada. Other companies may do it differently, as I said. You need to understand dealers are independent businessmen and they are customers. While they're branded PetroCanada, for example, we may have contracts that last a few years, they are customers and at the end of the contracts they may choose to go it with another brand and just buy a pure commodity off the posted rack.
They have access to buy that gasoline at the posted rack, at the prices that are being quoted, and have "Joe's" service station. They may choose to go with Shell or Wilsons or Esso or PetroCanada, and the companies compete with the dealers to try to acquire them to fly our brands and our pricing in our contract terms to those dealers are very business-sensitive. We compete on that basis and a dealer who is not happy with their supplier can shop around, and they do shop around. They will change suppliers and, to be honest, we guard very carefully that information, our contracts and our offering. It is a competitive field to go out there in trying to get dealer accounts.
MR. PARKER: Mr. Chairman, I used to be a retailer, not gasoline, but the garden centre business. When I would buy plants at $1 and I went to sell it for $1.50, then that was my choice. If I wanted to sell it for $1.59, it was also my choice, but if I change my price upward or downward, my wholesaler didn't come by and say, well you're charging more, now I want to charge you more, but that's apparently what retailers in the gasoline industry are facing. Another witness said last evening that they were being charged more if they decided to put their price up by a penny. Is that a practice with PetroCanada?
MR. LAWSON: No, it's not.
MR. PARKER: Thank you. Can I ask one further question, Mr. Chairman?
MR. CHAIRMAN: Yes.
MR. PARKER: The other issue that was brought up over and over last night and the previous evening was around credit cards, and when a retailer is on a margin of 2 cents, or 2.5 cents, by the time they pay their credit card costs, there's nothing left. They're at zero profit margin. Are there any alternatives to perhaps look at that or to allow a different price structure that would allow the retailer to start making a profit?
MR. LAWSON: The dealer, again I can only talk to PetroCanada but the relationship there are other puts and takes in terms of how they buy their product, in our case at that posted rack plus the delta, but it's fairly normal in the industry and certainly our case to be competitive that you also provide a cross-lease to the dealer in recognition of the assets which will offset the delta. There are puts and takes. There are charges for the credit card fees, so the contracts are a little bit of puts and takes on those various elements and those are the types of things that the oil companies do compete with in terms of soliciting the dealer accounts.
MR. PARKER: Okay, I'll just ask one further question, Mr. Chairman, if I could. Just to sum up, I guess, the retailers are in trouble. Many of them are facing tough times and many of them say they are going to go out of business, even though they're under contract they may be facing the wall and have to declare bankruptcy or whatever the case may be. Is there an overall plan perhaps to see independent retailers go out of business so that there could be more corporate gasoline stations?
MR. LAWSON: Certainly from PetroCanada's perspective, absolutely not. I think what might be helpful - because it does seem a little convoluted with the integrated oil companies, the various elements of the company - maybe just taking a second to explain how PetroCanada operates the business I think will provide some insights. We do have a resource end of the business. We are involved in refining. We are involved in the retail end of the business what we call the rack-forward business. We operate those businesses as separate units, so our resource end and our financials are separate. The resource end basically lives and breathes on crude oil prices, the good times and the bad times. That's the resource end of the business.
The downstream end of the business is our refinery and our retail side and we report on that as one unit, but internally, we operate our business independently. We transfer our product, gasoline, from our refineries to our retail group at a market base transfer mechanism and we do that based on what we think at Wilson Fuels, at Canadian Tire, Pioneer. Those retailers are buying product up so PetroCanada acquires our rack-forward group, this product at that price level and then we in turn operate our retail division to earn money and make a profit. We have seen that retail profit as being low this year for the reasons I stated earlier, the margins have been reduced, but certainly going forward, we see operating that business unit at being a profitable area of the business.
All of that said, we are seeing changes to the marketplace. All the things we did for 20 years become efficient and live within a small margin world, we're not out of the soup. It's going to get tougher with the new mass merchants coming into the market. We've seen that in the States and in Europe, I think that's a market dynamic, it's going to take place, we have to deal with it.
MR. CHAIRMAN: Thank you, and thank you member for the questions. At this time I would like to recognize Howard Epstein.
[3:15 p.m.]
MR. HOWARD EPSTEIN: Thank you, very much. One of the factors that seems not to have been looked at very much in this discussion is the fact that we have convened a special Legislature committee because what we're dealing with here is really an essential product. This isn't a look at the price of hair cuts or restaurant meals. This is more a concern to deal with something that is very central to the way North Americans have devised their lives. So we've seen, for example, the insurance issue be a real important one for many people. Now it's the price of the product at the pump or for home heating, but of course, we build roads, we design our cities, we have health implications and accidents and policing. This is all associated with your product and how it's used.
When we compare other kinds of essential products or services, their price is regulated. I think about electricity or about water, or telecommunications. Those things, unlike hair cuts or restaurant meals, the prices are regulated. We're tempted to look at this and say, if the price is too high, if consumers are having difficulties, if there's an array of problems, why is it that we shouldn't begin to try to do something on behalf of the public? What I'm hearing from you really is, there's nothing you can do. Leave it alone. That it's all geopolitics. It's all a big system. It's efficient. It's competitive. It's evolving, it's going to be even more competitive and even if some of your local stations go out of business, in the end, you'll get the best deal and leave it alone. I have to say, that seems to me a fair summary of what you're saying, but I remain unconvinced. So I have a few particular questions. I'd like to ask first, who are your members? Who are the members of the CPPI? Then, who are not members of CPPI who are in the similar business?
MR. LAWSON: Well, who are not members are probably easier. Irving Oil, Wilsons, Canadian Tire.
MR. EPSTEIN: Perhaps you'll supply me with a list of who the others are.
MR. MONTREUIL: Mr. Chairman, we have 14 members, across the country. You know the usual names, PetroCanada, Shell, Imperial, Ultramar, Husky Chevron, Sunoco, smaller companies like Parkland, Co-op in the west. Essentially the major integrated companies with some regional companies like Ultramar in Quebec or Sunoco in Ontario. So 14 companies.
MR. EPSTEIN: Okay, it would be good to have the list. Do your members sell into the P.E.I. market and the Newfoundland and Labrador market?
MR. MONTREUIL: Absolutely.
MR. EPSTEIN: But these are regulated markets?
MR. MONTREUIL: Absolutely.
MR. EPSTEIN: The suggestions that you made to us that in a regulated market there's a danger that the product won't be supplied doesn't seem to be the case for P.E.I. and Newfoundland. Anything that you want to say about that?
MR. MONTREUIL: Mr. Chairman, what we have said essentially is that it has been proven over and over again that a regulated market will bring higher prices to consumers.
MR. EPSTEIN: I wasn't asking about the price. I was saying are you supplying that market?
MR. MONTREUIL: Yes, we are.
MR. EPSTEIN: Fine, thank you. Is there anything you want to tell me about why you haven't boycotted them?
MR. MONTREUIL: Well, there's no reason to do so. At the end of the day consumers are paying more and if these margins are higher in these regulated markets, well obviously anyone operating these markets will benefit from the higher margins.
MR. EPSTEIN: Where you were telling us that the product might just go somewhere else, that hasn't been borne out historically.
MR. MONTREUIL: Mr. Chairman, the member is referring to something else. When we were referring to the fact that trying to regulate prices at the wholesale level, which is really a NAFTA-base, free-trade accord, type of products flowing without restrictive practices between the two countries. If a province was to try to regulate at a wholesale level, not the retail level, it's a totally different ballpark and no province has ventured into this arena, rightfully so, and this would be a cause, if you are a wholesaler, an importer or a refiner, and you have an option of selling your product in different markets and your local market is not as profitable because it's controlled and it's regulated below the continental or worldwide market, why would you operate in a market like that? So it's not the case in P.E.I. and it's not the case in Newfoundland and Labrador.
MR. CHAIRMAN: Would you like to make a comment as well?
MR. LAWSON: Mr. Chairman, PetroCanada is somewhat unique. In Newfoundland and Labrador we did have a retail operation up until about a year and a half ago. It was a very simple operating one. We bought gasoline as a commodity on the Island from the local
refiner and participated in the retail market. We did withdraw from the Newfoundland market there back, I think it was about a year and a half ago.
MR. EPSTEIN: I am interested in looking at the wholesale price and I'm interested in looking at how it's made up and I'm interested in looking at whether there are any reasons for us to think that we might want to regulate it and I'd like to start with the rack price. Do any of your members charge differential rack prices to different customers?
MR. LAWSON: Yes, the posted rack price that you see, and you'll see a reference in the OBG, is a price that represents a small buyer. It's a good reflection of somebody with a truck pulling up and filling up gasoline at a posted rack. Discounts are applied from that posted rack based on volume.
MR. EPSTEIN: What would be the attitude of your industry to a requirement that says that you have to sell at the same rack price to all comers?
MR. LAWSON: Again, it has been a standard in the past, certainly volume discounts, and there are costs involved with smaller accounts versus larger accounts. That's one of the reasons why the discounts will tend to vary on larger volume accounts.
MR. EPSTEIN: I understand the difference in why you offer your price structure the way you do now. I was asking how it would impact your business if you were required to offer the same rack price to everybody.
MR. LAWSON: Honestly, I'd have to think that through. I mean we've never seen that. We've never experienced that, so I'd have to think through what the implications of something like that would be, but it would be different than what we're doing today.
MR. EPSTEIN: Let me say that if you do have any thoughts on this and care to put them in writing, that would be very useful. Now, I'd like to ask about lag time in change of price between the time in which something geopolitical may happen that would affect the price of crude oil and how that flows through the system in terms of price impacts, because one of the things we're hearing is that of course ultimately these geopolitical factors are real factors and that there is such a thing as sort of the world market price of barrels of oil, but this is crude. This is the input into the refineries and of course that fluctuates.
What we've seen is that this seems to be a really major part of the price, pretax, but even when you leave that aside it's still a major part of the price and seems to be particularly volatile. When we see increases, the question is how quickly they flow through to actually end up impacting upon the retailers and then the customers and then when the price goes down, how quickly does that affect things? Could you take us through this and explain a little bit about this lag time issue?
MR. LAWSON: The commodity prices as opposed to the rack reflect changes in the geopolitical very quickly. Usually within a day. The events in the gasoline values are basically being set on supply/demand information, market dynamics. Actually, if you watch the screen you'll see the value of gasoline on a realtime basis in terms of what it's trading at, what gasoline is worth. Down in the United States it's uncommon to see the gasoline terminal rack prices change multiple throughout the day. The norm in Canada today is that they tend to change once a day on business days, but even there we've seen it change two or three times during the day, those type of events are starting to occur, a very quick pass-through.
The best example of this getting out of sync is when Canada had the old last-in, first-out accounting principles, remember that, LIFO. The U.S. worked on first-in, first-out. The result of that is Canada, when crude prices went up, would take 60 days to pass through. That created significant price differences between Canada and the United States and we saw product, when Canada lagged in increases, Canadian prices were lower and it would suck product out of Canada and the same happened on the other side. So the markets moved very quickly and in sync and if they don't do that, then the product will move between the borders.
MR. EPSTEIN: If we wanted to tackle this particular piece of the price structure, if we were focused on this and we wanted to do something about that in order to smooth it out or to adjust it, are there any suggestions you want to make to us about what we ought to do?
MR. LAWSON: I think as Bill has pointed out, the issue is that you cannot regulate one element of this. It's all one market, the crude market, the gasoline commodity market, the retail markets, and if you step in with only regulating one aspect of that, the whole thing goes out of sync. We haven't seen a solution on the regulated side that actually regulates the whole thing except for the National Energy Program which actually did attempt to do that, and it has its own set of implications.
MR. MONTREUIL: Back to the point you first raised, you would agree with me, Mr. Chairman, that over a year some of these fluctuations, ups and downs, are numerous. Now, what we're saying today is that despite these numerous fluctuations, when you do the averages over the year and compare what Nova Scotia and Canadians in general have been benefiting, what we're saying today is, of all G8 countries, when you remove the taxes, despite these fluctuations, despite these last-in, last-out, Canadians and Nova Scotians have been benefiting from the lowest ex-tax prices. So what are we trying to do here? We want to regulate to bring the price even lower? We already have the lowest prices of all the G8 countries. So what are we after?
MR. CHAIRMAN: Yes, thank you. It would be up to the member to ask the question, but we do understand your sentiment to that.
MR. EPSTEIN: I understand the point that's being made, we still do have a problem with the price, but that's not our only problem with it and I distinguish between the tax portion and the non-tax portion and when I look at other countries, it seems to me that the distinction is probably more on the price side, ultimately to the customer, less on the ex-tax price side. The differential there is I think not very much. You're shaking your head and you're saying, no, I guess I'd like to see details of that. So, again, that's something that you could document for us if you think it's different.
Let me just nail one thing down. I assume that tax is not an issue for you or your members, especially on home heating fuel. I take it, you don't care about this. This is public policy, our issue, nothing to do with you. Is that basically right?
MR. MONTREUIL: We believe, I mean, taxation is a society issue. It's a governmental responsibility and we are totally neutral. We are a good preceptor, we collect and we send it to you, that's the extent of our position.
MR. EPSTEIN: That's fine. I just wanted that for the record. I assume the same position on retail margins, this likewise is of no concern to you or your members?
MR. MONTREUIL: I don't know why you are saying that. Margins are obviously a great concern. This is the lifeblood of profitability of an industry, whether upstream, downstream, refining, marketing, margins are what profitability is built on. So we are very concerned. If we were to get into a market where margins are nonexistent, we'd be very concerned.
MR. EPSTEIN: I'm not talking about margins to your members in their direct first portion of their business, that is to say the refining end and first stage marketing. I was talking about retail margins only, that is, the vendors who deal with the public.
MR. LAWSON: Again, this goes to what I was saying earlier about the way we operate our company. We do have a significant retail operation, 820 of our sites are company owned and operated, price managed sites. That is we expect and try to make a profit in that area of the business. Retail margins are certainly a key piece to that in terms of being able to make a profit in that business.
MR. EPSTEIN: Okay, so you share the concern then of those retailers who characterize themselves as independent. You have a common interest there in seeing that there is a margin.
MR. LAWSON: Absolutely.
MR. EPSTEIN: Okay. Now the last thing I really want to ask about is whether you can document your margins, and I'm not talking about the retail margins. I'm talking about
the numbers I heard you use with respect to the margins you make up to the point that you in turn sell to the retailers. I heard the term used that it's essentially 2 cents on a litre. I wasn't sure over what period of time that was or whether this is a common figure now for all of your members, for how long it's been a common figure, what kind of margin we're looking at.
One of the main things I heard you say was that the retailers have to realize that they're in a very low margin business and they have to accept that the only way they're going to make a living is through having a car wash and selling food along with it, but you don't sell food and in your prime industry, you're not supplementing it by having a car wash over at the refinery and selling donuts and coffee. What you're saying is because of your very high volume, you're able to exist on these margins, but I'm still concerned about where I would find the data to actually document what those margins are because as far as I can see, it's a hugely profitable business. If that's purely attributable to the volume, then fine, but I'd like to see where that is, and if that number, 2 cents, can be documented, I'd really like to see that.
MR. LAWSON: I have three copies of that, that I'll submit to the committee.
MR. CHAIRMAN: Has it been tabled already in your report, or is this something in addition?
MR. LAWSON: I have it.
MR. CHAIRMAN: Thank you. Howard, is that it?
MR. EPSTEIN: That's it for now, thank you.
MR. CHAIRMAN: Well, thank you, kindly for your questions. I would like to recognize Mr. Jim DeWolfe.
MR. JAMES DEWOLFE: Thank you, Mr. Chairman, and thank you, gentlemen for coming here today. Mr. Simpkins you've been travelling with us, I noticed you in the audience the last two evenings in Yarmouth and Bridgewater, so you're well aware of the situation, as we are. Gentlemen, your job is to be here to deflect negativism and criticism from your industry, indeed, that's why you're the high-paid help. You're here to do a job and God love you, you may be worth every cent of it.
[3:30 p.m.]
This I can tell you, you didn't adequately answer questions that were put to you. I was sitting here listening when we talked about the disparity between communities. Mr. Simpkins, you recall the other night I happened to pull out a receipt from my diesel purchase.
I paid less than a retailer was buying his fuel for, a retailer who was selling 8 million litres a year. I just roughly calculated that I use about 2,000 litres a year, there's a huge disparity among communities and where in Heaven's name is the fairness in that?
My heart went out to some of these retailers who were sitting before us and presenting at our committee meetings. They have invested their life savings into companies, some have had companies that were passed on for generations, and they expanded them and here they are today going in the red, scratching every cent they can from outside sources to keep the industry afloat until something is done, hoping that something will be done. Where they used to have a margin of 8 cents, now some of them have less than a 2-cent margin. Where is the fairness when I can buy fuel in my community cheaper than one retailer pays for it at the wholesale level? There's something terribly, terribly wrong with the industry.
In that particular case, I used the distance from the refinery to that location, and the distance from the refinery to my location, which is in the other direction, to be almost equal, so it's not related to trucking charges - actually, I'm probably further away. So, I put it to you again, where is the fairness?
MR. CHAIRMAN: Thank you. Waiting for a response.
MR. SIMPKINS: Mr. Lawson?
MR. LAWSON: I think I heard two things there - one, again, regional differences in prices. We do see that happen. It is the competitive nature of the business. As Bill mentioned, what's in behind it is costs. You see some of the outlying areas, there are costs to get out there. Markets differ by efficiencies, and efficiencies are really a combination of a throughput through the sites, but also the ancillary revenues - sites that have good ancillary revenues are more efficient - those prices and margins will tend to be lower in those areas.
The third factor is just the competitive nature of that market. Sometimes it doesn't make a lot of sense when prices are lower in one area than in others, it's somebody in the competitive market is being very aggressive in their pricing. We see that happen in the markets for awhile, then it changes.
Those three things combined cause each of the markets to be different at times. Over time you need to look at the margins, basically. Those are really the underlying reasons for the differences regionally.
In terms of the fairness, it is an issue. Retail margins are going lower, it is getting tougher. It's not a lot different than the Home Depots that came in in the hardware business, brought big-box in, very low costs and had very low prices in the market. Very hard on the ma and pa hardware stores to compete with that. We're seeing a trend in the industry that way, we're seeing these big boxes in the retail market come in and that's the development
in the market. That is to the consumer's benefit - new competitors coming into the business that are efficient, that do lower the prices. It makes it difficult though for the sites that only sell gasoline, small volumes particularly, to survive in the business.
I mentioned we do have a number of dealers, we see them as competitors and a key part of our network. We are doing things as well to try and help our dealers. We've been quite successful in our businesses at our company sites, making capital investments in restaurants, A&Ws, car washes, c-stores. We have programs to help out our dealers to do the same thing at sites we think can grow their businesses up, have back court revenues and be successful businesses. You will see that some of our sites - we call them new image LCI, the white Lucabond sites - some of those are independent operators who have chosen to make those investments in the business, get ancillary revenues and will likely be quite successful going forward.
MR. DEWOLFE: Well, it certainly seems that the independents are under the control of the industry, their hands are tied, they have nowhere to turn - I guess that's why they came to us and are continuing to come to this committee to look for a solution. The company essentially owns them through their contracts. There's nothing they can do - they can't purchase cheaper gas that perhaps their competitor is buying because of the contracts. There has to be a solution and I hope this committee can come up with a solution. I don't expect you, as representatives of the company, are going to provide us with that solution. I think it's something we are going to have to find and perhaps legislate.
MR. CHAIRMAN: Would you like a quick response to that or a closing comment?
MR. DEWOLFE: I think the gentleman was very anxious to respond.
MR. MONTREUIL: I hear talks about fairness for independents. Where's the fairness about consumers? If this market that's been an 8, 9 cents market is ultimately to become - and no one knows - a 2, 3 cents market, that's going to be to the benefit of whom? Who's speaking on behalf of consumers who would benefit seeing these margins and, hence, prices at the pump go down by the same amount. We can't be talking on one side of the mouth about fairness for a certain segment of competitors - independents - and at the same time not be talking about fairness for consumers who are bound, like the rest of the countries - France, England and the rest of Canada - to benefit for more intense competition that is going to be upon us in coming years.
MR. CHAIRMAN: Thank you for your comment. Is that the final question?
MR. DEWOLFE: That's fine for now, thank you.
MR. TAYLOR: Mr. Chairman, on a point of order. I don't think there's anybody in this room who is talking out both sides of their mouth. With all respect, Mr. Chairman, what
we're saying here is - or at least, what I feel - that there's price discrimination taking place and there hasn't been one reply from members opposite that diminishes that concern. I stand by that and I take offence and issue with somebody suggesting that people are talking out of both sides of their mouth. We know there's no magic wand.
MR. CHAIRMAN: Thank you, Mr. Taylor. At this time I would like to recognize Gerald Sampson. Mr. Sampson, you have the floor.
MR. GERALD SAMPSON: I welcome the gentlemen here. Most of what I had to ask has been covered in some form or other, but I will pursue, maybe in a different vein.
After hearing the presentation, I'm confused. I don't know whether to bow to you people or to stand and praise you, and let me just finish up by saying that given the reputation that politicians have today, I'm proud to be a politician. The presentation that was made, I think you've grasped this committee's feeling for the hardships that your dealers are suffering and the presentation was made along those lines because it's almost when the presentation was finished that I was starting to feel sympathy for the large companies, I have to admit that, but I've gathered and collected my thoughts since that time.
Anyway, what I'd like to do is reference - these are names that are written into the record - Mr. Lawrence England presented last night in Bridgewater and has seen his profits shrink. You're selling a product, and Rodney Grace, I have his figures down here, he is up to 8 million litres a year. That fellow should be making all kinds of money and here's a gentleman that has progressed over the years and expanded and improved and has the latest in his station and can't make money at 8 million litres.
I understand that the profit margins are shrinking - well, whose profit margin is shrinking? It's only that of the independent or the dealer. Are you shrinking your take on the profit also to compensate that, or every time there's an increase in the cost we tighten the screw a little tighter on the person who's selling the very product that you want to sell? I have a problem with that, Mr. Chairman.
The legal counsel was there last night for the Retail Gasoline Dealers Association of Nova Scotia and in final conclusion he probably agreed a little bit that maybe there appeared to be discrepancy in the cost from wholesalers from what he heard and thought that that could be something that could be resolved and maybe the fuel companies might consider removing the cost of advertising from the cost of dealers and things like that.
Sarah and Frank Allen, private citizens, gas prices have doubled, profit margins have been reduced. I mean you're selling a product and yet the very person who you're putting out on the road to sell your product, you're cutting their commission. You're looking for more service and paying them less. Margo Hanley absolutely stated emphatically that the wholesalers treat all stations differently, so do the gas companies. So that in itself shows that
there's differential treatment when it comes to the pricing. I don't know, like I said, she even said that she has a letter on file that she received from a company when she was the president that said she shouldn't attend a certain meeting. So that, to me, points to intimidation. That's my interpretation of it.
So, Mr. Chairman, what I would like to ask, my first question, is an independent retailer capable of buying direct from the rack price, or from rack, or however they would get it, are they capable of doing that?
MR. SIMPKINS: Mr. Lawson will respond.
MR. LAWSON: Mr. Chairman, if I could, I would just like to go back on just a couple of items there quickly. The gentleman at the end, I'm sorry, I've forgotten your name, you mentioned the dealer buy price.
MR. CHAIRMAN: Excuse me, I would ask you that you answer the member's question. At the end of the session I will give you two minutes for closing comments.
MR. LAWSON: This is just setting the record straight, Mr. Chairman, in terms . . .
MR. CHAIRMAN: Well, if the member would allow it, we will let you go on a point of clarification, if the member would give of his time.
MR. GERALD SAMPSON: Quickly.
MR. LAWSON: The dealer buy price being rack plus 2 cents or 3 cents and that is very commercially sensitive, I just wanted to clarify that, it's not rack plus 2 cents, when you made that comment, sorry, I just want to clarify that piece of information.
The other one I would like to address is the one of price discrimination that you raised there. Bill addressed this. That's a very serious accusation - price discrimination. I could say these are unfounded accusations. They go beyond unfounded accusations. Accusations of predatory pricing, price discrimination, collusion, we've heard them many times, and have been investigated over and over and over again and have been proven not to exist. The evidence is not there. So we are very concerned about accusations that have been investigated and have been shown not to exist, including price discrimination, so I would like to make that point. The answer to the question, sir, is yes.
MR. TAYLOR: Mr. Chairman, on a point of order. I would like to make it clear, with all respect to our guest, that I wasn't making an accusation or an allegation of predatory pricing or price maintenance. I did say very clearly, and I apologize if I upset our guest, that I do believe, based on the information I have which are invoices from the wholesalers to the retailers, that there is price discrimination. There's only one refinery in this province and I
haven't heard anything here today, Mr. Chairman, to convince me otherwise and I do stand by that.
MR. CHAIRMAN: Thank you, gentlemen. Both sides have had an opportunity to express their point of view and now we would like to address Mr. Sampson's question.
MR. LAWSON: The answer is yes. Yes, independents can, if they choose not to go with a brand like PetroCanada or Shell, go to the terminal rack and buy that product. The posted rack would be a reasonably good proxy as to what their buy price would be. We do see in many markets, and not familiar here, but we saw, for example, markets in Quebec, Montreal and in Ontario, there are independent importers that exist. They bring product, gasoline, into terminal tankage and then resell to independent dealers.
The situation in Ontario was that at one point gasoline was brought into tanks in Hamilton. A consortium of Volco and Canadian Tire, which were independent retailers, bought through there. They stopped doing that because they found that they could buy from refiners in Ontario for the same price, competitive prices. That just goes to show that the prices for those products at the racks need to be competitive through the alternative whether it's a ship coming into Hamilton or a truck going over to Buffalo. So there are alternatives in terms of getting product, yes.
[3:45 p.m.]
MR. GERALD SAMPSON: Mr. Chairman, my second question is, I know you're talking about investing, invest in your dealers, and you're saying you're adding coffee shops and you're adding this and you're adding that, but some of the presentations that were given to us, these people already have that and without that they would be completely under, but still their margin of profit is down to below 1 per cent and they can't exist at that. Yet, at the same time, a lot of these people are tied into long-term contracts. So it's almost like once you got them in your grip, then you're not going to let go and now they have to do what they're told. Your product is being sold whether they make a profit or not.
The gentleman on the right is talking about the consumer, the customer. The consumers are going to receive more service if these stations can stay in existence and I point to that specifically because when you're in a business and you are making a profit, you are investing money which is deductible on your, like a little fellow like me would say income tax or your corporate statement, any investments are deductible.
We understand that, but one gentleman, Peter Mader, raised the point that in rural areas the loss of a gas station is the loss of critical mandatory infrastructure because when that is gone, you have fire departments that may have to travel hours to get to a station and nothing exists when the power goes off unless you have access to fuel and whatnot. So that was something that opened my eyes last night and I think there's a responsibility over and
above making a profit to be good corporate citizens to your dealers. So what I'm saying is some of these people, and you've heard the two gentlemen who were at the other meeting, you heard of them being sacrificed, that was the most polite way that I could put it, so what are you doing to help these dealers stay in business? Everything we've heard to date is basically forcing them to want to get out, but they can't because they're locked in. Can you give me a response to that?
MR. LAWSON: As I mentioned, the sites that we have, which are about 600 branded independent dealers, are part of our core network. Customers don't know the difference between that and our company sites. We're looking for those sites, you know, to represent our brand and provide great service and all things we're looking for and that's key. They're part of our long-term vision in terms of going forward as part of our retail network in Canada. We're hoping they will be there and be part of that. We are recognizing the issues in the retail margins and are trying to help them. We go in, again as I mentioned, we're trying to help them do some of the things we are doing here which is get their throughputs up and get some of those ancillary revenues in. In a lot of cases it does require massive capital investments and dealers are doing that and are becoming successful.
There are, however, sites that have got small throughputs and just don't have the opportunity to do anything. It doesn't make sense to put the amount of money in capital. Those are there. We had them ourselves, our own company sites, these go to the ones Carol talked about that we made a decision that we just cannot be profitable at that retail site and we had to make closure decisions. The truth is, unfortunately, some of these independent operators are in that same situation. Now, for us it's easier because we do have a number of sites and make that decision. For the independent operator, where it's him and his wife and family running the site and has been there for years, it is a tough situation. We'll go in and we'll look at the site and see if we can advise him how the site can become profitable. We'll actually provide some support if we can, financial assistance in terms of the site if we can make it profitable, but in some cases it just will not be profitable. It cannot be profitable. Small volume sites without the ancillary revenues cannot be profitable and it is an unfortunate situation, but that is what is occurring.
MR. GERALD SAMPSON: Through you, Mr. Chairman, to the gentleman, what are your feelings on partial regulation and I come to that conclusion after the advice that was presented by the person of legal counsel there last night and also dealers who are hoping to have, rather than total regulation like was prior to 1991, the regulation of a guaranteed profit margin for these dealers. They were talking 5 cents, some were talking more, but what's your feeling on partial regulation, that anybody operating one of these stations do not and should not have to work basically for nothing? I'm thinking of the guy who has a low volume and prior to was making a living, I'm thinking of the gentleman who was selling the 8 million litres and can't make a profit, so if they had a guaranteed base, because it appears that every time a new cost comes into the equation, it is the oil company that downloads that cost onto
the independent dealer and not absorb some of it themselves. So partial regulation, what is your take on that - guaranteeing these dealers a guaranteed percentage of a profit?
MR. MONTREUIL: Mr. Chairman, whether the regulation is partial or total, as long as we agree, that we're cognizant at the end of the day by introducing a regulation we are introducing inefficiencies into the system and that inefficiency ends up costing more to consumers. So when you say you'll agree on a margin, at one point in time you will probably not take the most efficient margin to agree upon. You will have to agree on a margin that eventually will probably be a bit higher than what this market to be more efficient would sustain. Now, who's going to pay for that? That margin, of course, will end up in the pump prices and consumers will pay for that. So whether it's partial or total regulation, that's their downside. They tend to introduce inefficiencies that at the end brings the lowest common denominator to a level and that level essentially breeds a higher margin and that level means a higher cost at the end, a higher price for consumers at the pumps.
MR. LAWSON: You asked about the site that's out in the small rural area that is a necessity. These are tough situations, but in that event where they have small throughputs they may need to put a price that's 3 cents or 4 cents higher, recognizing that's what they need to make a profit. When they do that, that allows the customer to decide whether they choose to frequent the local guy, keep him in business, and they see that as a convenience offering. So, again, that's always a choice where a dealer in these small areas could add 3 cents to their price and say with that I can make money, and have the locals make their decision where they choose to go to that site and pay the extra 3 cents, you know, supporting the local businessman, keeping him in business, because that local businessman probably needs that additional margin.
MR. GERALD SAMPSON: Before I ask my final question, just in response to that, we did hear that if Joe put his gas up another 1 cent or 2 cents, that immediately behind it the next day the gas company would jack up his costs. So there was no opportunity for him. The only one getting hurt was himself. We heard that referenced several times.
MR. LAWSON: I can assure that PetroCanada would not do that. It's not the way we price.
MR. GERALD SAMPSON: You're talking about efficiencies, Mr. Chairman, we're hearing about efficiencies being created. Efficiencies are put in place and continue to be put in place to save money, to create better profits, because now it doesn't cost you as much. You invest a certain amount of dollars, which is a deduction against your capital, and then you can now produce more fuel for less cost, but where are your efficiencies being trickled down through and creating some kind of relief or efficiency for the consumer or for the retailer? The more efficient you become, then the less costly it should be over a period of time. So can I have a response to that, Mr. Chairman?
MR. LAWSON: The Conference Board just addressed this and has an excellent session on that. The way they've looked at it is due to intense competition and lower margins, because of that intense competition, that's what drove the efficiencies and, again, we know PetroCanada, the oil industry was not profitable for a long time - very competitive, low margins. That's what drove the efficiencies and that's what drove us from, unfortunately, 20,000 to 25,000 employees down to about 4,000 employees, because that was the available margin in the market, and we had to learn to live within that available margin in the market.
The Conference Board also states that the oil companies have recently returned to profitability, not high profitability, reasonable profitability, and they've done that not from increased margins, but they did that through the efficiencies that were required in the marketplace. So the consumers did benefit, and it has been shown - and we will provide additional information - that those efficiencies through the market were passed on to consumers. Unfortunately, the level of government taxation more than offset the reduction in the gasoline margins and it wasn't clear and evident to the consumers over the past 20 years that the gasoline margins did actually come down through this intense competition, but it is well demonstrated and acknowledged by the Conference Board report in 2000.
MR. GERALD SAMPSON: That's it for me, Mr. Chairman.
MR. CHAIRMAN: Thank you for your questions, sir. I would like to recognize Michele Raymond.
MS. MICHELE RAYMOND: I'm sure you realize I'm stepping into this as an alternate, so I hope you will forgive me if I just ask for clarification on a couple of things that you may have gone over before. One of the things that you spoke about - and I should say, too, that I'm speaking about the wholesale and the retail aspect because that is a part of our mandate. So it may seem to be speaking out of both sides of the mouth, but it is certainly a part of the mandate of this committee to look at both areas.
You spoke at one point about sharing the margin and there is discussion as well of massive capital investments. When you decide to make one of those massive capital investments in a station - I guess I'm speaking to you probably, Mr. Lawson, because it's your company specifically - when you make some of that massive capital investment, how do you recoup that? Is there a reopening of the contract between you and the dealer, or what happens?
MR. LAWSON: Again, it's an area of the business I'm not directly involved in. Our field operating people here in the region would be involved in direct negotiations with a dealer, but typically it would be during a contract renewal that the field people would talk to the dealer and work to the contract and if there was an opportunity to the business to provide capital and help to build the business up, that would be part of the negotiations.
MS. RAYMOND: One of the questions - probably it's not appropriate to ask you as I realize it's not appropriate to ask about the numbers, but what are some of the parameters used in those negotiations? Obviously they're going to be posted rack price and it appears that the number of hours that a station will stay open in a month is one of those parameters that has to be negotiated - that's stipulated, is it?
MR. LAWSON: I'm sorry, I'm not that familiar, these are local things. I can talk more generally. Again, certainly the buy price is important and I've explained how we do that. There is usually a cross-lease payment which is kind of a norm in the business.
MS. RAYMOND: I'm sorry?
MR. LAWSON: It's a cross-lease payment, a recognition of the capital that the dealer has put into the site. So that's a negotiated amount that the dealer gets back. There are things like credit card fees where they use the credit cards. There is a series of puts and take in the contract. I'm sorry I'm not familiar with all the component parts, but at the end of the day we see that as we go in and make our offer to an independent dealer it has to be competitive to the offers being made by the other companies that may be talking to him, or their alternative not to be a branded site, their alternative to just be a "Mike's" gas station and buying the gasoline at the posted rack as an alternative for some locations as well.
MS. RAYMOND: Who would I talk to actually to find out what the parameters are that you negotiate along, would it be one of your field people?
MR. SIMPKINS: That would have to go through the chairman.
MR. CHAIRMAN: Yes, everything has to, all information supplied comes through the chairman.
MS. RAYMOND: So I can request that?
MR. CHAIRMAN: You can request it and they will filter it through the chairman and we'll make sure that all the caucus gets the information.
MS. RAYMOND: Fantastic. One other question - no, two other questions I guess. You mentioned for PetroCanada at least, it's 1,400 stations, is that right?
MR. LAWSON: Yes, that's right.
MS. RAYMOND: And 820 of those are company owned?
MR. LAWSON: We manage the price of 820 sites.
MS. RAYMOND: What would that figure have been 10 years ago?
MR. LAWSON: I think somewhere in the order of 4,000 to 5,000 - 10 years ago.
MS. RAYMOND: What, 45,000?
MR. LAWSON: No, 4,000 to 5,000. About 4,000 to 5,000 would be my estimate, yes.
MS. RAYMOND: Okay, so that would have been the number of price-managed ones - no, you have only 1,400 in total, sorry.
MR. LAWSON: I'm sorry.
MR. CHAIRMAN: Repeat the question, please.
MS. RAYMOND: There are, at the moment, 820 price-managed stations out of 1,400?
MR. LAWSON: Yes.
MS. RAYMOND: I'm just wondering, 10 years ago, what the proportions would have been, how many price-managed ones versus how many total?
MR. LAWSON: Likely about the same, maybe a 50/50. Right now it's about a 60/40 split, price-managed.
MS. RAYMOND: Increasing numbers then?
MR. LAWSON: Probably 50/50 would be a ballpark there 10 years ago.
MS. RAYMOND: Okay, so that has increased, the numbers of price-managed stations?
MR. LAWSON: Right.
MS. RAYMOND: The last question I had was when you talk about independents having the freedom to negotiate with different suppliers and so on, I assume that they have, however, entered into a contract with each producer, is that correct?
MR. LAWSON: That's correct.
MS. RAYMOND: What do you find would be the minimum length of contract that an independent would enter into? What's the shortest contract you're aware of?
MR. LAWSON: Well, we do have some that are actually on a month-to-month, but very rare. A year is possible, but typically they're two-or three-year relationships.
MS. RAYMOND: Two to three, okay.
MR. LAWSON: And where they're making these investments, they tend to be a little longer, you know, four to five years. So that's kind of the range.
MS. RAYMOND: So there's not really the freedom to turn on a dime.
MR. LAWSON: It's one of the negotiating items in terms of the length of the contract.
MS. RAYMOND: And the penalty clauses and so on?
MR. LAWSON: Yes. Generally where a dealer makes the investment, this one I talked about, our LCI image, the white image is very expensive, they want a longer-term agreement with us because that represents our brand and their preference is if I'm going to put the money in to look like a PetroCanada site, I'm going to have surety and supply on a longer term.
[4:00 p.m.]
MS. RAYMOND: Thank you very much.
MR. CHAIRMAN: Thank you, Michele, for your questions. Gentlemen, we've had the first turn of questions and the hour being 4:00 p.m., we've been in presentation questions and answers for two hours, but I will recognize Mr. Jim DeWolfe for a quick question and then on to Mr. Russell MacKinnon.
MR. DEWOLFE: Thank you, Mr. Chairman, I will be very brief. Gentlemen, you've already indicated that you sell for rack plus 1 cent or 2 cents. How do you know if it's one or it's two? Or, in fact, zero.
MR. LAWSON: I mentioned rack plus 2 or 3 cents as a range. The reason I'm mentioning that range is it's very business sensitive information so I'm just providing that range. That is very confidential information, part of our contracts.
MR. DEWOLFE: Have you ever sold for zero? Or, sold at rack? (Interruption)
MR. LAWSON: To some customers, yes.
MR. DEWOLFE: Have you ever sold for less than rack?
MR. LAWSON: Yes.
MR. DEWOLFE: To some of your own dealers to make them more competitive?
MR. LAWSON: The posted rack is a good reference price for all the prices PetroCanada has in the marketplace. For branded dealers, they buy at posted rack plus a premium. As I mentioned, there are other elements there - cross-leases, for example, to get cross-leases in the order of 2 cents is not uncommon. Based on the volume that go through the sites, they may buy at a posted rack plus 2 cents and they get 2 cents back on a cross- lease. There's puts and takes in the contracts that are business sensitive.
They are also buying not just gasoline, but for the branded dealers, they're buying PetroCanada gasoline so they have the PetroCanada brand, the advertising, the business support that goes in behind it. The gasoline is different. PetroCanada gasoline has additive injections. It's a different gasoline, part of our brand offering.
Other people may buy gasoline at terminal rack under a different brand and they wouldn't get those additives. Basically, those people, if they are large buyers, will buy as a discount off a rack and I mentioned that earlier - discounts off the rack to large buyers.
MR. CHAIRMAN: Thank you, sir. Russell MacKinnon.
MR. MACKINNON: Thank you, Mr. Chairman. I wanted to go to the issue of customer satisfaction. Our witnesses have indicated that the retailers are their customers and they value them very highly. That's a code word in the marketplace - you're a valued customer. Have there been any customer satisfaction surveys conducted by any of your membership or your organization collectively?
MR. LAWSON: I'm sorry, just a point of clarification. Is this the customers being the retail dealers or end customers?
MR. MACKINNON: Yes.
MR. LAWSON: The retail dealers?
MR. MACKINNON: Yes.
MR. LAWSON: Ultimately, the satisfaction there is whether they choose to stay with us. We have, as I say, over . . .
MR. MACKINNON: Oh, I see. Take it or leave it.
MR. LAWSON: Well, we have over 600 sites and we always have those sites coming up for renewals. Contracts typically, again as I mentioned, are one, two, three years so a number of them come up for renewals. Our gauge basically on our satisfaction is when we go in to renew the contracts - are they staying with us? Are they choosing to leave? I don't know about the other companies, I know for PetroCanada that PetroCanada dealers tend to renew with us and want to renew with us, enjoy doing business with us.
You need to be careful that in some cases, I mentioned this, some of these dealers count as small volumes and are unprofitable sites. We cannot find a way to make them profitable. For that, it's devastating for the people that own those sites. They are very unhappy about that, but we, unfortunately, don't have a solution to make a site that's unprofitable, profitable. What you will see and what we've seen is some dealers come forward and under those circumstances, they're upset and I understand why they're upset. That's not representative of our dealer network in Canada, they're proud to be associated with PetroCanada, they know they're dealt with fairly.
MR. MACKINNON: Let's dispense with all the verbiage. The answer is, if they don't like the terms of engagement, move on. It's like a tax auditor showing up at your business and saying I'm here to help you. I'm not so sure how many smiles we would have on that side of the floor.
On that note, one other point. One of the points in the presentation, Page 5, in reference to product supply. It says, "A regulated environment has the effect of supporting the least efficient operator." I'm not so sure what our witnesses were trying to get across here, maybe it's a little bit of an apprehension of some type of regulation to deal with the fact that we're post-regulation since 1991. Or, maybe a reference to PetroCanada, because of being a Crown Corporation that type of inefficiency, but I think it's fair to say that the position of industry is you don't want regulation. If you can put that on the table, I get a little nervous when they start mixing apples and oranges, using that type of comparison.
MR. SIMPKINS: I'll respond to that. We're not opposed to regulation. In fact, our members operate in regulated environments. All we're saying is that in regulated environments, clients or customers pay more.
When it comes to your question of the least efficient operator, that's exactly how regulation works. It supports the most inefficient operator, it provides them with a guaranteed margin. We heard that, over the last few days, some operators want 5 cents, some want 8 cents. The least efficient is the one asking for 8 cents. Where are you going to make that decision and our contention is that when you regulate, you regulate to the least efficient operator.
MR. MACKINNON: A final comment, Mr. Chairman. I guess I'm a little naive, when we had regulation, the price of fuel was 45.9, now it's 90.5. It doesn't sound to me like deregulation did a lot for the consumers in Nova Scotia. I realize there are other factors, but I think it does tie into that issue.
MR. CHAIRMAN: Thank you very much. I'd like to recognize Mr. Brooke Taylor.
MR. TAYLOR: Thank you, Mr. Chairman. I'd like to acknowledge our very patient guests here this afternoon. Once again, I refer to the Ontario Gas Prices Review Task Force report entitled, Fairness at the Pump. I want to focus on the federal Competition Act. That particular task force repeatedly heard that the federal competition legislation and the federal Competition Bureau were ineffective, toothless, and slow to respond. On average, it takes 10 months to investigate one small complaint and they felt - and I think I tend to agree - that is clearly ineffective. Hence, they made a recommendation that upon prima facie proof being provided at any hearing on a complaint regarding price discrimination under the Competition Act, it becomes the burden of the person or organization charged with the violation to rebut that proof. This would be similar to the United States Clayton Anti-Trust Act where oil companies have to prove that they do not price discriminate once a prima facie case has been advanced. This could be accomplished by amending the federal Competition Act and would effectively force any company perceived to be engaged in unfair business practices such as gouging or collusion to justify their pricing policies.
I wonder if our guests, one appropriate, could tell us what they think of that particular recommendation, maybe some of my lawyer-learned friends know whether or not that has been incorporated into the Competition Act?
MR. SIMPKINS: I think that's an issue for the Competition Bureau and it certainly would be inappropriate for us to make comments on a federal agency that's essentially the watchdog of our industry. So I think it would be inappropriate.
However, I think that a good solution and a solid solution is one that we're recommending that there be a national information group in Ottawa that looks at all of these issues.
MR. TAYLOR: That did generate a follow-up question. You can tell me here and Canadians that your organization did not speak against that particular recommendation?
MR. SIMPKINS: Not our organization, I'm not aware of it, but it would be a legal issue and it would be one of the laws of the land.
MR. TAYLOR: So, you're telling me then nobody from your organization - be it a legal beagle or whoever - spoke against that particular recommendation.
MR. SIMPKINS: I think it was actually the Law Society that spoke to that one.
MR. TAYLOR: Okay. I rest my case.
MR. CHAIRMAN: Seeing no further questions, thank you committee members. I would ask our presenters, our witnesses today if you would like a couple of minutes for closing comments. Gentlemen, I have to caution you with your closing comments because the committee does have a right to open up debate again, as sweet as they may be, would you like to have a few moments?
MR. SIMPKINS: I'd ask Tom just to make a couple of comments.
MR. CHAIRMAN: Tom, a couple of minutes. It's 4:10 p.m. and I would not be able to let you go over the time allotted.
MR. LAWSON: Thank you. I've just got a couple of comments. One thing I would like to clear up, I understand one of our PetroCanada dealers did make a representation and mentioned intimidation in a previous session. It quite surprised me. It is not representative of our relationship with our dealers. We do value our dealers, they're proud to be part of our network. We'll have to better understand what happened there. I understand it is a site that is closing, and there are some business circumstances there that I'm not totally familiar with.
Quick comments. I do empathize, certainly, with Nova Scotians and Canadians. They're confused. Gasoline prices shot up there earlier this year to high levels, very fast. There was a lot of rhetoric and misinformation, and they feel like they're being taken advantage of. The price volatility is very confusing, these cycles. In some of these things, we see cycles, going up and down 10 cents, 12 cents every three or four days. It's confusing as well. The markets, again, have been studied. They are very competitive, it's been proven. Certainly a challenge that we have here is getting out and better communicating with Canadian consumers. We have really been trying to do that. For PetroCanada, the decals on the pumps was a very simple way of communicating that they understood.
It's a complex issue, unfortunately. It is difficult for us to explain it to Canadian consumers. It is the reason why we are so staunch in terms of that was the sole recommendation that came out of the industry science and technology report last year, the sole recommendation was a national price information monitoring agency to be developed. The industry and PetroCanada fully supports that. What that would do is have people who are in the government, understanding the market, watching the markets, providing information on an ongoing basis to provincial governments and to Canadian consumers and to the media. EIA has an excellent model of that down in the United States that works very well, and we're very disappointed the federal government hasn't embraced that. Dan McTeague was on that committee, Dan McTeague was the one who asked for that
recommendation. Unfortunately, he's still an industry critic and yet that recommendation has not been moved forward.
PetroCanada - I'm proud of the company. I was hoping that we could - I hope we did - come out today and better explain what some of the market dynamics are and how the industry works. We operate to a very strict code of business conduct, and that's not only compliance of the law, it's high ethical standards. I'm proud of the company, and I'm proud of the people I work with. I hope that . . .
MR. MACKINNON: Mr. Chairman, on a point of order, maybe more a point of clarification. Our witness is talking about customer satisfaction, in a roundabout way. Has your membership conducted a consumer satisfaction rating on the price of fuel here in Canada?
MR. LAWSON: We do internal research.
MR. MACKINNON: Could you provide that information to the members of the committee?
MR. CHAIRMAN: To the chairman. Was that a yes?
MR. LAWSON: I would have to check on the businesses. We will follow on that, certainly.
MR. MACKINNON: Well, is it a yes or a no?
MR. LAWSON: I just don't know how sensitive that business information is. We do have internal information on that, and I would have to check with the company to see how sensitive that information is.
MR. CHAIRMAN: Well, if you would get back to us with your answer, then I guess that's the best I can offer you. He's not saying yes or no, but he will . . .
MR. MACKINNON: To be fair, speaking to the point, and that being he's in a roundabout way saying that there is customer satisfaction out there. That's the message he's trying to get out there. So if he has evidence to suggest that, and he says he does, then I think it's incumbent on him to provide that information.
MR. CHAIRMAN: Thank you for the question and your point, member. It would be up to the presenters to present the committee with that, if they so wish. Your point is well taken. If you would continue with your closing comments for the next 15 seconds, I would appreciate that.
MR. LAWSON: My final comments, again, I am proud of PetroCanada, I'm proud that we have a very strict code of business conduct. I know that we operate to that. I'm proud of the group I work with, within the pricing group. They're a good bunch of people. Sometimes it's easy to look at big oil as a faceless name. Part of the intent of coming out today was to put a face on what it is. We are proud of our services, we're proud of the products we're providing Canadian consumers. We know, at the end of the day, Canadians are getting their gasoline at very competitive prices. I think that all needs to be taken into account.
MR. CHAIRMAN: Thank you very much. We do thank you for coming today and answering the questions of the committee. They're very accomplished committee members. Thank you once again, and a safe trip home.
[4:15 p.m.]
MR. MACKINNON: Mr. Chairman, on a point of order. I hate to be persistent, but, again, in the very last sentence of the witness' remarks, he went back to the issue of customer satisfaction. We know the rules of debate in the House of Assembly, and if he reads from it there are certain rules that are attached. If he consistently refers to it, then those same rules apply. I would submit that the witness does have an obligation to provide that document.
MR. LAWSON: The point I made there was we're proud of the services and the products that we provide to Canadian customers, that they are well served, including very competitive gasoline prices. In terms of, again, customer research, we do market research on customer satisfaction, all elements of our offering, pricing is one. How do they feel? I just need to understand how sensitive that information is in order to comply with the request.
MR. CHAIRMAN: Member, you've made your point clearly. Thank you for that. Gentlemen, as Chairman, I have to call this to closure. Once again, thank you and good afternoon to you.
Ladies and gentlemen, at this time I would like to inform our viewing audience in the gallery that we do have fresh, cold water down here for you. I know it's very hot this afternoon. Before I call the next witness, I'm going to take a 5-minute recess, which I do mean, clearly, 5 minutes. Thank you.
[4:16 p.m. The committee recessed.]
[4:25 p.m. The committee reconvened.]
MR. CHAIRMAN: Ladies and gentlemen, I call the committee back to order. I'd like to say good evening to you all and welcome to all those visiting with us this evening. Once again, we do have a supply of fresh water. It's very warm in here this evening. So, at will you
may come down to the cafeteria and fill your glass, although I must say, we're not permitted to carry any type of lunch and/or water upstairs. I would also like to say that Kim is running back and forth here, you will see her in and out of the Chamber and if anyone would like to make a presentation that has not been scheduled, by contacting Kim, you may speak this evening. It's not our intent to stop any type of debate or presentation on this issue. It's a very important issue.
Also, it's my responsibility to inform everyone here this evening that everything you say is recorded, and may be used in your favour at a later date. In saying that, I'm sorry for the delay, but it's necessary that I go through the procedure. You do have approximately 15 minutes for your presentation and then time dictated at that point would be as long as the members wish to question. So after your presentation you can say thank you, or you can open up for questions, that would be up to you.
At this time, it's my pleasure to introduce Graham Conrad, Executive Director, Retail Gasoline Dealers Association. Sir, you do have the floor. If you need water at any time you can just motion to me and I'll have your glass filled for you, thank you, sir.
MR. GRAHAM CONRAD: Mr. Chairman, committee members, good afternoon, I guess it is getting closer to good evening. As introduced, my name is Graham Conrad, I'm the Executive Director of the Retail Gasoline Dealers Association of Nova Scotia. My background within the industry includes 11 years with Imperial Oil Ltd., in the Automotive Marketing Division, followed by another 12 years as an Esso Retailer on Wyse Road in Dartmouth. I've served as Executive Director of the Retail Gasoline Dealers Association for the past 10 years. My comments today are directed to the issue of gasoline retail pricing in Nova Scotia and the resulting inability of retailers to establish profit margins. The severity of this issue is such that our reports indicate it will soon lead to a dramatic decline in the number of retail outlets, level of competition, levels of service and employment within the industry. My comments will cover a brief overview of industry issues resulting from oil company pricing practices, as well as recommendations we feel will rectify the problem.
A brief description of the demographics of the retail gasoline industry in Nova Scotia indicates that there are about 529 outlets. Most of them are members of the association. There are approximately 370 outlets that are privately owned and we refer to them as independents. The balance consists of oil company owned and/or managed outlets. The Retail Gasoline Dealers Association has represented Nova Scotia's retail gasoline dealers and the motoring public for the past 60 years. In case there may be some interest, I brought along some copies of our 40th Anniversary publication on the history of Nova Scotia's retail gasoline industry. The document, while I wouldn't suggest we get into it here today, but the document highlights many of the people and the issues of the day, all of which played a part in shaping the industry as we know it today.
As you no doubt are aware, for 40 years prior to July 1991, the retail gasoline industry was regulated by the province. Retail gasoline pricing was for the most part, based upon factors such as cost of crude, refining, transportation, retailer and oil company profit requirements. Retailer margins had to be justified to the Board of Public Utilities and were subject to rigorous scrutiny. At the conclusion of regulation in 1991, gasoline retailers earned a maximum margin of 5 cents a litre. Nova Scotia had three refineries and there were 925 retail gasoline outlets. From 1991 until 2002, most retailers would agree that the industry was very competitive, reasonably understandable and still worth investing in. Retail prices and dealer margins all made sense, and oil companies certainly supported new dealer investment.
The situation is dramatically different now. Over the past year or so, oil company pricing activities have had a severe financial impact upon independent gasoline retailers. Independent gasoline retailers in Nova Scotia report they are now unable to price their product where they can make a profit and report that retail margins are being dictated by the oil companies. Retailers are being forced to sell gasoline at retail margins ranging from 1 to 3 cents a litre and are reporting very serious financial losses. Oil companies, on the other hand, are reporting record-breaking profits. Furthermore, as the price of gasoline increases, retailers are getting clobbered by the high cost of credit card surcharges paid to oil companies. Prevailing surcharges are 2 per cent, which translate into 1.5 to 2 cents a litre. Oil companies are raking in millions from credit card surcharges.
[4:30 p.m.]
In addition to the frustrations of selling gasoline at a loss, many retailers continue to deal with upset customers who question the retailer and staff about the unexplainable high and fluctuating price for gasoline. Many consumers actually believe retailers are benefiting from rising gasoline prices. Retailers express growing frustration for charging motorists so much more for gasoline, while not being able to intelligently explain why price changes are occurring. Retailers accept the fact that factors influencing retail gasoline prices on the global market are now more complex. It is, however, very difficult to accept unfamiliar and unclear explanations that do not fully explain the additional costs on a cent-per-litre basis. For example, retailers and the public deserve to know how much of a typical 5 cents a litre increase relates to cost of crude, refinery downtime in the U.S., climate changes, OPEC production, war in Iraq, or an abnormally high growth in the economy of China and so on. Nova Scotia's motoring public as well as gasoline retailers deserve more answers to the specific effect these global phenomena have on gasoline prices in Nova Scotia. Not just a sweeping statement of opinion from oil companies' spokespersons.
In terms of not understanding gasoline prices, there are now growing examples of retailers who report unexplainable discrepancies in gasoline pricing between retailers of similar brands from the same oil companies. As a result of inadequate profit margins, an increasing number of retailers are being forced to eliminate full-service offerings in order to survive. This is creating a great deal of upset from the growing number of seniors, disabled
and persons requiring special assistance who feel the retailers no longer are responsive to their needs.
The magnitude of these issues, all of which are a result of gasoline pricing, cannot be underscored. Many retailers throughout rural Nova Scotia have made their intentions known that they cannot stay open beyond the Summer, if the situation does not change. This week I learned of three closures in Cape Breton from retailers who could not hang in there. Mr. Chairman, committee members, there are two possible solutions to the issue related to oil company domination of retail pricing, declining competition and level of services to the motoring public. Both solutions require government response. One solution would be for functional divorcement legislation, whereby fully integrated multinational oil companies would not be permitted to directly participate at the retail level. This legislation exists in some U.S. states and other countries around the world such as New Zealand and Australia.
A second solution and the one we recommend, would be to introduce legislation similar to that in P.E.I., to establish minimum and maximum gasoline margins. The P.E.I. model seems to work well for that province and would certainly benefit the industry in Nova Scotia. In support of this recommendation, I have included in my presentation, a copy of a May 3, 2004 report from the Retail Gasoline Dealers Association, to Ministers Barry Barnet, Ernie Fage, Carolyn Bolivar-Getson, Rodney MacDonald, and to committee member MLA, Brooke Taylor, outlining major challenges facing Nova Scotia retailers and the reasons why the P.E.I. model of legislation is needed. Copies are available for the committee to read when you get the opportunity.
I would, however, like to refer to the report as part of my presentation here today. In the report, the most recent analysis of gasoline prices between Halifax and Charlottetown for the year 2003, excluding taxes and prepared from MJ Ervin and Associates weekly reports, demonstrates how the theory that a regulated market leads to higher gasoline prices really works. Average retail prices, excluding taxes for the past year, indicated Nova Scotia was 3.1 cents per litre lower on regular, 2.5 cents per litre lower on mid grade, and 2.1 cents per litre lower on premium. However, retail margins in Nova Scotia were 1 cent to 3 cents a litre as compared to margins of 4 cents to 6 cents a litre in P.E.I. So as you can see in this scenario, lower retail gasoline prices come directly from retail margins, not wholesale margins from the oil companies. In other words, in an unregulated market, oil companies are free to lower retail margins to the point where prices are lower, but they drive retailers out of business.
Furthermore, in Nova Scotia, very often we experience fluctuations in gasoline pricing such as up in the morning, down midday, up again in the evening, increases on long weekends, large immediate increases followed by gradual declines, all of which do not occur on Prince Edward Island. These fluctuations inevitably cost Nova Scotia motorists more for their gasoline. However, due to the temporary duration, they are seldom calculated in price comparisons between Nova Scotia and P.E.I.
In our opinion, the benefits to a margin management system similar to the P.E.I. model for Nova Scotia include reducing high turnover and instability within the industry, reducing unexplainable price fluctuations, maintaining competition within the industry, enabling retailers to continue full-service offerings, restoring confidence to the industry for new private investment, providing an improved business climate for other oil companies to invest in Nova Scotia, creating new employment opportunities - especially for rural Nova Scotia, and helping to maintain the support for Nova Scotia's tourism industry.
So to conclude my presentation, I want to thank the committee for the opportunity for us to express our views here today. I want to especially acknowledge the resolve of the government to appoint the review committee to hear directly from gasoline retailers throughout the province concerning these serious issues facing the industry.
MR. CHAIRMAN: Thank you for your presentation. At this time I would like to recognize Brooke Taylor.
MR. TAYLOR: Yes, thank you, Mr. Chairman, and thank you, Mr. Conrad, for your presentation. The regulation on Prince Edward Island and, as you know, Mr. Conrad, they regulate all aspects of the industry - wholesale and retail. Do you think there's any value in some form of, I guess you might call it partial regulation in regulating the wholesale component only, but guaranteeing the retailers a margin and maybe even have that same minimum/maximum. I understand that that is the situation with the retailers although if a retailer, I'm not sure if it's at any given time, feels they have justification, they can apply to the Island Regulatory and Appeals Commission for something that's inordinate, or they deem it to be, but I'm just wondering, to perhaps streamline it, do you see any value in a model where the wholesale price to the retailer could be regulated?
MR. CONRAD: Mr. Chairman, I guess our view is that we don't want regulation for the sake of regulation. We would not want regulation that would stymie competition. We think Nova Scotia needs more oil company representation so anything that can be done to entice other oil companies to come into the province, we are certainly in favour of. The only aspect, if you want to call it regulation, that we're looking at is retail margins only and we call it a margin management system. So if you want to call that regulation, then that's fine, but what we need is some protection for the individual retailer in the province against predatory behaviour.
You know I hear from retailers around the province the experiences that they have trying to establish their own margins and we don't agree with the definition of efficiency as laid on the table by CPPI. Our opinion and feeling about efficiency is a retailer who can make a living, make a satisfactory income on a million litres of gasoline a year, and provide a high level of service to the community that he's represented in and increase his annual gasoline volume by providing better levels of service, whatever, whatever, rather than, you know, just cut and chop and consolidate and force volumes into fewer and fewer locations because the
volumes are obviously greater on that scenario, you can afford to sell at lower prices. I don't think that necessarily fits the definition of efficiency. It's more like managing rather than being efficient.
MR. TAYLOR: In Prince Edward Island, I understand, discounts for volumes have been eliminated or at least the playing field has been levelled and you can't respond to a question of a retailer in one community paying 84 cents and another retailer paying 90 cents for the same product, maybe regular unleaded, and sometimes we're told that, oh, well, that's because that particular retailer is in this body that enjoys the volume discount, but if you don't happen to be in that particular fraternity, then you're on the outside looking in and paying more for your oil, it's legal under the Competition Act but, Mr. Chairman, it does seem very unfair, just more a comment, and I certainly appreciate Mr. Conrad . . .
MR. CHAIRMAN: Would you like a response?
MR. TAYLOR: Sure, thank you.
MR. CONRAD: Yes, if I could respond to that, again, I guess I go back to the comment that, you know, retailers should have the wherewithal to make their own decisions when it comes to what margin they need to run the business the way they want to run it and there's nothing disgraceful about running a one million litre operation. Major oil companies will not even negotiate anymore with a retailer who only sells one million litres a year. Their economics, in terms of their definition of efficiency, are such that they can't provide volume to a retailer when he's only going to sell a million litres a year and yet we have independents, local and on other oil companies, XTR is one that comes to my mind, trying to establish a network of locations, who welcome retailers who sell a million litres a year. So I guess the key, as we see it, is the freedom that a retailer needs to set his own prices to run the business the way he sees fit.
MR. TAYLOR: Mr. Chairman, our guest mentioned divorcement legislation and several other committees have made that recommendation to federal governments and it has fallen on deaf ears. The prospects of that being enacted today may not be perhaps as poorly received as it has been in the past. I will just throw that out because if you had that type of legislation, in my view, probably the industry then would perhaps tighten and fair itself up a lot. I will leave it at that, and Mr. Conrad wanted to respond.
MR. CONRAD: I just want to respond to that to the point that in my comments, and I was trying to explain why prices in Nova Scotia during that period of our last survey appear to be less than in Prince Edward Island and the reason is obvious, they just simply chop it off the retail margin in Nova Scotia. I guess maybe I didn't finish the point I wanted to make and that is that at this point in time there's no indication of the oil companies reducing their wholesale margins and the most recent MJ Ervin report that I have, which is July 6th,
indicates that marketing margins in P.E.I. are 12.1 cents a litre. Those are pretty good numbers.
So I guess all I'm saying is that, as we see it, to have a minimum/maximum margin in place, it allows the industry to discount, within the range, and if the oil companies decide that for market share or volume reasons they want to lower the price even further, they can still do that, they just have to take it out of their profits, that's all. So the price of gasoline can go down as low as they want to put it, but a minimum margin should be there to make sure that you don't price the retailer out of business.
[4:45 p.m.]
MR. CHAIRMAN: At this time I would like to thank Mr. Taylor and recognize Mr. Russell MacKinnon.
MR. MACKINNON: Mr. Chairman, the Retail Gasoline Dealers Association of Nova Scotia supported the legislation in June 1991. It became law on July 1, 1991. This issue that you speak to today, in terms of that minimum/maximum, was not addressed by your membership at that time. Would you have any sense of why?
MR. CONRAD: Mr. Chairman, it certainly was addressed at that time. We said that we could live with the deregulated market if the minimum margin would be 4 cents a litre. Finance Minister Joel Matheson was there at the time, and that was documented, that if a minimum retailer margin of 4 cents a litre was in place at that time, the association could live with deregulation.
MR. MACKINNON: It states in Hansard, and I will quote, on Page 6388, Monday, June 10, 1991, from the minister of the day who you just referenced, "It is felt, Mr. Speaker, that this increased competition will produce more efficient operators who will then be able to pass on to the consumers the benefit of lower prices."
Well, obviously, we're not seeing too much of that. There are a number of issues that you spoke to with regard the oil companies. One is about credit cards, the profits that they make using credit cards. Do you have any estimation as to how much money the oil companies make a year in Nova Scotia from credit cards?
MR. CONRAD: Well, I could tell you, Mr. Chairman, that if it was, say, for example, the average is 2 cents, now if it was 1 cent, if the oil companies pay the banks 1 cent, and there's good reason to substantiate that in fact it's lower than that, but if it was 1 cent, based on 1.2 billion litres of gasoline a year, there's $11 million a year, just from the profit on credit card surcharges.
MR. MACKINNON: Would that be your estimation?
MR. CONRAD: Yes.
MR. MACKINNON: With regard to the issue of customer satisfaction, you heard the previous witness indicate that he felt there was satisfaction with the retailers, in a roundabout way, it depends on how you interpret it - I interpreted it as take the deal or leave it - would you be able to comment on that, and give us some indication as to your membership's perspective on that relationship?
MR. CONRAD: Mr. Chairman, I guess my comment would be there are examples of retailers out there who are very happy with their relationship with their oil company, there are many, but there are certainly many out there that are not and for some very good reasons.
MR. MACKINNON: What about customer satisfaction? You indicated during your presentation about the inability to explain to the customers the dramatic rise in the price of gasoline at the pumps. What's your sense out there as to what the people of Nova Scotia are saying to you about the cost of fuel at the gas pumps?
MR. CONRAD: The office receives a lot of phone calls from curious or upset customers every time the price of gasoline goes up, certainly with large increases. Our assessment would be that the motoring public would prefer to have a better understanding of why they're paying what they're paying, precisely, cents per litre rather than just these general statements that sort of slough off increases.
MR. MACKINNON: Has your membership, through you, Mr. Chairman, conducted consumer satisfaction ratings, with regard to the price of gasoline?
MR. CONRAD: Nothing formal.
MR. MACKINNON: Why not?
MR. CONRAD: The retailer is the first line of contact with the consumer.
MR. MACKINNON: All the more reason.
MR. CONRAD: That's true, but as far as the association itself goes, we don't normally deal directly, in terms of those kinds of surveys that you're referring to, we would go through a retailer, and the retailer reports his customers' reactions or her customers' reactions.
MR. MACKINNON: Mr. Chairman, one final question at this time, if I could. You know the mandate of this committee is primarily to ascertain whether the price of fuel in Nova Scotia, gasoline, diesel, home heating, that sort of thing, is fair and equitable. So far, with the exception of one, every witness has either been representing the retailers of this
province or the wholesalers. We have 950,000 Nova Scotians, and it behooves me as to why we're not hearing from Nova Scotians, given the fact that the retailers association, the dealers association, are the front-line agents to that, that you haven't been able to provide us with some evidence to speak to the issue. So far we've been seeing the retailers present their argument about how they don't feel they're fairly treated by the oil companies. That's fine, that could be a very legitimate argument but I haven't seen the oil companies nor the consumers come before our committee and speak to that issue, at least not to my satisfaction. How do you respond?
MR. CONRAD: Mr. Chairman, there could be a lot of reasons for that. It could be apathy on the part of the consumer, it could be the time of the year, it could be - the public were made aware of . . .
MR. MACKINNON: They can't afford to drive to the Legislature because of the price of gas?
MR. CONRAD: Well, parking is a problem, I can tell you that much. Those are the only reasons I could suggest.
MR. CHAIRMAN: Howard Epstein.
MR. EPSTEIN: On Page 8 of your submission, you talk about fluctuations in gasoline pricing, and you refer to it, up in the morning, down midday, up again in the evening, and so on. So, I wonder if you can take us through this. Could you just explain to us the experience of your members in their dealings for the purchase of their product, and how this actually affects the bills that they have to pay in order to purchase the gasoline that they're selling? For example, your members, how often would they have to have their tanks filled up?
MR. CONRAD: That's a question that varies so much. It depends on the storage, on the amount of business they do, and then it depends on whether they buy the product or whether they're on consignment, and that sort of situation.
MR. EPSTEIN: Consignment is an option, is it, for some of your members?
MR. CONRAD: If the oil company agrees to it, yes.
MR. EPSTEIN: I have to say the impression we had, hearing from some of your members before, was that consignment didn't really seem to be much of an option. I think we were being told that they were expected to pay either cash on delivery or within 24 hours, that seemed to be what we were being told.
MR. CONRAD: That's correct, but there are arrangements out there where the oil company creates an agency operation with the retailer. The retailer gets his commission as
the product is sold through the pump, rather than buying it and marking it up and all of that. He just takes his commission as he reports revenue, after it's sold to the pump.
MR. EPSTEIN: I guess part of what I'm asking is, when is the price set? Is the price set as of the date of delivery, or is it set on some other date? More specifically, can the price fluctuate after it has been delivered to your members?
MR. CONRAD: I can answer that, yes, definitely. I have examples. I know retailers who have purchased their product, they call in the information, they pay for it as soon as they order the product, and the retail price, whatever it might be at that time, changes by the time the product arrives.
MR. EPSTEIN: The normal rationale for a vendor of a product changing their price is they are able to say, I can sell my product to somebody else at a higher price now, so I'm not going to sell it to you. But are you telling us that once the product is actually physically in the ground underneath the stations that are operated by your members, it's there, that the suppliers are actually saying to you, well, look, the price has gone up in New York, so now we're going to charge you more for this product that you have, physically, on your premises?
MR. CONRAD: Once the product is paid for, they can't change the cost of the product that's paid for, if that's what you're asking me.
MR. EPSTEIN: But if it hasn't been paid for?
MR. CONRAD: Yes, that's possible.
MR. EPSTEIN: Even if the arrangement for a delay in the payment is 24 hours?
MR. CONRAD: You're getting pretty specific here. I would feel more comfortable if I had retailers commenting on that. We aren't necessarily that closely involved in the day-to-day arrangements with retailers. It's sort of all over the map.
MR. EPSTEIN: I'm looking at the uncertainties and the fluctuations. I take it that the situation is that when your members, I suppose, call up, they must have a sort of standing arrangement for deliveries, but when they look to get delivery of the product, they're quoted a price at the time. Is that right?
MR. CONRAD: Yes. And usually dictated the quantities that they have to buy.
MR. EPSTEIN: They're told how much they have to buy?
MR. CONRAD: Yes.
MR. EPSTEIN: There's a minimum amount, I take it, is that right?
MR. CONRAD: Yes, that's correct.
MR. EPSTEIN: Just to focus on that, in this business that's probably not unusual. Wouldn't it be rather logical, that there be a minimum, a truckload or whatever? Is that right?
MR. CONRAD: Yes.
MR. EPSTEIN: There's an indication then of a price. Could it be the case that between the time the arrangement is made and the delivery that the price is changed?
MR. CONRAD: I guess my immediate reaction would be yes, that can happen, where they've ordered their product and the product is being delivered, and when it arrives it's at a different price. Yes. I can remember an incident in Antigonish with a retailer who made us aware of that situation.
MR. EPSTEIN: This characterization you make of pricing being up in the morning, down at midday and so on, what would account, in your view, for this kind of fluctuation on that kind of basis?
MR. CONRAD: That particular situation took place on more than one occasion in Sackville, and that particular operator was an agent of the company, and it was his way of getting a greater margin on the product that he was selling. That was the logic for why he priced it that way for the day. Many customers reacted to that. He has since ceased doing it. My point in my comments was that that situation could happen again in our environment, it couldn't happen in the P.E.I. environment.
MR. EPSTEIN: Okay. This was one part of it I was curious about. The only question that still seems to me to be a little vague is this business about credit card charges. Is the amount that is paid by your members, the retailers, to the oil companies only when their own branded credit card is used, or when any kind of credit card is used?
MR. CONRAD: It is any bank card, for sure, and their own branded card. There's a different policy for debit cards, I think there's a fixed amount of money for a bank debit card. For a VISA or a MasterCard or, I don't know who accepts American Express anymore, but either of those three, it's 2 per cent, and for the oil company branded card, there's an average 2 per cent surcharge on that.
MR. EPSTEIN: Sorry. Take me through this again. Let's look at debit cards. Essentially with a debit card someone comes in and purchases gasoline, pays for it with a debit card, which means an automatic transfer into the account of the owner of the gasoline
station. Are you saying that the oil company, your supplier, is taking some kind of cut of that as well?
[5:00 p.m.]
MR. CONRAD: The oil company charges the retailer for every debit card that is used.
MR. EPSTEIN: Why?
MR. CONRAD: Why does . . .
MR. EPSTEIN: Yes. Isn't that a transfer from the purchaser's account into the bank account of the retailer?
MR. CONRAD: The electronic systems that the retailers use, that the oil companies require them to use, every transaction that goes through that, the oil company charges them a user fee.
MR. EPSTEIN: And what do they charge?
MR. CONRAD: As I say, on bank cards or their branded cards, it's 2 per cent of the dollar value, and a fixed amount for the debit card.
MR. EPSTEIN: Fixed meaning it's a number of pennies?
MR. CONRAD: Yes.
MR. EPSTEIN: Not a percentage.
MR. CONRAD: No. That's correct.
MR. EPSTEIN: Do you remember what the number of pennies is?
MR. CONRAD: Not right off the top of my head, no.
MR. EPSTEIN: And how is this number established?
MR. CONRAD: My guess would be the oil companies just indicate that's how much the cost is going to be, just as the 2 per cent is established, they indicate that's what the cost will be for handling their credit.
MR. EPSTEIN: And on credit cards that are not the credit cards of the oil companies themselves, the amount you're saying is 2 per cent . . .
MR. CONRAD: Yes.
MR. EPSTEIN: . . . but that's a charge that arrives for the retailer from your supplying oil company?
MR. CONRAD: That's correct.
MR. EPSTEIN: Do you also have to pay anything to the bank for the use of the credit charge? For example, if someone comes in with a named bank VISA or MasterCard, you're not paying them, VISA or MasterCard?
MR. CONRAD: No.
MR. EPSTEIN: Thank you. I think I've got that straight now.
MR. CHAIRMAN: Brooke, a short question, I believe.
MR. TAYLOR: Mr. Chairman, I will try to make it brief. To Mr. Conrad, through you, we've been told by dealer after dealer that they're having a lot of difficulty in this industry, they produced numbers, now, granted, they weren't Canada Custom Revenue Agency, perhaps, returns, but dealer after dealer has told us very compelling stories regarding their business. You've indicated in this presentation, on Page 6, that this week I learned of three closures in Cape Breton from retailers who could not hang in there. We were told last evening that yesterday a retailer in Liverpool closed.
But, yet, we're told by the oil companies, or at least their representatives, that there's no fact to substantiate them going out of business, or something to that effect. You've represented, or at least your organization, the Retail Gasoline Dealers Association, for some 40 years, 60 years, a well-respected body, these are well-respected people, I just have to question, other than the need and the greed, why the oil companies will not acknowledge that the margin to the retailers has been slashed to such a degree that they're going out of business.
These are people who contribute to our society, to our communities, to the fire departments, we were told, et cetera. It's good enough for me, when the dealers step up to the plate. I have a lot of difficulty with oil companies trying to tell me contrary. So I asked them where are their facts, that these people are telling stories to us. It's very disturbing. Mr. Conrad, I wonder, what are your thoughts on that?
MR. CONRAD: Mr. Chairman, if I could comment on the examples that I gave of the three locations that have closed this past week, one of them was in River Ryan, outside of Glace Bay, between Glace Bay and Sydney, and the other one was right in Sydney, high-volume stations. A year ago, both of those outlets, maybe a year and a half ago, were very viable. One of them, in particular, was a PetroCanada on the main street or Coxheath Road, or whatever it is. This young couple had invested a lot of money in taking that station over and had done a really good job. So whatever's happened, in terms of the financial crisis is all within a year, year and a half. The message that I'm sort of conveying in my comments is that there's a lot more of that to come if something doesn't happen.
MR. CHAIRMAN: Thank you, Mr. Taylor. Mr. Parker.
MR. PARKER: Thank you, Mr. Chairman. Interesting to hear from you, representing all the retail stations across the province. We certainly heard from, I think, 11 individual retailers so far, all with the stories of woe and you're backing that up, that they're not making any money generally.
You also mentioned in your comments earlier that not all retailers are unhappy with their oil company, but are there some stations out there that are making money? Obviously, some are losing money, but what's the overall picture? Is it healthy or is it just a few that are making money?
MR. CONRAD: There are some retailers out there who can get by on less margin than others. As I said before, the really smaller locations - by today's standards, 1 million litres a year is small - there are many examples of retailers out there who earn a living and are quite happy doing what they do and will stay in the game as long as they can.
Then there are other examples on a market-by-market basis where retailers are able to earn a margin sufficient to make their business profitable. For the most part - in the bigger markets especially - that's not the case.
MR. PARKER: I guess the margin then certainly must be fluctuating. We heard from a high-volume retailer last evening in Bridgewater, 8 million litres per year, who's losing money. He's not making a profit so the margin certainly has gone down for most retailers. On the other hand, there must be some out there that have a better margin that they are able to make a profit.
MR. CONRAD: My assessment is that there are retailers out there now making 5 cents a litre. I know of some that are making 4 or 5 cents a litre, I know that. But I also know that there are more like the one you just described - maybe not 8 million litres, but I know others that are 5 million litres - that are unable to price their product to the point where they can get sufficient margin. As they move their prices up, we're told that their wholesale price comes up. That just defeats the purpose of moving the price up.
MR. PARKER: Okay. Mr. Chairman, I guess this is a good point to ask the question I have asked previous witnesses around when the price does go up, if a retailer who maybe purchases his gasoline, it's in the ground, and he decides he needs a little bit more margin and would like to move it up half a penny or a penny, some witnesses last evening told us that if they did that then their wholesaler would automatically put up the price by the same amount. Have you seen evidence of that?
MR. CONRAD: Yes, I have. Just in case it wasn't made clear how all this happens, as we understand it, the electronic systems that are used by the oil companies and retailers today provide all of the data of all of the transactions that take place every day. So if a retailer decides to put his price up, instantly that information is communicated to the oil company because they get all that information electronically every day.
MR. PARKER: Is that allowed then in their contract? Is it written that if they raise their price, then they're going to pay more? In other words, their margin is limited to a certain amount, but is that contractually agreed to by the retailer and the oil company?
MR. CONRAD: I haven't read every contract that every retailer has with every oil company. My suspicion is - I know my own personal feeling is - that's not appropriate, it's discriminatory as far as I'm concerned, but I think you will get a chance to talk to those retailers before your review is over to find out specifically who they are and what they're dealing with.
MR. PARKER: Well, we've heard evidence from the retailers that is happening. Now you, representing the association, are saying the same thing. We have to take people at their word, I guess, that it actually is occurring.
Related to that then is the word, intimidation. Maybe if that's part of it, do you have evidence that there is intimidation occurring by the oil companies to their retailers? Any other examples that may be occurring?
MR. CONRAD: I can just repeat what perhaps you've heard from other retailers and you may hear from other retailers again with the upcoming meetings, but when we have occasions to get together, whether they're communication meetings or an annual conference or whatever, of late - the last year, year and a half - the discussion that takes place concerning the upset and frustration levels among retailers has been greater than at any time I can ever remember.
MR. PARKER: I know we had one witness last night who indicated she was told not to attend a certain meeting or not to meet with a certain individual. That appears to be intimidation. She went to her meeting anyway.
One final question, Mr. Chairman, around this minimum/maximum model and I guess that's what we have in Prince Edward Island. Is the price the same right across the province or are there differences for transportation?
MR. CONRAD: Again, I can't answer that. That is so complicated. Common sense says it should be greater the further away the outlet is from the refinery, but we have seen examples where it's not. We've seen examples where it's not charged. It's not something that I could comment on with any degree of accuracy. I guess that's why I say the government has to look at that.
MR. PARKER: Right. But it's regulated there and I understood they have a minimum/maximum within a penny and a half, so the price could fluctuate then in Summerside as compared to Charlottetown as compared to Souris.
MR. CONRAD: Yes. I believe prices do vary.
MR. PARKER: Okay, thank you.
MR. CHAIRMAN: I recognize Mr. Taylor.
MR. TAYLOR: I just wanted to add by way of comment, my understanding is that the Island Regulatory and Appeals Commission guarantees the retailers that margin - whatever that margin is. In fact, it is similar, but it may vary within that one and a half cents. I don't believe there's transportation, although it's considered, it's not factored in. That's just the unofficial information that I have gleaned, if you will.
Also, I did want to mention, because it had been bandied about a little bit at some of our meetings that we're not hearing from many consumers. My office has been in receipt - me, as the MLA for Colchester-Musquodoboit Valley, although the petition was generated in another riding which means very little, I think it's in Colchester North actually. At a small retail outlet in less than two days, there are 150 names, folks that are signatory to this petition that are expressing their concern. You certainly will be, Mr. Chairman, I believe, up in Truro on Tuesday and you'll be provided with a copy of that petition. I just wanted to point out that consumers are very concerned and . . .
MR. CHAIRMAN: Thank you for that information. At this time I would like to recognize Michele Raymond.
MS. RAYMOND: Thanks. I just actually was wondering about Page 2 of your presentation, where you say that the industry has reacted - and I assume this is the retail industry - to declining margins by reducing full-service offerings. I only wondered about this because I understood that some of the producers are actually saying that they don't want any full-service at those stations. Are you aware of that?
MR. CONRAD: I can't say specifically any producer that said that. I do know that economic forces are making it more and more difficult to provide full-service and getting help and the cost of the payroll associated with it, are the factors that enter into going self-serve.
[5:15 p.m.]
MS. RAYMOND: So you're not aware of any of the companies having a policy that says no full-service?
MR. CONRAD: No.
MR. CHAIRMAN: Not seeing any further questions, I do thank you, sir, for your presentation. At this time I would like to call a gentleman by the name of Mark Parent. Mark is no stranger to the House. So, Mark, would you please come forward, state your name for the record, and at this time I would like to inform you that you have 15 minutes for your presentation and then if you so wish, you can open up for questions from the committee. Thank you, sir, you do have the floor.
MR. MARK PARENT: Mr. Chairman, Mark Parent is my name and I want to thank the committee for giving me the opportunity to present to them. Thank you also for considering the letter that I wrote to the committee where I expressed my disappointment that you weren't coming to the Valley region and I think I specifically mentioned Kings County which is the third most populous county in Nova Scotia. So I guess this is a situation of if the mountain won't come to Mohammed, Mohammed will have to go to the mountain. So I'm going to present to you a variety of constituency viewpoints and then try to summarize them and I'm here to present my constituents' viewpoints since they didn't have the opportunity in their own location.
They vary from viewpoints that I'm sure would represent viewpoints that your constituents would have. Today, for example, a retiree grabbed me and protested about the gas prices and his particular concern was the quick spikes in prices that can take place. He was driving the road in New Minas, he saw gas at 88 cents per litre, went down to Greenwich, it was at 93 cents. He said to his wife, oh, my gosh, we better get back to New Minas and buy that gas at 88 cents. By the time he got back to New Minas, which is two kilometres away, it was at 93 cents. He protested and wasn't listened to.
An independent retailer - whom I believe you heard - from the Valley area travelled down to Bridgewater and presented me with margins. I don't know if he gave this to the committee, I would be happy to leave this with the committee, showing the erratic margins and saying that as an independent retailer, unless the margins were somewhat consistent and higher than they've been recently, he wouldn't be able to stay in business, but you heard his
presentation and I will leave with you the document he gave me of the margins that he tracked over the last six months.
A retired professor has contacted me. His concern is the effect this will have on agriculture, and agriculture as you know is a big industry in the Valley, and he's calling for, when the prices get high, for tax relief for farmers. They already have as we know lower gas prices, but he's calling for further relief for them because he claims that with the high gas prices, Mr. Chairman, affecting the farmers, this affects the cost of food and this affects all of us and so it only makes sense to make sure that industries, such as farmers, are helped out in these high gas times.
A chiropractor from the Kentville area has contacted me and he has written saying that he would like to see independent investigations of the books of corporations that claim they must increase gas prices. So what he wants is an independent investigation. I believe that has happened at the federal level and he's calling for it at the provincial level. A government employee has written me. He has talked again about the problem on agriculture although he feels that because of the way the futures market operates, there's really nothing the province can do in terms of lowering the gas price. A social worker contacted me. I will read a little bit more of what he had to say because I think it's instructive. He's calling for some form of regulation.
MR. CHAIRMAN: Excuse me, member, if you're going to read from that, you have to be willing to table it.
MR. PARENT: I will. When he arrived back in the Valley in August 1998, regular self-serve gas was 55.2 cents a litre. Would you prefer me not to read it, just table it?
MR. CHAIRMAN: No, it's fine.
Order, please.
MR. PARENT: Today at the pump, some six years later, it is 93.9 cents, for an increase of 38.7 cents a litre, a whopping 70 per cent. There is no way that the price of crude or processing has increased 70 per cent in these six years. By contrast, the rising price from August 1994 to August 1998 was 53.9 cents to 55.2 cents, or 1.3 cents, or less than 3 per cent a litre - what a huge difference. So he's calling for regulation of gas prices on the basis of that and I will table that later.
A retired economist has written a long, long letter about how gas prices are set and the futures market. He feels that there needs to be disclosure of prices in the actual structure of the petroleum industry, the structure of finances and who benefits, et cetera, some more openness. Then a retiree has written to me suggesting that one of the problems with the high
price of gas is high taxes and that once gas reaches a certain level, the taxes should begin to drop in order to compensate for the high price of gas.
So just summarizing these, Mr. Chairman, I have independent gas retailers and others who call for regulation - basically looking at the P.E.I. model of regulation. There are others who feel that there's really little that a small province can do about gas prices and what they want is for the province to support gas efficient vehicles, if there's some way of doing that, and help for certain specific industries such as agriculture and low income Nova Scotians who may be harder hit by high gas prices. Then there's a large group of people who wrote feeling that the taxes are too high on gas and that once the prices get up, the tax needs to slide down in order to give some relief to these people. So these are just some of the people and, as you can tell, I'm sure they represent the viewpoints of constituents that you would have as well, but they've asked me to present on their behalf and I'm happy to do so. Thank you.
MR. CHAIRMAN: Thank you and any documentation that you've read from, you're going to leave behind and have tabled. We would like to thank you, seeing no questions, this evening (Interruption). I'm sorry, member, may I recognize you then, Russell MacKinnon has a question.
MR. MACKINNON: I'm just curious if the honourable member had a chance to raise any of these issues with his caucus colleagues?
MR. PARENT: My caucus colleagues and I have talked about this for many years.
MR. MACKINNON: For many years, so what action has been taken since you've raised them with your caucus colleagues?
MR. PARENT: In terms of gas prices?
MR. MACKINNON: Yes?
MR. PARENT: Well, the action is the all-Party committee that you see before you.
MR. MACKINNON: So it has taken two years to get (Interruption) Well, Mr. Chairman.
MR. CHAIRMAN: I'm sorry, I thought you were finished with your question.
MR. MACKINNON: No.
MR. CHAIRMAN: You certainly have the floor and the time is allotted to you to ask your questions.
MR. MACKINNON: Thank you, Mr. Chairman. Have you raised this issue with the Minister of Energy?
MR. PARENT: Yes, I believe the Minister of Energy was at meetings where I've raised the concerns of constituents.
MR. MACKINNON: Have you made any formal presentations, have you made any written submissions?
MR. PARENT: Yes, I have.
MR. MACKINNON: Would you be willing to table that for members of the committee?
MR. PARENT: I don't have it with me right now, but I would be happy to dig through my files and provide that for the committee.
MR. CHAIRMAN: And you would forward that through the Chairman.
MR. PARENT: I will forward that.
MR. MACKINNON: Have you also had discussions with the Minister of Finance with regard to the issue of the amount of taxation that's being charged on fuel in Nova Scotia?
MR. PARENT: I don't think I have letters to that effect, but I will check, Mr. Chairman, and get back to you.
MR. MACKINNON: How many service stations are in your constituency?
MR. PARENT: I'm not aware of that number right now, independent or . . .
MR. MACKINNON: Both.
MR. PARENT: I can't answer that right now.
MR. MACKINNON: Maybe if you can give an undertaking to the committee to find out what that information is in your riding?
MR. PARENT: Sure, and would you like it broken down into independents?
MR. MACKINNON: Please. Thank you, Mr. Chairman.
MR. CHAIRMAN: Thank you, Russell MacKinnon, for your questions. I would like to recognize Mr. Taylor.
MR. TAYLOR: Mr. Chairman, I would just like to thank our colleague, Mark, for coming in this afternoon. He brought some concerns on behalf of his constituents and he is right, those are concerns that are typical of everyday Nova Scotians irrespective of the riding that they reside in. I know Mark referenced, or the MLA for Kings North I guess in this venue, Mr. Chairman, did reference the fact he wrote us a letter. He did in fact and expressed concern that the committee did not entertain a meeting over in his constituency, but he motored over to bring those concerns to the committee. So I just want to thank Mark for showing up and it's welcome, Mark, thank you.
MR. CHAIRMAN: Thank you for your presentation, Mark. Have a pleasant afternoon and a pleasant weekend. Thank you.
At this time, I would like to call Wayne Pace. In saying that, Mr. Andrew Pelletier has asked to do a presentation and the Chair is going to allow that in the afternoon session.
Mr. Pace, I don't know if you need me to go through the rules, but you have 15 minutes for a presentation, then we'll open up for questions if you so wish. Everything that you say today is being recorded. Sir, you have the floor, thank you.
MR. WAYNE PACE: Thank you. My name is Wayne Pace, I operate two service stations, actually. I own and operate the Tantallon Esso just outside of Halifax and I also am a lessee at the Shell on Sackville Drive up in Lower Sackville.
First, I'd like to thank the committee for its apparent stand in supporting the retailers that I saw earlier today. The retail gasoline industry is in serious trouble and in my opinion is caused by the pricing strategies imposed by the major oil companies. The major oil companies directly or indirectly control retail and wholesale prices on gasoline in Nova Scotia. With that as the case, the respective companies control the income or lack of that the retailer can earn. We have to contractually buy from - to answer questions that were tabled earlier - the company we have contracts with, we don't have leeway until our contracts are up.
I just have several facts here about the industry. Most of them we've heard, but I'll just touch on them. In the past 14 months, retail margins have been reduced by 20, 25 per cent, which is substantial considering we don't make that much to start with on our gas. Back in the days of regulation, the Retail Gasoline Dealers Association proved to the Legislature that we needed 5 cents a litre to meet our obligations. The average today is 2.7 or 2.8 cents a litre, depending on which oil company you're with. That was 10 years ago that we proved we needed 5 cents a litre.
Since then, prices have gone up, minimum wage has gone up $1 in the last year and a half. In my case, that constitutes $6,000 to $7,000 extra in expenses. The electrical costs have gone up, insurance has gone up, the cost of construction on these sites has gone up because of the environmental issues around service stations. Credit card charges have gone up just because of the price of gas.
I know Graham Conrad from the retail gas association mentioned that 2 per cent was the going rate for the credit card charges, but I know with Imperial Oil I pay 1.8 per cent and with Shell I pay 1.75 per cent which is a little bit confusing considering Esso is a larger company and you would think they would be able to negotiate a better deal with the credit card companies, but Shell is actually a little bit lower.
We also pay a POS charge, which is a point of sale charge, anywhere from $60 to $90 a month just to have their POS system so that we can take their loyalty cards - with Shell it's Air Miles, with Esso it's the Esso Extra card. We have to pay for that piece of equipment, a monthly charge.
I'll now touch on the pricing. On multiple occasions that I've experienced retail prices increase, as soon as the retail prices increase, the wholesale price increases that same amount or close to it. On Monday, the price increased from 88.9 to 93.9. On Monday, before the price increase, I was making 1.75 cents a litre and on Monday afternoon when the price went up 5 cents a litre, I was making 2.75 cents a litre. I've made an extra penny a litre on a 5 cent increase. I'm not a lawyer, but I would say that's predatory pricing. I'll leave that to you guys.
All the major oil companies operate their corporate stores. They know exactly what it costs to operate a site. They know. It's not a guessing game for them, they have enough sites that they know exactly what it costs, to the tenth of a cent. They know that and yet they're keeping us below that level. Again, that's a little bit concerning.
[5:30 p.m.]
Oil companies have been making huge profits from the refining side. In my opinion, there's not a whole lot that we can do with that because that's to do with world markets. They can sell to us or they can sell to England - it doesn't matter where they sell it to, but they are making double historic margins on the refinery. Traditionally, they make 7 or 8 cents a litre and now they're making roughly 16 or 17 cents a litre. And the oil companies are making marketing dollars as well. One of the earlier guests mentioned 9.35 cents today on the retail margin and if I'm making 2.75 minus 9.35, there's a big chunk of change there that I'm not seeing. They're seeing a lot of it and they're still saying they're not making any money.
They suggest that they're making 2 cents a litre, I believe that was the number used, I suggest that 2 cents a litre is after all their expenses. Again, I'm not sure on that.
Now to pick on you guys for a minute - 93.9 is the street price today. A couple of years ago it was 73.9 - 20 cents a litre in the difference. The HST on that is an additional 2.6 cents a litre so you - the federal and provincial governments - are getting an extra 2.6 cents a litre and we're actually getting less and our expenses are higher. I guess as an industry, as part of the retail network, I'm not looking for huge, huge margins. I'm not looking for 8 or 10 cents a litre, which would be nice, but I'm not asking for that. I'm asking for something so that myself and my colleagues can sustain a business and make a reasonable living. I'm not looking to be a millionaire in two years, I'm looking to make a reasonable living and meet my financial obligations.
The possible implications of leaving the industry as it is are closure of more sites, which we've already talked about. That's not going to just happen overnight, it's going to be a gradual process - three sites this month, four sites next month and it's just going to continue on. Closure of full-service pumps - one of my sites which is the company-owned site which I lease - I do make a margin on that gas that I buy because I have to buy the tanker full of gas. I order gas twice a week, I buy it twice a week and if the price goes up, giddy-up, I make a little bit extra; if it goes down, then I lose. Overall, that balances out so I make a crappy margin.
My other site in Tantallon is split-serve - it has three self-serve and one full-serve pump - and that is going to have to change if something isn't done in the industry, because I can't afford to have the extra staff on. Service levels will deteriorate, you won't be able to afford to have the staff. To me, the main issue with service is staffing. The three most important things with gasoline volume is price - which we don't have any competitive edge because everybody sells for the exact same price. The next one is location. I can't move my site to somewhere else to get a better location because it is where it's at. The next important thing is service, the level of service. If I can't make money, I can't hire the staff to give the service that will make me competitive in the business. I don't have as deep a pocket as the oil companies and it makes it very difficult to compete. The other thing is hours of operation will have to be reduced. Instead of opening until midnight, I might have to start closing at 11:00 p.m. to save that little bit of wages.
I built my site in Tantallon modelled after Imperial Oil. I used Imperial Oil plans to build the site; it's got four pumps, a car wash, propane, a Robin's drive-through coffee counter, convenience store. I followed their model and it's not profitable. Again, I go back to my earlier comment, they know exactly what it costs to run a site and it costs them no less to run their sites than it costs me to run my sites. Just, they're getting some coming in the back door because they're making so much on their refinery and on the primary marketing team.
I guess another comment I have is the main offer at my site is gas - it's not the coffee or the soft ice cream that I serve. The major expense to build the site, to open the site is not
the coffee or ice cream or the donuts - it's the gas. What I had to invest in order to sell gas is the major component of the expense in opening up a service station. It's actually bringing
in less gross margin dollars than my auxiliary sales, which include the car wash and the ice cream and the coffee. Minimum profit margins have to be legislated for us to remain in business.
My recommendation would be just that, a minimum margin. If you think about it, we're not asking, again, for lots, for asking for, say, 5 cents litre. Well, if the average now is 2.7 cents, we're only asking for a 2.3 cent per litre increase. What does that average out to for an average consumer? If you buy 2,500 litres, which is 50 litres a week, $60 a year, that's what we're asking our consumers to pay, or for the oil companies to give up per customer. I guess the other recommendation is for people to stop buying their SUVs and to start buying Toyota Echos.
MR. CHAIRMAN: Thank you, sir, for you presentation. Mr. DeWolfe.
MR. DEWOLFE: I just wanted to thank you for coming in. Your presentation is not unlike others that we've heard. I just want to pass that on to you, that we're well aware of the situation. We appreciate your thoughts on it. Hopefully this committee will be able to do something that may help you out.
MR. CHAIRMAN: Mr. MacKinnon.
MR. MACKINNON: Mr. Chairman, in short, you have the pumps with the three grades, regular, premium and supreme?
MR. PACE: Correct.
MR. MACKINNON: Do you have two tanks or three tanks?
MR. PACE: I have diesel as well, actually.
MR. MACKINNON: Just speaking on the gasoline, do you have the two tanks for the three grades or do you have three tanks?
MR. PACE: I have blended pumps, so I have two tanks.
MR. MACKINNON: How often does the regulator visit your site?
MR. PACE: The regulator?
MR. MACKINNON: The provincial regulator, who checks to see if in fact your pumps are functioning properly.
MR. PACE: He showed up a year ago April. It was four or five months after I opened. That's the last time I saw him, yes.
MR. MACKINNON: Thank you.
MR. CHAIRMAN: Mr. Epstein.
MR. EPSTEIN: Mr. Pace, did I hear your last recommendation that people move to more efficient vehicles?
MR. PACE: I'm a consumer as well as a retailer. I sold my Dodge Dakota truck, which cost me $70 a week, and I drive a Volkswagen diesel Jetta and it costs me $20 a week. I'm a consumer as well as a retailer.
MR. EPSTEIN: So you're putting it in the context of one way for the customer to fight back is by buying less of the product. Is that right?
MR. PACE: Yes.
MR. EPSTEIN: Did you have any other concerns about the use of your product that you sell?
MR. PACE: No, that was it.
MR. EPSTEIN: Fair enough. It's a very good point. Can I just go back and ask you about one observation you made, which was about the price going up, I think you said 5 cents a litre one particular day. Can you just tell me how that worked?
MR. PACE: Like I mentioned, I operate two sites. I have two different agreements with each site.
MR. EPSTEIN: Two different companies.
MR. PACE: Yes, with the Shell in Sackville I buy my gas, I buy a tankerload. I have to call 24 hours in advance - actually it's supposed to be 48 hours, but they know I'm going to order it Tuesdays and Fridays or have deliveries Tuesdays and Fridays - I order my gas and I have a minimum load that I have to buy. I buy my gas, and I have to pay for it, I have to give them a cheque when they drop it off.
MR. EPSTEIN: C.O.D.
MR. PACE: C.O.D. I give them a cheque, and they drop it in the ground. That's what I pay. If the price goes up later that day, and I just filled my tanks, then I do make extra
margin, yes. Say if it was 88.9 and I filled my tanks up this morning and paid 88.9, less the 2 cents a litre I'm making profit, and it goes to 93.9, then I make that extra margin. But as it goes down, it's the same thing. If it's at 93.9 and it goes down to 88.9, and I just filled my tanks, then I lose.
MR. EPSTEIN: But now, what are you meaning by if the price goes up?
MR. PACE: If the price goes up, if the street price goes up. I'm a follower - I don't know if I'm supposed to talk about this, but I'm a price follower. I don't have the power, I have two locations separated geographically by a half-hour drive. If I put my price up tomorrow, nobody is going to follow me. If PetroCan or Esso put their price up tomorrow, then there's a possibility that somebody is going to follow. If one follows, another may follow, another may follow. That's why there's a time lag between the time the first guy goes up and the time the last guy goes up.
MR. EPSTEIN: You're describing yourself as a price follower, are you telling us that this is within your discretion, but you feel the pressure of the market to respond?
MR. PACE: With Shell. If I put my price up today, if I get a load of gas, I got a load of gas this morning, if I put my price today, I will make extra money on that load of gas, but I won't sell any gas because my price is higher. So I can't put my price higher, if I want to sell gas.
MR. EPSTEIN: You're not telling us that your supplier is telling you that you have to put the price up or down, you're saying that your situation is that you have to adjust.
MR. PACE: In this case, yes. But if I put my retail price up 1 cent or 2 cents a litre, the next time I get gas, on Tuesday when I get my gas, my price will be higher, my wholesale price will be higher. At my Esso in Tantallon . . .
MR. EPSTEIN: Before you leave this, are you telling us that your supplier, Shell, is tracking what you charge to your customers?
MR. PACE: They know what I charge.
MR. EPSTEIN: All right, so they know that.
MR. PACE: Through my P.O.S. machine.
MR. EPSTEIN: And that the price they charge you is somehow related to what you're charging your customers?
MR. PACE: Yes.
MR. EPSTEIN: Why do you think that?
MR. PACE: I know it is.
MR. EPSTEIN: Sorry - someone whispered it to you at night, or are they telling you? Let's be very clear, this is pretty important.
MR. PACE: When I started with Shell three years ago, the price was 76.9, 76.5, whatever it was. I made the same margin with Shell. Shell, by the way, historically gives lower margins than any of the other oil companies, and don't ask my why, because - anyway, historically. I was making the same margin at 76.9 that I'm making at 93.9, as I was at 82.1; whatever the price is, I make about the same margin within a tenth of a cent. If you want to see all my invoices, I can provide those for you.
MR. EPSTEIN: You're suggesting to us that your supplier in that case is adjusting your price, not on the basis of world market or how much it costs them to refine it, but on the price you're charging the customer, and they're doing it, you're saying, in order to keep your margin at about the same rate.
MR. PACE: I'm guessing that. I don't know what they're doing. I can't tell you what they're thinking or doing, but that's a reasonable assumption.
MR. EPSTEIN: Tell me again how long you've been in this business.
MR. PACE: I've been in the service station business for 18.5 years; I've been with Shell for three years and I've been with Esso for the 18 years.
MR. EPSTEIN: Were you going to describe a slightly different situation with respect to Esso?
MR. PACE: Yes, now at the Esso in Tantallon, the deal I have there is I don't buy the gas, they fill my tanks up, they're my tanks, they fill them up, and I pay for the gas when I sell it. It's sort of consignment - they don't call it consignment for legal reasons, but I don't pay for it until I sell it. Today, if the price is 93.9, I'm making 2.75 cents, and tomorrow if the price goes to 97.9, then I would get a fax saying this is your retail price and this is how much you're making. Like I described on Monday, it was 1.75, it went up 5 cents, and now I'm making 2.75. I suspect that, depending on what the world markets do, I will be making 1.75 come Monday again, unless the price goes up again.
MR. EPSTEIN: Again, I'm just a little confused about one or two points that are quite important here. You've accepted a tankful of gas, you described it as being on consignment. Does that mean you have not agreed with your supplier as to the price you're going to pay them?
MR. PACE: No, it's in my contract. I can't remember the exact wording of my contract, but it is that I have to pay for my gas as I sell it. The price is not negotiable, it is what they tell me the price is.
MR. EPSTEIN: In this case Esso is telling you what you have to charge your customers?
MR. PACE: Yes.
MR. EPSTEIN: That could change from day to day.
MR. PACE: Yes. It could change three times a day, it could change - whatever.
MR. EPSTEIN: Is it specified somewhere in your contract what your margin is going to be? It isn't?
MR. PACE: The only thing in my Esso contract is it has competitive price. They have to provide me with a competitive price.
MR. EPSTEIN: Very interesting, thank you very much.
MR. CHAIRMAN: Mr. Taylor.
MR. TAYLOR: I just wanted to say you piqued my interest there. I know of an independent who purchases from Esso, Wilson's I take it is supplying you with your Esso products. In this particular case, the owner purchases the tank of fuel, be it diesel or gas, it's placed in storage, and the price that he pays, based on the invoice, after it's marked up, that's the price that individual charges until another truck comes. I think it's Coastal, for example. The trucking rates don't vary, hardly any. Although you probably think of yourself as an independent, you're really not too independent when you're in that type of an arrangement.
[5:45 p.m.]
MR. PACE: I could buy my gas by the truckload from Wilson's for Esso, I could go that route, but there's no advantage for me to do that and it ties up $40,000. Either way you're getting horrible margins.
MR. TAYLOR: In your case, though, your margin stays the same, you said.
MR. PACE: No, it doesn't stay the same. I've made as little as 0.25 cents a litre, and I've made that for two, two and a half weeks in a row. Then I have to pay, depending on the price of gas, 1 cent, 1.25 cents for a credit card, so I'm losing. If you come in and buy gas -
when I'm making 0.25 cents, which very often I have in the last 12 months - and pay with a credit card, I'm paying you a penny a litre to take my gas away from me.
MR. TAYLOR: Mr. Chairman, our guest has one station in Tantallon, one in Sackville. It's coming from the Esso refinery. Is there a difference in the price of regular unleaded, for example? You said you can buy a tank - what could you buy a tank? Do you know approximately?
MR. PACE: It would be the same. If I bought a tank for the Esso in Tantallon, it would be the same as what I'm paying when I pay through the pump.
MR. TAYLOR: Do you know what that might be for regular unleaded today?
MR. PACE: It's 93.9 less 2.75. The retail price is 93.9 and I'm making 2.75 cents on it, so I would be paying 91.-whatever.
MR. TAYLOR: That again confirms my theory that there's certainly different prices being charged by the wholesalers to those retailers out there. I haven't heard a lot of justification for it. That's what we're trying to establish, why there's such a difference in the price that's charged to the retailers.
MR. PACE: Again, I can't answer.
MR. CHAIRMAN: Michele, did you have a question, a quick one? Michele Raymond.
MS. RAYMOND: The contract that you have with Esso is how long?
MR. PACE: It's 10 years.
MS. RAYMOND: And with Shell?
MR. PACE: Year to year, one year.
MS. RAYMOND: Shell is 12 months at a time, and Esso is 10 years. Thank you.
MR. CHAIRMAN: Thank you, sir, for your presentation this evening. Thank you kindly for coming. Enjoy your evening and your weekend. At this time I would like to call Mr. Bill Shellnutt. Bill, you've been in the gallery all day. I think you're familiar with the protocol this evening. You do have 15 minutes, sir, and then you can open up for questions. Also, your comments are being recorded, and you do have the floor.
MR. BILL SHELLNUTT: My name is Bill Shellnutt. Mr. Chairman, committee, I appreciate the chance to come here and say a few words. I'm a professional accountant. I've been involved with the gasoline business for the past 30 years. I've done various past presentations before the Public Utilities Board, in reference to getting price increases for the dealers over the years. I deal with a lot of service stations, and the majority of my business relates to dealing with the petroleum industry, both in New Brunswick and in Nova Scotia. We deal with a lot of our clients, doing accounting, on a month-to-month basis. We also, lately, have done a lot of business proposals for dealers who want to get into a station, expand their facility. It's hard to finance.
Basically, I'm just going to try to follow this here. The mandate says, " . . . the factors that affect the viability of low-volume outlets in the rural and urban marketplace; factors that affect the viability of independent retail operators in the province; and, any evidence of predatory pricing practices at the wholesale and retail levels of the market." The purpose is to provide a snapshot of the economic reality faced by independent petroleum retailers in Nova Scotia, to support the argument for regulation of minimum/maximum margins on fuel sold by petroleum retailers in Nova Scotia.
Since deregulation, I've seen many small-business owners not only struggle to survive, but I've also seen a predictable, consistent industry deteriorate into one that is unpredictable and difficult to budget, given wide fluctuations in margins. Establishing a minimum/maximum margin of fuel products would be a tremendous help to independent operators to more effectively help them plan, manage and grow their businesses.
The brief overview of the petroleum industry goes like this: there's the corporate sites, there's independents and there's now the big-box retailers. Economic realities are certainly faced by independent retailers: corporate control, shrinking margins, increased competition, cross-merchandising, questionable pricing practices. The concerns of independent retailers, the impact they have, they impact the consumers if the current trend is left to continue, in my conclusion.
The petroleum industry in Nova Scotia is made up of three primary components. The corporate sites, which are owned by large oil companies, which pump high volumes - usually 4 million litres or more, according to Kent Marketing statistics from 1999 - are typically located in major urban areas. Independents are lower-volume sales - 2.4 million, according to Kent's 1999 statistics - and are usually located in suburban and/or rural communities.
Nova Scotia big-box retailers like Canadian Tire, Superstore and Sobeys have added pumps to their sites and have used cross-merchandising as a way to entice consumers to buy their fuel. Cross-merchandising has meant that these retailers often offer consumers cash off purchases in their stores, based on purchases at the pump. In other words, the store may offer 3.5 cents a litre towards groceries. This has led to some questionable pricing practices. Consider Moncton this past Spring when the price of fuel was at an all-time high; while
retailers in Moncton needed to raise their price of fuel, the major-box retailers refused to move their prices and forced the market price to stay low. Some retailers were selling fuel at a loss just to stay competitive; meanwhile, the big-box retailers could make up the loss margin in products inside their store.
If these practices are to continue for longer periods of time, it could quite possibly result in closures of smaller, independent sites. If you're a corporate site, you can often respond easier to these threats, since the oil companies often support your sites by not changing rent, et cetera. Although some oil companies may do the same for their independents when the prices are too low, it is much more difficult for the smaller, low-volume sites to compete at that rate.
Independent retailers are subject to a number of constraints, often imposed by the oil company, that currently dictate the price that they charge for fuel and ultimately dictate their margin with little attention paid to the retailers' overhead expenses. Prior to deregulation, retailers can make approximately 5 cents a litre on their fuel sales. Although this margin fluctuated somewhat over the years, it remains consistent and fairly reliable. Operators could then effectively manage their business proactively and plan for their future. It also gave operators a chance to find new ways to generate revenue, improve internal controls, to help maximize the profits.
Since deregulation, this margin has slipped to between 3 cents to 5 cents a litre; however, in the past year, starting December 2003, we have seen the margin fluctuate from 1 cent a litre to 3.5 cents a litre, despite little change in overhead costs. With such low margins and their unpredictable nature, it makes it extremely difficult for the business owner to maintain employment levels, budgeting and plan for his/her future. Regulation would provide independents with some reasonable consistency, as well as a forum to present justified reasons for higher margins in their fuel products. Deregulation has effectively eliminated this forum, resulting in unpredictable pricing and consumer frustration.
Many petroleum retailers have added a number of ancillary services to the product mix. Some have service bays, convenience stores, fast food franchises, video rentals and so on. Fuel, however, is often the driving force in these businesses. Fuel sales often represent 65 per cent to 80 per cent of their total revenue. An often overlooked cost is credit card discounts, which usually run approximately 1.8 per cent per dollar. Therefore the margin is further reduced, since the retailer is required to pay the discount.
According to the Retail Gasoline Dealers Association, it has seen approximately 400 closures of petroleum outlets over the period of 1991 to 2002. These closures were throughout the province, including many rural areas. This trend is similar to what we saw with the closure of rural branch offices. This eventually led to some unserviced rural communities and forced residents to travel to their local branch. Some of this problem has
since been alleviated through on-line and telephone banking. This could be what happens to the rural service stations.
One of the key differences between independent, corporate and big-box retailers is that the independent retailers tend to give a lot back to the communities in which they operate. They typically buy goods from the communities, they sell to local suppliers, and they often sponsor community sports teams, especially children's teams and community groups. This is not to say that the corporate and big-box retailers do not give anything back, they often do, but being nationally or internationally-recognized companies, that broadens their scope and, therefore, they become less involved in smaller localized projects.
Independents always contribute to the business community and provide employment, especially to students. In fact, I owned my own station at one time in Cole Harbour. We employed many students, some of which have gone on to open their own businesses in this community. Service stations also seem to be a necessary service in growing communities outside urban areas. They tend to support growth and fill an important role in the community infrastructure.
During this presentation I focused on the concerns of the independent retailer. However, the concerns have a direct impact on consumers throughout the province. First and foremost, consumers, like operators, are confused and uncertain about fuel prices that seem to fluctuate without reason or justification. This results in frustration on both sides. Lower margins mean that some smaller volume sites in smaller communities cannot compete and are forced to make tough decisions. Some of these decisions result in closures and reduce service levels within suburban or rural communities. An increase in the number of closures means fewer competitors in the marketplace which can mean higher prices, lower service levels and less convenience. Big-box rebates at the pump do not necessarily mean lower prices in the stores. There are no freebies with big-box retailers. What they give up at the pump, they will make somewhere else.
In conclusion, establishing minimum/maximum margins of retail fuel can provide the industry with much more stability and a structure that would help promote operational efficiency, better planning and, hopefully, increase service levels. Stable margins provide independent retailers with a better opportunity to compete in a level playing field to help them survive and will provide a sure investment for their retirement.
MR. CHAIRMAN: Thank you, sir, and we have a question for you from Russell MacKinnon.
MR. MACKINNON: Mr. Chairman, I was particularly intrigued with the reference to the coupons, the bonuses, and rewards that are being offered by the big-box stores and the like. Would the witness be kind enough to expand on that just a bit? I understand the general thrust of what you're saying, but if you could tie that down a little more in some detail.
MR. SHELLNUTT: Yes, Mr. Chairman, what I know about this is that currently in Halifax at one of the big-box stores, people will buy fuel and the amount of fuel they buy, they get a rebate that they can use to purchase against groceries in their stores. I think they have a time frame in which to purchase the goods, but it probably has a tremendous impact with cross-merchandising where a small retailer doesn't have the opportunity to do that.
MR. MACKINNON: Through you, Mr. Chairman, and the witness obviously has indicated he has some history here, particularly with the Utility and Review Board, and the former board as well. When deregulation took place back in 1991, is it your sense that any of this type of activity was contemplated?
MR. SHELLNUTT: Mr. Chairman, back then, after deregulation came in, I would say for the better part of eight or nine years there was some consistency of margins. When they finished off in 1991, there was a 5-cent margin and that margin seemed to do adequately well for most of the independents and most of the retailers. They started changing the systems probably in 1999 to 2000 where the majors were heading more towards retail gas bars, and that's when the self-serve system started to change and a lot of retailers we deal with today, and even the new ones that we deal with, we're encouraging them to eliminate full-serve because of the cost of the purchasing of full-serve gas versus self-serve.
It has sort of switched in the last couple of years where probably 70 per cent or more of the sales of a retail outlet, independent, is self-serve. Now, in a lot of cases it has gone to 100 per cent and the reason they had to go there was to remain competitive, because they didn't have to pay the salaries to the people to pump the gas. For the hours they're open and the amount that they pump, which is 20 per cent to 30 per cent of their volume, there isn't enough margin in it to pay the wages of the employees to be hired to look after it.
MR. MACKINNON: So essentially the wholesalers have an opportunity to increase their profit margin, that's what you're saying?
[6:00 p.m.]
MR. SHELLNUTT: Basically over that time frame the margins have become smaller, particularly in the last 12.5 months. We were doing business plans two years ago and we were budgeting . . .
MR. MACKINNON: No, if I could, Mr. Chairman - and I hate to interrupt the witness in full flight there because he was doing so very well - I was talking about the wholesalers, not the retailers.
MR. SHELLNUTT: We never got too much involved at the wholesale level in the sense that the dealers who buy their product, whatever they're charged, that's what they pay. That's the arrangement that has been made whether it's contractual, when they buy the
product, this is the price they pay and when they decided to raise their margin before in the last couple of years, they could raise their margins to 4 cents or 5 cents which a lot of them were doing at the time and then whatever happened in the last number of years, it just got squeezed more and more. It came down from 5 cents to 3.5 cents, and it was pretty steady around the 3-cent range for probably about a year or more and then all of a sudden in the last year and a half it has been squeezed even tighter.
MR. MACKINNON: Well, I think we're touching on a very important issue - it has been alluded to by a previous witness - and that is the issue of customer satisfaction, consumer satisfaction, two different issues obviously. Obviously, there have been some studies done that would indicate that the general public is more content with that type of service. Otherwise, industry would not be moving in that direction. The details and the mechanics of what's happening within doesn't seem to be an area of concern with the consumer except for when the prices go up, then it really pinches a nerve. What are you hearing with regard to that? Are you aware of any studies that measure consumer confidence, customer satisfaction, that sort of thing?
MR. SHELLNUTT: I think - and this is a personal opinion - that consumers are relatively happy sometimes because, I guess in the last number of years, they've been used to prices just changing at random and the problem is, as consumers - myself included - we have vehicles. We have to get to and from and it just seems like whenever a price goes up, consumers react quickly, but en masse they don't seem to react like you would think they would. I don't know if we, as consumers, are complacent, that we just accept this and we take it.
When there are forums like this and you get the general public not responding to it, yes, it makes you wonder, but consumers know they have to go from A to B and they have to get there regardless of the price. I hear consumers complaining, they were frustrated two days ago, the price goes up, and then all of a sudden they talk about it and complain amongst themselves and it seems to fade away.
As far as consumer loyalty, it seems like the volume stations that we deal with, the volumes can fluctuate as price fluctuates. One time they had probably a loyal following, but now it's self-serve gas and you have to pretty well pump it yourself to save any amount of money. People seem to follow the price. There is brand loyalty still there, but price can have a bearing especially if it's significant in the marketplace today or tomorrow. Then it seems that once it gets back to a level field, everybody is charging the same, people go back to the same spot that they're used to buying product from.
MR. CHAIRMAN: Thank you, sir. There doesn't seem to be any further questions so we thank you for your presentation and your patience for waiting this afternoon. At this time I would like to call on Mitch Primeau. Mitch, you also have been in the gallery all day,
a long day for you. Sir, you have 15 minutes. You can take questions if you wish and you're aware that your comments are being recorded.
MR. MITCH PRIMEAU: Thank you, Mr. Chairman. My name is Mitch Primeau. I'm a retail petroleum development consultant. I have been running my own business for approximately the last six years. I'm an outsider, I reside in New Brunswick, but my work brings me to Nova Scotia. I also work in the deregulated market in Prince Edward Island and work in New Brunswick and I've been on the gasoline committee with the New Brunswick Government. I've done proposals on price regulation and I have ongoing discussions with Bruce Fitch, Jeannot Volpé and Bernard Lord. Prior to that I spent approximately 30 years in the petroleum industry. I worked for PetroFina, PetroCanada, Imperial Oil and Shell.
At this point in time I work with all of the oil companies, bar none, on behalf of retail gasoline dealers, negotiating contracts from time to time and lobbying government on specific issues and so on and so forth. I've been sitting in the gallery, that's true, and it has been awfully hard to bite my tongue by times and not say anything because I know a lot about the retail perspective from the dealer perspective, but I also know a lot about the oil company perspective and I know a lot about the regulatory systems and where they work and where they don't work and why. I didn't come with a prepared presentation, but I felt compelled to come down here today despite a personal situation that makes it difficult and I was hoping that I could have come and talked a little earlier, but I will try to keep it reasonably brief and address some of the gaps that were left in the issues.
As far as the public is concerned, I think I can fairly speak on behalf of the public and there's really no need for them to appear at these hearings. If you brought anybody in off the street and asked them if they would like lower gasoline prices, the answer would be yes. Conversely, if you said would you like a higher gasoline price, they would say no. If you asked them, would you like a regulated petroleum price, they would say it depends. What does it depend on? It depends on whether it's going to cost me more or cost me less.
We have heard testimony from various people here on various things and at times it can be misinterpreted and I'm trying to put myself in the position of some of the committee members listening to some of these responses from the oil company and trying to make sense of it, you know, as if I knew nothing about the industry and some of these things are extremely difficult. One message was clear from the CPPI people and the representative from PetroCanada, and incidentally one of the representatives from CPPI is on a leave of absence from Shell Canada Products so, obviously, he has a background in the petroleum industry. One thing that they made very clear was that they could operate in a regulated market without a problem. My experience, having worked with the oil industry in the head offices, they feel totally comfortable working within a regulated market. All they want to do is make a fair profit as well.
Prince Edward Island has a model right now that is regulated with a minimum margin in self-serve of 4 cents, maximum margin of 5.5 cents. This is excise tax. Full-serve has a minimum of 5 cents; maximum, 6.5 cents, excise tax. We have heard that prices are higher in regulated markets and Newfoundland and Prince Edward Island were cited. I don't dispute that for one moment.
As a matter of fact, two weeks ago I had a meeting with Bruce Fitch up in New Brunswick and he had made a statement in the newspaper that New Brunswick had the lowest gasoline taxes in Canada as opposed to, for example, Prince Edward Island that was 17 cents a litre. We're talking provincial road tax. P.E.I. has GST, no PST on gasoline, provincial road tax and GST. New Brunswick has a 14.5 cent provincial road tax, but 15 per cent HST. The net result is the buying price in P.E.I. is lower than it is in New Brunswick and consistently has been in my memory. Newfoundland as a regulated market has not been regulated for very long and it was always higher than anywhere else because of the transportation costs in getting the product there. So there are a whole bunch of things that can get really, really muddied.
You guys have a terribly daunting task in front of you to try to understand the petroleum industry. It's a very complex industry. By and large I have to say that the oil companies are ethical companies. Evidence of price fixing, price gouging, predatory pricing, has never conclusively been presented. I heard some comments on the federal Competition Board and I've had some dealings with them. I've been to Ottawa. Last year as a matter of fact I was in Ottawa on a case that I felt was clearly, in accordance with the federal Act, unfair pricing practices. They had no interest in it whatsoever. What they were particularly focused on is where some poor oil company representative who had insufficient training told somebody to put his price up and they had 16 cases like that going on and that's what they wanted to focus on. So we can't turn to the federal Competition Board to solve any of these problems.
The gasoline dealers are clearly not making sufficient margin. The result of it is going to be a lot of closures and a lot of failures. I've worked with a lot of the people who have provided testimony at other hearings throughout the province. I've seen their comments in the newspaper and I'm sure that you'll be hearing from more of the people whom I have worked with who have the same problems. If we go back a ways, I mean margins were reasonable and they could make a reasonable living. At this point in time margins are so doggone squeezed they have a hard time making ends meet.
One of the results of all this, of course, is trying to find efficiencies. We talk about diversity and the oil companies are coming in and they're saying, yes, you've got to have your fast food drive-through, you've got to do this, you've got to do that. Well, gee, that's great. If I'm going to get an A & W franchise and slap hamburgers, you know, sorry, you can't make any margin on it, maybe you should go try selling some gas with it. It doesn't
make sense to me. It has to stand on its own, you can't rely on ancillary services to provide this vital commodity.
You're going to have closures in rural areas and I've seen this happen. For example, in Prince Edward Island, a lot of the rural areas are losing their representation. Senior citizens have to drive much further to get their products. It's costing them more money to get their products. It's going to be the same thing as the post offices and the banks. All the rural communities will lose their representation unless something is done.
The provincial and federal governments, and we heard from, I think it was Mr. Tompkins from PetroCanada saying that 40 per cent of the price of a litre of gasoline is taxes and it's true. So when it gets up to that 99.9 cents, well, you fellows are making 40 cents a litre. I would suggest you take some of that 40 cents and ensure that other people are making a living to provide the level of service in the communities that they are servicing. It's not going to cost much to regulate, but they need to make a reasonable margin. You cannot blame the oil companies. Market conditions are part of it. Most oil companies are ethical; a vast majority of them are. One of the big threats that you have now and that you will continue to have is, as Mr. Shellnutt mentioned, the advent of the box stores. You know a 3.5 cent margin would look pretty admirable to a Mr. Wayne Pace and yet here you have the Superstore over there giving it away for groceries. My God, they're gouging us on groceries, so what are they doing screwing us on the gasoline market? Give me a break.
If there was regulation and a level playing field, people could compete. These sites have a minimum 100 kilometre impact radius. In the City of Moncton this week, there was a price restoration and trying to get up to 93.9 cents so the dealers could make a reasonable margin. Atlantic Superstore did not move. They stayed at 88.9 cents. Ultramar because of their Value Plus program is going to be the last one to move willy-nilly. The price restoration collapsed. The price should be at least 93.9 cents right now, but here's Atlantic Superstore with a 3.5 cents discount coupon, periodically $2 off for a 30-litre purchase, and then on top of that, you know, refusing to restore.
My God, at one time they kept the price at 16 cents below market in Moncton. We had a meeting with a bunch of dealers, a cross-section of dealers in Moncton, to try to determine where their margins were going and in deference to Shell, we had a Shell dealer, Esso dealer and a PetroCan dealer, there is a different pricing system for every oil company. They're all legitimate, but there is a different pricing system and it's hard to compare one to the other, but the result of it was at that point in time the Imperial Oil dealers were making 0.97 cents, the Esso dealer was making 0.9 cents and the Shell dealer 2.4 cents. You can't make as much in the good times with Shell, but there's a low-end deal.
I only used that to illustrate the fact that there's good and there's bad and each pricing system is very different and to try to get a handle on that is a real tough job. The oil companies, it was mentioned that, you know, I put my price up, my market price, and they
put their price up. Well, that is one of the oil company's system, is there's an available margin and it's maybe on a 60/40 sharing basis, they keep 60 per cent, the other guy gets 40 per cent, and if they find that the price is depressed, they might take their share down to 20 per cent and the margin is still tight, but they're not making any money either. The oil companies do not make a fortune selling gasoline. That's a misconception.
Right now they're making a tremendous amount of profit on exploration and development because of the world crude price. It's extremely high right now and if we are 60 per cent self-sufficient in Canada and they're extracting 60 per cent of their crude requirements from Canada at a cost of $9 a barrel and selling it to their own refinery at the world commodity price of $39 a barrel, they're making all sorts of money and then there's the refining branch of it. Refining has a fixed margin. They buy their own product, they refine it, they sell it to their own company or anybody else. They have a margin that they work on from which they have to pay all of their operational costs and show a profit.
[6:15 p.m.]
Then there's the other company and these are three different companies under the umbrella. There's the marketing company. The marketing company sells it to the dealers. They're taxed with making a profit on that end of the business as well. It's difficult for the marketing companies to make a profit, you know, 1 cent or 2 cents a litre, if they are lucky after costs, is all they're ever going to make and generally it's more like 1cent and they have been in a position where they have actually lost money on the marketing branch of it and they say well, you know, why should we care about that they're making it on the expiration development and refining. Well, heck, they don't have to sell it to us. They could sell it to the States or on the international market at the same price. That's the dynamics of the industry, so if we're going to buy it, we have to pay a price for it.
Price regulation could potentially cost a little more to the consumer, but price regulation is not about better prices, price regulation is about a fair and equitable price for the product that the consumer can feel a confidence in. People are no happier. I believe it was an MLA who mentioned one of his clients who circled back two kilometres to get back to New Minas to find the price was up. That's frustrating. That's a price fluctuation. You're driving by a place and you see 88.9, wow, I better fill up and then you get down the road and it's 82.9, it's just as frustrating. It's the up and down movement that frustrates. When it went to 99.9, there was a public outcry. It died down, and then the price dropped. It could have come down five cents a litre and everybody probably would have been happy, but it's the fluctuation that drives people crazy. That's what price regulation is about, it's about consumer confidence. It's not about a better price.
The dealers, now this is crazy, but this is the way it is in the oil industry, the price of your gasoline and diesel changes every day. What other product is there out there in the marketplace where you have a daily change in price but it doesn't change on the pump price
every day. This is one of the reasons that P.E.I. has a 30-day period, you have to apply every 30 days. It gives some consumer confidence. I've never heard the consumers complaining in P.E.I. about being gouged on their gasoline prices. They feel that they're getting a reasonable price and that they're being looked after by their representatives in government. That's really what I think price regulation is all about.
As difficult as you find it trying to come to grips with this industry, you can imagine, how could you ever explain to a consumer all of the components that go into making up a gasoline price. They have to have faith in you as their representatives to ensure that they get a fair price for their product and that you protect the people who are providing those services because in the long run the consumer's going to suffer if the dealers aren't there to provide those services. I think it's incumbent upon you to do something to bring this into control, and that's all I have to say.
MR. CHAIRMAN: Thank you, are you open for a question?
MR. PRIMEAU: Absolutely.
MR. CHAIRMAN: Russell MacKinnon.
MR. MACKINNON: Thank you, Mr. Chairman. I wanted to go back to this issue of promotions in the box stores and the like. It would appear almost as if what they're doing is circumventing the spirit of the 1991 legislation, because Section 14 (1) dealing with the cost of oil companies, sponsored gasoline promotion and the like. Am I to interpret from your comments that perhaps this is one of the areas that would be within our purview to be able to address, to level the playing field for the retailers, the oil companies and most importantly the consumer?
MR. PRIMEAU: Mr. Chairman, I'd be pleased to respond to that. It is my belief that partial regulation is a no go. I have looked at all sorts of different scenarios where we could potentially do a partial regulation, indeed there was legislation that was introduced here in Nova Scotia with regard to timing on price increases. Partial regulation is not going to work. You need full regulation. Full regulation used to include that promotional issue that you are talking about.
MR. MACKINNON: Yes.
MR. PRIMEAU: It is not in the spirit of the legislation, what they are doing, but in effect I believe that it states that the oil companies are not allowed to pass on to the gasoline dealer the cost of the promotion. In this case it's more like a corporate site. So they're not passing it on to anybody but themselves. They're incorporating the cost but it's certainly, in my opinion, in violation of the spirit of it. In P.E.I., under the legislation they have there, it would not be permitted, period.
MR. MACKINNON: Do you feel that this issue, I understand your point about partial deregulation, but this was a very contentious issue at that time. I remember sitting in the Committee on Law Amendments and there were a number of presentations that were brought to address this particular issue and the minister of the day indicated that he would bend to the support of the retailers and give them that support, but it doesn't appear that's what's happening today. You've answered the question even before I asked it. You need full regulation, and you have to level the playing field so that you're comparing apples to apples, not apples to oranges. Correct?
MR. PRIMEAU: Yes, and not using a vital product as a loss leader when in fact you're probably charging too much for your steaks.
MR. MACKINNON: Yes, they'll give you a discount on your pork chop, but they'll jam you on their potatoes.
MR. PRIMEAU: I don't know if they're allowed to sell their milk under cost. They have protections in that regard.
MR. MACKINNON: Yes. Okay, thank you.
MR. CHAIRMAN: Thank you, member. I'd like to recognize Mr. Brooke Taylor.
MR. TAYLOR: Thank you, Mr. Primeau for coming in. You seem very knowledgeable on the issues. I don't know how you put a price on fairness at the pump. I've heard that argument from several people, not just you, Mr. Primeau, that there will be a cost to establish a regulatory body, and that's a given, but presently there's a cost to deregulation. A great cost as far as I'm concerned. That cost is the instability and the inequitable prices that Nova Scotians are paying.
As well, with justification, we have employees in the Department of Environment and Labour, dedicated inspectors to the gas and oil industry; we have employees in Service Nova Scotia and Municipal Relations who are dedicated to this industry; we have employees in the Department of Finance; we have employees in the Department of Energy, and this isn't to suggest that you can somehow eliminate those positions if you move to regulation. I'm just trying to make the point that there is a price as well to deregulation. It's easy to say that, yes, you'll have to establish a body and it might be point-something of a cent or whatever the case is, but I think the advantages may just outweigh the disadvantages that the consumer, and just as importantly the retailer, is suffering through at the present time. I'm very heartened to learn that P.E.I. would not prohibit the big-box stores doing the cross-merchandising, if that's what it's called. I just wonder what your thoughts are on the price, and you probably have an idea.
MR. PRIMEAU: I've been asked this question by counterparts in New Brunswick as to how. There were three questions, how would you do it, why should we do it and how would you do it? Something like that. Anyhow, one way of doing it is to outsource it without having to create another body to oversee it. Outsource it based on a certain amount per litre or whatever to administer that, to do the investigations on a monthly basis; to make recommendations for price changes; to hear applications from the oil companies; to change the prices; to deal with complaints; and to encourage conservation in whatever way that they can. It certainly needs a body to oversee it and whether it's an internal or external source, I know that outsourcing has become something that's fairly interesting these days to a lot of corporations as well as governmental agencies and something like that. It might be a simpler way of doing it.
I have spoken with Allison MacEwen, who's with IRAC over in P.E.I., and asked if there have been some inquiries as to whether he would able to take on or be interested in administering price regulation for the other Atlantic Provinces. While he is a committed provincial employee at the time, there would be no harm, he simply would be capable of doing it by utilizing the system that they now have in place. The only thing that I caution about P.E.I.'s regulatory system is that marketing branch of the oil company, they don't recognize the oil companies' requirement to make a reasonable profit. There has to be some recognition of that. The oil company has to be able to make a reasonable profit so that they will reinvest in the communities so they can do long-term strategic planning vis-à-vis investment and maybe revisit some of these sites in the smaller areas. Market conditions have compelled them to withdraw, to consolidate, to close out some other corporate sites.
Actually, it was interesting hearing that too, 50 per cent of the corporate sites have been closed. Well probably out of that 50 per cent, there was a good 40 per cent of that which were sold to independents. The independents would buy them, take out the gas or operate until they could no longer make a living. Some of them rebuilt those sites. Some of them are doing well today. It's a very fluid market out there, but certainly independent gasoline dealers are suffering a great deal and they shouldn't be, that's detrimental to the future and well-being of the public and to the province.
MR. TAYLOR: I think Mr. Chairman we do have the capability, we used to have the Public Utilities Board and, as well, before you would out source, you'd certainly want to see some cost-benefit and cost-social-benefit analysis done, but I certainly believe that there are some options. Maybe a partnership, but I don't want to get the cart out ahead of the horse, too far down the road there, but that's interesting observations, thank you.
MR. CHAIRMAN: Thank you. Mr. DeWolfe.
MR. DEWOLFE: Thank you, Mr. Chairman. I thank you for your presentation. You seem to have a good handle on the situation. I was interested when you talked about price regulation that it's not just about lower prices, it's a means of creating some consumer
confidence and that's certainly something that I don't believe consumers have too much of right now. Perhaps they're blaming the companies unfairly, perhaps they're blaming government unfairly - I don't know who's to blame, but we do have to bring stability to the consumers.
Going back to something that was gnawing at me earlier, the fact that there's disparity in the pricing at the wholesale level across the province. How could we deal with that issue here in Nova Scotia? For instance, I had indicated that I was filling my car in Pictou County and paying a price that was less than a retailer was paying for his fuel on the other end of the province. How could we solve that problem?
MR. PRIMEAU: Mr. Chairman, obviously Prince Edward Island is a much smaller geographic area and it's administered as one price sold under one constant price. I have in the past been asked, how come we can't have a consistent price across the Province of New Brunswick or Nova Scotia, wherever it may be? It's the same as the Liquor Commission, you can have a consistent price clear across the board, provided it's higher than it should be in some areas and equitable in other areas. So, the only way to get around that, because there are transportation cost differences and despite that it's not as minimal as you may think it is - one-half cent a litre on 5 million litres is still $25,000 per year. So transportation costs are reasonably substantial and have to be taken into consideration.
You'd require that the province be broken down into price zone areas based on the point of supply and things like that and those ones are administered differently, but with the same formula, just recognizing an additional cost for a particular thing.
I'd like to mention a couple of more things. I did work here in Nova Scotia with some of the oil companies and I was working here during the regulatory system. It was a tremendous system and I will tell you, contrary to what the oil companies seem to believe, that it builds inefficiencies, it isn't true. Inefficient dealers will go out of business even if you have a guaranteed margin - it doesn't make any difference. They did then and they will again, whether the margin is high or low, it's a tough old battle and some people just can't run the sites properly.
Efficiencies, the dealers that you have heard from - at least most of them that I know - are amongst the most highly-qualified, highly-talented and highly-experienced, most knowledgeable, most competent dealers that you could ask for in the province. When I hear somebody like some of the people that I've read about in the media that I know well and some of the people who have testified here today saying that this is the margin that they need to live on. This is not a joke. There are not inefficiencies in their operation, they're down to bare bone and struggling to keep it alive at that point. I just wanted to point that out.
In addition to addressing your suggestion, I think it would have to be segmented and perhaps one, two, three, four price zones throughout the province and administered on the same formula but recognizing a transportation cost differential.
MR. DEWOLFE: Yes and I'm glad you brought that up. Through you, Mr. Chairman, the person that's peddling 8 million litres a year is obviously doing something right to be able to do that. So he's running a very efficient operation. On the other hand, he's not seeing any profit in his pocket so there is something terribly wrong with the system as it is today. You'd agree with that, would you not?
MR. PRIMEAU: My answer is yes, I would agree to that. There's something wrong with the system. I think what's wrong is that market forces are not doing the job and there needs to be some intervention to protect the public and the dealers.
MR. DEWOLFE: Thank you.
MR. CHAIRMAN: Very good. Not seeing any other questions, sir, I'd like to thank you very much for your presentation. Very informative tonight. Thank you, sir, and enjoy the rest of your weekend. I have one more presenter. Andre Pelletier, I hope I pronounced that right, how do you pronounce that? You're going to clear it up.
MR. ANDREW PELLETIER: Hello, Mr. Chairman, my name is Andrew Pelletier. I'm the Manager of Public Affairs for Quebec and Atlantic. I just want to bring up one issue that was brought up. We talked about intimidation and a piece of correspondence that apparently was addressed to a dealer and I believe through Mr. Simpkins that's Margo Henley. Today I did appreciate that it's only a cursory review - I phoned our local representative who's worked here in this area and P.E.I. for upwards of 20 years, Rick Graham, and he knows of no such correspondence.
[6:30 p.m.]
Certainly, as a corporation, we have a code of business conduct. We take allegations of this nature very, very seriously. I will look into this and assure the committee that if there is a piece of correspondence that somebody wishes to present to me, I will look into the background around this correspondence and why it was sent. When we operate a business and in the day-to-day dealings business affairs, you don't always see eye to eye and sometimes things get put on paper. Now, I don't know what happened with this piece of correspondence - what I am saying to the committee is that I was not able to locate such a piece of correspondence today.
MR. CHAIRMAN: Well we thank you for your point of clarification on that issue. That's it, sir?
MR. PELLETIER: That is all. Thank you.
MR. CHAIRMAN: Do you have nay questions at all for that (Interruption) I think that's appropriate for you to address that concern. Thank you.
At this time, that ends the afternoon session. Time has elapsed for that, of course, so we'll break now for our supper or break. We're going to come back at 7:00 p.m. We have two presenters this evening. We're adjourned.
[6:32 p.m. The committee recessed.]
[7:07 p.m. The committee reconvened.]
MR. CHAIRMAN: Good evening. I'm going to call this committee to order. My name is Bill Dooks, I'm the Chairman this evening. I just want an opportunity to go over a few of the rules and procedures of the committee. The presenters who will present tonight will sit here, to my right. Make sure that you speak into the mike, and make sure that the little light is on when you're ready to speak. When you speak, the light will come on. Fifteen minutes in presentation. Then, after your 15 minutes, you can open up for questions from committee members, if you so wish. If you do not wish, you can just make that known, and we will say good evening to you. I have to inform you that every comment is recorded, so you must be careful of what you say, or use the freedom of this House to say what you want.
The hour is 7:08 p.m., and the first witness would be William McCarthy. William is a representative of the retail gasoline operators. Sir, are you going to come over here? Thank you. Sit over here. Ma'am, you can sit with him if you want, over here, or you can keep your seat there, that's fine. This gentleman is from Cape Breton, and he's going on vacation for a few days, so he did drive to Halifax this weekend to give his presentation. Sir, you have the floor. Please state your name for the record.
MR. WILLIAM MCCARTHY: Good evening, my name is William McCarthy. Honourable members of the Legislature, honoured guests, I've been employed in the gasoline industry since 1956. For the last 21 years, I've owned Strathlorne Service Centre in Inverness, Nova Scotia. I'm here tonight because I'm concerned about the business practices of the companies that control the motor fuel industry in Nova Scotia. These are the points I would like to make this evening:
1. Wholesalers control both the wholesale and the retail price.
2. The present Motive Fuel Tax Act is anti-competitive, because it forces retailers to be under contract to only one supplier.
3. Large wholesalers have eliminated the necessary infrastructure that allowed effective competition in the past and forced many small wholesalers and retailers out of business. There is now only one real supplier of petroleum products in Nova Scotia.
4. Regulation may help, but in my opinion divorcement of refiners from owning, distribution, and marketing would foster more competition. It would give you true price competition, and I'll explain why later.
Wholesalers control the price. In Nova Scotia, under regulation, the Board of Public Utilities licensed retail outlets. The number of licences was frozen during the 1970s. Entry into the market at that time for new outlets was very difficult. If an oil company owned the license, which was not always the case, they could apply to the board to close that outlet and obtain another license in a different location. The only other way for them to get a license would be to buy it from an existing retailer, somebody who already owned a license.
The Board of Public Utilities also regulated the wholesale and the retail price of both motor fuels and home heating oil. The benefit to retailers who owned their license was that our supplier could not force us out of business. There was always a competitor looking for that business. It was and still is a volume-driven market. In the late 1980s, the wholesalers began lobbying hard to remove the barriers to entry into market caused by the freeze on new licenses. There were a series of public hearings held in Halifax and Truro - I personally presented at the one in Truro - that resulted in a few new license applications being approved in 1990. In 1991, the Cameron Government came to power and, with the stroke of a pen, gutted the Board of Public Utilities, ending the freeze on retail licenses and all price regulations.
Retailers like myself lost all the asset value of the license that many of us had paid tens of thousands of dollars for. We were never offered any compensation for the loss of this business asset. We also became the victims of the oil companies' ability to force the closure of unwanted outlets, often by predatory practices of the worst sort. Since 1991, the number
of licensed retail gasoline outlets has been reduced by over 50 per cent, due entirely to the strategies of the oil companies.
In the late 1980s, Gulf and PetroCanada began offering retailers a consignment agreement. This allowed retailers to pay for their fuel once or twice a week, once it had been sold, thereby not having to carry the high cost of their gasoline inventory. In the regulated environment, this was a very sought-after term. It acted as an inducement for retailers to switch to those brands. I was with PetroCanada when this first happened. The day that we switched to the agency agreement, I had $17,000 additional working capital in my hand to use in other areas of my business.
After deregulation and price controls, these consignment or agency agreements, as they came to be called, became fairly universal in the industry. Retailers had to accept these agreements which now included terms that gave the supplier complete control of the wholesale and the retail price at the outlet, or be forced to buy gas for cash at whatever price the supplier wanted to charge. Retailers who owned their own outlets, like myself, soon found that you did what the supplier told you to do, or they would put you out of business.
That threat was made to me more than once in the last 13 years. I know of other of my colleagues who have been given the same threat. This complete control of wholesale and retail price by the oil companies means that there can be no real competition for price in the Nova Scotia marketplace.
The Motive Fuel Tax Act permits only one supplier. The Motive Fuel Tax Act also prevents true competition, because retailers are required to be under exclusive contract with only one supplier. The Motive Fuel Tax Act keeps the majority of retailers who own their own outlets a servant of their supplier, not free to act independently with respect to pricing of the fuels they sell. Where the oil company owns the property, which is the case in the majority of locations today, the operator has to accept a contract that gives them virtually no rights at all. Indeed, this has often caused complete economic ruin to operators who tried to go counter to the will of their oil company or fell victim when their company decided to alter the style of business at that location.
Loss of infrastructure until only one real Nova Scotia supplier. Nova Scotia has lost much of the infrastructure that supports true competition for gasoline and home heating oil. In the former regulated market, there were three operating oil refineries in Nova Scotia and several marine terminals able to store tankerloads of refined products. Ultramar has dismantled and shipped away two refineries, PetroCanada and Irving have shut down several marine terminals and I recall a case where PetroCanada even scrapped a marine terminal here in Halifax rather than complete its sale to a small wholesaler who wanted to buy it and was willing to pay a good price for it.
In the old regulated market there were bulk terminals all over the province. In the tiny community of Inverness where I live there were two thriving profitable bulk terminals servicing home heating and farm customers that were owned by local businessmen. Terminals in Inverness, Whycocomagh, Cheticamp, Baddeck, St. Peters, Arichat, have all closed and that's just in Cape Breton. The oil company suppliers deemed that these independent and locally owned businesses were redundant.
[7:15 p.m.]
The new reality became that there was only one seller of home heating, bulk oil, and motor fuels in Nova Scotia - Imperial Oil. All oil products sold in Nova Scotia for the most part come from the Imperial Refinery, no matter what the brand. Through an exchange agreement, my fuel comes from there. Any competition between the remaining oil companies is mere window dressing to keep the federal Competition Bureau at bay. The small wholesalers that are left exist at the pleasure of the big companies. The recent deals cut by Imperial and Irving with Loblaw's, Sobeys, Canadian Tire and Wilson's Fuels only support the myth that there's true competition in this province. These locations are still owned and supplied by the oil companies. The large retail firm manages the locations and takes on environmental liability. Small independent outlets like mine will continue to lose volume and opportunity and be less and less able to compete fairly.
Regulation or divorcement, it matters not to an oil company at what point in the product stream they take the profit. The oil company refines it, stores it, distributes it, and in virtually every case in Nova Scotia, and in most of the rest of Canada, sets the price it sells for it retail. What this means is they're going to make money wherever the money is to be made and how they make it appear, whether they have retail "competition", price wars, whatever, they're still making it somewhere else in the stream.
In 2000 the Conference Board of Canada held hearings on complaints of predatory pricing and price fixing by major oil companies. These same companies were able to convince the Conference Board there was adequate competition in Canada. Put the facts of how the oil companies control price and marketing in Nova Scotia to a fair test and I think a much different finding will be forthcoming. Will new regulations make a difference? Perhaps, but maybe there's a better way.
Level the playing field, separate the refiners from distribution and marketing, eliminate or change the Tax Act so that a retailer can buy from any seller at any time, remove the provincial restrictions on new marine terminals, allow free trade in petroleum products from existing independent terminals like Statia Terminals in Point Tupper. To have a truly competitive market there needs to be several unassociated sellers - each with their own independent supply of product. If you don't have that, you don't have a competitive market.
Divorcement is a term that's used in the industry to describe the separation of refining of motor fuels from the distribution and marketing of those fuels. In a perfect competitive world there would be many different companies vying for the same market and using price competition and the uniqueness of their product or process, even the location of their sales outlets, to influence buying decisions by consumers. When was the last time you heard an oil company advertise anything special about their product? They can't because it all comes from the same place and it's not their unique product.
Before I came to Nova Scotia in 1982, I lived in Maryland in the U.S.A. In the late 1970s Maryland passed a law that forbade refineries and major oil companies from owning or operating retail outlets. Those regulations are still in place today in Maryland and several other U.S. States have also passed divorcement laws. I found on the Internet, as well, that there are places all over the world that have done this. I saw some of the lowest prices, as recently as December of 2003, for motor fuels on the Eastern Seaboard in Maryland. Prices ranged all over the map - as much as a 50 cents a gallon spread in the area. That's equal to a little over 10 cents a litre here. The lowest prices were always at unbranded outlets. Prices at branded outlets often varied by 10 cents a gallon and more at stations that were right across the street from each other. Compare that to Nova Scotia where there is lock-step pricing on every corner in every community along the major highways. Gas is selling for 93.9 cents in Nova Scotia today and that's just the rule. Who makes that rule?
A Google search on divorcement in the gasoline industry returned 422 documents. I have put two of the URLs here. You can find the rest of them just as easily as I did. One does not need to read very far in these documents to see how vigorously integrated oil companies have defended their monopoly to refine, distribute and market motor fuels. It's a huge business and as long as they control every element of the delivery stream to the end user, it is immensely profitable. The only way to alter the degree of freedom big oil companies have in setting retail price is to permit non-aligned sellers to access retail dealers like me and to vigilantly monitor predatory practices by the majors. Thank you very much for hearing me tonight.
MR. CHAIRMAN: Thank you for your presentation. Are you open for questions? At this time I would like to recognize Russell MacKinnon, please, first question.
MR. MACKINNON: Mr. Chairman, I have two questions. One is with regard to a suggestion or the recommendation to eliminate or change the Tax Act so the retailer can buy from any seller at any time. There is also a recommendation in here - remove the provincial restrictions on new marine terminals and allow free trade in petroleum pricing. Would you give us a little more detail on what you mean by that?
MR. MCCARTHY: The detail on the Tax Act, as I understand it, is that it was originally conceived to allow the provincial government to control the fact that they were going to receive the revenue stream from the taxes that were supposed to be collected on
motor fuels. They felt that the best way to do that was to force anyone who sold fuels to an end user to be registered with a supplier. They felt they could have a handle on the supplier and as long as he was collecting the tax, they could control him remitting it. They didn't want a situation where I was collecting the tax from the end user and it was up to me to remit it. That was what they were trying to avoid and in doing so in a regulated market, it really didn't make any difference. It didn't make any difference if I was under contract to one supplier.
The Public Utilities Board controlled the price that I paid, controlled the price that I sold it at, controlled the terms that I operated my business in terms of how it was presented to the public. They had standards for restrooms, standards for cleanliness, a standard for this and the other thing. It was like the grandfather, okay, they took care of us, and the supplier kowtowed to us. It was the most profitable time for them to be in this business and I can tell you that the parties they threw were something to see. I mean they spent money like it was going out of style on dealers just to keep us happy and keep us onboard because the only hammer they had was that they could insist on a five-year contract. So for five years they had my volume.
Well, at the end of five years, if somebody else wanted my volume more than they did, they would pay more for it, so they would get it, or they would offer me better terms so they would get it, or they would offer me something behind to clean up, you know, buy me a new house, you know, lots of things happened, and that's the way business was done. That all ended when regulations ended and, boy oh boy, I will tell you from my point of view, for about a year after regulations ended I made more money on gas than I have at any time up until recently when I was with a supplier who now treats me honestly and fairly and I'm able actually to make some money at it, but for that first year after deregulation before the oil companies got a handle on how they were going to capitalize on this boon, we were doing fine but, boy oh boy, did that change in a hurry.
MR. MACKINNON: My second question, Mr. Chairman, is with regard to the witness' reference on predatory pricing. Earlier today we heard witnesses from the Petroleum Producers Association make representation here today and maybe I was just a little sensitive to their comments, maybe a little over sensitive to their comments at the time, but I understood them to counsel members of the committee about the dangers of referring to that because it would be an issue of litigation, or even any suggestion of that, and, quite frankly, I was going to take issue at the time, but there were a lot of other questions on the go at the time.
The reason why I raise it now, Mr. Chairman, is because you're not the first witness to come before the committee and you seem to do it quite comfortably and freely and you seem to have a genuine sense of what you understand to be predatory pricing and people from all over Nova Scotia have kept coming back to this term. Would you be kind enough to expand a little more on that because this seems to be the bone of contention between these two particular . . .
MR. MCCARTHY: Mr. MacKinnon, I can give you a great deal of fact and information on that subject from my own personal experience. In dealing with a major oil company and I will name that company, Ultramar, which I was with for quite a few years, probably 15 years or more, over the period of that relationship which began under a regulated market, they made no more and no less than three threats to me that they were going to put me out of business. The first time was when deregulation first took place, then they bought Texaco, they had all these Texaco assets, one of which was a service station in Inverness. It was a competitor of mine. They decided that they would divest me and keep that location because it had a higher volume than I did - after they had agreed to enter into a new contract with me, okay, and this contract was in the hands of my lawyer and whatnot.
I was saved from that divestment at that time and they were forced to enter into this contract because the premise that they were trying to divest me under just wasn't valid. It was based on a data base that was developed by the Competition Bureau to make the wholesalers not have a dominant position in any given market because of these mergers, okay, and the criteria for that was that if there were three outlets in a market, they could only have one. If there were more than three outlets in a market, they could have two and it was a sliding scale. Well, there were in fact four outlets in Inverness and they only counted three, but based on that that my attorney, whose roommate happened to be the Chairman of the Competition Bureau at the time, his old roommate from university which didn't hurt, anyway, that was put aside and they did, in fact, honour the contract that they were going to enter into with me.
The last time the threat was made was in 2000 and they just gave me 30-days notice and I was finished and just before they were going to pull out their pumps, their signs and everything else, which they were pretty sure was going to put me out of business, they filled my tanks and when the representative for Ultramar came to close me down on June 1st, I had a cheque for the total cost of the gasoline in the ground and certified from my bank that I handed him for the product. He just couldn't believe it. He said, no, I'm taking that product out of the ground. I said, no, you're not, I own it. You're not touching my tanks. I own those tanks. That's what I know from my own experience.
Beyond that, as of Wednesday this week, based on the wholesale price which I receive every day from my supplier, and you'll never, if you talk to another branded operator, they will never be able to tell you on any day, or any point in time, what the wholesale price is because nobody will tell them. My supplier sends it to me every day. If I had had to buy gas that day and sell it at the local price which is set by Irving and Ultramar, it would have cost me half a cent more delivered at my door than what I was able to retail it for and if you don't think that's predatory, well, I need a new definition for the word.
MR. MACKINNON: Mr. Chairman, a point of order. I think it's incumbent that we remind this particular witness and all other witnesses who have appeared, they are under full immunity when they are before this committee. It's a committee of the House and I think those rights and privileges, you know, should be reminded.
MR. MCCARTHY: I'm not afraid of any action by any company against me.
MR. MACKINNON: I get the sense that you wouldn't be.
MR. MCCARTHY: But I will say that I'm here speaking, I hope, on behalf of a lot of people who can't come here and can't openly describe their situations because it would destroy their business opportunities.
[7:30 p.m.]
MR. CHAIRMAN: Thank you for that, member, I did remind the witness before he started with his presentation that you should watch what you say or enjoy the freedom of the House to say . . .
MR. MCCARTHY: I'm loving it.
MR. CHAIRMAN: A question from Howard Epstein, please.
MR. EPSTEIN: Mr. McCarthy, can you tell us a little bit more, if you know, about the idea of divorcement. What I'm particularly interested in is how it works. For example, you say that in your example of Maryland that they passed a law that forbade refiners and major oil companies from owning or operating retail outlets. I take it that what they would have to have done is divest and what I'm wondering is how that was done?
MR. MCCARTHY: It was done in a fairly orderly manner. I did live in Maryland at the time although I wasn't directly employed in the motor fuel industry then, I was working for a car dealer at the time. What it meant and what it amounted to, and I still had a lot of connections in that industry because I had been very close to it, it was fairly chaotic for awhile and there were a lot of people who had had this sort of grandfather relationships with their suppliers that were very worried about what this would mean. A lot of them were told they had to buy their outlets and many of them felt that that wasn't something they were prepared to do. The other thing that happened was that a lot of people who were well capitalized decided it was a good time to enter the wholesale industry.
MR. EPSTEIN: I'm wondering things like would operators be given by law a right of first refusal? Do you know that?
MR. MCCARTHY: That did happen, yes.
MR. EPSTEIN: It did?
MR. MCCARTHY: Yes, and they were somewhat protected in that they were given a time frame to work within, too.
MR. EPSTEIN: Was there some kind of mechanism for arbitrating price if they couldn't agree by free negotiations?
MR. MCCARTHY: There was an arbitration process that was there. Properties were supposedly all to be assessed by the same body. They didn't create a special commission for it, but the Board of Realtors stepped in there and offered to give their services to it, for fees obviously but, you know, there was an orderly process for trying to put fair valuations on properties.
MR. EPSTEIN: Did the legal structure include an obligation on the part of the purchasers to assume all environmental responsibility and liability for their sites, do you know?
MR. MCCARTHY: That's an interesting question because at the time that really hadn't stepped up to the front as an issue. To my recollection, there were not even any environmental assessments or cleanups or anything required during the process of turning over ownership. The industry hadn't gotten to that place quite yet. It happened within five or 10 years after this, but they were a little bit ahead of that as far as the divestments went.
MR. EPSTEIN: So you've emphasized this point quite strongly to us. Are you suggesting that if this were done, that this would really fundamentally alter the nature of the game here?
MR. MCCARTHY: Well, it certainly would upset a lot of people in the oil industry. They don't want this to happen. I mean if you would take a few minutes of your time and peruse some of these documents that are freely available on the Internet, all over the world governments, municipalities, states, people are just fed up with the way the oil companies control things. I'm going to throw something out here because it's fact and I dare anybody to prove otherwise.
Often we hear of a price war in Moncton, we've all heard of these things, maybe even travelled to Moncton to buy some of the cheap gas. There's only one way that's done. There isn't a single person in my shoes who's able to price below their costs. That's simply and only the oil companies saying, okay, we're going to show everybody that there's competition in this industry and that people are free to price where they want and blah, blah, blah. That's not true. They create the illusion that that's what's going on. They do the same thing in Sydney from time to time. The reality is dealers are told what to sell it for and they're told how much they can make on it and that's it. If you can get them in here to talk, they will tell you that story and they will tell you how it hurts them economically. I mean a lot of these guys are just barely getting by.
MR. EPSTEIN: Mr. McCarthy, I have another question for you if I may. We've heard from a number of dealers over the last couple of days and one of the things we haven't heard
from them - and I'm sorry I didn't ask this of other dealers - is whether there have been any discussions among the dealers about banding together in order to try to meet their suppliers on a more equal basis, forming co-ops, or purchasing together. Has there been discussion amongst any of these?
MR. MCCARTHY: Yes there has, I know a lot about that. I was on the executive of the Retail Gasoline Dealers Association for many years. Graham Conrad, was a presenter here earlier this afternoon, just before you broke, I think. I don't know for sure what he said but I think I have a good sense of what he probably said.
That association - which I have kind of pulled back from because I didn't agree with the direction they were going in - was trying to get what they called the Fair-marketing Practices Act, you all are familiar with that? Some of you have probably worked pretty closely with that. That was an attempt to try to address the contract issues, they felt that they could get some redress from some of this predatory business by having that in place. I just felt all along, always did, I was always opposed to just stopping there because I never felt like it was going to get the job done, it was a necessary first step maybe but it really wasn't going to get the job done.
It was never going to cause competition because the companies still controlled the price, both at the wholesale and the retail level; they controlled the supply; and in many cases - and I can show you how they've done this time after time - they have moved the demand, mainly through price; a certain amount of it through putting up really beautiful stations, having the latest c-store offerings and this, that and the other thing; cross-merchandising their businesses, which is why they brought Loblaws and Canadian Tire and these other players into it. It has drawn the volume away from us, they've taken our traffic, the small independents are getting shafted left, right and centre, by these tactics, and they're not fair because they are so much in control of what we have to compete with, which is nothing.
I'm going to tell you some facts and I can support these with actual numbers. I have made as high as 16 cents-a-litre on gasoline based on what I pay for it wholesale and what the set retail price is, based on the oil companies business. Nobody makes that kind of money in this province on gasoline ever. The only reason I have is because the oil companies have been gouging. It doesn't happen often but this started in the Winter of 2002, the retail price of gasoline was around 81.9 cents, if I remember correctly. On January 15th, roughly, very close to that date, for no reason whatsoever, based on the wholesale price that I receive every day, the oil companies raised the price 6 cents-a-litre - just raised it. They didn't give their dealers any more margin and it stayed there, but I didn't put my price up, I didn't change my price, I had no reason to. I was making a good dollar on what I was selling at the price I was paying. That situation continued right through June.
I did eventually have to go up, I went up, I think, as high as 84 cents, but they were over 90 cents at that point. I made more money that Winter and Spring than I ever made in
this business in my life and they were just pure shafting people, sticking it in their pocket, and I can put the facts right to that, I've got the numbers in my books and I can show them to you willingly, any time. It was all going into the pockets of the wholesalers, their dealers didn't benefit one bit from that. I did, because my supplier was fair with me.
MR. EPSTEIN: Mr. McCarthy, I was really asking this question about the possibility of people banding together. I get the impression it's been discussed at a low level, but . . .
MR. MCCARTHY: Let me back up to your question again, and I'm very sorry for digressing like that. As you can tell, I'm very passionate about this, I've lived with it, I've worked with it, I have fought it for a long, long time, and I'm very excited about being here.
They can't. They can't for the reason that we're here right now. The oil companies would find some way to do them in. As a matter of fact, most of these contracts that they have to give the oil companies virtually immediate termination notice for any reason they want to dream up. That is what the Legislature never gave us in that Fair-marketing Practices Act that we were trying to get - some protection from that; they have no protection.
So if they band together and try to form a union or try to form an association, we have an association, the association can't function because the association is afraid of everything else. The association is funded by the unpaid to the retailers commission off the tax that we collect, the Tax Commission will not pay it directly to retailers. What they have done historically, ever since I've been in the industry, is paid that to our association, which is what funds our association.
The oil companies are in a position and have exercised that right in some of their own outlets, some of their larger volume-owned outlets, by capturing that commission for themselves, and it has cost the association - Graham would have these numbers better than I do - the last time I was active on the board we had lost about 30 per cent of our funding between closures of outlets, but by the oil companies capturing that commission that normally would have gone to fund the association. So they've really stripped us of any power that we would have had and we're running scared.
MR. EPSTEIN: Well, the refiners left us with the impression this afternoon, when we were discussing rack price, that they give a discount for high-volume purchasers. They weren't specific but that was essentially what they were suggesting to us. Are you saying there is not that opportunity?
MR. MCCARTHY: Well there aren't any retailers benefiting from any of those discounts because the retailers don't deal on that level.
MR. EPSTEIN: So the only purchasers that could be benefiting from a high-volume discount would be what, something like Wilsons?
MR. MCCARTHY: Wholesalers, yes. Wholesalers and users can benefit greatly from situations like that, trucking firms, you name it.
Something else that puzzles me and I would like to interject here, too - I did have it in here but I tried to clean this up a little bit, but since you're asking questions, I'm going to offer this to you, diesel fuel pricing - what barrel are they making diesel fuel out of? Help me out here.
In Maryland and anywhere else you look at on the Eastern Seaboard, diesel typically is 10 cents-a-gallon more than regular unleaded. When regular unleaded was $1.19 in Inverness, diesel was 79.9 cents. Now what's driving that please tell me? If they're not gouging, what are you going to call it? Diesel is not 20 cents-a-litre cheaper to refine and distribute and market, it has a slightly lower tax structure, but it's not a cheaper distillate than gasoline, not by that range. The pricing in the U.S. would suggest that it's actually more expensive.
MR. EPSTEIN: Thank you, sir.
MR. CHAIRMAN: I would like to recognize Keith Colwell.
MR. KEITH COLWELL: I want to go back to the problem you had with restrictions on marine terminals and allowing more free trade of petroleum products maybe to yourselves or other people. Could, for instance, the Retail Gasoline Dealers Association, or independents such as yourself, make arrangements with offshore companies to supply the petroleum products you need if you can get a terminal at a lower price?
MR. MCCARTHY: Present provincial regulations don't permit that.
MR. COLWELL: No, but if they were removed?
MR. MCCARTHY: Absolutely. Statia Terminals in Point Tupper would be a perfect supplier for me. I would buy from them in a heartbeat if I could. As a matter of fact when Ultramar was kicking me out, they didn't realize how - we were fairly, adequately capitalized I will say, and had some resources to deal with - I was seriously considering getting a wholesale license myself at that point, but I want to retire this year, I'm trying to sell my business right now, some people are flying in from Germany next week to look at it.
If I had the energy and I was a younger man, I would be out there fighting them, I'm not a bit scared of them, but you guys are hamstringing us, we can't. That Tax Act is the biggest stone around our neck you could imagine, it gives them all the power. They don't negotiate with us because they don't have to.
MR. COLWELL: What effect do you think it might have on the retail price in Nova Scotia, from your experience being a dealer, and what it would have on the price of gas? Do you think if the restrictions were lifted and the Tax Act amended to allow easy purchase of offshore products, what kind of an effect do you think, with your experience, that the price of gas at the pumps or heating fuel or whatever would go to? Do you think it would be a substantial reduction or a slight reduction?
[7:45 p.m.]
MR. MCCARTHY: First of all, for that to succeed, you're going to have to keep an eagle eye on the predatory practices because, frankly, Imperial Oil is powerful enough to do whatever they want. If they want to put Nova Scotia out of business, they'll put Nova Scotia out of business and make no mistake about it.
You in the Legislature can keep that from happening, keep it under rein and certainly political pressure in the world of public opinion, isn't going to look too well on it. Any business person, in any endeavor, it doesn't matter what they're selling, if they're WalMart or whatever else, goes out into the world, finds the best price they can get for something, puts their cost onto it, adds a margin to it for profit and goes out to the marketplace and tries to be successful with it one way or another. All the things that used to differentiate sellers of petroleum products - from the time I was a little kid working in the industry across the street, 14 years old, pumping gas for 50 cents an hour - retailers were always trying to get customers to come in so they could build their volume, because they used to get volume bonuses. They used to get things that were inducements for them to get more customers, put more volume through the location. It's always been a volume business. The petroleum business has always been a volume business.
One of my ancestors who was a partner of John D. Rockefeller, he was my grandfathers' great great uncle, okay, I wish I'd inherited some of his money. (Laughter) Anyway, I know stories that have been in the family for years about how crooked those guys were, how they manipulated and coerced and forced people. K.C. Irving started in business because Esso screwed him on a deal. That's a fact, that's in his book. That's the real world out there.
If you have a lot of different sellers and a lot of different sources of product, everybody's going to get their head together and try to get that volume. How are they going to get it? They're going to start competing like they're supposed to compete, price is going to be part of it. Location's going to be part of it. The style of doing business is going to be part of it. Maybe they'll start putting tigers in our tank again, who knows. All the things that they've done over the years to market their product and drive volume, none of that's happening in Nova Scotia now, okay. They can't differentiate their product because there's no difference in it.
MR. COLWELL: Just one quick thing. Basically, and I know it's difficult to answer this without knowing what you can buy it for and what the transportation costs and all the other costs would be, you can't really give us an indication, but do you think you might be able to drop the price of the fuel 2 per cent, 5 per cent, 10 per cent? I know it's difficult to answer without knowing the wholesale prices and the transportation costs.
MR. MCCARTHY: If I was still in the position I was in, in 2002, when I didn't raise my price, when the price went up, I didn't attract any attention with that, but this last round when the price started coming down, the wholesale price fell a lot faster than the retail price did and I started dropping as fast as the wholesale price was dropping, because I could. All of sudden Ultramar was sometimes minutes behind me. I don't know if they had somebody parked out there watching where I put my prices or what, but all of a sudden they were following me as fast as I'd go down and all of sudden I was in a position where whoa, the price started going back up and here I am and now if I buy another load of gas, I'm going to be losing money on it. So that's the danger for me right now but I would price today at least 3 cents a litre lower than I am right now, if that wasn't going to cause them to just react to me. Based on the wholesale price, I have to keep coming back to it. They're the ones who are controlling both sides of this thing, okay.
I can't compete on price because they're going to put me out of business if they choose to, and they can. They don't give their own dealers anything to work with, and believe me, I hear it time and time. A guy in Baddeck, who is buying from Wilson's Fuels right now, flying the Esso flag, I'm making nine cents a litre, he's making three and a half.
MR. CHAIRMAN: Thank you, sir. Thank you for that comment. Any further questions? Charlie has a question.
MR. PARKER: I just had a quick question. Obviously you have a good wholesaler who is treating you right and that you're happy with. Who is your wholesaler?
MR. MCCARTHY: XTR in Burlington, Ontario.
MR. PARKER: So, is it trucked from there, or is it trucked from Dartmouth here?
MR. MCCARTHY: No, the gasoline comes from the Imperial terminal in Sydney. One day the invoice has Irving on it, another day the invoice has Esso on it. If the invoice has Irving on it, I know the gas is going to stink when you burn it. That's not to say anything negative about it, it's just a different refining process and different base stock, that's all that is.
MR. PARKER: I had one other question, you'd mentioned early on in your message that you thought retailers should be allowed to buy from anywhere. You would open up a much more competitive market?
MR. MCCARTHY: If in reality there was more than one seller, or if I could buy from Statia Terminals, which is a totally independent, then, yes, there could be some real competition, but as long as Imperial is effectively the only supplier in Nova Scotia - nobody else owns their own supply of fuel, okay. How are you going to have competition under that regime?
MR. PARKER: Right.
MR. MCCARTHY: Ultramar is not terminalling any fuel. Irving's not terminalling any fuel in Nova Scotia any more. They've shared that all with Esso now. Esso doesn't terminal any in New Brunswick either, by the way.
MR. CHAIRMAN: Okay, sir, thank you very much. I just have to speed along now, sir. Russell MacKinnon has a question.
MR. MACKINNON: Well, actually an observation, Mr. Chairman. I wanted to compliment the witness for bringing his thoughts and his comments here today, some rather substantive and informative detail that I think all members of the committee will be taking notice of. Thank you, Mr. Chairman.
MR. CHAIRMAN: Thank you, at this time I'd like to recognize Jim DeWolfe, please.
MR. DEWOLFE: Just through you, Mr. Chairman, I'm surprised that you're able to purchase it at the amounts that you obviously are, but I'm wondering, why couldn't other operators in this province deal through this same wholesaler, and why do they sell to this Ontario-based wholesaler at a lesser rate than they sell to other wholesalers? What's going on here?
MR. MCCARTHY: Since you asked that question, I'm going to tell you the whole story about my supplier. My supplier is people who had a rift with major oil companies, these are all guys who lost their jobs with major oil companies. They said, okay, we can do this. So they went away and they're doing it. They don't buy their fuel from Imperial, that's just where it comes from. They buy their fuel from Emera. Emera buys it from Imperial.
Start paying attention to how many people are taking a profit along the way here. You think there isn't money to be made in that business? Do you think the wholesalers aren't gouging the consumers of Nova Scotia as well as virtually, enslaving - that's the word I'll use and use it freely - enslaving their retailers? The people who are refining it make a profit. The people who transport it make a profit. The people who store it make a profit. The people who distribute make a profit. In between me and that fuel that comes from the Imperial refinery or the Irving refinery, one or the other, Emera's taking a profit, XTR is taking a profit and I'm still making more money than any other retailer in Nova Scotia, I would wager, who isn't dealing under the same terms that I am.
MR. MACKINNON: Congratulations.
MR. MCCARTHY: I got lucky.
MR. CHAIRMAN: One last question, Jim. Was that it?
MR. DEWOLFE: That's it, thank you very much.
MR. CHAIRMAN: I'd like to recognize Mr. Brooke Taylor.
MR. TAYLOR: Thank you, William for your presentation and being so polite to answer our questions here. We were told this afternoon by the oil companies that they take exception to folks making charges of predatory pricing and price discrimination and price maintenance and things of that nature and I apologize to the members of that fraternity that made a presentation this afternoon because we don't want to attribute something to them that they don't deserve, but based on the information that we've heard during these open discussions across the province, I wonder, and this is more a comment than anything, what other conclusion we can come to. We were told no, you have to bring more facts, this is just poppycock.
MR. MCCARTHY: I can bring you any facts you want, Brooke.
MR. TAYLOR: Well, I'm quite sure you can, and so can the other dealers. I had a receipt or a trucking invoice for an independent dealer where he was purchasing his product for a price somewhat similar to yours, in fact he was buying regular unleaded for 84.5 cents and he was buying his diesel for 72 cents. Most of all the dealers who made presentations in Bridgewater and Yarmouth said that they were paying 90 cents for regular unleaded, having to sell it at a thin margin. I don't know, maybe I'm missing something here, but the only conclusion I can come to, Mr. Chairman, is that there sure appears to be price discrimination out there.
MR. MCCARTHY: In my comments to a question . . .
MR. CHAIRMAN: There's no further questions? Maybe we could have your closing comments now, sir, respectfully.
MR. MCCARTHY: I'll close with this, earlier I told you that if I had had to buy gas Wednesday, last week, before the price went up in Inverness, I would have been losing 0.5 cent a litre, at least, on the gas. Two days later the price did go up in Inverness, it went to 95.9 cents, which gives me, again, a very comfortable margin. That's for full-serve regular unleaded. The day after that price increase happened, the wholesale price dropped 3 cents. The price in Inverness hasn't changed, the price on the highway hasn't changed, the wholesale price has dropped twice since then. I get this daily. It's faxed to me daily, they tell
me what the price is. They're very open, very honest, very honourable people to deal with. I'm so blessed to be associated with them.
MR. CHAIRMAN: Thank you, sir. I would like to thank you for coming tonight, and both you and missus enjoy your vacation down in New Mexico. Thank you for coming up from Cape Breton tonight. We appreciate that very much, sir.
At this time, being 7:57 p.m., I would like to call the next witness, Joan Jessome, please. I would like go over the rules of the protocol of the committee tonight. We have 15 minutes for your presentation, and if you wish the committee will ask you questions. I have to remind you that what you say tonight is going to be recorded. You have the floor.
MS. JOAN JESSOME: Mr. Chairman, members of the select committee, I welcome this opportunity to appear before you this evening about the topic of the committee, which is the petroleum product pricing or the cost of petroleum products, such as gasoline. We understand that you have a broad mandate to investigate the supply and pricing of fuels, such as gasoline and home heating fuel. We are pleased these hearings are taking place, although we are concerned that they are being done in the middle of the Summer, when it may be more difficult for concerned Nova Scotians to come forward.
Nonetheless, I can assure you that the work of your committee is important to our 22,000 members and to the majority of Nova Scotians. This is not surprising, considering we've had an approximately 16 cent per litre increase in Nova Scotia for the price of regular unleaded gasoline, between January and May of this year, according to the figures from MJ Ervin and Associates. These figures are found in an appendix, and all of this stuff is included after the presentation.
We, therefore, disagree with the Daily News columnist, John McLeod, who stated in his July 11th column that these hearings are a huge waste of taxpayers' money. Mr. McLeod suggested there is nothing more to be learned or any new solutions to be considered. It is, after all, according to him, the free market that determines what will happen to the prices.
Well, Nova Scotians did not elect the free market to represent us in last year's general election, we elected 52 representatives who should make every possible effort to meet with and receive ideas from as many concerned individuals and organizations as possible on an issue as important as petroleum pricing. We also believe that it is possible for the government, working closely with Nova Scotians, to develop appropriate policies and directions that will benefit most Nova Scotians, which the so-called free market cannot do.
[8:00 p.m.]
As I said, this issue is very important to our members, in fact a wide range of our members have to use their own cars to carry out their work for the government in a broader public sector. This includes at least 40 per cent of approximately 2,400 civil service members, such as Public Health inspectors, food inspectors, agriculture inspectors, occupational health and safety officers, child protection workers, social assistance caseworkers, technicians and property assessors. It also includes a variety of front-line health care workers, such as Public Health nurses, addiction services counsellors, group home workers, home support workers and mental health workers.
As you know, our members who depend on their vehicles to do their work receive a mileage allowance to cover such vehicle-related costs, such as gasoline, insurance and vehicle maintenance. As a result of the last round of bargaining in the Civil Service, which ended in arbitration, an award that was given in May 2002, the current rates, retroactive to April 2000, were set at the following, and are also found in Appendix 2 of this presentation. You have the presentation before you, but with the rates.
Ten years ago the mileage rate for civil servants was 25.2 cents for the first 16,093 kilometres, today it is 34 cents. That's a 9 cent increase in a decade. At the same time, the Nova Scotia Private Transportation Index, (PTI) which measures the cost to buy, lease, rent and operate a vehicle increased a whopping 75.3 per cent over the same period. Since the current rate was set in May 2002, the index has increased by 70 per cent without any adjustment in the rate. The PTI figures are also included in Appendix 3.
In its 2002 ranking of the annual Canadian vehicle cost in selected location Runzheimer. International, a company that specializes in travel and living costs found that Halifax was the second-most expensive city to own and operate a typical mid-size vehicle with yearly costs exceeding $10,000. The study included factors such as insurance, fuel, maintenance and other fees, and costs associated with running a vehicle. More recently, Statistics Canada reported on June 22nd with a regular monthly release of Consumer Price Index figures that Nova Scotia had the largest 12-month increase of any province, with a 34 per cent increase in gas prices from May 2003 to May 2004.
With the Canadian Automobile Association estimating, in its 2004 Driving Costs handbook, that fuel represents almost two-thirds of the annual operating costs of a vehicle, Nova Scotians, especially for those who use their cars for work, are facing the greatest increase in the cost of operating their cars in the country.
All this means, with escalating gasoline costs in particular, the gap between the current mileage rates for our members and the costs associated with operating a vehicle in Nova Scotia continues to widen. As a result, our members are being forced to subsidize the actual cost of offering public services out of their own pockets. In fact, we are hearing from our members, who are at the critical point of having to decide whether or not they can continue to afford to work.
In our view, action must be taken in the very near future to update the mileage rates for our members in light of the increasing costs we face. These rates can be increased through an Order in Council, without having to wait for the Legislature to resume sitting, as can be seen in Appendix 4, and our mileage rates are among the lowest in the country for civil servants and other employees who are members of our national union component.
What we want to see is not simply a rate increase but an established process for regular adjustments to these rates. Our sisters and brothers with the P.E.I. Union of Public Sector Employees have had such a provision in place since 1982-84 Civil Service agreement. It allows for a possible monthly change of 0.3 cents for each 1.8 cent change, increase or decrease, in the price of regular unleaded gasoline, based on the cost of gasoline compared to other costs of operating a vehicle, such as depreciation, financing, insurance, licensing, registration, tires, repairs, et cetera.
The changes in their mileage rates since March 1999 are found in Appendix 5. As can be seen, this provision has been used for all but one month since March 1999. We understand that it's worked very well with few complaints from either the employer or the employees. As you know, P.E.I. is one of the two provinces in the region that regulate the distribution and sales of petroleum products within this jurisdiction. Its regulatory body is the Island Regulatory and Appeals Commission, and has been authorized to do so since 1990 under the P.E.I. Petroleum Products Act. It is also responsible for lands protections, utilities regulation and auto insurance regulation.
The commission produces a separate detailed dealer and consumer petroleum price schedule on a monthly basis, of which the most recent can be found in Appendix 6. In our view, this type of information does not seem to be readily available in Nova Scotia. More importantly, the work of this commission has apparently had beneficial effects, at least for consumers, as can be seen in Appendix 7. Charlottetown had consistently the lowest prices for regular unleaded cents per litre, compared to Halifax, Fredericton, and St. John's for each month in 2000-01, 2002-03 and most of 2001-02.
Newfoundland and Labrador has a Petroleum Pricing Office with a commissioner, which is part of the Public Utilities Board of Newfoundland and Labrador. This office is authorized under the Petroleum Products Act of Newfoundland and Labrador. As in P.E.I. they set maximum prices of the products they regulate on a monthly basis. While their prices appear to be higher than in other parts of the region, Appendix A shows that the average margin spread between St. John's and other centres in the region has decreased with the establishment to this office and the spread within Newfoundland and Labrador has also decreased.
According to the acting director of this office in June, 2004 in a media release, the public can feel confident that, given the ongoing volatility in the markets, maximum fuel prices remain justified. With our regulation model, prices do not increase or decrease in
Newfoundland and Labrador as quickly as they do in our regulated markets, but when changes do occur, they reflect the true market conditions since prices were last set.
As he stated in the July 15th release, "One thing is for certain . . . the PPO is committed to continuing its work to effectively research and monitor the market's pricing behaviour and its impact as well as ensure there is continued stability and fairness for regulated fuel prices in Newfoundland and Labrador."
In our view, the proposed benefits of deregulating the price of petroleum products in 1991 have been a bust. The Cameron Government promised reduced prices of gasoline and heating oil through increased competition, better monitoring of prices, more prominent display of prices and allowing self-service outlets. The experience, especially over the last few months, shows we are truly suffering with a deregulated price environment. Contrary to what Service Nova Scotia and Municipal Relations Minister Barry Barnet said on May 13th, the P.E.I. and Newfoundland experiences show that regulation does result in lower prices and certainly better service to the public in terms of monitoring and information.
Again, I appreciate this opportunity to speak to the select committee. We are distressed and alarmed at the rising cost of petroleum products such as gasoline and heating oil and what this means for our members. Public sector workers shouldn't have to choose between maintaining their vehicle and filling up their tank to visit an elderly client or conduct a safety inspection at a work site. The workers who deliver these services also have a right to travel in a properly maintained and insured vehicle for their own health and safety.
Therefore, we make the final recommendations for serious consideration by this committee:
1. The establishment of a systematic process to review and adjust mileage/kilometrage rates for Civil Service and other public sector workers on a regular - (preferably a monthly basis). Adjustments made once every few years during negotiations are completely inadequate. The P.E.I. experience of approximately 20 years shows it can be done and to everyone's advantage.
2. The reinstatement of regulated pricing for petroleum products to ensure fairness and stability, better monitoring and information to the public. The recent P.E.I. and Newfoundland and Labrador experience shows to us that the people of those provinces are much better served by price regulation. In addition, it would greatly assist in establishing a regular adjustment process for mileage/kilometreage rates. Re-regulation should not be dismissed without serious consideration of it's possibilities to help address the current cost escalation crisis.
If there's any doubt about the need for action on increasing prices at this time, I want to make sure you know what 200 provincial government employees in New Brunswick have
done this week with their government's lack of concern to the need for increased compensation for their increasing vehicle costs. They have once again withdrawn their personal vehicles from government services. They refuse to use their personal vehicles anymore to subsidize public services. I can assure you, our members are just as angry and frustrated with the government and employers' inaction here as well.
Finally, I also want to remind you that increasing gasoline and heating oil costs are one of among many increasing costs of living for our members and all Nova Scotians. When you consider all the various rising costs for food, insurance, power, water, post-secondary education, government services, to name a few, it is vital that this government take action. The buck needs to stop somewhere and it shouldn't be in the workers of Nova Scotian's pockets. I welcome questions.
MR. CHAIRMAN: Thank you for your presentation. You're open for questioning and I do have a question from Russell MacKinnon.
MR. MACKINNON: Thank you, Mr. Chairman. Just briefly, Ms. Jessome, thank you for your presentation. Would you have any idea as to how much the provincial government paid out in the last year on mileage to members of your organization?
MS. JESSOME: Not enough. I don't know unless it's in the budget or in the books. I wouldn't have access to that information.
MR. MACKINNON: Perhaps if you could give an undertaking that you would make a request of the government for that detail?
MS. JESSOME: I'll take the undertaking, I don't know if I'll get the answer.
MR. MACKINNON: Okay, would you cc a copy to members of the committee?
MR. CHAIRMAN: Do it through the Chair, please.
MR. MACKINNON: Absolutely. Knowing what our limitations are here, what specifically could you recommend to this committee - I've heard your general recommendations. I suppose since 1991 deregulation and I've heard the oil companies say today that they don't have a problem with regulation, but regulation prompts inefficiency. I've heard retailers come in and say they want regulation, I've heard a very impressive witness, just the last witness before we broke for dinner, who indicated that we should have full regulation, not partial regulation. What is the position of your organization?
MS. JESSOME: What we're asking for as part of our recommendations, we're asking for a form of regulation. We're looking at the P.E.I. experience. The reason I'm here tonight is representing public sector workers who are taxpayers and the cost of them operating a
vehicle and being able to go to work, it doesn't pay anymore. They're losing money. The insurance rates have gone up, they can't take people in their cars anymore, the insurance rate's gone up on that. We are getting calls and e-mails and letters constantly, asking us to speak out on this issue and that's why we're here doing the presentation tonight. Nine cents a decade on mileage is just disgusting. It's not acceptable.
MR. MACKINNON: Unless the committee could find ways to reduce the cost of fuel.
MS. JESSOME: Reduce the cost of fuel and 34 cents a kilometre wouldn't be a bad idea if the fuel wasn't 93 cents a litre.
MR. MACKINNON: Thank you, Mr. Chairman.
MR. CHAIRMAN: Thank you for your questions, Russell MacKinnon. Now I would like to recognize Mr. Jim DeWolfe.
MR. DEWOLFE: Thank you, Mr. Chairman. Through you to Ms. Jessome, if there's anything that's consistent it's the fact that the information that we're getting is inconsistent. I think you made the statement - I couldn't find it in your notes - that consistently P.E.I. has lower prices than Nova Scotia. I have one chart here that I just pulled off the computer in preparation for this committee and it's June 22nd and it shows the Halifax prices at 89.9 cents; Charlottetown at 94 cents and then again on June 29th, similar prices at 89.9 cents in Halifax and Charlottetown at 94 cents. It indicated that at least during that time prices were lower in Halifax than they were in Charlottetown. I did have guests in my area that indicated the prices were cheaper in New Glasgow than they were in Charlottetown at one point this Summer - if you can call it a Summer.
We've also heard that there is a cost to regulation that may not show up at the pumps, there is another cost. There's a lot of things for this committee - I'm just sort of making a statement if you want to react to it - for this committee to consider but, we are getting a lot of conflicting information.
MS. JESSOME: Jim, we've attached some things to this report and our research - the document is done by our researcher and he's basing it on talking to people over in P.E.I. and the union in P.E.I. and Newfoundland and looking at their collective agreements. (Interruption) Oh, no, I'm not disputing your research either, but there's no question, every presenter has given a different view and are here for a different reason.
MR. CHAIRMAN: You're point's taken. At this time I would like to recognize Mr. Brooke Taylor.
MR. TAYLOR: Thank you, Mr. Chairman. Joan, I'd like to thank you - Ms. Jessome, I apologize for the informality here, but thanks for the presentation. Actually, the researcher with NSGEU has provided a complete chart for every month of the years you referenced in your report. It consistently, month after month after month, it shows Charlottetown has been lower like your presentation suggested. Backed up by this information, and that's why my colleague I'm sure is as perplexed as I am. We are receiving conflicting information but some of the information we receive collaborates this, some doesn't. It is a bit confusing to say the least, but I personally believe there's value in price stability and having motorists and all Nova Scotians enjoy and fair and equitable price. Right now there's so much volatility in the price structure.
I'm just wondering regarding the dilemma or the concern that NSGEU faces with mileage, the present rate that's being paid, if the bargaining agreement, like the collective agreement you have, permits some type of intervention? Obviously you're speaking on behalf of your organization, but, has there been some movement or is it locked in?
[8:15 a.m.]
MS. JESSOME: We're working on negotiations with government, with the Civil Service in particular and a lot of the other contracts do follow along on what they receive in those rights. When you're given an opportunity to appear before a select committee and to bring your views forward and not just represent that one group of people under that collective agreement, we took the opportunity to do that. We're not here just speaking on the fact that members are paid a certain mileage, but it's all of our members who have a vehicle and the costs they incur trying to raise their families and pay for gas.
MR. DEWOLFE: That's fine. Thanks for the presentation.
MR. CHAIRMAN: Well, I guess that's it for questions. I do thank you for coming in and representing your organization and you have every right to do that, and I just wanted to inform you that this committee is listening to all presenters and we're going to try to do the right thing for Nova Scotians, so thank you for coming in this evening.
MS. JESSOME: When is the report due?
MR. CHAIRMAN: August 31st, we have to have our report to the House.
MS. JESSOME: Okay.
MR. CHAIRMAN: Thank you, very much. At this time I would like, I believe, to call our last witness for the evening, Ian Crowe. Sir, you've been with us this evening, 15 minutes for presentation and I'll inform you that everything you say will be recorded and at the end
of your presentation if you're open for questioning we'll entertain that. The floor is yours, just state your name for the record, sir.
MR. IAN CROWE: Thanks, Mr. Chairman, my name is Ian Crowe. I know it's getting late and everybody would rather be out in that nice Summer air than in here, so I won't take very long. I'm here, Mr. Chairman, because I made the mistake some 18 months ago of picking up The ChronicleHerald and reading an article by, I believe it was, the Finance spokesman for the Opposition Party, who was talking about much of what we're talking about here in this forum tonight, which is regulation and comparing the price in Halifax to the price in Charlottetown and saying well, look, there it is, it's cheaper to buy gas in Charlottetown than it is to buy gas in Halifax, regulation works, why aren't we doing it?
I took a look at the article. It had a lot of numbers in it. Numbers tend to make most people's eyes glaze over. My training as a chartered accountant and tax specialist unfortunately for me in some ways makes my eyes light up. I like numbers. So I looked at the numbers and my immediate thought was, gee, that's a little strange, and I thought to myself, well I wonder what the difference in the tax is. Really this is the answer to the question that was posed in the session that we just had, month after month the price is lower in Charlottetown because month after month, the taxes are lower in Charlottetown and I really don't understand why the committee doesn't grasp that, Mr. Chairman? I'm here because I'm angry because it continues to get bandied about.
I sat here for an hour this afternoon and I was interested in the hearings and I wish I could have stayed for the rest of them, but my time was up at the meter and I have to tell you, I looked outside at the sun and I thought I'd rather be out in the sun, so I went out there, and I went home to look at the media coverage, and I use that word loosely, of the hearings and they were generally representative about what happened, but both stations that I watched indicated that all three Parties, and you certainly might want to make some comments on this, are leaning toward regulation and the CBC then finished off their report by commenting that well, the price in Charlottetown is four cents lower than it is here.
Well, I'll tell you that the reason it's 4 cents lower than it is here is that P.E.I. charges 7 per cent GST, whereas we charge 15 per cent HST, that's 8 per cent. At current prices that's approximately seven cents per litre. So if the price is lower in Charlottetown by less than the difference in the tax, it's actually higher. It is a fact that the prices in Charlottetown, when you take the taxes out for the last years, which is what I've looked at, are consistently higher than they are in Halifax, month after month. I see nods from, Mr. Chairman, members of the committee who are still pointing towards P.E.I. and saying that well it's cheaper in P.E.I., we should go to regulation and what I'd really like to get is a sense from the committee that they understand that's the reason why it's cheaper to buy gas in P.E.I. and that regulation really doesn't produce lower prices in the long run. That's what I have to say.
MR. CHAIRMAN: Thank you for your presentation. Do we have any questions from committee members? Russell MacKinnon.
MR. MACKINNON: I do, Mr. Chairman, and I certainly respect the witness' opinion. I think it would be ill-advised to suggest that members of the committee don't understand the difference of mathematics between one province and the other. There are another set of variables and complexities that are attached to the issue of regulation versus deregulation and without reiterating much of what's been said by much more learned professionals in the industry, particularly the last gentleman who spoke just before our dinner break, I would respectfully perhaps direct that to our witness and he may want to look at some of the other issues other than that simple price differential that he refers to. Other than that, that's all I have to say.
MR. CROWE: May I comment, Mr. Chairman?
MR. CHAIRMAN: Only if the member would wish you to comment on that comment.
MR. CROWE: I mean no disrespect to the committee members, I really don't, and I don't wish to oversimplify the matter but with respect to the committee and all the politicians, it's the politicians who are trying to oversimplify matters, by pointing to a system in P.E.I. and saying well look, there it is, I heard it here today and I heard it from witnesses. It was interesting that John McLeod was referenced. I have spent the last 18 months looking at the price of gas in Charlottetown and Halifax. I keep track of it on a regular basis. I calculate the taxes on a monthly basis and I have a well-read interest and knowledge in the area and I don't see what purpose is served by continuing to make references to the regulated markets in P.E.I. as examples of how it produces lower prices. That was my point.
MR. CHAIRMAN: Thank you. I would like to recognize Jim DeWolfe.
MR. DEWOLFE: Thank you, Mr. Chairman, and through you to the witness, and I have to say witness it's too bad that you weren't here to listen to the entire proceedings because it was said and I myself had said that price regulation is not about lower prices. I have it written before me in my notes that it's about stability in prices and it's about fairness, fairness to the retailers, and fairness to the consumer. It's all about consumer confidence. It's to try to put consumer confidence back in the system that's not there now. So when we use P.E.I. as an example, it's not necessary to lower prices, the spikes are taken out of it. There's no steep rises today and down tomorrow. It provides stability for those who are putting gas in their underground storage containers and not having to worry that the price is going to fluctuate and they'll be selling it at a loss tomorrow. It takes the spikes out for the consumer. It's all about consumer confidence.
MR. CROWE: As long, Mr. Chairman, as the consumers and the committee recognize that the price of the stability is demonstrably, higher prices.
MR. DEWOLFE: Through you, Mr. Chairman, I just wanted to also say that it's not only you that's well versed in the subject, we're fully versed on it. We're learning new things each day, but we were fully briefed on this subject. We did study the before tax price of gasoline across this country.
MR. CHAIRMAN: Thank you, Mr. DeWolfe. At this time I'd like to recognize Mr. Brooke Taylor.
MR. TAYLOR: I'd like to thank our witness for coming in and bringing his perspective to the committee. It is welcome. I just want to speak a little bit on the taxes from my end and we're never too young to learn, but MP Dan McTeague and his Liberal colleagues did a study relative to gas pricing in Ontario in 1998 and that document is available. One of McTeague's recommendations that was never accepted or enacted by his federal Liberal Government was that the GST be removed from the flat taxes. At that time he didn't reference the BST. As you know, Newfoundland, New Brunswick and Nova Scotia has, I guess I'm not supposed to refer to it as the BS tax, but the HS tax and in order to remove that, you know how cumbersome that would be and you need the agreement apparently of the federal government and the three provinces.
But having said that, I do want to say that the Public Accounts of this province will confirm that the road taxes that this government is applying, and on gasoline it's 15.5 cents, is going, or the equivalent, there's not a dedicated fund, but the equivalent of those road taxes based on the information we have . . .
MR. CHAIRMAN: A bit more.
MR. TAYLOR: . . . and a bit more, the Chairman is accurate, so I'm comfortable with our road taxes going to government services. What I'm not comfortable with is the fact that the 10 cents that the federal government applies, that flat tax to each and every litre of gasoline, what disturbs me is that roughly $140 million is siphoned off annually, we just get a fraction back in the form of monies to go to our roads.
So we do recognize that there's tax and, yes, there's tax on tax, but from my perspective as a politician, I would be shooting myself in the foot if I thought that we could somehow take that tax off and if it was taken off, we would see a reduction in services, I honestly believe, because our revenue would decrease but, as well, a concern that I have based on the New Brunswick experience of lowering taxes and based on some other information and examples from previous years to New Brunswick lowering their fuel tax, or provincial tax, the oil companies didn't pass it on to the consumers and that's very
disheartening. So I do want to say that I thank you for the point and it's certainly well taken and absolutely accurate the point you made.
MR. CROWE: May I just close, Mr. Chairman, with some comments and then I'll be out of your hair. We can all get out of here.
MR. CHAIRMAN: Sir, it's not that you're going to be out of our hair. You have a right to be here and I hope you enjoy that right.
MR. CROWE: I am enjoying it. I also don't want to belabour the point. I think I've made the point and . . .
MR. CHAIRMAN: Sir, the Chairman is speaking. You've made the point very clear and if you wish to have your closing comments at this time, I will accept them. Thank you.
MR. CROWE: I would then because the comments that were made by Mr. Taylor, which while I agree with most of them, were not on point. I certainly agree that reducing the tax is, as you know, going to either reduce services or you're going to have to put the tax back somewhere else. I mean I don't disagree with any of those points but, you know, what I object to is the continued suggestion that regulation produces lower prices and I believe that the facts that are in front of you, I went and looked at the background information that was provided on the Web site, all the facts, I'm sure that you have many more facts in front of you that weren't on the Web site, all of those facts support the conclusion that it is higher taxes that produce the higher prices in Nova Scotia. I'm not asking you to reduce those taxes, I'm simply asking you to be honest about it and recognize that it's taxes that's doing it.
MR. CHAIRMAN: I will recognize you, Mr. Taylor.
MR. TAYLOR: I know our witness is very sincere and we're all very sincere and honourable people in this Chamber, but if somehow I implied during the course of these deliberations, either today or at the two previous hearings, that somehow we could lower prices, I don't know how many times I've said we can't wave a magic wand and lower prices by regulation, but what we want to do is make our consumers out there somewhat more comfortable than they are today about the volatility in the prices, the spikes.
MR. CHAIRMAN: And I thank you for that comment and I would just like to tell the witness that we're only three sessions finished tonight in five and there has been no recommendation made by the committee at this point that we're going to regulate or that's the action we're going to take. I think it's fair to say that we're continuing with our effort and this committee is doing its best to create fair practices for all Nova Scotians. Sir, we thank you for coming tonight.
MR. CROWE: Thank you for having me and I'll just finish, I think from what I've seen, which is not everything, I think the committee seems to be doing a good job so let me not leave any misconceptions.
MR. CHAIRMAN: We thank you for coming. Ladies and gentlemen, it's 8:30 p.m. and at this time we will call the committee to close. I would like to thank my very accomplished colleagues tonight. They're working very hard and spending a lot of time. (Interruption) Yes, it's correct, and I would like to thank all the witnesses who have spent many hours here today sharing information with us to help us make an educated assessment of the information being provided. Our next meeting will be in Cape Breton and we're looking forward to hearing the comments from the Cape Breton people as well. Thank you very much, good night, drive carefully, and enjoy your weekend.
[The committee adjourned at 8:30 p.m.]
