HALIFAX, TUESDAY, JULY 27, 2004
SELECT COMMITTEE ON PETROLEUM PRODUCT PRICING
9:51 P.M.
CHAIRMAN
Mr. William Dooks
MR. CHAIRMAN: Good morning, everyone. My name is Bill Dooks and I'm chairman of the committee. I do apologize for the time that was allotted for an in camera session but it was necessary to go over certain rules and structures of the committee once again.
At this time I would ask the committee members to introduce themselves.
[The committee members introduced themselves.]
MR. CHAIRMAN: At this time I would ask Mike Duda from Service Nova Scotia and Municipal Relations to come up. We welcome you here today, sir, and while you are getting ready, as you all know the road show part of the committee is completed and I believe we have had a successful opportunity to listen to Nova Scotians from the industry, the retailers, and also private citizens. The committee has received a number of submissions and, of course, they will be reviewed as if they were presented to the committee in public.
Today we're here as an information session, there will be no deliberations. We've asked certain people to come as witnesses so that if any of the committee members should want to gain information, they would have an opportunity to ask staff members. The time allotted was 9:00 a.m. to 11:30 a.m. and it's obviously now between 10:00 a.m. and 11:30 a.m., and the committee will adjourn at 11:30 a.m. sharp.
Sir, I don't know if you have any opening comments but if you do, please begin.
1
MR. MIKE DUDA: No, I don't, Mr. Chairman. Thank you very much for the opportunity to appear before you once again. I don't think any of the officials have any kind of presentation for you. We have provided various materials to follow up on questions that were asked on the session we had on July 8th so we can deal with that, or the presentations we made back on July 8th, now that you've had time to digest that material, perhaps we could go over that. I'll leave it up to you whichever way you want to go with this.
MR. CHAIRMAN: Should Frank Moore and Bernie Meagher join you at the front? Are they with you?
MR. DUDA: They're not with us. We have two gentlemen from the Department of Energy and a gentleman from the Department of Finance.
MR. CHAIRMAN: Well, if they wish to take a seat beside you, you may want them to answer questions.
MR. BROOKE TAYLOR: Our guests are going to take some questions from us and things like that. Do you have a list of folks who are going to be asking questions?
MR. CHAIRMAN: No, I'll take the list as you nod to the chairman, so I would say you would be first on the list, Mr. Taylor.
MR. BROOKE TAYLOR: I just had a question, I don't know who's appropriate. This morning I noticed coming in that the price of unleaded at our gas stations - these are in Halifax County and Colchester County - and in Middle Musquodoboit at the Esso, the price was 95.9 cents a litre; in Meaghers Grant, the price was 86.9; in Stewiacke, 91.9 cents; and in Dartmouth on Victoria Road at the Ultramar it is 89.9. As you folks know by now, at least we've heard a number of retailers and dealers complaining that their margin has shrunk, keeping in mind that it all comes out of one refinery, yet there's such a disparity in the prices, if you will. I'm just wondering, what do you chalk that up to?
MR. DUDA: First, if you don't mind - I'll get to your question - I'll just introduce Bruce Hennebury from the Department of Finance, Allan Crandlemire from the Department of Energy, and Bob Newcomb from the Department of Energy. They were here previously. I would just chalk that up to, those disparities in prices that you're speaking about, local competition conditions, nothing more, nothing less than that. Margins, obviously, they are very low at this point in time. I'm not sure what to do about that. They're just very low. If those prices are as you cite them, in some areas margins are lower than others.
MR. BROOKE TAYLOR: Mr. Chairman, I wanted to make that point that that's just in the short distance from Middle Musquodoboit to Halifax this morning. Those are the prices at the pumps, posted for everybody to see. During our public hearings around the province, our regional meetings, I had suggested, much to the chagrin of big oil, that it seems
like there's a bit of - I say with a certain reticence - price discrimination taking place out there. I just wondered.
I haven't heard anybody, during our hearings or during our briefing sessions - and some of them have been very intense - explain what the big problem with levelling the playing field would be. I still have some difficulty with that. When I'm talking about levelling the playing field, I mean the wholesalers, the wholesalers who are selling to these dealers, have a large variety of prices for the same product. If you look up the definition of price discrimination, or at least the definition I have in this report, Mr. Chairman, it says, when you are charging different prices for the same product. I'm just going to wait, and perhaps I'll hear an answer that will allay my fears that there is some price discrimination taking place out there.
MR. CHAIRMAN: Mr. MacKinnon.
MR. RUSSELL MACKINNON: Mr. Chairman, my question is of a slightly different nature. It's with regard to the tax that's charged on fuel in Native communities. I'm looking at this federal memo here, and I'll table it, that indicates - this is the Winter of 2000 - that the five Indian bands are currently charging First Nations tax, better known as FNT, a 7 per cent value-added tax, equivalent to the GST. The reason why I'm raising this is because I have a number of retailers in my constituency who claim that the playing field is not a level playing field when they're competing with their Native counterparts.
Perhaps the representatives from Service Nova Scotia could give us some insight on this tax issue surrounding fuel, Native versus non-Native communities. The concern is if the intent was, originally, to have that consideration for the Native community, that's fine, certain arrangements between the federal government and/or provincial government, in our case, Nova Scotia, with the Native communities, that's fine. But when you have non-Natives buying on reserves as well, then things get a little convoluted. Could the representatives from the department give some clarity to members of the committee around this entire issue, so I can better understand it?
[10:00 a.m.]
MR. BRUCE HENNEBURY: I could address it to a certain degree. As I'm sure most committee members are aware, under Section 85 of the Indian Act, Natives who purchase gasoline and other products on-reserve, for use on-reserve, are exempt from federal and provincial taxes on that consumption. That does not alleviate their responsibility to collect taxes for sales to non-Native, off-reserve. So that collection should be done.
MR. MACKINNON: How is that monitored?
MR. HENNEBURY: Canada Customs and Revenue Agency does the administration on the HST side, and Service Nova Scotia does the administration on the provincial gas tax side of it, the fuel tax side, not the HST. Now, it's my understanding that Service Nova Scotia is working on a program with most of the bands in Nova Scotia to set up a carded system, where Natives on-reserve, who live on-reserve, use a card that takes the gas tax off of the price at the pumps, which will go a long way to improving compliance in that particular area.
I'm sure Bernie Meagher, if he was here - he's on vacation this week - he's quite knowledgeable in that system and the progress to date on that system. That's a system that we've been working on, and I think it will improve compliance to a great degree in that particular field.
MR. MACKINNON: Mr. Chairman, if I could, I noticed with this particular tax arrangement, this FNT, Membertou, Eskasoni, Chapel Island in the general proximity, where I reside and represent, they are not covered with this particular tax agreement. So it would seem to me there's an imbalance here. Many of the non-Native retailers, some of who have been forced out of business, they claim because of this imbalance. I don't think I've received clarity that I have a comfort level in terms of monitoring the issue.
MR. HENNEBURY: The issue you're talking about, the FNT, is an agreement between the federal government and those bands. I can't really speak to that.
MR. MACKINNON: One final question, Mr. Chairman. With regard to the purchase of fuel by the Native retailers from the oil companies, is that the same? Do you know if it's the same fee or price structure as with the non-Natives?
MR. HENNEBURY: I'm not sure of that one. I would defer to my colleague from Service Nova Scotia.
MR. MACKINNON: Somebody in the department would have to know, because if you're charging a tax, you would have to know what you're charging it on. So if you know . . .
MR. HENNEBURY: I'm not sure of the exact structure, of how those sales go through the wholesaler to the retailer.
MR. MACKINNON: Well, who's monitoring it? Who's watching this?
MR. HENNEBURY: That would be Service Nova Scotia.
MR. MACKINNON: So there must be an answer.
MR. DUDA: Yes, we could get that for you. I don't have that now.
MR. MACKINNON: Thank you.
MR. CHAIRMAN: Howard.
MR. HOWARD EPSTEIN: Mr. Chairman, I have a series of questions, and I'll be happy if it turned out that you don't know the answers today, that maybe you might try to track them down, if this is at all possible. Some of this is detail and some of it is broad picture stuff. The first point had to do with availability of gasoline at the pump for people in rural areas. A number of the retailers who came to speak to us pointed out that with closure of gasoline stations, especially in rural areas, there are big distances for some people, as customers, to travel to have their vehicles filled up. I'm wondering if we know the location of stations in rural areas and distances that customers might have to travel. If you don't know this right away, I'm wondering if this data is available or whether you can point out to us areas in the province where there might be particular problems in terms of accessibility. Does anyone know the answer to that right now?
MR. DUDA: There is a digital map on Service Nova Scotia's site that provides a geographic location of each of the 522 outlets in the province. Just by looking at the map, you can see where the outlets are located, whether they sell self-serve or full-serve gasoline, and what brand they are. It's very informative, I would recommend that you look at that map, if you would like that information. I think it would give you a pretty good picture of how far people are from each outlet.
MR. EPSTEIN: Good, that's helpful. I'll have a look. A related point is, I wonder if EMO, the Emergency Measures Organization, has made any comments on the availability of gasoline supplies in the case of emergencies, for example, hurricanes or big Winter storms - big Winter storms particularly, some of which we've experienced this past season - and whether they had any comments about ways in which to deal with that.
MR. DUDA: I'm not really familiar with the procedures that they've set up to deal with any kind of fuel emergency or anything like that. I suspect they have put some procedures in place if that became an issue, but I'm not familiar with it.
MR. EPSTEIN: Should we track this down with EMO directly, or would one of you want to take this as a link, or shall we just try to deal with them directly?
MR. DUDA: I can try to get that information for you.
MR. EPSTEIN: That would be a big help. The next small point is that we've heard a lot from gasoline retailers about their reduced margins. Essentially we've heard from a lot of retailers saying that they're not making a living selling gasoline. I'm wondering if there
is any overall data on the actual reported incomes for tax purposes of gasoline operators in the province. Clearly, I'm not asking you for individual information, what I'm asking for is whether there's overall information for retail gasoline operators as a class, in terms of their reported income tax filings, particularly whether this information is available over time.
MR. HENNEBURY: We have not done any kind of analysis of that, so the information, as you asked for it, is not available. We have, as you're probably aware, or can obtain income tax information on various individuals, and companies and firms. One of the issues around it would be that we identify businesses based on sort of a standardized industrial code classification system. That's only as good as the individuals reporting in that particular system. What I could try to do is perhaps find some statistical information on that. It would be a great deal of work for us to do any kind of time series, to go back on that particular thing.
MR. EPSTEIN: CCRA does not already pull this out?
MR. HENNEBURY: Not necessarily by industry, I'll have to go back and see what kind of a breakdown. They may have it, and if it's readily available, then, by all means, we could . . .
MR. EPSTEIN: That would be great. Anything along these lines would be a big help . . .
MR. HENNEBURY: I'll have to check.
MR. EPSTEIN: . . . even if it's not a purely Nova Scotia picture, although, clearly, that would be the most desirable, but if it's Maritimes or national, that would be useful. Whatever is out there would be a big help.
I'm wondering if any of you know whether any studies have been done about the price of crude, as to whether we should regard the price of crude as a fair price in terms of its relation to what it costs to extract and place on tankers. This is an element of the price that has been rising over time, and that seems to be a big part of the element of the price to the ultimate customers. In many respects, it's been suggested to us, not only is this beyond our control but that it's something that we have to accept as simply being the case. Even if that is so, what I'm still wondering is whether there's been any hard look at what it actually costs to extract crude oil and get it into a tanker and what relation, if any, that has to the price that's charged for it when it's then sold to refineries.
MR. DUDA: Various agencies and consulting groups look at that, that's a very important issue. Over time, crude oil is a commodity, it will sometimes dip below the cost of extraction; sometimes, as I'm sure is currently the case, it will go well above the cost of extraction. Over time, obviously, it's lucrative enough that businesses continue to extract it.
I'm not sure what that figure is right now. It will vary from different crudes, depending on whether it's extracted from offshore Canada or from Alberta, your costs will be different. They look at the various cost structures of different crudes, so they know what the costs are. Again, it's a market-driven price. Sometimes it will be below, sometimes it will be above that cost figure.
MR. EPSTEIN: Anything you could direct us to would be helpful in that. At one point it was suggested to us by representatives of the oil companies that certain forms of regulation that we might be thinking of might run up against some of the provisions in NAFTA. I'm wondering if there's anything you can tell us that might form a restriction under NAFTA. I'm aware, for example, that there's the question of the difference between domestic and export prices, but I'm wondering if there's anything else that's problematic, or making a distinction between Canadian companies and foreign-owned companies, again problematic under NAFTA. I'm wondering if there's any other form of restriction that we should be aware of that's problematic.
MR. DUDA: I'm afraid I'm not an expert on that agreement. I don't know, besides the issues that you have outlined. If we tried to restrict supply from their refinery in any way, I guess that would be another issue. Product coming in or product going out, that would go against any kind of NAFTA agreement. Possibly if we tried to regulate the refiner price, that may also conflict with NAFTA. But again, I'm not an expert in this area.
MR. EPSTEIN: That, in fact, was the particular point. I think this question of the price coming out of the refineries, whether this would be problematic under NAFTA, I couldn't think why. I'm afraid we didn't get into a discussion about it with the oil companies' representatives at the time. Anyway, I flag it just as something in case you're aware of it. Can I ask whether the province is now or has recently been involved in any funding of public or mass transit for municipalities, or whether there are any programs that you're aware of that are available to municipalities right now, if they were thinking of moving into mass transit, beyond what they're already in?
MR. DUDA: The Department of Service Nova Scotia and Municipal Relations does support initiatives for public transit by municipalities. I can't remember the exact name of the program, but there definitely is a program to provide the study and the implementation of mass transit programs in the municipalities of the province.
MR. EPSTEIN: If there's something you could give us in detail about that, something that would outline how the program actually works, that would be a big help.
MR. ALLAN CRANDLEMIRE: And on a narrower basis, Mr. Epstein, both the Department of Transportation and Public Works and the Department of Energy are putting funds into the rapid transit demonstration program that HRM is moving forward with, that will have a rapid transit line from Cole Harbour and Bedford-Sackville.
MR. EPSTEIN: One final point, in your initial presentation to us, it was pointed out that in the tax structure there's an exemption for fuel that's used for fishing and farming operations. I'm wondering how long that's been in place, and what is the stated rationale for it?
MR. HENNEBURY: I can't really answer the first question. I will have to do some research to find out. It's been a while. I've been with government for 14 years, and I think it's been in since I've been there. The rationale, as I understand it, is equivalent to the rationale for exemption for manufacturers, they're considered part of that manufacturing operation. It's only the fuel used in the actual production processes, so it would be the fuel in their boats, the fuel in tractors, that kind of fuel, the fuel used in the actual production of their product that is exempt or is provided a rebate.
[10:15 a.m.]
MR. EPSTEIN: Would that be tax deductible anyway, regardless of what the price was?
MR. HENNEBURY: It would, yes.
MR. EPSTEIN: And that would be true regardless of what the price was?
MR. HENNEBURY: That's correct.
MR. EPSTEIN: Thank you.
MR. CHAIRMAN: Mr. Charlie Parker.
MR. CHARLES PARKER: Mr. Chairman, my questions, I guess, are going to be directed around regulation. We heard a lot from both independent retailers and consumers that some liked regulation and some did not. We heard some pros and cons, especially on the Prince Edward Island model, and I think later on we're going to be hearing from government people there who are involved with that aspect. We heard about Newfoundland and Labrador a bit and also, we heard a bit about Quebec and the model they have.
First of all I just want to know if you are aware of or if you know anything about the Quebec model on regulation. It's something that we don't have a lot of information on, we're trying to get more on that. I understand it is partial regulation or it's somewhat different than the P.E.I. model. Can you give us any update on that?
MR. DUDA: I have a little understanding of that in that I agree, it's what we would call partial regulation. I believe the legislation does not allow retailers to sell their product below the rack price, which is a refinery acquisition cost. This is to prevent predatory pricing
by a refiner or a larger oil company against an independent. I understand that is what is in place and we're trying to get hold of an English version of their regulations and legislation, but as I understand, that is what is in force now, that partial regulation that does not allow retailers to sell below that rack price.
MR. PARKER: Do you know if there is a minimum-maximum allowable for a retailer such as P.E.I. has?
MR. DUDA: My understanding is they do not but I'll check that. As I understand, they only have the partial regulation, they don't get into the wholesale price or the retail margins.
MR. PARKER: We, too, are trying to get more information on it and perhaps we can share that, if you get information or vice versa.
MR. DUDA: I believe the Department of Energy is trying to get that information now.
MR. PARKER: If we in this province were to go with some type of regulation, whether it is the P.E.I. model, the Quebec model, or something different, I think you mentioned before the idea that it could be regulated by government, or it could be regulated by an independent body associated with government. Any further thoughts on that? If this committee were to recommend it and if government were to go with regulation of some form or another, what is the easiest way to oversee it in Nova Scotia?
MR. DUDA: I'm not sure that there is an easy way to do it but I would recommend that it be an arm's-length body, perhaps the Utility and Review Board would be most appropriate if we did get into that scenario. I would also suggest that if we do go down the regulation route - and I'm not going to state my position on that one way or the other - that we not just partially regulate the industry, either regulate the whole industry or don't regulate it at all. I think you can see that from the P.E.I. and Newfoundland and Labrador model, that they just don't regulate the retail margin, they regulate wholesale prices and retail prices. So where you do have it in practice, they choose full regulation rather than just one aspect or another because I think if you try to regulate just one aspect or another, you will get into a number of unintended consequences.
My suggestion - from looking at this over time - would be that if the committee does choose to recommend regulation that it go the full regulation route. Partial will create all sorts of problems that we don't understand.
MR. PARKER: So you are recommending if the committee, or if government were to go with regulation, it's all or nothing?
MR. DUDA: I'm just taking that from what other jurisdictions practise. A lot of jurisdictions have put thought into this and some have acted on it and they go the full regulation route. Looking at it ourselves, we can't see how a partial regulation would work without setting off all sorts of unintended consequences.
MR. PARKER: I had another couple of questions, Mr. Chairman, if I could, unrelated to regulation. There was some talk by one or two individuals who brought up the idea of fair petroleum leasing guidelines. Is that something your department is familiar with or do you have any information on that?
MR. DUDA: No, I don't know what that means and I don't believe we have looked at that at all.
MR. PARKER: I guess we need to dig a little deeper to find that out. I do recall a couple of individuals mentioned that in their presentations.
Another thing we heard about was volume discounting to retailers, I guess, the wholesalers supplied a rebate coming back. Is that a common practice, do you know, in the industry where there is a certain price wholesale to the retailer but then - I know it happens in the food industry - there's a rebate kickback to the retailer, is that occurring in the gasoline industry?
MR. DUDA: I'm not aware of that. I think we heard in testimony that there may be volume discounts off the rack to a wholesaler by the refiner, based on volume and other criteria. I'm not aware of anything . . .
MR. PARKER: One step further down the line.
MR. DUDA: One step down the line from wholesaler/retailer, I'm not aware of that at all, no.
MR. PARKER: They had other names for it too, I forget what they were, but it's basically a kickback to the retailer if they had a certain volume or a certain amount.
MR. DUDA: I'm not aware of any of that.
MR. PARKER: Those are all my questions for now.
MR. CHAIRMAN: At this time I recognize Mr. Jim DeWolfe.
MR. JAMES DEWOLFE: Mr. Chairman, I would like to go back to sort of an opening comment my colleague, Mr. Taylor, brought to our attention with regard to the variance in price. I can remember around this table as noted, particularly since we started
public hearings and travelling across the province, that there is indeed quite a variance in price of petroleum products. As Mr. Taylor cited this morning, within a radius of about 45 miles, there's a variance of 9 cents, and that's not altogether unusual.
I have always been quick to point out during the course of these hearings the fact that a local garage in my community is usually a couple of cents less than the competitors in town. It's not surprising that that's where I tend to fill up and I'm no different than anyone else. I was in Antigonish the other day and instead of paying 8 cents more, I put $5 in to get me home and filled up at my local dealer. It just shows that consumers are now very much aware of the price of gasoline, and they want the best deal. For 2 cents, they'll drive across town, and I'm no different than anyone else.
Having said that, the big oil companies are always quick to say that if we were to put fairness in the system for the local retailers, those costs would in turn be passed on to the consumers. I say that's not the case. One thing that we did learn during the course of our hearings, very early on, and it wasn't something that we were necessarily prepared for, I don't believe, as a committee, was the fact that the retailers, in many cases, are not making sufficient profit. What this does is it results in more service station closures, and those closures are more likely to take place in the rural areas first. They're the ones that are hit first.
As a committee, it's our responsibility to try to put fairness in the system and to protect consumers' interests, and certainly one interest the consumer is very much aware of is the closure of their rural stations. We've heard from people who had to travel upwards of 50 miles to get a gallon of gas for their lawnmower, as a result of a service station closing in Cape Breton. It is in consumers' best interests to keep these rural stations going. If one way we can do that is to put fairness in at the retail level, then that's what we should do.
Going back to the 9-cent variance that was noted in this particular area, that indicates to me - and I said that publicly at a hearing - that there is enough wiggle room within to handle a fair price at the pumps for the retailer. Where they used to get upwards of 8 cents, many are getting less than 2 cents now. Having had the best and the worst, they seem to be quite happy to settle for 4 cents or 5 cents at this point. They would be quite happy, I think, at this point to get that kind of a profit on a litre of gasoline. It was pretty sad to find out that some of them make more on a bag chips and a can of pop than they do on the tank of gas they're selling.
I'm just wondering if you would agree that I am probably correct in saying that there is enough wiggle room at the wholesale level to put fairness, first of all, at the retail level, to provide a fair price for the retailer. I'm just looking - one of you gentlemen may care to answer this - for an honest opinion. I'm not looking at all the other aspects of it. I don't know how we're going to get to that point. I'm just asking the question, would you agree that there's enough wiggle room in there to provide the retailer with an option that would allow him to stay in business?
MR. DUDA: That's a very tricky question. I think what we call the marketing margin, that wiggle room, can be up or down. You will see, from the date we've provided, that some years it's quite low, some years it's a little higher. What the proper amount is, I certainly can't say. Some years it's more, some years it's less. Whether there's wiggle room there now to cut into that, I wouldn't want to hazard a guess. I would suggest, if you were to try to meet the retailers' request of a 5-cent margin, up from 2 cents, I suspect most of that would be reflected in a higher price, rather than wholesalers cutting into the marketing margin, the wholesalers' margin. I suspect if you gave that 5-cent margin to retailers, it would probably result in a higher price.
MR. DEWOLFE: Mr. Chairman, through you, we have heard time and time again that if the retailer was to put their price up by a cent, the next load of fuel they get is up a cent, and they're prepared to back all these statements up with facts and figures, and I would suggest, Mr. Chairman, that this committee attempt to acquire all that information that they stated they would provide for us, so that we do have the facts and figures. If that's the case, it's not the proper way to do business by the oil companies. It appears to this committee, and at least to me, that this has taken place, because we've heard it from one end of the province to the other. There's no fairness in the system. If they would pass that on to the consumer, then that's wrong.
[10:30 a.m.]
MR. DUDA: I have no evidence if that is occurring or not occurring. I won't go there. I go back to my earlier point, that if you are going to regulate that margin, 3 cents, 5 cents, 7 cents, whatever it is, you will also have to set that wholesale price, or the industry may respond just as you've indicated. That's why you can't . . .
MR. DEWOLFE: You have to do the whole package.
MR. DUDA: You do the whole package, because if you don't set the wholesale price as well, then who knows what might occur.
MR. CRANDLEMIRE: You will have to use some care if you are going to recommend setting a retail margin from this perspective. One talks about it as if it was just a defined item, but it's very likely that different retailers have different packages of services that they're getting from the wholesaler, that sort of thing. Obviously that impacts on the retail margin that they would have as well. You need to be sure, if you're talking about a single item as a retail markup, or what have you, that you're comparing apples to apples in terms of what services are provided in that markup by the parent company.
I would just make one comment as well, in terms of the comparison in prices this morning. I recognize the issue around driving 60 kilometres or 80 kilometres and seeing that variation in prices on a given day, but I would be much more concerned if there was that
variation in a period of prices that had been stable for a few weeks than in today's situation. I know in metro, there was a penny change in price last Thursday or Friday and there was a two pennies price change yesterday. On any given hour, potentially, you could drive past a couple of stations and someone has just dropped by two or three pennies, and someone else hasn't made the change yet but will in short order. As well, you didn't mention, but I assume that was a comparison, Mr. Taylor, for self-serve in every case, or were there some cases that were full-serve in that mix?
MR. BROOKE TAYLOR: The 95.9 in Middle Musquodoboit is full-serve, the 91.9 in Stewiacke is self-serve, the 89.9 in Dartmouth is self-serve, and the 96.9 is full-serve in Meaghers Grant. I should have made that clear.
MR. CHAIRMAN: Mr. DeWolfe, you're still . . .
MR. DEWOLFE: Yes, and just in response to Allan, we are aware of those issues that you brought to our attention, and thank you for them.
MR. CHAIRMAN: Mr. Gerald Sampson.
MR. GERALD SAMPSON: Mr. Chairman, welcome. I would like to go back to the First Nations issue, if you have any information. If I were to purchase, as a customer, on- reserve as compared to a First Nations customer, do I receive my fuel from a different pump, or how is that regulated? How does that happen that I would pay the 7-cent tax and the Native customer wouldn't?
MR. HENNEBURY: As I mentioned before, there is a system in place now, or will be in place soon - and I will have to check with some folks at Service Nova Scotia to find out exactly what the status of it is - and the new system will be a carded system where eligible Natives who are on-reserve, status Indians, will have a card that they will give to the retailer. That card will take the provincial fuel tax off the price for status Indians and so the price at the pump will include, or should include, it is my understanding, all provincial sales taxes. So as a non-Native person purchasing on-reserve, the price you pay at the pump should be inclusive of all taxes that you would pay off-reserve. The retailer on-reserve is responsible for remitting all of those taxes.
MR. GERALD SAMPSON: That's in the future. What are they presently doing from when they've opened service stations up, which is now a considerable amount of time, there's a tremendous amount of fuel being sold; what is the present monitoring system, or is there any?
MR. HENNEBURY: Again, I would have to refer it to Service Nova Scotia in terms of the actual monitoring system that was in place before. What I can speak to is the policy issue and the policy issue is, the retailer on-reserve is responsible for remitting taxes for sales
to individuals who are not status Indians. So if you were to go on-reserve to purchase fuel or any other product, the retailer is responsible for collecting from you all applicable provincial and federal taxes and remitting them to the proper authorities.
MR. GERALD SAMPSON: And that's checked federally, or provincially, or both by federal and provincial inspectors?
MR. HENNEBURY: Federally it is done through the Canada Revenue Agency and that's the HST side of it, the 15 per cent HST. Provincially, it's the provincial excise tax and that would be done through Service Nova Scotia.
MR. GERALD SAMPSON: But you do have actual individuals who visit the stations in question to check up on that or is it just an honour system where you wait until it comes in and if it doesn't, fine but if comes in, okay?
MR. HENNEBURY: The whole taxation system in the province and even the country is a self-assessment system, so we depend on that self-assessment. But Service Nova Scotia does have auditors who visit.
MR. GERALD SAMPSON: Mr. Chairman, secondly I would like to touch on rural gas stations. I'm just wondering if the province has any policy regarding rural service stations and the fact that the province intends to maintain, as an integral service in rural areas, a certain number of service stations. As evidence was given to this committee, they are an integral part of rural economic development, they're a necessity for a community also when disaster strikes. Is there any kind of a policy that just because there's a little station in the middle of nowhere and it's not doing these gigantic volumes of business, is it just put on the free market system and it's business as usual, if they don't hit these large quotas and whatnot and if the business fails, well tough, too bad, Joe, you have to close, goodbye? As we see now, there is a trend that everything is being drawn into the large urban areas and there's nothing out there in the rural areas.
I focus on this because after one of our meetings, a professional firefighter came to me and said this is affecting volunteers. If we have to drive 20, 30, or 40 miles to fill up our tanks and we're called upon to do volunteer work, or if fire departments need fuel, it's that local station that opens at 2:00 a.m. or 3:00 a.m. to fill up the fire truck so they can continually fight fires, whether it is in a wooded area or whatnot. I'm just wondering if the government is saying, I'm sorry, Mr. Oil Company, but you must maintain a service station in areas of X,Y, and Z, around the rural areas, or are those service stations just on the free market, the same as anyone else and if the business goes under, it went under because of business reasons, there's no incentive to keep them alive?
MR. DUDA: The current policy of the government is to let the market prevail and market conditions will dictate what stations stay in place and which do not. However, I will say that our minister is constantly writing to stakeholder groups to try to keep stations in place in rural areas and to also provide full service for various consumer groups. So I know that is going on but to get to your question, no, there isn't a policy, or legislation, or a regulation that regulates what you are talking about. We do take some action but again, it's within a free market environment.
MR. GERALD SAMPSON: Mr. Chairman, I emphasize that because I have heard words this morning like "fair" and "honest" and I don't know where that fits within the context with these rural areas. There is no way a person with 100 people in a community, or less, can expect that service station to compete with somebody in an urban metro area, and when the market dictates, it is survival of the fittest. These people, regardless of how hard they work, they're just not going to be able to make it and you can see there is a general magnetism, I guess, that has been slowly and steadily drawing everything into the large centres. I would just like to see a policy put in place and maybe it's something that could be mentioned. I applaud the minister for keeping on top of it to try to do what he is doing but I would like to see some kind of policy created or even mentioned, brought forward, for rural areas, because we did hear "fairness" a lot in the recent government times and I would like to see that put into practice. Thank you.
MR. CHAIRMAN: I would like to recognize Mr. Brooke Taylor.
MR. BROOKE TAYLOR: Mr. Chairman, I wonder if somebody could tell me, how many employees with Service Nova Scotia and Municipal Relations are directly or indirectly working on petroleum-related matters?
MR. DUDA: Since 1991, when we deregulated, I don't know that there is any government employee, whether it is in our department, SNSMR, or any other department who works full time on this particular sector. Certainly, there are a number of staff who you see before you, who spend some of their time on this matter. Auditors, as we've mentioned, audit these companies but they also audit tobacco companies, so their time is split as well. I don't know of anyone who is dedicated full time to petroleum markets only, but there are, I would suggest, probably a couple dozen that spend part of their time on petroleum-related activities, whether it is auditing, or tax, or the regulation side, or monitoring of the market.
MR. BROOKE TAYLOR: A couple dozen employees, approximately, on a part-time basis.
MR. DUDA: Some of their activities are focused on the petroleum market.
MR. BROOKE TAYLOR: I wonder, Mr. Chairman, too, at the Department of Energy, how many would be working full time or part time relative to some of the issues we are discussing on gasoline, diesel products and home heating oil?
MR. CRANDLEMIRE: We would have two or three people who part of their responsibility would relate to either monitoring pricing and reporting through weekly reports, monthly reports, information on our Web site, that sort of thing. As well, we have another person in our department who would deal with specification issues around low-sulphur gasoline, low-sulphur diesel that's coming in 2007, low-sulphur home heating oil not too long afterwards, and myself, as manager, I have responsibility across the board for refined petroleum products, but they are only part of each of those three activities that I mentioned.
MR. BROOKE TAYLOR: I wonder as well, with the Department of Finance, and I recognize that some tax administration and perhaps fiscal policy and things like that would have to be adhered to, but I wonder, how many folks are working on these types of matters on, I guess it would be a part-time basis, or if they happen to be full time?
[10:45 a.m.]
MR. HENNEBURY: In our Tax Policy Division, we have three analysts; however, only one of those analysts would deal with the issue of commodity taxation, and that would include fuel, tobacco and HST. We don't sort of overlap with any of the other two departments in terms of the administration, the audit and compliance with Service Nova Scotia, the Department of Energy has its issues. We don't do any analysis around pricing or market issues, we deal strictly with tax policy and fiscal policy with respect to taxation.
MR. BROOKE TAYLOR: I wonder as well, with other departments, for example, Environment and Labour, Transportation and Public Works, and Agriculture and Fisheries, just to name three other departments, if we could, for our information purposes, get some type of handle on how many employees, on whatever the basis is, full time or part time, are actually employed, relative to what I'll call deregulation, if you will, at this particular point. I would like to have a number, keeping in mind that it would be difficult to pinpoint the exact hours on a weekly basis, perhaps, but just for my edification, I think that would be helpful.
Mr. Chairman, we had a presentation from the Retail Gasoline Dealers Association, suggesting that the committee look at two potential solutions, if you will, to this dilemma that consumers and dealers are facing. One of them was the divorcement legislation, to get away from these integrated establishments. You have the refiner, the wholesaler and the retailer. We are also very aware of the fact that that would require a lot of co-operation from our federal friends in Ottawa.
Looking at their second solution - and they're representing the nearly 500-plus retailers that are in the province - what they would recommend, would be to introduce legislation similar to that in P.E.I. to establish minimum and maximum gasoline margins. Some people who are out there reading the tea leaves are suggesting that the committee's going to come in with some form of regulation, and the cost will subsequently be passed on to the motorists.
One of the presenters in Truro, or at least to name one presenter from Ontario, Ken Wootten, the President of XTR Energy, he claimed that his retailers - and I think he has 20 in Nova Scotia, and I don't know how many across Canada - Mr. Wootten claimed that their margins are significantly higher than other retailers. I don't know the spread, some of my friends can help me, but I think the lowest retail margin for people buying from XTR is 7 cents a litre. That's why I'm trying to glean from our presenters why the levelling up of the playing field, in terms of the wholesaler selling the price at a similar rate to retailers, would be a bad thing. I realize in P.E.I. there's no such thing as volume discounts. If there is, all the retailers enjoy the volume discount.
Would there be any of our guests who would have a comment on that? The man sat before us and told us, Mr. Chairman, that he's buying from the Esso refinery across the water and selling it to his retailers, and they're making a reasonable living. Other retailers are telling us, no, we can't buy it, we have to pay 90 cents, regular unleaded, somebody else is paying 84 cents, and it's a real dog's breakfast out there in terms of pricing. From your perspective, what the heck is going on here? What gives?
MR. DUDA: I stated right upfront on July 8th, that this is a very complicated and complex industry. One of the reasons, as you've just given, is you have a wide range of possible margins. Part of the reason, I'm quite sure, is, you heard from a lot of self-serve operators, they're probably in the 2-cent, 2.5-cent range. Mr. Wootten, I believe many of his stations are full-serve, so his margins might be higher. I will take him at his word that his retailers are getting around 7 cents. I don't know, but if that's what he says.
It depends on whether you're self-serve or full-serve, that's one issue, where you would be located, the competitive conditions within your market, a whole lot of different things come into play to explain that variation. So it would be very difficult to regulate a retail margin that would be fair to the folks who are maybe only making 2 cents, and those folks who are making 7 cents. Where do you draw the line? Do you say everybody gets 7 cents? Well, then the one who is only making 2 cents now is going to make a whole lot more money. If you set it down to 3 cents or 4 cents, well, the guys who are making 7 cents now are going to take a hit.
It's very difficult to pick what that margin is. There are all sorts of variations - when you look at this sector, there are all sorts of variations there and it's very difficult to pick a number, if we had to.
MR. CRANDLEMIRE: There's a chance that the basket of services from XTR as a wholesaler is quite different from the basket of services from some other wholesaler, where the margin is very different. I don't know the details, but I would expect that there's a wide range.
MR. CHAIRMAN: I think Gerald Sampson has a point of order or some information that he . . .
MR. GERALD SAMPSON: I can add some information for you, if you want, Mr. Taylor, the notes I've taken on Mr. Wootten.
MR. CHAIRMAN: First of all, Mr. Sampson, we would ask Mr. Taylor if he would entertain . . .
MR. BROOKE TAYLOR: Sure. I had a couple of other questions (Interruptions) I would appreciate some information from my good colleague across the way.
MR. GERALD SAMPSON: Mr. Wootten stated that he has 20 retailers in Nova Scotia, as you said, soon to be 21. In Canada, he has just over 70 dealers. His suggestion was that there's a need for protection for wholesalers, dealers and consumers. Quebec has an exhaustive process, but they also have the largest number of independent dealers. He seemed to be the person who would come to the rescue of some company that was going under, that couldn't afford one of the big gas companies, and before they were closed and they were on the rocks, he would come in and salvage them.
MR. BROOKE TAYLOR: I appreciate that. There are a lot of contractual arrangements that preclude retailers from buying from a wholesaler that sells at a price that is quite a bit lower than other wholesalers. That's the point I was trying to make, that if Mr. Wootten can purchase it as a wholesaler - and I realize he doesn't have a big overhead or things like that and there are a lot of complications and factors at play. I've heard a lot of excuses but very few reasons as to why we couldn't have a level playing field on the wholesale level. Yes, it may mean looking at the retail level as well, in terms of margins, but surely to goodness if Mr. Wootten from Ontario can come into Nova Scotia and purchase petroleum products for a reasonable price and sell it to his retailers at a reasonable price, others might do the same thing. I'm just looking at that scenario.
The point that I was hoping to make was that it doesn't necessarily mean that the prices have to go up at the pump, because they're buying it at a lower price to start with, a lower wholesale price, that's where I was going with that. I'm just wondering if our guests, again, had a comment on the price that the wholesalers are purchasing from the refiner. There are questions about the refiner margin, too. I'm just wondering, what's so bad about wanting to have our wholesalers paying prices that are similar from the refinery, the one refinery? If everybody's buying from Esso, what are the pros and cons, from your perspective? Perhaps
our guests aren't the ones I should be asking this question to. What's so bad about wanting to see our wholesalers selling to the retailers for the same price for the same product - and adjustments, perhaps, for transportation, could be considered - what's the drawback as you see it?
MR. CRANDLEMIRE: I guess the very fundamental question I would have is, what problem are you trying to fix with that? I'll just go to one issue here. Suppose that to support small independent retailers, we want to guarantee a retail margin of 5 cents across the board, and let's keep the world simple for a minute and assume that the services from all the wholesalers are exactly the same. What's to stop a retailer who has his five pennies, from offering up all kinds of Canadian Tire option points or President's Choice bonus points or what have you, so that basically he undoes everything that you would try to achieve by regulating that 5-cent markup?
The marketplace is incredibly adept at working around whatever mechanisms are there to their competitive advantage. You certainly see that recently, with big-box retailers getting into the retail gasoline business. I think it would be quite difficult to come up with a system that keeps ahead of some of the biggest retailers in the country.
MR. BROOKE TAYLOR: Mr. Chairman, that may well be, but the jurisdictions I referenced this morning - for example, Meaghers Grant, Middle Musquodoboit, Stewiacke - they don't have those big-box stores. I don't think that would be a factor if those folks were buying at a wholesale level that was fair. The retailer, I believe, has to be able to pay a fair price, and they're certainly more than willing to do that, but when you have invoices that indicate, in the same week, that a person in one location in Nova Scotia, of comparable distance from the refineries, is paying 84.7 cents for regular unleaded and another, in that very same week, is paying 90.16 cents - and that was Rodney in Bridgewater - then, obviously, the playing field isn't level.
There seems to be some price discrimination out there. Until somebody can come up with a justifiable reason for that, or at least something that's comprehensive, other than different anecdotes and cross-merchandise shopping and all that kind of thing, I have some difficulty with that.
MR. CRANDLEMIRE: I can't explain that spread in prices.
MR. BROOKE TAYLOR: I appreciate that.
MR. CHAIRMAN: The speakers in line would be Danny Graham, Russell MacKinnon and Michele Raymond. At this time, I would like to recognize Mr. Graham.
MR. DANIEL GRAHAM: I want to thank you for coming and presenting your positions. In addition, for those who provided us with additional information today - perhaps it came from Service Nova Scotia - I would like to make special thanks, because I will be referring to some of the documents that have been provided to us just this morning.
Mr. Chairman, throughout our deliberations and the presentations, we've been encouraged by various parties to measure fact over emotion. Mr. Simpkins, from the Canadian Petroleum Products Institute, has, for example, encouraged us on a number of occasions not to create unintended consequences by the efforts that we're about to take. Mr. Crowley, from AIMS, has asked us to establish the truth through evidence and reason, and not through emotion. I think that we should be guided by that. I think those are helpful words of advice for this committee, because it's easy to take the anecdotes that you hear from various people who present, frankly, an emotional and compelling case, and pull them out of context and potentially create unexpected consequences. Nonetheless, we have still heard some pretty compelling stories, and there is a consistency to some of the things that we have heard.
Mr. Chairman, these are witnesses before the committee who I think provide us with some of the most substantive and objective evidence. I would ask - I know you've provided others with some flexibility, I intend to touch on about five subjects - for some flexibility when we're doing that, but acknowledge at the outset that, from my perspective, this committee, through its recommendations, is not going to be able to save Nova Scotians from the volatility of world prices with respect to petroleum products. But it does have the potential - I think greater potential than some might give it credit for - to help smooth expectations and ensure that Nova Scotians are better served than they have been, whether they're retailers or whether they're consumers of this product.
First, I would like to start with the issue of prices, and there's been much said, and perhaps I'll set out at the beginning what those five general subjects will be. I would like to talk about prices, regulation, closures generally, then margins and finally taxes. All of those things are interrelated. First, with respect to the issue of prices, in the information that was provided to us this morning there are a few colourful graphs, setting out the regular self-serve gasoline prices at the pump for Halifax, Sydney, Yarmouth and Truro compared to Charlottetown. Perhaps not surprisingly, Charlottetown is lower than the Nova Scotia prices, consistently since 1998.
There is, of course, an adjustment that needs to be made for that, and that relates to taxes, so the most compelling of those, when it comes to the question of regulation, is the one that is the chart that refers to the regular self-serve gasoline prices before taxes. I'm not sure whether my eyeballing this graph is a fair eyeballing, but in the graph that was provided to us this morning, this is the before-tax cost of gasoline, it would appear to suggest that, by and large, the price in Charlottetown is about the same, since 1998, as the price in the Nova Scotia communities. Now if that assumption is wrong - some years it's a little bit higher,
some years it's a little bit lower, and in the most recent year, 2004, it's even, if anything, lower before taxes.
[11:00 a.m.]
MR. BOB NEWCOMB: My name is Bob Newcomb, and I created that information for you. If you go to the back of that package, the actual numbers are there so that you don't have to guess by eyeballing. The actual numbers are there. In the before-tax price situation, probably about 60 per cent to 70 per cent of the time - the Charlottetown price since 1998 has been the highest of those five regions, on an annual average with the five regions coming forward. That's on a before-tax basis. Yes, by the time you take all the tax implications out and take the tax systems out and just look at what the gasoline market is doing, over the last five years the Charlottetown prices tended to be higher than the Nova Scotia prices.
MR. GRAHAM: When I look at this, if we take 2004, for example, it doesn't appear as if there's anyone who, before taxes, has a lower price than Charlottetown, in 2004. Am I mistaken?
MR. NEWCOMB: The before-tax prices?
MR. GRAHAM: In 2004.
MR. NEWCOMB: This is an average for the six months of the year. It has Charlottetown at 49.4 cents, Halifax is 49.1, Sydney is 49.6 (Interruptions) It's the bottom of the three tables. In this case, Truro and Halifax have been slightly lower than Charlottetown, and Sydney and Yarmouth have been slightly higher than Charlottetown, in the year to date, this year, on the before-tax prices.
MR. GRAHAM: Would you attribute this to the cost of regulation, or would you attribute it to market forces?
MR. NEWCOMB: At that point, right now, looking at this, it's hard - I don't think any statistical evidence would be conclusive as to whether it was regulation or whether it was just transportation differential, because Charlottetown is farther away from either the Halifax rack or the Saint John rack. So which it is, I don't think any statistics would give you a statistically significant answer to that. It's part of the mix, when they're this close.
MR. GRAHAM: Can you give us a sense of what the average price differential is over those years? I think this is an important piece of base information for us to do a comparison on. Is it roughly a cent a litre per year, or is it something less or more than that?
MR. DUDA: SNSMR has done a similar analysis - not as pretty as Energy's, however - just the numbers, back to 1991. Over the last five years, the differential has averaged 1.8 cents per litre on an ex tax basis. I think if you go into the years before 2000, you will see that, on average, the differential was probably higher than that 1.8 cents. There were some years where it was 5.3 cents, 4.2 cents, 6 cents, in the mid-1990s, that sort of thing. So the differential seems to have gone down over the last five years. But according to that data, over the last five years, the differential between Halifax and Charlottetown is 1.8 cents.
MR. CRANDLEMIRE: I don't think one can categorically say that regulation costs 1.8 cents or that it's higher just because of regulation. What one can say is, clearly a regulated market doesn't have lower prices, it's just the opposite way, it's tended to have, on average, higher prices by the 1.8 cents, whatever factors you attribute that to.
MR. GRAHAM: I would like to go to the chart that you provided this morning for the final price, taxes in, and Charlottetown has in fact had a lower price, consistently, than the Nova Scotia communities since 1998. Is that fair to say - after tax?
MR. NEWCOMB: The actual pump price?
MR. GRAHAM: The actual pump price.
MR. NEWCOMB: The numbers are there, and they speak for themselves, yes.
MR. GRAHAM: Has there ever been discussion within the department - and I know that this is a complicated issue because we're tied into two other provinces and the federal government - and this has been suggested by a number of presenters to us, that we find some way, when the price per litre goes above a certain amount, to eliminate the provincial portion of the HST on gasoline?
MR. HENNEBURY: We've had no discussions at a policy level about changing the way the tax is applied to gasoline based on price. It would not be considered, I don't think, appropriate policy to change, particularly a commodity like gasoline that changes on a regular basis. To continually change tax rates and the way its applied, with the changing price, it would be simply far too complex, I believe, for retailers, wholesalers, and for the government to simply collect it. So no, there have been no discussions about changing the policy around how HST is applied to petroleum products. Does that answer your question?
MR. GRAHAM: Yes, I think it does. Could you give us a sense of how challenging that would be? Are we back to the old question of HST and the relationship that we have with other provinces?
MR. HENNEBURY: Yes, to a certain degree. We could not do it unilaterally, it would involve actually changing the tax base and under the HST agreement the tax base must remain harmonized between the three provinces and the federal government. So what we would be challenged with is having the other two provinces agree that it was a proper thing to do, having the federal government agree that it was a proper thing to do, and that would be a national implication for the federal government; and secondly, the implications that it would have from an administrative perspective on gasoline retailers and wholesalers, and for the government in terms of collection. Essentially what you would be talking about would be a base that changes with price and that's a very complex situation to get involved with.
MR. GRAHAM: We sell - what is it? - 1.4 billion litres of gasoline in Nova Scotia per year, is that the number?
MR. HENNEBURY: It's 1.2 billion, I believe.
MR. GRAHAM: If the price of gasoline were to go from 80 cents to $1 per litre, for example, the province's take on that is roughly 25 per cent, is it not?
MR. HENNEBURY: Well yes, but you have to realize that the gasoline tax itself, the excise tax is fixed per litre, so it would not change with price.
MR. GRAHAM: It's not a matter of percentage?
MR. HENNEBURY: No.
MR. GRAHAM: For every 10 cents that the price of gasoline goes up, do you know how much the government receives in unexpected revenue?
MR. HENNEBURY: That's a question that we actually had addressed at our last session. I can tell you that if the price of gasoline was to go up by 10 cents per litre, the government would collect an HST of 8 per cent of that, so 0.008 cents on that 10 cents. We don't change our revenue forecasts to increase HST by that amount because we believe that HST is a broad-based tax that applies to all goods and services, and while the shifting may occur between tax and other commodities, the overall amount of HST collected would not change.
MR. GRAHAM: In relation to gas, how much extra money, just on gasoline, would come into the provincial coffers as a result of a 10-cent increase per litre in gasoline?
MR. HENNEBURY: I would have to go back and do that.
MR. GRAHAM: If you did the 0.008 times 1.2 billion . . .
MR. HENNEBURY: It's not quite as simple as that because probably about a third of all gasoline purchased is purchased by businesses who claim input tax credits, so that would not be additional HST. As well, probably about 90 per cent of all diesel purchases are businesses, and that again would be input tax credits so it would not be a revenue to the province.
MR. GRAHAM: You don't even have a rough estimate? Is it $1 million or is it $10 million?
MR. HENNEBURY: Again, I would rather go back and have one of my analysts look at it, as opposed to giving you an answer here on the spot.
MR. GRAHAM: Turning to the question of regulation, quickly. One of the things that we've heard from truckers and others is that regulation provides those who are planning their businesses to smooth out the effect of spikes in prices. They say when you go to the bank and you've got a big truck, and you've had to pay $200,000 for it, the first thing you need to do is present a business plan and your biggest cost is the cost of gasoline. If the cost of gasoline increases by 30 or 40 per cent, your entire margin is wiped out and the business plan doesn't exist as far as the bank is concerned, and you're apt to lose your truck just as easily.
How much consideration has there been around regulation in recent times? I would like to hear Mr. Duda respond to this because you had indicated that you would want to go in regulation to the "full monty" and not try something short of that. We've heard from a number of people, including the head of XTR, I believe, and David Collins at Wilson's, that partial regulation is their preferred approach; they liked the Quebec model. Mr. Collins set out a number of steps that have been taken in other jurisdictions. In the presentation that he provided us with he says there is a Petroleum Marketing Practices Act in the United States that covers the whole country, we don't have anything similar; over half of the states have a similar type of legislation; retail divorcement exists in a number of states, we don't have any in Canada; below cost sales, as a general matter, in 24 states and with respect to gasoline in 16 states, and we only have Quebec that does that.
I'm just wondering whether or not we've done what you would consider to be an exhaustive consideration of all of the steps short of full regulation that would give us more stability for retailers and in some respects for truckers and others who are trying to plan their businesses?
[11:15 a.m. Mr. Brooke Taylor took the Chair.]
MR. DUDA: I believe my earlier presentation on July 8th outlined probably about nine different options that we have looked at over the last six months or so. It is not an exhaustive list, we did not look at divorcement, for example. We did not look at the Quebec response. When I'm talking about full regulation, what I'm speaking about is the wholesale
and retail margin. You could do something like Quebec, you could do something like the United States - and those are partial regulations, I'll grant you that - I think they could be done, but when you're speaking about retail margins and wholesale prices, to my mind, in my opinion, those should be done as a package. To answer your other question, no, we have not looked at everything. We have looked at a good number of options, but we haven't looked at everything that may be practised in other jurisdictions.
MR. GRAHAM: You had indicated that there may be some unintended consequences to partial regulation. You made some general comments, and I think Mr. Crandlemire gave us an illustration of what might be one of those, if we were to recommend regulation at the wholesale level, and that is that Canadian Tire, which is selling gasoline, decides to introduce a competitive advantage by giving out more Canadian Tire money or some such thing as that. I'm not sure if I accept that as a response to this particular problem, because the question in those areas where the margins are so thin the stations might close, it doesn't appear to be one of volume, it seems to be one of price. They've got lots of volume, but they aren't making any money on that volume, and if the margins were better, then they would be fine and they wouldn't mind if Canadian Tire, perhaps, provided the competitive advantage they did, because all they want is for them to have a better margin. It's not a question of increasing volume or having that kind of a competitive advantage.
I'm just wondering, I think the committee needs to feel satisfied that we have really asked all the hard questions about what partial regulation might look like. Frankly, the question that we have been faced with most squarely is the one that suggests that there is something approaching - this is what's been suggested to us - predatory practices on the part of wholesalers to retailers in this province, that a suggestion that was provided by the main wholesaler in the province that we could see, in the next few years, as many as 150 closures of service stations, mostly in remote areas. That's an issue that I think is of real concern to this committee.
If, in fact, he's accurate in that prediction, then it certainly raises the spectre of some type of wholesale regulation to retailers, at least, to ensure that the people in Canso - and we heard the square testimony of the only fuel station in Canso, saying I'm going to have to shut my business. We all know how far Canso is from the next large community, it's not a short distance. Could you just give us more comfort that this issue of partial regulation is a bad idea?
[11:18 a.m. Mr. William Dooks resumed the Chair.]
MR. DUDA: I think, for example, if you just regulate the retail margin, 5 cents or whatever, and don't touch that wholesale price, you could still have volatility in that price from day to day. You would not be changing that issue at all, because much of the volatility in the price occurs at the wholesale level or upstream from there, i.e. the crude, the refining or the wholesale. That volatility doesn't occur so much in the retail margin.
MR. GRAHAM: What's being suggested is actually the wholesale regulation. For example, 5 cents at wholesale to retail.
MR. DUDA: Okay. Our terminology is different here. I'm talking about . . .
MR. GRAHAM: From Wilson's to the independent retailer, for example, that 5 cents is guaranteed. I'm just picking that number off the top of my head.
MR. DUDA: That is what we call the retail margin. The other aspect of that is setting the price the wholesaler sells to the retailer, that's different. You could have wholesale prices varying from day to day but they would always have to have that 5-cent margin on top of there. What I'm saying is, in my opinion, if you're going to regulate either one, you should regulate both of those.
MR. GRAHAM: I'm seeing the hook from the chairman, and he's graciously giving me one last line of questioning, and I'll do it quickly. It relates to margins. You provided us, in your earlier presentation, with a suggestion that these are charts, contained about five or six pages in, in your original presentation, that the refiner margin for gasoline was about 14.3 per cent - let me just deal with that, I'll just deal with margins generally. The marketer margin for furnace oil prices is 18.7 per cent, and the marketer margin for gasoline is 7 per cent. Some people are familiar with the practice of the oil companies, particularly when they're integrated, of providing large apartment owners with substantial discounts in their furnace oil price, as much as 20 per cent on the price.
One is left wondering if the margins are too big, with respect to home furnace oil, and it raises the question of whether or not there are hidden margins inside gasoline that are just as big or whether there are larger margins that are made up, particularly for those integrated groups at the refinery or some other way. Could you just comment on that, please? I'm not sure if I was as clear as I wanted to be.
MR. DUDA: I'm not exactly clear what the question is, but there is a difference in the marketer margin between gasoline and furnace oil, for sure. A large part of that is the additional distribution costs, you're delivering to a number of houses and apartments and so on versus one gasoline station. So, right there, the transportation is much less for gasoline. There are discounts based on volume, but other criteria, within the furnace oil business, so I'll get a discount of 2 cents from my particular volume and good credit, but an apartment will get an even larger discount, let's say 5 cents, because they're a larger volume and they may have an even better credit history, whatever. There are a number of criteria. Yes, there are different marketing margins for different customers in the furnace oil business.
MR. CHAIRMAN: Just to remind the committee and our witnesses, the time is now 11:22 a.m., and we were going to wrap up at 11:30 a.m. but we want to permit the committee members to have their questions answered. So if it's necessary for us to go into an extended time, we shall. Russell MacKinnon.
MR. MACKINNON: Mr. Chairman, I'm just reading a memo here, dated February 23, 2004, from David Collins, Wilson Fuels. It says that Esso has a target margin, over the run of a year, of rack plus 4.5 cents per litre, inclusive of freight. Their budgeted number is rack plus 4, inclusive of price. It would appear to me that there are a number of variables that are at play here. I put that there, because many of the small, private independents complained that it's costing them more to operate than their revenues. This would appear to me as if - and maybe my terminology is not quite appropriate but - the fix is in.
In 1991, when deregulation took place, it was premised on two factors: (1) to increase competition; and (2) to provide a lower cost to the consumer. We've heard a lot of interesting scenarios about how the terms of reference and the relationship between the large oil companies and the independent retailers have changed in the last two years, introducing their relationship through the large-box stores and so on. Now I notice particularly, many of these large-box stores, for example, like Sobeys, Loblaws, Canadian Tire and so on, offer coupons to consumers, things that the small, private independents cannot do, whether it be the Air Miles card or you buy x amount of groceries and you get 2 cents off your next fill-up of gasoline at a certain service station.
Has the department monitored this change in the relationship between the wholesalers and these large corporations, in the context of how it has impacted the independent retailers that have now gone from 900 down to less than 500? All indications are that that will continue to decline. Maybe there is a consumer satisfaction there, but at the end of the day, are they paying more or are they paying less? Who's monitoring this? I raised this with an oil company official during the Sydney deliberations, when we were on break. I got kind of a nice, friendly smile when I asked whether the consumers were paying more or less at the end of the day, but perception being reality, it was as long as they felt they were getting a bargain they would buy into it, but in reality they were paying more.
Ergo, the reality of what's happening here is that we have not increased competition. We've actually suppressed it. Consumers are now paying more with the introduction of these other factors, outside of what the spirit of the legislation has intended. Has anyone within your department monitored this issue and done an analysis of it?
MR. DUDA: We monitor prices, we monitor developments in the industry, and, as I indicated, we are quite regularly in contact with stakeholders in the industry to voice our concerns; however, we don't have any policy or legislative or regulatory tool at our disposal to address that kind of issue.
MR. MACKINNON: How significant an issue is this? Am I misreading something here? According to this memo, it would appear that anyone who's retailing for Wilson's is in a no-win situation, the fix is in between Esso and Wilson's, and the issue has been raised, about the separation of wholesalers and retailers. Something's amiss here. It seems like we're glossing over a lot of issues, but not getting right down - I believe Mr. Epstein drilled down, going back to the rack price and the cost of refining and so on. I'm concerned that the department has been somewhat silent, and maybe just in a state of ambivalence about this, and I don't mean that in a disrespectful way but it's maybe as you've suggested, you don't have the tools at your disposal to do anything.
Is anyone in the department doing an analysis of this? This seems to be the big issue. Consumer satisfaction would appear to be there. We have 950,000 Nova Scotians and how many have shown up? So, obviously, there must be some satisfaction there but, yet, they're paying more. Somebody is pulling the wool over somebody's eyes, and we, as a provincial body, have an obligation to protect the consumer. Are we doing it? Do you feel that it's being done effectively?
MR. DUDA: Government decided some time ago to allow the free market to determine what prices are and to determine the relationship between supplier and consumer. Yes, we do closely monitor aspects like safety. The federal government monitors issues like predatory pricing. However, by and large, we allow the free market to determine that relationship. Until government decides to change that, that's the environment we live in.
MR. MACKINNON: One final question, Mr. Chairman. Based on that response, and based on the situation we find ourselves in here today, are the officials within the department prepared to make certain recommendations to government on this particular issue, or are they just going to sit silent and try to read the tea leaves and find out what this select committee is going to come up with? Any time government makes a change of policy or legislation, whatever, it's usually based on the expertise within the various departments. We have to rely - otherwise we're not carrying out our due diligence. Surely to heavens somebody in the department must have a view on this, to guide this committee as to whether we're going in the right path or not.
[11:30 a.m.]
MR. DUDA: Since this has become an issue over, let's say, the last two years, officials have been looking at various options. I've outlined a number of them that we've looked at. We've made recommendations to government as to what it should do. As you are aware, a month or two ago it moved forward legislation around a 48-hour notice period, that's the response that government chose from the various options that were presented to it to go forward.
MR. MACKINNON: Well, that went over like a lead balloon. One final observation, Mr. Chairman. Will you table a list of those recommendations that were made by the staff within the department?
MR. DUDA: I outlined various options.
MR. MACKINNON: I know you've outlined them. I'm talking about the recommendations that were made in-house to the minister.
MR. DUDA: I think those are still before government. It would be the government that would have to release that.
MR. MACKINNON: Well, at least we have that on the table. There's information within the department that this committee does not have access to. Correct?
MR. DUDA: Certainly around recommendations that we made to government, yes.
MR. CHAIRMAN: At this time I would like to recognize Michele Raymond.
MS. MICHELE RAYMOND: I'll keep it really short here, and I hope you'll excuse me because I'm sitting in as an alternate and some of this may have been discussed already. Mr. Duda, you gave us, today - I think today anyway - a set of tables addressing two issues requested during your presentation of July 8th, a comparison of annual average margins and prices, this document here. I would just like to confirm that in Halifax we have identical crude costs and refiner margins as Charlottetown, obviously we have different tax structures in the two provinces, but to confirm the marketing margin, which is this flexible component, you have simply deduced - it's not that you've added up what you believe to be the components of the marketing margin, you're just working backwards from the ex tax price. Right? The rest of it must be marketing margin, without actually knowing what the components of that are. Is that correct?
MR. DUDA: This data was prepared from MJ Ervin data, I didn't prepare the data. I just put it in tabular format for you. I would have to check their methodology, but I believe you're correct, that they know the crude cost. They get the refiner margin off the posted daily postings, I believe from PetroCan - I may be wrong there - but they know the taxes, so your fallout figure is that marketing margin. That's my understanding of the formula.
MS. RAYMOND: I just wanted to confirm that was it, so in other words, we haven't got a clue what's in there. Can you also, very quickly - I missed the discussion around XTR, I believe that was the wholesaler referred to by the gentleman from Georgia, the gas station in Cape Breton. I had the impression that perhaps they were dealing in futures, to some degree. Is that correct? Where did I get that idea from, that it may have had something to do
with the levelling of their prices from the higher margins? Does that ring any bells with you? (Interruptions) You're not aware of anybody specifically dealing with it? Okay.
Last question, and it may be touching on Mr. MacKinnon's question here, I don't know, because there are some recommendations, presumably, that are out there but not available to us, but just in case, have you at least made any recommendations or do you have recommendations which would, beyond a letter-writing campaign and pleading, that would support the maintenance of individual rural stations? Is there anything beyond begging?
MR. DUDA: As I indicated in the list, government has looked at full regulation as one option that it could consider. That is one option that could, if not completely protect rural outlets, probably improve the situation that they're in now.
MS. RAYMOND: Nothing more targeted to this particular problem than an across-the-board sort of something which would protect all? Nothing specifically targeted towards the maintenance of . . .
MR. DUDA: We looked at, I believe I called it partial regulation, we looked at the same issue that you've been discussing, just providing a set margin or a range in the margin to retail outlets, whether rural or urban. We've looked at different margins for rural and for urban. So we've looked at a number of scenarios within full regulation and within partial regulation.
MS. RAYMOND: So you would see them as different. A very simple last question, marked fuels, they're monitored by your department, are they?
MR. DUDA: Yes.
MS. RAYMOND: And that's not a full-time occupation for somebody?
MR. DUDA: Again, our auditors do monitor that but they also monitor other businesses, tobacco and fuel, but it is one of the things they look at.
MS. RAYMOND: Do you know how much of the fuel sold in the province is in fact in the marked fuel category? I probably should have gotten that figure.
MR. DUDA: No, I can certainly find that out.
MS. RAYMOND: Yes, just out of curiosity.
MR. CHAIRMAN: We have three speakers in line, Howard, Brooke and Gerald. I would ask the members to be brief in their questioning.
MR. EPSTEIN: My point is to Mr. Hennebury. I wonder if you can help me with respect to a point you brought up earlier, about the HST. What I'm wondering is whether there's objective data on the assertion that you made earlier about an increase in revenue for HST related to gasoline at the pump actually impacting HST as it applies to other kinds of expenditures. It seems to me that the objective information seems to go the other way. My recollection is that globally HST revenues to the province have increased each year, and also we're seeing consumption of gasoline increasing each year. So I find it hard to see that there's any objective evidence that suggests that once the people are finding that they're spending more at the pump and therefore the government gets extra HST, they're forced to cut back on their other expenditures for goods and services, and therefore the overall HST revenues to the government stay neutral. It just doesn't seem to be there. I'm wondering if there's any objective evidence.
MR. HENNEBURY: We haven't done any objective analysis to sort of show that particular point. You're right, HST revenues have grown over the year, as have all provincial revenues, but that's growing more in conjunction with the growth in personal income than it has with respect to the price of any one commodity. While gasoline prices may have gone up, prices on other items may have stayed the same or indeed gone down. Computers, lots of electronics, things like that, these are all consumables that are part of the HST base, and they obviously go down in price as well.
I think what's caused the increase in HST over the long run has been the increase in personal income and the increase in the total consumption of the total basket of goods and services. I don't think you can attribute that to the price of gasoline, any more than you can attribute it to the price of any other commodity. There are hundreds and hundreds of commodities in the HST base. The point that I was trying to make is we forecast HST revenues based on the total consumption of goods and services that may occur in the province. That includes gasoline, it includes all of the other commodities. We do not change our forecast based on the price of gasoline, any more or less than we change the forecast because of the changing price of take-out foods or computers or any other commodity that is taxable.
What we look at is the total amount that consumers have available for expenditures. That's how we forecast our HST. The assertion that the HST will not change because of a change in the price of gasoline is based on the fact that we look at the whole basket of goods and not just one commodity. Certainly the amount of HST we collect on gasoline will change if the price goes up. There's no question. The question here is, will the province receive a windfall of revenues because of that? Our answer to that question is no, because it affects all of the other revenues.
The most recent large increase that we've seen in gasoline prices occurred between 1999 and 2000. In that fiscal year, we actually saw a 17 per cent decrease in gasoline tax revenues. So, again, do the revenues of the province change? No, that was probably a
revenue-neutral situation, because any of the revenues we may have gained from HST, we probably lost on HST in other commodities or in the gas tax itself. Once you lose a litre of sales, you lose not only the increase because of the price, you lose all the tax that you would have gotten on that litre of sales anyway. Do we have objective evidence for that? No, I don't have anything objective that I can supply you with that says this is what happens. All we have is the evidence throughout the years. You're right, HST has increased over the year, it's been closely tied with . . .
MR. EPSTEIN: With economic activity, surely.
MR. HENNEBURY: . . . personal consumption and economic activities, not with the price of commodities within the economy.
MR. CHAIRMAN: Brooke, with a quick one.
MR. BROOKE TAYLOR: Mr. Chairman, it seems to me like this committee does have the ability to do something relative to wholesale and retail margins, but, obviously, we can't control the world price of crude. I don't think, at this particular meeting, at least, we have delved into the issue of refiner and refinery margins, and I don't know, quite frankly, whether or not we have any jurisdiction to go there, when I'm thinking of the implications of our report and probable recommendations.
Do any of our guests know the situation there? Are they under any legislative obligation to report, if you will, to any of the departments represented here this morning? I know they're under, obviously, no requirement to sell to Nova Scotia, for example, Esso, but I'm just wondering, you don't see any area that the committee might just explore and examine? When we're talking about the major components of this, the world price of crude, the refiner, the wholesaler and the retailer, it seems to me that you can make recommendations until the cows come home, but if there's no chance of them being effective, then that will create ongoing problems.
I'm just wondering, at the refinery level, if any of our guests have any concern about the fact that there probably isn't any price justification there - a mechanism in place. I'm not saying the price isn't fair, but I'm just asking, do we as a province, do the feds, does somebody have any - as my colleague says - wiggle room there?
MR. CRANDLEMIRE: I'm not aware of any mechanism where a particular refinery is reporting directly to government, saying the refiner's margin is such. I would just question one assumption you made, you said obviously there was an obligation to sell their products to Nova Scotia.
[11:45 a.m.]
MR. BROOKE TAYLOR: No, I said obviously they are under no obligation.
MR. CRANDLEMIRE: Okay, I didn't hear the no part, that's certainly the case. They are in a market environment and they're selling their products wherever they choose. I think from a practical perspective it is very obvious they would serve Nova Scotia needs but certainly they export product as well and that's the case for other refineries in the Maritime Region.
MR. BROOKE TAYLOR: Would it be a huge invasion if we just looked at considering a request for the refinery to at least file something on a monthly or bimonthly basis? Is that deemed to be untoward from your perspective?
MR. DUDA: I think they'd be reluctant to do that for competitive reasons. It is a very competitive business and they would be reluctant to provide government - the federal government they do for tax purposes but otherwise, unless it was kept confidential they would be very reluctant to provide that information.
MR. CHAIRMAN: Gerald, a quick one.
MR. GERALD SAMPSON: As indicated between Mr. Duda and my colleague, Mr. MacKinnon, what recommendations have you made to the government, or information that is not included in the package that you presented here today, and can we receive that information as a committee?
MR. DUDA: Just to clarify, as we were going through this process we would analyze what we felt the problem was and we would make recommendations. Government would review those recommendations and either agree with them or not. Through that whole process over six months, there was back and forth between what we were recommending and what government would accept. What we ended up with in May, was the 48-hour notice. So through all that iterative process between government and the department, a number of recommendations were made. The Premier spoke that full regulation was not an option so we went back and looked at other options. It was an iterative process and what we came up with in May was that 48-hour notice recommendation.
Whether government is prepared to provide the recommendations that we made through that process, I would have to get clearance from government. I certainly couldn't provide that to you myself, but perhaps government would agree to do that.
MR. GERALD SAMPSON: This being a government all-Party committee and you being a senior analyst, I don't want to see this committee going in one direction and the senior policy analyst for the province making recommendations that we are not aware of. It
seems we all should be in sync so we're not going in one direction, you are suggesting something else, and somebody in between is refuting what it is that we're doing. So we're almost going against our own government, as a committee, trying to do one thing and behind the scenes the government is doing something else.
I would like you to get permission to give us your insight on what you see. You are dealing with this as a senior policy analyst and I don't know how you could provide it, but we should be aware of what your expertise is suggesting and leave it up to the committee to decide if we accept or reject it. That way, the two parties would be in sync, the committee being one and you representing the government. I would appreciate it if something could be done along those lines, Mr. Chairman, and that information or the answer to that be provided to us.
MR. CHAIRMAN: Committee member, it is permitted that you ask the witnesses to provide information. I would just ask if the witnesses would direct that through the committee so that I could distribute it to the committee members.
MR. MACKINNON: Mr. Chairman, a point of clarification. Our witness just indicated that the Premier indicated that full regulation was not an option when they presented their options to the government. Is that still on the table? This is very concerning, the Premier is saying one thing and the committee is (Interruptions) But that's what he stated.
MR. CHAIRMAN: He did say that, that's clear, but it's the mandate of this committee to go out and ask Nova Scotians their opinions and it's up to this committee to make a recommendation to the House.
MR. RUSSELL: But is it an exercise in futility if the Premier, the Chief Magistrate for the Province, has already stated unequivocally that full regulation is not an option?
MR. CHAIRMAN: The mandate of this committee is clear, it is to go out and ask Nova Scotians and on their behalf to make a recommendation to the House of Assembly . . .
MR. RUSSELL: Then maybe he should do it.
MR. CHAIRMAN: . . . by August 31st and I suggest we should do that and carry on with that, but thank you, member. Danny, you had a question. Order, please.
MR. GRAHAM: Just a follow-up to the question I had asked and it's relevant to what Mr. Epstein had asked. I know, Mr. Hennebury, you've provided us with an explanation about what happened in 1999, but there doesn't seem to be a square explanation of a correlation between the price of gasoline increasing and HST windfalls to the government.
I would ask that you provide to this committee - through the chairman - an indication just in relation to gasoline, how much extra revenue comes to the provincial government if there is a 20-cent rise in the price of gasoline per litre? You obviously can extract out of that the input credit, or whatever it is described as, that farmers and others in primary industries use, and if there's anything else that is obvious. We have heard you on the question that this may all be a wash, it may not be terribly material at the end of the day, but I think it is important for this committee to know what a 20-cent increase per litre results in, in terms of provincial revenue to the provincial government.
MR. HENNEBURY: I can do that. I just want to make it clear that it will be an estimate because for HST purposes gasoline sales are not required to be reported separately.
MR. CHAIRMAN: And you explained that to us in your last session and we understand and accept that.
Thank you very much, witnesses, for coming here and spending all morning with us. Your information is very important to us to make our decision. I would like to thank the members of the press, caucus support and the committee members.
We are recessed until 1:00 p.m.
[11:53 a.m. The committee recessed.]
[1:33 p.m. The committee reconvened.]
MR. CHAIRMAN: Good afternoon, ladies and gentlemen. My name is Bill Dooks and I am the Chairman of the Select Committee on Petroleum Product Pricing. I would like, at this time, to welcome our witnesses here with us this afternoon. I believe we have a Mr. Taylor, Mr. Jardine and Mr. Sullivan. You have travelled from outside of the province so we do welcome you here and encourage you to stay for our Tall Ships on Thursday, just call back and say that your business is going to keep you here longer and enjoy your time.
At this time I would like to take this opportunity and allow the committee members to introduce themselves, starting with Mr. Russell MacKinnon.
[The committee members introduced themselves.]
MR. CHAIRMAN: The other committee members will be arriving shortly.
At this time, gentlemen, just to go over a little bit of procedure, the committee will allow you to do a presentation - as I was speaking to you earlier - for approximately 20 minutes. At that time we will open up the committee for questioning. We certainly hope you enjoy your time with us. When you are ready you can start.
MR. RICHARD TAYLOR: I think, right off the bat, I should introduce Mike Sullivan, who is with me today. Mike is a Major Case Director with the Competition Bureau, so he would have the job of basically supervising large prosecutions. On my left is Dermot Jardine. The Competition Bureau, in the last two years, has established an office right here in Halifax. I think it has about seven people. Dermot runs that for us. I am Richard Taylor and I am, right now, Acting Head of Criminal Matters Branch. We do all the price fixing and bid-rigging prosecutions under the Criminal Provisions of the Act. We have copies of the presentation and some supporting material that I would like to, perhaps, give out now.
MR. CHAIRMAN: Sorry about that, gentlemen. Our clerk is just not here at this time. If you could - Mr. DeWolfe, if you could get our clerk for us.
MR. RICHARD TAYLOR: There is a lot of supporting material.
MR. CHAIRMAN: You can just leave them with me and I will have them passed around.
MR. RICHARD TAYLOR: Super.
MR. CHAIRMAN: Thank you. The clerk is behind us. Her name is Kim. She will do that for us.
MR. RICHARD TAYLOR: Great. So if it's okay with you, Mr. Chairman . . .
MR. CHAIRMAN: Yes, continue, please.
MR. RICHARD TAYLOR: Okay. I would like to thank you for inviting us here today to make a presentation. The Competition Bureau welcomes the opportunity to explain our role with respect to gasoline prices. With gasoline prices hitting an all-time high across Canada in May and June of this year, Canadians have expressed a lot of concern and are becoming increasingly frustrated.
We act as one of the people that hear about that frustration, very frequently. We have received hundreds of complaints at our call centre. We have committed, over the years, every time prices go up - we are called upon to have a look at them to make sure that they are not going up due to anti-competitive reasons that would run afoul of the Competition Act.
Over the years, we have devoted significant resources to investigating and exploring how gasoline markets function in Canada. Just this last May we commenced an examination, which is really our first stage of investigation. Because of the large number of complaints we've received - there are really two allegations that come up in the context of the Competition Act: the first is price fixing; the second is abuse of dominance, which is another
provision. It was the old monopoly provision. It is when companies get together or one dominant company tries to hurt competition.
In particular, we are focusing, as I say, on whether the price increases, this last May, were as a result of a conspiracy among many suppliers at the retail level, the wholesale level or the refining level - we look at all levels - or whether there could be some other explanation such as North American supply and demand condition changes.
Given that our examination is ongoing, we are right in the middle of it, we are not going to say anything today about what our findings have been relating to this most recent increase. We can't. We have access to sensitive information and we conduct our investigations in strict confidence. In fact, Section 29 of the Act makes it a criminal offence to violate that confidence, the confidential nature of investigations. We will issue a report or take action, as appropriate, under the Competition Act, if we determine that that is appropriate. Regardless, we will issue a report with our findings and that should be out in the Fall.
I would like to explain today what we have done in the past because this certainly isn't new to us. I have counted, I think, five major investigations of gasoline prices since I joined the bureau 20 years ago. I will just start off by telling you a little bit about what the Competition Bureau is.
We are an independent, law-enforcement agency that enforces the Competition Act to promote and maintain competitive markets in Canada. That is for lower prices, better product choices and, also, quality goods and services. We think that competition is the best way to achieve those outcomes. That is why we have had a Competition Act for over 100 years, to promote competitive markets.
The core of the bureau's enforcement efforts, as they relate to gasoline, involve reviewing mergers in the industry, mostly at the refinery and wholesaling level, but also relating to facilities such as pipelines, terminals, important facilities. So we review all mergers in the gasoline industry.
As I mentioned earlier, we have a monopoly provision. It is now called the abuse of dominance provision. It makes it an offence under the Act for a large firm to engage in anti-competitive practices that exclude competitors, small or medium-sized competitors. But if you are big in Canada and you control a large part of the market, and you use exclusive contracts or tying arrangements, or other restraints to lock up customers or to lock up sources of supply so that smaller and medium-sized business can't get them, then that raises an issue under our Competition Act.
Finally, the most important provision of the Act is the price fixing provision. It was the first provision over 100 years ago and it is strictly illegal. All countries have an anti-price fixing law. It usually forms the backbone of the various states' competition laws. That is because price fixing is very much akin to fraud. It is dealt with very significantly. It is a criminal offence with fines up to $10 million and five years in jail.
As I say, when gasoline prices increase, the bureau receives a large number of complaints. Every complaint is assessed. Every complaint is dealt with. Everybody gets a call back, a letter back or an e-mail back. We have a complaints centre. Those that raise issues, because they can't be explained or because they are suggestive of a potential violation, get kicked out to an investigator for investigation.
If, after investigation, we can't get to the bottom of it or there are still questions lingering after a preliminary investigation, we go on an inquiry, and once we are on an inquiry, we have three powers we can use to get evidence from anybody, not just who the targets are or those that potentially may be violating the Act. So suppliers, customers.
First of all, we can search and we search routinely. That means a surprise search with a court order. The second power we have is a subpoena power. You must come and testify or you must provide documents. The third power for conspiracy is wire tap, so we can obtain wire taps and, obviously, listen in on conversations, although that is not that common.
In addition to that investigative role, gasoline, because it is such a large issue among Canadians, we do something more than that. It really is our monitoring role, so I differentiate that from our investigative role.
We review routinely now - because we have done it so many times - gasoline prices in 12 major cities in Canada to make sure that, excluding taxes, they are in line with historic norms, and increases elsewhere in Canada and in North America. We compare the retail price of gas, excluding taxes, to historic Canadian norms and to prices elsewhere in the world, adjusted for exchange rates.
We compare wholesale prices at various locations in Canada, to prices posted on the New York Mercantile Exchange and U.S. racks closest to the Canadian border from coast to coast. There would be one in Maine, there is one in Plattsburg, New York, there is one in Buffalo, there is one in Minneapolis and there is one in Portland. Those are the closest wholesale points where anybody can go and buy gas from Canada. So we find they make a very good comparative for comparing Canadian wholesale prices.
Finally, the bureau analyzes wholesale and retail prices to ensure changes are consistent with such factors as rising crude oil or world and U.S. wholesale prices, as opposed to anti-competitive conduct.
The bureau's recent involvement in the petroleum sector can be traced back to a research inquiry we undertook under the old legislation, the Combines Investigation Act. The inquiry was undertaken between 1973 and 1985, and cost us $3 million in those days. It involved extensive hearings before the Restrictive Trade Practices Commission, which is the forerunner of today's Competition Tribunal. It is part of the federal court.
In 1986, the Restrictive Trade Practices Commission issued a report, entitled Competition in the Canadian Petroleum Industry. Over the period covered by the inquiry, 1958 to 1985, the RTPC found no evidence of collusion or overcharging by the oil companies, notwithstanding that there were some massive price increases in 1973 due to the OPEC oil embargo. Also, in 1979, following the loss of oil imports from Iran, after the Shah of Iran was deposed.
The RTPC also found that the Inter-Refiner Supply Agreements, the so-called swap agreements, between refiners were not anti-competitive but efficiency-enhancing. They found that there was no basis for the allegation at that time that the independent gasoline retailers had been subject to predatory market squeezing. Additionally, they found that regional price differences and wide price swings over the time were due to variations in competitive conditions caused by changes in supply and demand conditions. Though almost 20 years old, the report is almost exactly what is being investigated today, and so is at least illustrative of what has happened in the past.
[1:45 p.m.]
Since 1990, we have conducted five major investigations all tied to major price increases. We found no evidence to suggest that those price increases resulted from a national or regional conspiracy by anybody to fix prices, or by a dominant firm engaging in abusive, anti-competitive practices. In each case, prices had increased by about the same across North America, once you strip out the tax and adjust for the world crude oil prices.
It should be noted that in each previous case, where prices had increased significantly, market forces caused the prices to fall to more normal levels within a year. For example, in the summer of 1999, the price of gasoline increased sharply. After conducting an examination, the bureau concluded that those price increases were due to normal market forces. Specifically, we found that they were attributable to increasing crude oil prices which caused wholesale prices to rise throughout North America.
More recently, we examined, again, high gasoline prices in February and March 2003. They didn't go up as much as recently in May and June but they went up to the mid-80-cent level. We concluded at that point that a series of international crises which disrupted oil supply, such as a strike in Venezuela and increased demand for petroleum products due to abnormally cold weather in the previous winter, had caused the increases.
In November 2003 the House of Commons Standing Committee on Industry, Science and Technology tabled a report which you have a copy of. They interviewed experts, they interviewed representatives from the oil companies, the independent gasoline suppliers, and we also appeared before them. They concluded the same as the Commissioner of Competition, that the significant prices, not a little over a year ago, in February and March 2003 were due to rapidly rising crude and wholesale prices. It is not just the Competition Bureau's findings or the Industry Committee findings or the RTPC findings, we have put other reports in there as well.
In the past, numerous competition agencies around the world who we routinely speak to, and also committees such as this one, of various governments, here and elsewhere in the world, and also academic studies, have shown that supply and demand changes are what drive changing prices of gasoline.
Basically, it is important to note that the recent price increases here in Halifax follow periods where we had relatively low prices. According to MJ Ervin, data collected for Halifax, while prices reached an all-time high in the high 90s in May 2004, prices were 73.3 cents in Halifax in December 2003. Previous to this, in February 2003, prices were at their highest level before the most recent one in three years at 85 cents. Over the last three years, prices in Halifax have been high. It was 95 cents in May 2004 and as low as 61.8 in January 2002. Such up and down variability is a sign of a competitive, rather than a manipulative, market.
As was mentioned previously, the enforcement of the conspiracy provisions of the Competition Act is a very high priority for us. I mentioned the fines in the past. In the last 20 years we have secured numerous prosecutions; in the last 10 years the courts have agreed to numerous convictions and, to date, in the last 10 years, for conspiracy, we received fines of over $180 million.
We also have a very effective immunity program which was brought in about 1998. What it means is that anybody that is a participant who has knowledge of a conspiracy can come in and they will be given immunity if they have evidence that is relevant to our prosecution. It is extremely effective. We have people coming in from all types of industries who are aware of the risks of being caught and that compels people and we have other programs. We have a whistle-blower program which encourages people to come in and blow the whistle. Many times, disgruntled employees come in and use that one, people who have been overlooked for a promotion and have an axe to grind with their bosses.
The conspiracy provision is a priority. We have had large fines, we continue to make that a priority, we have good investigative tools and we also have the immunity program which works well.
Another priority for us is investigating abusive dominance by major companies aimed at pre-dating, disciplining or eliminating independent gasoline retailers. It is no secret that over the last 20 years, as well as our investigations of conspiracies, we have received numerous complaints from across Canada by independent gasoline suppliers alleging that the major oil companies - and even the regional, major oil companies, the regional, integrated oil companies - were squeezing them out of business by raising wholesale prices, shrinking retail margins and driving them out of the business.
To date, we have found no evidence. We are currently looking at this issue again and I am not speaking about now. To date, we have found no evidence to substantiate that claim. I will talk a little bit about that with you. What we have found is that retail margins have continued to fall across Canada from a high of about 6 to 7 cents a litre 20 years ago, to currently, where they are 4 cents a litre, 5 cents a litre and as low in some major centres right now at 3 cents a litre.
This has not been due to a desire by the majors to eliminate the independents by engaging in predatory behaviour. Instead, the decline has resulted from increased deficiency brought about by vigorous competition in the resale sector. Thousands of older, less efficient stations have closed over the past decade and have been replaced with fewer, much larger, more efficient stations offering a great array of products for consumers.
Twenty years ago, the average throughput per station was perhaps as low as 3 million litres a year. In 1999, it was 5 million. It is already up to 7 million nationally. There are stations in Toronto that are pumping 15 million litres a year. So there has been a significant change in the face of retailing.
Moreover, it is not only the majors like Esso, PetroCanada that are converting to new, high-volume stations with ancillary revenues from car washes, pizzas, burger joints and the like. Well-organized independents, such as Canadian Tire and a host of new entrants at the retail level, such as Loblaws and Atlantic Superstores, Safeway, Costco and Wal-Mart are changing the face of gasoline retailing in Canada.
I mentioned briefly that since 1992, we have been active on the conspiracy front, the abuse of dominance front relating to independents and also on the merger front.
We have had some local cases involving attempts to influence prices. We call it resale price maintenance. That is when somebody above in the chain, a wholesaler or refiner, tries to put pressure locally on somebody down. It could be another retailer, also. Somebody starts a price war, prices go down, somebody phones up and says, if you don't get your price up, we're going to match you or we're going to cut you off and not supply you. That's called resale price maintenance. It is not as serious an issue as conspiracy. We have had eight convictions in gasoline for that in the last 20 years.
I have mentioned also that we have been effective in dealing with competition issues that can arise from mergers. Just so you know, one example in this sector was that in 1998, PetroCanada proposed to buy Ultramar, Diamond, Shamrock. It would have resulted in PetroCanada merging its three refineries with 1,800 service stations, with Ultramar's refinery and 1,300 stations in eastern Canada. Ultramar was a vigorous and effective competitor in the eastern market. The bureau examined the situation and determined that if it proceeded we would challenge it and the parties agreed not to pursue it.
Another example of what we have done, at least, that has a connection to the Maritimes, was also, I believe, in 1998. We looked at the restrictive covenant on the Come-By-Chance refinery, which is operated by North Atlantic Refining. As a condition of being able to buy North Atlantic Refining, PetroCanada had put in a restrictive covenant that basically made unprofitable sales from that refinery to the mainland here. They could make them but there was a huge cost and premium they had to pay.
We indicated at that time that we would be willing to take that covenant to court and that has been removed. So now, product can flow from the Come-By-Chance refinery to the mainland here at much more reasonable prices. So those are some of the examples. Other examples outside of gasoline, we have a number of cases going on in the Maritimes right now involving price fixing, some of which have been in the press recently and I won't go into those.
In terms of gasoline prices in perspective, I have indicated that changes at the retail level are oftentimes brought about by changes in the world price of crude oil, which is the major cost component of gasoline once you take out the tax; it represents from 65 to 70 per cent of the price. We all know that crude can vary wildly - it was down to $19 not three years ago, it's now up around $40 - it can vary considerably with world events.
We only represent 2 per cent of the world's oil production so we have no impact on world oil prices, nor can the Competition Bureau challenge the cartel of OPEC, which is responsible for controlling supply. Other countries are not subject to the Competition Act. Other factors besides the price of crude, which have affected the supply of gasoline in recent years, has increasing North American and worldwide demand for gasoline, and a shortage of refining capacity. The increase in demand, especially in the U.S. last year, has been significant and they are obviously dealing here, in Canada, as well as in the U.S., with some very serious and severe environmental regulations which require some significant investments in the refineries to get them to meet the low emission standards.
Finally, I would point out that over the last 25 years no new refineries have been built in North America and that is also part of the problem. Rising world demand, rising North American demand, changing environmental regulations, and a lack of refining capacity around the world has led to increases recently, as well as the price of crude.
People oftentimes ask, how can retail prices within a region or town change significantly at a point in time? It's in addition to periodic, rapidly-rising prices, that would be the second-most important question, how can prices go up 10 cents overnight? Study after study, some of which I have left with you, point to the short-term cycle where local competition drives prices down at the retail level over a week, over 10 days, drives it down to wholesale cost and sometimes below, what they call an inversion.
Basically, somebody decides to restore it and they don't restore it the same way they brought it down, a cent at a time, they restore it by 10 cents and the other suppliers in the zone or region decide whether they want to match it or not - sometimes they don't and the price war continues. Sometimes they do and they all go up overnight 10 cents. That is a competitive cycle because after it goes up 10 cents the cycle starts again and prices are slowly coming down, day after day, until they get to the wholesale level again, and then the restoration takes place.
The issue is, in gasoline retailing, prices are visible to motorists in foot-high numbers so you can see them at 60 kilometres an hour, and your average consumer is willing to switch stations and drive quite a distance to be able to get two or three tenths-of-a-cent of a litre lower price. That means that if somebody doesn't match they go from having business to no business, so that's why we see prices that are very similar over a region at one point in time, and they cycle over time. These characteristics are due to competitors rapidly adjusting prices to the same level without conspiring.
[2:00 p.m.]
People also often ask, why do prices vary from Toronto, or Halifax to other more rural regions, or regions that are only 50 kilometres away? We also looked at that and brought a study that, I think, is helpful in that area to better understand that. Prices vary due to differences. Prices across provinces are due to wide variations in provincial tax treatments. Within a province, transportation costs play a significant role, as do the volume or through-put of a station. If you are pumping 7 million litres you can afford to charge a lot less than if you are pumping 1 million, you get efficiencies. You may be able to live on a 3-cent-a-litre margin, where somebody pumping a million litres can't.
Also, ancillary revenues are playing a much larger role and not everybody has the volume to justify ancillary revenues. So those are some of the reasons why prices can vary between Halifax and 60 kilometres away from here.
In conclusion, I just want to say a brief word about price regulation. The federal government does not have the authority under the constitution to regulate prices of gasoline, except in a national emergency. The responsibility to regulate prices of energy rests solely with the provinces, whether it is electricity, natural gas or gasoline. Most provinces have
decided not to regulate but instead let market forces dictate prices. Nova Scotia, I understand, deregulated gasoline prices in 1991.
As a matter of a general principle, there is no doubt in my mind that the best regulator in most markets is the competitive marketplace. Prices set by government rather than the market, though less volatile, result in higher prices to consumers and a less efficient industry. A casual review - and I emphasize "casual review" - of prices in Eastern Canada, tends to support this position.
Although we have not been able to calculate in or factor for differing transportation costs and volumes, which I believe important, the average price in Charlottetown, P.E.I. has been 2.39 cents per litre higher than in Halifax, Nova Scotia; 1.34 cents per litre higher than in Saint John, New Brunswick over the last three years. I think in St. John's, Newfoundland, they have been 2.4 cents per litre higher than in Halifax; and they've been 1.39 cents per litre higher than in Saint John, New Brunswick, over the last three years. As I emphasized, we can't draw any firm conclusions on that information because nobody to my knowledge yet has studied the impact of transportation costs or differing volumes which clearly affect retail prices. There is other information regarding regulation and that's the American experience, they have studied it.
The Federal Trade Commission, our counterpart in the U.S., conducted several studies of so-called divorcement legislation and below cost sales legislation. Divorcement legislation deals with the same issue as shrinking margins for independents and the fact that independents may not be able to survive when those margins shrink, the smaller ones.
In certain States in the U.S. they have come up with divorcement laws where, if you own a refinery in a state, you're not allowed to own gas stations, or you're only allowed to own a certain number of gas stations. Obviously, in Quebec and in some States in the U.S., to protect independents, they have come up with low price legislation which basically says there is a base limit you cannot go below and that's usually tied to the wholesale price. Those are the two kinds of regulations that are in effect in the United States.
An FTC study - which I've included and it is footnoted in my presentation - on the divorcement, it's a 1999 study, concluded that in the three or four states where they have divorcement laws, consumers paid 2.7 cents per gallon more and the cost to consumers in the three or four states was $100 million annually.
I will just point out again though, it's worth pointing out, that only the provinces have the constitutional authority to regulate gasoline prices. Given our knowledge of competitive markets and the amount of time we spent studying and enforcing them - and in particular the ones relating to gasoline - I would be remiss if I didn't mention a number of considerations which might be relevant to this committee going forward.
First of all, there is case law, well-developed case law, in Canada that if you regulate price, the Competition Act will no longer apply to the pricing of gasoline. If you regulate the price, the Competition Act may be ousted from application. Complaints that come in after that period would not be ours to deal with. It's significant law. There's been at least seven cases, and it goes back to the province's constitutional authority in certain areas with ousts federal legislation. If a province regulates prices, there can be no price-fixing under the Competition Act. Therefore, we can't apply it.
Secondly, I think extreme care must be taken in the design and implementation of any regulatory scheme to make sure you are not unintentionally facilitating anti-competitive conduct. Forcing large companies to give advance public notice of price increases may well have the effect of making it easier to conspire. They don't need to meet in the back-filled rooms to agree on a price, it's going to be posted. It wouldn't surprise me, under such legislation, that if they were forced to post a price that the price would go up three weeks from now, everybody would go up in three weeks. It seems to us to be very dangerous.
Finally, in the vast majority of cases, free markets which rely on competitive force provide the best mechanism for competitive prices, quality products and efficient production. Regulation can never hope to match the flexibility, transparency and efficiency of the free market.
In conclusion, I just want to add that the bureau is very active, I want to underscore that the bureau is very active, in gasoline prices and the issues that the committee is looking at. I would also like to reiterate, at any public forum that I speak at, anybody on the committee, anybody who listens to this committee, anybody who speaks to the committee, anybody who hears anything about the committee who has any evidence of price-fixing, they can phone anybody here, and we will guarantee absolute confidential treatment of their information. The only thing I cannot guarantee is that if I'm ordered by a court to divulge their name, we would have to do it. So if there's price-fixing out there and anybody knows about it in the Maritimes, give us a call. I will guarantee that their name will be held in confidence.
MR. CHAIRMAN: We thank you for your presentation. It's quite interesting, indeed. At this time, we'll open up the committee for questioning.
Mr. Russell MacKinnon, with the first question.
MR. MACKINNON: Mr. Chairman, I was quite intrigued by the last number of comments made by our witness with regard to giving the advance notice on prices. The government, several months ago, proposed to give 48 hours' notice on prices in Nova Scotia. What would the effect of that have meant had that been implemented?
MR. RICHARD TAYLOR: Well, I can't speculate as to what would have happened exactly. I can say that keeping prices secret from competitors is the lifeblood of competition. Not knowing what your competitor is going to do, vis a vis price, keeps you guessing and means that you have to always be willing to keep your costs down and lower your prices. If a major competitor - I understand it was a major supplier - if a major supplier, like an integrated oil refinery that is in both the refining, wholesaling and marketing, if they have to give three weeks' notice, everybody else that doesn't have to, or the competitors that do have to, will know, and they'll give notice or they'll just follow it up.
It would seem to me that you could have what is akin to price fixing without the agreement. At least it provides a vehicle for it. It's not right to say that it would be price fixing. It would provide a facilitating device to better enable price fixing. Price fixing would be more likely under such a scenario.
MR. MACKINNON: The next question is, in your opening remarks you made reference to some of the issues that your Competition Bureau deals with, one being abuse of dominance. Now, I'm not sure what the numbers in other jurisdictions look like, particularly in the de-regulated provinces and jurisdictions, but in 1991 when de-regulation took place, we had approximately 900 small private independents, and now we have less than 500. The intent of the legislation was to increase competition and to reduce prices to the consumers. The minister of the day stood and those were his exact words.
Since that time, obviously, there have been a lot of changes. I realize you made reference to the price of crude at about $40 a barrel. How many gallons of gasoline comes out of a barrel of crude?
MR. RICHARD TAYLOR: Forty-two, I believe.
MR. MACKINNON: So it's a little less than 45. We're looking at, when it's crunched, at about $160 a barrel, the final price. You say 60 per cent of that is the cost of crude. Are you able to break down the remaining $60 or $70?
MR. RICHARD TAYLOR: They have a study in the conference board, which we distributed. I don't have those numbers handy. It varies. Of course tax is the second-largest portion. Refining margins, I believe, are about 15 per cent, and retail margins are about 5 per cent. Retail margins have shrunk, I think I may have attached a graph. Certainly the conference board, at Page 32, deals extensively with Halifax pricing. It has some good information on what's happened to prices in Halifax in the last 10 years. I would urge you to look at that.
MR. MACKINNON: On this issue of the abuse of dominance, what I see happening here in Nova Scotia is that, contrary to what was contemplated at the time the legislation was approved, the wholesalers are now engaging in deals with these large box stores, you
mentioned Superstore, Loblaws, Canadian Tire, that sort of thing. They're able to offer package deals to consumers. For example, you go in and you buy $100 worth of groceries, we'll give you a $2 coupon on the next fill-up of gasoline at a selected service company outlet. Has your Competition Bureau looked at this issue and determined that that is not having a global negative effect on the consumers?
Ultimately, is the consumer paying more, is the consumer paying less, is the consumer paying the same amount? The fact is that here in Nova Scotia the vast majority of those service stations that are shutting down are shutting down in rural Nova Scotia. That is killing a large percentage of the economic lifeline in Nova Scotia. I would be very curious to see how the Competition Bureau is reviewing that issue.
MR. RICHARD TAYLOR: The trend that you speak about has happened across Canada, the majors, as well as the independents. The majors have shed thousands and thousands of stations. We went from 23,000 stations to - at the time of the conference board study - 13,000 in Canada, and we've slipped down below that now. The only point on the volume point I would make is you may have slipped from 900 to 500 stations, I would have to ask you what the volume per station is and what the share of the independents remains, because our tracking and the conference board tracking shows that independents' share, by volume, declined but not as precipitously as the number of stations.
Also, with the rise of the mass merchandisers, I think that the volume of the independents or the non-integrated may go up. Certainly in Toronto they're having a huge impact, and wherever they've entered, they've had a large impact. In terms of prices, whether prices are up and down, you mentioned, you have to strip out the impact of crude to know whether prices are higher. We have some real prices. We have a graph with real prices attached to my speech. That shows you that when you go to real prices, take out inflation, we're not experiencing the highest gasoline prices ever. There's been some periods before. The variation isn't as great.
Finally on couponing, I coupon all the time for groceries and at pharmacies and the like, and if a consumer can get a bargain by getting a few cents or a dollar off at the grocery store, Canadian Tire have couponed, as far as I know, for 40 or 50 years, buying the Canadian Tire money back. So there are various ways to do it. Canadian Tire is an independent, it coupons. There's a very significant independent called Pioneer in Southern Ontario, it has couponed for years. You don't have to be a mass merchandiser to offer consumers a good deal or the like. The issue from a competition policy point of view would be, are they cross-subsidizing gasoline to eliminate, intentionally, independents, or are they just giving consumers a good deal? Are they selling below cost, intentionally, or cross-subsidizing gas from sales in the big store, intentionally, to eliminate independents or are they just being good business people and giving consumers a good deal and still making money? We found to date that they're still making lots of money. If Wal-Mart does it, I'm
not aware of any evidence that Wal-Mart has lost any money in the last five years, even where they have gas stations.
[2:15 p.m.]
MR. MACKINNON: But you're missing my point, with all due respect. Ultimately, the consumer may think that they're getting a bargain by using these coupons but at the end of the day when you add the whole package together, are you paying more or are you paying less? You haven't answered that question. You've given me kind of a global, philosophical analysis of it but you haven't zeroed in, particularly, on the detail.
MR. RICHARD TAYLOR: The Competition Bureau also does all the misleading advertising Statutes and we enforce those as well. As a general rule, unless something is inherently misleading, it's not an issue under the Competition Act. If consumers are going and getting three cents a litre off their gas but then going and paying more in the store, I would be surprised that they would continue to go back. We believe that for the most part, when consumers are given accurate information, they don't make those mistakes, by and large. I think consumers can tell if they go into a mass merchandiser and get their milk at $2.99, plus they get a deal on the gas, I think they can tell that.
MR. MACKINNON: One final question, Mr. Chairman. I was just reading this memo that I referenced to earlier today and I would like your opinion on it, if you could. It's from a representative from Wilson Fuels and it states, Esso has a target margin (over the run of a year) of rack plus 4.5 cents per litre (inclusive of freight). Our budgeted number is rack plus 4 (inclusive of freight). Consequently, over the long haul, we should be 0.5 cents per litre less than the price you would have received from Esso. In other words, this is in reference to a memo that has been sent to someone who was a retailer for Wilson's. To me it sends a signal that it's take it or leave it for the small, private independents. We're controlling the market and if you don't like it well then put the lock on your door or sell.
MR. RICHARD TAYLOR: I'm not aware of that document or really what it speaks to but if you're saying that Esso has a target marketing margin of 4.5 cents per litre . . .
MR. MACKINNON: Yes.
MR. RICHARD TAYLOR: A targeted marketing margin. Wilson has a target marketing margin of 4 cents, so Wilson's would like to make over the year, from their 30 stations plus their Esso stations, because Wilson runs 11 Esso stations so I don't know how they do that. But I don't know the context of this, does Wilson say that they can't make 4 cents?
MR. MACKINNON: They are saying to their retailer that this is the fixed area and if you can't raise your price high enough out on the open market to make a profit, then too bad.
MR. RICHARD TAYLOR: If this is Esso telling Wilson to raise their price - and I'm just hypothesizing here . . .
MR. MACKINNON: No, Wilson is telling their retailer.
MR. RICHARD TAYLOR: Wilson are telling their retailers to raise their price?
MR. MACKINNON: If they want to make a profit.
MR. RICHARD TAYLOR: Then I guess the issue is that the majors are shrinking their margins so they can't, is that the issue?
MR. MACKINNON: Yes.
MR. RICHARD TAYLOR: So this goes back to Wilson basic concern over the ability of even well-organized independents to make a buck at retailing gasoline. I don't have the facts about this, it takes a lot of facts. I would say I looked at Wilson Web site yesterday and Wilson first came to us over a decade ago with their first allegation of predatory pricing. Looking at their Web site 10 years later, I see that they have a lot of very nice, large stations and I can't speak to how well they are doing, but like many well-organized independents, not mass merchandisers, they can make money and they can live profitably and they don't all go out of business, many of them are very successful.
MR. MACKINNON: Thank you.
MR. CHAIRMAN: Gerald Sampson.
MR. GERALD SAMPSON: Having heard your presentation and you saying you had gone through this 20 years ago and everything you said was basically relevant right up to where we are today. It left me wondering what the relevancy of this committee, you seem to have your finger on the pulse of what is taking place in the market.
Having said that, I would like to ask you if you have received any calls or complaints recently from local gas station operators?
MR. RICHARD TAYLOR: We have received a large number because as prices have gone up in certain locations, since March when we first started seeing the prices go up they came up on our radar screen, basically there has also been, in some locations, what I would call hyper-competition and the margins have shrunk even more in certain locations. From
those locations we have received complaints from independents, so yes we have, and we're currently investigating them.
MR. GERALD SAMPSON: You mentioned comparative pricing and I'm wondering, comparative pricing between Canada and the U.S.? Did you make any comparative pricing between Canada and the U.S. in areas that are regulated such as - and we keep referring to - Prince Edward Island, which is a regulated market as compared to other markets in Canada and the U.S.?
MR. RICHARD TAYLOR: No, other than what I've said, we have not studied the effect of regulation, we are the regulator of free market so we have no interest, other than for coming here. What we could find we have presented on the issue of regulation. To my knowledge there is no study yet of the impacts of regulation in Quebec, which have low price regulation, and P.E.I. and Newfoundland and Labrador, which have high price regulations and pricing tied to wholesale prices. All I mentioned was what we found in the U.S.
MR. GERALD SAMPSON: In your comparative pricing between Canada and the U.S., is the differential because of the amount of tax charged in Canada as compared to the U.S.?
MR. RICHARD TAYLOR: No, there is also a slight premium for the transportation cost, it's running about 3 cents per litre.
MR. GERALD SAMPSON: For Canada.
MR. RICHARD TAYLOR: There are five racks close to the Canadian border coast to coast. If you and I wanted to go down tomorrow, we could go down and we could rent a big truck and get our own gas. The closest one to here is in Bangor, Maine. There is one in Plattsburg, New York, there's one in Buffalo, New York, there's one in Minneapolis, and there's one in Seattle. Those people routinely access gas from those markets and, Canadian refiners could sell into those markets if they wanted to.
What we have found in the past - and the conference board study and other studies have shown - is that the Canadian industry, Canadian refiners, shadow price closest U.S. wholesale plus transportation cost, which is U.S. wholesale, plus about three cents on average, but it very much depends on where you are bringing it from and where you are taking it to.
MR. GERALD SAMPSON: One final question, Mr. Chairman. You mentioned efficiencies and I refer to a Mr. Rodney Grace of Bridgewater, who is presently operating his third station. He was very successful with the first and built a second that was purchased by a large conglomerate and made a profit, so then he went into the third station, a state-of-the-art, new station, everything environmentally friendly and whatever you could have, and he
is pumping 8 million litres a year. He told us at the meeting that he has tied himself into a 15-year contract where with 8 million litres, he cannot make money any more pumping gas. It kind of dispels the efficiency part and I'm just wondering where the pendulum swings or to whom does the arrow point for the problem?
MR. RICHARD TAYLOR: We're looking at that issue, and to say anything, make any allusion to Mr. Grace, we're looking at that issue in terms of the independents. The point is, it should be clearly stated that the Competition Act does not guarantee anybody a right to make a living. All it prevents is predatory pricing by a big firm, designed to eliminate the little person so that they can stay big and keep it all themselves. That's what we do. I can't explain, on a case-by-case basis, without looking at the facts.
I do know that if he complained to us we would look at his books very closely, we would look at his tax forms, and we would basically get an accountant in to see if he really is losing money. That's one of the things we would have to do. Predation is like a dodo bird, it's often sighted, it's often spoken about but it's not as common when we look at it. It's not a tactic that is that frequent. Big companies don't want to lose a lot of money driving a little person out of business. It's not that common.
MR. GERALD SAMPSON: One final supplementary, Mr. Chairman. After listening to all the presentations of independent gas station operators, there appears to be a trend that if there's any further cost to the large oil company, that seems to be downloaded onto the local station operator. Does the Competition Bureau have any input or effect on that, or is that allowable? They just seem to download the costs to maintain their margins, and the margin that suffers is always the bottom one, which is the local operator.
MR. RICHARD TAYLOR: We have no issue under the Competition Act with companies making money and making more money than another company. Another company that is also a customer of them - there's no obligation for them to charge at retail the same price. What there is an obligation for is, there's a number of provisions that deal with that relationship. They can't squeeze, purposefully, the margins in an effort to eliminate them. They can't predate them, they can't take money from refining or crude oil exploration, and then use it to cross-subsidize a price war at the retail station to put the small independents out of business. That is not allowed.
MR. GERALD SAMPSON: I brought that up because there's been a lot of talk and a suggestion of intimidation and whatnot, and I just brought that forward on their behalf.
MR. CHAIRMAN: Mr. James DeWolfe.
MR. DEWOLFE: Thank you, gentlemen, for being with us here today. I certainly found your report interesting. You did mention that you have very little evidence of collusion or price-fixing by the companies. You did mention price discrimination, where different
retailers are charged different prices by the same suppliers. That is indeed the case here in Nova Scotia, and that is something that the Competition Act should be addressing. You talked about predatory pricing, where one company temporarily charges a lower rate to a retailer to perhaps reduce or punish the competition. We've had evidence of that during the course of our hearings. We had a company representative that I questioned at a previous meeting, I asked that person, did he ever sell at rack price, and he said he did. I said, did you ever sell below-rack, and he said he did. That has taken place. So there's a lot of evidence of collusion.
There's evidence of predatory margins, that you mentioned. We had witnesses, time and time again, indicate that if the independent put their price up by a cent to try to make ends meet, and they're toughing it out, having hard times, that the next load of oil they received would be up a cent. They have told this committee they have the proof, they'll provide the invoices that will clearly show that this has been the case. I've asked our Chairman to have our committee obtain those documents, so that we can properly make a decision based on fact. So the evidence of collusion or price-fixing, so far, have been presented to this committee.
[2:30 p.m.]
I was interested in reading some information that was provided us by way of the Ontario Gas Price Review Task Force report. That was done in 2000. I don't expect there's a whole lot of changes within your structure since 2000, in the Competition Bureau, but it's most interesting that they indicated that the Competition Act doesn't give the Competition Bureau the tools necessary to ensure the marketplace operates in a fair and transparent manner. They concluded that in their report. That may or may not be the case, but they talk about the Competition Act.
The task force - and I'll read from it - repeatedly heard that the federal competition legislation and the federal Competition Bureau were ineffective, toothless and slow to respond. It went on to say that a government agency, that being the Competition Bureau that takes 10 months to investigate one small complaint is clearly ineffective, and perhaps what is required is an agency that won't try to buy time to hope that the problem goes away or gets stale.
This is just an opinion. It's expressed in this report. It's not necessarily my opinion, because I really know little about how you operate, other than what you've kindly provided us today. So, it went on to conclude that the task force was especially concerned about your ability to investigate price discrimination, predatory pricing, price maintenance and abuse of dominance, all the things that we have heard from today by way of your submission.
I am concerned that you indicated that if there's any indication of that going on in this province, all we have to do is just call you up and you'll investigate it immediately. But this is clearly saying that, hey, you're almost wasting your time going that route.
MR. RICHARD TAYLOR: No, I didn't mean to leave that impression. What I said is that if you conspire with another company, particularly in an industry such as gasoline, you would have to involve a large number of people. I speak to those people today, that if anybody wants to come forward and, in the last 50 years, has any evidence of agreements among the majors to fix, systemically, retail prices, I guarantee that I won't release their name. We haven't heard about it. It's a criminal offence. We have wire tap powers, we have search powers, subpoena powers. There's nothing wrong with our ability. We have had $180 million in fines.
So, point one is just because prices are the same in an industry does not mean that you should go to jail for up to 10 years for price fixing. Price-fixing is an agreement among competitors to purposefully charge an elevated price. Just because prices change, just because prices tend toward uniformity, because gas is virtually identical to the consumers, doesn't mean there's price-fixing. I believe we have all the investigative powers we need. Of course, because it's criminal law, we would still have to convince a criminal court, but I think we feel that that is part and parcel of what we do. We have to find it first, and we have the tools to find it. We haven't found it.
MR. DEWOLFE: The task force in Ontario didn't have much faith in your abilities to do that, apparently.
MR. RICHARD TAYLOR: It's odd, because a year after that task force, gas was 60 cents, the lowest, and they didn't congratulate us on stopping the anti-competitive conduct.
MR. DEWOLFE: Was that from other factors, or was that . . .
MR. RICHARD TAYLOR: Well, it's odd because when it goes up, it's always price-fixing, and when it goes down, we don't get the credit for finding the price-fixing or scaring them off. That report came in the last series of high gas prices. If you look at my chart, January 2001, it was down to 60 cents within about six or seven months. It was exactly coincidental with crude prices going from $42 back to $29. Whether it was price-fixing, and whether we had the powers to look at it, or whether it was just tied to crude, I don't know.
MR. MICHAEL SULLIVAN: I would just like to add a couple of things to that. There are organizations of independents like Sitma, there's a new organization in Ontario called the Independent Petroleum Retailers Association of Canada. They have frequently laid complaints before the Competition Bureau. We have asked them repeatedly for information to back up their cases because they come to us with these anecdotal stories about how the majors are putting them out of business, the prices are so low, and they frequently lobby
provincial governments to enact forms of price regulation to essentially protect them from the competitive marketplace.
Before giving too much credence to anecdotal stories about how it's very tough, they're all trying to put me out of business, there's predatory pricing, and this, that and the other thing, the committee should take the time, I think, to study these issues very carefully because of the harm they can cause the marketplace.
MR. DEWOLFE: Mr. Chairman, the gentleman is quite right in saying that and we are going to base our decisions on facts and not emotion. We are going to receive the information that we need to work with and I would think that this committee will be able to present you with enough evidence that you will have to dust off your Inspector Columbo clothes and get out there and resolve some of the problems that we're seeing here in the province - and I mean that in the nicest way.
There are indeed problems in this province. It was brought to our attention this morning by the member to our left that there is a 9 cent variance in the price at the pumps in a 45 kilometre radius, just on his drive to work here this morning.
MR. SULLIVAN: There could be a 10 cent difference between two stations side by each, if one's changing the price and the other isn't.
MR. DEWOLFE: I made it clear that in Yarmouth two weeks ago I was able to buy my fuel at my local service station at the retail level cheaper than the retailer was buying it from the company, and we were both an equal distance from the plant in Dartmouth. There are definitely problems coming to light here and I hope and pray your organization will have the ability and the tools necessary - as indicated by the Ontario report where they didn't feel that you had the tools necessary to properly do your job and I hope you have those tools now - and you are able to deal with the situation.
MR. RICHARD TAYLOR: I will just reiterate, if it's a competition issue we will be able to deal with it. If it's a right for everybody to stay in business, we can't deal with that, that's not our legislation, there's a distinction to be drawn.
MR. DEWOLFE: But margin squeezing is your business?
MR. RICHARD TAYLOR: No, it would meet the test under Section 79. A dominant firm engages in a - it's in the legislation - practice of anti-competitive acts which is or is likely to result in a substantial lessening of competition in a market. One of the anti-competitive acts listed is margin squeezing. If we can meet the five elements of the offence the tribunal will issue an order. We have won all five cases we've taken, so our track record is perfect right now. We don't have a problem securing convictions. We started in 1992 with NutraSweet and we just got another case right now in the courts called Bibby, which is our
sixth case. We have won five and we're hopeful we are going to win our sixth. I can't do better than winning them all.
MR. DEWOLFE: Thank you.
MR. CHAIRMAN: Mr. Howard Epstein.
MR. EPSTEIN: Mr. Taylor, I liked your characterization of the Competition Bureau as the regulator of the free market, it seemed to me a good phrase and very useful. It seems to me as well, though, that there are different ways of thinking about how the free market might be regulated.
The underlying thought of your legislation and agency seems to be that the test is whether consumers get a good deal where the product is available. One of the problems that we've had to deal with, and that we think about, is the availability of this product. So do I take it that if there are markets in which the product is just not available, for example, very rural areas where it seems likely that a lot of the stations are going to continue to close up and may close up completely, that this becomes irrelevant to what it is that you're doing? If it is relevant, how is it relevant?
MR. RICHARD TAYLOR: I think you may be alluding to what we would call market failure, when the cost curve of a business for something like electricity would not lead to the right investments and so nobody could make any money, so government steps in in those markets. We would have no quibble, it's not our place to quibble. If the federal or provincial government, or local government wants to step into a market to correct a market failure where that happens, then that's entirely up to the government to do and your right to do.
MR. EPSTEIN: So that's something a provincial government could seriously look at if it wanted to regulate the free market in that way.
MR. RICHARD TAYLOR: In those locales where you can't get the product, I suppose, yes.
MR. EPSTEIN: If it was a concern to us that the variations in price across the province were some kind of failure of the free market and we decided that we would like to see either uniform or close to uniform prices across the province, that's not within your mandate but it's something that we could think about, is that right?
MR. RICHARD TAYLOR: Correct.
MR. EPSTEIN: And likewise, there's no regulation of the free market to try to establish one national price or close to it, that's simply not something that is a feature right now?
MR. RICHARD TAYLOR: No.
MR. EPSTEIN: One of the things I wonder about is the aspect of regulation of the free market that has to do with profit levels. I rather got the impression from what you were saying that profit levels are relevant and yet at the same time on Page 4 of your notes, you refer to overcharging. Overcharging is your word and it's in the sentence in which you say that we found no evidence of collusion or overcharging by the major petroleum companies . . .
MR. RICHARD TAYLOR: That was in a study from the 1980s, that was back to the RTCP on a very specific research inquiry. We don't have that power anymore . . .
MR. EPSTEIN: Yes, you lost it in 1986.
MR. RICHARD TAYLOR: Right, so that was because in that period - it's a very important point - we could conduct general research inquiries into market failures and other areas related to competition. The allegation there was systemic overcharging, which may or may not have been due to price fixing.
MR. EPSTEIN: My question really is, does the idea of overcharging enter into any of the regulatory powers that you now are able to exercise at all?
MR. RICHARD TAYLOR: No.
MR. EPSTEIN: So that's not a concern to you, so this is not an abuse of dominance, for example?
MR. RICHARD TAYLOR: No. High profits may be a manifestation of anti-competitive acts but our job is to get the anti-competitive acts, not the high profit. Indeed, many companies who engage in anti-competitive acts aren't highly profitable.
MR. EPSTEIN: I understand that, but if it was a concern to us for exactly the same reason that underlies most of your activities, that is to say seeing to it that consumers get a good deal, if we were concerned with what we regarded as excessive levels of profits, that would be within our jurisdiction but it's not within your jurisdiction at all, is that right?
MR. RICHARD TAYLOR: No.
MR. EPSTEIN: Now I would like to turn to Page 11 and it has to do with this question of divorcement. You cite an American Federal Trade Commission study on divorcement. First in your comments, I think you suggested that there were maybe three or four states that did it. I haven't looked at this myself yet but we did hear from at least one witness who suggested they thought that as many as 17 American States do this. Is there somewhere we can check on this?
MR. SULLIVAN: I have some more information on divorcements that I can read out to you, if I can find it in my folder here. Bear with me for a moment.
MR. EPSTEIN: Sorry, it has actually just been pointed out to me by my colleague . . .
MR. RICHARD TAYLOR: I think what I meant to say the study we enclosed studied three or four states, I think that is what I meant to say. If you look at the study by Vita, Michael, I think you will see that they only looked at four of those States.
MR. EPSTEIN: Okay. In fact, my colleague, Mr. Graham, just pointed out to me that we also heard from another witness that there were maybe seven states and we did hear, actually, from another witness that there was maybe as high as 17. Clearly, we have to track this down.
[2:45 p.m.]
MR. SULLIVAN: I have a list of states. The states which we believe - this was done by a study by Michael G. Vita, who is with the U.S. Federal Trade Commission - the States which have them are: Maryland; Virginia; Connecticut; Delaware; District of Columbia/Washington D.C.; Nevada; Hawaii; and apparently there are a number of other states which have had proposed legislation but have not been passed, including two counties in California.
MR. EPSTEIN: Thank you, that is helpful information. What I'm really curious about though is just why exactly it is that the study by the FTC could conclude this. Do you happen to know whether they concluded it looking at the data and saying, here are the hard facts and it just doesn't do anything particular, or is there some reason that one could understand it as working that way? My instinct, I have to say, is the other way around. I would tend to think that divorcement would either increase competition or at least minimize the opportunities for anti-competitive activity.
MR. RICHARD TAYLOR: One possible explanation that I do know about is what we found out on the Diamond-Shamrock-Ultramar case. Refineries have to be run at 98 per cent capacity to be really efficient, it's a chemical process, if you shut them down you can't really run them at low capacity, or it's difficult to do. They are much better if they're run at high capacity, much as the airline business needs high-load factors to make money. That
would suggest that you would need to sell a lot of gasoline and if you have your own gasoline station you reduce some of the risk, if you have your own outlets you reduce some of the risk of basically being able to flog all your gas from your refinery. I think that's why these long-term supply arrangements are so eagerly sought by the refiners, as well as the Canadian Tires and the like, because it allows the refinery to plan and guarantee a certain level of production. Having your own stations may do that as well and if you take that ability away, you may increase the risk to the company.
MR. SULLIVAN: Basically vertical integration helps to reduce transaction costs between different players in an industry. Another result that they found from one of the U.S. studies - and actually there's more than just the FTC study, there was a study conducted by the U.S. Department of Energy and also a study conducted by the Maryland Department of Finance, which came out with similar conclusions, that basically the bottom line conclusion was that prices are higher in those states and that the hours of operation at the retail level are lower than they are in free market states.
MR. EPSTEIN: These would be concerns to us. I have to say, we've had no discussion as to where this committee is going on this issue but it has certainly been flagged for us as one possible step, and a number of us are thinking about it quite seriously so we would like to have a look at this in a lot of detail. I suggest it may also be that the circumstances in individual provinces or states may vary so that what is true with respect to that policy choice and its consequences may not be true in absolutely every jurisdiction. I think, for example, about Hawaii. Here you have an isolated part of the United States that seems to have gone in for this kind of regulation, the same way smaller, more vulnerable markets like P.E.I. and Newfoundland and Labrador have been the ones that have fought to take regulatory action because they're not so confident that the free market will operate to their benefit.
I can give you a dramatic example and I'm sure your own stats will show you this but I was in Toronto all last week where I saw gas prices at 68 cents or 69 cents, and last night when I was arriving at the airport here, the same Petro-Can station that was selling gas at 69 cents a litre in Toronto earlier in the day, was selling it at 89 cents a litre at the Halifax Airport. Now that's quite a spread and it's not likely to be accounted for just by transportation. It is hard to see where even a highly-competitive, high-volume market is going to account for all of that and that's where - when we run into facts like that - we really wonder whether the consumers of Nova Scotia are well served by the existing structures.
MR. RICHARD TAYLOR: Toronto is a hypermarket right now, so is Ottawa, where prices are cycling very, very rapidly. In the industry they call it erosion rates and that's the rate with which prices drop. I spoke briefly about the cycle, the natural competitive cycle forces prices down to cost. Somebody restores and most of the time others follow and you get the 10-cent jump - it is a 10-cent jump so let me give you one explanation. You are at the
top of your cycle, Toronto is at the bottom of theirs, one day, same place, two spots in Canada, no transportation cost, 20 cent a litre difference.
MR. EPSTEIN: It is quite striking. One of the assumptions behind the model that puts its faith really in high degrees of competition is that it's possible to have these high-volume retailers with lots of competition, it's an urban model which is not necessary applicable in rural areas or in provinces that are significantly rural. I know the stats that in Canada, as a whole, 80 per cent of the population lives in cities and that a number of them are very large cities, of course. But there are number of provinces like ours and all of the eastern provinces, where a lot of the population lives in rural areas where that kind of competition is more difficult to achieve. Thank you for coming.
MR. CHAIRMAN: Michele Raymond.
MS. RAYMOND: Thank you very much for coming in. Howard has set up some of the things that I was going to ask you about but one question I was wondering initially was, have you appeared in other provinces which were considering regulation and how did you end up here today?
MR. RICHARD TAYLOR: I don't recall, I don't believe so. We did appear before the Industry Committee last year. I had conversations with another provincial government that was thinking about it earlier this year but didn't go through on it and because it didn't become public I won't say anymore about it. In terms of Newfoundland and Labrador and P.E.I. I don't recall our being involved but that may be because there are a number of other people who could have been at the bureau. I couldn't find anything on our Web site that we made a submission. The submission would be posted to our Web site right after the presentation, so I assume we didn't.
MS. RAYMOND: The only other province that you have dealt with . . .
MR. SULLIVAN: When Nova Scotia was considering deregulating gas prices in 1989, we did make a presentation to the Government of Nova Scotia at that time, in support of Wilson Fuels, who was an advocate of deregulation.
MR. RICHARD TAYLOR: You ask why? I got a call from two people in government about two months ago. I don't recall their names.
MS. RAYMOND: I just wondered about the initiative there, thank you.
I guess one of the reasons I asked that is that I hear a lot of credos in what you're saying. I'm afraid I do hear a lot of I think, and I believe, and things like keeping prices secret is the lifeblood of competition and so on and I worry about this. I'm also hearing a lot about efficiencies and so on, we talked about thousands of stations having been reduced to a few more efficient stations and that's certainly true, but without knowing exactly what the parameters of the bureau, what exactly its terms of reference are, I would worry that the final result of unrestricted competition is going to be a spontaneously arising monopoly.
Are you worried simply about the impact on those consumers who buy from that end result, or are you worried about the process at all?
MR. RICHARD TAYLOR: We protect competitive markets, not competitors, it's almost a mantra for us. So we don't pick winners, we don't pick losers, we don't protect certain categories and promote others. We just stop anti-competitive conduct that would lead to monopolization. You should know that monopoly in of itself is not contrary to our Act, you have to be big and bad. (Laughter)
MS. RAYMOND: That's fine. I'm just wondering exactly what it is we're out to prevent in that because I do hear a couple of things. Some of these anti-competitive behaviours, you talked about local episodes and that these are the only places where you have had successful prosecutions.
This is not just about dollars, dollar cost. This is about some of the other things which may not be measured in dollars immediately. To have to leave the town which has no doctor's office, which has no gas station, which has no public transit, which has no train station and no airport, to get the gas to take you to those things, adds to the cost of that gasoline. Is that an issue? People are driving and as these stations close, the cost of their gasoline goes up. They have to drive for it. Is that an issue?
MR. RICHARD TAYLOR: It's not an issue for the Competition Bureau. It's not an issue we can address and it's not one that we would address. The only time we would address it is if it was done because of anti-competitive reasons.
What we deal with as the issue is a little different. What others on the committee have talked about a little bit today is the big station, integrated station coming into the small town and knocking the little person out. In that situation you still have a gas station, albeit, the integrated one. In areas where there is no gas station, there is no competition and it's not really something that we can - we can't put a chicken in every pot or a gas station
. . .
MS. RAYMOND: You can prevent some of the chickens being removed from the pots though.
MR. RICHARD TAYLOR: Well, if it's being done by anti-competitive reasons, yes, we would certainly look at that.
MS. RAYMOND: Yes, okay.
MR. RICHARD TAYLOR: If a large station entered the market and predated a little station out of business, and they were the only station in town, the big station, we would have a lessening of competition, I suspect, and we would have an issue.
MS. RAYMOND: So I wonder how big the market is? Is it the distance of a tank of gas? How do you define the size of one of those markets?
MR. RICHARD TAYLOR: We use the most comprehensive data. It is a company called Kent Marketing Data. It is excellent. It lists the sales - it is the only way you can really assess other than getting actual audited financial records from independents, Kent Data give a very accurate assessment of the shares, they track independents versus the majors. We use that data.
MS. RAYMOND: I mean the scope of the market? I mean, how do you decide the scope of the market, the range, the geographic distance from the big, integrated player which is considered to be the market.
MR. SULLIVAN: In a densely, urban area, like in Toronto, which is by far and away the largest city in Canada, there are probably something in the order of 40 to 50 little, local markets where there are little groups of competitors which compete with one another. In Ottawa, there might be 10 or 12. But if you live in Mulgrave, Nova Scotia - I honestly don't know how far people drive there to get their gasoline. It is something that we haven't studied because, as Richard said, we are generally looking at anti-competitive issues as opposed to . . .
MR. RICHARD TAYLOR: Well, we did study the Imperial Oil-Texaco merger in 1996. What we do is, we get postal code data and find out - try and track through credit cards and surveys - how far people drove. When we did the bank merger, for instance, the proposed bank mergers four years ago - all of the banks track where you live and you don't always go to your bank in your neighbourhood any more.
MS. RAYMOND: No, that's for sure.
MR. RICHARD TAYLOR: We got that data and we put together maps. We used something like - it's not exactly what we do - we use an 80 percentile or 60 percentile rule. No market is completely air-tight so there will always be the outliers.
MS. RAYMOND: Sure.
MR. RICHARD TAYLOR: We will use an average of 60 per cent. If our circle around competitor locations - if our circle captures 60 or 70 per cent, we won't try and go to 100 because then it could be hundreds of miles. We use economists and statistical methods to do that. It varies very much in case by case.
MS. RAYMOND: Okay, so if 60 per cent of the people are getting their gas at the big, integrated store at Antigonish - come from Antigonish. . .
MR. RICHARD TAYLOR: Come from 30 kilometres.
MS. RAYMOND: . . .then you're satisfied, no matter that the other 40 per cent may actually be coming from Mulgrave.
MR. RICHARD TAYLOR: It depends on the product. It could be higher. I use that merely as an illustration.
MS. RAYMOND: Yes.
MR. RICHARD TAYLOR: There is no - it really depends on the elasticity of demand and supply, how sensitive consumers are to changes in prices. That is where we would have an expert that would come in and they would do mapping for us. We would present that to a court and we have had to present that in numerous cases to the Competition Tribunal. Obviously, in our cases, where we allege a large lessening of competition, it favours us to narrow the market; whereas, those that we target, the companies, want to widen it to make it as big as possible to minimize their market share. So we get in that battle all the time and we look at it on a case-by-case basis with the use of experts.
MS. RAYMOND: Have you, in fact, done any of these cases in a rural context, just out of curiosity?
MR. RICHARD TAYLOR: We did all the bank mergers. Many of the. . .
MS. RAYMOND: No, I mean, the gasoline ones.
[3:00 p.m.]
MR. RICHARD TAYLOR: We have looked in local markets. We are looking right now at two.
MS. RAYMOND: No, rural, local markets.
MR. RICHARD TAYLOR: Yes, we are looking at rural markets rights in Ottawa.
MS. RAYMOND: Yes, okay. I am very interested to know about that. My last question is, you have talked about ancillary revenues, quite cheerfully, and we hear a lot of evidence about volume discounts and so on, but the cross-leasing phenomenon, is that something that you look into as a possible anti-competitive phenomenon? You seem very comfortable that people are obviously recouping their costs in the groceries and they are not paying more. But what about the fact that there are retailers who are telling us that the price that they pay for their gasoline, as I understand it, is at least partially dependent on other leases negotiated with, say, the grocery store, or whatever, who supplies their convenience
store? You don't see that as any kind of anti-competitive phenomenon for the person who can't negotiate that?
MR. RICHARD TAYLOR: We have a phrase, we call a conspiracy provision, a per se violation. You do it, you're going to get prosecuted. In other instances where there can be, such as that, a beneficial or non-anti-competitive result, we have to take a rule-of-reason approach and look at the facts. I can't answer. . .
MS. RAYMOND: What's a beneficial result? Tell me what beneficial is.
MR. RICHARD TAYLOR: A beneficial result is lower prices to consumers. We don't protect individual competitors because if one goes. . .
MS. RAYMOND: No?
MR. RICHARD TAYLOR: There may be others that are willing to enter. We don't pick winners and losers, we don't do that, we keep the market free.
MS. RAYMOND: Okay, a lower price to consumers.
MR. RICHARD TAYLOR: If company A goes out of business but company B can open up next week, that's the market. It is not our mandate to be worrying about which companies are surviving and which aren't on account of . . .
MS. RAYMOND: Not which but where, is what I am focusing on, still. Not which companies but where they are surviving because those consumers are not paying lower prices, if in order to get this essential service. They have to drive huge distances. You don't get anywhere without gasoline in this country.
MR. RICHARD TAYLOR: Not our issue, unless the other players in that market were driven intentionally from the market, then it is our issue.
MS. RAYMOND: So Kent Marketing Data then could give me some information about defining geographic. . .
MR. RICHARD TAYLOR: It would help you identify how many stations there are in a zone but it may not go down to the level you want. But if you had a town that you wanted to - I imagine you could find out, quite easily, how many gas stations. So if I've got a complaint from Shawville, basically, I would look at the seven gas stations. I could go and I could actually look in the Yellow Pages, and I could find the gas stations that were within 10 kilometres of Shawville.
MS. RAYMOND: Oh, that's easy.
MR. RICHARD TAYLOR: Then I could plot - figure out the next town over and where the closest gas station to that is. At least you can do it, intuitive, first cut. You could assess the status of competition in those small markets and who is going to be put out of business or who has gone out of business.
MS. RAYMOND: Or going. Okay, thanks.
MR. CHAIRMAN: Thank you, Michele, for your questions. We have three speakers. I should inform the committee that it is 3:00 and we would like to finish up our business today by 4:00. At this time I would like to recognize Mr. Brooke Taylor.
MR. BROOKE TAYLOR: Thank you, Mr. Chairman, and to our guests. I apologize for being late. I was meeting with some trucking company people and, believe you me, they are very concerned about the price of fuel and things of that nature.
My colleague referenced the Ontario Gas Prices Review Task Force Report Fairness at the Pump and in that report, on Page 15, it states that "The report of the Liberal Committee on Gasoline Pricing in Canada . . ." - the McTague report - that was in 1998, "The McTague report called upon the federal government to strengthen the Competition Act." One of the recommendations of the Provincial Tory Report - not to confuse the two - my colleague across the way sure won't confuse the two, (Laughter) but, nonetheless - entitled, Fairness at the Pump, the Honourable R.W. Runsimon - in that report, on Page 7, again it talks about strengthening the Competition Act, and you seem more than satisfied that you have the tools to do the job but, yet, these two reports, and probably more reports out there, are calling upon the Competition Act to be toughened up.
One of the suggestions, or one of the recommendations, in fact, is that the federal government act to shift the burden of proof for investigations under the Competition Act to the person/organizations accused of anti-competitive business. Now, we recognize those are serious allegations but we have had a number of presentations and received a lot of correspondence leading one to believe that there is, possibly, some form of price discrimination going on here in Nova Scotia. If I wanted to make a complaint and I would like to encourage you to investigate it, how do I proceed through that comprehensive process?
MR. RICHARD TAYLOR: Well, we have a 1-800 number. I will leave you a pamphlet on the Competition Bureau. We have a well-publicized 1-800 number. You will get an investigator to call you back within 48 hours. We receive about 5,000 complaints a year, not including misleading advertising. Including misleading advertising, it's 25,000. So we start with that process. Everybody gets a response. I think I alluded to the investigative process. The facts will be investigated.
MR. BROOKE TAYLOR: If I could, Mr. Chairman.
MR. CHAIRMAN: You may.
MR. BROOKE TAYLOR: How deep of pockets do I need as a citizen in this country, provided you do decide, yes, well, maybe there is enough, I don't know, overwhelming or compelling exhibits. I want to be careful not to use the term "evidence" but if I have more than just circumstantial evidence, if I have some exhibits that clearly seem to indicate there is a price discrimination going on, and you decide that, yes, there does seem to be something here, who makes that decision?
MR. SULLIVAN: It's the investigator who makes the decision.
MR. BROOKE TAYLOR: The one investigator makes the decision?
MR. SULLIVAN: That's right.
MR. BROOKE TAYLOR: Can he be overruled, or she overruled?
MR. RICHARD TAYLOR: Yes. We monitor the investigators all the time. Mike or somebody like Mike would review those complaints.
MR. SULLIVAN: So, let's say you had a constituent who wanted to complain about price discrimination. That person would call our information centre, it would be referred to an investigator, the investigator would initially contact the person by telephone, ask a lot of questions, you know, basically go through the process of getting the person's story down. They would make a decision about whether there appears to be grounds - sort of what we call "reason to believe" to start an inquiry. It's like the concept of probable cause.
MR. BROOKE TAYLOR: Yes.
MR. SULLIVAN: Once we reach that stage of reason to believe, it is at that point where we can use some of the investigative tools that we have under our legislation, the power to conduct court-authorized searches to issue subpoenas, to get information from the potential accused in the case, and to go through the investigative process like that.
I think some of the frustration that you might be hearing out of that Ontario process is that the Act doesn't give people quick fixes. The investigation process is fairly time-consuming. The process of preparing a case for trial and going to court is time-consuming, expensive and difficult for all parties involved. It's not a regulatory-type Statute where we can just call up someone and say, hey, you're breaking the law, knock it off. You have to be able to put together a case in order to. . .
MR. BROOKE TAYLOR: Yes, but I guess I'm having difficulty discerning why the federal committee's report and the provincial Ontario Government's report commend - and spend a lot of time on this particular issue.
MR. SULLIVAN: Well, I guess, just on the first point. . .
MR. BROOKE TAYLOR: Yes.
MR. SULLIVAN: . . . the point that you made about the reverse onus provision. I am not a lawyer but I know a little bit about the law . . .
MR. BROOKE TAYLOR: Neither am I. (Laughter)
MR. SULLIVAN: . . . having worked in the field for 21 years. It is very unlikely that legislation like that would be unconstitutional, where you have a reverse onus provision and a criminal law. Basically, in Canada, we come from the common law tradition where you are innocent until proven guilty. Being accused of a criminal offense this person could get fined or could go to jail, so they have a right to remain silent, they have a right against self-incrimination. It is very unlikely that that kind of proposal would get very far.
MR. RICHARD TAYLOR: I just want to add, also, the more recent report in June, the one I referred to that you have a copy of, said that we have all the powers necessary to investigate. That is the issue, investigate. I don't know, beyond searching, wire tapping and subpoena powers, what powers could we have. We have whistleblower protection. I mean, we don't have a witness protection program. Maybe we could go for that.
Ultimately, you are going to have to have somebody on conspiracy to come forward that has knowledge of the agreement. We can't convict without that evidence. We need the evidence. People come and allege price discrimination. We follow it up, we ask for the details, we ask what impact it was having on them. We may get their tax forms to see how much money they made over the last three years. Oftentimes, it doesn't materialize. There is a burden on the person coming forward to disclose all the relevant information they have, and to be honest and accurate. Sometimes, many of these complaints don't quite pan out like they looked originally.
MR. BROOKE TAYLOR: How many investigations - now, you say you've been successful in a number of convictions and things of that nature. How many ongoing investigations are you doing now, relative to oil companies?
MR. RICHARD TAYLOR: I can't comment on how many - I could comment generically - I can't answer how many we're doing in specific industries. I wouldn't do that. I could say we've got 34 ongoing major inquiries in Criminal Matters branch right now.
MR. BROOKE TAYLOR: 34. But you can't tell us whether it's oil-related or what it is. Well, according to these reports, as successful as you have been, there hasn't been - at least, I think it's referenced in the Liberal committee report in 1998, where they called the Competition Act toothless. They claim there hasn't been a conviction regarding this matter.
MR. RICHARD TAYLOR: Because we secure guilty pleas before we go to trial, for the most part. Now, we have got dozens and dozens of guilty pleas, companies, but that's because we build our case to a high level and I'd like to think it's because they know we've got the goods on them. We're a professional organization. We have $180 million in fines.
The fact is that companies don't want to go to trial and it becomes very expensive for us as well. I don't think that's necessarily an indictment on the effectiveness of the Act, when you've got dozens of convictions and $180 million in fines. I don't think you have to go to court and go to trial.
MR. BROOKE TAYLOR: So you're telling me that people are pleading guilty rather than go to court and the Act is appropriate, it has all the tools and all the teeth you need, and in spite of the objections, concerns and recommendations of these two reports, their findings are completely. . .
MR. RICHARD TAYLOR: No, I'm not. I'm simply addressing why we don't get a lot of guilty pleas and why we may still remain effective, notwithstanding we don't. There is an amendment process, Section 45, the conspiracy provision - is being looked at. There are people that are quite concerned about the difficulty we have in securing convictions because of the secret nature of the agreement and the difficulty in proving it.
Others think the Act is effective. We would like to see some changes but I don't think at the end of the day that it has diminished our effectiveness, first of all, in investigating these things and finding out about them. That requires search powers, subpoena powers, whistle blowing and the like. Whether we can convict all of those that we would like to, that is ultimately a difficult thing to assess. Whether we have under-convicted or over-convicted, I can't address that.
There are some changes. We have had some difficulty, starting with the PANS, the Pharmacy Association of Nova Scotia case which was right out of this province. We lost that one. We had charged a pharmacist with conspiring to fix prices in the 1980s. Some experts feel that the law needs to be changed to remedy what has transpired since then, so I'm not saying the law is perfect, no. We'd also like to move some of the criminal provisions to the civil side to reduce the burden of proof and we're working on that.
[3:15 p.m.]
MR. BROOKE TAYLOR: I appreciate that because that is, in fact, one of the recommendations that has been made actually by a couple of different committees. I would think you would have to have terribly deep pockets if you were going to try to pursue this and the onus - even though you put prima facie evidence forward - is on you, even though you have initiated an investigation and that's because it's on the criminal side, I understand.
MR. CHAIRMAN: Mr. Danny Graham.
MR. GRAHAM: Mr. Chairman, I thank the guests for coming the distance they have. It is obvious that you are informed and prepared in the specific for the Nova Scotia arguments. You know what arguments we have heard, in general, and to a certain extent I think I would characterize some of your comments as sobering as well as informative. Perhaps at the risk of getting into a discussion about the characterization of the evidence that we've heard so far, I'm not sure if I would go so far as others may have in suggesting that we've heard evidence of price fixing and collusion that is sufficiently compelling to draw any real conclusions. I would suggest that we've heard testimony that raises questions about those issues, about collusion and about price fixing, and they are serious concerns that have been brought to this committee and we are examining them in that light.
The evidence that we've heard is perhaps at least as consistent with hard-ball business and you're not in the business of supervising hard-ball business conduct and you're not in the business - nor are we - of ensuring that businesses stay in business, in ensuring that no matter how sympathetic a story might be about a gas station going out of business, it's not your world to interfere with that even if it is passed down through generations. I would make the argument that it is not our business to it, with a few exceptions. One exception is whether or not there is predatory practices that are going on - and I would like to suggest to you some circumstances that are potentially within your realm around that. In the second instance it is when there are questions about this being a necessity and in remote communities there is a need for people to have reasonable access to this. So I would like to touch on those issues first of all.
You were careful in your presentation and on Page 6 of the written presentation to say that to date there is no evidence of inappropriate behaviour toward retailers and on Page 6, the last paragraph, about sixth last line you say, while retail margins continue to fall across the retail sector, in the past there has been no evidence that this has been due to a desire by majors to eliminate independents by engaging in predatory behaviour. You have been discreet about what you're investigating right now. I'm not sure how discreet you need to be or whether or not you're prepared to comment on whether I may be reading too much into the potential for a continuing investigation.
Are you prepared to comment on what I'm reading as your careful use of language in suggesting that in the past there doesn't appear to have been a problem, but you're not surrendering the possibility that it may come to light that currently there is a problem that will be revealed at some later date?
MR. RICHARD TAYLOR: That's quite true. There are two reasons why we want to be very circumspect about what we're doing right now. First of all, we have to be under Sections 10 and 29 of the Act, and secondly, it's only prudent to withhold our conclusions.
MR. GRAHAM: You have conceded how the margins have shrunk over the years, that's been consistent with retailing generally. We have, however, heard from retailers both in Bridgewater and in Sydney, they are the two examples that I remember best, with lots of nods from retailers in the audience when this testimony was given afterward that on some occasions wholesales have provided prices to retailers and when retailers have tried to stretch their margin from three to four cents and increase the price, the wholesaler has increased the price to the retailer by that one cent on the next supply and it's not part of any agreement.
You've said that margin squeezing is something you could investigate. If that were in fact so and this was done deliberately to squeeze someone's margin, on its face does this look like something you would or should investigate?
MR. RICHARD TAYLOR: I'm not going to comment. When we do a case even to address a complaint and spend days looking at the facts, let me tell you what we do in that case. I would order the Kent data for every station in Sydney or Bridgeport, I would find out what the prevailing price is for the last six weeks and I would see if we had any other complaints about it in our file room because dollars to donuts we do, we then go and proceed with an analysis of the factual situation, and then we talk to the complainant. That takes a week or two, so to ask me what we would do, I can't answer that because I wouldn't comment on whether that's an issue or not.
MR. GRAHAM: I would suggest that the case that I put to you is sufficiently general that you could comment on at least of the question of whether it is inappropriate or appropriate action if someone were to be doing that?
MR. RICHARD TAYLOR: I don't know. I don't know the facts. I don't know what the wholesaler's sales are. I don't know how many gas stations, if any, the wholesaler has. There are a lot of facts so I just can't answer that, I'm sorry.
MR. GRAHAM: Let me give you an even softer question. Would it be troubling for you to hear that that sort of thing is being described?
MR. RICHARD TAYLOR: Again, without knowing the circumstances I can't tell you. There can be a worse situation. We had a situation where you can have a price of zero that wasn't predation in the market circumstances. Do you know why? It is kumquats and they were ruining so the grocery store gave them away and the little grocery stand down the road complained. So I can't tell you whether that is discrimination, predation, or what have you. I can't comment on it. I can tell you that if the person phones us, we would look at it.
MR. GRAHAM: It's troubling for me to hear you suggest that it's not troubling for you (Laughter) that there is the possibility that these margins are being deliberately shrunk just because the retailer tried to increase their price. I accept your proposition that somebody could be loss leading this thing at zero cents per litre and that's not predatory, I can accept that as a possibility. But when someone is deliberately trying to squeeze out the margin that somebody has created, at the very least I would have expected you to suggest that that was troubling.
MR. RICHARD TAYLOR: I'm just not prepared to comment on my personal views on an anecdotal issue that I have no knowledge about, I just can't do it. There are . . .
MR. CHAIRMAN: Order, please. If the witness does not wish to answer, Mr. Graham, maybe we could go on to the next question.
MR. GRAHAM: That's fine, I was looking for your professional view, not your personal view on it. The second issue does relate to remote locations and we would have an interest in this. It's interesting that you noted, I think it was Mulgrave, we had someone from the same County of Guysborough. Canso is a very remote community in Nova Scotia and the only gas station server in that community said that there is some chance that he may go out of business. We have been told there may be as many as one-third of the retailers in Nova Scotia who may go out of business, perhaps, in the next five years or so.
I wonder if you could comment on national trends that might exist because, while we may have a greater percentage of our population in rural communities, we don't have more remote communities than they do, for example, in every province west of Atlantic Canada. For those communities there must be something creative happening in this volatile time and if so, can you share with us what sort of things are happening?
MR. RICHARD TAYLOR: Well, I think to comment on the trend, which is in the conference board study - and I urge you to read that because I think it puts it into perspective what has happened over 30 years - obviously the large mass merchandisers and the large well-organized independents that have 30, 40, 50 stations, that seem to be doing quite well, they aren't everywhere - not everybody has a Loblaws or a Wal-Mart, or something like that. So in those locations though, I mean I'm having a little difficulty understanding the logic because how can a Wal-Mart, or how can an Esso predate them out of business when they're not in the market, they are nowhere near by definition.
There is a road up to Northern Ontario, up to Chapleau that has one gas station in 180 miles, I think it may be the most desolate gas station in Canada, I'm not sure. That station . . .
MR. GRAHAM: I'm not suggesting predation, I'm just asking questions about what might be done generally, whether there are other forms of regulation that perhaps other jurisdictions are involved in?
MR. RICHARD TAYLOR: There is always regulation.
MR. SULLIVAN: I think the hope for these gas stations in some of these small towns - and this is my personal opinion - need to offer a greater array of products and services for consumers, the things that consumers value. They will have to hook up with the local grocery store, the local convenience store. They have to be able to provide services that consumers in those small towns value and presumably to prevent those consumers in places like Canso or Mulgrave from driving to the next big town. If that's not possible then potentially I suppose there might be some form of regulatory solution, but that's not something that I have any opinions or could really offer any suggestions on.
MR. GRAHAM: You have indicated that if one were to move to a regulated industry, the Competition Act may not apply and there may be case law to support that. Is that to suggest that you don't respond to complaints in Newfoundland and Labrador and Prince Edward Island, because they are regulated?
MR. RICHARD TAYLOR: If they phone saying we have fixed prices, no, we don't respond to those and we can't charge the province with price fixing.
MR. GRAHAM: If the complaint is up the food chain to the refining level, and that sort of thing, which provincial governments would have a difficulty in controlling or managing, is there still some chance that you would look into a complaint?
MR. RICHARD TAYLOR: Yes, the only think exempt is the specific conduct that's being regulated. If you are regulating retail price, the Act doesn't apply to retail prices, it would apply to all other aspects of that industry.
MR. GRAHAM: I just want to get the source of this, you indicated - on Page 11 of your report - that the prices on Prince Edward Island, this is before taxes, were 2.3 cents per litre higher than in Halifax and in St. John's, Newfoundland, they have been 2.44 cents per litre higher than in Halifax. Could you tell us the source and the time frame?
MR. RICHARD TAYLOR: MJ Ervin is the source of data, I think it says January 2001 to June 2004. With MJ Ervin you can subscribe to data, it is a Calgary-based consultant
that tracks a weekly price survey in 12 major centres. If you subscribe you get the historic data and he strips the tax out, which is kind of good, too.
MR. GRAHAM: I apologize, you had that in there. This morning, just of interest, we heard government officials provide us with a contrasting figure of 1.8 cents to that 2.39 cents in comparing Halifax and Charlottetown, but it's still in the range of 2 cents one way or another. The U.S. legislation - in the United States they have the Petroleum Marketing Practices Act. Are you able to describe for the committee what that Act does? - and apparently we have nothing comparable for it.
MR. RICHARD TAYLOR: I'm not familiar with that legislation.
[3:30 p.m.]
MR. GRAHAM: Can you tell us the number of guilty please convictions that you had over the last 10 years or so?
MR. RICHARD TAYLOR: I would think it would have to be 30 but I'm just guessing. It's in our annual report but I can certainly get one of my researchers to get that back to the committee.
MR. GRAHAM: If you could, please. Right now we are told that refinery margins are in the range of 15 to 17 per cent. Can you tell us whether or not that has been a typical margin for refineries over the last 10 or 20 years?
MR. RICHARD TAYLOR: We are still verifying those facts but no, it would be higher. The conference board, which is the most comprehensive study I have seen in Canada suggests that it was about 12 per cent so again, you could verify that by looking at the conference board study, I left a copy of it. That suggests it's 12, I don't know what they currently are, we're still looking at that.
MR. GRAHAM: Those are my questions.
MR. CHAIRMAN: I would like to introduce Russell MacKinnon as the last speaker of the day.
MR. MACKINNON: Mr. Chairman, I want to go to Page 13 of the opening statement, In Conclusion, it says in closing I am of the view the overall Competition Bureau has the appropriate tools to investigate anti-competitive conduct and deal with structural problems that arise in the petroleum sector. Would not a drastic reduction in the number of retailers in the Province of Nova Scotia, with an anticipation of at least another 30 per cent dropping off, and the fact that the ones that seem to be taking over the market are the large, oil giants, if I could use that word so boldly, setting themselves up in a position where
eventually they can effectively monopolize and manipulate the price to the detriment of Nova Scotians? I will give you an example.
In Nova Scotia we have one large company that makes bricks, it's known as Shaw Bricks. Back in the late 1970s, I recall very distinctly there were three prominent businessmen in the Sydney area who wanted to start up a competing business making bricks and brick products, that sort of thing. That company dropped its prices to the point where those three businesspeople were out of business within two years, and then the prices at Shaw Bricks went back up. It may be an unfair parallel but I see the same thing evolving here in Nova Scotia. Would that not fall within your jurisdiction to look at the long-term implications? I know it's a fine line, you deal with criminal and that sort of thing and it's all about burden of proof and a whole lot of factors.
MR. RICHARD TAYLOR: The independents reach the highwater mark of sales of gasoline at about 27 per cent in the 1980s - they've declined to 19 and I believe they're on the rebound, they are certainly on the rebound elsewhere. The large independents with multi-stations, the MacEwens, the Wilsons - I was very impressed by Wilson Fuels and the number of stations they have and the Robins Donuts and the like. We have Wal-Mart coming in, we have Safeway coming in, we have Costco, Canadian Tire is going through a huge expansion and I understand they've just taken over 50 Irving stations out here. But they are independents and I don't differentiate between . . .
MR. MACKINNON: With all due respect, you can't consider them to be small, independent business people, these are giants. They have . . .
MR. RICHARD TAYLOR: You asked me if there was a structural issue . . .
MR. CHAIRMAN: Order, please. Excuse me, sir. You will have to wait until the member has finished with his question or comment before you answer.
MR. MACKINNON: That's okay, I enjoy a spirited debate. But with all due respect, they have very deep pockets, you are talking multinationals here. To try to put all these small, independent retailers in the same category, you are mixing apples and oranges. You are not even looking at a level playing field and I would suggest that perhaps somebody has their blinders on on this issue.
MR. RICHARD TAYLOR: If I can respond now. You asked me if there was a structural problem and a structural problem says, they're disappearing. We're saying as a group of competitors, the independents - and not picking out which ones are part of that - are as viable and are as aggressive and are as competitive as they ever have been, they are changing. We have not observed nationally the structural issue in terms of from the large numbers that we collect. In certain areas, I think it is becoming difficult for everybody to transition over to the new model.
You asked me at the start of the question whether we were aware of a large structural issue. I'm aware of the large number of unprofitable gas stations - the majors have shut something along the line of 9,000 down - have gone out of business, they have shut. They are being replaced by other forms of gas station with other owners and it has yet to be seen what the actual affect on the competition will be.
MR. MACKINNON: I don't know, maybe it is just my nature to be suspicious, but we are in the business of politics. You indicated in 1989 or thereabouts you came to Nova Scotia and again, for lack of a better phrase, the sales pitch was deregulation, you supported that, you indicated that on record. You are back again today indicating the same thing in essence in your report.
The present Premier - at least there was a public servant here this morning who indicated that the Premier - has already pre-empted the committee by stating he is against regulation. He has directed the staff in the Department of Service Nova Scotia and Municipal Relations that he will, categorically, reject regulation.
Have you had any particular specific discussions with government representatives
. . .
MR. BROOKE TAYLOR: Mr. Chairman, on a point of order. I was here for all of the hearing this morning and I am just wondering what the honourable member is referring to because . . .
MR. MACKINNON: Well he indicated this morning that . . .
MR. BROOKE TAYLOR: Who indicated?
MR. MACKINNON: The staff member, Mr. Duda, indicated that the Premier rejected regulation in the fuel industry. It was off the table, totally.
MR. CHAIRMAN: Member, if I may bring some clarity to this. I think the person with the department has said in the past - I believe he was making the note - that it was said at one time.
MR. MACKINNON: It was a recommendation to the government and the Premier said . . .
MR. CHAIRMAN: We will continue with the questioning but I think there has been a misunderstanding of the context of that statement.
MR. MACKINNON: We asked him twice and he was quite clear. We will let the public record stand.
Have you had any particular discussions with the government prior to coming in here today on this issue, or anybody in your department?
MR. RICHARD TAYLOR: I can't speak for anybody else, I haven't, the commissioner hasn't because I have the responsibility for the gasoline matters. I spoke to two people who were basically in the Government of Nova Scotia, one was a lawyer with the Attorney General's Office and somebody else was quite junior in the Energy Department, this was three months ago, when the press were reporting that there was some consideration being given to forcing companies to post price increases. That is the only contact we have had.
MR. MACKINNON: And did they ask for you to come to Nova Scotia at that time?
MR. RICHARD TAYLOR: No. They were just asking what we thought - and I think there was a question today - about the advisability of forcing companies to post price increases in advance.
MR. MACKINNON: So the government made that request of you before it made its announcement on the 48 hour posting? They made a recommendation in the House of Assembly, the minister did, that they would give 48 hour notice. So would you be able to time frame that?
MR. RICHARD TAYLOR: Probably not. I didn't write it down. These was a press report, it was all over the press, there were media reports, I got two calls about the advisability of that and that was two or three months ago. I don't recall when in the timing of that the thing did or did not go forward.
MR. MACKINNON: Your recommendation would have been against doing that?
MR. RICHARD TAYLOR: Simply that it could facilitate collusion, yes.
MR. MACKINNON: If they asked you that before they made the announcement then they didn't accept your advice and if they called you after the fact, then they made it without . . .
MR. RICHARD TAYLOR: Well, they wouldn't be the first ones not to accept my advice.
MR. CHAIRMAN: Thank you, member. I would like recognize for the final question of the afternoon, Mr. Brooke Taylor.
MR. BROOKE TAYLOR: Mr. Chairman, I would just say that I'm very pleased that our guests did come in this afternoon, I have the presentation in writing and will read it,
believe you me. I firmly believe that before we can have fairness at the pump you have to have fairness at the dealer storage tank. Now your view of fairness and mine are completely different and I realize that you have to work within the legislative framework that you have, and you may feel it is adequate, but I disagree.
These recommendations of the Province of Ontario Government and the recommendations of the federal Liberal Government have not been incorporated into the Competition Act. So, quite frankly, irrespective of some of the conclusions in your report, Mr. Taylor, I believe that in order for our consumers, here in Nova Scotia, to feel protected and confident that the price is fair, that we're going to have to very seriously look at some form of regulation.
There is no doubt in my mind that the Competition Act, in its present form, won't adequately address the concerns that consumes have. Even if they bring forward prima facie evidence and an investigation is started, the onus is still on the complainant, and that is through no fault of yours, I realize that and I want to respect that.
I just wanted to conclude by saying that while we have a Competition Act, I believe, like others before me, that there are some difficulties there, they may not be as pronounced as some believe them to be.
MR. RICHARD TAYLOR: I accept that but even if you agree that the law is defective, that doesn't prevent you from telling me, or any of your constituents telling me, evidence that they have. They have evidence because we do take cases, even though the law is not perfect, all law enforcement agencies do. If anybody out there - I have said this three times - has any evidence of anti-competitive conduct, phone us. We can't take, even through and imperfect system, what we don't know about.
Nine times out of 10, we go knock on the door of the company and say the jig is up, we gotcha, and they basically plead guilty and give us a fine. The issue we have is detecting it and that's what we would ask for your help in.
MR. BROOKE TAYLOR: Can I just say this, Mr. Chairman?
MR. CHAIRMAN: This would be the last comment.
MR. BROOKE TAYLOR: I just wanted to say - I know we are scheduled to close shortly - that I note the first recommendation the Ontario Government made was to forward all submissions received by the task force to the federal Competition Bureau for investigation. While some people probably can take a certain amount of solace out of that, just based on the track record - through no fault of the Competition Bureau but the legislative framework that is there - it's really difficult to proceed.
We have people for Pete's sake who are afraid and they want information kept confidential.
MR. RICHARD TAYLOR: We're used to dealing with that, though. We have an immunity program where it is a criminal offence for us to disclose the name, so we're very used to dealing with confidential information, and we're comfortable with it.
MR. BROOKE TAYLOR: Yes. It may be something we could talk about afterward, Mr. Chairman. Thank you.
MR. CHAIRMAN: Gentlemen, on behalf of the committee I do wish to express our gratitude for you travelling here today and going through a rather lengthy afternoon with some very difficult and harsh questions, but it is necessary for us to have our questions answered. We do thank you for coming, good health, and enjoy the rest of your time in Nova Scotia.
MR. RICHARD TAYLOR: Thank you very much for inviting us.
MR. BROOKE TAYLOR: Mr. Chairman, would it be possible for us to meet for five minutes in camera?
MR. CHAIRMAN: It certainly is, it is a request of the committee members to go immediately in camera. Mr. MacKinnon.
MR. MACKINNON: Mr. Chairman, is it possible that we could forward the copies of Hansard from the previous presentations? The witnesses may already have them but I think - whether some of the pieces of evidence were anecdotal or what - it would be nice to hear the professional view of our witnesses on some of that evidence that was given because at the time . . .
MR. CHAIRMAN: In our hearings? If you wouldn't mind . . .
MR. RICHARD TAYLOR: You can refer the matter to us but we do not enforce the Act in an open way, we do not . . .
MR. MACKINNON: No, I understand that, but at least if there was something.
MR. RICHARD TAYLOR: Just to be clear, we would deal with a complainant, so if you give us the name, we'll take if from there. But we wouldn't come back here and have you as an intermediary in that process. There is a level of confidentiality.
MR. MACKINNON: No. (Interruptions) I think it's important that our witnesses have that type of information because if there's a basis, I'm sure you will deal with it and if there isn't, well that's fine too.
MR. RICHARD TAYLOR: Certainly, people like Mr. Collins know our number because we're quite familiar in the past with them.
MR. CHAIRMAN: Thank you. If we could excuse all persons other than committee members for five minutes, we will go in camera.
[The committee moved into an in camera session at 3:45 p.m.]
