Assembly of New Brunswick
IV Regulation in Other Jurisdictions
A. Initiatives in Other Provinces and at the Federal Level
For the past few years, the only province with any regulatory involvement of note in the retail gasoline sector has been Prince Edward Island. That province regulates all aspects of gasoline retailing including prices and margins. However, gasoline pricing has become an issue in a number of Canadian provinces and regulatory strategies are being reconsidered.
The Province of Quebec announced a new regulatory scheme on October 17, 1996 which entails both retail and wholesale margin regulation. British Columbia has been conducting an inquiry and released a preliminary report in September, 1996. The report states that the British Columbia market "fails in certain respects to satisfy the conditions of a completely competitive industry" and further that "price discrimination appears to be occurring". The Government of Nova Scotia has initiated talks with the oil companies due to concerns about the potential for price discrimination to harm its independent marketers and competition generally.
The Federal Government plays an indirect role in the regulation of the industry through the Competition Act. The Bureau of Competition Policy which has responsibility for implementing the Act has just concluded an investigation into the gasoline industry. In a presentation to the Committee during the public hearings, Industry Canada indicated "The purpose of the Act … is to promote the efficiency and adaptability of the Canadian economy … ensure small and medium sized business have an equitable opportunity to participate in the Canadian economy and to provide consumers with competitive prices and product choices."
Since 1935, the Act has had provisions respecting price discrimination and predatory pricing. The hearing transcripts indicate: "… price discrimination is being party to a sale that discriminates against competitors of a purchaser of an article by granting a discount or other advantage to that purchaser which is not available to competitors at the time of sale…. Predatory pricing is a situation in which a dominant firm charges low prices over a long enough time period so as to drive a competitor from the market or deter others from entering the market. Having done that,it then raises prices to recoup losses … behaviour must have the effect of substantially lessening competition or eliminating a competitor."
The burden of proof under the Competition Act is that predatory pricing and price discrimination must be proven beyond a reasonable doubt. In large part, because this burden of proof is so difficult to satisfy, Industry Canada indicated "there are very few cases extant in this area … there are one or two in both instances which have gone through the courts … a provision that is not very often used."
The conclusion of the Committee is that the Competition Act has little effect in preventing discriminatory pricing or predatory pricing.
An overview of the regulatory climate across the country is provided in Appendix D.
B. Regulation in the United States
A number of states in the United States have implemented fair marketing practices legislation to protect independent gasoline marketers from predatory pricing. There are approximately 21 states that have so called "below cost " selling laws, and six states with partial divorcement legislation. The below cost selling laws prohibit gasoline retailers from selling at a price that does not cover their costs of doing business, with allowed exceptions such as to promote the opening of a new station or to meet a competitor's price. The partial divorcement laws prohibit integrated oil companies from operating outlets but do not prohibit them from outlet ownership.
There have been a variety of studies conducted on the impact of these laws. Regrettably, it is difficult to draw firm conclusions from these studies. One industry observer noted the conclusions of many studies tend to be predictable depending upon the study's sponsor.
Of particular note is a 1987 study sponsored by the American Petroleum Institute (API) entitled: "The Effects of State "Below Cost" Selling Laws on Retail Prices of Motor Gasoline". The API is the industry association for the integrated oil companies in the United States. This study has been cited by oil companies operating in New Brunswick in presentations to the Committee. It presents an analysis indicating that prices in the twelve months immediately following the implementation of below cost selling legislation, in three states with such laws, were higher than in neighbouring states without such laws. The study concludes that such laws are contrary to the consumer interest. The Committee has reviewed this study carefully and identified concerns with the methodology employed. In particular, the brevity of the time period examined raises questions about the validity of the conclusions.
Independent gasoline marketers in the United States have been promoting a piece of draft legislation referred to as HR 2966 which would introduce changes to the federal level Petroleum Practices Marketing Act in that country. This legislative proposal is best characterised as anti-discriminatory in that instead of prohibiting below cost selling, it prohibits a refiner marketer from selling to its regular customers at a price greater than 94% of the price charged at its own retail outlets. The refiner is free to engage in a price war under this proposal, but must protect all of its regular customers when it does so.
Appendix D provides additional information regarding legislation in selected US States.