Assembly of New Brunswick
VI Analysis and Conclusions Regarding Key Issues
The Committee has focused on four key issues in undertaking its review of the industry:
These issues are discussed in turn below.
A. Differences in Prices and Margins
1. Saint John versus other major cities
From 1991 through 1995, Saint John prices excluding taxes averaged at least 4 cents per litre more than the average for the largest cities in each province across the Country. Some of this difference is due to slightly higher retail margins in Saint John as shown in Exhibit 10. Most of it is due to higher refining and marketing costs and margins as shown in Exhibit 13. This price differential is particularly notable considering that in 1989 and 1990, Saint John prices were essentially comparable to the average for the other major centres.
The oil companies argue that the noted differences relative to other markets are less important than the fact that both ex-tax prices and refining and marketing costs and margins have decreased in Saint John since 1991. The Committee however is of the view that comparisons to other markets are pertinent. Further, the data indicate that ex-tax prices and refining and marketing costs and margins have not decreased to the same extent in Saint John as the average for other major centres.
The principal factor forwarded by the oil companies to explain the 4 cent difference is the lower average station throughput for Saint John versus larger centres. While the average throughput for Saint John stations is not known, Exhibit 18 provides an indication of the impact of average throughput on costs. The analysis suggests that the impact of throughput is in the range of one to two cents per litre. Offsetting this are three factors:
Balancing all of these factors, the Committee concludes that a substantial portion of the four cent per litre differential is not explainable by cost factors. Market factors, specifically a lack of competition in the market from 1991 to 1995 are believed to account for the difference. The decreases in prices realized in 1996 reflect the impact of greater competition
Exhibit 18 - Impact of Volume on Retailing Costs
2. New Brunswick versus other regions
The provincial average price data in Exhibit 7 which allows comparisons between New Brunswick and other provinces showed New Brunswick prices to be well in excess of Nova Scotia and Ontario but comparable to Manitoba. Each of these markets requires separate review.
Nova Scotia has been a highly competitive market since 1993 when new retailers began to enter the market subsequent to deregulation. These market dynamics produced price levels not generally considered sustainable in the long run, considering the cost of crude and reasonable refining and marketing costs. Nonetheless, Nova Scotia is usually the most comparable market for New Brunswick, with similar average throughput, similar transportation costs and being supplied by the same refineries.
Ontario data must be viewed in the context of the very high average throughput per outlet characteristic of that market. Average throughput per outlet in Ontario is more than double that of New Brunswick. As Exhibit 18, indicates, this provides that market with perhaps a 2 cent per litre cost advantage. The throughput difference does not, however, explain all of the price gap between New Brunswick and Ontario.
Manitoba has slightly higher throughput per outlet than New Brunswick. New Brunswick, however, should have a transportation cost advantage due to the proximity of most areas in the province to the supplying refineries and marine terminals. Manitoba has no refinery and no marine terminals. Product must be trucked across the province from the pipeline located at the southern edge of the province. Use of Manitoba as a benchmark should also recognize that its Government has had periodic concerns about gasoline pricing.
Balancing the available data, the Committee concludes that for the 1991 to 1995 period, average prices in New Brunswick reflect an overall lack of competition. Nonetheless, the available data suggest that the problem has not been as great on a provincial average basis as in Saint John.
3.Within New Brunswick
The considerable variability in county to county average prices in the province as shown in Exhibit 17 are not a reflection of cost differences from region to region but market forces. The entry of more independents into the market as well as Ultramar's "Value Plus" campaign has made gas prices in some areas highly competitive and highly volatile as outlets attempt to build market share. In other areas, where there is less competition, prices have tended to be higher.
The breakdown of outlets by county provided as Exhibit 2 shows that the degree of competition varies substantially by county. Some counties have all the majors and a variety of independents. Other countries are dominated by one or two of the majors. With this range of competitive conditions, substantial variability in prices is to be expected and has been the result.
B. The Impact of the Fuel Tax Reduction
A 2¢ per litre reduction in gasoline tax was effected by New Brunswick in April of 1992. New Brunswick now has the second lowest level of tax in Canada behind only Alberta.
The Committee has undertaken a variety of analyses to assess whether the tax reduction was passed on to consumers. The Committee concludes that the impact was different depending whether the first year after the tax reduction is considered or whether a longer term perspective of two to three years after is taken. Reference to Exhibit 13 shows that no increase in refining and marketing costs and margins occurred in the year after the tax decrease. The exhibit actually indicates that in the twelve months from April 1992 to April 1993, refining and marketing costs and margins in Saint John decreased, suggesting that initially the tax decrease was passed on.
A longer term assessment of the period of two to four years after the tax decrease, leads to a different conclusion. The analysis in the preceding section indicates that although gas prices have fallen in New Brunswick, they have not fallen as much as in other jurisdictions. The lower rate of gasoline tax in New Brunswick has not then produced correspondingly lower gas prices relative to other jurisdictions. The combined impact of the tax decrease and the lack of competition in New Brunswick was that the industry in New Brunswick was under less pressure than the industry across the rest of the country to rationalize and improve efficiency. It was only when new competition and price competition became active in early 1996 that the gap between Saint John prices and other centres decreased to more reasonable levels. The Committee is of the opinion that from 1993 to 1995 New Brunswick consumers did not receive the full benefit of the tax decrease.
C. The Size and Impact of the Independent Sector
The Committee has obtained information from a variety of sources indicating that the competitive structure of the market affects prices. First, the Committee heard from presenters at the public hearings that prices are a result of market forces. The Committee interprets this to mean that where there is increased competition, prices are likely to be lower and where there is less competition, prices will be relatively high. A review of price and industry structure data appears to support this conclusion.
An analysis was undertaken, comparing the average price by province for the major centres surveyed by Natural Resources Canada (NR Can), to the percentage of independent outlets in the respective provinces as reported by Octane magazine. This scatter plot is provided in Exhibit 19. Exhibit 20 shows a plot of average price for the major centres against average throughput for each province. While these analyses are not sophisticated, they suggest that both the percentage of independents and average throughput have an impact on prices. The conclusion of the Committee is that the presence of independents does have a downward impact on prices.
In reaching this conclusion, the Committee also considered the apparent impact of independents in Nova Scotia and the county to county discrepancies in prices within New Brunswick. Exhibit 21 shows the trend in prices in Halifax since 1989. Prices have decreased coincident with the entry of new independent marketers since the industry was deregulated. Exhibits 2 and 17 show the structure of the New Brunswick industry as well as average price data. In general, the counties with the most independents have the lowest prices and the counties which have the highest degree of domination by a single firm have the highest prices.
New Brunswick is a province with a very low percentage of independents overall. The Committee concludes that this has played a role in the degree of competition in the market and the price differences between New Brunswick and other jurisdictions noted above.
Exhibit 19 - Retail Price Excluding Taxes vs Percentage of Outlets Controlled by Independent Marketers, Canada
Exhibit 20 - Retail Price Excluding Taxes Vs. Annual Volume of Sales per Outlet
Exhibit 21 Saint John Ave. Retail Price vs Ave. Retail Price Excluding All Taxes for Atlantic Canadian Cities, 1989-1996
D. The Risk of Price Discrimination Reducing Competition
New Brunswick must be concerned about the level of competition in its market. Two companies control over 60% of the retail outlets and perhaps a higher portion of the total volume at retail. There are few independents compared to most other provinces. The wholesale market is even more concentrated. There were unexplained price differences between Saint John and other major centres across the country from 1991 to 1995.
In this context, the public hearings provided a number of examples where specified retailers were charged more for gasoline than the retail price at outlets displaying the brand of their supplier. It is clear that price discrimination has occurred such that different outlets in the same market area are paying substantially different wholesale prices from the same supplier.
The type of price discrimination that has occurred, could force both branded and unbranded independents out of the market or at least out of the price setting process. Accordingly, it is the view of the Committee, that such practices do present a threat to the overall degree of competition in the Province. Predatory pricing is a matter that falls under the jurisdiction of the Federal Government. However, it appears that under the Competition Act, the burden of proof required to prove predatory pricing, makes it unlikely that independent gasoline retailers are provided with effective protection.
E. Summary of Conclusions
In consideration of the above, the conclusions of the Committee are that: