IV Analysis of Key Issues
The Committee has identified key issues for analysis in this interim report:
- unexplained price differences
- impact of fuel tax reduction
- impact of independents
- price discrimination
These issues are discussed in turn below.
A. Unexplained Price Differences
The Committee has examined data from Natural Resources Canada regarding price trends which compare Saint John prices to the average of prices in other major centres across the country. A graph showing this comparison from 1989 to 1996 is provided in Exhibit 4. The Exhibit indicates that although the Saint John price was similar to the major city average during 1989 and 1990, beginning in September of 1991 a gap began to appear. The gap between the Saint John price and the major city average increased from 1991 until 1995 as shown in Exhibit 5. The gap has decreased and perhaps disappeared in 1996.
The Committee has been provided with no cost based rationale explaining the extent to which Saint John prices began to move above the major city average in 1991 and remained there until 1996. The differences between Saint John prices and the major city averages have been calculated by Natural Resources Canada and are presented in Exhibit 6. The difference has averaged more than four cents per litre over the 1991 to 1995 period.
Many presenters at the public hearings indicated that differences in prices in New Brunswick were attributable to differences in average volume per outlet in Saint John versus the other major centres. The Committee appreciates the impact of average volume but believe that its impact may have been overstated. The Committee's analysis is that perhaps 1˘ of the more than 4˘ differential can be explained by New Brunswick's lower average volume. This leaves in the range of a 3˘ difference that is unexplained. Many presenters at the public hearings indicated that gasoline prices reflect market forces. Accordingly, the Committee's preliminary conclusion is that the market in New Brunswick was not adequately competitive during the 1991 to 1995 period.
Exhibit 7 provides comparative data for taxes, prices and margins for the major centres in each province for 1989 to 1996.
Exhibit 4 Saint John price ex-tax vs Canada Ave. 1989 to 1996
Exhibit 5 Saint John price ex-tax vs Canada Ave. 1991 to 1995
Exhibit 6 Comparisons of retailer and refiner margins 1992 to 1996
B. 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.
It is the view of the Committee that it is necessary to undertake a national comparison of prices and margins before and after the tax change to determine the degree to which the tax reduction did flow through to consumers. In the 1989 to 1990 period, before the tax reduction, as shown in Exhibit 4, Saint John, New Brunswick had prices excluding taxes comparable to the rest of the Country. As the cost of crude is comparable in New Brunswick to the rest of the Country, it can be concluded that refiner and retailer margins were also comparable to the national average in this period. Exhibit 6 shows that during the first six months of 1992, the period when the tax decrease came into effect, refiner and retailer margins combined were 3.7˘ higher in Saint John than the national average for major centres. During the first six months of 1995, refiner and retailer margins combined in Saint John were 5.4˘ per litre higher than the national average for major centres.
In consideration of the increase in the spread between New Brunswick margins and the national average, it is the conclusion of the Committee, that over time, the tax reduction has been captured in large measure by the oil marketers and that consumers have not received the full benefit. The lower rate of gasoline tax in New Brunswick has not produced correspondingly lower gas prices for New Brunswick consumers. The lower tax may well have provided the opportunity for higher oil marketer margins. Consumers see only tax included prices as they make inter provincial price comparisons.
C. Impact of Independents
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 appear 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. This scatter plot is provided in Exhibit 8. Exhibit 9 shows a plot of average price 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 preliminary 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 10 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.
Exhibit 8 Retail Price Excluding Taxes vs Percentage of Outlets Controlled by Independent Marketers, Canada
Exhibit 9 Retail Price Excluding Taxes Vs. Annual Volume of Sales per Outlet
Exhibit 10 Saint John Ave. Retail Price vs Ave. Retail Price Excluding All Taxes for Atlantic Canadian Cities, 1989-1996
Exhibits 3 and 11 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. It is a preliminary conclusion of the Committee that this has played a role in the unexplained price differences noted above.
D. Price Discrimination
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.
Exhibit 11 Average price by County for New Brunswick
E. Summary of Preliminary Conclusions
In consideration of the above, the preliminary conclusions of the Committee are that:
- Cost differences do not fully explain the higher prices paid by New Brunswick gasoline consumers relative to consumers in other provinces for much of the past six years. Cost differences also do not fully explain county to county price differences within New Brunswick.
- The New Brunswick market has not been adequately competitive for much of the past six years.
- New Brunswick consumers have not received full benefit of the 1992 provincial tax reduction.
- The lower rate of tax in New Brunswick has made it easier for oil marketers to realize higher margins in New Brunswick.
- There is a risk that the few independents that do exist could be forced out of the market by discriminatory pricing activity on behalf of refiner marketers.
- An environment that encourages the presence of independents and competition at both the wholesale and retail level would be desirable for consumers.