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III Hearing Highlights and Regulatory Context

A. Overview of Oil Company Presentations at Hearings

The oil companies with refining capacity presented the Committee with a consistent perspective at the hearings, which is that there is no need to consider additional regulation of the gasoline industry. The principal reasons offered in support of this view are that:

  • Gasoline prices excluding taxes, and refining and marketing margins have been on the decline in New Brunswick and across Canada for the past five years.

  • Gasoline, excluding taxes, is approximately 30% less costly today in inflation adjusted terms, than it was in 1980.

  • Gasoline retailing practices are changing rapidly. The traditional two bay and pump island outlet is becoming relatively rare while a growing number of outlets have significant other revenue sources such as a convenience store or restaurant. Gasoline is at least as important to these outlets as a traffic builder, as for its direct profit contribution.

  • New Brunswick, has a high number of retail outlets per capita and for the available volume. Accordingly, it has an inherently expensive retail network which accounts for higher prices.

  • The market share of independents has been growing on a national basis as well as in New Brunswick.

  • Jurisdictions with experience in regulation have typically witnessed higher prices for consumers. Nova Scotia was often cited as an example.

B. Independent Dealer Presentations

The presentations made by the independently owned gasoline dealers operating under the brand of an integrated oil company and the views offered by independent chains such as Wilson or Greg's were consistent. Their principal assertions were that:

  • There is a concerted campaign by the refiner marketers to decrease the number of independently owned retail outlets in the Province.

  • The means being used by refiner marketers to "squeeze" independent dealers include:

    1. a variety of unexpected new charges or changes in costs for credit, temperature adjusted pricing and communications equipment.

    2. discriminatory pricing to the degree that dealers have paid wholesale prices higher than the retail price at nearby outlets operating under their supplier's brand.

  • Independent dealers are important to consumers as they encourage a price competitive market.

  • The independents that operate with low cost structures and that pass these efficiencies on to consumers, offer consumers a choice, good value and serve to promote efficiency on behalf of all retailers.

  • It is unfair and contrary to the interests of consumers to allow integrated oil companies to use margins from non-retail activities to subsidize price wars undertaken to drive independents out of business or out of the price setting process.

  • If independents are driven out of the market, it is highly unlikely that new entrants will appear and foster price competition. With only a few players, the market will become less competitive and more susceptible to higher prices over the long term.

C. Initiatives in Other Provinces and at the Federal Level

For the past few years, the only province with any regulatory involvement of note in this sector has been Prince Edward Island. It 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 discrimination to harm its independent marketers and competition generally.

At the federal level, the Bureau of Competition Policy is currently conducting an investigation into the gasoline industry.

D. 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 doesn't 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.

The 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 legislation is best characterized 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.

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