Return to Table of ContentsGasoline Prices and the Public Interest
The Consumer Advocate's Report on Gasoline Prices
in the Province of Newfoundland and Labrador
The total volume of gasoline sold in Canada declined by 28% between 1980 and 1990. This trend has continued in the Province of Newfoundland and Labrador. The total volume of gasoline sold in the Province was 580 million litres in 1996, approximately 4% less than the 604 million litres sold in 1994.
The number of gasoline outlets operating in Canada has declined from 22,000 in 1989 to 16,500 in 1995. The number of outlets operating in Newfoundland and Labrador has declined from 708 in 1992 to 545 outlets operating in 1997, a reduction of 23%.
The average volume of gasoline sold per station (throughput) in Canada exceeds 2.2 million litres annually. In 1997, the average throughput for Newfoundland and Labrador will be just over 1 million litres annually, an increase in value from previous years but still the lowest in the Country.
The average gross retail margin earned from the sale of gasoline in areas has decreased in the last 7 years. The gross retail margin earned from the sale of gasoline in the St. John's market has shrunk from over 10 cents per litre in the 1990 to a current 4 to 6 cents per litre.
Market participants have responded to the lower gross retail margins by closing stations in order to increase average throughputs. In some communities, the process of rationalization may result in too few competitors in the market. Too few competitors may inhibit competition and discourage participants from passing on to customers increases in the level of efficiency.
Market participants are also changing the character of their outlets to large, multi-service convenience centres in order to increase non-gasoline revenues. The volume of gasoline sold in some smaller communities will not support the investment needed to open a multi-service convenience centre. Therefore, some communities will not benefit from the increase in efficiencies gained by operating large convenience centres. This will perpetuate variations in the price of gasoline between rural and urban areas of the Province.
Variations in the price of gasoline between communities in the Province are primarily attributable to normal operating costs. These operating costs include transportation costs, terminal storage costs and increased handling. However, not all of the variation in price between communities can be explained through an examination of operating costs. These secondary variations are attributable to market dynamics.
Secondary variations in the price of gasoline between communities in the Province are attributable to one or more of the following causes:
1. No Price Regulation
If Government seeks to enhance wholesale and retail price competition in the Newfoundland and Labrador gasoline market, it should attempt to do so in the most cost effective manner possible. We believe the most cost effective public policies are those designed to utilize market forces instead of using Government's legislative powers to regulate price. Direct Government intervention in the market is generally the least desirable approach and should only be pursued as a final recourse where there is no indication that the market will behave correctly. We have found no evidence to support price regulation.
2. Government Monitoring System
With the production of crude oil from Hibernia, Newfoundland and Labrador joins a select group of provinces that sustain all segments of the oil industry. Government should view the retail of gasoline as part of the Province's increasingly strategic fully integrated oil industry. Accordingly, Government should maintain an independent and up to date source of reliable data concerning the gasoline retail industry in this Province, and those jurisdictions where oil produced from this Province is sold.
Government should institute an efficient and adequate monitoring system which will produce a reliable data base of price information for Government and consumers.
The Department of Mines and Energy should be designated as the lead Department of Government for all issues involving the oil industry, including consumer issues pertaining to the retail sector.
Government should commit sufficient resources to the Department of Mines and Energy to fulfil its role of gathering data concerning the industry.
The Department of Mines and Energy should publish monthly, in newspapers having a general circulation in the Province, price data for the sale of gasoline in selected municipalities in the Province.
The Department of Mines and Energy should publish once yearly, in newspapers having a general circulation in the Province, a report on the gasoline retail industry in the Province, including year by year information concerning the number of operating outlets, crude oil costs, wholesale prices at New York, Montreal and St. John's, and pump prices (weighted average) for selected municipalities in the Province.
Disclosure and provision of the data required by the Department of Mines and Energy for fulfilment of its mandate should be required of industry participants under regulation.
Under regulation Industry should provide to the monitor full and timely reasons following any price increase.
3. Encouragement of Competition
Posted prices communicate pump prices not only to consumers but to competitors who then react quickly to a change in the marketplace. Price posting regulations increase the likelihood that gains in efficiency will be passed on to consumers.
The Government of Newfoundland and Labrador should re-introduce Petroleum Price Posting Regulations under the Department of Mines and Energy Act, R.S.N. 1990, c. D-17, so that all retailers are required to prominently display the pump price for gasoline products.
4. Terminal Storage Facility Accessible to Independents
The presence of Independents in the retail gasoline market is beneficial for consumers. Newfoundland and Labrador has one of the lowest percentages of Independents in Canada. Independents will be encouraged to enter the marketplace through the establishment in the Province of a terminal storage facility that is accessible to Independents. Compliance with environmental regulations is the single greatest impediment to the establishment of an independent terminal.
It is recommended that Government develop a strategy to encourage the construction of an independently owned and operated terminal storage facility that would be accessible to Independents operating in the Province of Newfoundland and Labrador. The Whiffen Head Storage Terminal, or the existing terminal located at Long Pond, Conception Bay, could be used for this purpose.
5. Exit Barriers
Under current legislation, an outlet operator must remove any underground storage tanks following the closure of the station. However, there are no regulations which require the removal of underground storage tanks of a certain age. This combination discourages the exit of participants from the market who would otherwise prefer to close. This has a detrimental impact on the efficiencies of the market.
It is recommended that Government introduce legislation requiring the removal of underground storage tanks of a certain age. The age at which the tanks would be required to be removed should be determined by the Department of Environment following the conduct of an audit of all underground storage tanks in the Province.
Government should initiate discussions with industry participants to examine the feasibility of establishing an industry sponsored fund to be used in cases where the outlet owner is financially unable to comply with environmental regulation requiring the removal of underground storage tanks.
6. North Atlantic Refinery
The owners of the refinery located at Come By Chance, Newfoundland, are subject to a restrictive covenant. The restrictive covenant prohibits the sale of product refined at Come By Chance to any part of the Canadian market outside of Newfoundland. This covenant impedes the ability of the Come By Chance refinery to compete. This has an adverse impact on this Province's retail market.
It is recommended that Government request the Director of Investigations for the Federal Competition Bureau to review this issue and determine whether the presence of the restrictive covenant is unduly lessening competition in the Newfoundland and Labrador marketplace.
7. Measurement Canada
Studies indicate that upwards of 20% of gasoline pumps in use in Atlantic Canada are inaccurate. Evidence also indicates that Measurement Canada is not checking the accuracy of gasoline pumps on a regular basis.
It is recommended that Government actively pursue this issue with Industry Canada to ensure that the number of inspections and level of monitoring of gasoline outlets in the Province is completed on a regular basis.
8. Self-Serve Gasoline Pumps
The pump price for self-serve gasoline is typically two cents per litre lower than full serve gasoline of the same grade. Consumers living in some communities in the province, including Happy Valley-Goose Bay, Labrador, do not have access to self-serve gasoline. Industry should be encouraged to review their practice in this regard.
It is recommended that Government conduct discussions with industry participants to amend current marketing practices so that self-serve gasoline is available in every community in Newfoundland and Labrador which warrants the same.
This report is in response to events which began during the Fall of 1996, when several individuals drew attention to variances in gasoline prices within the province. Jim Courtney, Rex Barnes, Dan Hiscock, and others, formed a consumer group, "Newfoundlanders Against Gas Gouging", or NAGG. The issue was brought to the attention of MHA Anna Thistle, who approached Cabinet, pointing out the need for an investigation. In July 1997, Government responded by commissioning this study.
Hundreds of telephone calls, faxes, letters, and e-mail have gone into the compilation of this report. Evidence was also collected from written and oral submissions. A considerable volume of information was gathered from meetings with Government, industry and consumers. In addition there was extensive research and consultation with stakeholders.
Thanks and appreciation are due to many. I acknowledge the support and dedication of my colleagues, Mark Kennedy and Robert Dornan, who contributed greatly to this report.
I also wish to acknowledge the efforts of the major oil companies, not only the official company representatives but the local agents, dealers and employees who cooperated with our work. All these individuals voluntarily assisted with the fulfilment of our mandate.
Finally, I wish to thank the consumers of this Province, particularly those who came forward with submissions. This is their report.
Dennis M. Browne, Q.C.
TERMS OF REFERENCE
FOR A STUDY ON GASOLINE PRICES
Pursuant to Cabinet directive M.C. 97-0418, the Provincial Government authorized a Gasoline Price Study. The Terms of Reference for the Study were as follows:
Dennis M. Browne, Q.C. will serve as a consumer advocate to investigate and report on gasoline prices in the Province. In carrying out this study, Mr. Browne will:
1. examine the reasons for differences in the price of gasoline in various parts of the Province;
2. whether regulation of gasoline prices would be in the public interest, and, if so;
3. what the options are, given the experience in other jurisdictions.
Mr. Browne will meet with interested consumers and sellers throughout the province. He will report to the Minister of Government Services and Lands by the end of 1997.