EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, June 20, 1995

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[English]

The Chairman: I'd like to bring this meeting to order. The order of the day, of course, is in accordance with the Standing Order 108(2), a study of gasoline pricing.

Before I get rolling officially, I'd like to ask the media to leave us. It's not too often that we get cameras rolling on one side and cameras rolling on the other. That's either a good sign or a bad sign; we don't know yet.

Welcome this morning to the committee. I want to introduce George Addy, the director of investigation and research from the Bureau of Competition Policy; and Michael Ervin, the president of Q1 Solutions Inc. Mike will be making a presentation.

Our interest and our normal process in the committee is to have each presenter make opening comments, and then we are going to open the floor to committee members to question you.

I will start with Mr. Addy and have him introduce his colleague. He'll start with his presentation, and then we'll go to Mr. Ervin.

Mr. George Addy (Director of Investigation and Research, Bureau of Competition Policy): Thank you, Mr. Chairman. Appearing with me today is Mr. Harry Chandler, who is a deputy director in the bureau.

It's a pleasure for me to be here, and I want to thank the committee for adjusting its witness schedule so I could appear today as opposed to earlier on while other matters were before the courts.

The Minister of Industry, the Hon. John Manley, has a very active interest in this area, and he's sensitive to the public concern about fluctuations in retail gasoline prices.

Last year he asked me to consider whether amendments to the Competition Act would help address the issues in this sector. I reported to the minister following that review that I did not think amendments were needed. This report, which reviewed the application of the act with respect to the major competition concerns, was made public by the minister at that time, and I understand and trust you have received copies of that report, Mr. Chairman. I had asked that it be distributed.

[Translation]

My staff continues to closely monitor gasoline markets and we will take action when we find evidence of illegal acts. I am again reviewing for the Minister whether changes are needed to the law, including some kind of whistle blower provisions, such as proposed by Mack Harb, M.P..

This morning I would like to outline briefly the nature of the Competition Act in general terms and more specifically as it applies to retail gasoline pricing issues. I would also like to announce some initiatives that I believe will make the enforcement of the law more effective.

[English]

To begin then with some general features of the law, it's important to appreciate that the Competition Act is framework law. That has a number of implications. First, the act applies across the economy, not just in particular sectors. That means there has to be a certain balance and flexibility in the application of the law, because what might seem sensible for one sector could have serious implications for other parts of the economy.

The second implication is that the scheme of the act provides a framework within which business can be carried out generally, but does not prescribe or require businesses to do things or to obtain approvals. While outlawing certain practices with a view to preserving the potential for competition, it does not try to compel firms to compete or prescribe the pricing or other decisions that businesses take on a daily basis.

In other words, it does not establish a system of administrative regulation. There is no authority provided under the legislation to roll back prices, nor does the law contain any tests with respect to the fairness of prices. These are matters of provincial jurisdiction. The federal government does not have the constitutional authority in that area.

[Translation]

Third, the remedies provided for in the Act allow the courts to either punish those who break the law or grant remedial orders to corrupt anti-competitive situations.

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The former provides both specific and general deterrents to illegal behaviour. Those who are convicted and fined or imprisoned are deterred from repeating their conduct; others, observing the levying of penalties, are encouraged to comply with the law.

Similarly, the imposition of remedial orders communicates to business the types of behaviour that may potentially be struck down on competition grounds. The key point is that even though only a handful of cases are litigated every year, and each case can take a period of months, or even years, from start to finish, there can be a high level of voluntary compliance as business understands the boundaries of acceptable conduct.

I think that it is useful to understand these general features of the legislation in order to consider retail gasoline pricing issues in the proper context.

[English]

Turning to the application of the act, in particular its application to the petroleum products sector, price-fixing is often alleged when retail gasoline prices among competitors are identical or changed simultaneously. There are two provisions of the act that are directly relevant to this type of allegation: first, the conspiracy provision, which is section 45; and second, the price maintenance provision, section 61. Both are criminal law provisions, which require proof of all of the elements of the offence beyond a reasonable doubt.

While there are a number of elements that need to be shown, one of the most significant in the context of retail gas pricing is evidence of agreement among competitors. If there is no evidence of agreement or if there is a plausible alternative explanation for identical prices or simultaneous price movements, then the prosecution will not succeed because the criminal burden of proof beyond a reasonable doubt has not been met. The particular nature of the retail gas industry in Canada often affords an alternative explanation, known in the jurisprudence as conscious parallelism.

As is well known, gasoline stations communicate what they charge by posting large signs on their properties. That serves to inform the consumers what their offerings are and avoids people unnecessarily turning into the station site.

Because gasoline is essentially a homogeneous product, motorists see one brand of gasoline as identical to another, and because of that, gas station operators fear that if they charge a higher price than a competing station, they'll lose business. For similar reasons, if they charge a lower price, they know it will be matched, so that they will end up making less money selling the same volume of product.

Retailers that monitor their competitors and independently take action that best serves their interests are said to be engaging in consciously parallel behaviour, which is not illegal. This type of behaviour is legal because it falls short of an agreement. While the courts may infer the existence of an agreement from circumstantial evidence, as in other offences typically it requires some evidence of direct communication between the parties, threats or some such other conduct, in order to prove that an agreement has taken place.

My responsibility under the act is to uncover situations where prices are arrived at by anti-competitive means, where what is occurring is not consciously parallel behaviour but concerted action by competitors. To carry out my functions effectively, I need cooperation of individuals and firms who have information in this regard. I will comment more about that in a moment.

[Translation]

Another potential form of price fixing involves a supplier of petroleum products, that does not retain ownership of the product (such as through consignment selling), attempting to set the price at which the product will be sold, either by «agreement, threat, promise or any like means» or by refusing to supply the product or otherwise discrimate against someone who has a policy of selling at low prices. This type of conduct may again be dealt with under the price maintenance provision, that is section 61.

Anticompetitive behaviour by suppliers, whether by one firm or jointly with other suppliers, may also be subject to review under the abuse of dominant position provision of the Act. The price discrimination provision in the law, section 50 (1)(a), is also potentially applicable.

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[English]

All these provisions of the law are potentially powerful tools to combat anti-competitive behaviour in the retail gasoline business. They are comparable to the provisions that exist in other industrialized economies. While I'm satisfied the legislation that now exists provides the proper approach, a law is only as effective as the evidence one is able to assemble when a genuine contravention occurs.

Rather than change the law dramatically, I want to improve procedures to make sure we are capturing all the relevant information that may disclose an offence. I'm not referring to information on identical prices and simultaneous price changes, which I've already explained may quite legitimately be the results of consciously parallel behaviour and therefore not against the law. Rather, I'm referring to evidence that informants and witnesses may have of communications, threats, or other methods that competitors and suppliers may use to influence retail prices illegally.

In order to improve the effectiveness of the law as it now stands, we'll be undertaking some initiatives in the coming months.

First, we are going to attempt to clarify the protections available to informants and witnesses who come forward with information disclosing potentially illegal conduct. We want to make clear that all such information is treated with the utmost confidentiality.

Second, we will be establishing a program to provide recognition to those who assist us in an investigation, subject obviously to their consent.

Third, we will be providing further information on exactly what types of behaviour would contravene the law.

In addition, as part of a broader program to make the capture of information from the public more efficient, we will be establishing a centralized complaint office with 1-800 lines.

Last, we will be promoting voluntary adoption of corporate compliance programs that provide complaint mechanisms for employees who disclose potential contraventions of the act.

[Translation]

The petroleum industry is a very important component of the Canadian economy and it is essential for both consumers and businesses that its products be produced efficiently and priced competitively.

I believe the measures outlined above will enhance the prevention and detection of offenses in general and in the gasoline sector in particular. My staff will continue to monitor this sector for compliance with the law and we encourage people with knowledge of violations of the act to contact us.

I have concluded my remarks and I'm now ready to answer your questions. Thank you.

[English]

The Chairman: Thank you, Mr. Addy. Before we do that, we're going to allow Mr. Ervin to make his presentation. Then we'll go into questions of both the witnesses.

Mr. Ervin, please.

Mr. Michael Ervin (President, Q1 Solutions Inc.): Thank you, Mr. Chairman. I'm honoured to be asked to appear before this committee to offer my views on the issue of gasoline pricing in the Canadian marketplace, a subject it seems never loses its appeal for consumers, the media, or government.

I've often been approached by the media as an expert on the issue of gasoline prices, a title I wear somewhat uncomfortably. I'll explain briefly whereby I come by my experience.

I have fifteen years of experience in the downstream sector, and more recently five years of experience consulting to the industry. I'm currently the president of Q1 Solutions Inc., a firm largely focused on the Canadian downstream industry. Our principal service is marketing performance benchmarking, a process involving the analysis of company operating results, and reporting to our clients various aspects of their performance relative to the petroleum products industry at large. I work also with the CPPI and the Canadian Petroleum Communication Foundation in explaining gasoline pricing to the public and to the media.

In the limited time available I'll address three principal issues, which I hope will shed some light on the nature of this industry, both past and present. First we'll discuss pump price components - essentially look at how a $10 gas purchase breaks down - then underlying price factors, which are the forces that cause prices to change, and finally the question of regulating gasoline prices.

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At a very basic level, the revenue from a $10 purchase of gasoline will wind up in one of three areas: first, to pay for the raw materials used in the manufacture of gasoline, namely crude oil; secondly, revenues paid to federal and provincial governments; and finally, ``what's left'', available to the downstream industry to refine, transport, market and deliver gasoline to the consumer.

I deliberately use the term ``what's left'' to bring out the key point, which is that when the pump price changes as a result of the various dynamics to be explained this morning, only one of these three components actually changes along with it, and that is the last one - the industry margin.

I've prepared an historical look at how pump price components have affected the Canadian average pump price since 1991. These numbers are drawn largely from Natural Resources Canada historical data, which are available to the public.

The three components are additive in nature, with the industry margin completing the graph at the top. You can see that a representative pump price is about 55¢ per litre, with crude oil currently accounting for about 15¢ of that. Taxes account for an additional 30¢, bringing the pump price total to about 45¢. Given the average Canadian pump price of 55¢, what's left for the industry today is about 10¢ per litre.

If we actually alter the equation a little and look at the percentage make-up of the pump price, the historical picture looks a little like this. From this chart we can more clearly see that since 1991 the industry share of the gasoline dollar has been getting progressively smaller.

In other words, the downstream sector has, in very real terms, managed to do more with less, so that today the revenue break-out of a $10 purchase of gasoline looks a little like this. For a $10 consumer purchase, roughly $5.10 is remitted in the form of taxes; $3 goes to pay for the cost of the raw material, in other words the crude oil; and $1.90 is what's left for the industry to perform a number of operations on the crude oil, culminating in its delivery to the consumer's gasoline tank. This then is a snapshot of the big picture.

I will now focus on that industry slice of the pie by examining the driving forces behind the gasoline price changes in the market.

The underlying factors are best looked at on two levels, the wholesale and the retail stages of the marketing process. First of all, wholesale factors operate to determine the wholesale or rack price of gasoline. Principally they include three elements: the crude oil cost, for which refiners must pay a price determined in the global marketplace; the wholesale availability of gasoline resulting from fluctuating supply; and third, the availability of gasoline resulting from fluctuating demand. Those two latter elements are really two sides of the same coin, and determine the availability of wholesale gasoline on the marketplace.

Further down the marketing chain, the underlying price factors determining the retail pump price are first and foremost the rack price, which I just explained, and second, local competition. The human factor is a big element in this second underlying factor. Simply put, an individual retailer may simply decide to reduce his pump price for any number of reasons to try to capture a larger share of the market. Nearby outlets are typically forced to match the lower price in order to retain their business, as Mr. Addy explained. This type of competitive process occurs on a daily basis.

From this model, one can visualize a cascading process. Crude costs, combined with the supply and demand balance of refined products, are the key forces in setting the rack price, which in turn is a key factor that influences the pump price.

The next couple of charts will illustrate this model by showing a direct historical comparison of crude and wholesale price factors compared to the Canadian average pump price. The top curve you see is the actual pump price on a tax-excluded basis, and the bottom curve is the crude cost, Canadian or Edmonton par-value price.

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I've drawn in two trend lines to show the relationship. Although some commentators have suggested the prices of crude and pump prices do not correlate, in fact there's a fairly reasonable correlation between the two. One can see clearly, however, that although the price of crude oil has not changed substantially on a trend basis since 1991, the ex-tax price of gasoline has in fact declined considerably.

You can see that the relationship between crude and pump prices in fact is not exact, meaning crude oil is not the only determining factor in the pump price. As I've already mentioned, the real determinant of pump price is the wholesale or rack price.

This historical view at the bottom shows two curves showing the Toronto bulk contract price since February 1993 and the Buffalo rack price. The two upper curves show the Toronto retail price on an ex-tax basis and the Canadian average. Here you can see that a very tight correlation exists between the pump price, ex tax, and the wholesale or rack price.

Again, rack price is ultimately what retailers must pay for their goods, so it's not surprising that as rack prices move, pump prices are sure to follow. Again, rack prices change as a result of crude costs, and equally important, as a result of the supply-and-demand dynamics, which operate on a continental scale.

Finally, to touch on the question of a regulated gasoline market, where a high level of competitive conditions is present, non-regulated markets I believe have proven to be the most effective means of assuring consumers fair prices. Nova Scotia is one of the few provinces in Canada to have experimented with the regulation of downstream operations and pricing. For several years before mid-1991, retail pump price changes in Nova Scotia were subject to an application and review process under that province's provincial utilities board. Under this regime, the ex-tax pump prices in Nova Scotia, as you can see here, were considerably higher than the Canadian average. Following the 1991 removal of price regulation, pump prices in Nova Scotia dropped considerably and are now comparable with those in other major centres in Canada.

That, Mr. Chairman, concludes my prepared remarks. With the chair's permission, I'd be happy to answer any questions.

The Chairman: Thank you, Mr. Ervin. We certainly expect there will be some.

We'll start with Mr. Deshaies.

[Translation]

Mr. Deshaies (Abitibi): Mr. Addy, we've already heard other briefs on gasoline products. From my knowledge of the report you presented to Mr. Manley and from what I heard in your presentation, I gather that very few offenses can be easily detected. It is even quite difficult to prove that there has been fraud or an attempt to control the market. In the case of gas prices, very often an attempt to control prices is made so that wholesalers, and it's quite often wholesalers, or retailers can obtain higher profit margins.

At our last meeting I noted that very often people only take note of macro changes, that is rises or declines in the price per barrel in the Middle East. They're not conscious of the effect of such changes on prices at the pump because they realize that a significant amount of time, two to three months, is necessary for the effect to be felt at the pump.

People do notice when the price they pay is higher than the price paid by their neighbour, such as in the case of higher prices in Ottawa as oppose to Toronto. This is the problem that you refer to. Generally speaking, people who are not in business are not aware of problems relating to wholesale prices, market prices and supply. In the case of Toronto, gas comes from Sarnia whereas for Ottawa it may come from Montreal. This is a rather complicated business to explain to the man in the street and of course it's part of your job.

Is the Bureau of Competition Policy really the appropriate agency for exercising such control? The important thing is to know whether people are receiving enough information to distinguish between the effects of free competition and what would be a normal price to pay.

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Mr. Addy: I quite agree with the view you express. The market gives every indication of being a very competetive one. We are dealing with a homogenous product as far as consumers are concerned. Transaction prices are transparent. We know how much we'd pay at the service station across the street because the prices are posted. The market presents all these indications. We can observe parallel movements in price, etc. It may be the sign of a very competitive market or, at the other extreme, it may indicate conspiracy, an illegal agreement. It's very difficult to get the consumer to understand all these elements.

To answer your question more directly, we are convinced that it is the role of the Office of the director of investigation and research to educate the public in such matters and we attempt to do so. We did table a report last year. We publish newsletters that we send to those who lay complaints with the Office.

There's also the role to be played by industry. The consumer should be in a position to determine whether the price is fair and not necessarily whether the price was determined competitively. It's up to the consumer to demand explanations from the industry. I don't think it can really be said that a single body is required to answer all these questions and to provide such information. But there are various aspects to educating the public with respect to the various elements of the market.

Mr. Deshaies: Of course any business wants to maximize its profit. I think that the role of your organization is to ensure that there are no great discrepancies, which would not be found in a situation of normal competition, and in this respect you explained that certain criteria might apply to gas and others to the food sector.

Mr. Addy: The legislation establishes a certain system and it is our responsibility to police it. Within the prescribed limits, it is assumed that the market will regulate behaviour, prices, efficiency, consumer and supplier choice, etc. Our job is a bit like that of border guards concerning transactions and behaviour that go beyond the bounds of the legal framework.

Mr. Deshaies: It is not necessarily the Bureau of Competition Policy that best represents the opposing view to that of industry but rather the Consumers Association whose job it is to fight against not so much fraud but excessive industry profits.

Mr. Addy: Yes, the consumer certainly has an important role to play.

Mr. Deshaies: Thank you.

[English]

The Chairman: Thank you, Mr. Deshaies.

Mr. Morrison.

Mr. Morrison (Swift Current - Maple Creek - Assiniboia): My questions are for Mr. Ervin. With respect to your pump price components, you show, as of recent date, about 10¢ per litre as industry margin and about 15¢ as crude component.

The crude component, if you're looking at a vertically integrated company, also includes a margin. Is there any breakdown to show how much of that crude cost is actual operating cost or acquisition cost and how much of it is profit margin in the case of a vertically integrated company?

In other words, if you showed 10¢ on your diagram here, what would the real margin be if the mark-up on the crude itself was included?

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Mr. Ervin: The margin on the crude component is something that cannot be determined easily. Quite simply, if you're talking about an upstream company...and I must add that there are a number of players in the upstream who do not participate in the downstream sector and so they are really viewed, in my opinion, as separate industries. One can't arrive at a simple formula simply because the sources of crude stocks are many and varied and the costs involved in exploration and development from either conventional or heavy crude really get to be many and varied. There's no simple breakdown that's simply put.

Mr. Morrison: But there must be a horseback figure that you use in the industry to give a rough idea of that. Would it be half of the crude component? Ordinarily it would be margin, again speaking in terms of the vertically integrated companies. Or would it be less than half? Have you any idea at all?

Mr. Ervin: I can't really give you very accurate numbers, but what I can say is that in the 1980s the return on capital employed by the oil industry in general was significantly lower than that of other non-petroleum industries in Canada, about half that of non-petroleum industries. So to take a top-level comparison, that's the number I often point to in trying to make sense of what the profitability is in the upstream-downstream versus other industries at large in Canada.

Mr. Morrison: My second question is a slightly simpler one. In your analysis of pump prices, the rack price versus the pump price, I was a little bit astonished to see that the Toronto price is significantly lower than the Canadian average. Is that Canadian average weighted by volume or is it just an arithmetic average, which gives the same value to the price in Whitehorse as it does to, say, the price in Sarnia?

Mr. Ervin: That comes from NRCan, whose methodology employs weighting the price by volume.

Mr. Morrison: Then why is it lower in Toronto, which is a major market far from the source of supply, than it is in the rest of the country?

Mr. Ervin: I think Toronto has historically been a very competitive market. It's a relatively small, concise marketplace with probably the single largest number of competitors in that area. It's a highly competitive marketplace. It also benefits from being relatively close to the United States border and being close to the source of supply, the refining corridor from which the products are shipped. In many of the major centres in Canada the economics of supply combined with the intense competition tends to create a 1¢ to 2¢ benefit to consumers in that particular market.

Mr. Morrison: Where does most of the supply come from in the greater Toronto area? Would it be from Sarnia or would it be cross-border?

Mr. Ervin: Increasingly, independent marketers look across the border for supply. The Toronto wholesale and the Buffalo wholesale prices track very closely to each other. Quite simply, refiners and marketers in Canada must remain competitive with those in the United States in order to supply their markets in Canada. Canadian marketers can simply not get away with charging a premium to Canadian retailers.

The Chairman: Mr. Ervin, maybe you could clarify this for me, because we're all over the map on it. Correct me if I'm wrong, but what you're saying then is that because there is competition the industry can't get away with charging an exorbitant amount of money. But then you go to a place like northern Ontario where they can get away with it so they do charge it.

So in essence, then, the price is all based on competition, not on transportation at all. What Mr. Morrison is suggesting is that nowhere in Canada is transportation really the major factor. It's competition or the lack of. Is that a fair assessment? It seems to be what people are saying to us in the street - that depending on where they live, they pay a larger price than someone else in the country who seems to be able to compete with our American friends.

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Mr. Ervin: First of all, a large percentage of Canadians live close to the United States border in major centres. The historical tracking of pump prices in those major centres has shown there to be a very narrow range of prices, once you take away a tax component, between one major centre and another.

In an area such as northern Ontario, transportation costs do factor in, but I would submit, sir, that the local competition in those areas is increasingly important. The farther away from the major centres you move, the higher the percentage of independent, non-controlled outlets. Therefore, the pricing in these more remote marketplaces tends to be dominated or more characterized by non-company-controlled outlets. They simply charge their own price. They don't look to their oil companies, as they are not employees of the oil companies, to set the retail prices.

The Chairman: That doesn't bear out. I'm trying to get a handle on this whole issue of transportation.

Let me give you an example. I live in northern Ontario. Kenora is my home town, and there is another community that is an hour and a half away called Dryden. It's a smaller town than Kenora. It's also an hour and a half farther away from where the product is shipped from, because it comes from the west. It comes out of Winnipeg.

Historically, in Dryden the price has always been 2¢ lower in that community of 6,700 than in Kenora, where there are 17,000. In essence, it's over double the size and the competition should be much more severe in Kenora, but the price is 2¢ higher.

Then if you go 15 miles down the road, going west, the price drops 10¢. It's the only gas station down that road going to Winnipeg.

How do you explain that to the consumer who says there's something obviously wrong here? People say, yes, it's transportation costs, and of course in Winnipeg it costs 3¢ less than in Ontario because of tax. You can factor in the 3¢ for tax, but you have a heck of a time figuring out how this is supposed to all add up when you say that it's all based on competition. It can't be based on transportation because, as I just mentioned, it costs more to go an extra hour and a half down the road to Dryden than it does to drop it off in Kenora. But the price is different and there are more people living in Kenora than in Dryden.

Can you try to explain this to people? That's the reason we're sitting here this morning. People don't agree with you or with most of the industry analysis that's been done that there's nothing wrong with the industry, because every two years - I think Mr. Addy will bear this out - someone comes along and asks us to do a study, either provincially or federally, to argue that there's something wrong out there. We'd certainly like to know what it is. From your perspective, are consumers just whining because the prices are too high, but in fact they have no reason to complain?

Mr. Ervin: I'll admit that the farther away from a major centre you get, the more difficult it is to explain the variations in prices. I know of examples outside of Calgary where prices are historically much lower than those in the city, yet you can go farther down the road to another smaller centre where the gasoline prices are much higher than in a nearby major centre.

The factors influencing prices in these markets, the smaller rural markets, get to be many and varied, but I'll try to relate some of them.

First, outside major centres some of the underlying fixed costs, such as real estate costs or property rates, are much less. Labour rates are much reduced, and generally the cost of doing business covering the fixed costs is much less than in some of these smaller centres. In some small centres, there's the ability to actually charge less for gasoline. Conversely, in some small centres, where there's an over-supply or an over-abundance of retail outlets, there is a need for retailers to price the product higher in order to at least break even on the gasoline sales.

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No two rural markets are the same. You find a greater degree of homogeneousness in larger centres than you do in the smaller rural markets. I hope that explains, at least in part, why you get the variation in prices.

Mr. Arseneault (Restigouche - Chaleur): I would like to welcome the witnesses and thank them for their presentation.

I'd like to follow up on what you were saying, Mr. Chairman, but address my questions to Mr. Addy to see if we can substantiate some of the anomalies you've mentioned.

Members of Parliament have a tendency to receive a lot of complaints about price fluctuations, or so we're told. Maybe it's a little different in my area. I come from New Brunswick and represent a rural riding with some urban centres, but I have found in my experience that the price fluctuations occur generally in urban centres. In rural Canada there are no price fluctuations; there are just high prices. They can pick any type of excuse, reason or whatever fits the bill in that general area to explain why the prices are so high.

Mr. Addy, your department receives complaints with regard to price fluctuations. Is there actually a way of looking at them and dividing them between rural Canada and urban Canada to see if there is indeed some correlation there? Are all the complaints coming from urban Canada with regard to price fluctuation?

With regard to prices being higher in smaller communities or in rural Canada, is there something you could help us with there?

Mr. Addy: Let me deal first with the more general context. Perhaps Mr. Chandler might recall the statistical split. I don't recall offhand if there is a marked difference. My recollection is that there isn't, at least as far as the source of complaints is concerned.

The issues addressed by Mr. Ervin with respect to local market conditions I think are quite apt. A number of components go into determining what a retailer's posted pump prices will be. They deal with things like what type of retailer it is; is it company owned and operated or a lessee? I'm sure the committee's familiar with those types of arrangements. There are the local supply and demand conditions. Is there a refinery close by or is it further way? I think your point about transportation cost is true, Mr. Chairman. Just what percentage that is of the total price and how much it would influence the pump price is another issue, because a whole host of factors comes into play there, such as the number and types of competitors.

There was reference to the Toronto market. The Toronto market tends to have a very high percentage of independents relative to other markets in Canada. They tend to be more aggressive on occasion with respect to their pricing practices, and that tends to discipline the market. Whether or not you have a non-integrated retailer in the market is an influence.

The marketing, the refining marketing and the distribution costs come into the mix as well. You are well aware that from province to province you have different taxation levels, so that accounts for some of the differences as well. Perhaps Mr. Chandler can respond to the other component of your question on the split.

Mr. Harry Chandler (Deputy Director of Investigation and Research, Criminal Matters Branch, Bureau of Competition Policy): We certainly receive a lot of complaints from outlying areas, and not just the urban centres. As you say, there is particular concern from rural areas about the level of the prices, rather than about prices going up and down. We have to view those in terms of the law we have and determine whether that is a result of some kind of concerted action or exercising of market power.

Mr. Arseneault: Mr. Addy, I would like to follow up on what you mentioned in your presentation about jurisdiction. We heard last week from the department officials that many of the components with regard to pricing outside of taxes are basically out of the jurisdiction of the federal government. In fact, a lot of the matters that pertain to gasoline pricing fall more into the jurisdiction of the provincial government than the federal government.

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Here we are, a natural resources committee, examining whether we should go into some detailed study of gasoline prices or not. I'd ask you to maybe comment first of all on whether it's customary for you as a director, or your previous directors - I don't know how long you've been there - to report to the natural resources committee with regard to the operation of the Competition Act, or is it more practical or reasonable to report to the industry committee?

Second, do you see it more as a responsibility of provincial governments to look at gasoline pricing rather than a federal committee?

Could you comment on that quickly, please?

Mr. Addy: On the first part of your question as to whether it is common to report, the director has always been more than willing to appear before any Commons committee, and that will continue at least as long as I'm there, both before this committee and the industry committee. As to which is more appropriate, I think that's more for the committees to determine. I know this committee is knowledgeable about this issue and concerned about it.

On the second issue of pricing, I'd echo the legal advice I've been given that price determination is a matter of provincial jurisdiction. I would supplement that by echoing the testimony heard a little earlier about New Brunswick. From our experience in monitoring this industry over decades, regulated markets don't yield the type of competitive pricing you get in an unregulated market.

I think the witness was referring to Nova Scotia, which was regulating everything from whether you could have a self-serve or not, whether the self-serve could have a convenience store attached to it, what the hours would be, and a whole host of issues. From what we observed in tracking the prices under the regulatory environment, they were above the Canadian average. That's why we intervened before the provincial utilities commission hearing to support deregulation.

Mr. Arseneault: Mr. Addy, you mentioned in your presentation that you are more interested in looking at price fixing and that type of deal. My question has to do with lease fixing. I don't know if it's a term we use, but it's with regard to the retailer. The complaints I receive in my area are that the companies have very similar leases, whether it's Petro-Canada or Esso dealing with two different garages. The leases don't necessarily force these operators into setting prices, but the lease arrangements with those companies are very similar. If you don't toe the line with one, you can't jump ship and join the other company. There seems to be a type of pressure exerted on the operators to stay in line.

Does your department provide any type of protection for the garage operator or the retailer to be able to appeal to a board? I've written to the ministers and different officials and seem to get no for an answer all the time. The complaint I get in my area is that there is a lot of bullying by these large companies of the small retailer, and there's nowhere they can turn except the legal courts. It would cost them a fortune and be financially impossible to do.

Mr. Addy: The short answer to your question would be no, but let me expand on that. We do not act as an appeal board to deal with lease complaints. Leases themselves generally tend to be well known within the industry, because as the dealer changes his brand affiliation and negotiates a fresh lease with a new company, he will more often than not argue that he had this term in his previous lease and wants it in the new lease, etc. So there is a certain transparency in the lease terms that comes about by quite legitimate, normal, market interactions.

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We have not received any evidence to suggest this, but to the extent that evidence could demonstrate there was a joint effort on the part of the oil company owners to jointly arrive at a lease provision that would be abusive of tenants and therefore have a dampening effect on the competitive market forces, it may create an issue under our abuse of dominance provision. So there might be an avenue there if it's pursued jointly.

Mr. Arseneault: So it would be illegal for oil company owners to blacklist certain retailers because they're not toeing the mark on certain.... For example, they don't sign a lease with one company, saying they'll go to the other company, but the other company says no to them. Is that illegal if it can be proven there has been contact between both companies in regard to blacklisting a certain operator?

Mr. Addy: You have to very careful. I can't give you a yes or no to that because it depends under what provision of the legislation we're trying to examine this problem. Again, that is a factor of the evidence.

If we're looking at it from the criminal conspiracy or collusion type of provision, we have to do two things. We have to establish to the court's satisfaction that there was an agreement and that the agreement would have unduly lessened competition in the relevant market.

I will use this hypothetically, sir. If there were an agreement among all the suppliers to blacklist this one individual, it may not meet the second part of the legal test. It may not result in an undue lessening of competition in the market. There may be private remedies available through the civil courts, but it wouldn't contravene that provision.

Earlier I was referring to a civil provision known as the abuse of dominance provision. In that case, an individual entity, or several entities acting jointly, can abuse a dominant position in the market with the necessary effect. That may constitute an action we could bring before the Competition Tribunal for civil relief. That civil relief would include an order to cease and desist, or any order that would be appropriate to that particular conduct.

The Chairman: Mr. Reed, please.

Mr. Reed (Halton - Peel): This exercise and the amount of interest shown in it of course demonstrate the level of dependency we have on petroleum at the present time. I believe it's become a critical case, and I think it behoves us as legislators to do everything we can to expose our citizens to the options that are available and that will become available through the next decade or so.

I think we've clearly established with the evidence we've heard that there are two sets of price changes, one of which you probably can't do a lot about. The price of crude oil has risen approximately 20% in the last 18 months, so the rack price is what the whole industry has to deal with. The fact is that regardless of the margin in the field, crude oil prices are dependent on the world price of crude, so it doesn't really matter what the cost of getting it out of that particular well is. The world price and the world market determine that supply.

We're dealing with the short-term changes and the sometimes very wide fluctuations. An area like mine, which is northwest of Metropolitan Toronto, is probably one of the most competitive areas in Ontario, if not in Canada, where prices can sometimes fluctuate quite quickly by 4¢, 5¢ or 6¢ a litre. Those questions are always raised. Why is the price at this pump different from the price at that one? Or people say they just filled up down the road and drove 10 miles closer to home and found the price was down by 4¢.

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It raises one question that perhaps, Mr. Ervin, you would have a handle on. This question has been raised from time to time. Why not sell gasoline in the same way we sell beer? The only things we're as dependent on as we are on gasoline are water and - if I might be politically incorrect - beer. When beer is sold throughout Ontario, it's sold at a common price so that the added transportation costs are absorbed and so on. And when it gets into the retail outlets, it's priced in the same way. I know that if I'm paying $5 too much a case in Georgetown, I will still be paying $5 too much a case in Kenora.

I don't know if that kind of marketing has ever been looked at or if that is what happened in Nova Scotia. Is that essentially what happened there, where it was established that it didn't work?

Mr. Ervin: The Nova Scotia experience showed pretty clearly that when government gets involved in an infrastructure that has all the makings of an effective, competitive system, the consumer will not benefit.

I'm afraid I'm not sure of the Ontario beer analogy. I'm from Alberta, where you can get a pretty wide range of prices for beer, so it's difficult for me to comment on that.

I know about and I understand the frustration consumers experience when the price of gasoline fluctuates, sometimes on a daily basis. These fluctuations are very evident to consumers as a result of the posted pump prices. You can simply drive down the street and price gasoline, but you have to go into the store to find out what beer, milk and eggs cost. The fact that these prices fluctuate drives consumers, the media, and governments to distraction.

They're highly aware of the posted pump price. What they're painfully unaware of are the underlying factors. Consumers don't typically turn to page B13 of The Globe and Mail to look at the New York spot. They don't typically turn to The Globe and Mail to look at what's happened in the last month to West Texas Intermediate. If they were to track those prices in the same way they track posted pump prices on the street, I think they'd be able to make a lot more sense out of it.

Frankly, the industry does a poor job of educating consumers. If they were to actually display more than the posted pump price or perhaps display the ex-tax price, as is done for many goods in Canada, I think consumers would gain a broader appreciation of what the industry and the pricing are all about. In many ways, the industry is its own worst enemy.

Mr. Reed: Probably what you're demonstrating to us is that we're not getting such a good deal on beer.

Some hon. members: Oh, oh!

Mr. Reed: In the urban centres, that's right. The rural centres are getting some advantage.

Mr. Arseneault has just informed me that right now in Prince Edward Island the prices are being regulated. Has that gone on long enough to get a picture of the reality there and of what that means to the consumer?

Mr. Ervin: Mr. Addy might mention that. I don't have specific numbers worked out for this brief.

Mr. Addy: I'd like to verify if we have that data. I don't want to mislead the committee.

Mr. Reed: Okay.

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Mr. Addy: I believe the only information I have handy is a chart put out by National Resources Canada as of February 28, 1995. It shows Charlottetown's price at that date as above the Canadian average. But that's just a single snapshot.

The Chairman: Mr. St. Denis, please.

Mr. St. Denis (Algoma): Mr. Chairman, I appreciate the chance to ask a short question.

I'd actually like to follow up on a comment and question that the chairman raised a little earlier having to do with the relationship between transportation and maybe local competition factors. Like the chairman, I have a northern Ontario riding, and I get lots of grief from my constituents over gas pricing.

I'm not convinced that transportation is as big a factor in pricing as some would suggest. I'm wondering whether there are studies where a pair of communities, such as Dryden and Kenora or another pair of communities elsewhere where there is a price differential, has been studied to actually analyse in great detail why that has happened. Such a study would be more specific than talking about it in generalities: south versus north, urban versus rural. Are there studies that have micro-analysed the situation of, in this case, two rural communities where the differences are quite apparently dramatic?

Mr. Ervin: I've done such a study. It was a comparison of Peace River and Grande Prairie, Alberta, which lie to the northwest of Edmonton. There's a considerable difference. Both markets receive their supply from Winnipeg.

I'm afraid I don't have the study in front of me, so I'll try to quote off the top of my head. The historical differences between those two markets get to be in the order of about 5¢ to 6¢ per litre. I believe my study covered a two- to three-year period of time. There was a definite trend that showed that the price difference was about 5¢ to 6¢ per litre. Both are relatively small markets and both are supplied from the same primary supply point, Winnipeg.

Again from the top of my head, I'll just go into some of the findings. The most distinct difference between those markets was the number of retail gasoline outlets on a per capita basis in those two centres. Grande Prairie was a slightly larger market than Peace River, and Grande Prairie was the market with the lower historical price.

Grande Prairie outlets in that market sold on the average about twice the gasoline per outlet of the average outlet in Peace River. Actually, my presentation was made, not surprisingly, to the Peace River Town Council, which has made a point of corresponding with all the oil companies that supply that area to get some answers. But the most distinct difference was that in the Peace River district there was really a glut of gasoline stations and in order to recover costs the operators simply had to charge more because they were selling less gasoline.

Now, that's only one factor. What my study wasn't able to determine was what other ancillary services are offered in those two markets. Frankly, in Grande Prairie there were outlets that had more c-store representation, which tended to offset the revenues from gasoline, whereas in Peace River -

Mr. St. Denis: Is that report in the public domain or is that a private report?

Mr. Ervin: That's something I did for the Peace River community, and I'd be very happy to provide it to you.

Mr. St. Denis: I'd be pleased to have a copy of that if there's no surcharge.

Mr. Ervin: No. If you'd like, you can have a copy if the work's been done.

Mr. St. Denis: I have just a final sentence and I'll pass it back to you, Mr. Chair.

When I was listening to you make your comments earlier, it seemed to me that sometimes we're subsidizing the competition in the U.S.-Canada border communities. The further we are from the highly competitive areas, there's a chance to make up our losses, as they do with milk. We pay more for milk in rural communities than you do in the cities, where competition is stiffer. So there's a tendency to have the rural areas subsidize the urban areas. But I'd be glad to be disabused of that idea eventually if it's not true.

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Mr. Ervin: I would be happy to try to talk to that particular -

Mr. St. Denis: Thank you very much.

The Chairman: Did you want to comment on the sense of the consumers in rural Canada that it's not competition and it's not so much transportation costs, it's the fact that because we are landlocked and captive and we can't drive to the American border because it's a couple of hundred miles away, we have no choice but to pay that price? They charge it and then they make it up somewhere else where it's a little more competitive. What's your analysis of that statement?

Mr. Ervin: Sales of petroleum products, whether they're to commercial accounts or to retail accounts, are sold at a posted tank wagon price. In the case of retail dealers, the industry phrase is DTW: dealer tank wagon. Those DTWs vary from market to market, and by and large they're set very rationally to take into account the differences in the markets relating largely to differences in transportation costs.

Again, I've seen rural markets that are well above and well below the major urban centres. So what really gets to be the determining factor in either those very high prices in the rural areas or, conversely, the historically low prices in rural areas is the local competition factor. Because of the nature of the rural markets being more lessee- and independent-oriented as opposed to company-controlled, they are really under the influence of the local dealers and their own individual inclinations about how to compete, as well as the economics of the market, such as I've illustrated with Grand Prairie and Peace River.

The Chairman: Mr. Thalheimer.

Mr. Thalheimer (Timmins - Chapleau): What would any of you feel if government wouldn't regulate prices but would simply say that the price, whether it's provincial or federal, has to be uniform within Ontario or Alberta; if they said if gasoline prices are 53¢ in Toronto, they're 53¢ in Kenora? What would be wrong if the government regulated to that extent? Do you see some pitfalls there? We have it, I suppose, in spirits and wine, beer, and so on. You have the same volume, and it's the same price in Timmins, in Kenora, as it is in Toronto. What would be wrong if governments had that jurisdiction, if governments simply said, look, charge according to fair competition, but it has to be uniform throughout the province, throughout the country? Would you see any problems with that type of legislation or control?

Mr. Addy: I would raise the fundamental concern that in effect it would be a form of regulation, and it would not be accomplishing what I view as one of the main benefits of competitive markets, and that's rewarding the aggressive, innovative competitor. Where you've had different regulatory environments, whether it's been setting a floor or setting a ceiling for the product, you've observed a tendency for prices to coalesce around the ceiling. Even if you say the regulatory regime will be that you can't fluctuate within 5¢ of whatever that number will be, I would venture that you would see everybody clustering right up at the target and you wouldn't have the same competitive dynamics in the market.

Mr. Thalheimer: You feel prices would go up as a result of that type of regulation?

Mr. Addy: Yes. I think you would end up having the competitors coalesce, and I think the competitive response would be, I can optimize my return in selling at that high price and I won't suffer any volume trade-off, because everybody else is going to be running up there as well.

Mr. Thalheimer: Quite frankly, I don't follow your argument, because the forces of competition are still out there, just as they are in spirits. Why do you feel those forces of competition wouldn't react as they do today, or have for the last...?

Mr. Addy: All I can go on, sir, is our experience in monitoring the market and our experience in observing regulated markets. There is no question in my mind that the optimal return to the economy is in a competitive market as opposed to a regulated market.

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Once you get into the regulated stream, you have to examine what exactly the proposal is, what's going to be the cost of administering that regulatory environment, and what benefits there will be coming out of that. Also, you have to do your trade-offs. Are the costs worth what we perceive to be the benefits? From all the experience we have in the bureau, I would advise against that.

Mr. Thalheimer: I see, but the government in my scenario would not be regulating prices. I'll make that clear. It would simply state that whatever the prices or market forces demand anywhere in the country, it's uniform, period. We're not regulating the prices. That can go from whatever it wants to to whatever high or whatever low.

I don't see that this part of the regulation would increase prices. It's not like the situation in which you're trying to regulate in Nova Scotia and these other areas that you mentioned this morning. This is not a regulation of price; this is simply stating that the price has to be uniform throughout the country or the province if governments have that sort of jurisdiction.

Mr. Ervin: You would be suggesting then that a Petro-Canada, Esso or Shell, at a corporate level, would simply set that price. Then, whatever price is set -

Mr. Thalheimer: It has to be uniform.

Mr. Ervin: That is in effect doable, I suppose, within the infrastructure. But you would ultimately have to turn all of your retail dealers into company-operated outlets, as they would no longer, in accordance with the competition policy, be in a position to price their own product. They would cease to be purchasers and resellers of gasoline, but would then have to simply comply with the directives of the company. That, I would submit, sir, takes out one of the factors that assures consumers of fair, competitive pricing today.

Mr. Thalheimer: That's the problem I'm having. Religiously, up in Timmins and Kenora it's 10¢ to 15¢ higher than that in Toronto. What's the fairness in that system? For the same litre of gas, you pay 15¢ more in Kenora and Timmins than in Toronto. What's the fairness in that? It's very unfair.

If we had a standard price across the province, then let the market forces fluctuate the prices, as market forces would, but it's standard, so I'll know when I go to Kenora that I'm paying the same per litre as I am in downtown Toronto or downtown Sarnia. I just don't see your argument that says that would increase the price, and everybody would pick it up at 60¢ to 70¢ a litre.

The Chairman: Let's put it a different way for Mr. Thalheimer. We obviously don't, as a government, regulate interest rates; it's regulated by the financial institutions. We all have the same interest rate on one given week or another.

What's stopping us from allowing, by certain indicators, to have the same gas price across the system, because in fact it equalizes itself out? The best example I could find is that we don't regulate interest prices around here. So why can't we say that there will be certain indicators that dictate the gas prices? If it has to be, then someone will decide that through the major industrial individuals that are in the business. Then the little guy in Timmins or Kenora will have to follow suit that same day, because the price is posted.

That was one of the questions I was going to ask you: why do we even post the price? We don't do that for milk or eggs. We go into the grocery store and shop around. We know what the prices are, and we make a decision.

Part of the argument that's being put to us is that it's fixed, because everybody looks down the street at their competitor, who is on the street corner, of course, as you well know, and then they just move it up and they leave it there.

Why do we allow them to do that? Is it found to be more effective than to suggest that they can't post the prices that openly? I could, as a consumer, go and shop around and say to the local gas station people that if they drop the price a couple of cents, then I can get my friends to come and buy gas from that place.

Mr. Addy, what would you think about that?

Mr. Addy: It's an interesting suggestion. I can only rely on my experience to date. Indeed, this very issue of posting was raised before the Restrictive Trade Practices Commission when it had its four-year inquiry into competition in the petroleum industry.

The issue of posting came up. In the context there, the consumer complaints were that they were only posting the regular leaded price, not the lower- or higher-grade prices. Consumers were being sucked in, basically, to go into the outlet. They found that the gas they wanted to buy was actually 10¢ a litre more.

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The pressure at that point was to make sure that if they were going to post, they would post all product offerings so the consumer driving down the road can readily make that decision to go left or right to buy gasoline.

It's an interesting issue. You're right that if there was no posting it would be more difficult for the retailers. It would be less transparent, so their search costs would go up to determine what their competitors are charging. They'd have to walk across the street or do a foot survey and actually walk up to the pumps, as opposed to making a drive around the neighbourhood to canvass who's doing what in the market.

The victim in that case would be the consumer, because they would not have that information readily addressable. After driving into the station, would they drive out once they saw the prices on the pump? I don't know, but there's the trade-off that you'd make there.

Getting back to your banking analogy, it's true that the Bank of Canada sets the interest rate, but when the product offerings are provided to consumers under mortgage rates or personal loan rates, etc., there's quite a degree of variation. You can have regional variations within the same bank as well. So the analogy works so far, but there's discounting. If you're friendly with your bank manager, you might get another quarter of a point off. I don't know. But there are various fluctuations, so to the extent that you'd want to impose that type of regime, you have to police it as well. There's a tremendous cost involved in that.

I'm sorry, I keep coming back to a fundamental point. Our experience would suggest that bureaucrats aren't as good as companies in the private sector in running businesses. When we have the marketplace making those decisions and trade-offs, they tend to yield the best efficiencies in the marketplace.

The Chairman: Based on that, let me put it to you a different way. I sense that there's no competition at all and that it's the reverse of what's been suggested by many who came to the committee. It reminds me of my discussion when I chaired a committee on the railway industry: there's very limited competition. In fact, if it weren't for the National Transportation Agency having a scenario of artificial competition, the shippers would be paying a heck of a lot higher prices than they do now. So the government has set that.

The sense we have, at least in rural Canada, is that there is no competition; it's basically set for us by somebody in a distance place, and there's nothing one can do about it. When we talk to service station owners, they continue to tell us point-blank that they're not making a lot of money. They're just basically making my mortgage payments like everybody else. If you think they're rich guys in town, look at their bank accounts. They're not making all the cash here; somebody else is making it.

This is my question to you, Mr. Addy: is there an interest, at least from the federal government's perspective, to open up the market even further and make it more competitive than it already is, or are you suggesting that we would like to be competitive? But I would argue that there are very few places in Canada in which there is competition. Maybe it's in the major centres, but there certainly is no competition going on in Kenora. Everybody has the same price. Go to Dryden and you'll find the same price. It's the same price in Timmins.

Maybe we should be deregulating this thing to a point at which our American friends can move right in. The major oil companies won't be controlling the whole process, because there are no independents where I come from. Quite frankly, I think they would be pushed right out of the market if they tried.

So let me ask that question from a federal perspective: have you done any analysis on whether maybe we should go further and have regulatory change to the point of opening the market up to any player who wants to get involved?

Mr. Addy: On that specific issue of what the future policy directions would be, no, we haven't undertaken any study in that regard.

On the first part of your question, it is unequivocal that the more competition there is the better, as far as we are concerned.

There is often a debate that centres around what is a fair price versus one that's been set in a competitive market. Markets are subject to their individual features. The Toronto market is different from that of Dryden, as you suggested. There may not be enough independents there to add greater discipline to the market. That doesn't mean, in competition law terms, that the prices being set there are being set in an anti-competitive fashion.

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So there's a difference that's more than semantic. There is a big difference between what is perceived to be a fair price and one that's being set in a competitive market.

That's why I alluded in my remarks to several players being involved here. There is the director as the border guard. There's the consumer as the purchaser of the product. There are the suppliers of the product, who are the retailers and their suppliers. Everybody has to be brought to task to make sure they're playing their role. There's nothing wrong with ensuring and requiring, from the consumer's perspective, a determination or an explanation as to whether or not this is fair and whether or not the prices in Dryden are, in my view, being set in an anti-competitive fashion.

There's no doubt that this is a key sector of the economy. It's one that we monitor very closely on an ongoing basis, whether or not we have complaints. I don't know how many interviews we've conducted just in the last year with people who have raised complaints. We're more than willing to take enforcement action if we have the evidence, but we always have to be sensitive to whether it's an issue of fairness or of illegal practices.

The Chairman: Let's deal with that, because that's the crux of why we're here. Quite frankly, I don't think there's anyone here who has any evidence that could prove, through the regulatory regime you're involved with and administer through the law, that it's anti-competitive.

But take the criteria of fairness with the consumer. Of course we all know, because we're sitting here, that every couple of years the consumers get very disillusioned and cranky. Quite frankly, they would probably not agree with what they've heard today from you gentlemen, such that everything is fine in the industry and it's working great.

If that were the case, why would people continue to be pushing politicians to do something about it? We'd be able to explain it very readily. But when I asked Mr. Ervin to explain why there's a 10¢ difference 15 miles away, and it happens to be 15 miles closer to the source of that product, there's no explanation for that, unless the DTW zone happens to start or end there. That's the only explanation I could give. But you can't sell that to the average person on the street.

So my question to you, Mr. Addy, is this: is there a way of dealing with this in a method that will bring some fairness to the system, or do we just continue to tell people that's the way it is? We're trying to get someone to tell us that there's a better way to do this, because obviously from your complaint situation you are getting a lot of complaints from people, and it's not getting any better. In fact, it probably is getting worse. Therefore, we have to come up with some sort of recommendation or solution to the issue at hand.

I can't seem to get from anyone at this point more than an answer such that everything is fine out there, it's working really well, and just leave it. But then you talk to an average consumer, and that's not the answer you get at all.

Our job, and yours I suppose, is to make sure consumers get a good value for their dollar and that fairness is built into the system. That's what competition is supposed to be all about.

If we did a review of the legislation on the books now that you administer under the fairness criteria, you wouldn't pass. If you ask the average consumer in any poll and in any place in the country whether they thought we had good legislation on the books to make sure there was fair competition, I would guess that the answer would be absolutely no.

So my question to you is, if you were put in our position, what would you do differently? You're suggesting that your legislation works fine for the competition factor and that people are not rigging the system, but on the fairness criteria, they're not doing that at all. So could you give me some ideas as to how you perceive you're going to make things different so this won't happen over and over again? Committees and politicians are being pushed to change the system.

Mr. Addy: There is no easy answer, Mr. Chairman. I wish I had one for you, but I don't. There is a host of issues.

If the objective were to eliminate the consumer concern... Perhaps, as one of the members was suggesting, the problem is that the prices are posted. If you did that, then consumers wouldn't be as readily informed on price fluctuations and so on, but they wouldn't be complaining. I don't think that's the right approach, though. It doesn't get to the heart of the issue. It's just dealing with the process issue.

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It is a complex matter to deal with, and there is a lot to be done in facilitating understanding. That's why I'm here today and why we take every opportunity available to promote an understanding of that type of marketplace.

As consumers drive down the road and see the posted price for regular unleaded gasoline, that's what they fix on. They might not notice the fact that one outlet has a convenience store, a car wash, and has just refurbished the tanks to meet environmental requirements, whereas the station across the street is just a shack, a tool shed with some pumps out front. The consumer focuses on that price. As Mr. Ervin remarked, infrastructure costs are high. It costs a lot to have a car wash available, or a convenience store there.

The retail offerings go beyond just what the price per litre is of that gasoline and sometimes we lose sight of that. If I go to a station that has this whole basket of offerings for me, just to buy gas, I've got to pay for the option of using all the other services as well. That's that sort of learning we have to do.

We have to encourage people who have evidence of an infraction to come forward. That's one of the initiatives that I discussed this morning. I also want to encourage companies to put in place compliance programs that would not penalize people within their company from coming forward and complaining to the bureau. I'm very hopeful that perhaps that type of thing could yield some results, but I don't think there is a magic solution that you can come up with today or tomorrow that will solve the issue in its entirety. We've just got to keep working on it, frankly.

Mr. Chandler, did you want to add something?

Mr. Chandler: I just wanted to say that if the committee is going to consider another system, you will want to ask some very careful questions. What would the system be? How would it work? What is the cost of regulation going to be? Would the dynamic competition as it exists - at least in some markets today - be killed? What is your ultimate goal; is it price uniformity across the country? I am sure you could have that, but it would be at a cost and I think you'd want to consider that very carefully. Your proposals and questions raise a number of very interesting issues and require, I think, some careful consideration before you propose a change.

The Chairman: Do you recall a number of years ago - I am sure Mr. Reed was a member of a provincial parliament when this took place - a north-south study on gas that was done for the Province of Ontario. Of course, as you know, the government that left office here not too long ago ran on a platform of uniformity of pricing across the province of Ontario. That was never implemented, for a number of reasons, I think mostly political ones.

Analysis on a number of occasions has shown that if you had a uniform price across Ontario, the price hike, because of the large population in the southern section of the province, would have to be no more than a quarter of a cent to pay for the difference in transportation. It's obviously not land value and things like that that Mr. Ervin talks about, because our land value is much lower in northern Ontario than it is in southern Ontario. I would have to pay millions for a piece of property in downtown Toronto, for example, comparable to my property on Lake of the Woods. Hence the cost of doing business in northern Ontario is somewhat reduced.

The only argument that the gas companies seem to be using, at least in northern Ontario, is the transportation cost. Their arguments fall apart if you analyse them very closely.

You may not be able to have a uniform price across the whole country, but my question would be what's stopping the provinces from having a uniform price across the province like they did in P.E.I.? Why would that cause so much concern regarding competition if in fact the difference is only a quarter cent or something of that nature?

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That's what people are asking in the outlying regions of the country, people who don't happen to live within 150 miles of the U.S. border: why can't we equalize it, as Mr. Thalheimer has suggested, and there would still be competition in the marketplace? Is that impossible to do, from your perspective, as someone who administers the act you have?

Mr. Addy: The short answer to your question is no, it's not impossible to do. All we're trying to flag is that there are costs. There will be lost dynamic efficiency. Dynamic competitive force will be lost in the marketplace.

It's up to the government, be it provincial or federal, whoever has jurisdiction on the particular proposal, to do that sort of trade-off. All we're doing is cautioning that to the extent that we have any value-added to bring to the table, we think that has to be done very carefully, because there will be costs.

The Chairman: That's my point. I'm one of those who believe there is no competition on gas prices in rural Canada. I'd like to see Mr. Ervin's study of the smaller communities in rural Alberta who have some sort of local competition. If local competition is going on, it must be awfully limited, quite frankly, because the difference in price between Winnipeg and Kenora is a good 10¢, and it's only two hours away. It's not that far away.

So the question is, do we have too many gas stations in the community? Is that how you relate this whole discussion? What would the consumer do? The minister has suggested the consumer should shop around. Well, it's a heck of a shopping spree to go buy gas in Winnipeg to shop around. How do you shop around in a local environment that has maybe six or seven gas stations in it?

That's what we're trying to find out here in this preliminary study. Are there ways of doing that, from the competition bureau perspective, of creating competition in a community where really there is none?

Mr. Addy: Are there ways of doing it? I think you have to take a step back and ask, okay, what are the competitive features of that market? You have your population; that's one.

You asked about throughput. My information is that yes, there are too many gas stations in Canada. We have about twice as many per capita, as I understand it, as they have in the U.S. They pump about half the volume the average station pumps in the U.S. Is that a feature? Yes, because that means a lot of stations out there have to have a price high enough to offset the lesser throughput to pay their operating costs and suppliers, etc. So that is a feature.

What can we do? We can do our utmost to see that the barriers to competitive entry aren't there, that the municipality hasn't, through zoning, sewn up all the real estate that might be available for use. There are other barriers, regulatory barriers for environmental certifications or whatever. There is a whole basket of things.

To the extent we can address issues that would free up access to the market, maybe you'd have a seventh competitor coming into the Dryden market or something of that nature. That's one of the ways of addressing this: the barriers to entry. Can people come in?

The Chairman: I'll just conclude with this. The research staff have given me something that confirms what I've been trying to get across. This is the Petroleum Communication Foundation. They tell us the regional variations in crude oil costs are usually less than 1.1¢ per litre. So in fact the whole argument of the price difference being 10¢ because of transportation and the local economy really starts to wear very thin for those of us who know the cost of living in northern Ontario versus living in southern Ontario.

My argument in my mind is still that there is no competition in northern Ontario. Therefore it's a captive market. The price is set fairly high because they can get away with it because we have nowhere else to go.

The argument Mr. Thalheimer makes is, again, the one we're really looking at. We are trying to find out why we can't do this and why people seem to be so opposed to it: setting a price across the province that's equal. That means someone in Toronto may have to pay one-quarter of a cent more for gas, but then we'll get the same price they will, based on a scenario like this, because the population...the volume is so high in Toronto versus how much we'll ever consume as consumers in northern Ontario.

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Has anybody done any studies to look at that based on the competition scenario? I ask this because you're in the competition business. You have to do analyses as to whether there is truly competition, and if there isn't, how do we create competition to make it fair for consumers?

As I mentioned before, in the National Transportation Agency we created a false economy in the sense of competition in order to deal with captive shippers. Now, we're captive consumers. We have nowhere to go. I can't go to Buffalo. I'd love to go to Buffalo for my gas, and I'll bet you that everybody in northern Ontario would go. But we have no choice; we have to buy it where we are. Therefore, we have no options.

How do you create that competition, whether it be artificial or genuine?

Mr. Addy: Again, you're identifying the point very squarely, Mr. Chairman. It's a function of the relevant market. You might in your area, in Dryden, have only seven outlets and those seven operators know that you're not going to drive the two hours to Winnipeg to get a half cent off a litre, just as if I'm stuck on the 401 somewhere and I'm running out of gas, the operator of that station knows that I'm captive.

But that doesn't mean the price is being set in an anti-competitive fashion. We might feel it's not fair that I get nailed for my gasoline when I'm driving down the 401, but you can bet your booties that the next time I'm going to fill up before I get on the 401. You might not have that opportunity there.

So it's the issue of competition versus what's perceived to be fair. I'm speaking on the competition side and I'm just identifying that local market conditions in a competitive market might actually dictate that you're paying more than you would in Toronto, and that can be ``competitively set''. It's not illegal; it might not be fair. That's the difference.

The Chairman: I totally agree with you. It's not illegal, so I don't think there's a debate. It's a matter of fairness in the system, because that's a very large component of people's everyday or yearly costs. That affects their standing of living significantly, especially in areas where you have no choice but to drive a significant distance to get to and from work and to maintain a respectable living standard.

Really, what people are so angry about is that the fairness test just isn't there, and what we're trying to find out here in these discussions is if the federal government, under its jurisdiction, can do anything about it or if it is totally within provincial jurisdiction.

Mr. Addy: As we've indicated, to my knowledge, the setting, fixing, of a retail price for gasoline is an issue of provincial jurisdiction.

Mr. Reed: I have one brief question, just so we'll know we've touched on it. It has to do with tank wagon prices. If I am a refiner and I have three different kinds of customers - one is the integrated customer where the fuel goes on consignment; another is a privately owned brand station where the fuel is sold outright; another is a no-label or a no-name station where the fuel is sold directly - do the tank wagon prices vary? All other things being equal - location, distance, travel, all that stuff - do the tank wagon prices vary among those kinds of purchasers?

Mr. Addy: Whether it's the wholesale rack or a dealer tank wagon - on occasion I tend to get the two figures confused - discounts are offered, secret discounts if you will, off posted prices to customers that they negotiate with the refiners. If you're a large independent with 50 outlets, you'll be able to negotiate a bigger discount off DTW or the wholesale rack than a single outlet operator will.

Mr. Ervin might want to add to that.

Mr. Chandler: Just before he does, I could add that there is a provision in the Competition Act that is there to protect competitors, competing purchasers, who buy similar quantities of a product. So the prices should be uniform. There should be no discrimination. It's the price discrimination provision. So you'd have to find out whether these operators are competing. Are they in the same market? Are they buying the same volumes? If they are, the law says there can't be a practice of charging different prices or of selling at different prices.

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Mr. Ervin: I would add that because of the variety of modes under which retailers can operate, there are going to be some differences in tank wagon prices. For instance, in selling gasoline to a lessee where perhaps the supplier provides pumps and tanks and so on, there's going to be a dealer tank wagon price that reflects that mode.

There are non-brand and independents who purchase from the very same supplier that carries a national brand. Many of those sales actually occur at the refinery level and don't take place through the marketing organization, to take, let's say, Petro-Canada as an example. In fact, there is often internal competition between the refining end of sales and the marketing end of sales where, for instance, a no-name independent is getting a pretty good rack price through that open wholesale market and that retailer is then able to undercut that very same supplier's own brand.

Mr. Reed: What I was trying to do is arrive at a tank wagon price without variables. When you take the frills off the lessee - I realize it's built into that price - but if you pull that out and try to level the playing field, it's obvious - we heard the word ``secret'' here - that deals are cut.

The only follow-up question to that is, do we have access to that information or is that privileged information?

Mr. Ervin: Sales to some independent chains, notably taxi companies in many markets, are negotiated on the same basis that an oil company would negotiate a sale to any other commercial supplier. It's simply negotiated on the basis of the volume and some of the delivery economics: is there a large storage tank; is it economical to deliver? But they're essentially negotiated on a ``one-of'' basis in the same manner that any primary supplier would negotiate with a wholesale customer.

That constitutes a relatively small percentage of the retail gasoline infrastructure. By and large, the most sales of gasoline occur through a dealer tank wagon infrastructure.

Mr. Reed: I just speculate as to whether that might account for the difference in the price in Kenora.

Mr. Chandler: We do have access to that kind of information when we need it, and we have looked at those issues. It typically arises where there are allegations of squeezing on the part of a vertically integrated supplier so that there are more favourable terms to a company operator, for example, vis-à-vis an independent.

We have looked at that question a number of times in the past. We've reviewed all the data we need to review, including the secret deals, whatever they are. We can do that because there are formal powers in the act that allow us to do that, and we can do that because there is a framework, as Mr. Addy said, in the abuse of dominant position provision that allows us to ensure that kind of activity is not taking place.

The Chairman: In wrapping up, Mr. Addy, based on the fact that the minister you work for, the Minister of Industry, is also the minister, as I understand, of consumer protection under the federal jurisdiction, can you tell me whether in fact there has ever been any discussion with the provinces?

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Jurisdictionally speaking, if you wanted to make some moves and changes in how fairness was arrived at in this particular discussion we're having as to gas pricing alone, you would certainly have to come to a meeting with all the provinces and sit down and talk about the issue. Has that ever been done, at this point, by our minister or previous ministers of the federal government and the provincial governments? Has it been talked about at a meeting of sorts of the officials and/or ministers as to how we deal with these continued, revolving complaints we get year after year that this industry really isn't doing a service to consumers as far as it relates to fairness? It's not based on whether there's racketeering or whether competition is not being followed under the act you have, but the fact that there is certainly a problem in the consumer's and average Canadian's mind about how we arrive at the price at the end of the day.

This is information that would be valuable to the committee, whether someone has really attempted to resolve this issue in a different forum, one other than going out with some politicians and studying it to death and coming up with a report that ends up on someone's shelf and collects dust for a number of years. I probably could throw a few at you. You've probably read them all in the last twenty years...of what's been said and not said. But we have still arrived at the same conclusion. People aren't very happy.

Can you give me some information on whether that is a topic of discussion by the federal and provincial officials?

Mr. Addy: On the mechanism side, Mr. Chairman, first, there is an ongoing, continuous dialogue between the federal and provincial officials responsible on a host of consumer-related issues, whether telemarketing...a whole host. Whether this has been on a specific agenda I don't know off the top of my head. We can advise you of that. Likewise, we can advise you if there has ever been a federal-provincial ministers meeting where it was on the agenda. I don't know the answer to that. We'll have to inform ourselves.

The Chairman: I'd appreciate getting that information, because it might make things a lot easier for us down the line as we try to get a handle on whether we are going to be the fiftieth committee in the last twenty years to do a study. I don't think that would be overly helpful if there's a different mechanism that could be used. So we'd appreciate that information.

Mr. Addy and Mr. Ervin, we very much appreciate it. We as well as you know this is a very difficult issue for consumers and for elected officials to try to grapple with. We certainly appreciate the information. If there's anything else that you've not given us this afternoon and this morning but that comes to mind, please feel free to send it on to the committee, because we'll be discussing this further in camera in the next number of weeks.

On behalf of the committee, thank you very much.

Colleagues, we'll call this meeting adjourned to another date when we have had an opportunity as a steering committee to have a discussion on where we go from here. On behalf of the committee, I want to thank everyone for being here. We'll see you at the next meeting of the natural resources committee.