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November, 1989 - Submission of the Director to the Nova Scotia Board of Public Utilities

Submission of
The Director of Investigation and Research
Competition Act
November, 1989

Nova Scotia Board of Public Utilities

In the Matter of the Nova Scotia Board of Public Utilities Act R.S.N.S., 1967, Chapter 117. As Amended, and particularly section 36 thereof;
And in the Matter of An Application by Wilson Fuel Company Limited to Obtain A Retail Gasoline License (New) - Parking Lot - Truro Mall, Robie Street, Truro, Nova Scotia.

1. Introduction

The mandate of the Director of Investigation and Research (hereinafter the Director), is the administration and enforcement of the Competition Act. The purpose of the Act is a very broad one which is set out in section 1.1 as follows:

"The purpose of this Act is to maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy ... in order to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and in order to provide consumers with competitive prices and product choices".

In Canada, retail gasoline marketing is a matter of considerable public interest. The industry has been the subject of several inquiries under the Competition Act and its predecessor the Combines Investigation Act. In recent years, there have been three convictions of oil companies under the price maintenance provisions of the Act.¹

In the 1970's the Director conducted a lengthy inquiry related to all facets of the petroleum industry. This led to proceedings before the Restrictive Trade Practices Commission (RTPC) commencing in 1981 and culminating in its 1986 report entitled "Competition in the Canadian Petroleum Industry". In its conclusions and recommendations the RTPC indicated that (p. 467):

"there is a need for improved understanding at all levels of government of the effects of government policies on the petroleum industry. There is also a need for improved consultation regarding the purposes and implementation of government policies affecting the industry".

This submission is made within the spirit of the above recommendations.

The Director has received this Board's consent to intervene in this matter pursuant to s. 126(1) of the Competition Act. The Director's intervention is in respect of the lack of competition from independent gasoline retailers in Truro, Nova Scotia.

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2. Present Market Structure of the Petroleum Industry in Atlantic Canada

In Atlantic Canada, there are four refiners as illustrated in Table 1: Irving Oil, Newfoundland Processing, Imperial and Texaco. Irving Oil has the largest capacity accounting for over half of total refining capacity in the region but has a policy of not supplying independents. Much of its output is exported to the United States.

The second largest refinery, accounting for about 23 percent of the capacity in the region, is operated by Newfoundland Processing at Come-by-Chance. It is primarily an export refinery, selling most of its output to Cumberland Farms in New England. Petro-Canada bought this refinery which was in bankruptcy in the 1970's and subsequently sold it to the present owners in October, 1986 for one dollar. This sale was accompanied by a 25 year restrictive covenant that effectively prevents t"f output from being sold into Canada with the exception of Newfoundland.

Table 1 ²
Atlantic Canada Refining Capacity

Firm	B/CD³	Location	Share of Refining Capacity %
Irving	250,000	Saint John	54.6
Nfld. Processing	105,000	Come-by-Chance	22.9
Imperial Oil	82,000	Dartmouth	18.0
Texaco	20,500	Halifax	4.5
Total	457,300		100.00

In Atlantic Canada, according to the National Energy Board, no independent wholesalers or retailers import motor gasoline due to a lack of access to independently owned marine terminals and the high cost of trucking from Maine. Any wholesale purchase of imported gasoline made by an independent in Atlantic Canada must be made through a Canadian refiner. As a result there is no competition from independents at the wholesale level.

The competitive impact of this market structure is that the refining industry in Atlantic Canada is highly concentrated with little choice left to independent retailers but to purchase their supplies from the vertically-integrated oil companies with whom they compete.⁴

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3. Competition from Independent Gasoline Retailers

In Atlantic Canada, independents own about 50 of the 2700 retail outlets which represent about 2.0 percent of the retail gasoline market.⁵ Independents in other regions of Canada represent on average 23 percent of the retail gasoline market and have traditionally exerted significant competitive pressure in the market.

The RTPC Report on Competition in the Canadian Petroleum Industry (p. 319) stated that:

"In the last 15 years there has been a radical transformation of retail gasoline marketing by the integrated marketers. These changes were a response to a decline in the demand for the offerings of traditional gasoline outlets. These changes were also goaded by the serious competitive threat of independent marketers which caused the integrated marketers to seek to lower distribution costs to more competitive levels."

In its report, the RTPC recognized the importance of the independent retail gasoline sector and made a number of recommendations directed toward the reduction of barriers to entry. These recommendations included:

that the petroleum companies not enforce non-petroleum use covenants on properties they have sold;
that the Government of Canada confirm its policy of allowing imports of petroleum products;
that refiners supply products to independent marketers.

In most parts of Canada, independents have provided greater choice in the offerings available and have generally exerted downward pressure on prices in markets in which they have been present. For example, in many cases, independents offer full service at self-service retail prices. It is submitted that the competition provided by such alternatives would provide a positive benefit to consumers in Nova Scotia and add a significant competitive discipline to the market.

There is evidence that dealer margins are higher in Nova Scotia than other provinces in Canada. In 1988 and from January-October 1989 dealer margins in Halifax were 4.6¢/L, the maximum permitted under the Board's regulations.⁶ While 4.6¢/L is the maximum permitted under the Board's regulations, it has become the industry norm in Nova Scotia as companies have priced up to this maximum. During the above time periods the Canadian average for dealer margins was 3.5 and 2.8¢/L respectively.

If we compare markets which had a similar amount of stations such as Regina with Halifax (Table 2) we find that the retail margins are much more stable and higher in Halifax as compared to Regina which has a larger segment of independent brands.

Furthermore retail pricing data collected by EMR for 13 major centres for regular unleaded at self-serve outlets (full-service for Halifax) indicates that for 1988 retail prices in Halifax were on average higher than the Canadian average by 1.0¢/L. From January to October 1989 the retail price in Halifax was on average lower by 0.6¢/L than the Canadian average. It should be noted that provincial taxes in Nova Scotia (September 1989) are 9.0¢/L compared to the Canadian average of 10.6¢/L.

On an ex-tax basis (federal and provincial) the average price of gasoline in Halifax for 1988 was 2.7¢/L higher than the Canadian average, and from January to October 1989 Halifax prices on average were 1.5¢/L higher than the Canadian average. It is submitted that the lack of an independent retail gasoline sector has reduced competitive pressure on prices and that the entry by independent gasoline retailers in Nova Scotia would likely encourage greater price competition.

Table 2

1989 Distribution of Retail Outlets for Halifax and Regina
City	Independent Brands	Regional Refiners	Major Refiners	Total
Halifax	2 (1.5%)	49 (36.3%)	84 (62.2%)	135
Regina	23 (22.8%)	21 (20.8%)	57 (56.4%)	101

Retail Margins of Regular Unleaded Gasoline (cents per litre)
Date	Halifax	Regina
January 1988	4.6	3.8
February	4.6	3.6
March	4.6	3.5
April	4.6	3.4
May	4.6	3.5
June	4.6	3.2
July	4.6	3.6
August	4.6	3.1
September	4.6	3.2
October	4.6	3.4
November	4.6	3.2
December	4.6	3.2
January 1989	4.6	3.3
February	4.6	3.8
March	4.6	2.6
April	4.6	3.0
May	4.6	4.8
June	4.6	4.4
July	4.6	4.2
August	4.6	4.3
September	4.6	4.3
Average	4.6	3.6

Note: This table was adapted from graphs contained in the original submission and should therefore only be considered an approximation.

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4. The Truro Market

At present the market within Truro being considered by this Board is serviced only by integrated refiners such as Irving Oil, Ultramar, Petro-Canada, Shell, Imperial and Texaco and not by any independent retailers. This is typical of the retail segment of the industry in Nova Scotia which is dominated by those vertically integrated firms who sell gasoline under their well established brands.

These retailers offer consumers certain benefits such as credit cards, advertising and a high level of service each of which has an associated cost. An independent retailer in the Truro market would offer a different mix of services that would create the possibility of greater price competition. Evidence from other parts of Canada is that independents generally offer the public lower retail prices. This would provide consumers with a real choice.

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5. Competition As A Public Interest Factor

It is respectfully submitted that it is within the mandate of this Board in assessing the public interest, convenience and necessity factors to consider the benefits of competition. The public interest is satisfied where the retail price of gasoline is established on a commercial basis under competitive conditions. In order for this to occur independent retailers must be given the opportunity to expand their retail outlets and invest in the necessary infrastructure (i.e. terminals) in order to compete in the marketplace.

The application by Wilson Fuel does not relate to 'the establishment of another retail outlet by one of the existing refiner-marketers in the Province. As a new entrant, it would provide consumers with a new offering in the marketplace. It is submitted that such competition would provide a positive benefit to consumers in Nova Scotia and would help to ensure that a vital commodity such as gasoline would be supplied in the most economically efficient manner.

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6. Recommendations

It is recommended that competition should be accorded a significant positive weight by the Board in assessing the public interest criteria. On this basis, and given that the Applicant meets all the necessary technical standards, there are sufficient grounds for the granting of a license to the Applicant.

It is respectfully submitted that the implementation of regulatory policies by the Board should be the least restrictive possible of competition in the retail gasoline sector in Nova Scotia.

In summary, it is recommended that the Board revisit its September 18, 1989 decision with a view to granting a retail gasoline license to Wilson Fuel Company Limited for establishing a retail gasoline outlet located at the Truro Mall.

All of which is respectfully submitted this day of November,1989.

Howard I. Wetston
Director of Investigation and Research

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NOTES

¹ R.v. Imperial Oil Ltd; Ont. Co. Ct., Apr. 4, 1984; R.v. Sunoco Inc. (1986), 11 C.P.R. (3d) 557 (Ont. Dist. Ct.); R.v. Shell Canada Products Ltd, (1989), 24 C.P.R. (3d) 501 (Man. QB.)

² National Energy Board

³ Barrels per Calendar Day

⁴ Director of Investigation and Research and Imperial Oil Limited, (1989), Competition Tribunal. Affidavits of Bill Stanbury and George Lermer (July 1989) regarding the proposed Imperial Oil and Texaco, Canada merger.

⁵ Kent Marketing Services Ltd. Kent Market Data

⁶ Monthly Data Energy Mines and Resources (EMR)
Retail Margins are taken from data provided to EMR each month by major marketers. They are a representative industry average and individual retail margins can vary considerable from these averages. Since the data is primarily for company operated stations, it does not take into account commissioned operations or independent branded dealers.