Gasoline Prices and the Public Interest
The Consumer Advocate's Report on Gasoline Prices
in the Province of Newfoundland and Labrador

CHAPTER ONE

Foreword

Consumers have long been troubled by the variations in pricing for a litre of gasoline throughout the Province. In 1993, the Town Council of Channel-Port Aux Basques requested explanations from the oil companies as to why gasoline prices were so high in their area as compared to neighbouring communities. In reply, Irving Oil Limited stated:

Over the last six months, we have experienced an actual increase in crude costs and an increase in gasoline tax of 2 cents per litre. Presently the Newfoundland market is very price unstable so pump prices for our company are monitored daily and reviewed weekly so that we offer the Town of Channel-Port Aux Basques our high octane gasoline at competitive prices.(1)

Imperial Oil Limited offered:

In the case of Port Aux Basques, as well, our two Esso retailers are "dealers"; that is, independent business persons who buy from us at a wholesale price and set their own retail prices. In other words, Imperial Oil does not determine pump prices at any outlet in this particular market.(2)

Ultramar provided:

First and foremost, the ongoing price war in Corner Brook has depressed gasoline prices to the point where they are the lowest in Newfoundland. Oil companies, like ourselves, have had to significantly subsidize the wholesale prices to our dealers so that they could remain competitive and financially viable. As such, this had a considerable detrimental impact on our financial operating results in this particular market. Based on the foregoing, we can legitimately say that the prices in Channel-Port Aux Basques are not unusually high . . . but the prices in markets like Corner Brook are unusually low. In fact, retail prices in the Corner Brook area have dropped more than 10 cents per litre over the past 6 months.

Secondly, our higher operating costs, including the added delivery expense from Corner Brook has a direct bearing on the retail prices in this area.

Thirdly, it is important to note that the stations in this area set their own gasoline prices by adding their mark-up to our wholesale prices. I would tend to agree with you that dealer margins in this area are relatively high as compared to the Corner Brook area.(3)

In 1997, when gasoline prices rose significantly in Central and Eastern Canada, The Evening Telegram published a story, part of which offered as follows:

"The summer's higher prices were blamed on shortages caused by breakdowns at refineries supplying Central and Eastern Canada plus demand for gas that was 15% higher than expected. That was because of the booming economy and higher fuel consumption rates of many automobiles, especially sport utilities.", said Imperial Oil spokesman, Richard O. Farrell.(4)

The industry has provided a multitude of reasons to explain why there are variations in the price of gasoline throughout this Province and elsewhere. Consumers however, remain unconvinced. Predictably, this has led to consumer frustration with the oil industry.

When this Study was commissioned on July 16, 1997, Premier Brian Tobin, Minister of Government Services and Lands, Ernest McLean, and Grand Falls-Buchans MHA, Anna Thistle, held a news conference in Grand Falls-Windsor. At that time Minister McLean explained:

"One reason for our gasoline prices is the level of taxation that is needed to pay for things like hospitals and such. Beyond that, there can be significant differences in what consumers pay for gasoline in different parts of the province. The consumer advocate will look into concerns that have been raised about prices and determine why they can be so different depending on where you live. This will assist consumers and government to understand the issue better, and what should be done about it." (5)

This statement best reflects our objective in the preparation of this report.

 

Methodology

This study was not commissioned pursuant to the Public Inquiries Act. Accordingly, there was no power to summon witnesses to give evidence or to order the production of documents. However, this did not prove to be an impediment. To the contrary, the informal process employed to gather evidence about the industry encouraged stakeholders to participate in the study and disclose confidential information concerning their operations in the Province. It is doubtful whether the same level of participation would have been readily provided under a formal public inquiry.

In an effort to seek input from consumers, a call for submissions was published in newspapers circulated throughout the Province. In response, consumers, gasoline retailers and municipalities called, wrote, faxed or e-mailed their comments.

A research and investigation program was established to identify the factors contributing to the price of, and price variation in gasoline sold in the Province. The results of previous inquiries were examined, including the recent inquiries conducted in British Columbia, New Brunswick and Quebec. In addition, the latest case studies issued by the Federal Competition Bureau were reviewed, as were studies conducted by Industry Canada.

Companies directly involved in the gasoline retail business in the province were presented with an extensive questionnaire (See Appendix "A") which sought detailed confidential information concerning the company's operations in the Province. Confidentiality agreements were entered into with oil companies in order to facilitate their voluntary compliance with the request for information. These agreements disallowed the use of any confidential information in a manner which would identify the source. In addition, it was agreed that this confidential information would be returned to the source at the conclusion of the study; this has been done. Meetings were held with representatives of each oil company to discuss the information provided in their responses to the questionnaire and to obtain clarification where appropriate.

Many municipalities throughout the Province made submissions. A formal presentation was made by the Town of Grand Falls-Windsor and the Town of Happy Valley-Goose Bay. A submission was also made by the Combined Councils of Labrador.

There were consultations with representatives from the Provincial Department of Mines and Energy, Government Services and Lands and Works, Services and Transportation. In addition, meetings were held with the Energy Sector of Natural Resources Canada, the Federal Competition Bureau, representatives of Measurement Canada, and the Independent Retail Gasoline Markets Association ("IRGMA"), as well as the Canadian Petroleum Products Institute ("CPPI").

Members of the House of Assembly participated in the study. A meeting, chaired by the Leader of the Opposition, was convened during which the views of the Official Opposition caucus were obtained. There was a comparable meeting chaired by the member for Grand Falls-Buchans with a caucus committee of Government members of the House of Assembly.

 

Consumer Concerns

In order to fulfil the mandate of the Study it was imperative that the consumers of the province be consulted and given an opportunity to present their views. The consultation process was beneficial in the preparation of this report. The following is a synopsis of the issues consumers have raised:

Dominant Position in Small Markets

Many residents of Newfoundland and Labrador are concerned over the closure of retail outlets in their communities and the resultant possibility that one or two companies may dominate the local market.

Price Fixing

Many consumers observe the identical nature of gas pricing. This has led to speculation that the industry engages in price fixing.

Price Maintenance

Similar to the complaints of price fixing, consumers, and some retailers, made submissions that there was unwarranted control of retail prices by certain suppliers.

Price Difference Between Sydney, Nova Scotia and Channel-Port Aux Basques, Newfoundland

Many consumers drew our attention to the variation in the price of gasoline between Sydney, Nova Scotia and Channel-Port Aux Basques, Newfoundland. This difference has caused many to believe the oil companies are taking advantage of consumers in Newfoundland and Labrador. The following are some of the comments received:

"I am directly involved in the tourism trade and on a daily basis this is the major complaint people have about coming to Newfoundland."

"I go to the mainland twice a year and I am always amazed that the prices of regular gas are always at least ten cents a litre cheaper in North Sydney than in Corner Brook."

"From time to time I also travel to Halifax. I know the gas price is a lot cheaper about ten miles from the ferry in North Sydney. I arrange to fill up there both to and from Halifax."

Price Variations Within the Province

Submissions from consumers in rural Newfoundland and Labrador detailed the variation in prices between rural and urban markets. Mayor Lloyd Rossiter, writing on behalf of the Town of Ramea, presented a typical complaint in detailing the issue as follows:

(1) $1.20 km from Corner Brook to Burgeo (206 X 2 X $1.20) = $494.20

(2) $216.00 ferry rate (return) = $216.00

(3) $120.00 salary = $120.00

Total Cost $830.20

Pump Price Not Justified by Cost Differences

Consumers believe that the pump price is not a reflection of the cost and margins of the product. Often, these consumers track cost factors such as the price of crude oil and believe that the explanations put forward by the industry at any given moment are not accurate. For example the Town of Lewisporte states that they "can not understand why prices can be different outside Lewisporte when the actual gasoline is stored in our tank farms. The price per litre unit is cheaper in Gander and Grand Falls/Windsor than in Lewisporte. It's an extra cost for different oil companies to transport gasoline to these areas."

Competition Bureau

Consumers, particularly those who have had dealings with the Competition Bureau, have expressed concern over the ability of the Bureau to properly act as a watchdog of the industry. A consumer group has pointed to the low number of prosecutions as indicative of the inability, or reluctance, of the Bureau to effectively monitor the industry.

Oil Companies Respond Inadequately

The consumer group NAGG has publicly expressed its concern about the "shroud of secrecy" surrounding the gasoline and oil industry, as well as the frustration at the lack of an adequate response to consumer concerns. A founding member of the NAGG organization stated, "I'm not meaning to point fingers at oil companies specifically, but they would have gotten a lot further with me if I had a sense that I was getting a little bit of co-operation from them. But it is impossible to get a straight answer out of anyone employed with these companies to explain the reason for the discrepancies in gas prices across the province."

Return to Table of Contents

1. 1 Correspondence, May 17, 1993.

2. 2 Correspondence, May 3, 1993.

3. 3 Correspondence, July 26, 1993.

4. 4 The Evening Telegram, September 22, 1997.

5. 5 Press Release, July 16, 1997.

6. 6 Correspondence, August 18, 1997.

7. 7 Correspondence, October 20, 1997.

8. 8 The Advertiser, August 4, 1997.