Competition Bureau submission to the OECD Competition Committee roundtable on Competition in Road Fuel

June 20, 2013

1. Introduction

  1. Canada’s Competition Bureau (the “Bureau”) is pleased to provide this submission to the OECD Competition Committee’s 20 June 2013 roundtable on “Competition in Road Fuel”. The Bureau, headed by the Commissioner of Competition (the “Commissioner”) Footnote 1, is an independent law enforcement agency responsible for the administration and enforcement of the Competition Act (the “Act”) Footnote 2 and certain other statutes. In carrying out its mandate, the Bureau strives to ensure that Canadian businesses and consumers have the opportunity to prosper in a competitive and innovative marketplace.
  2. The road fuel sector is of utmost importance to Canada, particularly given the country’s vast geography and dispersed population and markets. Competition in this sector facilitates the efficient movement of people and goods, which underpins economic growth and prosperity. It is also a sector that is inherently complex, both in technological and market dimensions, and is very much in the public eye.
  3. One of the Bureau’s priorities has been to protect competition through enforcement actions. In recent years, the Bureau undertook merger reviews and cases under the criminal conspiracy provisions of the Act in the road fuel sector. For example, in 2009, the Bureau undertook a review of the largest domestic merger in Canadian history — the merger of Petro‑Canada and Suncor, two major players in the road fuels industry in Canada. In addition, in 2008, the Bureau announced that it had uncovered a significant gasoline price‑fixing cartel in Quebec. These initiatives preserved competition for road fuel in two key Canadian provinces, Ontario and Quebec, while at the same time enabling consumer choice and confidence in the integrity of key markets.
  4. While enforcement has been the most visible part of the Bureau’s work in the past few years, advocacy initiatives can play an equally important role. Recently, the Bureau has renewed its emphasis on advocacy work. The Bureau’s advocacy mandate is clearly spelled out in the Act. In particular, under sections 125 and 126 of the Act, the Commissioner is able to make representations before federal and provincial regulatory boards, commissions or other tribunals. In addition to what is provided by statute, the Bureau has historically made numerous suggestions and recommendations directly to federal, provincial and municipal governments.
  5. In the road fuels sector, however, concerns voiced by policy makers, the media and consumers have, at times, raised issues that are beyond the Bureau’s mandate. Over the last twenty years, the traditional one‑product gasoline station has been supplanted by larger multi‑purpose retail outlets offering, in addition to gasoline, confectionary products, car wash services and, in some cases, coffee and fast food. Thus, questions have arisen whether the intense pressure on some retailers’ margins, and in some cases exit, is the result of industry change or predatory pricing. Similarly, price volatility due to world events, such as hurricanes and international conflicts, has led some to question the fairness and reliability of market outcomes. In response, the Bureau has expended considerable efforts to develop industry‑specific knowledge of the road fuel sector. It is also worth noting that some provincial regulators have introduced maximum retail prices while, at the same time, the province of Quebec introduced a minimum retail price.

2. Background on the Canadian petroleum industry

  1. At a national level, Canada is a net exporter of crude petroleum.Footnote 3 Regionally, however, Canada is made up of two distinct regions: Western Canada, which exports crude petroleum to the United States; and Eastern Canada, which relies on crude oil imports from Western Canada and the Atlantic Basin.
  2. Most of Canada’s refining capacity is located in Eastern Canada, where much of the final product demand lies.Footnote 4 While there are major refining centres in Edmonton (Western Canada) Sarnia (Eastern Canada) and Montreal (Eastern Canada), most Canadian provinces have at least one refinery.Footnote 5 The refineries in Sarnia are connected to Western Canada via pipeline, and the refineries in Montreal have access to crude oil imports from the Atlantic Basin.
  3. Canada’s largest population centre, the Greater Toronto Area (the “GTA”), is not home to any significant refining capacity. However, the major refining centres of Sarnia and Montreal are located within 600 kilometres of the GTA.Footnote 6 While gasoline is shipped into the GTA via a combination of rail, truck and marine, the most cost effective means of transportation is via gasoline pipelines, including the Transnorthern Pipeline (the “TNCL”), which connects the GTA to refineries in Montreal, as well as the refinery in Nanticoke, Ontario.Footnote 7
  4. As noted above, there have been changes in the structure of the retail gasoline market in the past twenty years. There are currently about 12,000 retail fuel sites in Canada, with an average annual throughput of about 3 million litres per site. Twenty years ago, there were about 20,000 retail fuel sites, with an average annual throughput of about 1.5 million litres per site. About 17% of retail fuel sites have a car wash; about 60% sell diesel; and about 70% are self‑serve.Footnote 8

3. The Suncor/Petro‑Canada merger

  1. As noted above, the 2009 Suncor/Petro‑Canada merger was the largest domestic merger in Canadian history. It involved assets at multiple levels of the supply chain, including:
    1. petroleum and natural gas production and transportation (including oil sands assets);
    2. refining;
    3. transportation, terminalling, distribution and wholesaling of refined products; and
    4. retailing of refined products (such as gasoline, diesel, lubricants and jet fuels). It was also the first big test of the revamped merger review provisions of the Act, which were enacted in March 2009. Suffice to say that it was a complex review that was subject to intense public scrutiny.
  2. The Bureau’s new Supplementary Information Request (“SIR”) mechanism provided an efficient framework for the merger review process. Under the former merger review process, in the absence of the Bureau obtaining an injunction to prevent closing, the parties to a notifiable transaction could simply await expiration of a 42‑day statutory waiting period during which they could not close their transaction.Footnote 9 Under the new framework, in the few cases where serious concerns arise, parties to notifiable transactions are advised within 30 days of their pre‑merger notification filing whether a SIR will be issued. If a SIR is issued, the parties cannot close their transaction until 30 days after all requested information has been provided to the Bureau. In the few cases where a SIR is issued, the Bureau generally adopts a surgical approach based on a tailored request for information, and engages in a pre‑issuance dialogue with the parties to narrow the request, where appropriate, and in a post‑issuance dialogue to ensure that the request can be responded to constructively.
  3. The Bureau’s review of the Suncor/Petro‑Canada merger was completed (including issuance of a SIR) and remedies negotiated in less than four months from the date of filing. The process facilitated a focused review in which certain markets that proved not to be problematic were taken off the table expeditiously as the parties responded to the Bureau’s priority areas on a rolling basis.
  4. After a review of a vast volume of documents, data and other evidence, the Bureau’s review focused on wholesale and retail gasoline markets in the GTA. At the wholesale level, the proposed transaction would involve combining ownership of two of six refineries (owned by five producers) serving the GTA. It also involved the merged entity acquiring much of the terminal capacity at the GTA end of the TNPL, which Ultramar (located in Quebec) used to bring product into the GTA market.Footnote 10 Additionally, there was a potential vertical element to the transaction as, pre‑merger, Suncor was a net buyer of wholesale gasoline while Petro‑Canada was a net seller.
  5. Based on the totality of the evidence, the Bureau concluded that absent wholesale and retail remedies, there would be a substantial lessening of competition.
  6. In order to resolve the Bureau’s concerns, the parties entered into a Consent Agreement, which was registered with the Competition Tribunal. Among other things, the Consent Agreement provided for a ten‑year agreement under a party would be granted access to terminalling services, namely, storage and distribution capacity at the GTA end of the TNPL.Footnote 11 Further to the Consent Agreement, this capacity was subsequently awarded to Ultramar. As a result, the Consent Agreement remedied the substantial lessening of competition that the Bureau concluded was otherwise likely in the market for wholesale gasoline in Southern Ontario and the GTA.
  7. The Consent Agreement also imposed a requirement that the merged entity provide wholesale volumes to unintegrated retail competitors in the GTA. This was a sufficient remedy to assure that access to wholesale volumes would remain.
  8. In addition, the Consent Agreement provided for the divestiture of 104 retail gas stations, due to the number of horizontal overlaps present between the parties in a significant number of local relevant geographic markets. For the purpose of the Bureau’s analysis, Suncor’s interest in Pioneer, another road fuels retailer, was also taken into account. The divestiture process took several months, due in part to the need to deal with transitional and roll‑out issues, as well as environmental considerations. However, the process went smoothly and, in the end, 98 of the gasoline stations were divested to Husky, an established player in the retail gasoline industry that, prior to the divestiture only had a toehold presence in Southern Ontario.Footnote 12

4. Quebec and Ontario gasoline cartel cases

  1. In June 2008, the Bureau announced that investigative efforts had uncovered an extensive retail gasoline cartel in the province of Quebec. As a result of this investigation, 39 individuals and 15 companies have been charged with fixing the price of gasoline at the pump in four local markets in the province of Quebec. As of May 21, 2013, 33 of the individuals and seven of the companies had pleaded or were found guilty, with fines totalling over $3 million. Of the 33 individuals who have pleaded or were found guilty, six have been sentenced to terms of imprisonment totalling 54 months.
  2. The successful enforcement action would, in all likelihood, not have been possible without the significant wiretap evidence obtained by the Bureau. The wire taps took place from March to June 2005 and from December 2005 to April 2006. Numerous alleged price fixing incidents were documented through the use of these wiretaps, including one that involved more than 20 separate gas stations.
  3. In addition to the investigation in the province of Quebec, the Bureau has investigated gasoline pricing in the province of Ontario. Following this investigation, four companies plead guilty to fixing the price of gasoline at the pump in three local markets in Ontario. These companies were fined a total of more than $2.5 million.
  4. It is important to note that these enforcement actions took place under the former criminal conspiracy provision, which required the Crown to prove that the agreements prevented or lessened competition “unduly” in the relevant markets. However, effective March 2010, this provision was amended to create a new criminal provision that makes agreements between competitors to fix prices, allocate markets, or restrict output per se illegal. With the removal of the requirement to prove “undueness” element, the Bureau expects that future criminal conspiracy investigations will likely move forward more quickly.
  5. Also, in September 2010, the Bureau published the Leniency Program, which complements the Immunity Program. Under the Leniency Program, a recommendation for lenient treatment may be available for an organization or individual that does not qualify for immunity, provided that it terminates its participation in the cartel, cooperates fully with the Bureau’s investigation and any subsequent prosecutions, and agrees to plead guilty. The Immunity and Leniency Programs have proven to be the Bureau’s best weapons for combating anti‑competitive agreements. For example, the Bureau’s investigation of gas prices in Ontario benefited from cooperation provided under both of these programs.
  6. Enforcing the conspiracy provisions in the Canadian gasoline market continues to be a high priority for the Bureau. For example, in addition to the convictions secured to date, further criminal proceedings are scheduled in 2014 for other parties to the gasoline price‑fixing cartel in Quebec, including Irving Oil and a number of individuals.

5. The abuse of dominance examinations

  1. In the past, numerous concerns relating to road fuels have been voiced by commentators, and the general public, in Canada. Generally, these have focused on complaints about high retail prices or concerns that major incumbents were attempting to predate independents out of the market. Recently, these concerns appear to have abated, though this may reflect the fact that there have been fewer exogenous shocks experienced of late.
  2. Since 1990, the Bureau has conducted six major investigations related to price spikes in the gasoline industry and each time issued a comprehensive report describing its findings. The Bureau specifically looked at whether price increases stemmed from anti‑competitive acts or from market forces. In these cases, no evidence was found to suggest that periodic price increases resulted from a national conspiracy to limit competition in gasoline supply or from abusive behaviour by dominant firms in the market. Instead, the Bureau concluded that market forces, such as supply and demand and rising crude prices, were largely responsible for the price spikes.
  3. The Bureau found no evidence of pricing resulting from a coordinated attempt by a group of incumbent gasoline retailers (the “majors”) to discipline or eliminate independent retailers. In support of this conclusion, the Bureau noted that the majors have a different number of stations in local areas, sell different amounts of gasoline, and locate their stations in different areas. All these factors imply that the majors do not have the same incentives to behave in a coordinated fashion. Given this, the observed trend of exit over time by many independent retailers more likely reflects the evolution of the industry to larger retail outlets with higher throughput.
  4. These conclusions were based on economic and accounting work the Bureau commissioned to understand what drives margins in the retail gasoline industry. The Study, “What Determines the Profitability of a Retail Gasoline Outlet? A Study for the Competition Bureau of Canada,” prepared by LECG, suggested that a station’s volume of gasoline sales is the largest driver of profitability, as it means there are more customers to buy convenience store items and other services in addition to their gasoline purchases. Furthermore, it found that ancillary profits are comparable to the per litre profits derived from the sale of gasoline.
  5. In 2005, the Bureau conducted an in‑house study to test whether the large price increases observed in the spring and summer of 2004 were the result of anti‑competitive acts. The data analysis was based on the Conference Board study, “The Final Fifteen Feet of Hose: The Canadian Gasoline Industry in the Year 2000”, released in February 2001 and sponsored by Industry Canada and Natural Resources Canada. The empirical tests were conducted for 10 cities across Canada: Saint John, Halifax, Quebec City, Montreal, Ottawa, Toronto, Winnipeg, Regina, Calgary and Vancouver. For each of these cities, monthly retail prices from MJ Ervin and monthly wholesale prices from Bloomberg for unleaded regular gasoline were obtained. Crude oil prices and American wholesale prices were also obtained from Bloomberg.
  6. The empirical analysis the Bureau conducted suggested a fairly close relationship between Canadian wholesale prices and American wholesale prices. It also suggested that the relationship changed during the period of May 2004 to August 2004, but only in the Prairies. The analysis suggested that this may be explained by the greater difficulty in obtaining imported wholesale gasoline from the United States compared with the situation in eastern Canada and Vancouver. In sum, the analysis found no unusual price behaviour in the Canadian gasoline industry (i.e., it found no evidence of price effects that could have been explained by anti‑competitive behaviour).

6. Advocacy

  1. Advocacy is an important part of the Bureau’s mandate. In the road fuel sector, however, concerns voiced by policy makers, the media and consumers have often raised issues that are beyond the Bureau’s mandate.
  2. From a competition policy perspective, businesses are generally free to set their own prices, at whatever levels the market will bear. Prices being “too high” or charging high prices at times of actual or anticipated excess demand do not, in and of themselves, constitute a violation of the Act. High prices are a concern only when they are the result of anti‑competitive conduct.
  3. The Bureau has no ongoing monitoring role in the road fuel sector (or any other sector of the economy) nor does it function as a price regulator. While Natural Resources Canada, a separate federal government department, has the responsibility to monitor road fuel prices, the Canadian federal government does not regulate road fuel prices. Some Canadian provincial governments, however, have recently chosen to regulate road fuel prices. Specifically, Nova Scotia, New Brunswick, Newfoundland and Prince Edward Island have imposed maximum retail prices while Quebec has imposed a minimum retail price. Industry commentators, such as the Consumers Council of Canada, observe that the main purpose of these regulations is to reduce price volatility and to protect small retailers.
  4. As noted above, the Bureau conducted an in‑house study in 2005 to support its enforcement activities under the Abuse of Dominance provisions. In particular, the study examined the price fluctuations observed in the summer of 2004 to determine whether the prices were the results of competitive forces or some other factors. The study also examined the issue of asymmetric pricingFootnote 13 in the Canadian gasoline industry.
  5. The results from the empirical analysis suggested no systematic changes in the relationship between retail prices and wholesale prices.Footnote 14 Instead, the analysis suggested that the observed changes may simply reflect abnormal conditions prior to the period of interest. The results also found no evidence of asymmetry. In particular, the analysis indicated that retail prices adjust in the same manner following a decrease or an increase in wholesale prices.
  6. Through the Bureau’s enforcement experience and in‑house study, it has developed expertise in the road fuel sector. The Bureau has been called to appear before Parliamentary committees on several occasions to field questions on issues such as the high price of road fuels being charged to consumers and asymmetric price adjustments. Much of the Bureau’s advocacy efforts related to road fuel have involved educating policy‑makers, commentators and the general public on the limits of the Bureau’s mandate as it relates to these pricing concerns. Despite advocating the Bureau’s limits on its mandate in this sector, it continues to be called upon to address concerns of high price of road fuels.

7. Conclusion

  1. One of the Bureau’s priorities has been to protect competition through enforcement actions, such as merger review and cases under the conspiracy provisions. The Consent Agreement in Suncor/Petro‑Canada merger case protected and promoted the incentive and ability of sources of supply located in Quebec to respond in the event of a post‑merger price increase in the GTA. In addition, enforcement of the conspiracy provisions in the gasoline market has deterred anti‑competitive conduct and helped promote confidence in the integrity and fairness of marketplace outcomes.
  2. The Bureau has undertaken an examination of other forms of potentially anti‑competitive conduct (such as predatory pricing) in the gasoline industry and has studied asymmetric pricing. These efforts have been concluded as no evidence supporting the concerns alleged was uncovered. Concerns voiced by policy makers, the media and consumers often raise issues that are beyond the Bureau’s mandate of remedying anti‑competitive conduct.
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