Competition Bureau statement regarding Parkland’s acquisition of Pioneer

OTTAWA, April 1, 2016 — Following the first mediation processFootnote 1 undertaken in a Competition Tribunal proceeding, the Commissioner of Competition and Parkland Fuel Corporation (Parkland) reached a Consent Agreement that resolves the issues in dispute in eight predominantly rural retail gasoline markets in Ontario and Manitoba. In six of these markets, Parkland will divest a station or gasoline supply agreement in order to remove the overlap resulting from the merger. In two additional markets, Parkland is prohibited from increasing any profit margin that it earns on the sale of gasoline.

The mediation, conducted by the Honourable Paul Crampton, Chief Justice of the Federal Court, stemmed from the Commissioner’s 2015 application to the Competition Tribunal alleging that the acquisition by Parkland of substantially all of the assets of Pioneer Energy LP (Pioneer) would result in a substantial lessening or prevention of competition in 14 local markets in Ontario and Manitoba. The application was relatively novel in that it alleged that the merger would increase the ability and incentive of both the merged entity to unilaterally increase prices and of all competitors in the markets to more effectively coordinate pricing, to the detriment of competition.

In May 2015, following the filing of the application, the Competition Tribunal issued the first contested injunction in a merger application, preventing Parkland from implementing the deal in six local markets in Ontario and Manitoba pending the outcome of litigation. The Tribunal found there was evidence to infer that, without the injunction, there would be harm to consumers and the general economy in six of the markets at issue. In its submission, Parkland had proposed to divest or terminate its presence in 11 markets to remedy the competition concerns. However, the Tribunal indicated that Parkland’s proposal was not defined enough and sufficient to allow the Tribunal to conclude that it would address the concerns in those markets.

Based on further evidence collected following the filing of the application, the Commissioner concluded that the merger was not likely to result in a substantial lessening of competition in Chelmsford/Azilda, Ontario as initially alleged. In the context of the mediation and in the interests of a timely resolution to the litigation, the Commissioner ultimately chose not to continue the litigation to pursue a remedy with regard to the remaining five markets.Footnote 2

Background

Gasoline represents a significant cost for most Canadian households and businesses, and competition among gasoline retailers is important to Canadian consumers.

Pursuant to an asset purchase agreement dated September 17, 2014, Parkland agreed to acquire from Pioneer 181 Pioneer corporate stations and 212 supply agreements in Ontario and Manitoba. The merger was completed in June 2015, subject to the injunction issued by the Tribunal.

The eight markets subject to the Consent Agreement are listed below, along with the type of station controlled or supplied by each of the parties. Markets with a star were subject to the interim injunction order.

Markets subject to the consent agreement
Market Parkland Stations Pioneer Stations
*Subject to Interim Injunctive Order issued by the Tribunal in May 2015.
Bancroft, ON* Dealer Corporate
Hanover, ON Dealer Corporate
Innisfil, ON Dealer Corporate
Kapuskasing, ON* Corporate Corporate
Tillsonburg, ON* Dealer Corporate
Lundar, MB* Dealer Dealer
Neepawa, MB* Corporate Dealer
Warren, MB* Dealer Dealer

Analysis

Parkland and Pioneer own and lease corporate retail gas stations at which they set the price of gasoline (corporate stations). They also supply gasoline to retail gas stations owned or leased by third party operators or dealers under exclusive, long-term contracts of up to ten years (dealer stations). During the terms of these contracts, Parkland and Pioneer can increase the wholesale price of gasoline charged to dealers at any time, thereby influencing retail gasoline prices set by those dealers. As a result, in assessing the degree of market concentration post‑merger, the Bureau attributed gasoline sales from both Parkland’s corporate stations and Parkland supplied dealer stations to Parkland.

The Bureau’s review focused on whether the merger was likely to substantially lessen competition in local geographic markets where the parties overlap, either through the presence of a corporate station and/or the supply of gasoline to a dealer station. In particular, the Bureau analyzed both the unilateral and coordinated effects of the transaction, including how much the merger would impact both the ability, and the incentive, of remaining competitors to more effectively coordinate on pricing, to the detriment of competition.

The Bureau took into consideration, among other factors, the extent to which effective competitors would remain after the merger, and the likelihood of entry or expansion by other potential gas retailers in those markets.

During the course of its review, the Bureau conducted interviews with numerous stakeholders, including gasoline retailers, wholesalers and refiners, and government and regulatory agencies. The Bureau also obtained records and data from a number of market participants on a voluntary basis and pursuant to court orders obtained under section 11 of the Competition Act (Act), and consulted with industry and economic experts.

Market definition

The relevant product market is the retail sale of gasoline, because vehicle operating specifications constrain consumers in their ability to switch to other fuels.

The relevant geographic market is local. Consumers face transportation and opportunity costs to buy gasoline at more distant stations, and they are also limited to a certain volume of gasoline by the size of their vehicle’s tank. In determining what competitors to include in the local geographic market, the Bureau relied on interviews with local market participants; internal documents provided by the parties and third parties, including price monitoring, pricing strategy and competitor assessment reports; industry experts; and market visits.

Fred Scharf, an industry expert, produced a report describing which stations should be included in each local market. His analysis was informed by over 30 years of experience at all levels of the wholesale and retail gasoline business, visits to the markets, documents and data of the parties and third parties, and included:

  • The relative strengths and weaknesses of the parties and other stations in the areas (based on location quality, convenience and marketing effectiveness);
  • Traffic arteries, roadways and consumer traffic patterns;
  • Boundaries, both natural and man-made, that could impact competition among gasoline retailers;
  • Population information;
  • Where available, area growth plans;
  • New retail gas station entry or possible exit; and
  • Retail activity outside the gasoline industry in the areas that would impact consumer and competitive behaviour as it relates to fuel competition.

Unilateral effects

The Bureau found that, pre-merger, Parkland and Pioneer competed for the retail sale of gasoline in local markets where they each operated a corporate station. The Bureau also found that Parkland and Pioneer competed in local markets where one operated a corporate station and the other supplied gasoline to a third party dealer, or where both supplied gasoline to third party dealers. Parkland is able to increase retail prices at its corporate stations because it decides the price at the pump. Parkland is also able to materially influence the retail price of gasoline at dealer stations it supplies. The cost of fuel is the most important factor in determining the retail price of gas, and when Parkland exercises its contractual right to increase wholesale prices to a dealer, those price increases are typically passed along to consumers.

The Bureau also concluded that, post‑merger, Parkland would have an increased incentive to raise retail prices at its corporate stations or prices charged to third party dealers it supplies in the eight markets. This conclusion is informed and supported by the independent expert analysis of Dr. Igal Hendel, which stated that the degree of market power that may be exercised by Parkland post-merger must take into consideration not only Parkland’s ability and incentive to increase retail gas prices at its corporate stations, but also its ability and incentive to influence retail gasoline prices at its dealer stations by exercising its rights under exclusive supply agreements.

The analysis demonstrates that, pre-merger, a price increase would have resulted in a portion of sales being lost or diverted to a competitor, whereas, post‑merger, the newly acquired stations would now recapture a portion of these lost or diverted sales. When sales are diverted to a corporate station, they are recaptured immediately at the retail level; and, when sales are diverted to a dealer station, they are recaptured at the wholesale level because Parkland has the exclusive right to supply that station with gasoline.

Dr. Hendel constructed a model to illustrate how retail and wholesale prices would increase post-merger due to both of these effects, using inputs that included:

  • estimates of the degree to which customers could alter their purchases in response to price changes and competitors’ responses;
  • dealers’ ability to pass increased wholesale costs to consumers; and
  • calculations of the upward pricing pressures, price effects, and the deadweight loss to the economy based on the competitive impact arising from the resulting ability of the merged firm, independently or collectively, to exercise market power.

Dr. Hendel’s analysis relied on transaction data and financial information from the parties and from 19 market participants, which was obtained voluntarily or through Federal Court Orders issued under section 11 of the Act.

In the contested markets, the Bureau concluded that the merger was likely to substantially lessen competition in these markets because of the loss of rivalry between Parkland and Pioneer and the substantial increase in concentration due to the limited number of remaining competitors.

Coordinated effects

Evidence gathered by the Bureau suggests that, without the Consent Agreement, the merger would have increased the level of concentration in the retail supply of gasoline in a number of markets, significantly increasing the extent, likelihood, frequency and duration of tacit coordination among some or all of the retail gas stations in those markets.Footnote 3

Dr. Marcel Boyer, an expert who examined whether the merger would likely increase the ability for market participants to coordinate on decisions, such as pricing, found that the transaction posed serious risks to competition in certain of the markets the Bureau examined. Dr. Boyer reviewed party and third party documents and visited the local markets. He determined that the proposed transaction could increase the likelihood of coordination by:

  1. removing a particularly aggressive competitor,
  2. facilitating the exchange of information, and
  3. making the merged entity more capable of reacting to and punishing deviating behaviour.

Dr. Boyer noted that, for firms to coordinate, they need to establish terms of coordination, detect deviation or cheating by a rival, and react to (or punish) deviating behaviour. He cited a number of factors that, in his opinion, are relevant in determining whether such conditions exist to do so:

  • Limited number of competitors;
  • Similarity of products;
  • Similarity of firms (e.g. whether firms have similar costs);
  • Stable demand;
  • Degree to which firms can enter or exit the market;
  • History of prior coordination between competitors;
  • Transparency of pricing and other market information;
  • Frequency and size of purchases (e.g. do customers make small regular purchases or large infrequent purchases);
  • Credibility of punishment by the merged entity;
  • Nature and distribution of excess capacities; and
  • Possibility of punishment by the same firms in other markets.

Barriers to entry

The Bureau determined that significant barriers to entry and expansion exist in the contested markets, owing in part to market maturity, high fixed costs, and environmental and regulatory approvals. The cost to construct a new station can range from $2 to $4 million, and the time required to obtain financing, municipal approvals and complete construction outside a major urban center in Manitoba or Ontario can range from 18‑32 months.

Remedy and conclusion

Following a mediation, Parkland has entered into a registered Consent Agreement with the Commissioner, which requires Parkland to divest a corporate station or dealer supply agreement in Kapuskasing, Bancroft, Hanover, Innisfil, and Tillsonburg, Ontario, and Neepawa, Manitoba, and prevents Parkland from increasing any profit margin that it earns on the sale of gasoline to its dealers in Lundar and Warren, Manitoba.

The Commissioner accepted a resolution to the litigated proceedings to address the likely substantial lessening of competition resulting from the merger. In markets where Parkland and Pioneer have at least one corporate station, the Bureau found that a divestiture was an effective and viable remedy because it eliminates the existing overlap and thereby Parkland’s incentive to increase prices. In markets where the parties only supply gasoline to dealer stations, the Bureau was satisfied that by preventing Parkland from increasing any profit margin that it earns on the sale of gasoline to those dealers, the merger is not likely to substantially lessen competition.

The Bureau actively monitors developments in the gasoline industry. Where there is sufficient evidence to demonstrate a violation of the Act, the Bureau has taken, and will continue to take, appropriate enforcement action to address such concerns.

The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.

This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.


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