Remarks by Don Mercer, Assistant Deputy Commissioner of Competition

Review Task Force
Ontario Gas Prices
Ottawa

March 3, 2000

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I would like to thank you for inviting me to speak here today. I welcome this opportunity to discuss the Competition Bureau and our role in the Canadian petroleum markets.

With prices at an all time high, gas is an extremely hot topic these days. For the Competition Bureau, gasoline has been, and continues to be, a top priority. We have dedicated many resources to studying, examining and inquiring into this market; we are committed to ensuring that this market is as competitive as it can be. A fair, efficient and competitive marketplace provides consumers with the lowest prices and encourages companies to innovate and offer new product choices.

It is important to note that the federal government does not have constitutional authority to regulate prices, except in a national emergency. That responsibility rests with the provinces. Most provinces have decided not to regulate but to let market forces determine the price of gasoline. As a matter of general principle, there is no doubt in my mind that the best regulator of gasoline prices is a competitive market. Prices set by government rather than the market usually result in higher prices to consumers.

The role of the Competition Bureau is to administer the Competition Act, which includes criminal provisions against price fixing, price maintenance and civil provisions dealing with abusive behaviour by those in a dominant position, among others. All of these provisions apply to gasoline and other petroleum products markets. The purpose of the Competition Act is to maintain and encourage competition in Canada. This is different from protecting individual competitors or types of competitors.

I would like to point out that the provinces, or private parties, can take enforcement action under the criminal provisions of the Competition Act. For example, if the Attorney General of Canada does not prosecute an offence, then Counsel for the provincial Attorney General can conduct the prosecution. Under section 36 of the Competition Act private parties may sue for losses or damages as a result of conduct under the criminal provisions of the Act.

I encourage you to visit our website at: www.cb-bc.gc.ca - click on Consumer Info and you will find our dedicated gasoline section which provides consumers with answers to frequently asked questions, a list of Bureau activities including examinations and inquiries and links to other related sites.

By visiting our site you will see that over the years we have engaged in many activities relating to gasoline and other petroleum products and I will outline a few of them.

As many of you will recall, last summer we were faced with a significant increase in the price of gasoline, a source of complaints from many consumers who thought that these prices identified a lack of competition. The Bureau examined this gasoline price increase and we found that the gasoline price increase was the result of companies' independent pricing decisions made in reaction to normal market forces. Specifically, we found a correlation between increasing crude oil prices on world markets and wholesale gasoline prices.

Independent retailers have been particularly vocal about low gasoline prices alleging that they are predatory and intended to put them out of business. The Bureau has examined the independent retailers' situation extensively. We have undertaken studies and inquiries to determine whether independent retailers were the victims of anti-competitive behaviour in various market across Canada.

• For example, in the Chatham market in Ontario, we found that the allegations brought forward did not indicate anti-competitive behaviour. No policy of low pricing by the targeted gasoline company was uncovered. The alleged predator was found to have sold gasoline at a price below cost for one day only, but this does not constitute behaviour contrary to the Competition Act.
• We also received a number of complaints which alleged that low retail prices in the greater Vancouver area, following the entry of ARCO Products Ltd. in 1998, were pushing independent gasoline retailers from the market. The complainants claimed that the pricing policies of ARCO and other integrated gasoline companies, namely lowering retail prices, below the wholesale prices paid by independent retailers or the costs of production, would eventually eliminate competitors in the greater Vancouver area.

We concluded that the pricing policies of ARCO and other integrated gasoline companies in the greater Vancouver area have not resulted in, nor are they likely to result in, a substantial lessening of competition.

What about market power in the gasoline industry? Market power is the ability to set prices above competitive levels for an extended period of time. Market power is usually associated with high market shares, barriers to entry, and, in the case of joint control, some form of co-ordinated behaviour. The abuse of dominant position provisions in the Act are able to deal with many potential anti-competitive problems in gasoline markets. The Bureau has reviewed a number of complaints under this provision. For example, the Bureau examined the gasoline market in Saskatchewan and in Chatham, Ontario after receiving allegations of abuse of dominance, and of criminal behaviour. We concluded that the required control of the market was not present to satisfy the abuse of dominance position provision, nor were the allegations of criminal behaviour substantiated by the facts disclosed during the examination.

Recently, the Bureau examined allegations that gasoline prices were artificially high in the Kenora area as the result of an agreement to fix prices. While our examination confirmed that prices were higher in Kenora than some nearby communities, we found that there were explanations for these differences unrelated to price fixing or other anti-competitive conduct. Our examination also found that similar prices were the result of retailers independently deciding to follow price changes by other retailers, rather than the result of an agreement among retailers. We therefore concluded that higher gasoline prices in Kenora, Ontario, as compared to some nearby communities, is explained by normal competitive forces.

How do we deal with competition in a market with only a few players? The Bureau has been very effective in dealing with competition problems that could arise from proposed merger transactions in the gasoline industry by:

• blocking potential transactions which could substantially lessen competition;
• by requiring parties to divest significant assets such as refineries, terminals and service stations and;
• by requiring refiners to supply product to independent retailers.

For example, the proposed joint venture between Petro-Canada and Ultramar Diamond Shamrock in 1998 would have resulted in Petro-Canada merging its three refineries and over 1,800 service stations with Ultramar's refinery and 1,300 service stations in Eastern Canada. The Bureau examined the situation and determined that the proposed merger of these two major players in Quebec and Atlantic Canada would lead to a substantial lessening or prevention of competition. As a result of the Bureau's aggressive opposition to the joint venture, Petro-Canada and Ultramar decided to abandon their plans.

A matter currently in front of the Competition Tribunal is Ultramar Diamond Shamrock Corporation's proposed acquisition of Coastal Canada Petroleum Inc's Ottawa terminal. On February 16, 2000 we filed an application for a consent order with the Tribunal. I will not go into all the details of this case given that it will be heard before the Tribunal shortly. However, I will say that the purpose of the consent order is to maintain competition in the storage and wholesale supply of gasoline and other petroleum products in the Ottawa region. The Bureau has identified competition concerns and Ultramar has agreed to very stringent measures to ensure continued access to a competitive source of wholesale supply to independent marketers. These measures should benefit both independent marketers and consumers.

In closing, I would like to bring to your attention a case that is currently before the courts which illustrates the Bureau's ability to act where we have evidence of an offence. We recently conducted an extensive inquiry into allegations that Irving Oil Inc. and two gasoline retailers were engaged in anti-competitive pricing practices in Sherbrooke, Quebec. On September 28, 1999, Irving Oil Inc. and two gasoline retailers, were each charged with pricing offences under the criminal provisions of Competition Act.

I will add that the Competition Bureau has the appropriate tools to investigate anti-competitive conduct in the petroleum sector. The Commissioner has the authority to obtain search warrants, wiretaps, and subpoenas to investigate, and where we find evidence of anti-competitive behaviour, we do not hesitate to act quickly and appropriately. Again, I appreciate being asked here today and I look forward to further meaningful discussions with this task force.