Newfoundland’s Oil Price Regulation:
Cure Worse Than the Disease
by Peter Fenwick
Laws, like physicians, should help, or at least do no harm.
That advice from Hippocrates is being ignored by the Newfoundland government as it brings in a cumbersome, complex and costly gas and fuel oil pricing law. It is a cure worse than the disease.
The Bill, now at second reading in the Newfoundland House of Assembly, will establish an all-powerful pricing commissioner who will be able to establish prices at each and every gas station in the province. In the long run it is likely to increase prices not reduce them.
For a province that resisted pressure to bring in price controls for years it is also a major flip flop.
Two years ago energy minister Roger Grimes rejected oil and gas price regulation, arguing that gas prices would normally be higher in a regulated market. But in his recent successful campaign to become premier he reversed his position. Hard pressed by his populist opponent he seized on gas regulation as a way to build up his credibility as a grass roots politician. He won by 14 votes on the second ballot. The result is Bill 4.
Although modelled on the PEI legislation, it is substantially more complicated, giving an oil price czar the right to set prices in up to ten different zones across the province. And if that is not enough, prices can be set on a station by station basis. The industry is worried that the legislation could transform the industry into a virtual utility. Even those who lobbied for the legislation, while still supportive, concede that it will not lower prices.
The price commissioner will also be able to regulate home heating fuel prices, but the province has yet to figure out how heating fuel prices, that are often bundled with burner service contracts, can be effectively regulated.
The Browne Report
Organised oil price dissatisfaction dates back to 1996 when Newfoundlanders Against Gas Gouging (NAGG) was founded in central Newfoundland. At the time they brought their complaints to their MHAs, one of whom eventually became premier.
The government then appointed St. John’s lawyer Dennis Browne to investigate the oil industry. His conclusion was simple: “[He] found no evidence to support price regulation.”
He did recommend several measures to improve petroleum product marketing, however. His main recommendations were designed to increase awareness of price differentials across the province and allow consumers to bring pressure to bear on gas stations with higher prices.
Newfoundland also experienced a drop in the volume of gas being sold in the nineties. Oil companies reacted by closing stations. While urban retailers became more efficient, Browne worried that these closures might lead to reduced competition in rural areas. Yet that rationalization has not led to increase profits for the station operators; in St. John’s their margin dropped by half since 1990.
In the face of this report the provincial government avoided gas and oil price controls and instituted a system of publishing the price of gas in various parts of the province.
But then the price of crude oil was $10 a barrel, today it is almost $30. Public opinion in Newfoundland now appears to support the regulation of oil and gas prices. This last winter has been especially hard, with governments moving to rebate homeowners who burn oil for heating purposes.
Is the problem gas prices, or taxes?
Yet gas prices have not risen as rapidly as the price of crude even though almost 90% of the price increase of the last few years was due to increases in crude oil and taxes. Indeed, almost half of the cost of gasoline is taxes. Newfoundlanders pay 37.1 cents in federal and provincial taxes on every litre of gas, while other Atlantic Canadians pay between 27.7 and 33.4 cents. On April 1st the non-tax portion of the price of a litre of gas in St. John’s was actually less than in regulated Charlottetown, and a bare one to two cents more than in Halifax and Saint John.
In the last two years oil prices in St. John’s rose by 29 cents, almost 22 cents of which went to the price of crude, while a further four cents were collected by governments through increased HST. The refiners, distributors and the dealers netted less than four cents. In PEI the flat tax is less than in Newfoundland, and PEI has exempted gasoline from its retail sales tax.
Which may be why the Grimes government is bringing in gas and oil regulation instead of reducing taxes. Both gasoline taxes combined bring in about $200 million year, an amount that would drop substantially if the province were to charge the same gasoline taxes as Prince Edward Island.
Is there competition in the gasoline market?
Last year the federal government commissioned the Conference Board of Canada to study the issue and report back. Their conclusion was the same: “Consumers in Canada are well served by the current market system that determines market prices.”
The Conference Board also found that the high volatility of gas prices that Matthews used as an excuse for bringing in regulation was due, not to gouging, but to the actions of a highly competitive market. If one gas station tries to increase its market share it can precipitate a price war. That fluctuation may be exasperating to consumers, but it is how markets remain efficient.
Both Browne and The Conference Board found that what variation in the price of gasoline there was, depended on the nature of the market in each area. In a city with a number of independents, with large cross subsidized outlets, the consumer benefits. In more rural areas where there are fewer retailers and the throughput is smaller, the price is higher.
Gas price regulation and rural Newfoundland
It is not surprising that NAGG was started in rural Newfoundland where price comparisons with St. John’s angers consumers. In Newfoundland and Labrador gas sales average one million litres per station, less than half the Canadian average. In recent surveys St. John’s retail margins were found to be two to three cents per litre above the Canadian average, but one to two cents less than in regulated Charlottetown.
But the bill will not help rural Newfoundlanders much. The price commissioner will be able to establish up to ten different pricing zones, all with different prices. But even within those zones the commissioner will be able to vary prices. Presumably the smaller, less cross-subsidized outlets, will be allowed to charge higher prices, a situation likely to lead to their rapid demise. Gas prices in NAGG’s hometown of Grand Falls-Windsor will still be higher than in St. John’s.
Apart from the difficulty of setting prices for the 545 outlets in the province, the establishment of maximums will inevitably lead to hardship for the few independent distributors just as it has in PEI. In that province distributors have to pay a fluctuating rack price while they deal with a set retail price. The pressure on them is likely to make their existence even more precarious, and in the long run lead to less competition. It is the same flawed pricing regime that is bankrupting California electrical utilities.
And while the province will attempt to cope with that problem by adjusting prices monthly, it still causes problems. In PEI hearings and delays have meant distributors have lost money for as much as 90 days when prices rise. In the April 24 edition of The Guardian a PEI distributor complained that he is losing six cents a litre on the gas he is selling, a loss that has him using his home as security to stay in business. Driving independents out of business is no way to lower prices.
The nightmare of price regulation
From an economic standpoint, the regulation of prices is fraught with difficulties. Set too high, the price subsidizes high cost, inefficient dealers, while it gives windfall profits to the efficient. Set too low the price will drive otherwise efficient sellers out of the market.
The regulation of oil and gas prices will also slow the move to larger, more cost-efficient outlets that can subsidize gas sales with other revenue. In the long run that will only lead to increased inefficiency and higher costs. A minimum price will keep even inefficient dealers in business. The price will tend to rise over that which the market, with its long term discipline, would have set.
But the legislation does not promise to lower the cost of petroleum products. As the minster said when he introduced the bill into the legislature, “I would say at the outset that one of the things that this bill will not necessarily accomplish is to ensure that there will be lower prices…”
Given the historic opposition of the government to imposing gas regulation it is clear that this is a smoke screen designed to curry political favour, and to obscure the role taxes play in keeping oil prices high. The legislation is designed to reduce criticism rather than oil prices. When Matthews introduced the bill he said “So, on the basis of the lack of confidence… by the people of the Province, and on the basis of the… representations that all of us have had from the general public,… it is appropriate to bring in a petroleum products regulatory regime…”
Nowhere does he say that it is a good idea.
A better strategy
But there was another way to go.
Both Dennis Browne and the industry argue that some measures to increase competition should be implemented. Both look for a stronger monitoring system that would produce reliable data on oil prices and more importantly, on costs in the industry. An efficient market needs accurate and timely price information.
Indeed the Progressive Conservative Opposition in the House of Assembly has proposed a watchdog system without setting fixed prices. In debate on Bill 4 their critic said “We will create a petroleum products monitor to ensure monitoring and disclosure of gas and oil pricing for consumers.” Even the Consumers Association of Canada is on record as being opposed to price regulation.
The Canadian Petroleum Products Institute (CPPI) also opposes the regulation of prices, but is supportive of a Petroleum Products Commissioner who would monitor the industry and inform the public. They have even agreed that the Commissioner should establish price guidelines. Under their suggestion the consumers would be able to compare the price at the pump with what the commissioner deemed fair and decide accordingly.
A system like that would improve the flow of information, but would not force the province to adopt an extremely complicated pricing system that stifles competition and leads to higher prices.
In the case of Bill 4, the cure is substantially worse than the disease.
Peter Fenwick, a Newfoundland writer and broadcaster, is the former Director of Communications of AIMS and a former member of the Newfoundland House of Assembly
This article was originally posted on the AIMS website on 25 April 2001