Order No. P.000515-0

IN THE MATTER of the Petroleum Products Act, R.S.P.E.I. 1988, Cap P-5.1

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IN THE MATTER of non-crude oil related applications filed pursuant to Section 32 of the Petroleum Products Act, supra, by various licensed wholesalers concerning prices charged for motor fuels and heating fuels to dealers and consumers in the Province of Prince Edward Island.

Monday, the 15th day of May, A.D., 2000

BEFORE

Wayne D. Cheverie, Q.C., Chair
Ginger Breedon, Vice-Chair
Elizabeth MacDonald, Commissioner

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Decision

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I.  INTRODUCTION 

The Petroleum Products Act, R.S.P.E.I. 1988, Cap. P-5.1 requires the Commission to approve the prices of all petroleum products sold in the Province.  On 28 August 1991, the Commission issued Decision and Order No. P.910828 (“the 1991 Order”) which established, among other things, criteria for the filing of applications by licensed wholesalers pursuant to the Act, supra, with respect to non-crude oil related costs. 

As a result, the Commission received applications in accordance with this Order on or before 15 March 2000, which applications were advertised in the public press as provided for in the 1991 Order.  The Commission agreed to receive public input with respect to these applications up to and including 15 April 2000, and prepared a viewing file containing copies of all applications and supporting documentation received, with the exception of a portion of support filed with one application, which particular data was filed in confidence.  This file was viewed by a total of five persons—a representative of one of the applicants, two retail dealers, a representative of the P.E.I. Petroleum Marketers’ Association and a self-employed consultant.  No member of the general public took advantage of the opportunity to view the applications.

The Notice of Applications, however, resulted in letters in opposition to the increases sought being received from Grant Moase of Summerside; Amber Doucette (address unknown); H. Smets of Charlottetown; Martha M. Fraser, President of Charlottetown Meals on Wheels Inc.; and Donald C. Ramsay of Summerside.  The P.E.I. Petroleum Marketer’s Association, Charlottetown filed a letter in support of increased prices, and suggested changes in the handling by the Commission of the applications made by wholesalers for price changes.  A comment relating to the applications and the proposed investigation into petroleum pricing by the federal government was also received by e-mail from Phil Ferraro.

After reviewing all documents relating to these applications, the Commission concluded that a public hearing would be unnecessary. As required, these applications are supported by sworn declarations as to the information filed by the applicants.

It was noted, however, that a number of applicants suggested changes in the process in place by the Commission with respect to fixing just and reasonable prices, and particularly with respect to the timing of applications relating to crude costs.  The Commission believes there is some merit in the suggestion relating to more frequent filings.  Therefore, the Commission intends to deal with this matter in the next scheduled review of crude cost-related adjustments, and will comment further on this issue later in this Decision.

With respect to the individual applications for varied pricing adjustments, the Commission has reviewed each on its own merits, having given the opportunity to all interested parties to participate in accordance with the 1991 Order.  This Decision and Order provides for the review of non-crude costs annually unless special circumstances require a change.  It sets out provisions for a review of the non-crude related costs for the previous year (in this case 1999) against those same costs for the year previous to that (in this case 1998).  Most of the applications received did not meet this specific provision, and this point will be covered in more detail later in this Decision.  However, the Commission has reviewed the pricing requests contained in these applications in light of market conditions in other regions (especially within the Atlantic region), the general economy and other financial indicators.  In addition, the Commission has considered the public input received, and the general impact of the increases indicated by the most recent upward adjustments related to crude costs which were approved effective 1 May 2000.

As all parties have now had a reasonable opportunity to provide input with respect to the non-crude related component of pricing, the Commission feels that it is fitting to issue its Decision and Order without further delay.

II.  REVIEW OF NON-CRUDE PRICING APPLICATIONS

It should be noted at the outset that the Commission had received some applications for pricing increases prior to the normal filing date for non-crude related pricing adjustments of 15 March 2000.  The Commission considered the difficulties of dealing with non-crude related applications of a significant nature outside the guidelines of the 1991 Decision and Order, and felt that it was necessary to maintain the process previously established in order to provide equal opportunities to all wholesalers operating in this jurisdiction.  As mentioned in the introduction, this process allows for dealing with non-crude related factors once a year based on changes in costs over that particular one-year period against the previous one-year period.  As a result, these applications were indicated as being premature, having been filed outside the criteria set out in the 1991 Order relating to special or extraordinary circumstances, and the applicants were so advised.  Three non-crude related applications which were considered to be the result of special circumstances were approved in the meantime—one respecting an application by Imperial Oil Limited and two respecting applications of Petro-Canada.

The Commission did, however, also issue an Interim Order No. P.000215-0 on 15 February 2000 authorizing a 1.0 cent per litre (“cpl”) increase in the prices of stove oil and an increase of 2.0 cpl in the prices of furnace fuel over and above the prices then in effect for all wholesalers.  This step was taken after review of the abnormal situation which occurred during the period January to mid-February which had the effect of depressing the suppliers’ profitability with respect to these particular products during the heavy heating period.  These increases were authorized effective 17 February 2000 and have remained in effect to this date.

The Commission believes that the regulatory process in place in this jurisdiction allows over time for the reasonable recovery of under-earnings which may result from price spikes such as those experienced this past winter.  The process is designed to eliminate the extreme highs and lows.  In addition, some of the reason for the loss of wholesale margin claimed to have been experienced in this jurisdiction has been created over a considerable period of time by voluntary price reductions, especially with respect to dealer prices of gasoline, as a result of attempts by wholesalers to better position themselves so as to gain or retain market share.

A summary of the applications under consideration and as published is as follows:

1.  ULTRAMAR LTD. – An application for a 5.2 cpl increase in dealer prices of all grades of gasoline and a twelve-month temporary increase of 2.0 cpl in the dealer and posted consumer prices of diesel fuel, as well as in the posted consumer prices of stove oil and furnace fuel.

2.  SHELL CANADA PRODUCTS LIMITED - Application for a 9.4 cpl increase in dealer prices of gasoline and a 3.2 cpl increase in the dealer price of low sulphur diesel fuel, as well as a 2.2 cpl increase in the posted consumer price of gasoline, a 0.6 cpl decrease in the posted consumer price of both grades of diesel fuel, a 0.1 cpl increase in the posted consumer price of stove oil and a 1.8 cpl increase in the posted consumer price of furnace fuel.

3.  IMPERIAL OIL LIMITED - Application for a 1.2 cpl increase in the prices of all dealer and posted consumer product prices.

4.  IRVING OIL LIMITED - Application for an 8.6 cpl increase in the dealer and posted consumer prices of all grades of gasoline and a 4.9 cpl increase in the price of dealer low sulphur diesel and posted consumer prices of both grades of diesel.  Application requested no change in the posted consumer price of stove oil, and a 3.3 cpl increase in the posted consumer price of furnace fuel.

5.  PETRO-CANADA - Application for a 5.0 cpl increase in the dealer prices of all grades of gasoline and low sulphur diesel fuel, and an application for a 2.0 cpl increase in the posted consumer prices of all products (gasolines, diesel, stove oil and furnace fuel).

6.  CO-OP ATLANTIC - Application for a 10.0 cpl increase in the dealer and posted consumer prices of all grades of gasoline and a 7.7 cpl increase in the dealer and posted consumer prices of diesel fuel, as well as an increase of 6.7 cpl in the posted consumer price of stove oil and a 5.7 cpl increase in the posted consumer price of furnace fuel.

As is obvious from the above summary, the applications differ in every respect with regard to format, supporting documentation, and also in the fact that in only one case is the price increase requested to be applied equally over the total basket of refined products for which the Commission must establish just and reasonable prices.

The wide range of requested price adjustments and supporting documentation, if approved, would result in significant price differentials for participants operating in the same market.  The Commission therefore feels it is necessary to view these applications in a more collective fashion.

As a result, the Commission has had to rely not only on the filed applications and other sources of information as outlined in the Introduction, but more specifically on information provided by M. J. Ervin & Associates Inc., Independent Consultants, and on the “Fuel Fax” which is funded by the Canadian Petroleum Products Institute and published independently by M. J. Ervin & Associates in conjunction with Purvin & Gertz Inc.  Other information obtained independently by the Commission with respect to prices in effect in other Maritime Centres is also reviewed regularly.

Having said that, however, the Commission notes that in reviewing the above-noted applications, many of the applicants went much further in their presentations than assessing cost increases over the one-year period provided for in the 1991 Order.  A short summation relating to the varied aspects of each specific application follows:

ULTRAMAR LTD. – This wholesaler filed its application prior to the issuance of the Commission’s Interim Order relating to upward adjustments with regard to stove oil and furnace fuel referred to earlier.  As a result, amendments to this application became necessary prior to the 15 March 2000 deadline for filing.  These amendments left the Commission with an application requesting increases in Ultramar’s dealer gasoline prices of 5.2 cpl in order to recover previous market-related decreases which were authorized by the Commission over a considerably long period of time.  No permanent increase was requested with respect to the price of dealer low sulphur diesel, although a temporary increase of 2.0 cpl for a twelve-month period was felt to be appropriate.  This Applicant also suggested that a temporary increase of 2.0 cents per litre in the posted consumer prices of stove oil, furnace oil and diesel for a twelve-month period would be in order.  The Commission reviewed the current posted consumer prices of Ultramar Ltd. in relation to those in effect for its competitors, as well as posted prices in other areas.  The Commission is of the opinion that with the temporary increase relating to two of these three products and the most recent crude-related upward adjustment to all three products since the filing date of the amended application, that prices have been adjusted sufficiently to compensate for the spike in prices above referenced.  With regard to suggestions relating to changes in legislation, these suggestions are not within the jurisdiction of this Commission.

SHELL CANADA PRODUCTS LIMITED – As noted previously, this wholesaler has applied for a 9.4 cpl increase in the dealer prices of gasoline and a 3.2 cpl increase in the dealer price of low sulphur diesel fuel.  Shell’s application is based primarily on previously authorized market-related reductions, as well as increases specifically related to benzene reduction in gasoline, and the provision by this company of “Air Miles” in conjunction with its sales of petroleum products.  As set forth earlier, this Applicant requested a 2.2 cpl increase in the posted consumer prices of all grades of gasoline as well as other pricing adjustments relating to its other posted consumer prices, including a further increase in the price of furnace fuel.

Obviously, non-crude related costs contain a component for marketing, which component includes promotions.  In the case of this Company, it implemented the Air Miles program in the early 1990’s in two stages—firstly with regard to retail purchases, and secondly with regard to heating fuel accounts.  It is apparent that a portion of the component of pricing already established for marketing/promotions was utilized for this purpose.  While the request to increase for previous market-related reductions may have some merit, and the benzene factor (0.6 cpl) has already been substantiated to the satisfaction of the Commission and granted to two competitors, the request relating to pricing increases with respect to promotional activities currently in place is not deemed to be warranted.

IMPERIAL OIL LIMITED – This Applicant chose to apply for pricing increases of 1.2 cpl on all products based on increased refining costs resulting from higher crude costs in effect at the time of the application.  The support for this request was not expressed as a cents per litre increase based on the overall non-crude related costs in effect for 1999 over 1998—the process which is provided for in the 1991 Order.  While an increase appears to be justified in view of previously granted market-related reductions, the support for this request is somewhat flawed in light of the approach taken by Imperial.  The Commission notes that it previously approved a non-crude related increase of 0.6 cpl relating to benzene reduction in gasoline through its Decision and Order No. P.000114-3.

IRVING OIL LIMITED – This Applicant requests increases of 8.6 cpl relating to market conditions with respect to both dealer and posted consumer prices of gasoline.  Irving further proposed increases of 4.9 cpl in the price of dealer low sulphur diesel and its posted consumer prices of both grades of diesel product.  It is noted that while wholesale market-related decreases of a significant nature have been authorized over time with respect to dealer prices, (particularly gasoline), the same cannot be said for the posted consumer prices of gasoline or diesel fuel presently in effect.  This applicant deals with the erosion of wholesalers’ margins related to each product individually.  Some concern is expressed that the current dealer margins, which have not changed since 1991, somehow protect dealers to the detriment of wholesalers.  Reference is also made to discounting of posted consumer prices by wholesalers.  The Commission questions the relevance of these issues in the present exercise.

PETRO-CANADA – Petro-Canada has applied to increase all dealer prices by 5.0 cpl.  This Applicant feels that such an increase is warranted in view of previous market-related reductions.  The Commission has recently authorized Petro-Canada a 0.6 cpl increase in gasoline prices related to the requirement to reduce benzene content in accordance with new Federal Regulations (see Order No. P.000210-5).  Petro-Canada further applied for a 2.0 cpl increase in all posted consumer prices, including stove oil and furnace oil.  This request was stated to be in addition to the interim adjustments to the prices of stove oil and furnace oil previously mentioned.  Among many other statements, the following statement in support of its application was made by this Applicant:

“Petro-Canada has been directly impacted by the reduction in margin and risk associated with the environment such as crude and commodity price swings and associated lags as well as competitive adjustments by other wholesalers.  On the other hand, the dealer has remained largely protected from this volatility.”  

This Applicant included various recommendations in its presentation to the Commission relating to their perception of improvements to the pricing processes, both crude and non-crude related. 

CO-OP ATLANTIC – This Applicant requests a straight 10.0 cpl increase in all grades of gasoline in both pricing categories.  Further, this Applicant applied to increase all categories of diesel fuel by 7.7 cpl, stove oil by 6.7 cpl and furnace fuel by 5.7 cpl.  This wholesaler is not a refiner, and therefore attempts to service its customers through “spot market” purchases from other licensed wholesalers rather than on a firm contract based on approved prices, less a fixed discount.  The Commission feels that any other arrangement with respect to product pricing by those who are not in a position to do other than purchase refined product is fraught with its own risks in a regulated environment.  The Commission has not to date regulated in this regard with respect to individual agreements reached between refiners and other stakeholders in the industry.  This is an issue, however, which may need to be investigated further should the Commission become aware that competitors are being supplied with product at prices higher than those effective in this jurisdiction.

III.  DECISION

As referenced in previous orders, the Commission recognizes the difficulty of wholesalers in carving out their non-crude related costs as they relate to the Prince Edward Island market.  The Commission also understands the reluctance of wholesalers to provide information publicly which is necessary for the Commission to make proper decisions with respect to non-crude related costs.  Such being the case, it is difficult to deal with varied applications in such a way so as to achieve all the objectives of this industry.

The Commission hastens to point out, however, that the Petroleum Products Act, supra,  has as one of its goals the imposition of “universal” prices, by brand, throughout the Province.  Prices cited by others for other areas generally refer to a survey of regular unleaded gasoline, self-serve, in a particular city or area of a jurisdiction at a given point in time.  These prices can be altered at any time by either a wholesaler or a retailer.  In comparing prices available from surveys conducted in other jurisdictions with those in effect here, the Commission remains cognizant of the fact that the wholesale prices which it authorizes are effective for the entire Province, and normally remain constant for a period of approximately two months.  As a result, the system always has the potential for some element of under-recovery and over-recovery during specific periods.

All requests for pricing adjustments were assessed in relation to the currently-approved schedules of both dealer and posted consumer prices.  This exercise indicated, for instance, that if the current requests were authorized, the dealer base price (which does not include taxes and retail markup) for regular gasoline would range from a low of 36.5 cpl to a high of 44.8 cpl.  Such disparities in the market-place would surely result in the inability of several suppliers to continue to operate.  The posted consumer price (which does not include taxes) for regular gasoline would range from 44.1 cpl to 55.5 cpl.  While posted consumer prices are maximum and can be discounted for reasons related to high volume use, etc., some would suggest that such spreads would not be just and reasonable, especially in a regulated market where wholesalers operate on a reasonably level playing field.

It should also be noted that the most recent survey available with respect to furnace fuel postings in our neighboring jurisdictions indicate that in one province, these posted prices vary from 39.9 cpl to 52.9 cpl.   In another province, the postings are not as widespread, but range from 42.5 cpl to 44.4 cpl.  Accessible furnace fuel postings in the third province in this region are not readily available.  In this jurisdiction, it must be remembered that the postings cover the entire Province, are maximum prices, and remain subject to discounting.  Our current postings of furnace fuel range from 45.3 cpl to 46.0 cpl.  If the requested increases were to be granted, Prince Edward Island postings would go from 46.5 cpl to 51.3 cpl.  In light of this, and given the recent upward adjustment of 2.0 cpl awarded in the Commission’s Interim Order No. P.000215-0, no additional increases are herein granted in this regard.

It would appear that some recovery of market-related reductions in dealer gasoline prices is warranted—however, to view this situation historically would appear to be flawed in that there have obviously been other adjustments and efficiencies put in place to counteract the fact that the refining and marketing margins are stated to be lower than they were when base prices were last confirmed.  One applicant feels that an appropriate margin is one which is an average of the 1993-95 margins obtained by this wholesaler.  Once again, it must be repeated that the Order relating to non-crude pricing adjustments provides for a review of a company’s non-crude related costs for the previous calendar year in comparison to those incurred the year before.

It is obvious, however, that dealer diesel prices have not been the subject of requests for market-related decreases to the same extent as have dealer gasoline prices—with the result that in some cases, the diesel fuel prices are now higher than even the premium grade of gasoline, even though it is a product which is not as highly refined.  No further increases are authorized herein with regard to this product either at the dealer or posted consumer level.

Given all of the foregoing, and based on all the information filed, as well as the materials referred to earlier, the Commission concludes that an increase in the price of gasoline based on non-crude costs is warranted.  However, given the nature of the present applications and the variety of supporting documents, the Commission finds itself unable to order individual increases with precision.  That being the case, the Commission concluded that an increase of 1.2 cpl in the price of all grades of gasoline contained in the dealer schedules of all Applicants is just and reasonable.

In addition, both the dealer and the posted consumer prices of all grades of gasoline for the remaining wholesalers who did not receive an earlier approval with respect to the requirement to reduce benzene will also be granted an increase of 0.6 cpl if desired by those affected wholesalers. While it appears that there is some merit in adjusting gasoline prices in the posted consumer schedules of those wholesalers whose present posted consumer prices of gasoline do not maintain differentials between grades similar to those maintained in their dealer pricing schedules, this can best be accomplished at a future time in collaboration with those particular wholesalers.

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IV.   ORDER

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 IT IS THEREFORE HEREBY ORDERED:

1.  THAT an upward revision in the prices of all grades of gasoline contained in the dealer schedules of all wholesalers in the amount of 1.2 cents per litre be implemented, effective 12:01 a.m. on 20 May 2000;

2.  THAT the increases of 1.0 cent per litre on stove oil and 2.0 cents per litre on furnace fuel authorized on an interim basis effective 17 February 2000 be confirmed;

3.  THAT the dealer and posted consumer prices of all grades of gasoline sold by Ultramar Ltd., Shell Canada Products Limited, Irving Oil Limited, and Co-Op Atlantic be further adjusted upwards by 0.6 cent per litre effective 12:01 a.m. on 20 May 2000 to cover the cost of reducing benzene levels as required by the Federal Government (Imperial Oil Limited and Petro-Canada having previously been granted similar increases for this same reason), unless advice to the contrary is received by the Commission by 12:00 noon on 18 May 2000 that the implementation of this additional increase is not desired by that wholesaler;

4. THAT all other pricing adjustment requests contained in the applications under consideration be denied;

5. THAT each wholesaler provide their written comments with their next application relating to crude oil cost adjustments with respect to suggestions that the present regulatory process regarding crude cost-related adjustments be amended to a monthly rather than a bi-monthly activity, at which time this matter will receive further consideration by the Commission

6.  THAT all prices resulting from this Decision and Order shall remain in effect until otherwise ordered by the Commission.

DATED at CHARLOTTETOWN this 15th day of MAY, A. D., 2000.

BY THE COMMISSION:

Chair

Vice-Chair

Commissioner

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