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Presentation to the Charlottetown Rotary Club
April 2, 2007

Maurice (Moe) Rodgerson
Chair and CEO

I am pleased to have the opportunity to speak with you about the petroleum pricing responsibilities of the Prince Edward Island Regulatory and Appeals Commission.

Let me just say at the outset that, while petroleum pricing is probably the first thing people think of when the Commission's name is mentioned - especially today - it is only one of a number of regulatory, appellate and administrative functions assigned to the Commission. Of the 18 staff at the Commission, only one works full time in petroleum and three others are involved in terms of data input and analysis but are also responsible for activities related to auto insurance, sewer and water utilities, electric utilities and Island Waste Management.

Last year in this province we used approximately 197 million litres of gasoline, 178 million litres of home heating fuel, almost 25 million litres of diesel fuel at retail outlets, and 21 million litres of propane.

Retail gasoline sales peaked in 2002 at 203 million litres.

The Commission has a wide scope of jurisdiction under the Petroleum Products Act which goes well beyond pricing and last year we issued 328 petroleum licenses which cover wholesalers, retail distributors, tank trucks, and over 200 retail outlets.

The 208 retail outlets licensed in 2005 included 40 stations, 68 merchants, 70 marine facilities, and 30 locations where only propane is sold.

There are 84 outlets where you can get full serve and 58 where you can get self serve, but 60 percent of the gasoline volume is sold at self serve outlets. There is a trend towards self serve and that trend increases when prices are high.

Over 80 percent of the outlets are independently operated.

34 outlets sell in excess of two million litres of gasoline a year and, of those, ten outlets sell over four million litres a year. 64 outlets sell less than a million litres a year.

A large outlet in Ontario might sell 30 million litres.

It is also worthy of note that the economics of gasoline sales usually means it is associated with some other service such as a convenience store, coffee shop, fast food outlet or repair service.

In the process of doing our job and interacting with the public we also run into some misconceptions about the petroleum industry and the price setting process of the Commission.

The local service station may be owned outright by a local business person; it may be leased from one of the major oil companies and run as an independent or it may be run by the major company itself as a corporate outlet. As I have indicated, over 80 percent of the outlets are independents.

The latest North American industry trend is towards the major oil companies getting out of the retail business and we have already seen significant change here as in other markets across the country. This change is attracting some new participants to the industry as well as changing some of the regulatory dynamics.

In the past, a vertically integrated company might be willing to absorb losses in one aspect of its business because it was making money overall. Now there is an expectation that each aspect will be profitable and that is even more critical if each aspect of the industry is being provided by an independent business.

The purpose of this Act is to regulate the distribution and sale of petroleum products within the Province of Prince Edward Island for use within the province, and the type, location, and operation of facilities and equipment associated therewith, and to ensure at all times a just and reasonable price for heating fuel and motor fuel to consumers and licensees within the province.

The purpose in terms of pricing is therefore two fold in that we have a responsibility to both consumers to ensure fair pricing and to the industry to provide a viable economic environment.

We often have people expressing concern that they can't afford rising prices and, while we sympathize with that view, the Commission can not operate in isolation from the world. Since we rely entirely on imported product, and the Commission is a provincial body, there are obviously some factors that are beyond our control. We must therefore focus on ensuring that the price in this province is justified.

Petroleum prices in this province, this region and all of eastern Canada are driven by the New York Mercantile Exchange, where not only crude but refined products are traded. While crude is the base product, the refined products can react differently to market forces. Seasonal demand or inventory issues can cause products to track in one direction while crude is going in another

For example, on March 9th, the Commission adjusted gasoline prices upwards but there was no change in the price of diesel or home heating fuel. Growing demand for gasoline in the US, coupled with some supply issues in terms of refineries experiencing reduced output, continued to push the price of gasoline upwards on the commodity exchange at a more significant rate than the pressure on home heating fuel prices, which were dampened by reduced demand due to warmer temperatures.

The result is that while there is a link between crude prices and commodity prices there are in fact times when crude prices may be stable or even declining and commodity prices are rising.

And, I might just throw in there that some have suggested we only make adjustments outside the normal pricing schedule when prices are going up, in fact the two non-scheduled adjustments previous to March of this year were to implement unscheduled price reductions – that being August of last year when prices were reduced 6.2 cents per litre and October of 2005 when prices were reduced by 10 cents per lire.

In some ways the pricing system is simple; in other ways it can be very complicated.

The Commission is independent and has complete authority to determine the most appropriate method of price regulation and we do update that process from time to time.

When I joined the Commission in 2000, we were the only Atlantic Canadian jurisdiction regulating prices. Today all four Atlantic Provinces regulate prices and utilize a process similar to that adopted by the Commission.

Here in this Province the Commission sets a number of price factors. We determine the price at which a wholesaler selling product in the province can sell that product to the retailer.

We control the mark up permitted at the retail level for all grades of gasoline and for self serve and full serve gasoline, and therefore the final price at which the product is sold to the consumer.

We do not control taxes, so our decisions are based on the ex-tax price of the commodity, and then the federal and provincial taxes are factored in and the minimum and maximum consumer price determined.

The consumer price for gasoline can fluctuate in a Commission approved sleeve of 1.5 cents per litre. This is designed to permit some degree of retail competition. At times a retailer might choose to operate close to the minimum price and at other times close to, or at, the maximum Commission approved price.

This can also account for small price differences from one area to another.

We track that price every day, and over a two week period the average change in those daily prices becomes the indicated price change for the next pricing period.

In other words, prices may go up one day, down the next, but if over the course of those two weeks the average is an upward price change of 5 cents per litre, the five cents becomes what we call “the model indicated” price change for the Commission to consider. We do that for each of the three products of gasoline, diesel and heating fuel.

Propane is priced out of Sarnia, Ontario.

The Halifax rack prices – that is the posted price for refined fuel products picked up at the refinery is also recorded each day and tracked over the pricing period.

The Commission has the volumetric data on volumes of products sold by every outlet, of every company, because we require companies to report each year on the volume of product sold each month.

The volumetric data permits the Commission to factor in previous gains or loses to ensure stability in the market and fair prices for consumers and fair returns for the industry over time. This volumetric data is reviewed at every pricing meeting.

The Commission tracks the weekly, monthly and year-to-date margins and also the weighted margins which take into account volumetric data.

To provide further input into the pricing decision, the Commission monitors prices in other jurisdictions so that we can compare prices on the Island to other communities in this region and the country and this also helps ensure our modeling process is capturing the necessary data.

There is a formal pricing meeting, at which a Commission panel receives and reviews the various pieces of information and data I just referred to and then makes a pricing decision. The same process is followed for home heating fuel, diesel and propane.

As you can appreciate these sessions can be lengthy with various pieces of information discussed in detail.

Once a decision is made, an Order is issued to the industry indicating the approved prices. This includes a pricing grid which sets out the prices for the various products and the permitted mark-ups.

The Commission does spot checks to ensure compliance with pricing orders.

For example, a period of a couple of days of price spikes might suggest a price increase is in order, but the other data and information from staff reviews would indicate the spike relates to a specific situation that will be quickly resolved and therefore can be discounted or ignored.

The Commission can also vary the timing of pricing decisions and, as you may recall after the major hurricanes two years ago, the Commission moved to reviewing prices on a daily basis.

The commodity market is influenced by the actions and decisions of various traders based on thousands of pieces of information and at times even rumours. In recent weeks there was even speculation over the impact of an earlier move to daylight savings time on fuel consumption.

The US is the world's largest consumer of oil and the largest gasoline market. 40 percent of the gasoline in the world is consumed in the US.

If imports of crude are up, and all refineries are operating and there is lower demand or an increase in inventories, it puts a downward pressure on commodity prices. If imports are down, refineries are off line, or there is increased consumption and a draw on inventories then commodity prices rise

One – The Commission tracks a significant amount of data and invests a great deal of time in reviewing prices and making price adjustments, and we do so with the dual responsibility of being fair and reasonable to both consumers and those who supply your fuel needs. Decisions are made based on the very best data we can access.

Secondly, oil is a world commodity and we are not isolated from world events so what happens half way around the world can easily impact the price at the pump here.

Thank you.