Address to Rotary April, 2007
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the Charlottetown Rotary Club
April 2, 2007
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.
|There are three general areas that I'll cover today. I will give you a
brief overview of the petroleum industry in the province, address some
misconceptions about the industry and then review for you the Commission's
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.
||By way of comparison, it is estimated
Ontario consumes about 16 billion litres of gasoline a year or, put
another way, about as much in four days as the Island does in a year. The
US consumes more in three hours then we do in a full year.
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
|The Commission licenses everything
from the truck that delivers heating fuel to your home to the corner
store that sells propane.
The 208 retail outlets licensed in
2005 included 40 stations, 68 merchants, 70 marine facilities, and 30
locations where only propane is sold.
||Specifically looking at gasoline -
there are 108 outlets in the province and of these - 24 are self serve,
34 are what we class a split serve meaning they offer both full and self
service, and 50 are full service only.
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
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 a reflection of the North
American trend in retail outlets that almost 40 fewer licenses were issued
last year than a decade ago although the Island continues to enjoy a high
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
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.
||It is not all big
oil. Yes, it is true that the major oil companies have made and
continue to make record profits, but that doesn't mean those involved
in the industry on the Island make record profits nor does it mean we
can force the majors to share those profits with us.
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.
|Therefore, while the
outlet may be branded or flagged as a major oil company, the person
paying all the bills is most likely a local business person. In fact,
in many instances, even the supply of fuel to the outlet is handled by
a company other than the major oil company itself, as the major oil
companies focus on exploration and refining. This contrasts with the
past when the major oil companies tended towards vertical integration
- owning everything from the well head to the gas pump.
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
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.
|Another common assumption is that
the Commission's function is to set the price from the point of view of
protecting consumers. The purpose of the Petroleum Products Act as stated
in 1988 when full price regulation was assigned to the Commission is
stated as follows:
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
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
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
|Yet, another assumption is that
price of crude is the only determining factor in pricing. In fact, there
are a number of pieces of information considered in making a pricing
decision and crude is a minor one.
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
||In our case, there are three main
products tracked, gasoline, diesel fuel and home heating fuel. Each is
subject to various market forces so that there are times when there can be
more pricing pressure on one product than the others.
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
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
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.
|Now to the pricing system:
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
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.
|Our pricing process begins with the
New York Mercantile Exchange spot market prices. New York is a major
trading point for oil and oil products. The Commission buys daily pricing
information from an expert company in New York so that we have the
accurate daily closing on the commodity fuel prices. We then do our own
conversion into Canadian funds based on the Bank of Canada daily rate and
the result is the Canadian cents per litre cost of New York harbour spot
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,
|The Commission also tracks the daily
closing of the barrel price for crude and monitors changes in crude prices
because crude, while not the only factor, is still a factor in determining
the price you pay.
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.
||Therefore, we know what months have
higher volumes and those which have lower volumes for each of the fuel
products. This provides the Commission with another piece of data to judge
the return to the industry and if they are below margin how much that is
costing them, and if they are above margin how much they will make. Or
from the consumer perspective how much more they are saving or paying.
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.
|A Commission staff person monitors
world oil prices, activities and the various factors that may have a
pricing impact and formally reports that information to the Commission
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
The Commission does spot checks to
ensure compliance with pricing orders.
|The Commission has full discretion
in the setting of prices as well as in the timing of pricing decisions.
This means, for example, that we are not required to strictly follow the
model, but rather it is used as one tool of many in making a final price
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
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.
||Each week the United States
department of Energy produces a report which indicates the status of crude
imports, refinery efficiency, and inventories of gasoline, diesel and
heating fuel. That report influences the market.
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
|We are also in a situation where
world production and consumption are close, less then a million barrels a
day, so traders watch the world wide industry and if there is a disruption
of supply in the middle east, or a pipeline leak, or ships held up by
weather or even tensions between two countries it can have a significant
impact on prices. The hurricanes of 2005 demonstrated just how much of an
impact weather can have on fuel supply and prices.
||I hope that there
are a couple of things you take away from this meeting:
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.
And finally, while you may sometimes
be upset at the oil companies, or blame the Commission for higher prices,
this is a classic supply and demand situation and if the demand for
petroleum products continues to increase, it is unlikely that prices will
drop, as overall demand is determined by the collective decisions of