Industry Committee on Oct. 3rd, 2006

[Dane Baily]

The refining capacity is adequate. What's happened is that a lot of product is coming into southwestern Ontario from Quebec now. That has been the supply.

Ultramar has expanded. I think a few years ago they were at about 160,000 barrels a day. With the recent expansion they're working on, I think they will actually go past the largest refinery, which is 250,000 barrels at Irving. So there's huge incremental creep. That's almost 100,000 barrels a day, which is 20% more than the Petro-Canada refinery that just shut down.

So there's no question that right now Ontario is in a net import situation. They're poorly positioned. They don't have access to international crude supplies, and the Canadian crude is heavier and it's going to the south where they have cokers. That's just the economic reality of it. But your point is true that as we get tight in refining capacity, which we saw in the western area when Suncor had their fire in their upstream plant--and what people don't know is that the Suncor plant, their heavy oil plant, actually produces a lot of diesel oil--there was a shortage of diesel in the Prairies, and you know economically it's booming. The prices were higher than they should have been normally if that plant hadn't come down. So we're always subject to the laws of supply and demand, but it came back on and the premium came out of the market.

Normally, Edmonton refineries supply right through Vancouver to Victoria Island. There was product being imported into Vancouver and back-hauled up to Kamloops. It was a very tight situation.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Baily. I understand you have to go. It's five minutes after five.

I'm going to take the Conservative spot here, and after me, we'll have Monsieur Arthur.

Mr. Cleland, you mentioned, I believe, the capital cost allowance, and this has been mentioned by a number of witnesses. I just want to get on record what your recommendation to the committee would be with respect to the capital cost allowance. Some people, such as the CME and the plastics industry, recommended that we go to the two-year write-off of capital cost allowance. Do you have a specific recommendation for us on the capital cost allowance?

[Michael Cleland]

Mr. Chairman, I'll speak particularly on behalf of my own industry. In the last couple of years we've seen improvements in the capital cost treatment of the long-distance pipelines, and actually the rectification of a problem on the treatment of compressor stations.

Going forward, the thing we focused on this year is the distribution system itself, where our capital cost treatment has depreciation at 4%, and we recommend that it be moved up to 8%. That would put us on a competitive basis, for example, with Mr. Konow's distribution companies. His recommendation might be that it should go a little farther than that. In our case, it is a question of ensuring that we renew the capital stock, that we extend service to as many customers as possible, and that we are in a competitive position with our electrical colleagues.

[The Chair, Conservative, James Rajotte]

Mr. Konow, do you want to comment?

[Hans Konow]

Yes. We too have had some benefit in moving our capital cost rate from 4% to 8%. When we look at the United States, they're higher than that. We would like to see basic infrastructure go from 8% to 12%, but we also have some targeted asks that would help advance energy efficiency, and in those areas we're looking for basic.... For smart meters, for instance, we'd like to move from 8%, which is wholly unrealistic, to something more in the area of 45%, which is common for communications and software, because that's what smart meters really are; they're all about communications and the software attributes. For so-called firmware, 12% on the hardware would be fine. So there are some blended rates we're looking for.

These are targeted adjustments to try to encourage the deployment of some of these things.

[The Chair, Conservative, James Rajotte]

The Energy Dialogue Group does not have a universal recommendation. If we could ask your members if they want to provide specific ones for each industry association, that's fine. But I think in this report to the government we want to be as specific as possible so that it is acted upon.

The second issue I want to raise is the issue of an energy framework, distinguished from what was in the past the national energy program. Is your group in favour of this government adopting an energy framework to ensure that energy remains a cost advantage and that we have a diverse supply of energy, especially for the manufacturing sector?

[Hans Konow]

Absolutely. We've been working hard for a long time to try to get a framework. By that--we want to be very clear--we don't mean a rigid, top-down kind of plan. What we're talking about is a clear understanding of where the federal government's policy envelope sits and where the provincial energy policy envelopes sit, so we can examine them and make sure they're coherent in terms of a broad energy policy.

What are the messages that investors are getting when they look at Canada as a destination, which we would hope would be a destination of choice for investment in energy infrastructure? We think having a coherent policy framework would make a lot of sense. Then, of course, we step it down to what we talked about earlier in terms of regulatory coordination between federal regulatory authorities with powers and provincial regulatory authorities and powers, all to try to make it transparent, understandable, coherent, and efficient.

[The Chair, Conservative, James Rajotte]

Mr. Cleland.

[Michael Cleland]

Mr. Chairman, if I could, I'll just add a little bit to that. I fully subscribe to that. I think the important point is why we think there should be an energy framework. It is not, as Mr. Konow suggests, that the federal government should be acting in all sorts of new ways outside its jurisdiction. What we're saying is that it should be acting within its jurisdiction and doing the things it now does, but doing them in a more coherent policy context. Take energy efficiency, for example. We think it would be appropriate to situate that in a clearer policy context as opposed to just having a bunch of programs.

There is climate change--Mr. Baily talked about climate change. We can't figure out where we're going on energy and we can't figure out where we're going on climate change until we start to talk about both in the same paragraph. That has to be part of an energy framework. Then there are other pieces. Yes, indeed, we think this is an important piece of the puzzle going forward.

[The Chair, Conservative, James Rajotte]

Okay, thank you.

Mr. McTeague, are you on again?

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

I didn't expect to ask the question. I wanted to perhaps flesh it out.

[The Chair, Conservative, James Rajotte]

Okay. Could you be very brief, because Monsieur Arthur has not asked any questions yet.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

We have, Chair, I believe, until 5:30. I'm willing to allow Mr. Arthur to go first, if you wish.

[André Arthur, Independent, Portneuf—Jacques-Cartier, QC]

My problem is that my questions were for Mr. Bailey and had to do with refining. I would have liked to ask him to complete some of the answers he gave earlier. Unfortunately, he has left. So, I am just going to leave and give my speaking time to Mr. Carrie.

[The Chair, Conservative, James Rajotte]

Well, Mr. McTeague, you might as well go then.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Then the question would not be so much on refinery...but I would like to make a couple of acknowledgments to help Mr. Arthur.

And perhaps, Mr. Cleland, you could help us a bit on this.

I have today, as of about an hour ago, the various rack prices or wholesale prices for energy. And they do vary. In Quebec, for instance--and Mr. Baily alluded to this--the price of refined gasoline in Montreal is about 48.3¢ a litre, and that's before taxes, for the same type and quality of gasoline. If you're living in London, Ontario, where Mr. Shipley comes from--not quite, but very close to that region--you find that the price of gasoline is at 1.6¢ a litre more. There is this variation and fluctuation, but by regions there seems to be a tremendous amount of control for prices. No one challenges those prices.

Given the profits that are being made, and the fairly substantial wholesale profits over and above what we see in the United States at any given time, four or five cents a litre, provable today, from New York.... Mr. Baily wasn't able to answer that question, and I appreciate you may not be able to.

What, in your mind, do you think needs to be done to try to bring some degree of competition to that sector of the marketplace, given these substantial and rather important controls of prices that we're seeing in regions across the country?

[Michael Cleland]

I have to say I'm sorry, Mr. McTeague, but I do think I would be well off my patch if I were to offer comments in that area. It's not the industry for which my association is responsible.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

There is a comment here that you've made regarding substitution. In the substitution you refer to the fact that home heating fuel, which is, as we know, diesel, may drive the price of another form of another commodity. And we talked about arbitraging and speculation a while ago, through my colleague Mr. Masse.

Do you believe there is a chance for us to be more predictable as Canadians, since we are an energy producer? A lot of us know the valuation of the Canadian dollar often follows the price of energy. When energy is up, so is the currency; therefore, it's a shield against the benchmark for pricing, which is the United States, not Canada. And I'm not here to reopen that debate.

Is there any way in which you can provide, short of a regulatory regime, perhaps a more competitive regime in terms of those who supply a product? Your member companies, I would assume, include the propane industry.

[Michael Cleland]

No, they don't.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

It's a very troubling industry, as the chair will remember, because of course there's virtually only one company in Canada that provides it, and we have a competition bureau that was asked to give some comment on it, that felt it was a very dangerous situation for consumers if only one company could produce it.

How do you think we can get to the point where we can assure Canadians that all the money they're investing, including what Mr. Baily said a little earlier about the Toronto prices and the big refineries at St-Romuald...? In my region, in Toronto and London, an enormous amount of tax money was spent building pipelines to ship gasoline and oil to the west. That line has now been turned around to allow gasoline to flow the other way into Toronto, with the predictable effect that we're paying higher prices in the heartland of where manufacturing is taking place. Now, that's not to exclude other regions, but it makes us rather uncompetitive.

How can we respond to that when local competition is not allowed to flourish in such places as Toronto, and not just on gasoline, obviously, but on other products?

[Michael Cleland]

Again, I would have a hard time commenting on what happens in refined-product markets.

I think this is instrumented in the natural gas industry. The key there is that natural gas is traded in highly competitive markets, where you have liquid trading hubs. One of the biggest North American trading hubs is at Dawn in southwestern Ontario; others are in Chicago, in Henry Hub in Louisiana, or at AECO in Alberta. Those liquid trading hubs--lots of pipe, lots of storage, lots of physical gas available--create opportunities for people to buy and sell gas. And if you look over the last fifteen or so years, it has been a very competitive market.

So it's about infrastructure and it's about transparent markets.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Do you think Canada is well placed as far as its mix of various types of fuels and energies that exist, and not just in terms of hydro-electric, not just in terms of nuclear? We have coal, gas, propane, and LNG being used potentially down the road. Do you see manufacturing and others being kept on a firm footing as far as assurance of a competitively priced product is concerned? I recognize that much of these are the result of international pricing. Our mix of energy is perhaps one of the most enviable in the world, including the infrastructure that supports it. Do you believe in the next ten to twenty years that they will continue to be seen generally as a competitive advantage for Canadians, and manufacturers in particular?

[Michael Cleland]

I would certainly agree with you. We are in an extremely enviable position. I doubt there is any country in the world that is in a more enviable position in terms of the availability of energy and the reliability of the system for delivering it.

Will we be in a better position going forward? Yes, subject to a couple of caveats: if we get the investment conditions in place, particularly regulatory conditions; and if we get public support to put that investment in the ground. That's absolutely key. We need to work with the public to make sure they are with us, because right now they're not stepping up in favour of anything, whether it's wind power, new generation, or new pipelines.

So we need to work on that. This is an important role for government.

[The Chair, Conservative, James Rajotte]

Thank you.

We're going to Mr. Carrie for five minutes.

[Colin Carrie, Conservative, Oshawa, ON]

Thank you very much, Mr. Chair.

We mentioned a little bit about what government can do for the manufacturing sector, and I just wanted to get you on the record. With the government coming forth in our latest budget with the GST cut, the corporate tax cuts, and looking at a decrease in capital taxes, would you say it's true that at least we're on the right track with regard to taxation?