Industry Committee on June 22nd, 2011

[The Chair, Conservative, David Sweet]

You'll see that I do treat every member the same, though, and—

[Dan McTeague]

And former members.

[The Chair, Conservative, David Sweet]

That's right.

That exhausted the seven minutes.

Now we'll hear from Mr. Chisu for seven minutes.

[Corneliu Chisu, Conservative, Pickering—Scarborough East, ON]

Thank you very much, Mr. Chair.

I would like to address my questions to Mrs. Mollie Johnson and Richard Bilodeau from the Competition Bureau.

I understand that the Competition Act and Canada's competition regime changed significantly as a result of the amendments passed by Parliament in March 2009. These amendments, which represent the most significant changes to the act in over 20 years, were aimed at modernizing the legislation and bringing it more closely in line with the competition laws of Canada's major trading partners. This means that you have the latest tool to protect customers.

In view of my background in engineering, and as a regulator of the largest professional engineering association--the professional engineers in Ontario--I have quite a familiarity with the complaints process, so I have to address four questions to you.

Number one, in your opening remarks you indicated that you receive an influx of complaints at the bureau when there is a spike in gas prices. Typically, what is the nature of these complaints? Could you please explain to committee members what steps the bureau takes when it receives complaints?

That is my first question. Would you like to have all three, Mr. Chair? May I?

[The Chair, Conservative, David Sweet]

Certainly. Go ahead, Mr. Chisu. Whether there'll be time enough to answer them all is another story, but go ahead.

[Corneliu Chisu, Conservative, Pickering—Scarborough East, ON]

Does the commissioner need to receive a complaint in order to begin an investigation?

How do the recent changes to the Competition Act help you crack down on anti-competitive behaviour in the petroleum sector in different regions?

What powers do you have to investigate and punish anti-competitive practices in the gasoline business?

Last, what does the typical investigation look like? If you get a well-founded complaint, what is your process for following through, and how long does it take?

[Mollie Johnson]

Maybe we'll break that up between the two of us.

I think for the purposes of today's discussion there are two parts of the amendments that I'd like to flag for you. In 2009 the Competition Act was amended. There are two provisions I think are most pertinent to today's discussion. The first was that Parliament amended our merger process. What that did was introduce a two-stage process so that it streamlined the process but also put us in a position where we're better able to receive information and get the information we need from the merging parties so we can properly and effectively assess the competitive impact of the transaction and then impose remedies as required. I think in my opening remarks I mentioned the Suncor and Petro-Canada transaction. That was the first one that we actually moved through the process in 2009. That was the first set of amendments that came through that I think has relevance today.

The second provision is the criminal conspiracy provisions. Those came into force in March 2010, so a year after the bill was passed. Those removed the requirement to prove there had been economic harm as a result of the conspiracy. It used to be that we had to prove economic harm as well as the cartel. Now all we have to do is prove the existence of the cartel—for example, that there had been fixed prices or there had been an allocation of markets. Then we also increased the penalty from $10 million to $25 million, I believe, and then from five to fourteen years.

With those new provisions, we believe we are in a much better place to first of all get the information we need when we're doing merging transactions, and then also, when we are able to prove and have evidence of a cartel, more effectively move ahead with those cases.

I think those are the relevant provisions of the 2009 amendments.

I'll turn it over to Richard.

[Richard Bilodeau]

I'll go in the order you asked your questions.

In the first one, you asked about what kinds of complaints we get when prices increase and there is a price spike. I think the most common complaint we get in those situations is basically a complaint that prices have increased and they think something's going on in the marketplace. It is the most basic complaint: prices are high and consumers don't know why. What we do in that situation is look at the market and try to determine what's going on in the market that either could explain or could not explain the price spike. In terms of gasoline and the types of complaints, that's what we look at in the initial step.

You asked also whether we need a complaint to start an investigation. The commissioner has the ability to initiate an investigation or an inquiry in a number of different methods. Usually, in the vast majority of cases, it is through a complaint. She does have the ability as well to investigate issues on her own if she identifies a concern in the marketplace or through reading the newspapers or a report on the Internet. She has the ability to start asking questions and investigate. The minister also has the ability to direct the commissioner to initiate an inquiry.

How we conduct our inquiry.... You asked a question about our powers and how our investigations are conducted. It really breaks down into four components. On the initial complaint, the initial concern that's raised either by us or by a complainant, we look at the situation, we examine the complaint, and we try to determine at the first step whether the issue that's being raised is something the Competition Act can address. Is there legislation or are there sections of the act that the conduct would apply to?

If the answer to that is yes, we'll dig a bit deeper. We'll start asking questions of the complainant, try to understand what's going on in the marketplace, do research on the Internet, potentially talk to other players in the marketplace to better understand the dynamics and what's going on.

After that preliminary step, if we feel there are serious concerns or grounds to believe that the act has been potentially violated, we have the ability to recommend to the commissioner, and the commissioner can follow this to initiate a formal inquiry to dig deeper and to determine the facts of the situation.

By virtue of going on inquiry, she has access at that point to a variety of what we call statutory investigative tools. She has the ability to subpoena documents, subpoena witness statements, and subpoena written responses, if you like. In the case of criminal investigations, she has the ability to ask the court—and again for subpoenaing documents we do need permission from the court—for the ability to search businesses, what we call search warrants.

The final step of that investigation is that if we feel there is conduct that needs to be addressed, we will in most cases talk to the targets of our inquiry and seek remedy at that point. And in the cases where we are not able to secure a remedy we think is necessary, we'll address our matter to the tribunal in the case of civil matters or to the criminal courts.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Bilodeau. It's amazing that you got all those answers in.

I just want to advise members that we'll follow the Standing Orders. We'll get as many questioners in as we can, and when the bells ring we'll adjourn.

As one last thing, I would like to extend the appreciation of the committee to our witnesses, because we will quickly gavel and head over for votes afterwards. So we will thank you very much now.

Mr. Hsu is first up, for seven minutes.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

Thank you.

I'm going to use some of my time and then pass it back to Mr. Regan.

My first question is for the Competition Bureau. Does the Competition Bureau look at local markets? The reason I'm asking is that I had a constituent contact me to let me know that in Kingston, their home town, on a particular day the price is such and such, but in Gananoque, which is just 15 to 20 minutes down the highway, the price is very different. This person understands that prices go up and down and that gasoline markets are very competitive, but the person could not explain this price discrepancy.

Do you examine competition at a local level like that? If somebody were to file a complaint, would you investigate?

[Richard Bilodeau]

To take that a step further, if somebody were to file a complaint for a situation similar to what you just described, we would ask questions, ask what is going on, what prices they are seeing in the market. At that point we would also take a look at what's going on in the marketplace in terms of the crude oil and wholesale gasoline affecting that region.

I think it's important to note that as I mentioned earlier, different prices in different local markets can be affected by a variety of factors. If we're talking about an increase in price--often people complain about high prices--unless the high price is the result of anti-competitive behaviour and unless there's some information that there's a price discrepancy or a higher price as a result of anti-competitive behaviour, or even some semblance of that, there's no basis on which to initiate an investigation and inquiry under the Competition Act.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

Do you generally feel that you have enough information, or are there certain pieces of information that you would like to have that you don't have?

[Richard Bilodeau]

Obviously, when we conduct an investigation, the more information the better. That being said, I think over the years it has been discussed. We've done a lot of investigations over the last 20 years and gained a good understanding of the gasoline market in Canada--local, regional, national, and even international. That base of knowledge and experience allows us to look at these situations, understand the market dynamics, and try to determine at that point if there is cause for concern under the act, or if it is just local market conditions playing out and affecting the retail prices.

[Ted Hsu, Liberal, Kingston and the Islands, ON]

That leads me to my question for Mr. McTeague. It surprises me that there is no Canadian inventory report, because in a lot of markets that kind of thing is used to make sure the markets are well regulated. In the equity markets, if you hold more than a certain percentage of the stock you have to report it. In the commodities markets, I think there are daily reports on the holdings by speculators and hedgers.

So my question for Mr. McTeague--because the U.S. has been doing it--is whether this is an easy thing to do, and if so, who should be or who should have been taking the lead on that?

[Dan McTeague]

Thank you for the question, Mr. Hsu.

Kingston is one of the strangest markets out there. But when you're a refiner that makes 23¢ a litre turning crude into gasoline when it only costs 4¢ or 5¢ a litre, so that your profit is about 17¢, 18¢ per litre net, you don't really worry about the retail margin. You can squeeze it to 5¢, 6¢, 7¢ a litre and put someone out of business, as they did in the large urban centres, and at the end of the day you'll get your market share.

On the question on the commodities markets, I think it may be difficult for us to try to unscramble these eggs that have been thrown around the world now for the past 12, 14, 16 years. But one thing is very clear. We can work through a process of broad international coordination, and it seems to me that Canada is one of the countries that resists. Some of the comments I've heard from the bank governor, his assistant, the deputy assistant of the Bank of Canada.... They seem to be somewhat neutral as to whether or not Canada ought to do anything. They may actually think that it's a good thing for commodity prices to go through the roof, because one region of the country may benefit while another region of the country may suffer. I think, for instance, of manufacturing in our part of the world, in Ontario.

So there are things I think we can agree on--position limits, large-trader reporting. We need to know who's there, so that we don't have a repeat of June 2009, when Vitol moved, with no money down, $11 billion worth of crude and caused tremendous dislocation. I see Mr. Greenberger in the background shaking his head, so I must be on the right track. There are also pre-trade risk safeguards. There's a number of things we should actually look at, but if there's no will, let alone an interest, to clue into what is driving volatility, then this is an exercise in futility.

Having said all that, I appreciate Mr. Chisu's comments about the 2009 amendments to the Competition Act. I think if he would speak to some of his colleagues, like Mr. Menzies and others, they'll know that a lot of those amendments were based on the work that I did throughout the years 2000 to 2005.

[Geoff Regan, Liberal, Halifax West, NS]

Let me ask a question to the Competition Bureau folks, if I may. Mr. McTeague talked about the issue of wholesale rack prices for gasoline and how rack prices in Canada are considerably higher than those in the U.S. Do you examine that question?

[Richard Bilodeau]

In the normal course of our work it's not something we would track. We may do so from time to time, when we do get complaints about high prices, whether it's high wholesale prices or high retail prices. Or sometimes we get complaints of predatory pricing, where some players in the market may be pricing below a certain measure of cost for a certain period of time. We will look into those situations of what's going on with the wholesale price.

We look at the differential between city pairs, just like Natural Resources Canada does with Fuel Focus, when it tracks, for example, the wholesale price in Toronto and the wholesale price in Buffalo. What we usually see in comparing those two markets is that prices usually move in sync, in unison. You'll also find there's usually not very much gap between the prices.

I think, as we heard, it's market dynamics: if it's cheaper for a refinery or a marketer to buy gasoline in Buffalo, then he'll go to Buffalo to buy it, and if it's not, he'll buy it in Toronto.

But it's not something that we track as a matter of course.

[Dan McTeague]

Chair, if I could comment on that, a marketer in Ontario cannot go to the United States to buy product because the specifications are different. It's an example where the Competition Bureau probably doesn't understand that things have changed.

The specification difference, particularly as it relates to sulphur, is one of the main reasons you can't drive a truck over...not that there's a refinery in Buffalo you could get it from. This myth that somehow the relevant market is the United States, as you can see right now, is simply just that: a myth. It is not true.

[Geoff Regan, Liberal, Halifax West, NS]

Are my two minutes up, Mr. Chairman?

[The Chair, Conservative, David Sweet]

That's pretty well it, sir. Thank you very much.

Now we'll move on to our five-minute rounds.

Mr. Braid, for five minutes.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you, Mr. Chair.

And thank you to all of the witnesses for being here this afternoon.

Mr. McTeague, welcome back. It's good to see you again.

[Dan McTeague]

Thank you, Mr. Braid.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

I'll start with a question for you.

In your presentation, and through the question-and-answer period, you've spoken about your concern with respect to the role the market plays, concerns with respect to “excessive speculation”. Mr. Greenberger spoke about that, as well. What can the Government of Canada realistically and practically do about excessive speculation on Wall Street?

[Dan McTeague]

Thank you for that, Mr. Braid. I know of the good work you've done on committee. I miss those days, and I look forward to future ones, particularly on this issue.

I think the starting point was what we agreed to at the G-20 in Pittsburgh and what I alluded to in my opening comments. I'm going to quote what we agreed to: that all standardized over-the-counter derivatives “should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties” by the end of 2012 at the latest.

What we're saying is that there should be global oversight. We want to know who is trading. We want to know if they should be trading.

We want to recognize something that's far more important here, and I think Mr. Greenberger has suggested this as well. The way it has always worked, certainly since 1936 and prior to the deregulation, has been that a hedger will minimize the risk between a producer of product who sells a product on commodities--and there are several of them--and a purchaser; let's call them a consumer. The hedging is to minimize the risk so that by the time you take delivery of that product it has the value you agreed to.

Unfortunately, with the rise of the index investor--the financialization of that process--the traditional hedger has been driven out and the cost of hedging has gone through the roof. Rather than simply buying and then selling and taking delivery of your oil or your wheat or your corn, what the index investors are doing is rolling over these contracts and providing a permanent floor that drives prices up.

Should they be able to do that? The recognition is that there has to be some degree of concern when you see prices going the way they are in many parts of the world and creating the kind of poverty and dislocation that is there.

Mr. Braid, I pointed out earlier that it does not serve the oil industry of Canada or the oil industry around the world to see that kind of volatility. They need predictability too, and that's why I think we need to concentrate on that. Canada has been very quiet on that point.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you.

Mr. Huffaker, we heard in the first panel--and this is generally known and understood--that western Canada is an exporter of crude oil; central Canada imports crude oil. What are the business factors in place that stand in the way of central Canada importing less crude oil?