Natural Resources Committee on Dec. 9th, 2014

[The Chair, Conservative, Leon Benoit]

Good morning, everyone. We're here to continue our study of the propane market of last year. As we heard last week, the market was filled with supply shortages and high prices. Last week we had presentations by witnesses from the department and from the Competition Bureau and from the National Energy Board. There won't be any presentations to start today. We'll get directly into questions and comments from members.

The first part of the meeting will be questions and comments for those three groups. During the second part, we'll have new witnesses for an hour, and then we've agreed to leave 15 minutes at the end to see what we want to do with this at that time.

We will start by getting directly to questions for officials from either the Department of Natural Resources or the Competition Bureau or the National Energy Board. I will just quickly introduce you again. From the Department of Natural Resources, Terence Hubbard is the director general of the petroleum resources branch of the energy sector area; Douglas Heath is the director of the oil sands and energy security division of the energy sector area; and Ruth Talbot is the deputy director of fuels and refining in the oil sands and energy security division.

From the Competition Bureau, we have Martine Dagenais, who is the associate deputy commissioner of economic policy and enforcement, and Greg Lang, who is the senior competition officer. Again by video conference from Calgary, we have Shelley Milutinovic, who is the chief economist; and Darren Christie, who is the director of the energy markets team and acting director of the energy trade team.

Thank you all very much for being here again. Unfortunately we had an interruption last week. I haven't heard of anything this week, so let's hope for the best.

We'll go straight to Ms. Block for questions to the witnesses.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you very much, Mr. Chair. I join you in welcoming our witnesses back.

Thank you so much for being willing and taking the time to come back for us to ask you some questions. I did review the material we have, and I want to just put back into context the fact that both the bureau and the NEB identified four factors that were part of the reasons we had a propane shortage last winter. I was glad to hear that in the study you did you were consistent in your findings. I appreciate that.

I guess one of the things that need to be very clear in the minds of members of Parliament is what the federal responsibilities and provincial responsibilities are. I wanted to give you an opportunity to speak to that just a little bit more and to refresh our memories in terms of our responsibilities with regard to regulating propane in Canada. I know there are some shared responsibilities federally and provincially when it comes to natural resources, so you may want to touch on those and then speak specifically to propane.

[Terence Hubbard, Director General, Petroleum Resources Branch, Energy Sector, Department of Natural Resources]

Thank you for the question.

The management of energy resources in Canada is indeed a shared responsibility between the federal and provincial governments.

The provincial governments are the owners of resources within their provincial boundaries. They have the primary responsibility for regulating their development, including the exploration, production, gathering, and transmission of energy within their borders, as well as the downstream use of that energy within their market: the local distribution, storage, and marketing, as well as energy prices within provincial boundaries.

For the most part provincial governments have followed market-based approaches to establishing energy prices within their jurisdictions. Some jurisdictions have chosen to regulate markets in some manner, including Prince Edward Island, Newfoundland and Labrador, New Brunswick, Manitoba, and B.C. The methods in which they do this vary across jurisdictions.

In terms of the federal role, with respect to energy resource development, the Government of Canada regulates the interprovincial and international movement of energy through the National Energy Board, regulating movement across provincial borders or across international borders. The federal government also has specific responsibilities for energy development in Canada's frontier areas, in the north, or Canada's offshore. In Atlantic Canada we share the management of oil and gas development with our provincial colleagues in Newfoundland and Labrador, and Nova Scotia.

Outside of a national emergency the federal government has no responsibility or ability to intervene in energy markets. The provincial governments have this responsibility. In the event of a severe energy supply disruption, the federal government does have emergency powers in place where it could, following the request of a province, intervene directly in energy markets and implement these emergency powers to direct the movement of energy.

In the case of propane markets last winter we saw—and experiences were localized—temporary disruptions in energy markets. At the federal level we never received a formal request from provincial governments to directly intervene in energy markets. At the federal level we continued to monitor energy markets very closely. We work with our colleagues at the Competition Bureau and at the National Energy Board, as well as within provincial governments and within industry, to monitor very closely developments that were happening so that we had the best advice and information available to inform policy discussions in terms of any appropriate steps that may have been needed.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Outside of a state of emergency the federal government has no responsibility to deal with a propane shortage other than to monitor the situation and perhaps step in when a province, or a number of provinces, asks the federal government to do so. Is that what I heard you say?

[Terence Hubbard]

That is correct, with the exception of energy transportation across provincial or international borders where our National Energy Board colleagues issue export licences for the export of propane or other commodities. In an emergency situation, or in a period of temporary market disruption, it is the provincial governments that have the primary responsibility. Federal authorities are limited to an emergency situation.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Okay, thank you.

I'd like to ask a question of the Competition Bureau, if I may.

I know your report concluded that there was not enough evidence to show that any anti-competitive activities took place. What I'm wondering is—and this may not be directly related to what happened last winter—what specifically is it that you're looking for when you are trying to assess whether or not any anti-competitive activities have taken place?

[Martine Dagenais, Associate Deputy Commissioner, Economic Policy and Enforcement, Competition Bureau]

In order for the bureau to commence a formal investigation under the Competition Act, we need evidence that a specific section or provision of the act may have been violated.

Where the propane industry is concerned, anti-competitive conduct would likely arise from probably three different types of conduct under the act. One could be having two or more people agreeing to fix prices or allocate markets. In that situation we would need evidence that two or more people have engaged in an explicit agreement to engage in this conduct.

A second one could be a firm abusing a dominant position in a marketplace. For this we would need to have a three-part test: first, a firm, or a group of firms, has a dominant position in a market; second, they have engaged in a practice of anti-competitive acts; and finally, that practice would have a negative effect on competition in the marketplace.

A third one could also be having an agreement between competitors that would have an impact on competition as well.

Those are the kinds of evidence that we would need to commence a formal investigation under the act.

[The Chair, Conservative, Leon Benoit]

Thank you, Ms. Block.

Mr. Rafferty, go ahead, please. You have up to seven minutes.

[John Rafferty, NDP, Thunder Bay—Rainy River, ON]

Thank you for being here.

I've had a number of conversations with the Canadian Propane Association over this past year. I guess the gist of it is that there's plenty of propane, there was plenty to be transported, and it wasn't really an issue. I'll look at these things and I'll reference them again, as Ms. Block did. I've heard all of these in the past.

I just want to get your thoughts on this, and also the thoughts of the other group. We had an interesting situation in my part of northwestern Ontario. Propane, as you might know, is a single supplier in many areas—one company supplying in many areas. I happen to live in a part of northwestern Ontario where we have two suppliers, and I'll just briefly tell you what happened this past winter. I don't mind naming them; they're Cal-Gas and Superior Propane.

I happen to be a Cal-Gas customer for heating my home. What was interesting was that they had lots of propane priced exactly the same all winter. The complaints that I heard as a representative were all from Superior Propane customers about a shortage, only being able to fill half the tank, going up 80% to 90% per litre in price, and so on. As I look at this explanation and remember last week what everybody had to say, the only thing that I can come up with—and I'd like your comments on this—is that it clearly wasn't anti-competitive but a retail miscalculation. One supplier miscalculated the amount that they would need in northwestern Ontario. Because there are two companies there, one clearly did not miscalculate and the other one did.

Can I get your comments on that?

[The Chair, Conservative, Leon Benoit]

Go ahead, Mr. Lang.

[Greg Lang, Senior Competition Officer, Competition Bureau]

Thank you.

[John Rafferty, NDP, Thunder Bay—Rainy River, ON]

I don't want to pick on any companies. That's the situation as it was.

[Greg Lang]

Yes, and I should start off by saying that we're required under the Competition Act to conduct our investigations confidentially, so I can't speak to specifics of specific companies in specific areas. We did survey a very large range of retail propane companies across Ontario and Quebec, but the specifics of those conversations I have to keep confidential.

First, I think it's fair to say that the increased demand for propane this winter, both for home heating purposes and for U.S. agricultural demand, was unexpected. It exceeded the forecasts of people who we spoke to.

With specific regard to northwestern Ontario, it was a unique situation. What we observed was that the biggest issues with shortages and high prices occurred in western Quebec and eastern Ontario. For northwestern Ontario, the evidence we heard was that the prices rising so high this winter made it economical for supplies to be trucked in from a hub or a propane terminal near Winnipeg. Generally propane retailers in northwestern Ontario had better access, there were fewer shortages, and prices did not rise as high as in some other areas like eastern Ontario and western Quebec where retail suppliers tend to source from underground storage at Sarnia instead.

[John Rafferty, NDP, Thunder Bay—Rainy River, ON]

Mr. Hubbard.

[Terence Hubbard]

To add a few more comments to what Greg outlined below, it's important to note that individual retailers of propane base their contracts with their suppliers on historical demand. They sign up either for variable-price contacts, or in some cases fixed-price contracts, based on what they estimate the demand from their customers will be for the season.

Last winter was an abnormal winter in terms of extreme cold temperatures. We saw across the country, as well as in the U.S., that there were a number of instances where retailers misjudged the amount of supply that they would need in terms of meeting their customers' demand for the winter. This led to, in some cases where suppliers didn't have fixed-price contracts with their wholesalers, paying escalated costs to ensure supply going forward.

[John Rafferty, NDP, Thunder Bay—Rainy River, ON]

Thank you very much.

[The Chair, Conservative, Leon Benoit]

Do you want the National Energy Board to respond as well by video conference?

[John Rafferty, NDP, Thunder Bay—Rainy River, ON]

Oh, I'm sorry.

Ms. Milutinovic and Mr. Christie, go ahead if you have something to add.

[Darren Christie, Director, Energy Markets Team and Acting Director, Energy Trade Team, National Energy Board]

Sure. I would just add two things.

We tend to look more at the macro-picture as opposed to the individual retailer level. Two things suggest to me that it was more than just an isolated retailer perhaps making a miscalculation. We did see very large inventory draws across significant areas, and that suggests that it was a substantial increase in demand that was affecting more than just an individual retailer. Similarly the price increases that we spoke to in our introductory comments last week, which are cited in the report, are wholesale prices. It wasn't as though it was something that was isolated for a couple of retailers.

[John Rafferty, NDP, Thunder Bay—Rainy River, ON]

Let me ask you one quick question while we're still talking.

Did the amount that North America exported over this past winter have any influence on supply at all? As supply was needed domestically, did the exports drop? Did they stay the same? Were they increased?

I wonder if you have some comments on that.

[Shelley Milutinovic, Chief Economist, National Energy Board]

Exports from the last quarter of 2013 to the first quarter when the shortages were mostly happening, particularly in the U.S., fell almost 70,000 barrels a day. Flows that were going to be exported offshore were called back into the North American market in response to price.

[John Rafferty, NDP, Thunder Bay—Rainy River, ON]

Okay.

Thank you very much.

[Shelley Milutinovic]

Then for the next quarter they increased again.

[John Rafferty, NDP, Thunder Bay—Rainy River, ON]

Right. Thank you very much.

Do I still have time?

[The Chair, Conservative, Leon Benoit]

Your have time for a very short question.