Natural Resources Committee on Dec. 9th, 2014

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

Very quickly, for the Competition Bureau, is there in any merit in suggesting that there be a federal oil and gas ombudsman who would work with each of the provinces' ombudsmen—perhaps appointed in those provinces—on the competition aspect, not just with propane but with oil and gas generally?

Is there any merit in that conversation?

[Martine Dagenais]

In the Competition Bureau's view, we always advocate that regulators and policy-makers rely as much as possible on market forces to achieve the benefits of competition. Usually when market forces are insufficient to achieve certain strategic objectives, we try to work with them closely. We are willing to work closely to assist them in implementing strategic policy objectives that may address a strategic issue, but it usually has to be in the least intrusive way.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Rafferty.

Mr. Regan, go ahead, please, for up to seven minutes.

[Geoff Regan, Liberal, Halifax West, NS]

Thank you very much, Mr. Chairman.

Thanks to the witnesses for coming back this week. I'm sorry we didn't have more time last week.

Last week, we seemed to hear from everybody, “It's not us. It wasn't our responsibility. The situation was unique. Things are all better now. Don't worry. There's nothing to see here. Move along.” That doesn't give me a lot of confidence going forward. No one is taking responsibility for this, and that's worrisome.

First of all, my question is to Mr. Hubbard and to Ms. Milutinovic.

In your testimony last week, you both talked about the responsibility that your agencies or departments have to monitor what's going on. Well, what happened? If you're supposed to monitor this, why didn't you see it coming and why didn't you do anything about it?

[The Chair, Conservative, Leon Benoit]

Mr. Hubbard.

[Terence Hubbard]

Natural Resources Canada regularly monitors energy markets: oil, gas, and other commodities. We track market developments, and we're in regular contact with our provincial counterparts, as well as with our industry colleagues, in terms of identifying potential market issues going forward.

I think everybody was caught a little off guard last winter, in terms of low inventories heading into the winter as a result of the huge crop demand in the U.S. Then we were caught again by unexpected big demand for propane for home heating purposes, given the abnormally cold temperatures.

In terms of federal responsibilities and the marketplace, the price increases essentially provided the signals that the market required that the commodity be moved around to where it was most needed. We saw last winter that those market forces worked, in terms of moving supplies away from export markets in the U.S. gulf coast back into the northeast and Canadian markets to ensure that adequate supply was available.

Moving forward into this winter season, we see that industry has taken a number of steps in response to last year's developments to ensure that we're better positioned in terms of meeting their market demands going forward. In terms of the—

[Geoff Regan, Liberal, Halifax West, NS]

Thank you. Sorry, I have a very short time.

Ms. Milutinovic, you answered this question about your monitoring responsibility and what happened. My understanding was that the NEB in fact gave the green light, or in other words gave export orders leading into this period.

Now last week when you testified, you didn't talk at all about the timing, how many export orders there were, or that they were any different than normal. You said what the normal range was, but clearly there must have been some export orders issued.

What concerns me is that NEB didn't seem to make sure that there was a cushion. It looked at the weather forecast and said, “Well, it's going to be a mild winter. Let's relax and allow exports to go out.” However, it didn't have the kind of cushion that ensured there would be sufficient supplies to make sure there wasn't the kind of spike in prices that consumers experienced. Why not?

[Shelley Milutinovic]

When we issue export orders, those are issued for a term of up to one year. So we don't look at them on a day-by-day basis and look at the weather and see what's going to happen.

What happened last year was very much a response to weather. It wasn't an issue of insufficient supply. There was lots of supply in North America, but the supply wasn't where it was needed.

Parties throughout the supply chain have taken all kinds of steps over the last year to make sure there isn't the same kind of response—weather is always an unknown—and to ensure that supply is where it's needed. They've done things like expanding underground storage in Alberta, in Sarnia; adding above ground storage all over the Midwest and in market areas; additional rail-loading facilities are being added in North America in Alberta, in the Midwest; distributors are adding trucks to their facilities; and encouraging customers to stock up early. They're doing all kinds of things to make sure that the propane is where it's needed if weather strikes again this coming winter.

[Geoff Regan, Liberal, Halifax West, NS]

So would you say that none of the agencies or departments here before us really has a responsibility to prevent this kind of thing from happening in the future?

Consider the fact that, as we've heard, this is a cross-border market. It's a matter of international trade, which of course falls within the responsibility of the Government of Canada, yet there's nobody here saying to us, “We're going to make sure this doesn't happen again.” “We're going to leave it to the market”, is what it sounds like, and that doesn't seem to me like a very satisfactory response.

Does anybody want to raise their hand and take responsibility for preventing this next time? I don't see any hands up.

Let me ask you this then. I want to talk to—was there a hand up?

Mr. Hubbard's hand is up.

[Terence Hubbard]

I have a brief comment on that. As I mentioned earlier, the management of resources is a shared responsibility. The Government of Canada has taken a number of steps over the last number of years to support new investment in Canada's resource sector. We've taken steps through Natural Resources Canada to modernize the regulatory system at the federal level for project reviews. We're investing in new safety systems to support the safe and reliable transportation of our energy infrastructure. We're working closely with the provincial governments to ensure that we have a framework in place across Canada to support new investment going forward.

But the reality is that we have an integrated North American marketplace for commodities such as propane, and this marketplace, and the movement of commodities north and south across these borders, has served both Canada and the U.S. quite well. Going forward, as I think our colleagues at the National Energy Board indicated last week, we're seeing a huge increase in the production of natural gas supplies in the U.S. and related propane increases as well. Just over the last two years, we've seen an increase in propane supplies from our U.S. colleagues greater than Canada's total propane production. So the supply is available. The industry continues to make investments to support the infrastructure in place and the Government of Canada is taking steps to support the development of this infrastructure.

[Geoff Regan, Liberal, Halifax West, NS]

We heard from Mr. Rafferty that the price didn't rise in northwestern Ontario, or not much.

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

There were two companies. One didn't rise; the other one did.

[Geoff Regan, Liberal, Halifax West, NS]

I wasn't meaning to ask you a question. But thank you, I appreciate that.

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

That's just for clarification.

[Geoff Regan, Liberal, Halifax West, NS]

That's a clarification, I appreciate that.

But it was more of a local phenomenon. So what it sounds like is that the cost to those suppliers of propane did not go up, yet, because they could, they were charging more.

Ms. Dagenais, I am not saying that it is anti-competitive behaviour, but is raising prices really just for the benefit of consumers?

Is it gouging? Is gouging different—I think it is—from anti-competitive behaviour? Can you have gouging without it being anti-competitive? Was there gouging here or am I looking at it the wrong way?

[The Chair, Conservative, Leon Benoit]

I need a very short response, please.

[Martine Dagenais]

Let me stress at the outset that we fully understand that this could impact Canadian consumers. But high prices under the Competition Act are not in and of themselves illegal because they need to be linked to an anti-competitive act.

It doesn't mean that the bureau doesn't care about, or is not interested in, the broader public policy surrounding the movement of prices in this sector and other sectors, and we advocate, most of the time anyway, for healthier and competitive markets because in many ways they constitute the best protection against high prices. I would say at the end of the day, if the consumer feels they're being gouged and if this is the result of an anti-competitive act, they should just provide us with the evidence and we will not hesitate to investigate and to enforce the Competition Act.

[The Chair, Conservative, Leon Benoit]

Thank you.

Thank you, Mr. Regan.

We'll start the five-minute rounds with Ms. Crockatt, followed by Mr. Trost and then Mr. Bevington.

[Joan Crockatt, Conservative, Calgary Centre, AB]

Thank you very much to the witnesses.

I found it interesting that apparently my Liberal friend over there doesn't believe in free markets and may not understand that the federal government doesn't set the price of commodities like oil, gas, and propane, or else we probably wouldn't have $63 oil today.

I wanted to talk about basically some of the fundamentals here. Being from Alberta, I'm interested that 85% of propane comes from natural gas production, and that most of Canada's propane comes from Alberta and B.C., which I hadn't fully appreciated before.

So I'd like to know in light of that, can you sort of talk about...and I think I'll put this to the National Energy Board, to Shelley Milutinovic. In a way we're fighting the last war, because this is history and not what you're forecasting going into the future. The situation that we had of high prices last year, briefly if you could just consolidate, why did we have that and why do we not have it this year?

[Shelley Milutinovic]

We had high prices last year because going into a very cold spell, we had very low stocks. Part of the reason we had low stocks was that people were expecting.... The weather forecasts weren't anything like what had transpired, but we also had very low inventories because of a very late, wet, high, large corn harvest in the U.S., which kind of in November just sucked the inventories down, and propane was going offshore. So when winter hit, there was kind of a confluence of factors and prices rose because there wasn't enough supply where it was needed. In some cases, the inability of rail because of severe weather and the inability of trucks to get to market caused a problem.

Fast-forwarding to this year, the stock situation looks very different from last year. In Canada our stocks are 50% higher than they were last year. In eastern Canada they're 60% higher. In the U.S. they're 40% higher. We have an entirely different stock picture. Then the corn crop in the United States was a very large crop this year, but it didn't have anywhere near the crop drying requirements, and that's pretty much behind us. Those are the two things.

Exports, while they were pulled back, are now continuing to increase. There is that flexibility. They'll go in response to price. So if in response to weather over this coming winter the price rises, we'll see some pulling back from the export market. But we have such a high propane supply in the United States. In the last year the United States has added another almost equivalent of Canada in terms of propane production, so propane suppliers in western Canada and in the United States are trying to find markets for their product, which is why they're looking offshore.

[Joan Crockatt, Conservative, Calgary Centre, AB]

Some Canadians may have feared that we would have shortages in the future, and that this was due to sort of a shortage of supply and production. You're essentially telling us that's not the case. Do you think most Canadians appreciate that the U.S. production of propane has boomed in the same way their oil and gas production has boomed?

[Shelley Milutinovic]

I'm not sure that consumers know that or not. That depends on the communications between the distributors and their suppliers, I think.

[Joan Crockatt, Conservative, Calgary Centre, AB]

Can you just explain for me again—I'm just looking to lay down fundamentals here.... Since two of the huge gas suppliers that were mentioned, Cal-Gas and Superior, are both located in Calgary, I'm interested in knowing where the consumers are in Canada, the bulk of the consumers, and how do they get their product?

[Shelley Milutinovic]

There's propane consumption across Canada. Only 9% of propane consumption is actually residential, but of those residential markets, Ontario is the highest and it has about 2% of its consumers. There is a 1% average across the country, 2% in Ontario.

To get to market, it can flow on pipelines. There are a number of pipelines that can move the propane. Rail tends to be the predominant one, and trucking is another possibility but it's more expensive, so it tends to be used for shorter distances. But rail is the major one.

[The Chair, Conservative, Leon Benoit]

We'll now go to Mr. Trost.

Before doing so, I would like to ask for some clarification on a question that Ms. Crockatt asked. You gave a general answer saying that usage was higher due to crop drying in the United States and a cold winter, but what percentage did usage go up over the final quarter of 2013 and first quarter of 2104 compared to the average for those same periods?