25 July 2005

The gasoline regulation charade [revised]

One of the greatest public policy failures of the Grimes administration was the imposition on Newfoundlanders and Labradorians of the Petroleum Products Pricing Commission (PPPC).

The progeny of the old PPPC, now under the Board of Commissioners of Public Utilities (PUB) carries on the useless practice of appearing to interfere in the marketplace on behalf of consumers.

The PUB is now conducting a public consultation on the whole business of price regulation for petroleum products, i.e. gasoline and home heating oil. Here's the link to the discussion document.

Don't get too excited.

The PUB merely wants to hear about how the regulation should be conducted. So much for thinking outside the box by at least offering the chance for consumers to challenge the very idea of government regulation of petroleum prices.

Well, here is such a challenge.

The PPPC is a fraud.

In a normal world, gasoline prices are set by the marketplace. The consumer price is determined by costs (price of oil, processing costs, shipping costs, etc.) and demand. Prices in Newfoundland and Labrador vary across the province and differ from the price in other places in Canada based on all those factors.

It should come as no surprise that gasoline was cheaper in St. John's, for example, than it was elsewhere. The population is larger which means, among other things, that a retailer can make enough cash to sustain his or her business based on volume of sales. There are a bunch of different retailers and in the old days, before Roger Grimes created a sinecure for an old buddy, they used to watch each other like hawks to see where the price was going.

The price per litre went up and it went down, and not surprisingly because the cost of the raw material never dropped dramatically the price never dropped dramatically either. During the Gulf War in 1991, the prices skyrocketed based on international tensions. After the war was over the prices dropped significantly, as one would expect.

There were calls for price regulation but successive provincial governments came to the conclusion that in the modern economy, regulation was a charade. They rejected it.

Then along came Roger Grimes and his cabinet.

In 2001, they created the PPPC and set up George Saunders in an office in Grand Falls.

They studied oil and gas prices using the New York as a baseline. They set a benchmark year and price and then announced the maximum prices to be charged to consumers across 14 zones. That's system that continues today, with irregular changes based on nothing more than international changes in the price of oil.

In other words, Saunders and the PPPC spent a chunk of money (from the oil retail companies) to recreate a bureaucracy to do what the market was already doing. The PUB discussion document basically asks people to help them refine a set of formulae and rules and models that recreate what in just about every other part of North America is handled by competition in the marketplace.

Consumers in other places grouse about prices, and rightly so. That's a consumer's fundamental right.

But they also have the right to change their consumption, as prices rise. Drive less. Buy a smaller, more fuel-efficient vehicle. In the case of businesses, they can just pass on the added costs to consumers, as they used to do.

And what is the upshot of four years of gas regulation?

Today, I am paying $1.04 per litre for regular unleaded gasoline in St. John's. In Eastern Ontario, I can buy gasoline for almost 20 cents per litre less. On Saturday it was about $0.87 per litre in most places around Kingston.

My sharp-eyed father-in-law keeps close track of the prices and takes advantage of whatever savings he can. He drives less. He bought a more fuel-efficient car.

But, by my informal calculation, that's one of the largest gaps in pricing I have ever seen in the 15 to 20 years I have been commuting from St. John's to Kingston ever so often. Gas prices are actually going down around Kingston whereas in this province there have been only modest drops in price.

The reason is simple: in a world where retailers are told what to do they will always charge the maximum.


There is no incentive to drop prices and pass along any benefit to consumers.

And don't believe the malarky of the commissars who tell you that if it wasn't for the PPPC prices would be higher or that if the PPPC ran "better" it would prevent the prices from going up.

It's a crock.

Gas prices across Newfoundland and Labrador vary from place to place, based on a bunch of factors. Essentially as costs of production increase, so too do consumer prices.

Just like they used to in 2000 B.G./B.S. (Before Grimes/Before Saunders).

But they don't go down as much as they might in 2005 without the PPPC.

Rather than continue the PPC charade, I have a simple suggestion:

Scrap gas price regulation.

It serves no useful purpose. The situation that obtains today across the province is exactly the same one that would exist without the PPPC, except that we never see a reasonable break on price reductions that the market would deliver and has delivered elsewhere.

And so what if gas prices go up? I'd rather that people thought harder about the energy use and the only truly effective way to do that is to smack them in the wallet.

Some people, notably the self-appointed gasoline watchdogs have talked about freezing provincial taxes on gasoline. In his one note-worthy foray in the public since the House of Assembly closed, Liberal leader Gerry Reid suggested that the province's gas tax haul be frozen at around the $1.00 per litre mark.

As someone else noted, that doesn't do a damned thing to help people on low and fixed incomes. It just makes it easier on the guy with the gas-sucking truck so he can keep sucking gas.

It sure as hell doesn't change the provincial tax haul.

As the PUB document notes, the provincial government hauls in a flat 16.4 cents per litre regardless of the base price of the fuel. In addition, the province collects 15% harmonized sales tax (HST).

In other words, if Reid's idea were implemented, the provincial fuel tax would remain at 16 cents per litre so as long as gas is being sold, the provincial government doesn't give a damn what the retail price is.

As for the HST, the province could only change its application in agreement with the Government of Canada. It could happen. If it did, the province would still rake in over 20 cents [math correction] for every litre of gasoline it is selling...just like it is doing today.

Oh yes, and since the PPPC system keeps gasoline prices artificially high, the odds are against the price dropping below a buck a litre anytime soon.

Dumping the PPPC would at least get rid of a needless bureaucracy and open up the prospect consumers could see some understandable changes in gas prices both up and down. In the meantime, as prices increase, consumers who can actually make changes in their lifestyle could do so.

For those on low and fixed incomes, the provincial government has the option of putting in place a program aimed specifically at the people who can actually use some relief from high home heating costs. They can easily figure out who those people are and the province can afford it. After all, Loyola Sullivan is profiting from both the high price per barrel of our own offshore oil and the marvelous HST on a litre of refined gasoline and home heating fuel.

Would that a political party in the province had the courage to suggest just such a policy.

It would indeed be a New Approach.