Democracy Gone Astray

Democracy, being a human construct, needs to be thought of as directionality rather than an object. As such, to understand it requires not so much a description of existing structures and/or other related phenomena but a declaration of intentionality.
This blog aims at creating labeled lists of published infringements of such intentionality, of points in time where democracy strays from its intended directionality. In addition to outright infringements, this blog also collects important contemporary information and/or discussions that impact our socio-political landscape.

All the posts here were published in the electronic media – main-stream as well as fringe, and maintain links to the original texts.

[NOTE: Due to changes I haven't caught on time in the blogging software, all of the 'Original Article' links were nullified between September 11, 2012 and December 11, 2012. My apologies.]

Sunday, October 28, 2012

Former Competition Bureau cop says Canadian petroleum companies monopolize markets and put price fix to our pumps

John Grant worked for the federal Competition Bureau for 25 years. He was an investigator. A competition cop.

He worked a lot of cases — fraud, direct marketing, telemarketing — although he specialized in petroleum investigations.

His work took him to the Maritimes, southern Ontario and Ottawa, where he worked a case the 1990s that I was involved in, although, I never met him at the time.

(That case, which I wrote about at length for the Sun, led to price fixing charges against Mr. Gas, Suny’s and Seaway Gas. When it went to court, Mr. Gas pleaded guilty to one count of attempted price fixing, and the remaining charges against all the companies were dismissed.)

Grant retired in 2005, and says he enjoyed working for the Competition Bureau. He was treated well. The bureau gave him a career and a life-long interest in commerce and economics.

It also gave him an insight into the petroleum industry, which he continued to track, although he does so now in the business pages of newspapers, not by interviewing gas retailers, or poring over company documents.

Anyway, this past summer — when the cost of regular unleaded gas in Ottawa shot over $1.30 a litre — John Grant called me.

“Mr. Corbett,” he said, after introducing himself and explaining his background, “I’d like to meet you.”

You rarely get a chance to talk to a competition cop, even a retired one, so I quickly agreed. However, not knowing how much time to put aside, I asked him why.

“Well, I’ve heard you talk about gas prices and there are some things you should know.”

“What sort of things?”

“I’ll tell you when we meet, but you should know that you’re partly right about gas prices, and partly wrong.”

“Sounds like a good day. What part am I wrong about?”

“You’re wrong about why we’re paying so much at the pumps.”

“And the right part?

“You’re right when you say there’s price fixing.”

Gas refineries

Our first meeting took place at a Starbucks in Orléans. At 67, Grant looks at least 10 years younger than his age, an impression helped by the motorcycle helmet he carried under his arm when he walked into the coffee shop.

As soon as he sat down, he reached inside his coat and pulled out a manila envelope. When he opened the flap of the envelope he pulled out a map of Canada.

I stared at the map and quickly saw it was a breakdown of gas refineries in Canada. As I was looking at the map, Grant pulled another piece of paper from the manila envelope and placed it beside the map.

“What’s this?” I asked.

“A list of the refineries that have been shut down in the last 40 years.”

It was a two-page list, dating back to 1970. I ended up counting 31 refineries. Which meant a refinery had been closed in Canada, on average, every 16 months.

“The first thing you have to do when you want to fix the price,” said Grant, leaning back and taking a sip of his coffee, “is control the supply.”

That first meeting lasted nearly three hours. Grant said he contacted me because “I’m a motorist too, and I’m fed up with these prices.”

He also said, many times, although he believes there is price fixing in the petroleum industry, the companies may not even be committing a crime, so ephemeral, so wispy, are the machinations of big oil.

“I don’t believe there are smoke-filled backrooms where oil company executives get together and set the price,” said Grant. “They’re much too clever and sophisticated for that. Plus, they don’t need to. The fix is right out in the open.”

He referred again to the shrinking number of refineries in Canada — which lets a small group of companies control the supply — but also started talking about vertical integration and what is known in the petroleum industry as “product exchange agreements.”

The nub of Grant’s argument — there is price fixing in the petroleum industry — can be found in those two concepts.

In a nutshell, vertical integration occurs when a company controls all, or most aspects, of an industry. The company, in other words, will be the supplier, manufacturer and retailer of a product.

Beer sales operate like that in Ontario, with the Beer Store controlled by three breweries (Molson-Coors and InBev SA, which together own 97%, and Sapporo, which owns 3%.)

Gasoline goes one step further than beer with the largest oil companies in Canada actively engaged in exploration as well, which would be the equivalent of growing the hops and barley.

‘Death knell’

“Vertical integration can often be the death knell of competition,” says Mel Fruitman, a spokesman with the Consumers Association of Canada (CAC).

“Certainly, in the petroleum industry, we are seeing more and more of this,” Fruitman said.

Grant says the large petroleum companies have been actively trying to build a vertical integration business model for decades. It is why they have shut down refineries. Why every new gas station is owned by a petroleum corporation, and not an independent business.

The petroleum industry denies vertical integration, by its very nature, leads to a less competitive market.

“That is simply not true,” says Bill Simpkins, with the Canadian Fuels Association.

“There are many other vertically integrated companies, and the reality is it leads to greater efficiencies and better prices for the consumer.”

Product exchange agreements are the second prong of Grant’s argument. In later meetings we discuss this concept at length. In one meeting he gives me a 2008 Natural Resources Canada report, which both acknowledges and explains the practice:

“Product exchanges,” says the report, “are now very common in the Canadian refining industry. In order to reduce transportation costs and to capitalize on increasing economies of scale, refiners have entered into a large number of product exchange agreements with one another.

“Product exchanges occur when one refiner provides another refiner with specific products in a certain location in exchange for a similar quality and volume of products in another location.”

I read the passage twice, then look at Grant in disbelief.

“Yep,” he says. “They swap product. We’re supposed to believe they’re competing, but what they’re actually doing is swapping product.”

When I ask Fruitman about product exchanges, he gets me to read the passage to him three times before he’ll comment. Finally, the spokesman for the CAC says:

“That’s astonishing. If you’re agreeing on the quantity of product, and the transportation of the product, then surely you’re agreeing on the price of the product as well.

“How in the world is that not collusion?”

Simpkins says both Fruitman and Grant are misunderstanding the nature of product exchanges.

“The Competition Bureau has looked at (product exchanges) backwards and forwards and found nothing wrong with it,” he says. “The fact is you can’t have a refinery in every market in Canada, so this is simply a way of getting refined product to consumers at the best price.”

Vertical integration

In our final meeting, Grant makes a prediction on what will happen when this story appears.

“An industry spokesperson will say vertical integration and product exchanges are necessary, given the high cost of oil exploration and the high cost of building new refineries.

“They will probably say that this is a complicated business which most people don’t understand and furthermore, this has been a hot political potato for years and if there was any price fixing surely the government would have caught it by now.”

What won’t be said, says Grant, is government makes a lot of money off the petroleum industry, so where is the incentive to change the status quo?

Nor will anyone mention some things in life aren’t complicated.

He insists a competitive petroleum market could be easily created if the federal government simply passed legislation limiting vertical integration and product exchanges.

“If the oil companies had to compete to sell their gas to independent retailers — true independent retailers — the price at the pump would drop tomorrow,” he says.

So, is the price at the pump “fixed?” I contacted Grant’s former employer, to get a comment.

Sadly, a Competition Bureau spokesman declined to answer specific questions, choosing instead to send me passages from the Competition Act pertaining to vertical integration and collusion.

He did, however, end his written response with the following observation:

“It should also be noted that the Bureau has conducted a total of seven market studies and nine investigations into allegations of conspiring to fix the price of gasoline and other anti-competitive behaviour since 1990.

“In each of these investigations, the Bureau found no evidence of a national conspiracy to limit competition in gasoline supply, or abusive behaviour by dominant firms in the market.”

Grant, the former competition cop, also predicted this comment.

Original Article
Source: ottawa sun
Author: Ron Corbett

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