HALIFAX, TUESDAY, JANUARY 7, 2003
STANDING COMMITTEE ON ECONOMIC DEVELOPMENT
1:00 P.M.
CHAIRMAN
Mr. Brooke Taylor
MR. CHAIRMAN: Good afternoon, everybody. I would like to bring the Standing Committee on Economic Development to order. I would like to inform committee members that today, our witnesses/guests are the Canadian Oil Heat Association, the Nova Scotia chapter. To my left, at the far head table is Mr. Fred Chalmers. Fred, welcome, good afternoon. Fred is the President of the Canadian Oil Heat Association. With Mr. Chalmers is Mr. David Hovell, he's the Executive Director. Welcome David and Fred.
Before we begin, I wonder if committee members could identify themselves and if you are substituting or replacing another member, please indicate that too for recording purposes. We will begin, perhaps, with Mr. Hendsbee.
[The committee members introduced themselves.]
MR. CHAIRMAN: Thank you very much members and, of course, as per usual, we are assisted by a very capable clerk, Darlene Henry. Good afternoon.
I think, Mr. Chalmers and Mr. Hovell, the process has pretty much been explained to you as far as the presentation and then a Q and A session goes. So if you would like to begin, you are welcome to do so.
1
MR. FRED CHALMERS: I'm the President of the Canadian Oil Heat Association, Nova Scotia chapter. I'm also the Manager of the Wilson's Home Heating Division in this province, so I'm very much involved in the process of marketing heating oil in the Province of Nova Scotia. I was going to say it's a pleasure to be here but I don't know if it's going to be a pleasure or not. Then I was going to say it's an honour, maybe it's a dubious honour but I'm certainly flattered that you think that I have two hours' worth of information that you don't already have and I'm certainly willing to share it with you. I've prepared a little presentation just to try to frame the discussion. In my question and answer period, I hope I can refer to some of the topics I have introduced. So here we go.
First of all, the oil heat industry in Nova Scotia, what I call the oil heat industry, is made up of 87 what we call oil heat marketers in the province. They come in every shape and size. I guess probably the largest oil heat marketer is Irving and the smallest one is - well, I'm up there with the smallest ones. We employ 1,000 Nova Scotians. We heat 227,000 homes in the Province of Nova Scotia, which is about 62 per cent of the market share. Economists would say that our industry has an impact of about 1.5 per cent of the gross domestic product in Nova Scotia.
The first thing, 227,000 homes, if we say that a home burns about 3,000 litres of heating oil through the winter season, that's about 700 million litres we sell in the Province of Nova Scotia and 700 million litres, it's pretty obvious that every penny in the price that people pay, every penny we reduce it puts $7 million into the local economy; conversely, every time the price goes up a penny, it takes $7 million out. If people save money on their home heating bills, they usually spend it. I don't think it's a source of savings.
So on an average, if you take the 700 million over the course of a year, it's 12,000 barrels a day. That's sort of the global number. The Esso refinery over here produces about 80,000 barrels a day, so it's about 15 per cent of the output of the local refinery. The refinery in Saint John, New Brunswick produces 250,000 barrels a day, that's a world-class refinery, and it's about 5 per cent of the production of the Irving refinery in Saint John, New Brunswick. It's pretty obvious from that that both the refineries in the region are net exporters. There's no way we consume all the product that they produce.
We always say that the Nova Scotia market for heating oil is about 10 per cent of the Canadian market. It's a big heating market in Canada. It's about 3 per cent of the U.S. market. In some senses, although we're small, it's an important piece of the heating oil market. If you look at the world business of petroleum, and I'm a small part of it, it's about 77 million barrels a day, so this industry we're talking about is two hundredths of 1 per cent in the world scale. We don't have much impact on the world petroleum business. If you added up all the petroleum that's consumed in Nova Scotia, it would be less than five hundredths of 1 per cent of the world business. I'm a small player in a piece of business that's enjoyable to be in and, by and large, I'm the flea on the hair at the end of the tail. I'm really a small
piece of this worldwide business that we're a member of. If you have any questions on that, just feel free to interrupt, first of all, because . . .
MR. CHAIRMAN: Mr. Chalmers, what we normally do, the tradition here, is to go through with the presentation, and members will jot down some notes or make some mental notes or whatever. If that's okay, you can continue, please.
MR. CHALMERS: Okay, thank you. So, the Canadian Oil Heat Association was formed on a national basis in 1983. We have 300 members nationwide. We have 45 members in Nova Scotia, and they run the gamut of the oil heat marketers, equipment manufacturers, service technicians, wholesalers. It's an industry with many facets, if you're looking at it microscopically. I think it's important to note two things here. On a local basis, we don't enjoy the support of either Esso or Irving, which are two big people in the home-heating market in Nova Scotia. Not that they may not share our vision, but they aren't part of our group. We are, basically, the people who are buying and reselling heating oil.
My company and our companies offer the following services, and all of these are part and parcel of the package that we believe is important, but not all of us do. We offer delivery plans, automatic delivery; budget payment plans where we finance people's heating requirements over the winter; we lease equipment, furnaces, boilers, water heaters; we install heating systems; we do furnace maintenance; we do emergency services for customers; and we also offer a new product which we call price protection, which may be germane to the discussion today.
Why did our company introduce price protection into this market? I guess the short answer is, as we all know, one of the advantages of natural gas is they offer some stability with natural gas pricing, and we feel that we may be facing a new competitor in the market. Our surveys are showing that one of the big concerns that our customers have is volatility in price as opposed to absolute price. If people know at the beginning of the year what the price is going to be, then they seem to be more assured that they have made a great choice for heating their homes, and we certainly want to reinforce that. Competition is the short answer of why price protection has come into the market.
[1:15 p.m.]
In preparation for this meeting, I did a small survey of the prices in the Halifax market as of yesterday morning. I've used names here. This is public information. You can call any one of these companies and ask them what their price is and they would be glad to share it with you, particularly if you tell them you might be interested in buying it. This price represents what used to be the regulated tank wagon price in this province, it's the list price, it's the price that you would pay at my company if you phoned up and wanted a cash delivery, this is the price that you would pay.
One thing to note here is there's quite a drastic variation in price. There's a 9 cent spread in a 50 cent price. Why is that? I think this is an illustration that we have a very active market, particularly in the City of Halifax. We have about 15 people who are competing with each other to supply home heating oil to the residents of Halifax. I think the previous slide referred to services, not all these companies offer all these services and when people are looking for a supplier, I would like to think that they're looking at the total package and the total cost of heating their homes. I spend a lot of time and my particular market position is that although I may not have the lowest price in heating oil, I certainly offer the lowest cost solution to heating your home. As I have said, I think this is an illustration of a very active market and a very competitive market.
The next slide I think I want to talk about is the big price slide. It's going to take me a few minutes to explain this slide and after you see this slide and understand it, I hope we can make some reference to it over the course of the afternoon. I have extracted this information, first of all each data point in this slide represents the first business day of the month, it's five years, there are 61 data points here. The bottom section of this graph is the price of crude oil as quoted as the West Texas intermediate price of crude oil, translated to Canadian dollars per litre. As you can see, this is not a constant price over five years.
I took a look at the market this morning, it's $31.60 a barrel. One interesting tidbit is the dollar a barrel is a penny a litre. I try to illustrate this because there are 159 litres in a barrel and the U.S. dollar is worth about $1.58 Canadian, so in rough numbers, it's a very good number, a dollar a barrel is a penny a litre. When the price of crude goes up $6 a barrel, then it's natural and should be expected that the price of heating oil delivered in Nova Scotia is going to go up 6 cents a litre at least, before tax.
The next data point, you have to add in what's called the refiner margin and this is an implied number because the total of the crude oil plus the refiner margin is what we call the Halifax rack. This is a published number, it's available in the oil buyer's guide, it's available on the Internet. The number you see here is the low Halifax rack on the first day of the month. Most of us in the buying and reselling business are buying product based on that Halifax rack price. So the difference between the Halifax rack price and the crude oil price is what I've chosen to call a refiner margin. Today it's about 6.6 cents a litre.
If you add in the retail margin, we get the tank wagon price, which was what I referred to on the previous slide. The tank wagon price quoted in this data set is in general
the Statistics Canada price, but in the more recent months I have chosen to use my own price in Halifax for expediency but it is, in general, sort of the mid-range or the price - it's where I have chosen to put my company, anyway. To get the final delivery price to the homeowner, we have to add the HST. So, as we speak today, the Halifax price of heating oil is just over 60 cents a litre. I think that's enough said about that for the moment.
The Halifax rack is too high, it's always too high as far as I'm concerned because that's what I buy on. So, I am constantly negotiating to keep that price down as low as I can. There's not much liquidity in that price, I only have two suppliers, there are only two refineries in the region and as I said, as much as my customers call me every day to tell me the price is too high, and they tell me that every day, it doesn't matter what time of the year it is, I would say that the Halifax rack price is too high. But to be fair to the people who set the Halifax rack price, it's a very good price in Canada.
Today it's about - what do my numbers say? - it's 38 cents a litre today. Probably a week and a half ago or three days ago it was a penny and a half higher than that. So that will give you some idea of the volatility that I'm dealing with. My price can change overnight by a penny, a penny and a half, two cents, I think the worst thing I've seen was 3 cents, but when we're setting the residential prices and we all understand that volatility is an issue with our customers, underneath that I'm dealing with extreme volatility in my price. So the price in the Halifax rack today is 38 cents, and just for an example, the price in Quebec City at their rack is 39.3 cents and the Calgary rack, which is sort of the made-in-Canada rack, is 38.6 cents. So the Halifax rack, although I feel it's too high - and it's always too high - is extremely competitive in Halifax.
I can only speculate on how it's set that way. But I have already alluded to the fact that the refiners in this district are net exporters of heating oil and they would export into the biggest heating oil market, which is the New York Harbour market. So, the New York Harbour market is a liquid market. It's traded on the NYMEX heating exchange. This morning it's 87.5 cents a U.S. gallon, which is 35.25 cents a litre - that's this morning - and two days ago it was 37 cents a litre. So there is a very close correlation to movements in the NYMEX price and the movements in the Halifax rack price. It would be a very extraordinary circumstance where . . .
MR. DAVID HENDSBEE: Just to clarify, is this U.S. or Canadian dollars you're quoting?
MR. CHALMERS: I'm quoting crude oil prices in U.S. dollars a barrel and I'm also quoting the cents per litre equivalent. Anytime I say cents per litre, it would be Canadian cents per litre. So when I said the NYMEX price this morning is 87.45 cents per U.S. gallon, that translates to 35.25 Canadian cents per litre. Fair enough?
I have one more slide then we will be able to flip back and forth to these as questions arise, maybe. This is taking the same chart that we had before and expressing it as a per cent of the delivered price, because quite often businesses run on a markup or a profit margin that is per cent and we look at per cent margins. As you can see here, the only constant per cent margin in our business is the government's share. It's 15 per cent on top of my price, which is roughly 13 per cent of the final delivered price. As you can see, all the rest of us get varying proportions of the final per cent. Right now, in a rising market, typically, local heating
oil marketers would be in a shrinking margin position, both in absolute cents per litre and in percentage terms.
That concludes my prepared testimony. (Laughter) I hope we can refer to some of these numbers.
MR. CHAIRMAN: Thank you, Mr. Chalmers and Mr. Hovell. Do we have some questions? Mr. Samson.
MR. MICHEL SAMSON: Thank you, Mr. Chalmers, for your presentation. Looking at the government's Web site, the Department of Natural Resources, dated today, they are listing the 2002 oil price with taxes included at around 58.5 cents. In 1999, when the Conservative Government would have taken office, it was 35.9 cents, which is almost an additional 23 cents a litre than what Nova Scotians were paying back in 1999 as to what they are paying today. I am just curious, if you could tell us, just briefly, what the main reasons are for such a drastic increase within a period of three years.
MR. CHALMERS: From 1999?
MR. SAMSON: Yes. It was 35.9 and today they are listing it as 58.5.
MR. CHALMERS: And the government Web site was updated when?
MR. SAMSON: It was downloaded today.
MR. CHALMERS: I know, but what are the prices there? The last time I looked they were about six months out of date. Is that the utilization page?
MR. SAMSON: This is in November 2000, is what they are saying is the date that they are using for these prices.
MR. CHALMERS: Yes. Well, anyway, referring to this slide so that we are talking about the price today at 58 cents - so that is sort of what is reflected on my graph here - is the same price. The other data point that you had was when?
MR. SAMSON: 1999.
MR. CHALMERS: Which is the lowest point?
MR. SAMSON: No, that's just showing that the average price at that time was 35.9 cents.
MR. CHALMERS: Yes, but in April 1999, you can see on this graph, if you refer to it, is the lowest price in the last five years.
MR. SAMSON: Yes, what would be the main . . .
MR. CHALMERS: Well, first let me say, I don't think it was all the local economy. You can see in April 1999 that the GST portion of this price - let's start with the one that I always love to talk about - was 4.5 cents. Today it is 8 cents. So 3.5 cents of that has gone into government revenue, okay? The retail margin in April 1999 was 10 cents and now it is 14 cents a litre. So 4 cents of it has gone to the retail marketers. Let me, first of all, say that 10 cents a litre is too low for our business, so that was a great time for consumers.
The refiner margin has gone from 2.29 cents in April to 7.78 cents, so that is 5 cents a litre. We have got 5 cents a litre in the refiner margins, we have got 4 cents a litre into heating oil marketers margins and we have got 4 cents in the government margins so far.
The price of crude oil in April 1999 was $18.50 U.S. per West Texas Intermediate. Today it is $32 which - if you look at the cents per litre - is a 9 cent a litre increase in the crude price.
MR. SAMSON: Mr. Chalmers, you are probably aware, in the last and preceding two years, there was a heating oil rebate program that was offered by the Province of Nova Scotia to consumers who use oil to heat their homes. As part of that program, I am curious, did your association have any discussions at all with the government about the program or how it would be implemented, or did they seek your input as an association as part of this rebate at all?
MR. CHALMERS: I think in times like this when we have a run-up in the price - and we saw it up until January 2001 and we are seeing it again this year, the similar type of phenomenon, the people most devastated by this are obviously people living on the margin,
people who are struggling to make ends meet. In general, I wouldn't say these are people in the rental market either. They are people who own their own homes and are struggling to make their monthly payments on it, whether these people are on fixed incomes or not.
[1:30 p.m.]
I think my comment at the time was, it was a valid concern and it is part of our society that we have to look after people who are struggling, you know, as a good neighbour. I don't remember suggesting $50, I don't remember suggesting that the government should do something. I do remember making the same comment at the time.
MR. SAMSON: Based on the comment . . .
MR. CHALMERS: I would just like to say that as oil heat marketers in the province, we are very aware of this phenomenon because we get the calls first. We have the people who are struggling to make ends meet calling us, asking us for help. I would like to think that we all do as much as we can in terms of extending credit terms - is one thing we do - and we also participate in the Salvation Army Good Neighbour Energy Fund, where there are emergency drawdowns available to people like this.
MR. SAMSON: No, I appreciate that and, certainly, I think most of us around the table are aware of the Salvation Army fund and have used it for our own constituents. Based on your own experience with the calls that you have had and the situation that numerous Nova Scotians find themselves in, and some of your own customers, is it your opinion, I guess, in the feedback that you have received, that the oil rebate program did provide relief to Nova Scotians who most needed it?
MR. CHALMERS: Tough call. We all know it was under-subscribed, first of all, so not as many people took advantage of it as one would have thought. Certainly, I do know that some of my customers took advantage of it because they came to us for their receipts. How many - not very many. Did it go to the right people? I can't recall, to be truly honest with you. I can't recall who got it. In my mind, I'm in the office every day and I am pretty familiar with a lot of my customers but I don't remember any particular individual who asked for it.
MR. SAMSON: Have you received any comments this winter on the fact that there is no rebate program that has been offered?
MR. CHALMERS: We haven't got a call about price yet. We haven't got a call in my office about people concerned about making payments yet. I think people are still digesting Christmas and we just haven't had those calls.
MR. SAMSON: In your experience . . .
MR. CHAIRMAN: Mr. Samson, I'm going to have to cut you off in the interest of fairness. Mr. MacKinnon. We'll try to get back to you, Mr. Samson.
MR. RUSSELL MACKINNON: Mr. Chairman, I noticed, one of the factors that generally can be attributed to the increase of home heating fuel is the question of shortage of natural gas, as it is quoted here in this booklet that has been provided to us, because the large industrial consumers of natural gas in the United States have what they refer to as interruptible supply contracts.
MR. CHALMERS: That's correct. If you look at the January 1st spike, it was mostly that phenomenon where there was a huge run-up in natural gas prices and people with dual-fuel capabilities switched.
MR. MACKINNON: Is that . . .
MR. CHALMERS: Sorry, I didn't give you a chance to ask the question.
MR. MACKINNON: No, that's quite all right because it seems to fit in with the issue of the offshore natural gas situation here in Nova Scotia and what appears to be a rather interesting scenario with Emera Fuels. As we notice, Emera seems to have acquired a considerable number of small, private independents over the last number of months, perhaps a year or so.
What do you attribute that to in terms of what the overall plan is, in terms of conversion from oil to gas? The overall thrust of your association and so on seems to be stay with oil, not convert to gas, but yet one of your larger stakeholders seems to be moving in quite that opposite direction behind the scenes and that does have an impact on supply and demand and the price that consumers will pay, particularly those on low and fixed incomes.
MR. CHALMERS: We have made the observation and certainly people like us in the States, it doesn't seem fair that because natural gas is priced so high that our customers have to pay more. It's another illustration of the fear and greed cycle, I guess. First of all, natural gas and where natural gas might sit in the province and what impact it might have on the home heating oil market, when I checked the markets this morning, the price of natural gas was over $5 per 1 million Btu, that's U.S./U.S. Another interesting number for you folks to bear in mind is that a barrel of crude oil has a little over six times the heating capacity that natural gas does. It's the law of 6.2, I like to say.
So $5 per 1 million Btu for natural gas is about $31 or $32 a barrel for crude oil, if you just look at the heating oil equivalents. Historically natural gas has been priced at least $10 a barrel underneath West Texas Intermediate and natural gas only made inroads in heating oil markets when it was at least $10 a barrel underneath the price of crude oil because basically they are a source of heat, both of them. They are the raw materials for both of us.
My competitor, who I will be first to admit, and ourselves, have to start somewhere. So when the price of natural gas and the price of crude oil are approximately the same in terms of heating value, then it really comes down to efficiency and distribution. I believe in the Nova Scotia market that we will always be a more efficient distributor of heat than a natural gas utility. If the government doesn't subsidize the natural gas utility, we'll always be there and we'll always offer a better value because we can go from crude oil to delivered price at a lower cost than a natural gas utility can.
MR. MACKINNON: What you are saying, sir, is that eventually, as the number of participants in your association are reduced, in other words the total number of private independents are reduced, competition is reduced, the larger corporations will eventually gain a monopoly on the market and will be able to pretty well dictate the price to the consumer.
I realize that there is a very fine line, the margin between the rack price and what the independents are able to produce. If you go down the scale that you showed there, the larger corporations like Irving, PetroCanada, Esso and so on, they have the higher ones. But if you go up, who owns Save On Fuels? It's Emera. Am I correct on that?
MR. CHALMERS: No, that's not correct.
MR. MACKINNON: Or Anytime Fuels, who owns that?
MR. CHALMERS: I'm not sure.
MR. MACKINNON: Emera.
MR. CHALMERS: You made a statement there that I don't agree with.
MR. MACKINNON: Well, what I'm seeing is that the stage is being set so that eventually there will be very few suppliers and distributors in the market and the price will be effectively controlled. That's to the government's advantage because their revenues are based on a percentage. It's not based on a payment per litre.
MR. CHALMERS: Whose revenues?
MR. MACKINNON: The government's, right? So it's tougher for the small-private independents.
MR. CHALMERS: Okay, you made a statement that you believe the market will consolidate and I wanted to take exception to that for a moment. The barriers to entry are very low to get into the business of distributing heating oil. All you have to do is buy a truck, and you can finance that. The phenomenon that we witnessed recently since the deregulation of the price is, in fact, that the number of competitors is the market has grown not shrunk, so I would take exception to that.
Now, Emera has come into the market lately, and it's been an interesting phenomenon because it's the first time we've seen a well-capitalized new entrant. I fight every day against lots of big bucks of capital, but we've been successful. I don't believe that the independents will ever be in a situation where they can't compete until we're supply constrained, and that's my biggest fear. We do have a small number of suppliers in the market. My particular company goes to great lengths to compete in that market as well. Basically, our ability to compete is based on the greed of my suppliers, wanting my volume. If there isn't a large number of suppliers, then it makes it a lot harder for us to compete and to get a decent price.
I think there is some import capability in this province. You referred to Emera Fuels, and they certainly have the import capability. We have it on a small scale, but we probably
couldn't support the whole province. That's our biggest concern as a group, the liquidity on the supply side of the market. In terms of competing on the distribution, a small guy can compete. It's a mix-and-match of services. Able Fuels is probably the fastest-growing fuel oil distributor in the province, for instance.
MR. CHAIRMAN: Thank you, Mr. Chalmers. Mr. MacKinnon, I am going to have to move along. I would advise honourable members and, in fact, our guests, if they're so inclined, to be a little more concise in their questions and answers, it would give more members an opportunity to chime in. Mr. Corbett.
MR. FRANK CORBETT: There are two prices that wholesalers pay, one referred to earlier as the rack price and there's one called the direct delivered price, the DDP. It's usually a little higher. I'm just wondering what the difference is in those two pricing systems, besides the obvious . . .
MR. CHALMERS: I'm not sure about the direct delivered price. It's not very relevant in the supply side, where we buy. The direct delivered price is the nominal price that a refiner will charge or use as a benchmark in his own marketing activity. For instance, in the industrial world - and I've never been there, so I should first of all say I'm speculating to some extent - direct delivered prices are usually quoted for large consumers of fuel. In my experience over the last 15 years, it's become less and less relevant in that most large contracts are based on the rack price now, a differential off the rack price, so it's rack plus a half or rack plus one or rack plus four and a half would be the way that prices would be quoted to a larger consumer now as opposed to the direct delivered price.
MR. CORBETT: Now the rack price as of January 6th for Esso furnaces is 38.5 cents.
MR. CHALMERS: Where are you? As of when? No, that's what I quoted. I think I said 38 cents.
MR. CORBETT: Yes, 38.6 cents.
MR. CHALMERS: The low rack, you're quoting the Esso rack.
MR. CORBETT: The average as of December 31, 2002, the average price per litre in the Halifax area was 61.1 cents.
MR. CHALMERS: Delivered, all taxes in.
MR. CORBETT: That's roughly about a 52 per cent, 53 per cent markup from rack to delivery. That's quite a sizable markup.
MR. CHALMERS: No, the rack doesn't include tax, first of all.
MR. CORBETT: Okay, but it's still a sizable increase. It's much more than your 10 per cent margin that you talked about before.
MR. CHALMERS: I've never alluded to a 10 per cent margin. We live and die on cents per litre. None of our margins are percentages. That's an impression that people have, mistakenly. When I said 10 I meant 10 cents, and when I said 14 I meant 14 cents.
MR. CORBETT: But still the difference in the rack price . . .
MR. CHALMERS: The difference in the rack price . . .
MR. CORBETT: . . . and the delivery price.
MR. CHALMERS: . . . and the tax-out price at the end of December was about 16.6 cents.
MR. CORBETT: Yes. So using those same dates, we would see, in a place like Quebec City, roughly 7 cents cheaper.
[1:45 p.m.]
MR. CHALMERS: I don't know.
MR. CORBETT: Yes, it's 53.4 cents as of December 31st.
MR. CHALMERS: I think Nova Scotians in general enjoy a very good price. Any comparisons we've done on a national basis, and we tend to do it when we get together at our national conventions, Nova Scotia is always under. It may not be today.
MR. CORBETT: Okay, why wouldn't they be today, then?
MR. CHALMERS: I don't know. Typically our members have a smaller margin than our compatriots in Upper Canada. One thing you have to appreciate here is that these prices we're talking about change in heartbeats. As you said, the Halifax rack price two days ago was a penny and a half higher, and the retail price hasn't changed in that interim. My margin today is 13 cents. You're saying three days ago it was 16 cents, that's the reality of what we're dealing with every day. If you think that price is too high, then it's going to attract competitors which will drive the price down. That's the way the market works. That margin is what it is.
MR. CORBETT: You're competing against yourselves in some ways. Your industry controls 60-some per cent of the home heating in this province, 62 per cent.
MR. CHALMERS: Yes, we compete against electricity, wood, propane. There is inter-fuel competition, and there is a significant number of people in this province who have chosen to heat their homes with electricity for whatever reason.
MR. CORBETT: But the reality is you still control 62 per cent.
MR. CHALMERS: And not all the rack prices are 15 cents, as we just saw in this supply. Some of them are down at 6 cents, 7 cents.
MR. CORBETT: But what we're looking at here is averages, and the average is 61.1 cents.
MR. CHALMERS: I think average is a dangerous place to go. You can drown in a brook that's an average of six inches deep. (Laughter)
MR. CORBETT: And you can swim in one that's six feet deep, and I know that we're drowning in oil costs now.
MR. CHALMERS: But as I said, there are low barriers to entry here, and if the margin gets too high more people come in. Why did Emera get in there? They thought they could make a buck there, right? They looked at natural gas, they spent $5 million, people say, looking at natural gas, and they jumped into the heating oil market.
MR. CORBETT: But with the absence of no distribution for natural gas, if that competitor came into the market it would have an impact on your pricing regime also.
MR. CHALMERS: Who's to say? If it's a free market and the natural gas distributor has to pay its freight in the long term, then they can't compete with us. Sempra said they were going to do however many counties, all the counties in seven years - industry pundits said there's no way you can do that - and when they started to look at the numbers, they're gone. The new guy on the block, he's in here saying he's going to do 4,000 houses at the outside, and he needs community co-operation and community partnership.
Our industry is saying that that's just a red flag, that means they're looking for taxpayers' money. They want to take money from everybody else in the province and give it to these 4,000 people so that they can deliver natural gas to them. Is natural gas going to have an impact? It already has, I would contend, because price protection wouldn't be in this province unless we were concerned about meeting our competitors head-on. Can we meet them on price? Yes, I'm sure we can.
MR. CHAIRMAN: Before I recognize Mr. Epstein, Mr. Chalmers, you mentioned the fact, a short time ago, that you are concerned about the supply and future supplies of your product. I was just wondering, where there's been so much talk lately about labour strife in
Venezuela and the threat of war in Iraq. From your perspective, has that legitimately affected the recent price increases?
MR. CHALMERS: Oh yes, I don't think there's any doubt that that is the major influence in the most recent run-up of prices. There's two elements, there are absolute increases in the price of crude oil and there is also the element of uncertainty. It is the uncertainty that leads people in the market to ask for a bigger price, you know. You look at it, you've got a crude oil producer who has a well in his backyard, what rationale is there for him to go from $10 a barrel to $32 a barrel. He's just doing what any businessman would do in the position he's in. He's trying to get better value for his product.
In terms of absolute numbers, the price of crude oil sort of topped out around $32 and nobody in the business - or what I read from the business analysts who trade in crude oil - that can't be supported in the long term, even the OPEC nations recognize that at $32 a barrel that's not going to happen. The world economy is going to shrink and ultimately they're going to be less better off, $26 would probably be something they would be very happy with in the long term. I think there's an uncertainty factor of at least $6 a barrel in the market as we speak. But also as we speak, OPEC nations, Saudi, has just said that they're going to increase their production by 2 million barrels a day to supplant the shortfall that's attributable to the Venezuelan strike. So as we're speaking here, traders are digesting that information and overnight the price slid about 80 cents a barrel.
I can't impress upon you enough, I don't think, how volatile this market is from a buyer's point of view and I buy. We have to buy every day and our prices come back, overnight changes in the New York Harbour market are reflected in my price the following day.
MR. CHAIRMAN: Mr. Epstein.
MR. HOWARD EPSTEIN: Mr. Chalmers, what we're really wondering about is the figure that Mr. Corbett drew your attention to at the beginning, which is the difference between the price coming out of the refineries at around 38 cents a litre and the price to the consumer at around 61 cents. Looking at that you have identified for us the two other components, one's tax and one's the retail margin - the retail margin means the price that goes to you and the other members of your association for the service of delivering the oil and all of the other services you offer so . . .
MR. CHALMERS: Yes, it's our gross margin.
MR. EPSTEIN: So that's right, it's gross but clearly when I look back at the slide here, the tax portion is about half of what the retail margin is. Over the four years you have given us here, your retail margin has fluctuated between maybe 8 cents or 10 cents on each
litre, to about maybe 15 cents on each litre. It's not clear that this is related in any way to the underlying price of the furnace oil coming out of the refinery but it looks fairly substantial.
I guess what's not clear is what you suggested, that if the price was too high that there would be lots of new entrants coming in, that is they would see the opportunity to make money by - you implied, I think - selling under your price, so they would say we can deliver it for less than you can deliver it for, so we've got an opportunity. How would they know whether this is a profitable business for them to be in? Is it not the case that none of these companies are regulated as to price? For example, with Nova Scotia Power, they have to go and justify all their costs to the Utility and Review Board, you don't, none of your members really do. You are in a marketplace but you don't have to lay out for the public and therefore potentially all comers, how you spend your money, what the profit margin is ultimately, what the rate of return is, we don't know. We assume that if you are in business and continuing to be in business that you are making a return that makes it attractive but we have no idea how much it is, nor do your potential competitors, anyone who you said could just go buy a truck and get into the business. They don't know whether it's potentially profitable or not. So, is it fair to say that they're missing that piece of information to build a competitive market place?
MR. CHALMERS: Where am I going to start? I think first I want to start by saying that this is a daily snapshot that I've given you here. It's 60 days over five years. I've also alluded to the fact that the price volatility is on the order of 2 or 3 cents a day, or it can be under extreme conditions. So the average, the unweighted average over this period of time is about 13.5 cents or 14 cents. So if you want to tell my potential competitors that, then feel free to do so.
MR. EPSTEIN: That's publicly available information. What they don't know is whether they can make a profit on that.
MR. CHALMERS: You say it's public information and it is, I agree with you, what the retail margins are. So what other piece of information do they need?
MR. EPSTEIN: I think the structure of what all the expenses are in running such a company.
MR. CHALMERS: But that's sort of business, isn't it? (Interruption) That's not what I'm sharing with you.
MR. EPSTEIN: No, you're not.
MR. CHALMERS: First of all, Mr. Epstein, I have complete faith that the market works. If you don't agree with that then we can't really go very far because we don't ask Canadian Tire what the components of their bicycle prices are, we just have faith that
competition is a good thing and competition ensures that we get a good price. I think the reality of the consumers is that we all love competition when it's giving us a great price and we all hate it when the price is high, and we all think it's always too high.
MR. EPSTEIN: What we're dealing with here is not the kind of product that Canadian Tire sells, we're dealing with something that's a daily necessity in a cold climate. I think that's the essence of it, really. Let's look at your competition.
MR. CHALMERS: So is food and we don't ask Sobeys how they arrive at the price of bananas or potatoes either.
MR. EPSTEIN: We can look at that next, but let's look . . .
MR. CHALMERS: Well, I think we've agreed to disagree.
MR. EPSTEIN: Your competition, because fuel oil has 62 per cent, your competition is electricity, wood, what else?
MR. CHALMERS: Certainly the major competitor is electricity but it is only one component of competition. We also have, as I keep trying to tell you, that competition on an inter-marketer basis is extremely active. I'm in an unique business, I agree. When you contract with me to deliver your heating services for winter, neither one of us knows what the price is going to be.
MR. EPSTEIN: We started to talk about what the impact would be of natural gas being introduced into the market place here. Did you really say that it wouldn't have caused any problems for you or it wouldn't have introduced any element of competition at all? Is that your position?
MR. CHALMERS: Oh no, I think we'll get better but I don't think we'll be competing, necessarily on price. Because we're going to set the price in the near term. The question for them is can they sell at that price?
MR. EPSTEIN: When you referred to price protection, what were you referring to?
MR. CHALMERS: It takes various forms. One of my competitors has introduced a plan that if you sign a contract with them to buy heating oil from them for the winter, they would guarantee your price for the whole winter. One of my other competitors says that they will offer you a maximum price and you have to pay for that protection. This is available, the point I want to make here is that as this market matures and as these new services get introduced, the issue of price volatility will be an individual consumer's decision as to whether they want to pay a premium to cap their price and guarantee their price or whether they're going to play the game.
MR. EPSTEIN: Individual homeowners?
MR. CHALMERS: Yes. I have 750 people on my customer list who have chosen to cap their price for the winter, at no cost by the way.
MR. CHAIRMAN: Thank you very much, Mr. Chalmers.
Mr. Carey.
MR. JON CAREY: Coming from a business background, I think I can understand a little bit about what you're saying. Can you explain to me why a homeowner would buy from Irving at 55.9 cents when they can buy from Save On Fuels for 46.9 cent? I realize you're in competition but being as objective as you can be I'm asking you that question.
MR. CHALMERS: In economic terms it is the value equation. I really can't comment on that, why individuals would choose to do that. The people who buy from me, buy from me because they think they're getting a good deal, aren't they? And I'm above them too.
MR. CAREY: Okay, there's a 3 cent difference between you and Irving, for example.
MR. CHALMERS: Yes.
MR. CAREY: So why do people buy from Irving in Truro, or wherever your outlets are over the province - and I know you have many - what do you give or what does Irving give that you don't or why would they pay 3 cents a litre?
MR. CHALMERS: You know, from our marketing studies that we've done as an organization, one of the biggest fears people have is running out of oil in the middle of the night. That's the number one issue with our consumers, is the reliability of the delivery process, believe it or not. Perhaps, and I suggest only perhaps, that they've looked at all of the alternatives, and I would hope they do, and looked at the value they're getting and decided that the services that Irving offers at 55.9 cents and all of the other services is a better value for them than taking a chance with Wilson's, for instance.
These are individual consumer's decisions and what drives one consumer and what drives another, I don't know.
MR. CAREY: And I understand that. I guess we all know that these retail prices, if I went to one of these companies, yours or any of the others and said I wanted a larger volume of oil, I get a better price and that happens. I can't speak for your company but I know the one I buy from does and I expect you do too.
MR. CHALMERS: And you look at it in terms of gross return.
MR. CAREY: Sure. I guess my concern as a person representing the public and my constituents is I find, as I've said, I believe in the business system, the capitalistic system, I'm a supporter of that, however, I do have a problem that the person who has - as you say - marginal income, has problems getting there, they're paying top buck when I'm buying for less.
MR. CHALMERS: This sort of issue came up the last time we had a price spike too and there was a lot of publicity about people having $100, for instance, and unable to get anybody to come and deliver to them. If you look at advertising that's done in the Halifax newspapers and the Yellow Pages for these one-truck distributors or multi-truck distributors, these cash distributors, they're quite proud of the fact that they will deliver the $100 order.
MR. CAREY: But we know they're not making any money on a $100 delivery that they're delivering.You can't send a truck out for that.
MR. CHALMERS: You know, if they stay in business they're making money, that's it. It's none of my business how they make money.
MR. CAREY: No, and mine either. I want everyone to stay in business, it's good for the economy.
MR. CHALMERS: Well, I guess it's certainly an illustration that price isn't everything.
MR. CAREY: But I guess my point is that the average person who is on the lower economic level does not have the negotiating ability or the chance, or I don't know what you would call it, but they call up your company and you tell them it's 52.9 cents and that's what they pay you. If some other person buying more volume or having better negotiating skills perhaps or whatever will buy for less, so the person with the low income is paying the higher rate.
MR. CHALMERS: I disagree with this statement. I think, particularly in the Halifax market, it's just absolutely not true.
MR. CAREY: I don't know about the Halifax market, but I can tell you that in Kings County I don't know of any elderly person on low income who is paying the same price for their home heating oil that I am. Anyway. Oil tanks in and around your home, where you deliver it to, was the organization that you belong to involved in the decision on the lifespan of that and when it had to be replaced, that type of thing? How much input did the oil companies that deliver have in that, or did you have any?
MR. CHALMERS: I'm certainly glad you brought that topic up. That is the hot topic of the year in our business. That is what my customers are complaining about more than
anything. There has been an increased concern about the stewardship of the environment in general. Certainly our industry has accepted the challenge of providing some leadership on this issue. We've been - I don't want to use the term lobbying - advocating a consistent oil storage management program for this province for the better part of two years. In the lack of any leadership, then the leadership is all coming from the insurance business right now. By and large the life spans that we're seeing proposed or enforced in this province are those of the insurance companies.
Some of my customers are being told that they're going to have to replace their oil tank every 10 years. The insurance company is driven, of course, by the costs of providing this insurance, because certainly the cost of dealing with a spill has escalated fairly dramatically over the last five years in response to our increased societal concern about the quality of the environment. That's what's driving their thinking.
Did we have any input? Yes, we have had quite a bit of influence, certainly in the Province of Prince Edward Island, for instance, in the Province of Newfoundland. Our organizations have participated in setting what we think are reasonable life spans or economic life spans for steel oil storage tanks. But right now those life spans being used in this province are those that have been determined by individual home insurance companies.
MR. CHAIRMAN: Mr. Samson.
MR. SAMSON: Thank you.
MR. CHALMERS: Where were we? (Laughter)
MR. SAMSON: Mr. Chalmers, based on your experience I guess the big question that Nova Scotians are asking of you, asking of us and asking of themselves is, based on your past experience in this industry and where you see the market is with the conditions that have already been talked about, in your opinion should Nova Scotians expect any drop in the price of home heating fuel this winter, or is where we are today probably where we're going to remain for the rest of this coming winter?
MR. CHALMERS: I have a favourite response to this question. If I knew I would be in the Cayman Islands somewhere on a cell phone making more money than I can make distributing heating oil in the Town of Truro in the Province of Nova Scotia. This is a market that is, to a large extent, worldwide. Oil is what makes the world go. It's dominated by big players operating in a global sense, and they don't know what the price of oil is going to be. That's what the New York Mercantile Exchange is all about, some people will assume the risk, and that's the facility we use to offer price protection to our customers. Somebody in the trading business, in the financial services business will name a price and they will cover it at a price. So if you want to bet that crude oil is going to be $26 a month from now, somebody will say, I will sell it to you in return for the opportunity to make the money on the
difference. I mean, in the simplest form. So the short answer is, nobody knows what the price is going to be, right? Is it likely to stay up? Not very likely.
This fear-greed cycle that we are in where people are afraid of shortages - and, you know, the reality is, when North Americans are afraid of shortages, they bid the price up and somebody else in the world goes without, right? North Americans are rich enough and affluent enough to make sure that any short-term supply disruptions are not going to happen. It happened in 1971 when we didn't have the liquidity in the markets that we have today.
Every price spike has been short-lived and I would contend that right now we are on a price spike. If the people in Venezuela go back to work and the war in Iraq is short-lived, the price will crash. You tell me.
MR. SAMSON: Sure. I guess, just as a final question, you did make reference earlier regarding the government's rebate program that some representations had been made in the past. Have you or do you intend to, as an association, make any representations towards the government in regards to a home heating oil rebate for this winter in light of the high prices we are currently faced with?
MR. CHALMERS: We have no plans at the moment.
MR. CHAIRMAN: Thank you. Mr. Hendsbee.
MR. DAVID HENDSBEE: Thank you, Mr. Chairman. I had various questions. Some of them have been answered already, about tank safety and the guaranteed pricing regime that you have, plus the minimum delivery charges of $100 or 100 litres, whatever the case may be. But to go back to the pricing of fuel, the tax that the government controls is the 15 per cent GST, or the harmonized sales tax. Is there any excise tax component in our fuel heating prices?
MR. CHALMERS: Not in heating oil, no. Now heating oil is very similar to diesel. There is a federal excise tax on diesel.
MR. HENDSBEE: So there is a federal excise tax, plus. . .
MR. CHALMERS: No, there isn't, not on heating oil.
MR. HENDSBEE: Not on heating oil. So the only thing that we have, as a government, control of, would be the 15 per cent GST, but we in this province, also in conjunction with New Brunswick and Newfoundland, would have to have consensus in adjusting that in any way possible, unless we want to have our own fuel assistance rebate program which is something that the government could discuss at a future time.
My question to you would be, then, do you think the government should be getting into the regulation of prices?
MR. CHALMERS: No. (Laughter)
MR. HENDSBEE: What benefit would there be to try to get - if the people are going to speak about P.E.I., but doesn't P.E.I. just have a 90-day delay? Basically, their suppliers are going to be faced with the same fuel price increase. All they are doing is getting a delay in the process of the market. The regulators over there are just going to have to deal with the price at a later date, that is all it is.
MR. CHALMERS: Well, first of all, if you choose to get into the business, you're all the way in. You can't be half pregnant here. When you become a regulator you become part of our business if you are going to regulate the price. If you're going to come in, then there are some pitfalls.
First of all, the price in P.E.I. today - I had it written down here and I am just trying to refer to it - is 48.8 cents. At the prices that are existing today, that will be another 4.3 cents that is going to go into that market to make it 53.1. As you saw on my slide on the price survey, people in Nova Scotia can pay less than that if they choose today, that regulated price. I think that it is their choice. People in P.E.I. don't really have a choice.
The other thing that has happened is that Newfoundland, 18 months ago, chose to regulate - and this is the headline in the paper last week - that they have had to back away from the regulated price because the marketers there are saying, you're saying that I have got to sell it for 48.8, for instance, but I have to pay 49.3 for it. Take the extreme example. It is not going to happen. I am not going to sell it for less than I pay for it. I am not into philanthropy and I am not a charity. So once you're in, you're in.
[2:15 p.m.]
MR. HENDSBEE: So the only difference from us and P.E.I. is that they do not charge the GST portion. (Interruptions) So there is a 7 per cent variance right there because they don't charge - or the additional 8 per cent, I would say, for provincial tax, or whatever the case may be - they aren't harmonized like the other Maritime Provinces are. Second of all, for instance, your earlier graph showed a 9 cent variance of the different suppliers. You wouldn't have that competition in a regulated industry, you would have one price for all.
MR. CHALMERS: Well, that is just an illustration of the choice. You know, that's not the price. When I say 52.9 cents, I'm not telling you - and my customers know that, that we have a customer loyalty program and a rewards program. Depending on the choice that people make for their services, the price of oil might reflect the difference.
MR. HENDSBEE: Now just a little bit more about tank safety and stuff. I see you're advocating that tanks be kept indoors in homes, in basements and everything else like that, whatever the case may be. What policies of insurance coverage do home fuel delivery services have for any oil spillage?
MR. CHALMERS: I can't speak for all of them but I know that right now, the liabilities associated with delivering oil include environmental liabilities. So, for instance, if it is deemed to be an error on the part of my company, an environmental incident or a spill incident, then my insurance will cover the costs that I am deemed to be responsible for. That goes with my vehicle insurance and everybody has vehicle coverage. Although I can't say 100 per cent, it is my understanding that where we are deemed to be responsible for an environmental incident, we do have insurance. Does that answer your question? Is that the question that you had?
MR. HENDSBEE: Well, I just wanted to make sure that if there is a fault or an error of the delivery, that the homeowner doesn't get dinged with the bill.
MR. CHALMERS: The care and custody of the oil that has been delivered is an individual homeowner responsibility. I just want to make sure that you understand that. So that if one of my customer tank fails, then the costs associated with the environmental remediation of that incident are the responsibility of the person who owns the tank.
MR. HENDSBEE: But in the circumstance where you may have overfilled the tank or had a faulty shut-off valve, whatever the case may be, an overflowing tank, that would be the responsibility of the deliverer then?
MR. CHALMERS: Yes.
MR. CHAIRMAN: Just a quick question, Mr. Chalmers. You being an independent, or at least representing an independent company, many times, as MLAs, we hear complaints from consumers that when the price of crude goes up, almost overnight the prices reflected either at the pumps - and I know we are talking about home heating oil, or relative to home heating oil - not so much regarding home heating oil. But I know inventory capacity varies from station - an independent and company station - to station. But from your perspective, looking at it in that context and being in the business, what the heck is going on when, in fact - we know that world prices sometimes do drop, if you watch the television and the stocks, et cetera. How come there is such a big difference in time, so to speak, between the time the price may drop and the price actually goes down, to purchase home heating oil or purchase gasoline, from your perspective?
MR. CHALMERS: To a large extent, perception is reality here. You asked about inventory. Inventory in an oil heating market probably carries - well, some of us don't carry any inventory. There are companies in the City of Halifax that buy what they sell on a daily
basis, but certainly the gasoline inventory in this province can be measured in days, one day, two days? So heating oil is probably the same, certainly less than a week, were the inventory in the hands of marketeers. So, . . .
MR. CHAIRMAN: If I might, excuse me, is that necessarily so in rural Nova Scotia as much as perhaps in Halifax-Dartmouth?
MR. CHALMERS: The amount of inventory that a marketer carries? Well, it's a trend, it is a very dominant trend. The amount of secondary storage in our industry has shrunk dramatically over 10 years, both in our market and any other market because the costs associated with the storage of this product are continuing to increase. So, as I said, secondary storage is shrinking quite dramatically. That's a general business thing as well, just-in-time deliveries are becoming sort of the way the world works. So, a refiner may have 24 or 45 days of inventory and, of course, the producer has about 30 years of inventory. So who stands to gain in a rising price market? I think it's pretty obvious.
I had a call from one of my customers, a propane customer as it turns out, when I increased his price this fall and believe me it happens, and it happens quite a bit, and it turned out that his price had gone up exactly the same amount as I had lowered it. He's in the restaurant business and he called me up and he said, how come my price went up? I said, it didn't go up it went down and it went up and you didn't call me when it went down. So, why are you calling me when it went up? Would you have preferred that it stayed the same? So, that's being a little facetious but I'm just saying that perception is reality.
The other phenomenon is, I'd rather be a bum once and a hero 100 times. It's price volatility that my customers are concerned about. So the way I run my business is that I have a target margin that I need to run my business to make some money and I won't apologize for making money because that's why I'm in business. I know what I have to charge and I know where to set the prices in order to make some money relative to my costs. For me, fuel oil is just a cost, it comes off my gross margin. So when I'm meeting my target margins, I'm not touching prices, when they start to slide, I start watching it and I start watching it every day and I start watching my competitors every day to see what they're doing, because they're faced with the same cost structures or the same cost of furnace oil that I have when my prices are going up, their prices are going up. We all tend to hold off as much as we can and hope that it'll change. But when it becomes obvious that it has to go, you might over compensate and that's what happens in a risk environment. Because I have to take the risk of the price decrease. So, when it falls, you watch it when it falls too. If you're sure it's going to go down then you start passing price decreases on.
I made a mistake this fall because I lowered my price 3 cents a litre in December and, man, I had to go back up and that's not fun when you have to go back up, you get the phone calls and you get the people complaining and you have to make the explanations. I would rather not get those calls.
MR. CHAIRMAN: Thank you. Mr. MacKinnon.
MR. RUSSELL MACKINNON: Mr. Chairman, with regard to the oil tanks. I was just recently involved in a particular case out on the old Sackville Road, and I'm not sure if you're familiar with that one or not. There was an oil spill there that was estimated at $0.25 million, a very prominent property, I think most people would be aware of it and then it had spillage over onto the neighbours, which was estimated at another $200,000. Then it became a major insurance issue. That begs to raise the question about your association's concerns about the escalating cost because of oil spillage, vis-à-vis tanks. Have you had any discussion with the provincial government in terms of regulating that aspect of the industry? I know you have a brochure here about having well-designed and safe oil tanks.
MR. CHALMERS: I don't know how we're doing for time but anyway, the answer is yes, we have had discussions and yes, we've made very specific recommendations about what we feel that we have to do as an industry and yes, we told the province that we need their co-operation and support to make it work. Whether or not you call it regulation or something else, personally, I prefer less government is better government to a large extent but we've made a proposal for an industry-led solution to this problem.
MR. MACKINNON: How has the government reacted?
MR. CHALMERS: Very positively and we expect their support.
MR. MACKINNON: So you expect the oil tank regulations to be implemented.
MR. CHALMERS: I guess, David, maybe you can speak to the time frame on that.
MR. DAVID HOVELL: We struck a working group with the Department of the Environment which was comprised of the industry, the oil industry, the insurance industry, the environmental industry and government. The mandate of the current working group is to deliver a report to the minister early this year. Actually, that working group is meeting again on Thursday. It has met once in December and they're looking forward to delivering a report and recommendations to the minister no later than the end of March.
MR. MACKINNON: If I could, Mr. Chairman, that would have an impact on the cost. The bottom line being, there is a cost to everything. Has the industry had discussion with government as to who will absorb the cost? Obviously, the government seems to be getting a pretty free ride, as the price goes up, 15 per cent of whatever the price is, the higher the price the more money they make. Has the government put any money on the table, so to speak, to address this concern? Obviously - and it's not just out on the Old Sackville Road - I know of several instances in my own constituency, we're talking of anywhere from $25,000 to $750,000 in some cases.
MR. CHALMERS: When the spill happens, it's too late. That's our industry's position. Our position is to eliminate all spills. That's the cheapest solution, and ultimately it will save money.
MR. CHAIRMAN: Mrs. Baillie.
MRS. BAILLIE: Mr. Chalmers, when you spoke about - in fact it made me heartsick - North Americans being so greedy that some people have to go without, it didn't make me feel very good. When Jon Carey was talking about the different prices, I kind of look at it this way, I burn a lot of oil, I'm able to pay my bill on time, and because I'm able to do that that allows my company to maybe run out with a truck with 100 gallons for somebody that needs it. Is that the way your company kind of operates, would you say?
MR. CHALMERS: I didn't understand the question.
MRS. BAILLIE: Do you take the good with the bad? Your good customers, the people who are able burn a lot of oil and are able to pay the bill on time, you make money on those customers, right, so then what I would call the working poor or the man who just has enough, a $100 bill, that enables your truck to run out to service him. Do you work on those lines? I would hope.
MR. CHALMERS: There's no conscious effort to do that.
MRS. BAILLIE: No?
MR. CHALMERS: Our company values a customer's loyalty very much. For people who have dealt with it, and I think most of us feel the same way, those who are in the business, we recognize that the consumer has made a long-term commitment to us and that if they're in a rough patch we really owe it to them to help them get through. Ultimately, of course, they have to pay for the oil.
MRS. BAILLIE: Oh yes.
MR. CHALMERS: That's why we have various payment options and financial payment plans and price protection plans, to enable our customers to manage their home heating requirements. Certainly, as you said, some people are more able than others to do that. I would say it's also not fair to my customers to ask them to subsidize, because my customers are making home heating decisions that are based on their own best interests. I don't think they would pay me a premium if I told them that because you pay me 3 cents a litre extra, I'm going to look after your neighbour for you. It's not going to happen.
MRS. BAILLIE: That wasn't what I meant.
MR. CHALMERS: It's not going to happen. To answer your question, I guess your question is, is a company like mine more or less able to deliver the $100 call? I'm no more or less able.
[2:30 p.m.]
MRS. BAILLIE: With that in mind, being a good citizen, in your mind what should we, as Nova Scotians, or the province, do to combat this apparently unstable price in oil? Is there anything . . .
MR. CHALMERS: First of all, I don't think as a government we should accept the responsibility for it. I think the government's efforts are far better directed and probably more effective in - I like to say - helping our neighbour. It has become the government's role over the years and Canadians have come to expect that the government will be in the social services business for one reason or another. If you ask me whether I agree with that or not, that would be another discussion but that is something we've come to expect, that social services and support are delivered by the government. I think it's a perfectly valid role and as Mr. Samson alluded to earlier, the government is going to have extra money in their coffers as a result of the price increase that would facilitate that.
MR. CHAIRMAN: Mr. Chataway.
MR. JOHN CHATAWAY: Mr. Chalmers, I very much appreciate your presentation today. I'm not a member of the Canadian Oil Heat Association but I'm certainly far more informed of the goodness that you have done and things like this. I understand that when you met as an association there was sort of - I'm sure the date would have been the same because I do understand that much of this business is a very volatile business and you gave us those based on 60 days over five years and things like this, so it's a very good background.
Basically you had some comparisons of Nova Scotia to other parts of Canada and I'm getting the impression - correct me if I'm wrong, please - that Nova Scotia's oil heat is basically cheaper than in many parts of Canada. I guess we are in the bottom third, not the top third, that is price-wise, et cetera, et cetera. I did not come to the meeting but I understand in February 2000, I think Stephen McIntosh was in your position?
MR. CHALMERS: No, in David's position.
MR. CHATAWAY: Oh, David's position, pardonnez-moi. But during his presentation he stated that competition and not regulation was by far more in the best interests of all Nova Scotians. Certainly, from some of your comments today I'm getting the same impression. I am just wondering, would you agree with Stephen's conclusion that competition is better than regulation, or any update on that? How does your organization feel today about regulating prices?
MR. CHALMERS: It's almost philosophical, isn't it? Philosophically, our organization believes that competition creates the best situation for consumers. Our organization is made up of people who are in business to make money, who participate in the market, who are willing to compete with big bucks and small bucks and all sorts of fuel competitors. We believe that more competition creates more benefits for the consumer; it's a philosophical issue.
We've seen the market behave in these scenarios before and the market works. As soon as the price starts to fall, the price delivered to our consumers is going to fall because if it doesn't, somebody is going to come along and make my customer an offer that they can't refuse. That's going to happen. As long as there is liquidity in the supply market, we'll be okay, and Able Fuels, Anytime Fuels and Dan the oil man, and new entrants will come and people will drop out. That's the way it is. The most efficient operator is the one who will be there in the long-term. The person who combines value and economics will prosper.
Our company has been in business for over 125 years. We are going to be here. I made that point before to Mr. Sempra, that I will be here after you're gone.
MR. CHATAWAY: Okay, that is your opinion as the head of the Nova Scotia group, et cetera.
MR. CHALMERS: Absolutely.
MR. CHATAWAY: Does that pretty well apply right across Canada, most people and members of your association feel that competition is better than regulation in the long run?
MR. CHALMERS: Oh, absolutely. But let me say, first of all, that our company, was in a price-regulated market before and we made money in that situation too. If you want to get in the pool, come on in, the water is fine. But the government has to recognize that when they get in, they're in. They are just part of the industry then. To me, government is better off standing on the outside pointing fingers at times like this, than they are being part of it.
MR. CHATAWAY: The market is a very good business, I think, for all North Americans, et cetera.
MR. CHALMERS: The only thing I was going to say about the heating oil markets in the country is, there isn't much of a heating oil market in a lot of parts of this country. There isn't much competition in our business in a large part of the country. Nova Scotia may be a small part of this country but it has got a healthy, competitive heating oil market that is not enjoyed by everybody in the rest of the country, because of the fact that - you know, I mean, P.E.I. has got a big oil heat market too but they are a lot smaller, of course. This is a market that runs like a market. You know, how else can I compete with Irving?
MR. CHATAWAY: Exactly. Well, that is certainly the impression I have, and when you have compared Nova Scotia or even Atlantic Canada to other parts of Canada, we are better off, the person who actually buys oil, et cetera, to heat their homes, et cetera is better off in this neck of the woods than in other parts of the world.
MR. CHALMERS: You know, in absolute terms, the Ontario market is bigger. It is smaller, relative to their population base. There is less competition in that market. There is a very healthy and competitive market in Quebec, P.E.I., Nova Scotia and Newfoundland. Places where people are more dependent on a utility are less competitive and don't enjoy the same benefits.
MR. CHAIRMAN: Mr. Corbett.
MR. CORBETT: Mr. Chalmers, you talked earlier about, I believe, the Saudis increasing production; I think the Russians, also, yesterday.
MR. CHALMERS: Yes.
MR. CORBETT: What is the lag time between wellhead, we will call it, to the time it gets, say, from the Saudis or Russia to NYMEX?
MR. CHALMERS: Well, NYMEX is primarily a market of future prices.
MR. CORBETT: Yes. So you say the New York Harbour price.
MR. CHALMERS: The New York Harbour. I mean, it is my understanding - I really have got to watch myself here. You know, we all think we know everything about our business but there are cargoes on the sea that haven't been assigned. They are owned by traders who haven't sold them. Sometimes they pile up, and at other times people are crying for them. So a trader has bought a cargo of crude oil, he has put it in a tanker, he has started it towards the east coast of North America and he doesn't know where it's going. So why is he doing that? He's doing it to make money.
MR. CORBETT: I guess the question is, if the Saudis have increased production, what is it - assuming that it goes from the wellhead to the New York Harbour, what is the lag time? How many . . .
MR. CHALMERS: The lag time in the price is a heartbeat.
MR. CORBETT: How long would it take that commodity to get from the wellhead?
MR. CHALMERS: The actual, physical molecule?
MR. CORBETT: Yes.
MR. CHALMERS: I have no idea but I want to say one thing here that I don't want to introduce a bunch of fear-mongering here. Distillate stocks and gas stocks in North America are very healthy. There is a lot of product. If the demand slackens off, then those product pricings will fall sort of contra to crude but crude inventories are low in a relative sense to last year because of the disruption in supply from Venezuela. Crude prices fell on the New York market today because Saudi said they were going to shortfall them, they were going to supply the shortfall as a result of this until the strike ended. So, as I said, the price is a heartbeat. So there are enough molecules in North America that we aren't going to go without. I'm sorry to have upset you earlier but that's the reality of it. The people who were buying from Venezuela had to find other supply and they went out and bid the price up. They bid the price up to get supply for North America and somebody had to go without in the short term.
MR. CORBETT: So when the New York Harbour price increases, do the Canadian suppliers then ship to there as opposed to ship domestically? Is that what happens?
MR. CHALMERS: I think the logistics of the molecule movement aren't really important for your consideration.
MR. CORBETT: It's not a matter of changing the valve, it's the price is the price.
MR. CHALMERS: Information moves across this planet at light speed now. It is very difficult to arbitrage a price. Everybody who trades in these commodities or related commodities has their eye firmly fixed on what is going on on the floor of the New York Mercantile Exchange. That's what I want to say. That includes my suppliers.
MR. CHAIRMAN: Thank you, Mr. Corbett. Mr. Carey.
MR. CAREY: I just have a couple of quick questions. In your introduction I think you indicated there were two suppliers that you have a choice of purchasing from.
MR. CHALMERS: There are two suppliers of refined product in the region.
MR. CAREY: And do you have a choice of buying from either one?
MR. CHALMERS: That doesn't add any value to our conversation.
MR. CAREY: Okay.
MR. CHALMERS: My company is in the business of buying product every day. We do the best darn job that we can.
MR. CAREY: Then perhaps you could explain - maybe you don't want to go into any detail - but your price protection program, would people who offer that, your company, I know you would certainly know and maybe you know of the others, but when you do that, do you buy crude futures?
MR. CHALMERS: In my case, we don't buy crude futures, we buy heating oil futures. There is a very direct connection between the price of heating oil in New York and the price that I pay in general. As I said, as a bigger buyer, we basically buy on formulated prices.
MR. CAREY: So if one of your customers had come to you in September and said I want to participate in this price protection program, are you at liberty to say what you would have charged them?
MR. CHALMERS: Yes, I'm proud to say that we didn't charge them anything.
MR. CAREY: Well, price protection, what would be the maximum price they would have to pay?
MR. CHALMERS: That depends on when they bought it.
MR. CAREY: September.
MR. CHALMERS: They paid my list price in September. That's what we are capped at. The deal that I made, and I can't speak for everybody, was the day you wanted to cap your price, then the price of the day was what you capped it at.
MR. CAREY: So if I came to you today as a supplier . . .
MR. CHALMERS: I'm not offering it today.
MR. CAREY: You are not offering price protection today.
MR. CHALMERS: I can't.
MR. CAREY: So the price protection . . .
MR. CHALMERS: The opportunity to protect your price expired on November 30th.
MR. CAREY: Would that be a normal, annual program, price protection?
MR. CHALMERS: This is the first year we offered it.
MR. CAREY: Thank you.
MR. CHALMERS: It's very popular in the northeastern U.S. market. It's virtually the rule there and I fully expect that it will become the rule.
MR. CHAIRMAN: Mr. Hendsbee.
MR. HENDSBEE: One last question. Could you tell me if the Canadian Oil Heat Association, the Nova Scotia chapter of it, will be engaging in any public education campaign or have any industry incentives or initiatives to help to meet the Kyoto Accord requirements that have just been imposed upon us by the federal government?
MR. CHALMERS: The first thing I'd like to do is educate myself and I've started that process. So far, I've determined, in my opinion, with some ability to back it up, that at my customers' level, switching to natural gas is not going to bring us any closer to the Kyoto target - individual consumers in their own homes. I want to tell my customers that, because I don't want them to feel that they're polluting the environment by making this choice of heating oil. That's the first thing I'm going to do.
[2:45 p.m.]
What I need to know and what I'm trying to assess is what the Kyoto target means for my individual customer in terms of how much carbon an individual household in Nova Scotia creates by heating their home. I don't even know the answer to that at this point. As I said, my first step is to try to get educated on this, to try to understand what it means so that I can tell my customers, because our customers depend on us to give them the straight dope. I'm proud to say that I believe we do.
Certainly our organization has started a process, educating all our members, and we fully intend to find out what the Kyoto Accord and the signing of the Kyoto Accord mean for our industry. We don't know that yet, so we're not prepared to undertake a public education campaign, but I fully anticipate doing so.
MR. CHAIRMAN: Mr. MacKinnon, a few short snappers.
MR. MACKINNON: I want to follow up on that line of thought. On your Web site - it's essentially a competition between oil and natural gas, that seems to be the benchmark - you refer to oil being efficient, competitive, economical, environmentally responsible and safe. I understood you to say that government is getting itself in a position of subsidizing the natural gas industry. Am I correct on that assumption?
MR. CHALMERS: I didn't say that. I would hope that they won't. I will do everything I can to make sure that they don't.
MR. MACKINNON: I'm a little concerned. One of your largest partners is now, as I understand, making a bid for the distribution rights for natural gas. Also, being a partner, let's say you get your electric bill at the end of month and in it is a little flyer, for example, hypothetically, listing all the options that could be available if you were to switch to natural gas, because they would not only have the distribution rights but the ability to sell other products and make it pretty attractive to the consumer. How does the rest of your membership feel about that, and how would they be in a position to even be competitive, price-wise as what was suggested?
MR. CHALMERS: Either you know something that I don't, or I'm missing what you're trying to say. So, you will have to be a little plainer.
MR. MACKINNON: I guess I'm going back to the point about all the acquisitions that Emera has been making over the last year to year and a half. It seems to be just glossed over here. I think, ultimately, that's going to have a significant impact, particularly for the poor and the fixed-income earners in Nova Scotia. They will be forced to pay a higher price at the end of the day because competition will be reduced, and that's what it's all about, isn't it, supply and demand.
MR. CHALMERS: Certainly more competition creates more benefit, I agree with that. The fact that it's going to be reduced by Emera entering the market, I'm not sure that's true. Let me say that first of all.
MR. MACKINNON: Duly noted.
MR. CHALMERS: But I don't think I answered your question.
MR. MACKINNON: You didn't.
MR. CHALMERS: What is it?
MR. CHAIRMAN: Would the member please place his question again?
MR. MACKINNON: Is that going to change the mandate and the focus of your organization, when the big stakeholder within the organization has now committed itself toward promoting the use of natural gas as opposed to oil? There's going to be a shift here, and that will have an impact on the small private and the low and the fixed income Nova Scotians.
MR. CHALMERS: It's certainly been a trend in North America for utilities to try to get in the unregulated side of related businesses. We have seen the Consumers Gas and TransCanada Pipe, and certainly convergence is the buzzword.
Personally, I'm not afraid to compete with them but you know, there is a $20 million fund running around this province that was created during the signing of the offshore development agreement, that was supposed to be used for the - I'm going to get it wrong, but it was supposed to be used to promote the consumption of natural gas in the province by lowering the burner tip price. Our organization feels that that fund could be misused quite easily and we would advocate that the electrical utility in this province be encouraged to consider natural gas for electrical generation and pass the savings along to their customers.
MR. MACKINNON: You're getting closer to answering my question, thank you.
MR. CHALMERS: If I haven't answered it's because I didn't understand it or I don't know something that you know.
MR. CHAIRMAN: I just had a question, Mr. Chalmers, directed to you. We're pretty much hearing that we should be loyal and stay with oil but I was just wondering if a new homeowner out there is looking at the way they're going to heat this new building and really compare the different components involved in delivering that home heating oil and natural gas to their house, the competition, so to speak, you know, as far as home heating oil goes we have OPEC, the traders maybe in certain cases, the refiners, the retailers and some of the natural gas proponents are saying that grammy and grampa out there and other new homeowners do not have to go through all of these variables. I just wonder how you would answer that type of concern?
MR. CHALMERS: That's why we introduced a price protection program in my company.
MR. CHAIRMAN: You just basically said that it's not in effect now.
MR. CHALMERS: Oh, it is. All I'm saying is if you sign a contract to buy natural gas . . .
MR. CHAIRMAN: Before the end of December, did you not . . .
MR. CHALMERS: Just a second. In July or June they will set your price for the year, I'm just saying I will do the same thing.
MR. CHAIRMAN: But just for my own clarification . . .
MR. CHALMERS: Price volatility is a big disadvantage for our industry. In order to be effective and compete we are going to have to do something about it and we're going to.
MR. CHAIRMAN: But did you not say that your price protection provision to lock in that home heating oil price I'm paying today, is not available?
MR. SAMSON: No, it ended on a certain date. That's what he said.
MR. CHALMERS: That's what I'm saying, it's no different. You can choose to speculate on a spot price in natural gas too, I guess, but normally the natural gas business is quite different. You sign a contract for one year, five years, 10 years and for that period of the contract, they're going to - but the big advantage they have is you can't move either, the pipe is hooked up and you're done, you're stuck. I have to live on goodwill to keep my loyal customer.
MR. CHAIRMAN: But do the natural gas proponents, from your perspective, have an advantage in that they don't have to go through so many different entities before they actually get it to that gas burner sitting in the kitchen?
MR. CHALMERS: I don't think it's any different on that side of the energy business, it really isn't. There are traders in natural gas futures and that's how the price is set in natural gas. There are shippers, there are receivers and there are distributors, I don't think it's any different than my side of the energy business.
MR. CHAIRMAN: That pretty much concludes the hearing today. I would like to thank Mr. Chalmers and Mr. Hovell for coming in today. If they have some short summary comments, we would certainly welcome them. We do have a couple of minutes. I want to caution committee members that we have some unfinished business, it will probably take us two or three minutes at the conclusion of the meeting.
MR. CHALMERS: I only have a couple of comments. I just want to reinforce what a pleasure it's been to be here. I think we've had a fruitful discussion, and I hope that you have some insight into what I face every day in the street. I want to assure you that we believe that the market works. It's the most efficient way to allocate goods and services of any kind and in particular home heating solutions. More competition makes the market work better. We already have competition in electric, oil, gas, wood and certainly the present threat of natural gas has made us better marketers. We also compete on a marketer-and-marketer basis. If you are contemplating regulation, it means you're going to join us on our side of the business. The more we have, the merrier it is. The prices will restore as they always have, and the pain that the consumers in Nova Scotia are going through today is temporary. (Applause)
MR. CHAIRMAN: Thank you for coming in, we really appreciated it. Now committee members, our next meeting is January 21st. The guest will be Titanium Corporation. In terms of committee business, Darlene has provided us with a witness statement, and I'm wondering if honourable members would take their copy or pass it on, whatever the case might be, if you're a replacement member, to a committee member, and give it some thought. It's essentially the same thing, I understand, that the Public Accounts Committee has in place, and if you're so inclined, at the next meeting maybe we can ratify this. Any questions or comments from honourable members?
MR. MACKINNON: Move to adjourn.
MR. CHAIRMAN: The meeting is adjourned.
[The committee adjourned at 2:57 p.m.]