Are gasoline prices lower in regulated markets? We ask an expert

Mar 09, 2017   | Categories: Fossil Fuels, Fuels
Did you know that gasoline prices are regulated in some parts of Canada?

If you live in Quebec or Atlantic Canada, provincial governments have regulated how high — or low, for that matter — prices can go at the pump. West of Quebec, however, there is no regulation.

But how does regulation affect the consumer? And how are prices regulated in the affected provinces? We asked Jason Parent, Vice-President of the Kent Group Ltd., an independent data and analytics firm, to explain.

Canadian regulated gas price markets

Quebec: The pros and cons of a price floor

“Quebec has what’s called a price floor; they have a formula that establishes their floor on a weekly basis, and you can’t price below that. A price floor is typically put in place to prevent predatory pricing, or pricing below cost, which can be perceived as a disadvantage for smaller independent players,” said Parent.

Whether Quebec’s policy is effective or not is not necessarily clear. A particular drawback to a price floor could be that it can keep smaller, inefficient, and sometimes uncompetitive retailers in business, ultimately driving prices higher (via higher margin needs).

“It also inhibits the entry of cost-cutting players such as Costco,” added Parent. “Costco’s business model is not necessarily congruent with a price floor policy, and it may limit their presence or affect their low-price strategy in those jurisdictions. Again, this potentially leads to higher prices for consumers.”

The flip side: New Brunswick’s price ceiling

New Brunswick has taken the opposite approach: it has a price ceiling in place. Its approach is rooted in the assumption that pricing is not sufficiently competitive and that consumers should be protected from unreasonably high prices. Their formula takes into account a reasonable margin for sellers, distribution costs and other factors.

“In my opinion, the regulation in New Brunswick has been fairly ineffective for a while now,” said Parent. “The reason why I say that is because prices for the most part have remained well below the ceiling. Prices rarely push up against the ceiling (at least for retail transportation fuels); meaning that the regulation itself is ineffectual. It’s the market that is influencing prices in New Brunswick, not regulation.”

Newfoundland and Labrador also has a price ceiling, similar to New Brunswick’s.

Nova Scotia: the blended method

Nova Scotia has mixed the two approaches, with both a price floor and ceiling set on a weekly basis.

“The regulations in Nova Scotia are really good at controlling price volatility. The problem with that is, while consumers don’t like volatility in pricing, volatile markets are usually indicative of intense price competition . . . generally meaning consumers are paying less.”

The unique blend: Prince Edward Island

Prince Edward Island also has a floor and ceiling, but the price is within a much tighter range – roughly a cent per litre, said Parent.

“Their situation is unique in that their prices are not set based on a formula per se. It’s set at the discretion of the Island Regulatory and Appeals Commission. They will work with industry and follow benchmarks to determine what they think is a reasonable price.”

Many options, varied success

 “There’s a multitude of different approaches that can be taken, all of which have their strengths and weaknesses, and different reasons for existence,” said Parent. “Generally with price regulation, the government identifies some specific issue that they want to control. It could be volatility, or prices being too high, or to perhaps protect smaller players.”

“Some regulated jurisdictions have more success with meeting stated intentions, but at its core, price regulation is meant to replicate the unregulated market but control for some specific variable.”

However, if price regulation is ineffective, you could end up affecting the market in unintended ways.

“If you set a price ceiling, but have set it too low and the formula doesn’t allow for a reasonable margin, the retailer suffers. This can drive retailers out of business, or inhibit the entry or investments from other players”
And fewer retailers can lead to less competition or concerns over security of supply.

How different are gas prices across Canada?

Unregulated Canadian gas markets
According to Parent, gas prices in regulated and unregulated markets in Canada are generally not a whole lot different, said Parent.

“If you track prices with taxes removed and you correct for the differences in their underlying wholesale prices . . . prices between the Atlantic Provinces and the rest of Canada are not much different.”

But consumer perception often trumps reality. For example, a consumer may look at Nova Scotia prices and see the stability, assuming that’s a good thing and that prices are therefore better. Not necessarily, says Parent.

“In Nova Scotia, you might not have some of the volatility you may see in an unregulated market, but on balance you may be paying a slightly higher price. Again, volatility is indicative of aggressive price competition where retailers are willing to give up margin to pick up market share, or to get people into their convenience store.

Parent says that volatility in the market is good for consumers because they pay less for a product, but many consumers don't see it that way. They see the prices jumping up and down and think they're being gouged, or that something funny is going on.

 “It’s not necessarily the case that you pay less in a regulated market.”

Want to learn more about gas pricing? Find out whether Canadians pay more for their gas than others, and what makes up the cost of gas at the pump.
 
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