:
Good morning, everyone. We're here to continue our study of the propane market of last year. As we heard last week, the market was filled with supply shortages and high prices. Last week we had presentations by witnesses from the department and from the Competition Bureau and from the National Energy Board. There won't be any presentations to start today. We'll get directly into questions and comments from members.
The first part of the meeting will be questions and comments for those three groups. During the second part, we'll have new witnesses for an hour, and then we've agreed to leave 15 minutes at the end to see what we want to do with this at that time.
We will start by getting directly to questions for officials from either the Department of Natural Resources or the Competition Bureau or the National Energy Board. I will just quickly introduce you again. From the Department of Natural Resources, Terence Hubbard is the director general of the petroleum resources branch of the energy sector area; Douglas Heath is the director of the oil sands and energy security division of the energy sector area; and Ruth Talbot is the deputy director of fuels and refining in the oil sands and energy security division.
From the Competition Bureau, we have Martine Dagenais, who is the associate deputy commissioner of economic policy and enforcement, and Greg Lang, who is the senior competition officer. Again by video conference from Calgary, we have Shelley Milutinovic, who is the chief economist; and Darren Christie, who is the director of the energy markets team and acting director of the energy trade team.
Thank you all very much for being here again. Unfortunately we had an interruption last week. I haven't heard of anything this week, so let's hope for the best.
We'll go straight to Ms. Block for questions to the witnesses.
:
Thank you for the question.
The management of energy resources in Canada is indeed a shared responsibility between the federal and provincial governments.
The provincial governments are the owners of resources within their provincial boundaries. They have the primary responsibility for regulating their development, including the exploration, production, gathering, and transmission of energy within their borders, as well as the downstream use of that energy within their market: the local distribution, storage, and marketing, as well as energy prices within provincial boundaries.
For the most part provincial governments have followed market-based approaches to establishing energy prices within their jurisdictions. Some jurisdictions have chosen to regulate markets in some manner, including Prince Edward Island, Newfoundland and Labrador, New Brunswick, Manitoba, and B.C. The methods in which they do this vary across jurisdictions.
In terms of the federal role, with respect to energy resource development, the Government of Canada regulates the interprovincial and international movement of energy through the National Energy Board, regulating movement across provincial borders or across international borders. The federal government also has specific responsibilities for energy development in Canada's frontier areas, in the north, or Canada's offshore. In Atlantic Canada we share the management of oil and gas development with our provincial colleagues in Newfoundland and Labrador, and Nova Scotia.
Outside of a national emergency the federal government has no responsibility or ability to intervene in energy markets. The provincial governments have this responsibility. In the event of a severe energy supply disruption, the federal government does have emergency powers in place where it could, following the request of a province, intervene directly in energy markets and implement these emergency powers to direct the movement of energy.
In the case of propane markets last winter we saw—and experiences were localized—temporary disruptions in energy markets. At the federal level we never received a formal request from provincial governments to directly intervene in energy markets. At the federal level we continued to monitor energy markets very closely. We work with our colleagues at the Competition Bureau and at the National Energy Board, as well as within provincial governments and within industry, to monitor very closely developments that were happening so that we had the best advice and information available to inform policy discussions in terms of any appropriate steps that may have been needed.
:
Thank you for being here.
I've had a number of conversations with the Canadian Propane Association over this past year. I guess the gist of it is that there's plenty of propane, there was plenty to be transported, and it wasn't really an issue. I'll look at these things and I'll reference them again, as Ms. Block did. I've heard all of these in the past.
I just want to get your thoughts on this, and also the thoughts of the other group. We had an interesting situation in my part of northwestern Ontario. Propane, as you might know, is a single supplier in many areas—one company supplying in many areas. I happen to live in a part of northwestern Ontario where we have two suppliers, and I'll just briefly tell you what happened this past winter. I don't mind naming them; they're Cal-Gas and Superior Propane.
I happen to be a Cal-Gas customer for heating my home. What was interesting was that they had lots of propane priced exactly the same all winter. The complaints that I heard as a representative were all from Superior Propane customers about a shortage, only being able to fill half the tank, going up 80% to 90% per litre in price, and so on. As I look at this explanation and remember last week what everybody had to say, the only thing that I can come up with—and I'd like your comments on this—is that it clearly wasn't anti-competitive but a retail miscalculation. One supplier miscalculated the amount that they would need in northwestern Ontario. Because there are two companies there, one clearly did not miscalculate and the other one did.
Can I get your comments on that?
:
Good morning. Thank you, Mr. Chair and members of the committee, for the opportunity to appear today to discuss the propane market in Canada. My name is Guy Marchand, and I'm here with Andrea Labelle, who's the general manager.
[Translation]
We look forward to making a short presentation on the propane industry in Canada and answering your questions afterwards.
[English]
In order to be respectful of the time we have today, I'll be briefly covering what the Canadian Propane Association is, the propane industry in Canada, and propane's benefits and uses, which will allow for more time to cover the 2013-14 winter, the winter ahead, and then finally, questions and answers at the end.
The Canadian Propane Association offices are headquartered here in Ottawa, and we have a presence in each region of the country. We have over 400 members representing producers to retailers, and everything in between. Notably, in 2014 alone, the CPA has trained and will have trained, through our Propane Training Institute, nearly 35,000 students on the safe handling of propane. We also have a wholly owned subsidiary, which is also operating as a non-profit, that handles emergency response activities for LPGs by rail and road, as well as for newly formed flammable liquids by rail. In addition the CPA is an industry advocacy organization working with government regulators nationwide.
Canada produces approximately 11 billion litres of propane per year. Our economic contribution is approximately $16 billion, $1 billion of which goes to taxes and royalties, and we employ more than 20,000 Canadians. The propane industry is regulated by a number of federal, provincial, and municipal codes: the Transportation of Dangerous Goods Act, better known as TDG; environmental emergency regulations; CSA codes adopted into provincial regulations; and finally, municipal zoning bylaws.
Propane is primarily transported by rail, pipeline, and trucks. Prices are influenced by many factors, primarily supply and demand, and crude and natural gas prices. As with other commodities, prices are not set by individual companies. Mont Belvieu, Texas, is where the price reference point is in North America. Propane is then purchased on the wholesale market by distributors and retailers. We are part of an integrated North American market that determines the price, and are part of a well-developed infrastructure across Canada and the U.S.
As far as exports go, the U.S. is Canada's only export market, and in turn the U.S. exports overseas. Over the last few years Canadian exports accounted for 40% to 50% of demand, and they are shipped primarily by rail.
Propane is a safe, clean, abundant, cost-effective, and portable energy source. It's a Canadian story. Some current uses of propane include industrial use in mining; use in construction, including as temporary heat source and for forklifts; residential use for heating, cooking, outdoor living, and lawn care; transportation for government and private fleets, as well as school buses; agricultural use for barn heating and crop drying; and use as a petrochemical feedstock.
:
I'll take over from here.
Now for the reason we're here today to discuss what happened this past winter. It was not only the access to supply, but the price increases. Our industry did dub last year “the perfect storm”. It felt as if every day we were waking up to a new issue obstructing our access, but these issues were not isolated to the propane industry in Canada. Other industries felt the same: natural gas, hydro. Everyone really felt the pinch last year.
Factors included the longest and coldest winter in recent history, maintenance related to pipelines, rail, and truck terminals, issues related to road transportation due to the weather, record demand for crop drying, and even fractionation plants being offline due to prolonged power outages, particularly in Newfoundland and Labrador. There were even two train derailments in New Brunswick, which could have affected supply and price.
It is important to note, specifically to your question earlier, we don't want this to happen again. It's not in anybody's best interest. This is our industry's business and we're not in the business to not have one, so I want to ensure that's clear.
What happened? It's important to note that before the winter began, the National Energy Board predicted below average propane demand for the winter, and Environment Canada predicted a milder winter. The NEB also reported that in October 2013 inventories were slightly below the five-year average, adequate to cover the heating season. Then the crop drying demand late in the fall depleted supply, and on top of that we had an earlier winter. The result was lower-than-average inventories entering the high-demand heating season, with distributors having ordered supplies based on the forecast of a milder winter.
During the winter of 2013-14, there was record sustained cold, logistical transportation issues, facility and pipeline maintenance, power outages, and train derailments. It's also worth noting that the federal government imposed a prioritization of grain order over other commodities on CN and CP toward the end of the winter. This did not impact us last year, but it remains a concern for us because that is still in effect. We can talk more about that later.
The result of this was that there were delivery delays, for example, railcars covered in snow, inaccessible roads due to snow in some regions; and extremely high demand resulting in rapid and continual depletion of supplies with little opportunity to build inventories back up. The diminished supplies across North America caused prices to climb.
What did the Canadian propane industry do? We issued four press releases to update the public on this situation. We were transparent, open, and cooperative during the NEB and Competition Bureau market propane review, which found no evidence of anti-competitive activities and that the long-term outlook for supply is predicted to be stable. We provided information in interviews to all media, including print, radio, and TV. We met with government at all levels to help keep them informed, and we developed consumer-pricing resources for our members to distribute to their customers to help them better understand how pricing works.
How will this winter be different? Wholesale prices have fallen dramatically, just like oil. We match that. Storage levels are the highest in 11 years, and there are record highs in the U.S. Industry has implemented an increased use of technology in delivery routing systems and remote storage monitoring. Industry has invested heavily in additional primary on-site storage, and new rail terminals will be online in the first quarter of 2015.
What can the federal government do? We have three asks that we think would help: collect and report more detailed propane industry statistics; consider the impact of rail volume requirements, and that's a big one for us; and finally, include the propane industry in the development of energy policy.
As you may have guessed, I will be giving my presentation in French, which is my mother tongue. If you have any questions, I will be able to provide you with more details.
Our presentation is somewhat similar to that of the Canadian Propane Association. We have experienced the same problems. We live in the north and heating is extremely important for the Association québécoise du propane.
I will start by telling you about the propane industry in Quebec and explaining why propane is the proper solution. I will quickly go over winter 2013-2014 in retrospect and tell you how the Association québécoise du propane responded to the mini crisis. I will then provide you with our forecast for winter 2014-2015. Finally, I will quickly conclude with a few recommendations on use.
The Association québécoise du propane includes producers, wholesalers, 60 gas retailers, transporters, manufacturers of appliances, cylinders and truck tanks, equipment distributors and a few associates.
Our association's mission is to promote the development of propane while assisting its members in improving legislation, regulations, codes and standards. We also work closely with the Régie du bâtiment du Québec.
We have three main committees that help us operate in this industry.
Our mutual aid committee's goal is to train counsellors in emergency response and to support the emergency response plan. Transport Canada requires that we have an emergency response plan, and the mutual aid plan helps us in that sense. Our technical and training committee revises, updates and circulates information about codes, standards and regulations. Our team of trainers manages the training in propane handling for more than 2,000 students a year.
Propane use in Quebec is approximately 600 million litres a year. Propane generates $650 million for the Quebec economy and over $50 million in tax rebate. Some 2,000 jobs are directly related to our industry.
As the Canadian Propane Association mentioned, the propane industry is safe and regulated. We use the Canadian Standard Association (CSA) codes. The Régie du bâtiment du Québec and municipal regulations govern our industry.
In Quebec, 90% of propane comes from natural gas extraction. As mentioned a number of times, propane is transported by trains and tanker trucks. The remaining 10% comes from Suncor and Valero Energy refineries. It is delivered to most wholesalers by train and distributed to residential consumers by tanker trucks.
We are a North American integrated market, as the folks from the Canadian Propane Association said.
The factors that influence propane prices are: supply and demand, which are very elastic, as they say in marketing; the prices in Sarnia and Mont Belvieu, Texas, affect quotes; the wholesalers internal market versus retailers, transporters and the carbon tax in Quebec.
Propane is the preferred solution because it is safe, abundant, clean and flexible. In addition to being profitable, its quality-price ratio is outstanding.
Propane is used in households for heating, in agriculture, in the mining industry, in construction, in transportation, for vehicle fleets, and in petrochemical plants that make plastic materials.
Quebec will be using more and more propane as alternative fuel because it meets the objectives of the Quebec government in terms of new policies and energy challenges. Propane is less polluting and makes vehicle motors run silently. It generates 20% less greenhouse gas emissions. There are filling stations available everywhere in Quebec. Vehicle conversion techniques have been proven, and propane is economical fuel.
I will now explain what caused the mini crisis in Quebec last winter.
As was mentioned a number of times, the mini crisis was caused by very cold temperatures and the logistics of the railway cars. As Andrea mentioned earlier, in western Canada, the cars were stuck in the snow. There were technical problems with the refineries and the pipeline. There was a strong demand in autumn for grain drying. Another major factor was that a cold winter started while the grain drying season was hardly over, creating an overdemand.
As the Canadian Propane Association mentioned, the industry was misled by inaccurate weather and stock forecasts.
The industry relied on statistics. The prices were set, but there were some miscalculations.
The National Energy Board said that the stocks were to be sufficient for the year. At the end of the day, there were miscalculations because of the higher demand.
Let's look at the results, because there is always a cause and effect relationship. The heating season suddenly created a stronger demand, which reduced available stocks. Distributors order according to forecasts and statistics, as I just said. Restricted supply ensued.
Some distributors worried about the difficult situation and reacted without delay towards their clients. In other words, they started informing their clients that there might be some problems.
Temperatures remained very cold in much of North America. In fact, 26 American states were affected. President Obama declared a state of emergency in some states. Problems remained and added up: train derailment, pipeline maintenance, refinery reduced production due to technical problems.
Furthermore, railways deliver grains first. Priority was given to grain delivery by rail last winter.
Let's go back to the beginning of 2014 and look at the causes and results. There were delivery delays, a very strong demand, which lowered the stocks that could not be restocked. Provisions were low while the prices stabilized. Consumers in Quebec started worrying and news reports were very negative.
What was our response to the crisis? We met at three extraordinary meetings. We sent two releases to our members. We properly informed the media. We organized a press conference on December 27, 2013. We sent a press release to TV media. We met with print media. We answered to journalists from every conceivable media outlet. We also did several radio interviews for Radio-Canada and CTV.
Our plan for 2014-2015 is to: manage stocks better, improve equipment—as Ms. Labelle indicated earlier—invest in stocks, put in place crisis units, define everyone's roles in the event of such situations, improve communication with consumers and increase communication with our government officials.
The joint report by the National Energy Board and the Competition Bureau indicated that no evidence was found to suggest anti-competitive conduct. There was a unique confluence of events, known as the “cocktail”: unusual cold, very high demand from the U.S. and Canadian agricultural sectors, lower than normal stocks, and overseas U.S. exports rapidly growing. The conclusions drawn by the Competition Bureau were the same as the ones observed by the Association québécoise du propane.
We recommend that the government maintain minimum permanent propane stocks and that priority be given to rail transportation for propane supplies.
Thank you.
:
Thank you very much. I appreciate that answer.
We have a situation now, at least in northwestern Ontario, where suppliers have....They've let the price fluctuate throughout the heating season and during the year. It has not been a fixed price. They've signed everybody up on fixed contracts, including my supplier. It's about 10% more than it was in the previous year.
My concern is this. If we're going to see the wholesale price go down, how are consumers going to ever realize that price? We've seen fixed prices before in the natural gas market in the past and various things. They're not very workable.
Do you have any influence on retailers at all, to say to them, “Listen, we don't want to get into these fixed price contracts because what it looks like is that you're taking advantage of a crisis”. Certainly, they will this year because the price will continue to go down. I don't mind telling you what I paid on my new contract. I think it's 76¢ a litre.
Years and years ago, I worked in propane at a co-op and know that propane was, at that time, sort of a throwaway thing. It was not really seen as a serious gas product, which it is now.
I'm just curious as to what you think about retailers. I know you don't have any say in what retailers do. Do you find that might hurtful to the industry?
:
There was no difference. Okay.
We had a situation, of course, where in the dead of winter, some people had no supply or they had a huge spike—I mean, 100% or more. A spike of 400% is an enormous spike in cost if you're trying to heat your home with this. I don't think those consumers would have felt that there was a well-functioning market at that point.
We heard a lot from the departments and agencies about how they try to ensure there is a well-functioning market, and I appreciate their efforts in that regard. However, certainly I don't think that consumers felt it was there last year, or that there was a level playing field in terms of the way that the market was functioning.
I understood what you said about how you can't say to your members, “Let's talk about the price.” I appreciate that. I can also understand how you would want to say to your members in certain cases, “We don't want to get a bad rap for our industry”.
Let's go back to the suggestions you had about what the Government of Canada should be doing. You seem to be suggesting that the government is not collecting and reporting detailed enough statistics, or accurate or up-to-date enough statistics, on what's happening with propane supplies. How should that be changed?