Competition Bureau's Role in the Energy Sector

André Lafond
Deputy Commissioner of Competition
Civil Matters Branch, Competition Bureau

Board of Directors Meeting of the Canadian Gas Association (CGA)
Ottawa, Ontario

September 29, 1998

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I would like to thank the Canadian Gas Association for this opportunity to meet with the Association's Board of Directors and to briefly outline for you the Competition Bureau's role in the energy sector.

Introduction

I do not have to remind you that these are interesting times in the natural gas industry. The process of deregulating natural gas markets and prices, is continuing to alter the industry. The entire North American energy sector is being reshaped by the restructuring of the electricity sector to create competitive generation and retail markets. The market coverage of natural gas in Canada is soon to be expanded by the development of Sable Island Gas and the establishment of distribution facilities in New Brunswick and Nova Scotia. Convergence between gas and electricity, and also non-energy industries such as telecommunications, is an often heard word when talking about the future of the industry. In addition, markets for energy are becoming increasingly "North-Americanized" through expansions of transmission capacity and the removal of regulatory barriers to trade.

All of the above developments will mean both a further strengthening of market forces in the natural gas sector and continuing pressure for restructuring. As for what I believe this will mean for your businesses, a statement made by the English Philosopher and Political Scientist, Jeremy Bentham, in the late 1700's comes to mind. As he stated some 200 years ago:

These words are as relevant in today's emerging energy markets as when they were first put on paper. In open and competitive energy markets, the success of companies will not be determined by regulators and governments. Rather, it will depend on the ability of companies to reshape themselves to be able to provide energy and related services meetings consumers' tastes and needs at a competitive price.

INTERVENTION WORK

The Competition Bureau welcomes these developments in the North American energy sector. The Competition Act gives the Bureau the right to intervene before federal regulatory bodies and the power to intervene, upon invitation, before provincial regulatory authorities. Those provisions (ss 125 and 126 of the Competition Act) give the Bureau a unique opportunity to influence regulatory policy from the outset. Most recently, our intervention work has involved participating in the reviews of both natural gas and electricity legislation in Ontario leading to the introduction in June this year of Bill 35, the Energy Competition Act. We have also contributed to the efforts to complete restructuring of the Alberta electricity sector to open it to full generation and retail market competition by the year 2001.

We have undertaken these interventions with five main objectives in mind. The first is to promote competition in all aspects of the energy sector except those in which competition is clearly not adequate for achieving an economic or social policy imperative. The second is to ensure that regulation, in cases where it is necessary, takes the form that least restricts or distorts competition. Our third objective is to promote the use of mechanisms for rapidly removing any remaining regulation once the need for it disappears. The fourth objective is to ensure that there is an effective and coordinated set of regulatory and competition law restraints to prevent anti-competitive abuses during the transition from regulated to competitive energy markets. And finally, we want to ensure that where there is effective competition, the Competition Act, not regulation, will be relied on to ensure that the public interest in maintaining this competition is protected.

COMPLIANCE WITH THE ACT

In addition to our intervention activities, the other key task of the Bureau is to ensure maximum comformity with the Competition Act. As a part of Canada's marketplace framework law, the Act applies to any commercial business activity that is not directly regulated. Therefore, any deregulation of natural gas markets will mean a corresponding increase in the jurisdiction of the Competition Act in your industry.

The Act already applies to aspects of your industry that have been deregulated, such as gas sales at the wholesale level. However, its application in other areas has been limited by various factors including the continued regulation of retail gas supply by distributors, barriers to gas, electricity and telecommunications convergence, and regulation of billing, metering, storage and other gas services.

But, this situation is changing. The proposed Ontario Energy Competition Act is setting the stage for fully deregulating retail gas sales in Ontario. The opening of electricity markets in Alberta, Ontario and eventually other provinces will put both gas and electricity on a more equal competitive footing and open more opportunities for mergers and strategic alliances between gas and electricity companies both within Canada and between Canadian and US companies.

As a safeguard of the public interest, competition law differs fundamentally from regulation in both its objectives and approach. The basic objective of competition law is straightforward. It is to maintain and encourage competition and the benefits it provides to consumers, businesses and the economy.

Unlike regulation, competition law relies on market forces as the principle method for achieving the efficient supply of products, low prices, consumer choice and dynamic and competitive industries. Under competition law, businesses have broad control over their business activities.

The Competition Act covers a variety of business practices that may have anti-competitive effects. These include, for example, mergers and strategic alliances, contracting practices that may be used to prevent a dominant position in a market from being eroded by competition and conspiracies to maintain or increase prices or market shares. The Bureau's intervention in regard to these practices, however, is confined to cases where it can be shown that the business conduct is likely to substantially or unduly lessen competition in a market.

Two examples

To better indicate what this may mean for your businesses, I would like to provide a little more detail on two aspects of competition law that may be particularly important for you in the future: they are the Competition Act provisions dealing with abuse of a dominant market position and mergers.

Under the abuse of dominance provisions, companies that have substantial control over a market are not permitted to engage in anti-competitive acts that prevent or lessen competition in the market. These acts may include for example, the use of long term contracts, squeezing of retail and wholesale margins and selling products at less than cost.

The mere use of any the above practices is not prohibited. Also, companies will not be penalized simply because they have had the good fortune or competitive acumen to achieve a strong position in the marketplace. Rather, an issue is created under the Competition Act only where a dominant company uses an anti-competitive practice to prevent or lessen competition substantially.

As an illustration where this may occur, in one of our cases, a company having a share of over 80% of a market was found to have contravened the Competition Act by using long-term evergreen contracts to tie up buyers and staggering the renewal dates of contracts to make competition and entry difficult. In the specific factual circumstances under consideration, it was concluded that the effect of these practices was to create excessive barriers to new entry and deny consumers the benefits of effective competition. To restore competition, the company was ordered to change its contracts to eliminate the relevant practices.

Under the merger provisions of the Competition Act, companies may be prevented from engaging in any activities involving a change of control over assets where it is determined that it would likely lessen competition substantially in a market. Various factors may be looked at in making this determination, such as the market shares of merging companies in the markets affected, the nature and effectiveness of other competitors and the likelihood of new entry. Where there is the likelihood of a substantial lessening of competition, flexibility is provided under the Competition Act to resolve related concerns other than by preventing the merger. This may involve, for example, the merging companies agreeing to sell off some of their assets in the relevant markets.

An example of how we view mergers is provided by the NOVA/TCPL merger announced in January this year. In this case, we concluded that the merger was unlikely to result in a substantial lessening of competition. This was primarily because of the continuing regulation of NOVA's and TCPL's core gathering and transmission businesses and the accord reached between the companies and the Canadian Association of Petroleum Producers and the Small Explorers and Producers Association of Canada which helped to resolve various third party concerns.

In contrast to the above case, our initial review of the recent proposal by Ultramar and Petro Canada to establish a joint refining and retailing division, indicated serious competition concerns. We found that the proposed venture would have led to a substantial lessening of competition in the Quebec and Atlantic Canada markets where the two companies currently compete at both the wholesale and retail levels. In response to our finding, the companies abandoned the venture.

Applying the Competition Act in industries, like naturl gas, that are in transition is especially challenging for the Competition Bureau. On one hand, businesses in these industries are naturally concerned about the impact that competition law can have on their ability to reshape and restructure themselves order to compete in a changing environment. On the other hand, markets in transition, particularly ones coming out of regulation, are also the ones in which competition can be the most fragile.

We attempt to balance these concerns through a four part approach. First, as noted earlier, we intervene in regulatory and policy hearings in support of the establishment of competitive market structures. The best way to guard against anti-competitive practices in markets in transition is really to get the market structure right in the first place.

Second, we place a strong emphasis on public awareness and education regarding competition law in deregulating markets. Awareness is the necessary first step for helping businesses to avoid unnecessary competition law conflicts and problems this may cause for their business strategies. We promote it through presentations like this one and meetings with companies to explain the Competition Act and how it may affect them.

Third, we strongly encourage businesses to consult with us early regarding planned business behaviour that may raise a competition issue in order to avoid any unnecessary delays or conflicts. In the case of large mergers, this is not optional. Prenotification and a minimum waiting period of from 7 to 21 days is required under the Competition Act. Failure to comply can result in fines and further unnecessary delays in completing the merger.

Fourth, we attach a high enforcement priority to industries in transition so that we can rapidly deal with any competition issues that may arise.

In conclusion, let me assure you that the Competition Bureau, through our everyday dealings with industry, is aware of the pressures that Canadian businesses face in adapting to and competing in changing domestic, North American and world markets. Our goal is to support, not hinder businesses in dealing with these pressures, while ensuring the benefits of competitive markets for all Canadians. In any dealings your company may have with us, you should expect, and we commit to professionalism, fair treatment and timely consideration.

Thank you very much.