The Competition Act and the Canadian Transportation Sector in the 1990s

Address by George N. Addy
Director of Investigation and Research
under the Competition Act

To the Board of Directors of the
Canada Ports Corporation

Ottawa, September 27, 1994

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I. Introduction

Good morning. As some of you may recall, during the mid-1980s I served briefly as General Counsel to the Canada Ports Corporation. It isa pleasure to be back on familiar ground.

As you all know, Canada's transportation sector is currently in the throes of far-reaching changes. After decades of high levels of subsidization resulting in inefficiency and excess capacity in various modes, the federal government is committed to meaningful structural reforms.

The Minister of Transport's plan for the Canadian transportation sector emphasizes the commercialization of many services formerly provided directly by the government along with other measures to strengthen market disciplines. (The Honourable Douglas Young, New Directions for Transportation: A Reality Check - an address to the National Transportation Day Dinner, Thunder Bat, Ontario, June 3, 1994). These initiatives are consistent with competition policy principles and will undoubtedly foster greater efficiency and responsiveness to users.

In my remarks today, I will first provide an overview of key aspects of the Competition Act and the responsibilities of the Bureau of Competition Policy. I shall then discuss some current issues relating to competition in various individual transport modes. Finally, I will share some thoughts on principles to guide Canadian transportation policy in the 1990s.

II. Overview of the Competition Act and key responsibilities of the Bureau of Competition Policy

At the outset, it is important to note that competition law is fundamentally different in approach and application from direct economic regulation of specific industries. Unlike regulation, the Competition Act is a general law of general application, which cuts across all sectors of the economy from transportation to the manufacture of shoes; and from petroleum products to the information highway.

Also unlike economic regulation¹ competition law does not involve prior approval of business conduct. Competition authorities do not regulate levels of service, quality, prices or profits. Rather, they seek to provide a framework within which these outcomes can be freely determined by competitive market forces.

The Competition Act contains provisions relating to both criminal offences and civil "reviewable" matters. The criminal offences are set out in part VI of the Act and include conspiracy, bid rigging, predatory and discriminatory pricing, price maintenance, misleading advertising and other deceptive marketing practices. The provisions dealing with civil reviewable practices are found in part VIII of the Act and relate to matters such as merger review, abuse of a dominant position, refusal to deal, tied selling and exclusive dealing.

The Director of Investigation and Research is an independent law enforcement official responsible for the administration and enforcement of the Act. He is appointed by, and serves at the pleasure of, the Governor in Council. In addition, while the responsible Minister can require that the Director inquire into a particular matter, there is no broader Ministerial directive power regarding the conduct or termination of inquiries under the Act.

Evidence of criminal matters is referred to the Attorney General of Canada for consideration of prosecution before the courts. With regard to civil matters, the Director makes applications to the Competition Tribunal for various remedial orders designed to maintain competition and deal with anti-competitive practices.(Important procedural safeguards applicable to the exercise of the Director`s powers are discussed in George N. Addy, Private Rights and the Public Interest Under Canada`s Competition Act - remarks to a seminar on Antitrust in a Global Economy, Fordham Corporate Law Institute, October 21-22, 1993.)

The Competition Tribunal is a quasi-judicial body which operates at arm's length from the Director. (The Tribunal's statutory authority is provided in the Competition Tribunal Act, R.S.C., 1985, c. 19, 2d Supp.)Its role is exclusively adjudicative. Created in 1986 with a view to developing specialized expertise in competition matters, the Tribunal consists of judges of the Federal Court, Trial Division and lay members, who are typically economists or individuals with background in business.

As a vital adjunct to enforcement of the Act, the Bureau devotes significant resources to promoting voluntary compliance with the law. A program of compliance has been developed to educate the public as to how the Act operates both at a general level and in specific instances. (Director of Investigation and Research, Compliance Bulletin 1993). At a general level, the Director has issued enforcement guidelines that describe the Bureau's enforcement policy in regard to merger review (Director of Investigation and Research, Merger Enforcement Guidelines 1991), predatory pricing (Director of Investigation and Research, PredatoryPricing Enforcement Guidelines 1992), price discrimination (Director of Investigation and Research, Price Discrimination Enforcement Guidelines, 1992)and misleading advertising (Director of Investigation and Research, Misleading Advertising Guideilines, 1991). We have also published several pamphlets and information bulletins dealing with matters of interest.

 At a case-specific level, the compliance program also provides for a system of advisory opinions whereby the Director invites parties to request an opinion on whether the implementation of a proposed business plan or practice would cause an inquiry to be initiated under the Act. In the context of merger review, the Act establishes a formal process whereby the Director may issue an Advance Ruling Certificate indicating to parties to a proposed transaction that he does not have sufficient grounds on which to apply to the Tribunal for a remedial order.

Apart from its responsibilities in the area of competition law enforcement and promotion of voluntary compliance, the Director has a separate institutional responsibility for competition advocacy. This responsibility is manifested in interventions by the Director before federal and provincial regulatory agencies, such as the CRTC and the National Transportation Agency, and by ongoing efforts within government to make the case for policies that provide the maximum possible scope for operation of competitive market forces (For an overview of the Director's regulatory intervention activities, see Joseph Monteiro, "Representations by the Bureau of Competition Policy - The First Fifteen Years," Canadian Competition Record, vol. 15, no.1, March 1994, pp.17-38.)

The transportation sector has long been a key focus of the Bureau's competition advocacy activities. For example¹ staff of the Bureau provided advice to Transport Canada regarding the various legislative initiatives of the late 1980s which evolved from the Minister of Transport's 1985 White Paper, Freedom to Move. As you know, this legislation substantially reduced the degree of economic regulation in the transportation sector, consistent with principles advocated by the Director.

More recently, the Bureau made representations to the Royal Commission on National Passenger Transportation, and provided a detailed submission to the National Transportation Act Review Commission (Director of Investigation and Research, Submission to the National Transportation Act Review Commission, June 1992). The findings and recommendations of the Commission were consistent with the Bureau's submission in key respects (See National Transportation Act Review Commission, Competition in Transportation: Policy and Legislation in Review, 2 vols.; 1993).

III. Key competition issues in some of the individual transport modes

I turn now to a brief discussion of some current issues of interest in regard to competition in individual transport modes. I will deal first with the air and rail modes and will then comment on some current issues in the ocean shipping sector. As suggested by staff of the Ports Corporation, I will also briefly set out some aspects of competition policy that potentially have implications for their tariff setting activities.

The airline sector has attracted considerable attention in recent years. This has been due, in part, to recurring high levels of excess capacity, fare wars and financial instability. Some have interpreted this situation as being evidence a "failure" of deregulation. A strong argument can be made, however, that the difficulties that major air carriers have experienced in the past (in both the U.S. and Canada) are due not to intrinsic problems with deregulation, but to an over-expansion of capacity and related managerial decisions taken in the late 1980s (See William A. Jordan, "New Aircraft Orders: Still A Leading Indicator of Airline Profits," Airfinance Journal, no.139, June 1992, pp. 42-47. A similar conclusion was reached in the report of the National Transportation Act Review Commission, id.).

A specific matter in the airline industry that generated interest on the part of the public and the Bureau concerned the recent successful efforts of Canadian Airlines to enter into an alliance with AMR Corporation. In order to pursue the AMR option, Canadian had to free itself from certain contractual obligations to Gemini, a computer reservation service owned by Air Canada, FWA (the parent of Canadian) and Covia. The arrangements with Gemini had been approved by the Competition Tribunal in a previous proceeding under the Act. Air Canada wanted to hold Canadian to its obligations vis-à-vis Gemini, which would have effectively blocked the AMR proposal.

Following a successful application by the Director, the Tribunal ordered that Gemini be dissolved - freeing the way for the arrangement between Canadian and AMR to proceed. Of course, from a competition policy point of view this was clearly preferable to a partial or total merger of Air Canada and Canadian.

Looking into the future, some key challenges remain. International alliances among airlines continue to gather momentum. Air Canada, for one, has been aggressive in pursing marketing arrangements with United Airlines and Air France, not to mention its significant equity investment in Continental Airlines. These market changes may necessitate re-examination of some longstanding policies, such as the existing restrictive limits on foreign investment in Canadian carriers.

Another key area of interest regarding the evolution of Canada's transport system relates to the rail mode. As you know, following much speculation, just last week Canadian Pacific Ltd. proposed to buy the Eastern Canada railway operations of Canadian National Railways.

In this era of deregulation and international trade liberalization, it may seem plausible that Canadian railways need to further streamline their operations and increase their efficiency in order to better respond and adapt to rapidly changing market conditions. For the past few decades, they have steadily lost traffic to the trucking industry, mostly in the carriage of high-value manufactured goods.

While recognizing the need to consider carefully the potential benefits of some form of rationalization, I believe it is also vital to preserve a healthy degree of interfirm rivalry in the provision of rail services. Experience in the U.S. affirms that competition helps to keep rates low and provides a desirable incentive for efficient service (See Clifford Winston et al, The Economic Effects of Surface Freight Deregulation Washington, D.C.: The Brookings Institution, 1990). This translates into important competitive advantages for user industries.

Assuming that CP proceeds with its announced offer, the transaction would be reviewable under the merger provisions of the Competition Act, as is the case with any merger or proposed merger or acquisition which comes to our attention. (A transaction is deemed to be a "merger" under the Competition Act when direct or indirect control over, or significant interest in, the whole or a part of a business of another person is acquired or established. The Act requires that parties provide the Director with advance notification where two thresholds are exceeded: one relates to the size of the merging parties and their affiliates, and the other concerns the value of the transaction.)

It would be inappropriate for me to comment in any detail on the assessment of a CP-CN deal. However, I can at least mention some aspects of the legislation and the factors that Bureau staff generally take into account when assessing whether or not a particular transaction raises an issue under our Act. Further background on the points I am about to mention may be found in the Bureau's Merger Enforcement Guidelines.

Basically, the Act is intended to deal with mergers that are likely to prevent or lessen competition substantially. In economic terms, this means that the merger would create or significantly enhance the ability to exercise market power. (Generally, market power is the ability to profitably maintain prices above or reduce output below levels that would be observed in a competitive market environment. Market power may also be manifested in other dimensions such as a lack of innovation in the relevant market.)

A key aspect of this determination relates to the delineation of the relevant product and geographic markets. This is based on the identification of substitution possibilities for users in the event of a "significant and non-transitory" increase in prices above prevailing levels. Under this approach¹ alternative products and suppliers located in alternative geographic areas that are viewed as readily substitutable by users in the event of such a price increase are included in the relevant product and geographic markets. Those which are not viewed as acceptable alternatives are excluded.

Once the relevant markets have been defined, it is possible to consider the implications of the market shares of the merging parties and industry concentration levels. I should emphasize, however, that such quantitative indicators are only the starting point of our analysis. Mergers are also assessed by reference to various qualitative criteria which are specified in the Competition Act. A few of these are the extent of foreign competition in the market, the degree of barriers to entry, whether the business of a party to the transaction is likely to fail, the presence of substitutes for products supplied by the merging parties and whether there would be effective competition remaining in the market after the merger.

The Act also provides that the Competition Tribunal cannot make an order if it finds that the likely gains in efficiency resulting from a particular merger transaction would be greater than, and would offset, the effects of any prevention or substantial lessening of competition.

 With regard to the ocean shipping sector, I see from the Globe and Mail of September 15 that the proposed acquisition by Canada Maritime Services Limited, a subsidiary of Canadian Pacific Limited, of Cast Marine Holdings has been put on hold, at least temporarily, by a judicial ruling in Bermuda. Both Cast and Canada Maritime service the North Atlantic container shipping routes between Montreal and Europe. As the press coverage accompanying the initial announcement of the proposal indicated, this acquisition would represent a substantial consolidation of container shipping capacity operating out of the Port of Montreal.

As with a possible rail rationalization arrangement, the factors that my office would consider in assessing the competitive impact of the proposed Cast/CanMar merger are set out dearly in the merger provisions of the Act and the Merger Enforcement Guidelines. Given the importance of the choice of relevant product and geographic markets, an obvious issue would relate to the extent of competition between the Ports in Eastern Canada and those along the east coast of the U.S.

Assessmentof the CASI'/Canmar transaction would also require consideration of a unique feature of the ocean shipping industry - namely, the role of shipping conferences and the special treatment that they enjoy under the Shipping Conferences Exemption, 1987 (SCEA). As you know, shipping conferences are cartels that regulate rates and conditions of servicein international linershipping, which is the regularly scheduled component of the ocean freight shipping industry.

The SCEA legislation provides a limited exemption for certain activities of conferences from the provisions of the Competition Act. Notwithstanding thisexemption, SCEA also seeks to promote a degree of competition by sanctioning the use of private service contracts with individual shippers and independent action by conference members on published rates and service items. (See R.D. Anderson and S.D. Khosla, "Canada's New Shipping Conferences Legislation: Provision for Competition Within the Cartel Systern¹" Canadian Competition Policy Record, vol.9, no.1, March 1988, pp.1-19.) It is important to consider whether the proposed merger would have an impact on the effectiveness of these provisions.

Of course, the future of SCEA is also an important issue in its own right As the National Transportation Act Review Commission mentioned in its report, continued statutory exemption for liner conferences is at odds with the principles of market-oriented reforms implemented in other key transport modes in recent years (National Transportation Act Review Commission, vol. 1, p.138.).

Turning now to the role of the Canada Ports Corporation, given the time available it is not possible for me to comment in detail on specific activities such as tariff setting and their status in regard to the Competition Act. It may be helpful, however, if I briefly set out some of the basic provisions and concepts that would be applicable in assessing these activities.

To begin with, depending on the legal and institutional context, tariff setting activities might well be assessed in relation to the conspiracy section of the Competition Act. This provision makes it an offence to engage in agreements or similar arrangements that lessen competition unduly in a market The relevant case law indicates that the test of undueness relates to the seriousness of the effects of a particular arrangement and is evaluated with reference to both the structure of the market (e.g, the market share of the parties) and behavioural issues (e.g., the degree of control exercised through a particular arrangement) R. v. Nova Scotia Pharmaceutical Society et al (1992)43 C.P.R. (3d) I (Supreme Court of Canada, July 9, 1992).

The potential application of the abuse of dominant position provisions of the Act should also be noted. These provisions, which are civil in nature, are applicable to conduct engaged in by a firm or group of firms that substantially or completely control a class or species of business in Canada or an area thereof. In addition to this threshold criterion, in order for the Competition Tribunal to make an order under the abuse provisions, it must find that the parties have engaged in a practice of anticompetitive acts, and that the practice has had, is having or is likely to have the effect of lessening competition substantially in a market.

In assessing the activities of the Ports Corporation and other maritime entities, a key consideration would be the delineation of the range of ports that should be included in the relevant geographic market. Essentially, this would involve identifying the groups of ports that potentially exercise meaningful discipline on each other in terms of constraining possible increases in tariffs.

I should also mention that section 2.1 provides that the Act is binding on Crown corporations in respect of commercial activities that are engaged in by the corporation in competition with other persons. Hence, in principle, an incorporated port authority could be found to be liable under the Act.

Further to this point, the Act provides that the conspiracy provision is not applicable to situations inwhich two or more corporations are controlled by thesame legal person. Thislimitation would not, however, beapplicable in situations where the Canada Ports Corporation is dealing with entities not subject tocommon control or otherwise deemed tobeaffiliates. Furthermore, the abuse of dominant position provision is not subject to a similar limitation.

Finally, certain activities of the Canada Ports Corporation could also be subject to the regulated conduct defence recognized in the jurisprudence in this field. In general, this defence applies to conduct such as tariff setting that is actively supervised by a government agency pursuant to validly enacted legislation. I would caution, however, that this defence was developed by the courts in the context of the criminal provisions of the Act, and may not be applicable to proceedings under the civil provisions.

Iv. Looking ahead: some guiding principles for canadian transportation policy in the 1990s

In closing, I would like to put forward for your consideration a few guiding principles for the evolution of the Canadian transportation sector and transport policy in the l99Os:

• First, I believe that our transportation Systems should be integrated, flexible and user-oriented. Users today want door to door service that is prompt, reliable and safe. It is up to the service providers, with appropriate market incentives, to provide optimal combinations of air, water, rail and trucking services.
• Second, our transport systems must be adapted to provide efficient service with minimal government support. As the Minister of Transport has emphasized, the Canadian taxpayer simply cannot afford to continue the level of direct subsidies that historically have been provided.
• Third, I suggest that, as we move away from direct subsidies for the transportation sector, we must avoid efforts to maintain existing service levels through inefficient cross-subsidization. in general, economic efficiency requires that the price of services provided be equivalent to their marginal cost in the relevant markets.
• Fourth, experience suggests that efficiency in the transportation sector requires continual vigilance in the maintenance of competition in both its intramodal and intermodal dimensions. Vigorous rivalry among service providers within an industry is the best way to ensure low prices, an optimal range of service options and continuing pressures for innovation.
• As a fifth and final guiding principle, I suggest that the Canadian transport sector must be globally oriented and must take account of international opportunities and challenges. More and more, it is evident that to prosper, 'Canadian industries must compete effectively in continental and overseas markets. Efficient and competitive transportation links are a key element of the logistics that will enable them to meet the challenge.

Thank you for your attention, and I look forward to your questions.