Annual Report 1996/97 - Industries in Transition - a Continuing Priority

Last year's Annual Report noted the continuing evolution from regulation to competition in many major business sectors. As part of this transition, the Bureau played an important role in the development of competition policy. With the broadening of deregulation activity into areas such as finance and energy, the Bureau has expanded its policy development activities in these areas. In addition, there was considerable activity in the telecommunications sector.

Financial institutions

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Interac

On April 26, 1996, hearings concluded before the Competition Tribunal in respect of an application under section 79 of the Act that was filed by the Bureau on December 14, 1995. The application was for the Tribunal to issue a consent order under section 105. Four parties were granted leave to intervene and argued that the requested consent order was not sufficient to restore competition.

On June 25, 1996, the Tribunal issued the consent order requested by the Bureau.

The major competition issues addressed in the consent order can be categorized in terms of: access, fees and innovation.

The order requires Interac to open its network to potential participants on a non-discriminatory basis, except that Interac is allowed to stipulate that only regulated financial institutions are entitled to issue cards which access the network. Accordingly, participation will not be limited to members of the Canadian Payments Association (CPA), and others will be able to take advantage of certain privileges currently restricted to charter members; most notably the right to directly connect to the network.

The order prohibits Interac from continuing its practice of levying new member entry fees based on card issuance. Rather, fees will be collected on a user or transaction basis payable by all members. The order also requires Interac to discontinue its prohibition of surcharging. Accordingly, automated banking machine (ABM) deployers will be able to determine and charge a competitive price for ABM services. The inability of ABM deployers to levy a charge to a cardholder of another Interac member precluded the deployment of ABMs in accordance with market forces.

The order alters the composition of the Interac Board of Directors, removes Interac's prohibition on the use of pass-through accounts, and makes the Interac network software available for new services that require on-line access to demand accounts. The removal of the prohibition on the use of pass-through accounts is to enable entities which do not qualify for CPA membership, such as brokerage firms, to have an ability to provide their customers with Interac access. This would be achieved by means of a "pass-through" arrangement negotiated between the non-CPA member and a CPA/Interac member.

The Interac case was significant in that it identified and addressed competition issues that any dominant shared network is likely to confront. The consent order provides guidance as to how these issues might be addressed.

Telecommunications

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The focus of the Bureau's telecommunications activity centered on submissions to the proceedings of the Canadian Radio-television and Telecommunications Commission (CRTC), applications brought before the Competition Tribunal, and participation in hearings before other regulatory bodies.

Teleglobe mandate review

As noted in last year's Annual Report, the Bureau made a submission to the government in December 1995, with respect to its review of Teleglobe Canada's monopoly mandate for international telecommunications services. The Bureau advocated the removal of Teleglobe's monopoly and relaxation of foreign ownership and by-pass restrictions. As part of the World Trade Organization Basic Telecommunications Agreement concluded in February 1997, Canada has agreed to:

• end the Telesat monopoly on fixed satellite services effective March 1, 2000;
• allow the use of any foreign-owned satellite to provide services (other than DTH/DBS) to Canadians, as of March 1, 2000;
• remove traffic routing rules for all international services and all satellite services by March 1, 2000;
• maintain its open, competitive market and existing transparent regulatory regime; and
• remove routing restrictions for most international services as of December 31, 1999.

Local service pricing options (CRTC 95-49)

In February 1996, the Bureau intervened in a proceeding established by the CRTC to examine the question of affordability of Canadian telecommunications services during a transition to cost-based rates or rate rebalancing in which cross-subsidies to basic local service are being reduced and local rates are increased over time (Telecom Public Notice CRTC 95-49).

In written submissions filed in February, March and June 1996, the Bureau urged the Commission to continue its process of rate rebalancing in order to both eliminate the inefficiencies to the economy arising from distortions in the rate structure, and to remove a major obstacle to the development of competition in local telephone service. The Bureau argued that if the Commission were to find that, based on declining penetration rates, there was an affordability problem, from a competition and efficiency standpoint, such problems should be addressed by providing assistance directly to qualified subscribers.

In November 1996, the Commission rendered a decision in which it found that generally, affordability of basic local service is not a significant problem in Canada (Telecom Decision CRTC 96-10). The Commission found that for some subscribers lump sum service and security charges and toll service bills were a problem in terms of affordability. The Commission directed the telephone companies to implement a series of bill management tools to assist subscribers in these areas, and ordered the companies to establish a program to monitor penetration rates on a going forward basis.

Tariff review (CRTC 95-3)

In January 1994, the CRTC issued a public notice with respect to the provision of directory database information. At issue was whether the telephone companies under CRTC jurisdiction should be required to make available non confidential residential and non residential information in an unbundled form, and what the appropriate rates and other terms and conditions for access should be. The Bureau filed for and received intervenor status.

In March 1995, the CRTC issued Decision 95-3, in which it required the telephone companies to provide non-confidential residential and non-residential listing information in an unbundled form. However, privacy rights considerations led the Commission, in a split decision, to order an opting-out provision as a privacy safeguard in the decision which would have allowed subscribers, simply by calling a 1-800 number, to have their names and numbers withdrawn from the data bases supplied to independent telephone companies, but this number could not be used to withdraw from the directory data bases of the telephone company publishers. Upon research, certain independent publishing companies concluded that the percentage of telephone subscribers who would likely opt out according to a 1-800 procedure would be unacceptably high. This would make their directories less complete than those published by telephone company affiliates or their exclusive contractors, and therefore less valuable. They asked the CRTC to review and vary the decision, which it refused to do in Decision 95-14.

Subsequently, the independent publishers appealed to the Governor-in-Council to vary Decision 95-3 with respect to the opting-out provision. The Bureau supported this application, arguing that, while privacy rights are of vital importance, there are means of protecting them without providing an advantage in the market to the telephone company publishers. In June 1996, the Cabinet concluded that ". . . fair and sustainable competition in the directory publishing market is in the public interest and agrees with the reasons of the minority decision . . . ." It instructed the Commission essentially to substitute the minority decision for the majority.

In July 1996, the CRTC issued Public Notice 96-27 to, among other things, implement the Cabinet's ruling. By the end of the fiscal year, all submissions of the interested parties were in, but the Commission had not concluded its deliberations.

Broadcast distribution (CRTC 1996-69)

In May 1996, the CRTC issued a Public Notice calling for submissions on a number of proposed revisions to the regulations relating to the distribution of television broadcasting. This review was necessary as a result of the development of new means of broadcasting distribution in competition with cable operators. These include direct-to-home (DTH) satellites, local multipoint communications systems (LMCS or "wireless cable") and telephone companies.

The Bureau filed a submission in mid-July and a second stage submission in mid-August. The Bureau's submissions supported the elimination of the exclusive licensing policy and endorsed certain pro-competitive proposals by the Commission. The submission also recommended the adoption of criteria for assessing actual competitive entry before price deregulation of the cable companies. Also, it was submitted that new entrants should have access to Canadian specialty and pay television services on nondiscriminatory terms and conditions and that the Commission should consider whether exclusive long term contracts with condominiums and apartment buildings raise significant barriers to entry. The second submission also addressed possible predatory pricing and cross subsidization by incumbent cable operators.

The Commission announced its new regulatory framework on March 11, 1997. The new policies address a transition from a monopoly to a competitive environment for broadcasting distribution, and aim to establish rules that treat all distributors fairly.

Local telecommunications competition (CRTC 95-36)

As indicated in last year's Annual Report, the Bureau intervened in the CRTC proceeding on opening local telecommunications markets to competition (Telecom Public Notice CRTC 95-36). The Bureau participated in the CRTC's public hearing process in August 1996, and in October, filed a detailed written final argument. The Bureau advocated the adoption by the Commission of the following five principles in opening this sector of the market to competition: (1) maximize reliance on competition and market forces; (2) adopt market-based pricing and new mechanisms to address social policy objectives; (3) establish clear rules governing the obligations of the Stentor companies to provide access and appropriate pricing principles to induce efficient competition; (4) define parameters for network access negotiations and establish timely and effective dispute resolution mechanisms; and (5) minimize regulation. ²

Regulatory forbearance on long distance services (CRTC 96-26)

In November 1996, the Bureau intervened in a proceeding established by the CRTC to determine if the market for long distance telephone services was sufficiently competitive to warrant forbearance from regulation by the CRTC of the services provided by dominant carriers, principally the members of the Stentor Alliance (Telecom Public Notice CRTC 96-26). Under section 34 of the Telecommunications Act, the CRTC is required to forbear from regulation where it finds that a service or class of service is sufficiently competitive to protect the interests of users and forbearance would not unduly impair the development of a competitive market. In written submissions filed in November 1996, and in March 1997,  ³ the Bureau submitted that the market for long distance services was sufficiently competitive to warrant broad forbearance of the services of the Stentor companies. The Bureau advocated full deregulation of long distance services, with the exception of ensuring that access to the transmission capacity of the Stentor companies be made available for resale and sharing for a period of two more years. The Commission's decision was expected in the fall of 1997.

Tele-Direct

On February 26, 1997, the Competition Tribunal rendered its decision in the Tele-Direct matter. The application had been filed on December 22, 1994.

The application alleged that Tele-Direct (Publications) Inc. and Tele-Direct (Services) Inc. (Tele-Direct) had tied the sale of advertising services to advertising space in the Yellow Pages. Under the abuse provisions of the Competition Act (section 79), the tie as well as a number of other acts were alleged as anti-competitive acts which had had an exclusionary effect on advertising agencies, advertising consultants and competing telephone directory publishers.

The Tribunal found that there was a tie of advertising space and services with respect to large local and regional advertisers. As a remedy it ordered that Tele-Direct must pay a commission on, or sell space and services separately for Yellow Pages advertisements that cover a province-wide region of six markets or more. This will allow advertising agencies to offer their services to a greater number of advertisers, who will benefit from increased competition. With respect to advertising consultants, the Tribunal prohibited Tele-Direct from engaging in discriminatory acts with respect to the consultants or their customers. Again advertisers will benefit from increased competition as consultants will be able to more freely offer their services. The other allegations against Tele-Direct relating to agencies, consultants and competing publishers were dismissed.

CANYPS order variation

On November 18, 1994, the Competition Tribunal issued a consent order with respect to national advertising by members of the Canadian Yellow Pages Service (CANYPS), the industry association of publishers of Yellow Pages directories in Canada, under the abuse of dominance provisions of the Competition Act. AGT Directory Limited (AGT) and Edmonton Telephones Corporation (Edtel) were among the respondents to the order. Subsequently, TELUS Corporation, the parent of AGT acquired Edtel.

On January 15, 1997, AGT and Edtel filed an application with the Competition Tribunal, under subsection 106 (a) of the Competition Act, for an order to vary four provisions of the CANYPS order so that the two companies could operate jointly in certain areas which were prohibited by the provisions of the order. On February 14, 1997, the Bureau filed a response to the application arguing that there had not been a change in circumstances as alleged by the applicants.

At year end, the parties were awaiting the Tribunal hearing and settlement discussions were ongoing.  ⁴

Electricity

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During the past year, the Competition Bureau furthered its participation in the study of possible restructuring of the electricity systems in British Columbia and Ontario. Previously, Bureau submissions and evidence were provided to the 1996 review by the Advisory Committee on Competition in Ontario's Electricity System (the MacDonald Committee) and the 1995 Electricity Market Structure Review by the British Columbia Utilities Commission (BCUC).

In Ontario, further analysis was provided to the government following the release of the MacDonald Committee Report, in May 1996. The recommendations in the report, while generally consistent with the market structure elements recommended by the Bureau, raised a number of potential competition concerns. Further analysis and recommendations on these aspects of the report were prepared and provided to Ontario government officials in September for use in preparing the provincial government's response. As of March 31, 1977, the Ontario government had not yet responded to the MacDonald Committee findings.

On March 10, 1997, as a follow-up to the Bureau's participation in the BCUC Market Structure Review, a submission as well as expert evidence were provided to the Commission's 1997 Hearing into the Issue of Retail Access and Unbundled Tariffs. The submission and evidence deal specifically with the potential benefits from, and structural requirements for, effective and efficient retail competition in the electricity sector.

More specifically, they:

• developed the case for early adoption of retail competition;
• outlined competition principles for restructuring to put such competition in place;
• recommended several key market structure elements including vertical separation of competitive and non-competitive parts of the B.C. electricity key market structure, the development of an independent system operator and open access spot market, and the creation of an open access transmission and distribution system; and
• outlined the role of competition law in helping to guard against anti-competitive abuses in electricity markets.  ⁵

Natural gas

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National Energy Board/Transportation of natural gas liquids

During November 1996, the National Energy Board (NEB) held a hearing to consider the application of PanCanadian Petroleum Limited for an order requiring Interprovincial Pipe Lines Inc. (IPL) to transport PanCanadian's natural gas liquids. Although IPL is a common carrier pipeline regulated by the NEB, Amoco Canada Petroleum Company Limited controls facilities required to transport natural gas liquids on the IPL and was the only natural gas liquids shipper on the IPL.

Pursuant to section 125 of the Competition Act, the Bureau intervened in the NEB hearing, arguing in favour of open access to common carrier pipelines. The Bureau urged the Board to consider whether restrictions on access were limiting competition in natural gas liquids markets.

In the Bureau's view, the order sought by PanCanadian held out the possibility of competitive benefits in the form of higher prices for producers and lower prices for consumers of natural gas liquids. Moreover, the Bureau argued that measures to provide for more open access over and above the order sought by PanCanadian would be in the public interest should the Board conclude that restrictions on access were limiting competition in natural gas liquids markets.

In its decision released on February 6, 1997, the Board granted PanCanadian's request for an order requiring IPL to transport PanCanadian's natural gas liquids east from Alberta. In addition, the Board instructed IPL to consult with industry participants and report back to the Board by September 2, 1997, on commercial solutions to provide for open access for all potential natural gas liquids shippers. If the Board is not satisfied with the outcome of IPL's consultations, it has undertaken to consider regulatory measures to provide an appropriate solution.

In its decision the Board emphasized that it considers open public access to pipelines under its jurisdiction to be of overriding importance. The Board also noted that while the order sought would alleviate the obstacles faced by PanCanadian, it must also consider the needs of other potential shippers who could compete effectively in natural gas liquids markets.

In summary, the Board's decision holds out the prospect of increased competition in natural gas liquids markets with ensuing benefits for both producers and consumers of natural gas liquids.

Manitoba Public Utilities Board
natural gas local distribution companies

Between June 10 and June 12, 1996, the Manitoba Public Utilities Board (MPUB) conducted a review of the structure of the provincial natural gas sector and the role of Centra Gas Manitoba Inc. with respect to the distribution, retailing and storage of natural gas. A key issue in the proceeding was the desire of Centra, a regulated integrated utility, to also compete as an unregulated entity in the retail gas market.

The Bureau, in a presentation to the Board on July 9, 1996, outlined the potential role of competition law in a less regulated natural gas retail market. In addition to describing the interface between competition law and direct economic regulation, the presentation noted that competition law supports deregulation by providing an effective set of disciplines against many types of anti-competitive behaviour.

On November 4, 1996, the MPUB issued Order No. 110/96 containing guidelines for acceptable conduct between Centra Gas Manitoba and its affiliated companies. In its decision, the Board acknowledged the assistance provided by the Bureau, noting that "as the natural gas industry, and other utilities, move towards a greater reliance on competition rather than regulation, the Board will be guided by some of the concepts elucidated upon by (the) presentation."

Other interventions

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Canada Post Mandate Review

In April 1996, Bureau staff made a presentation at public hearings conducted by the Mandate Review in Ottawa. The presentation followed a written submission made to the Review in February 1996, in which the Bureau recommended that a study be undertaken to determine whether the current regulatory framework is consistent with the objective of providing cost-effective, quality postal services. It suggested that abating or relinquishing Canada Post's exclusive privilege over first class mail delivery, in order to allow competition where feasible, is the most appropriate means of obtaining these objectives.

The Review's report was released on October 8, 1996. It recommended that Canada Post's activities be restricted to mail delivery.

Beer intervention, Quebec

In July 1996, the Competition Bureau intervened before the Régie des Alcools des Courses et des Jeux du Québec in the application by Lakeport Breweries for a permit to distribute private label beer to retail grocery stores supplied by Hudon et Deaudelin in the province of Quebec. Hudon et Deaudelin supplies over 1,100 stores under franchise (notably IGA) and non-franchise arrangements. This application was opposed by the major brewers, Molson and Labatt.

The Bureau took the position that it would be in the public interest to grant this permit as it would lead to an increase in competition and to lower prices in the Quebec beer market. An expert witness for the Bureau testified that the introduction of private label beer in Metro-Richelieu stores following a similar hearing in 1994 (in which the Bureau had also participated) had resulted in the major brewers introducing low price brands to compete with the Metro private label offering. It was also submitted that so-called price brands accounted for an increasing proportion of the Quebec beer market and that in the result, Quebec consumers had benefited from lower prices and more choice.

The Régie, after hearing the evidence, reserved its findings until an appeal of an earlier decision to grant a permit to Lakeport, had been heard by the Supreme Court of Canada.

In February 1997, after the Supreme Court of Canada ruled that the permit granted in 1994 was valid, the Régie incorporated this decision as well as the Bureau's evidence of 1994 and 1996 and granted Lakeport Breweries its permit to distribute private label beer in Hudon et Deaudelin affiliated stores in the province of Quebec.

The Competition Bureau's submissions and portions thereof were cited in a total of seven legal proceedings and were important motivating factors in the decisions by the Régie to grant both permits. In summary, the sale of private label beer was found to be in the public interest because it enabled Quebec consumers to benefit from greater choice and lower prices.

Review of the Special Import Measures Act

The Competition Bureau made a submission to and appeared before the House of Commons' Joint Sub-Committee of the Standing Committees on Finance and on Foreign Affairs and International Trade. The Competition Bureau submission argued for amendments to the Special Import Measures Act (SIMA) to achieve a better balance between: (1) providing protection to Canadian producers against injurious dumped or subsidized imports; and, (2) the need to ensure that trade remedy actions (anti-dumping and countervail actions) do not unnecessarily limit competition in Canada or raise prices for consumers and downstream industries which must compete in both Canadian and foreign markets.

The Competition Bureau urged that the public interest provision in the SIMA be made more effective by defining a list of factors for consideration by the Canadian International Trade Tribunal (CITT). Specifically, the Bureau recommended that in assessing the public interest, specific account be taken of the impact that the imposition of duties may have on downstream users, access to inputs, restrictions of competition and restrictions of choice to consumers. It was felt that elaborating a list of relevant factors would give greater guidance to the CITT, whether or not the imposition of dumping duties would be in the public interest, would ensure greater consistency in decision making, and also provide greater transparency regarding Tribunal decisions.

The Bureau also advocated the adoption of a lesser duty test in a separate provision or as part of the public interest provision. It was recommended that consideration should be given to requiring that duties should be no greater than necessary to remove injury done to domestic industry from dumped or subsidized imports. A lesser duty rule is used by a number of Canada's trading partners, including the European Union, Mexico, Australia and New Zealand.

The Committee's report endorsed the approach of the government to work toward the elimination of anti-dumping remedies in the context of free trade areas. The Committee recommended that access to the confidential record be extended to experts representing interested parties to the proceedings before the CITT. It also recommended improvements to the public interest provision and the introduction of a lesser duty rule. In coming to its conclusion, the Committee stated that it found "this question has been addressed compellingly by the Competition Bureau, as follows: 'The Canadian approach to remedies should reflect the differences between Canadian and U.S. economic realities, viz: (i) trade accounts for a much greater percentage of our national income and, therefore, disruptions of trade flows are likely to be far more costly to Canadian consumers and industrial users than in the U.S.; (ii) Canada has more concentrated production structures and as a consequence, duties are more likely to permit protected producers to exercise market power and raise prices and profits beyond costs with implications for both efficiency and fairness; and, (iii) the high foreign ownership of many Canadian industries implies that the benefits of protectionist actions often accrue to foreign shareholders while the costs are incurred by Canadian consumers and participants in user industries. ' "  ⁶

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2. On May 1, 1997, the CRTC announced a series of decisions which introduced new rules to facilitate the entry of new service providers into the local exchange market; established a price cap regulatory regime for the existing telephone companies; and allowed telephone companies to apply for broadcasting distribution licences. The Commission's decisions adopted many of the Bureau's recommendations including setting out clear rules governing access to the Stentor companies' networks by new entrants, minimizing regulation and maximizing reliance on market forces in local telecommunications markets.
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3. The Bureau also filed a submission in April 1997.
   
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4. Subsequently the Bureau and the companies reached a settlement on the matter and on May 30, 1997, the Competition Tribunal issued a consent order under section 106 (b) of the Competition Act varying four provisions of the CANYPS order.
   
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5. The BCUC hearing was subsequently canceled due to the establishment of a government appointed task force to examine electricity market structure reforms in B.C. Submissions to the canceled hearing are being used as inputs to the work of the task force.
   
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6. On April 18, 1997, the government tabled its reply to the Committee and adopted the competition enhancing recommendations of the Committee. The Competition Bureau will continue to participate in the inter-departmental consultations chaired by the Department of Finance as the reply is developed into legislative proposals.
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