Bill C-235

Comments of Harry Chandler
Deputy Commissioner of Competition (Criminal Matters)

Standing Committee on Industry

March 24, 1999

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Thank you Madam Chair and members of the Committee for this opportunity to speak to you. This afternoon, I would like to briefly discuss three areas related to the proposed amendments contained in Bill C-235. Then I would be pleased to answer any of your questions.

First, I want to start by briefly outlining the nature of the Competition Act in general. Secondly, amendments of the nature proposed in Bill C-235 will have broad implications and I also want to outline some of the concerns of the Competition Bureau. These concerns include: (a) use of criminal sanctions to deter potentially pro-competitive conduct; (b) introduction of the concept of requiring firms to earn a "reasonable return;" and (c) the creation of a civil alternative to the Act's effective criminal provisions against price maintenance. Finally, I would like to briefly explain some of the information that independent experts have provided to us with respect to issues concerning Bill C-235.

1. Competition Act

To begin with some of the general features of the law, and in view of the proposed amendments which are being considered, it may be appropriate to first note that the purpose of the Competition Act is to maintain and encourage competition in Canada. This can be different from the objective of protecting individual competitors or types of competitors.

It is also important to appreciate that the Competition Act is framework law. This has a number of dimensions. First, the Act applies across the economy, not just to particular sectors. That means that there has to be a certain balance and flexibility in the application of the law because, what may seem sensible for one sector, could have serious implications for other parts of the economy.

Second, the scheme of the Competition Act is that it provides a framework within which business can be carried on generally but does not prescribe or require businesses to do things or to obtain approvals. While outlawing certain practices which significantly reduce competition, it does not try to compel firms to compete or prescribe the pricing and other decisions they take in business. In other words, it does not establish a system of administrative regulation. There is no authority provided under the Act to roll back prices nor does the law contain any tests with respect to the reasonableness of prices. These are matters which lie under provincial jurisdiction. In the absence of a national emergency, the federal government does not have constitutional authority in this area.

Third, the remedies provided for in the Act allow the courts to either punish those who break the law or grant remedial orders to correct anti-competitive situations. The former provides both specific and general deterrence to illegal behaviour. Those who are convicted and fined or imprisoned are deterred from repeating their conduct; others, observing the levying of penalties, are encouraged to comply with the law. Similarly, the imposition of remedial orders communicates to business the types of behaviours that may potentially be struck down on competition grounds. The key point is that, even though only a handful of cases may be litigated every year, and each case can take a period of months, or even years, from start to finish, there can be a high level of voluntary compliance as business understands the boundaries of acceptable conduct.

Within this context, we are concerned that Bill C-235 may have broad implications that are not yet fully understood.

2. Bill C-235

2.1 Criminal Provisions

For example, it has been previously stated that the first part of Bill C-235 (which requires vertically integrated suppliers to set retail prices at a level that will cover "marketing costs" and a "reasonable return") is specifically intended to protect non-integrated gasoline retailers from the squeezing of margins by the major integrated retailers.

It proposes to do this through criminal sanctions: with fines for a second offence of up to $25,000, for each day that the offence is committed, along with imprisonment. In the Bureau's opinion, criminal provisions are not appropriate.

Pricing decisions on gasoline can be made on a daily basis by individual competitors in hundreds of local markets across the country. Criminal provisions are likely to cause retailers to err on the side of caution and set the price of gasoline higher than necessary. Criminal provisions are also more likely to increase the incentive for integrated firms to avoid the potential problems associated with this kind of legislation by simply deciding not to supply independents.

Low prices are generally pro-competitive. They benefit not only individual consumers directly (many of whom frequently complain to the Bureau about high gas prices) but also businesses purchasers (particularly those firms for whom gasoline represents a major input cost). Price competition can also provide incentives to reduce costs through product innovation or more efficient distribution systems.

Under very rare circumstances, low prices can also represent anti-competitive predatory pricing. Allegations of predatory pricing in the gasoline industry can be examined under both the criminal and civil provisions of the Act. Typically, proper analysis requires examination of market structure and related considerations.

Our understanding of the basic theory put forward to support Bill C-235 can be summarized as follows: (1) Canadian gasoline markets are dominated by one or more vertically integrated firms; (2) these vertically integrated firms are squeezing the margins available to non-integrated firms for the purpose of putting them out of business; and (3) if the independent firms are put out of business, then competition will be substantially lessened.

These arguments can be specifically and directly tied to the current civil "Abuse of Dominant Position" provisions of the Competition Act. Under these provisions, the Competition Tribunal can issue a remedial order if it finds there is evidence indicating that:

1. one or more companies substantially or completely control a relevant market;
   
2. that company, or those companies, have engaged in a practice of "anti-competitive acts;"

   (section 78 of the Act specifically lists, as an example of anti-competitive acts, "squeezing, by a vertically integrated supplier, of the margin available to an unintegrated customer who competes with the supplier, for the purpose of impeding or preventing the customer's entry into, or expansion in, a market");

   and

3. the practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market.

These provisions were a part of major revisions made to the Competition Act in 1986 after years of debate and extensive consultation.

2.2 Reasonable Return

The amendments proposed in Bill C-235 introduce the concept of requiring firms to earn a "reasonable return" on retail sales. The introduction of a concept like this represents a form of price regulation or government intervention into the marketplace that is not normally seen in competition legislation.

While regulation of prices and profits may be appropriate under some circumstances, I think it is generally recognized that this type of regulation is administratively costly, usually leads to higher prices and can create other kinds of market distortions. In the case of gasoline, for example, price regulation in some American states has led in the past to prohibitions against innovations such as self-serve gas stations.

As you may know, Québec passed legislation similar to Bill C-235 in 1996. On August 31st, 1998, the Régie de l?énergie du Québec began hearings into what kinds of operating costs, if any, should be included in calculating fair retail prices. These hearings are still going on. So, it is not a simple process that Bill C-235 is proposing.

What constitutes a reasonable rate of return, of course, normally varies from company to company or individual to individual (and may be dictated by supply and demand conditions at a given point in time). It is these differences in opinions which can often lead to increased price competition.

2.3 Bill C-235's Part 2

Section 2 of Bill C-235 proposes to add the following phrase to the current list of anti-competitive conduct outlined in the Competition Act's Abuse of Dominant Position provisions:

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"78(j) by a vertically integrated supplier, coercing or attempting to coerce a customer who competes with the supplier at the retail level in the same market area, in relation to the establishment of the customer's retail price or pricing policy."

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To the best of our knowledge, this proposed amendment has not been widely discussed or debated. It may, however, seriously undermine a very effective section of the Act.

Under the current price maintenance provisions of section 61 in the Competition Act, it is a criminal offence for a supplier to directly or indirectly attempt to influence upwards, by agreement, threat, promise or any like means, the price at which a competitor sells or advertises a product. This has been a relatively simple section to enforce; is generally understood by businesses; concerns conduct which is almost always anti-competitive; and has been used successfully with respect to a wide variety of products.

With respect to gasoline, for example, the Competition Bureau has received many complaints over the years alleging that gasoline prices are too high as the result of price fixing. In response, the Bureau has stated that it has prosecuted gasoline companies in the past, and will prosecute in the future, when there is evidence that one or more offences have been committed. Since 1972, there have been 12 prosecutions under the criminal provisions of the Competition Act with respect to gasoline or heating oil. Ten of the twelve prosecutions were successful and all of them were related to charges under the price maintenance provisions of the Act.

The courts as well have indicated that they view this conduct as serious. In a leading case involving Shell Canada, for example, the company was fined $200,000 for price maintenance by a Shell representative, even though the court also found that the conduct was contrary to Shell's corporate policy. In his judgement, the trial judge noted that the attempt by a Shell representative to encourage a retailer to increase its prices amounted to a form of price fixing, and that prohibiting this type of conduct was especially important with respect to a product like gasoline because it is purchased by so many people.

This is the type of conduct which many people believe is ideally suited for criminal law.

Part 2 of Bill C-235, however, creates a civil alternative with additional tests (requiring, for example, that the conduct is engaged in by one or more firms which substantially control a relevant market). Rather than simply duplicating existing legislation, it is likely to undermine the effectiveness of the criminal provisions. There will inevitably be pressure to proceed under the civil provisions unless there are exceptional circumstances.

3. Expert Reports

In order to assist us in advising the Minister on issues related to Bill C-235, the Bureau commissioned four studies which I understand have been forwarded to the Committee. I trust you will have an opportunity to hear from the authors of these reports but I would like to briefly outline some background information on these experts and some of the information that they have provided to us.

The experts included:

• A former Commissioner and Acting Chairman of the United States Federal Trade Commission (a federal investigative and adjudicative agency with responsibilities that include American antitrust legislation) who provided information on American federal predatory pricing laws and state sales- below-cost or minimum markup legislation (similar to Bill C-235).
  Report available in HTML or (PDF: 91 KB).
  
• An economic expert who has recently completed an article for an economic journal concerning American sales-below-cost or minimum markup legislation.
  Report available in HTML or (PDF: 63 KB).
  
• A former Director of Natural Resources Canada who analysed market structure trends using data purchased by the Bureau from Kent Marketing Services (a marketing research firm which provides information on Canadian market shares of gasoline sales in major municipal areas that is generally recognized as an industry standard).
  A copy of this report may be obtained from the Competition Bureau's Information Centre.
  
• Econometricians from the Bureau, the Law and Economics Consulting Group in San Francisco, and Laval University in Québec City, who examined whether a statistical relationship can be established between the presence of independents in a market and lower retail gasoline prices.
  A copy of this report may be obtained from the Competition Bureau's Information Centre.

As I have suggested before, amendments to the Competition Act can have far reaching and sometimes unintended effects. I think it is important that the Committee have the facts before it to provide a proper basis for deliberations. For example:

• It has been said that Newfoundland and New Brunswick are the best examples of where high prices can be primarily attributed to a drastic decline in the number of independent retailers. The Canadian consultant who analysed market share data, however, has concluded that the market share of independents increased significantly during the last ten years in St. John's, Newfoundland, and Saint John, New Brunswick.
  
• It has also been said that the Competition Act allows US companies to do in Canada what they are prohibited from doing by federal law in the United States. An American legal expert, however, has advised that U.S. jurisprudence concerning American federal law reflects an approach to predatory pricing that is very similar to the approach used by the Competition Bureau (which, in turn, is based on lessons learned through Canadian jurisprudence).
  
• It has also been said that sales-below-cost laws, or related legislation that has been passed by some states, has been responsible for increased competition in the United States. In fact, information from the independent experts indicates that this legislation is likely to increase prices for the consumer and, based on historical data, is unlikely to achieve its stated objective of protecting smaller retailers.
  
• It has been said that the federal government should follow the example set by Quebec with its Bill 50 or New Brunswick with its Bill 11. New Brunswick's Bill 11 was a Private Member's Bill proposed by an opposition member in 1997 and it was subsequently withdrawn. Last month, the New Brunswick government introduced legislation requiring the reporting of certain data but specifically rejecting price regulation. To quote from the press release:

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"We have examined several types of price regulation currently in place in Prince Edward Island and Quebec and have concluded that they do not provide consumers with lower prices."

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• It has also been said that the pricing activities of the major oil companies is determined on the basis of maintaining stable market shares. Analysis of their market shares over time, however, demonstrates that they are not stable. Data provided by one of the experts, for example, indicates that during the last five years in Montreal, the market share of Company A (confidentiality considerations prevented the expert from publicly linking the names of specific major oil companies to city market shares) changed - 0.4%, 4.2%, 1%, 5.2%, and .8%. Company B generally experienced modest growth, Company C generally experienced modest decline and Company D experienced both increases and decreases.
  
• It has been said that true competition will end with the loss of the traditional independent gasoline retailer. Sophisticated statistical analysis, however, found no direct relationship between the presence of independents in a market and lower retail prices. While we recognize that independents have had a role in creating a competitive environment in some markets, we are concerned that the proposed legislation will limit the ability of the major oil firms to also create a more competitive marketplace.
  
• It has also been suggested that vertically integrated oil companies have the market power to raise wholesale prices while lowering retail prices. Previous studies, several of them done for the Bureau, have indicated that retail prices generally track crude oil prices. There is a delay between when crude oil prices change and retail prices change, and this delay can vary by city, but the delay is generally not faster when crude prices increase as compared to when crude prices decrease. One of the expert studies examined whether the same could be said of wholesale prices and found that, indeed, wholesale prices closely reflect crude oil price fluctuations.

4. Conclusion

In conclusion, I do not want to leave the impression that the Competition Bureau will not act when there is evidence suggesting that competition has been, is being, or is likely to be substantially lessened with respect to any product.

Last year's decision by Ultramar and Petro-Canada to abandon their joint venture plans as a result of the Director's position on the proposal is just one example. In this case, it was concluded that the plan would substantially lessen competition by the removal of an aggressive price competitor; substantially increase concentration in Québec and parts of the Atlantic Provinces; and significantly reduce competition among wholesale suppliers to non-integrated retailers.

As another example, the Bureau has committed extensive resources to ongoing litigation before the Competition Tribunal with respect to the sale by Petro-Canada of ICG Propane to Superior Propane. The transaction would merge the only two national suppliers of propane and the Bureau has asked the Tribunal to disolve the merger or order divestiture.

I also want to repeat that the Bill, which has not had the same kind of consultation normally associated with substantive changes to the Competition Act, may have other implications which are not yet understood.

I would now be pleased to answer any questions that you might have.