Speaking Notes for Konrad von Finckenstein Commissioner of Competition

Bill C-249 An Act to amend the Competition Act

Standing Committee on Industry, Science and Technology

March 31, 2003

(PDF: 243 KB)

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Introduction

Thank you Mister Chair and members of the Committee for inviting me here today. As always, I welcome the opportunity to discuss competition policy and I am pleased to participate in your deliberations on Bill C-249, An Act to Amend the Competition Act.

I would like to take this opportunity to thank the Committee for its excellent work in studying competition policy in Canada and especially for its recent report on modernizing Canada's competition regime. The next round of competition law amendments will follow closely on the Committee's recommendations and ensure that the Bureau has the tools to effectively enforce and administer the Act.

As you know, the Competition Bureau promotes and maintains fair competition so that Canadians can benefit from lower prices, product choice and quality services. Our work benefits consumers and contributes to a healthy and robust economy. The Competition Act plays a vital role in this process.

Bill C-249 is consistent with these objectives. The Bill seeks to ensure that consumers are not left out of the equation when considering mergers involving efficiency claims. It would also safeguard competition to the benefit of consumers and the Canadian economy.

Before addressing the Bill itself, I would like to provide some brief context on merger review in Canada.

Merger Review

In general, mergers are viewed positively as one of the core business strategies to increase competitiveness. However, the Bureau pays close attention to mergers that would substantially prevent or lessen competition in the relevant markets. In reviewing mergers, we consider many different elements including the level of economic concentration in the relevant industry and market shares for the merging parties. The Bureau also considers such factors as:

• whether foreign competition will provide effective competition in the relevant markets;
• whether one of the merging parties is a failing firm;
• the extent to which acceptable substitute products or services are available;
• the existence and effects of any barriers to entry;
• the extent of remaining competition in the relevant markets;
• whether the merger would remove a vigorous and effective competitor; and
• the role of innovation in the relevant markets.

After considering such factors, the Bureau decides if it will challenge a merger or allow it to proceed. In most cases, when we have competition concerns regarding a transaction, we are able to remedy the problem by working with the parties. Merging parties will often present a modified proposal. If they choose to proceed with the merger despite our objection, we will challenge it before the Competition Tribunal. It is up to the Competition Tribunal to decide the matter.

During Tribunal proceedings, merging parties may raise the "efficiency defence" under section 96 of the Competition Act. To successfully argue the defence, the parties must persuade the Tribunal that the merger will generate efficiencies that are greater than and offset the anti-competitive effects of the merger.

Since 1998, the Competition Bureau has reviewed over 1300 proposals. In most cases where we had concerns, we were able to resolve the issues without the need for litigation. A handful of transactions led to fully litigated proceedings. One such case was the merger between Superior Propane and ICG Propane.

We challenged the proposed merger because it would result in a substantial lessening and prevention of competition in numerous markets across the country. As well, it would lead to the creation of monopolies or near monopolies in 16 local markets and would give Superior a national market share of 70%. The Tribunal unanimously agreed with our assessment. However, the merger was allowed to proceed because the Tribunal concluded that the efficiencies outweighed the anti-competitive effects.

As an aside, it is timely that we are discussing efficiencies today because the Bureau has decided that it will not appeal the Federal Court of Appeal's latest decision in the Propane case. An information notice will be issued today. After extensive litigation, it is clear that further litigation would not have clarified the efficiency defence. Only a legislative solution is workable.

It is not my intention to go into the details of the Propane case. However, I will say that the outcome is unacceptable from a policy view point for two reasons:

Firstly, an anti-competitive merger will survive if it generates sufficient efficiencies, even if it results in substantial harm to consumers. Take for example rural households in the Yukon. These households will be hostage to a monopoly supplier to heat their homes. Natural gas and heating oil are not acceptable alternatives for these propane customers.

My second objection is that the interpretation given to section 96 means that the Competition Act condones the creation of monopolies. In our view, it is a perverse result that the application of the Competition Act results in sanctioning the creation of a monopoly.

Efficiencies are obviously an important element of a successful economy. However, they are best realized through a competitive market which achieves not just efficiencies but choice and innovation. We must favour a competitive economy which expands opportunities for Canadian participation in world markets.

Bill C-249

When the Act was amended in 1986, Parliament was seized with the report of the Royal Commission on the Economic Union and Development Prospects for Canada, the "MacDonald Commission" Report which, among other things, noted the urgency of opening up Canada's markets, and freeing up Canadian industry to compete internationally. At that time, there was widespread recognition that Canadian firms faced a daunting challenge in adapting to a new competitive world and Competition Act discussions reflected this view. We see this particularly in Section 96 of the Act which not only cites efficiencies, but emphasizes in 96(2) the importance of gains in exports or import substitution.

Canada's economy has changed significantly since 1986, due to globalization the FTA and the NAFTA. Today's economy is knowledge driven and dynamic. We have a vastly different perspective on the importance of competition as the driving force behind development.

But we have a law that has not changed and which is leading to results inconsistent with the new reality.

Bill C-249 would limit the application of the efficiency exception to ensure that consumers benefit from gains in efficiency. This means that efficiencies could never be used to save a merger that resulted in the elimination of competition altogether.

I am aware that an amendment to Bill C-249 was recently proposed by the sponsoring member. As I understand it, this amendment would replace the existing s. 96(1) by the following:

"96(1) In determining for the purpose of section 92, whether or not a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially, the Tribunal shall, together with the factors that may be considered by the Tribunal under section 93, have regard to whether the merger or proposed merger has brought about or is likely to bring about gains in efficiency that will provide benefits to consumers, including competitive prices or product choices, that would not likely be attained in the absence of the merger or proposed merger."

In lieu of having a "trade-off" between efficiencies and anti-competitive effects, efficiencies would be considered as part of the overall assessment of the merger. The amendment would ensure that the Competition Tribunal will have regard to efficiencies only when there is a net benefit to consumers through competitive prices or product choices and only when the efficiencies would not likely be attained in the absence of the merger.

Bill C-249 in its present form and the proposed amendment, are consistent with the treatment of efficiencies in other jurisdictions. This is particularly important in a multi-jurisdictional context because divergence in merger review can adversely affect the ability of firms to compete internationally. In the US, competition policy serves the interest of consumers. Therefore, claims of efficiencies may only be taken into account if they do not result in higher prices to consumers. In the UK, a new law that will come into force shortly will allow the Office of Fair Trading to take into account clear and quantifiable claims of efficiencies only in mergers where the consumer will benefit from lower prices, greater innovation and greater choice. These two countries consider efficiencies as part of the lessening of competition test, which would also be the case in Canada with the proposed changes to Bill C-249.

You will find additional information on the treatment of efficiencies in other jurisdictions in the independent study commissioned by the Government, as part of its response to this Committee's Eighth Report. The study is available on the Bureau's Web site (www.cb-bc.gc.ca).

In principle Bill C-249 as it is, subject to some refinements in language, is a workable alternative to the status quo. I am enclosing, as annex 1, a possible revision of C-249 reflecting such necessary refinements. However, while this is a workable model, I prefer the approach presented in the amendment to Bill C-249 proposed by the sponsoring member because it strikes a better balance between protecting the interest of consumers and the importance of efficiencies in merger review. As such, it is complementary to the evaluative criteria of section 93 and is fully consistent with the objectives of the Competition Act. It also brings the treatment of efficiencies in Canada closer to that of our international counterparts.

If the Committee would permit, I would like to propose two very technical changes to the amendment to Bill C-249 proposed by the sponsoring member to make it more consistent with the language of section 93 (evaluative criteria) and so that the French and English versions are equivalent. In the English version, I would recommend changing the word "shall" at line 3 to "may"; and adding the word "and" at line 6 before the word "that". In the French version, I would recommend changing the word "doit" to "peut" at line 3.

Conclusion

In closing, I would reiterate that section 96 of the Competition Act needs to be fixed to bring about clarity on how efficiencies should be considered, to provide Canadians with merger review provisions comparable to the provisions observed at an international level and to safeguard consumers from non-competitive price increases, loss of choice and quality that result from monopolies.

Thank you for allowing me share my views on Bill C-249. I would now be pleased to answer any questions you may have.

Annex 1 : Suggested Revision to Bill C-249

Restriction

(4) For the purposes of this section, the Tribunal shall not find that a merger or proposed merger has brought about or is likely to bring about gains in efficiency that will offset the effects of any prevention or lessening of competition where the merger or proposed merger will or would likely result in an increase in prices of products of the merging parties from the prices that existed or would likely have existed before the merger or proposed merger.

Restriction

(5) For the purposes of this section, the Tribunal shall not find that gains in efficiency offset the effects of any prevention or lessening of competition if those effects amount to or are likely to amount to the elimination or near elimination of competition.