Letter to the British Columbia Minister of Environment and Climate Change Strategy Pursuant to Section 126 of the Competition Act

May 3, 2019

On this page:

  1. Introduction
  2. The Generator Levy Bylaw may reduce and/or eliminate competition in the market
  3. Less competition may result in reduced choice and innovation
  4. Less competition may result in higher prices
  5. The Generator Levy does not reflect the actual fixed costs of Metro Vancouver transfer stations
  6. Conclusion

The Honourable George Heyman
Minister of Environment and Climate Change Strategy
Legislative Assembly of British Columbia
Parliament Buildings, Room 112
Victoria, British Columbia 
V8V 1X4

Dear Minister Heyman:

I am writing to you further to your request that the Competition Bureau (the "Bureau") provide its views as to any competition-related issues regarding Bylaw 307 (the "Commercial Waste Licensing Bylaw"), Bylaw 308 (the "Generator Levy Bylaw"), and Bylaw 309 (the "Solid Waste and Recyclable Material Regulatory Bylaw"). Pursuant to section 126 of the Competition Act (the "Act"), the Bureau's views are set out below.Footnote 1

Separate from its enforcement mandate, the Bureau is providing these views in the context of its role as an advocate for the benefits of a competitive marketplace. As Canada's competition expert, the Bureau makes representations, such as this submission, to public bodies that carry regulatory activities in order to shed light on competition-related issues that exist independently of any outcomes of a formal investigation under the enforcement provisions of the Act. Such submissions aim to help regulators formulate and implement regulations that satisfy their non-competition related policy objectives while respecting, to the greatest extent possible, competition's central role in the Canadian economy.

Introduction

In the Bureau's view, the bylaws could have significant negative effects on competition for the handling, transfer and/or recovery of mixed municipal solid waste ("waste management") within the Metro Vancouver area. Competition is important because it allows Canadians to profit from rivalry between competitors, which leads to lower prices, increased product choice and quality of service, and greater levels of innovation. When entities (whether public or private) compete on the merits, market forces generally deliver the most efficient and beneficial economic outcomes for society.

Accordingly, this submission urges the Ministry to consider and understand these potential negative effects on competition before the Minister makes a decision on whether to approve the bylaws. In the Bureau's view, measures that have significant negative effects on competition should only be implemented where it can be established that public policy objectives cannot be achieved without the associated negative effects on competition. To date, following a careful and thorough evaluation that has incorporated the viewpoints of a variety of stakeholders, including Metro Vancouver, the Bureau has not been provided with information to suggest that there is a conflict between advancing Metro Vancouver's environmental objectives and vigorous competition.

The Generator Levy Bylaw may reduce and/or eliminate competition in the market

Metro Vancouver owns a network of transfer stations in the Metro Vancouver area whose operation it contracts to third party operators. By virtue of the Generator Levy Bylaw and the Commercial Waste Licensing Bylaw, which Metro Vancouver has indicated facilitates the implementation of the Generator Levy Bylaw, Metro Vancouver has effectively increased the costs of any competing non-Metro Vancouver facility that engages in waste management in or around the Metro Vancouver area. Situations where one competitor raises the costs of rivals — and thereby eliminates or reduces their ability to compete — undermine, in all but exceptional cases, the underlying goals of competition policy. The Bureau's analysis suggests that approval of the Commercial Waste Licensing Bylaw coupled with the continued application of the Generator Levy Bylaw will have this very effect, and indeed likely result in a monopoly on waste management in the Metro Vancouver area. In this regard, we note that the Integrated Solid Waste and Resource Management Plan ("ISWRMP") envisages participation by the public and private sector to achieve its goalsFootnote 2 and that Metro Vancouver has licensed a party to provide waste management services akin to Metro Vancouver transfer stations in the Metro Vancouver area.

Specifically, the Generator Levy Bylaw requires all haulers to remit the Generator Levy (currently $42/tonne) to Metro Vancouver for waste delivered to any non-Metro Vancouver facility, whether inside or outside the Metro Vancouver area and whether licensed by Metro Vancouver or not.  The Generator Levy Bylaw forces non-Metro Vancouver facilities to decide either to:

  1. let their customers pay the amount of the Generator Levy (currently $42/tonne) on top of any existing tipping fees; and/or,
  2. absorb the amount of the Generator Levy.

These considerations do not apply to Metro Vancouver facilities as haulers who deliver waste to Metro Vancouver facilities do not have to remit the Generator Levy.Footnote 3 Based on the Bureau's current understanding of the marketplace, no party would be able to compete with Metro Vancouver facilities under these conditions.

Absent the Generator Levy, the prospect of competitive entry is not simply a theoretical possibility as at least one party has obtained a Metro Vancouver licence to operate a mixed material recovery facility ("MMRF") in the region.Footnote 4 This facility has not, however, commenced operations.

At least one objective of the Generator Levy Bylaw is to restrict or minimize haulers' use of non-Metro Vancouver transfer stations.Footnote 5 Indeed, the implementation of a split-fee, akin to the Generator Levy, was contemplated by Metro Vancouver as a waste flow control measure as far back as 2012.Footnote 6 Metro Vancouver's adoption of Bylaw 280 in 2013, which was subsequently rejected by the then-Minister of Environment, Mary Polak, was an attempt to eliminate or minimize haulers' use of otherwise competing non-Metro Vancouver transfer stations. Notably, in the course of rejecting the bylaw, Minister Polak stated that: "Bylaw 280 stifles competition on residuals management. This limits options and combined with steadily increasing Metro tipping fees could have a significant effect on the local taxpayer."Footnote 7 In fact, the Ministry's press release at the time listed a number of public interest concerns that factored into the decision to reject Bylaw 280 including "the potential for Bylaw 280 to create a monopoly on waste management."Footnote 8 In the Bureau's view, the continued application of the Generator Levy Bylaw is likely to achieve the result that the Ministry of Environment feared in 2014 (i.e., a monopoly on waste management in the Metro Vancouver area).

In effect, Metro Vancouver suggests it ought to handle all waste in the Metro Vancouver area. This suggestion, however, ignores the possibility that Metro Vancouver operates less efficiently than non-Metro Vancouver facilities. The Generator Levy Bylaw prevents any such facility from supplying a market mechanism to address any such issue.

Less competition may result in reduced choice and innovation

Given the substantial additional cost that the Generator Levy Bylaw imposes on non-Metro Vancouver facilities, these facilities will not be a viable option for waste generators and haulers. That is to say, waste generators and haulers will not be able to choose a competing transfer station or MMRF that is (potentially) more efficient, geographically closer, and/or otherwise less expensive (save for the Generator Levy), than Metro Vancouver facilities. This, in turn, would limit the introduction of new or innovative technology that would help Metro Vancouver recover more recyclables from its waste streams. In this way, the Generator Levy Bylaw not only prevents any such competitive discipline on Metro Vancouver facilities but could also stifle efficiency and innovation that otherwise typically arises in competitive markets.

The Bureau understands that Metro Vancouver attributes its high diversion rates in part to its ability to enforce material bans on mixed municipal solid waste coming into its transfer stations and has concerns that its diversion rates and source-separation goals could be compromised with the presence of private facilities in the Metro Vancouver area.Footnote 9 However, the Bureau wonders whether these environmental objectives could be achieved through other means, such as incentivizing market participants to contribute to its objectives, as opposed to solutions that structurally favour Metro Vancouver facilities. Alternatives to the Generator Levy Bylaw could include additional auditing or enforcement of material bans at private facilities, or coordination with neighbouring regional districts to ensure material bans are respected. It is not apparent that Metro Vancouver has considered, or attempted to implement, these types of alternative solutions. Such solutions could help Metro Vancouver achieve its environmental objectives while allowing Metro Vancouver residents to benefit from competition, most notably through competitive discipline and innovation that is typically brought through private investment.

As noted above, the Bureau does not possess any information that would indicate a conflict between Metro Vancouver's environmental objectives and open (regulated) competition. For example, it is difficult to conceive of a situation where innovation brought about by a facility like a MMRF, which could extract  a portion of a waste stream that is otherwise destined for a landfill, could accomplish anything but improve Metro Vancouver's diversion rates. Indeed, this appears to have been recognized by Metro Vancouver given its recent proposal for the Metro Vancouver MMRF pilot project.Footnote 10 Yet, the Generator Levy Bylaw (and the facilitating Commercial Waste Licensing Bylaw) discourages investment by private entities seeking to introduce this type of innovation into the Metro Vancouver area.

Less competition may result in higher prices

In the absence of competition from private waste management facilities, Metro Vancouver is able to raise its tipping fees without competitive constraints. In fact, Metro Vancouver has recognized this reality in recently announcing plans to significantly raise tipping fees in the Metro Vancouver area without projecting a loss in anticipated tipping fee revenues.Footnote 11 But for the Generator Levy Bylaw, this would likely not be possible.

In 2018, shortly after the Generator Levy Bylaw was implemented, Metro Vancouver announced plans to raise its tipping fees by an average of 8% per year over the next 5 years for large loads, amounting to a total increase of 47% over that time period.Footnote 12 Metro Vancouver's planned substantial increase in tipping fees would otherwise not be sustainable were actual (or potential) competition from non-Metro Vancouver facilities a consideration.

In 2015, after Minister Polak rejected Bylaw 280 and before the Generator Levy Bylaw was in place, Metro Vancouver substantially lowered its tipping fees for large loads and maintained its fees at this level for three years.Footnote 13 Metro Vancouver appears to have taken this action in order to be competitive with private transfer stations located outside the Metro Vancouver area.Footnote 14 This tipping fee decrease was successful in minimizing waste flow going to these neighbouring private transfer stations (i.e., the lowering of tipping fees resulted in a substantial recapturing of waste flow by Metro Vancouver facilities).Footnote 15

The 2015 decrease in tipping fees for large loads was manifestly a reaction by Metro Vancouver to the loss of waste volume to, or competitive discipline provided by, the neighbouring facilities. This is confirmed by the fact that Metro Vancouver's treatment of large loads differed from its treatment of other load sizes. While Metro Vancouver reduced tipping fees for large loads, it increased tipping fees for medium and small loads, as well as municipally-collected waste, all of which were unlikely to switch to neighbouring transfer stations.

In summary, Metro Vancouver's historical tipping fee actions and future plans strongly suggest that Metro Vancouver believes the Generator Levy Bylaw will be sufficient to eliminate competition to its transfer stations in the Metro Vancouver area.

Subject to further analysis, the Generator Levy Bylaw may result in higher prices for other load sizes as well.  We note that Metro Vancouver is planning to increase its pricing for all load sizes over the 2019-2023 period.

The Generator Levy does not reflect the actual fixed costs of Metro Vancouver transfer stations

Metro Vancouver has stated that its rationale for the Generator Levy Bylaw is to have all participants contribute to the fixed costs of Metro Vancouver's transfer station network and solid waste planning so as to ensure the transfer stations can continue to operate and remain available for all generators.Footnote 16 However, the quantum of the Generator Levy does not appear to be commensurate with any reasonable calculation of Metro Vancouver facilities' fixed costs. In fact, the Generator Levy appears to significantly exceed fixed costs in any reasonable accounting sense, and is only "fixed" by virtue of the contract Metro Vancouver chose to enter into with its third party operator.

A fixed cost is an expense that must be incurred regardless of the volume of the good or service provided, i.e. expenses that have to be paid by a firm even when it is not producing any good or offering any service.Footnote 17 An example of a fixed cost would be the payment of rent.

A variable cost is an expense that is dependent on the volume of the good or service provided, e.g. the costs associated with purchasing the inputs that are necessary to produce a good or service.Footnote 18  In the context of a transfer station, overtime labour costs associated with operating a transfer station for an extended period of time represents a variable cost.

For the purposes of determining the amount of the Generator Levy, Metro Vancouver appears to have designated as "fixed" the vast majority of the costs associated with the operation of its transfer stations. A review of Metro Vancouver's Request for Proposals 16-071 confirms that, under the contract Metro Vancouver chose to enter into, Metro Vancouver must pay a fixed monthly rate to the third party operator of their transfer stations located in North Shore, Coquitlam and Surrey.Footnote 19 If Metro Vancouver's Generator Levy is calculated using the (fixed) monthly rate Metro Vancouver is charged by its third party operator, then this will necessarily include both fixed costs (e.g., the land and the building) and variable costs (e.g., incremental labour and incremental daily maintenance of the facility and equipment). Under different contract terms, the fee Metro Vancouver has to pay could vary based on the volume processed at the facilities. In short, rather than covering Metro Vancouver's fixed costs of running its waste program, the Generator Levy covers not only fixed costs but also some variable costs.

Conclusion

The Bureau is of the view that the Generator Levy Bylaw and Commercial Waste Licensing Bylaw raise competition-related concerns in that their adoption and implementation may result in a reduction of choice and innovation and/or an increase in tipping fees paid by waste generators in the Metro Vancouver area that would not occur absent these measures. Moreover, the Bureau is of the view that measures put in place by Metro Vancouver, indeed any public or quasi-public entity, should not create competitive advantages for one competitor over another. Most importantly, the Bureau is of the view that such measures should only be used where market forces will not achieve the relevant public (e.g., environmental) policy objectives and, even then, only to the extent necessary to achieve those objectives.

The Bureau appreciates the opportunity to provide these comments for the Minister's consideration.

Yours truly,

Anthony Durocher
Deputy Commissioner of Competition

cc. Metro Vancouver

Date modified: