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Competition Bureau statement regarding its inquiry into alleged anti-competitive conduct by Enercare

OTTAWA, September 19, 2019 — Today, the Commissioner of Competition announced that he has discontinued an inquiry into whether Enercare Inc. (Enercare), a rental water heater provider, has engaged in conduct contrary to the abuse of dominance provisions of the Competition Act (Act). This statement summarizes the Competition Bureau's inquiry and the reasons for its discontinuance.

The Bureau's inquiry primarily examined two forms of conduct. First, the Bureau investigated Enercare's water heater return policies and practices, in particular Enercare's agency verification policies and return depot policies. Second, the Bureau investigated Enercare's use of a "buyout only, useful life" form of contract (a "BOULC"). Enercare has used BOULC since 2010. The only termination option for a BOULC prior to the end of the water heater's "useful life" (a finding that Enercare makes at its sole discretion) is to purchase the water heater at a price schedule determined by Enercare when the contract is concluded.

In brief, the evidence gathered and analyzed by the Bureau suggests that Enercare holds a dominant market position. The evidence also suggests that Enercare is engaging in conduct that, in certain circumstances, could raise concerns under the abuse of dominance provisions. However, the evidence obtained by the Bureau to date does not support a conclusion that Enercare's conduct is having or has had the effect of substantially lessening or preventing competition, which is one of the requirements for conduct to be an abuse of dominance. As a result, the matter does not justify filing an application with the Competition Tribunal at this time. Since Enercare's conduct remains ongoing, should new and compelling evidence come to light demonstrating that the Act is engaged, the Bureau will take appropriate action.

Background

Unlike other areas of Canada where most homeowners own their water heater, a significant number of homeowners in Ontario rent their water heater from service providers like Enercare. Rental water heater agreements typically involve a consumer paying a monthly fee in exchange for the installation of the rental water heater in their home, along with certain maintenance and repair  services by the rental water heater provider. Since the early 2000s, the Bureau has taken significant enforcement action to address concerns relating to alleged anti-competitive conduct in this market, including filing applications and Registered Consent Agreements with the Competition Tribunal.

The Bureau's investigation

Enercare's predecessor, Direct Energy Marketing Limited ("Direct Energy") began using the BOULC in 2010. This followed the Commissioner's approval of Direct Energy's use of the BOULC in accordance with and for the purposes of a consent order that bound Direct Energy until February 20, 2012.Footnote 1 In particular, BOULCs are characterized by clauses relating to the term of the contract and termination by the customer. In Enercare's current contract, these terms are as follows:

2. Term:
The term of the Water Heater rental ends if this Agreement is terminated by you or by us […] or when the useful life of the water heater has ended. The useful life of the Water Heater ends when Enercare or its authorized service  provider determines, having regard to the relevant factors, including without limitation, the age of the Water Heater and the cost of any repairs to be made to the Water Heater, that it is no longer commercially reasonable to repair the Water Heater. […]
9. Termination […] by You –
Your sole method of terminating this Agreement prior to the end of the useful life of the Water Heater is to purchase the Water Heater. You may purchase the Water Heater at any time for a buyout price that reflects, among other things, the unpaid cost of the Water Heater and related installation, finance and servicing costs, which buyout price can be found on our website. […]

As a result, unless Enercare determines that a water heater is commercially unreasonable to repair, a customer's only termination option is to purchase it. For instance, according to Enercare's 2019 buyout schedule, the required buyout for a 50-gallon power vent gas water heater that is less than one year old would be $1,620 and $707 for one that is 10 years old.

In 2014, as part of Enercare's acquisition of Direct Energy, Enercare provided a written commitment to the Commissioner that it would not continue engaging in practices relating to the return of water heaters that were the subject of litigation between the Commissioner and Direct Energy before the Tribunal.

Following the receipt of numerous customer complaints about Enercare's water heater return policies, contracting practices, and alleged breaches of a written commitment previously provided to the Commissioner, the Bureau commenced an inquiry in 2017. During the inquiry, the Bureau interviewed key market participants while also gathering relevant records from many of these parties, including through court orders to compel the production of records, written returns, and oral examinations pursuant to section 11 of the Act.

Analysis under the abuse of dominance provisions

Abuse of dominance occurs when a dominant firm or group of firms in a market engages in a practice of anti-competitive acts, with the result that competition has been or is likely to be prevented or lessened substantially.

Dominance

The Bureau sought to determine whether Enercare holds a dominant position, or more specifically, whether Enercare possesses a substantial degree of market power in a relevant market. This process requires determining both the relevant geographic market(s) and relevant product market(s) affected by the conduct.

Based on the results of its inquiry, the Bureau considered the relevant geographic markets to be local, located within areas of Ontario that are supplied gas exclusively by Enbridge Gas Inc. (the "Enbridge Gas Territory"), which for analytical purposes can be aggregated into the Enbridge Gas Territory due to their similar market structures. With regard to the relevant product market, the Bureau examined whether the market includes only rental gas-powered water heaters or whether it is broader such that it also includes gas-powered water heaters purchased through retail channels. To inform its analysis the Bureau gathered extensive information during the course of this inquiry, including the views of competitors as well as the evidence on consumer substitution in the face of significant differences in lifetime costs between rental and retail gas-powered water heaters. While the Bureau considered both product market definitions, it is of the view that, on balance, the relevant product market is likely limited to rental gas-powered water heaters based on the information available at this time. Among other things, this view is based on the fact that rental water heaters have significantly higher lifetime costs for consumers than owned water heaters, after accounting for likely installation and maintenance costs for the latter.

The Bureau is of the view that Enercare likely has the requisite market power (i.e. is dominant) in the relevant product market. This conclusion is based on indirect and direct indicators of market power. Information gathered during this inquiry suggests that in 2018 Enercare had a market share of approximately 80% in a relevant market that includes rental gas-powered water heaters in the Enbridge Gas Territory. Direct evidence of market power includes Enercare's high internal rates of return and an ability to impose consistent price increases above the rate of inflation. This, together with Enercare's market share, indicates that Enercare is dominant.

A practice of anti-competitive acts

As described above, the Bureau examined whether Enercare's water heater return policies and its use of the BOULC constituted a practice of anti-competitive acts for the purpose of the abuse of dominance provisions.

The Bureau's findings on each of these forms of conduct are described below.

Water heater return policies and practices

One component of the Bureau's inquiry concerned Enercare's water heater return policies and practices, including Enercare's compliance with the written commitment. Customers who signed agreements with Enercare prior to the introduction of the BOULC in 2010 have the ability to terminate their agreement by returning their water heater to Enercare without paying a buyout fee.

The Bureau examined Enercare's policies and practices for the return of such water heaters, such as Enercare's agency verification policies and Enercare's return depot policies. Specifically, the Bureau examined allegations that Enercare's return depot policies resulted in delays owing to its depots being understaffed, having unpredictable hours, and/or Enercare depot employees arbitrarily rejecting the return of water heaters. With regard to its agency verification policies, the Bureau examined Enercare's policy of requiring a 48 hour window to elapse before it would accept the return of a water heater that had been submitted for return by a competitor. Evidence gathered during the inquiry suggests that Enercare would attempt to reach out to the customer during this time, though actually making contact with the customer was not required for Enercare to accept the return at the expiry of the window.

Based on the information gathered during this inquiry, the Bureau believes that any delays associated with Enercare's return depot policies did not appear to be sustained and systemic such that they would amount to a "practice" for the purpose of the abuse of dominance provisions at this time. With regard to Enercare's agency verification policies, while the Bureau believes that this conduct amounts to a "practice", the evidence gathered during this investigation did not establish that Enercare had engaged in this conduct for an anticompetitive purpose as described in jurisprudence interpreting and applying sections 78 and 79 of the Act. As a result, the Bureau did not conclude that Enercare's agency verification policies constituted an anti-competitive act.

Should the Bureau otherwise become aware of credible evidence that Enercare is engaging in a practice of anti-competitive acts, it will investigate and take appropriate action.

BOULC

The Bureau's inquiry also examined whether Enercare's use of the BOULC constituted an anti-competitive act. Since September 2010, all customers who entered into rental water heater agreements with Enercare (or previously, Direct Energy) have entered into a BOULC. The proportion of Enercare customers who are party to a BOULC has continued to grow. In 2018, approximately 45% of all Enercare rental water heater customers were party to a BOULC.

Based on the information gathered during the inquiry, the Bureau concluded that Enercare is engaging in a practice of anti-competitive acts for the purpose of the abuse of dominance provisions. In particular, the Bureau's inquiry uncovered evidence suggesting that Enercare's purpose in using the BOULC and requiring customers to pay the buyout price is to deter customer attrition (including attrition to competitors). The Bureau views this as evidence of exclusionary intent.

In arriving at this conclusion, the Bureau also considered whether Enercare's use of a BOULC was in furtherance of a legitimate business objective, in particular, if the BOULC is necessary to protect Enercare's initial investment in providing customers with a water heater. Notably however, information gathered in the course of the inquiry indicated that the magnitude of the required buyout prices, and the duration for which they were required, went substantially beyond a level commensurate with recovery of Enercare's initial investment. Based on the totality of the evidence, the Bureau could not conclude that Enercare's conduct was motivated primarily by a pro-competitive or efficiency-enhancing rationale.

Substantial lessening or prevention of competition

The Bureau's inquiry considered whether competition has been or is likely to be prevented or lessened substantially as a result of Enercare's conduct. As the Bureau's inquiry did not currently support a finding that Enercare's water heater return policies constituted a practice of anti-competitive acts for the purpose of the abuse of dominance provisions, its analysis in this regard focused on Enercare's use of the BOULC.

To assess the competitive effects of Enercare's conduct, the Bureau considered qualitative information and conducted extensive quantitative analysis based on data gathered from Enercare and other industry participants. The Bureau considered, among other things, whether:

  • the BOULC assists Enercare in maintaining higher rental rates;
  • the BOULC has the effect of deterring or preventing Enercare customers from switching to competitors; and,
  • Enercare provides its customers who have a returnable water heater (i.e. those who are not party to a BOULC) with materially better retention offers.

The evidence gathered in this inquiry indicated that the BOULC has reduced customer switching away from Enercare. However, it did not establish that the BOULC assists Enercare in maintaining materially higher prices in the form of higher rental rates, or otherwise in the form of better retention offers for customers with returnable tanks. Furthermore, the evidence gathered in the course of the investigation was insufficient to establish that the BOULC had the requisite negative impact on entry or expansion by competitors.

In light of these and other findings, the Bureau has concluded that, at this time, there is insufficient evidence demonstrating that Enercare's conduct has had, is having or is likely to have the effect of substantially lessening or preventing competition in the relevant market(s) to justify filing an application with the Tribunal.

Conclusion

The Commissioner has elected to discontinue his inquiry because, at this time, there is insufficient evidence upon which to conclude that Enercare's alleged conduct has contravened the abuse of dominance provisions of the Act. Accordingly, the Commissioner believes that the evidence does not justify making an application to the Tribunal at this time.

The Commissioner's enforcement decisions are based on the available evidence. Should new and compelling evidence come to light, in particular from a competitor substantiating anti-competitive harm caused by the BOULC, the Bureau will take appropriate action.

Sources cited in this Position Statement

This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.


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