INDY Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, April 13, 1999

• 0907

[English]

The Vice-Chairman (Mr. Eugène Bellemare (Carleton—Gloucester, Lib.)): I call this meeting to order pursuant to an Order of Reference of the House dated Tuesday, October 20, 1998, consideration of Bill C-235, An Act to amend the Competition Act, the protection of those who purchase products from vertically integrated suppliers who compete with them at retail.

Our first witnesses today are from Bell Canada; the Canadian Association of Internet Providers; the Canadian Radio-television and Telecommunications Commission; and Internet Direct and Tucows Interactive.

Welcome, and thank you for coming as witnesses. You have five minutes each for your presentations. You can read your documents, although usually one prepares a document that's longer than five minutes. I suggest it has more impact when you just speak from memory and refer to your notes on occasion. You will have ample time to answer questions later on, when every member has five minutes each.

Usually we begin alphabetically, but I know what it feels like to always be the first to speak, so I'm going to do this in reverse and start today with Internet Direct and Tucows Interactive.

Mr. Timothy Denton.

Mr. Timothy Denton (Counsel, Internet Direct and Tucows Interactive): Mr. Chairman, I would beg leave to go later. The person with my speech is out at the photocopy machine making copies for the members. It would be helpful if I were able to at least refer to it.

The Vice-Chairman (Mr. Eugène Bellemare): Fine.

The next group is the Canadian Radio-television and Telecommunications Commission.

Do you have your brief with you?

Mr. David Colville (Vice-Chairman, Telecommunications, Canadian Radio-television and Telecommunications Commission): Not only do I have it, Mr. Chairman, but I'll also take your admonition not to read the brief and instead give a quick overview of the commission's views.

First of all, just for the record, my name is David Colville. I'm the vice-chairman of telecommunications with the CRTC. I'd like to thank you and the members of the committee for the opportunity to appear today and to, perhaps more importantly, answer any questions you might have regarding this particular issue.

I also want to stress at the outset that we are not experts on the Competition Act, but I would like to note that the CRTC has been very active in promoting competition in the telecommunications and broadcast distribution business for a number of years. Certainly since I've been with the commission, and before, we've been opening up the long-distance market to competition, as I think everyone around the table will know from the various ads and pitches about lower long-distance rates that you perhaps have seen.

We've opened up to competition the local telephone market, the cable markets, and the pay telephone markets as well, and most recently the international telecommunications market. I think very shortly we'll be seeing a significant lowering of long-distance rates.

• 0910

We've been encouraging competition not simply because competition is an end in itself but because we believe competition brings consumer benefits.

I should say that pursuant to powers in the Telecommunications Act, as we've been opening up markets to competition and felt that there was sufficient competition in the marketplace to serve consumer interest, we've been using the powers we have to forbear to do just that—to forbear from regulating, allowing the players to participate in the marketplace unfettered by regulation.

We've done that as well in the terminal market and in the long-distance market more recently, although we have not done so in a number of the other markets where we've opened up the competition. We've not forborne from the dominant providers as yet, because we have not felt there was sufficient competition in the marketplace for us to forbear.

While we have the power to forbear, we have the power to re-regulate if we find the markets aren't performing as perhaps we had thought they might in a forborne world. Even where we have forborne, we've managed to retain a few powers to ensure that discriminatory practices don't take place and that we have the power to protect, for example, consumer interest as it relates to privacy of information and so on.

Coming to the particular issue at hand here, I would note that it is certainly our view that we have the powers under the Telecommunications Act within our regulatory jurisdiction to deal with the issues that I believe are intended to be dealt with through the amendment that's being proposed here to the Competition Act.

I hope I'm not being too flippant by suggesting that putting the fox among the chickens here, with the regulators sitting among some of the parties who.... I'm sure all of you around the table will know there's a dispute among some of these parties that are before us at the present time. I can't comment on the merits one side or the other of that particular dispute, as we've not rendered the decision on a couple of applications that have been filed before us by at least one of the parties around the table here today.

I would just close, Mr. Chairman, by saying that in the particular case of the telecommunications market, I think it's important to understand—and I'm sure most, if not all, of the members know this—that as we've moved from monopoly to competition in this market, historically there were many services in the telephone market that were in fact priced below cost, and in fact there still are. I know one of the issues of fundamental concern to members is below-cost pricing.

For example, residence service in many areas has been priced below cost because historically regulators have believed that to be in the public interest. In many cases those services still are priced below cost, and even business services in some rural areas are priced below cost. I guess I would have a bit of a concern to the extent that those kinds of issues may get caught up in some of the aspects of this proposed amendment.

The other area that I think would be of some concern would be the whole issue of fairly rapid technological change and introducing new services to the marketplace.

With that, Mr. Chairman, I'll close, and leave it to the others to comment. I can answer any questions members may have.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Colville. We will now hear from the Canadian Association of Internet Providers, represented by Mr. Gord Waites and Ms. Kirsten Embree.

[English]

Mr. Gord Waites (Representative, Canadian Association of Internet Providers): Thank you, Mr. Chairman.

I'm with Netcom Canada, representing the Canadian association of Internet service providers today. I won't go through my presentation in detail, but I will give you some of its highlights.

We have a specific interest in this bill because we buy on a regular basis from vertically integrated suppliers, one of the aspects spoken of in the bill. Specifically—and this is the example I will give today—we buy from telephone companies. As you know, the telephone companies in Canada are also Internet service providers and therefore competitors of ours as well. So we want to ensure, and want to continue to ensure, that there is competition in this marketplace. It's a very active and rapidly growing marketplace.

• 0915

I wanted to just walk through a couple of examples. I won't get into too much detail, but I think it's important for all of us to understand that some of the deregulation that has happened has actually permitted telephone companies to, in some cases, manoeuvre around the current regulatory or anti-competitive safeguards in place.

I'll speak historically for a few moments—

[Translation]

Mrs. Francine Lalonde (Mercier, BQ): Mr. Chairman, I would like to know if texts are available in French. Do you have French- speaking members?

Ms. Kirsten Embree (Representative, Canadian Association of Internet Providers): No, we do not.

Mrs. Francine Lalonde: You do not have any French-speaking members?

Ms. Kirsten Embree: No, we do not.

Mrs. Francine Lalonde: You have no French-speaking members?

Ms. Kirsten Embree: We do in Quebec, but we do not have a presentation in French this morning.

The Vice-Chairman (Mr. Eugène Bellemare): Very well. We will go back now to Mr. Waites.

[English]

Mr. Gord Waites: I have some specific examples I wanted to speak about in a historical context.

Most people here today who would be familiar with the Internet or Internet-access businesses are probably familiar with dial-up access, where from home you can use a PC and dial through a modem using the telephone network to get access to the Internet, either from the telephone companies themselves or from independent Internet service providers, of which there are some 400 or 500 in Canada, from the very smallest in rural communities to some very large national players, including the telephone companies and cable companies themselves.

With dial-up access, the Internet service providers buy from the telephone companies traditional business lines, or dial-up lines, at their premises, and when a consumer dials they simply dial through those business lines. The ISP pays the telephone company tariff prices—these are regulated services—for those services.

Through the dial-up period there has been no problem with anti-competitive behaviour. The telephone companies operating their ISP divisions, which, by the way, are operated as an unregulated entity, have had to buy those same business lines from the telephone companies at the same rates an ISP would have to buy them. So a self-balancing act happens.

With the introduction of high-speed access, which I'm sure many of you have heard of, now we can get Internet access from our home 20, 30, or 40 times faster than you can get through dial-up. A new technology that we call “ADSL”, or asynchronous digital subscriber lines, has been introduced. In very simple terms, it's using the existing telephone line to put a high-speed digital signal over that telephone line while still allowing the telephone line to be used for regular telephone use. So it allows a very high-speed connection and still keeps the telephone line free for regular telephone calls that may occur.

This service can only be provided over copper loops—in other words, the wires that are in the ground today—and with equipment installed in the central office. These are the telephone companies' offices.

The difficulty has been that specifically Bell Canada, through Bell Global Solutions, has introduced a service, Sympatico High-Speed Edition, which uses this technology, pricing it at $39.95 a month. In turn, the Internet service providers have gone to Bell Canada and said, well, we want to buy the same components from you that Bell Global Solutions buys from you to provide the same service to our end customers, just as we do with regular business-line service today.

Unfortunately, the price for that service is $127 and change. As you can see, it's about 320% of the end-user price to buy one component of the service. This is not even the whole service because on top of the access, the Internet service provider has to provide technical and customer support, e-mail service, web service, and a whole area of additional costs and services.

• 0920

So we have a situation today where, to buy a component of the service, it's being offered to us at a price that's manyfold what the retail price is. We have a vertically integrated supplier selling a service at $40, selling a component of that service that is mandatory—or bottleneck, if I can call it that—to competitors for manyfold what the retail price is.

What actions have we taken on that front? Obviously we've complained to the CRTC. We have a complaint in front of them right now. We've filed many interventions with the CRTC to try to get this resolved. We filed a six-citizens' complaint with the Competition Bureau against Bell Global Solutions—or Bell Sygma, as it was known at the time—to try to get a resolution to this issue. While they found that there was pricing below cost, they did not have the powers to take action against the telephone companies.

So as we sit today, I guess all of the complaints in the press and whatnot have introduced a new wrinkle into this ongoing saga. A new company has emerged, Bell Nexxia.

The Vice-Chairman (Mr. Eugène Bellemare): Can you wind down now?

Mr. Gord Waites: I'll be one more minute.

Bell Nexxia is another 100%-owned affiliate of Bell Canada. They've come back and offered us this same service for $24 a month. Supposedly they're buying it from Bell at $127 and selling to the ISPs at $24. Again, this pricing just does not make any sense to the ISPs.

In summary, I want to say that we are in support of this bill. We would like to ensure that it covers not only products but services as well. We would like to ensure that it also covers wholesale services—i.e., suppliers buying components of an end service from a vertically integrated supplier.

Thank you.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Waites. We will now move to Mr. Timothy Denton.

Mr. Timothy Denton: Thank you, Mr. Chairman. I will be able to answer your questions in French, but I will give my presentation in English.

[English]

As we are speaking to our briefs rather than from our briefs, I'd like you to take a look at the presentation. On the second page is a graph. This graph shows the proportion of all traffic carried on networks. You can see that the shaded portion is declining. That shaded portion is the portion represented by voice traffic carried on public networks.

The telephone companies are in the business of making their money off voice traffic on public networks. They also make money on data traffic. But essentially the system of telecommunications as we have known it was built and designed for the parameters of the human voice—average three-minute calls and certain assumptions about the number of people who would be calling at any given time.

The Internet is not about voice traffic but about communication between machines. The Internet is a grammar for machines that allows any machine speaking a certain protocol to talk to any other machine. The phone system was not designed to deal with the issue of Internet traffic.

This graph comes from what used to be called “Bellcore”, the central research facility for the American phone companies. The projection for what voice traffic will be of all telephone traffic is such that we may expect to see, by 2010, all voice traffic being less than 1% of all data traffic. This is a revolution in technological affairs akin to the passage from sailing ships to steamships. It's quite normal in business for this to happen, but it's now happening in what used to be an extremely stable industry that was a monopoly, which is in transition toward new forms of sending signals.

So that's the first thing. The phone companies, of course, are completely aware of this, and they are concerned.

• 0925

The second graph is on the third page of my presentation. It was taken from the speech by John MacDonald, president of Bell Canada, at the Net 98 conference last year at Whistler. He reviewed the challenge posed by the Internet as a new telecommunications technology and said that Bell was ready to face this challenge. But one of the more interesting slides in this was his assessment of what the value would be of the existing telecommunications apparatus, which, technically speaking, is based on a system of sending signals, circuit-switching.

You can see in his estimation that the value of the entire current apparatus will drop to zero. Now, wisely, he did not put dropping “to” zero but dropping “towards” zero.

You can see that this is a graph, a schematic, and it has no predictive capacity for the sake of business projections, but it is his estimation of where the technology is taking us. After 100 years of dominance through what was called “circuit-switch architecture”, it's going to head to total obsolescence.

The phone companies are aware of this. The Internet service providers are aware of this. I ask you to think about this: Why didn't you see this reported in the newspaper?

The answer was that every person in that room ran either an Internet business or an Internet network. It was a completely known fact to them. It wasn't a surprise. Everyone just realized that the phone company had themselves woken up to this new reality.

If the president of General Motors had come out and said that the value of all their productive assets was dropping rapidly towards zero in a predictable future time horizon, you would imagine that it would have reached the papers. When the same thing is announced in the telecommunications computer business, people go, “Yeah, so what?”, because everyone knows this is going on.

The bill you see before you may have its virtues and it may have its faults, but it attempts to address a situation that is occurring in the real world. As Gord Waites has explained, Internet service providers depend at this stage of their evolution on cable companies and phone companies for access to underlying facilities, the things that transport our signals. Faced with these new technological realities, the incumbent carriers have the means, motives, incentives, and opportunities to render life difficult, as it were, for their Internet service provider rivals while they make the transition to this new architecture of sending signals.

I have one final point. I think everyone is aware that when they get on the Internet, they have probably spent some time perhaps rummaging about in open files in France or Australia or anywhere else on the planet. The free calling zone, as it were, of the Internet is the globe. The value proposition of the Internet is radically different from the value proposition of the phone company.

The local calling zone of the phone company gets as far as Sainte-Cécile-de-Masham or Lanark or someplace else 35 to 40 miles out of Ottawa. The free calling zone of the Internet in Ottawa is the globe.

So you have two different businesses with radically different value propositions, and one apparently holds most of the cards at the moment—they have access to your house—while one apparently holds very few. We may rationally expect in the foreseeable future that there's going to be a good deal of competition between these two ways of sending and moving signals.

That is the reason we support this and other bills that seek to address the problem of the competitive position of phone companies and other incumbent carriers against Internet service providers. We think it's a matter for your serious attention.

Thank you.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Denton. We will now go to the Bell Canada representatives, Mr. Bernard Courtois and Ms. Linda Gervais.

• 0930

Mr. Bernard Courtois (Chief Regulatory Officer, Bell Canada): Thank you, Mr. Chairman.

[English]

We looked at this bill as being initially intended to deal with issues with respect to gas retailing. We, of course, profess no expertise or specialty in that business. But it's an amendment to the Competition Act, and as framework legislation it covers all industrial sectors. When we looked at what it would mean for our industry, we found we had a lot of concerns that we felt we had to come and express and put fully before the members of the committee so that you can decide what to do.

Our comments, by the way, pertain only to clause 1 of the bill, the principle about essentially no retail prices below wholesale. They don't pertain to clause 2 of the bill.

I don't need to emphasize too much the importance to Canada of telecommunications in the kinds of industries you've been hearing about in the knowledge economy. The government, of course, has recognized, with its Connectedness agenda—the objective of making Canada the most connected nation in the world by 2000—how important it can be to the future of this nation to have an innovative and world-leading telecom industry.

In our industry, while all kinds of players make various contributions, it's the integrated suppliers, one of which is the Bell BCE family, who will invest the most in infrastructure and together with that invest in creating products and services.

Within the BCE family we go from Nortel, which people know about in terms of equipment: to Bell Canada, which creates services; to BCE merges, which creates electronic commerce solutions; to Bell Nexxia, which has been created to offer a nation-wide service based on the most up-to-date Internet-protocol-based technologies.

When we looked at the impact this bill would have on our business, we had to conclude—and that's what we want to convey to you—that this bill would lead to higher prices for consumers and business customers in our industry. It would cause integrated suppliers like us to have to think twice about whether they operate dual distribution—that is, whether they all sell wholesale to other retailers, on the one hand, and sell retail direct—or whether they should pull out of the wholesale business and simply operate in the retail environment.

One of the problems we have there is that the Canadian approach to the telecom industry has been to have a network of networks, where everybody sells at one time or another to someone else on a wholesale basis in addition to retailing.

The bill would place integrated suppliers at a serious competitive disadvantage, because there are many normal, competitive pricing practices our competitors would be able to continue to do and we would not. That would necessarily put us at a tremendous disadvantage. It would also take away from customers one of the key players participating in these competitive practices.

As well, it would really make it more difficult and would limit and constrain the introduction of new products and services, particularly the ones that are truly new and require spending to develop a market.

Let me emphasize that wholesaling is quite pervasive in our industry.

[Translation]

In our industry, there are many resellers who buy services from carriers and develop a service that they sell to their customers.

There are also re-billers. Companies like Sears and the Royal Bank, for example, take a complete service from someone else, simply put their name on it and resell it.

There are also carriers who—and people are perhaps not aware of this—nearly exclusively buy services from other carriers and resell them. Even Bell Canada covers only part of the country, that is, part of Ontario and Quebec. When we offer our customers a service, we do so by buying services from other carriers in the country and selling a complete service to our customers.

Competing carriers, such as AT&T, Sprint, etc., buy services from Bell or from each other. These companies all have wholesale divisions. In order to fill out a geographic network, cover excessive volume or services that they do not provide, or to be able to provide services while the networks are being built, companies create an income base by buying wholesale from a competitor and reselling. Wholesale is thus very common in our industry.

• 0935

[English]

Another thing that is quite pervasive in our industry is price differentiation. That's carried out by all players. The integrated players do it, as do the semi-integrated players, the carriers like AT&T and Sprint, and resellers.

It's quite frequent, of course, to offer volume discounts. A customer the size of the Government of Canada, for example, could be buying a lot more than a reseller and would get a lower price at retail than the reseller would get wholesale. The reseller would be targeting a different market and would still be able to have success in the mid-sized or consumer market they would be targeting.

There are also differences in terms of whether you buy a long-term contract or you're simply buying month-to-month. There are time-of-day discounts in our business, with large differences in terms of the cost of a long-distance call in the evening or on weekends compared with the business day.

There are differences in residence prices versus business prices. For example, in the residence market we charge much less for local service than for business service. We charge less at retail than the wholesale price of the business service.

We have a $20-a-month cap that is now pervasive in this industry for long-distance calls on evenings and weekends. That's unique in the world. We couldn't offer that service at wholesale to our large competitors—AT&T and Sprint, to give examples—because they would pump through so much traffic it would be disastrous for us financially. So here is a case where a retail price for consumers is lower, in effect, than the wholesale price to the largest wholesale customers.

Promotions are also a frequent part of this industry, as they are in many other industries. We sell options and features such as call display or messaging. We give away a couple of months of it for awhile, in the slower periods of the year, say, such as October or November, well before the Christmas rush. In long-distance at various times people are offered 12 months free, or service charges are waived. This is done as a normal practice to stimulate business and get a customer that you hope to keep for a long time.

We also have in our industry—and it's perhaps unique—some pricing that's below cost and below wholesale for public interest reasons. For example, in the government's SchoolNet initiatives we gave away some satellite time and are foregoing long-distance charges for some schools that don't have local access to the Internet.

Again, these are all things that according to this bill would not be permitted.

In terms of new products or technologies, it's also frequent—and I'll talk a little bit about that—to develop a market in the early phases of a product, when the costs are still high, at a price that consumers are prepared to pay but is below cost, and probably below what wholesale would be.

So this principle of no retail pricing below wholesale would really hurt those integrated suppliers who are integrated, while it might not, it seems, hurt those non-integrated suppliers who perhaps don't invest as much as we do in infrastructure and so on. It would still hurt them, because the integrated suppliers might have to pull out of the wholesale market sometime—

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Mr. Courtois, your times has expired.

Mr. Bernard Courtois: Mr. Chairman, I would simply end by saying that I hope that the committee will reconsider this bill. I will be pleased to give details on what happened in the case of the CISC and the Internet high speed access service to illustrate what I have been saying, which is that this innovation and the technological progress we have made would not have been possible if this bill had been enforced and those activities were not allowed. Thank you.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Courtois.

We will now take questions from the members.

[English]

Before we go to the MPs' questions I would like to remind you that MPs will have five minutes each for questions. If, when you answer the questions, you're succinct, you'll have more questions from that particular MP. If you're not, that will be the question.

So you should remember that, because some MPs have a load of questions to ask you.

The first member comes from the opposition. That would mean Mr. Jaffer from the Reform Party.

• 0940

Mr. Rahim Jaffer (Edmonton—Strathcona, Ref.): Thank you.

I have just a general question pertaining to the issue, as we heard from Mr. Courtois, of below-cost pricing, and how it's often done to get various products maybe tested, or to help various groups that wouldn't necessarily be able to pay the full price.

To your knowledge, are there any government subsidies or anything along the lines of government help that would keep below-cost pricing or selling sustainable over the long term, or is it just usually the initiative—and you mentioned the research and infrastructure investment you make into certain products and services—when you would just introduce it over a short period of time, and then, obviously, below-cost pricing is not sustainable?

Mr. Bernard Courtois: There are some parts of our industry where there's a subsidy for local residence telephone service. There's a subsidy collected from long-distance, and it's redistributed to any carrier that offers residence service in areas where the price is still below cost. It covers part of the gap.

Generally speaking, though, the kinds of things we've been talking about reflect the normal business practice that either you have slow-moving times of the year or merchandise that's going to get obsolete or in our case, say, a new product. Obviously, you're only giving a price below cost if you hope you're going to keep the customers, and in the longer run they'll pay you a normal profit margin. You're spreading out, in effect. You're making an investment early on in the hope of recouping it with a normal commercial margin.

I mean, no company, as far as I'm concerned, can go on with permanent below-cost pricing.

Mr. Rahim Jaffer: Okay.

I guess one of the things I was also concerned about in the presentation by the Internet providers was that obviously, when companies charge below cost to consumers, consumers benefit overall.

I'm just curious as to why, as legislators, we should place additional cost on consumers to benefit your companies.

Mr. Gord Waites: I don't think the Internet service providers are suggesting that we place additional cost on end consumers. What we need to question is the actual underlying cost of providing the services.

If, on one hand, a telephone company can see fit to charge a $40 end retail price for a service, it's very unlikely that the underlying cost is really $127. In fact, that's probably a very inflated price they're charging, with a tremendous margin built into it, because telephone companies are not required to charge a small percentage over cost; they can charge whatever they feel, as long as it's compensatory. Therefore, they can maintain a position for as long as they wish such that they in fact can offer services that other competitors cannot.

As long as that remains in place, they will continue to gather all of the market share for that segment of the market.

Mr. Rahim Jaffer: Going on that logic, I guess one of the questions I would have is that when it comes to basic Internet industry, and the way the Internet industry has grown, especially with smaller players and competition in the market, there's been very little government intervention at all, or legislation surrounding Internet companies. This is something we're looking at now.

When I look at AOL, Yahoo!, or other companies, they've all been successful. They've developed through basic existing competition dealing with telecommunications companies and others in working out deals. Some of these companies have become very large and very successful.

So I guess I can't see the justification here for government intervention if in fact, through time, the markets can work out the problems in any case.

Mr. Gord Waites: Right. I agree with you completely. In fact, interestingly enough, the Internet industry grew out of buying traditional telephone company services. As I said before, we bought traditional business lines, we bought traditional fibre-optic T1 accesses for business customers—services that were already tariffed for other uses, and had been available for many years.

So market forces had forced those prices to a level that provided some return on investment to the telephone companies, but in fact those services were used to create a whole new service—Internet access.

What's happening now—and this is the reason for the request at this point in time—is that new technologies are emerging. ADSL is not the only one. Cable access is another area of concern. New technologies are emerging that today are based on near-monopoly facilities—in other words, copper loops or coaxial cable into the home. Unless Internet service providers are expected to build a completely redundant, parallel infrastructure into every home into Canada, which probably doesn't make sense economically, we need fair and equitable access to those facilities.

• 0945

It's not at all unlike when we opened the long-distance market in Canada. If the telephone companies had had their way, they would have charged 5¢ or 10¢ on each end of every call for termination and origination to cover the supposed costs.

The CRTC, at the end of the day, found out those weren't the costs at all. In fact, they were in the neighbourhood of 3¢ or 4¢, and today are in the neighbourhood of 2¢ per end of call. The AT&Ts and the Sprints of the world will pay the telephone companies that cost for originating and terminating traffic.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Mr. Jaffer, Thank you very much.

[English]

The next person is Sue Barnes.

Mrs. Sue Barnes (London West, Lib.): Thank you, Mr. Chair.

Welcome, and thank you for your testimony. I found all of you put your points across very well.

Our job here is not just to look at your industries and the conflicts going on between the parties at the table at present....

Mr. Colville, I'll save you from answering some of the questions, because I do believe they would put you in a difficult position.

Now, I'd love to have your marketing directors here. I'd really like to ask your marketing directors how they're going to rewrite the economy of Canada, as it's been known, on how they sell services to Canadians, how they penetrate markets, how they get people into stores. It's not your industry; I really do want you to think beyond your current conflicts and your current problems, because this bill, if passed, will go beyond that.

I can think of marketing schemes right now that are very common. If everybody in this room thought of furniture stores, and their loss-leader sales....

I used to practice law. There were certain services I offered, such as writing a will, where I did not get my money out of what it cost me in terms of time and expertise, but I gained a client, usually, if I handled that transaction properly.

So I think what you're asking, if we go through with this...and it's a serious question, because I think the initiator of the bill brought through some serious concerns on a very important area in which it will have impact. I think what's happened here is that we're looking at a situation where the impact's much wider.

Maybe it's too hard to ask you to play devil's advocate, but I'm going to ask the Internet providers to picture this: Bell's gone. They're history. We're 50 years down the road, if that's what your scenario plays out to be, and you're trying to innovate.

Would your marketing department want a situation where there's no aspect that you could do something with using pricing that goes below the wholesale price; that doesn't allow for these sale promotions; that doesn't say, okay, we're going to go into X geographical area and do something special because we want to test it to bring something new and innovative into the field that we don't think we could afford to do if we had to do it globally, all at once?

I see these problems in this legislation as it's now drafted. If I'm wrong, I'd like to know that. I need you to put on a hat that looks beyond your own current situation. If you feel that's too unfair, say so, but I would like you to try to get to that place, and to realize that it's criminal law we're trying to involve here. It's not just economics. It's criminal law.

You can rest for awhile, at least from me. To the questions I've put, I think you'd have to say, “I can't answer that.”

Perhaps we can start here, then the Internet providers, and then Bell Canada, if you feel you want to. I think you've stated your point, but if you want to add to that, please feel free.

That'll probably take up my five minutes, unfortunately, unless we get to other rounds.

Mr. Timothy Denton: I'll be as brief as possible.

Mrs. Barnes, you're asking the right questions about the law of general application. Thank you for thinking like a legislator.

I think the issue here should be the regulation of those having monopoly power, and any solutions should be directed to those who exercise...not monopoly power. I'll speak more accurately if I say market power.

For the time being, the issue is not so much the regulation of the Internet as the regulation of those who exercise market power. To the extent that any of your solutions and remedies can be directed and channelled to those exercising that kind of power, which is given to cable and phone companies by means of the fact that it is impossible at this stage economically to reproduce those facilities that go into a home...and it is from those limited amount of wires that come into a home that all their market power is extracted.

• 0950

Generically, then, my answer must be that you want to think very carefully about any kind of remedy that covers the whole of the economy. Therefore, it seems to me that the remedy should be directed towards those situations where market power is being exercised.

It is, I believe, an established fact that the CRTC has concluded that coaxial cable and phone lines into the house provide the basis for the exercise of market power.

I think that is all that needs to be said, really, in answer to your question.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Mr. Waites.

[English]

Mr. Gord Waites: Sue, thank you for your comments.

I will put my marketing hat on for a moment. I do agree with you that Internet service providers, or any businesses, need flexibility in how they go about approaching a market or how they go about marketing products and services. Whether that be through promotions or incentives or discounts and the like, I think that's a common business practice in all industries.

Hence we have tried to keep the provision of Internet services in Canada unregulated so that we're not encumbered by all of the requirements of filing tariffs and discount schemes and that type of thing. We can be more flexible and more agile in the marketplace.

I have to agree with Timothy, though, on the point that where there's bottleneck or monopoly facilities required, which can actually in the longer term put viable competitors out of business so that there ends up being only a monopoly or a duopoly in the marketplace, there needs to be a remedy. Unfortunately, with unregulated and regulated entities, and subsidiaries that are unregulated, there have been ways, at this point in time, anyway, to circumvent current safeguards.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Waites. Mr. Courtois.

[English]

Mr. Bernard Courtois: Our marketing people sometimes come to talk to us regulatory folks and say, listen, so-and-so has just given away a PBX to get long-distance and other business for a large customer, or they're giving away Internet service to get the total business of a customer: Is there anything you can do to stop that?

Unfortunately, we have to say, no, that's not regulated. It's normal competitive practice. You have to go and fight it out in the marketplace.

What would happen here, however, under this bill, is that if it was an integrated supplier doing this, it would be criminal, whereas for the other competitor it would not be. Obviously there would be less of it in the marketplace. It would be bad for customers. In other words, the things that are good for customers and good competitive practice would sometimes be criminal under this bill.

In our case, we had the Competition Bureau investigate the high-speed Internet market. They concluded that trying to stop us from selling below cost, as we tried to develop the product, would have impeded the introduction of that new technology, denied consumers the benefits of price and service competition, and not be in the interests of customers.

In other words, the cable companies sell high-speed Internet for $39.95. They're not covered by this bill because they don't sell wholesale. They only sell for themselves.

Now, if we don't match that price, we have no business. We can't develop it, and we couldn't do what we did, which was to use real, live customers to solve the cost problem and get the cost down from $127, $150, and $200 with very big steps in technology so that we can then offer it now to ISPs at $24. We couldn't have done that if we hadn't been in the marketplace and couldn't have matched the cable companies' price.

So I can't see how that would be good for consumers and good for innovation.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Courtois. Linda Gervais, did you have something to add?

[English]

Ms. Linda C. Gervais (Vice-President, Federal Government Relations, Bell Canada): I just wanted to state for the record that it's very confusing sometimes with the number of Bell Canada companies and BCE companies. We've heard reference to Bell Global Solutions and Bell Nexxia and so on.

Bell Nexxia is our new company, our new national services provider. It is our new Internet-based company. It's going to specialize in terms of Internet capability services on a nationwide basis. Bell Nexxia is responsible for providing underlying facilities, the network on which Internet service providers can in fact put their services.

The price that has been offered to the Internet service providers is not $120 but $24, going up to $29, depending on volume and contractual arrangements.

So I want to make it very clear that the price we are offering to Internet service providers right now is below the cost at which we're selling it at a retail level.

• 0955

I would also point out the fact that we are in active negotiations with a number of ISPs. Our network is open for use by our competitors, and it has been for a long time.

I've heard reference to the cable companies, and I think there's a question about how open that network is.

So I just wanted to put that on the record.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Ms. Gervais. We will now continue with Mr. Colville.

[English]

Mr. David Colville: I have just a quick comment.

Because the two Internet providers talked about essential or monopoly facilities, I just want to make it clear—and we don't have a marketing arm—that in order to facilitate competition we have mandated the unbundling and setting of tariff rates for the essential or bottleneck facilities that have been referred to here.

In my view, at least, that had been taken care of within the Telecommunications Act.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Colville.

Mrs. Lalonde.

Mrs. Francine Lalonde: So you are saying, Mr. Colville, that this monopoly situation cannot exist and that if it ever did exist, the CRTC could intervene.

[English]

Mr. David Colville: That's right.

[Translation]

Mrs. Francine Lalonde: It seems to me that there are problems here at several levels, including research and development. In other sectors, firms that mobilize resources for research and development clearly do so with the aim of getting a temporary advantage in the marketplace. We also looked at this issue with respect to pharmaceutical products, for example. I do not think that this can be dealt with in a general way, which makes things very complicated.

Another complicating factor is that some Internet providers are very large. Is America Online a member of your association, Mr. Waites? Yes? Then, America Online could buy as many available lines as possible from Bell and turn around and offer a significant discount as long as it is able to do so, given its size. Bell could not do the same thing because it has to charge its customers the same price at the retail and wholesale levels, which America Online is not required to do.

[English]

Mr. Gord Waites: If AOL was to buy services from Bell Canada directly, they would have to pay the $127.55, the unbundled, filed tariff that is approved by the CRTC, which is what Mr. Colville spoke about. That is the approved tariff.

So AOL would have to buy a component of this service for $127.55, and to be successful in the marketplace, I assume they would have to—

[Translation]

Mrs. Francine Lalonde: I'm sorry, but that is not what I was asking.

Under this bill, America Online could, for example, buy at $24.00 and resell at $18.00 for a certain period, given its size, with a view to getting customers to switch from Bell or other companies. There would be nothing in the bill to stop it from doing so, but Bell would not have the same right. Bell has to sell retail at the same price as it sells wholesale.

[English]

Mr. Gord Waites: Right, but—

[Translation]

Mrs. Francine Lalonde: Yes, that is true.

[English]

Mr. Gord Waites: —I think what you're asking is whether AOL would be able to sell services at a loss.

[Translation]

Mrs. Francine Lalonde: Yes, absolutely.

[English]

Mr. Gord Waites: Right.

[Translation]

Mrs. Francine Lalonde: Nothing prevents it from doing so.

[English]

Mr. Gord Waites: I think any business in Canada can sell services at a loss, if they wish. I think your only question is whether AOL is big enough that they could sustain this for a long period of time.

In fact, AOL in Canada is quite small compared with their size in the States. The largest Internet service provider in Canada is in fact Bell and its member companies.

[Translation]

Mrs. Francine Lalonde: You see, by answering my question in the affirmative, which is not what I was expecting, you have raised an important problem, which we have also seen in other sectors.

• 1000

In the oil sector, for example, large non-integrated suppliers have taken control of a given market by buying up the small retailers and then selling below cost in order to obtain a market. There is nothing to prevent that from happening anywhere in Canada for any service.

I very much support the intent of this bill, but I can compare this to what happened in Quebec in the oil sector. The Quebec legislation, which is administered by a management board, affects all players in the same manner. Its purpose is to provide independent retailers with adequate business conditions, but it does not create different conditions for integrated suppliers and large non-integrated suppliers.

I would like you to react to what I have just said because I think this is the major problem. As parliamentarians, we have sympathy for independent retailers, especially when we think of them as small, but in fact some of them are very large.

[English]

Mr. Gord Waites: Right. I agree that some of the suppliers are very large here, but selling below cost is not sustainable.

If there was a monopoly provider of gas, say, and they were also selling through a vertically integrated organization—and again, I apologize, because I'm not an expert on the gas industry—and they sold below cost for a long period of time, they would put all other suppliers out of business. They would be the only supplier left in town. So where there are monopoly facilities involved, I think that is where the differentiation lies.

I come back to the point Timothy Denton made earlier, that there is only one supplier of this type of facility in Ontario and Quebec, and it happens to be Bell Canada. We have to go to them to get services. If we have to pay 300 times higher than the retail rate, we won't be in business, and neither will AOL, UUNet, or the hundreds of other Internet service providers. The only one remaining at the end of the day will be Bell Canada.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Ms. Lalonde.

Mrs. Francine Lalonde: Thank you, Mr. Chairman.

The Vice-Chairman (Mr. Eugène Bellemare): We will now go to Mr. Keyes.

[English]

Mr. Stan Keyes (Hamilton West, Lib.): Thank you very much, Mr. Chairman.

I thank the presenters for their presentations this morning.

I would guess that we've digressed from the debate we probably should be having on this particular bill by my colleague, Dan McTeague, but I suppose all the information is important and relevant.

I get rather confused—and I'm not sure about any other MPs around here—when you have Mr. Waites saying it's $127.55 and you have Ms. Gervais from Bell Canada saying, no, it's not, that in fact the cost is below the retail, and there's no one selling above retail to the Internet service providers. I don't know which one is right. I suppose at the end of the day it'll be the CRTC that makes that decision.

Mr. Colville, can you quickly tell me, with regard to this dispute that's going on between the Internet service providers and Bell as their provider, whether the CRTC has the power to deal with this issue completely?

Mr. David Colville: We have the power to deal with it. We would witness that the parties recognize that by the fact that they've filed at least two applications regarding the issue.

Mr. Stan Keyes: But you have the tools to deal with this issue.

Mr. David Colville: Yes, we do.

Mr. Stan Keyes: Mr. Denton, how much does Tucows Interactive invest in the development of newer, faster high-technology infrastructure?

Mr. Timothy Denton: We're not in the infrastructure business, sir.

Mr. Stan Keyes: Okay, thank you.

Does your company provide a free service at all to any group or organization?

Mr. Timothy Denton: No, they do not, or not to my knowledge, but I'm—-

Mr. Stan Keyes: You see, I have a problem with all of this—and Mr. Colville will probably be taking notes on this one—and I'm therefore going to take this argument two steps back. I mean, we're starting to have a debate here from two steps forward. Let's take it two steps back.

Company A dumps a whole bunch of money, and invests a considerable sum of money, in the development of infrastructure. Then along comes resellers who say, well, that's the only telephone line, and that's the only cable line, coming into the house, so we have a right to some of that action.

• 1005

Mr. David Colville: Yes.

Mr. Stan Keyes: Agreed. No problem, because we're a captive audience for the two lines.

But then if the one company—let's say your company, Mr. Waites—has a service to offer, and then Bell, Company A, comes along and says, well, we're just going to dump in tens of millions of dollars to develop something a little faster, a little more speedy, a little more modern, your company comes along and says, hey, that's terrific. We want a piece of that action, and we want it at the same price these people are going to offer it for, because it's my right—or however you want to describe it.

You haven't made a dime of investment in all the millions upon millions of dollars it takes to make that possible, and yet you still think it's fair to take that service and not see an increase in the price of that service. We have a price discrepancy going on here between Bell and Internet providers—I don't know which one is right—but obviously they're going to have to charge a little bit more money to try to recoup some of that investment money.

The Vice-Chairman (Mr. Eugène Bellemare): Mr. Waites.

Mr. Gord Waites: I think you have a valid point. Why would resellers be allowed into the marketplace, or why should anybody else be allowed—

Mr. Stan Keyes: No, no, I didn't say that. Resellers should be allowed in the marketplace.

Mr. Gord Waites: Okay. I think your question was with regard to why we should be allowed to get access to a technology that was invented or created by the telephone company.

Mr. Stan Keyes: At the same price the telephone company has decided to put it out at.

Mr. Gord Waites: Because if you don't, there will be no competition.

I'll just bring you back to long-distance before there was competition. I hope some of you remember, but I remember how, as a child—

Mr. Stan Keyes: Mr. Waites, there'd be no competition if you didn't have another product to offer. You have a product to offer. It may not be as fast and as fancy as the new product the Bell company wants to put forward, but they've invested a lot of money to make that new product.

Now, you have a product to offer. There is competition, although not for the fancy product.

Then again, I drive a 1990 Honda. I'd love to own a Cadillac with that new fancy technology in it, but I can't afford it, so I settle for the 1990 Honda.

Mr. Gord Waites: But you don't drive—

Mr. Stan Keyes: It's the same with your service. If a customer has the money they'll go to Bell and pay the extra buck because the extra buck—

The Vice-Chairman (Mr. Eugène Bellemare): Let Mr. Waites answer the question.

Mr. Stan Keyes: I'll ask the question first, Mr. Chairman, if it's all right with you, and then we'll have an answer. I just want to make sure Mr. Waites understands my point, because he was drifting in another direction.

Mr. Gord Waites: You don't drive a 1951 Buick because it's obsolete. What will happen over time is that traditional dial-up access will become obsolete as high-speed access becomes more widely deployed.

I want to make one thing very clear: The telephone companies did not invent this technology. This technology was invented by many of the vendors who are out there today. There are standards councils working around the world, in which all ISPs participate, to define standards for high-speed access.

Why should we get access to this technology? Because it uses underlying monopoly facilities. It does not make sense to run extra sets of wires into everybody's home—a third set, a fourth set, a fifth set, and so on.

So as long as it's using an underlying monopoly facility, we feel all Canadian businesses should have equal and fair access to that.

Mr. Stan Keyes: I think, Mr. Chairman, Mr. Waites has missed my point. He's made a very convincing debate from his point of view, but he obviously doesn't understand that I'm not talking about a 1951 Buick; I'm talking about 1990 versus 1998. I'm talking about people out there who still have Pentium Is and IIs, even though there's Pentium III available. They can't afford to buy Pentium III.

But you still have Pentium I, and these people are offering Pentium III. You know what? That's competition, because they're allowed to sell something a little faster, a little brighter.

Anyway, that aside, Mr. Chairman, I'm not sure—

The Vice-Chairman (Mr. Eugène Bellemare): Just a second.

Mr. Courtois.

Mr. Bernard Courtois: Just to clarify what's happening with the prices, both prices are correct. In other words, the $127 is what the price was initially, because the costs were much higher than that, at $150 and $200.

We charged that to Bell Global Solutions, which offered Sympatico, and they invested in building a customer base and working with us to get the costs down. That's world-leading work we did to get the costs down, and now we're offering it at $24, if the ISPs are interested in taking it.

That couldn't have happened if in the meantime we couldn't have sold at $39.95, the price set by the cable companies, and it couldn't have happened if we had had to subsidize AT&T and Sprint and AOL, companies that worldwide are much larger than us.

As you know, we can't sell below cost. We have to sell in a small enough quantity that we hope to recover it with normal business pricing down the line. In the meantime, the cable companies could sell at $39.95, whether it's below cost, above cost, or whatever, and this bill wouldn't touch them, because their system is not open.

The other thing I'd like to point out is that Internet service in various places in the world is sometimes given away for free. Even in Ottawa here there was Freenet. People give it away for free. In the U.K., British Telecom eventually had to match its competitors and give the access away for free and hope to make money with the advertising and other things.

• 1010

With this bill, people like us, those who invest, wouldn't be allowed to have these normal commercial practices. It would only be done by the ones who are not investing in infrastructure.

Mr. Stan Keyes: And, Mr. Courtois—

The Vice-Chairman (Mr. Eugène Bellemare): Last question, Mr. Keyes.

Mr. Stan Keyes: —I would imagine that we as legislators are just scratching the surface on this thing. I mean, we're not even talking yet about discounts for volume selling, discounts for the length of a contract, residential versus business rate arguments, etc.

That's why I started this question, Mr. Chairman, by asking Mr. Colville if indeed he does, through the CRTC, have the tools and the power to deal with this situation. He said he does.

Thank you.

The Vice-Chairman (Mr. Eugène Bellemare): Mr. Jones.

Mr. Jim Jones (Markham, PC): Thank you.

I'd like to ask Timothy Denton a few questions.

You said the average telephone call was three minutes. I don't know what you were trying to do with that argument, because things have changed with the Internet. The average Internet call is probably hours.

Bell, or the big service providers, probably had to rework their physical plants to allow for that type of connection. Are you saying they don't deserve to charge more money? Because they probably had to invest in more equipment and more technology to—

Mr. Timothy Denton: Nothing of the kind. I was simply making the observation that a human call has a certain kind of duration. These machine-to-machine communications have a different set of characteristics—in length, in how much traffic goes, and in the nature of that traffic.

The phone companies have no issue with people making money off the services they provide. We do have an issue, as all people would when you're dealing with people who exercise market power, with how far they are allowed to use that power.

The point is, two technological systems are in competition. The phone companies, through next year, are moving as rapidly as they can to become integrated Internet service providers. This is a normal form of market evolution. In the meantime, however, both they and cable companies still are managed to say, “We own the plant upon which your signals ride.” Therefore, as far as we're concerned, they exercise a degree of market power.

Plus, given the architecture of their systems, which are not built or designed for, and are largely incompatible with, the way in which the Internet works, they have certain ways of pricing for calls that are irrelevant, or antithetical, to how the Internet operates.

So I'm just forewarning you that there will be more of these types of clashes over the next decade.

Mr. Jim Jones: I'd like to get one point clarified. What is the cost for the Internet service providers? Is it $20 to $29 or is it $129, as these people are saying?

Mr. Bernard Courtois: That has changed in the last year. The cost for us to provide the service to Bell Global Solutions or to ISPs for high speed was $127 or $150—or more, if you had a small number of customers—but by the work we've done over the last year, to go from normal ADSL to one-meg modem and also to change the network topology and create a network manager technology and work with it, we've been able to get the cost down. Bell Nexxia now offers it to ISPs for commercial application, beginning this summer—or for trials now, if they want it—at $24 for a large volume, or $29 per customer for a small volume.

So we've made the big break in costs and in technology by being out there working with real customers and trying it out.

By the way, Bell Nexxia's business is not to be in the retail ISP.... Bell Nexxia's business is to sell to ISPs. In our case, we view ISPs as critical, important customers.

Sympatico, even though it's the largest ISP in Canada, has only about one-seventh of the market. We need that other six-sevenths of the market to fill our lines and get a mass market for this. We've been able to make big breakthroughs. We're talking to ISPs, and they would still like the price to be lower, but we've made the breakthrough by having Sympatico invest in customers, invest in developing the market.

• 1015

Obviously, we hope everyone is going to make money with this in the long run, but making money on the Internet, I have to say, is not obvious. You don't necessarily make money with your monthly fees. You try to recover as much of your costs there as you can if you're an ISP, and you try to make money with advertising or electronic commerce or other services you provide.

For a lot of Internet companies, they're booming in the stock market, and their sales are booming, but they're not making any profits. Obviously, everybody is looking to make a profit at some point. That's why the cost or the price to ISPs has changed very substantially; it's because of the work we did.

Indeed, the problem we faced with ADSL was worldwide. Everybody had this problem that ADSL could not match the price with the cost of the cable modem, particularly in Canada, because prices are lower here than anywhere else in the world. We've worked a lot to solve those cost and technology problems.

Mr. Gord Waites: Perhaps I can add to that. I have just pulled out a letter from Mr. Courtois to the CRTC regarding that very issue. He confirms in this letter that the tariff as filed today is the tariff that is charged for this one-meg ADSL service, which is the $127.55.

So if an ISP wants to buy from Bell Canada, who is the owner of the monopoly facility, and therefore who is regulated and controlled by the CRTC, we pay $127.55. If we want to buy through an unregulated affiliate of Bell's, which is Bell Nexxia, then Bell will sell the service to Nexxia supposedly for $127.55, and Nexxia will in turn sell it to—

Mr. Janko Peric (Cambridge, Lib.): On a point of order, Mr. Chair, can we get a copy of this letter?

Mr. Gord Waites: Yes, you can.

Nexxia will sell it to the ISPs for $24, I assume losing $103 on every customer in the process. That doesn't make sense.

Mr. Bernard Courtois: Mr. Waites is right; it doesn't make sense, and that's not the way it's working. There's a tariff for one service that gets you to a central office, but then you have to combine that traffic in one city and, by combining more traffic, try to get economies in the network there.

That's what Bell Nexxia does, but any carrier can come and get that service from Bell at each central office and try to combine it at one place in the city and sell it to ISPs.

At the moment, yes, we charge the tariff price to our affiliate that tries to aggregate the traffic. Obviously, between now and the summer, when the new capability is put in place, we'll have to look at that tariff component, but that only gets you to the local central office. It doesn't get you to the central point in the city, which is what ISPs want.

That's why Nexxia is looking ahead, saying that beginning this summer, you'll be getting it at $24.

Mr. Jim Jones: So is Nexxia the big pipe across the country?

Mr. Bernard Courtois: Yes.

Mr. Jim Jones: Then you have to get from your house to Nexxia.

Mr. Bernard Courtois: Yes. Bell only gets you from your house to a switching centre, of which there are many in a city. Then some other carrier has to come and pick up that traffic and deliver it to one central point in the city. The ISP also has to buy someone to carry that traffic. If you want to access sites in California, say, you need to buy this big capacity.

That's what Nexxia will sell. But there are other competitors doing that.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Jones.

Mr. Waites, if we can get a copy of this from you the clerk can make copies for every member of the committee.

[Translation]

We will now go to Mr. Lastewka.

[English]

Mr. Jim Jones: Can I just finish with one more quick question? Then I have to leave.

The Vice-Chairman (Mr. Eugène Bellemare): Yes.

Mr. Jim Jones: How true is it nowadays that hand-wiring is no longer a monopoly and therefore regulation is not needed? I'm thinking satellites and dishes, where you don't have to have the cable or the copper wire into the house.

How far away are we from that, and isn't that going to be serious competition to both the cable companies and Bell?

Mr. Bernard Courtois: Look TV is a wireless cable company. They've announced that they're getting into the Internet access business, and they have a high-capacity system.

There's no doubt that at the moment the principal routes are cable, coaxial, and telephone wire, and there's no doubt that there are other technologies coming along. Eventually the cellular types of companies in the third generation might be able to offer the same kind of thing, but at the moment it's principally cable and telephony.

The awkwardness here is that the cable company would be unaffected by this bill. Their system is closed to ISPs, and the phone company would be prevented from being competitive in the market even though its system is open to ISPs.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Jones.

Mr. Lastewka.

• 1020

Mr. Walt Lastewka (St. Catharines, Lib.): Thank you, Mr. Chair.

I have a couple of brief questions. Mr. Keyes was on the same track I was.

My question is directed to Mr. Colville.

After hearing the discussion this morning, it seems to me that the ISPs are challenging the CRTC for not doing their job in breaking up Bell's monopoly of cable into the home, because after we got into a whole pile of discussion, we went back to discuss the monopoly of getting into the home.

Could you give us some information on your work to make that monopoly not a monopoly?

Mr. David Colville: This ties into Mr. Jones' question, really, in terms of some of the comments made earlier, that when we opened up the local market to competition—that is, the facility from the customer or the ISP through the Bell switches—we said there are certain essential facilities here, and those facilities would be essential and bottlenecked for perhaps some time to come. It may not be practical for somebody to duplicate that infrastructure for some time.

We are seeing the development of some forms of wireless technology, such as this multi-point distribution system Look TV uses.

That may develop to be a formidable competitor. If it and others do, then we may well be able to say we can step away if there is no longer a monopoly in that portion of the market. But for now and for the foreseeable future, that last mile, if you will, is still an essential facility, in our view, and we've ordered that it be unbundled and provided to competitors. That's the way we're going to have competition.

From the comments I've heard today, and the mere fact of the applications we have before us, I think that's recognized.

Mr. Walt Lastewka: Would you agree with that, Mr. Waites?

Mr. Gord Waites: I believe there is an unbundling that has happened through the CRTC. The unfortunate thing, though, and what we're talking about here, is anti-competitive pricing practices. They've unbundled the component and said, fine, you pay $127 for it and we'll sell it to the end user at $39.

So it hasn't been effective. Yes, it is unbundled. We can buy the underlying facilities. There is a tariff for it that's been approved by the CRTC—at a rate that's 320% of the retail rate.

Mr. Walt Lastewka: Mr. Colville, do you monitor the unbundling to make sure everything is going according to whatever you have decided as a plan?

Mr. David Colville: We monitor what's going on in the marketplace and we regulate certain of these rates.

I have to be careful about how much further I go on this, because we have a dispute before us right now on this very point that we've been talking about all morning.

The Vice-Chairman (Mr. Eugène Bellemare): I'd like to remind the committee that the CRTC is like a court—I believe, Mr. Waites and company, you've lost your case, and now you're in appeal—and we should not be debating the value of the pros and cons at this particular committee meeting. Perhaps you could redirect your questions toward Mr. McTeague's bill as opposed to the value of the opinions of both parties.

Thank you.

Mr. Lastewka.

Mr. Walt Lastewka: I'll pass.

The Vice-Chairman (Mr. Eugène Bellemare): The next person would be Mr. Chatters.

Mr. David Chatters (Athabasca, Ref.): Thank you, Mr. Chairman.

I have first just a comment. Again, there are a lot of technical arguments going on that are above my head in many respects, and quite confusing, but generally what we're debating today is a bill that is advocating price regulation and using the Criminal Code to enforce that price regulation.

I can't understand where in the long term that's in the best interests of consumers. Surely the responsibility of the government, of the regulators, is to ensure competition in the marketplace. The CRTC and the Competition Bureau are charged with that responsibility, and say they are doing that. I haven't heard any real evidence to say they aren't.

The concerns I have about the long-term interests of the consumer remain. I haven't heard anything else.

Specifically on the discussion that's been going on today, and being a rural telecommunications consumer, my question is on whether this particular bill would make the practice of the cross-subsidization of local telephone services—that is, local and long-distance services—illegal.

• 1025

The rural consumer of telephone services, be it Internet or long-distance or whatever service you're receiving in rural areas, is greatly subsidized by the long-distance service. As a consumer, you're receiving that service well below the actual cost of that service. Will this bill make that practice illegal?

Mr. David Colville: That's one of the reasons I raised the point in my opening comments. We've had below-cost pricing in the telephone business for many years. Frankly, I don't know whether or not this bill would impact on that but I would certainly have a concern about whether or not it would. I think for quite some time we're likely to see local telephone service, certainly residential service, in some parts of the country continue to be provided at below cost.

In fact, I have to keep apologizing for having proceedings underway, but as some of you may know we have another proceeding underway—we refer to it as the “high-cost” proceeding—that is looking at the very issue of how we're going to continue to ensure that telephone service is provided at affordable levels that may well be below cost in many areas of the country, because if you had to provide the service at cost, people simply couldn't afford it in many rural areas.

Because the bill is intended to be so all-encompassing, I don't know enough to be able to say whether in fact it would create problems in terms of being able to satisfy that concern.

Mr. Bernard Courtois: Mr. Chatters, in our case, we've looked at it, for example, in band D, our rural band. The cost of an unbundled loop that we have to provide to our competitors—the CRTC looks at it and determines that it's cost-based—is $33 a month. The residence service there is $19 a month.

Now, at the moment there's a subsidy for the residence service to help close the gap, but if it ever turns out that there wasn't a subsidy, we'd have to jack up the price by $14 in these rural areas. That's why I gave the example of SchoolNet. In the places that don't have local access to the Internet, usually schools in less densely populated areas, we're giving away the long-distance to make up for that gap.

We've thought about it, and we've looked at it under this bill. If there's no exception to get us out of that, it would be criminal.

Mr. David Chatters: Where is that subsidy coming from?

Mr. Bernard Courtois: At the moment, we take some money from every minute of long distance and put it into a pool. Every competitor who wants to provide local residence service in that area then will have access to that subsidy. But there isn't an explicit subsidy for everything we provide in rural areas. Under this bill, there's no room for someone to look at it to see whether it would be right or wrong. Everything is automatically criminal.

The Vice-Chairman (Mr. Eugène Bellemare): Mr. Colville.

Mr. David Colville: We've set the price for the unbundled loop in that territory, so the wholesale rate, if you will, would be the $30 rate. The retail rate is $18.

We've mandated that the subsidy, which comes from all the long-distance providers, be portable. That is, any company who goes in to provide telephone service in that band D, that rural community, would get the subsidy, but the problem is, it would appear that this practice would be offside in this legislation.

Mr. David Chatters: Okay.

Thank you, Mr. Chairman.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Chatters. Next we will go to Mr. McTeague.

[English]

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.): Thank you very much, Mr. Chairman, for the few minutes here.

I want to begin by acknowledging that the bill itself really deals with the matter of retail as opposed to the matter of below-cost selling as opposed to the matter of price fixing or other comments that have been made here that really do not deal with the question—either intentionally or per se—of price fixing, or the question of setting of costs.

Mr. Courtois, a few minutes ago you suggested that you can't get away with below-cost selling. Bell Canada has not provided an opportunity to do that, and yet the Competition Bureau on March 17 said you can do just that under certain circumstances.

I'm concerned about that, because Mr. Colville has said he can address those competitive problems, and it's obviously a matter of saying, well, we're setting aside this unfairness because we believe there's another objective we want to realize—that Bell Canada, or Sympatico in this case, has to compete with the cable company.

The question to you, Mr. Colville, is that knowing that the cable companies have not been deregulated as has Bell Canada, can you tell me, knowing what you know, why we have not deregulated the cable companies so that there is a level playing field between the two, so that businesses can compete at the tariffed rate or apply to another wholesaler for, say, similar product?

• 1030

Mr. David Colville: In fact, we have initiated a proceeding to look at this issue of having the cable operators, if you will, unbundle their facilities in order to offer high-speed access so that the service could be sold to Internet service providers as well. We recognize that is another bottleneck facility, if you will, in terms of high-speed access. There is a proceeding underway, and there are technical issues associated with that as well.

My understanding from some discussions with some of the parties, in fact, is that they're working together to try to resolve this issue. There's a trial going on with Videotron to investigate how they can effectively do that so that the cable portion of this would be unbundled and the facility offered to ISPs as well.

Mr. Dan McTeague: Mr. Colville, the application before the Competition Bureau in matters very familiar to you and the CRTC.... The claim you've made here is an important one, I think, for this committee. You have suggested that you can handle the issue of competitiveness. I'm just wondering, in the context of the fact that you've known this for a couple of years now, why you haven't acted immediately.

Mr. David Colville: We've known...?

Mr. Dan McTeague: About the cable companies having an advantage over Bell Canada, which allows Bell Canada to then bounce off the idea through the Competition Bureau that it has to compete with somebody who is not deregulated.

Mr. David Colville: Well, the cable companies have quite a different facility infrastructure. I can't remember the exact date, but some time ago we did recognize that this was a problem, not so much in terms of the relative pricing of the cable to Bell; rather, they had this capability for high-speed access, and we wanted that facility made available for others to be able to provide things like high-speed Internet access.

At the time, though, we recognized there were a number of technical difficulties around it that had to be resolved, and the parties have been working since then to try to resolve those issues.

Mr. Dan McTeague: I have questions for some of the lawyers here at the table. I guess it could also be for the committee members.

Are they familiar with any part of the Competition Act right now in which legislation is erected to be aimed specifically at one industry only within the current framework of the Competition Act? As well, is it true that under the current act, anti-competitive activity is one that exists over an extended period of time with the objective to substantially lessen competition, the prevailing attitude of the Competition Bureau in jurisprudence?

I'd like those of you who have a background in law to comment on that, because it would appear to me that the underlying scaremongering that might occur as a result of this bill might be the fact that, oh, it's criminal, or that somehow the civil section.... Really, if you speak to some of the noted lawyers on the question of competition, you will know full well that the civil provisions under the reviewable matters are not civil at all.

I think, Mr. Denton, you talked about the question of in rem, or in general, injunctive relief.

Is there a more fundamental problem with the Competition Act that this committee has simply not looked at, when the marketplace is changing so fundamentally?

Mr. Bernard Courtois: Mr. McTeague, I am responsible at Bell for all matters dealing with the Competition Act, and I have a few years' experience in those matters. I'm not aware, even though that might have been the solution here, that any aspect of that act is targeted to only one industry and not others.

For the rest, competition law has evolved in recent years, and the question of predatory pricing is being looked at quite differently. In terms of predatory pricing, it turns out we have a more open economy today than we had 50 years ago or whatever, but in a fairly open economy most of the time predatory pricing is not going to work.

In the courts in the U.S. there are a lot of cases on this. The courts in the U.S. have now come to the conclusion that it's going to be very rare that there's real predatory pricing—that is, that you're going to be able to get your competitors out of the market, establish a monopoly, and keep the monopoly so you can charge overly profitable rates. The courts have found that most of the time their attitude now is going from trying to protect competitors to trying to protect competition. By protecting competition, in many cases, the applicants coming before the courts are in effect trying to prevent practices that the courts are finding are good for customers. They make it tough, but competition is tough—

Mr. Dan McTeague: Mr. Courtois, there is no jurisprudence, however, for someone who has had a comparative advantage, as in the monopolies in the company you represent.

• 1035

I take it that in the United States or in Canada we would have the application of something similar to the Clayton Act, where there is an injunctive outside of the goalposts, if you will, of their competition act.

Mr. Bernard Courtois: In both Canada and the U.S. and in some other countries we've evolved this notion of the dominant supplier in the telecom business, and there's a regulator to look after those things.

So like the issues we've been discussing here, it's not a matter of whether I'm right or wrong about the prices or whatever; someone is there to look at that, be it the Competition Bureau or the CRTC. I'm quite happy for them to look at it. If they conclude that what we're doing is actually what we're saying—helping to develop a market that will benefit all ISPs—then someone is there to look at that and at least in the cases where it's good for competition and good for customers, it will be allowed to go ahead.

That's what concerns me about the bill—

Mr. Dan McTeague: But, Mr. Courtois, how do you, sir, in that context, gain one-seventh of market share by driving the price below your tariffed rate? How do you recover that in order to gain market share? Where is the money coming from, Mr. Courtois?

Mr. Bernard Courtois: Most of our customers are on the usual dial-up system—

Mr. Dan McTeague: Sorry, but I guess my final question is, do you have to have deep pockets in order to do this?

Mr. Bernard Courtois: —and only a prospect of 10% to 15% of Internet users will go for high-speed, so it's much smaller. We have 9,000 customers on high-speed. We have enough money to support that, but of course we have to get the cost down as soon as we can. Otherwise, we couldn't go on for any long time. We couldn't support seven times 9,000. We've gotten the cost down so that by this summer, the price will have changed. We won't have completely solved the economics of the Internet, but what we've done has proven useful to all ISPs.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Courtois.

Ms. Gervais.

[English]

Ms. Linda Gervais: We've heard a lot this morning about the market power of Bell Canada and the $120 rate. In fact, the ISPs have a competitive choice in terms of suppliers. If they want to come to Bell and pay a regulated tariff rate of $120, they may do so, or they may go to our unregulated supplier, Bell Nexxia, as a competitive choice on their part, and have a rate of $24.

A voice: That's incorrect.

Ms. Linda Gervais: It's in the summer.

Mr. Dan McTeague: But they can't go to anyone else. They can't go to a cable company. Where are they going to buy tariffed rates from?

Ms. Linda Gervais: I guess what we're doing is trying to provide the service to our competitors, and we're not in a position to respond for the cable companies about why they're not.

Mr. Dan McTeague: But you control the infrastructure in a deregulated market. The cable companies are not part of the equation right now. If I'm a little Internet service provider, I have no choice. I have to go to you, and I have to pay the piper. You determine what the rules of the game are because you control not only the infrastructure but also the price infrastructure.

Is that not correct, as evidenced by what the CRTC said?

Ms. Linda Gervais: No, no.

Mr. Bernard Courtois: For the regulated portion, which is about an $80 or $85 tariff, the CRTC controls the tariff portion. Then there's the part that any other carrier can come and pick up.

Yes, it's a fact that someone is there to look at what we're doing, and of course we have to compete in the marketplace with the price that's there. It's $39.95, and we didn't drive that market price.

The Vice-Chairman (Mr. Eugène Bellemare): I would like to thank the very mixed and open-minded group we've had this morning. They have shown that democracy works. We can all give our opinions, our points of view, without getting at each other's throats, either literally or psychologically.

You've been extremely interesting, and it has been very educational. Thank you very much for your participation.

We'll take a short break before the next session.

• 1039

• 1047

The Vice-Chairman (Mr. Eugène Bellemare): I'll convene the meeting.

In the second round, our witnesses are: Nick Jennery and David Wilkes, from the Canadian Council of Grocery Distributors; Robert Morton and Pierre Moncion, from the Canadian Federation of Independent Grocers; and, in an individual presentation, Fred Wade.

Mr. Wade should be here shortly and we'll start with presentations.

You have five minutes for your presentation. If you read your material, you may go over the five minutes. You may find it more effective—it may have more punch—if you just recite off the cuff what you've written in your report. As for questions, the MPs, the members of the committee, have five minutes. Some use long preambles and some ask short questions. If, when you answer a question, you use the whole five minutes, that's it. If you would appreciate more than one question from a member, make your answers succinct.

Mr. Wade.

Mr. Fred Wade (Individual Presentation): Thank you, everyone.

I'm representing Wade Enterprises from the Annapolis Valley in Nova Scotia. My family has been in the food business for a number of years.

In 1918, my grandfather opened a general store in the Annapolis Valley of Nova Scotia. Through good business practices, dedication, hard work, and sacrifice, our family and staff, through four generations, built that single store to a business of 8 supermarkets employing over 350 people and doing over $40 million annually.

• 1050

Our company grew and prospered for all the right reasons: we worked hard, we were innovative, we gave good value to our customers, and we provided the best in service. We were considered good corporate citizens in the communities, with support for virtually every group that walked through our doors with a request for help. Our list of donations reads like a who's who in the communities. We actively solicited donations for food banks in our area, and not only collected food items for them but matched each and every item donated by our customers with equal value from us.

We reinvested heavily in our stores, with regular renovations and upgrades. Our staff, being highly motivated and well-trained, contributed heavily to our success. They were taught to be professionals in their fields, whether as a cashier serving customers or a meat cutter preparing meat. Training courses for all departments were part of a continuous program so as to keep our staff abreast of the very latest techniques in food service. In fact, we were asked to share ideas and methods nationally with our peers at a grocers' conference here in Toronto so that others might benefit from our success.

We paid our staff very well for our industry in our part of the country and had benefits to match. We had one of the very first profit-sharing plans to be implemented on the east coast, with full disclosure of our financial statements to our staff and with their participation in our profits.

Since we started business in 1918, we've weathered the Depression, competed toe to toe with and survived the rise and fall of a national retailing food giant, Dominion stores. Sobey's made a foray into our market area a number of years ago and actually closed some time later because we proved to be such tough competition, as we like to think. However, they returned in force to locate nearby in New Minas with what we considered a “superstore” at that time. Sobey's proved to be tough competition themselves, with a large and brand new store, new services, and, compared to ourselves, a massive corporate infrastructure to support them.

However, our company and our program proved to be just as successful as theirs was. We lost very little market share or customers, and we gave just as good as we got as time went by. Having such a large competitor on our doorstep forced us to operate even more leanly and more aggressively and to be more innovative than we previously had been. But we were doing it.

Then the Loblaws Real Atlantic Superstore came to town. We had been aware of their strategy of breaking into other maritime markets for some time and knew that they would arrive shortly to challenge Sobey's market share in our area as well. We prepared to do battle. Margins were shaved even finer, hundreds of thousands of dollars were invested in yet another store renovation, advertising and promotion were increased, and we waited. They opened in September, 1995, in New Minas, which is in the middle of our market area. From their opening ad and their retail price structure, we knew it was going to be tough.

In the grocery industry, the weekly advertising of special sale items acts as a draw to our customers to come and purchase at our stores. Very often, these items are loss leaders or are actually priced below our landed cost. Of course, the hope is that the customer will also purchase a basket of goods along with the loss leader so that the overall result is a profitable sale.

But this, of course, is predicated on the fact that your regular prices are set at a profitable level. This basic law of economics did not seem to apply to the Loblaws superstore.

In the grocery industry, it's an accepted fact that 80% of our volume comes from only 20% of the items in our store, items that are called category leaders: Kellogg's Cornflakes, Maxwell House Coffee, Kraft Cheez Whiz, Heinz Ketchup, and so on. These would normally be priced very competitively on a regular basis as these are the items that consumers would price-compare from store to store—our impressionable price list, if you like. We would still have a small profit margin on them because of their volume.

Loblaws went beyond using weekly loss leaders to capture market share to pricing category leaders and even ordinary items throughout the entire store—hundreds if not thousands of items—at a price level that they thought consumers could not refuse.

Let's look at how low they went. At Thanksgiving, one of the main items to draw customers to your store is turkey, and at Thanksgiving, as at Christmas, it is always priced competitively by everyone in the business. If you're able to make a few cents a pound on turkey, you should consider yourself very lucky. For Thanksgiving 1995, our frozen Grade A turkey was costing us $1.32 per pound. A very good feature price for any store to promote them at would have been $1.29 per pound—a loss of 3¢ a pound. This is expensive, but is also considered a normal cost of doing business in the food industry.

However, we and the entire industry were shocked when Loblaws advertised Grade A turkey the week before Thanksgiving at 87¢ a pound and continued the sale the entire following week, right up to Thanksgiving. This is a loss of almost $8 on a large turkey, and they sold thousands. This is not smart business practice by anyone's standards. It was designed solely to remove as many customers as possible from their competitors' stores during a crucial selling week.

Let's go back to that impressionable price list of items that produce 80% of the business for a food store. On a price check of staples, done on the same day between ourselves and the superstore in New Minas, we found that their retail was 6% below our cost on those items.

• 1055

However, also on that same day, we compared their prices with those in one of their stores here in Ontario, where they already hold a dominant position in the marketplace. The findings? Their Ontario store was 17% more expensive than their store in Nova Scotia.

The fierce war being fought in Atlantic Canada during this period even showed up in StatsCan statistics: the CPI index for food bought for home was 6% lower than Ontario's for that six-month average. We had always thought of the Ontario market as being fiercely competitive, a market that we thought ourselves lucky not to be part of, but here we found that Canada's largest food distributor, doing almost $10 billion in sales, was prepared to pump millions of dollars of operating losses into our small marketplace in order to gain market share.

But we were their customer too. One of our supermarkets was leased from Loblaws and they were the primary supplier to us. What prices did they charge us? I have listed a few examples. For no name bleach, our cost from Loblaws was $1.33; however, they sold it for 69¢. For Allen's apple juice, our cost was $1.52; they sold it for 93¢. These prices were advertised as their everyday low prices, week in, week out, not just as specials or as temporary reductions. These differences are immense when you consider that net profit in the grocery industry is typically measured at less than 1%. It must be apparent to anyone looking at these figures that it was impossible for us to compete.

The Vice-Chairman (Mr. Eugène Bellemare): You have one minute left.

Mr. Fred Wade: If we tried to come close to matching the prices, we would have been bankrupt in weeks. As it was, our customers could not ignore the difference and started to support the superstore, in many cases reluctantly. To us, there was clear evidence of predatory pricing as defined by the Competition Act:

having the effect or tendency of substantially lessening competition or eliminating a competitor, or designed to have that effect.

Well, it certainly had all of that. We and many of my colleagues are clear proof of it, but, for whatever reason, the Competition Bureau chose not to act on our evidence.

There was no doubt in our mind that these prices could not sustain their business or any business in the long term and that eventually they would have to raise their prices, but we did not have the financial resources to wait them out. After six short months, our family made the heart-rending decision to sell our business to one of our competitors—Sobey's. After almost eight decades in business, another Canadian small business institution was gone.

Today, the price of that no name bleach quoted as an example has gone from 69¢ to $1.29. With the recent spate of mergers, competition in the food industry has lessened even more, dramatically so. We could have competed quite favourably with any competitor that must play by the normal realities of profit and loss and return on investment, but when a massive company with such a stranglehold on the market decides to turn their sights on a particular market or geographic region with the intent of gaining market share regardless of cost, the outcome will be loss of competition.

The wake-up call that we tried to send to the Competition Bureau back in 1996 fell on deaf ears, but our predictions of store closures and loss of competition has all too sadly come true. Small-town Canada has been hurt terribly by the onslaught of superstores in many categories besides food: toys, business supplies and stationery, pet stores, building supplies and hardware, books, and others.

However, I defend the right of a free market to decide whether a superstore will triumph over smaller independent businesses. But they must never be allowed to use their financial strength to artificially depress prices in a market so as to eliminate their competition. It is too late for Wade's Foodstores and for many others, but it is not too late for those independent and family-run businesses still hanging on. They're not looking for protectionism or subsidization. We can compete, given a level playing field.

The act seems to be quite clear with regard to price predators, but it is not working. If an amendment such as Bill C-235 is what is required to level that field, I urge this committee to support it fully. There must be room in Canada for independent business. There must be room for family-run businesses.

You can make the difference. Thank you.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you very much, Mr. Wade, for sharing your personal experience with us.

The next witness is Mr. Jennery.

Mr. Nick Jennery (President and Chief Executive Officer, Canadian Council of Grocery Distributors): Thank you, Mr. Chairman.

Good morning, members of the committee. I'm president and CEO of the Canadian Council of Grocery Distributors. With me today is David Wilkes, CCGD's vice-president of Ontario region and trade relations.

CCGD is a non-profit trade association representing the interests of the grocery distribution industry across Canada. With annual sales of approximately $57 billion, employing more than 440,000 people in the wholesale and retail grocery distribution industry, it constitutes an important sector of our economy. CCGD members account for approximately 80% of the total grocery distribution network in Canada. Our members consist of both small and large grocery wholesale, retail, and supermarket operations, as well as companies that provide goods and services to the industry.

• 1100

Our goal is simply to help our members provide a variety of products and services to consumers through an efficient supply chain. This goal helps to explain why CCGD is here and has asked to be before you today, an opportunity for which we're most grateful. Put simply, it is the view of our membership that Bill C-235 will adversely affect the industry's continued ability to provide consumers and customers with the efficient service and competitive pricing they enjoy today.

We have provided you with a two-page outline in both French and English, which sets out our reasons for opposing Bill C-235.

As part of my opening remarks, I do not propose to go through that outline in detail. Rather, in the brief time allotted to me, I would like to focus on Bill C-235's key flaw, namely, that it will operate contrary to the best interests of competition in general and of the competitors it is supposedly designed to help.

First, on competition: as you all know, the purpose of the Competition Act is to encourage competition and to promote the efficiency of the Canadian economy. Bill C-235 will do neither. Instead, it will discourage suppliers from achieving the efficiencies that are available through vertical integration and will thus sacrifice the interests of consumers who benefit from these efficiencies. Rather than face the risk of criminal prosecution, rather than face substantial compliance costs, vertically integrated suppliers will likely instead engage in fewer promotions.

You should understand that our industry, as Mr. Wade has pointed out, is one that is highly responsive to market demands, in which prices change on a weekly and sometimes daily basis. Promotions, feature pricing, and discounts are all fundamental merchandising tools for both large and small retailers, which consumers have come to expect. You only have to look at your weekly in-store flyer to see how aggressive that is.

You will also see vertically integrated suppliers likely abstain from volume discounts and refrain from responding to price reductions by customers and retail competitors, and we believe that is both bad for competition and bad for consumers.

Second, on competitors, much has been said about Bill C-235 being necessary to protect the little guy, the small independent retailer who is allegedly being squeezed at both ends by the big vertically integrated suppliers. But will Bill C-235 help these retailers? No, because the obvious choice for a vertically integrated supplier faced with this type of criminal sanction will be to stop supplying independents. This is obviously bad for these independents and bad, again, for competition and for consumers.

In my opinion, it will limit the ability of the independents to respond to the market, a market where competition is growing, with new players, new formats, new distribution channels, and new store formats, each and every year. There has never been more competition and more variety in locations for the purchase of consumer products than there is today.

To summarize, it is CCGD's view that Bill C-235 is unnecessary. In fact, the Competition Bureau says that it does not need this legislation. It is inconsistent with the provisions of the Competition Act and it will not achieve its stated objectives.

As to Mr. McTeague's suggested amendments, while CCGD believes that they rectify some of the problems with Bill C-235, in our view they do not affect the fundamental thrust of the legislation. We ask, therefore, that you decline to approve the bill in any of its suggested forms.

In closing, CCGD and its members appreciate Mr. McTeague's efforts to help small businesses in Canada. We share that goal as well. However, our concern is that his proposed solution will cause more problems than it solves. We believe that the act as it is currently structured is sufficient to address Mr. McTeague's concerns.

Thank you for your time and consideration.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Jennery.

Mr. Morton.

Mr. Robert Morton (Director, Public Policy, Canadian Federation of Independent Grocers): Thank you, Mr. Chairman.

I am the director of public policy for the Canadian Federation of Independent Grocers. I am joined by Pierre Moncion. In addition to his role as a member of CFIG's board of directors, Mr. Moncion operates a retail grocery store in Pembroke, Ontario.

On behalf of the Canadian Federation of Independent Grocers, I want to thank you for providing us with the opportunity to take part in the industry committee's examination of Bill C-235.

• 1105

The Canadian Federation of Independent Grocers is a non-profit trade association founded in 1962 with the purpose of furthering the unique interests of Canada's independent or franchised grocery stores. CFIG's retail members represent 30% or $17 billion of Canada's $56 billion in retail sales.

CFIG would like to recognize the honourable member for Pickering—Ajax—Uxbridge for his efforts in the preparation of Bill C-235. This is a very well intentioned piece of legislation.

It is CFIG's position that the Competition Act currently contains the tools necessary to address the matters of predatory pricing and abuse of dominant market position.

In order to explain this position, I would like to quote a statement that CFIG president John Scott made to this committee on May 13, 1998, with respect to Bill C-20:

The spirit and intent of the Competition Act seeks to preserve competition in the interest of consumers. The interpretation by the bureau of the provisions of the act further narrow their particular interest or enthusiasm in pursuing many matters which are often, in our opinion, offences under the act. As a result, it is extremely difficult for independent grocery retailers or anyone else in our sector to have the bureau seriously investigate charges of abuse or apparent violations.

We recommend that as the Standing Committee on Industry you undertake a review of the spirit and intent of the act and the activities of the bureau with respect to small business. It is repeatedly mentioned by the political elements in our country that small business is the backbone of our economy. We agree that the health of the small business sector is extremely important to our way of life. We submit that without the active involvement of the bureau in a more rigorous application of some of the specific sections under the act, it will be very difficult for this entrepreneurial part of our economy to continue to thrive.

CFIG's position has not changed since this statement was made nearly one year ago. By undertaking a review of the Competition Act and the activities of the Competition Bureau with respect to small business, this committee could put fire to the feet of the bureau and make them understand that the scope of their interpretative guidelines must be broadened in order to enable it to enforce the existing legislative provisions. The current narrowly defined scope of the bureau's guidelines offers small business little or no support. I can assure you that CFIG would be willing to assist your committee with this review.

By pursuing this strategy, the industry committee would increase the effectiveness of the existing Competition Act and legislation such as Bill C-235 would be unnecessary. In the absence of a review of the bureau's interpretative guidelines, at first glance there is some merit in bills such as the amended version of Bill C-235. A close examination reveals some problems relating to the structure of the grocery industry in Canada.

It's crucial to understand that in the grocery industry the majority of franchised grocery retailers lease their stores from a franchiser. That franchiser is also their wholesaler. These franchises can be terminated on very short notice. If legislation such as Bill C-235 is passed, these fledgling entrepreneurs may lose their franchise if the franchiser decides to turn their store into a corporately owned operation.

It's important to note that the amended Bill C-235 makes no reference to the use of loss leaders. Loss leaders are a normal business practice in the grocery industry. Under the terms of the amended Bill C-235, a chain that decides to feature a product as a loss leader would be forced to drop the wholesale price below its retail price. This raises questions with respect to how or if the long-established use of loss leaders would be allowed under the terms of the amended version of Bill C-235.

It's also necessary to understand that the majority of the grocery products wholesaled in this country go through six major distributors. By passing this legislation, you are running the risk of some of these distributors getting out of the wholesale business.

In conclusion, I want to make it clear that CFIG is very supportive of the intent of Bill C-235. Given the existing structure of the retail grocery industry, it is our opinion that the industry committee can more effectively resolve these issues through a review of the existing interpretative guidelines used by the bureau in investigating the Competition Act.

By making the Competition Bureau understand that it must broaden the scope of its interpretative guidelines to enable it to enforce existing legislative provisions, this committee will increase the effectiveness of the Competition Act, which in turn will enable small business owners to continue to be viable in the market.

I also want to make it clear at this point that this position has the full support of the CFIG board of directors, as well as large independent grocery store operations such as Longo's and Commisso's.

Thank you very much.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Morton.

We'll now go to the members. The first member to ask a question or questions will be Mr. Chatters.

• 1110

Mr. David Chatters: Thank you, Mr. Chairman.

I would like to thank the presenters for their presentations. It's very interesting. Again, there certainly seems to be a recognition that there is a problem out there with fully integrated companies and how they treat their franchisees, whether it be in the oil business or the grocery business. But there also seems to be a general recognition that what's being proposed in Bill C-235 will not solve the problem, that we need to approach the problem from a different direction and try to address the problems that are there in competition in another way.

I'd like to perhaps have you just address that issue a little more. How could we better address the problems of competition than by what we're trying to do in Bill C-235?

Mr. Fred Wade: If I may, I will speak to that. I think that the intent of the Competition Act and the wording, “predatory pricing”, say it all. The problem is that either the Competition Bureau does not feel that it is worded properly to enable them to be successful in a prosecution or there's some other reason. To me, the intent is very clear and the wording is very clear.

We felt that there was ample evidence of predatory pricing in our case, yet we were unable to get the bureau to act on that. My definition, which I proposed to the Competition Bureau and they agreed with, was that predatory pricing is any pricing structure that will not sustain the business in the long term. If you're setting your retail prices so that you're posting millions of dollars per year in operating losses, to me that's predatory pricing. That is not sustainable for any business. Therefore, there has to be some other reason to set your prices that low.

Perhaps you're right. Maybe there is another way to approach it. I believe that the wording is correct in the act. How do we get the end result? How do we take action against predatory pricing or other actions?

Mr. Nick Jennery: To address the process of competition, I think it's extremely important to ensure that the Canadian marketplace continues to be a consumer, demand-driven marketplace: let the consumers decide where they want to buy products and what price they are prepared to pay.

Right now, if you introduce Bill C-235, you will introduce a floor price. You will substantially impact the ability to promote feature prices and provide discounts. All the merchandising tools that you've heard everybody talk about today are merchandising tools designed to bring consumers and customers into your store so that you have an opportunity to provide goods and services, to allow you to do that. By introducing a floor price into the marketplace, you will hurt competition severely.

Mr. David Chatters: But time marches on—

Mr. Nick Jennery: Sure.

Mr. David Chatters: —and the new threat to the retail grocery market business is not the superstores and the other big integrated chains. It's probably the direct marketers, the Internet marketers, the Amways of the world, whose intention is essentially to eliminate the retail marketers and the infrastructure that they work out of.

We as legislators have to look at how we preserve competition and the bargains for the consumer that you talk about—

Mr. Nick Jennery: Yes.

Mr. David Chatters: —and I think that's a broader direction than what we're focusing on in Bill C-235.

Mr. Nick Jennery: If I might comment on that, I would say that the current legislation is allowing people who don't have bricks and mortar to get into the grocery business. You can buy laundry detergent in general merchandise stores, in gas stations, and in small, big, and large supermarkets. There has never been more choice in distribution than there is today. That's based on the current legislation. While the total tonnage in terms of consumption remains relatively flat, that pie is being divided up amongst more players and competition has never been more intense than it is today—and it continues to be so.

While large supermarkets and small supermarkets and the people who have bricks and mortar are obviously concerned about the potential for Internet distribution by people who don't have that infrastructure, that's fair ball. We realize that you compete not only on the price of goods but also on services, on store location, on customer service, on a variety of things.

• 1115

In the grocery distribution industry, we feel that we can meet consumer demand with that, but we need that elasticity in terms of both pricing and goods and services. We welcome competition, and indeed, it's coming. We have one player in the marketplace that is twice the size of the total Canadian grocery industry, and that alone is a huge incentive to be on your toes, to look for efficiencies that often come through vertically integrated operations. Those efficiencies would not be achievable under Bill C-235.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Chatters.

Monsieur Keyes.

Mr. Stan Keyes: Thank you, Mr. Chairman. I appreciate the interventions, especially Mr. Wade's intervention, because, while he told us of his family-owned business and when it was sold he probably made a whack of money, he's here anyway to tell us that there's a problem with the industry. I certainly appreciate his personal story of this whole thing.

I don't know if I have so much a question, Mr. Chairman, or a comment. If all the evidence comes forward.... Mr. Wade has stated a whack of evidence here. He's looked at price differences between what he paid and what was paid by the big competitor who came into the neighbourhood, and it just behoves me to think that the Competition Bureau decided...or what it decided back when it decided it.

As I understand it, Madam Clerk, we're having the Competition Bureau back here to this committee.

The Vice-Chairman (Mr. Eugène Bellemare): On Thursday.

Mr. Stan Keyes: I'm glad, because after learning everything we've learned from the different witnesses who have come forward, I have a bunch of questions for the Competition Bureau. It's obvious, too, that the act probably needs a redefinition. I appreciate Mr. Morton's intervention, because he was very forthcoming on the fact that corrections can be made—and maybe they should be—through the Competition Act. Maybe there should be a review with specific reference to the very witnesses that we've had over the last two weeks.

When we last did the Competition Act review, none of this stuff came forward. We didn't get anything from the petroleum people or the independent gas retailers. We didn't get anything from grocery store owners, etc. Well, maybe it's time. When that act comes forward, that's going to be the time to sit down and re-examine that act and make those changes.

Mr. Jennery, what if suddenly you were Mr. Wade or your company was Mr. Wade's, let's say, and you owned the grocery store, a whack of a big store that's providing customers with great prices on turkey, like the example Mr. Wade gave, and all of a sudden an even bigger giant came along, from the U.S., say, and started that whole approach against your superstore on the east coast? Can you see the analogy I'm drawing here? Can you see the problem that might develop for the superstore?

We can say that it's great for the consumer and the prices are going to be low and all this kind of stuff.... Well, yes, they're low while Mr. Wade is still in operation, fighting tooth and nail to make it, but as soon as Mr. Wade is gone, what's going to protect the consumer from your prices going right back to where Mr. Wade's were—plus 10¢ because you have to make up for all the losses you made trying to put Mr. Wade out of business?

Mr. Nick Jennery: If you'd like me to comment, I think that if you're referring to the predatory pricing where there is an intent to lessen competition, there is a framework there to deal with that. As I mentioned in my comments, we are dealing with new competitors in the marketplace, offshore competitors that have operations that are substantially bigger than any Canadian operation. In fact, there is one that is twice the size of the Canadian industry.

Mr. Stan Keyes: On that point, are you satisfied that the framework in the Competition Act will provide you with protection against those giants if they come in on you?

Mr. Nick Jennery: Yes, we are.

Mr. Stan Keyes: You think you can protect yourself?

Mr. Nick Jennery: We feel that—

Mr. Stan Keyes: Mr. Wade wasn't able to do that and independent gas retailers weren't able to do that, but you think you can.

• 1120

Mr. Nick Jennery: There are a lot of stories of casualties and successes. New independent retailers have grown, have thrived.

Our business is a rapidly evolving, changing business. The supermarket is no longer a purveyor of grocery products. It's a supplier of banking services, dry cleaning, video.... The “convenience store” is no longer really a convenience store. They're getting into prepared products. They're getting into fast food. They're getting into ready-to-eat meals. That is where consumer demand is going. It is changing our shopping. Probably your purchase and procurement habits have changed over the years, as have mine.

The smart entrepreneur, the grocery retailer, tries to anticipate that and gear their business to it. We realize that we will never be able to compete on price alone because of the investment that we have in bricks and mortar, but we do think that we can continue to thrive and survive and grow our industry, because we understand the consumer. We figure we understand the consumer—

Mr. Stan Keyes: I understand. Sorry to interrupt, but I only have five minutes—

Mr. Nick Jennery: Sure. I'm sorry.

Mr. Stan Keyes: —so I have to pop in sometimes.

The Vice-Chairman (Mr. Eugène Bellemare): Last question, Mr. Keyes.

Mr. Stan Keyes: Thank you, Mr. Chairman.

I understand the diversification of an independent grocer or whomever, and what he has to do; you say that it's the new consumerism and they're looking for that banking machine outlet in their store or they're looking to buy a dozen flowers and walk over to the other part of the store and buy a hammer if they need one.

But I would contend that probably Mr. Wade had to go to his dad and say, look, we have to put a banking machine in here or we have to put the flowers in here or we have to sell hammers now, because we're not going to cut it just selling groceries—we can't be just a grocery store any more. If that's the case, so be it, but why did that come about? Did it come about because the consumer wanted it or was it because the giant came in next door and it was “Maxi-Plus”? Not only do they sell tomatoes, they sell nylons.

Mr. Nick Jennery: There is no doubt that consumer demand has changed. The one-stop shopping, the consumer's expectation of a grocery store, has changed over the years. There is a lot of consumer research to back that up.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Keyes.

[Translation]

Mr. Dubé, it's your turn.

Mr. Antoine Dubé (Lévis-et-Chutes-de-la-Chaudière, BQ): I did not hear Mr. Wade's presentation, but he ended by saying something that interested me. He said that the aim of the present Competition Act is clear, but that there are problems with enforcement. I would like him to tell me about those enforcement problems. Can he identify them and say where they come from and what causes them? If so, how can we correct and overcome these enforcement problems? Other witnesses may want to speak to this as well.

Mr. McTeague wanted to resolve the problem, but perhaps his solution does not work for all sectors, especially the food sector. I would like to hear what you have to say on it.

[English]

Mr. Fred Wade: When we approached the Competition Bureau regarding our allegation of predatory pricing in Nova Scotia, we came to Ottawa. We met with them on a couple of occasions. I provided inside information, probably 30 pounds of pricing information, price books, price lists, and price checks, and I got the impression from the Competition Bureau that they had never had such a wealth of inside information given so freely by an insider. They turned it over to a staff economist to have him analyse the level of pricing and compare pricing between Ontario and Nova Scotia.

Two weeks later, I talked to that economist on the telephone. He stated to me that in his mind the evidence was clearly predatory, that there was no other word for it, but he also cautioned me. He said, “I'm only drafting a report. Now, what my superiors do with this report is up to them. I can only pass on the report.” Since that time, of course, the superiors decided that they could not proceed any further unless I produced written evidence or an executive who stated, “Yes, we definitely intended to put somebody out of business.” I found that very difficult to achieve.

I requested a copy of that report in order to see exactly what wording the economist used, and I was refused access to it. All I have is what I was told on the phone, and I took great comfort from the fact that other people believed what I was saying. I still would like to see what that report says.

May I point out that—

The Vice-Chairman (Mr. Eugène Bellemare): Excuse me. Could you not get that through access to information?

Mr. Fred Wade: That is an avenue, I guess, that I will have to follow up.

Mr. Janko Peric: On a point of order, Mr. Chair, could we not have our clerk request that?

The Vice-Chairman (Mr. Eugène Bellemare): Why not?

• 1125

Mr. Fred Wade: May I say that I agree with many—

The Vice-Chairman (Mr. Eugène Bellemare): Mr. Wade—

Mr. Fred Wade: Yes, sir.

The Vice-Chairman (Mr. Eugène Bellemare): —I think I will ask the clerk, the greffier, to request a copy of that report. I warn you, though, that they may say that it's an internal discussion and we may not be able to get it, but the request will be made by our clerk.

Thank you very much.

Mr. Dan McTeague: I realize that I am not a member of this committee, but we are parliamentarians, and if we request something, it should be given forthwith.

The Vice-Chairman (Mr. Eugène Bellemare): Don't draw the conclusion right away. We are making the request.

Mr. Wade, I'm sorry for that interruption.

Mr. Fred Wade: I was just going to say that I agree with many of Mr. Jennery's comments, in that consumers should be able to decide where they wish to shop, based on goods and services and so on, but it must be a level playing field. When one competitor is allowed to set their prices many percentage points below their landed cost for an indefinite period of time, that is artificially depressing the market.

Yes, it will garner market share, which is their primary objective, but it will also serve the purpose of eliminating competition, of eliminating small business, which is the backbone of Canada. My company, my family, provides the corpse. We provided the evidence to the Competition Bureau that this was happening, but no one was able to do anything about it, so it is not working.

[Translation]

Mr. Antoine Dubé: Obviously, I cannot verify what you are saying, but given your experience, I will take you at your word. You are saying that there is an operational problem in the Competition Bureau. That is not a problem with the legislation, but an operational problem. In your opinion, is the problem due to a lack of staff? Your answer goes further. It almost implies that someone has provided a report, but that someone higher up in the hierarchy decided that it would not be published. If I was in your place, I would say that the management information mechanism should be more transparent. Is that what you mean?

[English]

Mr. Fred Wade: I think the people at the Competition Bureau were being quite candid with me. They indicated that such a prosecution is a criminal prosecution. It's considered a very big deal when you criminally prosecute a large Canadian corporation for predatory pricing. It was not going to be taken lightly by the bureau.

Also, it would require tremendous resources on the part of the bureau, possibly a year and a half in litigation and millions of dollars, $2 million, possibly, to proceed. They did not want to proceed unless they felt very confident that they would achieve a conviction. I believe that they were quite gun-shy because they had just lost a similar prosecution in the petroleum industry. I think they were very demoralized by that. They were not at all eager to try the courts again. I believe that was their key feeling.

[Translation]

Mr. Antoine Dubé: That is a bit like what we see in the United States. Criminal litigation can take longer because there are appeal processes, etc. Finally, there are some situations that get very complicated. One of the aims of Mr. McTeague's bill is to ensure that criminal rather than civil proceedings are used. In Canada, civil proceedings for business activities come under provincial jurisdiction. That is not an easy route.

I would like to ask the other witnesses a question. Do they agree that it is appropriate to use criminal proceedings to resolve business problems, as Mr. McTeague does in his bill?

The Vice-Chairman (Mr. Eugène Bellemare): That is your last question, please, Mr. Dubé.

Mr. Antoine Dubé: It is the same question. I am trying to make it more understandable.

• 1130

[English]

Mr. Nick Jennery: Yes, I understand your question. I don't think I'm trained and skilled enough to talk about whether the remedy should be criminal or civil, but I would point out that I think while everybody shares concerns about competition.... Perhaps I didn't correctly answer Mr. Keyes' question about whether we are concerned. The fundamental question is, does Bill C-235 help this situation? My sense is that it takes away some very important flexibility from everybody who plays in the marketplace. You have less tools in your bag in order to compete. I think that's the key question.

Mr. Robert Morton: I don't have the legal expertise to provide a full comment on that, but basically I'm in agreement with Mr. Jennery's comments.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Dubé.

[English]

Mr. Lastewka.

Mr. Walt Lastewka: Thank you, Mr. Chair. Before I ask my question, I should tell you that I come from an area where independent grocers and big box stores open up and close on a continuous basis. It's called the Niagara area. I see this all the time.

Mr. Wade, in your area now, if I understand correctly, both Sobey's and Loblaws are there. Do they compete head-to-head?

Mr. Fred Wade: Previously they have. Now that the market is down to two players, if I were in their shoes, I would tend to back off on the competitive pressure a little. I'd have some losses to recoup and I'd own 50% of the marketplace, so it's not required for me to go toe to toe to try to get more than 50%. I'm splitting half the pot. That's a lot more than I had prior to the merger. Therefore, now let's concentrate on making money.

Mr. Walt Lastewka: But if I understand correctly, they still compete head-to-head for market share.

Mr. Fred Wade: No, I would not say so. I would say that the competition has lessened dramatically. In my marketplace, there were four or five competitors: Sobey's, Loblaws, myself, and other independent grocers. Now there are two.

Mr. Walt Lastewka: Yes, but....

Mr. Fred Wade: I know what you're saying. No, the level of competition is not as high. If you check my sample prices—

Mr. Walt Lastewka: On my last visit to the area, I think I saw very good competition on prices between the two. You're saying there isn't?

Mr. Fred Wade: The merger hasn't gone down yet. The dust from the proposed merger hasn't settled yet. If we come back two years hence, I think you'll find a dramatic difference in the competitive situation. Will Nova Scotia prices be 17% lower than Ontario's? No.

Mr. Walt Lastewka: No. But if the majors decide to increase their prices, that then allows the independents to come back in and take away some of the competition.

Mr. Fred Wade: No.

Mr. Walt Lastewka: You don't think that happens?

Mr. Fred Wade: No, because what happens when an independent tries to come in and buy from Loblaws is that he will charge me $1.33 for bleach and he will sell it for 69¢ as long as it takes in order to get me to give up the ghost. For me to open, to try to get back into the business, it will cost me anywhere up to $10 million, for one store only, and then I need an infrastructure of a distribution system. I have to buy from somebody. If I buy from Loblaws or from Sobey's, I'm at the mercy of what they're going to charge me. I've given evidence here of the way they have treated independents in the past. That 69¢, which was touted as the everyday low price, week in, week out, is now $1.29. That is before the merger has finished.

Mr. Walt Lastewka: Mr. Jennery and Mr. Morton, you're familiar with the situation across the country or in many areas of the country. My perception is that the consumer does win with lower prices, because the minute the larger stores start to increase prices there are new entries, and the competition continues. At least that's what I've seen. Is that your understanding of what happens?

Mr. Nick Jennery: Correct. The grocery industry is a story of how a successful player or store from that has built a business. Sometimes, along with that, they build up an infrastructure, which sometimes raises costs and perhaps leaves the door open for a lower cost format store, a club store, a big box store, something where the overhead is not as big, to come in and compete on price alone. That's a natural evolution that continues; it's been going on for decades.

• 1135

If you look at even the top six, which represent about 75% of the grocery distribution network...but that's only within grocery and doesn't take into account the fact that drugstores have about 10% of the market share, mass merchandisers have about 10%, and all of these new players.... They have substantial wholesale operations, and in some of the business arrangements, which are extremely complex and varied between the wholesaler and the independent—and I would leave it to CFIG to perhaps expand on that if necessary—in some cases the wholesaler gets his money only when there is a sale at the independent retailer's. There's a very real incentive to support the independent retailer.

These business arrangements all vary across the country and, again, I will say that there is that continuous evolution of casualties and new players that come in, such as you describe.

Mr. Walt Lastewka: Is there any difference? Is the Annapolis Valley situation different from that in other areas of the country?

Mr. Nick Jennery: To a grocer, probably. Yes, absolutely. The grocer is the touchstone for what the consumers want. He or she knows those consumers in terms of buying habits. All of the major players and a lot of the minor ones have loyalty programs. They have consumer databases. That's their business. That's how they compete: by knowing who walks in your store, what they want, when they want it, and at what price they want it.

Mr. Walt Lastewka: But is that any different in the Annapolis Valley versus the Hamilton area?

Mr. Nick Jennery: My only point is that perhaps with respect to the consumer base and the shopping habits, the Annapolis Valley could be different from Hamilton—or from Sudbury or downtown Toronto.

Mr. Walt Lastewka: But the systems in place—

The Vice-Chairman (Mr. Eugène Bellemare): Your last question, Mr. Lastewka.

Mr. Nick Jennery: I would venture to say yes, pretty much.

Mr. Walt Lastewka: Mr. Morton, do you have any comment before he cuts us off?

Mr. Robert Morton: I only have the comment that independent and franchise grocers survive by identifying and meeting the needs of their customers in niche markets. Anything that's going to make it more difficult for our members to meet those niche needs is going to cause concerns, and that's why Bill C-235, which could potentially mean that some of the distributors would decide not to provide our members with goods, is particularly troublesome to us.

But I also want to make it clear, to return to the major point I made during my presentation, that we believe the problem here is the interpretative guidelines. If they are broadened appropriately through a review by this committee, it's our understanding that the Competition Bureau would be in a position where they would have to more fully examine Mr. Wade's situation.

Mr. Walt Lastewka: Thank you.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Lastewka.

[English]

Mr. Walt Lastewka: Thank you, Mr. Chairman.

The Vice-Chairman (Mr. Eugène Bellemare): Mr. Chatters.

Mr. David Chatters: Mr. Chairman, I hear again and again that the way to solve the problem is not to attack certain players, the large players of fully integrated companies in whatever, whether it be groceries, energy, or telecommunications. The problem lies with the Competition Bureau and its failure to protect competition to some degree.

Despite the evidence that we saw, that Mr. Wade presented, the Competition Bureau didn't prosecute that particular company, and that's bothersome. We in fact have that structure in place that's supposed to do a job and that doesn't appear to be doing the job, for whatever reason, whether it's because they're gun-shy because they lost one case—that's a feeble excuse, if that's the case. It would be more troublesome to me if there is perhaps political influence by the major players or something of that nature. Is that a possibility?

You talked about broadening the guidelines. I can't see how broadening the guidelines will motivate the Competition Bureau to prosecute in a case like Mr. Wade's. It has to be something more than simply broadening the guidelines; it has to be a bulldog mentality to go after these people and to be willing to take your chances in court, it seems to me.

Any one of you could comment on that.

Mr. Robert Morton: I'll just make a quick comment, but I would agree that it's something that you should ask the Competition Bureau about when they reappear here, on Thursday, I believe. It's a matter of the broadening. Through your investigation of how those interpretative guidelines could be broadened, you could address your question of how you can get them to actually enforce these things a little bit more willingly. That's something that only they can answer. I'm sorry, but I can't answer that for you.

• 1140

Mr. David Chatters: Truly, as Mr. Keyes said, I'm really pleased that the Competition Bureau is coming back, because there are certainly questions we have now that we didn't have when we had them before us earlier. I think they need to answer some of these questions.

I really don't have any other questions, Mr. Chairman.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Chatters.

We will go now to Mr. Ian Murray.

[English]

Mr. Ian Murray (Lanark—Carleton, Lib.): Thank you, Mr. Chairman.

Mr. Wade, you had a very compelling presentation. I think I'd go so far as to say it's rather disturbing. You may have noticed there seems to be a consensus developing—in this room, at least—that we should be taking another look at the Competition Act. When they appeared before us earlier, they told us they have all the tools they need to do the job. I think we can dispute that statement.

We've had a very even-tempered presentation from Mr. Morton, positioned in a very helpful way.

I don't think any reasonable person can look at the list of prices you've presented to us, Mr. Wade, and not assume that it's predatory pricing, although I have one question, without wanting to get into the minutia of retailing. I was reminded of a visit I made to the grand opening of an expansion of a store in my riding a few years ago. It was one of those Your Independent Grocer stores. I told the owner that I was uncomfortable buying his specials because they were so cheap. I thought I was taking advantage of him. He said not to worry, that he gets rebates from the manufacturers on all of those specials.

Is that the case? In the examples you cited, perhaps Loblaws was getting rebates from manufacturers, perhaps it wasn't just a question of the wholesale price but also of some extra help.

Mr. Fred Wade: Determining your actual landed cost is very difficult in the grocery industry because there are many under-the-table deals, inside deals, manufacturers' rebates, special allowances, and so on. There's nothing dirty about it; it's just the way they calculate the price they're going to charge you. It's just like the automobile dealer saying that a vehicle is $1 over invoice cost. The invoice in the window is not what he's paying. He's getting inside money and his actual landed cost is lower than that.

However, the prices were so low in Nova Scotia that even though I am not privy to Loblaws' actual landed cost, there was no doubt in my mind or my peers' minds that it was way below their costs. There's no way that they were buying that much lower than we were able to buy direct from the manufacturer. In fact, we were told that in certain stores they were prepared to sustain multi-million-dollar operating losses for an indefinite period of time until they achieved the market share that they felt they needed to have.

Mr. Ian Murray: Thanks.

Mr. Jennery, you mentioned that there is a growing number of retailers, that there are many more locations and distributors now for members of your association to service. Let's use National Grocers as an example. It's relevant today because we're talking about a Loblaws operation in the Maritimes, and National Grocers probably has a significant, if not major, portion of the distribution business in Canada, at least in Ontario, I would think.

It struck me that perhaps distributors are now in the position of deciding where independent retailers will locate. I'm not sure if I can spell this out to make sense, but obviously in the case of Mr. Wade's family business, the distributors were able to decide, through their retailers, that they did not want to have an independent store operating there. I'm just throwing this out as a question, which I know is probably very difficult for you to answer, but do you think there's any truth to the idea that distributors can have kind of a decision-making role in where independents are allowed to locate in this country? Because they can decide to step in themselves at any given time, thanks to their deep pockets, and set up their own store in competition.

Mr. Nick Jennery: I don't think anybody in this room can comment on the actions of an individual. We just don't have that knowledge base.

I think wholesalers, independent retailers, and vertically integrated companies are experts at understanding the shifts in demographics, in “cycle graphics”, where people are located, and where you think you can sell what types of grocery products. You'll see changes in any one of the areas represented around the table, changes in store formats and changes in store locations within a marketplace. That's happening all the time and will continue to happen all the time. Those populations change and those populations grow.

• 1145

Can they be the sole influence? I don't think so. I don't know that. I would say, though, that they clearly have expertise in where they think the volume of business can be best obtained and in how best to service the community. The retailer is the touchstone with the community. That person, that store manager, lives and breathes touching his or her community. They're a huge influence on where a store could be located.

If I may, I will just quickly comment on the promotions. These can be retailers' promotions, manufacturers' promotions, and wholesalers' promotions. They could be seasonal inventory clearance promotions, general promotions, and cross-promotions. There's a plethora and a wide variety of promotions and features—for a whole lot of difference reasons too.

Mr. Ian Murray: Thank you.

Mr. Wade, do you want to comment on that as well?

The Vice-Chairman (Mr. Eugène Bellemare): Mr. Wade.

Mr. Fred Wade: Yes, I just wanted to point out that, really, the true independents are very rare in Canada. There are very few left. What is bandied about as an independent is really someone who franchises the store. They don't own the land. They don't own the program. Their name isn't over the door. Basically, they manage the store. They are told what prices to put on their goods and how to operate under their program. It's a very strict program.

I classify an independent as the breed that's gone, as one that owned the land and the store and called their store what they wanted. A little bit less than that is someone who operates their own program; they determine what they're going to sell it for in their own price program, under their own name, and so on. There are hardly any of those left in Canada—very few.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): We will now go to Mr. Dubé.

Mr. Antoine Dubé: I would like to ask Mr. Wade a question. You were an independent. You were an owner, were you not?

[English]

Mr. Fred Wade: I was.

[Translation]

Mr. Antoine Dubé: In your representations, did you consider using the services of an association representing people like you? First of all, is there an association of independents?

[English]

Mr. Fred Wade: I was on Mr. Morton's board of directors for the CFIG for two different terms for a total of eight years. The CFIG came with me to Ottawa. We appeared before another parliamentary committee in 1995-96. We met with the Bureau of Competition, and at that time the CFIG was of great assistance in trying to get the bureau to act.

I think that the membership makeup of the CFIG has changed a great deal and that now a majority of the members are franchisees of either Sobey's or Loblaws.

I'm sorry, Mr. Morton, but I think you're wearing a pair of handcuffs with regard to how much you can speak out against the large wholesalers, because a great deal of the membership is made up of people who do business with Loblaws or Sobey's.

[Translation]

Mr. Antoine Dubé: I would now like to ask Mr. Morton a question. Do you have any reaction to what Mr. Wade has just said? Do you feel handcuffed or constrained?

[English]

Mr. Robert Morton: At this time, I can just reiterate our point that I made earlier. It's our belief that the issues Mr. Wade has mentioned at this committee could have been addressed by the Competition Bureau with the expanded interpretive guidelines.

[Translation]

Mr. Antoine Dubé: Before the Easter break, we met with an association equivalent to yours in the petroleum products industry, the association of petroleum sector independents. Their views were quite different from yours. They strongly supported Mr. McTeague's bill because they felt that the Competition Act did not have what it took to protect them.

You work in the food industry. Does your association have contact with associations in other sectors, such as the petroleum industry? If so, what stage are your discussions at?

• 1150

[English]

Mr. Robert Morton: We don't communicate with them on an ongoing basis; it would be on an issue-by-issue basis. I can't comment on their particular position because we are the grocery industry, which, in terms of structure, is significantly different from the oil industry. Our position might be different from theirs, and that's just the way it is, given our structure in our industry.

[Translation]

Mr. Antoine Dubé: All right.

The Vice-Chairman (Mr. Eugène Bellemare): Very well.

Mr. McTeague.

[English]

Mr. Dan McTeague: I want to pick up from what Monsieur Dubé has just said.

Mr. Morton, I have to say I feel sorry for you. I think you're both handcuffed and muzzled.

I just want to know if the position you have currently with respect to current status of the mergers that have occurred.... Of course, these mergers were announced subsequent to the House of Commons voting on the bill and certainly intensified the interest of the committee as well as that of most people in the House of Commons. Do companies like Loblaws and Sobey's control many of your federation's members to the point where they could easily put your members out of business if they really wanted to?

Mr. Robert Morton: I'm just going to comment by saying that with respect to the proposed mergers, we have made our concerns known very clearly to the Competition Bureau.

Mr. Dan McTeague: Yes, we've heard that, Mr. Morton, but I'm concerned that your position here, as evidenced by the comments by Mr. Wade and some of the other comments of interest to the members, is that you're in something of a feudal position, whereby your overlords now can pretty well tell you on what terms you're going to survive. Mr. Wade, as a former member of your board of directors, has suggested that the true independent simply doesn't exist. There are a number of analogies to other industries, which we have discussed before this committee.

I'm wondering if, really, this position has you at a point where, yes, you can talk about what you did last year, and surprise, surprise, nothing happened, and I'm wondering if there would otherwise be a more forceful argument by your association if they were not really burdened with the yoke of having the wholesaler control you and your membership.

Mr. Robert Morton: I can just state that our position has the full support of our board of directors as well as that of a number of large independent grocery store operators.

Mr. Dan McTeague: Just for the record, you mentioned Fred Longo of Longo's foods. I just want to make sure it's on the record that you said you were supportive of his position.

Mr. Robert Morton: Anthony Longo. Yes.

Mr. Dan McTeague: Yes. You've also spoken to Charlie Coppa of Highland foods. I notice that you didn't mention his name.

Mr. Robert Morton: Within any large organization such as ours, there are dissenting opinions on certain issues. It's the same with any large organization.

Mr. Dan McTeague: We're interested in the source of that dissent, but I think it's become very clear, and I thank you for your response.

Mr. Jennery, can you tell this committee how many independent wholesalers of grocery products there are in the greater Toronto area today as a result of the mergers that your members have announced?

Mr. Nick Jennery: How many independent...?

Mr. Dan McTeague: How many independent wholesalers of grocery products are there in the greater Toronto area today?

Mr. Nick Jennery: It depends on how you define “independent wholesaler”. There are wholesalers of a variety of products. Some offer complete lines. Some do not offer complete lines.

Mr. Dan McTeague: I'm talking about the complete line, Mr. Jennery.

Mr. Nick Jennery: I couldn't tell you.

Mr. Dan McTeague: Well, Mr. Jennery, this is very interesting, because a number of articles suggest that there is just one in all of the greater Toronto area, so three million people plus are now subordinate to the dictates of one single, simple supplier.

Maybe I could ask you another question that might help expand this view. Your committee—you—were particularly critical of Bill C-235 prior to the vote at second reading. Subsequently, the House of Commons and this committee learned that two of your council members, Loblaws and Sobey's, formally announced substantial mergers with Provigo and the Oshawa Group respectively.

Could you inform this committee and let us really know here what control you now have of the wholesale and retail markets a result of these mergers in the Atlantic provinces, in Quebec and in the Ontario regions?

As well, do you believe that your initial decision by your council to oppose Bill C-235 strengthened or weakened your members' mergers intentions?

Mr. Nick Jennery: I think it's absolutely inappropriate to comment on the mergers and acquisitions that are currently before the bureau. These transactions and discussions have not been completed.

Mr. Dan McTeague: Your members have, for all intents and purposes, suggested that they are. When I phoned your offices, there was a suggestion that they have already taken place, notwithstanding the Competition Bureau.

In fact, Mr. Vice-Chairman, members have gone as far as to report earnings of companies that have merged in their third-quarter reports.

So I'm not using the Competition Bureau; I'm basically using your own information that you're supplying to the public in general and to shareholders.

Mr. Nick Jennery: I would beg to differ with the members' comments. We have never commented on the mergers and acquisitions and the fact that they are complete and a done deal.

• 1155

Mr. Dan McTeague: Mr. Jennery, how concerned is your council about the concentration of Canada's grocery industry? Are you worried that the industry will end up really dominated entirely by just two players? I say that in the context of whether you can confirm or deny whether one member of your group, Loblaws, is currently undergoing negotiations with Overwaitea and Save-On Foods to control or dominate the western Canadian marketplace.

Mr. Nick Jennery: There is no substance to the rumour that you've just put on the table. There is no fact to suggest that those negotiations or those deals have actually gone on. Certainly I'm not privy to any of that information. I would, just for the record, correct something. Three million people are not serviced by one wholesaler. They never have been and, in my opinion, they never will be.

Mr. Dan McTeague: Mr. Jennery, I guess our concern as a committee and my concern as a member who sponsored this bill is the notion that you seem to be advancing, which is totally erroneous, that this somehow eliminates the notion of loss leader or that you can't have a promotional sale, or that somehow the volume in question is not considered.

I'm wondering how you can perpetuate this belief, knowing full well, if you or your lawyers have read this, that they can simply invent these things out of thin air. Do you really understand the bill, Mr. Jennery? Does your legal counsel really understand the bill and what it really defines as a standard of predation under which a dominant player, a vertically integrated dominant player, would be in a position of absolute power and control over the price structure if left unchecked?

Mr. Nick Jennery: I recognize that while the bill has undergone a number of changes and amendments.... But I do recognize that a fundamental piece of the bill is that it has linked the retail price to the wholesale price, and that is the basis of my comments.

Mr. Dan McTeague: Mr. Chairman—

The Acting Chairman (Mr. David Chatters (Athabasca, Ref.)): Your time is up, Mr. McTeague.

Mr. Dan McTeague: Thank you.

The Acting Chairman (Mr. David Chatters): Mr. Dubé, do you have more questions?

[Translation]

Mr. Antoine Dubé: I would like to give Mr. McTeague time to finish his questions.

[English]

Mr. Dan McTeague: Do we have an hour left here? It says according to the schedule that it's from 11 to 1 o'clock.

A voice: I won't argue that.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. McTeague.

Mr. Chatters is next.

Mr. David Chatters: I have no further questions.

The Vice-Chairman (Mr. Eugène Bellemare): Then the next person is Ms. Barnes.

Mrs. Sue Barnes: Thank you.

Thank you for your testimony.

I represent a largely residential riding in the city of London, Ontario, which is known as a test centre, often for all of Canada. A lot of people market there. It's interesting: my own observation in my own riding is that many of the superstores—and this may be different from Mr. Wade's experience—actually close. Those that were into the bulk goods have shut down. They open for a short time and they shut down fairly rapidly. The new larger stores that have opened are nearly what I'd call entertainment. They have live music playing, they offer cooking instruction, and you go through rows and rows of very prepared foods, certainly, I think, reflecting the demographics of my riding—people who are probably looking for quick meals.

But what's the most interesting to me and what I'd like to ask the independent grocer representative about is the successful cropping up all over my largely residential riding, and within 10 blocks of my own home, of two bakery stores doing just breads—I'm not talking about cakes—of one specialty cheese shop, of a gourmet butcher, of a greengrocer and fruit.... I think of them as independent small business people, because I know our federal government has even supported them on the SEA operations—taking unemployed people and putting them out there. With respect to their supplies, would they be part of your organization? They seem to be doing a booming business.

Mr. Robert Morton: Our members are service grocery stores.

Mrs. Sue Barnes: Where would they get their supplies? Would they come from people like your suppliers, Mr. Jennery?

Mr. Nick Jennery: Possibly.

Mrs. Sue Barnes: All right. All I'm saying is that I think the divergence across Canada is there right now, and I take your point: that it is, like every other industry that could be affected by this bill, an industry in great transition, and different type of players are meeting the demographic needs. I'm really pleased you're here because, like the gas industry that prompted this bill, you are run on large volume with small margins, and I think that's really important to realize.

Mr. Jennery, you were very clear about the state of the Competition Bureau, about it being capable of managing the problem.

• 1200

Mr. Morton, in my mind today you've been less clear, and your testimony, especially your written testimony, hedges on the fact that yes, you think the tools are there under the Competition Act right now, but if you got better guidelines or better interpretative models.... The reality is that the members around this table are very concerned in this area. We are faced with making a clause-by-clause decision probably as early as Thursday.

So even if you got your review and even if you got wider interpretive guidelines, I'd ask you a question. Perhaps it's not going to be possible for you to answer it, but I'm going to ask you a question. With the tools and the act as it stands right now, making an assumption, perhaps, which may or may not be accurate, that they are properly applied or are applied in a reasonable manner, are there the tools under the bill that you would find acceptable to meet the challenges that are out there for people? What is your position? Because I find you sort of sitting on the fence, and I need to know.

Mr. Robert Morton: Well, just let me say that of course the act is probably not perfect, but if you were to expand those interpretative guidelines it would certainly make things a lot easier for our members.

Mrs. Sue Barnes: I'm sure it would. My question to you is this: are the powers in the Competition Act enough protection for you right now? Knowing full well that I'm one member around this table that has to vote on this bill, clause by clause, in a couple of days....

Mr. Robert Morton: Do you mean do we think that you should support Bill C-235?

Mrs. Sue Barnes: You're somehow saying that even though you understand the good intentions, you don't support the bill as it's currently drafted.

Mr. Robert Morton: No, we don't support the bill as written, because it doesn't solve the problems it's intended to solve.

Mrs. Sue Barnes: All right.

Mr. Robert Morton: Sorry if that wasn't clear. I hope it's clear now.

Mrs. Sue Barnes: Okay. That's what I needed to hear. It sounded more to me—and I had to be clear on this—like you were saying that if we fixed the interpretative guidelines, it would be better, and I'm saying to you that on Thursday it won't be fixed, that there won't be any interpretative guidelines. My question to you was, knowing that there's no fixing of any guidelines on Thursday, would you support this bill?

Mr. Robert Morton: No.

Mrs. Sue Barnes: Thank you. That's what I needed to know.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Ms. Barnes.

Mr. Dubé.

Mr. Antoine Dubé: I would like to ask the Canadian Council of Grocery Distributors for a piece of information. How many wholesalers are there supplying Toronto and how many supplying Montreal? If it is too difficult to give figures for specific cities, just give me the numbers for Ontario and Quebec.

[English]

Mr. Nick Jennery: I couldn't give you a definitive number. I can say that if you look at the top six grocery distributors, five of them are vertically integrated and have significant wholesale operations. But there are a lot of regional wholesalers, both on the retail and the food service sides of the business.

[Translation]

Mr. Antoine Dubé: Fine.

I would now like to ask the Canadian Federation of Independent Grocers how many individual grocers and how many franchises they have among their members. If you don't have numbers, you could give me percentages.

[English]

Mr. Robert Morton: Our total membership is in the range of 3,600. As for the number of franchisees, I couldn't tell you exactly what the number is, but it's a very high proportion.

[Translation]

Mr. Antoine Dubé: What would be the approximate percentage?

[English]

Mr. Robert Morton: I wouldn't want to make a guess and be wrong on that.

[Translation]

Mr. Antoine Dubé: Could you provide that information to the committee after you do your research?

[English]

Mr. Robert Morton: Sure.

[Translation]

Mr. Antoine Dubé: By Thursday? Thank you.

I would now like to ask the representative of the Canadian Council of Grocery Distributors what the market share is of the five wholesalers he is talking about.

[English]

Mr. Nick Jennery: It depends on how you calculate it, but—approximately—the top six represent about 75% of the marketplace. You have to understand that's only of grocery distribution; that's not the distribution of grocery products. For grocery products, you have to take into account drug stores, mass-merchandise stores and convenience stores. There are a lot of other distribution channels, and that percentage is just of that one segment of that pie.

• 1205

[Translation]

Mr. Antoine Dubé: You say 75%. Is that percentage increasing or decreasing, or has it been stable for some time?

[English]

Mr. Nick Jennery: Notwithstanding the current mergers and acquisitions, it has been stable within a couple of percentage points, but what has happened is that this sector has lost an overall amount of business to new formats. The club store, for instance, is one format that has taken a substantial amount of market share within the last seven or eight years. The drug stores' percentage has grown as well, and if you walk into any of these mass merchandise stores you'll see they have bigger amounts of square footage devoted to selling grocery products. Gasoline stations is another one.

Mr. David Wilkes (Vice-President, Ontario Region and Trade Relations, Canadian Council of Grocery Distributors): If I may just add to that, too, let me say that it's not only at this end of the market where the changes are going on. The point that Ms. Barnes made is that it's at the bottom end as well, if I can use that terminology; there are the specialty stores, the bakeries, the delis, the niche players. The market is a very dynamic marketplace. The grocery segment is facing competition from both the niche players, as Ms. Barnes described, and the big boxes that Mr. Jennery's been talking about. So I think it's important not to view it in isolation.

[Translation]

Mr. Antoine Dubé: I am not an expert in your field and I would like to know if the six wholesalers are mainly Canadian owned or if there are also foreign interests.

[English]

Mr. Nick Jennery: I'm not entirely sure of my facts. I could make an educated guess, but I'd rather be sure of my facts. I would tend to say no, but I would like an opportunity to correct that, based on annual reports and ownership and shares and that type of thing.

[Translation]

Mr. Antoine Dubé: All right.

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. Dubé.

Do you have one last question, Mr. McTeague?

Mr. Dan McTeague: Yes, like always. I found this presentation quite interesting.

[English]

Mr. Jennery, you stated that five of six of your major players or members are vertically integrated majors. Could you tell us what percentage of the Canadian market they currently control—that is, your membership—roughly speaking?

Mr. Nick Jennery: Again, you're getting into a complicated area of definitions, because they're in competition with other distribution channels, so if you're looking at people who just go to grocery stores or people who buy grocery products, they're very different pieces. As an approximation, supermarkets have between 65% and perhaps approaching 70% of the business as a format alone.

Mr. Dan McTeague: I don't want to go in circles here, but I want to understand this. Your membership, the people that you represent, are retailers and at the same time wholesalers—

Mr. Nick Jennery: Correct.

Mr. Dan McTeague: —in that they not only sell to themselves, they will sell to others, like, for instance, many of the former and now a few of Mr. Morton's representatives.... So there is a relationship currently, wherein you're not only competing as a box store or as a supercentre or whatever the case may be, you're also selling to the few that are out there who would compete against you. Is that correct?

Mr. Nick Jennery: Correct.

Mr. Dan McTeague: That share is, in your estimation, in the 60% or 70% range right across Canada right now?

Mr. Nick Jennery: No. The 65% range related to a Statistics Canada definition of what a supermarket store is, whether it's independently owned or whether it's owned by one of the larger chains.

Mr. Dan McTeague: Okay. So I understand that Loblaws does not wholesale except to its franchise stores, i.e., its own stores. Correct?

Mr. Nick Jennery: Yes. I'm not familiar in infinite detail with the business transactions of individual members. As a trade association, we comment on the overall trends of the industry.

Mr. Dan McTeague: Two members of your association were Sobey's and the Oshawa Group, up to the time at which the mergers were announced—

Mr. Nick Jennery: Correct.

Mr. Dan McTeague: —and we can argue about whether it's accepted or not, but they were the only full-line wholesalers in the Toronto area. Now that they've merged, once it's approved, if it's approved, that would mean one. Is that correct? There would be one wholesaler in the Toronto area for full-line wholesaling.

• 1210

Mr. Nick Jennery: I'm sorry. I cannot confirm that.

Mr. Dan McTeague: All right.

Maybe I could make one final point, Mr. Chairman, if I'm given the opportunity. I just want to make sure that my time is not running out precariously here.

The Vice-Chairman (Mr. Eugène Bellemare): A very quick point.

Mr. Dan McTeague: It is.

With respect to CFIG, Mr. Morton, it appears that 70% to 80% of your members.... Actually, maybe I should ask this of Mr. Wade, because I think he can shed some light on this.

These so-called independents are locked into—we talked about it—franchise agreements. How important is a franchise agreement in separating what your wholesaler wants you to do from what you can do as your own store manager or would-be owner?

Mr. Fred Wade: It would depend on the individual franchise agreement, but typically, in the agreements that I'm familiar with and have seen, you don't have much choice at all as to how to run your business, other than opening the doors, greeting customers, making sure things are clean and well-stocked, and so on. That's the extent of how you manage your business. Everything else is controlled—and controlled very tightly—by head office, and you do not deviate from that if you wish to remain in business.

Mr. Dan McTeague: What if, Mr. Wade, you wanted to come into Canada and you saw a situation in which the landscape of the Canadian grocery industry, retail and wholesale, was controlled by a few dominant players? Let's say that you wanted to get into the marketplace, and you wanted to work as hard as you can. How could you do it if the price structure, if the status of those wholesalers-retailers, the vertically integrated suppliers, is so strong and so profound? How would you manage to break in and break their stranglehold on the marketplace? Could you?

Mr. Fred Wade: That's why I'm here today. It's because of my concern with how the food industry and the retail industry are going in Canada—and including the petroleum industry.

Let's say that after the mergers take place we have two large, dominant players controlling the vast majority of the food business in Canada. Let's say that we do have a party outside Canada who decides he'd like to come in, who decides that they're getting fat and rich and that the prices are at a level that aren't too terribly competitive, so he can go in and, with lower prices, do it. First off, it's going to require a huge investment in cash just to get the door open. As I mentioned, it will take possibly $10 million per location to get established, and then there's your infrastructure of distribution.

Why would I do that if I know that those dominant players are prepared to invest millions and millions of dollars of depressing the prices in that marketplace below my cost?

Mr. Dan McTeague: So your sunk cost is, in effect, impossible. You'll lose even that initial toehold that you're looking to get—

Mr. Fred Wade: I'd have to be prepared to go to war, for possibly years at a time. It's still continuing in Atlantic Canada; it's been going on for probably four years now.

Mr. Dan McTeague: Would you say, then, Mr. Wade, that the game is over? We eat three times a day. I don't gas up three times a day and I don't bank three times a day. With the Competition Act as currently constructed and currently enforced, do you think the game's over and that we have effectively a monopoly or oligopoly in the distribution, wholesaling, and retailing of groceries in Canada?

Mr. Fred Wade: With the current act and the current attitude of the Competition Bureau, there's nothing to be done. The game is over.

Mr. Dan McTeague: Thank you.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Thank you, Mr. McTeague.

Mr. Dubé.

Mr. Antoine Dubé: Mr. Chairman, I do not have any questions for the witnesses, but because of their comments, I would like to make a suggestion to the committee on two aspects. It seems to me that we should obtain information on the market shares and the number of franchisees, on the one hand, and individual independents, on the other, in the food sector, but also in other sectors. The other day we heard from representatives of the oil sector. This is important information that we should be able to obtain, if it exists. If it does not, I can understand that we will not be provided with it.

The Competition Bureau may tell us that it does not have this kind of information because it is watching for practices that compromise competition. However, Industry Canada or Statistics Canada may have information on this. I feel that this is very important. I do not blame them, since it is very difficult. Mr. Jennery was saying that it all depends on what is taken into account or not taken into account where market share, etc., is concerned. I imagine that there must be people in the government who can give us an answer.

I would appreciate it if the clerk, with the agreement of other committee members, would take the necessary steps to obtain this information, if it exists. If it does not, we will have to wait for another time.

• 1215

The Vice-Chairman (Mr. Eugène Bellemare): Are you making a specific request?

Mr. Antoine Dubé: Yes. I would like to have information on the industry sectors that we have heard about up to now: petroleum, communications, food, and the others. I would like figures on market share and on franchisees and individual retailers. What is the situation in those sectors?

The Vice-Chairman (Mr. Eugène Bellemare): The clerk will look into it.

Mr. Antoine Dubé: If this information exists. If it does not, I will be concerned. I assumed that the government, Industry Canada, would be well informed.

The Vice-Chairman (Mr. Eugène Bellemare): The last question goes to Mrs. Barnes.

[English]

Mrs. Sue Barnes: How much time do I have?

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): Five minutes.

[English]

Mrs. Sue Barnes: Thank you very much.

Just so I can put the evidence I've heard today into perspective, first of all, Mr. Morton, how many organizations are under your umbrella? How many members do you have?

Mr. Robert Morton: Approximately 3,600.

Mrs. Sue Barnes: All right.

I want a clarification from Mr. Wade. You said that your operation was sort of rare in Canada. How many just like you would be left?

Mr. Fred Wade: There was one in Truro, Nova Scotia, that gave up the ghost two weeks ago; it was a fourth generation independent. It was Ryan's IGA. He was totally independent. He owned his own store and his own location and could not compete any longer.

Mrs. Sue Barnes: My questions is, how many...?

Mr. Fred Wade: I think it would be easier to ask—

Mrs. Sue Barnes: Or maybe it would be easier—

Mr. Fred Wade: —Mr. Morton.

Mrs. Sue Barnes: —to ask Mr. Morton.

Mr. Fred Wade: He can probably count on two hands the number of true independents we have in Canada.

Mrs. Sue Barnes: All right. So the majority, the independents, really, as they exist now, are probably the franchise operators that could be turned into.... You've made the point—

Mr. Robert Morton: Our members are the franchised operations.

Mrs. Sue Barnes: Okay.

Mr. Jennery, you made a written proposal. You made a very strong statement here, and what I'm going to ask Mr. Morton is whether he would agree with this, because it's crucial to the question. You've said that Bill C-235 will not achieve its stated objectives, that it will motivate wholesalers to deny supply to independent grocers, and that it will lead to higher prices to consumers. That's an incredible statement, to my mind. You've clearly said that you believe this to be true.

Mr. Morton, would you agree with that?

Mr. Robert Morton: Yes.

Mrs. Sue Barnes: Thank you.

That's the end of my questions.

[Translation]

The Vice-Chairman (Mr. Eugène Bellemare): I would like to thank the witnesses.

[English]

I'd like to thank the witnesses that came here today and answered very well the barrage of questions from different directions. Your presentations, Mr. Wade, Mr. Jennery, Mr. Wilkes, Mr. Morton and Mr. Moncion, were very much appreciated.

Before declaring the meeting adjourned, I'd like to advise the committee that the next meeting is this afternoon at 3.30 in Room 253D, Centre Block.

[Translation]

The meeting is adjourned.