INDY Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, April 14, 1999

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[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): We will call the meeting to order. Today we have, 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 (protection of those who purchase products from vertically integrated suppliers who compete with them at retail).

This afternoon we are going to have two different groups of witnesses. I'm very pleased that for our first group of witnesses we have... I apologize. We have three groups of witnesses here.

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From the Canadian Bar Association we have Ms. Tamra Thomson, the director of legislation and law reform; and Mr. Barry Zalmanowitz, the member of the national competition law section.

We have Professor Jean-Thomas Bernard from the Department d'Économique, Université Laval. And with Professor Bernard we also have, from the Competition Bureau, Anindya Sen. And then we have Mr. Tim Columbus, counsel for the Society of Independent Gasoline Marketers of America.

Then from the Centre for the Study of Regulated Industries we have Mr. Daniel Martin Bellemare, an expert.

I believe we have three opening statements, beginning with the Canadian Bar Association. Then we'll move to questions. So everyone knows they have about five minutes for opening comments.

Mr. John Solomon (Regina—Lumsden—Lake Centre, NDP): Madam Chair, is there a document that comes with the first presentation?

The Chair: It should be in front of you. You should have a number of documents. Does everyone have three different documents?

The clerk will make sure everyone has the different documents in front of them. You should have received this in your offices already, the clerk has informed me.

That being said, we'll begin with the Canadian Bar Association. Ms. Thomson.

Ms. Tamra L. Thomson (Director, Legislation and Law Reform, Canadian Bar Association): Thank you, Madam Chair and honourable members.

The Canadian Bar Association is very pleased to have the opportunity to speak to you today on Bill C-235, which would amend the Competition Act. The Canadian Bar Association is a national association representing over 35,000 jurists across Canada, and amongst our primary objectives are improvement in the law and improvement in the administration of justice. It is in this context that we make our remarks to the committee today.

With me is Barry Zalmanowitz, who is a member of the competition law section. The submission you have received has been prepared by the competition law section and has been approved as their statement by the Canadian Bar Association. I would ask Mr. Zalmanowitz to address the substantive area of the submission.

Mr. Barry Zalmanowitz (Member, National Competition Law Section, Canadian Bar Association): Thank you, Madam Chair.

The national competition law section of the Canadian Bar Association urges this committee to recommend against passing Bill C-235, and we urge against passing it either in its original form or in its amended form. As you know, the Canadian Bar Association, and this competition law section, does not represent any specific sector of business or industry in Canada. It is a group of lawyers who practise and are interested in competition law and policy and the orderly development of competition law and policy.

One must ask what are the purposes of Bill C-235? The stated purpose is to protect a specific category of businesses, and it is those who find themselves in the position of purchasing supplies from a supplier who also happens to be a competitor with them at the retail level.

What is the object of the Competition Act? The object of the Competition Act and competition policy in general is to maintain and encourage competition in Canada in order to promote the efficiency and the adaptability of the Canadian economy. If one asks whether this bill is consistent with the objectives of the act, I think the answer fairly clearly is no, the bill is not consistent with the act or the notion of competition policy. It really is an attempt to shelter a specific category of player in our market from the effects of competition.

It is in opposition to the general purpose of the act. It opposes another section of the act that relates to price maintenance. And to the extent that there is room in the Competition Act for provisions that protect smaller competitors against predation, that is provided for in the act in paragraphs 51(c) and 78(a). Those all have as an element of an offence, or in order to seek some remedy, that there is a substantial lessening of competition.

We are not aware of any study or evidence to show that this particular group of business people need the government to step in and protect them over and above the protection that is generally available to other competitors.

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The other question that one must ask is what would the likely effect be of this legislation? I think one thing that is obvious is that it would probably have the effect of discouraging suppliers from continuing to distribute through independents as well.

One must ask why does a supplier choose to distribute through independents as well, to begin with, and the answer is that it is felt, according to that supplier, that it is an efficient and competitive way of distributing. When you impose artificial restrictions and create problems for suppliers who have a dual mode of distribution, the likely effect will be to discourage suppliers from continuing to use independents in that category.

The next question is what is the likely effect on consumers? Our submission is that the likely effect will be higher prices because of less competition.

In situations where there are vertically integrated suppliers who are also supplying independents, and if this law were to come into force, the vertically integrated supplier would be inhibited from dropping the retail price because there would always be the concern of criminal liability if the wholesale price to the independents became out of line and resulted in an offence here. The consumers would likely be losers if Bill C-235 became law.

The likely effect on the economy as a whole is that it would impose artificial restrictions on suppliers choosing efficient methods of distribution. It would tend to lower the productivity and efficiency of the Canadian economy and the ratio of the inputs to the level of outputs in this economy, which is already a concern that economists have identified in comparing Canada to other competitive and developed countries.

In conclusion, although the amendments that are proposed would address some of the concerns about interpretation, uncertainty and compliance, they don't eliminate the fundamental concern with the bill in its unamended form. It's a bill that is not good competition policy. It is in fact the opposite of competition policy; it's a form of price regulation.

Perhaps the aspect of the bill that is most disturbing is that, if passed by Parliament, Canada will have a provision in its Competition Act that exposes its citizens to a risk of serious criminal liability for engaging in conduct that is not anti-competitive.

Thank you.

The Chair: Thank you very much, Mr. Zalmanowitz.

I'm now going to turn to Professor Bernard for an opening statement.

[Translation]

Mr. Jean-Thomas Bernard (Individual Presentation): [Professor, Economics Department, Laval University] Good afternoon. My name is Jean-Thomas Bernard and I am an economics professor at Laval University in Quebec. I have been studying the operations of the energy market in Canada for about 25 years.

Last January, the staff of the Competition Bureau asked me to participate in a study of competition in the gasoline market in Canada. My involvement was twofold. First, I participated in the design phase and then, as the study got on, I made comments on the results.

Economists have been interested in the operations of the gasoline market for a long time, and of course, there were many studies on the subject. One may ask, then, what this new study is going to add to the knowledge we already have. It's innovative in three ways.

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First, it's very rich in terms of statistics. We have data on the price of gasoline in 11 Canadian cities; this data has been collected on a monthly basis over a period of nine years.

Second, the way other factors which have a bearing on the price of gasoline are treated in this study is new. It's an important point, because if you don't take these other factors into account, it's possible to see competition as playing a more important role that it does in fact, because it's these other factors which also have an influence. Among them, there is for instance, the size of the service stations, the density of population and the per capita income.

Finally, this study is particularly focused on the measurement of competition.

Two major conclusions are drawn from this study, and they are the following.

First, regarding the retail market, as expected, it works the following way. When competition is intense, prices are lower. When there's less competition, prices are obviously higher. Our competition indicator is what we call concentration. The less actors, the less competition. And obviously, the more actors, the more competition. In this regard, independent marketers don't play a particular role. At this level, their action is similar to that of integrated corporations or more regionally-oriented companies.

Second, the price of crude oil has a direct influence on the wholesale price of gasoline. When crude goes up by one cent per litre, the wholesale price goes up by one cent. This is an indication that refiners don't use the wholesale price as a strategy to influence downstream competition, at the distribution level.

In closing, I'd like to underline that this study has been done according to generally accepted practices and that different versions of the models which were used have been explored. All the results strongly support the conclusions I just outlined. So they are not specifically linked to the approach taken. These are general conclusions. Thank you.

[English]

The Chair: Thank you very much, Professor Bernard.

Now I'm going to turn to Mr. Tim Columbus.

Mr. Tim Columbus (Collier, Shannon, Rill & Scott; Counsel, Society of Independent Gasoline Marketers of America (SIGMA)): Thank you, Madam Chair.

My name is Tim Columbus. I'm a lawyer from Washington, D.C. In my professional capacity, I serve as counsel to the Society of Independent Gasoline Marketers of America, as well as the National Association of Convenience Stores.

I have submitted to the staff a brief prepared statement, which, with your concurrence, Madam Chair and members of the committee, I would appreciate having included in the record of these proceedings, but then I'll move on to summarize.

Before I do that, I want to say one thing. As someone whose family's tenure in North America started north of the U.S.-Canadian border, I want to thank you. I feel very honoured to be here today, and I can only tell you that my Canadian ancestors would be proud, so I hope I don't embarrass them.

Before I tell you what I do support, I should tell you what I do not support. I do not support legislation that prohibits sales below cost. I do not support minimum mark-up legislation or any other law aimed at preserving a particular class of competitors rather than promoting competition.

I do support legislation aimed at protecting consumers' interests in ensuring that the inappropriate exercise of market power does not deny consumers the cost savings offered by superior operating efficiencies at different levels of distribution. Consequently, I endorse a positive report from this committee on Bill C-235 as it is proposed to be amended by Mr. McTeague—and Madam Chair, whenever I refer to Bill C-235 hereinafter, please understand I am referring to it as it is proposed to be amended by its primary sponsor.

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As proposed to be amended, Bill C-235 is not a sales-below-cost bill, nor is it a minimum mark-up bill. It stands for a very simple proposition: specifically, that any integrated entity, such as an integrated refiner, that has dominated every level of a commodities market should not be allowed to use that dominance to eliminate its more efficient customer competitors by charging those customer competitors a price that is higher at the wholesale level than that integrated entity is charging consumers at the retail level.

Any marketing entity's efficiencies are relevant to competition only to the extent that a retailer can obtain a product such as gasoline at a price that, when added to its costs of operation, permits that marketer to charge a price equal to or lower than the prevailing retail price. If a marketer cannot obtain a product such as gasoline at that price, he or she very simply is out of business regardless of his or her level of efficiency.

Let me postulate one example here. Assume a refining company that sells at both wholesale and retail in a particular market sells to its retail consumer customers at 40¢ per litre and sells at the terminal rack at 40¢ per litre. Assume further that it costs that refiner 6¢ per litre to move gasoline from the rack to the retail consumer. The net-back on that sale is 34¢ per litre. The net-back on the sale to the wholesaler is 40¢. My own view is that when you realize that perhaps that marketer could have moved that gasoline from rack to retail at 3¢ per litre, it would have permitted the refiner to charge 35¢, a penny more than it actually achieved on its retail sale on a net-back basis, add its costs of operation, 3¢, add a penny for profit, and charge the consumer 1¢ less.

That example, which is not really that unrealistic, if it's unrealistic at all, should raise some questions for you. The first one is, why is that refiner in the retail business?

What I'm trying to get the committee to focus on today is that you have to ask yourself, why would any for-profit entity, such as a refinery, engage in behaviour that is clearly non-economic, that is, on a consistent basis accept a lower net-back on sales to one class of customer than to another, particularly when you realize that we're talking about an inversion in terms of how commodities markets normally work? Wholesale sales always cost a seller less than retail sales. There is no economically rational explanation for why a for-profit entity would charge its less-costly customer more than it charges its more-costly customer, unless that seller perceives that expenditure of funds as an investment that it expects to recoup at some subsequent time.

As Mr. McTeague proposes to amend Bill C-235, it is not a panacea for retailers of gasoline or any other commodity. The bill as proposed to be amended contains no guaranteed margin, no minimum mark-up, for anybody. However, it is an important step in the right direction, that direction specifically being toward the protection of Canadian consumers' interests in ensuring that economically efficient marketers are not eliminated by the inappropriate and—okay, I'll say it—predatory exercise of market power by their integrated supplier competitors. Those marketing efficiencies leave if that marketer is unable to obtain product at a price that lets them be relevant to your consumers. There is a very limited number of supply alternatives in the motor fuels industry in Canada. That's different from where I come from.

I'm taking too much of your time and I'll stop. I'd be happy to answer any questions my testimony may have raised.

The Chair: Thank you very much, Mr. Columbus.

I'm now going to turn to Mr. Daniel Bellemare.

Mr. Daniel Martin Bellemare (Expert, Centre for the Study of Regulated Industries): Madam Chair and members of the committee, good afternoon. I would like to thank you all for providing me, in my capacity as counsel to the Centre for the Study of Regulated Industries, an opportunity to share with this committee my thoughts on Bill C-235.

The Centre for the Study of Regulated Industries is a non-profit organization affiliated with McGill University's law faculty. As such, we are involved in research and interventions in the area of competition law and regulatory matters.

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There is no doubt in my mind that independent retailers need to be protected against anti-competitive practices engaged in by vertically integrated suppliers for the following reasons.

First, the Canadian manufacturing sector is highly concentrated. Most manufacturers operate within an oligopolistic market structure. There is a general consensus among experts in the area of industrial organization that an oligopolistic market structure is not conducive to vigorous price competition, especially when a homogeneous product is involved.

Second, vertically integrated manufacturers—that is, supplier-retailers—use their market power within the manufacturing sector to neutralize more efficient and cost-conscious independent retailers, competing on prices. The most obvious example is the oil industry, where vertically integrated refiners are squeezing independent retailer profit margins. The problem is so serious that in the province of Quebec we had to adopt special legislation on below-sale costs, which is embodied in an act respecting the Quebec energy board. In that context, it becomes essential to preserve price competition at the retail level.

Third, we are of the view that we must strengthen independent retailers' bargaining power vis-à-vis vertically integrated manufacturer-suppliers to place them in a better position to negotiate wholesale prices and pressure suppliers to become more efficient and cost conscious.

Should Canada's manufacturing sector be more competitive, the market would discipline suppliers. However, we have a very serious problem in Canada. The Competition Bureau—and the office of the director of investigation and research—is a toothless and totally ineffective anti-trust agency. Worse, the director has been an accomplice in the oligopolization of key economic sectors: among others, oil, supermarkets, and telecommunications.

In fact, the Attorney General of Canada and the director have delegated the administration and enforcement of the act to a few lawyers from the private sector, representing Canada's largest corporation. For example, last November we made an application to the Competition Bureau for an investigation into the Loblaws-Provigo merger. We were told candidly by officials in the justice department and the Competition Bureau that the lawyer who is currently representing Loblaws was representing the director in the CAST merger case before the Competition Tribunal between February 1995 and March 31, 1998. And the Loblaws-Provigo transaction occurred some time in October or November 1998.

We turned to the justice department, and the justice department said, we will send you a copy of our policy on hiring outside counsel, because we have a very efficient policy against conflict of interest and reasonable apprehension of bias. In this policy you can clearly see that there are three types of cases considered when it comes time to decide whether a case will be treated in-house or outside the justice department. Competition law cases are considered to be class two cases, routine cases. So this is the importance that the Attorney General and the bureau are according to competition law enforcement in Canada.

This is not an isolated case. The centre is now currently preparing a detailed study on the administration and enforcement of the act since the coming into force of the Competition Act in June 1986, and we will release this study soon.

Finally, we must keep in mind that amendments to the act alone will not produce magic results. We also need effective enforcement. Accordingly, we believe the act should be strengthened, but we also believe the major problem we have is the fact that the director and the Attorney General have been pursuing a non-enforcement agenda since the coming into effect of the Competition Act in June 1986.

Thank you very much for your attention. I am available to answer questions in both French and English.

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[Translation]

Thank you for your attention. I'd be happy to answer questions both in English and French.

[English]

The Chair: Thank you very much, Mr. Bellemare.

Mr. Sen, maybe you could just explain why you're sitting at the table, so that everyone is aware. You're not sitting together, and I apologize. I didn't realize that you weren't sitting together when I called on Mr. Bernard.

Dr. Anindya Sen (Economist, Competition Bureau): Sure. My name is Anindya Sen and I'm the author of this study. I'm a bureau economist. Specifically, I'm the author of the econometric study of wholesale and retail gasoline in Canada, and I did collaborate on this work with Professor Bernard and Dr. Campbell Watkins. They are bureau witnesses, but I thought that since I was the author of this work also, I would make myself available to the committee personally if they wish to ask me any questions.

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.): On a point of order, this witness who has presented himself is scheduled to appear this afternoon. I don't see the relevance of his being here. In fact, he is to be here this afternoon.

The Chair: My understanding was that Mr. Bernard asked Mr. Sen to accompany him. Mr. Bernard is our witness, so it will be Mr. Bernard or Mr. Sen who will answer questions, not both at the same time.

Mr. Dan McTeague: Am I to understand then, Madam Chair, that I can bring someone with me tomorrow, anybody I want basically, without their being on the list?

The Chair: Mr. McTeague, if you wish to give your time to someone else tomorrow, you're more than welcome to do that, yes.

We will now return to questions. Mr. Chatters.

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

I guess first I have to start with a statement, simply because when I hear all of the accusations about the lack of competition in the gasoline market, it seems curious to me that the actual retail price of gasoline has been dropping for years and is essentially as low as it was some twenty years ago. That doesn't happen if there's no competition, so there must be competition somewhere in the system to make it work.

I have a number of questions from the Canadian Bar Association, and because you're lawyers, I would like legal answers to the questions.

In your opinion, would the implementation of Bill C-235 precipitate a court challenge, either based on its discriminatory nature against the vertically integrated companies and other retailers or based on invasion of provincial jurisdiction? Price regulation is a provincial jurisdiction, and as you've heard, Quebec has already regulated under their jurisdiction. So in my opinion, perhaps the federal government would be invading provincial jurisdiction.

My question is for Mr. Bernard. I took exception to the comment you made. I don't argue that there is a direct correlation between crude oil and retail gasoline prices, but you said that if crude oil goes up a cent a litre, gas goes up a cent a litre, and I can't accept that. I believe the relationship is that if crude oil goes up a dollar a barrel, gasoline goes up a cent a litre. That's quite different from what you suggested.

For Mr. Columbus, I appreciate your support of free and open competition, and I can't understand how you can support this amended bill when in fact it's restricting the vertically integrated oil company on the price it can set, but others in the same marketplace can do the same thing essentially. They can sell below their wholesale cost without being penalized. Therefore, you're not levelling the playing field; you're unlevelling it.

In my own community, the oil companies had a retail price set and organizations like Canadian Tire and Superstore, who aren't vertically integrated oil companies, were selling below their wholesale cost and covering that margin somewhere else. They would be able to continue to do this in this environment, and I can't see how that is supporting free and open competition.

The Chair: Professor Bernard and then Mr. Columbus.

[Translation]

Mr. Jean-Thomas Bernard: Maybe I wasn't clear enough. My comment was on the relation between the price of crude oil and the wholesale price charged by refiners.

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The study shows that when the price of crude oil goes up by one cent, this one cent increase is passed on to the wholesale price of gasoline about two months later. It's an indication that refiners don't play with the wholesale price regardless of the price of crude. When the price of crude changes—

[English]

[Editor's Note: Inaudible]

Mr. David Chatters: ...connection.

Mr. Jean-Thomas Bernard: Yes.

The Chair: Mr. Columbus, do you have a comment?

Mr. Tim Columbus: Thank you, Madam Chair.

Sir, let me respond in three ways. First of all—

The Chair: I should explain this from the beginning. We only have five minutes for questions and answers for each questioner, so if everyone takes five minutes it's going to go much too long.

Mr. Tim Columbus: Got it.

I do not stand for the proposition that the gasoline market is non-competitive. If there were only three companies in Canada selling gasoline, the market would be competitive. The question is at what price level. At some point, if the problem I described in my hypothetical were to go forward, the consumer would pay a higher price than he had to pay because he would have lost marketing efficiencies.

My point is very simple: I don't care if it's a big company or a small company; what I think this committee should be most interested in is preserving the ability of someone who performs a function better than its competitors to make that superior performance relevant to the consumer. In the context of an integrated petroleum industry, you have a great problem with that right now, because the wholesale cost and the retail price are de facto controlled by a supplier competitor of the independent marketer. That supplier competitor does not have to compete on efficiencies; he can simply put that independent entity out of business based on pricing.

Mr. David Chatters: Then let's respond in the same way Quebec did, by placing the same restriction on everybody rather than picking out the integrated oil companies.

Mr. Tim Columbus: With respect, what Quebec does is not for me to say.

Mr. David Chatters: Yes. Now we need the legal questions.

The Chair: Mr. Zalmanowitz, you had a question or quick comment?

Mr. Barry Zalmanowitz: I think there was a question addressed initially by Mr. Chatters, and that was related to the constitutionality of the legislation. My response is that if the object of the legislation isn't competition but it's simply to protect the contractual bargaining power of someone who is treated unfairly, then, yes, that raises an issue as to whether the Parliament of Canada can legislate in that area. I think it goes really to our point. We don't see this as being something that advances competition law and competition policy; it's something else.

So there would be an issue in that area. I'm not so sure there would be a real issue on a challenge based on the discrimination provisions in the charter. They're not the kinds of grounds that normally one can challenge legislation on.

The Chair: Thank you. Thank you, Mr. Chatters.

Mr. Peric.

Mr. Janko Peric (Cambridge, Lib.): Thank you, Madam Chair.

Mr. Zalmanowitz, you mentioned that if this bill was passed the consumer would pay more. Could you be a little bit more specific? Could you brief this committee as to how that would happen?

Then, Mr. Columbus, in the last five years the competition in Canada dropped by 15%. What has the situation in the United States been in the last five years?

Mr. Barry Zalmanowitz: The reason we think the tendency of this legislation would be to increase prices to the consumer is that the problem arises when there is price competition and the price starts going down. That's when the retailer is being squeezed. It's usually a result of some factor a price war can start. But the problem with this legislation is that the integrated competitor, before deciding to reduce a price or to respond to price competition, is going to start worrying about whether it will be violating criminal provisions of this act and whether it has to get its wholesale price to its independents in line at the same time. That will tend to keep the prices stickier at a higher level. That's the argument. We think there will be those kinds of tendencies.

Mr. Janko Peric: Mr. Columbus.

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Mr. Tim Columbus: If I understand your question, I can tell you the state of competition in in the retail gasoline market in the United States is intense. A significant portion of the competition is provided by what we lovingly refer to as “unbranded private-brand marketers”, and those are people who do not fly in the greater oil companies' trademark.

That section of the industry in the United States has historically been viewed as the most price competitive. It does not trade on brand names, it doesn't take credit cards. Instead, it lives on innovation and price competition. That segment has been viewed by the Federal Trade Commission and other anti-trust authorities in the United States over the years as the most pro-competitive segment of the retail gasoline market in the United States.

The best example I can give you is the sixth circuit's opinion in Mobil v. Marathon in the early 1980s, when Mobil tried to buy Marathon. That transaction was blocked to a substantial extent at that point because Marathon was the largest single source of supply to private-brand marketers in the United States.

Mr. Janko Peric: Mr. Zalmanowitz, do you have any comments on this decline of competition in Canada over the last five years?

Mr. Barry Zalmanowitz: I don't think there has been a decline in competition. I haven't done the economic study. I think Mr. Bernard probably would be in a better position.

Mr. Janko Peric: Before we go to Mr. Bernard, it's interesting that you are representing 35,000 members of your organization, and you came to this committee and you haven't done your homework, but you are opposing this bill. You're not aware that according to Canadians... We had opportunity to listen to them for the last year and a half, and to listen to not only one sector of industry but many of them. And it's happening all over, not just in gasoline but in the food industry as well. We heard witnesses yesterday on what is going on.

In my opinion and in the opinion of Mr. McTeague and other members of the Liberal caucus, the consumer will pay more if there is no strong competition, if there is a monopoly.

Mr. Barry Zalmanowitz: To respond, I think one of the problems in amending... You said we haven't done... I purport to represent 35,000 members, and that's the Canadian Bar Association. I represent the competition law section. I'm a lawyer in private practice from Edmonton. I'm the chair of the legislation and policy committee, and you have a limited amount of time to respond to these, but we respond based on our knowledge and our interest in this area. I am not aware of any study. There may be.

Consumers may perceive something, but I think if you're legislating responsibly you would look for empirical studies to determine: Is competition being lessened in the sense that prices are going up? Is there market power in the sense that those with market power are earning more profits at the expense of the consumer?

I am not aware of any study that supports that. But I would think that before you start legislating, you would want some kind of study to, first of all, identify the problem, and then secondly, say that this legislation will actually remedy the problem and not make it worse.

Mr. Janko Peric: The Competition Bureau—

The Chair: Last question, Mr. Peric.

Mr. Janko Peric: Yes.

The Competition Bureau did not become aware that the Liberal caucus on gas prices did a study and submitted a report to the government, and I'm really surprised that you're not aware the crude oil price went down from $26 to $9 and the gas price didn't go down 50%. Do you have any comments?

The Chair: Professor Bernard.

Mr. Jean-Thomas Bernard: I don't think the result of the study that was conducted supports your last statement, that is, in terms of wholesale price. The price basically followed the price of crude. The crude price went down and the wholesale price—

Mr. Janko Peric: What's the crude price right now?

Mr. Jean-Thomas Bernard: Right now, in U.S. dollars, I think it's around $14 or $15 a barrel.

Mr. Janko Peric: It went down to $9. Now it's higher.

Mr. Jean-Thomas Bernard: Yes. It is up now, yes. So over the period we are dealing with here, 1991 to 1998, we have that the price before tax, in real terms, went down in Canada. I think the figure is about 4¢ to 10¢. I'll have to check, but it definitely went down. What went up is the tax chunk there. That went up.

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Mr. Janko Peric: Oh, we are aware of provincial and federal taxes and GST on those two taxes, and we recommend the Minister of Finance take that GST off provincial and federal tax. But the tax is not going up and down every long weekend or during the summertime. What's your explanation there?

Mr. Jean-Thomas Bernard: If we look at the—

Mr. Janko Peric: We are out of time, Madam Chair—

The Chair: Mr. Peric, would you please let Professor Bernard finish. You asked a question.

Mr. Jean-Thomas Bernard: Okay—

Mr. Janko Peric: Could I just reaffirm my position on this—

The Chair: Mr. Peric.

Mr. Janko Peric: Thank you very much.

Mr. Jean-Thomas Bernard: If we look at the broad picture in terms of market share, over the 11 cities that we had here—

Mr. Janko Peric: I don't buy that. I listened to the independents—

The Chair: Mr. Peric, let Professor Bernard finish. You're done talking.

Mr. Janko Peric: Thank you. I can use my time the way I want it.

The Chair: Thank you. Yes, you're finished. I just want to get an answer to the question so I can move on.

Professor Bernard.

Mr. Jean-Thomas Bernard: Okay. If we look at the 11 cities, the market share of independents over that period overall stayed roughly the same. In some cities it went up. The market share in St. John's, Newfoundland, went up. In most cities there was very little action—some movement up, some movement down, but overall there was no change. It's true that over the same period... I would not quote this as the exact figure, but about 5,000 retail stations were closed down. That's a lot, and that's a lot of pain too. But overall it did not affect the market share distribution across major regional distribution and independents. So a lot of people moved out, and it is fairly easy to understand why.

The market has been reorganized—stations are larger, and they stay open longer because we have association with food and all these services. So now they can stay open 24 hours and split the income across that, so this makes for a more efficient station, provides more service to the people. But when we look at market-share data, it has not changed.

The Chair: Thank you, Professor Bernard.

Mr. Solomon.

Mr. John Solomon: Thank you, Madam Chair.

I have not seen the report with respect to what Mr. Bernard is speaking about, but perhaps the Canadian Bar Association could explain to me how the following situation has developed. There are two points. One, in your presentation, on page 4, you indicate in the bottom sentence that:

A vertically integrated supplier's affiliate may be purchasing larger volumes of products at volume discounts, resulting in lower wholesale or retail prices than would be available to non-integrated suppliers.

I come from Saskatchewan, and I do not have an example, in my last 25 years living there, of that particular statement. I'm wondering if you could dig up your files and get back to me in writing, if you can't answer verbally, how that proves to be the case in a market like Saskatchewan.

I will give a little background, Madam Chair, if I may. From the fall of 1997 till early 1999, about a 15-month period, the price of crude oil was between $10 and 13¢ a barrel. In Saskatchewan, the price of gasoline at the pump dropped from about 58¢ or 59¢. It took about 12 or 13 months to drop to 53.9¢, which was between 4¢ and 20¢ a litre higher than any other province in the country, any other marketing area with the same tax regime.

I'm wondering how your legal presentation to us today defines that as open and free competition under the current Competition Act, if you could answer that, please. By the way, if I may add one thing, Madam Chair, within hours of the price going back up this spring—although it took 15 months to drop in Saskatchewan, it took 15 hours to increase the prices back to where they were about two years ago.

The Chair: Mr. Zalmanowitz.

Mr. Barry Zalmanowitz: I can't comment on the specific fact situations in Saskatchewan. But to begin with, I can comment right now on the question you had about paragraph 50(1)(a) of the Competition Act, explaining that. Simply, all that points out is that the act permits discrimination on the basis of volume. That is, a supplier can discriminate between customers who are competitors on the basis of giving volume discounts as long as they make the same discount structure available to everyone, and they're aware of it.

• 1620

All that was intended here was pointing out that there are perceived to be efficiencies with discounts, and that's why you can get volume discounts, because it's more efficient for a supplier to do it in one large transaction than perhaps in smaller lots. That simply points out that it's inconsistent with paragraph 50(1)(a), which permits that, but these amendments would not account for volume discounts and the efficiencies that would go along with them. We were just pointing that out in that section.

Now I can't comment on whether in a particular part of Saskatchewan at a particular time there was collusive activity or something else. I don't have the facts and the information. I just can't help you and I wouldn't be able to help you if I came back in writing on it, because that's beyond the scope of what I'm doing.

Mr. John Solomon: Thank you, Madam Chair. Thank you, Mr. Zalmanowitz, for your response.

This doesn't happen in Saskatchewan—what you claim happens here and in other parts of the country. It just doesn't happen, because the people who bring the prices down are not the Essos or the Shells. At least in the last few years in Saskatchewan, it's been the independents. They're the only ones who have been able to provide some competition in the field.

A statement was made, I believe, by Professor Bernard that—two points. One, crude oil prices are connected directly, point for point, to gas prices at the pumps. I think you said that.

Mr. Jean-Thomas Bernard: Wholesale.

Mr. John Solomon: Number two, the number of independents and their share of the market hasn't changed. The information we have in Saskatchewan is that from 1992 to 1998 the market share for independents dropped from 20.8% to 8.6%. That's in a six-year period. I'm wondering how your numbers jibe with that, and why they don't reflect the fact that the market share of independents in Saskatchewan has been severely impacted as a result of either predatory pricing practices or some other practices the Competition Bureau can't seem to get their teeth into.

Mr. Jean-Thomas Bernard: Actually, I work with the numbers that are available and have not constructed these numbers myself.

Basically, we don't have here an observation for the whole of Saskatchewan, but we have observations for the city of Regina. There, independents in 1988 had slightly more than 10% of the market and in 1997 a bit higher.

Mr. John Solomon: In Saskatchewan?

Mr. Jean-Thomas Bernard: In Regina, and Regina I would think is a fairly big chunk of Saskatchewan.

Now, for your numbers to be correct, it would mean that every independent—and I'm exaggerating here—in the rest of the province was closed down, because they held their share in Regina.

Mr. John Solomon: I'm not sure what information you got, because the information I quoted was from the Independent Retail Gasoline Markets Association, which seemed to have had a fair amount of study on that.

Mr. Jean-Thomas Bernard: Well, these are the statistics that are available; they are not collected by the Competition Bureau. A lot of this came out of a study that was realized through Natural Resources Canada, Industry Canada, and the Competition Bureau, not with the intent of realizing this special study. So when you look at this line here, it's very hard to argue that a number of the independents were shut out of the market in Saskatchewan.

Mr. John Solomon: Does that information, Professor, indicate that the number of independents have increased, remained the same, or decreased?

Mr. Jean-Thomas Bernard: It does not tell us anything about the number of independents. It simply tells us that the share of the gasoline sold in Regina stayed steady.

• 1625

Mr. John Solomon: I'm from Regina, Madam Chair, and if I may say, Professor, the number of independent stations have halved in that same period, and they have not increased in terms of a significant amount of traffic. So I'm curious—and we could maybe talk about that later—about your database.

The Chair: Thank you.

Mr. McTeague.

Mr. Dan McTeague: Thank you, Madam Chair. I'd like to point out a couple of things here. The report compiled by the Competition Bureau that you were looking at, Mr. Solomon, includes Mohawk, Tempo, and Super-Save. Mohawk is now owned by Husky, a refiner. Tempo is owned by Federated Co-op, a refiner; and Super-Save by ARCO. Clearly, the fox is monitoring the chicken coup. And the statistics that are given are obviously flawed, because they don't understand the difference between a true independent and someone who is affiliated with a major integrated supplier.

Madam Chair, I have a couple of questions here. I just wanted to make the point that the Canadian Bar Association seems quite content with the status quo. I'm wondering if they actually know there have been some 342 complaints with just three convictions over the last 10 years. I'm concerned about that, because it seems they have a lot more faith in the system and the current Competition Act than do consumers and a lot of other people who have been affected by it.

Having said that, my questions are for Mr. Columbus. Under this Bill C-235, can retailers offer promotions, loss leaders, products, etc.?

Mr. Tim Columbus: Sure, in my understanding of the bill, as you propose to amend it in its final form. Yes, sir. There is nothing in this bill that restricts any seller with respect to price. He can charge as high a price or as low a price... he can give it away. The only thing he cannot do is extract from his independent wholesale customer competitor a greater charge than he is charging at the retail level.

Mr. Dan McTeague: I note a comment here about the concern the bar has with the wording of this bill as it relates to proposed sections 50.1 and 78. Unfortunately for the Canadian Bar, the wording is precisely that which is found in sections 78 and 79. My question to you is, can you explain your statement that the U.S.A.'s independent marketers have long been viewed as the most effective factor in the industry?

Mr. Tim Columbus: Sure. The bureau of competition of the Federal Trade Commission is responsible, along with the anti-trust division of the Department of Justice, to enforce the United States anti-trust laws from the perspective of the federal government. In that connection—I believe it was in 1981, but it could have been 1982—they recommended, and the commission voted out, a complaint, which was pursued in federal district court in the northern district of Ohio, in which they saw an injunction against Mobil Oil Corporation's acquisition of Marathon. It has been the bureau of competition's position consistently that the unbranded independent segment of the retail motor fuels industry has always been the primary price-competitive segment.

As I tried to indicate before, Mr. McTeague, advertising works. These people don't sell under Esso. These people don't do that. What they do is sell private-brand gasoline. Therefore, the only effective means they have to compete is price. In order to be effective price competitors, they have had to be the most innovative segment. They were the people who invented self-service gasoline in the United States. They were the people who first put retail convenience food markets on a gasoline site and tried to generate additional income. Now many of those innovations have been adopted by integrated companies.

One of the things you have to understand is that big companies like to think they do everything at least as well as little companies. And for some things they do, and for other things they don't. Historically, people who are hands-on entrepreneurs stay closer to cost.

Mr. Dan McTeague: Mr. Columbus, I'm interested in that because there are some people who obviously oppose the bill, suggesting somehow it leads to inefficiency. You're suggesting just the opposite, that it is extremely efficient to have independent operators—as long as we can, of course, get our data correct, according to some who are presenting the information as questionable and somewhat distorted.

Can you explain to the committee the type of infrastructure available in the U.S.A. to transport and store product? Specifically, can you tell the committee if the U.S.A. has public terminals, public pipelines, public pipelines connected to public terminals, and refiners that do not retail? I guess I really want to note here that publicly accessible infrastructure is not available in Canada, and that all refiners also retail.

Mr. Tim Columbus: Regarding the accessibility of public warehouse terminals and common-carrier pipelines, we have, as you know, a pretty wide-open border for petroleum products. Canada is a substantial exporter of petroleum products to the United States. This greatly facilitates the viability and economic efficiency of independent marketers. The reality is, why would any integrated company sell to an independent marketer if that independent marketer couldn't get product from an alternative source? As long as you can get product from an alternative source, you will have competition at the wholesale level, which will let those efficient retailers survive and prosper. Being an independent marketer does not mean per se you are the most efficient guy in the market. If you're not, you'll leave, just like an inefficient big company.

• 1630

My concern in my testimony is that I think the Canadian consumer is at risk with respect to losing the potential efficiencies offered by independents, and so the public availability of that infrastructure—you know, the people who own that all get paid pretty well; they have done quite nicely over the last 10 years—is a great contributor to competition in the U.S. gasoline market.

Mr. Dan McTeague: That was very revealing. Thank you, Mr. Columbus.

The Chair: Thank you very much, Mr. McTeague.

Mr. Jones.

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

I have a question. What obligation does the integrated supplier have to the independent gas stations? Does he have to sell to the gas station—yes or no from the law society—in Canada?

Mr. Barry Zalmanowitz: No.

Mr. Jim Jones: In the U.S.?

Mr. Barry Zalmanowitz: No, you do not have to supply. There's no law I'm aware of that positively compels an integrated supplier to supply. It's a business decision they make.

Mr. Tim Columbus: In the United States there is no obligation to sell, which I think is one of the reasons Bill C-235 has been proposed to be amended. It doesn't constitute price regulation the way we normally think about that. You can do anything. If you don't want to be bound by its provisions, don't sell at the wholesale level. So you have that flexibility.

Mr. Jim Jones: I just want to ask Mr. Columbus again, in the U.S., has the number of gas stations... Dan, is it for the last 10 years or 15 years that you were quoting 22,000 to 13,000?

Mr. Dan McTeague: No, that's the M.J. Ervin study, Madam Chair, which says there has been a radical reduction. That was from 1995. The numbers from 1989 to 1995 went from 22,000 to 16,000.

Mr. Jim Jones: Okay.

Mr. Dan McTeague: That's, of course, by Industry Canada and the vertically integrated suppliers.

The Chair: Thank you, Mr. McTeague.

Mr. Jim Jones: Okay. My question is now to Mr. Columbus. In the U.S. from 1989 to 1998, has the number of gas stations increased or decreased?

Mr. Tim Columbus: I don't know. I suspect it has decreased. As you're probably aware, in 1988 the Environmental Protection Agency in the United States issued some underground storage tank regulations that required substantial capital investments in retail motor fuels outlets. The compliance deadline for that was December 22 of last year. I think for the most part you've seen less efficient outlets close—disappear.

Mr. Jim Jones: Also, in the law society's presentation they said consumers could become the losers if this were passed. Could you elaborate on that?

Mr. Barry Zalmanowitz: Yes. Our belief is that by imposing that kind of restriction, if an integrated company that also sells at retail has to consider, before it lowers its retail price or participates and gets involved in responding to competition, what effect it's going to have on the independents that it also supplies, that will tend to prevent them from lowering the price at that level. It'll make prices sticky and less competitive. That's how we think it will tend to keep the prices higher. It seems that the objective of this legislation is to protect a specific category of competitor from the full forces of competition.

I suppose this is another related point. You asked the question of whether integrated suppliers are obliged to sell to independents. The answer is no. If the purpose were to get rid of them, the easiest thing to do would be simply to not renew the supply agreements, to no longer supply them. Now, if you create difficult laws that hamper or inhibit the integrated company from changing its prices, making it do something else to make sure it doesn't commit an indictable criminal offence, it may have the tendency of saying, we don't need any independents any more. It may have the opposite effect of what's intended. That's a concern. Then you will have, or you may have, higher prices as well when you get rid of all of the independents.

The Chair: This is the last question, Mr. Jones.

• 1635

Mr. Jim Jones: My question is now to Mr. Columbus. In your presentation you said that if this bill is passed it will protect the Canadian consumers. How is it going to protect the Canadian consumers?

Mr. Tim Columbus: It protects the Canadian consumer because it's going to inhibit the tendency of integrated companies to use their ability to control the costs at which independent participants, potentially very efficient participants, acquire and establish through the retail channel the price they obtain in the market, to use that ability to compete via price squeeze as opposed to operating efficiency.

The gentleman has just suggested that the integrated companies may decide they don't need independents any more. If they're in a position to do that in Canada, you have a much larger problem than anything else we've talked about. Most integrated companies want to move product off a wholesale rack simply because they find it profitable. If we're talking about what Mr. McTeague has proposed, which is that you will simply charge your wholesale customer no higher price than you charge your retail customer, and if it's true, and I believe it is, because as he said, sales are normally more efficient in larger lots than smaller lots—a retail sale is normally 10 to 12 gallons rather than 8,000 gallons at a time—you're going to get a higher net-back on that wholesale sale. You ought to want to make a lot of sales off that wholesale rack, as opposed to through that retail outlet.

I think what you're going to find out is that people who run gas stations particularly well will prosper, and people who don't, whether they're independent or integrated, will fail. And the consumer is going to get the benefit of the bargain. I will tell you that's how it has worked in the part of the world with which I am familiar.

The Chair: Thank you very much, Mr. Jones.

Mr. Keyes, please.

Mr. Stan Keyes (Hamilton West, Lib.): Thank you, Madam Chair.

Let me first preface my question to Mr. Columbus by thanking him for his presentation. He's giving us an interesting presentation on gasoline prices and how the bill would affect them.

I think it's important for me to learn, Mr. Columbus, if you are aware of how this bill might impact on other commodities, like e-commerce or the telecommunications industry, as stated by them. I think Bell made a case. Even AT&T I believe would make a case. Have you examined how this bill would impact on them?

Mr. Tim Columbus: No, sir. I would be misleading you if I said I had.

What we're talking about here is wholesale as opposed to retail sales, Mr. Keyes. If we're talking about large lots, as opposed to small lots, large lots always carry lower costs than small lots. So it's difficult for me to understand why AT&T or anyone would want to charge a more costly customer less than he would want to charge his less costly customer.

Mr. Stan Keyes: I understood your argument. But I'm also confused, quite frankly, by the fact that if a company—and it happens—let's say to be vertically integrated, is going to get into the business of offering up discounts or any of that kind of thing, then you're talking about dropping the price. That's just sort of a part of or a natural form of competition, when you start discounting your price. If that's going to impact on you as e-commerce or as a telecommunications offerer, then you're going to be impacted. You can see where the rub is up against the competition.

Mr. Tim Columbus: Mr. Keyes, I wish I had a zippy comeback for you, but I don't.

Mr. Stan Keyes: Mr. Zalmanowitz, it's difficult for my constituents and me, quite frankly, to understand how it is that we could buy a litre of gasoline one week before Easter in Hamilton for 48¢ and then at Easter and for a number of days afterwards, probably over a week afterwards, that price is 59-something a litre. You probably ran into that in the area at Easter time. I can understand the difficulties in price modifications and all that stuff, but you're talking about an 11¢ jump in gasoline for a period of time. I have trouble understanding it.

I've tried, quite frankly, to determine, this bill aside, whether it's a shortfall in the Competition Act itself or the Competition Bureau that's been unable to address some of the concerns addressed by the witnesses, the inappropriate market muscle comments that have been made by those witnesses who have appeared before us on my colleague Dan McTeague's bill, C-235. Can you see anywhere in this bill, if your association has thought about it, where an amendment can be made to the Competition Act to accommodate the concerns that are being put forward by my colleague?

• 1640

Mr. Barry Zalmanowitz: No. If the concern is to prevent situations where the retail price of gasoline takes a large jump before a holiday—

Mr. Stan Keyes: No, no. The bill is dealing with your independent retailer who wants to buy the gasoline for less money than he sees his competitor up the street is selling it for, when he's buying it at rack. That's the issue.

Mr. Barry Zalmanowitz: I don't see that you can deal with that. I don't see that as a competition law or competition policy issue. Something that is a competition policy issue is whether these markets are generally competitive. I think Professor Bernard addresses that question—why it goes up in one particular place this time and whether that is a function of some conspiracy or agreement.

Mr. Stan Keyes: No, no, let's get away from that. I was only stating that as an example. Let's stick with the issue.

My colleague Dan McTeague's bill completely devotes itself to the fact that you've got a situation where an independent gasoline retailer buys it at rack for say 48¢, fills up his underground tanks, and then closes his lights that night, drives up the road, and sees it for 46¢ at Sunoco, where he bought the damn stuff. That's the issue here, and that's what this bill is trying to address.

I'm at a dilemma because I'm trying to rationalize whether or not we can somehow apply this bill. Or if it's determined that this bill casts too wide a net—and there are examples out there about telecommunications, etc.—if that's the case, then how can we address this issue by my colleague through the Competition Act? It's obvious the bureau isn't getting off its ass and doing the job, so how do we give them the tools?

No, I'll be blunt about it, Walt; I haven't got a problem with it either.

If it's the tools they need, then how do we change the act to make the bureau understand there is a problem here? Do you think that's possible? Do you think there's an amendment we can make to the act to address this situation for that little guy?

Mr. Barry Zalmanowitz: I don't think so, without contaminating the effectiveness of the Competition Act.

Mr. Stan Keyes: Thanks. We've got an answer.

The Chair: Just before we go on, I want to let everyone know that we have about 16 minutes left before out next group of witnesses, and Professor Bernard has to go to catch a plane. I'm going to excuse Professor Bernard and thank him for being with us, and we're going to go to the next round of questions.

Mr. Jim Jones: I just have a quick question.

The Chair: Mr. Jones, you're back on the list, but I'm only going to allow everyone one question and one answer, or we're not going to get through this.

Mr. Chatters.

Mr. David Chatters: My question would be on the comments that the fully integrated supplier doesn't have to sell to the independent. That surprised me a bit, because I understood that section 75 of the Competition Act has what we call a refusal-to-deal clause, and if the independent hasn't got a different source of supply, then the Competition Bureau can force that integrated supplier to sell to that independent. Am I wrong?

Mr. Barry Zalmanowitz: There is a refusal-to-deal provision in the Competition Act. The commissioner—he is now called “commissioner”, and he used to be the director—can apply to the tribunal for a remedy if all of the criteria are met. But that's a general exception. That doesn't create an obligation on a supplier to sell to someone, and it's perfectly legal not to, unless there has been an application by the commissioner to the tribunal and the tribunal has found that the criteria are met and the tribunal orders that person to do it. So there's that qualification.

Mr. David Chatters: Sure, okay.

Just for my closing remark, it never ceases to amaze me that there's this concern that prices go up on a Friday afternoon of a long weekend and somehow that's collusion and price-fixing. Yet I can demonstrate where a case of Coca Cola is regularly $4.69, and on a long weekend it costs $2.69. So it's the same thing: it's merchandising; it's marketing. It happens all the time. I don't see that as sinful.

• 1645

The Chair: Thank you, Mr. Chatters.

Madam Jennings.

[Translation]

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): I have two questions and they'll be very brief.

The first one is for Mr. Columbus. It's about those studies which were done by Mr. Calvani, who is from the States, and by Mr. Johnson. I'd like to know whether you had an opportunity to review these two studies. If your answer is yes, what's your opinion about these two studies and what's their relevance to Bill C-235? Could you please wait a minute before you answer, because I have another question for Mr. Zalmanowitz and Ms. Thomson.

It's about an allegation by Mr. Bellemare that I find extremely serious. I am a lawyer by profession. When I hear someone say that an administrative agency, which can sometimes exercise quasi judicial powers, is biased or at least, can be perceived as biased, I am very concerned. When Mr. Bellemare talked about this lawyer who was asked by the Competition Bureau to investigate a claim by his institute, I felt very concerned. I'd like to know what you think about that, as representatives of the Canadian Bar Association. I am very concerned, and I am going to investigate this further, outside this room.

[English]

The Chair: Mr. Columbus.

Mr. Tim Columbus: Madam Chair, I have to apologize, I have to listen so intently because I've lost my French.

I will tell you that I have had an opportunity to review Commissioner Calvani's and Professor Johnson's studies. You should know that I have known Commissioner Calvani for many years and I hold him in high regard. I would agree with almost everything he says about U.S. competition law in that study. And I find Mr. Johnson, on whom Mr. Calvani at least in part relies, to be pretty accurate.

The key point is that I don't believe those studies address the issue that is now before this committee, given the fact that Mr. McTeague has proposed to amend his bill to come down once again to a very simple proposition, which is that you shall not charge your wholesale customer at wholesale a higher price than you charge your retail customer. This is not a below-cost selling law, at least not as it's understood in the United States at the federal level or at the state level. It is not a minimum mark-up law, as that term is understood, or as I believe would be covered in any of the studies or charts included.

So what I tell you is that I think Professor Calvani has given you an excellent primer on U.S. competition law, but I think he's responding to a question that is no longer before your committee. I say this with the greatest respect, but I don't think it's relevant to what you're talking about here today.

Ms. Marlene Jennings: Thank you.

Mr. Barry Zalmanowitz: To respond to your question, which is, as I understand it, that Mr. Bellemare accused the people who administer the Competition Act, the director and staff, of hiring somebody who's in a conflict of interest—

Ms. Marlene Jennings: Oui.

Mr. Barry Zalmanowitz: —I think that's a fairly serious allegation. I don't know the facts surrounding that allegation, but as a lawyer I would say that if you make an allegation like that you must be prepared to prove it, and I can't comment on it because I'm not aware of it. I have been dealing with the Competition Bureau for years, mostly on the other side of the Competition Bureau—

[Translation]

Ms. Marlene Jennings: I'm sorry. When you say "the other side", what do you mean?

[English]

Mr. Barry Zalmanowitz: Usually it's the Competition Bureau that is taking an interest. They're either prosecuting a client of mine or opposing a merger my client wants to be involved with. I should say in most cases my client's interest would be at odds. And I have found the integrity in the bureau is very high. I can comment that at one point the bureau contacted me concerning hiring me to do something. I pointed out the possibility of a conflict and it was terminated immediately; it was inappropriate.

So I'm surprised by it, but I don't know the facts. I think it's a very serious allegation, but I would find it surprising personally if there was something inappropriate there, given my experience with the bureau and the integrity the bureau has demonstrated.

• 1650

Ms. Marlene Jennings: Thank you.

The Chair: Thank you, Madam Jennings.

Mr. Solomon.

Mr. John Solomon: Thank you, Madam Chair.

Before I ask my question, I wanted to table a letter addressed to all of us from the Canadian Federation of Independent Business concerning Bill C-235. To quote the letter briefly, “...the stated purpose of the Competition Act... Unfortunately for small and medium-sized businesses, the Act fails to deliver on its intended purpose”, which we reviewed earlier, to maintain and encourage competition in Canada. The Canadian Federation of Independent Business believe “that the proposed amendment will help strengthen the Competition Act and make it more effective for independent small and medium-sized businesses”. And they're urging us to provide support for this amendment.

Perhaps you've answered my question, Mr. Zalmanowitz, and that was in relation to who your clients might be, whether you represented somebody in the oil business, for example.

But my question would be to Mr. Columbus. What U.S. legislation, in your opinion, best encourages competition among, for example, gasoline companies and retail grocery outlets?

Mr. Tim Columbus: Historically, I happen to think the United States anti-trust laws are the primary body of consumer protection law in the United States federal code. I am not expert on Canadian law in any way, shape or form, Madam Chair, so if I make a mistake, indulge me.

But it is my understanding that you don't enforce them the way we do. And I'm not talking about the federal government's enforcement. A very substantial portion of the anti-trust law in the United States—in fact, when you take a look at Commissioner Calvani's study, you'll see him cite cases. You'll see that those are cases between private parties. You have private-party plaintiffs going after people who they think have crossed the line. I don't believe you have that here. I could be dead wrong. But the anti-trust laws have been great to us, for the most part.

They are not perfect. Obviously I do not need to tell the members of this committee that the United States federal government makes a thousand mistakes a day. You've all had to live with a bunch of them. So take that at face value. But the anti-trust laws have been the best tool we've had.

Is it a perfect tool? No. Have there been times when I've suggested there be other other tools? Yes. In the early 1990s there was federal legislation, which came within an eyelash of passing, that would have been a more aggressive version of Mr. McTeague's bill. And the reality is that since the major oil companies saw the federal legislature come that close to passing something, the behaviour about which the independent marketing community complained has abated, to a very substantial extent. I think people looked up and said, why would we ever do that again? And God willing they won't. So I think the anti-trust laws are our best tool.

The Chair: Thank you, Mr. Columbus. Thank you, Mr. Solomon.

I'm going to remind members that we need brief questions, brief answers. And, Mr. Solomon, you should know that all members of the committee have that letter from the CFIB and it's part of the committee record already.

Mr. Bellemare, one question and one answer.

[Translation]

Mr. Eugène Bellemare (Carleton—Gloucester, Lib.): My question is for the other Mr. Bellemare.

Bell Canada is starting to get interested in the Internet and invests an enormous amount of money, hundred of million of dollars, in research, equipment, etc. The company discovers that it can offer an Internet service which is much faster than the others. It decides to sell the service to its customers at a reduce price, below production costs. If an independent company, also involved in Internet services, wants to sell the same product, it has to charge more. Do you think that what Bell Canada does is not proper when it sells this service at a reduce price?

• 1655

Mr. Daniel Martin Bellemare: You're raising an issue which, I would say, is rather complex. On the face of it, if the situation is such as you describe, I don't really see any problem, unless there are other aspects that I don't know about. For instance, what is the market structure in terms of the companies which, like Bell Canada, are on the Internet market? No, offhand, I don't see any problem.

Mr. Eugène Bellemare: Isn't there a contradiction between what you just said and your position?

Mr. Daniel Martin Bellemare: Which one?

Mr. Eugène Bellemare: Your position on the price of gasoline. You say that integrated companies should not sell gasoline to their own marketers at a lower price than the wholesale price they charge to independents. Isn't that a similar situation?

Mr. Daniel Martin Bellemare: Could you tell me where there is a contradiction?

Mr. Eugène Bellemare: I'm the one who asks questions.

Mr. Daniel Martin Bellemare: I agree, but I have to ask you a question in order to answer yours. I'm sorry, but I don't see what you are getting at.

[English]

The Chair: Briefly.

[Translation]

Mr. Eugène Bellemare: Okay.

Mr. Daniel Martin Bellemare: All I say in my presentation is that in some sectors, particularly telecommunication equipment, which belongs to the manufacturing sector, and oil refining, the level of concentration is very high. Because of this level of concentration, it's necessary to impose a number of legislative and statutory rules, so that retailers can deal with these people on a fair basis and are not prevented from competing with their suppliers on the market by a certain price policy. That's all I say.

Mr. Eugène Bellemare: But the argument—

[English]

The Chair: Mr. Bellemare, does that answer your question?

[Translation]

Mr. Eugène Bellemare: Yes.

The Chair: Thank you.

[English]

Mr. Jones.

Mr. Jim Jones: Yes, thank you, Madam Chair.

Getting to prices where I can't sell gasoline at less than wholesale, let's give you an example whereby the independent takes 10,000 gallons a month and I charge him 20¢. The petroleum company down the street sells 100,000 gallons a month and I buy it for 15¢ a litre because I can take a whole truckload at a time. This bill would be saying that I cannot sell gas lower than the independent's price that I've charged him for wholesale. Is that correct or not correct?

Mr. Barry Zalmanowitz: I think that's correct in the situation where the integrated company also has a subsidiary. You have to charge them the same price and you can't give your own separate company a volume discount. It's my understanding that this bill, even as amended, would prevent that.

In a situation where there are two circumstances, there's a situation where the integrated company does not retail through a separate company. There the only restriction is that your price to your independent can't be more than your retail price. Then you'd run into a problem in the situation where, as I say, for some reason the integrated company operates through separate corporate divisions. The volume discounts, as I understand that legislation, would be a problem.

Mr. Tim Columbus: Mr. Jones, if I may, my understanding of this bill is quite different from that. My understanding of this bill is that it does not deal with price discrimination between different kinds of wholesale accounts.

Mr. Jim Jones: It doesn't say that.

Mr. Tim Columbus: I do not believe it does say that. My understanding of this bill, as Mr. McTeague proposes to amend it, is that it only prohibits an integrated company from charging an independent wholesaler more at wholesale than it is charging a retail customer at a retail outlet. So if I have a motorist coming in through one of my company-operated outlets, and I'm charging him 49¢ a litre, this bill only says that I may not charge an independent customer of mine more than 49¢. I can charge him 48¢. I can charge that independent person... I don't see how this has anything to do with discounts to affiliates.

• 1700

Mr. Jim Jones: Now, hold it. That is not true. I said that if you buy 100,000 gallons and you're at 15¢... I can sell that for 15¢ a litre, right? I do not have to go and have that independent drive his truck into my warehouse and sell it to him for 15¢ a litre.

Mr. Tim Columbus: Are you an end user? I'm really just trying to get the facts down straight.

Mr. Jim Jones: I think what we heard earlier in some of the debates we had was that if I'm going to sell it for 15¢ a litre and I'm selling 10 times as much as the independent, then I have to allow that independent to go into my warehouse or my... what do you call it?

Mr. Tim Columbus: The terminal rack.

Mr. Jim Jones: The terminal rack. And I have to sell it to him for 15¢ a litre there.

Mr. Tim Columbus: Okay, my understanding is twofold. One, you don't have to sell to that independent customer at all unless you're contractually bound to do so. That was my understanding of his response to the gentleman's question. If you are selling at retail at 15¢, then the wholesale rack price could not exceed 15¢, assuming that you're in the same market—

Mr. Jim Jones: No, but I'm saying—

The Chair: Mr. Jones, your last question, please.

Mr. Jim Jones: No, I think you're assuming something. I'm saying there is no allowance in here for one person who is selling 10 times or 100 times more; he has multiple locations, and he can offer that type of volume discount to his customer.

Mr. Tim Columbus: Under this bill, I believe he can offer a volume discount to his big customers.

Mr. Jim Jones: But my question is then—because there are accusations made there—how do we know the gas stations are selling under their wholesale costs? We don't know that.

Mr. Tim Columbus: Under this bill, wholesale cost is irrelevant. All it says is that you can't charge more at wholesale than you charge at retail. My understanding of the amendments is that this is all it says.

The Chair: I think we're going to have to agree to disagree here. I have two more questions, one from Mr. Lastewka and one from Madame Lalonde.

Mr. Lastewka.

Mr. Walt Lastewka (St. Catharines, Lib.): How much time do I have?

The Chair: You have one question. We're trying this; it's not working, but we're trying.

Mr. Walt Lastewka: Okay, then I'll ask Mr. Columbus, does the U.S. have the same law as Bill C-235?

Mr. Tim Columbus: No, sir.

Mr. Walt Lastewka: Thank you.

[Translation]

The Chair: Ms. Lalonde, please.

[English]

A voice: You should ask, why not?

[Translation]

Ms. Francine Lalonde (Mercier, BQ): I am sorry I missed your presentations. I have a short question for Mr. Bellemare.

You're certainly aware of bill 50, that was passed in Quebec. In this bill, integrated suppliers are not treated differently from all the other companies. Don't you think it creates a better environment? I know that there might be a jurisdiction problem, but isn't it true that the Quebec legislation, where there is no difference between integrated suppliers and the major importers which could act differently on the market and not abide by the principles you formulated, better than legislation which concerns only integrated suppliers?

Mr. Daniel Martin Bellemare: In both cases, we have general implementation provisions, and I think that it is how we should try to deal with the problem.

The bill you mentioned, which is the Act respecting the use of petroleum products, provides that in Quebec, no retailer can sell for less than a fixed price. There are provisions in this bill against charging less than this price, otherwise, it is viewed as a predatory price. That kind of practice is completely different from what this legislation intends to cover, since, as Mr. Columbus said, it's rather aimed at preventing discriminatory practices at the wholesale level.

In both cases, it's a general implementation legislation. I think this is how we should try to deal with the problem.

[English]

The Chair: Thank you.

Mr. Dan McTeague: Madam Chair, on a point of clarification, I want to clarify because I'm not sure if I heard correctly, in response to Mr. Lastewka's question—

The Chair: Mr. McTeague, I'm sorry, you've had your question.

Mr. Dan McTeague: It's not a question. I'm asking for clarification, Madam Chair, because I don't know what he said.

• 1705

The Chair: I'm sorry, Mr. McTeague, I watched what took place a few seconds ago with your assistant going behind Mr. Columbus, and now a question. I'm not going to allow it. We are going to move on. You've had your question and your answer. We have several witnesses waiting. I've asked everyone several times to please try to keep their questions and answers brief.

I apologize to the witnesses. I have a feeling that we could go on for several hours here.

Ms. Marlene Jennings: Madam Chair.

The Chair: We're going to suspend for two minutes, and then we have another group of witnesses.

Ms. Marlene Jennings: Madam Chair.

The Chair: Madam Jennings.

Ms. Marlene Jennings: As a point of clarification, Mr. Columbus, does the U.S. have similar legislation—

The Chair: No, Madam Jennings.

Ms. Marlene Jennings: —yes or no?

The Chair: You're asking a question now. We are moving on.

Ms. Marlene Jennings: He was asked a question, and I did not understand the response.

The Chair: The question was answered clearly no.

Mr. Janko Peric: Why not?

The Chair: We could go into an hour's debate on Canadian and United States legislation. With all due respect, members, please.

Mr. Janko Peric: Madam Chair.

The Chair: We're going to suspend for two minutes.

Mr. Walt Lastewka: I was cut off on my question.

The Chair: Mr. Lastewka stood by the rule of having one question and one answer. I'm not going to allow several others to participate now in the same question.

I want to thank our witnesses for being here. I want to thank everyone who has come a distance.

We're going to suspend for two minutes to allow our witnesses to change places.

• 1706

• 1712

The Chair: We will resume our hearing.

We seem to have lost one of our witnesses, but we're going to proceed anyhow. We're please to have with us Ms. Loretta Mahoney, Dr. Ronald Johnson, and Mr. Jeffrey Schmidt, and I assume that Mr. Watkins will arrive shortly.

I'm going to begin with Ms. Mahoney. Do you have an opening comment, an opening statement?

Ms. Loretta Mahoney (Individual Presentation): Thank you, Madam Chair, for allowing me to review briefly, for you and the members of the industry committee, the study on retail gasoline market shares that I prepared for the Competition Bureau.

My understanding is that Bill C-235 is predicated on the assumptions that the presence of independent retailers in the retail gasoline marketplace is essential to competition, that these independent retailers are being driven from the marketplace by the vertically integrated companies, that the vertically integrated companies do not compete amongst themselves, and that therefore Canadian motorists will be faced with higher gasoline prices. Some parts of my study, hopefully, will increase clarity on these assumptions.

The data used in the market share and service station sections of the study were purchased for me by the Competition Bureau from an objective and reliable source, Kent Marketing Services. Kent is a private Canadian company based in London, Ontario.

The inference that independents are disappearing seems unfounded when market share analysis is reviewed. Let me provide a few illustrations.

In a comparison of the market shares of the independents in the last five years of the study—that is, from 1993 to 1997—with the first five years, 1988 to 1992, the independents had improved their market share in nine of the cities studies, had no change in market share in Toronto, and had experienced a 1% market share drop in Montreal.

The market shares of independents have shown impressive gains over the decade in St. John's, Saint John, and Halifax, and these gains have continued in 1998, although at reduced rates.

The market share analysis would also suggest that the integrated companies do compete amongst themselves. Using Montreal as an example, I would point out the significant market share changes year over year of the top four integrated companies. Similar patterns observed in all the cities with independent marketers infer that there is competition amongst the integrated companies.

• 1715

The next section of the study dealt with service stations, and you are probably familiar with the rationalization of service stations that occurred in many areas in Canada in the early 1990s. Today I would like to stress the very different responses of the integrated companies and the independents.

The rationalization was deepest in the four eastern Canadian cities studied. These were Quebec City, Montreal, Ottawa, and Toronto. There was a net closure of 635 stations or about one-quarter of the stations over the ten years.

I use the term “net closure” to reflect a decrease in the number of service stations, taking into account the net effect of new stations, rebuilt stations, branded stations, and closed stations.

Of the 635 net closures, the integrated companies had 669 fewer stations, and the independents increased their number of stations by 34. This increase in the number of service stations by the independents is not really good news for the independents because average throughput is, for the most part, a more important indicator of productivity at the retail level than numbers of service stations, and in this context, the integrated companies have outperformed the independents over the decade under review.

The average throughputs in the Montreal market, for example, reveal the successful rationalization strategies. At the start of the decade, the integrated companies had average throughputs some 750,000 litres a year higher than their independent competitors. After the peak period of rationalization, the integrated companies' throughput was about one million litres a year higher than the independents. By the end of the decade, the gap had widened to an almost two million litre advantage for the integrated companies.

The acquisition and divestiture analysis, consolidated for Quebec City, Montreal, Ottawa, and Toronto, showed that rebranding and service station closures accounted for about 90% of the net change in the number of service stations. Over 1,400 service stations in these cities were rebranded in the ten years, and in the last five years, the independents were responsible for about three-quarters of the rebranding. This is a significant statistic in that it confirms that the independents are acquiring the surplus stations shed by the integrated companies and these stations are typically the poorest performers.

Thank you for your attention.

The Chair: Thank you very much, Ms. Mahoney.

I am now going to turn to Dr. Ronald Johnson. Dr. Johnson.

Mr. Ronald Johnson (Individual Presentation): Thank you, Madam Chair. My name is Ron Johnson. I'm a professor of economics at Montana State University.

I have taught and conducted research in the area of industrial organization and anti-trust for over twenty years. A number of my articles have focused on vertical integration and retail price controls and, more recently, on gasoline pricing and sales-below-cost laws.

My purpose today is to summarize a report I prepared for the Competition Bureau, entitled The Impact of Sales-Below-Cost Laws on the U.S. Retail Gasoline Market.

Earlier in these hearings, reference was made to the similarities between sales-below-cost laws as adopted by various states and Bill C-235. This afternoon I heard that there was no similarity between these two laws, but I do think there are some lessons to be learned or points to be made about what happened in the United States and how the sales-below-cost laws have impacted the industry in the U.S.

Like Bill C-235, the aim of general sales-below-cost laws, as well as motor-fuel-specific sales-below-cost laws, is to protect small firms from larger, high-volume, often vertically integrated competitors. Sales-below-cost laws do not explicitly establish minimum prices; rather, violations occur when prices are less than the seller's cost of doing business, or some proxy thereof. While often promoted as protecting consumers from the adverse consequences of predatory pricing, studies—one of them being one of my more recent ones—indicate that these laws have had the opposite effect: higher consumer prices. But it is also questionable how much protection these laws have afforded smaller independent dealers.

• 1720

Although sales-below-cost laws have increased prices to consumers, it does not necessarily follow that profits of retail gasoline dealers will also increase. Entry into the retail gasoline business is relatively unencumbered compared to other industries, and higher profit margins would likely attract entry. Moreover, with the advent of convenience stores, price competition in the sale of gasoline might be replaced by other types of product competition, driving profits downward, because sales-below-cost laws may encourage firms to engage in other types of competition. These laws can have an ambiguous effect on the average size and number of establishments, and therefore it may yield no long-term benefit for smaller firms.

Over the last 30 years the marketing of gasoline has changed substantially. There are now considerably fewer outlets. I believe that question was raised before. The number of outlets in the United States has dropped dramatically since 1972, and the ones that remain seldom resemble the traditional small service station, with its single island of gasoline pumps and one or two services bays. Although there is only a limited number of studies, empirical evidence indicates that general sales-below-cost laws, as well as motor-fuel-specific sales-below-cost laws, have done little to retard the decline of small retail establishments.

My report examines the impact of sales-below-cost laws on the characteristics of the U.S. retail gasoline market. In particular, the report examines the impact these laws have had on the number of retail establishments, the proportion of small operators in each state's market, and the proportion of outlets with service bays. The latter is a characteristic generally associated with traditional service stations. The analysis focused on the years 1987 and 1992, and that's because of data limitations. About half the continuous 48 states had general sales-below-cost laws and seven states had motor-fuel-specific sales-below-cost laws in effect in both 1987 and 1992.

The empirical results, taken collectively, indicate that neither general nor motor-fuel-specific sales-below-cost laws had a statistically significant impact on the number or composition of retail gasoline outlets in the states with these laws in effect.

The results also reveal that prohibitions on refinery-operated outlets—these are the divorcement laws in the United States, and five states have those—and bans on self-service, which two states have, have not stemmed the decline in retail outlets or affected the composition of retail establishments.

The decline in outlets without payroll, sometimes referred to as mom-and-pop outlets, is associated with population growth and increase in property values, while the laws aimed at protecting these establishments appear to have had little impact.

Sales-below-cost laws had little discernible impact on gasoline service stations with service bays. The decline in outlets and changing characteristics of the retail gasoline sector appear to be due to new marketing approaches, such as the increase in self-service, rising property values, and environmental regulations, which have become increasingly stringent over time, rather than predatory actions of vertically integrated oil companies.

While the belief that sales-below-cost laws protect smaller establishment is widespread, my report indicates that there is little basis for that belief. Thus, the higher retail prices that have accompanied such laws have imposed costs on consumers with no offsetting benefit. Attempts to regulate an industry are often premised on the idea that regulation will improve matters for some constituency. But that outcome can be elusive, with the end result offering little to the favoured constituency while imposing substantial cost on the general public.

I thank you, and I'll be glad to answer any questions you have about sales-below-cost laws or the gasoline market in the United States.

The Chair: Thank you very much, Dr. Johnson.

We're now going to turn to Mr. Campbell Watkins from Law and Economics Consulting Group Inc.

Mr. G. Campbell Watkins (Individual Presentation): Honourable members, my name is Campbell Watkins. I have about 30 years of consulting in the energy industries, in teaching, research consulting, and in publications, and most of my work has been in Canada. I'm currently working in the United States for Law and Economics Consulting Group.

I've provided you with a statement, and I don't propose to repeat that, so let me make some quick summary comments.

The first comment I want to make is that the model used to estimate the effects in Dr. Sen's paper was of two dimensions: it used data for cities and it used data over time. Now, that means you tend to have more reliable estimates from using a greater volume of data like that than if you just confined it to either what is called time series, the vertical data, or just the data across cities. I endorse that approach.

• 1725

The second point I want to make is to clarify the role played by Law and Economics Consulting Group. The major role was in terms of assembling the data and estimating the model that was specified, and the various versions of it. This is not a trivial task, in that we had some 8,500 observations to treat. In so doing, I checked the data for what seemed to be any apparent anomalies or errors, and I didn't find any.

The second role of LECG, the secondary role, was in providing some advice on the results and, for that matter, on the model specification.

Thirdly, let me comment about some of the results. I just want to mention three things here.

Firstly, we get the result that fewer firms may translate into higher market shares. That, as you might expect, would increase prices, and we get that result.

There was no trend—and I think Loretta Mahoney's evidence showed that—in the data that I looked at. I looked at the trend in the role of the independents, and certainly for some cities it moves up and down, but overall, when you look at the period, there isn't a great sea shift in the role of the independents. Moreover, when you translate the shares of the various companies engaged in the various market sectors into measures of what are called concentration, you don't get any major trends in those over time by city.

The next point I want to make is that having the results of the model establish that in fact a higher concentration led to higher prices, the next question the specification looked at was, does it make any difference as to where the source of increased concentration or decreased concentration, for that matter... is there a differential impact? Do the independents have a greater than commensurate effect on the market price according to whether the level of concentration increases or not? The answer to that seemed to be no, that there was no distinctive role for the independents in that context.

The third and final issue I wanted to comment on was the analysis of wholesale prices, where they did closely track crude oil prices—and, as you heard Professor Bernard say earlier, pretty well on a cent-for-cent basis. Also, there was a result there that in fact the level of wholesale prices was affected by the number of wholesalers in the individual markets. What that suggests is that there was no evidence from the wholesale market of any deliberate intent by the setters of the wholesale prices to manipulate them in response to changes in crude oil prices, and that indeed the level of the wholesale prices was affected by the number of participants in the market.

Thank you.

The Chair: Thank you very much, Mr. Watkins.

I'm now going to turn to Mr. Jeffrey Schmidt, attorney with Pillsbury Madison & Sutro.

Mr. W. Jeffrey Schmidt (Attorney, Pillsbury Madison & Sutro): Thank you, Madam Chair.

My name is Jeff Schmidt. As was true of my good friend Mr. Columbus, I'm also an anti-trust lawyer in Washington, D.C.

I'm here today on behalf of Commissioner Calvani, who is charged with responsibility for analysing the U.S. experience with predatory pricing and below-cost statutes. I believe you have his report in front of you. I have worked with Commissioner Calvani now for approximately 12 years, since I served as his chief anti-trust adviser at the Federal Trade Commission. I think, as Mr. Columbus also suggested, Commissioner Calvani is generally viewed as one of the... or with my bias, I'd say the leading U.S. anti-trust lawyer with respect to predatory pricing issues.

• 1730

The summary of Commissioner Calvani's report is essentially that predatory pricing is generally defined as sales below cost by a powerful firm over a long enough period of time for the purpose of driving a competitor out of business. The predator firm then raises prices to above competitive levels to recover its losses and render its predatory strategy profitable.

As Mr. Columbus also alluded, the United States has a rich history of both statutory and case law that treats issues of price predation. Our earlier federal judicial treatment was both aggressive and, in my view, economically unsophisticated. As a result, the law of predatory pricing harmed competition and tended to injure consumers, who paid higher than competitive prices.

Federal law in the United States on predatory pricing has now become much more pro-consumer. Today there is a consensus, led by the United States Supreme Court, that instances of predatory pricing are very rare and that courts should not find this pricing behaviour unlawful without proof of sales at below an economically sound measure of cost and, significantly, evidence that the predator will be able to recover its losses.

Three developments were important during this evolution.

First, the courts began to appreciate that erroneous enforcement hurts vigorous price competition and increases prices. As a result, the United States courts became more cautious. Second, the case law adopted a more meaningful and economically based definition of what constitutes “below cost”. Lastly, the courts concluded that there is no significant prospect of injury to competition unless the alleged predator is subsequently able to recover the cost of its predation. Accordingly, proof of likely recovery has become a necessary element of the plaintiff's case at the United States federal level.

This federal approach in the United States to the subject of predatory pricing is quite similar to that of the Canadian Competition Bureau, as reflected in its predatory pricing enforcement guidelines.

About half of the American states do have laws that attempt to address predatory pricing. Some states have predatory pricing laws of general application. Other state laws focus on specific markets, specific types of statutes, such as the retail sale of gasoline. Some states have both. Construction and enforcement of state law has varied over the years. Some states, like their federal counterparts, require proof of sales below an economically sound measure of cost and proof of probable recovery of losses. Other have adopted what is considered more of a populist view, similar to the earlier federal treatment, and focus on injury to competitors rather than injury to competition. In yet other states there has been very little activity.

Studies of gasoline markets, as Dr. Johnson has suggested, demonstrate that consumers can pay higher prices in markets with gasoline below-cost sales law. More interestingly, at least some of these studies show that independent dealers may not be better off as a result of these laws. Thus consumers can pay higher prices, but independent dealers may obtain no greater returns. Perhaps for these reasons, efforts to secure similar legislation at the federal level in the United States have failed.

In summary, the United States anti-trust law is dynamic. Federal anti-trust law has matured and today seeks to protect consumers—a very singular focus on consumers and not on competitors. This new learning has not fully been embraced by state law yet, but there is certainly evidence that state legislatures and state judiciaries are moving in that direction.

Thank you.

The Chair: Thank you very much, Mr. Schmidt.

I will now begin with questions. Mr. Chatters.

Mr. David Chatters: I have a very simple question, because we keep hearing the same message over and over again. I would just ask each one of you to tell me, in your opinion, does Bill C-235 constitute price regulation and will it result in higher prices for the consumer? That's a simple, straightforward question.

The Chair: Are you addressing this to all of them, Mr. Chatters?

Mr. David Chatters: Yes, to each one.

The Chair: Ms. Mahoney.

Ms. Loretta Mahoney: With respect, that was beyond the bounds of the study I was engaged to do for the bureau, but I would have a personal opinion.

Mr. David Chatters: I would like to hear it.

Ms. Loretta Mahoney: Yes. My personal opinion is that this type of regulation, of government intervention, you do at your peril, and it is typically not to the benefit of consumers.

Mr. David Chatters: Thank you.

The Chair: Dr. Johnson.

Mr. Ronald Johnson: I don't think it's a very easy question, whether this is price regulation or not.

Mr. David Chatters: But it's what we have to determine.

• 1735

Mr. Ronald Johnson: Yes. I think it really borders on it, but it's not that pure a case at all. And do I think this bill as amended will have a negative effect on consumers? Yes, but I think it's going to have a more positive effect on the bar. I was surprised the Canadian Bar Association was not for this one. I sense you're going to have a lot of litigation over this, given the ambiguity and the way in which this bill is written.

One of the things I was trying to point out in my paper is that the large oil companies and the large retailers... That's really what some people are concerned with—we have independent retailers, but sometimes in the United States they own 50 or 60 stations. Yes, they're not small independent dealers. They'll find ways around this.

And I'd be more concerned with the telecommunications issue that was brought up. I'd be much more concerned about what this bill will do in some of the other areas.

Mr. Campbell Watkins: Your question was, is this price regulation? The answer is yes. Any time you restrain prices in this way, that's regulation.

The Chair: Mr. Schmidt.

Mr. Jeffrey Schmidt: I believe under the U.S. laws this would be viewed as a form of an attempt to measure costs, which under predatory pricing analysis is one aspect of the test: are you pricing below a relevant measure of costs? I think you have one defined in this most recent amendment. But the second test under the U.S. version would be whether there is a likely recovery of the profits or the losses that are being suffered by the predator. And this I believe is missing from this statute.

Mr. David Chatters: I'm not sure if he answered the question.

Mr. Jeffrey Schmidt: I think the short answer is that I would view it as a form of price regulation, yes.

Mr. David Chatters: And it will result in higher consumer prices?

Mr. Jeffrey Schmidt: Well, again, with the caveat that it was not Commissioner Calvani's or my charge for this purpose, I think the history and the rationale of our Supreme Court cases are that getting involved in regulating prices, getting involved in deciding what level of prices is appropriate or not, is something our U.S. Supreme Court has decided hurts consumers, and we need to be very careful to stay away from that unless there is clear evidence that anti-competitive conduct is involved.

Mr. David Chatters: Thank you.

The Chair: Mr. McTeague.

Mr. Dan McTeague: Thank you, Madam Chair.

My first question is to you, Mr. Schmidt. It's my understanding that your law firm is the principal law firm for Chevron, Standard Oil of California, so-called SOCAL. Can you confirm this?

Mr. Jeffrey Schmidt: My law firm does represent Chevron, Mr. McTeague.

Mr. Dan McTeague: Given this information, can you ethically offer an opinion that is in conflict with Chevron or Standard Oil of California?

Mr. Jeffrey Schmidt: Well, Mr. McTeague, my law firm is one of many law firms that represent Chevron. I can tell you, as you'll see from Commissioner Calvani's report, that the citations Mr. Calvani refers to are frequently his own articles published on predatory pricing, which go back long before Commissioner Calvani came to Pillsbury Madison & Sutro in 1991.

Mr. Dan McTeague: That's a question, Mr. Schmidt. Yes or no? Do you think you can offer an opinion to this committee, given your firm's connection with Chevron, Standard Oil, SOCAL?

Mr. Jeffrey Schmidt: Yes. I do not believe it's a conflict, sir.

Mr. Dan McTeague: Thank you.

I want to turn to Ms. Mahoney. Thank you for that, by the way. I think that sets things very straight.

Ms. Mahoney, why did you include major and regional refiner-marketer private brands in the market shares of independent gasoline retailers? For example, Mohawk is 100% owned by Husky Petroleum, a regional refiner; Tempo, 100% owned by Federated Co-op, a regional refiner. Actton Super-Save, mainland Vancouver, was also sold to Arco, a U.S. refiner. Elsewhere in western Canada, the company was sold to Parkland Industries, a regional refiner. Pioneer Petroleum is 50% owned by Sunoco, a regional refiner. Top Valu is owned by Pioneer and Sunoco.

You know that a number of people have made assumptions, wonderful assumptions, without your study being peer reviewed, such as the CAA. Do you think the inclusion of the above retailers as independents has clouded your report with respect to the trends in independent market shares? Surely they should not have been used as part of your obtaining so-called accurate information.

Mr. Loretta Mahoney: I don't believe this clouds the report. My definition of independents is those that have no refining capacity and obtain their product supply directly from Canadian refiners through wholesale dealers or by importing a product. I'm comfortable with the classifications.

• 1740

Let me just give a few examples. Mohawk, yes, that was bought by Husky in the last half of 1998, and Mohawk was legitimately shown as an independent for the period of my study, which ended in the third quarter of 1998. I don't have Kent Marketing's data for the fourth quarter of 1998, so I don't know how they'll be showing Mohawk in the fourth quarter, but I am sure that—

Mr. Dan McTeague: I think it's important to understand that you have submitted information as of March 1999, so is it accurate to say that you have a rather interesting and somewhat distinct view of a true independent in that there can be an affiliation, if not ownership, and that furthermore your facts and figures are way out of whack with the current reality that exists in Canada?

Ms. Loretta Mahoney: The classifications do change as appropriate. Let me give you another example. Sergaz was removed from the independent group and transferred to the regional private brand category when Ultramar purchased Sergaz in 1994. The Mohawk case is an example of a recent transaction, and it will be reflected in Kent Marketing's 1999 data as a regional private brand.

I can go through each one on the list.

Mr. Dan McTeague: Thank you, Ms. Mahoney, thank you.

Ms. Loretta Mahoney: I stand by the definitions, and they are the definitions currently accepted by most industry players.

Mr. Dan McTeague: Mr. Johnson, you've spoken rather eloquently to the notion of what has occurred in Montana. I'm wondering if you are familiar with the fact that Wisconsin and Pennsylvania have increased their below-cost legislation. And would you agree therefore with the conclusion of Mr. Columbus, that this is not below-cost legislation? Could you comment on that, sir?

Mr. Ronald Johnson: First of all, my study does not even consider Montana, except for the 48 states. The one about below-cost pricing, the refereed article, didn't have Montana in the sample.

Mr. Dan McTeague: I'm sorry, you did refer to Montana as an example of a state that has repealed its below-cost selling laws because they allegedly raised—

Mr. Ronald Johnson: Oh, in the report.

Mr. Dan McTeague: —retail gasoline prices. So you did talk about Montana, sir.

Mr. Ronald Johnson: About the prices, yes. But my study is not focused solely on Montana.

What was your other question, sorry?

Mr. Dan McTeague: The second question is do you consider this bill to be a bill that deals with below-cost selling?

Mr. Ronald Johnson: No.

Mr. Dan McTeague: Finally, my question then would go to Mr. Watkins. Mr. Watkins, I believe... Who's here on behalf of our good friend Mr. Calvani?

Mr. Jeffrey Schmidt: I am.

Mr. Dan McTeague: Thank you. Despite your remarks, I have one small question for you. Mr. Calvani, it's been suggested, has created a wonderful piece here, except that Mr. Calvani does not take into account the amendment that was made almost three or four weeks ago. Given that this is the case, would it be fair to say that the veracity of his report, given the amendment, is out of context?

Mr. Jeffrey Schmidt: Mr. McTeague, I think the charge that Commissioner Calvani was faced with was analysing U.S. experience with predatory pricing and below-cost state statutes, and I don't think that's impacted by whatever state the amendment is in today.

Mr. Dan McTeague: The reason I ask that, Mr. Schmidt—

The Chair: Last question, please, Mr. McTeague.

Mr. Dan McTeague: Yes, thank you, Madam Chair.

It deals with the fact that although we have an interesting way of measuring a number of concerns dealing with below cost, Mr. Calvani could not have known what the amendment was and its impact ultimately on the analysis here within Canada.

So I wanted to reiterate the point that it would appear to me that if Mr. Calvani was writing this on a certain set of assumptions, and you're here presumably on his behalf, those assumptions are no longer valid or relevant; and therefore not only is your testimony of concern, but unless you're offering something different from Mr. Calvani, it is probably outside the ambit of this proposed amendment to this bill. Is that correct?

Mr. Jeffrey Schmidt: Mr. McTeague, I have to stand behind the report we submitted.

The Chair: Thank you.

Mr. Dan McTeague: That's my final question. Thank you, Madam Chair.

[Translation]

The Chair: Ms. Lalonde, please.

Ms. Francine Lalonde: I'm going to make a statement and then, I'll ask you for your comments.

We have to establish, since this is what Mr. McTeague is aiming at, whether this Bill would in fact allow retailers to keep or to increase their market share to create a competition which would be to the benefit of consumers.

• 1745

Now, the bill, which I supported upon second reading, forces the integrated company to charge retailers a wholesale price equal to its own retail price. This means that the small retailer or the independent retailer will be forced to limit its operational costs and retail its gas at a higher price than the integrated supplier, because it's going to buy it at that price.

If it's the only condition and if retailers have no other means to try and get by, is this bill really going to allow retailers to compete on the market, which means that overall, the price of gasoline would remain as close as possible to the international price?

I hope that I'm not making life too difficult for the translators.

[English]

The Chair: Any comments? No. Dr. Johnson.

Mr. Ronald Johnson: If I understand the question, it's whether or not this bill would really help them compete. And I think again, if we're talking about the small independent dealers, the forces determining the marketing structure here will go on even with this bill, or without this bill. That's the message I want to tell you. You may slow a few things down here and there, but I think the end result would be slightly higher prices for consumers and, again, substantial difficulties in interpretation of this act in other areas of the economy.

[Translation]

The Chair: Ms. Lalonde, do you have other questions?

Ms. Francine Lalonde: I'd like to add that when I asked the CPPI representative whether the fact that the price in Montreal is closer to the international price is due to the presence of independent importers who can buy boat fulls of oil already refined and who, therefore, don't need to go through refiners, the answer was "yes". When you talk about market power, are you talking about this type of competition?

[English]

The Chair: Mr. Watkins.

Mr. Campbell Watkins: If I understood your question, I think you are correct in saying that the price of gasoline in the Montreal area is more closely related to the imported price of gasoline from the Caribbean or wherever because of the access through the facilities there, although I think there's probably a seasonal aspect as well. So I think you're right.

The Chair: Any other comments? Your last question, Madam Lalonde,

[Translation]

please.

Ms. Francine Lalonde: Independents are not all small. This is one of the big issues I have difficulty with.

• 1750

I support the intent of this bill, and I am still trying to see whether it will, in fact, serve its purpose. Independents are not all small. There are big ones which are not integrated and to which the restrictions imposed on integrated supplies will not apply. There is Costco, for instance, and others.

[English]

The Chair: Ms. Mahoney.

Ms. Loretta Mahoney: I would comment that of course I agree with you that within the categories, even within the major categories, there are different sizes.

Among the integrated companies we have refiners with a presence across the country. We have refiner-marketers that have a presence only in one province. And amongst the integrated players, we have very small independents. Amongst the independents, we have very small players, such as the mom-and-pop single outlets with no service bays, no car washes, no ATM machines, no video rentals, and we also have very large independents. I think it's not breaking any confidentiality to use Canadian Tire as an example. And the experience within the categories is very mixed. For instance—again it's no secret—I'm not breaking any confidences to say that Canadian Tire has average throughputs at their service stations that many of the integrated companies would only dream of having.

So these companies all contribute in their own way to competition, and indeed over the period of my analysis we saw very mixed results. Some companies had reversals of fortune, other companies fared better, again within the same category. But because we deal with averages, I presented the integrated companies as one category and the independents as another category, recognizing that there are considerable differences within those groups.

The Chair: Does anybody else have anything to add?

Dr. Johnson.

Mr. Ronald Johnson: I think the example of Costco is getting right at the point here. This law would have nothing to do with Costco, in the sense that Costco could still continue to use it as a loss leader and eventually drive out the smaller independent operators. So in that sense with this law, you're not giving them any protection. If that's your objective, it just strikes me that it's not really what's going to happen here.

The Chair: Thank you.

Thank you, Madam Lalonde.

Ms. Jennings, please.

Ms. Marlene Jennings: Thank you. I have a couple of questions. I have five minutes, I believe.

The Chair: That's the plan.

Ms. Marlene Jennings: Thank you.

I have one question for you, Mr. Schmidt. Are you convinced that Mr. McTeague's bill, with the amendments, were the amendments to that bill to be passed, would be below-cost legislation?

Mr. Jeffrey Schmidt: Madam, I have not studied, and our focus was not on, the particular proposed legislation or the amendments, as again it was on the U.S. experience with predatory price setting.

Ms. Marlene Jennings: So your comments and the study by Mr. Calvani are specifically directed to the United States, the American experience, and you cannot comment, on the basis of the Calvani report, on McTeague's original bill or on the amendments he has submitted?

Mr. Jeffrey Schmidt: That is correct, with the—

Ms. Marlene Jennings: Thank you.

Ms. Mahoney—

The Chair: Ms. Jennings, would you allow him to answer that entire question. He was in the middle of a sentence when you cut him off.

Mr. Schmidt, did you have something you wanted to add?

Mr. Jeffrey Schmidt: I was just going to add, with the addition that the charge was to compare with the Competition Bureau's predatory pricing guidelines.

Ms. Marlene Jennings: Yes, but it still has nothing to do with Mr. McTeague's bill, or the amendments he has brought to that bill. That's the point I want to understand.

Mr. Jeffrey Schmidt: I think that is fair.

Ms. Marlene Jennings: Thank you.

• 1755

Ms. Mahoney, I was very interested in the definition you gave of what a refiner is, what a wholesale refiner is, what a regional wholesale refiner is, what an independent is, etc.; and that under the Kent Marketing Services, as there were changes within the definition that you gave, an entity that was defined as an independent but was bought by a regional wholesale refiner, or by a national... their market share was then shifted into the other category. Okay?

Ms. Loretta Mahoney: Yes, at the appropriate time.

Ms. Marlene Jennings: At the appropriate time. And then the market continued to change or whatever, and it did so under the new category, etc. If I'm to understand that, then if Mohawk at the time of purchase—and under your definition Mohawk was independent—had an 8% share, the purchaser's share of the market would have increased by 8%. Is that correct?

Ms. Loretta Mahoney: I don't think it is as simple as that. Let us say, for simplicity's sake, that as of the third quarter of 1998 Mohawk was classed as an independent. Let us say that in the first quarter of 1999 Mohawk is now classed as a regional private brand by virtue of its acquisition by Husky.

Ms. Marlene Jennings: Yes.

Ms. Loretta Mahoney: The market is evolving, the market is dynamic, so there's no guarantee that Mohawk will retain its 8% share.

Ms. Marlene Jennings: I understand that.

Ms. Loretta Mahoney: The new owner may decide to close some stations. I can't say it would have an 8% market share.

Ms. Marlene Jennings: My understanding is that in the study you did you were not able to get right down to a day-per-day, or a week-per-week, or a month-per-month market analysis. It was done by quarter. And therefore purchases by—your definition—wholesale refiners, regional or national, at the very beginning of a new quarter... you would not be able to determine in a scientific, statistical fashion, with the methodology you use, the actual impact on a day-to-day, week-by-week, or month-to-month basis. You would only be able to do that on a quarterly basis. Is that correct—because you used a quarterly basis.

Ms. Loretta Mahoney: Again the answer is that it's not that simple. Certainly I don't have day-by-day information on changes, and neither does Kent Marketing. Kent Marketing typically does its reads two, three, or four times a year, depending on the size of the market.

Ms. Marlene Jennings: Is there any way Kent Marketing can readjust figures?

Ms. Loretta Mahoney: May I finish?

Ms. Marlene Jennings: Yes.

Ms. Loretta Mahoney: I have looked at the market—this particular study covers a period of ten and three-quarter years. I don't think what happens in a single day or a single quarter negatively impacts on the conclusions of this trend analysis, which is over a very long period.

The Chair: Madam Jennings, last question, please.

Ms. Marlene Jennings: I'm not calling into question your conclusions. I'm trying to understand the methodology. I want to know, does Kent Marketing have a mechanism by which to adjust the figures at the end of a quarter when they realize that someone's been bought out and has moved into another market share—to do a readjustment?

Ms. Loretta Mahoney: My understanding is that they do not go back and retroactively adjust. They have a reading that stands, and then in the next reading, if there has been a re-branding, it will be taken into account—if a station has closed, if there has been transaction, etc.

Ms. Marlene Jennings: Okay.

The Chair: Thank you very much, Madam Jennings.

Mr. Jones.

Mr. Jim Jones: I would like to get some clarification on what is meant when you say “sales below cost”. What is the cost for the integrated supplier? Can I have multiple costs, one to the independent based on volume and one to his own retail chain? What does “below cost” mean?

The Chair: Dr. Johnson.

Mr. Ronald Johnson: All the states seem to have a slightly different proxy for measuring a trigger as to when it is, but the basic price... In gasoline, the motor-fuel-specific laws—Wisconsin is an example of one—also talk about vertical pricing. What they will do is essentially look at the rack price. Let me give you the example of how it works in Montana.

• 1800

Montana had a 6% mark-up. This is before the voters repealed the law last November. If a retailer was selling at less than a 6% mark-up, the neighbouring stations could call the county attorney and protest to the county attorney that they were selling below cost. They know what the rack price is and they also know what delivery costs are and stuff like that, so they have a very good idea of when that trigger happens.

They can simply call up and say, okay, that's below cost. The county attorney would then issue a call—it could be a phone call—or actually write a letter to the so-called offending station and essentially give a cease-and-desist order.

Mr. Jim Jones: So my question is, is there only one cost then?

Mr. Ronald Johnson: In that case, there would be only one cost they would have to look at.

Mr. Jim Jones: It doesn't matter if I had 100 stations in the state, and I'm buying 10 million gallons a year, and the other guy is buying 10,000 gallons a year; it's only one cost.

Mr. Ronald Johnson: The way in which it was interpreted, and the way in which it was enforced, was yes.

Mr. Jim Jones: That is dangerous.

The Chair: Mr. Watkins.

Mr. Campbell Watkins: Could I just add to that, sir?

The whole question of what constitutes the appropriate cost, in terms of the way the analysis of predatory pricing has operated in the United States, has been very difficult to handle, because it's a question of what cost you're talking about. You talk about short-run variable cost, you talk about short-run average cost, you talk about long-run marginal cost, you talk about long-run average cost. There are various ways of defining cost, and I'm sure you can appreciate that any attempt to define the cost that should be measured against the price is, in terms of measuring predatory pricing, very difficult.

Mr. Jim Jones: So, Mr. Johnson, in the U.S., say for example, the telcos, which have volume discounts or different types of pricing, if this type of law were enacted, would only be able to sell their services at one cost?

Mr. Ronald Johnson: If, for example, Costco could negotiate a lower wholesale price, I think you could bring that into court. That's just a guess. You wouldn't have to use the common rack price as the trigger point. Again, I don't know of any case where that has actually come forth, although I understand now in Tennessee there is a case that is being heard. It has to do with Wal-Mart.

My point on these things is that Wal-Mart and other companies like Costco may well be selling well below their delivered price. They use it as a loss leader. That's exactly what I tried to say in my statement. You can't just look at one price. People are going to that store nowadays and they're buying gasoline, and they're also buying milk and a whole bunch of other commodities. The mere fact that you regulate on one dimension doesn't let you off on what they can do on all these other dimensions.

Even if you regulated Costco, at this particular point, if they had to be at the rack price—even though I don't see how this law actually gets at Costco, but if you did—Costco could still lower some other prices in order to attract customers. They could provide some other kind of service at the gas station, at the pump. There's a whole host of things they could do to get around these kinds of things.

The Chair: Thank you.

Mr. Peric.

Mr. Janko Peric: I have one question for each witness. I'll start with Mr. Johnson.

Mr. Johnson, can you tell this committee the type of market shares independents hold in the United States? Can you tell the committee if the United States offers publicly accessible pipelines, publicly accessible terminals, and does this open most U.S. markets to wholesale and retail competitors? Are you aware that there is no publicly accessible infrastructure in Canada?

Mr. Watkins, you stated in your report that wholesale prices follow food prices and, as a result, refiners are not taking advantage of the wholesale level. Can you comment on the level of wholesale prices over crude prices in Canada, and are they at the same level in the United States?

• 1805

Ms. Mahoney, you mentioned in your statement that in the last five years of study the independents have improved their market shares in nine cities, and so on. How did you get those figures? Did you conduct the studies yourself or did you get those figures from some other sources?

Whoever wants to can go first.

The Chair: Mr. Watkins.

Mr. Campbell Watkins: The question was, do I have or have I seen data on what are called the refinery margins, that is, the difference between the wholesale price for gasoline and the cost of crude oil feedstock at the refinery? I haven't in the context of this study. Let me add to that by saying the relationships that were referred to in the analysis were really relating to a change in the price rather than the gap between the two prices.

So what they were saying was that if the lower price, the crude oil price, goes up by, say, 10¢ per litre, then the upper price, the wholesale price, would also go up by about the same amount. So whatever the margin was, it would be constant.

Mr. Ronald Johnson: As far the market shares are concerned, I don't have exact numbers, so this has an asterisk on it. What is published by the Department of Energy through their surveys is a figure on the amount of fuel that passes through outlets that are owned by refiners. Now, we're not just talking about a branded dealer out there, all right? We're talking about the situation where they actually own the physical station and they lease it out to some other private party to run, or they run it themselves. It's owned by them. So these are integrated refineries in that sense. I think it's around 25%, but that's just a guess.

I think the other issue you brought up is an important one. I don't know the history here in Canada of what's going on, but as far as the publicness of terminals is concerned, we do have common carrier provisions in the United States so that anybody who's qualified can ship fuel over these pipelines. If that's not going on in Canada—and it may be a bottleneck—it may be something this committee should be looking into.

Ms. Loretta Mahoney: The information you requested is contained on page 8 of my report. It looked at the five-year average from 1988 to 1992 and the five-year average from 1993 to 1997. That is what I referenced when I said the independents' market share had increased. For example, St. John's, Newfoundland, went up from 8.7% to 17.9%, Quebec City from 22.3% to 23.8%. I did note that Montreal had declined by 1%, from 19.7% to 18.7%.

Mr. Janko Peric: Yes, I can see that.

Ms. Loretta Mahoney: All that data was obtained from the analysis of the Kent Marketing data.

The Chair: Thank you, Mr. Peric.

Mr. Jaffer.

Mr. Rahim Jaffer (Edmonton—Strathcona, Ref.): I just have a quick question for whoever would like to comment on it.

One thing that's becoming clear to me a little more from the witnesses' presentations and some of the questions is that it doesn't seem to be a question of really how many players in the market are necessarily going to create competition, but instead what sort of barriers there are to entry into the market. This is a better measure of what competition is.

For instance, we've seen cases in the U.S. with Microsoft. It's obviously a big company with a dominant position in the market, yet to maintain its market share it did not take advantage in any way of predatory pricing. At least that has been proven now, from what I understand.

I would just like to hear some of your comments, given that aspect, and maybe with the course of this legislation we might be going about it in the wrong way, in evaluating what constitutes competition in a market.

The Chair: Dr. Johnson.

• 1810

Mr. Ronald Johnson: This is actually one of my favourite subjects, and the reason is that I think too much emphasis is put on market share. I think market shares are trigger points. So if, for example, you have 20 equal-sized firms in the market, walk away; don't worry about it. On the other hand, when you start getting highly concentrated markets, it opens the door to say, let's go and take a look at something. But it certainly isn't the condemnation.

I think you're absolutely right; what matters is how quickly you can move in and out of the market. We know that if there's enough potential competition out there, one firm will do it.

The Chair: Thank you.

Are there any other comments to that? Monsieur Bellemare.

Mr. Eugène Bellemare: Merci, madame la présidente.

The bill, as presented, seems to be industry specific. In my mind, I'm trying to juggle, are we trying to protect the consumer or are we trying to protect fair competition? And in trying to protect fair competition, there's a subclause: are we protecting the independent?

You're going to come up with a fast yes-or-no answer on any of those three items, but my basic question or my most important question is, assuming that your answer is that we're protecting the consumer if we pass this bill and that it should be passed—assuming that for an instant, even if it's contrary to what your mindset is right now—what would be the impact on other industries?

The one that comes to mind is telecommunications, where, for example, a company—let's say Bell Canada—has devised a very fast Internet system by spending a fortune in research and material, and now, to introduce the product, they want to sell it at a much lower cost than their production cost. But the independent Internet people are saying, that's not fair; we would want to be able to purchase at the retail price at which you're selling. To my mind, it sounds like these independent Internet servers are cherry-picking, like they don't want to invest; they don't want to do research. All they want to do is be able to use the connections and go out in the market and sell.

What are your opinions on this thought?

The Chair: Mr. Watkins.

Mr. Campbell Watkins: Let me try to answer some of those questions.

The first one is, is this bill directed at independents? No, that's not named in the legislation. But I think if you look at the intent, the practical effects of the bill, yes, it is.

Does it protect the consumer? I think the answer to that is moot. The reason I say that is because the dynamics of competition may have some negative impacts on that.

The Chair: Dr. Johnson, do you have any comments?

Mr. Ronald Johnson: Yes. I don't see this bill as protecting consumers. At least, the analysis and the arguments presented that I have read—and I have read some of the earlier testimony—don't support that.

What I see, though, with this bill—and you brought it up with telecommunications—is potential mischief. If Madam Chair will allow me, I'll give you an example.

Imagine the shoe manufacturer who has a particular model and also has a retailing outlet, which is branded name. Many of these outfits also sell their same product to discount shops—at least, that what my wife tells me, where she shops and gets all the branded-name stuff. But if that manufacturer, through its retail establishments—for example, they're selling in an upper-class neighbourhood and the discount store is in a lower-class neighbourhood—decides that this shoe is not moving and they decide to clear it out of their market, they go ahead and lower the price, and they could lower the price below the wholesale price they've actually been selling it to or contractually arranged with the discount store. Given this bill, they would be in violation.

The Chair: Okay.

Mr. Eugène Bellemare: Mr. Schmidt.

Mr. Jeffrey Schmidt: My comment would relate more generally to the U.S. experience with predatory pricing problems, and that is simply that in reading the most recent Supreme Court cases in the United States, there is a clear focus on the consumer, despite the fact that many times individual competitors are the subject of very harsh and perhaps even unfair treatment. The Supreme Court has made it clear in the United States that the focus of our anti-trust laws has to be simply whether there's injury to consumers, not whether there are injuries to particular competitors.

• 1815

The Chair: Are there any other comments?

Thank you very much, Mr. Bellemare.

Mr. Stan Keyes: Madam Chair, could I interrupt on a point of order for a moment? I'm sorry to do this to the witnesses, but we have enough members here now, if a motion were to be put forward—

The Chair: Mr. Keyes, you can't put a motion on a point of order.

Mr. Stan Keyes: All right, then.

The Chair: I was going to recognize you after Mr. Jones. So if Mr. Jones has no questions, I'd be pleased to recognize you.

Mr. Keyes.

Mr. Stan Keyes: Thanks, Mr. Jones.

You know, Madam Chair, because of the lack of time... That's what it has been, I think, a lack of time devoted to this bill, Bill C-235. It's not anyone's fault, because there are House orders that say it has to be returned to the House in a specific time period, etc. While the bill is very clean and very simple, I fear—and it's not just me; there have been, in the words of at least one other witness, questions on what this bill will do in other areas—its implications may go beyond what we're really trying to do here. And in my opinion, there's been a lack of witnesses.

Quite frankly, I would have liked to know what the minister thought about this bill. I would have liked to hear what the agriculture industry had to say about this bill. I would have liked to know what the transportation industry had to say about this bill. We'll hear none of that, because we're limited in time.

Can anyone... I know I can't; I'm going to admit it here and now. Can anyone, except for Mr. McTeague, who we all recognize has been very knowledgeable on this issue... He's been carrying the can on this thing for a long time and he's been making some pretty solid arguments. I can't move on something that I'm not fully informed about, when I don't have enough answers. I don't have the opportunity to have enough questions.

But I like what he's doing. And if anything, what Dan McTeague's bill has done is point, I think, to some inadequacies in the Competition Act and to the fact that there's a problem with the Competition Bureau. I'm not speaking for anyone else. I think there's a Competition Bureau problem.

For all these reasons, Madam Chair, I'd like to move that at its earliest convenience, the industry committee thoroughly review the Competition Act and the Competition Bureau. It's as simple as that.

The Chair: Mr. Keyes, to move that motion right now, I would require unanimous consent because of the 48-hour rule.

Mr. Stan Keyes: I apologize. Then I request unanimous consent to move.

The Chair: Is there unanimous consent for Mr. Keyes to move that motion now?

[Translation]

Ms. Francine Lalonde: I agree with that.

[English]

The Chair: Do you agree with that?

[Translation]

Ms. Francine Lalonde: I would have proposed it.

[English]

The Chair: Mr. Jones.

Mr. Stan Keyes: You don't want to move this motion?

Mr. Jim Jones: No. I think we can bring it up in the next meeting, but not right now.

The Chair: We could take it as notice, Mr. Keyes, to deal with it.

Mr. Stan Keyes: All right, it's notice for a steering committee, then.

The Chair: No, no. You can put forward the motion. We just cannot deal with it at this time because we have a 48-hour substantive rule.

An hon. member: We have to think about it.

Mr. Stan Keyes: Sure. Then I'll file the motion for 48 hours.

The Chair: So it's tabled.

Mr. Stan Keyes: Thank you, colleagues. Sorry for the interruption to the witnesses.

The Chair: I have no other questions on my list.

I want to thank our witnesses for being with us this afternoon and for coming the different distances they did. It's been a very interesting discussion.

I do note that the number of retail operations has declined in both countries, and there's obviously an explanation we have to find for that.

So I thank you all for being with us. The meeting is adjourned.