INST Committee Meeting

37th PARLIAMENT, 2nd SESSION

Standing Committee on Industry, Science and Technology

EVIDENCE

CONTENTS

Monday, April 7, 2003

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1535

The Chair (Mr. Walt Lastewka (St. Catharines, Lib.))

Professor Stephen Ross (Professor of Law, University of Illinois College of Law, As Individual)

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1540

The Chair

Ms. Kasia Majewski (Policy Analyst, Canadian Chamber of Commerce)

Mr. John Clifford (Partner, McMillan Binch, Canadian Chamber of Commerce)

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1545

¹

1550

The Chair

Mr. James Rajotte (Edmonton Southwest, Canadian Alliance)

Prof. Stephen Ross

Mr. James Rajotte

Prof. Stephen Ross

The Chair

Mr. John Clifford

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1555

Prof. Stephen Ross

Mr. James Rajotte

Prof. Stephen Ross

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1600

The Chair

Mr. Larry Bagnell (Yukon, Lib.)

Mr. John Clifford

Prof. Stephen Ross

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1605

The Chair

Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance)

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1610

Prof. Stephen Ross

Mr. Brian Fitzpatrick

Prof. Stephen Ross

Mr. Brian Fitzpatrick

Prof. Stephen Ross

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1615

Mr. Brian Fitzpatrick

The Chair

Mr. Brian Fitzpatrick

Mr. Dan McTeague (Pickering--Ajax--Uxbridge)

Mr. John Clifford

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1620

Mr. Dan McTeague

Mr. John Clifford

Mr. Dan McTeague

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1625

Mr. John Clifford

The Chair

Prof. Stephen Ross

The Chair

Mr. Andy Savoy (Tobique—Mactaquac, Lib.)

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1630

Mr. John Clifford

Mr. Andy Savoy

Prof. Stephen Ross

Mr. Andy Savoy

Mr. John Clifford

Mr. Andy Savoy

Prof. Stephen Ross

Mr. Andy Savoy

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1635

Mr. John Clifford

Mr. Andy Savoy

Mr. John Clifford

Mr. Andy Savoy

Prof. Stephen Ross

The Chair

Mr. Brent St. Denis (Algoma—Manitoulin, Lib.)

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1640

Prof. Stephen Ross

Mr. Brent St. Denis

Prof. Stephen Ross

Mr. Brent St. Denis

Mr. John Clifford

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1645

Prof. Stephen Ross

Mr. John Clifford

Mr. Brent St. Denis

The Chair

Mr. Brian Fitzpatrick

Prof. Stephen Ross

Mr. Brian Fitzpatrick

Prof. Stephen Ross

The Chair

Mr. Brian Fitzpatrick

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1650

Prof. Stephen Ross

Mr. Brian Fitzpatrick

The Chair

Mr. Dan McTeague

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1655

Mr. John Clifford

Mr. Dan McTeague

Mr. John Clifford

Mr. Dan McTeague

Mr. John Clifford

Mr. Dan McTeague

»

1700

Mr. John Clifford

Prof. Stephen Ross

The Chair

Mr. Brian Fitzpatrick

»

1705

Prof. Stephen Ross

Mr. Brian Fitzpatrick

The Chair

Mr. Larry Bagnell

Mr. John Clifford

Mr. Larry Bagnell

Mr. John Clifford

Mr. Larry Bagnell

Mr. John Clifford

Mr. Larry Bagnell

»

1710

Mr. John Clifford

Mr. Larry Bagnell

Prof. Stephen Ross

Mr. Larry Bagnell

Mr. John Clifford

»

1715

Prof. Stephen Ross

Mr. Larry Bagnell

Prof. Stephen Ross

The Chair

Mr. John Clifford

The Chair

Mr. Dan Shaw (Committee Researcher)

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1720

Prof. Stephen Ross

Mr. Dan Shaw

Prof. Stephen Ross

Mr. Dan Shaw

Mr. John Clifford

Prof. Stephen Ross

»

1725

The Chair

Mr. Geoffrey Kieley (Committee Researcher)

Prof. Stephen Ross

Mr. John Clifford

Mr. Brian Fitzpatrick

The Chair

Mr. Dan McTeague

Mr. John Clifford

»

1730

Prof. Stephen Ross

The Chair

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CANADA

Standing Committee on Industry, Science and Technology

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NUMBER 035

l

2nd SESSION

l

37th PARLIAMENT

---

EVIDENCE

Monday, April 7, 2003

[Recorded by Electronic Apparatus]

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[English]

    The Chair (Mr. Walt Lastewka (St. Catharines, Lib.)): The order of the day, pursuant to Standing Order 108(2), is consideration of Bill C-249, an act to amend the Competition Act.

    Today we have representatives of the Canadian Chamber of Commerce and, as an individual, a professor of law from the University of Illinois College of Law, Mr. Stephen Ross. Welcome. From the Canadian Chamber of Commerce we have Kasia Majewski and John Clifford. We'll start off, following the agenda, with Mr. Ross.

    Professor Stephen Ross (Professor of Law, University of Illinois College of Law, As Individual): Thank you very much, Mr. Chair, members of the committee.

    It's a distinct pleasure and honour to have been invited from south of the border to appear before your committee today to discuss potential legislative responses for recent decisions by the Competition Tribunal and the Federal Court of Appeal concerning Canada's merger law.

    By way of background, I teach courses in competition law and comparative Canadian-U.S law at the University of Illinois and via teleconferencing at the University of British Columbia. My research includes work on American and Canadian competition law, and I've written a number of articles on the treatment of efficiencies, a subject I also discuss in my one-volume treatise on American law.

    I also should add a caveat that after I'd already written two of my three articles on the propane case, while the case was under consideration I did briefly consult with the Competition Bureau on the specifics of the propane case, on the legal issues on appeal.

    Let me assure you that my testimony does not reflect the effort of some archetypical American to impose the approach used by our courts on Canadian law. Much of my comparative law work focuses on the important institutional, economic, and value-based differences between our two countries. As I've detailed elsewhere, my own suggestions for Canadian legislative reform differ from U.S. law.

    Canada is a smaller market, and you will be more often confronted with a trade-off between greater efficiency and increased market power than American competition enforcers.

    A variety of concerns could lead you to seek to depart from the prevailing American price standard that prevents acquisitions where the effect is likely to raise the post-merger price to consumers. But as I detail in my written remarks, in my view sound Canadian competition policy, as reflected in the original intent of Parliament in enacting section 96 in the first place, is that these departures, if any, should be specifically justified and not accepted wholesale.

    The foundation of my work is the notion that competition law should protect consumers, and my principal reason for so thinking is not based on principles of welfare economics that seem to have dominated the academic and legal debate about the subject. Rather, a consumer-oriented approach is based on two key assumptions that I hope you share.

    First, in a democracy public policy should either make the majority of citizens better off or should provide the majority with a good reason to justify their self-sacrifice.

    Second, most Canadians interact with the economy primarily as consumers and workers, not as shareholders. These two values lead me to conclude that a public policy that systematically transfers wealth from consumers to shareholders is not neutral, it is unsound, unless justified by considerations that benefit most Canadians as workers or for non-economic reasons.

    Your committee and the government need to carefully consider why Canadian law would ever want to permit mergers that increase economic power to raise price, deny consumers competitive choices, and transfer wealth from the majority of Canadians, who are consumers, to a minority of Canadians and foreigners who are shareholders.

    Indeed, since I wrote these remarks I've had the benefit of the remarks last week by Vice-Chair McTeague and Commissioner von Finckenstein, suggesting that perhaps the need to justify--and these are Mr. McTeagues' words--“a modicum of competitive harm” to consumers in order to permit Canadian firms to compete globally is no longer warranted.

    Others have suggested that the efficiency defence aids in improving product quality or allows firms to survive in regions where competition would be unprofitable. I believe that the former is already considered in the section 92 analysis. A quality-improving merger would not substantially lessen competition.

    The latter is a legitimate issue that could be specifically addressed in new legislation, but I see no public benefit in allowing corporations to raise price, lower costs, and retain all the benefits for themselves. The majority of Canadian economists seem to favour a standard unconcerned with global competition or other specific justifications, but rather solely focused on maximizing the total wealth of the nation without regard to how the wealth is distributed. Why should the House of Commons, representing Canadian voters, embrace such a policy?

    I consider in my testimony a pure and simple democracy, a society consisting of 10 people governed by a majority vote. Suppose all of them earn $10, and the wealth of society is $100. Now suppose two of them, Adam and Betty, have an idea of a practice that will give them each $50 of income while the remaining eight citizens would have their incomes halved to $5 each. The community will ordinarily reject the rule, even though it enhances overall economic welfare by increasing total income from $100 to $140.

     I note that in my example the proposal will not be defeated because Adam and Betty are wealthier or because Gord, Hermione, Isabel, and John have greater marginal utility for their dollar than Adam and Betty. Rather, the proposal will be defeated simply because it enriches two and makes eight poorer without justification.

    There are important exceptions detailed in my written testimony and cited articles that remain true in complex as well as simple democracies, and Canadian public law is not and should not be ruthlessly majoritarian, but there ought to be a good justification for making the majority worse off.

    Whether or not at some point in time so many Canadians will own stock, either through individual investment or through pension funds such as the Caisse de dépôt, that a pro-shareholder, anti-consumer policy will make most Canadians better off, that is not the case today. Nor is there any social justice argument that Canadian corporations can make to justify a moral claim on money now in the pockets of Canadian consumers. Nor am I aware of some giant political compromise that compensates Canadian consumers.

    Thus, it is no surprise that the legislative debates, as opposed to the economic debates, concerning the enactment of the efficiency defence provide nothing to support the claim by Canadian economists that wealth maximization should be the goal of the legislation. Nor should it be a surprise that the other two leading competition law regimes, the United States and the European Union, both require that efficiencies be significantly shared with consumers in order for them to justify an anti-competitive merger.

    Bill C-249 seeks to clarify parliamentary intent that the Competition Act should be interpreted to benefit most Canadians. In doing so the bill is part of a long-standing tradition of parliamentary correction of unduly narrow judicial interpretations of competition law.

    I think the decision in Superior Propane is equally worthy of parliamentary clarification. The current law is, to be blunt, a mess. If not overturned by the Supreme Court of Canada, it allows the tribunal to pursue an unduly narrow approach that will too often ignore concerns with competitive prices and consumer choices.

    Most Canadians do not endorse the Criminal Code's prohibition on theft because crime will lead to inefficiency, although crime willindeed lead to inefficiencies. I note, apropos of the balancing weight test, that if Parliament were solely concerned about equitable wealth transfers, it might well legalize burglary and larceny, which often takes from the rich and gives to the poor.

    I suggest that Parliament did not seek to promote competitive prices and consumer choices because poor consumers need more money or because their marginal utility of the dollar is greater. Rather, these benefits of a competitive economy are those that all Canadians deserve--indeed, to use an example from the literature, even wealthy downhill skiers paying lift fees to a corporation that may be owned by the Caisse de dépôt. I apologize for my horrific French pronunciation.

    Rather than entrust the Competition Tribunal with broad redistributive authority, it makes more sense to use Parliament's taxing and spending powers to achieve redistributive goals.

    In sum, I urge you to critically rethink why it is that you want an efficiency defence in the first place. My own approach would be to allow the Competition Tribunal and the courts to continue to develop the law, aided by refreshed thinking on the subject by the Competition Bureau.

    I certainly cannot quarrel with your judgment to join the U.S. and the E.U. in insisting that mergers not harm consumers, but if you wish to maintain a uniquely Canadian approach, I suggest you simply legislatively overrule Superior Propane and specify those circumstances when, to use Mr. McTeague's language, a small modicum of harm to consumers would be justified as a matter of public policy.

    I thank the committee, and eagerly look forward to any of your questions.

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    The Chair: Thank you very much.

    Next is the Chamber of Commerce.

    Ms. Kasia Majewski (Policy Analyst, Canadian Chamber of Commerce): Good afternoon, Mr. Chairman.

    My name is Kasia Majewski. I am policy analyst for the Canadian Chamber of Commerce.

    Thank you for inviting us today to appear before you on this study.

    Our general comment, if I can make this statement, is that we believe sound public policy results from the process that allows all interested and affected parties ample time to engage in the legislative process and to comment on the legislation. Should the government feel that the efficiency defence requires changes, we urge that such a process be followed.

    I would now like to turn the floor over to my colleague, Mr. John Clifford, partner with McMillan Binch, for specific comments on the proposed bill.

    Mr. John Clifford (Partner, McMillan Binch, Canadian Chamber of Commerce): Thank you, Kasia, and thank you, Mr. Chair, for inviting us to speak to you today on the subject of the proposed Bill C-249.

    You have our submissions on this bill, which were made to you in November 2002. However, the proposed amendment to Bill C-249 has made our November comments moot. Our focus today will be on the amended bill.

    The Canadian Chamber of Commerce continues to believe that the efficiency defence is an important part of the Canadian competition regime and that any changes should be made judiciously and within the current process of reform of the act.

    Bill C-249 proposes amending section 96 of the Competition Act, which provides a so-called efficiency defence. Essentially, section 96 says that anti-competitive mergers--that is, mergers that prevent or lessen competition substantially--should not be prohibited if they result in gains in efficiency to the Canadian economy that are greater than and which offset the anti-competitive effects of the merger.

    As we understand from the new amendment proposed by Mr. McTeague, the intent of the proposed Bill C-249 would be to remove the efficiency defence from the Competition Act. Efficiencies instead would be considered as a factor in the merger analysis done under section 92. The new amendment further instructs the tribunal to consider consumer surplus efficiencies as part of its analysis of a merger.

    As you have heard from other witnesses and will hear again, the question of what role efficiencies play in the merger process is an important one. It is a question that many other jurisdictions are asking themselves.

    The efficiency defence in the Canadian Competition Act is not a relic of the original act; rather, section 96 itself came about through a process that started with the introduction of Bill C-256 in 1971 and represented the result of long deliberations, almost 16 years, among various stakeholder groups. The legislative history and debate is summarized well by the Competition Tribunal in its reconsideration decision in the Superior Propane case.

    Recognizing that Canada is both a small and very open economy, section 96 is designed to capture benefits for the Canadian economy as a whole, which absent such a defence would be lost to Canada when certain mergers are prohibited by Canada's competition regulators. In short, it is designed to help Canada create a more productive economy.

    The efficiencies resulting from such a merger may increase the global competitiveness of the relevant industry sector by reducing duplication and allowing the firms to engage in more efficient production. They may increase product quality or allow a firm to survive and continue to serve consumers in a region in which it is difficult to profit. That is the goal of section 96 as it currently exists.

    This goal fits within the tradition of the Canadian Competition Act. Unlike the United States anti-trust laws, which aim to directly protect and benefit consumers, our act seeks to ensure that marketplace frameworks are in place to promote competition and the efficient operation of markets. This in turn will lead to benefits for all segments of society.

    By enacting Bill C-249, Parliament would be indicating not only that efficiencies do not hold the central role that we believe they should in the Canadian competition policy, but also that Canadian competition law should play a role in wealth distribution. This is a role for which it is ill-suited. There are other mechanisms, for example the taxation system, that are better suited to wealth and income distribution.

    The Competition Act is best suited to maximize a total Canadian wealth, promoting the efficiency, productivity, adaptability, innovation potential, strength and size of the Canadian economy. That is, the act looks at the size of the whole pie and the means of keeping it growing, not to allocating the pieces of the pie. It is not and cannot effectively be a wealth distribution mechanism.

    So this resolution of the Superior Propane case in favour of the merger necessitates changes to this section. The efficiency defence has been applied very judiciously. Since 1986, when the merger provisions of the Competition Act were adopted, there is no case in which the Commissioner of Competition is on record as having decided not to challenge a merger because there were greater offsetting efficiencies.

    The Superior Propane case is the only efficiencies case in the first 15 years of the existence of the merger efficiency defence. The case was hard-fought by both the commissioner and the parties, in part because the commissioner's own position in the case was inconsistent with his merger enforcement guidelines. The Superior Propane case has brought about clarity to the rules relevant to establishing an efficiency defence. It has begun the process of building a body of case law on this important section of the Competition Act.

    The chamber is of the view that section 96, as interpreted by the Competition Tribunal and the Federal Court of Appeal, is workable and that no amendment to the section is needed at this time. We believe that the reason there have been so few cases based on section 96 is that mergers that lead to a substantial lessening of competition but also generate efficiencies that offset and exceed the lessening of competition are quite rare.

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    However, if the existence of the efficiency defence did lead to a wave of mergers that were efficient, it is the submission of the Canadian Chamber of Commerce that Canada would be better off, because such mergers would be beneficial to the economy, and these mergers should be allowed to proceed.

    Even if it was thought that an amendment to the act was required, there is no urgency to making any amendment. We make this comment having regard to the amendments to Bill C-249 that were proposed in this committee. Any amendment to section 96, or indeed to any section of the Competition Act, should be the subject of careful study and analysis. This was the recommendation of this very committee, which in its recently released plan to modernize Canada's competition regime recommended that an independent task force of experts be established to study the role that efficiencies should play in all civilly reviewable sections of the Competition Act, not just within section 96.

    The amendments proposed to Bill C-249 represent a fundamental change in the consideration of efficiencies in any merger analysis. In essence, the offence would be abolished and consumer-related efficiencies left as one of a number of factors to be considered by the Competition Tribunal and the Competition Bureau. Such a fundamental policy change should only be made after careful consideration and discussion.

    The chamber's view, which is preliminary, given that we learned about this amendment just over a week ago, is that the amended Bill C-249 will create uncertainty and reduce the value of efficiencies such that they will have minimal relevance in a merger analysis.

    In summary, we believe that the proposed Bill C-249 should not be enacted. Making this amendment would indicate that the goal of the Competition Act is not to maximize the efficiency and strength of the Canadian economy. We believe that it would have serious negative implications for the future legislative course of the act and for its enforcement.

    We recommend that the government pursue its commitment to studying the role of efficiencies in mergers and engage in full consultations with all stakeholders on this important and complex issue.

    Mr. Chair, thank you again for this opportunity to speak, and I would welcome any questions.

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    The Chair: Thank you very much.

    Mr. Rajotte, eight minutes.

    Mr. James Rajotte (Edmonton Southwest, Canadian Alliance): Thank you very much for coming in today. I certainly appreciate your presentations. I thought they were very well done.

    Perhaps what I can do is start with Professor Ross. Given what was just said in the presentation by the chamber, and particularly.... Do you have their presentation?

    Prof. Stephen Ross: I've talked to them about the substance of it, so none of it was a surprise.

    Mr. James Rajotte: Under point 6 they state that “our Act seeks to ensure”, meaning the Canadian act, “thatmarketplace frameworks are in place to promote competition and the efficient operation ofmarkets. This in turn will lead to benefits for all segments of society.” To put my cards on the table, that's certainly where we're coming from. Is that accurate in terms of how you read the Canadian act in comparison to the American act?

    You talk on page 2 of your presentation about how the foundation of your work is “the notion that competition law should protectconsumers”. That seems to indicate the direction the U.S. has decided to go in. But then you go on to say that your principal reason for so thinking is “not based on principles of welfare economics”. That's my impression of the presentation you're giving to me. You say that competition law should protect consumers. Distinguish how it's not based on welfare economics, because that was certainly the perception I had.

    Prof. Stephen Ross: I think I can answer both questions, hopefully, with the following statement.

    With respect, I don't want to quibble with their history, but I do not agree that a law that promotes the efficient operation of markets will necessarily in turn lead to benefits for all segments of society. The Superior Propane case is an illustrative example. I think that there are cases--not many, to be sure, and we're in agreement on this--where, given the way shareholder wealth is distributed and given open markets where so many sellers in Canada are American businesses that under NAFTA you have to treat equally, I do not think it is true that efficient operations will necessarily benefit all segments of Canadian society.

    The reason I say that my statement is not consistent with economic aspects of total welfare is, total welfare asks how big the pizza pie is. My suggestion is that democracies try to find out how many people are getting how big a slice of the pie. A proposal that makes two great big pepperoni pizzas in a city like Montreal on a Friday that might have Catholics who aren't eating meat during Lent and observant Jews and Muslims who aren't eating pork...they are going to oppose adding a bigger pie that is a pepperoni pizza and they might prefer a smaller pie that is a cheese pizza.

    I may have lost you on that.

    Some hon. members: Oh, oh!

    Prof. Stephen Ross: But the point is that a welfare approach looks at the total size of the pie and doesn't care how it's split up. The thrust of my work is, you have to care how it's split up and not, as has been suggested, to favour the rich or to favour the poor. It's that on this, as in all issues, you ought to be considering what makes most Canadians better off.

    I don't think, given the current status of the shareholder ownership of corporations in Canada, the current state of the law makes Canadians better off.

    The Chair: Do you want to respond to that, Mr. Clifford?

    Mr. John Clifford: Our approach has historically been, first, to look at the total wealth of the economy without regard to ownership by Americans, by Canadians, by Europeans, or anyone. It's a question of, in any analysis, what is the most efficient result? I would acknowledge that in some circumstances there will be some groups that are harmed and others that will benefit, but the benefits will outweigh the harm, and that's the whole, principal reason for having section 96.

    I also think it's quite important to think about section 96 in the context of the entire framework of the Competition Act. It's just one section in a very large piece of legislation. The merger review section in particular is not focused just on consumers, it's focused on a whole array of factors and a whole array of considerations, consumers being just one of them.

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    Prof. Stephen Ross: It is not my place to tell you what Canadian public policy should be. I can offer to you, though, that if there are specific reasons why a majority of Canadians who are consumers should be made worse off, that's for you to decide, but you should figure out what those cases are.

    The chamber offers three in their comments. I don't think one is really a lessening of competition, the improved product quality. As to the other two, if you feel that there ought to be some mergers that would substantially lessen competition but would promote a global competitiveness or allow firms to maintain competition in certain regions, I certainly think it's legitimate public policy for you to make that clear, and I think you ought to make that clear. There was certainly no claim in the Superior Propane case that the merger was necessary to increase competitiveness or to protect a Canadian firm serving a particular region of Canada.

    Mr. James Rajotte: You see, this is where for a policy maker it becomes very difficult, because you talked about looking at a potential merger in terms of it benefiting all segments of Canadian society. I think, realistically, what I would say is...I don't know, even a merger or even when you have companies breaking up, you're always going to have people who are hurt or people who are dislocated and displaced.

    One question I would have is whether either the Competition Bureau or the Competition Tribunal is even a good determinant of what's going to happen down the road in terms of the social benefit or the social harm that happens from a potential merger. I don't know how familiar you are with the transportation industry in Canada, but take the situation where Air Canada basically swallowed up Canadian Airlines. You can make the case it did not help consumers in this country, yet what is the response of parliamentarians as policy makers supposed to be in that situation? In fact, it's often government regulation that indirectly creates the situation where these larger companies grow up in the first place.

    Maybe you could just give us some guidance, particularly since we could be faced with more mergers in the airline industry. We could certainly be faced with merger proposals in the banking industry, and I think that's certainly where this committee is looking in terms of what impact this amendment could have on that process.

    Prof. Stephen Ross: There are a number of policy responses you could make. You could have industry-specific legislation, as you did with the Air Canada merger. You can identify a framework that works in most cases. The difference, I think, between my position and the chamber's position is that my default rule is something that is a majoritarian principle, something that benefits most Canadians.

    There's a fundamental difference between the marketplace and government choices. Government choices are one person, one vote. Marketplace choices are one dollar, one vote. I think Mr. Clifford is right. One of the things the efficiency defence does is, it says that when there are winners or losers, you have to pick who's the winner and who's the loser. The efficiency defence says that the winner is the person who has the most money. My framework is that the default rule ought to be that the winner is the side where there are the most winners and the fewest losers as a matter of people. I think that's the starting point.

    I'm not familiar with all the various intricacies. You have specific policies about wanting to maintain Canadian ownership, an issue I know Canadians are sensitive to but Americans are less sensitive to. There are a variety of policy considerations you want to make in making those choices, but it seems to me that those really are your policy options, to make it industry-specific or to make a generalization, and then you have to pick which generalization you want.

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    The Chair: Thank you, Mr. Rajotte.

    Mr. Bagnell.

    Mr. Larry Bagnell (Yukon, Lib.): Thank you.

    I'll just put my bias on the table at the beginning. I think we need a change, either one at least as strong as the weak change we're looking at, the amendment, or the stronger change that was originally proposed. This is partly because of Superior Propane, which, as you know, hurt my constituency, the Yukon, very hard. I haven't heard anyone yet I can remember who came before us who agreed with that decision.

    My questions are and have been for all the witnesses around whether the original bill, the stricter one, or the weaker amended one would have solved that problem or helped to solve that problem better. Some people said yes to that. Others have said there was the power to make the decision not the way it was in the existing legislation, to have a better decision come out.

    It was fascinating to hear your comment about the legislative change in that particular case. Just as you're delighted to be here, we're delighted to have someone from our closest friend and ally south of the border here today.

    My question to the chamber is basically on that. How do we avoid those types of problems? Either would the existing bill do it or would these new changes do it, or should we just legislate against them? This is in light of the fact that the amendment allowing the efficiency is still being considered; it's not taking it out; it's just saying it's in the context of having to consider other things as well. So the efficiency is all still there.

    In your brief, under number 6, you say that of the mergers challenged there's only one case where there has been a defence on the basis of section 96. So you could say that 100% of the time it's been applied, it hasn't worked.

    Mr. John Clifford: There are a number of points I can respond to in your tough question. In terms of whether the act needs to be amended in order to deal with the perceived evil that resulted, I'm not sure that the case would be decided the same today if it were re-litigated starting from scratch. The reason for this is that this was the first case under section 96, and no one really knew what it meant to weigh the offset from anti-competitive effects versus the gains in efficiencies, a bit of an apples and oranges comparison, as we always thought about it as anti-trust lawyers.

    What this case has helped do to a great degree is really clarify what the approach is. It has gone through several decisions at the tribunal and at the Federal Court of Appeal, and we finally came out and said the total surplus standard, which is nice economic jargon, is the approach that should be applied in any case under section 96.

    I think any case going forward now will be dealt with differently because the standard is known. If you look back at Superior Propane, and this is alluded to by the tribunal in its reconsideration decision, you'll see that there was a suggestion that had there been different evidence before the tribunal, the result might have been different. The tribunal has to make its decision based on the facts before it. So the question remains whether the facts would be different if we were to start that case all over again today.

    I can say that the amendments that are proposed would result in a different approach to Superior Propane. In particular, the amended Bill C-249 directs the tribunal to only consider efficiencies. So it's not an absolute defence. It's not an absolute win. Who knows what level of efficiencies would ever be required to win the day as a defence. That's the uncertainty I'm worried about. It also directs the tribunal to consider efficiencies that relate to consumer surplus only. That really narrows the pool of efficiencies that would be relevant. I think that applying that standard to Superior Propane would have gotten a different result. But again, I don't think that at the end of the day you need to have the amendment in order to have a different result.

    Prof. Stephen Ross: I'd like to respond to that. My very good friend and namesake--although, alas, no relation--Professor Thomas Ross, explained in his testimony how he thought that perhaps the result in the Superior Propane case could have been different even under the current law.

    In simple terms, here's the difference. Let's say that the competitive price of a good is $10, and every member of the committee would purchase the product for $10. Let's say that the price goes up to $15 because there are only a few people, and they're not competing that effectively. Mr. Bagnell and Mr. Savoy decide not to buy, and the rest of you pay $5 more. What I say is that the $5 more, which all the rest of you are paying, is a harm that needs to be considered. The chamber says, “We are not interested in the $5 you are paying in higher prices. We are only concerned with the fact that Mr. Bagnell and Mr. Savoy are now spending their money on something else that's less efficient.” That's called a dead-weight loss. Suppose that the remaining firms merge to a monopoly and the price goes up to $20. As a result, Mr. St. Denis and Mr. Marcil no longer buy the product, and the rest of you continue to buy it.

    What the tribunal did in the Superior Propane case is they only paid attention to Mr. St. Denis and Mr. Marcil. They did not pay attention to Mr. Savoy and Mr. Bagnell because they weren't buying propane before the merger. They had already stopped buying propane because there were only two major firms in most markets and the price was already above the competitive level. Professor Ross says that you should also count Mr. Bagnell's loss and Mr. Savoy's loss and that if you had done that, the result might have been different. That's a fair point.

    But let me contrast the new proposed language in terms of the effect on the resources of the bureau and how they have to litigate a case. As I understand the proposed language, the bureau would have to prove that the merger would be likely to increase price and in making that decision would have to consider efficiencies that may affect the market afterwards. That's all they have to prove. They don't have to prove how high the price will go specifically, just that there would be a substantial increase in price. That is difficult to prove, but doable.

    Under the current law the bureau has to prove that it will increase in price by a specific amount. In this case they proved $40 million a year in propane. Proving by what specific amount a merger is going to go up is much more difficult. Also, they will now have to prove, under Professor Tom Ross's view, not only the amount that it would go up after the merger, but they then have to figure out--and how you would do it for a market like propane, I don't know--what the competitive price would be. They already have to figure out whether it's Mr. St. Denis and Mr. Marcil or Mr. St. Denis, Mr. Marcil, and Mr. McTeague who would not buy under this certain thing. Now, Tom Ross says go back and figure out how many Savoys and Bagnells are there, and then compare that to the efficiency defence.

    One of the benefits of the proposed new language that has not been addressed is that I think it would significantly shorten and simplify the proceedings, and that would allow the bureau to get more bang for the taxpayer's buck.

º  (1605)  

    The Chair: Thank you.

    Mr. Fitzpatrick.

    Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance): This has kind of twigged my interest here. I remember back in the seventies when General Motors had a huge market concentration...[Tecnical difficulties—Editor]. That isn't how that played out. We know that.

    I want to pursue your $15 argument here. I remember Xerox, General Electric, IBM, even Harley-Davidson, as far as that goes. If they start playing the $15 argument and abuse their position in the market and lose sight of quality and service and everything else, the market has an interesting way of correcting those problems. That's part of the dynamic of the market system. I think that corrects more problems than all the interventions by tribunals and government agencies put together.

    I'm just going to throw that out to you, because I can think of a lot of examples that fit that category. You could take Ford before General Motors.

º  (1610)  

    Prof. Stephen Ross: You are absolutely correct. I think this may also explain some of the original thinking--and you'd have to talk with people who were around then--about the efficiency defence, and why I would argue that potentially the Canadian efficiency defence today is less necessary. Twenty years ago the way anti-trust enforcers analysed what would be a substantial lessening of competition was way less sophisticated than it is today. Most of the sophistication has gone in the direction of more tolerance of private mergers.

    What I would say is that if the bureau is doing its job, take the General Motors example, if there were a merger between General Motors and American Motors--I don't know if you remember American Motors; actually they merged with Chrysler--they would say if we only reduced trade barriers.... And trade barriers are now coming down because we have free trade. There's going to be Toyota, Honda, and these other firms coming into the industry. If they're doing their job, they are finding a substantial lessening of competition only where there are significant existing barriers to entry that prevent the process from happening the way you're talking about it.

    Mr. Brian Fitzpatrick: I just want to pursue that a bit further. I did have the opportunity at one time reading W. Edwards Deming on monopolies and concentration of power. He used to take the position that you can have monopolies that are quality organizations and have a lot of pluses on their side, and if they have good management, they are focused on quality and have the right culture in place. He could give you numerous examples. He'd probably say General Electric is a good example today, or Boeing.

    His argument is that you can build long-term relationships with your customers and your suppliers. You avoid shortcuts in the marketplace. You can look at long-term planning. You can spend a lot more money on research and development because you're not up against the wall on a lot of these things. You can apply standardization principles, which help everybody in the marketplace. He'd go through tons of examples of how this has worked in the past, that it isn't always a bad thing.

    In Canada we don't have a big economy like the U.S. We have a lot of areas like the Yukon, which my friend keeps referring to. I have problems with the Superior Propane case, because if you have only two people providing propane in the Canadian market--and it's a very small market--if anybody thinks you're getting any real competition out of that situation, they're dreaming. The market is going to be carved up and there isn't going to be competition in those markets. Maybe there is even an argument that the two coming together would be beneficial rather than bad.

    My own point of view is that if you abuse your monopoly power--and Deming would say the same thing--and you don't want to provide service to the customer and so on, somebody else is going to come along and do it to you like Toyota or Honda did with General Motors.

    Prof. Stephen Ross: In the first place, part of the answer is the wit economist who pointed out that in the long run we're all dead. It's true that in the long run, almost anything like that will happen. The question is how long are you willing to tolerate abuses of monopoly position and consumer abuse before it finally happens. I would say that if the Competition Bureau and the tribunal are doing their job, when the dynamics you are talking about, Mr. Fitzpatrick, are likely to occur in a reasonably short period of time, then they shouldn't intervene even under the new language that's being proposed.

    Mr. Brian Fitzpatrick: I'll just make one comment on that, if I could. In the global economy we have today, it doesn't take very long. There are lots of examples. If you're going to sit on your rear-end and take an abusive attitude, it doesn't take very long. We're in a revolutionary period of time, and you're going to get kicked in the rear-end if you do that.

    Prof. Stephen Ross: I agree. If I could just follow with one more thing, though, I think that's why you notice that a lot of these cases are not global competition cases. We have an increasingly global economy, but we can't ignore that millions of consumers every day buy goods and services from people who are not interacting in a global economy. I think it's no accident that the market here was not the global market for major propane development or drilling, or anything else. It was the transportation and delivery of propane for primarily small businesses and individual homes. That's not a global market. That's why I completely agree with you that for the vast majority of markets the dynamic is working exactly the way you say it is. I would suspect that's why in the vast majority of markets, in the vast majority of cases, the bureau approves the mergers.

º  (1615)  

    Mr. Brian Fitzpatrick: In regard to my own belief in Canada—and you're probably not as familiar—I think a lot of the areas where we have problems in Canada with lack of competition and concentration of power are the very areas where the government has intervened, intervened to shelter these companies and these organizations, for whatever reason, from the evil powers to the south of us, or Europe, or Japan, or wherever they're coming from, and somehow this is a great benefit to Canadian society.

    I disagree with them. We lose a major advantage of a free market system when we deprive the consumer of competition, and the government is the biggest culprit in this country.

    The Chair: Do you want to finish with that?

    Mr. Brian Fitzpatrick: No, that's my statement.

    Mr. Dan McTeague (Pickering--Ajax--Uxbridge): In a year and a half, when the election comes, I'm sure you'll be able to use your PSA. I hope that isn't charged against your global budget.

    Colleagues, Mr. Clifford, Ms. Majewski,and Mr. Ross, thank you for making this trip to Canada. I know you've written plenty about this issue. I want you to be aware that this is obviously an area of interest of mine, and it certainly predates even the wrangling between both the bureau and the tribunal, the tribunal and the court, and back and forth.

    I am interested in a couple of points. I want to get it on the record, first and foremost, for your sake, Mr. Ross. Mr. Pitofsky, former Federal Trade Commission chair, pointed out:

Efficiencies should almost never justify a merger to monopoly or near monopoly. Efficiencies should not vindicate an otherwise illegal transaction.

If there are efficiencies, they should be taken into account in close cases (and not when the merger leads to monopoly or near-monopoly), at least where proof of those efficiencies is relatively clear, the benefits are likely to be passed on to consumers, and the efficiencies cannot be achieved in a substantially less anti-competitive way.

    At the heart, of course, of that is I suspect the treatment we have in the United States. And we have talked to Tom Ross, who is very, very effective. I was interested in his point with respect to the Superior case. He argued here last week that Superior should not have won. Of course, it had been treated in terms of efficiencies.

    My question, before going to you, Mr. Ross, would be to the Chamber of Commerce, because it says here:

The Superior Propane case has brought clarity to the rules relevant to establishing an efficiency defense.

    My argument, of course, and you can take it for what it's worth, is that it has created a very dangerous precedent. To back that up, I want to point out what Frank Matheson of Charles Rivers Associates and Ralph Winter, an associate of yours, Mr. Ross, have said in their conclusion:

...as the Tribunal recognizes, relatively small cost efficiencies may be enough to offset a substantial lessening of competition. Prior to Superior Propane, competition lawyers would have properly advised clients not to pursue mergers that involved an obvious and substantial lessening of competition. After Superior Propane, such advice is too conservative for mergers involving significantefficiencies.

    Given that we have a precedent, given that a good number of people in the legal and obviously in the economics community believe this is certainly a precedent, how would you categorize this as clarity when you win a case by default, Mr. Clifford?

    Mr. John Clifford: Those are very good questions, Mr. McTeague. Thank you.

    The case is an important precedent because it answers some very important questions that were left unanswered in the legislation, such as how do you measure efficiencies. The quote you gave us of Mr. Pitofsky talks about efficiencies not saving a merger, but he doesn't talk about how you measure the efficiencies. Is it consumer surplus? Is it total surplus? There's all the economic jargon we're all familiar with if we've read the Superior Propane decision.

    What the decision gives us, by way of clarity, is how you go about measuring those efficiencies when considering a merger. On the advice given to potential merging parties, it has always been that you can have a merger that might result in a substantial lessening of competition, but it might be saved if your efficiencies offset that anti-competitive effect. The question always in the advice was “But we're not quite sure how to measure that offset”. So we now have clarity on that, which is quite important to us.

    You can't lose sight of the fact that the Superior Propane case is unusual in its facts. It's only the first case in 15 years that's relied on this section, so it really points out the fact that efficiencies being close to saving an anti-competitive merger is only going to happen in rare circumstances. Every year, thousands and thousands of mergers go through where efficiencies are relevant, but they don't save the anti-competitive merger because more often than not the mergers are not found to be anti-competitive.

º  (1620)  

    Mr. Dan McTeague: Thank you for that. But I see, for instance, comments by a colleague of yours, Mr. Baldanza, in his review of what happened in this case. He said that in fact not all considerations were taken into account, and while the tribunal accepted certain methodologies to accept what the effects were, the effects on consumers were rather minimized, and perhaps I would even dare to say, with all due respect, trivialized, in favour of finding efficiencies on behalf of the company.

    I guess I have a concern with saying they've made a decision on Superior and there's a substantial lessening of competition. The whole of sections 93 and 92 set out that this is dangerous, for the obvious reasons. We know there's going to be an 8% increase to every customer. And by the way, the 20% cited by the tribunal says it's only 20% of consumers because in the end it's all the other middlemen--Esso, Imperial Oil, etc.--who are going to pay for this. Ultimately they'll pass those costs on to consumers.

    I'm interested in trying to try to find out if we're talking about minimizing the redistributive effect. That is the role of taxation. By the way, I applaud you for saying the federal government should be involved in taxation. I'm sure that's music to the ears of some, but not to this committee. I suggest it might be helpful if you could tell us what you mean by redistribution, when in fact we see good examples here of what redistribution really means. It means a transfer of wealth from a group of individuals, consumers, over to the bottom line for shareholders.

    With all due respect, Mr. Clifford, I think that sounds a whole lot like the pejorative trickle-down. It doesn't sound like good sound public policy. No matter what the justifications were for doing this, it's clear that the precedent that's been set in Superior is a very dangerous one for consumers and for competition, if I'm to read the purpose section of the Competition Act.

    Mr. John Clifford: Those are very good points, Mr. McTeague.

    The tribunal, in its decision on Superior Propane, both the original decision and confirmed on reconsideration, valued the loss to consumers and the efficiency gains the parties put forth that would result from this merger. They found that the efficiencies far exceeded the adverse effects on competition.

    The tribunal rejected other positions taken by the commissioner about the redistributive effect because there was no evidence that the transfer was socially adverse. There was no evidence that the large number that the commissioner was advocating in fact did go to affect consumers solely.

    That was the tribunal's decision, and that was based on the facts of that case. Ultimately we stepped back from this and said that was an important case; it helped the evolution of the jurisprudence. But fundamentally what's being proposed in Bill C-249, which is what we're talking about today, is a significant policy change in the analysis of mergers in Canada and the consideration of efficiencies when looking at mergers, anti-competitive or otherwise. That change is quite significant, and there should be a more fulsome and open debate about where we should end up on that.

    In our view, the current law and rules are workable. We understand total surplus and know what it means. It encourages efficiency and growth in the economy as a whole.

    Mr. Dan McTeague: Mr. Clifford, we're the only nation in the world that has and employs a total surplus standard. In the same document I quoted a little earlier, from Charles Rivers and Associates and Ralph Winter of the University of Toronto, their comment here is very telling, just as in Superior Propane the tribunal could state:

If Parliament had intended that transfers from consumers to shareholders be considered, it would no doubt have clearly stated this intent in the act.

    I don't think any of us here are arguing the merits of whether Superior was correct or incorrect. I think the reality is that for the first time it's been tested, and it's been found wanting, for the simple reason that it does something no other nation would permit, and that is to see a devolution of wealth from one constituency—which we all represent—to another. That constituency may or may not have, as its consequence, the competitive interests of the country at heart.

    I'm interested in finding out why it would be that 17 years later we could not say that this thing has not worked. It certainly has created a blueprint for the monopolization of the country, if I'm to look at the Superior Propane case. Why would we accept and tolerate a standard that no other nation would subject its own citizens to, and why do you do so?

º  (1625)  

    Mr. John Clifford: I'm not advocating... [Technical difficulty—Editor]... monopolization of the country. I do think that in most merger cases there will be efficiencies that will result from the merger. That often is a reason why parties merge. It will be the extremely rare case where efficiencies will be sufficient to outweigh the anti-competitive harm. Superior Propane, based on the evidence the tribunal had before it, happens to be one of those cases, and you can agree or have concerns about the result.

    I think the important constituency is the Canadian economy as a whole, not just consumers on one side, and not just corporations on the other side, or not workers on the other side. We're consumers; we're producers; we're workers. We all benefit from the efficiencies that will result from a merger, and the fact that Canada is the only jurisdiction in the world that has a discrete efficiency defence I don't think is necessarily a bad thing.

    I think it might show, in fact, that when we enacted that section in 1986 it reflected 15 or 16 years of concerted debate in this country about how we should look at mergers. If you look at the United States, for example, their merger law is not founded in a discrete merger provision. It has evolved over time with their jurisprudence, through a general provision in a criminal statute. The history of these things is quite different.

    I had the benefit of reading Professor Tom Ross's submission to this committee last week. He identifies in this, and also in the report he's prepared for the Competition Bureau, that there are other jurisdictions—other leading economic jurisdictions—that are considering efficiencies and the relevance of efficiencies to their merger analysis and taking efficiencies quite seriously. I think that might reflect a change in approach around the world that is pointing out the importance of efficiencies to us.

    The Chair: Professor Ross, did you have a comment?

    Prof. Stephen Ross: I just wanted to comment on the very last point made. Professor Ross's detailed report to the Competition Bureau, which talks about many other nations, is a wonderfully great resource, and I have no reason to quarrel with any of the details. I do quarrel with his spin.

    I grew up in Los Angeles and took Spanish in school. When I gained an interest in studying Canada, I took one class in reading French. So I am moving in that direction: that does not make me a francophone. The idea that other countries who have taken an approach that is very hostile to efficiencies or an unsophisticated approach to efficiencies are looking at efficiencies in a more positive way—which is what he reports is right—I do not think is consistent with the spin that people are moving toward his view of the Canadian policy, which is the total surplus standard.

    I know of no other countries that are operating in that way. And to the extent that any countries are changing—I would cite the example of the United Kingdom—they are moving from a system where a court could consider the whole picture, or helping producers, or something like that, to a statute that more explicitly focuses on consumers. So it is true that if Canada is on the far left and America in the sixties would be on the far right—or you could reverse them—the fact that people are moving in the direction of Canada doesn't mean that the approach that's taken by economists is the new fad.

    The Chair: Thank you very much.

    Mr. Savoy.

    Mr. Andy Savoy (Tobique—Mactaquac, Lib.): Thank you very much, Mr. Chair.

    Thank you very much for coming.

    Regarding the precedent the Superior Propane case creates, Mr. Clifford, you had mentioned in your testimony that in the review that was done, they noted that if the information had been presented in a different fashion, the decision may have been quite the opposite. I understand that was the case. But when you set a precedent and you're looking at developing case law, the review isn't as pertinent as the actual decision itself. So haven't we set a dangerous precedent with Superior Propane?

    I would just like both your comments on that in terms of case law and the precedent we've set. We may have thought in retrospect that the decision was wrong or the data could have been presented differently, but the actual result or the effect it has establishes a precedent. I'd like your comments on that. In going forward, won't we look specifically at case law?

º  (1630)  

    Mr. John Clifford: You are correct, Mr. Savoy. We will look at the case law. It is precedential from that point of view. But I think the next case, if there is another case sometime in the next 15 years that considers section 96--assuming it's not amended--is going to look at the factual considerations in the Superior Propane case, what evidence was before the tribunal, what was proved and what wasn't proved.

    That's where I was coming from when I made my comments initially that it's not clear to me the Superior Propane result would be the same if the case were litigated again today. Because we now know what the approach would be to valuing the efficiencies that were claimed. We now have the cloaked references in the decision about things that were or were not proven, things that were not reliable, that might have influenced the result. As an anti-trust lawyer, if I were to be litigating that case all over again, or a similar case, on behalf of the commissioner, there's perhaps different evidence that you would seek to prove to show that the loss to the economy was greater and perhaps the benefits, the efficiency results in the case, didn't offset the costs.

    So yes, it's precedential, but the facts are the facts as they were. I think it would be different in the next case.

    Mr. Andy Savoy: Do you agree?

    Prof. Stephen Ross: I agree.

    Mr. Andy Savoy: Okay. So you're saying the weight wouldn't be set based on precedent, on the decision; the weight would be set more on the review.

    I'm just trying to reconcile in my mind what future deliberations may hold. Would we put more on the precedent-setting case of Superior Propane in terms of the decision rendered, or would we put more on the review and what I call the learning experience?

    Mr. John Clifford: If I could approach it this way, Mr. Savoy, I think it would.... We're now looking at the case for its precedential value. I'm thinking about what framework it has established that you'd want to look at the next time around to try to find the facts to fit into that framework. That's its relevance.

    Mr. Andy Savoy: Okay.

    Prof. Stephen Ross: Could I jump in there?

    As I tried to detail earlier, and you might draw expert advice from the competition law section of the Canadian Bar Association or the bureau on this, I think it's important to consider for the future case--you can even go through the exercise with Superior Propane itself--what the bureau would have to prove under the current law and what it would have to prove under the proposed language of the amendment to Bill C-249.

    My analysis is the resources that will be required to analyse the case under the proposed language are substantially less than the resources required under the precedent of the Superior Propane case, even though we now know what the standard is and there is some clarity from that direction in terms of all the economic evidence that has to be compiled. I think that's a factor you also need to consider, because one of the problems is the more the government has to prove, the more costly it is to taxpayers, and the more likely it is, from Mr. Fitzpatrick's point, the government might screw things up. The more you keep it simple, stupid, the more you're likely to make the sorts of surgical incursions that are appropriate for the government in a predominantly free market economy.

    Mr. Andy Savoy: Actually, that's where I was going, so thank you very much.

    As to my second question, in your presentation, Mr. Clifford, you mention in paragraph 13 that under the proposed amendment, in regard to the consideration of efficiencies in any merger analysis, in essence the defence would be abolished. I don't get that from this amendment. Could you expand on that to some extent?

    Mr. John Clifford: Sure.

    Mr. Andy Savoy: A consideration of efficiencies defence certainly isn't being abolished.

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    Mr. John Clifford: It's a good question and one that's important to clarify. The current law says that if you have an anti-competitive merger, it should not be prohibited if the gains in efficiencies outweigh the competitive effect. So it's clear. If the gains are greater, the merger is saved and you go on to the next case.

    Bill C-249, as amended, says efficiencies are a factor to be considered and they may be considered. There's no certainty that they're going to carry the day. There's no indication about how great the efficiencies must be or what they must offset. They're just a discrete type of efficiency that is to be considered along with the other factors that are set out in section 93 of the act that the bureau and the tribunal consider when they're looking at a merger.

    For example, section 93 has specifically seven or eight different factors, such as effective remaining competition in the marketplace, barriers to entry, extent of foreign competition--all factors that are relevant to a merger analysis. No one factor saves the day.

    There's a lot of discretion involved in terms of the weight that has to be applied to any particular factor, and that would be caught by this new bill. There would be lot of discretion by the bureau and the tribunal as to how much weight to put on the particular factor and whether the efficiencies still might be great, but there may be other reasons the merger would still be blocked. So that's the difference. The clear, positive defence is taken away in favour of a discretionary analysis.

    Mr. Andy Savoy: So the defence is greyer, but the defence is still there. In other words, the defence isn't abolished; it's just greyer, if you will.

    Mr. John Clifford: I actually don't consider it to be a defence at all. I think it's just directional to the bureau and to the tribunal to say this is one of the things you should think about when you're analysing the merger.

    Mr. Andy Savoy: Could I have your comments on that, Mr. Ross?

    Prof. Stephen Ross: I know why successful people hire Mr. Clifford and pay him what McMillan Binch charges for his services. He's a very effective lawyer, and I think the way he's thinking about it is a defence as in a criminal law case, meaning something that you raise, and if you prove it, you win.

    In that sense, he is correct that the amendment would abolish an efficiency defence, in that it is not a specific, provable, affirmative defence that, if proved, the defendant wins. But it is clearly true that there are a number of examples. In fact, Mr. Clifford himself might be before the tribunal under this language offering efficiency arguments as to why a merger should not be blocked. A merger might create very few firms, but the efficiencies might allow the merged parties to block the unilateral market power of the number one firm in the market, if they aren't the number one firm.

    A merger might so change the costs and innovation in the market that even though you have, say, three firms remaining, the likelihood that those three firms will actually compete among each other is significant, as opposed to just colluding, like the big three auto companies used to do in the past. That would demonstrate that there was no benefit to competition.

    There is the significant possibility that it would promote product choices. For example, suppose two major television manufacturers got together to have a significantly new high-definition TV or something like it that might not otherwise be possible. That innovation would be a factor that would have to be considered.

    In addition--and this is a major difference from America and American law--Canadian law currently, and as I read the proposed amendment, would still allow a merger to be saved, even though it lessens competition in one market.

    I use the example in my first piece, the Antitrust Law Journal piece, about the merger that benefits Canadians all across the country but hurts lobsterers in New Brunswick and Maine. The tribunal would have discretion to approve that merger. So I think there are many ways that efficiencies are still properly considered under this language, but I do agree with them that, the way lawyers think about it, by removing the absolute defence, that is a significant change from the current law.

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

    Mr. St. Denis.

    Mr. Brent St. Denis (Algoma—Manitoulin, Lib.): Thank you very much, Mr. Chair, and thank you all for being here.

    I'd like to ask my questions from a philosophical, wealth redistribution angle.

    It certainly wouldn't be the intention of any part of the government in this country to find a perfect total way to redistribute wealth. That is sort of contrary to a free society, and so on, and so forth. But that said, it has generally been the philosophy of Canadian governments to find a better way to redistribute wealth so that we don't have the gravely poor within our society, for whatever reason they may be poor.

    So I'm wondering, if we accept that the tax system and the social safety net do not perfectly achieve government's objectives to redistribute wealth, is this humble attempt within this context, within competition law, to redistribute wealth by removing the efficiencies defence and moving it to a consideration by the bureau a big step in terms of redistributing wealth, or is it a small step? Are we making a sea change in redistributing wealth, or is this a minor piece in the whole redistribution puzzle?

º  (1640)  

    Prof. Stephen Ross: I think if you put aside the specifics that were introduced by the balancing weight approach that was brought into consideration in the propane case, where you actually looked at the wealth of the consumers, if you put that test aside for a moment, my thrust and the thrust of my testimony is that consumers need to be protected in Canada not because they are poor, but because most Canadians are consumers. I would say a proposal that makes Mr. Lastewka and Mr. Fitzpatrick wealthier at the expense of the other four of you is presumptively a bad idea.

    I have no idea about your personal income and wealth. I assume your government salaries are relatively decent, so you're all reasonably well off. Maybe some of you are wealthier than others, but it doesn't matter to me. That's my presumption.

    If in fact it turns out that you, Mr. St. Denis, have particular needs and the rest of the community ought to redistribute to you because of your needs, that is a separate question, and I don't think competition law should be dealing with that.

    So my approach is not one of wealth redistribution, but majoritarianism. The chamber can address it, but I think its approach is maximizing the wealth of everyone without regard to who is the winner and who is the loser. My approach is to oppose private agreements that make most people worse off.

    Part of that does go back to a philosophy of the common law that Mr. Fitzpatrick may not find appealing, but if you go back to the old English common law, the presumption was that in a free market, people compete with each other, and when they agree to get together--whether it's by a cartel or a merger--it needs justification. That might be a fundamental philosophical difference.

    If two people want to get together, who used to be competing and know they're no longer competing, there are two philosophical approaches. One is to say that needs a justification, and if they're going to make most people worse off, that's a bad idea. Another philosophical approach is to say if two people want to get together, you, the government, or we, as a society, need a very strong justification to tell them that they can't get together. I think that may inform the debate and the philosophy on this.

    Mr. Brent St. Denis: So is this a big change or a small change, Mr. Ross?

    Prof. Stephen Ross: This particular amendment is a small change.

    Mr. Brent St. Denis: Mr. Clifford.

    Mr. John Clifford: I think it is a big change, but I think it's going to have a small effect.

    I think it is a big change because it is a fundamental difference in how we approach or value efficiency--I see Professor Ross shaking his head; he may agree with me. You're really saying forget about producer surplus; the focus is on consumer surplus, and that's really all that's relevant, and you're taking away the defence.

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    Prof. Stephen Ross: I agree with his analysis.

    Mr. John Clifford: I think the reality is that section 96 analysis is relevant in so few cases that the change would have little impact. It will definitely have an impact on approach, but in reality, there aren't that many cases for which it's going to be relevant.

    Mr. Brent St. Denis: Okay, that's fine.

    Thank you, Mr. Chair.

    The Chair: Thank you.

    Mr. Fitzpatrick.

    Mr. Brian Fitzpatrick: If we're talking competition law and we start talking about redistribution of wealth and state notions of fairness and so on, I really have a lot of problems with that. I recall that at the height of the Venezuelan strike this year, the dictator or president seized all the beer factories and Coca-Cola plants there. He said the collective rights of the people were more important than the property rights of the owners of these plants, who had to get Coca-Cola and beer equally distributed out to people in his country.

    I just don't know where we'd go if we started talking about using public policy for those purposes. Most Canadians would just love to be able to go the NHL hockey games during the playoffs, but we all know it's only a select few who can afford to do that. It may not be fair and it may not be right, but that's the way it is.

    I want to raise an issue about intervention in your country you still have problems with, where interventions took place in the interests of what they thought was fair with redistributing wealth and so on. I'm thinking of things like the telecommunications business, the airline industry, and a lot of those areas. Maybe in the short term the consumer and the public gained a lot from these sorts of interventions because they had more choice, lower prices, and so on, but in the long term I think we're starting to see serious problems with that.

    If businesses cannot have the efficiencies to actually make a decent profit and reinvest in their businesses and so on, somewhere down the line it's bad for everybody, not just those businesses; it's going to be bad for the public at large too.

    I just raised that concern because I don't know how far you want to go with these competition policies. I think in your country the market has straightened out most of the abuses of monopolies. In fact, the government's record in dealing with them has been rather dismal.

    Prof. Stephen Ross: I share your general observations about a variety of policy missteps. I think that in the airline industry I would disagree with your characterization of the intervention. It may have been that the market was messy, but what the government basically did was, it got out of the regulation of the airline industry. I think that the airline industry may be the exception that proves the rule, but it actually does not support the general faith in free markets you've been advocating today, because what happened was that we--

    Mr. Brian Fitzpatrick: I think you're just replying to how our Minister of Transportation described the airline industry in the U.S.

    Prof. Stephen Ross: The American market was extremely regulated in a way I'm sure you would find extremely distasteful. The government got out of the industry and actually what happened was that the transportation secretary displaced the normal antitrust rules and approved a number of mergers that created the sort of dominant firms in the hub-and-spoke systems that are now going broke.

    In terms of telecommunications, I would have to say it's too soon to tell. I certainly respect the point of view that AT&T--Ma Bell--the one company that owned everything, had some benefits. But I would suggest that if that really is your philosophy, then you're not concerned about section 96 versus not section 96, you're talking about a wholesale scaling back of the Competition Act to maybe the 1950s level in Canada. It's your policy judgment whether you think that's a sound idea or not.

    The Chair: He's a fifties devil's advocate.

    Mr. Fitzpatrick, please continue.

    Mr. Brian Fitzpatrick: I was going to raise another point. I come from rural Saskatchewan, and people talk about these monopolies or concentrations of powers and mergers leading to all sorts of problems. Interestingly enough, I think if you went back about forty years in rural Saskatchewan, most communities were dependent on propane for service, yet virtually nobody uses propane any more. This is because of the simple reality that if you don't serve your customer and do all the right things and so on, other people move into the market and all sorts of things happen. Natural gas moved into the market because the economics of the situation improved. The propane people were overcharging or abusing the market, and the natural gas people got in.

    There was a whole host of other things. People started putting a lot more insulation and better windows into their homes and doing all sorts of good environmental things, what people on the government side in Canada would describe as pro-Kyoto things.

    There's an assumption here that you just have the public by the throat on these things and there are no options for people. I think that's a misconception, because if you approach your consumer and your customer that way, you're going to be losing in the long term, and your shareholders are going to be the biggest losers in that kind of strategy if that's how you want to approach things.

    I just wanted to hit that point.

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    Prof. Stephen Ross: Mr. Fitzpatrick, I think your point is an excellent one to be laid out in the debate. I am absolutely unqualified to talk about the nature of competition for heating in rural Saskatchewan, but you are. I would encourage you, Mr. McTeague, and others to engage in that debate.

    If in fact within a reasonably short period of time your constituents in rural Saskatchewan would respond to the Superior Propane monopoly by shifting to other heating, to better insulation for their homes, etc., and it's a tolerable period of time, then I would say that they should not have found a substantial lessening of competition, and the tribunal erred there.

    On the other hand, if the amount of time it would take to have the dynamic processes you're talking about is perceived by you guys to be an unduly long amount of time, then I think that the processes you talk about really aren't sufficient and require government intervention. That's the debate you guys need to have.

    Mr. Brian Fitzpatrick: With regard to the Superior Propane case, the thing that would really bother me if it did occur, but it didn't, is if there were something in the way of government policy that deprived other people from entering that market and dealing with that situation, because that really creates a lot of problems. They do have the consumer by the throat if that happens. Too often in this country that happens with our policies and our regulatory environment. We protect those monopolies from anybody else entering the marketplace and getting rid of the abuse.

    The Chair: Are there any comments?

    Mr. McTeague.

    Mr. Dan McTeague: Mr. Chair, thanks again. It's not very often that a vice-chair gets to ask questions.

    I find myself in a bit of a conflict of interest, because it's my bill. So please don't take this the wrong way.

    Mr. Fitzpatrick had pointed out farmers in Saskatchewan. I was interested in his comment, because I was reading today about Superior bidding for Petro-Can. That would have been way back--sorry, my paper is a little mouldy--on Friday, July 17, 1998. It says:

Propane is commonly used in cities at backyard barbecues and by some taxi fleets, and many rural residents depend on it for heating homes and fuelling appliances. Farmers in particular use propane to run equipment that dries grain.“Farmers wouldn't want to deal with one big propane company,” said Darrin Qualman, executive secretary in Saskatoon for the National Farmers Union. “Increased market power allows you to price your product at whatever the market will bear.”

    Obviously, the history on this is very interesting.

    I want to come back to you for a second, Mr. Clifford. I apologize for the need for the amendment. We put the amendment forward in light of what happened with regard to Superior. Neither you nor I had the benefit of knowing the outcome.

    In terms of your original assessment of Bill C-249 and its amendment, do you believe it is a more acceptable amendment than the one I had first proposed in terms of the actual bill itself? It leaves efficiencies. It does not relegate them, for instance, to a matter of a simple consumer test.

    You were talking a little bit about other nations coming toward us. I'm wondering if the proposed amendment, by making it a factor, notwithstanding everything that is in section 93 about barriers to entry and the removal of a vigorous, effective competitor, all things that we identify as.... You have no trouble with section 93, I take it.

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    Mr. John Clifford: No.

    Mr. Dan McTeague: So having it as a factor within that, although it doesn't give it as the absolute, as was determined before, if you have no problem with section 93....

    I'm looking for advice from your organization as far as do you believe that the amendment goes a step further than the original bill toward your goal of ensuring that at least efficiency is treated? I understand your point about not wanting to have it relegated to anything but an absolute treatment, a stand-alone. But would you admit that it's a much better proposal than the original?

    Mr. John Clifford: Our comments on the original bill are reflected in our November submission. The amendments that are here go much further because they do remove the possibility of efficiencies being a defence. The reality is that the section 93 factors that we alluded to before are accepted measures for determining the impact of a transaction on competition--for example, higher barriers to entry and rigorous competition. That helps you to assess the state of competition that may result from the merger if it is consummated.

    Efficiencies really offset those. I don't think that looking at efficiencies is a proper way to measure an anti-competitive effect. They are relevant to trying to weigh the extent of the anti-competitive effect once you think it does exist and whether or not they should be saved because there's efficiency in the marketplace more generally.

    Coming back to your specific question about this particular bill, I do think it is a sea change in a policy approach because it's clearly saying look only to certain consumer surplus elements, don't focus on producer surplus. It does radically change the approach to the assessment of efficiencies.

    Mr. Dan McTeague: Earlier, Mr. Clifford, I mentioned to you the comments by former chair Pitofsky. Of course I was referring to the comments he made at the Metropole Hotel in Brussels, Belgium, on September 14 to 15 as they referred to the EC merger and U.S. approaches to international mergers. It was of course views from the authority.

    In those very interesting comments he made—because of course they've talked about this—he also talked about the 1997 revisions, but he included something I don't think this committee has had an opportunity to discuss. That's the question of subjecting efficiency to a competitive effects analysis—in other words, using a test.

    I think what I've tried here with this bill, for the benefit of your membership, Mr. Clifford, is to do exactly the same. It's to say that efficiencies, far short of being stand-alone, because they may in fact be a read-out or a blocking-out of the competitive process, should be looked at in terms of a rather sterile environment on its own; we should in fact try to put it in terms of a wider competitive test.

    I'm interested in hearing whether the Canadian Chamber of Commerce, given all the other issues dealing with free trade and NAFTA and the World Trade Organization—which of course your organization is very sensitive to and very supportive of—would not find itself in a bit of a contradiction in advocating something domestically that it may find difficulty, or at least some conflict with respect to other organizations and other arrangements, in advocating internationally.

    Mr. John Clifford: The Chamber of Commerce seeks consistency in all of its involvements, whether they're domestic or international. In looking in particular at Bill C-249, the concern of the chamber is that the framework currently, under section 96, does allow the measure of a wide array of efficiencies that will be removed if the bill is passed—either the former Bill C-248 or the amended Bill C-249—because we're then forced to look only to consumer benefits and not to producer benefits. That is a significant policy change, which is of importance to the chamber and to our memberships. Taking away the counting of those important efficiency and productivity benefits is a concern here and will be in other contexts as well.

    Mr. Dan McTeague: Would you or your organization support a sliding-scale approach to efficiencies? For instance, where there are greater efficiencies that are likely to have anti-competitive effects, or where you have anti-competitive effects, they would outweigh the kinds of efficiencies you seek—it falls into the whole question of the test I was referring to a little earlier—so that the greater the anti-competitive effect, the less likelihood that you would be able to use the offset.

    What I'm really trying to aim at here, Mr. Clifford, is we've come a long way in this bill trying to find ways in which we could make a lot of people very happy, understanding that Canada is alone and an exception in a world that doesn't treat efficiencies as enthusiastically and as cheerfully as your organization does, or as the interpretation of the act does.

    Has your organization given any comment to some of the many academic opinions around the world—given, of course, that economists aren't necessarily Canadian economists; that the bar isn't just a Canadian bar; that we're dealing more with global trade? It's in that context, as you mentioned a little earlier, as the commissioner mentioned a little earlier about globalizing, that we would certainly want to consider other tests that exist around the world.

    Do you believe we would... You know what I'm trying to go for.

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    Mr. John Clifford: We haven't considered the specific issue you're asking about. I think conceptually sliding scales are difficult, but I think the reality is that the current law does in fact allow for sliding scales. The greater the anti-competitive effects, the more efficiencies you need to have to offset those.

    The Federal Court of Appeal was quite clear to the tribunal that you have to consider other effects particular to that case as well, that will help you actually place some weight on those efficiencies. You're going to come up with a number once you do your calculation, but there's going to be some discretion involved there, because the tribunal has to make an assessment as to whether or not the efficiencies are in fact going to be achieved. The closer the efficiency number is to the value of the anti-competitive effects, the more, in my view, the tribunal and the bureau will treat the efficiency numbers with suspicion, because it's not always guaranteed that you're going to get them at the end of the day.

    Prof. Stephen Ross: The sliding scale sounds like the approach Madam Justice Reed suggested in the Hillsdown case. I agree that under current law that would be considered.

    One of the difficulties in all these things is when you entrust something to a tribunal, what do you look at the tribunal doing? I think one of the differences in Mr. Clifford's approach in responding to Mr. Savoy's question is he thinks that in the hands of some “Teddy Roosevelt bust-up-the-trust tribunal judge” they could completely ignore all efficiencies, and that would be an absolutely terrible thing.

    When I read the actual decisions of the judges who actually inhabit your Competition Tribunal I have a somewhat different view. In the actual Superior Propane case there was a three-member tribunal. The judge and the academic economist found definite efficiencies there. It was the businesswoman who actually dissented and found that she was very skeptical of efficiencies in that case.

    While I certainly agree with Mr. Fitzpatrick that many government initiatives that seek to tinker with the economy turn out to be misguided, it is also statistically true, at least in the United States, that at least two-thirds of mergers don't turn out to have any of the benefits for the merging parties that they thought they would.

    So one of the difficulties in assessing the strength of efficiencies is whether you are going to get it right or not. That factor is already present in current law and would remain present in the draft language.

    The Chair: Mr. Fitzpatrick, did he get your attention on that one?

    Mr. Brian Fitzpatrick: I agree with you that with the record on mergers, investors shouldn't be chasing after them. Warren Buffet has written lots on this--that generally they turn out to be train wrecks. I'm not exactly sure the government should be trying to control this thing. I mean, it's a market mechanism.

    We have something unique in Canada that you don't have in the U.S. They're called income trusts. Superior Propane really isn't a limited company trading on the stock market like a traditional company; it's an income trust. If I understand the organization correctly, the net earnings of that company are flowed through to the unit holders. That's a source of income for a lot of retirees in Canada. There are a lot of these income trusts in Canada, but I guess the argument we're really getting into is whether they are abusing their power. I understand the net return to the unit holders is somewhere in the 8% or 9% range. Does an 8% or 9% return to the investors sound like an organization that's abusing its market power, and so on?

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    Prof. Stephen Ross: I don't know enough about financial market analysis. All my academic criticism of Microsoft can't approach the fact that as soon as I bought the stock it crashed. So I'm the wrong person to talk to about that.

    A well-known American economist once talked about merger policy as being to business sort of like what drugs are to surgery. It seems to me, Mr. Fitzpatrick, you have suggested--and I think it is an intellectually respectable approach--that one approach to competition law is basically to permit anybody to do whatever they want, and then when the firm actually abuses their power, come in, regulate their price, and punish them or have some other means of doing that. That would be, to use the analogy, the equivalent of surgery. Let people do whatever they want, and if it turns out that you get an infection and it really harms you, there's always surgery. Meanwhile, let's not build up all these antibodies with antibiotics.

    The standard conventional wisdom of the last half century is to treat it with antibiotics. Sometimes you build up an immunity and sometimes the antibiotics make things worse, but in the meanwhile we avoid even the potential of those sorts of abusive situations.

    I certainly think it is a respectable position of public policy. It is not one reflected in the current Competition Act, but I certainly think it's a reflectable policy to say let's just let the market work completely, and when we identify clear abuse, let's step in and regulate the market then. But that is not the approach that Canadians or Americans have taken.

    Mr. Brian Fitzpatrick: I'm not exactly sure and don't want to be pinned down as saying that fully represents my point of view, but just to give an example, from what I can understand of the problems they had in the Australian airline industry with smaller airlines, the dominant carrier basically said to the government of the day, “Thanks, but no thanks”. From what I can gather, that airline or their airline industry is in a lot better shape than our airline industry is today.

    What we had in Canada was a lot of government intervention. We had problems in this country in trying to impose conditions, and so on. I think that the verdict on most of them is that they haven't worked; they have been very counterproductive. We might have been better off just letting these people work this problem out, with the government backing off. Hopefully this time around they might follow the other approach.

    The Chair: Mr. Bagnell, and then I have the researchers who have a couple of questions.

    Mr. Larry Bagnell: Thank you.

    Mr. Clifford, would your concern with the proposed amendment be any lessened if there were some caveats to it, in the sense that we could maybe use the words “provide benefits to consumers... were likely to bring about gains, such as”? I understand that your concern is that it reads that the only way that efficiency can be looked at is if it mandatorily brings benefits to consumers, and competitive prices or product choices. So it has to include those, or benefits it will not be allowed at all. Could that be made one of the things we look at? It may not even have been the intent.

    Mr. John Clifford: That's how I read the current bill, that the phrase “including competitive prices or product choices” just directs you to things you can think about, but really the focus is that you can only look at gains in efficiencies that provide benefits to consumers.

    Mr. Larry Bagnell: And it has to include “competitive prices or product choices”.

    Mr. John Clifford: You could take that phrase out and it would make no difference to the substance of the bill.

    Mr. Larry Bagnell: To you.

    Mr. John Clifford: In my view.

    Mr. Larry Bagnell: So the efficiency has to provide benefits to consumers.

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    Mr. John Clifford: That's right.

    Mr. Larry Bagnell: Right. Thank you.

    Mr. Ross, I wonder if you could give us a short lesson on the alternative ways of solving these competition cases, like Superior Propane. You mentioned one in your opening remarks.

    I also think it doesn't work. There are probably hundreds and hundreds of small cases, and I don't think the system can handle them. If it's an integral part of how we think society should be, we should deal with them all.

    So what alternative methods are there to solving anti-competitive behaviour? You mentioned just legislating a case, or having a provincial or territorial government passing legislation that fits within the whole mechanism. What else could be done to solve these problems?

    Prof. Stephen Ross: As I said, I think there are several things you could do to approach anti-competitive mergers. One is you could say—which is what the court did there—“We're going to do nothing, because eventually the things will all work out. The shareholders are often retirees. Anyway, even if they're not retirees, the wealthy people aren't going to put the money in a mattress; they're going to spend it. It will trickle down to the ordinary Canadians, so we should just do nothing.” I think that's one policy approach.

    Another policy approach would be to say that there are certain circumstances where there are certain kinds of efficiencies that clearly benefit Canadians in some way, and we're going to permit them. I don't think that was true in the propane case, but I can imagine a case—I can't remember the firms' names, but there were two—where if, for example, Bombardier and another company both made small regional jets and they both merge....

    Now, it's true that Air Canada is one of the purchasers, but most of the purchasers are world-wide. So if you actually had an unusual case, a world market where there were two Canadian firms that were dominant firms on the world stage and there were some efficiencies to allowing them to merge, you might say that in those specific cases it would be okay.

    Or you could adopt—and this would be consistent with my basic approach—the chamber's testimony. They gave three specific reasons why they thought efficiency defences were all right. You could put that in as a defence and say, if you can prove these three things, we're going to tolerate, to use Mr. McTeague's word, a small modicum of competition.

    Or you could take Mr. Fitzpatrick's approach—and this rather combines two of the things we've talked about—and say as far as the federal government is concerned, we're just going to let people do whatever they want, because there are some benefits to monopoly. But especially if we're talking about products people really need, we're going to then allow the provincial and territorial governments under the property and civil rights power they have to specifically regulate essential goods. They could regulate them and put in price regulations, or they could break up monopolies in those essential industries, etc. That's another approach.

    Or you could take the approach that most of the world takes. That is to say that when firms that were previously competing are now proposing to not compete any more, and the effect is to substantially harm consumers, that effect—even taking into account and after considering all the efficiencies—is not something we generally want to permit.

    Mr. Larry Bagnell: My basic view of the act is it's to make sure competition works; that there's competition in our free markets.

    Perhaps you could comment on that. This amendment simply is ensuring in a particular situation that might not allow that to occur.... I'm assuming there's lots of economic research that suggests that in more cases than not, when a company is a monopoly it becomes less efficient in its internal costing and spending and everything. In cost it's not as efficient, so that's detrimental to society and consumers.

    Mr. John Clifford: Mr. Bagnell, you're quite right that the Competition Act as a framework legislation is meant to create a structure or a framework to promote competition. But it has a number of other objectives as well. The efficient growth of the Canadian marketplace and benefits to consumers are included in them, and I think it's important from a policy perspective to not zero in on any one factor in particular but rather try to achieve through legislative enactment and amendment a balanced approach thast tries to encompass as many, if not all, of those factors as possible.

    The fear the chamber has is that this amendment is focusing on just consumer benefits. It removes from consideration some very important other means of achieving efficiencies when parties merge.

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    Prof. Stephen Ross: I agree with Mr. Clifford that it focuses on some considerations at the expense of others. I think the problem with the current law is that the net effect of it is to give too much weight to certain factors. That's sort of the basis of my policy disagreement with Mr. Clifford's position, and it's ultimately the judgment the committee is going to have to reach.

    Mr. Larry Bagnell: Neither of you commented on the fact that according to the literature, if your company is in a monopoly position, it tends to be less efficient than one that's not in a monopoly position, which therefore would be bad for....

    Prof. Stephen Ross: I think that is generally true in the literature. I think that because of that, one of the legitimate points that the Competition Bureau could make in a merger-to-monopoly case is to ask the tribunal to consider whether the merger to monopoly will actually reduce efficiencies. So even under the current efficiency defence, that's a factor that could be taken care of.

    I'd also suggest one other thing. Some of questions to me are characterized by the difference between Canada and the United States. Apropos of your question, I think it's another factor to consider. There are two means by which inefficiencies can be corrected in a large free market. One is through the pressure of competition, and one is through the market for corporate control. If a firm is slothful and inefficient, they might be put out of business by a rival. They might also be put out of business because some stockholder, investor, or investment banker, somebody like that, thinks that they can run the company more efficiently, and they take over the company. That is true in both the United States and Canada. However, Canada has far more important players where the corporations are family owned or thinly traded. The ability of the market for corporate control to discipline inefficient managers is less in Canada than in the United States. To be fair, I think it is capable of being considered within the current efficiency defence. But I think that, for the reasons I stated, Canadians have more reason to be vigilant about firms obtaining monopolistic control than larger markets like the United States or Europe where the capital markets may be more open.

    The Chair: Mr. Clifford.

    Mr. John Clifford: I largely agree with what Professor Ross is saying, although I don't know if I agree that we need to be any more vigilant than any other jurisdiction. I think inefficiencies are something we should all watch out for because they go against the grain of promoting growth in the economy.

    The Chair: Mr. Shaw, you have a question.

    Mr. Dan Shaw (Committee Researcher): It's a two-part question. It's open to both witnesses. Currently, section 96 weighs the dead-weight loss versus the efficiencies. So if it's $10 million in efficiencies and $20 million in dead-weight loss, that's a negative. They will not allow that merger to pass. If the opposite of the situation happens, they allow the merger to go ahead.

    When you're comparing $10 million to $5 million, you're comparing apples to apples. If you use Mr. McTeague's amendment where he brings it back to section 93, you're comparing substantial lessening of competition factors to efficiencies. If you talk about $10 million compared to three versus two producers and the other factors, whether there's foreign competition, etc., are you not comparing apples with oranges there? How do you weigh them?

    My second part to the question would be directed more to Mr. Ross. You said that you believe the evidentiary burden would be lessened under the new proposed amendment. But the wording, as I understand it, is “the...proposed merger has brought about or is likely to bring about gains in efficiency that will provide benefits to consumers”. You still need to know the elasticity of demand and the pre- and post-merger prices and quantities. You still need to know of these efficiencies what are fixed cost savings and what are margin cost savings. So I don't see the evidentiary burden. Could you explain to me why I may be incorrect there?

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    Prof. Stephen Ross: Let me take them in reverse order, Mr. Shaw.

    The short answer to that is that in a case like Superior Propane, there were no benefits to consumers, so you don't even have to go there. You have to do an analysis under section 92, which takes account of the efficiencies in determining whether it is likely that there will be a substantial increase in price. Unless you have one of these unusual things where the price is going to go up or the product choices are going to go up, something like that, in a typical merger case, if the efficiencies are not significant enough to retard any substantial lessening of competition, then the gains in efficiency are not benefiting consumers.

    Mr. Dan Shaw: How do you know what those efficiencies are? Do you not need the evidentiary burden of the price elasticity? In this amendment it's saying they're bringing about efficiencies that provide benefits--that is, it has to be passed on. To know how much could be passed on, you have to know what types of savings you're talking about, and you have to know that price elasticity of demand. So where's the reduced evidentiary burden?

    Prof. Stephen Ross: At this point I have to plead relative lack of qualifications to people who actually are litigators in the bureau, so all I will report to you is that in doing my work on this case I've had occasion to talk to a number of U.S. anti-trust enforcers who report that their burden in proving a substantial lessening of competition is way easier. It requires way fewer resources than what the Canadian bureau has to go through, because you don't have to specify the amount of the increase. You just have to determine that even after taking into account all the efficiencies, there will still be unilateral market power exercised by the remaining firms to some significant degree.

    Mr. Dan Shaw: But you're avoiding the question of how you determine efficiencies you're comparing it to.

    Anyway, if you could answer the first part....

    Mr. John Clifford: I don't know how you'd measure them with the proposed amendment. Looking at the U.S. experience as overviewed by Professor Ross, perhaps it's easier there because they really don't count efficiencies for much, so there is less to count up.

    I agree with you that in order to determine whether there is a lessening or a prevention of competition that is substantial, you have to do that today before you consider emergencies, or you'd have to do it if this amendment goes into force, because you still have to go through that complete analysis and try to value what the adverse effect on competition will be.

    If we look at Bill C-249 as proposed, it presumes as part of that analysis that you have to look about gains and efficiencies that provide benefits to consumers that would not likely be obtained in the absence of the merger. How do you determine that? You have to really ask yourself, well, if the merger didn't happen, what would these individual parties do in the future? How do you prove that?

    To me, it's very subjective. If you think there are going to be some benefits to consumers that result from the merger, you still have to value those. There still has to be a way to put a dollar amount beside it to make it measurable. Yet it's a bit, as you said, apples and oranges.

    Prof. Stephen Ross: On the efficiency, I agree that if you are considering efficiencies you still have to put a value. But in that merger-specific language here, my understanding is that is the current practice of the current law. The bureau is free to argue under current law that an efficiency that is being put forward by the merging parties could be achieved by the merging parties by some alternative means, and then the tribunal would reject the merger under current Canadian law. So I think that merger-specific language and the counter-factual that you go through is something that is a feature of current Canadian law, as well as under this test. That may be confusing, but this section isn't making that part any worse.

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    The Chair: Mr. Kieley, you had a question?

    Mr. Geoffrey Kieley (Committee Researcher): Thank you. I do have a brief question.

    Professor Ross, I think this really gets at the issue the committee is dealing with: Is the current law, as it has been interpreted by Superior, better than either of the proposed amendments? What the other Professor Ross suggested was that the law is not a mess, as you suggest, that in fact it has been clarified by Superior and we now have a qualified total surplus standard.

    The question is really for the chamber, and for you. By qualified total surplus they mean they're going to do a total surplus analysis, which is nice and clean and they can crunch the numbers and come to a good result, but if there's any egregious redistribution, the tribunal will have a residual discretion to say even though you've made it on the numbers, it's no go because of the redistribution. Is this something that would satisfy your consumer-oriented approach, and is it a compromise that would satisfy the chamber, given this current interpretation that's out there?

    Prof. Stephen Ross: If you could assure me that the judicial member of the Competition Tribunal was the honourable Dan McTeague, I would say that this qualified standard would be all right. If you could assure that the judicial member on the Competition Tribunal is the honourable Marc Nadon--which will no longer be, because he has been promoted--I would say it will clearly not permit this and will be a dramatically anti-consumer move.

    So how the median judge on the Competition Tribunal will rule is something on which you need to consult your own lawyers. My own sense of the jurisprudence of the tribunal, given the reasoning that was stated by Justice Nadon, is that the qualified standard doesn't really move very far from the total surplus standard, which is precisely why Professor Tom Ross, who liked the total surplus standard in the first place, thinks this qualified standard, which isn't much of a qualification, is a good idea.

    Mr. John Clifford: The chamber believes the current qualified standard is quite workable. It's understandable. It imports a discretion in the numbers exercise to make sure that egregious redistributions don't occur, to the extent that remains a concern. That allows a case-by-case analysis at some qualitative level, over and above the pure counting of the numbers and trying to get to the best result having regard to all of the evidence.

    Mr. Brian Fitzpatrick: I have just a quick observation about Canada and our health care system. The very argument used by people, certainly on the other side, on the great benefit of the state-run monopoly in Canada is the great efficiency gains from having this public monopoly in place. It's just an observation on my part that they use that argument all the time in the debate over the delivery of health care.

    I think something like 90% of the Canadian population lives within 100 miles of the U.S. border. The rest of the country is very underpopulated, hard to service, and so on. The reality in a lot of markets is there isn't a lot of room for fierce competition. Communities are lucky if one truck comes to their community, if they have one bus service, if they have one grocery store and one electrical or power company servicing their community. That's the reality, and in that context you have to have some sort of regulatory system in place to protect people in those situations. That's the reality of Canada.

    The Chair: Mr. McTeague, do you want to finish up with a short question?

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

    Coming back to Fasken Martineau and Baldanza, the bottom line is that from their perspective, certainly those in the legal community, it's obviously a mixed bag. Transfers from consumers to shareholders of a merged entity due to higher propane prices are ignored.

    I guess I really want to ask one simple question, and both of you can answer this. If we are prepared to set aside the interests and wealth of consumers, how do we become attractive internationally?

    Mr. John Clifford: I don't think we're advocating setting aside the interests of consumers. I think we're advocating ensuring that the interests of consumers are taken into account and balanced against other interests that are reflected in the Competition Act.

    Ultimately we step back and say this is framework legislation. It needs to be applicable and work in an economically sensible manner. The current laws do that and achieve the overall objectives of the act.

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    Prof. Stephen Ross: Before I respond, I would like to take this opportunity to thank the committee for its hospitality and compliment the members of the committee. This is the first opportunity I've ever had to testify before a committee of your Parliament. I have had the honour of testifying before a variety of committees of the United States Senate and the United States Congress. I must say that I have never had the opportunity to have such close attention paid to two witnesses who were not major-league celebrities, where the C-SPAN lights were not on and where, although there was some rhetoric and speech-making, most of the questions were legitimate efforts to ascertain the views of the members, compared to your compatriots south of the border. So this has been a very positive experience for me.

    To substantively answer your question, Mr. McTeague, I think the international focus was the primary focus of the debates in 1986, and it's a legitimate concern. You've made the observation that things have changed in the last 17 years and perhaps we no longer need that. There was a reference to that in Mr. von Finckenstein's comments as well.

    I leave it to this committee to decide that, but I don't think it's appropriate or necessary in framework legislation, as Mr. Clifford says, to create a framework that systematically exploits millions of Canadian consumers because of the possibility that in some cases some other policy should be served. My own view is that the better approach in those cases is to specify, through a defence or some other statutory language, consideration to ensure that the sorts of mergers that you feel are necessary to maintain international competitiveness are permitted.

    But that does not mean it has to swallow up those cases, and I would suggest propane is one of them, where Mr. Bagnell's consumers are severely exploited and there is no benefit. If there is a case where we need to exploit Mr. Bagnell's consumers or constituents, or perhaps Mr. Fitzpatrick's rural constituents, so all Canadians can benefit from greater jobs or something like that, if there's a trade-off there that's something I think you are uniquely responsible for making. I certainly can't tell you that. But when there's no trade-off, I don't see a reason for allowing these things to go forward.

    The Chair: Thank you very much. That concludes our day today.

    I want to thank all of the witnesses for being with us and for having a real good dialogue on Bill C-249. Thank you very much, and have a safe drive or flight home. Thank you.

    The meeting is adjourned.