INST Committee Meeting

37th PARLIAMENT, 2nd SESSION

Standing Committee on Industry, Science and Technology

EVIDENCE

CONTENTS

Wednesday, April 9, 2003

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1535

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

Mrs. Tamra Thomson (Director, Legislation and Law Reform, Canadian Bar Association)

The Chair

Mr. Tim Kennish (Past Chair, National Competition Law Section, Canadian Bar Association)

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1540

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1545

The Chair

Mr. Robert Russell (Lawyer, Borden Ladner Gervais, As Individual)

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1550

¹

1555

º

1600

The Chair

Mr. Robert Russell

The Chair

Mr. Robert Russell

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1605

The Chair

Mr. Robert Russell

The Chair

Mr. Roger Ware (Professor, Queen's University, As Individual)

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1610

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1615

The Chair

Mr. James Rajotte (Edmonton Southwest, Canadian Alliance)

Mr. Robert Russell

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1620

Mr. James Rajotte

Mr. Robert Russell

Mr. James Rajotte

Mr. Robert Russell

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1625

The Chair

Mr. Roger Ware

The Chair

Mr. Tim Kennish

The Chair

Mr. Larry Bagnell (Yukon, Lib.)

Mr. Tim Kennish

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1630

Mr. Larry Bagnell

Mr. Tim Kennish

Mr. Roger Ware

Mr. Larry Bagnell

Mr. Roger Ware

Mr. Larry Bagnell

Mr. Tim Kennish

Mr. Robert Russell

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1635

The Chair

Mr. Larry Bagnell

Mr. Robert Russell

The Chair

Mr. Brian Masse (Windsor West, NDP)

Mr. Roger Ware

Mr. Brian Masse

Mr. Roger Ware

Mr. Brian Masse

Mr. Roger Ware

Mr. Brian Masse

Mr. Tim Kennish

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1640

Mr. Robert Russell

The Chair

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.)

Mr. Tim Kennish

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1645

Mr. Dan McTeague

Mr. Tim Kennish

Mr. Dan McTeague

Mr. Roger Ware

The Chair

Mr. Dan McTeague

Mr. Robert Russell

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1650

The Chair

Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance)

Mr. Tim Kennish

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1655

Mr. Brian Fitzpatrick

Mr. Roger Ware

The Chair

Mr. Robert Russell

Mr. Brian Fitzpatrick

Mr. Roger Ware

The Chair

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

Mr. Robert Russell

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1700

Mr. Tim Kennish

Mr. Roger Ware

Mr. Andy Savoy

Mr. Tim Kennish

Mr. Roger Ware

Mr. Andy Savoy

Mr. Robert Russell

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1705

The Chair

Mr. Andy Savoy

Mr. Robert Russell

The Chair

Mr. Tim Kennish

The Chair

Mr. Roger Ware

Mr. Andy Savoy

Mr. Roger Ware

Mr. Andy Savoy

The Chair

Mr. Gilbert Normand (Bellechasse—Etchemins—Montmagny—L'Islet, Lib.)

Mr. Tim Kennish

Mr. Gilbert Normand

Mr. Tim Kennish

The Chair

Mr. Tim Kennish

Mr. Gilbert Normand

Mr. Tim Kennish

»

1710

The Chair

Mr. Robert Russell

The Chair

Mr. Roger Ware

Mr. Gilbert Normand

Mr. Tim Kennish

Mr. Robert Russell

The Chair

Mr. Roger Ware

The Chair

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CANADA

Standing Committee on Industry, Science and Technology

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NUMBER 037

l

2nd SESSION

l

37th PARLIAMENT

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EVIDENCE

Wednesday, April 9, 2003

[Recorded by Electronic Apparatus]

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[English]

    The Chair (Mr. Walt Lastewka (St. Catharines, Lib.)): I call this meeting to order.

    Today the Standing Committee on Industry, Science and Technology is studying Bill C-249, an act to amend the Competition Act.

    We have guests from the Canadian Bar Association. Mr. Tim Kennish is no stranger to this committee. Welcome back. Tamra Thomson, welcome. Robert Russell is presenting as an individual.

    We have one more witness who we thought was going to be here. We're not quite sure what happened.

    We'll start with a presentation by the group. We'll go as shown on the agenda, starting with the Canadian Bar Association and Ms. Thomson.

    Mrs. Tamra Thomson (Director, Legislation and Law Reform, Canadian Bar Association): Thank you, Mr. Chair. I'll start and then hand things over to my colleague Mr. Kennish.

    We're very pleased to appear before this committee today on behalf of the national competition law section of the Canadian Bar Association. The section has a long history of commenting on amendments to the Competition Act in their various stages.

    The Canadian Bar Association is a national voluntary association that represents over 38,000 jurists across Canada. One of our objectives is to work toward improvement in the law and in the administration of justice, and it is in that light that we make our comments before you today.

    You have received a copy of our written submission, and I will ask Mr. Kennish, who is the past chair of the competition law section, to address the bill and the changes that have been proposed to it.

    The Chair: Thank you very much.

    Mr. Tim Kennish (Past Chair, National Competition Law Section, Canadian Bar Association): Thank you, Mr. Chair and honourable members. As Tamra Thomson just mentioned, it's a pleasure for us to be here to present our views on this bill, as amended. We also appreciate the continuing interest you show in improving the Canadian competition law.

    We have strongly held views on the subject of efficiencies in merger law analysis. In particular, we have a concern that efficiencies are not being given sufficient consideration, not only in the context of mergers but also in other areas of the bill's provisions. But that other subject is for another day. We realize that today's focus is on the merger defence.

    Our previously furnished submission, which was dated September of last year and was presented to you later in the fall, was in response to the original bill and may or may not be of any continuing relevance. It appears that it's been replaced by the current bill. But to the extent that it is something you are continuing to consider or might wish to in the future, we just wish to reiterate, as put in fairly strenuous terms in the submission, that we're opposed to it. Because of the limitations of time and also because it may not be relevant for your purposes, I'll just confine myself to two comments on that bill.

    First, proposed subsection 96(5) of the original bill would emasculate the merger efficiency defence entirely, because in effect the defence would really only operate in the circumstances where the reliance upon it would be precluded by this provision, which is to say it talks about the defence being unavailable where the merger would create or enhance a dominant position. The bureau itself has publicly indicated that it interprets dominant position as the possession of a market share in excess of 35%.

    The other comment relates to proposed subsection 96(4) of the bill, which would only recognize efficiencies to the extent it could be shown that a majority of the efficiencies generated by the merger would be passed on to consumers in the form of lower prices. That's a difficult task to prove on a perspective basis in any event, but it would confine the type of efficiencies that could be recognized to a limited range and wouldn't take account of important efficiencies like productivity enhancements, improvements in quality, service of products, or innovation.

    But we assume that instead your intent here is to have us consider the new proposed amendment to subsection 96(1). As drafted, it would adopt a factoral approach. In other words, it would treat efficiencies as a factor in consideration of the legality of a merger.

    This is a substantial difference from the defence we currently have where, theoretically at least, the efficiencies could override a judgment on the legality of a merger. In other words, it could trump an anti-competitive effect in certain circumstances. Under this new proposal it would become a factor, along with other factors that are used to assess the legality of a merger, such as the ease of entry into the market or the strength of the remaining competition. I'll talk further about that.

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    Just as background historical fact, it's our understanding that the inclusion of section 96 in the package of amendments to the law enacted in 1986 was a response in part to concerns that had been raised by the business community about the then new merger provisions. Given that background, it's particularly important to modify it only after due reflection has been given and there has been an opportunity for broader public discussion. There is a constituency out there that thinks that was part of an understanding about how the act would have been amended.

    We have to acknowledge that the role played by efficiencies in the some 16 years since the defence went into the act has been pretty marginal, for a couple of reasons. First, it's a defence, so it is considered only after there's already been a judgment that the merger would cause a substantial lessening of competition.

    Second, I think there's clearly a reluctance on the part of the Competition Bureau to recognize that efficiencies could override a merger that substantially lessened competition, so there isn't an acceptance of that possibility. You really have to go to court to win on the defence.

    In the result, it appears that efficiencies are not really being considered to any great degree in merger review, and it's not obvious to us that they're being considered in other areas, such as in cases involving exclusive dealing, tied selling, or market restriction.

    I know that people think the decision in Superior Propane may enlarge the scope of operation of efficiencies, but in our view that's not very likely. First, the decision in the case interpreting section 96 requires that for the defence to apply, the efficiencies must outweigh and offset not only the dead-weight loss--an economist's term for the loss of productivity--resulting from the reduced competition brought about by the merger, but also that portion of the wealth transfer that arises from the merger that is judged to be socially adverse.

    The requirement to identify what is socially adverse raises significant uncertainties, and I think few merger counsellors are going to be able to predict when the defence would be invoked or available.

    Beyond this, we think the actual scope for invoking the defence is really quite limited. I am sure you have heard this from others, but there seems to be general agreement amongst knowledgeable economists that had the dead-weight loss in the Superior Propane case been properly calculated, i.e., had not been undervalued, the efficiency gains would not have offset that loss. The defence would not have been available. Thus it appears that the only case in which the defence was relied upon in the last 16 years, had it been properly analyzed, would not have been available in that case.

    So I think there is little real prospect of merger-facilitated monopolies running rampant in the economy and raising prices to consumers  as a consequence of the way in which section 96 has been interpreted.

    We are concerned about section 96 not because it goes too far, but because it has a pretty limited scope and has effectively marginalized the consideration of efficiencies in merger review. Because it's turned to after the analysis is done and is an all-or-nothing proposition, it means that efficiencies don't get proper attention in the merger review process. Since the achievement of efficiency is one of the acknowledged goals of competition policy, that's a shortcoming that I think is worthy of correction.

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    So the Canadian Bar Association national competition law section executive has an inclination toward accepting a factoral approach, such as suggested in the amendment, as this would enable efficiencies to be more regularly considered in merger review. However, because of the recent introduction of the amendment you are now considering, we haven't had a chance to review this with our membership as we would ordinarily do, so we can't fully endorse the idea. In any event, we're not convinced that this particular amendment is the way to go for a number of reasons, and I'll just conclude with these.

    First, on a technical point, if efficiencies are going to be a factor, they ought logically to be included in the list of other merger review factors set forth in section 93. There's no reason for them to be isolated in a section on their own. That would raise questions as to whether they're to be given any different weight from the section 93 factors.

    Secondly, the way the proposed amendment is described actually limits the efficiencies that can be considered to those in respect of which consumers benefit. Imposing a limitation of that type effectively ignores a range of other potentially important efficiencies, such as productivity, improvements, and innovation gains that can't be tracked directly through to consumer benefits.

    More importantly, because this proposes a major change and will be important to the future operation of the act, I think it raises a process issue. Because the public hasn't had an opportunity to comment on this proposal, it is therefore desirable that it be considered in a larger forum where public consultation can take place, such as is presently underway with regard to the reforms to section 45 and the pricing provisions of the act.

    So while we tend to agree that some measure of legislative reform may be necessary to improve the operation of law in this area, we would strongly recommend that the review of this be undertaken in the context of the kind of process that's underway with regard to section 45.

    Thanks very much.

    The Chair: Thank you very much.

    Mr. Russell.

    Mr. Robert Russell (Lawyer, Borden Ladner Gervais, As Individual): I'd like to thank the members for once again providing me with an opportunity to address you on proposed amendments to the Competition Act. I certainly think I speak on behalf of the members of the bar in expressing appreciation for this committee's continued interest in improving our competition laws in Canada.

    By way of some short background, just so you know, I'm appearing as an individual, but my experience in the area has been both in the private sector and on behalf of the competition commissioner. I have appeared for the commissioner on two contested mergers. What I hope to give you today is my experience and my thought process, which come from acting on both sides of the street, so to speak.

    I have a brief opening statement with respect to the efficiency provision proposed by Bill C-249. I'm going to confine my comments today to the proposed amendment by the sponsoring member.

    I start off by saying I support the amendment because primarily I believe it accords with Parliament's intent in enacting Bill C-91, which brought us our new Competition Act in 1986.

    I believe much of what has occurred before you--and I've read the transcripts and the debate on the role of efficiencies--is misaligned. You've heard a number of lawyers and economists who appeared before you talking about their views on the proper role of efficiencies and competition policy.

    I believe the intersection of competition policy and economics, stripped of its legalese and its economic theory, is essentially a question of public policy or social policy--no less than taxation or health care--that must reflect Canadian societal values. It really distills down to that. When you focus on it that way, then the clarity that needs to be brought to it is the clarity the elected members of Parliament must see in the legislation.

    I've read far too much; there have been articles published since 1986, when the act came in. There is no single topic in competition policy that has had greater debate in our system of law than the efficiencies defence. So when I hear people talk about further study and need for examination, I'm going to tell you, it was debated for 18 years before Bill C-91 in 1986 and there have been 17 years since. There's been nothing more widely written on, spoken on, published in Canada, and reflected upon in other jurisdictions--and they don't pay much attention to us normally in our efficiencies defence.

    The debate has been reflected in committees such as this in numerous previous bills before Parliament before Bill C-91 was passed. Unfortunately, the statutory language we acquired in section 96, rather than clearly defining how efficiency should impact competition policy, increased the level of uncertainty. In fact, what you had after 1986 was a focus by academics and by lawyers, saying this one's going to be really tough. Then you know what happens--we have merger enforcement guidelines that are published and withdrawn.

    As a side story, I can tell you in one of the cases in which I was going to have to argue for a former commissioner, then called the director, I was going to have to deal with the efficiency defence. I told him point blank, if he expected me to stand up and defend the MEGs, the merger enforcement guidelines, he needed to get other counsel, because I didn't agree with them. I thought it was the wrong interpretation of the legislation at the time and I thought it was completely outside of what Parliament had intended for efficiencies.

    Now we find ourselves at a place where we will go forward with the decision of the tribunal that we found in Superior Propane. Although I don't think the Financial Post always gets it right, I think it focused on it correctly this time when it said, “The case means under the Competition Act, the efficiencies of a merger--the cost savings realized from joining two companies--can trump the impact of higher prices on ordinary consumers”. That is actually what we're talking about. No matter what anybody tries to tell you, that is the effect of the decision.

    In that same article, Mr. John Rook, a noted competition litigator who acted for the commissioner in the appeals in Superior Propane, posited the following view: “I suspect that most members of Parliament will take the view this decision tips the scales against consumers to an unwarranted degree and should be changed”. It goes on to say, “The commissioner is to be commended in moving quickly to address this issue”.

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    I must say as an aside that this doesn't come from the commissioner; nonetheless, I understand the commissioner is supporting the most recent amendment. I won't be presumptuous enough to say I know what the members of Parliament think, but I do believe that Mr. Rook clearly identified the issue you have before you. I think that issue is, what did Parliament intend when it enacted section 96?

    Curiously, with all the litigation that went on in Superior Propane, there has been no mention of the Hansard. I've been litigating for over 20 years, and when we have statutory interpretation at stake we normally go to the Hansard. It's one of the aids when the court says there's an ambiguity in the statute--what did the parliamentarians think they were doing?

    In this case, at least, the tribunal decisions don't reflect that anybody looked at it. So I pulled them. Bill C-91 was set down for second reading on April 7, 1986 and the Honourable Michel Côté, Minister of Consumer and Corporate Affairs, set out the purpose of the bill.

    Now, I should have said at the beginning I have provided my speaking notes. They're currently in for translation and I'll provide them to committee when they are translated. I have provided the English version of them for today.

    The quote from Hansard says:

Hon. Members of this House are well aware that Parliament has tried several times before to enact amendments to the Combines Investigation Act. ... This time the proposed Competition Act enjoys an unprecedented degree of support throughout the business community, especially with small businesses, and consumer and labour interests.

    I want you to reflect on that, but when you see our support, when we talk about the efficiency defence and the current interpretation and who it ignores, you'll see it ignores all of those elements, save and except the business interests, in the way efficiencies are now weighed. So as for all the support we talked about for the new act, it's come down to one of those groups whose interest is now supported by the current interpretation of section 96.

    It goes on to say:

As the Consumers' Association of Canada stated after I tabled this Bill in December: “The new Competition Act promises real progress for consumers and is a major improvement over current legislation.”

The purpose of Bill C-91 as stated in the purpose clause in the Bill, is to maintain and encourage competition in Canada.

    I won't read the whole quote because it takes too long, but it goes on to say there are four main objectives set out in the act. The first objective is to promote the efficiency and adaptability to the Canadian economy--efficiencies are supported under this act. Second, of course, is that Canadian companies are to compete effectively in world markets and better meet foreign competition. The third objective is to ensure small and medium-sized enterprises have an equitable opportunity to participate. The fourth, which is emphasized in my notes, but not the least, is to provide consumers with competitive prices and product choices. As such, this objective becomes the common denominator in what we are trying to achieve. This is the ultimate objective of the bill.

    Reconcile, if you can, the decision of the tribunal in Superior Propane with what I just read from Hansard. What the tribunal now says is that the existence of section 96 signals the importance that Parliament attached to achieving efficiency in the Canadian economy. Indeed, in view of the tribunal, section 96 makes efficiency the paramount objective. The attainment of efficiency in merger review cannot be limited thereby when competition and efficiency conflict. It trumps everything else.

    But the minister, in introducing the bill to Parliament, said the trump card is consumer welfare. There's no mystery about that. People are conveniently forgetting when we get into debate what Parliament said the new Competition Act was about.

    I've talked to colleagues; I was down in Washington at the ABA antitrust conference last week, and some people talked about these other factors as being “just that other bumph that Parliament put in”--the other bumph about consumers, about small businesses, and about our ability to compete against foreign competitors.

    Parliament didn't think it was bumph when it enacted Bill C-91. It made it clear that the cornerstone of this bill was consumer welfare. Not surprisingly, the absence of clear language in section 96 has had this long history of controversy. Parliament acknowledged there were 18 years of debate before the new Competition Act came in, and now we've had 17 years of debate on the efficiency defence since it came in.

    There was an early decision of the tribunal in director against Hillsdown Holdings, where Madam Justice Reed said the appropriate approach was to focus on consumer welfare in keeping with the objectives found in section 1.1 of the Competition Act. However, I believe the parliamentary record is clear as to the objective, and I believe Madam Justice Reed was correct in the Hillsdown decision. Unfortunately, those comments were not followed in the recent decision in Superior Propane.

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    While we can have a number of approaches, we need clear guidance. We need a clear set of rules to determine how this current trump card is played.

    Unlike many of my colleagues in the competition law bar and economists, I don't believe the correct approach is primarily legal or economic. As I said earlier, it's a question of public policy. I do not presume it's too complex for those who are not lawyers or economists to understand.

    Does Parliament wish to permit mergers that result in higher prices to consumers or to reduce product choices? If they don't, then the total welfare approach that is now adopted in Superior Propane is the wrong approach.

    Consumers, on one hand, would favour consumer surplus because it doesn't mean that if they're in Atlantic Canada they're paying too much for propane. Producers and shareholders, of course, want to generate efficiencies to maximize shareholder value. We have competing public policy issues. However, I don't think it would be much comfort to Canadians, say customers of Air Canada, to reflect on it when they buy their tickets to fly to western Canada these days. The people thought that the combination of the two national airlines would be efficient.

    I should posit to say that I don't think a lawyer worth his or her salt in this area in any network industry couldn't make an overriding efficiency case for their private sector client based on what the tribunal has determined today. Any network industry will have such significant efficiencies, based on the calculations in Superior Propane, that they will overcome the substantial lessening in every single case.

    When Professor Ross appeared before you...and although I'm going to make a few comments about what he said, I assure you I have the utmost respect for Professor Ross. He's worked with me on cases. I should say Tom Ross; I don't know Stephen Ross, although I have some comments on what he said as well. But I do want to focus on Professor Ross. I think he did a very good job of focusing on the other side of the case. So I've picked my adversary, as litigators do, and I want to respond to some degree in terms of what he said.

    He said transfers should be neutral. He espoused the view that consumer welfare is unimportant from a pure economic point of view. He acknowledges in many papers he's done that the total welfare approach ignores international boundaries.

    The sum total of that is that it doesn't matter whether Canadian consumers are worse off if the efficiencies increase the wealth of foreign corporations or the shareholders. I equate that with: we shouldn't be concerned about the standard of living in Canada. I say this because if we have a merger in which the shareholders are outside of this country and they extract higher prices in Canada, it directly impacts the standard of living in Canada, but there were efficiency gains, although they were transferred, to foreigners. That's the total welfare approach. There's no “Made in Canada” part of total welfare.

    This approach completely relegates three out of four of the stated objectives in subsection 1(1) of the act to secondary importance, or irrelevance.

    Brian Facey, one of the counsel to Superior Propane, commented on what the tribunal's interpretation now means. He said:

All other non-economic effects of mergers, such as job losses, plant closures, loss of sovereignty, the concentration of wealth, the protection of small business, and wealth transfers are considered neutral from an economic perspective under Canadian merger law and are, consequentially, irrelevant under this standard.

    Mr. Facey, Superior Propane's counsel, one of the people who won, is now telling you and admitting in an article that that's the consequence. So while Mr. Facey is one of the ones who advocate total welfare in a number of articles he's done, he's acknowledging, very honestly, the consequences. But when I read you that list, as parliamentarians, are you to consider that all of those things are completely neutral and immaterial to one of the cornerstone pieces of economic legislation in this country? That's what you're really being asked to do.

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    The Chair: Mr. Russell, I apologize, but you've gone 50% over your time limit. I'm afraid that if the bells ring you're going to lose all of us.

    Mr. Robert Russell: May I have two short sentences? I'll jump to--

    The Chair: You really need to conclude.

    Mr. Robert Russell: I'll conclude quickly.

    I've spoken about parliamentary intent. I believe it's clear. In addition to that, I would like to make three points very briefly on why I personally support the amendment that the sponsoring member put forward--three additional issues.

    The first is that the consumer surplus standard, which is consumer welfare, is clearly embodied in the amendment and is consistent with the approach taken in every other major jurisdiction, including the United States, the U.K. and the European Union.

    Professor Ross said they were considering changes. The U.K., only this spring, adopted legislation that applied the consumer welfare standard. They were considering efficiencies, but what they considered and determined were the standards that are now put to you today in this amendment.

    The consumer surplus standard is consistent with the approach to efficiencies that my colleagues Adam Fanaki and David Ackman and I put forward in a draft of a new dual-track section 45, the conspiracy provision. I simply make the point that it's important to harmonize what we're going to do with efficiencies in the new conspiracy provision with what we do in mergers. And I actually had provided a copy of our proposal to the honourable member, Dan McTeague, and it's very closely reflected in the amendment he put forward in terms of what we had included in the draft legislation for section 45.

    Finally, the total surplus standard, the one that the tribunal now adopts, makes enforcement of the act extremely difficult, increasing the complexity and cost of merger review significantly. And I put a number of references in there.

    You're talking about litigation. With regard to the one that I was involved in for the commission, they decided to spend $10 million on legal fees--to my knowledge, the current budget of the Competition Bureau, in total, is about $25 million--on the one case, the other side spent $10 million, and the efficiency defence wasn't even touched in that case. This is very expensive litigation without clear rules. The taxpayers will be paying for enormously complex review and litigation.

    I thank you for the time and the overtime you gave me and I'd be pleased to answer any questions you have.

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    The Chair: I apologize, but you went almost double the time.

    Mr. Robert Russell: I tend to do that in court as well. Sorry.

    The Chair: We also have with us today Mr. Roger Ware, professor at Queen's University. Mr. Ware, please.

    Mr. Roger Ware (Professor, Queen's University, As Individual): The concerns I wish to express today have to a significant extent to do with process rather than the content of the bill, but I have some observations on that in its amended form too.

    An excellent report that was released by this committee almost exactly a year ago, in April 2002, contained the following recommendation:

That the Government of Canada immediately establish an independent task force of experts to study the role that efficiencies should play in all civilly reviewable sections of the Competition Act, and that the report of the task force be submitted to a parliamentary committee for further study within six months of the tabling of this report.

    This did not happen and has not happened. There have been no independent task force, no study, no consultation, and very little discussion--and here I disagree with my learned colleague on my left here--on the role of efficiencies in merger review or for that matter in other sections of the Competition Act.

    As an alternative, the commissioner did commission a report last fall from Tom Ross and Ann-Britt Everett that consisted of a useful but largely uncritical review of merger practices with respect to efficiencies in three other jurisdictions, the U.S., the European Union, and Australia. One notable conclusion from this report is that all of these jurisdictions are moving in the direction of a greater role for efficiencies in merger review.

    The current Bill C-249, if I understand the amended version correctly, represents a major amendment to merger review in the Competition Act. When the original act was drafted, a long-lasting debate on the role for efficiencies took place among academics, lawyers, the business community, policy-makers, and politicians. A good summary of that debate can in fact be found in the propane tribunal's redetermination decision, and I'm sure there are references in Hansard to that. No such debate is taken with respect to this amendment or to the bill as a whole.

    I want to emphasize that section 96, which provides an efficiency defence, is not broken or unworkable, nor does it give unfair weight to producer interests over consumer interests. In 16 years of this statute, only one merger case has been heard that involved a trade-off between higher prices and greater efficiencies to be expected from a merger. Had the evidence in that case been properly presented, it would most likely have failed the total surplus test and the merger would have been denied. Moreover, we would continue to have a well-articulated and transparent standard for merger review, one that would be a clear guide to businesses as they contemplate these transactions.

    At the risk of repetition, I will say that mergers in highly concentrated markets are very unlikely to succeed through the application of the existing section 96, the efficiency defence. The efficiency gains that would be required under a properly applied total surplus test or a modified total surplus test as articulated by the tribunal are just much too large and not likely to be credible in practice.

    I'd like next to comment on some aspects of the submission made to this committee by the commissioner of competition about a week or so ago because I think some of his comments were misleading.

    The commissioner stated that Bill C-249 seeks to ensure that consumers are not left out of the equation when mergers involving efficiency claims are being considered, but in fact the existing legislation does not in any way leave consumers out of the equation. Any losses expected by one set of consumers, the ones who buy the product, are balanced against gains expected for another set of consumers, those who own the merging companies. As a point I've made elsewhere, we are in fact all consumers.

    The commissioner states that the interpretation given to section 96 by the propane decision means that the Competition Act condones the creation of monopolies. This statement is misleading for at least two reasons.

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    First, it has been stated by several economists that a properly applied total surplus test would make it impossible to approve a merger to monopoly on efficiency grounds if one ever came before the tribunal. The reason the propane merger survived was because the commissioner failed to present the correct evidence on what the magnitudes of the likely changes in consumer and producer surplus were.

    Second, as I have written elsewhere, the concept of monopoly is an elusive one and not a good basis on which to anchor competition policy. The current amendment to Bill C-249 contains the phrase “near elimination of competition”. This is not a precise term and would likely lead to much wrangling in front of the tribunal in any specific case where this clause was a critical element. Moreover, preventing monopolies per se should never be an objective of competition policy.

    Consider markets that are contestable or nearly contestable. Take a dealership in a small town where there might well be a single manufacturer that supplied that dealership for, let's say, snowmobiles at any given time. But if that manufacturer attempted to increase price to the dealer in that town, the dealer would simply switch to an alternative supplier, of which there are many. That is, the supplier may well have a monopoly at any moment in time, but they will not have what economists call “market power”.

    It is because such terms such as “monopoly” are so vague that scholars and practitioners in the competition area prefer to use the term “market power” to describe any adverse effects of mergers or other practices. Any changes in market power are precisely captured in the current merger legislation and in the legislation relating to other anti-competitive practices as well. The right question to ask about a merger or other practices is whether it will lead to an unacceptable increase in market power, not whether it will lead to a monopoly.

    Finally, the commissioner argues in favour of Bill C-249 because it will bring Canada's merger review closer to the standards used in other jurisdictions. He also claims that divergence in merger review can adversely affect the ability of Canadian firms to compete internationally. This statement is quite misleading. Any standard for merger review that puts a greater weight on efficiency considerations for Canadian firms than those faced by their international competitors will be to the advantage of those Canadian firms, not to their disadvantage as the commissioner has suggested. This is because allowing Canadian firms to merge and become more cost-efficient will make them stronger, not weaker, competitors with their international rivals.

    Turning to more substantive issues on the content of the amended bill, I would begin by repeating that in my opinion, a major study and consultation exercise should precede a change in merger review of this magnitude and significance.

    However, to offer some general comments, I'd say that the biggest weakness of section 96 as currently drafted is that it is triggered only after a substantial lessening of competition is found under section 92 and then only at least with the current commissioner if a contested case is heard at the tribunal. I would prefer efficiencies to be considered as part of the evaluation of where the competition is being substantially lessened. Thus, the efficiency defence might be included as one of the factors to be considered in section 93, and here I agree with what my colleague Tim Kennish just said.

    The issue of how to weight efficiencies would still be unresolved, and I would prefer a continuation of the course the Competition Tribunal has begun to chart of a modified total surplus approach.

    I have a couple of comments that are really in the nature of drafting comments, and maybe I will offer them for what they're worth, but they may in fact represent my own confusion about what the current amended bill is. There is a phrase in the proposed subsection 96(1) that “gains in efficiency that will provide benefits to consumers”. These are the gains that would be counted. As I've noted above, the shareholders of the merging companies are consumers too, and they may well receive benefits from a merger that involves a price increase.

    Also, it's entirely possible that a merger may cause prices to increase slightly but still increase consumer surplus, because if there's a quality improvement or possibly a change in the brand structure offered by a particular firm, it may well be that consumer surplus can still increase when prices rise at the same time. Then we have a problem. Are we saying there are benefits to consumers or not?

º  (1615)  

    Secondly--and this is my last point--again this may be my own confusion, but as I understand it, the word “offset,” which is the old word from subsection 96(1, still appears in proposed subsection 96(4), which is still, I believe, in the amended bill, but it no longer appears, of course, in the new subsection 96(1). I find this a little confusing because the issue was supposed to be that losses to consumers could be offset by gains in efficiency. It no longer says that, and so the word “offset” seems a little bit confusing in proposed subsection 96(4).

    Those are my comments. Thank you.

    The Chair: Thank you very much.

    Mr. Rajotte, you have about six minutes. We're trying to monitor whether there's going to be a vote or not.

    Mr. James Rajotte (Edmonton Southwest, Canadian Alliance): Thank you, Mr. Chairman.

    Thank you very much for your presentations here today.

    It seems one of the main issues the committee will be looking at, and the questions you raise, is should Parliament amend the Competition Act now or should it engage in further study? Some of you have pointed to the recommendation in the last report we did on competition.

    I was interested, Mr. Russell, in the argument you made that there has been nothing more widely written upon than the efficiencies defence over the last 17 years. I think I'm accurate in stating that.

    The Canadian Bar Association, in their first paragraph on page 3, reference the fact that “In over 15 years, onlyone case has gone to the Competition Tribunal in which efficiencies was the decidingfactor.” It's therefore saying, and I think obviously pointing out, that we should have more cases before we amend the law. So how would you respond to that? How would you respond to what they state here?

    Mr. Robert Russell: I'd respond in a couple of ways.

    First of all, when they say there's one case, it was considered in another case that I mentioned, which was the Hillsdown case. Also, we have only had a handful of cases before the tribunal on contested mergers, so when you say we have two--I think it's out of ten, if I have the right count at the moment....

    Partly, there was a comment by Professor Stephen Ross that you might reflect upon the fact that our enforcement is less active in Canada because of some of the uncertainty in our act. So the business community doesn't fully understand how efficiencies are going to apply to their business. The commissioner has been reluctant in terms of acknowledging efficiencies. But I don't believe, as I said, it's something you should let be litigated and determined, because it's essential social or public policy in Canada. You're basically leaving it up to the courts. If I'm correct--and I think Hansard clearly reflects it--that the intent was clear when Parliament enacted the new Competition Act, then what you have is a legislative drafting problem; you don't have a policy problem.

    If you look at Hansard and agree that the intention of Parliament was to have a consumer welfare standard, then the drafters didn't get it right. Madam Justice Reed, who was on the tribunal, said--or that's what you get out of what she said--she'd be sort of surprised if Parliament intended anything different. People forget about the dissent in Superior Propane. One of the members dissented and said, “I'm a bit surprised too that this is where we are”.

    So I think this is more like a charter case, because it's so important to our economy, if the courts come back to you--in this case, the tribunal--to say, the drafters didn't get it right, Parliament, it's time to fix it.

    I don't agree with my colleagues. There is so much written on efficiencies, not only in this jurisdiction but otherwise. In our review of it for section 45 amendments, we have looked at other jurisdictions.

    My friend says the commissioner was misleading in suggesting that we're standing alone. I disagree. I think what the report said was not misleading, and it said people are looking at it. Tom Ross was correct. But I'm going to tell you what they did when they looked at it. They had people like my friend here who said there should be a wider role for efficiencies. It's being rejected in those jurisdictions.

    I could quote for you, if I had more time, what the European Commission has said. They're not doing that; it's consumer welfare. The U.S. is not doing it; it's consumer welfare. Australia is not doing it; it's consumer welfare. And the U.K. just put legislation in a month ago that said it's consumer welfare. So when I hear my colleagues say they are considering it, there are people advocating it--they always will--but the legislation in those other countries is not reflecting it.

    We stand alone. We are ridiculed. As anti-trust lawyers, people joke.

    I went to Italy last year, to the International Bar Association, and Superior Propane was being discussed. It was getting attention--and Canada doesn't get a lot of attention in legal circles, let me tell you. But this is getting attention because they think it's a joke in other jurisdictions. They think we've taken it so far that we've completely eviscerated competition policy in Canada with the approach to efficiencies.

    It really is efficiencies, and there is structural competition policy. In other words, you make a prediction that if we get too concentrated, businessmen don't act rationally. My friend here will do his formulas for you, and what they assume in their formulas is that the businessman always acts rationally.

    Let me talk about Mr. Milton. Did he act rationally? When he went after other airlines, was that rational? He would say no, it's not, because it's not rational to predate, because predation ends up catching up with you. Well, maybe he's right. But Mr. Milton still arguably, in some people's minds, predated against other airlines.

    Businessmen act with ego, irrationality, and consumers pay. So what we decided a long time ago, in this jurisdiction and others, is that structurally we look at concentration. We look to make sure we have a competitive marketplace.

    Competition policy has supported deregulation. Without structural norms in competition policy, then deregulation ends up in monopoly enterprises. Ontario is facing that problem with deregulation of Hydro. If you don't have these structures in place, then yes, it's efficient to have one airline, but it's not good for consumers.

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    Mr. James Rajotte: Can I then pick up on that? You talked about the intent of Parliament in enacting the Competition Act, section 96. I believe you referenced a fourth objective, which was to provide consumers with competitive prices.

    Just a quick answer, but did I hear you correctly in saying that a merger that did result in reduced consumer choice was something that should not be allowed?

    Mr. Robert Russell: No, sorry, I didn't make myself clear. The Hansard referred to consumer prices and choices, but the proposed amendment says “will provide benefits to consumers, including”--and that's a really important word in the proposed section--“competitive prices or product choices”.

    Professor Tom Ross was incorrect when he suggested to you that this provision could lead to higher prices. I don't agree with that. What it could do is make it a neutral issue if we had innovation, for example, because that can still benefit consumers. So the benefit to consumers here still gives some latitude to the tribunal to look at all sorts of benefits to consumers but applies consumer welfare, which means it has to benefit the consumer in some way.

    Mr. James Rajotte: I guess from my own perspective I'm frankly rather uncomfortable with Parliament being in the position of approving or not approving mergers based on benefits to consumers. And you pointed out Air Canada. Most mergers do not happen with CEOs or shareholders coming together and saying, how can we benefit consumers? That's not their goal, initially, for merging.

    One of the bigger issues facing me is how do we face the fact where you have two private or publicly held companies that engage in a merger process? I think we ought to be very careful, though, with the role we give parliamentarians, Parliament, and the Competition Bureau in preventing such mergers. And where do you draw the line if you really set the standard in terms of consumer benefits?

    One of the issues we'll deal with is bank mergers. I don't think the banks are going to get together and ask how they can improve services to Canadians; they're going to get together and they're going to ask how they can improve profits. This is the starting point for merger talks.

    Mr. Robert Russell: I think you're absolutely correct. If you and I are shareholders in a company, we expect profit maximization in that company. And I don't think Parliament should arbitrate one merger or the other. That politicizes the process.

    What we're talking about here is a clear rule for balance, maximizing profit and consumer welfare, and what's the line we're going to draw. That's really what we're talking about. And I'm saying to you that when Parliament brought in the new Competition Act, it wanted that balance.

    You've read what the tribunal has said. It's a trump card today. The counsel for Superior Propane said it's a trump card today. My friends here today acknowledge that when they say it didn't get a lot of attention because it wasn't until you found out there was a substantial lessening that you analyzed this--because it's a trump card. That's what I'd add to that.

    In other words, the factoral approach that is proposed here seems to be broadly supported. But then the test of what line you draw, consumer welfare, total welfare, or modified total welfare, is the line that Parliament needs to draw so that the tribunal then does the balancing. It's not Parliament that will do it.

    Currently the tribunal interprets the section as saying there is no balancing. That's the point I make to you. They say it's a trump card. So as long as that maximization of profit shows up in efficiencies, the consumer welfare issue is submerged in the analysis.

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

    Do any of the other panellists want to answer one of the questions?

    Mr. Roger Ware: I want to respond to something that Mr. Russell has said several times. I don't understand his analogy of the trump card.

    We've had no cases, zero, in 16 years in which efficiency would have been decisive had they been properly conducted. So what does a trump card mean? I don't understand what that means, to be honest.

    It seems to me efficiency, at the moment, is almost completely emasculated. It has a very minor role. Had the legislation been left untouched, it might never play a decisive role in a case.

    The Chair: Mr. Kennish, did you want to make a comment?

    Mr. Tim Kennish: I want to make a brief point in response to your initial question.

    The subject of efficiencies has been the subject of a lot of comment recently, largely revolving around the decisions of the Competition Tribunal and then the Court of Appeal and then back to the tribunal. It is closely watched because it is thought to be important, but it isn't something that has been written about to death. It's mostly been an evaluation of the case itself. And when we proposed more opportunity for discussion and dialogue about this, it's that this is a change. What is proposed by the sponsoring amendment is a change in the way it's written now, and it is worthy of having broad input and public discussion.

    The Chair: Mr. Bagnell.

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

    I basically agree with everything Mr. Russell said. In fact, I'd like to use your speech for mine in the House of Commons, so I won't ask you any questions.

    I disagree with the statement that the shareholder is the consumer, because the consumers I'm worried about are the ones who can't feed or clothe their family, and I don't think most of them are the biggest shareholders.

    Also, on the process, these are the hearings, this is the study. We've spent as much on these seven lines as we sometimes almost spend on an entire bill. And if it's only going to be used once in 16 years, this is enough for me to make the decision. And you've all had excellent input.

    I would like to improve the amendment, because I think it's needed and great for the reasons Mr. Russell said.

    Mr. Kennish and some of our other witnesses talked about how it's qualified related to the gains in having to provide benefits to consumers, including competitive prices or product choices. And I'm not positive if the intent is to limit it to only benefits. Perhaps you can outline in a little more detail, because you did it only briefly in your submission, the other benefits that might be gained, other than competitive prices or product choices to consumers.

    Mr. Tim Kennish: I think the way it reads, the limitation is that it has to be a benefit to consumers, and they've given examples in terms of competitive prices and product choices. Even those, in a broader description of benefits to consumers, wouldn't necessarily pick up productivity enhancements that do not flow immediately through to consumers in some tangible form. And innovation changes that would be overall net economic benefits may not be seen to be specifically consumer benefits.

    If we're proposing to move to considering efficiencies as a factor--in other words, it's not necessarily going to be decisive; it's part of the alchemy that is applied to figure out whether the merger, on balance, warrants being allowed to go ahead--then I think you should consider all efficiencies, because efficiencies are one of the objectives of competition policy...not limited to consumer outcomes.

º  (1630)  

    Mr. Larry Bagnell: Okay. So let's say this line is actually made clear to make sure it is anything that benefits consumers. If the result doesn't ultimately go to consumers, who does it go to? Why would we do it? If you innovate a new product so therefore you have a better chance of survival and staying in the market, and you're going to have more profit so you could then reduce your price to consumers, where would these efficiencies go, if they don't go to Canadians?

    Mr. Tim Kennish: The efficiencies might be captured on the production side, or they might be in a form that you couldn't readily identify as being benefits that are enjoyed by consumers directly. I think it's an unnecessarily limiting qualification on recognizing efficiencies. I'm not an economist, and perhaps Professor Ware would be a better person to zero in on that.

    Mr. Roger Ware: The distinction that economists usually make is that if there are efficiency gains associated with a merger, then some of them may accrue to shareholders, to the owners of the firm; in other words, they may enhance profits. As the chair said, they may well enhance profits, so then, of course, the profits belong to the shareholders or the owners of the firm. So those gains that may accrue from efficiency don't directly go to the consumers of that product.

    Mr. Larry Bagnell: Yes, but that's the whole public policy of having a Competition Act. We may as well not have one. Let's have everyone have monopolies, and several people in Canada get very rich. They may be the most efficient and they'd have lots of money, but the whole idea of competition is to make sure there is good competition among firms so that we can have lower costs through the dead weight and good prices for a vast majority of Canadians.

    Mr. Roger Ware: I don't disagree with that. It's the question of what yardstick you use, what criteria you use to evaluate that statement.

    Mr. Larry Bagnell: We haven't removed efficiencies; it's still one of the factors that's looked at.

    Mr. Tim Kennish: Mr. Chair, perhaps I could comment further.

    Mr. Bagnell, in the earlier bill, the requirement was to show that benefits to consumers were realized in the form of lower prices. That would be a very limited range of efficiencies potentially that could be generated by a merger. So this steps that up. It says they just have to be benefits to consumers. They don't have to be in the form of lower prices, so product quality improvements might arguably be something that the consumer would directly benefit from.

    I think the objective of achieving efficiencies is a worthy goal, wherever they land, and it's just one factor in a mix of factors that you assess to figure out whether the merger ought to be allowed to proceed.

    Mr. Robert Russell: The issue that the honourable member has focused on is very important, and we actually spent a lot of time on it when we were looking at section 45 for an efficiency defence. From a legal standpoint, the word “including” has been very extensively reviewed by the courts in other legislation. The phrase, “including competitive prices or product choices”, particularly the punctuation that's there, with a comma before “including”, would mean that it can include other benefits to consumers. But the courts have said that it should be like the ones that are listed. They use this type of construction that says “benefits to consumers that are like these things”, which is basically the way you would read the statute as it currently is.

    Let me give you an illustration, which we discussed many times, under section 45 having to do with a merger. Two companies that are working on an AIDS vaccine decide that the research and development is very expensive and that they can't do it on their own. They're not going to get there. So they merge. They're the only two companies working on it, so we have a monopoly. The prediction is that now they have efficiencies and R and D that will let them get an AIDS vaccine to market within a reasonable period of time. The argument for the merging party, if I were acting for them, would be that those efficiencies will be turned into what you could call innovation or new product choices, if you want, but the ability to produce that AIDS vaccine for the consuming public. So there is a consumer benefit out of getting the vaccine. What they have to balance, of course, is that by creating a monopoly, we would predict, structurally they could charge whatever price they wanted. So the tribunal would then have to balance those two potential outcomes, because they're making predictions, and decide what's the benefit to consumers.

    So it does allow breadth, but as the honourable member focuses on, it is a consumer focus that allows balancing.

º  (1635)  

    The Chair: One more question, Mr. Bagnell.

    Mr. Larry Bagnell: But to the man or woman on the street, wouldn't the words “such as” make that more clear than “including”? The way the average person might read that is that it's mandatory that you have competitive prices or product choices.

    Mr. Robert Russell: The research we did is that “such as” might actually be construed more narrowly. “Including” was seen to be potentially broader. What you're dealing with is the court's interpretation of other statutes.

    The Chair: Thank you very much.

    Mr. Masse.

    Mr. Brian Masse (Windsor West, NDP): Thank you, Mr. Chair.

    I want to go to a couple of comments of Professor Ware. I don't have your presentation. There were a couple of things about whether they had been properly conducted. Your position appears to be that the interpretation is the main problem. Is that what you're saying, that our people aren't doing their job? Whereas Mr. Russell is saying that it just hasn't been crafted properly and requires fixing. Is that the main part of your argument?

    Mr. Roger Ware: I would argue that it doesn't require fixing at all. Actually, section 96 works fairly well. In fact, I would echo something Tim Kennish said, which is that, if anything, it has made it very difficult to get efficiency claims or benefits accruing from a merger to be considered both at the Competition Bureau level in an investigation and by the tribunal. So if anything, the current statute has proved in practice to be biased against the consideration of efficiencies.

    Mr. Brian Masse: I just want to be clear on your comments, though, about things being properly conducted. Where specifically are you identifying that they haven't been?

    Mr. Roger Ware: The point I made a couple of times in my presentation is that it's widely accepted by at least all of the economists who have reviewed the propane decision that the commissioner's evidence contained a fairly substantial error in his calculation of total surplus. In fact, the tribunal, in its redetermination decision, acknowledges the same thing. But they weren't able to hear the correct evidence because it wasn't presented. Had that error not occurred, the propane decision would probably--I can't say for sure--have gone against the merger.

    Mr. Brian Masse: We're going back to probability now. We have to decide to act one way or another on this.

    Mr. Roger Ware: Absolutely. It's an important qualification to the idea that somehow the propane decision is an affront to our notion of what our merger law should do. It's very important to recognize that the propane decision is not an accurate reflection of what the legislation says.

    Mr. Brian Masse: On that, I'm going to ask Mr. Kennish and Mr. Russell to please comment as well, if they'd like.

    Mr. Tim Kennish: Thank you.

    Just to reiterate, my point is that, being a defence and being reserved for consideration only after a determination has been made that the merger is otherwise unlawful, efficiencies aren't getting much, if any, play in merger review generally. After all, efficiencies are part of the judgment about the worth of a merger. Does it have a pro-competitive outcome or is it going to be positive to the economy? Will it impair competition?

    Efficiency gains can in fact be pro-competitive. For example, by improving the cost structure of the merged firmed, they put pressure on other competitors to achieve similar economies, which could result in price reduction—and certainly in cost savings to the economy.

º  (1640)  

    Mr. Robert Russell: Going back to your question about whether there was error, there are a lot of armchair quarterbacks after the event. I would say that lawyers are prone to that as well as economists.

    I think the best answer to your question is to be found in the dissenting opinion itself. People don't look at it, because they just look at the majority all of the time. But if you look at what Christine Lloyd said in Superior Propane, she said basically that the bureau had very good economists who had done their math right, but she was caught by the interpretation that the majority was giving to section 96. If you want what the tribunal's dissent said, the answer to your question is, no, it's the interpretation of section 96 that is wrong. She makes that very clear in paragraphs 506 to 508, where she mentioned some of the things that Mr. Kennish has spoken of. She said that treating it as an absolute defence is wrong; balancing it the way that they did is wrong. She says the interpretation is wrong, but the majority has now determined that. There's the decision not to appeal this, but this is the law of Canada as it sits today.

    The Chair: Thank you, Mr. Masse.

    Mr. McTeague.

    Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.): Thank you, Mr. Chair.

    Thank you for appearing, and thank you for appearing in the past, all of you, with the exception of Ms. Thomson.

    I'm interested in both of you, Mr. Ware and Mr. Kennish, since you did appear before this committee. Contrary to Mr. Ware's assertion that there has been no consultation, you were in fact here with members of Parliament in February 2002.

    I'd like to read into the record comments that both of you have made, which create a bit of a concern for members like me who have these records and faithfully follow them—and certainly in terms of the amendment. I am willing to give you these transcripts. Let me get right to the point.

    Mr. Kennish, you had suggested to this committee that:

I think the game is really over here. The Federal Court of Appeal made its judgment. Leave was sought to the Supreme Court of Canada, and they declined to allow the leave application. So the Federal Court of Appeal's decision on whether or not the total surplus standard is an appropriate one for working this trade-off is settled. I agree with Paul.

Paul in this case was Paul Compton. You continued that:

I think just about any other effects that have to be covered in order to invoke this defence are going to be so large that the scope of meaningful efficiencies under the act will be diminished to the point of disappearance. So I wouldn't wait.

    Mr. Ware, you piped in at that point by saying:

May I add just a couple of points?

--in that, you agreed with Mr. Kennish--

I think we might get some quite interesting ruminations from the tribunal on all of the directions they've been asked to pursue. But I do agree with both my colleagues that whatever we get from the tribunal in their final decision, it's going to imply a complete reconsideration of the role of efficiencies, which will start with a reconsideration of section 96.... We should actually try to reformulate our view of efficiencies, and there are various ways of doing that. Certainly some modification of section 96, perhaps possibly getting rid of it, will be required.

    Mr. Kennish, you finished your comments by saying:

The upshot of all this is that I would like you to consider that we'd be better off if section 96 itself were to be repealed and section 93, which is the one that directs the tribunal as to considerations it ought to take account of in looking at whether a merger should be allowed to proceed or not, should be directed to consider efficiencies in that connection.

    Finally, on that point, Mr. Ware, I understand your interest here, and certainly with respect to the total surplus—but your comment was:

In my opinion, if we're going to abandon total surplus, which we may well have done already, then I would agree with Tim Kennish. I think the way to go here is to go with something called a price standard, which means that we'll accept something if the efficiency gains are large enough such that consumers benefit. As Tim said, I'd like to put it right in section 93 so that we don't have this juggling game going on between sections 93 and 96.

    Gentlemen, I think the amendment that has been proposed to Bill C-249 tries to reflect in some way the concerns and the exchanges that you've had at this committee. I think we've been very faithful to your views.

    That was in February 2002. Since then, I understand that we had the determination decision, but given all of the overwhelming evidence and your own views, could I ask the simple question, what has changed in the past 66 weeks that would make you change your mind here today?

    Mr. Tim Kennish: Mr. McTeague, if I may explain a point of principle here, I was speaking in my personal capacity. I'm here today on behalf of the competition section of the Canadian Bar Association. We met yesterday for the purpose of consolidating our viewpoints, so the points I'm presenting today represent a larger body of opinion.

    I concluded my remarks by saying--you may not have understood--there's a value in approaching it as reflected in the amendment. But because this particular proposition hasn't been discussed broadly among the affected communities and because section 96 was part of a bargain that was effectively struck in 1986 when the law was changed substantially, I think it's worthy of having the kind of public discussion that will go on in regard to section 45. I personally would like to see the law amended in the way it's generally proposed, but I think that particular point hasn't been discussed as fully as it should be.

º  (1645)  

    Mr. Dan McTeague: Have you changed your opinion, Mr. Kennish? If you were to remove your hat today representing the bar, would your position be different as a person from what it was in February 2002?

    I say this not to try to put you into a corner, but because I took your words to mean something that's extremely important. You've been very helpful to this committee in the past, but your words rang very true for many members, certainly on this side of the committee. One of the reasons the amendment is before us is that it does in some way render some faith to what you had said.

    Mr. Tim Kennish: Speaking as an individual, my preference would be to have the efficiencies considered as a factor in merger review, along with other factors. We would be well ahead, because I don't think they're being considered at all now and they're very important to evaluating merger outcomes.

    Mr. Dan McTeague: Thank you.

    Mr. Ware.

    Mr. Roger Ware: There are three things I'd say in response. First, I think you'll find some other testimony from last year where I said I thought that section 96 was functioning or could function reasonably well.

    Second, I've always been in favour--and I said this just now--of collapsing or combining the content of section 96 into section 93, which might be accomplished by repealing section 96. I don't like the kind of secondary nature of the efficiency defence. It is only triggered subsequent to a finding of a substantial lessening of competition.

    Finally, if I could just repeat back to you the quote you read, I did say that if we are going to abandon total surplus I would favour something like a price standard, and that's still true today. At the time I was not in favour of abandoning total surplus and I'm still not. But if you ask me about my second choice, the answer is something like a price standard.

    The Chair: Do you have another question, Mr. McTeague?

    Mr. Dan McTeague: Thank you.

    Like you, most of us on the committee thought of--I'm using your quote here and this will be last time I do it--the Superior Propane Titanic disaster. This was, of course, the reason you suggested there ought to be some reformulation.

    My final question is to Mr. Russell. You've had some experience, which you've alluded to. I'd like you to give us an example, because I've heard from others--and I've read this into the record in a previous testimony--that economists and lawyers are concerned that the precedent is now there and it will more than likely be used. Your experience was the $25 million ratio, which of course is the amount of money the Competition Bureau receives every year--in one case $10 million.

    It seems to me that if you had three such merger cases you wouldn't be simply trumping consumers, you'd be trumping the resources the Canadian taxpayer gives to be able to provide effective enforcement of competition law.

    Is this a concern of yours?

    Mr. Robert Russell: Very much so.

    The case I was referring to was Cast, a contested merger case in the container shipping industry. The $10 million figure came from Canadian Pacific, which was the responding party, complaining at the end they'd spent $10 million. That's where I got the figure from. They did that publically in the newspapers.

    I should add that although they had claimed efficiencies in that case, we didn't get to that stage of the case before it was resolved. So it would have been even more expensive, I can tell you. But they did claim them, and I had to spend a lot of time--I was acting for the commissioner in that case--reviewing their efficiencies, talking to experts, and considering section 96.

    I can tell you section 96 is a mess. From a lawyer's standpoint--and I've litigated constitutional cases; statutory interpretation has been a fair part of my practice--section 96 is a mess. I'm not surprised. I haven't said a lot about section 96 over the years publically, but in my opinion to my client at the time, the commissioner, I said it was a mess. I said the MEGs were a mess.

    And quite frankly, contrary to what my friends have said, I can turn back to Margaret Sanderson's article that was dated in the eighties, and the response that came from Stephen Ross. The title was--and I think it's very apt for you today that he wrote an article well in advance of Superior Propane--“Did the Canadian Parliament Really Permit Mergers that Exploit Canadian Consumers so the World can be More Efficient?”That was the title of his article. Those articles are from 10 years ago. In fact, Tom Ross and I talked about doing an article together on efficiencies after that. That was at least 10 years ago. I'm surprised anybody would say we haven't thoroughly exhausted ourselves on this.

    I think the delineation is clear, but I think you really have to be careful. A number of commentators--not just me--including counsel for Superior Propane, actually said.... In a recent article, Brian Facey and Dany Assaf--they're supporters of total surplus and they acted for Superior Propane--said they lamented that: “It appears the application of the efficiencies defense in Canada will involve a multi-faceted analysis that may differ on a case-by-case basis, with business predictability being subordinated.” Even those that support it recognize how unwieldy it will be.

º  (1650)  

    The Chair: Thank you very much.

    Mr. Fitzpatrick.

    Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance): I have just a few brief comments.

    I used to wonder why we didn't look at legislative intent from Hansard until I got to this place, and then I backed off. All you have to do is sit through question period...and may I mention the firearms registration if you really want to determine intent from legislation by looking at debates in the House.

    I also want to make another comment. There are a lot of people on the government side who consistently use the efficiency argument and the total surplus argument to defend the Canadian health care system and the way it's operated. It's a consistent argument they use on that.

    I want to address an issue with the Superior Propane case, because I live in an area where we're lucky we get service, let alone worrying about price competition. In my community, if Imperial Oil sets the price, everybody else is going to follow it. If the banks adjust the interest rate on a one-year mortgage, the next day everybody's going to have their rate set accordingly. We're just lucky if we have the service, and I think for 90% of Canada, they have the good fortune of living within 100 miles of the U.S. border, where there's more competition. The rest of us don't have that benefit.

    I'm just trying to figure out this Superior Propane case, this dead weight argument on this thing, because you have basically a duopoly providing the service, not five or six people like the banks. We're talking about two people providing it. When all of a sudden we have one outfit providing the service, all these horrendous anti-competitive things are going to happen.

    Maybe somebody here can enlighten me on what these great dead-weight losses were when this merger took place.

    Mr. Tim Kennish: Again, I'd just preface this by saying I'm not an economist, but the dead-weight loss is basically the loss of productivity from the economy as a result of higher prices or the reduced availability of product. The question, really, was whether in the Superior Propane case the dead-weight loss was properly calculated, because the efficiencies have to exceed the dead-weight loss plus this wealth transfer.

    The considered view of economists is that the dead-weight loss was underestimated very materially, and had it been properly calculated, the efficiencies wouldn't have exceeded the dead-weight loss and, as a consequence, the efficiency defence would not have been available and the transaction would not have been allowed to go forward.

º  (1655)  

    Mr. Brian Fitzpatrick: My own observation on that, sir, with all due respect, is I did not foresee any price competition treatment for those two companies. There is something called the law of diminishing return, and I think both of these companies knew that law very well. I'm not exactly sure the elimination of one merged into another would have a dramatic impact on the price of propane in the marketplace.

    Mr. Roger Ware: There was a lot of debate in the hearing about whether or not prices would go up as a result of this merger. I wasn't involved in the case, but there are hundreds of pages of evidence presented simply on that point.

    To elaborate on what my friend Tim Kennish said, what a dead-weight loss really means is that some consumers who value the product at more than it costs to produce will be prevented from consuming by a price increase. That's what it means. Then economists attempt to quantify that magnitude.

    The Chair: Mr. Russell.

    Mr. Robert Russell: In response to the comment of the member, you're basically saying you don't see much change from duopoly to monopoly. You're probably right about that. Those of us who want to avoid the structural concentration in the marketplace don't want to get to where we even started in propane in the first place, with only having a duopoly, and your observation that there wasn't price competition that was sufficient is coincident with that theory.

    I should say there's a bit of an irony, because I acted for Amoco when it acquired Dome Petroleum. It was the very first merger case considered under the provisions back in 1986, and one of the arguments we used successfully, which was made publicly, is that the propane companies had monopsony power. Monopsony is when the buyers have so much market power that they actually countervail market power on the other supply side. We successfully argued they were too concentrated in this industry already, in our advocacy for the Dome-Amoco merger, then 10 years later those two companies merged into what we have today in Superior Propane.

    I think your observations about lack of competition in the first place are probably correct, but that makes the point, as opposed to detracting from the point, that we're trying to make for consumer welfare.

    Mr. Brian Fitzpatrick: One last comment I'll make on that is that a lot of underpopulated areas in the country, in trying to hoist or force competition into those kinds of markets, the end result of that could actually be no service at all. The nature of the beast is such that you're lucky if you can get one outfit that can serve that market.

    Mr. Roger Ware: Perhaps I could respond to that. That does resonate with something I was saying in my presentation about something else that economists call contestable markets, that it is perfectly possible to have a single supplier. Some people might like to call it a monopoly, although personally I don't find that very useful. But that market can behave perfectly competitively, because any attempt by that single supplier to increase price would be met by the entry of some new supplier.

    The Chair: Thank you, Mr. Fitzpatrick.

    I'll now go to Mr. Savoy.

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

    Thank you for coming today. I have a couple questions. The first one I'd like to address is the issue of certainty, in terms of merging firms. Presently we have a situation where it seems to be quantifiable.

    In general, I should start by saying I support this amendment in general, the intent of it, because I think Superior was a travesty, but I have a few concerns surrounding it.

    In terms of the certainty on merging firms--and I would direct this to Mr. Russell, I think--they've said that because there is less certainty and more subjectivity, let's say, on the part of the commissioner under this new amendment we're proposing, it may put a--some would use the word “chill”--on firms that may want to merge.

    Actually, I'll get everybody's comments on this. Is that a realistic assessment, or do you think it is hypothetical?

    Mr. Robert Russell: I think it's more than that, I think it's insincere of those who commented that the amendment could create uncertainty. I think those who are not advocating at the moment.... Both sides of this equation agree that this approach gives more certainty to competition law, that making it a factor gives more certainty to competition law. If you look at the most recent article in the anti-trust journal, which talks about what Europe has done, they wanted certainty. They had a green paper and they came back and said, no, we need consumer welfare so we have certainty.

    So I think the comments that say it creates uncertainty are really not very sincere, personally.

»  (1700)  

    Mr. Tim Kennish: Let me simply comment that the present interpretation of section 96 creates considerable uncertainty. As an adviser to possibly merging parties, I wouldn't know where to begin to tell them what is the wealth transfer that the efficiencies have to exceed, simply because I don't think it's a knowable proposition. You have Mr. Ware pointing out that the producers have shareholders and they could be anywhere. It's very hard to figure out who they are, in the first place. Secondly, there are also factory workers who are involved in producing the output of the merged firm. They probably deserve some consideration.

    So I don't think section 96, as it presently stands, is certain in its operation at all, really. And I think the factorial approach, while it doesn't necessarily determine the outcome, is a much healthier approach to take.

    Mr. Roger Ware: Any change in the legislation, any significant change, is going to create uncertainty. I mean, that's almost definitional. But I would argue that it would be hard to imagine a greater degree of uncertainty than we have had for the past decade, with respect to the interpretation of section 96. So in the long run, I would imagine this amendment would involve less uncertainty.

    Mr. Andy Savoy: Thank you.

    In terms of another topic, we've seen other jurisdictions, most other jurisdictions in Europe in fact, looking at allowing consumers a fair share of the benefits. I'm speaking of the Treaty of Rome, for example. I wonder if we don't move in that direction and we allow the Superior case to stand as a precedent in case laws, which is what it is based on.... Mr. Russell, you said that any lawyer worth his salt would be able to litigate a case like this, or try a case like this, and win on most occasions based on this precedent. To what extent would the others agree with that?

    Mr. Tim Kennish: I would disagree in part. In my opening comments I said, I think, that the range of cases that would actually qualify for the use of this defence would be quite small.

    Mr. Roger Ware: I agree with that. As I've already said, I think it's actually quite unlikely that you would come up with an efficiency enhancing merger that would meet a properly applied total surplus test, certainly not with the degree of concentration that you have in Superior Propane.

    Mr. Andy Savoy: Simply to reinforce your thoughts on this, Mr. Russell, I would like to hear you again on this topic.

    Mr. Robert Russell: In advising private sector clients in mergers, I can't think of one that doesn't make their case to shareholders based on efficiencies gained from the merger. And the ability to get opposing experts to do the math and to present the case, which even in Superior Propane was a moving target to some degree, and the numbers, the quantitative analysis that was done.... I do not believe, as I said and say again, any competition litigator worth their salt is going to be able to mount a great efficiency case based on this decision. This is wide open. For any network industry out there--I mean, delivering propane in trucks; you can analogize to any other industry you want, delivering bread in trucks--you are going to make the arguments and you are going to make a major contest, an expensive contest, and I think you're going to succeed based on this decision.

    Now, courts have done it before, and I guess the tribunal could do it. It could start modifying its test because it realizes the impact of it. But then we would have structural change in Canada while we're waiting for that. I mean, you can't go back once you let concentration occur. Who thinks that we're going to readily have a competitive airline industry in Canada again? We're lucky we have new entry.

    But in answer to the questions that were over here, the way you get small communities served is small business, and that's why our Competition Act wanted to preserve that. It wants some balance to create opportunities for a small business that will take the risk to go into a small community and serve them propane, or have a small plane fly into a remote community in Canada. As soon as you concentrate your economy in a sector, the way we have, you lower the opportunities for entry, which is already a factor in our act. You've lowered that opportunity by the market power that's being created.

    Those are all things that in a country like Canada, with its relatively small economy, we have to protect. The efficiency defence, as we now have it, is impacting on all of that.

»  (1705)  

    The Chair: Thank you, Mr. Savoy, unless you have a very short question.

    Mr. Andy Savoy: Yes, it's a very short question.

    You've seen it used once in 15 years. Do you anticipate, because of the Superior Propane decision, that we'll see it much more frequently in the near term?

    Mr. Robert Russell: It hasn't been used once in 15 years. It has been litigated through to completion once in 15 years, but in every single case I've been in it has been raised--every single case. And it has to be administratively reviewed, and experts have to be retained, and you have to go through it. It's used in every single case; it just hasn't been litigated in every single case.

    The Chair: Mr. Kennish.

    Mr. Tim Kennish: My experience is that people have stopped proposing efficiency cases in support of merger review, and I understand the bureau's position is that they actually don't consider them until they've decided that the case should otherwise be stopped because there is substantial lessening in competition.

    The Chair: Mr. Ware.

    Mr. Roger Ware: I'm sorry. Is the question whether we would expect to see more cases still?

    Mr. Andy Savoy: Yes.

    Mr. Roger Ware: I think I already addressed that.

    The interesting case to me, as an economist, perhaps might be a bank merge, where, as someone pointed out, we have a less concentrated industry than propane. With substantial efficiency gains, we might get a case where the current law might possibly put the approval of the merger on the margin of acceptance.

    Mr. Andy Savoy: Thank you.

    The Chair: Mr. Normand, you're the last one.

    Mr. Gilbert Normand (Bellechasse—Etchemins—Montmagny—L'Islet, Lib.) Would you permit me to speak in French?

[Translation]

    Mr. Kennish and Mr. Ware, you indicated that from a legal standpoint, section 96 has worked well for the past 16 years. According to Mr. Russell, any changes would be made mainly for social policy reasons. Nevertheless, I'd like to know if any citizens -- and by citizens I also mean enterprises -- have been adversely affected by the shortcomings of section 96.

[English]

    Do you understand?

    Mr. Tim Kennish: I apologize, I missed the first part as I was switching languages. I apologize, so I did not hear your full question.

    Mr. Gilbert Normand: You and Mr. Ware said that from a legal point of view, section 96 was very good for 16 years, and Mr. Russell added that if we changed the law, it would be for social politics. As for you, do you know of any Canadian companies and citizens who have been, how do you say--lésés--under section 96?

    Mr. Tim Kennish: I'm sorry. I still didn't quite understand.

    The Chair: Repeat it in French and let's make sure of the interpretation.

    Mr. Tim Kennish: I apologize for not--

[Translation]

    Mr. Gilbert Normand: Have any Canadian citizens--and by citizens I mean enterprises as well as individuals--been adversely affected by the shortcomings of section 96 over the past few years?

[English]

    Mr. Tim Kennish: I am not aware of any case that has not been allowed to proceed because section 96 did not properly come into play to recognize efficiencies, but it's pretty clear to me that efficiencies are not being really considered in the equation today and I think we would benefit from having that come about. The amendment proposed by Mr. McTeague would be helpful in that regard.

»  (1710)  

    The Chair: Mr. Russell.

    Mr. Robert Russell: I believe, and I have to say in part, to answer your question, consumers have been disadvantaged. I think that while we say there is one case that was litigated through to completion, it doesn't mean in other cases the issue wasn't brought forward and considered as one of the things the bureau has to consider administratively. And the threat of complex economic analysis to support the current interpretation of section 96, I believe, has had the effect of cases being permitted to go ahead because the bureau would have to undertake a very significant analysis in order to oppose it. That is only part of the problem, because chronic underfunding of the bureau and their ability to pay for this huge analysis that goes with this is part of it as well.

    So section 96 is complex, therefore expensive. Therefore, I think it has had weight, even when it hasn't been litigated, to permit mergers that might not have been allowed otherwise.

    The Chair: Mr. Ware.

    Mr. Roger Ware: Although I can't, obviously, point to a specific example, I think it's highly likely there are efficiency-enhancing mergers that have been deterred or chilled or prevented by the uncertainty and the confusion about the legislation. Yes, I would think that's highly likely.

[Translation]

    Mr. Gilbert Normand: I have a short question that might not be easy to answer, but I will go ahead and ask it anyway. If Microsoft had had to contend with section 96, would it have been able to get by here in Canada, contrary to what happened to it in the United States?

[English]

    Mr. Tim Kennish: Section 96 is a merger efficiency defence. The case that was in consideration in the U.S. was a practice matter that had to do with the way in which they were packaging some of their functionality being offered. The efficiency defence wouldn't have been relevant to that, but I think efficiencies should be taken into account in all of these evaluations of those kinds of arrangements.

    Mr. Robert Russell: I have to agree with Mr. Kennish that it wasn't a merger case with Microsoft. Let me answer your question this way. If Microsoft had proposed to merge with Corel Corporation in Ottawa, which has WordPerfect as its software, yes, it would be treated differently under our law than in the U.S., I believe, based on efficiencies that could be argued in terms of the products, the cross-pollination, and the cost of software development. They could make different arguments under our law than they would be permitted to make in the U.S. if that presented itself.

    The Chair: Mr. Ware.

    Mr. Roger Ware: I would echo that if you take the same transaction, or a similar transaction, in the two jurisdictions, they would likely be treated differently under the two legislative frameworks. The post-propane framework of section 96 would be more permissive toward efficiencies.

    The Chair: Thank you very much. Our time has elapsed.

    I want to thank the witnesses and remind the members that we have one item in camera that will be dealt with. We'll take a one-minute break while the room is cleared.

    Thank you very much. This public portion of the meeting is adjourned.