Mandate of the Advisory Panel on Efficiencies

Introduction

In September 2004, the Competition Bureau launched a national consultation process on the role of efficiencies under the Competition Act. The process consists of three key initiatives. First, the Bureau issued a consultation paper entitled Treatment of Efficiencies in the Competition Act to form the basis of discussion with a broad range of stakeholders who were invited to submit their views in both written submissions and roundtables, held in Vancouver, Toronto and Montreal. Second, the Bureau held an international roundtable in October 2004 with participants from the EU, the US, Australia, Mexico and the UK. Third, the Competition Bureau has established an advisory panel of experts with backgrounds in business, economic policy and international trade. The mandate of the Advisory Panel is described below. Reports on these three consultation initiatives will be made public.

Mandate

The mandate of the Advisory Panel on Efficiencies is to assess the role that efficiencies should play in the administration and enforcement of the Competition Act (Act) in the context of Canada's evolving economy. In doing this assessment, it will consider the general economic and business implications of the current treatment of efficiencies under the Act, and comment on the characteristics that the Canadian competition policy framework should have, in order to ensure that efficiencies are properly addressed. This mandate is focussed on the treatment of efficiencies under the merger provisions of the Act, but the Panel may wish to consider the applicability of their findings to the treatment of efficiencies in the context of strategic alliances and other trade practices.

The Panel will provide a broad overview of the general economic and business context in which the efficiencies defence and other provisions of the Competition Act operate in Canada. In particular, the Panel should consider the arguments which link the need for Canada's approach to efficiencies in merger review, to the nature of the Canadian economy. To this end, the Panel should consider how the Canadian economy and business environment have evolved since 1986. Factors that may be taken into account include the Canada-U.S. free trade agreement (1988); NAFTA (1994); broader trade liberalization within the WTO and through other trade arrangements; changes to the levels of foreign direct investment in Canada and to levels of outward investment from Canada; changes to relative levels of business concentration and business size both domestically and internationally; productivity levels; technology and innovation; the institutionalization and internationalization of corporate ownership and any other matters that the Panel may consider relevant.

As the economy has evolved differently in different sectors, it may be necessary for the Panel to consider whether these differences are relevant for the consideration of efficiencies under the Act. In this context, the Panel will also consider the relevance of the different types of efficiencies in Canadian competition policy and, in particular, the relevance of dynamic efficiencies.

In carrying out its mandate the Panel will:

1. Review the consultation paper.
2. Review the report of the international roundtable held in October 2004.
3. Review the written submissions provided as part of the consultation process.
4. Review the report of the roundtable discussions held in Vancouver, Toronto and Montreal.
5. Interview interested stakeholder groups and experts it deems appropriate.
6. Review any other matters it considers salient to fulfil its mandate.

The Panel will provide the Commissioner of Competition with a written report in June 2005.

The Panel

A biography of each member of the Panel is available through the following links. Also included for ease of reference is a biography for Janet Bolton, who will act as the Panel's secretary.

Marcel Côté, Chair
Jalynn H. Bennett, Member
Dr. Roger Gibbins, Member

Background

Information respecting the treatment of efficiencies in Canadian competition law, which forms the background to the Panel's mandate, is found in the Bureau's September 2004 consultation paper. As noted in the consultation paper, the passage into law of Bill C-91, now the Competition Act, followed almost two decades of academic and policy debate respecting reform of competition law, including the question of efficiencies. This debate was effectively launched by the release of the 1969 report of the Economic Council of Canada. The Economic Council observed that small market size often resulted in inadequate specialization and short, below efficient scale, production runs for Canadian firms. It also observed that foreign and domestic tariff protection contributed to this inefficiency, although it also noted that other factors such as transportation costs, non-tariff barriers, such as patents and customs valuation, might have a more powerful impact on market size in some sectors. The Economic Council therefore recommended that Canada adopt a competition law and policy that promoted economic efficiency.

In the years following the release of the Economic Council Report, several bills were introduced in Parliament for the purposes of amending the competition law. Section 96 -- the merger efficiency defence -- became part of our competition law when Bill C-91 was enacted in 1986. Section 96 prohibits the Competition Tribunal from making an order prohibiting a merger when the merger has brought about or is likely to bring about gains in efficiency that "will be greater than, and will offset, the effects of any prevention or lessening of competition" occasioned by the merger, and where other conditions are met.

Since 1986, the Competition Tribunal has applied the efficiencies defence in only one case ? the Superior Propane case (2000-2003). In Superior Propane, the Tribunal found that a merger of retail providers of propane would give rise to monopolies or near-monopolies in a number of local markets, and would likely result in average price increases for retail propane of at least 8 percent. However, the Tribunal also found (in an initial decision, and in a re-determination decision following appeal) that the efficiency gains generated by a merger between retail providers of propane were "greater than, and offset" the anti-competitive effects of the merger, and it rejected the Commissioner's challenge to the merger on the basis that the merger efficiency defence applied.

Following the Superior Propane litigation, a private member's bill, C-249, was introduced that would have repealed the efficiencies defence in section 96(1) in favour of an approach that would have made efficiency gains a factor in the analysis of whether a merger substantially lessens or prevents competition. This approach is commonly used abroad, particularly in the United States and the European Union. Bill C-249 also proposed a "consumer benefit" requirement where the only efficiency gains to count would be the ones providing benefits to consumers, including competitive prices and product choices. Bill C-249 was passed by the House of Commons, but died on the Order Paper while in the Senate, prior to the 2004 election.

Some opponents to Bill C-249 argued that it did not recognize the unique nature of the Canadian economy. Several commentators referred to the smaller size, geographical diversity, greater openness and world-trade orientation of the Canadian economy as compared to, for example, the United States, and argued that these factors provided a basis for retaining the section 96 efficiencies defence as a uniquely Canadian approach to efficiencies. Similar arguments have been made in the context of the current consultation process.

By contrast, many commentators argued that repeal of section 96, and having efficiencies become a factor in the determination of whether a merger substantially lessens or prevents competition, would be more consistent with Canadian economic conditions since it would allow efficiencies to be more routinely considered in merger cases. They pointed this approach out that Superior Propane is the only case since 1986 where the defence has been applied. Many other comments were received during the recent consultation process. Please visit http://www.primestrategies.ca/bureau/index.htm for more details.

Competition Bureau
March 2005