Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 34 - Evidence
OTTAWA, Thursday, March 14, 2002
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-23, to amend the Competition Act and the Competition Tribunal Act; and Bill S-40, to amend the Payment Clearing and Settlement Act, met this day at 11:00 a.m. to give consideration to the bills.
Senator E. Leo Kolber (Chairman) in the Chair.
[English]
The Chairman: We have a quorum to continue our hearings on Bill C-23 and Bill S-40.
Our first witness is Mr. Clive Beddoe, Chief Executive Officer of WestJet.
Mr. Clive Beddoe, Chief Executive Officer, WestJet: Thank you for this opportunity to appear before your committee to present other arguments in respect of the amendments to Bill C-23.
I am President, founder and Chief Executive Officer of WestJet. Three other co-founders and I formed WestJet six years ago with a view that there was no low-fare airline in Canada, nor had there been one created since the deregulation of the airline industry in Canada in 1988.
We stumbled on this opportunity because we are not from the airline business. We were businessmen who saw an opportunity. That opportunity was very simple: If we could create an airline with a low-cost structure, then we could provide low fares in Canada and stimulate traffic in the same mode that Southwest Airlines used to become successful in the United States. We have done that.
Initially, we raised $28 million from a number of different private investors and institutions. That $28 million investment in our airline has grown — along with other equity invested in the company — to a point where the company has a market capitalization of about $1.4 billion. This is similar to the performance of Southwest Airlines.
We were told when we started that we had no hope of making it successful. We were laughed at throughout the industry and by Air Canada and Canadian. We have proved them wrong. Therefore, in light of our success, I believe I have some authority to speak to the problems from which the airline industry suffers and the need for some amendments to the Competition Act.
I am not a lawyer and I do not have a legal background. However, I do know the implications of trying to compete against one carrier with, in our view, an 84 per cent market share in today's marketplace.
Our industry is in terrible disarray. I am speaking here not only because I am with WestJet; I believe I speak unofficially on behalf of several other small airlines, a number of which suffer from the same problems we do. Their names are Hawkair, Peace Air and Bearskin Airlines. They all suffer from the same problem that we do: the dumping of capacity into the marketplace and anti-competitive behaviours by Air Canada.
We have a unique industry in Canada in that we have one carrier who has 85 per cent market share with the support of the Government of Canada. I do not think that is healthy in any industry. It is a very unique situation. I cannot think of another industry where one private corporation has that much dominance in the marketplace. That much dominance can lead to anti-competitive behaviour and has done so. The fact that we have lost seven airlines in the last six years speaks to the kind of anti-competitive behaviour that has occurred for a long time.
Much as the amendments that we propose to the bill have been watered down somewhat, they are a start. We would like to see them adopted because under the current legislation there is no penalty to anti-competitive behaviour. There is no way to stop it.
The very nature of our industry is such that there is a high fixed cost structure, unlike a manufacturing business for example, and so it is easy to drive airlines out of business, relatively speaking. The only way to bring some sanity to the business and attract capital to it is to strengthen the Competition Act and give greater power to the Competition Tribunal and the Competition Commissioner to allow some cease and desist decisions to extend from the time a complaint is filed to the time a complaint is heard.
In our case, we filed a complaint against Air Canada two years ago. We are still waiting to actually come before the tribunal. We are told by our lawyers that we can expect another three years before that complaint is finalized — five years to deal with one complaint about one route. That is hopelessly inadequate. However, it is a beginning. At least the system, if these amendments are passed, will provide a disincentive on the part of Air Canada to delay the process, which has happened to date.
I would be happy to answer your questions. I know that some of you have been lobbied by Air Canada who claims that it is not fair and that Air Canada should be allowed to compete. They do compete. In fact, Air Canada has undercut our fares in a number of different markets and I have a list of those markets. They undercut our fares constantly, although not by large amounts. We do not object to Air Canada competing on a fair basis. We object to the dumping of capacity, and that issue is not necessarily addressed adequately in the current legislation.
Having said that, I would be happy to answer any questions you have.
Senator Tkachuk: When you say, ``dumping of capacity,'' what do you mean? How do you do that in the airline business?
Mr. Beddoe: We have a graph we can give you later. This is what happened to us in Moncton: Air Canada announced they had 182 seats a day flying out to Toronto. We flew an equivalent routing from Moncton to Hamilton. Air Canada announced they would cut their capacity back to 165 seats a day. Their walk-up fare was $605. They were not making money, but they were still charging $605 for a one-way walk-up fair on that routing. That is a two-hour flight. We introduced our walk-up fare of $355. The moment we announced we were going in to Moncton with one flight a day, Air Canada increased capacity on that route by 50 per cent, increasing their capacity to 255 seats a day, while undercutting our fare by $100, thereby flooding the market with cheap seats. That was an attempt to drive us out of the market by not allowing us to be profitable on that route. That is what dumping is all about.
Senator Tkachuk: Have they done on this on more than one occasion that you can name?
Mr. Beddoe: Absolutely. We were a sole supplier of service into Abbotsford. We had five flights a day between there and Calgary. A year ago, Air Canada decided they had to compete on that route. They put three flights a day on top of us. We have counted their passengers for about a year now. On average, we would say they are running with a 50 per cent load factor. Their own financial statement says they need a 78 per cent load factor to break even. They have been running with 50 per cent load factor. They have lost millions of dollars doing it. Why? To drain our profitability, to take passengers away from us so we will ultimately be harmed and not grow.
Senator Tkachuk: We have heard a number of different numbers relating to the amount of business that Air Canada has. Some have said it is 80 per cent, others that it is approximately 60 per cent. How do they arrive at those numbers? As well, how do you arrive at their numbers of 80 per cent of the air carrier traffic in Canada?
Mr. Beddoe: There are three ways to measure the market. First, available seat miles: when you fly one seat one mile, that is one available seat mile. A 120-seat airplane flying one mile is 120 available seat miles. You can measure it in revenue passenger miles. That would be the same measure, but the number of people you have in those seats is the measure. Lastly, you can measure in dollars. No matter how you calculate it, with respect to those three measurements, they come out almost all the same.
You can read Air Canada's own year-end financial results. Last year, they flew 20.3 billion available seat miles. We flew 3 billion available seat miles. That is a market share ratio of 13 per cent to us, 87 per cent to Air Canada. There is no-one else in this business at the moment.
If it is calculated on revenue passenger miles, the numbers come out nearly the same. If you look at our fourth quarter, and do the same calculation on our fourth quarter against Air Canada's fourth quarter, you will find a ratio of 16 per cent for us and 84 per cent to Air Canada.
Mr. Milton said, in Florida on February 11, that Air Canada's market share rose from 73 per cent in the year 2000 to 78 per cent last year. These figures disagree with ours largely because, I think, they exclude the coach air partners that Air Canada has.
Senator Tkachuk: Why do you think there is no WestJet equivalent in Eastern Canada?
Mr. Beddoe: There have been two attempts to create one. CanJet and Royal both tried to do the same thing. Both were driven out of business. CanJet lost $30 million in the course of six months. They did get a cease and desist order from the Competition Bureau; it lasted 80 days. During that time, their losses diminished and they started to move towards profitability. As soon as the 80 days was up, Air Canada responded by matching their fares, offering double, triple mileage points on top of the competitor, and essentially sucking up the demand. CanJet then failed.
Senator Tkachuk: Do you have the numbers as to what the average ticket prices were during the time these two airlines were functioning and competing with Air Canada in Eastern Canada, and what they are now, without those two airlines?
Mr. Beddoe: The Competition Bureau has those numbers. Our ambition was to lower fares by 50 per cent in every market that we go into. We have done that consistently in every single market. Even in markets where we have no competition, we charge the same relative fare as we charge in markets where we compete. An example would be Calgary-Comox. We charge the same relative fare on that routing — which has no competition — as the fare we charge on Calgary-Victoria.
If you go to markets where there is no competition, on average, fares are double compared to where there is competition. That is almost uniform right across the system, no matter how you measure it. One of the problems with airfares is there are so many different types of fare. It is very difficult to analyse. They range from advance fares through to walk-up fares. The pricing strategies are very complicated. If you plot equivalent fares against each other, you will see in the markets where WestJet flies, they are at least half of what they are where Air Canada flies as a sole supplier.
Senator Fitzpatrick: Can you give us an example of where the predatory practice of Air Canada has impacted negatively on your airline or other airlines in British Columbia?
Mr. Beddoe: I cannot specifically address British Columbia. I have one example that was, perhaps, glaringly obvious because it is a market that we entered, left and then returned to. That was between Calgary and Winnipeg. When we started with three airplanes in 1996, we identified Winnipeg as a market we should be able to stimulate by providing low fares. When we went into that market, the walk-up fare was $395 one-way from Calgary to Winnipeg. We entered that market with a fare of $199 on a walk-up basis. As soon as we did that, Air Canada and Canadian collectively increased capacity on top of us. I do not have the exact figures, but they increased capacity in the order of 30 per cent, and matched our fares.
We were a newcomer to that market. Frankly, Winnipeg did not respond as favourably to us as we would have liked. Our philosophy is ``use us or lose us.'' After three months of being there, we realized other markets such as Saskatoon or Regina did want us. We rescheduled the airplane out of Winnipeg back into those two markets.
Immediately after we left, the airfare went to $395. That was on June 21, 1996. By July 21, 1997, that $395 fare had risen to $461 — no competition. By November 4, 1997, it had risen to $484 — no competition. We re-entered the market on March 20, 1998, and the fares suddenly crashed to $224 — the fare we charged. If you drive the competitor out of the market, the fares will become abusive.
Senator Fitzpatrick: You mentioned several small international airlines, not your own such as Peace Air and Hawkair. Have there been similar impacts on those very small airlines?
Mr. Beddoe: I am not here solely because of WestJet. We need a viable industry in Canada. We need small airlines to feed into larger communities. The president of a small carrier approached me after our hearings before the Commons committee. His company is called Hawkair. He flies a small turboprop operation out of Terrace, B.C. He told me that when he bought a Dash 8 to fly between Terrace and Vancouver, because the fares were so high, Air Canada immediately put two Dash 8's right on top of him to drive him out of the business.
I was approached several days ago by the president of Peace Air, which flies out of the Peace River region. He told me the same sort of thing happens to him. He says he does not have the money or resources to fight this. He says, ``I just cannot take these people on.'' Bearskin Airlines has had the same experience.
These are all airlines that have the potential to grow into what was once the Time Airs, the Canadian regionals, the Air Ontarios. That is where we need to see competition start to grow. If it does not happen at the grassroots level, it will not happen at all.
Senator Fitzgerald: There has been some concern expressed about the authority that the commissioner has to move unilaterally for a cease and desist order against a predominant airline and the harm it causes to the airline for such an order to be launched. What is your impression as to the harm that would cause Air Canada, say in the case of Hawk Air, if there were a cease and desist order in that regard? I think you have already described the harm that was caused to Hawk Air. I would like to know how much harm is done to the predominant airline when it has a cease and desist order against it.
Mr. Beddoe: In actual fact, I would say they would benefit from it. The dumping of capacity at a cost that is less than Air Canada can make money at means that Air Canada will lose less money. I would have to tell you it should be beneficial to Air Canada. The cease and desist order would only benefit Air Canada financially. If it would stop flying three half-empty airplanes against us in Abbotsford, it would save itself much money.
Senator Meighen: Mr. Beddoe, I was struck favourably by your remark that you were not a lawyer. Perhaps that is why I have understood most of what you said. However, I must confess that I am an ex-lawyer. Let us continue in this non-legalistic vein.
What goes around comes around. Senator Fitzpatrick alluded to the fact that in some quarters there is concern about what might appear to be a very large discretionary authority that might be vested in one individual, whoever that individual is, in the Competition Bureau. Yet, however we slice it, we as Canadians have managed to royally muck up the industry and the market. I do not know how we unscramble the egg, but it will not be easy.
Are there communities in this country that might not be served unless there was a requirement for someone to serve them? I would like to hear your views on that.
I think we are aiming for a competitive market where small communities with a small market do not lose out on service. Are you satisfied that the provisions proposed in Bill C-23 will enable us to arrive at that situation? Are you concerned at all about vesting a lot of discretionary power in the hands of one person who might turn around and bite you one day? Are you satisfied that if cease and desist orders could be issued very quickly, that that is the essence of solving our problem?
In this business — and I never did any competition law — definitions seem to be very difficult. What is ``dumping of capacity''? I think we know generally, but specifically, it may be hard to say. I would like your comments on the general situation.
Mr. Beddoe: Going back to your first question, whether small communities would prosper or have air service if Air Canada were to pull out of those communities, I say ``absolutely.'' Capitalism has an incredible ability to fill a void as soon as it is there. We have watched many little airlines try to get going. I do not think there is any doubt there are aircraft and pilots around. We have 750 pilots on our waiting list wanting to fly with us. There is no shortage of equipment or pilots. If there were a reasonably strengthened or somewhat strengthened Competition Act, capital would be drawn back into the business as well.
Senator Meighen: On that point, am I correct that Air Canada is required to provide service to certain small locations?
Mr. Beddoe: Currently, as part of its deal with the government to be allowed to take over Canadian Airlines, I believe Air Canada is required to fly to certain small communities until the end of this year. However, at the fares it is charging, I am sure it is profitable. If not, Air Canada certainly gained the benefit of that feed traffic, which is what this is all about. Feed is the name of this game. It is important to maintain feed so as not to lose control over that person flying from Cranbrook to Calgary or Vancouver. If that person in Cranbrook says, ``I have to go to Hong Kong next week,'' and picks up the phone and calls the travel agent, he can go one of two ways. He can drive somewhere to us — we do not fly to Cranbrook — and then fly to Vancouver and choose from two or three airlines. Alternatively, he can fly on Air Canada and be looked after all the way through the process and never have to consider where his bags go or if they will get lost.
Air Canada will continue to fly that route solely to ensure it gets that one incremental passenger on that Hong Kong routing, because Air Canada has hundreds of places where those individual passengers ultimately come from to congregate in Vancouver to go to Hong Kong.
The danger from Air Canada's point of view is that, if they lose that, they have to face competitive qualitative issues. Now that person has a chance to make a choice. He might be able to get on a competing airline in Cranbrook, get to Vancouver and actually have a choice. No longer is he captive to Air Canada. He can now possibly fly Cathay Pacific, who might have a better product. Now Air Canada will have to face the problem of a qualitative effort in terms of improving the quality of its product against the quality of the competing product.
By dominating the feed, an airline does not have to compete on a qualitative basis. I think that is what is fundamentally wrong. That is why the dominance is so destructive to the industry.
Senator Meighen: If you were the king of transportation in Canada, how would you eliminate that situation?
Mr. Beddoe: One must create an environment where capital has some degree of safety. Several days ago I read an airline analysis that reported that the airline business in Canada has seen the losses of $3.8 billion worth of capital since deregulation. The problem is that when deregulation occurred in 1988, no one thought about all these issues and the consequences. The Competition Act was never adequately drafted to address this sort of competitive environment and this industry. The act is largely drafted toward manufacturing and deals with issues such as avoidable costs, which does not apply to the airline business. That point would involve a long discussion, and that is not what we are here to do. We do have an act and it has some possibilities. That is why we suggested that the one way to improve it is to make these two amendments.
Under the current act without those amendments, there is no penalty at all. There is no deterrent against this anti- competitive behaviour. I am not sure if $15 million is adequate. It is a drop in the bucket in this industry. However, it is a start. If we pass this, there should then be some closer examination of the industry as a whole and what can be done to really improve the quality of the industry across the whole spectrum — not just with respect to this anti-competitive behaviour.
Senator Meighen: Do you have any concern about using the Competition Act to regulate specific industries? Next year it might be the grocery business.
Mr. Beddoe: It is so easy to destroy an airline. I will give you some simple numbers. The average margin in the airline business probably runs around 2 per cent to 3 per cent. Canada 3000's average margins with 1.7 per cent. Their best year ever was 2.4 per cent.
A typical airplane with 120 seats, running with a 75 per cent load factor, has 90 passengers. That represents the typical average flight. With a 2 per cent margin, 1.8 passengers on that flight made money for the airline.
It is very easy to swamp the market with extra capacity and drain two or three or four people off of that flight, as long as you do not care how much money you lose, to turn that flight into a losing proposition. It is very simple.
We have succeeded by having a low cost structure. We break even with a load factor of around 56 per cent or 57 per cent. It is very hard to stop us. In the year 2000, we made an operating margin of nearly 20 per cent, pre-tax and pre- profit sharing. It is very hard to stop us — particularly now because the public rallies around the only alternative in the marketplace.
Senator Meighen: Why do others not follow that example?
Mr. Beddoe: They could if they could get capital, but they cannot get capital any more. We raised $28 million initially, and have since raised considerably more than that. However, that capital now is not available to others. Canada 3000's president has tried to raise capital and has given up. He cannot do it. He will not come back into this industry.
We did an equity issue the other day and raised $80 million. It was six times over-subscribed. We are profitable and successful.
Senator Meighen: Am I to understand that if the capital acquisition or capital-raising problem could be solved—
Mr. Beddoe: The capital raising problem is a function of profitability. People want to invest in profitable airlines.
Senator Meighen: You were not that profitable always.
Mr. Beddoe: Yes, we have been.
Senator Meighen: What is to stop me from starting airline and being equally profitable in eastern Canada?
Mr. Beddoe: You must get the capital. It is a chicken-and-egg problem.
Senator Kroft: I have a couple questions to try to better understand your industry because as much time as we spend on it, your industry is a challenging one to understand.
You have told us that your market cap has moved from $28 million to $1.4 billion. You have raised additional new capital, and you have been profitable so you have contributed to that value both through generated earnings and new capital.
You made yourself an attractive company and an attractive investment, obviously. An equity issue that is six times over-subscribed is a good indication of that.
I would be interested to know if this is because you have defined your niche play and have a good understanding of your business model. I do not want to tread into things that would be confidential.
You juxtapose yourself against Air Canada, which is a full-service airline. I would invite you to describe what you would call yourself or whether you would agree with what I have called Air Canada. They work with regional flights feeding into a national trunk and then into an international system.
Do your business model and your system work within the constraints of a limited business plan or can you take your approach and extend it into a fully competitive, identical full service operation?
Mr. Beddoe: The industry in Canada is about a $12 billion a year business. That figure is prior to September 11. It shrank somewhat after that. It is now recovering back towards that figure.
The domestic marketplace in Canada is about $4.5 billion. That is just travel within Canada. We can certainly compete 100 per cent in that marketplace, without legal practical or restriction. The transborder market is about $2.5 billion. We can compete in that and will do so. We will be in that game. We can even go into the market of probably Mexico. We can go into the Caribbean market with the equipment that we have now.
Our model is to use one type of airplane, the 737. The 737-700 series airplane today has evolved to the point where it has capacity to fly from Calgary to the Bahamas or Vancouver to Honolulu non-stop. There is absolutely no reason why we cannot, over time, extend our reach to those sorts of places. I am not sure that we want to do that, but there is nothing to stop us practically speaking.
You could add the $2.5 billion and the $4.5 billion together, and you are at $7 billion. You could add in some stimulation factor that we bring to the marketplace. My guess is that we can participate in about $8 billion of that $12 billion marketplace.
We will not participate in the $4 billion that represents transborder, transatlantic and transpacific markets. Those markets will be markets ultimately served by other competitors such as Canada 3000 and other charter carriers who will come along.
Senator Kroft: Other than the limited extensions outside of the country, you do not anticipate being in the position where you would have to get into that feeder model to get that passenger into the system because you have a different business model?
Mr. Beddoe: No. We feed ourselves. We recently launched a flight from Calgary to Comox about a year ago. Comox is a city of 20,000 people, yet that routing was successful from the day it started because there are 200,000 people in the environment from Nanaimo north up the island. A community of 20,000 people got non-stop jet service that they had never seen before.
Senator Kroft: I understand. Since you are not contemplating flying to Hong Kong, Seoul or London, you will not have in your model the concern of trying to get that passenger fed into your system early.
Mr. Beddoe: We are not feeding into our system. However, we will feed into other carriers. We are now feeding KLM and Cathay Pacific out of Vancouver — not on a formal basis, but an informal basis.
Senator Kroft: You will not be worried about capturing that passenger? You will provide the feeding function.
Mr. Beddoe: To that transatlantic transpacific operator, yes.
Senator Kroft: I will jump to a totally different question, which follows a bit from Senator Meighen.
I asked the Commissioner of the Competition Bureau when he was here whether the proposed rules of the Bureau would bring that which is necessary to create stability in the airline market. I did not get an answer that that piece alone was enough to do it. There is more that needs to be done.
This raises the question of a policy framework that goes beyond just policing competition to ensure that Canadians are fully served with the range and quality of service that they need. I would like to come back to that question to see whether you feel that competition alone, policed through the act, will be enough to provide that range and quality and variety of service that Canadians want.
Mr. Beddoe: I do not think that it will be enough. However, it will at least hinder the anti-competitive actions of Air Canada. Let us be clear, if they are not competing in an anti-competitive way, they have nothing to fear from this legislation. In fact, I would say that they would benefit financially from it because it would save them from their own absurd behaviours.
Senator Kroft: That takes me back to last question of Senator Fitzpatrick on how they should go around hoping that they get cease and desist orders because they could can make money that way. I found that an odd piece of logic. You are now saying in different language, save them from themselves — ``Stop me, or I will kill again.''
Mr. Beddoe: Not really. If you look at the history of their behaviour, their business model is total domination of an industry. It has not worked. If it had produced profits, one might say that is not a bad idea, but it has not worked. There was a $1.2 billion loss last year, and it was a $600 million loss before September 11. This policy was not working. I fail to understand why any businessman would continue to do this. Sooner or later one has to wake up and ask if this is working.
Senator Tkachuk: Is it because they think the government will bail them out?
Mr. Beddoe: Absolutely.
Senator Kelleher: I have a number of questions that do not directly deal with your immediate problem, so I hope you will bear with me. I want to put them to you because you are in the airline industry and you have knowledge of it.
One problem that has been brought to our attention is deficiencies with the mutual legal assistance sections that have been put into this. Are you familiar with that?
Mr. Beddoe: No, I am not.
Senator Kelleher: Then I will not ask you to comment on them.
There is some concern about having given direct access to people other than through the commissioner. Are you familiar with that?
Mr. Beddoe: I have heard those discussions, yes.
Senator Kelleher: I would be interested in hearing your opinion about whether that would be a useful addition to this legislation.
Mr. Beddoe: I am not sure I am qualified to comment on that. I have not studied those provisions of the act as proposed. Certainly, those provisions are available elsewhere in other countries. I cannot comment on them. I am not a lawyer and do not profess to be a competition lawyer versed in those issues.
You must remember that the Competition Act, as it stands, is a complaint-driven legislation. There must be a complaint. The commissioner on his own appears as if he cannot initiate an action against Air Canada under the current legislation. It has to be complaint driven. My understanding from people such as Hawkair and so on is their complaints just got cast aside. My sense is that the act does not afford them much opportunity to pursue remedies unless the competition commissioner feels it appropriate. Maybe it is appropriate for him to have access through some private access to this act.
The Chairman: I am informed it is not strictly complaint driven. He can do it on his own.
Mr. Beddoe: That is not what we are told.
The Chairman: That is what the act says.
Senator Kelleher: You are concerned about the cease and desist order as presently drafted for this legislation. You are saying that the 80-day period should be extended until the complaint is finally dismissed or dealt with. How beneficial do you feel that would be to your particular problem in this area?
Mr. Beddoe: I can only speak to my own experiences. When we filed our complaint against Air Canada, we requested information from them, and the information we requested did not come. We got piles of other information instead — mountains of it — to try to sift through. The whole process was frustrated and there were delays. They, in turn, asked us for mountains of information. Much of it was extremely confidential information that we would not normally wish to give a competitor. It took us an extremely long period of time just to get data.
They have an incentive not to provide data because the 80-day provision, which we never relied on, can run out, as it did in CanJet's case. In the case of Canada 3000, I believe it filed a complaint against Tango, but it did not survive long enough to get through that stage. They were gone, leaving behind a trail of $60 million of unpaid bills. I think the 80- day provision encourages Air Canada to frustrate the process, and by extending that to the time that the tribunal hears the issue now reverses that process and will encourage them, possibly, to get at the solution and get the proper documentation submitted.
Senator Kelleher: This would go some way to alleviate some of your concerns?
Mr. Beddoe: Absolutely. It also would go some way to alleviate the commissioner and the tribunal's concerns because at least there would be an incentive to provide the information in a timely fashion to get the cease and desist order removed potentially — if, indeed, they were not pursuing anti-competitive behaviour.
Senator Poulin: I am from Northern Ontario, and I must tell you that in January, when I flew into the Sudbury airport, your new plane was on the tarmac, next to Bearskin. We rely a great deal on our regional airline, Bearskin Airline. For Northern Ontario, it is extremely important to be able to travel at reasonable prices for business or personal reasons. That is why I have been particularly interested in the changes that would be brought about to the Competition Act.
You kept saying that you were not a qualified lawyer. Well, I am not a qualified specialist in the transportation industry. However, we all know it is a very complex industry but an essential one in our country for all the good reasons we already know, and it always has been.
Because you say that the industry is in disarray, do you find that the Competition Act is the appropriate venue to deal with the problems that you presented so well to us today?
Mr. Beddoe: The problem we have today is a direct result of extensive anti-competitive behaviour. Again, you have to look at the facts I presented, and there are ample examples of it. It is a step in the right direction. I do not think it is the sole solution. However, having total dominance in the hands of one player is not healthy for any country, any industry.
I believe United Airlines and U.S. Air were in discussions about merging before September 11. The U.S. Congress, I think, was looking into the issue from an anti-competitive point of view — whether it would to an anti-competitive environment. I am drawing these numbers from recollection, so I may be slightly incorrect. It was my understanding that the combined market share of U.S. Air and United would have been 24 per cent, and the U.S. Congress decided that was anti-competitive. It was too much dominance in the hands of one carrier. Yet, in Canada, we have one carrier, that has, by my calculations, 84 per cent of market share. Something is wrong here. This is not going to be healthy.
The Chairman: Mr. Beddoe, the question was whether this is the best way to correct it. You have articulated very well that it is a mess. How do we fix it?
Mr. Beddoe: It is a first step towards it. I do not believe it is the sole step, and it will not be the sole solution. It will take much more analysis later, but it is the beginning of a process because where we are today has come from substantially anti-competitive behaviour, in my view.
Senator Poulin: Because it is such a complex industry and because you said that the spirit of the Competition Act is really targeted at goods, are you sure that the bureau is the right place to discuss transportation issues?
Mr. Beddoe: I think it is the only one available to us for the time being. If we do nothing, we will go back to the same situation that led to the demise of many airlines already. The cease-and-desist provisions do not work as they are drafted. Eighty days is not sufficient, and there is no penalty in the process. It is not the sole solution, but it is a starting point.
Senator Poulin: Let us come back to the 80 days. You were giving the example of a complaint that you filed two years ago. Could you explain how the amendments to the Competition Act would prevent delays regarding a complaint?
Mr. Beddoe: Had this legislation been in place at the time we filed that complaint, we could have sought a cease-and- desist order against Air Canada. Presumably, Air Canada would have been required under that order to maintain their pricing structure, or at least maintain capacity, so that we were not being driven out of the marketplace. If they wanted to then resort to market penetration or anti-competitive behaviour, they would be under an obligation to prove to the commissioner that they were not anti-competitive in their behaviour. There would be incentive now to provide, first, the right documents; second, in a timely fashion; and third, not pursue delaying tactics of one kind or another. Currently it is to their benefit to delay the process. That is the problem.
The Chairman: Thank you for coming, Mr. Beddoe. Good luck.
Mr. Beddoe: Our luck is in your hands if you fly us.
The Chairman: I would not go so far as to say that.
We will next hear witnesses on Bill S-40, An Act to amend the Payment Clearing and Settlement Act.
Senator Angus: I wish to have it recorded that I am present for the hearing on Bill S-40. I am formally returning to the banking committee for the purposes of this legislation. However, I was not present earlier this morning nor will I be present when you resume your discussions on Bill C-23 for the reasons which I put on the record and in my letter to the clerk at the beginning of the hearings on Bill C-23.
The Chairman: Thank you, Senator Angus.
I welcome Mr. Denis Norman and Mr. Doug Wyatt from the Department of Finance. Please proceed.
Mr. Denis Normand, Senior Chief, Payments, Financial Sector Policy, Department of Finance: This bill amends the Payment Clearing Settlement Act to provide Canadian securities and derivatives clearing houses with legal protections similar to those in place in the United States and other G7 countries in the event that one of their members becomes insolvent or declares bankruptcy.
[Translation]
With over 190 member firms, the Canadian securities and derivatives industry is a key player in Canada's financial system. The industry provides a mechanism for raising capital, channelling savings into investments, and minimizing and hedging risks through derivatives contracts.
The clearing and settlement of securities and derivatives trades in Canada is conducted through three clearing houses — the Canadian Derivatives Clearing Corporation, The Canadian Depository for Securities, and the WCE Clearing Corporation.
These organizations clear and settle trades on four exchanges — the Toronto Stock Exchange, the Bourse de Montréal, the Canadian Venture Exchange in Calgary, and the Winnipeg Commodity Exchange.
[English]
Canadians' securities and derivatives clearing houses are among the most efficient in the world. They enable consumers and businesses to buy and sell securities and derivatives in a timely manner and at a reasonable cost. They do this by providing clearing and settlement services and acting as a central counter party to securities and derivative trades.
As a central counter party, they assume settlement risks; that is the risk that a member may default before a transaction is settled which would result in a financial loss to both the clearing house and its members. Because of this, securities and derivatives clearing houses have risk reducing measures that require members to post collateral and net their obligations with the clearing house. The Canadian securities and derivatives industry is in need of a competitive legal regime that lowers settlement risks for their clearing houses and therefore lowers trading costs. This will make these clearing houses more efficient and competitive with the United States and other G7 countries and help to keep trading activity here in Canada.
The amendments in Bill S-40 accomplish this by expanding the scope of the Payment Clearing and Settlement Act to include legal protection for securities and derivatives clearing houses of their netting agreements and collateral posted by their members. I would note that the protections being sought are over federal bankruptcy and insolvency laws.
[Translation]
Before closing, I want to mention that the changes in this Bill are in line with recommendations made by the Bank for International Settlements (BIS), which is the international forum that fosters co-operation among central banks and other agencies in pursuit of monetary and financial stability.
The BIS supports a well-founded legal basis for securities settlement systems so that rules and procedures can be enforced with a high degree of certainty. In particular, they favour the enforceability of netting arrangements and the ability to realize assets pledged as collateral.
Mr. Chairman, the amendments in Bill S-40 will help to ensure that Canada's financial sector remains efficient and competitive.
[English]
Senator Angus: This is a rather complicated and obscure piece of legislation, but it is here for the reasons you have said, I gather.
First, is there any other way the relief that is being sought by the clearing houses and the exchanges could have been obtained, or was there a constitutional obstruction? I am trying to understand why we have had to amend the Payment Clearing and Settlement Act.
Mr. Normand: Other countries have similar types of provisions in their legislation that accomplish the same thing — countries in Europe and the United States. It is true that one could amend the various bankruptcy and insolvency acts to accomplish the same outcome. However, we believe that using the Payment Clearing and Settlement Act has some advantages: it is central; it covers off all situations; and particularly for any foreign dealers or participants it is easier for them to be able to look to one quite narrow piece of legislation and understand what the effect is to the agreements of the various clearing houses.
Senator Angus: You are saying that this legislation, in your judgment, will override the Bankruptcy and Insolvency Act for the specific purposes of these exemptions; is that correct?
Mr. Normand: That is correct. It will override all bankruptcy and insolvency legislation.
Senator Angus: It will not lead to a lot of litigation as tow ho has the jurisdiction? I am thinking of a situation under the Companies' Creditors Arrangement Act, CCAA, where the court grabs security and you end up fighting under the bankruptcy law. I am assuming, but I would like you to affirm for us, that some body such as the Department of Justice has a look at these laws before they are put to Parliament as to the constitutionality or the consistency or otherwise with other statutes.
Mr. Wyatt, General Counsel, General Legal Services, Department of Finance: There is no constitutional issue in this legislation. We are essentially overriding other federal bankruptcy legislation.
Senator Angus: You feel it is clear as drafted?
Mr. Wyatt: Yes.
Senator Angus: You talk about 190 members of clearing houses and then you talk about parties to, say, a derivatives transaction. I believe in this case that the members are parties, but I may be wrong.
Could you walk us through a simple transaction? Could you give us the a-b-c saying: there is this party and that party, but then insolvency intervenes and this would have happened except now this law will stop that from happening.
Mr. Normand: I think I will defer to my colleagues from la Bourse since they can get into all the technical aspects of a trade.
Mr. Giovanni Giarrusso, Senior Executive Vice-President, Corporate Affairs, la Bourse de Montréal: Mr. Favreau, who is our senior vice-president clearing, will take you through the way the transaction works and the relationship between the members of the clearing corporation and the participants in the market.
Senator Angus: If I may add to my question, since you are going to respond to that question: The documentation refers to other exchanges besides la Bourse de Montréal, but I understand — correct me if I am wrong — it is principally la Bourse de Montréal that is affected by and has sought out this legislation. Am I correct in that understanding; and, if so, why?
Mr. Normand: Senator, in fact, Bourse de Montréal and the Canadian Depository for Securities, CDS, raised this issue with us. The latter has a slightly different situation because their debt-clearing service is currently designated under the Payment Clearing and Settlement Act so it already has some protections. However, the CDS felt it did not have enough protections — particularly with some of the transactions they were getting into with their debt net function, and that is the repo transactions. They were looking for something very similar to what la Bourse wanted.
Senator Angus: What about the Canadian Venture Exchange, CDNX, the Winnipeg Commodity Exchange, and the Toronto Stock Exchange, TSE? You are lumping them in but I had understood that la Bourse de Montréal was affected because it is the derivatives and structured products exchange or market.
Mr. Normand: The Canadian Depository for Securities is the central hub or depository for Canadian securities. It does clearing and settlement functions for the Toronto Stock Exchange and the Canadian Venture Exchange. There is also, as you point out, the Winnipeg Commodity Exchange. It has its own clearing corporation. Its structure is very similar to CDCC, which is fully owned by la Bourse de Montréal. You have these four exchanges: The bourse, which has its clearing corporation; the Toronto Stock Exchange and the Canadian Venture Exchange that principally go through CDS; and the Winnipeg Commodity Exchange, which handles agricultural products like canola, wheat and other grains. They have their own clearing corporation.
There are linkages with these clearing corporations, as my colleagues will point out. For example, the Bourse does the clearing and the settlement services on an administrative contract for the Winnipeg clearing corporation — they actually perform the settlement services for them. The type of margins deposits that are requested and required, by, for example, CDCC, will quite often come from securities that are on deposit with the Canadian Depository for Securities. There are linkages. They are all very similar.
Senator Angus: That is the collateral when you talk about that security on deposit that, by this legislation, is exempted from seizure under the bankruptcy laws?
Mr. Normand: That is right. All these clearing corporations operate in a similar way. As I explained earlier, you have a central clearing house. That clearing house has members or participants. The clearing house steps into the middle of the transaction. In terms of a sale of a commodity or derivatives contract between dealer A and dealer B, you have the clearing house in the middle of that. Actually, the sale and purchase is with the clearing house. In essence, it takes on that risk in the middle of the transaction. Because it is taking on that risk, there is the possibility that one of the parties to the transaction might not complete it.
These types of clearing houses will have rules that require their members to put up certain amounts of capital, collateral, margin deposits, and the transactions will be netted. What I mean by ``netted'' is that if I am a dealer and I am buying and selling a lot of contracts — and, perhaps I have sold $100 million and I have bought $90 million — it is the net amount — namely, the $10 million — that I will receive in this case from the central clearing house. The first thing is to reduce the net obligations that are going back and forth to the clearing house.
Second, there are amounts that are put on deposit to ensure that you are covering off the risk of a default on the transaction. If there is a default, then all of the participants of the clearing house — as the remaining members — will have increased contributions. They will ultimately have to pay in some way for the failure. It is a little like an insurance-type pool.
Although this type of event is not a common event, it is important to reduce risk so that a clearing house will not be able to net those transactions nor be able to realize the collateral right away to complete the trade. If it cannot, then it takes on that risk and, ultimately, makes our markets less sufficient and more costly.
The Canadian markets in general — in both the securities and the derivatives markets — are quite small by international standards. We believe that they are an integral part to the financial sector and to the economy. We must ensure that they are as efficient as possible and, in many cases, more efficient where they can be than other clearing houses around the world.
Senator Angus: You have started by answering the question I asked earlier, which you referred to Mr. Favreau. I would still like, for the same reasons, to do one transaction for us, in the simplest form, both with and without this legislation.
Mr. Michel Favreau, Senior Vice-President and Chief Clearing Officer, la Bourse de Montréal: I would like to take the example of having a transaction made between two dealers on the exchange. The clearing house registers this transaction immediately after the transaction time. After registration, there are now two transactions: There is one transaction between the first dealer and the clearing house and a second transaction between the clearing house and the second dealer.
Senator Angus: That is known as the counter party as represented by his broker, I suppose. That is to say, the member is really representing some commercial party. Is that correct?
Mr. Favreau: Yes. The traders on the exchange are known as ``approved participants'' in the exchange. All have the clearing relationship with the clearing members of the clearing corporation. All transactions done on the exchange are cleared by the clearing members of the clearing corporation. At the end of day, the transactions made by dealers are reflected in the books of the clearing members of the clearing corporation. There is a long side and a short side on each transaction. One member holds the long side; the other member holds the short side.
On a daily basis, the clearing corporation — and more often on an inter-daily basis, but to simplify this we will talk about a daily process — does the netting of the positions, as was explained by Mr. Normand. That is to say, it offsets, for one clearing member and for one account of this clearing member, the long positions and short positions to end with a net position. This offset can result in the clearing member owing sums to the clearing corporations or the clearing corporations owing sums to the clearing member, depending on the results of the transactions.
This amount of money is then settled through a payment on the morning after the transaction, on a daily basis. The clearing corporation will then evaluate the risk represented by the positions of the clearing members. That risk is basically that the clearing member defaults.
Senator Angus: That clearing member, again, is a broker, in real terms, representing some commercial party. Is that correct?
Mr. Favreau: Yes. The clearing members of the clearing corporations are members of Canadian exchanges.
Senator Angus: You are hesitating to use the word ``broker.'' Let us use the term ``securities dealer,'' then.
Mr. Favreau: We can also have banks as clearing members. Actually, we have one bank as a clearing member. That is why I am hesitating.
Senator Angus: I understand.
Mr. Favreau: The clearing house then evaluates the risk on the positions; that is, the risk being the default of a clearing member. How do we evaluate this risk? We simply make the assumption that there is a default. We then evaluate what we call ``worst case scenarios,'' depending on the market conditions prevailing at the time of default. We apply the worst case scenario conditions to the portfolio held by the clearing member and with that we can evaluate the maximum loss for the clearing corporation because in the case of a default of a clearing member, the clearing corporation, would have to handle and liquidate the portfolio of that member. We imagine, for example, that price indices vary from 6 per cent to 12 per cent scenarios, up and down, and I would say based on historical considerations. There is a sort of formula that enables us to evaluate the maximum loss incurred by the clearing house should a clearing member default.
This risk is then covered because we ask all clearing members to pledge securities, what we call collateral, to meet this risk requirement on a daily basis. Also on a daily basis, we require clearing members to deposit or to pledge security or cash with the clearing house so that this these risks are covered.
Senator Angus: Still, you are making it very complicated. I know how complicated it is. However, if you could put it like the risk of insolvency, which is what this is all about when you cut through everything else.
That is certainly what it says in the speech of the government, but we are not talking about the insolvency of some client of one of the members. For this to even come into play as a piece of legislation, we are talking about some financial institution or member of the exchange in question, or clearing house going belly up. Is that not the case?
Senator Furey: If I may interject, I will try to get to what I think is at least the substance of one of the points that Senator Angus is making. Without this amendment, when a member who defaults or seeks bankruptcy protection, any deposit that he has with the clearing house by way of collateral, or any netting that the clearing house has with respect to him, will be subject to the protection order. With this amendment, that collateral and that netting belonging to that particular member is exempted from the bankruptcy order. Is that not the sum and substance of this amendment?
Mr. Wyatt: I think so, senator. I tried to reduce it to simplicity. Senator Angus is right. This does not deal with the bankruptcy of a customer of a clearing member; it deals with the bankruptcy of clearing members. It essentially says that if a clearing member is insolvent, or going insolvent, they cannot go to court and get an ex parte order freezing the collateral. The clearing house can realize on its collateral that right to use it to complete the other transactions, and that is all it says.
Senator Meighen: We are preserving the integrity of the clearing house, in effect.
Senator Angus: I will mention Enron because we read every day about Enron. In that case, it was derivatives trading but it was done over the counter rather than through an exchange, as I understand. When you people advertise and talk about being competitive and having a system that is immune from insolvency, you are encouraging people trading in these structured products to go through an exchange that has the clearing system behind it rather than just private party and private counter party, like Enron and one of these partnerships. In that case, the stock went down and everybody was burned. This would not happen here. Is that a significant difference?
Mr. Wyatt: One significant difference is that, as you pointed out, these are exchange-traded derivatives. Second, the clearing houses are regulated entities under the securities laws of the provinces.
Senator Angus: That is why I said there was a constitutional issue. The provinces could not fix this problem; they needed a federal act, and you people are here from the department to say you agree and you think it is a good piece of legislation, right?
Mr. Normand: That is right, senator.
The Chairman: Thank you. Are there any other questions?
Honourable senators, is it agreed that we go to clause-by-clause study Bill S-40, an act to amend the Payment Clearing and Settlement Act?
Hon. Senators: Agreed.
The Chairman: Is it the intention of any honourable senator to propose an amendment?
Shall the title stand postponed?
Hon. Senators: Agreed.
The Chairman: Shall clause 1 carry?
Hon. Senators: Agreed.
The Chairman: There is only one clause. Shall the title carry?
Hon. Senators: Agreed.
The Chairman: Shall the bill carry?
Hon. Senators: Agreed.
The Chairman: Shall we report the bill today?
Hon. Senators: Agreed.
The Chairman: Thank you, gentlemen, and thank you, Senator Angus.
Mr. Robert S. Russell, Individual: Honourable senators, I should like to give a bit of background on myself. I am a partner with Borden Ladner Gervais. I am the National Chair of the Competition Law Group at our firm. I have practised competition law for 19 years and I am also a commercial litigator.
With respect to Bill C-23, I should like to try and present a pragmatic viewpoint from a litigator as to why the provision should be supported by the Senate.
I have appeared at all levels of court, including the Supreme Court of Canada, and a number of appellant courts in the provinces. I have had numerous appearances before the Competition Tribunal. I should also outline the capacities in which I have appeared in the past. I have appeared on behalf of private sector clients. I have also acted as counsel to the current Commissioner of Competition, as well as two of his predecessors.
I have appeared before the Standing Committee on Industry, Science and Technology, in respect of Bill C-23 in November of last year and in respect of additional issues that the committee has asked me address. I also appeared before the Standing Committee on Transportation and the Senate in respect of Bill C-26 almost two years ago, and some of the members here were there at the time. That, of course, included what is now section 104.1, which I have seen has shown up in the testimony before you again today. I will answer any questions you may have with respect to section 104.1 as it relates to clause 103.3, which is the temporary orders provision before you.
I should tell you that in my appearances in respect of Bill C-26 two years ago I was representing three international air carriers: British Airways, Air France and Cathay Pacific. I do not appear on their behalf today.
Like Mr. Wong, who has already appeared before this committee, I was retained by the competition commissioner to advise on what is now the interim orders provision in clause 103.3. I should also tell you that the commissioner consulted with a number of competition law professionals — both lawyers and economists — with respect to the content of clause 103.3. I believe it would be inappropriate, as one of the legal advisers to the commissioner, to state or even leave the impression whether the current provision in clause 103 accords with the advice I gave to the commissioner. Suffice it to say that I believe the broad consultative process engaged in by the commissioner has resulted in a proposed amendment to the Competition Act, which is an improvement to our competition laws and should be fully supported.
When we look at this issue, it should not be a debate about private sector versus public sector. I think this needs a broad public policy review in terms of what it should achieve for competition policy in Canada. I have provided a paper to you, and I apologize if it is not in both official languages, because it should be. I have been out of the country and unable to ensure that before today. If it is not in both official languages, I will undertake to provide to do that.
I would like to note that proposed section 103.3 is an important provision to improve our Competition Act. This is a provision that supports the investigative process. I have read the transcripts and testimony before you, and that has not been clearly pointed out to this committee. It is a provision that applies to the investigative stage — the policing stage — where the commissioner is gathering the necessary evidence to determine whether there is a case. In those circumstances, the features in 103.3 are not unusual at all. It is quite commonplace for investigative orders of this kind to be ex parte, which means ``without notice.'' That is for good reason, because the police — and I say that in the broad sense as I refer to people who enforce the act — have to move quickly to gather evidence. They are not in the same position once they have commenced a case, to put forward affidavit evidence to support the ordinary injunction test. I was disappointed to see in the transcripts that that has been put to you as a replacement for what 103.3 is seeking to achieve in competition policy.
An ordinary injunction requires two things: to show irreparable harm to an interest and to show a balancing. It is inappropriate in the investigative stage because the commissioner has no evidence, at first. He or she has to gather evidence before bringing a case. It is when the commissioner brings the case that he or she seeks an order under sections 104 or 100, if there is the belief that a case can be made. Those provisions are not a replacement for what proposed 103.3 seeks to achieve.
This is the circumstance. You have heard a witness today who talks about what may be a precipitous act by a competitor, and without this tool to stop conduct while the investigation is occurring, the other competitor can go out of business. You have talked a great deal about airlines, but it can apply to other industries where precipitous conduct is applicable. The commissioner needs to protect the public interest — which is what this is about — pending investigation.
I have been involved in those investigations and they are laborious. You must talk to people who will be prepared to testify; they are often afraid to testify because of the consequences from a dominant player in the marketplace; and these investigations cannot be done overnight. When Mr. Wong told you that this can be done in 24 hours, I must say to the contrary, with respect to Mr. Wong, that it is not applicable to the investigative stage. That is a mistake.
This is day one that we are talking about with 103.3, to give the time for that investigation for the evidence- gathering to take place. It is not unusual in other regimes in this country and it different from what exists in the U.S. The FTC or the DOJ — they have split jurisdiction in the U.S — can seek an ex parte order for an interim measure, just as they are able to do here. It can be challenged as it can be in this law.
If you examine the fairness aspect of proposed section 103.3, the party can challenge the order of the tribunal the minute after it has been issued. That has put a protective order up such that the party can come immediately before the tribunal and claim that the order should not have been issued. Thus, it is immediately reviewable by the tribunal — there is an immediate review possibility that is identical to the situation in the U.S. The order only lasts for 10 days as an ex parte order, which means that the commissioner then has to go on notice with evidence to support the extension of the order for two further periods of time.
Notice kicks in, and it is only a 10-day order. In the U.S., the DOJ can obtain a 10-day ex parte order, which means they go without the other side being present to get the initial order. That order can be challenged immediately and it only lasts for 10 days.
Ms Susan Hutton form the Chamber of Commerce said the main issue is that there is no appeal. Again, that is an absolute red herring. In an appeal, you have to obtain a stay of the order or the appeal is worthless when it is a 10-day order. I will give you the example: Let us say Air Canada has an order against it on day one and it cannot fly a certain route in a certain fashion so that a competitor is protected during the term of the order. If Air Canada immediately files an appeal, they will need a stay of that order, which means they can go ahead and do what they were going to do in the first place. If it is precipitous, then in that period of time the other competitor is harmed. If they do not obtain a stay, the appeal will take much longer than 10 days; it will take perhaps two years. In that case, they might just as well not have appealed because the 10-day order will have sat against them for the full two years. Hence, the stay issue is ultimately important to whether an appeal right should be given.
The second point is that the Competition Act does not give appeal rights for investigative orders as it is currently drafted. Even before the Competition Act came into effect in 1986, the Combines Investigation Act did not give appeal rights to investigative orders. We have section 11 orders under this act. That means an order can be issued to produce documents. Again, it is done ex parte — there is no notice to the other parties — so it is identical in that respect and the party can seek to challenge it on a limited basis. However, there is no appeal right, and that was argued in the Ontario Court of Appeal whether there should be, under principals of justice or any other grounds, an appeal right to the investigative orders under the act. They said ``no'' in a unanimous decision of the Ontario Court of Appeal in the case involving CP ships.
None of those things were brought to your attention. When people show up as lawyers at the bar and do not represent to you that these things have been decided, I become quite concerned that it will give you the wrong impression about the intent of proposed section 103.3. It is not unusual and, in fact, it codifies the procedure elements that already exist in other jurisdictions and which are necessary for investigations to occur under the act.
The fairness comes into immediate review for the parties. It avoids the problems with an injunction, and let us talk about that for a minute. Some have asked: Why not give the other party notice? The reason you give notice in litigation is that it gives the other party full answer to your application or your motion. That means they are able to file materials and cross-examine you on your materials.
We have another lawyer here and so you know there is nothing that I am saying that is unusual about the process. Try to get that done in 10 days. This is the pragmatic approach that I am talking about. A 10-day cease and desist order cannot have these elements or it is unworkable. You would end up with something that might as well not be in the legislation at all. It will not work if we do it as a full notice provision, as is found in the other injunction provisions in the act.
That is why it is drafted in such a way — identical to what we see in Europe and in the U.S. There is nothing unusual about this legislation whatsoever.
There were one or two other points that came up in the testimony that I reviewed: The registration of orders and the comments about the tribunal being a rubber stamp. Again, experience in our courts shows that settlements and consent agreements are signed by the registrar of the court all the time. There is nothing unusual about the procedure being put forward here. In competition law itself, undertakings are entered into between the parties all the time because you need a workable settlement process in order to achieve what is quite often a compromise. That is what a settlement is, so really, the act is simply taking a private undertaking in law today, which is used all the time in the competition bar between private parties and the commissioner, and ensuring that it is a registered order with the tribunal, giving the tribunal jurisdiction to vary it if necessary.
Thus, you are actually strengthening competition policy as it currently exists — you are not weakening it or bypassing the consent order process as has been suggested. That process will still exist. The Competition Commissioner has stated that one of his five touchstone principles is transparency. If a given case needs the ability for the public to intervene in the process, I am certain there will still be consideration given to a full consent order process, which will allow interveners to come before the tribunal to make their cases. Again, this is an additional mechanism to strengthen what is already done today.
There is another issue that I believe to be a problem. It was suggested that the adverse effects test that is being added to proposed section 75 is unusual because it is not the same as substantial or undue lessening, which can be found elsewhere in the act.
In support of that, Mr. Wong suggested that concerning the act, it was misplaced to talk about protecting competitors. Do you remember him saying that that is not what this act is about: it is not to protect the competitor, it is to protect competition? Again, that is not correct. Section 1 of the act not only protects competition for the consuming public in general but, as you will see that in the preamble, which is section 1 of this act, it is also to protect small and medium-sized businesses. Our act has a secondary objective, if you will. It is not just to be competition per se, but it is to allow the small and medium-sized business sectors to survive in this country. If you put substantial lessening into proposed section 75, you will take away its purpose.
There can be an instance where two large competitors are very vigorous competitors, but there is a refusal-to-deal situation occurring in that market to some small player. From a broad competition standpoint, it will not matter one iota, prices will stay low for consumers as long as the big companies are fiercely competing. Section 75 was intended to protect small and medium-sized businesses, and if you take the test up to substantial lessening you have basically gutted its protection for them. The reason that ``adverse effects'' were taken as language is they reflect what the Competition Tribunal said when it applied Section 75. A refusal to supply must have some adverse effect on competition for the act to apply. What is happening here is the codifying of an appropriate test while preserving the protection for small and medium-sized business.
It was important to put that to you because the perspective of trying to deal with the merger section that applies substantial lessening is a different provision in our act. It is a different test because it is solving a different purpose. Refusal to supply was initially brought in to protect small and medium-sized businesses. If we did change it today, such as using undue lessening as a test, or substantial lessening, you will have essentially eliminated that provision in terms of its effectiveness in our statute.
One of the other questions raised was why is there proposed section 104. (1) if we have proposed section 103.3? I cannot recall who raised that question. Why industry specific provisions?
First, I do not generally support industry specific provisions in the act, nor do many competition law professionals. However, we have a very unusual circumstance in the airline industry. I acted for Canadian airlines in the 1992 battle with Air Canada. They were trying to survive back then.
International air carriers have found Air Canada's international market share go from 80 per cent to 90 per cent over the last two years and have felt the effects, as well as the WestJets of the world and the others that have now disappeared. The problems of the airline industry require very specific measures. Why? Because the international community in this industry looks in horror at Canada. To attract foreign capital of any sort into Canada, we must show that we are prepared to take strong measures in this industry. That also applies to domestic capital, because people have little faith that the competition laws in Canada will protect a new entrant. The only way competition will return is to have new entrants in the markets and allow existing players like WestJet to be able to expand.
There must be a strong code of conduct. Two years ago, when the airline industry appeared before the Senate and the parliamentary committee, it was thought that a code of conduct was needed for the airline industry in Canada, to ensure that Air Canada, and the world, knew that the Canadian government was prepared to take very distinct steps.
Other questions were asked this morning about structure in this industry. As long as we have foreign ownership restrictions, we have limited foreign capital coming in. As long as foreign carriers are not allowed to do what is called ``cabotage'' in Canada, attempts to have any true form of cross-border competition in Canada will be limited.
Those are things that the competition commissioner said in his letter two years ago, that would be necessary for us to be able to restore competition in Canada.
All those issues are dear to my heart.
Senator Tkachuk: You said the purpose of the act was to ensure that small and medium-sized enterprises have an equitable opportunity. Does that mean that it is there to protect them? It gives them an equitable opportunity to participate. It does not talk about ensuring competition in the small business sector.
Mr. Russell: It is actually in section 1, the purpose section of the act. It is very clear this is the purpose of the act. I am not drawing it from another section.
The purpose of the act is not only to ensure that consumers have good prices — in very simple terms that is what competition policy is typically about — but also to give equal opportunity to small and medium-sized businesses. Economists do not particularly like that aspect of our act because that is not a true economic objective. A true economic objective would be to let the marketplace, whether it is big players or small players, do what it can to deliver the best price to consumers. That is pure competition policy.
There is no equivalent to section 1 in U.S. anti-trust law. That is why certain provisions like refusal-to-supply do not work the same way in the U.S. We adopted that approach to competition policy in Canada because we are a smaller country, with concentrated industries, and we wanted to ensure that small and medium-sized businesses have an opportunity. You have an economic policy beyond competition policy in the Competition Act. That is what section 75 is all about.
Senator Tkachuk: You mentioned earlier that you were a little uncomfortable with the fact that a specific industry was being used to justify the act through this piece. However, that has not been true in the past. Is this not the first time that one particular industry was targeted and placed into the Competition Act, as the airline industry has been in these amendments?
Mr. Russell: No. We used to talk about the Canadian Tire amendment to the act. It allowed Canadian Tire to make certain changes to its franchises that otherwise would offend the act. There was an exception that allowed the soft drink bottlers to do certain things. There is a history of pressing issues that arose that have evolved the act.
In Germany, there was much state ownership, much like in Canada at one time. There was a deregulation movement and many of their structured industries, such as electricity, rail and airlines, had structures built in place that tend to prevent new entry. That was a concern, so Germany brought in very specific provisions — such as essential facilities provisions — to cure those structured industry problems. We brought those in two years ago for the airline industry. Thus, competition law has evolved in our jurisdiction, and others, to face problem that we have.
We have an unprecedented problem in Canada because we are completely dependent on air travel for much of our travel. If this happened in Europe, rail and auto transportation would compete, but, except for the distance between Montreal and Toronto, there is no competition from other sectors in Canada. We are very vulnerable.
Monopoly groups are hurting us internationally in terms of business. I mean monopoly, not 90 per cent, when I say that. British Airways served 12 cities in this country with routes to London. It was eliminated from all but three as a result of this merger. There is now no competition from Calgary to London, England. The statistics have shown it has completely dried up. The irony was, in the very year that occurred we established a British trade office in Calgary to attempt to attract more British business into Calgary.
This has an enormous effect on our economy because we depend on it so much, so it requires special rules. It is not something we like to do as a pure competition policy matter. There is a problem and unless we are going to re-regulate — which I do not believe is the solution — we have to be able to rely on stronger competition laws to deal with the problems and encourage new entry by attracting foreign capital into Canada.
This is a cyclical industry and companies fail. It is not a risk-free industry to begin with, and people know that. Canadian airlines evolved from no less than 10 carriers in Canada. Where they were one, 10 before them folded over the years. We have had this continuing consolidation trend in Canada for the last 30 years. We must have stronger competition policy to prevent it from becoming a no-man's land for capital being directed towards the industry.
Are there other solutions? Only solutions that the government will need to pursue about foreign ownership and foreign carriers in Canada because they are the only other potentials right now. Except with new start-ups, it takes some time to compete. It is not a solution for business travel.
Senator Fitzpatrick: Mr. Russell, I have listened carefully to your testimony and appreciated some of the things you said.
Would you see a lessening requirement for proposed section 104.1 if airline policy, per se, were addressed? For example, would it be better if ownership requirements and the capital ceiling for cabotage became part of government policy? Would you still see that it was important to have an industry specific section to the act?
Mr. Russell: Until we would achieve a competitive market, I think it is necessary. There is a long history. Public documents in 1992 showed a scorch earth policy by Air Canada against Canadian. It was an internal document that became public. That document actually talked about the elimination of Canadian Airlines as a competitor.
We have a history of combative competition in this industry in Canada. Until we have competitive markets again, strong measures are required.
Senator Fitzpatrick: Are you saying that environment will persist until we have a policy that works and gets competition into the market?
Mr. Russell: Typically, the competition commissioner would not accept a 50 per cent market share or higher in most sectors. I heard the numbers this morning. I have some familiarity with the numbers. You were talking over 80 per cent domestic and 90 per cent international routes in Canada as being held by Air Canada. It is a long way before we will get back down to tolerable levels in terms of concentration in this industry.
Senator Meighen: Did I hear you advocating cabotage regardless of whether there is reciprocity?
Mr. Russell: No, I did not say that.
Senator Meighen: No, you did not say that, but you were speaking about cabotage. Would your position be in favour of cabotage but only if it were reciprocal?
Mr. Russell: As a competition lawyer, I do not care what the cost of cabotage is to a domestic carrier. However, as a citizen, I do care that Air Canada survives. I do care that it employ the people that it employs and that we have a domestic industry in Canada, which currently is mainly Air Canada.
I want to see them survive. Therefore, cabotage at any cost would not be a good public policy for Canada.
Senator Meighen: The commissioner says that he needs proposed section 104.1 because proposed section 103.3 is not quick and efficient. Are not there ex parte applications under proposed section 103.3? I am having trouble thinking of the commissioner being the judge and advocate rolled into one. There would be no requirement to go before an independent third party to justify his or her case. It bothers me as a lawyer.
Mr. Russell: I understand that. It is, from the standpoint that you put it, atypical that you have the advocate and judge in one person.
That is not dissimilar to what the commission does in Europe. In Europe, the commission is the commissioner plus the competition tribunal in one. They can issue their orders for interim orders as well.
When you examine the way our Competition Act was built, we tended to focus in the last decade or longer on the commissioner as a litigant as opposed to his full role. If you look at the act clearly, he has an administrative role up front. During investigations, he has an administrative discretion that must be exercised. There is an oath of office under section 7 that requires him to act appropriately and fairly under act. The old concept, you will recall, was persona designata. It does not exist very much any more but he is still one of those old creatures of statute that has that discretion.
At the investigative stage, I think it is important. It is important when we are in a difficult position in one industry, perhaps, to give that role. It should be exceptional. I agree with you. As a lawyer, I do not think that we should give that power lightly.
I do not think that we can say that proposed section 104.1 should disappear because 103.3 is proposed in Bill C-23. The only thing that I could say to you credibly is that the reason you would keep clause 104.1 is because we are in the crisis that we are in. We need those strong powers to be able to deal with the situations.
As we have seen, an airline can go out of business in days. I worked for three years on one of the commissioner's cases, and I was in the investigative stage. It is not easy to gather the evidence for these cases. I can tell you that it is a laborious process. Parties are prepared to expend millions on this litigation.
After the CP case was over, the president of the CP ships announced that he had spent over $10 million on his case. Those are the sorts of fees that some of these companies are prepared to pay in these battles.
You have to put it in context of the battle within which you are. Unless the government will give unlimited financial resources, you have to balance it by giving some strength to the administrative powers that the commissioner should have under the act.
Senator Kelleher: You heard Mr. Beddoe this morning give evidence that he felt that the 80-day period was deficient. Do you agree or disagree with that?
Mr. Russell: I have two parts to the answer. I agree with him that 80 days is not enough. However, in all due respect, he missed that 80 days is the investigative stage, which I stress to you. After 80 days, I think that the commissioner should be in a position to seek an injunction through 104. Through a different type of injunction, you can extend the period. Once you get a 104 injunction, it stays in place until the actual hearing of the application occurs before the tribunal. Therefore, the sequencing of this is to get the investigative interim measures order and then get enough evidence to put affidavits together.
The problem is that at the beginning, the commissioner has no evidence. He has nothing. The other party, for example, be it Air Canada, since we have been focusing on them, has all the information they need to try to avoid it because it is their business. They can say what the effects on their business will be.
The commissioner simply needs the time to do his investigation and put him in place to be able to do that and at the end of the 80 days, he can seek an injunction under proposed section 104.
The Chairman: He gets this without any evidence at all?
Mr. Russell: No, he has to put an affidavit forward saying he has a reasonable belief. I think that was understated in the testimony before this.
The Chairman: He puts forward his opinion?
Mr. Russell: He must say that he has a reasonable belief under his oath of office based on his seeing sufficient evidence to lead to that belief.
Senator Meighen: Are you saying that after 80 days he has to seek a more permanent order before the tribunal?
Mr. Russell: Yes, he would seek it before the tribunal, on notice under proposed 104. He would seek, in essence, an injunction.
Senator Kelleher: Why did not that happen in the case he complained to us about this morning?
Mr. Russell: I do not know. I am not involved in the case, so I do not know why that has not happened.
Here is one of the things that would have happened. Section 11 is the order that gets the documents from the parties to which I referred earlier. By the way, it has the same test; when you go for a section 11 order, the commissioner simply has to state under oath in an affidavit that he has reasonable belief that an offence has occurred. It is not a different test than that which has existed in the act for a decade.
The Chairman: He has to go somewhere to do it.
Mr. Russell: He does it the same way as he would under 103.3.
The Chairman: It is not the same as 104.
Mr. Russell: The proposed section 104.1 is, I acknowledge, an extraordinary provision for the airline industry. It went through on that basis at time two years ago as a code of conduct and a signal from the government that they would act quickly to eliminate the problem. That is why proposed section 104.1 exists in the bill in my view.
The Chairman: That may be, but those who are ex-lawyers are troubled by it, rightly or wrongly. We will hear many more witnesses.
Senator Meighen: Mr. Russell said he was troubled too.
Mr. Russell: No, I did not say that.
The Chairman: Thank you.
The committee adjourned.