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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 29 - Evidence


OTTAWA, Wednesday, February 20, 2002

The Standing Senate Committee on Banking, Trade and Commerce met this day at 3:50 p.m. to examine and report upon the present state of the domestic and international financial system; and to give consideration to Bill C-23, to amend the Competition Act and Competition Tribunal Act.

Senator E. Leo Kolber (Chairman) in the Chair.

[English]

The Chairman: Honourable senators, we have two topics to deal with this afternoon. The first is to examine and report upon the present state of the domestic and international financial systems on border issues. The witnesses from the Privy Council Office are Robert Fonberg and Phil Ventura.

Please proceed.

Mr. Robert Fonberg, Deputy Secretary to the Cabinet, Plans and Consultation, Privy Council Office: Honourable senators, Canada and the United States are each other's most important trading partners with close to $2 billion a day crossing our borders. Our bilateral trade relationship is the largest in the world, and our border is the busiest in the world. For example, annual two-way trade is nearly $700 billion. Eighty-five per cent of Canada's merchandise exports are destined for the United States. We are the number one export destination for 38 of the American states. Throughout the 1990s, trade between the two countries has grown at an unprecedented average rate of 11 per cent per annum.

Even prior to September 11, administration at our land border was having difficulty keeping up with the increased economic flow that was brought about by the signing of the Free Trade Agreement and NAFTA. The depth and the breadth of our economic relationship and what it has meant to us has been brought into sharp relief following the tragic events of September 11.

The immediate response to those threats was to focus exclusively on the question of national security. That had an immediate impact on the trade flow at the border. Industries on both sides of the border found their just-in-time deliveries, stuck and trucks in line-ups, sometimes kilometres long. This situation had an immediate impact on both sides of the border. The auto sector estimates that unexpected shutdowns due to the late arrival of parts can cost the industry as much as $25,000 per minute.

September 11 caused us all to reassess the security context in North America and these considerations dominated the agenda while issues surrounding economic security largely disappeared from view.

The need to get the bilateral economic security issues back on the agenda spurred the Prime Minister to appoint the then Foreign Affairs Minister, Mr. Manley to coordinate discussions with the United States concerning the management of the border. I was asked to support Mr. Manley in that role.

President Bush designated Governor Tom Ridge, the newly appointed director of Homeland Security to assume a similar role for the Americans. Our joint objective was to enhance our security to ensure the free flow of low-risk people and goods across the border.

We did not view public and economic security as competing objectives but as mutually reinforcing objectives and goals. Given the extraordinary level of border traffic it is neither possible nor desirable to conduct a full search of all goods or people transiting between our two countries; we need to focus our resources on the areas where we believe the problems exist, that is high-risk goods and people.

To separate low-risk and high-risk traffic flows we need good information and efficient intelligence. We need to concentrate our resources on the high-risk traffic while facilitating the movement of low-risk traffic.

When Governor Ridge visited Ottawa on December 11, 2001, the visit resulted in the signing of the Smart Border Declaration and the Action Plan for Creating a Secure and Smart Border.

The Smart Border Declaration restored the balance between economic and national security. The declaration states:

Our countries have a long history of cooperative border management. This tradition facilitated both countries' immediate responses to the attacks of September 11. It is the foundation on which we continue to base our cooperation, recognizing that our current and future prosperity and security depend on a border that operates efficiently and effectively under all circumstances.

The 30-point action plan is built on four pillars: promoting the secure flow of people, promoting the secure flow of goods, safeguarding our shared infrastructure, coordinating our actions, and sharing information. Since the signing of the action we have seen unprecedented and sustained engagement from the White House and the U.S. administration.

The Deputy Prime Minister and Governor Ridge last met in New York on February 2, 2002 to review the progress action plan.

The Smart Border Declaration recognizes that without the right security foundation, there is no basis for facilitating low-risk flows. There are four items that are particularly important to Canada from an economic perspective. The expansion of the NEXUS program is especially important to Canada. NEXUS is a pilot program for frequent travellers. It was temporarily halted following the events of September 11. It is a model for how we can facilitate the two-way flow of low-risk travellers with the use of a single, secure card. The Americans have come to view the NEXUS card an excellent model on which to build. We are now in discussions with the U.S to have the card not only restored but also expanded along the entire border.

We need harmonized commercial processing or a customs self-assessment type program. We need more effective measures to speed the flow of low-risk goods. The Canada Customs and Revenue Agency had been moving towards a customs self-assessment program that would streamline the flow of goods from companies while meeting rigorous security requirements. We believe that this is a model on which a bilateral program should be built.

We see the need for a joint examination of land pre-clearance options. In many locations it would be more efficient to clear goods before they arrive at the border or well after the goods have crossed the border. This would ease traffic congestion at the crossing.

The final item that is important to Canada is coordinated border infrastructure investment. It has been recognized that the effects of each of these initiatives can be amplified and improved by strategic infrastructure investments at the key border crossings; nearly 30 per cent of Canada's exports cross at the Windsor-Detroit border.

We are pleased with the progress that has resulted from our discussions. The bulk of the 30 items in the action plan will take some time to work through, but our aim is to see results for each of them by June. We have been using a coordinated approach involving all key ministers and departments in order to achieve the objectives of that plan.

Minister Martin met with Treasury Secretary Paul O'Neill on February 8, 2002. Secretary O'Neill is ultimately responsible for the U.S. Customs Agency and is committed to achieve success on the file. Ministers MacAulay, Graham, Caplan Coderre, and others are in regular contact with their American counterparts concerning their respective initiatives. We are keeping provinces and municipalities aware of and informed of our activities.

Deputy Prime Minister Manley and Governor Ridge bring a strong commitment to these discussions. They are in contact to ensure that progress is made and that the momentum is maintained.

It is widely recognized that it is in the best interests of both of our countries to deliver on the 30 points of the action plan. It is seen as a win-win situation. As the Deputy Prime Minister said recently,

Through the policy focus that emerged through this crisis, we have made greater and faster advances over the last few months than in some cases over the past five or fen years. The new border plan recognizes the mutually reinforcing nature of public and economic security and the importance of an efficient and effective border as an underpinning to this.

Senator Angus: We were interested to hear from the centre about what is being done because there is so much conflicting reporting in the media. We have had hearings on the economic consequences of September 11.

I am particularly interested in the shipping industry. We have not had any witnesses but we have had indirect representations made to us.

I am told, first of all, that the Americans have been holding information sessions and that Ambassador Celucci has been speaking with shippers and other transportation industry people to outline these measures.

Are you aware of the discussions and what comment do you have on the things that they are saying? I understand that they have had strong things to say that would not be in the best interests of Canadian operators.

Mr. Fonberg: I am not aware of the meetings that the ambassador is having. I assume that the issue is marine transit.

Senator Angus: I want to discuss container shipping. I am amazed that you are not aware that the U.S. has been holding these meetings here in Canada. The meetings have been open and a number of senators and members have been invited to attend.

Mr. Fonberg: I am not aware of the meetings. The marine transit issue is an important issue for both sides.

Senator Angus: A large amount of import traffic comes through Canada. Sixty-five per cent of all import container goods from Europe going to the U.S. travels through the St. Lawrence system by vessel and then by train or truck into the U.S. They go not only to the East Coast, but also the hinterland.

If these containers have to be stopped in transit, opened, scanned and de-stuffed, I am told that this procedure would bring the flow of trade to a standstill. Major operators in the field feel that if they have to have a spot check or otherwise, it would be best to do it at the place of destination.

You spoke about the real estate issues of land made available for clearance. I thought maybe under that heading you might have something to say on container traffic. Can you tell us what is going on?

Mr. Fonberg: A lot of the container traffic issues are outside of the narrow purview of the action plan. The two countries have certainly agreed that we need to be more effective in our inspections of the containers coming through the five key ports. I do not know the traffic statistics concerning containers but the numbers are considerable.

We have agreed to have joint container inspection units at the five main ports. It has been generally recognized that we probably do not know nearly as much about what is in these containers, as we ought to know.

We must to try to find ways to identify the risks well before they get to North America. The challenge then is to have the right kind of information and the right kind of intelligence to know what the high-risk containers are.

Our challenge, from an action plan perspective, is to try to move traffic. We should be able to look at the container once, clear it once and let it move from Halifax into Chicago or wherever it is going. That is opposed to having it opened and inspected but not pre-cleared in Halifax and having to be inspected again.

The challenge is to find a way to have those containers inspected and cleared just once. It is a challenge for both the U.S. and Canada and the containers that move in both directions.

Senator Angus: Do you support the option that that the containers come in by ship to Halifax and then move via truck or train across the border and then have the check done there rather than stopping in transit and opening and de- stuffing? That is ridiculous.

Mr. Fonberg: I think that the challenge is to only stop the container once. The question is: Can you do that at the port of arrival or do you do it somewhere else along the line?

The challenge for the North American trade flow is to do it once. How do you find a way to do that?

Senator Angus: We have resources being deployed on that issue?

Mr. Fonberg: That issue is being examined.

Senator Angus: In cooperation with the industry?.

Mr. Fonberg: In cooperation with the industry that includes container operators.

Senator Angus: Is there a facility if these operators need to explain their problems? I am told that there has been a revolution in the international shipment of goods; the days of break bulk cargo and ocean carriers are over. The vast majority of goods is carried in containers.

I am told that the containers are delivered empty to the warehouse of the original shippers. No personnel from the shipping line stays at the shippers' warehouse to check what goes into the containers. The containers are stuffed. A document is issued. They then phone the shipping company to pick up the container. It ends up on the ship and travels to Halifax. Nobody from the carrier side has ever seen the goods. It is said to contain 64 pallets of ladies' cashmere sweaters and yet it might contain what we found in Palermo, men in pinstriped suits in a travelling apartment. This gets your attention.

How do we address that problem?

Mr. Fonberg: I do not think it is different from how we try to address the secure flow of goods back and forth across the 49th parallel. You need to understand who the original manufacturer is and you need to make sure that person is secure. If you are not sure of that, you have to look inside the container. You need to understand who the shipper is because a shipper can play around with the contents.

We have to have security and intelligence on the factory floor and all the way up. We must know the shipper and follow the container until it arrives in Canada. That is the system that we are trying to build through this custom self- assessment model.

This model should be used globally as well. If you do not have the information and the intelligence to know who or what is potentially high-risk and if you do not know anything about the shipper you are going to have a closer look at the container. The challenge is to be able to identify those high-risk containers and track the container as it moves around the world.

You are right. There are thousands of these containers on the water all the time.

Senator Angus: What happens in the situation where the containers are then put onto trains or into trucks? Then there is the issue of the truck drivers. How is that situation being addressed?

The border gets tied up if they stop every truck driver and want to know how highly cleared he is and whether he has a record or a grandfather from the Middle East.

Mr. Fonberg: The customs self-assessment model that the Canada Customs and Revenue Agency has been developing, and which we are trying to get the Americans to buy into, would see that the driver be security-cleared. The program allows for low-risk traffic that would include the goods, the factory, the truck and the truck driver. All would be security-cleared to the point where we have a high degree of confidence in their low-risk status. We would not stop them at the border or if we did it would be for a 30-second interview.

I understand that most of the applicants for the customs self-assessment program have been trucking companies that are trying to get their drivers secured because this is their lifeblood. It is all about security-cleared traffic, people, goods and factories.

Senator Angus: I am not speaking for all my colleagues when I say what I am about to say. We are coming to the conclusion of the evidence we have heard in this set of hearings and one of the big effects of September 11 has been that it has brought focus onto the border. We have been trying to achieve that for some time. However, it was not high enough on the agenda of either Canada or the U.S., and there were not sufficient resources committed to it.

Even though security is the big issue being discussed here today, is one of the consequences of September 11 that it may lead to a speeding up of trade traffic between Canada and the U.S.?

Mr. Fonberg: Yes.

Senator Angus: That is an odd conclusion to have resulted from a terrible accident. We now must admit that the border issue had been neglected in the past.

Mr. Fonberg: Our view has been that the border had fallen behind before September 11. It had fallen behind as an administrative line that facilitated the growth of North American trade. The objective that Mr. Manley and Mr. Ridge set out was not to get the border back to the level of operational efficiency of September 10 but to get the border set up to deal with the growth in trade volumes that we expect to see over the next five to fifteen years.

Security is the foundation on which you build the facilitation and expedite the programs or administrative changes that you are talking about, senator.

Senator Banks: Two per cent to 3 per cent of the containers that cross the border on trucks and trains and those that come through ports are inspected. Are we correct in understanding that?

Mr. Fonberg: I do not dispute that number. However, I do not know what the exact number is.

Senator Banks: We have been given that information from other witnesses.

I am concerned with the establishment of safe shippers and truckers, et cetera. I am not talking about a truckload of hubcaps that is going from Windsor to Detroit, but about the kind of thing Senator Angus spoke of. I am concerned about a container that has been loaded in Potsdam, for example.

In order to establish what are low-risk shipments, is it not necessary that there be some kind of North American representation in Potsdam to verify that the container has been inspected, sealed and marked and is okay for transport. We cannot make that identification at Halifax, can we?

Mr. Fonberg: That is correct.

Senator Banks: Are we talking about that? Are we talking about projecting our assessment of what is safe and what is not to the major shipping ports in the world?

Mr. Fonberg: That would be the objective and the goal. That is where we will push again. It is a little bit outside the action plan. However, the discussions that have taken place between Mr. Manley and Mr. Ridge have gone into this area.

Everybody wants to be part of the inspection team in Rotterdam because containers leaving that port travel all over the world. It is not just a North American presence; it is a security presence to ensure that the items contained in the containers is not illegal or dangerous.

Yes, the objective is to go as close to the source as you possibly can. You are correct is saying that it does a lot more good to figure it out at the source than it does once it has reached New York, Halifax or Boston.

Senator Kroft: I would like to change my focus away from goods and go to the movement of people in airports. I presume that is issue is central to your program. You mentioned the NEXUS program that had been in place was suspended.

Did you say that you are hoping to have it started again or that it has been started again?

Mr. Fonberg: I apologize, senator. My notes should be corrected because I said we hoped to have it started again. In fact, it has been started up. The start-up was announced in December; it is a limited pilot project.

Senator Kroft: We live with the hope that September 11 triggered a realization to a better way to manage our borders. We are exploring new technology and investing more time and making more of a commitment than was there before the tragedy.

Can you give us some sort of an idea of how airports are operating and where the application of things like NEXUS or technology may come in? Can you tell us what the timeframe is for the major breakthroughs in terms of getting us out of the mess we are in now?

Mr. Fonberg: By way of background, NEXUS was the second generation of land border frequent traveller program that the two countries had previously run independently. At Windsor-Detroit the Americans had a program that allowed for frequent travel passes; we had a similar program. However a frequent traveller had to apply to the two different programs and had to have two different cards. The programs employed two different kinds of technology. NEXUS moves beyond that. It involves a single card for people going either way. It is still a pilot project.

There has been a lot of discussion about expanding the NEXUS pilot and learning from it. There has been a great deal of speculation about opening the project at the two key crossings in B.C. That is expected to occur within the next five or six months.

The Canada Customs and Revenue Agency has been working toward something called an EPS program, which stands for Expedited Passenger System. The EPS is essentially the airport version of NEXUS that will employ biometric technology. A frequent traveller will get security-clearance and use his card as identification. Then the traveller will have his iris scanned and be allowed to pass on to one further spot check and then on to the plane. Right now it is a one-way program. For frequent air travellers The CCRA is looking into this issue of frequent air travellers. We are trying to encourage the Americans to do the same.

It is my understanding that the Americans are starting to use frequent traveller cards at a number of airports. They are piloting biometric technology that allows frequent flyers to move about in American air space. The program does not apply to Canada.

Senator Kroft: Obviously, agreements between the two countries are required. However, what works domestically is not dramatically different from what happens cross-border.

Mr. Fonberg: The question is more in relation to the security, the screenings and the information that is needed to make the program work. For a while we will disagree on the kind of technology and the kind of biometrics, I suspect. However, the larger question will be around the nature of the security screening.

Senator Tkachuk: Last week, the Standing Senate Committee on Agriculture and Forestry was in the Maritime provinces. One of the concerns from the woodlot owners in New Brunswick is that a lot of trucks leaving Canada to go to the United States are carrying stolen wood. As the price of wood gets higher it has become profitable to move onto a Crown woodlot area, strip it, throw the lumber on a truck and haul it south.

This is becoming a serious issue in New Brunswick. Do the customs agencies on either side of the border detail the kinds of shipments that are moving over the borders?

Mr. Fonberg: I do not have specific information on sharing arrangements. However, on the security and enforcement side there area number of different kinds of sharing of information arrangements between immigration agencies and customs agencies. They are trying to deal with the same risk, whether it is coming from Canada and going to the United States or vice versa.

If there were an issue identified I assume that the proper information would be shared with the right authorities.

Senator Tkachuk: I do not know that. Would it be possible to ask whether it is being shared and to find out for us? You could send a reply to the clerk of the committee or to me directly.

Mr. Fonberg: Yes.

The Chairman: Thank you for being with us.

The second item today is to examine Bill C-23, to amend the Competition Act and the Competition Tribunal Act. The witnesses from the Competition Bureau are Konrad von Finckenstein and Suzanne Legault. From Industry Canada Legal Services, we have Louise Faille.

Senator Angus: I wish to make the following personal statement for inclusion in the official record of these hearings. It appears evident on the face of Bill C-23 that it is directed at least in part against Air Canada. I am a member of Air Canada's board of directors, and I wish to declare my interest in this regard.

I will not be attending or otherwise participating in any respect whatsoever in the hearings on Bill C-23. I have arranged with my party to replace me on this committee for the duration of the Bill C-23 hearings.

Mr. Konrad von Finckenstein, Commissioner, Competition Bureau: The proposed bill addresses six major areas of competition law: It deals with prohibiting deceptive price notices; enhancing mutual international assistance and several competition matters; improving the Competition Tribunal process; giving the Competition Tribunal the ability to issue interim orders; providing a limited right of private access to the Competition Tribunal and providing additional measures to protect competition in the Canadian airline industry.

I will go through each one of these areas in turn.

[Translation]

The first amendment deals with deceptive prizes notices. For example, we have warned Canadians many times against ``Scratch-and-Win'' promotions which are sent directly to their households.

The new offence will prohibit the sending of documents or notices that give the general impression a prize has been won, but require the recipient to incur costs which exceed the value of the prize itself. It also sets a ``code of conduct'' for businesses who wish to use this type of promotion for their commercial activities by ensuring that the information in the marketplace is accurate and adequate for consumers to make informed decisions. The proposed amendment will not impede on the legitimate practices of law-abiding enterprises.

I brought copies today of the draft enforcement guidelines to describe how this provision would play out in practice. With your permission I would like to table these.

[English]

The second amendment will enhance mutual international assistance in civil competition matters. Bill C-23 proposes to add a new section to the act that will allow the gathering of evidence for and from foreign jurisdictions with respect to civil competition matters.

A similar framework currently exists with respect to criminal matters under the Mutual Legal Assistance and Criminal Matters Act, but no such framework is available for civil competition matters. It will allow the Competition Bureau to obtain and consider the evidence it needs to ensure that enforcement decisions affecting competition in Canada are made in Canada.

The new Part III establishes the basic requirement of any treaty negotiated for that purpose. It will allow Canada to enter into treaties only with other countries that have substantially similar competition laws and legal standards as we have.

Once such a treaty is signed, the decision to act on a request for evidence from a foreign authority will rest with the Minister of Justice. The gathering process will take place under stringent judicial oversight.

As a result of stakeholder concerns, amendments were added to give voluntarily provided information confidentiality protection under the Competition Act along with the potential to waive such protection. Further, amendments were added to indicate that information already in the possession of the commissioner may be sent in response to a request under a treaty only pursuant to the procedure outlined in such treaty.

We have prepared a model treaty that reflects the obligations into which we would be entering. With permission, I would like to table them because they would illustrate how such treaties would operate.

The third area addressed by the bill is how to improve the Competition Tribunal process.

[Translation]

These amendments are about giving the tribunal the tools to manage its caseload so that its proceedings operate in a more efficient or business-like manner. With these amendments, the tribunal will award full costs against any party; hear and determine, by way of reference, questions of law, jurisdiction, practice or procedure; register consent agreements with no hearing necessary; hear and determine, on a motion from a party, an application in a summary way.

[English]

The fourth area deals with interim orders. The key to effective enforcement is speed. It is the ability to halt alleged anti-competitive conduct before irreparable harm is done to competition.

Under the current powers, we can only apply for an interim order from the Competition Tribunal during an inquiry in matters dealing with mergers and reviewable deceptive marketing practices. The proposed amendments would allow the tribunal to issue an interim order while the bureau is investigating a complaint pertaining to reviewable matters under section 8, such as abuse of dominant position.

Before it issues an order, the Competition Tribunal would have to find that the conduct is likely to cause injury to competition that cannot be remedied by the tribunal; that a person is likely to be eliminated as a competitor; or a person is likely to suffer a significant loss of revenue or market share or suffer some other harm that cannot be remedied by the tribunal.

[Translation]

During its review of Bill C-23, the House of Commons made two key changes to the bill. The first one provides for a limited right of private access to the Competition Tribunal. The second one provides for additional measures to protect competition in the Canadian airline industry.

Let me start with the limited right of private access. Private access has been a recurrent topic for discussion in previous legislative rounds. Many observers have argued in favour of broadening access to the Competition Tribunal for private parties. On the other hand, others have argued in favour of status quo, that the Commissioner of Competition should be the only person who can make an application for an order before the Competition Tribunal. It has been our long-held belief that a limited form of private access would complement the enforcement activities of the Bureau. The issue was thoroughly discussed during the Public Policy Forum consultations which preceded the introduction of Bill C-23 and during the Commons committee hearings.

Stakeholders in favour of private access indicated that the experience with private access in other jurisdictions, notably Australia, has shown that it yields many benefits by: establishing important precedents about competition law; allowing the competition enforcement authority to concentrate on cases raising public concern; making the competition legislation more effective and achieving greater compliance with the law; and demonstrating that private enforcement can be more suitable for businesses than public enforcement.

[English]

The prevailing argument against private access is the risk of possible strategic litigation. In light of the competing interests the government proposed a balanced solution that limits the number of anti-competitive conducts open to private action: the refusal to deal, tied selling, exclusive dealing, and market restrictions. It introduces stringent safeguards to lessen the risk of strategic litigation.

Those safeguards include that the tribunal will act as a gatekeeper. Only the tribunal will grant leave and only where it is satisfied that there is reason to believe the applicant is directly and substantially affected in its business by the alleged anti-competitive practices. A 15-day period will be provided during which submissions may be made in respect of applications for leave to provide respondents with adequate time to address the allegations against them in the leave application.

Cases cannot proceed if the Commissioner of Competition is on inquiry or has settled a matter. The tribunal cannot award damages to aggrieved parties. The tribunal can award full costs against any party in accordance with the Federal Court rules.

Cases must proceed within a year following the cessation of the conduct in question. An economic test has been added to section 75, the refusal to deal section, that requires the applicant prove an adverse effect on competition.

We believe that the amendments to the current proposal strike an appropriate balance and should be enacted.

[Translation]

The last area of amendments deals with the protection of competition in the airline industry. You will recall that amendments to the Competition Act for dealing with domestic airlines were first introduced as part of the restructuring of the Canadian airline industry, in the aftermath of the Air Canada/Canadian merger.

Those amendments permitted the enactment of regulations defining anti-competitive conduct as they apply to air carriers. They allowed the Commissioner of Competition to issue temporary orders when: firstly, he is investigating a complaint into alleged anti-competitive conduct under section 79 against the dominant airline; and secondly, he considers that in the absence of an order, the conduct will likely cause injury to competition that cannot be remedied by the tribunal; a person is likely to be eliminated as a competitor; or a person is likely to suffer a significant loss of revenue or market share, or suffer some other harm that cannot be remedied by the tribunal.

Following the coming into force of these amendments, the bureau enacted regulations and issued enforcement guidelines to inform the industry about the type of conduct that the bureau would likely challenge.

[English]

Bill C-23 now proposes additional measures to strengthen the Competition Act to deal with the challenges facing Canada's airline industry. The collapse of Canada 3000 and the likelihood of new start-up airlines make it especially important to protect competition in the airline industry.

Since the departure of CanJet, Royal, Roots, and Canada 3000, Air Canada now accounts for approximately 80 per cent of the domestic airline market. Coupled with the airline industry's unique characteristics, the proposed amendments will ensure that the rules set up under the act are followed.

What are the unique characteristics of the airline industry? They include competitive information that is available on computer reservation systems through the dominant airline and its competitors; the ease with which capacity can be redeployed; the mobility of assets; and the low variable cost structure of the airline industry.

The proposed amendment will grant the tribunal the authority to maintain a temporary order until the bureau has had sufficient time to receive and review the information needed to determine whether to make an application before the tribunal. In addition the amendment will provide the Competition Tribunal the authority, as an incentive to comply with the Competition Act, to impose an administrative monetary penalty of up to $15 million against an airline when a permanent order has been made under section 79, which deals with abuse of dominance under the Competition Act.

What is currently available to air carriers? Regulations defining what constitutes anti-competitive behaviour in the airline industry and enforcement guidelines on the abuse of dominance in the airline industry are available. The act as amended by this bill will provide for binding advisory opinions by the commissioner.

If the dominant airline still refuses to comply with the code of conduct established by the regulations and the guidelines and does not obtain an advisory opinion, then the tribunal could decide to impose an administrative monetary penalty. It is not an obligation; it is a discretion vested in the tribunal.

In the process of deciding whether or not to impose a penalty, the Competition Tribunal would look at different factors, such as the frequency and duration of the practice, the vulnerability of the class of persons affected; the injury to competition; the history of compliance with the Competition Act; and any other relevant factors.

[Translation]

Bill C-23 is a balanced package of amendments with strong support from a wide range of stakeholders. In our view, the bill before you will strengthen our competition law to the benefit of all Canadians.

[English]

Senator Kelleher: Page 10 states:

Cases cannot proceed if the Commissioner of Competition is on inquiry or has settled a matter.

Please explain that to me.

Mr. von Finckenstein: We will take as an example tied selling. If someone has complained to us, the person cannot at the same time go and ask the tribunal for leave to proceed on their own. We investigate and the perpetrator of the act will perhaps agree to settle. If they think their practice is anti-competitive, they may ask what they can do to change it. We will have an undertaking. In effect, the issue has been settled. The party cannot then come forward and start an action upon the same issue because in effect it has been concluded.

Senator Tkachuk: I believe the contentious part of the act to be the airline industry. There are a couple of other factors included with it as well.

You mention in your presentation that Air Canada now controls 80 per cent of the market in Canada. Previous to the merger of Canadian Airlines and Air Canada, what percentage of the market did Air Canada and Canadian Airlines control in this country?

Mr. von Finckenstein: The two airlines together?

Senator Tkachuk: Yes.

Mr. von Finckenstein: I do not have the figure but I could provide it for you. Presumably, it is pretty close to that which Air Canada controlled subsequent to the merger.

Senator Tkachuk: The same as it would control today?

Mr. von Finckenstein: A little bit less because there have been some exits from the market. Canada 3000 has exited. I do not know the percentage post-merger.

Senator Tkachuk: When Onex was attempting to purchase both Canadian Airlines and Air Canada, had they been successful they would have controlled 80 per cent of the market?

Mr. von Finckenstein: Or whatever the combined share of the two airlines was at the time.

Senator Tkachuk: With respect to the two airlines, Canadian Airlines and Air Canada, were you consulted in what I thought was deliberate government policy to have one person own both airlines? Were you consulted when that process started?

Mr. von Finckenstein: You will recall that the provision regarding airlines was suspended for 90 days. There is a provision under the Canadian Transportation Act that when the government believes there is an imminent breakdown of the Canadian transportation system or a part thereof, the government can suspend the Competition Act with regard to that part of the transportation system. That was invoked by an Order in Council. As a result, the commissioner was deprived of any function during those 90 days.

At the same time, the Minister of Transport wrote to me and asked me to provide him with advice on restructuring the Canadian airline industry in order to ensure a competitive outcome. I wrote the minister a 28-page letter, outlining various things that could be done to ensure that if such a merger took place, it would be as pro-competitive as possible. That was made public and is part of the record.

To a large extent, the things I advocated should be done were done. I also made suggestions regarding changes to the regulatory framework, which were not adopted.

Senator Tkachuk: Were some of the portions contained in this act part of that 28-page letter; for example, article 104, which deals with Air Canada?

Mr. von Finckenstein: We suggested that the Competition Act should be strengthened and that the power to issue temporary cease and desist orders should be vested in the commissioner so that he could intervene in cases of alleged anti-competitive conduct where a threshold case had been made out and where it had been established that the prerequisites were met. As a result, the conduct could be stopped while an investigation was undertaken in order to prevent somebody being driven out of business while the investigation is ongoing.

It was in Bill C-26, which amended both the Canadian Transportation Act and the Competition Act.

Senator Tkachuk: Were you also consulted when Air Canada and Canadian merged?

Mr. von Finckenstein: Yes. At that point in time, the 90-day suspension was over; therefore, the Competition Act and all of its provisions applied to the merger. We had to review the merger, which we approved. We then stated publicly that we approved it because we thought it was the lesser of two evils. Without it, clearly Canadian Airlines was going to fail. Canadian was technically bankrupt and was going out of business, and the assets of Canadian would have been picked up by Air Canada out of bankruptcy without any rules restricting anti-competitive behaviour.

We negotiated with Air Canada a series of concessions regarding airport slots and space at airports. We attempted to have them sell Canadian Regional Airlines, but there were no buyers for it. There were a whole series of concessions.

I stated I did not think the measures were sufficient, but it certainly ameliorated some of the anti-competitive effects of this merger. It was preferable to letting Canadian fail because of all the disruption it would cause, and then to see the assets wind up in the possession of Air Canada without any of the benefits that we negotiated at the time of the merger.

Senator Tkachuk: Would some of the benefits that you negotiated have meant increased costs to Air Canada as compared to their competition?

Mr. von Finckenstein: Air Canada enjoys a dominant position as a result of the merger. For instance, we insisted that some of the takeoff and landing slots in Toronto had to be returned to the airport and assigned to start-up airlines. There were provisions regarding frequent flier points, which is a good way to tie people to fly with your airline. Air Canada would have to make their frequent flier points available to start-up airlines so they could buy them and distribute them with their flights. As a result, customers would not become completely captive to Air Canada.

There were provisions regarding the sharing of counter space at airports. There were provisions regarding when Air Canada could start a discount airline, and we insisted on a delay of over a year to give others a chance to start. CanJet did start during that period.

There is a host of provisions, and they were very heavily negotiated. Air Canada tried to minimize some of the areas. If you were to ask the cost impact, you would have to ask Air Canada. I cannot tell you.

Senator Tkachuk: Obviously you were concerned with the possibility of a dominant air carrier where there were two before. One of the concerns was the health of one airline: Canadian Airlines. Was the agency concerned that the health of Air Canada would be threatened by the take-over of Canadian? Were you concerned about the extra responsibilities that they had to incur, not only in the contract that they had with Canadian Airlines but also the obligation that your agency was placing upon them?

Mr. von Finckenstein: I am charged with ensuring that we have a competitive system in Canada and that we maintain it. It is not part of my job to make business decisions for parties wishing to merge. They must decide whether they wish to merge and the costs of doing so. Many mergers that come before us and are approved fail later on. Mergers are a risky business. There are many factors that determine whether a merger is successful.

We approach it purely by determining the effect on competition and whether the merger will result in a substantial lessening of competition. That is the test the act specifies. In cases where it does impact upon competition, we try to lessen it or, in rare instances, we oppose it. In most cases we request a structural solution; in other words, a divestiture of a line of business or part of the business or sharing the business so that there is no impact on competition. However, the business judgment, as to whether to merge or not, whether to accept our conditions or not, is up to the parties. It is not our decision.

Senator Tkachuk: Your judgment was that Canadian Airlines would precipitate a situation where there would be no competition even though they may have been in trusteeship and perhaps sold to another entity. There were obviously some business decisions made in that case.

Mr. von Finckenstein: You are correct. There was no buyer for Canadian. The airline had searched high and low around the world. There were no members of One World Alliance that were willing to come to the rescue. Without the merger with Air Canada, in our view it was certain Canadian would fail and fail quickly. I do not believe that view is in doubt.

Senator Tkachuk: They were close to bankruptcy.

Mr. von Finckenstein: They were out of cash, their bookings were falling off, and there were huge debts coming due.

If Canadian had failed, if they went into bankruptcy, what would happen then? It was our assessment, and obviously you may question it, that if they had failed, most of the assets would have been bought by Air Canada at fire-sale prices, and Air Canada would have the same dominance they have now without any of the concessions that we negotiated from them which have mitigated against their dominance or have given a chance to others to enter into the market or to compete with them.

Senator Tkachuk: Is it possible they may have been a healthier airline if they had picked up a bankrupt company and therefore maybe not have started Tango and other low-cost carriers?

Mr. von Finckenstein: It was their choice to put it into bankruptcy. Canadian was acquired through a numbered company, and then Air Canada negotiated with the lenders. At that point in time there was nothing stopping Air Canada from letting Canadian fail. We did not force them to merge. It was their decision.

I understand it was driven to a large extent by the tax benefits of that merger. There was tax losses of close to $600 million that Canadian had accumulated and Air Canada inherited through a merger that would have been lost had they picked up the assets in bankruptcy. Air Canada took the position that it was better to merge than to let Canadian fail. Again, those decisions were not made by us and I only know these things by deduction. You should ask Air Canada those questions.

Senator Tkachuk: The brief says that the portion of the bill that deals with Air Canada and the $15 million is the result of a number of private members' bills becoming part of the government bill, which was sponsored in the Senate by Senator Poulin.

Were you consulted by the members of Parliament or did they suggest these amendments on their own? How did these amendments come to be? They are rather complex and have tremendous ramifications. How did they end in this act rather than the Transportation Act, for example?

Mr. von Finckenstein: To clarify, these are all government amendments. They are not amendments proposed by private members. They were introduced at the end of the second reading stage by the government and adopted. They did, however, especially the private access part, result from testimony before the committee. There was all-party consent that private access would be beneficial and should be added to the bill. There were hearings in the fall on the issue of private access on the basis of a previous private member's bill and a draft amendment which was drafted by a member of the House of Commons, which is essentially what you have before you but in a less complicated form because various interactions of sections and so on had to be considered.

The government drafted and introduced these amendments on both private access and in the area of dealing with a dominant airline. Yes, we were consulted. We fully support the amendments to deal with the dominant air carrier. They are deterrent sections. There should be no need to award an administrative monetary penalty to Air Canada. Air Canada now knows the rules of the game. Basically, you can price but you cannot price below avoidable costs. Those are the tests we set out in the regulations and they were further amplified by guidelines we have issued. They have the ability to ask us for written opinions if there is any question as to whether the prospective activity will be in violation. If they still proceed and they are told by the tribunal to cease and desist certain activities, then that is fine. If they engage in conduct that they knew well beforehand is in violation of the act and the rules, the tribunal, as a deterrent, has the ability to award these administrative monetary penalties against them, always taking into account the factors set out in the act. The factors are: the frequency and duration of the practice; the vulnerability of the class of persons affected; the injury to competition; the history of compliance with the act by this entity; and any other relevant factors.

The court will obviously look at this carefully in deciding whether it is a case in which they should award such an AMP as a deterrent or whether it is a case of difference of opinion and it was all right for Air Canada to engage in the practice because it was questionable whether it was in violation of the act or not.

[Translation]

Senator Hervieux-Payette: From what I understood of your answer to my colleague, you have participated in and been closely involved in the drafting of this bill which comes from different sources. In order to clarify certain terms and legal practices, on pages 3, 14 and 15 of the French version of your brief, you refer to regulations and guidelines. You also mention the issue that has just been raised, the code of conduct set out in the regulation and the guidelines.

Could you please explain the distinction that you make between a regulation and a guideline, and what the scope of each would be? When the issue is a regulation, in general, you can appear before the tribunal and have it enforced, and it may be studied on the basis of its compliance with the law, but guidelines are much more vague. Could you please tell me what your expertise is in this area that allows you to define the guidelines that would apply to this industry, who will draw them up, who will review them and how you will establish them?

[English]

Mr. von Finckenstein: The regulations are made pursuant to the act. The act gives the Governor in Council the power to make regulations. The Governor in Council has done so and has passed a regulation defining what is anti- competitive conduct in the airline industry. That regulation states that if you are the dominant carrier, you cannot price your product below avoidable costs.

On top of that, the bureau has issued a guideline saying that this is how we interpret the regulation and this is how it is to be applied in practice. We issued that for the aid and benefit of the airlines so that they know how we interpret the act. We do that with most other sections of the act as well because the act and its regulations are written in generally vague terms. It uses such words as ``substantial lessening of competition'' and ``undue lessening of competition.'' What do these words mean? This is our interpretation and if we take a case to court, this is the position that we will advance.

Of course, the court can say that our interpretation is wrong, but until such time as we are before a court and the court says otherwise, this is the position we will take. We issue that in order to help the industry. I assume that people are in business to make money, not to engage in lawsuits.

These are the rules and this is how we interpret them. If you have a different interpretation, you will find yourself in court. If you do not want to be in court, follow these rules and our interpretation of them.

[Translation]

Senator Hervieux-Payette: I refer you to page 11 of your brief, to the second last paragraph where we see ``after the Air Canada/Canadian merger'' concerning the issue of amending the Competition Act. My colleague started to study this issue. We are all aware that when someone suffers damages, they can ask for an injunction. We could have had a provision that would allow not only the airline companies, but all businesses or industries in Canada who inflict irreparable damage to a competitor, to obtain an injunction based on certain rules.

How was the decision made to enforce the Competition Act — the Competition Tribunal — versus civil courts or the Canadian Transportation Agency, which has expertise in the transport field?

Mr. von Finckenstein: The only way that a case can be brought before the Competition Tribunal is through the commissioner. He has a monopoly on this. These are not issues that can be brought before a regular court or before the Transportation Commission.

Senator Hervieux-Payette: But if we look at a parallel area, in the past, we had the Railway Act which was responsible even for telecommunications, and there were two sections of the law. We functioned under a monopoly called Bell Canada for years, which was governed by transport legislation. People conferred, and you were able to protect the public.

So why would the Canadian Transportation Agency not have the necessary jurisdiction, as we are dealing with the transport sector? When we are discussing air transport, there are competitors that are also in the railway, sea and land transport sectors. They are also competitors and we are not only discussing airline companies. Therefore, with all of these components, the expertise comes back to the Canadian Transportation Agency?

Mr. von Finckenstein: In short, the Canadian Transportation Agency can resolve disputes according to its mandate. But if there are complaints against the abuse of dominance, under section 79, there is only one court that has jurisdiction, and that is the Competition Tribunal. The commissioner is the only one who can launch a proceeding against, in this case, Air Canada, under section 79, before the Competition Tribunal.

Senator Hervieux-Payette: Therefore, if I follow your logic, you are involved in the drafting of this bill and you are the duly appointed tribunal. Can you explain to me why all of the other industries would not be subject to the same regulations and provisions? We have even seen colleagues, who were ministers, who gave their opinions on the sugar issue and who lost their seat at the cabinet table. There are other sectors where competition is not necessarily significant — salt comes to mind because I worked in that area as well. I am wondering why an industry or a piece of legislation or a Parliament would intervene only in one sector? Are we to draft legislation every time we have to deal with an issue that affects one industry in particular?

[English]

Mr. von Finckenstein: The short answer is that we have a crisis in the airline industry. We also have an industry that has assets that are exceedingly mobile. As I mentioned in my remarks, the anti-competitive behaviour can be relatively easily engaged in. Clause 79 applies to all provisions, the abuse of dominance. However, the new amendments that deal with administrative monetary penalties in effect only apply to the airline industry. That was a government decision.

Senator Banks: I am hopeful that there will be competition in the Canadian airline industry. I think competition is good for every industry. However, I am concerned about the way in which we appear to be going about getting competition. This is a long-term concern of mine, which I can explain by telling you that, decades ago, I used to be involved heavily in the advertising business and one of my clients was Canada Safeway. Food is essential, as is air travel.

Canada Safeway became dominant in its market to the point it was deemed by law that it had to be restricted. That offended me because the dominance was obtained by being really good at what they did. It arrived at a point at which it became dangerous. The means by which that restriction was achieved was an act of the provincial legislature.

You said that Air Canada enjoys a dominant position as a result of the merger. It is also the case, is it not, that Air Canada enjoyed a dominant position before the merger? Among the airlines, were they the dominant airline?

Mr. von Finckenstein: Not really. They were the largest but they were not dominant.

Senator Banks: What is the difference between largest and dominant?

Mr. von Finckenstein: There was Canadian Airlines and Air Canada. They both had a large share of the market. Dominant is when a company can dictate prices and can force its competitors to follow its lead. That was not the case when we had Canadian Airlines and Air Canada competing on most routes.

I believe there is a misunderstanding. We are not against success. If someone obtains a dominant position in the market through the natural course of being super competitive that is fine. The problem comes when they use anti- competitive measures in order to gain dominance. That is when we step in.

If someone enters the market and is successful and as a result becomes a big player, that is fine. Wal-Mart is a huge retailer in the States and is now becoming a major player in Canada; I am not aware there has been any anti-trust, as the Americans call it, or competition complaint against Wal-Mart. The way they grew has not, to my knowledge, ever been held to be anti-competitive. There have been no allegations of that.

However, when you use your might, your dominance, in order to push others around, to engage in anti-competitive conduct, force them to buy products they do not want or squeeze them out of markets and then raise shares in that market once they have gone, yes, that is when we will step in.

Senator Banks: I agree those things are reprehensible, but does that mean too that if airline A chases, by methods which in your view are okay, all of the other airlines or all of the seriously competitive big airlines out of the business, you would not then intervene?

Mr. von Finckenstein: You are absolutely right. If they do not engage in anti-competitive conduct we would not intervene. We would have no grounds to intervene.

Senator Banks: Would that be the case notwithstanding the fact that there would not then be competition?

Mr. von Finckenstein: That is not my job. My job is to make sure that there is a competitive system and to ensure that people play by the rules. If they play by the rules and as a result of that one company completely dominates and the others go out of business, then the government will have to look at the regulatory framework, the structure, and decide what they want to do. It is not something that could be dealt with using the powers under the Competition Act.

Senator Banks: You have the job, among other things, of determining whether an aggressive business practice crosses over a line and becomes unacceptable, in your view, and there are guidelines that determine that. Could you tell us what those guidelines are?

Mr. von Finckenstein: One of the most difficult parts of the act is to draw the distinction between vigorous competitive conduct and anti-competitive conduct. One is okay; the other is not.

In the airline industry, we have gone one step further. The government has actually issued a regulation saying that the following constitutes anti-competitive conduct. One of those factors is offering your product below avoidable costs. If a product is priced at less than avoidable costs, which is your total cost minus your non-sunk portion of your fixed overhead costs, this serves as the bright line. If a company is dominant it must price its product above that. If the price is below then the company really has no business reason to do it except to drive another company out of business and we come after them.

We are involved in a dispute with Air Canada right now as to how you calculate your avoidable costs and what goes into the category. However, the rule is clear that there are avoidable costs and the legislation says that. As long as Air Canada provides its product above avoidable costs the Competition Bureau has no reason to go after them. Their position is, and you will hear from them, that they also have the right to match; in other words, if a company enters into the business and has extremely low costs they are entitled to match that price. We dispute that. We say no. The price of dominance is that you live by the rules set out in the act and the rule says you cannot go below avoidable costs.

Senator Banks: In the end, making those determinations fall within the purview of the commissioner.

Mr. von Finckenstein: Only the determination to challenge falls within the purview of the commissioner. The tribunal makes the final decision.

Senator Banks: In the process of challenge, could you, for a maximum of 80 days direct that something be done by that dominant airline?

Mr. von Finckenstein: Not quite. When we have a complaint, we call an inquiry and look at the evidence. If the commissioner considers that in the absence of a temporary order injury to competition that cannot adequately be remedied by the tribunal is likely to occur and the person is likely to be eliminated as a competitor or suffer significant loss of market share, revenue or other harm that cannot be remedied, I can issue an order for up to 80 days instructing a party to not do this particular activity.

Now, needless to say I could be challenged on that, and I will have to prove in a court that in effect all of these things are true.

The Chairman: Could you clarify that? Why would you be challenged in a court? In the way some of us read this, you do not have to ask a court if you can issue the order.

Mr. von Finckenstein: I can issue the order but Air Canada will appeal the order as they did last time before the Competition Tribunal. They will make the statement that I do not have the grounds to make that order. The grounds set out in the act that someone is likely to be eliminated do not exist. They will challenge the very fact that I made the order and the tribunal has the power to nix the order if they feel I had no reason to make the order.

The act sets out the test. If an allegation is made we do an initial investigation, and on the basis of the investigation of the data that has been given to us, we can issue an order. The very next moment Air Canada gets that order.

We have only issued it once, since we had that power. We said certain flights between Halifax and Montreal and Halifax and Ottawa were below avoidable costs, and Air Canada should stop issuing that particular flight at that particular price. They could fly everything but they could not price them as low as they did.

The very next day after we made the order, Air Canada filed in the Competition Tribunal and argued that we had no grounds to make that order. They also filed a constitutional challenge that giving that power to the commissioner was in excess of jurisdiction. They lost on both of those charges, but they did challenge it.

The Chairman: Is there any other way in Canadian law for someone to issue an injunction without going to a judge?

Mr. von Finckenstein: We did some research into this question, and this kind of power to issue exists in other laws. My colleague was just in the process of looking at that.

There are provisions in the Aeronautics Act, the Food and Drugs Act, the Firearms Act and the Customs Act. Each time the person, who is vested with the power similar to the commissioner's, can be challenged before a court and a court can reverse a decision if they feel it is unfounded.

It is a decision that must be very well based, and you must be able to prove that indeed you have met the requirements of the act.

The Chairman: If you have section 103, why do you need section 104?

Mr. von Finckenstein: Section 103.3 is for all industries; section 104.1 is for the airline industry. The airline industry is a very special case because of the situation that we are facing and because of the high mobility of assets and the ability to shift the assets. Airline pricing is constantly in flux. Without a very quick response mechanism we do not feel we have the necessary power to deter anti-competitive behaviour.

Senator Hervieux-Payette: You talk about the mobility of assets. I always see planes, so it is quite clear for me that it is a mobile industry.

I have always had the impression that the airlines were never buying any planes. The planes may be mobile but they do not belong to the airlines, so they are more on a leasing arrangement.

Mr. von Finckenstein: Whether you buy them or lease them, you still fly the flight from Ottawa to Halifax. You can change that flight and use the same plane to fly from Ottawa to St. John's or Ottawa to Toronto wherever the traffic will be higher. You can you shift your airplanes and your crews. If you want more details, I have my expert. I can ask him to give more explanation on this issue.

The Chairman: The answer does not sound right.

Mr. David McAllister, Senior Competition Law Officer, Civil Matters Branch, Competition Bureau: The concept of the mobility of assets is that typically entry by a small competitor will occur on a small number of routes, city pair routes, where that new entrant will start to offer service and a dominant airline that has a large fleet can quickly deploy either a larger aircraft on that route or additional aircraft and additional flights in order to add capacity within a matter of hours. That is the concept of mobility of assets.

It is very easy for the large carrier to target the small carrier on any city pair route by moving its assets. As the commissioner mentioned earlier, you pair this with the other factor of the transparency of pricing in the industry, because of the way airline tickets are priced, the dominant airline knows the lowest price of its competitor so it can meet or undercut that price.

The Chairman: How long does it take to go to the tribunal under section 103?

Mr. von Finckenstein: It depends on how long it takes you to get the necessary documents prepared. You need a hearing with the tribunal. The tribunal needs to be convinced of your application to issue an ex parte order. After a few days' return there will be a decision on that ex parte order.

It is clearly not quick and efficient. For that reason, we need a different provision for airlines than for all other industries.

The Chairman: I have to tell you, speaking only for myself;I am scared by the provision.

Mr. von Finckenstein: To reassure you, I can only say that I issued guidelines on how we would exercise them. This provision has been there for two years and we have used it only once. We received a complaint from CanJet in early October 2002 and we issued the order about 45 days later after the investigation.

I am fully aware that this is a very large power and it must be exercised with prudence. I am also aware that it can do damage to Air Canada. Therefore, when we issued an order we specified specific flights with specific prices that they could not offer.

It was very targeted and very limited. I do not think it caused any significant economic harm to Air Canada. The case is still ongoing but based on our investigation we felt very clearly that we had to intervene.

Senator Banks: Commissioner, do I understand correctly that the order to which you referred was an order to stop doing something?

Mr. von Finckenstein: Yes.

Senator Banks: It is also the case that under section 104 you can issue an order requiring an airline to do something?

Mr. von Finckenstein: I can only issue negative orders. I can only tell them not to do something that is anti- competitive. In this case, we told them that the fares they offered were below avoidable costs, and that they could not do that.

Senator Banks: Can the tribunal issue an order requiring something positive to be done?

Mr. von Finckenstein: Yes, it can, but it is very rare because the tribunal does not want to get into the act of monitoring. They will do it where the order has no ongoing effect. Generally, the orders of the tribunal are of a negative nature. They can give positive orders.

Senator Banks: Are the powers of instruction that you have about the same as the powers that the tribunal has?

Mr. von Finckenstein: No. First, they are limited to 80 days. They can make it infinite.

Senator Banks: I am only talking about initially, to get something started.

Mr. von Finckenstein: All I can say is that we want the ability to get the necessary information to determine whether to go before the tribunal and ask for a permanent order. It may be as a result of a complainant coming forward and making out a case. We issue the order. We then investigate. Air Canada gives us other information. If we come to the conclusion that the conduct is not anti-competitive we do not do anything.

The Chairman: The section suggests that the person is required to take the steps that the commissioner considers necessary. It does indicate whether that is negative or positive, but what you consider necessary to prevent injury to competition or harm to another person.

Mr. von Finckenstein: I find it hard to see that as a positive step. We are talking about 80 days. The objective is to stop anti-competitive harm. Presumably it is written that way because you have to advertise the fact.

The Chairman: You have been with this for a long time. I am not arguing with you. We are trying to understand it.

Mr. von Finckenstein: I am trying to explain the context. When we tell them not to offer flights at certain prices we could go further and make them advertise the fact that they are no longer offering the flight at that price. That is the positive part of it. It would have to be tied into the negative one. What you are trying to do is prevent behaviour, not to give the commissioner powers to run an airline. That is not the issue here.

Senator Kroft: Many of us are uneasy about this legislation for a number of reasons. One of them is that the specificity of the singling out of a single industry raises the question of whether or not this legislation is really as much about developing a transportation policy as it is about competition.

You have responded by denying two things. You have said that airline industry is unique in its ability to quickly change prices and the mobility of its assets. They can move to another route and do a number of things that make that industry special. You have also said that as long as Air Canada acts consistently and does not offend your idea of inappropriate competition even if they achieve 100 per cent of the market that would not be concern you.

Mr. von Finckenstein: I do not think I have any such power under the Competition Act.

Senator Kroft: You have been clear on that. You have answered the question of singling out the airline industry by saying it has special characteristics and that market share is not your concern as long as it is properly earned.

Having heard you say all that, I think about the number of other industries that I could look to that each had their own characteristics. Senator Banks referred to Safeway. If you go down the line with the large supermarkets, you would get a non-mobility argument. You would say that their power in the market is because a competitor cannot take a supermarket out of Saskatchewan and move it to Alberta. The capital cost is such that once someone achieves dominance, nobody else can move into an area, so immobility of assets gives market power. You can say that railways have market power because the people who build the factories or dig the mines along the railways are captives of the railways because they cannot move the mines or factories. They are locked into a particular rail. You cannot put a potash mine somewhere where there is no potash.

You could make a case that almost every major industry, or many that have massive economic influence, has huge numbers of special features that require special cases. Therefore, I am left unsatisfied by the argument that this one particular industry, which has been a troubled one and which Canadians care about deeply, seems to be loaded with all this legislated power. You are not taking away the former powers that were there but are adding.

It is not unnatural that we are left with discomfort that the objective is somehow to govern this industry in a way that goes beyond the benign explanation that you have given.

Mr. von Finckenstein: First, section 104.1 really is not before you. It already is law. It has been enacted. What is before you is a slight amendment to it to deal with the gap filling. I can now issue an order up to a maximum of 80 days. If, at the end of those 80 days, the information has not been given to us, in this case Air Canada, and that information is vital for us to make the determination, then we can go before the tribunal and ask for an extension until such time as we get that vital information. We have to convince the tribunal that that information is vital and has not been furnished and is in the possession of Air Canada and that we need it. That is the only part before you of 104.1, this tiny amendment closing the potential gap. Why? Because we ran into exactly that problem the only time we ever issued an order. The 80 days expired, and we still did not have the information from Air Canada. Now, to Air Canada's credit, they did not re-institute those prices that were in dispute, but they could have. This legislation now gives us the additional power to go before a tribunal and ask for that order. That is the only part before you. A decision was made earlier to give the commissioner this power.

Second, you must understand that what we are trying to do is not to protect the competitors of Air Canada. That is not our job. Very many of them will enter the market. Many of them will fail for all sorts of reasons that have absolutely nothing to do with Air Canada. It might be a lack of financing, their marketing plan, their route structure or whatever. The only thing we are concerned about is anti-competitive behaviour.

The mere fact that Air Canada has market power is not a problem. The problem is whether it abuses that market power or if there is an abuse of dominance. In order to make clear what we mean by that, we defined anti-competitive behaviour in the airline industry. We have not done it for any other industry, but we did it here, and we could issue a guideline because the government feels and we feel that a healthy aviation industry is vital to the prosperity of the country. We have chosen not to regulate the airline industry but to have a competitive airline industry, but we have to make sure that there are fair conditions in that market and that people can compete.

Given the mobility of assets, and I can only say that because of the ability to change flights, one has to react quickly. That is why that power has been vested in us. All we are asking for in this legislation is that this existing power be augmented by this gap filling that I mentioned, so that in those cases where the information is not rendered, we have the ability to ask the tribunal to extend the time we have available.

Senator Hervieux-Payette: How many other countries have provisions such as those for dealing with competition?

Mr. von Finckenstein: What do you mean by ``provisions such as those''?

Senator Hervieux-Payette: I mean what we are discussing, given the powers that you have. There are so many countries where there is only one airline, and I just want to know if we are unique.

Mr. von Finckenstein: We are not unique. It is hard to compare legislation from country to country. Countries have different judicial systems and different procedures. For instance, if you are talking about temporary cease and desist orders, there are such powers in the EU Commission. It has powers of that nature. Under certain circumstances in the U.S., they can go to court to get such orders.

Ms Suzanne Legault, Assistant Deputy Commissioner of Competition, Legislative Affairs Division, Competition Bureau: There are various provisions in the EU and the United States. The FTC has the power to obtain a restraining order, which is a preliminary injunction; that is in emergency situations. In the EU there are some provisions, and in that case, the commission makes the decision and adjudicates. They have the powers to issue temporary orders.

There are variations in many different jurisdictions because of the different regimes. Nonetheless, there are other such temporary powers.

Mr. von Finckenstein: As I mentioned before, there are other pieces of Canadian legislation where power is vested in a body.

Senator Hervieux-Payette: I am aware of that.

Senator Tkachuk: Like Senator Banks I also want to see a healthy airline industry in this country and a good deal of competition. In Western Canada, we have WestJet. I do not want to see predatory pricing put a small airline in trouble and then have to face higher costs later.

I did not quite understand why the Air Canada/Canadian fiasco happened in the first place. I would have liked to have seen Canadian go bankrupt and let whoever wants to pick up the parts go from there.

When you are trying to enforce this act, what is your understanding of the airline policy of the Government of Canada?

Mr. von Finckenstein: I believe that within the constraints of the Canadian Transportation Act, the Government of Canada would like to see a competitive airline industry. We have put several restraints on it, as you know. We do not allow foreign ownership of airlines, which is probably one of the biggest restraints. We do not allow foreign airlines to fly into Canada and pick up passengers and fly them from one point of Canada to another, and so on.

There is a regulatory framework that puts all sorts of restrictions on what an airline may or may not do. Generally, the Government of Canada has decided that the Canadian airline industry should be a competitive one and is trying to foster it. We have seen an agglomeration of airlines, in effect, the merger of the two large ones and the failure of many small ones. To the extent that that is the outcome of the natural competitive forces in the marketplace, that is fine.

WestJet is an example that small airlines can prosper. It is doing well. You must have a good business plan and sound financing, and you must have your niche.

By the same token, the company that has a dominant share can abuse it. Apart from the general airline policy of the Government of Canada, we are trying, through the Competition Act, to ensure that the dominant airline plays by the rules and does not use its dominance in an anti-competitive way.

Senator Tkachuk: What would happen if a dominant airline such as Air Canada were close to bankruptcy?

Mr. von Finckenstein: If Air Canada went into bankruptcy, a receiver would be appointed and the airline would probably be restructured in bankruptcy. In the interim, it would be run under receivership. We have seen that happen in other jurisdictions. Airlines have been restructured through bankruptcy. Several of them in the United States have been restructured successfully, and, of course, some of them unsuccessfully.

Senator Tkachuk: We face this sort of issue in the banking business. They are too big to fail. I already know what the Government of Canada's transportation policy is in regard to airlines because it did not want to let Canadian go bankrupt. It wanted to find a buyer for Air Canada/Canadian, and it was willing to impose an 80 per cent dominant market share to save Canadian because the government it did not want Canadian to go bankrupt.

There is now a dominant player in the marketplace that controls 80 per cent of the business. The government's position, as stated in its previous policy, is that it does not want to have Air Canada go bankrupt because that would allow Air Canada to have a dominant position. However, with Air Canada now controlling 80 per cent of the market, will the government not have to come in and subsidize the airline to keep it going or else take out some of its creditors to release its debt load for it to function properly?

Mr. von Finckenstein: I do not see the link you are making between dominance and bankruptcy. Just because you are dominant does not mean you cannot be bankrupt and be restructured.

Senator Tkachuk: That was my point.

Mr. von Finckenstein: I cannot explain to you why the government did what it did with Canadian. I can only tell you where we are right now.

Senator Tkachuk: If the government did subsidize the dominant player, would that be unfair competition as far as WestJet and the other airlines are concerned?

Mr. von Finckenstein: I am sure they would feel that was so. If the government decides to do so and gives itself the legislative power to subsidize Air Canada, it would be overriding the Competition Act, and I would have nothing to do with it. That is a decision of government policy.

I can tell you only what my policy is as administrator of this act and how I would enforce it under the present circumstances.

Senator Tkachuk: Let us continue with some of the provisions of the act. The commissioner may impose a cease and desist order. Therefore, as you stated earlier, the air carrier's activities would be shut down for a period of time on a particular line, or whatever it was you decided. You also can get an extension now past the 80 days. What if, at the end of it, it is found innocent of those earlier allegations, as you stated? Would it be compensated for the damages?

Mr. von Finckenstein: This is an exercise of power. I do not think there is any way for damages unless one could prove malicious use, or maybe construe a tort. This is a power vested in the commissioner. Obviously, it has to be exercised prudently and according to the very strict conditions that are set out in the act. As I say, it is reviewable by a court and will undoubtedly be challenged every time it is exercised.

Senator Tkachuk: If the allegations were found to be not true, then there is no compensation whatsoever, either from the airline or group making the accusation or the Government of Canada? Therefore, the only one who pays is the person who has to shut the airline down, whether it is WestJet or Air Canada.

Mr. von Finckenstein: It is the same as with any injunction when given by a court. There is no difference. The activity has to cease during that period of time, and to the extent that there are negative cost implications, they will have to be borne.

Senator Tkachuk: If there was a penalty imposed, would they pay the full penalty, or would it be the penalty minus the period of time they were shut down?

Mr. von Finckenstein: Do you mean the new penalties under the act?

Senator Tkachuk: Yes.

Mr. von Finckenstein: If penalties are imposed, that means that the court has made an order against the company, therefore, there is no question of that prohibited conduct turning out to be innocent.

Senator Tkachuk: The threshold is $10 billion in revenue. What Canadian airlines meet this threshold?

Mr. von Finckenstein: What threshold do you mean? What are you reading from?

Senator Tkachuk: Under the Air Canada amendment, the threshold is $10 billion in revenue.

Mr. von Finckenstein: $15 million.

Senator Tkachuk: I am not talking about the amount of the fine I am talking about the gross revenue. What airline would be dealt with under this legislation?

Mr. von Finckenstein: It has to be a dominant airline. You are talking about a market; the market is defined as a city pair. If an airline flies between two city pairs it would have to have dominance in that market. As to the dominance, you look at the facts and see what percentage of the market they control.

Senator Tkachuk: I must be misreading the $10 billion revenue.

Mr. von Finckenstein: I have not used the figure of $10 billion. Perhaps you are you referring to the revenue Air Canada earns?

Senator Tkachuk: Yes.

Mr. von Finckenstein: You probably get the $10 billion from the fact you are asking whether the $15 million is something that Air Canada can afford. I do not know what the actual revenue is but it is certainly in the billions.

Senator Tkachuk: We discussed obligations earlier. You mentioned that you negotiated with Air Canada while the merger was taking place. There are also obligations from the act when they were privatised. We also dealt with the amendments to the act in the last session. What other obligations do they have that other airlines do not have?

Mr. von Finckenstein: I honestly cannot answer that question. The only thing I recall is that at the time the merger was approved they had entered into obligations with Transport Canada vis-à-vis service to communities and whether they could lay off certain employees or not.

Senator Tkachuk: You discussed how you calculate whether their pricing is predatory, and how they set their pricing. By law their headquarters has to be in Montreal.

Mr. von Finckenstein: This is clearly part of their fixed costs and sunk costs. By law, their headquarters has to be in Montreal. Therefore, when we say you have to price by unavoidable costs we are excluding those sunk costs. They do not have to price it so that they recover the costs from operating in Montreal, because that is not something that they can change.

Senator Tkachuk: Including maintaining overall facilities in Winnipeg and Mississauga?

Mr. McAllister: The competition bureau is dealing with all of these issues right now. There are a huge number of different cost components that go into the operation of an airline: everything from meals to fuel to aircraft leases, and so on. Overhead obligations such as maintenance and necessary plant costs are considered overhead fixed costs and they are not considered part of the avoidable costs.

The rule does not require Air Canada to cover its total costs, only those costs that are avoidable, which is less than total cost. You have to go through each cost item, and the exercise before the tribunal has been quite detailed in terms of dealing with the major cost components and decide whether they costs are avoidable or sunk.

Senator Tkachuk: I want to return to that $10 billion. I have an explanation of subclause l l.4:

the purpose for permitting the imposition of an administrative monetary penalty is to create an additional incentive for compliance with the Competition Act by a dominant air carrier. In the absence of a meaningful administrative monetary penalty, a dominant carrier has a strong incentive to engage in abuse of dominant conduct. Currently, the dominant carrier achieves total annual revenues of approximately $10 billion. The proposed maximum of $15 million is not unreasonable, and would have to be assessed by the Competition Tribunal on a case-by-case basis.

It seems to me this little amendment was written with only one air carrier in mind. What happens if WestJet becomes a dominant carrier in Western Canada and someone wants to start another airline?

Mr. von Finckenstein: We only have one dominant carrier right now and that is Air Canada. The penalty that may be imposed is up to $15 million; it is not set at $15 million. The tribunal looks at the circumstances and the factors that are outlined in clause 11.4, and will determine the appropriate amount.

In the present situation, given the present dominant carrier and its revenues, it is a meaningful amount, but one it can well afford.

As I keep saying, it is up to $15 million, and it is up to the tribunal to decide the appropriate amount. They may not award anything, or award a lower amount. Taking your example, if one day WestJet is the dominant carrier, they will look at WestJet's revenues, financial situation and conduct, whether it was anti-competitive or not, and determine what is required and the appropriate amount.

Senator Tkachuk: Is it tax deductible?

Mr. von Finckenstein: Fines are not tax deductible. That is the whole purpose. They are meant to be meaningful and to deter.

I might point out to you that subsection 3.3 specifically says:

The purpose of an order under subsection (3.1) is to promote practices that are in conformity with this section, not to punish.

The tribunal is specifically instructed by the legislation: If you award an administrative monetary penalty keep in mind the purpose is to promote conformity with the section. You are not there to punish.

The Chairman: That sounds good, but are you punishing.

Mr. von Finckenstein: Every time you promote conformity you are in some way punishing, if that is the how you want to look at it.

Senator Tkachuk: Just a comparison question. Is the proposed monetary policy consistent with the penalties imposed for this type of behaviour in other countries?

Mr. von Finckenstein: You have completely different regimes. For instance, in the United States you can you sue for damages. You can sue for triple damages, which is far in excess of $15 million. In European countries there are some very stringent monetary penalties. Regimes are different.

In Canada under the civil regime if you engage in anti-competitive conduct, generally the response or remedy is that you get an injunction from the tribunal saying stop doing this.

In the case of the airlines we have added to the abilities of the tribunal to say ``stop doing that.'' We want to promote conformity within that section and we feel that in consideration of the gravity or frequency of the offence, an administrative monetary penalty in the amount of $15 million is appropriate.

Senator Tkachuk: How did you choose that number?

Mr. von Finckenstein: When you choose a dollar figure you want to make sure that it is meaningful and at the same time not excessive. There is no intention here to punish or to hurt, but it has to be great enough so that there is an incentive to comply with the legislation. If the figure is too low, it simply becomes the cost of doing business. If it is too high, it has the potential to hurt the company rather than promote conformity.

Senator Kroft: I would like an answer that requires your opinion, rather than facts. I am still struggling with the area of trying to define this as a legislative search for policy framework. Do you believe that when one airline has 80 per cent of the market can produce long-term equilibrium and stability in the market? Could that situation produce what economists define as ``market equilibrium''? Can this situation produce sustained fair competition on a long-term basis with proper supply-demand responses? Will that only happen with the kind of force that is applied on a violation- response-violation-response scenario? Can you have a market that operates on an equilibrium condition with one player having 80 per cent of the market?

Mr. von Finckenstein: Using the Competition Act to avoid anti-competitive behaviour and trying to achieve equilibrium really depends on our regulatory framework and the conditions that are set for allowing people to enter and run airlines.

When I say we approved the merger of Air Canada, I maintained that unless you make structural changes to the regulatory framework, you would not get there. The Competition Act is in place to avoid excesses and abuse, but you are talking about something different. You want to see market equilibrium with players of equal size.

Senator Kroft: They do not need to be equal in size. They can be various sizes provided they can live ``happy in the valley.''

Mr. von Finckenstein: It is difficult to envisage that happening without a change to the regulatory system.

Senator Kroft: The requirement for a policy structure that can produce the regulatory framework is not in any way replaced by the operation of your —

Mr. von Finckenstein: There are many aspects to it. We are dealing only with the enforcement of the Competition Act. In the airline industry there are other aspects that need to be addressed so that we can deal with the current situation.

Senator Banks: When you were defining ``dominance'' in a market you said that the dominance existed between two cities. Then, you said that you meant ``national dominance.'' This is a purely hypothetical situation: Let us say that WestJet becomes dominant in the Calgary-Edmonton-Regina-Saskatoon quadrangle and becomes enormously successful. Another smaller airline wants to compete with them. Would you be concerned about that? Would that be dominance or does dominance need to be national dominance?

Mr. von Finckenstein: The market we define comprises the flights between two city pairs. In your example, if WestJet became dominant between Saskatoon and Calgary and used its dominance in anti-competitive ways, yes, we would become concerned.

The Chairman: Thank you for appearing before the committee.

Mr. von Finckenstein: It will be our pleasure to return to assist you in any way with your deliberations.

The committee adjourned.