OTTAWA, September 28, 2017 — The Competition Bureau (Bureau) announced on September 27, 2017 that it reached a Consent Agreement with Superior Plus LP (Superior) regarding its proposed acquisition of Canwest Propane (Canwest) from Gibson Energy ULC (Gibsons). This agreement protects Canadians by preserving competition for the retail sale of bulk propane in western Canada, northern Ontario and the Northwest Territories.
Following a detailed review, the Bureau determined that a remedy was required to resolve competition concerns in 12 local markets where the merger would have otherwise been likely to substantially lessen competition and where claimed efficiencies did not clearly and significantly outweigh the merger's anti-competitive effects. Superior has agreed to sell retail propane sites and associated assets in those 12 markets.
As part of its review of the transaction, the Bureau interviewed industry stakeholders, including customers in a variety of segments, competitors of various sizes, regulators, and suppliers. The Bureau obtained records and data from a number of these stakeholders, and consulted with economic, accounting, and industry experts. In addition, numerous Canadians shared their views in an online form on the Bureau's website.
This statement summarizes the approach taken by the Competition Bureau in its review of the proposed transaction.Footnote 1
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Superior is Canada's largest national propane retailer. Canwest operates in the retail bulk propane distribution business in western Canada, in over 70 locations from British Columbia to northwestern Ontario. On February 13, 2017, Superior announced that it had agreed to purchase all outstanding shares and units of the entities that carry on the retail propane business of Canwest, including both Stittco Energy and Cal-Gas, from Gibsons.
Propane is a natural gas liquid that is a by-product of both natural gas extraction and crude oil refining. It is used by many Canadian households to heat their homes. Many Canadian businesses, including in sectors such as oil and gas, mining, and agriculture, use it to heat buildings and power equipment.
The Bureau assessed whether the proposed transaction was likely to prevent or lessen competition substantially for the retail sale of bulk propane. The Bureau also assessed the merging parties' claims of the likely efficiencies compared to the likely anti-competitive effects of the proposed transaction.
i. Product market
The Bureau determined that the relevant product market is the retail sale of bulk propane. The analysis conducted found that some alternatives to propane, such as fuel oil and electricity, may exist for a limited number of customers; however, these alternatives are not easily substitutable for propane due to switching costs and factors such as price differences and insurance requirements. Additionally, some fuels, such as natural gas, are not available to consumers in many of the geographic areas that would be impacted by the proposed transaction.
The Bureau considered three primary categories of bulk propane customers: residential customers; commercial and institutional customers; and oilfield customers.
Residential customers are generally located in rural areas without access to the natural gas grid, and therefore require propane for a number of uses, including heating their homes during the winter. Commercial and institutional customers of propane, such as mining operations, restaurants, shops, and government customers, require propane to heat their premises and operate essential equipment. Commercial and institutional customers are distinct from residential customers in that they generally purchase larger volumes and may require a higher frequency of tank fills. Oilfield customers require substantial volumes and very frequent deliveries of propane to operate their drilling and pumping equipment and to heat the buildings at their wellsites, among other uses.
ii. Geographic markets
The Bureau determined that the relevant geographic markets for retail bulk propane distribution are local in nature. Bulk propane is delivered by truck directly to a customer's location, where a large tank on the customer's property is filled. These trucks generally do not travel great distances to deliver propane, as the costs associated with trucking over long distances can become prohibitive.
The Bureau determined that there are 25 relevant geographic markets where Superior and Canwest compete with one another. In determining these relevant geographic markets, the Bureau considered a number of factors including: the location of customers, the topography and road access, the distance between retail sites, and delivery areas based on the Bureau's analysis of customer delivery data obtained from Superior and Canwest.
Each of these 25 geographic markets was rigorously analyzed to determine any anti-competitive effects that might result from the merger.
The Bureau concluded that the merger would likely lessen competition substantially in 22 of the 25 relevant geographic markets. Several of these markets involved a post-merger environment with three or fewer competitors, and Superior would have a monopoly in some markets post-merger.
The Bureau used a number of standard economic modelling tools, including the Bertrand model of competition with Logit demand, to help analyse the merger and quantify its likely anti-competitive effects. This model describes differentiated suppliers competing by setting price; if a supplier raises its price, it will lose some sales as customers may choose to reduce their propane consumption or purchase propane from a different supplier. Post-merger, Superior would benefit from customers that would have otherwise switched to Canwest, and would therefore have the incentive to raise its price. The model uses pre-merger data to calculate each firm's profit maximizing price and quantity – both pre-merger and post-merger. These results are then used to estimate the likely anti-competitive effects of the merger.
The Bureau's modelling consistently predicted that material post-merger price increases were likely to occur in the 22 markets.
Barriers to entry
The Bureau further concluded that factors such as the expansion of existing competitors or the entry of new competitors were unlikely to occur on a large enough scale to prevent the likely substantial lessening of competition arising from the merger.
Several attributes of the retail bulk propane industry create high barriers to effective entry, including market maturity, economies of scale, high switching costs and restrictive contracts with incumbents, access to supply, sunk costs of infrastructure, and regulatory barriers. Customer switching costs and existing contracts with incumbent suppliers are a particularly significant barrier to entry. Contracts can be long in duration and often contain auto-renewal clauses, right of first refusal clauses, equipment removal costs, and other restrictive terms that give incumbents significant advantages in customer retention. The potential for strategic behaviour by incumbent suppliers, such as delaying tank removal or otherwise interfering with the transition of customers to new suppliers can also deter customer switching. Based upon the above noted factors, the Bureau concluded that timely entry into the relevant markets is unlikely to occur with sufficient scale and scope to constrain the likely material price increases.
The efficiency exception under the Competition Act (Act)
What is an efficiency gain?
Companies that merge may gain efficiencies in their operations, which can lower their costs. Efficiency gains arise from the integration of resources between the merging firms and may include savings related to administration and streamlined operations.
The Act contains an efficiency exception (section 96), which prohibits a remedial order from being issued if parties can show that gains in efficiency likely to be brought about by the merger that would be lost as a result of the remedial order would outweigh and offset the merger's anti-competitive effects. Accordingly, under Canadian competition law, finding that a merger will likely substantially lessen or prevent competition is a necessary but not sufficient condition for the Competition Tribunal (Tribunal) to prohibit a merger or issue a remedial order, if the efficiency exception is successfully raised by the merging parties. Conceptually, this can be thought of as a trade-off between the likely costs to the economy of issuing the order (i.e. lost efficiencies) and the likely costs to the economy of not issuing the order (i.e. the anti-competitive effects).Footnote 2
As noted in the Merger Enforcement Guidelines, in appropriate cases and when provided with timely information validating claimed efficiencies, the Bureau will consider efficiencies internally and will not necessarily resort to the Tribunal for adjudication of the issue. Accordingly, in the case at hand, in order to determine the scope of an appropriate remedy, the Bureau engaged in a trade-off analysis for each of the local geographic markets where a substantial lessening of competition was found to be likely in order to determine which of the local markets had gains in efficiency arising from the proposed transaction that clearly and significantly outweighed the anti-competitive effects of the proposed transaction.Footnote 3 The Bureau considered several types of cost savings including those generated by the overlap between the merging parties' locations and between their delivery routes, as well as head office efficiencies. As part of this analysis, the Bureau engaged in a detailed review of the merging parties' financial data and transaction planning documents to verify the dollar-value of claimed efficiencies and the likelihood that the efficiencies would be realized.
The local market specific approach used by the Bureau helped to craft a remedy that addressed competition concerns while allowing efficiencies to be realized in markets where they were likely to clearly and significantly outweigh the anti-competitive effects of the proposed transaction.
In implementing this approach, the Bureau considered how head office efficiencies would be impacted while assessing the local market trade-offs. The Bureau recognizes that some head office efficiencies may be lost as a result of a remedy that only involves a small portion of the acquired assets. However, order implementation costs – that is, costs that would be incurred by a buyer of the assets involved in the remedy – are not considered to be efficiencies that would be lost as a result of an order. The Supreme Court of Canada determined that efficiencies arise through the integration of resources between the merging firms, through the act of merging. Any other associated costs in the implementation of a remedial order are not forgone efficiencies that are to be counted for the purposes of the test in section 96.Footnote 4
In comparing the likely efficiencies from the proposed transaction to the likely anti-competitive effects, the Bureau considered both the loss in allocative efficiency (i.e. the deadweight loss) and the socially adverse portion of the wealth transfer from consumers to producers to be anti-competitive effects. This wealth transfer arises from the higher post-merger prices paid by consumers. In this case, the socially adverse wealth transfer was comprised of two components: the transfer of wealth from lower-income residents to bulk propane retailers; and the transfer of wealth from government entities to bulk propane retailers.
The Bureau concluded that no remedy was required in ten local markets, because the efficiency gains resulting from the transaction were likely to clearly and significantly outweigh the likely anti-competitive effects in these markets.
Remedy and Conclusion
In each of the remaining 12 markets, the Bureau concluded that, without a remedy, the efficiency gains resulting from the transaction would not be likely to clearly and significantly outweigh the anti-competitive effects. To address the Bureau's concerns, Superior has agreed to sell retail propane sites and associated assets in these 12 markets. In all markets except Thunder Bay, this includes the sale of a number of Canwest customer contracts to the purchaser of these assets.Footnote 5 In addition to the assets to be sold, the Bureau required that Superior waive contract terms which impede customer switching in four markets, including Thunder Bay. These terms include any terms providing for automatic renewal, exclusive supply or minimum volume requirements, equipment removal, propane pump-out or other termination fees including charges or damages. A description of the markets and the required remedy is included below. The Commissioner is satisfied that the terms of this remedy, as set out in the Consent Agreement, address concerns related to the proposed transaction.
Summary of the Remedy
Superior has agreed to sell 14 assets in the following 12 markets:
- Kamloops, BC and Winfield, BC;
- Kindersley, SK and Swift Current, SK;
- Prince George, BC;
- Golden, BC;
- Castlegar, BC;
- Valemount, BC;
- Port Hardy, BC;
- Sexsmith, AB;
- Medicine Hat, AB;
- Rainbow Lake, AB;
- Hay River, NT; and
- Thunder Bay, ON.
As noted above, a portion of Canwest's customer contracts will be sold along with the assets in all of these locations with the exception of Thunder Bay and Winfield.
Superior has agreed to waive contract terms preventing Canwest customers from switching suppliers in the following regions:
- Okanagan Valley and surrounding areas in British Columbia, including: Kelowna, Lillooet, Oliver, Winfield, Armstrong, Sicamous, Revelstoke, and Kamloops;
- East Kootenay region in British Columbia, including: Invermere, Golden, Cranbrook and surrounding areas;
- Williams Lake, British Columbia and surrounding areas around Williams Lake and Prince George; and
- Thunder Bay, Ontario and surrounding areas.
This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.
However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.
The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.