Case Documents

CT-2012-003 THE COMPETITION TRIBUNAL IN THE MATTER OF the Competition Act, R.S.C. 1985, c.C-34, as amended;

IN THE MATTER OF an application by the Commissioner of Competition pursuant to section 79 of the Competition Act;

AND IN THE MATTER OF certain policies and procedures of Direct Energy Marketing Limited.

BETWEEN: THE COMMISSIONER OF COMPETITION Applicant - AND -

DIRECT ENERGY MARKETING LIMITED

REQUEST FOR LEAVE TO INTERVENE ON BEHALF OF NATIONAL ENERGY CORPORATION

National Energy Corporation (operating as National Home Services) (“National”) requests leave of the Competition Tribunal pursuant to subsection 9(3) of the Competition Tribunal Act, R.S.C. 1985, c. 19, as amended, and section 43 of the Competition Tribunal Rules, to intervene in this proceeding. In support of this request, National relies on the Affidavit of Gord Potter, sworn September 4, 2013 (the “Potter Affidavit”).

Respondent

- 2 - A. Name and Address of Proposed Intervenor The name and address of National is: National Energy Corporation 25 Sheppard Avenue West Suite 1700 Toronto, Ontario M2N 6S6

Attention: Gord Potter Phone: 416.673.4765 Fax: 416.747.5872 The address for service for National is: Davies Ward Phillips & Vineberg LLP 155 Wellington Street West Toronto, ON M5V 3J7

Attention: Adam Fanaki Phone: 416.863.5564 Fax: 416-863-0871 B. National 1. National operates under the name "National Home Services" and supplies natural gas and electric water heaters for rental and related services to new and existing homeowners in Ontario and Québec.

2. National is a wholly-owned subsidiary of Just Energy Group Inc. ("Just Energy"), a corporation arranged pursuant to the Canada Business Corporations Act that is publicly traded on the Toronto Stock Exchange and the New York Stock Exchange with its head office in Mississauga, Ontario. Just Energy has operations in Canada, the United States and the United Kingdom.

3. In early 2008, National began supplying water heater rentals to residential customers located in certain parts of the principal operating territory of the

- 3 - Respondent, Direct Energy Marketing Limited ("Direct Energy"), consisting of certain regions within eastern Ontario, central Ontario, the Niagara Region and the Greater Toronto Area (defined as the "Relevant Market" in the Notice of Application filed by the Commissioner of Competition (the "Commissioner's Application")).

4. When National entered into the principal operating region of Direct Energy in 2008, Direct Energy was a party to a Consent Order issued by the Competition Tribunal that prohibited Direct Energy from, among other things, preventing competitors from disconnecting and returning water heaters or engaging in other forms of anti-competitive conduct.

5. The Consent Order facilitated entry and expansion by National into the principal operating territory of Direct Energy by preventing Direct Energy from engaging in anti-competitive conduct that would impede or constrain National's ability to compete in those local regions.

6. However, upon the expiry of the Consent Order on February 21, 2012, Direct Energy implemented new procedures regarding the return of water heater tanks by customers electing to switch to competing suppliers, along with other modifications to Direct Energy's established practices that constrain or prevent National from effectively competing and expanding in the Relevant Market.

7. As a result of Direct Energy's anti-competitive conduct, National's ongoing attempts to expand in the Relevant Market have been significantly constrained or impeded.

8. Since 2008, National has secured approximately 170,000 customers or approximately 12% of the approximately 1.4 million available water heater rental customers located in the Relevant Market. Direct Energy is the dominant supplier of water heater rentals in the Relevant Market, with more than 1,100,000 water heater rental customers or approximately 78% of all available water heater rental customers.

- 4 - 9. Although National holds a relatively small share of the Relevant Market, National is one of the largest competitors to Direct Energy for the supply of water heater rental services in the Relevant Market. Apart from Reliance Comfort Limited Partnership (“Reliance”), National is the only competitor to Direct Energy for water heater rentals with operations in several regions throughout Ontario and Quebec.

C. Test For Intervention 10. National satisfies all of the criteria for intervenor status in this proceeding. In particular:

(a) National has been and continues to be directly affected by Direct Energy's anti-competitive acts, including the exclusionary water heater return policies and procedures implemented by Direct Energy;

(b) The matters alleged to affect National are within the scope of the Tribunal’s consideration and are matters sufficiently relevant to the Tribunal’s mandate;

(c) The representations to be made by National are relevant to issues specifically raised in the Commissioner’s Application; and

(d) National will bring to the Tribunal a unique or distinct perspective that will assist the Tribunal in deciding the issues before it.

11. Each element of the test for intervention is outlined more specifically below and in the Potter Affidavit that forms part of this Request for Leave to Intervene.

D. Matters Required to be Addressed in a Motion for Leave to Intervene 12. Subsection 43(2) of the Competition Tribunal Rules (the “Rules”) requires a person making a motion for leave to intervene to set out:

- 5 - (a) the title of the proceedings in which the person making the motion wishes to intervene;

(b) the name and address of that person; (c) a concise statement of the matters in issue that affect that person and the unique or distinct perspective that the person will bring to the proceeding;

(d) a concise statement of the competitive consequences arising from the matters referred to in subparagraph (c) with respect to which that person wishes to make representations;

(e) the name of the party, if any, whose position that person intends to support;

(f) the official language to be used by that person at the hearing of the motion and, if leave is granted, in the proceedings; and

(g) a description of how that person proposes to participate in the proceedings.

13. The title of the proceedings and the name and address of National are set out above. The concise statements referred to in Rules 43(2)(c) and (d) are set out below.

E. Matters in Issue that Affect National 14. National is directly affected by the matters identified in the Commissioner’s Application.

15. National is a competitor to Direct Energy for the rental of natural gas and electric water heaters and the supply of related services to residential customers in the Relevant Market.

- 6 - 16. Direct Energy has engaged in anti-competitive conduct that constrains or prevents National from securing new customers and expanding in the Relevant Market, including the following:

(a) The vast majority of homeowners in the Relevant Market are existing customers of Direct Energy. When an existing customer of Direct Energy decides to switch to National, the Direct Energy water heater tank located in the customer's home will be disconnected by National and replaced with a new water heater tank. The old Direct Energy water heater is returned to one of Direct Energy's return depots by National.

(b) When National entered into the Relevant Market in 2008, Direct Energy was a party to a Consent Order issued by the Competition Tribunal that prohibited Direct Energy from, among other things, preventing competitors from disconnecting Direct Energy water heaters and returning such water heaters to Direct Energy.

(c) The Consent Order also required Direct Energy to operate return depots where competitors could return Direct Energy tanks during normal operating hours.

(d) Prior to the expiry of the Consent Order, National employed a simple process for returning Direct Energy tanks on behalf of new customers that did not require any form of pre-authorization from Direct Energy; specifically, the following: (i) the customer agreed to purchase water heater rental services from National; (ii) National and the customer agreed on a date for the installation of a new National water heater tank; (iii) the new National water heater tank was installed at the home of the customer and the old Direct Energy tank was removed; and, (vi) the old Direct Energy tank was returned to a Direct Energy depot during normal business hours.

- 7 - (e) The process required under the Consent Order allowed National to return tanks to Direct Energy efficiently with little or no impact on the homeowner.

(f) However, the day after the Consent Order expired, Direct Energy began to impose arbitrary restrictions on the return of water heater tanks from former Direct Energy customers and other measures to prevent National from effectively competing in the Relevant Market.

(g) First, upon expiry of the Consent Order, Direct Energy imposed significant restrictions on its return depot locations. Such restrictions included: terminating the operation of certain return depot locations, limiting the number of water heater tanks that competitors can return at any given time, restricting the return of tanks to only certain days or hours within a day and restricting the locations at which competitors may return tanks. These restrictions made it more difficult and costly for National to return old Direct Energy tanks.

(h) Second, customers that wished to return a Direct Energy water heater tank were required to complete a Rental Removal Order Form and obtain a Rental Authorization Number ("RAN") from Direct Energy.

(i) Direct Energy used the RAN policy to deter or impede customers from switching to National or other competitors. For example, Direct Energy requires former customers to contact Direct Energy by telephone to obtain the RAN and uses this process to dissuade customers from switching to National or other competitors.

(j) Third, effective as of the date of the expiry of the Consent Order, Direct Energy refused to recognize the validity of letters appointing National to act as an agent for former Direct Energy customers with respect to the process for returning water heater tanks. National has attempted to assist its customers through the RAN process by obtaining a RAN on behalf of

- 8 - the customer or by participating with the customer on calls with Direct Energy. Following the expiry of the Consent Order, Direct Energy refused to recognize National’s appointment as the agent of the customer and refused to permit National to join in on calls by customers attempting to obtain a RAN, even though such customers requested that National participate in these calls.

(k) Fourth, Direct Energy amended the terms of its water heater rental agreements to provide that existing customers who wished to terminate their agreement with Direct Energy would be required to purchase the water heater tank at a significant cost, unless such customers opted-out of the amended terms by notifying Direct Energy prior to a specified deadline.

(l) Following a review of Direct Energy's conduct by the Ontario Ministry of Consumer Affairs, Direct Energy agreed to suspend its proposal to amend the terms of water heater rental agreements for existing customers. However, customers of Direct Energy that entered into a rental agreement after September 16, 2010 and who wish to terminate their water heater rental agreement prior to the end of the term must still purchase their water heater from Direct Energy at a significant cost.

(m) On March 24, 2012, Direct Energy agreed to permit National to return water heater tanks on an interim basis and to obtain RANs on behalf of National's customers. However, this arrangement was explicitly stated by Direct Energy to be on an interim basis only and with a full reservation of Direct Energy's rights to insist on strict compliance with the RAN and other policies of Direct Energy.

(n) National believes that in the event that the Tribunal does not issue a remedy, Direct Energy will require National to strictly comply with the RAN and impose other anti-competitive measures that constrain or impede National's ability to compete.

- 9 - (o) In any event, despite the interim arrangement, Direct Energy has consistently delayed in providing National with RANs required under Direct Energy's process. In some cases, Direct Energy has delayed the supply of RANs for 30 days or more.

(p) Direct Energy also continues to bill homeowners that elect to switch to National as their supplier of rental water heaters even after Direct Energy has been informed of the homeowner's decision to switch to National and where the delay in the return of the customer's old water heater tank is entirely attributable to Direct Energy. In these cases, National is often required to compensate the homeowner for the additional fees paid to Direct Energy, thereby increasing National's costs.

(q) In addition, even where National is able to obtain a RAN, Direct Energy has imposed arbitrary limits on the process for returning tanks at its depots which prevent National from returning old Direct Energy water heaters on behalf of customers in a timely and efficient manner. These restrictions include: (i) limiting the number of water heater tanks that competitors can return at any given time; (ii) restricting the return of tanks to only certain days or hours within a day; (iii) restricting the locations at which competitors may return tanks, including refusing to accept tanks at locations where Direct Energy previously accepted tanks; and (iv) imposing other restrictions that frustrate National's efforts to return Direct Energy water heater tanks in an efficient manner.

(r) As a result of Direct Energy's restrictions on the return of water heater tanks, National is currently storing more than 550 tanks that it has not been able to return to Direct Energy. National has been required to expand its warehouse facilities to store water heater tanks that Direct Energy will not accept on a timely basis.

(s) As a result of these restrictions, National incurs additional costs from the storage and handling of Direct Energy water heater tanks.

- 10 - 17. As a result of Direct Energy's anti-competitive conduct, National's ability to effectively compete and expand in the Relevant Market is impeded or constrained.

18. Direct Energy's practice of anti-competitive acts has had and is having the effect of preventing and lessening competition substantially. In the absence of Direct Energy’s water heater return policies and other anti-competitive conduct, National would expand in the Relevant Market thereby increasing competition substantially.

19. As a competitor to Direct Energy and as a firm attempting to compete and expand in the Relevant Market, National has a direct and significant interest in the outcome of this proceeding and the competitiveness of this industry.

20. Indeed, National's ability to effectively compete and operate successfully in the Relevant Market is dependent upon the outcome of this proceeding. In the absence of an appropriate remedy with respect to Direct Energy's anti-competitive conduct, National will continue to be constrained from effectively competing and expanding in the Relevant Market.

21. Accordingly, National is directly and significantly affected by the outcome of this proceeding.

F. Matters Alleged to Affect National are Within the Scope of the Tribunal’s Consideration

22. The matters that affect National are within the scope of the Tribunal’s consideration and are relevant to the Tribunal’s mandate to hear and determine the issues raised by the Commissioner’s Application.

23. The matters that affect National relate to: (a) The impact or likely impact of Direct Energy's water heater return policies and procedures and other anti-competitive conduct on the ability of competitors to effectively compete and expand in the Relevant Market;

- 11 - (b) The impact of Direct Energy's anti-competitive acts on customers or potential customers of competitors, including the impact of this conduct on the ability of competitors, such as National, to effectively induce customers to switch suppliers;

(c) The impact or likely impact of Direct Energy's conduct upon competition in the Relevant Market generally and National, in particular;

(d) Barriers to entry and ease of entry into the Relevant Market, including the impact of Direct Energy's conduct in creating artificial barriers to entry and expansion for rivals, such as National, and raising rival's costs; and

(e) The impact of the Commissioner’s proposed remedies on competitors, such as National, and on competition in the Relevant Market.

24. These matters are within the scope of the Tribunal's consideration of this matter and are relevant to the Tribunal's mandate to hear and determine the issues.

G. National's Proposed Topics are Relevant to the Issues Raised by the Proceeding

25. National's proposed topics are relevant to the issues raised by the Commissioner's Application and are relevant to the Tribunal's mandate to hear and determine the issues.

26. National's proposed topics (the "National Proposed Topics") address the matters that affect National in this proceeding and include:

(a) the development of the Ontario rental water heater industry as it relates to National;

(b) the issue of Direct Energy’s anti-competitive acts as they relate to National, including the impact of Direct Energy's water heater return policies and procedures and other anti-competitive conduct on the ability of National to effectively compete and expand in the Relevant Market;

- 12 - (c) the impact of Direct Energy's anti-competitive acts on customers or potential customers, including the impact of this conduct on the ability of National to effectively induce customers to switch suppliers;

(d) National's interactions with Direct Energy with respect to the matters at issue in the proceeding, including dealings with Direct Energy regarding the Return Authorization Number and other aspects of the water heater removal and return process;

(e) National's perspective as a participant in the industry on the appropriate definition of the product and geographic markets;

(f) the issue of Direct Energy’s dominant position as it affects National and competition in the Relevant Market generally;

(g) the issue of the substantial lessening or prevention of competition as it relates to National and competition in the Relevant Market generally;

(h) barriers to entry and ease of entry into the Relevant Market, including the impact of Direct Energy's conduct in creating artificial barriers to entry and expansion for National and raising National's costs;

(i) the statements made and conclusions drawn by Direct Energy concerning National in the Response of Direct Energy filed in this proceeding; and

(j) the impact of the Commissioner’s proposed remedies on National and on competition in the Relevant Market.

27. The National Proposed Topics are relevant to the issues raised by the Commissioner's Application, including, but not limited to, the following issues raised in the Commissioner's Application:

(a) The definition of the relevant market for the supply of water heater rental services in Ontario [paras. 30 to 33 of Commissioner's Application];

- 13 - (b) Whether Direct Energy is the dominant supplier of water heater rental services in the Relevant Market [paras. 14, 34 and 35 of Commissioner's Application];

(c) The history and development of Ontario's rental water heater industry [paras. 12 to 17 of Commissioner's Application];

(d) Whether Direct Energy's water heater return policies and procedures have the effect of imposing significant costs on competitors and preventing customers from switching to those competitors, thereby excluding competitors in the Relevant Market [paras. 2 and 39 to 41 of Commissioner's Application];

(e) Whether Direct Energy's conduct has had and is having the effect of preventing and lessening competition substantially in the Relevant Market [paras. 4 and 44 to 47 of Commissioner's Application];

(f) Whether in the absence of Direct Energy's water heater return policies and procedures, competitors would likely enter or expand in the Relevant Market [paras. 4 and 44 to 47 of Commissioner's Application];

(g) Whether Direct Energy's water heater return policies and other conduct creates significant barriers to entry [paras. 35 and 46 of Commissioner's Application]; and

(h) The nature of the remedies required to address Direct Energy's conduct and specifically, whether the relief sought by the Commissioner should be granted [para. 51 of Commissioner's Application].

H. National’s Unique or Distinct Perspective 28. National will bring a unique or distinct perspective to the proceeding for the following reasons:

- 14 - (a) National is one of Direct Energy's largest competitors for the supply of natural gas and electric water heater rentals and related services in the Relevant Market;

(b) National commenced supplying water heater rental services in the Relevant Market in 2008 and is therefore uniquely positioned to provide a perspective on the barriers to entry and other conditions of entry into the Relevant Market;

(c) National began offering water heater rental services prior to the expiry of the Consent Order, but has also attempted to expand into other local regions within the Relevant Market following the expiry of the Consent Order. National is therefore positioned to provide the Tribunal with a unique perspective on the impact of the Consent Order on barriers to entry and the costs associated with customer switching, as well as the conditions of competition generally in these regions;

(d) Although National has a substantially smaller presence in the Relevant Market than Direct Energy, apart from Reliance, there is no other competitor to Direct Energy for water heater rental services that operates in the Relevant Market with the same scope and scale as National;

(e) Unlike smaller competitors to Direct Energy, National also supplies water heater rental services in several parts of Ontario and Quebec. National is therefore positioned to provide the Tribunal with a broader perspective on the supply of water heater rental services in areas both within and outside of the Relevant Market;

(f) National has been supplying water heater rental services in Ontario since 2008 and is therefore able to provide the Tribunal with a valuable perspective on the conduct of the participants and the industry generally over the longer term; and

- 15 - (g) As recognition of National's role in the Relevant Market, National is the subject of a number of specific allegations in the Response of Direct Energy dated August 26, 2013, including paragraphs 6, 18 and 28.

29. National also has a perspective that is unique or distinct from that of the Commissioner of Competition. As an experienced participant in the industry, as a target of Direct Energy’s anti-competitive conduct and as a firm that is attempting to expand in the Relevant Market, National will bring a perspective to the issues and evidence that is distinct from the Commissioner’s perspective.

30. In addition, although National intends to support the position of the Commissioner generally, based on the allegations in the Commissioner’s Application, there are topics on which the position of the Commissioner and National appears to differ. For example, the following:

(a) Anti-Competitive Conduct: The Commissioner's Application does not appear to address the full scope of the anti-competitive conduct of Direct Energy. Additional anti-competitive conduct includes (at least) Direct Energy's price discrimination or similar forms of discriminatory promotional programs that target only those customers that are the subject of National’s marketing efforts or who have recently elected to switch to National.