PUBLIC VERSION

Reference: The Commissioner of Competition v. CCS Corporation et al., 2012 Comp. Trib. 14

File No.: CT-2011-002

Registry Document No.: 189

IN THE MATTER OF the Competition Act, R.S.C. 1985, c. C-34, as amended;

AND IN THE MATTER OF an Application by the Commissioner of Competition for an Order pursuant to section 92 of the Competition Act;

AND IN THE MATTER OF the acquisition by CCS Corporation of Complete Environmental Inc.

BETWEEN: The Commissioner of Competition (applicant) and CCS Corporation, Complete Environmental Inc., Babkirk Land Services Inc., Karen Louise Baker, Ronald John Baker, Kenneth Scott Watson, Randy John Wolsey, and Thomas Craig Wolsey (respondents)

Dates of hearing: Nov.16-18, Nov.22-25, Nov.29 - Dec.2, and Dec.13&14, 2011

Before: S. Simpson J. (Chairperson), P. Crampton C.J. and Dr. W. Askanas

Date of reasons and order: May 29, 2012

Reasons and order signed by: S. Simpson J. (Chairperson), P. Crampton C.J. and Dr. W. Askanas

Concurring reasons signed by: P. Crampton C.J.

REASONS FOR ORDER AND ORDER

TABLE OF CONTENTS

PARAGRAPH

A. EXECUTIVE SUMMARY  4

B. INTRODUCTION  5

C. THE PARTIES  6

D. THE PARTIES’ POSITIONS  7

The Commissioner  7

The Respondents  8

E. THE EVIDENCE  9

f. INDUSTRY BACKGROUND  9

Disposal at Secure Landfills  9

Bioremediation - Methodology  11

g. THE ISSUES  12

ISSUE 1– IS CCS’ ACQUISITION OF COMPLETE A MERGER?  12

ISSUE 2– WHAT IS THE PRODUCT DIMENSION OF THE RELEVANT MARKET?  15

The Analysis  15

Evidence about the Use of Bioremediation  16

Evidence about Storage and Risk Management  22

Conclusions about the Product Market  23

ISSUE 3– WHAT IS THE GEOGRAPHIC DIMENSION OF THE RELEVANT MARKET?  24

I. The Contestable Area  25

II. All of NEBC  26

III. The Babkirk Polygon  29

ISSUE 4– IS THE MERGER PRO-COMPETITIVE?  30

ISSUE 5– WHAT IS THE ANALYTICAL FRAMEWORK IN A “PREVENT CASE?  31

ISSUE 6– IS THERE A SUBSTANTIAL PREVENTION OF COMPETITION?  32

A. The “But For” analysis  32

Introduction  32

Scenario #1 – A sale of Complete to SES  34

Scenario #2 – The Vendors Operate Babkirk  39

The Vendors’ Documents  40

The RADs  44

The Operations Plan  46

Was Babkirk Going to Compete with CCS?  48

Conclusions  49

B. What are the Relevant Assessment Factors?  54

Conditions of Entry  54

Absence of Acceptable Substitutes/Effective Remaining Competition  55

Countervailing Power  56

C. Conclusions  57

ISSUE 7– WHEN THE EFFICIENCIES DEFENCE IS PLEADED, WHAT IS THE BURDEN OF PROOF ON THE COMMISSIONER AND ON THE RESPONDENT?  57

ISSUE 8– HAS CCS SUCCESSFULLY ESTABLISHED AN EFFICIENCIES DEFENCE?  62

What are the Claimed Efficiencies?  62

The assessment of the claimed efficiencies  66

Transportation and Market Expansion Efficiencies  67

The Roll-off Bin Business Efficiencies  68

The Overhead Efficiencies  69

The Qualitative Efficiencies  70

What are the Effects for the Purposes of Section 96 of the Act?  71

Quantifiable Effects  72

Non-quantifiable Effects  77

Are the Cognizable Efficiencies Greater than and do they Offset the Effects?  78

ISSUE 9– WHAT IS THE APPROPRIATE REMEDY – DISSOLUTION OR DIVESTITURE?  80

H. COSTS  85

I. FOR THESE REASONS THE TRIBUNAL ORDERS THAT:  85

J. THE SCHEDULES  86

Schedule A: Map Showing Secure Landfills (based on Exhibit 4-A to Dr. Baye’s Expert Report) 87

Schedule B: The Evidence  88

Schedule C – Map of NEBC, the Contestable Area and the Babkirk Polygon  90

K. CONCURRING REASONS BY P. CRAMPTON C.J.  90

A. IS CCS’S ACQUISITION OF COMPLETE A MERGER?  91

B. MARKET DEFINITION  93

C. THE ANALYTICAL FRAMEWORK IN A “PREVENT” CASE  94

D. WHEN EFFICIENCIES CAN BE CONSIDERED  100

E. THE EFFICIENCIES DEFENCE  101

(i) Conceptual framework  101

(ii) Socially adverse effects  102

(iii) Non-quantifiable/qualitative effects  105

A. EXECUTIVE SUMMARY

[1]  The Tribunal has decided on a balance of probabilities that the Merger is likely to prevent competition substantially in the market for the supply of secure landfill services for solid hazardous waste from oil and gas producers in a geographic market which, at a minimum, is the area identified by CCS’ expert, Dr. Kahwaty, as the “Potentially Contestable Area”.

[2]  The Tribunal has concluded that CCS is a monopolist in the geographic market and that it exercises significant market power which is being maintained as a result of the Merger.

[3]  Although Dr. Baye, the Commissioner’s expert, suggested a wide range of likely price decreases in the absence of the Merger, the Tribunal has found that a decrease in average tipping fees of at least 10% was prevented by the Merger.

[4]  There is significant time and uncertainty associated with entry. The Tribunal has concluded that effective entry would likely take a minimum of 30 months from site selection to the completed construction and operation of a secure landfill in the relevant market.

[5]  The Tribunal has also decided that, in the absence of the Merger, the Vendors would likely not have sold the Babkirk Facility in the summer of 2010 but would have operated it themselves and would have constructed a new secure landfill with a capacity of 125,000 tonnes by October of 2011. This landfill would likely have operated as a complement to the Vendors’ bioremediation business until no later than October 2012.

[6]  The Tribunal has also concluded that the Vendors’ bioremediation business would likely have been unprofitable and that by October 2012, the Vendors would likely have changed their business plan to significantly focus on the secure landfill part of their business or would have sold the Babkirk Facility to a secure landfill operator. In either case, no later than the spring of 2013, the Babkirk Facility would have operated in meaningful competition with CCS’ Silverberry secure landfill. It is the prevention of this competition by the Merger which constitutes a likely substantial prevention of competition.

[7]  The efficiencies claimed by CCS do not meet the requirements of section 96 of the Act.

[8]  Divestiture is an effective remedy and is the least intrusive option.

[9]  The application has been allowed. The Tribunal has ordered CCS to divest the shares or assets of BLS.

[10]  In dealing with the facts of this case, the Tribunal’s conclusions were all based on an analysis of whether the events at issue were likely to occur.

B. INTRODUCTION

[11]  The Commissioner of Competition (the “Commissioner”) has applied for an order under section 92 of the Competition Act, R.S.C. 1985, c. C-34, as amended (the “Act”), dissolving a transaction in which CCS Corporation (“CCS”) acquired the shares of Complete Environmental Inc. (“Complete”) and ownership of its wholly-owned subsidiary Babkirk Land Services Inc. (“BLS”) on January 7, 2011 (the “Merger”). In the alternative, the Commissioner requests a divestiture order requiring CCS to dispose of the shares or assets of BLS in a manner to be directed by the Tribunal.

[12]  In her application (the “Application”), the Commissioner alleges that the Merger is likely to prevent competition substantially in the market for hazardous waste disposal services in North-Eastern British Columbia (“NEBC”) because, at the date of the Merger, Complete was a poised entrant by reason of having obtained the regulatory approvals needed to operate a secure landfill for hazardous solid waste on a site at Mile 115, Alaska Highway, Wonowon, B.C. (the “Babkirk Site”).

[13]  Pending the Tribunal’s decision on this application, CCS undertook to maintain all approvals, registrations, consents, licenses, permits, certificates and other authorizations necessary for the operation of a hazardous waste disposal facility (the “Babkirk Facility” or “Babkirk”) on the Babkirk Site. Complete’s other assets and businesses were not subject to this undertaking.

C. THE PARTIES

[14]  The Commissioner is the public official who is responsible for the enforcement of the Act.

[15]  CCS is a private energy and environmental waste management company. Its customers are mainly oil and gas producers in Western Canada. CCS owns the only two operating secure landfills in NEBC that are permitted to accept solid hazardous waste. One is the Silverberry secure landfill (“Silverberry”). It opened in 2002. It is located approximately 50 km north-west of Fort St. John. The other is called Northern Rockies secure landfill (“Northern Rockies”). It opened in 2009 and is situated about 340 km northwest of Silverberry, about 260 km from the Babkirk Site and approximately 20 km south of Ft. Nelson. CCS also operates a variety of different types of secure landfills in Alberta and Saskatchewan and owns a separate waste management business called Hazco Waste Management (“Hazco”). Schedule “A” hereto is a map showing the locations of the landfills which are relevant to this Application.

[16]  BLS was founded in 1996 by Murray and Kathy Babkirk (the “Babkirks”). BLS operated a facility which was not a secure landfill. It had a permit for the treatment and short-term storage of hazardous waste on the 150 acre (approx.) Babkirk Site. It is located approximately 81 km or 1 ½ hours by car, northwest of Silverberry. The Babkirks operated their facility for approximately six years under a permit from the British Columbia Ministry of the Environment (“MOE”) which was issued in 1998. However, in 2004, they stopped accepting waste. Two years later, the Babkirks retained SNC Lavalin (“SNCL”) to prepare the documents BLS needed to apply for permits for the construction of a secure landfill capable of accepting solid, hazardous waste at the Babkirk Site.

[17]  The individual Respondents are the former shareholders of Complete who sold their shares to CCS in the Merger. Karen and Ron Baker are married and Ken Watson is their son-in- law. Tom Wolsey is Randy Wolsey’s father. The former shareholders will be referred collectively as the “Vendors”. All the Vendors, except Tom Wolsey, gave evidence in this proceeding.

[18]  In November of 2006, Randy Wolsey, acting on his own behalf and on behalf of other individual Respondents, negotiated a “handshake agreement” with the Babkirks to purchase the shares of BLS. The deal was conditional on BLS obtaining approval for the secure landfill from the Environmental Assessment Office (“EAO”). In April 2007, the Vendors incorporated Complete (initially called Newco) to be the company that would eventually purchase the shares of BLS. After an extensive process of consultation and review, the EAO issued a certificate (the “EA Certificate”) to BLS on December 3, 2008. Four months later, in April 2009, Complete acquired all the outstanding shares of BLS and it became a wholly-owned subsidiary of Complete. Thereafter, on February 26, 2010, BLS received a permit from the MOE authorizing the construction of a secure landfill, with a maximum storage capacity of 750,000 tonnes, and a storage and treatment facility with a maximum capacity of 90,000 tonnes (the “MOE Permit”).

[19]  At the time of the Merger, Complete had other business interests. It operated municipal solid waste landfills for the Peace River Regional District as well as a solid waste transfer station. In addition, it owned a roll-off container rental business (the “Roll-off Bin Business”). Since the Merger, those businesses have been operated by Hazco.

[20]  CCS, Complete and BLS will be described collectively as the “Corporate Respondents”.

D. THE PARTIES’ POSITIONS

The Commissioner

[21]  The Commissioner alleges that because CCS owns the only two operational secure landfills for solid hazardous waste in NEBC, it has a monopoly and associated market power which allows it to price discriminate between different customers and set the prices for hazardous waste disposal above a competitive level. These prices are known as “Tipping Fees”.

[22]  The Commissioner alleges that Complete was ready to enter the market for secure landfill services in NEBC and that it was likely that competition between Complete and CCS would have caused a decline in average Tipping Fees in NEBC of at least 10%. Alternatively, the Commissioner alleges that the Vendors would have sold Complete to a purchaser which would have operated a secure landfill in competition with CCS. Finally, the Commissioner maintains that any efficiencies associated with the Merger are likely to be de minimis.

The Respondents

[23]  The Vendors submit that their sale of Complete was not a Merger under the Act because there was no business in operation at the Babkirk Site. They also deny (i) that Complete was poised to enter the market for the direct disposal of hazardous waste into a secure landfill and (ii) that, in the absence of the Merger, an alternative buyer would have purchased Complete and operated a secure landfill. The Respondents maintain that if the Vendors had not sold Complete to CCS, they would likely have processed hazardous waste at the Babkirk Facility using a treatment technique called bioremediation. This type of treatment would have been complemented by a half cell (125,000 tonnes) of secure landfill. The secure landfill would only have been used to store the small amount of hazardous waste that could not be successfully treated, and would not have been used to engage in meaningful competition with CCS in respect of the supply of secure landfill services.

[24]  The Corporate Respondents challenge both the Commissioner’s interpretation of CCS’ pricing behaviour and her prediction of the anti-competitive effects she has alleged would likely result from the Merger. Among other things, they allege that the Commissioner’s approach to market definition is fundamentally flawed and that the area in which there is scope for competition between the Babkirk and Silverberry facilities is, at best, limited to the very small “Potentially Contestable Area” identified by CCS’ expert, Dr. Kahwaty (the “Contestable Area”).

[25]  The Corporate Respondents also submit that the efficiencies resulting from the Merger are likely to be greater than, and will offset, the effects of any prevention of competition brought about by the Merger. They further argue that the Commissioner failed to meet her burden of quantifying the deadweight loss as part of her case in chief. As a result, they say that the Tribunal should conclude that the Merger is not likely to result in any quantifiable effects.

[26]  Finally, all the Respondents submit that if there is to be remedy, it should be divestiture, rather than dissolution.

E. THE EVIDENCE

[27]  Attached as Schedule “B” is a list of the witnesses who testified for each party and a description of the documentary evidence.

f. INDUSTRY BACKGROUND

[28]  The management of solid hazardous waste generated by oil and gas operators is regulated in British Columbia by the Environmental Management Act, SBC 2003, c 53 (the “EMA”) and regulations. If the waste produced meets the definition of “hazardous waste” found in the Hazardous Waste Regulation, (B.C. Reg. 63/88) (the “HW Regulation”), oil and gas operators wishing to dispose of hazardous waste must do so within the confines of the legislative framework. The MOE is responsible for administering the EMA and HW Regulation.

Hereinafter, hazardous waste as defined in the HW Regulation which is solid will be described as “Hazardous Waste”.

[29]  Under the HW Regulation, a person must receive a permit from the MOE to operate a facility called a secure landfill that can accept Hazardous Waste for disposal. A “secure landfill” is defined in the HW Regulation as a disposal facility where Hazardous Waste is placed in or on land that is designed, constructed and operated to prevent any pollution from being caused by the facility outside of the area of the facility (“Secure Landfill”).

Disposal at Secure Landfills

[30]  Oil and gas drilling operators (also called waste generators) produce two major types of Hazardous Waste that can be disposed of at a Secure Landfill: contaminated soil and drill cuttings. The contaminants are typically hydrocarbons, salts, and metals.

[31]  Hydrocarbons are categorized as light-end hydrocarbons and heavy-end hydrocarbons. The evidence shows that Hazardous Waste often includes hydrocarbons of both types.

[32]  Oil and gas generators can contaminate soil with salt when, among other things, they inadvertently spill produced water or brine. Produced water is water that has been trapped in underground formations and is brought to the surface along with the oil or gas. Metals can be found in Hazardous Waste because they occur naturally or because they have been included in additives used in drilling.

[33]  The HW Regulation states that a Secure Landfill cannot be used to dispose of liquid hazardous waste.

[34]  Hazardous Waste from “legacy sites” can also be disposed of at Secure Landfills. Dr. Baye defined legacy waste as “accumulated waste from decades of drilling activity that has been left at the drilling site” (“Legacy Waste”).

[35]  Operators pay third-party trucking companies to transport Hazardous Waste to Secure Landfills. Transportation costs are typically a substantial portion of waste generators’ overall costs of disposal. Dr. Baye estimated that a generator would pay $4 to $6 per tonne for every hour spent transporting waste from, and returning to a generator’s site.

[36]  At the hearing, Mr. [CONFIDENTIAL] and Mr. [CONFIDENTIAL], indicated that no ongoing liability is shown on their books once Hazardous Waste is sent to Secure Landfills, even though generators could be liable if a Secure Landfill operator goes bankrupt or if the landfill fails and Hazardous Waste leaches out of the facility.

[37]  The MOE has issued five permits for Secure Landfills. Four of them are in NEBC and are currently valid: Silverberry, Northern Rockies, Babkirk and Peejay.

[38]  Silverberry has a permitted capacity which allows it to accept 6,000,000 tonnes of waste. At 1.52 tonnes per cubic meter, which is the same figure used to calculate tonnes at Silverberry, Northern Rockies’ permitted capacity is 3,344,000 tonnes. In 2010, [CONFIDENTIAL] tonnes of Hazardous Waste was tipped at Silverberry and, in that year, Northern Rockies accepted [CONFIDENTIAL] tonnes.

[39]  Tipping Fees vary depending on the type of waste. According to the evidence given by Dr. Baye, the average Tipping Fee for all substances at Silverberry was [CONFIDENTIAL] per tonne in 2010 and the average Tipping Fee for all waste tipped at Northern Rockies in the same year was [CONFIDENTIAL] per tonne.

[40]  Peejay is located in a relatively inaccessible area near the Alberta border. It was developed by a First Nations community to serve nearby drilling operators such as Canadian Natural Resources Limited (“CNRL”). Construction specifications and an operational plan for Peejay were approved by the MOE on March 11, 2009. However, the Secure Landfill has not yet been constructed and there may be financial difficulties at the project.

[41]  There are presently no Secure Landfills in operation in NEBC which are owned by oil and gas generators.

Bioremediation - Methodology

[42]  Bioremediation is a method of treating soil by using micro-organisms to reduce contamination. The microbes can be naturally occurring or they can be deliberately added to facilitate bioremediation. In NEBC, bioremediation usually takes place on an oil and gas producing site where the waste is generated. Bioremediation can also be undertaken offsite but the evidence indicates that there are no offsite bioremediation facilities currently operating in NEBC.

[43]  A common bioremediation technique is landfarming. In landfarming, contaminated waste is placed on impermeable liners and is periodically aerated by being turned over or tilled. The landfarming technique the Vendors planned to use involves turning soil to create windrows which are [CONFIDENTIAL] triangular-shaped piles of soil [CONFIDENTIAL].

[44]  The preponderance of the evidence showed that, given sufficient time, light-end hydrocarbons can be successfully bioremediated in NEBC despite the cold if the clay soil is broken up. However, the Tribunal has concluded that soil contaminated with heavy-end hydrocarbons is not amenable to cost effective bioremediation because it is difficult, unpredictable, and very time consuming. Further, waste contaminated with metals and salts cannot be effectively bioremediated with technologies currently approved for use in Canada.

[45]  Once bioremediation is complete, an operator will normally hire a consultant to determine whether the Hazardous Waste can be certified as “delisted” in accordance with a delisting protocol. If so, there is no further liability associated with that particular waste.

[46]  Mr. Watson testified that his company, Integrated Resource Technologies Ltd. (“IRTL”), had successfully bioremediated hydrocarbon-contaminated soil throughout the winter in NEBC and Northern Alberta. Since about 2002, he has been using a specially designed machine from Finland, the “ALLU AS-38H”. This machine [CONFIDENTIAL] is capable of breaking up heavy clay so that bacteria can enter the windrow and consume the hydrocarbon contaminants.

g. THE ISSUES

[47]  The following broad issues are raised in this proceeding:

1. Is CCS’ acquisition of Complete a “merger”?
2. What is the product dimension of the relevant market?
3. What is the geographic dimension of the relevant market?
4. Is the Merger Pro-Competitive?
5. What is the analytical framework in a “prevent” case?
6. Is the Merger likely to prevent competition substantially?
7. What is the burden of proof on the Commissioner and on a Respondent when the efficiencies defence is pleaded pursuant to section 96 of the Act?
8. Has CCS successfully established an efficiencies defence?
9. Is the appropriate remedy dissolution or divestiture?

ISSUE 1– IS CCS’ ACQUISITION OF COMPLETE A MERGER?

[48]  As a threshold matter, the Vendors submit that the Application should be dismissed because, at the date of the Merger, Complete was not a “business” within the meaning of section 91 of the Act, given that it was not actively accepting and treating Hazardous Waste, and was not otherwise operational in relation to the supply of Secure Landfill services. Instead, they maintain that Complete was simply an entity which held the assets of BLS, i.e. permits and property. Accordingly, the Vendors’ position is that, because CCS acquired assets which had not yet been deployed, it did not acquire a “business”, as contemplated by section 91 of the Act. The Vendors also submit that the other businesses owned by Complete and acquired in the Merger are not relevant for the purposes of this Application because the Commissioner does not allege that they caused or contributed to a substantial prevention of competition.

[49]  A merger is defined in section 91 as the acquisition of a “business”. The section reads as follows:

In sections 92 to 100, “merger” means the acquisition or establishment, direct or indirect, by one or more persons, whether by purchase or lease of shares or assets, by amalgamation or by combination or otherwise, of control over or significant interest in the whole or a part of a business of a competitor, supplier, customer or other person.

Pour l’application des articles 92 à 100, « fusionnement » désigne l’acquisition ou l’établissement, par une ou plusieurs personnes, directement ou indirectement, soit par achat ou location d’actions ou d’éléments d’actif, soit par fusion, association d’intérêts ou autrement, du contrôle sur la totalité ou quelque partie d’une entreprise d’un concurrent, d’un fournisseur, d’un client, ou d’une autre personne, ou encore d’un intérêt relativement important dans la totalité ou quelque partie d’une telle entreprise.

[50]  Business is defined as follows in subsection 2(1) of the Act (the “Definition”):

“business” includes the business of	« entreprise » Sont comprises parmi les entreprises les entreprises :
(a) manufacturing, producing, transporting, acquiring, supplying, storing and otherwise dealing in articles, and	a) de fabrication, de production, de transport, d’acquisition, de fourniture, d’emmagasinage et de tout autre commerce portant sur des articles;
(b) acquiring, supplying and otherwise dealing in services.	b) d’acquisition, de prestation de services et de tout autre commerce portant sur des services.
It also includes the raising of funds for charitable or other non-profit purposes.	Est également comprise parmi les entreprises la collecte de fonds à des fins de charité ou à d’autres fins non lucratives.

[51]  The Tribunal notes two features of the Definition. First, it uses the word “includes”, which means that it is not exhaustive. Second, unlike the definitions of the term “business” found in statutes such as the Investment Canada Act, R.S.C. 1985, c. 28 (1^st Supp.), the Definition makes no reference to generating profits or revenues.

[52]  Turning to the facts, it is the Tribunal’s view that, for the reasons described below, Complete was actively engaged in the development of the Babkirk Site as a hazardous waste treatment facility.

[53]  Before the Merger, Complete had taken the following steps:

• It had purchased the shares of BLS, thereby acquiring the EA Certificate and the Babkirk Site;
• It had continued the application process and had secured the MOE Permit;
• It had held numerous shareholders’ meetings to plan how the Babkirk Site would be developed as a bioremediation facility and how that facility would operate in conjunction with other businesses owned by the Vendors;
• Its shareholders had discussed bioremediation with Petro-Canada and had solicited its interest in becoming a customer for both bioremediation and Secure Landfill services;
• It had hired IRTL and had paid it [CONFIDENTIAL] to bioremediate the soil in cell #1 at the Babkirk Facility. This work was undertaken because it was a condition precedent to the construction of the half cell of Secure Landfill;
• It was developing an operations plan for the Babkirk Facility.

[54]  In the Tribunal’s view, these activities demonstrate that Complete was engaged in the business of developing the Babkirk Site as a Hazardous Waste treatment service that included a Secure Landfill. Since the Definition is not exhaustive, the Tribunal has concluded that it encompasses the activities in which Complete and its shareholders had been engaged at the time of its purchase by CCS. Further, the absence of a requirement for revenue in the Definition suggests to the Tribunal that it covers a business in its developmental stage.

[55]  For all these reasons, the Tribunal has concluded that Complete was a business under section 91 of the Act at the date of the Merger.

[56]  In view of this conclusion, it is not necessary to decide whether Complete’s Roll-off Bin Business or its management of municipal dumps could be businesses for the purposes of section 91 of the Act.

[57]  However, in the Chairperson’s view, a business being acquired in a merger must have some relevance to a Commissioner’s application. In other words, it must have the potential to impact competition in the markets at issue. This observation means that, in this case, Complete’s Roll-off Bin Business and its management of municipal dumps would not have been caught by the definition in section 91 because they are not involved in any way in the disposal or treatment of Hazardous Waste. In his separate reasons, Crampton C.J. has taken a different position on this point.

ISSUE 2– WHAT IS THE PRODUCT DIMENSION OF THE RELEVANT MARKET?

The Analysis

[58]  In defining relevant markets, the Tribunal generally follows the hypothetical monopolist approach. As noted in Commissioner of Competition v. Superior Propane, 2000 Comp. Trib. 15, 7 C.P.R. (4th) 385 (Comp. Trib.) (“Propane 1”), at para. 57, the Tribunal embraces the description of that approach set forth at paragraph 4.3 in the Commissioner’s Merger Enforcement Guidelines (“MEGs”), which state:

Conceptually, a relevant market is defined as the smallest group of products, including at least one product of the merging parties, and the smallest geographic area, in which a sole profit-maximizing seller (a “hypothetical monopolist”) would impose and sustain a small but significant and non-transitory increase in price (“SSNIP”) above levels that would likely exist in the absence of the merger.

[59]  The price that would likely have existed in the absence of or “but for” the merger in a “prevent case” is the Base Price. The burden is on the Commissioner to demonstrate the “Base Price”. In this case, Dr. Baye has predicted a decrease in Tipping Fees in the absence of the Merger of at least 10% and in some of his economic modelling the price decrease is as large as 21%. In The Commissioner of Competition v. Canadian Waste Services Holdings Inc., 2001 Comp. Trib. 3; 11 C.P.R. (4th) 425; aff’d 2003 FCA 131, at para. 92, the Tribunal observed that, when a price change can be predicted with confidence, it is appropriate to delineate markets based on the likely future price even if the future level of that price cannot be predicted precisely.

In such cases, it may be sufficient for the Commissioner to demonstrate a range in which the likely future price would have fallen.

[60]  However, if a reasonable approximation of the likely future price cannot be demonstrated, it may be difficult for the Tribunal to clearly define the boundaries of the relevant market. In such cases, it will nevertheless be helpful for the Tribunal to be provided with sufficient evidence to demonstrate why substitutes that appear to be acceptable at the prevailing price level would or would not remain acceptable at price levels that would likely exist “but for” the merger or anti-competitive practice in question. In any event, evidence about various practical indicia is typically required to apply the hypothetical monopolist approach. The Tribunal recognizes that, like other approaches to market definition, the hypothetical monopolist approach is susceptible to being somewhat subjective in its practical application, in the absence of some indication of what constitutes a “small but significant and non-transitory increase in price” (SSNIP). For this reason, objective benchmarks such as a five percent price increase lasting one year, can be helpful in circumscribing and focusing the inquiry.

[61]  In the Application at paragraph 11, the Commissioner alleged that “[t]he anti-competitive effects of the Merger “primarily” affect oil and gas companies disposing of Hazardous Waste produced at oil and gas fields within NEBC.” [our emphasis]. However, in his initial report Dr. Baye did not limit the product market to Hazardous Waste produced at oil and gas fields. Nevertheless, during the hearing, Dr. Baye and Dr. Kahwaty essentially agreed that the amount of solid hazardous waste generated by non-oil and gas sources and tipped at Secure Landfills in British Columbia is so small that it does not warrant consideration in these proceedings. Accordingly, in the Tribunal’s view, the Commissioner’s product market definition is “solid hazardous waste generated by oil and gas producers and tipped into secure landfills in NEBC”.

[62]  However, the Respondents deny that the product market is as narrow as the Commissioner suggests. They say that it also includes bioremediation and the storage or risk management of waste on the sites where the waste was generated. They assert that these options constrain any market power that CCS may have. We will deal with these positions in turn.

Evidence about the Use of Bioremediation

[63]  Bioremediation has been described above and the evidence is clear that it is not an acceptable substitute for generators of Hazardous Waste if soil is contaminated with salts or metals. The Tribunal also accepts that, if heavy-end hydrocarbons are present, bioremediation is not cost effective or successful in a reasonable timeframe.

[64]  Mr. Andrews gave evidence about the use of bioremediation. He joined the MOE in January 2011. At that time, he was asked to review the E-Licensing Database, which keeps track of the progress made by operators who are bioremediating Hazardous Waste. He found that approximately 50% of the operators who had entries in the Database had reported no annual activity. He said that this indicated that many operators “had stopped actively treating H[azardous] W[aste] at these sites, or at least had stopped reporting any activities to the MOE.”

[65]  He therefore contacted Conoco Philips Canada, Suncor Energy Inc. (“Suncor”), Progress, Devon Canada Corporation (“Devon”) and Apache Canada Ltd. (“Apache”). They accounted for 80% of the registered sites with no reported activity. Among other things, he asked these operators to update their operations plans and submit annual reports.

[66]  According to Mr. Andrews’ witness statement, three of the operators reported that they had dealt with the Hazardous Waste they were bioremediating by sending it to a Secure Landfill and he anticipated that the remaining operators would do the same because bioremediation had failed. Mr. Andrews also said that Suncor filed an operations plan for its registered bioremediation sites which stated that, in the future, it would be sending all its Hazardous Waste to a Secure Landfill.

[67]  Mr. Andrews also described his experience with onsite treatment before he joined the MOE. He stated the following in his witness statement [paragraphs 23-26]:

I managed the HW at seven sites that CNRL had registered. These sites were allocated north of Fort St John and on existing oil and gas lease sites or on abandoned sites. There were approximately 50,000 tonnes of HW at these sites.

Initially, we tried treating the HW onsite. At each of these sites we put the HW into windrows and used a turner to turn the HW three times per year at each site. Hazco Environmental Services was the contractor that provided the windrow turner. We also added fertilizers and nutrients in the soil to assist in the bioremediation process. The fertilizer is meant to add additional nutrients to aid the bacteria to process the hydrocarbons.

CNRL pursued this treatment process for two years. While CNRL was able to reduce the contaminants in the HW at these sites, it failed to reduce the contaminants enough to "delist" the HW. Delisting HW means reducing the presence of contaminants low enough so that the soil is no longer considered to be HW. CNRL spent significant amounts of money on treatment because the sites required constant monitoring. The sites would get wet and require dewatering out to prevent berm overflow and enable equipment access.

Ultimately, after two years of treatment, it was clear that bioremediation would not work to address the contamination issues. CNRL decided to send the remaining HW to a Secure Landfill, specifically Silverberry, which was the landfill closest to the sites. I was also responsible for this process. It took CNRL approximately 2-3 years and several million dollars to send all the waste to Silverberry.

[68]  [CONFIDENTIAL], who works as a Contracting and Procurement Analysist for [CONFIDENTIAL], testified that its current operations in NEBC are in two fields called [CONFIDENTIAL]. He indicated that [CONFIDENTIAL] uses Secure Landfills to dispose of its Hazardous Waste and that it does not bioremediate because of the associated costs, the time necessary to bioremediate, and the manpower required to undertake bioremediation. He stated that liability has the potential to remain if the Hazardous Waste is not effectively bioremediated and that additional costs might be incurred if the Hazardous Waste, which is not effectively treated, must be tipped into a Secure Landfill. He added that there is ongoing uncertainty about whether bioremediation is effective or not.

[69]  [CONFIDENTIAL], the Vice-President of Operations at [CONFIDENTIAL], testified that [CONFIDENTIAL] uses an oil-based mud system to reduce friction on horizontal wells and that the oil-based mud cuttings are typically tipped into Secure Landfills. He also stated that [CONFIDENTIAL] sees disposal at a Secure Landfill as the most economic alternative for dealing with the Hazardous Waste from drilling, as disposal eliminates the increased environmental risk and cost of long term storage and/or site remediation. He explained that “[c]ontainment, transport and disposal of hazardous waste generated from drilling operations is currently the only option used by [CONFIDENTIAL] for managing hazardous waste generated from drilling.” Accordingly, it is clear that, at its current drilling sites, only Secure Landfills are used for disposal.

[70]  However, with respect to the Legacy Waste in NEBC on drilling sites which [CONFIDENTIAL], Mr. [CONFIDENTIAL] testified that [CONFIDENTIAL] will bioremediate some of the waste on these sites. He explained that bioremediation of the Legacy Waste had already been started by [CONFIDENTIAL]. He stated that the decision to dispose of Hazardous Waste instead of treating it is taken on a case-by-case basis, and depends on the type and amount of Hazardous Waste present on the legacy site, the likelihood of successful remediation, and the cost of excavation, transport and disposal.

[71]  During a review of the HW Regulation undertaken by the MOE, the MOE retained Conestoga-Rovers & Associates to conduct a report on Secure Landfill disposal. The report is entitled “Secure Landfill Disposal Policy Review” and dated March 2011. It states:

Based on equal weighting of cost, cost variability, timeline, and treatment certainty landfilling [Secure Landfill] is the preferred option under all scenarios. Landfarming [bioremediation] can be an appropriate method for treating hydrocarbon contaminated soils given appropriate concentrations and a multi-year timeline.

[72]  Devin Scheck, the Director of Waste Management and Reclamation at the British Columbia Oil and Gas Commission, testified that many operators still choose to dispose of their contaminated soils in Secure Landfills, even in situations where bioremediation is feasible, because of the associated costs and timeframe. He said the following in his witness statement [paragraphs 25-27]:

In my experience, a significant number of the sites that Operators seek to remediate are remediated by the Operator disposing of the contaminated soils at a landfill. With sites that are only contaminated with light end hydrocarbons, Operators may seek to bioremediate the soil on site, but heavy end hydrocarbons tend to have a poor response to bioremediation. As well, tight clay (which is prevalent in North Eastern B.C. where the oil and gas activity is most prevalent) makes bioremediation difficult, as does the relatively cold weather in the region. The presence of other contaminants, such as salts or metals that exceed CSR standards, prevent bioremediation from being an appropriate option, as salts and metals cannot be bioremediated.

Accordingly, when dealing with anything other than light end hydrocarbons, my experience is that Operators will usually dig up the soil, and dispose of it at a Secure Landfill like Silverberry in B.C. or a closer landfill across the Alberta border, such as the CCS Class II Alberta Landfill at LaGlace.

In my experience, even where bioremediation may be feasible, many Operators will still choose to landfill their contaminated soils. With bioremediation there is much uncertainty about costs, and the timeframe required for treatment is also uncertain. Weather conditions, site access issues, amount/type of treatment, future equipment and labour costs, as well as the costs of ongoing access for treatment and sampling to determine if the soils are remediated contribute to this uncertainty.

[73]  Mark Polet, an expert environmental biologist with specialized knowledge in environmental assessment, remediation and reclamation, as well as waste facility management development, stated as follows in paragraph 17 of his expert report:

Once an Operator in NEBC decides to clean up its waste, the two most practical options available are: 1) the disposal of the waste at an appropriate landfill; or 2) the treatment of the waste onsite through a process known as bioremediation. Operators do not have a uniform preference for either option but, in my experience, will choose an option based on cost, risk, efficacy and other reasons such as environmental stewardship.

[74]  At the hearing, Mr. Polet testified that the costs of bioremediation and secure landfilling can be comparable. He stated:

Once you define the types [of contaminants], you can decide on the most prudent response. And so, for instance, if I found on a site just the light end hydrocarbons with no other types of contamination mixed with it, I would look at bioremediation as an alternative. If it had salts and metals associated with the contamination, as well, then I would lean very strongly to landfill. If it had heavier end hydrocarbons, I would lean strongly to landfill, as well.

In terms of cost, there -- can be quite comparable in price, but of course bioremediation is very limited in what it can be applied to. And the one thing that we've noticed in working in the field is that when bioremediation is not managed properly, then much material actually lands back up in the landfill, anyway. So it has to be well managed to work properly.

[75]  There is also evidence about bioremediation in the Statement of Agreed Facts (the “Agreed Facts”). However, at the hearing it became clear that, contrary to the way in which they are presented, some of the facts were not actually agreed. The problematic evidence concerns bioremediation and was gathered in two ways. The evidence in paragraphs 63-67 of the Agreed Facts was given directly to the Commissioner’s staff. This evidence will be called “Evidence A”.

[76]  Evidence A has two significant characteristics. The sources are not named and the Agreed Facts state in paragraph 63 that “…the Bureau has not confirmed the truth of the facts communicated to it by the operators…” Evidence A is in the Agreed Facts because CCS insisted that it be included and CCS asks the Tribunal to give it weight and assume it is true.

[77]  Evidence A reflects that operator “F” bioremediates at least 70% of its waste in BC because it considers bioremediation to be better for the environment. Operators “H” and “J” bioremediate about 50% their waste. These operators appear to be bioremediating on their drilling sites to avoid the transportation charges and Tipping Fees associated with Secure Landfills.

[78]  Although the Commissioner cannot confirm its truth, the Tribunal is nevertheless prepared to give Evidence A some weight because it can see no reason why industry participants would lie to the Commissioner about their use of onsite bioremediation. However, without knowing the volume of waste produced by “F”, “H” and “J”, it is impossible to determine whether bioremediation is being undertaken on a significant scale. In any event, it is clear that, even for these waste generators, there is a substantial portion of Hazardous Waste in respect of which bioremediation is not used.

[79]  The second category of evidence is found in paragraphs 69-74 of the Agreed Facts. It was gathered in July 2011 by representatives of National Economic Research Associates (“NERA”). Dr. Baye works at NERA and it appears that NERA was retained by the Commissioner to interview industry participants. The Commissioner’s staff attended these interviews and the six sources are named ([CONFIDENTIAL]). No concern is expressed about the reliability of this evidence. This evidence will be called “Evidence B”.

[80]  The Commissioner only called witnesses from [CONFIDENTIAL] and [CONFIDENTIAL] who, as discussed above, indicated that they do not bioremediate as a matter of policy [CONFIDENTIAL].

[81]  CCS states the evidence of the other four operators, described in Evidence B, shows that they are active bioremediators and CCS asks the Tribunal to draw an adverse inference from the fact that they were not called by the Commissioner. However, in the Tribunal’s view, no such inference should be drawn because the Commissioner had no obligation to adduce the evidence and it was open to CCS to do so.

[82]  Evidence B shows that [CONFIDENTIAL] bioremediates 10-15% of its waste. [CONFIDENTIAL] engages in some bioremediation at about 70% of its sites and [CONFIDENTIAL] bioremediates about 75% of its treatable material onsite. (It also appears to treat the balance of treatable material offsite but this is not explained. Since there are no offsite bioremediation facilities in NEBC, the Tribunal has concluded that this statement must refer to offsite treatment elsewhere.) [CONFIDENTIAL] bioremediates onsite and sometimes moves waste between its sites for bioremediation. In the last 3-4 years, it has bioremediated 60-70% of its abandoned well waste.

[83]  It is noteworthy that this evidence gives no volumes for treatable and Legacy Hazardous Waste. In these circumstances, and given that the Respondent did not call witnesses from these four operators or other operators, the Tribunal is not persuaded that bioremediation is being undertaken on a significant scale in NEBC.

Evidence about Storage and Risk Management

[84]  Storage means that Hazardous Waste is left untreated on a drilling site which is still under lease. As long as the MOE does not order a cleanup, this option is available even though drilling has finished, as long as the operator continues to make the lease/tenure payments for the site. Since such payments are low compared to the cost of cleaning up the site, doing nothing may be an attractive option in some cases and the evidence from Trevor Mackay’s examination for discovery is that “many” operators have waste stored on their sites. However, Mr. [CONFIDENTIAL] testified that [CONFIDENTIAL] does not store the Hazardous Waste generated from drilling operations for long periods of time, due to the cost and potential liability issues. He explained that the typical well site storage costs during drilling operations are [CONFIDENTIAL] per well.

[85]  Risk Management is a process undertaken when drilling is finished and an operator wishes to terminate a lease. The operator must restore the site’s surface as nearly as possible to the condition it was in before drilling. Once this has been accomplished, a Certificate of Restoration (also referred to as a Certificate of Compliance) is issued and the operator’s lease is terminated. However, the operator remains liable for any issues arising from the Hazardous Waste that is left behind and is obliged to comply with conditions such as monitoring even after the certificate is issued.

[86]  On this topic, Mark Polet said the following in his reply report:

Based on my experience, Operators use risk management as a last resort if treatment or disposal are not practical. I rarely recommend it because even if approval is obtained, which in my experience is very difficult, the Operator retains liability and there is a recognition that the site may need to be revisited if issues arise.

[87]  Pete Marshal, an expert in Hazardous Waste management, testified that, although disposal in a Secure Landfill, bioremediation and risk management are each potentially available methods for dealing with Hazardous Waste, he did not know how many operators choose risk management.

[88]  This evidence leads the Tribunal to conclude that risk management is seldom used and is not considered to be an acceptable substitute for disposing of Hazardous Waste in a Secure Landfill.

Conclusions about the Product Market

[89]  Although some operators with Hazardous Waste which is contaminated with light-end hydrocarbons consider bioremediation to be an acceptable substitute for disposal in a Secure Landfill, there is no evidence about the volumes of waste which are successfully bioremediated. More importantly, there is no evidence that the availability of bioremediation has any constraining impact on Tipping Fees in NEBC. In addition, the Tribunal finds that bioremediation is not considered by at least some waste generators to be an acceptable substitute for disposal in a Secure Landfill, particularly in respect of soil that is contaminated with heavy- end hydro-carbons, salts or metals.

[90]  With regard to storage and risk management, there was no evidence about the volumes stored in NEBC and no evidence to suggest that the tenure payments or the cost to obtain a certificate of restoration have any impact on Tipping Fees at Silverberry.

[91]  Because bioremediation is not cost effective and is slow for a substantial volume of contaminated soil in NEBC and because it does not work at all on salts and metals, the Tribunal is satisfied that a substantial number of generators do not consider bioremediation to be a good substitute for the disposal of such Hazardous Waste in a Secure Landfill and would not likely switch to bioremediation in response to a SSNIP. Accordingly, the Tribunal is satisfied that the relevant product is “solid hazardous waste generated by oil and gas producers and tipped into secure landfills in NEBC”.

ISSUE 3– WHAT IS THE GEOGRAPHIC DIMENSION OF THE RELEVANT MARKET?

[92]  The Tribunal and the courts have traditionally considered it necessary to define a relevant market before proceeding to assess the competitive effects of mergers under the Act. (See, for example, Director of Investigation and Research v. Hillsdown Holdings (Canada) Ltd. (1992), 41 C.P.R. (3d) 289, at 297; Canada (Director of Investigation and Research) v. Southam Inc, [1997] 1 S.C.R. 748, at para. 79). However, they have cautioned against losing sight of the ultimate inquiry, which is whether the merger being assessed prevents or lessens, or is likely to prevent or lessen, competition substantially. (Southam, above; “Propane 1”, above, at para. 48). With this admonition in mind, it is the Tribunal’s view that, in this case, the Tribunal may evaluate the competitive effects of the Merger without precisely defining the relevant geographic market.

[93]  This conclusion is important because, as will be discussed below, the evidence that has been adduced does not permit the Tribunal to delineate the exact boundaries of the geographic market.

[94]  The Tribunal agrees with the approach taken in the MEGs. The process begins with a small area around one of the merging parties’ locations (in this case, a Secure Landfill site) and then asks whether all rivals operating at locations in that area, if acting as a hypothetical monopolist, would have the ability and incentive to impose a small but significant price increase (typically 5%) and sustain that increase for a non-transitory period of time (typically one year). If the postulated price increase would likely cause purchasers of the relevant product in that area to switch sufficient quantities of their purchases to suppliers located outside that area to render the price increase unprofitable, then the geographic dimension of the relevant market would be progressively expanded until the point at which a seller of the relevant product, if acting as a hypothetical monopolist, would have the ability and incentive to impose a SSNIP.

[95]  In the case at bar, the evidence dealt with three geographic regions:

1. The Contestable Area – this was identified by Dr. Kahwaty on behalf of CCS.
2. All of NEBC – the Commissioner, supported by her expert Dr. Baye, submitted this definition of the geographic market.
3. The Babkirk Polygon – this area was identified in internal CCS documents dealing with the potential impact of the Babkirk Facility on CCS.

I. The Contestable Area

[96]  In broad terms, the Contestable Area identified by Dr. Kahwaty encompasses an hourglass shaped area of 11,000 square kilometres which lies between the Babkirk Site and Silverberry. In his analysis, the road network in this area is such that there are some areas in which both Silverberry and a potential landfill at the Babkirk Site may be viable disposal options for customers with well sites in those areas. Dr. Kahwaty acknowledges that the transportation costs required to reach Silverberry or the Babkirk Site are such that both may be economic alternatives for these customers. In Dr. Kahwaty’s view, the geographic scope of the relevant market should be limited to this area.

[97]  Dr. Kahwaty used Dr. Baye’s 10% predicted decline in Tipping Fees as his benchmark for defining the geographic scope of the relevant market. In short, he assessed every well site and calculated whether, if given a 10% reduction off the Tipping Fees paid at Silverberry, the customer would be indifferent as between tipping at Babkirk and Silverberry, having regard for the fact that their total disposal cost (transportation plus Tipping Fee) would be the same for each Secure Landfill. Twelve such customers were identified, accounting for approximately 41,900 tonnes in the Contestable Area. Dr. Kahwaty acknowledged that a larger critical price discount would produce a larger contestable area.

[98]  The Tribunal is satisfied that a hypothetical monopolist supplying Secure Landfill services to these twelve customers in respect of the Hazardous Waste generated in the Contestable Area would have the ability and incentive to impose and sustain a SSNIP above levels that would likely exist in the absence of the Merger.

[99]  Indeed, the Tribunal considers that the Contestable Area is likely understated and, in fact, smaller than the minimum area in which a hypothetical monopolist would have the ability and incentive to impose and sustain a SSNIP. The Tribunal has reached this view for several reasons. First, the Tribunal accepts Dr. Baye’s position that “Babkirk need not have a location advantage for a customer – and the customer need not switch from Silverberry to Babkirk – for that customer to significantly benefit from the lower Tipping Fees stemming from competition”. Second, the evidence suggests that new wells are likely to be drilled in the area between Babkirk and Northern Rockies, and that there is Legacy Waste sitting on abandoned well-sites in that region. Meaningful price and non-price competition between Babkirk and Northern Rockies for at least some of that waste likely would have developed in the absence of the Merger. Third, the geographic extent of the Contestable Area is necessarily limited by Dr. Kahwaty’s assumption of a base price that is only 10% below prevailing levels. If that figure is too low Dr. Kahwaty admitted that the geographic market would be larger than the Contestable Area.

[100]  In addition, the Tribunal notes that the volume of Hazardous Waste generated in the Contestable Area likely is greater than reported by Dr. Kahwaty because he only used data for 2010. Moreover, Dr. Kahwaty excluded CCS’ national customers from his analysis and this may also have resulted in an understated geographic market.

[101]  With respect to the possibility that Secure Landfills in Alberta might be economically accessible for generators of waste in the Contested Area, Dr. Kahwaty stated that “transportation costs are too great for [customers located to the south and east of Silverberry, who currently tip their waste in Alberta] to opt to dispose at a potential landfill at the Babkirk site (even with a significant discount) as compared to disposing at Silverberry at current prices.” The Tribunal extrapolates from this and concludes that customers generating Hazardous Waste in the Contestable Area are unlikely to transport their waste to secure landfill sites in Alberta due to the significant transportation costs and potential liability that would be associated with hauling waste over such a long distance.

[102]  For all these reasons, the Tribunal concludes that the geographic market is at least as large as the Contestable Area. We now turn to whether it could be as large as all of NEBC.

II. All of NEBC

[103]  NEBC covers approximately 118,800 square kilometres and is vast in comparison to Dr. Kahwaty’s Contestable Area. NEBC and the much smaller Contestable Area are compared on the map attached hereto as Schedule “C”, which is taken from Tab 29 of Dr. Kahwaty’s report of October 21, 2011.

[104]  Dr. Baye concludes that the relevant geographic market is NEBC on the basis that this is the region where targeted customers are located, including current customers at both Silverberry and Northern Rockies Secure Landfills.

[105]  In reaching this conclusion, Dr. Baye relies on an economic theory of market equilibrium which predicts that CCS would have an incentive to compete with an independently operated Babkirk Facility for customers located outside of Dr. Kahwaty’s Contested Area. This theory is based on his understanding that CCS’ average 2010 Tipping Fees at Silverberry were approximately [CONFIDENTIAL] per tonne and its average landfill costs were approximately [CONFIDENTIAL] per tonne, yielding a margin in excess of 60%. Using these figures, Dr. Baye assumes that CCS would be prepared to reduce its Tipping Fees by 25% or greater in some areas to retain business in the face of competition from an independent Babkirk Facility.

[106]  However, among other problems, Dr. Baye’s theory fails to take into account the opportunity cost to CCS that would be associated with substantially reducing its Tipping Fees to sell landfill capacity today, which could be sold in the future at higher Tipping Fees to customers located closer to Silverberry. In the absence of any analysis of how this opportunity cost would factor into CCS’ current decision-making process, the Tribunal finds that the economic theory relied on by Dr. Baye is not particularly helpful in defining the geographic scope of the relevant market.

[107]  In his initial report, Dr. Baye also provides estimates based on econometric regression models which he asserts are consistent with this theory and his definition of the geographic market as extending throughout all of NEBC. The first set of models, found at Exhibits 19 and 20 of Dr. Baye’s initial report, test his hypothesis that the distance between a Secure Landfill and its closest competitor is a significant predictor of the average Tipping Fees at that landfill.

[108]  Exhibit 20 predicts that the opening of an independent landfill at the Babkirk Site will result in a large decline in average Tipping Fees at Northern Rockies, because it would reduce the distance to Northern Rockies’ nearest competitor to three hours and 49 minutes. However, this ignores (i) the substantial transportation costs that the vast majority of customers who tip at Northern Rockies would have to incur to transport their waste to Babkirk, (ii) the very small number of well-sites located between those two facilities, and (iii) the apparent absence of any incentive for CCS to alter its Tipping Fees at Northern Rockies in response to entry at Babkirk.

[109]  The second set of regression models are estimates offered by Dr. Baye which relate to a “natural experiment” involving SES’ entry at Willesden Green, Alberta, in December 2008. That facility became the closest competitor to CCS’ Rocky Mountain House landfill (“Rocky”), located approximately one hour away. In his analysis of CCS’ 2010 transactions data, Dr. Baye discovered that CCS substantially reduced the Tipping Fees it charged to several customers subsequent to the opening of SES’ facility at Willesden Green.

[110]  To address the possibility that these substantial price reductions were purely coincidental, Dr. Baye developed “difference in difference” (“DiD”) regression models, reported at Exhibit 26 of his initial report. The DiD approach controls for unobserved events, other than SES’ entry at Willesden Green, which might have led to the observed decline in Tipping Fees at Rocky. In short, the DiD models include a “treatment” setting in which the event (in this case, entry) occurred and a “control” setting in which the event did not occur. Dr. Baye took the change in Tipping Fees that occurred in the treatment setting and subtracted any change that occurred in the control setting. He interpreted the difference in the change (or the “difference in difference”) as the effect of entry at Willesden Green on Tipping Fees at Rocky.

[111]  It is significant that, in selecting a control landfill, Dr. Baye considered it important to pick a site that “is unlikely to be affected by the treatment event – in this case entry at Willesden Green.” One of the principal criteria that he employed in making that selection was that the control landfill had to be “at least 300 km away” from Willesden Green. The same logic would imply that entry at Babkirk would not likely affect Tipping Fees at Northern Rockies, which is situated 260 km away from the Babkirk Site. A key assumption underlying Dr. Baye’s DiD models is therefore inconsistent with his definition of the geographic market as all of NEBC. This, together with the fact that Northern Rockies is almost four times further away from Babkirk than SES’ Willesden Green facility is away from CCS’ Rocky facility, lead the Tribunal to conclude that Dr. Baye’s DiD analysis is not particularly helpful in defining the geographic scope of the relevant market. That said, as discussed in detail below, the transactions data which reveals substantial price reductions by CCS to seven of its customers following SES’ entry at Willesden Green is relevant to the Tribunal’s assessment of the likely competitive effects of the Merger.

[112]  Finally, the Tribunal notes that Dr. Baye also points to internal documents of CCS which he says are consistent with his definition of the relevant geographic market. However, those documents simply: (i) make projections of the overall annual operating margin ([CONFIDENTIAL]) that CCS stood to lose at Silverberry and Northern Rockies were an independent landfill to open at the Babkirk Site; (ii) predict a pricing war if the Babkirk Facility was operated independently or acquired by a third party; (iii) discuss the likelihood of having to compete through “value propositions”; and (iv) reflect that CCS likely takes into account its customers’ transportation costs to the next closest competing landfill in setting its Tipping Fees. While these types of statements assist in assessing whether the Merger is likely to prevent competition substantially, they are not particularly helpful to the Tribunal in defining the geographic scope of the relevant market.

III. The Babkirk Polygon

[113]  The Babkirk Polygon is the third area that was discussed at the hearing. That area was identified by a member of CCS’ business development team who was asked to project Babkirk’s market capture area. The Tribunal has added a rough depiction of that area on Schedule “C” hereto.

[114]  The Babkirk Polygon was apparently intended to identify the locations of existing Silverberry customers who would be likely to tip at Babkirk rather than at Silverberry, if Babkirk was operated as a Secure Landfill. In other words, the Babkirk Polygon was CCS’ representation of the geographic locations of business it risked losing if Babkirk opened as a Secure Landfill. It includes territory north and west of Babkirk and is a larger area than Dr. Kahwaty’s Contestable Area.

[115]  The Tribunal is satisfied that the locational advantage that the Babkirk Facility would enjoy for customers with drilling operations situated to its north and west is such that those customers would not likely tip at Silverberry in the absence of a very substantial reduction in its Tipping Fees. Given the opportunity cost that CCS would incur by offering such a substantial reduction in its Tipping Fees, and given the absence of any analysis by the Commissioner or Dr. Baye of the impact of that opportunity cost on CCS’s decision-making, the Tribunal is not persuaded that CCS would have an incentive to compete for those customers in the absence of the Merger.

[116]  Likewise, the Tribunal has not been persuaded on a balance of probabilities that such customers who operate to the north and west of the Babkirk Facility would tip at Silverberry, in response to a SSNIP above the maximum average tipping fee level that it believes is likely to exist in the absence of the Merger. For the reasons discussed below, the Tribunal has concluded that such price level will be at least 10% below existing levels. However, transportation costs and the liability associated with transporting Hazardous Waste over the long distance to Silverberry are such that it would require more than a SSNIP to induce waste generators located in those regions to tip their Hazardous Waste at Silverberry.

[117]  The Tribunal has concluded that the geographic scope of the relevant market is at least as large as the Contestable Area identified by Dr. Kahwaty, and likely falls between the limits of that area and the bounds of the Babkirk Polygon, which includes some of the Contestable Area, but adds significant territory north and west of Babkirk.

[118]  The Tribunal is satisfied that it would not matter if the geographic scope of the relevant market actually includes additional customer locations in the Babkirk Polygon, beyond the Contestable Area, because CCS would remain the sole supplier of Secure Landfill services to any reasonably defined broader group of customers.

ISSUE 4– IS THE MERGER PRO-COMPETITIVE?

[119]  CCS has suggested that the Merger is pro-competitive because it brings to the market a new Secure Landfill at the Babkirk Site. CCS further asserts that the Merger will most quickly transform the Babkirk Site into a Secure Landfill to complement CCS’ existing business and serve the growing oil and gas industry in NEBC. CCS says that these facts explain its customers’ failure to complain about the Merger.

[120]  The Tribunal disagrees. In its view, a merger which prevents all actual or likely rivalry in a relevant market cannot be “pro-competitive,” even if it expands market demand more quickly than might otherwise be the case. Such a merger might be efficiency-enhancing, as contemplated by the efficiency defence in section 96 of the Act. However, it has adverse consequences for the dynamic process of competition and the benefits that such process typically yields. In the absence of actual rivalry, or a very real and credible threat of future rivalry, meaningful competition does not exist.

ISSUE 5– WHAT IS THE ANALYTICAL FRAMEWORK IN A “PREVENT CASE?

[121]  The “prevention” branch of section 92 was raised in three previous Tribunal cases: Canada (Director of Investigation and Research) v. Southam Inc. (1992), 43 C.P.R. (3d) 161 (Comp. Trib.), rev’d on other grounds (1995), 63 C.P.R. (3d) 1 (F.C.A.), rev’d, [1997] 1 S.C.R. 748, Propane 1 and Canadian Waste Services. However, since those cases were primarily concerned with allegations involving a substantial lessening of competition, the Tribunal did not address in any detail the analytical framework applicable to the assessment of an alleged substantial prevention of competition.

[122]  In determining whether competition is likely to be prevented, the Tribunal will assess whether a merger is more likely than not to maintain the ability of the merged entity to exercise greater market power than in the absence of the merger, acting alone or interdependently with one or more rivals. For the purposes of this case, this requires comparing a world in which CCS owns the relevant Secure Landfills in NEBC (i.e. Northern Rockies, Silverberry and Babkirk) with a world in which Babkirk is independently operated as a Secure Landfill.

[123]  In assessing cases under the “prevent” branch of section 92, the Tribunal focuses on the new entry, or the increased competition from within the relevant market, that the Commissioner alleges was, or would be, prevented by the merger in question. In the case of a proposed merger, the Tribunal assesses whether it is likely that new entry or expansion would be sufficiently timely, and occur on a sufficient scale, to result in: (i) a material reduction of prices, or in a material increase in non-price competition, relative to prevailing price and non-price levels of competition, (ii) in a significant (i.e., non-trivial) part of the relevant market, and (iii) for a period of approximately two years. If so and if the entry or expansion likely would occur within a reasonable period of time, the Tribunal will conclude that the prevention of competition is likely to be substantial.

[124]  The Tribunal also considers whether other firms would be likely to enter or expand on a scale similar to that which was prevented or forestalled by the merger, and in a similar timeframe. Where the Tribunal finds that such entry or expansion would probably occur, it is unlikely to conclude that the merger is likely to prevent competition substantially.

[125]  As noted earlier and as recognized by all parties, the price against which the prevailing prices will be compared will be the price that would likely have existed in the absence of the merger. The burden will be on the Commissioner to demonstrate that price level, or the range of prices, that likely would have existed “but for” the merger.

[126]  In final argument, the Commissioner and CCS suggested that helpful guidance on the approach that should be taken to prevention of competition cases can be provided by the U.S. jurisprudence pertaining to mergers that have been alleged to reduce potential competition. In the Tribunal’s view, that jurisprudence is not particularly helpful to merger assessment under the Act, because it was developed in respect of a different statutory test and, for the most part, many years ago. (It appears that the US Supreme Court and the federal appellate courts have not had an opportunity to revisit that jurisprudence since the 1980s. See M. Sean Royall and Adam J. Di Vincenzo, “Evaluating Mergers between Potential Competitors under the New Horizontal Merger Guidelines”, Antitrust (Fall 2010) 33, at 35.)

ISSUE 6– IS THERE A SUBSTANTIAL PREVENTION OF COMPETITION?

A. The “But For” analysis

Introduction

[127]  In Commissioner of Competition v. Canada Pipe Company Ltd., 2006 FCA 233, the Federal Court of Appeal decided that a “but for” analysis was the appropriate approach to take when considering whether, under paragraph 79(1)(c) of the Act, “…the practice has had, is having or is likely to have the effect of preventing or lessening competition substantially.” The specific question to be asked is stated, as follows, at paragraph 38 of the decision “…would the relevant markets – in the past, present or future – be substantially more competitive but for the impugned practice of anti-competitive acts?”

[128]  Language similar to that found in section 79 appears in section 92 of the Act. Section 92 says that an order may be made where “…the Tribunal finds that a merger or proposed merger prevents or lessens, or is likely to prevent or lessen competition substantially.” For this reason, the parties and the Tribunal have determined that the “but for” approach is also appropriate for use in cases under section 92 of the Act. The parties recognize that the findings will be forward looking in nature and CCS has cautioned the Tribunal against unfounded speculation. With this background, we turn to the “but for” analysis.

[129]  The discussion below will address the threshold issue of whether effective competition in the supply of Secure Landfill services in the Contestable Area identified by Dr. Kahwaty likely would have materialized in the absence of the Merger. Stated alternatively, would effective competition in the relevant market likely have emerged “but for” the Merger? After addressing this issue, the Tribunal will turn to the section 93 factors that are relevant in this case, as well as the issue of countervailing power.

[130]  In undertaking the “but for” analysis, the Tribunal will consider the following questions:

1. If the Merger had not occurred, what new competition, if any, would likely have emerged in the Contestable Area?
2. If the Merger had not occurred, what would have been the likely scale of that new competition?
3. If the Merger had not occurred, when would the new competition likely have entered the market?

[131]  The Commissioner suggested that either June or July, 2010 be used as the timeframe for considering the “but for” world. CCS, on the other hand, was more precise and suggested that the relevant time for this purpose should be the end of July 2010, when CCS and Complete signed the letter of intent which led to the Merger. Since the parties have essentially agreed, the Tribunal will focus on the end of July.

[132]  The Tribunal’s view is that, as of the end of July 2010, there were only two realistic scenarios for the Babkirk Site absent the Merger. They were:

1. The Vendors would have sold to a waste company called Secure Energy Services Inc. (“SES”), which would have operated a Secure Landfill; or
2. The Vendors would have operated a bioremediation facility together with a half cell of Secure Landfill.

[133]  Extensive evidence was adduced on these topics. The discussion below summarizes the most important aspects of that evidence.

Scenario #1 – A sale of Complete to SES

[134]  In February of 2007 when the Vendors first met to organize Complete, they decided that their exit strategy would be to sell the company to Newalta Corporation or to CCS. Newalta is a waste company which operates Secure Landfills in Alberta. However, it was always the Vendors’ intention to sell only when they could achieve an acceptable return on their investment.

[135]  In November 2007, Canaccord Capital sent a four-person investment team to Fort St. John to investigate the purchase of a number of the Vendors’ companies, including Complete. At that time, the Vendors’ intentions about a sale of Complete were recorded in the company’s minutes, which, among other things, stated:

…consensus at Complete’s meeting was to carry on the way we are going unless we are presented with a very attractive proposal from outside. We don’t want to do all the work for the benefit of others – better to take a longer time, but to have higher rewards for ourselves…

[136]  Subsequently, a Vision Statement, dated June 22, 2008, was prepared by Karen Baker. That document stated that they wanted to make a “good return on sale of company”. The Statement also observed:

The VISION of Complete Environmental Inc. is to become a diversified, highly efficient, environmental corporation in NEBC generating a high profit margin thus, presenting itself as an attractive acquisition to multiple potential purchasers.

[137]  After Complete received its MOE Permit on February 26, 2010, Ken Watson’s company, IRTL, offered to purchase Complete for [CONFIDENTIAL]. Before that offer was made, the Vendors had not been actively considering a sale. However, IRTL’s offer spurred them to seriously consider the matter and, before they responded to IRTL’s, they authorized Randy Wolsey to contact CCS and SES for expressions of interest.

[138]  On March 23, 2010, Randy Wolsey spoke to SES but was told that it had no interest in making an offer because it was busy with its initial public share offering. However, SES did indicate a possible future interest and stated that it valued BLS at approximately [CONFIDENTIAL] in either mixed cash and shares or [CONFIDENTIAL] plus a share offering. In contrast, CCS expressed immediate interest and Dan Wallace of CCS verbally offered [CONFIDENTIAL] for BLS.

[139]  The Vendors eventually decided to sell Complete to IRTL. However, IRTL’s offer was withdrawn in early June 2010 after Ken Watson learned that, contrary to his expectations, Canaccord Capital would not finance IRTL’s acquisition of Complete. After Cannacord declined, he did not have time to arrange alternative financing.

[140]  According to Karen Baker, after IRTL’s offer was withdrawn, the Vendors decided to try to sell Complete one last time. They concluded that, if they did not receive an interesting offer, they would operate the Babkirk Facility themselves. This would involve moving forward with an operating plan and constructing a half cell of Secure Landfill. To ascertain if a sale was possible, Randy Wolsey was again asked to contact CCS and SES. In addition, he was asked to contact Newalta. He did so, but Newalta did not respond to his email.

[141]  At about that time, Dan Wallace of CCS apparently heard that IRTL’s offer had fallen through and sent Randy Wolsey an email asking if CCS could renew its earlier offer. Mr. Wolsey responded by offering to sell BLS for [CONFIDENTIAL]. On June 22, 2010, CCS agreed to purchase the shares of BLS for that amount.

[142]  Inexplicably, Randy Wolsey did not tell the other Vendors about his deal with CCS. Instead, he arranged a meeting with SES (the “Meeting”). It was held on June 29, 2010 and was attended by Rene Amirault, President and CEO of SES, Dan Steinke, SES’ Vice-President of Business Development, and Corey Higham, SES’ Business Development Representative (the “SES Group”).

[143]  According to the Vendors, the SES Group spent much of the Meeting giving a presentation to show that SES was an attractive investment. An SES brochure prepared for potential investors was used for this purpose. However, the Vendors were not interested in acquiring shares of SES and they testified that no price for BLS or Complete was ever suggested and no offer was discussed.

[144]  According to Mr. Amirault, he indicated during the Meeting that an all cash offer could be made. The Vendors denied this. Since this evidence is significant and was not included in Mr. Amirault’s witness statement, the Tribunal has concluded an all cash offer was not mentioned and that the Vendors understood that SES would only purchase Complete if it could use its shares to finance part of the purchase price.

[145]  During the Meeting, the SES Group had questions about how to secure the necessary regulatory approvals to allow SES to expand the permitted capacity of the Babkirk Facility and to upgrade the design of the Secure Landfill cells (the “Questions”). The Vendors could not answer the Questions and Mr. Amirault testified that he asked for and was refused permission to speak to Del Reinheimer about the Questions. However, some Vendors could not remember anyone from the SES Group asking for permission to speak to Del Reinheimer about the Questions and other Vendors denied that anyone asked for such permission at that time. Mr. Reinheimer was the Section Head, Environmental Management in the Environmental Protection Division of the MOE.

[146]  Mr. Amirault stated that following the Meeting, SES was actively interested in purchasing Complete and gave the following reasons to explain its failure to make an offer or submit a letter of intent in July 2010:

• The Questions had to be answered before a price could be established.
• There was no particular urgency about making an offer because there were no other buyers. Mr. Amirault testified that the Vendors had indicated at the Meeting that Complete had promised a First Nation that it would not sell to CCS and the SES Group knew that Newalta was not interested.

[147]  Mr. Amirault acknowledged that the Questions were about process i.e. “how to” go about getting approvals for increased permitted capacity and enhanced cell design. He also stated that he had no doubt that the approvals would be forthcoming. In these circumstances and because, as described below, SES was actively engaged in the development of another Secure Landfill, it is the Tribunal’s view that SES would have known what it needed to spend to increase the permitted capacity and upgrade the landfill cells at the Babkirk Site. Accordingly, the Tribunal does not accept Mr. Amirault’s evidence that SES could not establish a purchase price without the answers to the Questions.

[148]  There is a dispute about whether, on July 6, 2010, Corey Higham sent Ron Baker an email setting out the Questions which had been discussed at the Meeting. Mr. Amirault stated in hearsay evidence in his witness statement that Corey Higham had told him that the email had been sent. A photocopy of that alleged email was appended to Mr. Amirault’s witness statement. However, after Ron Baker made a witness statement stating that he did not recall having received the email, no reply evidence was filed by Corey Higham to say that it had, in fact, been sent. The email is an important document to the extent that it evidences an ongoing interest by SES in receiving answers to the Questions. However, given that it was not properly adduced, the Tribunal gives it no weight.

[149]  As mentioned above, Mr. Amirault testified that Ron Baker told the SES Group during the Meeting that he had promised a First Nation that the Vendors would not sell the Babkirk Facility to CCS. This meant that SES understood that the Vendors were not likely to receive a competing offer. However, this apparently significant detail did not appear in Mr. Amirault’s witness statement and was not referred to in his examination-in-chief. It was mentioned for the first time in answer to a question posed by the Tribunal. For this reason, this evidence is not accepted as an explanation for SES’ failure to show a more active interest in purchasing Complete.

[150]  Mr. Amirault acknowledged that the window for undertaking construction in 2010 “…was closing, closing fast” and that SES wanted to begin construction at Babkirk at the end of August or by mid-September at the latest. This meant that, if SES had been actively interested in acquiring Complete, it would have moved quickly to present the Vendors with a letter of intent. Mr. Amirault also testified that, apart from updating its earlier market study of the Babkirk Facility, no further due diligence was required. In addition, he testified that he did not need the approval of his Board of Directors to deliver a letter of intent. In these circumstances, the Tribunal has concluded that SES’ failure to follow up more quickly on its meeting with the Vendors and its failure to demonstrate any interest in making an offer at that time are attributable to a lack of active interest in acquiring BLS in July 2010.

[151]  Ron Baker recalls that he was called by Corey Higham on July 28, 2010. However, Mr. Baker does not remember what Mr. Higham said during that telephone call. Since Corey Higham did not give evidence, the Tribunal considers it fair to assume that he did not make an offer to purchase Complete or propose a letter of intent. Although Mr. Baker does not recall much of his own side of the conversation, he does remember telling Mr. Higham that Complete had just signed a letter of intent with CCS.

[152]  The Tribunal considers it noteworthy that, since 2007, SES had been developing a new Secure Landfill called Heritage. It was located approximately 153 km south of the Babkirk Site. However, it was not favourably received during public consultations because it was to be located near a populated area and on a site where a landslide had occurred. Corey Higham of SES was told on July 26, 2010 that the EA’s review of the Heritage Project had been “suspended” pending further evidence from SES about the suitability of the site. SES eventually abandoned the project in December of 2010.

[153]  Based on this evidence, the Tribunal has concluded that SES had an ongoing general interest in the Babkirk Facility. It had spoken to Murray Babkirk when he owned BLS and it had indicated possible future interest when Randy Wolsey contacted it in March of 2010. SES also sent its most senior executive to the Meeting in June 2010. However, the Tribunal has also concluded that SES was not actively interested in a purchase in July 2010. It never discussed a potential price, and, although it asked the Questions, the answers were not crucial to setting the price and SES already knew that it would be granted the additional approvals it sought. Finally, although Mr. Amirault testified that there was no due diligence of any consequence to be undertaken, SES did not send a letter of intent and there are no internal SES documents showing that it was preparing to make an offer. The Tribunal has concluded that SES’ failure to take a more active interest in purchasing Babkirk is explained by the fact that it was still giving priority to its project at the Heritage site. This is understandable, since it had already invested three years and approximately $1.3 million in developing the project.

[154]  In all these circumstances, the Tribunal has concluded, on a balance of probabilities, that SES likely would not have made an acceptable offer for Complete by the end of July 2010 or at any time in the summer of 2010 and that the Vendors would have moved forward with their own plans to develop the Babkirk Facility.

Scenario #2 – The Vendors Operate Babkirk

[155]  The Vendors’ position is that Complete was created to purchase BLS and to operate a bioremediation facility on the Babkirk Site. They assert that their plan was to accept only Hazardous Waste contaminated with light-end hydrocarbons which could be treated using bioremediation.

[156]  However, the Vendors recognized that bioremediation might sometimes fail and that they might be left with clumps of contaminated soil (“Hot Spots”) after the surrounding waste had been successfully treated. The Vendors understood that the contaminated soil would have to be placed in a Secure Landfill before the remaining soil could be tested and de-listed as non- hazardous waste.

[157]  To enable BLS to permanently dispose of the contaminated soil from the Hot Spots and to attract customers to the Babkirk Facility, the Vendors proposed to construct a Secure Landfill on the Babkirk Site, which they described as “incidental” to their treatment operation. This meant that only soil that was not successfully treated using bioremediation would be moved into the Secure Landfill. The Tribunal will give this meaning to the term “Incidental” in the context of the Vendors’ Secure Landfill in the balance of this decision.

[158]  The Commissioner denies that the Vendors’ Secure Landfill was only to be used on an Incidental basis. She maintains that the Vendors always intended to accept and directly and permanently dispose of all types of Hazardous Waste in their Secure Landfill. We will refer to this business model as a “Full Service” Secure Landfill. To support her position, the Commissioner relies, in part, on the documents used to obtain the EA Certificate and the MOE Permit. These documents will be described collectively as the Regulatory Approval Documents (“RADs”). As discussed below, the RADs clearly indicate that a Secure Landfill was to be opened on the Babkirk Site. The Commissioner also relies on the Draft Operations Plans (the “Operations Plan”) for the Babkirk Site, which show that a Full Service Secure Landfill was planned.

[159]  Finally, the Commissioner relies on statements in a variety of documents which she asserts reflect that the Vendors intended to compete with CCS. She submits that references in those documents to competing with CCS meant operating the Babkirk Facility as a Full Service Secure Landfill.

The Vendors’ Documents

[160]  The Vendors explained that they needed an EA Certificate and an MOE Permit for a Secure Landfill in order to accept Hazardous Waste of any kind for any type of treatment at the Babkirk Facility. However, they also stated that neither document required them to operate on a Full Service basis. In other words, although they were entitled to do so, they were not required to accept all types of Hazardous Waste for direct disposal. Instead, they were free to operate an “Incidental” Secure Landfill.

[161]  The Vendors ask the Tribunal to focus on the documents which were prepared when Complete was being incorporated and when the MOE Permit was finally granted, as the best evidence of their intention, which they say was to use the Secure Landfill on the Babkirk Site only as Incidental to their bioremediation. The five documents in this category will be described as the “Vendors’ Documents”. We will deal with them in turn below.

[162]  Minutes of a meeting that Randy Wolsey and Ken Watson attended with Del Reinheimer and other MOE and EAO officials on January 24, 2007. The minutes state:

Ken [Watson] discussed the remediation side of the facility’s operations, which will continue even after (if) the landfill is constructed. He stated that he has had interest expressed from companies who wish to pursue remediation as well as landfilling. Ken outlined some of the practices and equipment currently used in other operations with which he is involved, and showed some pictures and videos of the equipment (e.g. ALLU AS 38 composting machine) in action.

Ken and Randy stated that their intention would be to have an ALLU AS 38 kept at the facility full-time. They cited that it would be capable of processing up to about 25,000m per day of Peace River region clay.

[our emphasis]

[163]  In his testimony, Mr. Reinheimer agreed that his understanding was that the Vendors were going to operate a bioremediation facility and that it was an open question whether or not the Secure Landfill, for which application had been made, would ever be built. In the Tribunal’s view, this evidence supports the Incidental nature of the Secure Landfill.

[164]  Minutes of a Newco meeting dated in February 2007. These minutes record the Vendors’ vision for their new business, which was to become Complete. The minutes make no mention of a Secure Landfill at the Babkirk Site. They speak only of processing waste. The document also describes CNRL and Petro-Canada as customers for treatment and indicates that Petro-Canada has been interested for years. In context, it is clear that Petro-Canada’s interest was in bioremediation. The fact that a Secure Landfill is not mentioned even though the application for its approval was already underway, strongly suggests that it was to play an Incidental role in Complete’s business at the Babkirk Site.

[165]  The minutes read as follows:

Newco name should be “Environmental Services Co.” not “Waste Management (Facility) Co.” Services to be offered by Newco were suggested to include drilling for sites in the 115 area, remediation on clients’ sites, excavation at client sites, and processing at 115 landfill. We could also coordinate the trucking to haul clients’ contaminated dirt that we would excavate at client sites to Mile 115 for processing, although we would not own such trucks.

The Target Market would be environmental engineering companies and end-user oil and gas companies such as PetroCanada and CNRL. It would be good if we could get a letter from PetroCan/Matrix regarding the potential amount of work. Our services are needed – PetroCan has been interested for years now. This should be a “Market Pull” rather than “Product Push” situation.

There would considerable landfill preparation at Mile 115 [the Babkirk Site]. Randy suggested Tom would probably like to be involved here with heavy equipment operation. We expect to have the permit by Nov 1/07. It would probably take 1 year for money to come in from sales for the landfill itself since we have to build the cells.

[the emphasis is in the original]

[166]  The Tribunal has studied the final passage quoted above and has concluded that, although the term “landfill” is used, the topic under discussion was actually bioremediation and the Vendors’ plan to sell the successfully treated soil.

[167]  A diagram outlining Newco’s operation. This document shows how Complete’s treatment facility on the Babkirk Site would complement other businesses operated by the Vendors. The diagram does not refer to the existence of a Secure Landfill. This omission also suggests that a Secure Landfill was not a significant part of Complete’s business or of the Vendors’ plan to integrate a number of their businesses.

[168]  Minutes of January 20, 2010. This document describes a meeting that Ken Watson and Ron Baker attended with Del Reinheimer and other officials from the MOE to discuss the Vendors’ plans for the Babkirk Site. By this time, Complete owned Babkirk and had received the EA Certificate. The issuance of the MOE Permit for the Secure Landfill was the next step. The relevant portions of the minutes read as follows:

Ken [Watson] and Ron [Baker] both stressed that although they would rather not use Babkirk as a Landfill but as a treatment facility, industry demands that Babkirk is Permitted as a Secure Landfill prior to transporting materials to or using Babkirk in any way. The term “Secure” appears to be of utmost importance to all major oil and gas companies.

• Although Del [Reinheimer of the MOE] didn’t understand why industry perceives as such, he realized the concern.

• He stated that even though the Permit may be approved, operation of a Secure Landfill may not begin until the Operating Plan is also approved and the landfill has been constructed.

• Ken and Ron agreed it is rather the perception of the word “Secure” that is required at this time to entice clients, than the use of an actual operating landfill.

• Ken suggested that prior to approved Secure Landfill operations, unacceptable material could be sent to CCS (small amount around contamination source) and the remainder could be accepted at Babkirk.

All agreed construction of the landfill is to commence within 2 years of Permit issuance; and that the Landfill Operating Plan must be completed prior to construction but the issuance of the Permit itself is not affected by the existence or not of the Operating Plan.

Ron [Baker] suggested that the Permit read that the construction phase of the landfill be completed in small segments of a ½ cell over a period of time rather than the construction of a full ½ cell at one time (as suggested by Reg).

[our emphasis]

[169]  In the Tribunal’s view, there are several reasons why this document indicates that the Secure Landfill at the Babkirk Site was to be Incidental. First, Ron Baker was suggesting that even a half cell was not needed and proposed that smaller segments be constructed. This approach makes sense only if the Secure Landfill was to be Incidental. No one intending to compete with CCS’ Full Service Secure Landfill at Silverberry would contemplate the construction of a small segment of a half cell.

[170]  Second, the Incidental nature of the Secure Landfill is disclosed when Ken Watson suggested that, before the Secure Landfill was operational at Babkirk, unacceptable material could be moved to CCS. The interesting point is that the unacceptable material is not material delivered by waste generators for direct disposal into the Secure Landfill at the Babkirk Site. Rather, it is only the “small amount around [the] contamination source” or, in other words, the material around Hot Spots. Once again, this confirms that the Vendors’ intention was that their Secure Landfill would only be used on an Incidental basis.

[171]  Minutes dated March 20, 2010. These minutes reflect the Vendors’ thinking in response to the offer to purchase that they received from IRTL. The minutes indicate that, at that time, they believed they had the following three options:

1. Operate start first secure cell and bioremediate [inc salt];
2. Bioremediate without cell;
3. Sell ???

The Minutes also stated:

“Need 12 month season to see how well bioremediation works.”

[172]  The Vendors ask t  he Tribunal to note that this evidence all predates CCS’ purchase of Complete and the Commissioner’s interest in the Merger. The Vendors also submit that their evidence at the hearing was consistent with their intention to operate only an Incidental Secure Landfill. Both the proposed manager of the Babkirk Facility (Randy Wolsey) and the man who would be in charge of daily operations (Ken Watson) testified that the only waste they intended to accept at Babkirk was waste which could be bioremediated.

The RADs

[173]  There are numerous RADs, however, those which are particularly relevant are: the “Terms of Reference” dated August 29, 2007; the “Application for an Environmental Assessment Certificate” dated February 11, 2008; the “Babkirk Secure Landfill Project Assessment Report” dated November 12, 2008; and a “BC Information Bulletin” dated December 9, 2008.

[174]  The first significant RAD is the Terms of Reference for the Babkirk Secure Landfill Project. It was approved by the EAO on August 29, 2007.

[175]  Section 3.1 reads as follows:

The Proponent [Murray Babkirk] has experienced a considerable decline in the amount of waste brought to the existing facility for storage and treatment since the approval of the Silverberry Secure Landfill Facility application (north of Fort St. John, B.C.) as understandably, direct disposal forms a more cost effective option for clients than treatment and disposal. The conversion of the existing facility from a purely Short-term Storage and Treatment Facility to a Secure Landfill and Short-term Storage and Treatment Facility will allow fair competition between the Proponent and Silverberry facilities in providing responsible waste management solutions for local industry.

[…]

This section will provide:

[…]

□ a list of the materials to be accepted at the Project for disposal;

□ a general description of the criteria that will be used to determine whether contaminated soil will be disposed of directly into the secure landfill or treated by bioremediation;

[…]

[our emphasis]

[176]  This document suggests that the proposed facility on the Babkirk Site would accept Hazardous Waste for direct disposal into the Secure Landfill and that the Secure Landfill was being developed so that the Babkirk Site could compete with CCS at Silverberry. This document was first drafted by SNCL on the instructions of Murray Babkirk, who was effectively the proponent, since, with his wife, he owned BLS. However, as discussed below, some of the Vendors later reviewed it and they did not suggest changes to reflect their intention to operate only an Incidental Secure Landfill. Since the further RADs contain similar language, it is not necessary to describe them in detail. The Tribunal is satisfied that they all indicate that there would be a Full Service Secure Landfill on the Babkirk Site.

[177]  It is clear that some of the Vendors were, in Karen Baker’s words, “integrally involved” during the regulatory process leading to the EA Certificate. Some attended and assisted with information sessions, consultation meetings, and presentations to First Nations; some were included in correspondence regarding the EA Certificate; some participated directly in drafting or reviewing some of the RADs; and some assisted the Babkirks with technical matters. The Vendors also advanced funds which the Babkirks were able to use to finance the environmental assessment process and pay the fees charged by SNCL. This financial support totalled approximately $300,000 and was deducted from the purchase price that Complete eventually paid the Babkirks for the BLS shares. In all these circumstances, the Commissioner submits that the RADs reflect the Vendors’ true intentions.

[178]  However, the Vendors state that while the RADs authorized the construction of a Full Service Secure Landfill, they say nothing about the Vendors’ intentions. Mr. Baker explained that, as far as the Vendors were concerned, as long as they had an approval for a Secure Landfill, no one would complain if they chose to operate it on an Incidental basis. He also stated that, if they had asked to amend the Terms of Reference, which is clearly the document on which the later RADs were based, it would have slowed down the approval process for changes that, in the Vendors’ opinion, were unnecessary.

[179]  The Tribunal has concluded that this explanation is reasonable and that it underpins Mr. Baker’s response when he was asked why the Vendors didn’t correct the Terms of Reference to reflect their intention to operate an Incidental Secure Landfill. He testified:

[…] There was nothing in it that was that onerous to us or important to us to warrant changing.

[180]  In view of this explanation and in view of the Vendors’ Documents which, starting in January 2007, consistently show that their plan was to operate an Incidental Secure Landfill, the Tribunal concludes that, although the RADs accurately described what could be offered at the Babkirk Facility, they did not accurately reflect the Vendors’ intentions.

The Operations Plan

[181]  The Vendors never completed an Operations Plan for the Secure Landfill on the Babkirk Site.

[182]  The first Operations Plan was prepared by SNCL. An early and incomplete draft of that document is dated January 9, 2008. The evidence showed that a revision was prepared in December 2008. The Tribunal is satisfied that both versions provided in several places that the Secure Landfill could be operated on a Full Service basis. For example:

[…] The addition of secure landfill capabilities to this facility would allow for direct disposal in addition to treatment and remediation of contaminated soil. This addition would allow the Babkirk facility to compete with the nearby Silverberry Secure Landfill facilities. The proposed facilities would be contained entirely within the footprint of the former facilities.

[our emphasis]

[183]  Mr. Baker’s evidence was that the Vendors worked directly with SNCL on the Operations Plan and that they had worked “quite a little bit” on revisions to the first draft. However, he testified that when the Vendors reviewed the revised version they were not satisfied and decided to prepare their own plan. He added that writing a new plan would have taken “months” of work.

[184]  However, other evidence makes it clear that the Vendors did not pursue the idea of rewriting the Operations Plan. Minutes of Complete’s meeting, which Ron Baker attended in March 2010, show that the Vendors then thought that it was “mostly in order” and that only a couple of weeks were needed to put it in final form for the MOE. Minutes of a later meeting in May 2010 suggest that the Operations Plan needed “4-5 days work”.

[185]  Mr. Baker acknowledged that he understood the Operations Plan to be saying that waste generators could directly and finally dispose of untreatable Hazardous Waste into the Secure Landfill at the Babkirk Site. In this regard, the transcript of his cross-examination at p. 1212 reads:

Mr. Iatrou: So you would accept waste. Some of it might be highly contaminated, not really treatable. That would stay in [the secure landfill], but the stuff that could be treated would come out of that cell as capacity and the bioremediation cell was freed up?

Mr. Baker: That’s correct.

[186]  However, a review of Mr. Baker’s entire cross-examination on the Operations Plan reveals, in the Tribunal’s view, that when he gave that answer, he was not saying that the Vendors intended to operate a Full Service Secure Landfill. Rather, he was describing what was possible under the plan. This difference becomes clear in the following exchange:

Mr. Iatrou: You would accept the same sort of material that you could take to Silverberry?

Mr. Baker: Yes, correct. We could accept it. Our plan was not to accept the type of soil that can only go to Silverberry, if you get my drift here. I suppose I have to explain that slightly.

[our emphasis]

[187]  Towards the end of his cross-examination, Mr. Baker began to answer questions from the Vendors’ perspective. For example, when asked about the section of the Operations Plan that spoke about closing secure cells once they were filled, he stated “This was the concept, that if we ever got around to using the Secure Landfill section of our facility…” [our emphasis].

[188]  And at the end of his examination, when asked whether or not all three secure cells had to be built at once, Mr. Baker said “No, no, no. This whole idea of graded construction was that we – our intention half of one cell and never have to do anything further. That was our intention. We would store so little of this landfillable material in that portion of a cell that it would last us the lifetime of our interest in this operation.” [our emphasis].

[189]  In the Tribunal’s view, it is clear that the Vendors’ approach to the Operations Plan was the same as it had been to the RADs. A plan that permitted the direct disposal of Hazardous Waste did not oblige the Vendors to accept it. It is obvious to the Tribunal that, from the early days of Newco in 2007, the Vendors wanted to make the Babkirk Facility as attractive as possible for sale and this meant that it had to be capable of being operated as a Full Service Secure Landfill. However, this does not mean that the Vendors intended to operate the Babkirk Facility in that manner given their long expressed preference for a bioremediation facility with an Incidental Secure Landfill.

Was Babkirk Going to Compete with CCS?

[190]  The Commissioner also relies on what she describes as the Vendors’ expressed intention to compete with CCS to support her allegation that Complete was poised to operate a Full Service Secure Landfill at the Babkirk Site. The statements on which she relies are found in the RADs, the Operations Plan and in Complete’s minutes.

[191]  There is no doubt that, in 2006 when the Babkirks approached SNCL to work on documents for the EA Certificate, they intended to operate a Full Service Secure Landfill on the Babkirk Site once the approvals were in place. As noted earlier, the original project description prepared by SNCL makes this clear when it says:

The Proponent [BLS owned by the Babkirks] has reportedly experienced a considerable decline in his soil storage and treatment business since the approval of the Silverberry Secure Landfill Facility application (north of Fort St. John, BC) as understandably, direct disposal forms a more cost effective option for clients than treatment and disposal. The conversion of the existing facility from a purely Short-term Storage and Treatment Facility to a Secure Landfill and Short-term Storage and Treatment Facility will allow fair competition between the Proponent and Silverberry facilities in providing responsible waste management solutions for local industry.

[our emphasis]

[192]  This language is repeated in the Terms of Reference and the point is made even more clearly in the application for the EA Certificate. It states that the proposed facility would allow the proponent to provide “market competition for direct disposal of waste soil” and speaks of the Babkirk Facility being in “direct competition” with CCS at Silverberry.

[193]  The Vendors’ Operations Plan also mentions that the Secure Landfill has been added to the Babkirk Site to allow it to compete with Silverberry and, in the Vision Statement she wrote for Newco, which is attached to minutes dated June 22, 2008, Karen Baker stated that the Vendors wanted Complete “…to become the Number One Competitor to the industry leader [CCS/Newalta]”.

[194]  In his cross-examination at the hearing, Randy Wolsey acknowledged an intention to compete with CCS. However, he testified that while landfilling and competing with Silverberry was “going to happen”, it would be on a “very different scale” because the Vendors were going to supply a “brand new service”.

[195]  Mr. Baker also acknowledged in his testimony that the Vendors did intend to compete with CCS and others, but not on price. He stated that they were going to compete by offering a service that was different from anything offered by CCS or Newalta.

[196]  The Tribunal has concluded that Complete intended to “compete” with Silverberry by offering a new bioremediation service, and that its statements about competition were not intended to mean that the Vendors planned to operate a Full Service Secure Landfill on the Babkirk Site.

Conclusions

[197]  If the Merger had not occurred, it is the Tribunal’s view that, at the end of July 2010, in the absence of a letter of intent from SES, the Vendors would have proceeded to develop the Babkirk Facility. This would have involved:

• Completing the Operations Plan;
• Securing the MOE’s approval for the Operations Plan;
• Constructing a half cell of Secure Landfill capacity i.e. 125,000 tonnes; and
• Accepting Hazardous Waste for bioremediation and moving waste that could not be successfully bioremediated into the Incidental Secure Landfill.

[198]  Although there was evidence to suggest that the Vendors might have decided to start accepting waste for bioremediation without any Secure Landfill capacity, the Tribunal has concluded that the Vendors would likely have built their half cell of Secure Landfill as soon as possible for two reasons. First, the Vendors told Del Reinheimer of the MOE on January 20, 2010 about the importance customers placed on having Secure Landfill capacity available. Indeed, Petro-Canada had refused to deliver waste for bioremediation until the Vendors opened a Secure Landfill. Second, Ken Watson testified that the plan was to store in the Secure Landfill all waste that was awaiting treatment. Presumably, this storage capacity would have been needed as soon as the business started in earnest.

[199]  The Tribunal has also concluded that it is more likely than not that the Vendors would have had an approved operations plan by the end of October 2010 and that the three months of preparatory work, which Ken Watson testified was needed before the Babkirk Facility could accept waste, would have been substantially completed by the end of October 2010.

[200]  This means that in the spring of 2011, the Vendors would have been able to accept waste for bioremediation. However, since generators had advised that they would not tip until a Secure Landfill was available, it is unlikely that any meaningful quantity of waste would have been delivered. Construction of the half cell of Incidental Secure Landfill would have begun as soon as the construction season opened in June 2011. Accordingly, given that the evidence showed that the construction would take three or four months, the Tribunal has concluded that the Babkirk Facility would have been fully operational by October 2011.

[201]  The evidence establishes that the Vendors felt that a twelve month period was needed to see how well bioremediation would work. The Tribunal therefore considers it reasonable to project that the Vendors would have carried on with bioremediation as their principal focus through the fall of 2012. However, the Tribunal has also concluded that, notwithstanding Ken Watson’s contacts and his experience with bioremediation, the Vendors’ bioremediation business would have been unprofitable for the reasons discussed below.

[202]  There would have been few if any customers for two reasons. First, while the evidence showed that there is a significant amount of treatable soil on drilling sites in the area around the Babkirk Facility, the bioremediation that presently occurs is done by generators on their own sites. There was no evidence that any companies are paying to transport waste to offsite bioremediation facilities in NEBC. Although Ken Watson testified that he expected that CNRL, Encana, and Bonavista would be interested in disposing of their waste in this fashion and, although Petro-Canada had been interested, the Vendors did not call evidence from any prospective customers to say that they would be prepared to truck their waste to the Babkirk Facility for bioremediation. Further, the Vendors provided the Commissioner with a list of potential customers and [CONFIDENTIAL] was first on that list. However, Mr. [CONFIDENTIAL], Vice-President, Operations at [CONFIDENTIAL], testified for the Commissioner that [CONFIDENTIAL] philosophy is “going to landfill”. In other words, his company was not a significant potential customer for the Vendors’ bioremediation facility.

[203]  Second, the Vendors testified that the Tipping Fees they would charge for bioremediation would be significantly higher than Silverberry’s Tipping Fees for Secure Landfill services. It is difficult to imagine that generators with waste that could be bioremediated on their own sites would pay large sums to transport their Hazardous Waste to Babkirk and tip there at rates higher than those at Silverberry, given that they could continue to bioremediate on their own sites or tip for less at Silverberry.

[204]  Further, there was no evidence from any potential purchasers who might have bought treated waste from Complete for use as cover for municipal dumps or as backfill for excavations. It does not appear that any such sales would have been available to generate revenue for Complete.

[205]  It is not clear how long the Vendors would have been prepared to operate on an unprofitable basis, without beginning to accept more waste at the Secure Landfill part of the Babkirk Facility. In their final written submissions, the Vendors ask the Tribunal to assume that they would have incurred losses for two years before they decided that their venture had failed.

[206]  However, the Tribunal has concluded that, because there was no evidence that the Vendors have deep pockets or significant borrowing power, it is unreasonable to suppose that they would have been prepared to operate unprofitably beyond the fall of 2012, when they could have generated additional revenues by accepting more waste into the Secure Landfill part of their facility.

[207]  Accordingly, it is the Tribunal’s view that the Vendors would have started to operate a Full Service Secure Landfill at least by the spring of 2013. In other words, they would have begun to accept significant quantities of Hazardous Waste for direct disposal into Babkirk’s Secure Landfill, in competition with CCS. In the alternative, they would have sold Complete or BLS to a purchaser which would have operated a Full Service Secure Landfill. Given that the Vendors had a valuable and scarce asset and given the evidence that demand for Secure Landfill services has, for some time, been projected to increase as new drilling is undertaken in the area north and west of Babkirk, the Tribunal is satisfied that such a sale would have been readily available to the Vendors. Finally, whether Babkirk was operated by the Vendors or a new owner, Babkirk and Silverberry would have become direct and serious competitors by no later than the spring of 2013.

[208]  We have reached this conclusion notwithstanding CCS’ submission that the Vendors’ lack of experience and the smaller capacity of the Babkirk Facility would have constrained it from functioning as a serious competitor. In our view, as they had done in the past when they retained IRTL, the Vendors would have hired experts, if needed, to redress their lack of expertise. Moreover, 750,000 tonnes of permitted capacity was sufficient to allow the Vendors or a purchaser to compete effectively with CCS at Silverberry.

[209]  To summarize, the Tribunal has decided that it is likely that the Vendors would have operated a bioremediation treatment facility with an Incidental Secure Landfill for approximately one year from October 2011 to October 2012 (the “Initial Operating Period”). Thereafter, in the spring of 2013, the Babkirk Facility would have become a Full Service Secure Landfill.

[210]  Turning to the impact of these developments, it is the Tribunal’s view that, as soon as the half cell of the Secure Landfill capacity at the Babkirk Facility was operational in October of 2011, waste generators who tipped at Silverberry would have seen that there was a potential alternative to Silverberry at the Babkirk Facility. The Tribunal cannot predict what would actually have happened. However, we can reasonably expect that, during the Initial Operating Period, some generators of Hazardous Waste would have asked the Vendors to take their waste for direct disposal, if only to use the possibility of disposing at Babkirk as a basis for negotiating lower Tipping Fees at Silverberry. This would have been possible because many oil and gas producers have one year non-exclusive contracts with CCS.

[211]  As well, given that the Vendors would have needed revenue and given that it might have been convenient for some of their customers, it is reasonable to assume that the Vendors would have accepted at least some Hazardous Waste for direct disposal during the Initial Operating Period, in spite of their evidence that this was not their intention. This possibility was foreseen by Ron Baker when, in his cross-examination, he was asked about the decision matrix in the Operations Plan which reflected that soil which arrived and could not be bioremediated would be landfilled with other soil that could not be bioremediated. He said that, “if we had room”, “chances are” such soil would be put in the Secure Landfill.

[212]  The question is whether this competition afforded by Babkirk in the Initial Operating Period can be considered substantial. In Director of Investigation and Research v. Tele-Direct (Publications) Inc. (1997), 73 C.P.R. (3d) 1, the Tribunal addressed the question of the potential importance of a small amount of competition, in the course of examining the impact on Yellow Pages consultants of Tele-Direct’s discriminatory anti-competitive practices. In that case, the Tribunal was considering whether there had been a substantial lessening of competition.

[213]  The Tribunal heard evidence that consultants, who charged fees to place Yellow Pages advertisements, had lost time and money and that their ability to attract new customers had been damaged by Tele-Direct’s conduct. The Tribunal also found that, although the consultants only occupied a small segment of the market and had a limited and fragile ability to compete with Tele-Direct, they had had a significant positive influence on the level of service Tele-Direct provided to customers who were purchasing yellow pages advertisements. In this context the Tribunal stated at paragraph 758:

Where a firm with a high degree of market power [Tele-Direct] is found to have engaged in anti-competitive conduct, smaller impacts on competition resulting from that conduct will meet the test of being “substantial” than where the market situation was less uncompetitive to begin with. In these circumstances, particularly Tele-Direct’s overwhelming market power, even a small impact on the volume of consultants’ business, of which there is some evidence, by the anti-competitive acts must be considered substantial.

[214]  In contrast, in this case, the Tribunal has concluded that the competition offered by the Babkirk Facility in the Initial Operating Period would likely have had no material, let alone significant, impact on pricing at Silverberry, because any competition would have been offered on an extremely small scale. In our view, during the Initial Operating Period, Silverberry could have ignored any requests by customers for lower prices because the Babkirk Facility would not have been a viable alternative for the volumes of Hazardous Waste oil and gas producers tipped at Silverberry. This means that the prevention of any competition that would have developed in the Initial Operating Period would not have been “substantial”.

[215]  Turning to the spring of 2013, the competition that would have been offered by Babkirk as a Full Service Secure Landfill would have been direct and substantial and, as discussed below, it is this competition that was substantially prevented by the Merger.

B. What are the Relevant Assessment Factors?

Conditions of Entry

[216]  The conditions of entry into a relevant market can be a decisive factor in the Tribunal’s assessment of whether a merger is likely to prevent or lessen competition substantially. This is because, “[i]n the absence of significant entry barriers it is unlikely that a merged firm, regardless of market share or concentration, could maintain supra-competitive pricing for any length of time”( Hillsdown, above, at 324; see also Propane 1, above, at para. 127).

[217]  To be effective, entry must be timely, likely and sufficient to ensure that any prevention of future competition will not be substantial.

[218]  CCS maintains that the evidence in this case is that the Secure Landfill business is not characterized by significant entry barriers and that the conditions for entry are conducive for potential competitors. In this regard, CCS asserts that (i) the regulatory regime is permissive, as evidenced by the fact that a number of permits to operate a Secure Landfill have been granted in NEBC in recent years, (ii) there is a growing market in the NEBC region for oil and gas drilling and related services, coupled with a growing demand and pressure for socially responsible waste management alternatives, and (iii) the industry practice of engaging in short-term contracts is conducive to entry. CCS further asserts that the Commissioner’s reliance on the fact that BLS took nearly four years to obtain its Secure Landfill permit is misplaced, most importantly because BLS did not pursue concurrent permitting. Concurrent permitting allows an applicant to pursue applications for EA Certificates and an MOE Permits (together the “Authorizations”) in tandem. CCS also asserts that entry is much less time consuming if a remote area near Babkirk is selected. Thus, attempts to develop secure landfills in populated areas around Dawson Creek should not be accepted as precedents for the timing that entry might involve near Babkirk.

[219]  Among other things, prior to seeking the Authorizations, a new entrant must spend several months selecting a site from among various potential sites. This involves drilling test holes to determine whether the site’s subsurface characteristics are appropriate for Secure Landfilling. If so, a further assessment is undertaken which involves drilling multiple test holes and installing monitoring equipment. There is no evidence about the time needed to complete only a site selection. However, [CONFIDENTIAL] spent 15 to 18 months on site selection and the preparation of an application for a potential landfill.

[220]  Once a potential entrant has completed the site selection described above, it must then obtain the required Authorizations. The evidence is that this process would likely take at least 18-24 months and that a further 3 to 4 months are needed for construction.

[221]  Notwithstanding the time and money ($1.3 million) it spent during the development process, as described earlier, SES abandoned its plans to open the Heritage landfill and, after spending $885,000.00, CCS abandoned its proposed Sunrise Landfill in NEBC, due to opposition from local residents. These two incidents of site abandonment by knowledgeable industry participants underscore the risk and uncertainty associated with new entry, as well as the “sunk” nature of the entry costs in the event that an entry initiative is unsuccessful.

[222]  Based on this evidence, the Tribunal has concluded that, even in a remote location and even with concurrent permitting, it would take a new entrant at least 30 months to complete the process of selecting a new site, obtaining the required Authorizations and constructing a new Secure Landfill. That said, the Tribunal notes that there is no evidence of any proposed entry in the Contestable Area.

Absence of Acceptable Substitutes/Effective Remaining Competition

[223]  For the reasons given earlier, the Tribunal is satisfied that, for some product and for some generators, bioremediation does not compete in the same market as the supply of Secure Landfill services and does not exercise any constraining influence on price or non-price competition within the latter market.

[224]  This conclusion is supported by the fact that CCS’ Tipping Fees are significantly higher in areas where it does not face competition from other Secure Landfill operators, than they are in areas where CCS does face such competition. In addition, the “natural experiment” that occurred when SES opened its facility in Willesden Green Alberta, and CCS substantially reduced its Tipping Fees to seven of its significant customers, strongly suggests that CCS’ pricing behaviour is primarily determined by reference to the location of competing suppliers of Secure Landfill services, rather than by competition with suppliers of bioremediation services.

[225]  Dr. Baye provided extensive evidence with respect to CCS’ alleged ability to price discriminate in order to show that it had market power. However, given the foregoing and because CCS is a monopolist in the relevant market and is not constrained by any actual or potential competition from within or outside the market, it is clear that CCS has significant market power. This conclusion is further supported by the discussion of countervailing market power immediately below. For this reason, it is not necessary to consider the allegation of price discrimination.

Countervailing Power

[226]  CCS correctly notes that none of its customers have complained about the Merger. CCS encourages the Tribunal to infer from this that the Merger is not likely to prevent competition substantially. However, the Tribunal is not persuaded that this is a reasonable inference.

[227]  The Tribunal recognizes that CCS’ largest customers pay lower Tipping Fees than its smaller customers. However, the Tribunal notes that Dr. Baye’s report indicates that even CCS’ largest customers are forced to pay higher Tipping Fees in areas where CCS faces no competition than in areas where such competition exists and this evidence was not contested. In 2010, the average Tipping Fees at Silverberry and Northern Rockies were [CONFIDENTIAL] and [CONFIDENTIAL] respectively. However, Tipping Fees at CCS’ South Grande Prairie [CONFIDENTIAL] and Rocky [CONFIDENTIAL] in Alberta were significantly lower because they both face competition from SES. This no doubt explains why Mr. [CONFIDENTIAL], who testified for the Commissioner, made it clear in his testimony that he would welcome competition for CCS in NEBC.

[228]  The attenuated or limited nature of any countervailing power that may be in the hands of CCS’ largest customers is also reflected in the evidence that written requests by them for price relief were rejected by CCS during the industry downturn in late 2008 and early 2009.

C. Conclusions

[229]   

1. Based on all of the foregoing, the Tribunal has concluded that the Merger is likely to prevent competition substantially. The Merger prevented likely future competition between the Vendors and CCS in the supply of Secure Landfilling services in, at the very least, the Contestable Area. Although the competition that was prevented in 2012 is not likely to be substantial, the Tribunal is satisfied that by no later than the spring of 2013, either the Vendors or a party that purchased the Babkirk Facility would have operated in direct and serious competition with CCS in the supply of Secure Landfill services in the Contestable Area.
2. In estimating the magnitude of the likely adverse price effects of the Merger, the Commissioner relied on expert evidence adduced by Dr. Baye. That evidence included economic theory and regression models. However, for reasons discussed below the Tribunal has not given significant weight to that economic theory or to those regression models in assessing the magnitude of the likely adverse price effects of the Merger. In reaching this decision, the Tribunal took into account the fact that the models do not control for costs, and the fact that, although Dr. Baye acknowledged that his theory of spatial competition should only be used if other data were unavailable, he used his theory even though he had actual CCS data.
3. Nevertheless, as discussed below in connection with the “effects” element of section 96, the Tribunal is satisfied that prices likely would have been at least 10% lower in the Contestable Area in the absence of the Merger.
4. The Tribunal therefore finds that the Merger is more likely than not to maintain the ability of CCS to exercise materially greater market power than in the absence of the Merger, and that the Merger is likely to prevent competition substantially.

ISSUE 7– WHEN THE EFFICIENCIES DEFENCE IS PLEADED, WHAT IS THE BURDEN OF PROOF ON THE COMMISSIONER AND ON THE RESPONDENT?

[230]  CCS has alleged that the Commissioner failed to properly discharge her burden to prove the extent of the quantifiable effects of the Merger. CCS alleges that the Commissioner’s failure to prove those effects in her case in chief has precluded CCS from being able to meet its overall burden to prove the elements of the efficiencies defence on a balance of probabilities. CCS asserts that the Commissioner’s failure means that the effects should be zero and that the Application should therefore be dismissed.

[231]  In paragraph 48 of its response to the Commissioner’s Application, CCS pleaded the efficiencies defence in the following terms:

The Acquisition has brought about or is likely to bring about gains in efficiency that will be greater than, and will offset, the effects of any prevention of competition that will result from the Acquisition, and the gains in efficiency will not likely be attained if the requested order or orders are made by the Tribunal.

[232]  The burdens of proof under section 96 were established and applied over the course of the four decisions in Propane (Propane 1, at para. 48, rev’d on other grounds 2001 FCA 104, [2001] 3 F.C. 185 (“Propane 2”), leave to appeal to SCC refused, 28593 (September 13, 2001), redetermination, The Commissioner of Competition v. Superior Propane Inc., 2002 Comp. Trib. 16, 18 C.P.R. (4th) 417 (“Propane 3”), aff’d 2003 FCA 53, [2003] 3 F.C. 529 (“Propane 4”)). “The effects of any prevention or lessening of competition” must be demonstrated by the Commissioner on balance of probabilities (Propane 1, above, at para. 402; Propane 2, above, at para. 177, Propane 4, at para. 17). Her burden is to prove (i) the extent of the anti-competitive effects in question where they are quantifiable, even if only roughly so (Propane 4, at paras. 35 38), and (ii) any non-quantifiable or qualitative anti-competitive effects of the merger. It also includes the burden to demonstrate the extent of any socially adverse effects that are likely to result from the merger, i.e., the proportion of the otherwise neutral wealth transfer that should be included in the trade-off assessment contemplated by section 96, as well as the weighting that should be given to those effects (Propane 4, above, at paras. 35-38, and 61-64). In this case, there being no socially adverse effects, the term “Effects” will be used to described quantifiable and non-quantifiable anti-competitive effects.

[233]  That said, the respondents bear the burden on the ultimate issue, namely, that the efficiency gains are likely to be greater than, and to offset, the effects of any prevention or lessening of competition likely to result from the merger (Propane 2, above, at para. 154).

[234]  There is no dispute about the fact that, in his expert report in chief, Dr. Baye only calculated that an average price decrease of at least 10% would be prevented by the Merger. This meant that CCS did not have a figure for the Effects and was obliged to serve its expert report on efficiencies with no ability to take a position about whether the number it calculated for its total efficiencies was greater than the Effects. As a result, CCS maintains that, as a matter of substantive and procedural fairness, it was effectively denied a right of response and the ability to properly meet its own burden under section 96. It therefore asserts that the Tribunal should conclude that there are no quantified Effects as a result of the Merger.

[235]  Dr. Baye did eventually quantify the Effects but not until he wrote his reply report, which was only made available to CCS two weeks before the hearing. By then, the Tribunal’s Scheduling Order did not permit CCS to bring a motion or file a further expert report. In addition, the Tribunal accepts that, in practical terms, there was insufficient time before the hearing to permit CCS to move to strike Dr. Baye’s report or to seek leave to file a further report in response to the Commissioner’s quantification of the Effects.

[236]  The Commissioner maintains that her substantive burden to quantify the Effects only arises once a respondent advances its affirmative defence by proving efficiencies. She submits that any other result would require her to respond to every bald assertion of efficiencies, regardless of whether a respondent actually relies on efficiencies at the hearing. She asserts in her final written argument that this “would be an incredible waste of resources, and one that is antithetical to the notion of responding to an affirmative defence”.

[237]  In the Tribunal’s view, the Commissioner’s argument about resources does not justify her failure to meet her burden to prove the Effects as part of her case in chief. Once CCS pleaded section 96, the efficiencies defence became part of the fabric of the case and, if it had not been pursued by CCS, the Commissioner would have been entitled to costs fully compensating her for work done by her experts to calculate the Effects.

[238]  The Commissioner also defended her approach by stating that, until CCS served Dr. Kahwaty’s report on efficiencies (“Efficiencies Report”), it was an open question whether it was going to pursue the efficiencies defence at all. In this regard, she noted that prior to serving that report, CCS advanced no facts or proof of efficiencies, and provided no guidance on the types of efficiencies that Dr. Kahwaty planned to identify and quantify. She also observed that the Tribunal’s Revised Scheduling Order, dated August 19, 2011, indicated that CCS might not pursue the efficiencies defence.

[239]  The revised scheduling order required the “Corporate Respondents to serve expert reports, if any, on efficiencies and provide them to the Tribunal” on or before October 7, 2011 (our emphasis). However, since the phrase “if any” was proposed by the Commissioner and not by CCS, the Tribunal does not accept that it suggests that CCS had resiled from its pleading.

[240]  In addition, the Tribunal can find no basis in the record for concluding that CCS did not intend to mount the efficiencies defence. The Tribunal notes that the Commissioner asked questions about efficiencies during examination for discovery and asked, during a case management teleconference on August 15, 2011, that CCS be ordered to produce documents relevant to the issue. During that teleconference, the Presiding Judicial Member stated that efficiencies were at issue and that, if relevant documents existed, their production was required.

[241]  Given the pleading of section 96 and these developments, the Tribunal concludes that there was no reason to doubt that CCS would pursue an efficiencies defence.

[242]  The Commissioner further asserts that the legislation and the case law do not dictate how she must meet her burden to prove the extent of the Effects. She submits that she is not obliged in every case to lead evidence about demand elasticities and provide detailed calculations about the range of likely Effects. This is particularly so in a case such as this in which she asserts that the efficiencies are “plainly so minimal that it was an open question whether [the efficiencies defence would even be pursued]”.

[243]  The Tribunal acknowledges that the legislation and the jurisprudence do not dictate how the Commissioner must meet her burden. However, as noted above, where it is possible to quantify the Effects of a merger, even if only in “rough” terms, the Commissioner has the onus to provide an estimate of such Effects (Propane 4, above, at paras. 35 – 38).

[244]  Indeed, where the necessary data can be obtained, the Commissioner will be expected in future cases to provide estimates of market elasticity and the merged entity’s own-price elasticity of demand in her case in chief. These estimates facilitate the calculation of the magnitude of the output reduction and price effects likely to result from the merger. They are also necessary in order to calculate the deadweight loss (“DWL”) that will likely result from the output reduction and related price effects. DWL is the loss to the economy as a whole that results from the inefficient allocation of resources which occurs when (i) customers reduce their purchases of a product as its price rises, and shift their purchases to other products that they value less, and (ii) suppliers produce less of the product.

[245]  Given that there will often be shortcomings in the data used to estimate market elasticities and the merged entity’s own-price elasticity of demand, prudence dictates that a range of plausible elasticities should be calculated, to assist the Tribunal to understand the sensitivity of the Commissioner’s estimates to changes in those elasticities. The Tribunal will be open to making its assessment of the quantitative extent of the Effects on the basis of persuasively supported “rough estimates” of those Effects, but only if the data required to reliably estimate elasticities cannot reasonably be obtained. Such rough estimates may be derived from evidence with respect to the magnitude of the likely price effects of the merger, including statements or projections made in the internal documents of the respondent or its advisors (including its investment bankers); persuasive estimates by customers, other lay witnesses, or expert witnesses; and persuasive evidence from “natural experiments.”

[246]  Although the Commissioner failed to meet her burden, in the unusual circumstances of this case, CCS was not prejudiced by that failure because, instead of doing the required independent analysis of elasticities, Dr. Baye relied on his assumed price decrease of at least 10% and on certain assumptions used by Dr. Kahwaty in calculating CCS’ claimed market expansion efficiencies. In making that calculation, Dr. Kahwaty assumed that the opening of a Secure Landfill at Babkirk would lead waste generators to dispose of approximately [CONFIDENTIAL] additional tonnes of Hazardous Waste, as forecast in CCS’ internal documents. Further, during the hearing. Dr. Kahwaty was able to effectively attack Dr. Baye’s DWL calculations on various grounds, including his failure to base them on conventional calculations of elasticities when he could have obtained the data necessary to perform those calculations. In short, CCS was able to effectively assert the defence and argue that the efficiencies its expert presented were greater than the Effects (i.e. the DLW) calculated by Dr. Baye. For these reasons, the Tribunal declines to dismiss the Application.

[247]  There is a second reason why CCS’ request is being denied. CCS was also required to show that the cognizable efficiencies would be likely to offset the Effects. This means that even if the Tribunal had accepted CCS’ submission that a zero weighting should be given to the quantifiable Effects, it would not necessarily follow that the Tribunal would find that the offset element of section 96 has been established on a balance of probabilities.

[248]  This is so for two reasons. First, as noted in Propane 3, above, at para. 172, “it cannot be concluded that the Tribunal would find that efficiency gains (whether large or small) that marginally exceeded the effects (whether large or small) would necessarily offset those effects.” This is because the loss of dynamic competition will always merit some non-trivial qualitative weighting in the trade-off assessment. Indeed, dynamic efficiencies and dynamic Effects can have a major impact on the trade-off assessment. Second, in this case, the Commissioner adduced evidence of qualitative Effects in Dr. Baye’s expert report in chief. As well, CCS adduced evidence of qualitative efficiencies, such as improved service, reduced risk for customers and the environment, which put in play the issue of whether a substantial prevention of competition likely would adversely impact upon these matters.

[249]  Accordingly, the Commissioner’s failure to meet her burden to quantify the Effects, even in rough terms, at the appropriate time is not a sufficient reason to conclude that CCS is relieved of its obligation to meet its burden to meet the “offset” element in section 96.

ISSUE 8– HAS CCS SUCCESSFULLY ESTABLISHED AN EFFICIENCIES DEFENCE?

What are the Claimed Efficiencies?

[250]  We now turn to summarizing the efficiencies claimed by CCS. In that regard, Dr. Kahwaty testified on behalf of CCS that the Merger would likely result in efficiencies that he grouped into the following five categories.

[251]  Transportation efficiencies: These were described as being productive efficiencies realized by those customers presently serviced at Silverberry, who have an aggregate of [CONFIDENTIAL] locations that are situated closer to the Babkirk Facility than to Silverberry. Once CCS opens the Babkirk as a Secure Landfill, those customers will realize significant transportation cost savings, thereby freeing up resources for other uses. Based on what he described as the “going rate” of approximately [CONFIDENTIAL] for trucking services, the number of loads shipped from each of the above-mentioned [CONFIDENTIAL] locations in 2010, and the time saved by tipping at Babkirk instead of Silverberry, Dr. Kahwaty estimated the annual aggregate transportation cost savings for the aforementioned customers to be [CONFIDENTIAL]. Using a lower trucking rate of [CONFIDENTIAL] per hour per load (or $5 per tonne per hour of transport), Dr. Kahwaty provided a second estimate of those annual transportation cost savings, which totaled [CONFIDENTIAL]. Dr. Kahwaty also calculated that his two estimates represented approximately [CONFIDENTIAL] and [CONFIDENTIAL] respectively of CCS’ 2010 revenue derived from the [CONFIDENTIAL] customer locations in question.

[252]  Market expansion efficiencies: Dr. Kahwaty stated that, absent the opening of a Secure Landfill at Babkirk, a significant volume of existing Legacy Waste and newly generated Hazardous Waste, within the drawing area of the Babkirk Facility, would not have been transported to Silverberry due to the significant risk, and related financial liability, that would be associated with transporting such waste over the long distance to Silverberry. However, with the opening of a Secure Landfill at the Babkirk Site, CCS estimated that approximately [CONFIDENTIAL] tonnes per year of such waste (“Market Expansion Waste”) likely would be transported for disposal at Babkirk. Dr. Kahwaty acknowledged that this estimate is “necessarily imprecise,” and suggested that the incremental volume of Market Expansion Waste could substantially exceed CCS’ estimate of [CONFIDENTIAL] tonnes per year. Based on the reported margin for Silverberry in 2009 of [CONFIDENTIAL] and a price of [CONFIDENTIAL] per tonne, Dr. Kahwaty estimated an increase in producer surplus from this incremental volume of [CONFIDENTIAL]. In addition, based on an estimated reduction in disposal costs of [CONFIDENTIAL] per tonne, Dr. Kahwaty estimated that customers would gain approximately [CONFIDENTIAL] per year in consumer surplus. This is only 50% of the product of multiplying [CONFIDENTIAL] by [CONFIDENTIAL], because Dr. Kahwaty felt that customers do not gain the full reduction in the costs of disposal when they are induced to dispose of their waste by virtue of a lower overall cost of disposition. The sum of the estimated [CONFIDENTIAL] in producer surplus gains and the estimated [CONFIDENTIAL] in consumer gains, was a total of [CONFIDENTIAL] of annual market expansion efficiencies.

[253]  Overhead Efficiencies: Dr. Kahwaty estimated that the Merger would result in annual overhead savings of approximately [CONFIDENTIAL]. He stated that these savings likely would be achieved by virtue of the fact that CCS could draw upon its existing administrative staff (e.g., those persons who deal with legal, regulatory, marketing, engineering, financial and health & safety matters) in operating the Babkirk Facility. In the absence of the Merger, he stated that the Vendors likely would have had to incur expenses associated with these functions. In reaching his estimate of [CONFIDENTIAL], Dr. Kahwaty used the cost reductions that CCS has achieved in operating Complete’s Roll-off Bin Business as a proxy. In addition, he submitted that some “qualitative” credit should be given to this category of efficiencies, because Complete would otherwise need to expend resources developing administrative systems and to deal with some of the matters identified above.

[254]  Roll-off Bin Business Efficiencies: Dr. Kahwaty estimated that CCS’s Merger of the Roll-off Bin Business has resulted in annual cost savings of approximately [CONFIDENTIAL]. These savings were described as having been achieved as a result of (i) the upgrading of its trucks to meet higher safety standards, (ii) investments in business development efforts, and (iii) the absorption of administrative functions, such as billing, into CCS’ pre-existing corporate systems.

[255]  Qualitative efficiencies: Dr. Kahwaty listed the following qualitative efficiencies as being likely to result from the Merger:

1. the landfill services to be offered by CCS at the Babkirk Site will be of higher (and known) quality and involve less risk for customers due to CCS’s knowledge and experience in the operation and management of hazardous waste landfills;
2. customers will benefit from being able to purchase bundled packages of services that may include, for example, loading, trucking and tipping services;
3. the landfill services to be offered by CCS at the Babkirk Site will reduce risks for customers due to CCS’s substantial financial resources, which provide assurance to customers regarding the long-term management of the Babkirk Facility and the potential continuing liability for wastes disposed in that landfill;
4. CCS will have the capability and resources necessary to expand the Babkirk Facility as necessary and to meet special customer needs (e.g., rapid responses to increased disposal needs);
5. since landfilling is CCS’ business and since the Vendors were not planning to operate a Secure Landfill, CCS will promote landfilling services to a greater extent than the Vendors would have done, once the Babkirk Site is operational, making trucking cost efficiencies available to more customers;
6. the provision of Secure Landfill services by CCS at the Babkirk Site will reduce risks for generators, trucking firms, and other road users related to the transportation of Hazardous Waste on roads over long distances;
7. increased competition in the Roll-off Bin Business will benefit roll-off customers and may reduce the extent of any DWL in the roll-off industry, which will increase the total surplus generated in the roll-off marketplace; and
8. . increased site remediation from reduced trucking costs will benefit area residents, wildlife, and the overall environment, and will also further the government’s policy of expanding contaminated site remediations.

[256]  Dr. Kahwaty also stated that some or all of the efficiencies identified above would likely be achieved sooner by CCS than by Complete or by any third-party who might acquire the Babkirk Facility pursuant to an order of the Tribunal.

[257]  In addition, Dr. Kahwaty stated that CCS should be given credit for some of the efficiencies that it has already achieved in respect of the Roll-off Bin Business.

[258]  Finally, Dr. Kahwaty provided reasoned estimates about the extent to which the above- mentioned trucking and market expansion efficiencies would increase under market growth scenarios of 1%, 2% and 4% compounded annually over the next 10 years. Based on this work, he suggested that these increased efficiencies ought to be considered by the Tribunal.

[259]  After providing his annual estimates of the quantifiable efficiencies, Dr. Kahwaty calculated the net present value of those efficiencies as of January 1, 2012 using three different discount rates: (i) a risk-free interest rate of 1%, which he described as being the annual yield on one to three year government of Canada marketable bonds over the 10 week period preceding the date of his report (October 7, 2011); (ii) an interest rate of 10%, which he described as being “roughly equivalent to rates prevailing in the oil and gas industry”; and (iii) an intermediate rate of 5.5%.

[260]  The Tribunal accepts the evidence of Mr. Harrington, the Commissioner’s expert, that, in broad terms, the discount rate used in calculating the net present value of efficiencies typically does not matter, so long as the same discount rate is used to calculate the net present value of the Effects. That said, the Tribunal also accepts Mr. Harrington's evidence that, (i) as a general principle, the appropriate discount rate to use in discounting a set of future cash flows is a function of the risk of those cash flows being wrong, (ii) there is some uncertainty associated with the efficiencies identified and estimated by Dr. Kahwaty and CCS, and therefore (iii) the midpoint (5.5%) of the three discount rates identified by Dr. Kahwaty is the most defensible of the three rates to use in calculating efficiencies and Effects in this case.

The assessment of the claimed efficiencies

[261]  In the initial stage of assessing efficiencies claimed under section 96 of the Act, the Tribunal applies five screens to eliminate efficiencies that are not cognizable under that section.

[262]  The first screen eliminates claims that do not involve a type of productive or dynamic efficiency, or that are not otherwise likely to result in any increase in allocative efficiency. The second screen narrows the claimed efficiencies to those that the Tribunal is satisfied are likely to be brought about by the Merger. Efficiencies that cannot be demonstrated to be more likely than not to be attained in the Merger are filtered out at this stage. The third screen filters out claimed efficiency gains that would be brought about by reason only of a redistribution of income between two or more persons, as contemplated by subsection 96(3). These types of gains include savings that result solely from a reduction in output, service, quality or product choice, as well as from increases in bargaining leverage and reductions in taxes. The fourth screen filters out claimed efficiency gains that would be achieved outside Canada and would not flow back to shareholders in Canada as well as any savings from operations in Canada that would flow through to foreign shareholders.

[263]  In the case at bar, the application of the first four screens does not result in the elimination of any of the claimed efficiencies.

[264]  The fifth screen filters out claimed efficiencies that either (a) would likely be attained through alternative means if the Tribunal were to make the order that it determines would be necessary to ensure that the merger in question does not prevent or lessen competition substantially, or (b) would likely be attained through the Merger even if that order were made. This screen has a critical role to play in the case at bar.

[265]  In this case, the fifth screen eliminates most of the efficiencies claimed by CCS. With three exceptions, being the one year of transportation efficiencies and the one year of market expansion efficiencies discussed at paragraph 269 below, as well as the overhead efficiencies discussed above, virtually all of the efficiencies claimed by CCS would likely be achieved even if the order referred to in the preceding paragraph is made. That order is an order for the divestiture of the shares or assets of BLS (the “Order”).

[266]  Although there is currently some uncertainty regarding the identity of a prospective purchaser, the Tribunal is satisfied that a divestiture will ultimately be made to a purchaser who will operate the Babkirk Facility and attract essentially the same volumes of Hazardous Waste as were assumed by Dr. Kahwaty in arriving at his estimates of transportation and market expansion efficiencies.

[267]  The Tribunal has decided that, absent exceptional circumstances, it will not be prepared to conclude that the claimed efficiencies that would be realized by any acceptable alternative purchaser should be included in the trade-off assessment, on the basis that it is not possible to identify any particular likely purchaser of the shares or assets contemplated by the divestiture order.

Transportation and Market Expansion Efficiencies

[268]  Based on the reasonable assumption that a purchaser under the Order will emerge and attract, in its first year of operation, the volume of Hazardous Waste that formed the basis for Dr. Kahwaty’s estimates of CCS’ claimed transportation and market expansion efficiencies, those efficiencies cannot be considered in the section 96 assessment because they are likely to be achieved even if the Order is made.

[269]  A noteworthy exception to this conclusion concerns the transportation and market expansion efficiencies that CCS claims would be achieved more quickly by CCS than by a purchaser. In this regard, CCS asserted that it would already have been operating at Babkirk but for the Commissioner’s intervention and that, in any event, it is likely to be in a position to operate a Secure Landfill at the Babkirk Site by the summer of 2012. In contrast, CCS stated that a purchaser following a divestiture is unlikely to be in a position to operate a Secure Landfill facility at the Babkirk Site before mid-2013, having regard to the time required (i) for the Tribunal to render a decision in this proceeding, (ii) to effect the actual sale of the shares or assets of BLS (which it estimates to will require “at least six months, or more,” inclusive of due diligence), (iii) to modify or prepare an operations plan for the landfill, (iv) for the MOE to approve the operations plan, and (v) for the purchaser to construct the landfill, bearing in mind that construction can only be undertaken between June and September.

[270]  In the Tribunal’s view, claimed efficiencies that would not likely be achieved by a purchaser under the Order, but that would likely be achieved by CCS solely because of the types of delays identified immediately above and associated with the implementation of the Order, are not cognizable efficiencies under section 96. These will be described as “Order Implementation Efficiencies”. In the case at bar, CCS and the Vendors completed the Merger after being advised that the Commissioner intended to apply to the Tribunal. To give the Respondents the benefit of Order Implementation Efficiencies in such circumstances, and thereby potentially preclude the Tribunal from issuing the Order in respect of their anticompetitive Merger, would be contrary to the purposes of the Act.

[271]  In any event, even if CCS were given full credit for the Order Implementation Efficiencies, those efficiencies are only likely to be between [CONFIDENTIAL] and [CONFIDENTIAL] (which represents one year of transportation cost savings) plus [CONFIDENTIAL] (which represents one year of annual market expansion efficiencies). As discussed below in connection with the Tribunal’s treatment of the “offset” element of section 96, these efficiencies are not sufficient to change the Tribunal’s overall determination with respect to section 96.

The Roll-off Bin Business Efficiencies

[272]  The divestiture of the shares or assets of BLS will not have any impact on the Roll-off Bin Business efficiencies claimed by CCS. Stated alternatively, those efficiencies will likely be attained even if the Order is made. Accordingly, those efficiencies cannot be considered in the trade off assessment contemplated by section 96.

[273]  CCS has also submitted that certain productive efficiencies have already been achieved as a result of (i) its upgrading and sale of trucks to meet higher safety standards and to operate more efficiently, and (ii) CCS having absorbed certain administrative functions into its pre-existing corporate functions. However, as Mr. Harrington testified on behalf of the Commissioner, these efficiencies would only be lost if CCS were required to divest the Roll-off Bin Business. Given that the Order does not include the Roll-off Bin Business, those efficiencies will not be affected by the Order as contemplated by subsection 96(1) of the Act. Accordingly, they are not cognizable. In any event, given the value of these efficiencies, which Dr. Kahwaty estimated to be approximately [CONFIDENTIAL], the Tribunal’s overall conclusion with respect to section 96, set forth below, would not change even if these efficiencies were given full value in the trade-off assessment.

[274]  More generally, if certain efficiencies have already been achieved, they cannot be considered to be a potential “cost” of making the order contemplated by section 96. Therefore, they cannot be considered in the assessment under section 96. In other words, it cannot be said that those efficiencies “would not likely be attained if the order were made,” as required by subsection 96(1).

The Overhead Efficiencies

[275]  As has been noted, Dr. Kahwaty estimated that these efficiencies would likely total approximately [CONFIDENTIAL] per year. He arrived at this assessment by, among other things, using as a proxy the cost reductions that CCS has achieved in operating the Roll-off Bin Business. Those cost reductions amounted to approximately 21% of the overhead expenses that previously were incurred by Complete in operating the Roll-off Bin Business. Dr. Kahwaty applied this 21% to the overhead expenses incurred at Silverberry, to reach his estimate of approximately [CONFIDENTIAL] in annual overhead savings. Mr. Harrington took issue with this methodology, in part because the Roll-off Bin Business is different from the landfill business. In addition, he opined that if there is a divestiture, some of these savings, which he described as being equivalent to one-half of the annual cost of a full time back-office employee, would likely be achieved by the purchaser. The Tribunal is persuaded by this reasoning and therefore accepts Mr. Harrington’s conclusion that the annual overhead efficiencies which are cognizable under section 96 are reasonable but are probably somewhat less than the [CONFIDENTIAL] that CCS has claimed.

[276]  As a practical matter, given the conclusion that the Tribunal has reached with respect to the “offset” element of section 96, discussed below, the fact that a more precise estimate of the cognizable overhead efficiencies is not available does not affect the Tribunal’s overall determination with respect to the efficiencies defence in section 96.

The Qualitative Efficiencies

[277]  As discussed above, Dr. Kahwaty identified eight types of qualitative efficiencies that he claimed would likely result from the Merger. The Tribunal is not persuaded that any of these efficiencies “would not likely be attained if the Order were made,” as provided in subsection 96(1). Ultimately, the answer to that question is dependent upon the expertise, financial resources, and reputation of the purchaser under the Order. Given that the purchaser may well have the same expertise, financial resources and reputation as CCS, the Tribunal cannot give significant weight to these claimed efficiencies. Indeed, given that the purchaser will have to be approved by the Commissioner, the Tribunal is of the view that all, or virtually all, of these claimed efficiencies are likely to be achieved by that purchaser.

[278]  Regardless of the identity of the purchaser, some of the types of qualitative efficiencies identified by Dr. Kahwaty will be achieved, including those related to the Roll-off Bin Business, the reduction of risks related to the transportation of Hazardous Waste over long distances and the increased site remediation that will benefit residents, wildlife, and the overall environment. In fact, to the extent that the Merger is likely to substantially prevent competition, as the Tribunal has found, we conclude that it is entirely appropriate to take into account, in the trade-off assessment, the likelihood that there will be less site clean-up and tipping of Hazardous Waste in Secure Landfills than otherwise would have occurred if an Order were made. This will be described below when non-quantifiable effects are considered.

[279]  The Tribunal concludes that the only efficiencies claimed by CCS that are cognizable under section 96 are a maximum of [CONFIDENTIAL] in annual overhead efficiencies, having a net present value of approximately [CONFIDENTIAL], using a discount rate of 5.5%.

[280]  If, contrary to the Tribunal’s conclusion, the Order Implementation Efficiencies are also cognizable under section 96, then it would be appropriate to include in the trade-off assessment further amounts of approximately [CONFIDENTIAL] to [CONFIDENTIAL] (i.e., one year of transportation cost savings) plus [CONFIDENTIAL] (i.e., one year of annual market expansion efficiencies).

What are the Effects for the Purposes of Section 96 of the Act?

[281]  As CCS noted in its Final Argument, the total surplus approach remains the starting point in assessing the effects contemplated by section 96. Under that approach, the cognizable quantifiable efficiencies will be balanced against the DWL that is likely to result from a merger. In addition, the Tribunal considers any cognizable dynamic or other non-quantifiable efficiencies and anti-competitive Effects. Where there is evidence of important dynamic or other non- quantifiable efficiencies and anti-competitive effects, such evidence may be given substantial weight in the Tribunal’s trade-off assessment.

[282]  After the Tribunal has assessed the evidence with respect to the quantifiable (i.e., DWL) and non-quantifiable anti-competitive Effects of the merger, it will assess any evidence that has been tendered with respect to the other effects contemplated by section 96 and the purpose clause in section 1.1 of the Act. It is at this point that the Tribunal’s assessment will proceed beyond the total surplus approach. In brief, at this stage of the Tribunal’s assessment, it will determine whether there are likely to be any socially adverse effects associated with the merger. If so, it will be necessary to determine how to treat the wealth transfer that will be associated with any adverse price effects that are likely to result from the merger. In a merger among sellers of products, that wealth transfer will be from the merging parties’ customers to the merged entity. Of course, to the extent that the merging parties’ rivals may be likely to follow such price effects, the wealth transfer would need to be calculated across the sales or purchases of such rivals as well.

[283]  The Tribunal expects that in most cases, it will be readily apparent that the wealth transfer should be treated as neutral in its analysis, because the socio-economic profiles of consumers and the merged entity’s shareholders will not be sufficiently different to warrant a conclusion that the wealth transfer is likely to lead to socially adverse Effects. For greater certainty, the cognizable social Effects under section 96 do not include broader social effects, such as those related to plant-closings and layoffs (Propane 1, at para. 444).

[284]  In these proceedings, the Commissioner adduced no evidence with respect to socially adverse effects. Indeed, in her Final Argument (at para. 208) she conceded that the Merger is not likely to result in any such effects, and that the wealth transfer should be treated as being neutral in this case. Accordingly, the discussion below will be confined to anti-competitive effects. In other words, in making its determination under section 96 in the case at bar, the Tribunal will adopt the total surplus approach.

Quantifiable Effects

[285]  Quantifiable anti-competitive Effects are generally limited to the DWL that is likely to result from a merger.

[286]  In this case, the DWL is the future loss to the economy as a whole that will likely result from the fact that purchasers of Secure Landfill services in the Contestable Area will purchase less of those services than they would have purchased had the Tipping Fees for such services declined due to the competition that would likely have materialized between CCS and Babkirk operated as a Full Service Secure Landfill.

[287]  The DWL that is likely to result from a merger is likely to be significantly greater when there is significant pre-existing market power than when the pre-merger situation is highly competitive (Propane 3, above, at para. 165). In the case at bar, as in Propane, the Commissioner did not adduce specific evidence of pre-existing market power, for example, with respect to the extent to which prevailing Tipping Fees exceed competitive levels. Therefore, the Tribunal is not in a position to quantify the impact that any such pre-existing market power likely would have on the extent of the DWL. Where, as in this case, the pre-existing market situation is characterized by a monopoly and the Tribunal is not provided with sufficient persuasive evidence to enable it to quantify the Effects associated with such market power, it will be open to the Tribunal to give qualitative weight to those Effects. Given the very limited nature of the cognizable efficiencies in this case, it has not been necessary for the Tribunal to attribute such a qualitative weighing to those Effects in making its determination under section 96.

[288]  As discussed above, CCS submitted that the Tribunal should conclude that there are no quantifiable Effects as a result of the Merger, because the Commissioner did not lead any evidence with respect to such Effects until she served Dr. Baye’s reply report, on November 4, 2011. The Tribunal has rejected that position because CCS was not ultimately prejudiced in this regard. The Tribunal will therefore proceed to address the evidence adduced in Dr. Baye’s reply report. As will be noted below, the Tribunal is satisfied that CCS would not have met its burden under section 96, even if the quantifiable Effects had been deemed to be zero.

[289]  At the outset of his reply report, Dr. Baye summarized a number of the conclusions set forth in his initial report, dated September 30, 2011. These included the following:

1. the Merger likely prevents the prices for the disposal of Hazardous Waste generated in NEBC from falling significantly for many customers;
2. the effects of the Merger are unlikely to be uniform across all customers in the relevant market; and
3. the average reduction in the Tipping Fees throughout NEBC is likely to be at least 10%, but the effects are likely to be significantly higher for customers generating Hazardous Waste in the vicinity near Babkirk and Silverberry and lower for customers located near the southern and northern boundaries of NEBC.

[290]  The Tribunal is satisfied, on a balance of probabilities, that with the exception of the geographic extent of the Effects, the foregoing conclusions are supported by the weight of the evidence that it has found to be credible and persuasive. As to the geographic region over which the aforementioned Effects are likely to result from the Merger, the Tribunal finds that, at a minimum, such Effects are likely to extend throughout the Contestable Area identified by Dr. Kahwaty. Given the conclusions that the Tribunal has reached regarding the minimal nature of the efficiencies claimed by CCS, it is unnecessary to define the scope of the anti-competitive Effects with greater precision.

[291]  As Dr. Baye explicitly noted, his conclusions were based on a range of different sources of information and economic analyses, rather than on any specific source of information or economic methodology. Those sources included CCS’ internal documents and a “natural experiment.” The Tribunal has not placed weight on the economic models that are set forth in Dr. Baye’s reports, for example, the tipping fee and DiD regressions presented at exhibits 20 and 26 of his initial Report, which are also briefly discussed in his reply report. In the Tribunal's view, some of the assumptions underlying those models are questionable. The same is true of some of the outcomes of those models, such as the prediction of greater adverse price effects for customers located closer to Northern Rockies than to Babkirk. In the Tribunal's view, those predictions of Dr. Baye’s models are counterintuitive and are not supported by the weight of the other evidence adduced in these proceedings.

[292]  More generally, as noted above, Dr. Baye’s models do not account for the opportunity cost that CCS would incur if it were to lower Tipping Fees to the 20 - 25% range necessary to attract business from customers located farthest away from Silverberry and Babkirk, respectively, as discussed at paragraphs six and seven of his reply report. The Tribunal is not persuaded that it would be in CCS’ interest to reduce prices to that extent in the near future, and to thereby deplete its finite Secure Landfill capacity at Silverberry, assuming that CCS would likely be able to attract business at higher Tipping Fees further in the future to fill that capacity.

[293]  Notwithstanding the fact that the Tribunal has found the models at exhibits 20 and 26 to be unreliable, we are satisfied, on a balance of probabilities, that competition from an independently owned and operated Full Service Secure Landfill at the Babkirk Site likely would result in CCS reducing its prices by an average of at least 10% for customers in the geographic market described above. This conclusion is based on evidence from CCS’ own internal documents, evidence given by [CONFIDENTIAL] of [CONFIDENTIAL] and the transactions data pertaining to the “natural experiment” at Willesden Green modelled in Dr. Baye’s DiD analysis.

[294]  The internal CCS documents referenced above include:

1. a slide presentation, dated August 26, 2010, which is attached at Exhibit K to Mr.D. Wallace’s witness statement, [CONFIDENTIAL]
2. an e-mail, dated July 15, 2010, sent by Trevor Barclay to Ryan Hotston and Lance Kile, [CONFIDENTIAL]
3. a document, entitled [CONFIDENTIAL], containing several slides dated “3/9/2009/ [CONFIDENTIAL]
4. a financial analysis prepared by Dan Wallace, attached to an e-mail dated March 31, 2010, and at Exhibit C to his witness statement, [CONFIDENTIAL]
5. a document dated March 31, 2010, entitled [CONFIDENTIAL], attached at Exhibit D to Dan Wallace’s witness statement, [CONFIDENTIAL]
6. a document, entitled [CONFIDENTIAL], dated September 15, 2009 and included at Tab 32 of the Parties’ Admissions Brief, [CONFIDENTIAL].

[295]  Turning to evidence from customers, there was, as mentioned earlier, an unusual paucity of such evidence in this case. However, Mr. [CONFIDENTIAL], Vice President, Operations, at [CONFIDENTIAL] testified that “competition, in our mind, provides a more competitive playing field in terms of your pricing setup” and that “in Northeast B.C. we currently don’t have that same level of competition in this facet of our business.”

[296]  Lastly, the transactions data from the “natural experiment” at Willesden Green, which is found in Dr. Baye’s initial report, demonstrates that CCS reduced its prices significantly to seven customers after SES’ entry at South Grande Prairie.

[297]  For all these reasons, we have concluded that, in the absence of the Merger, competition in the provision of Secure Landfill services at Silverberry and the Babkirk Site likely would have resulted in prices being, on average, at least 10% lower in the geographic market described above. This is a sufficient basis for concluding that the Merger likely will prevent competition substantially, particularly given that the Merger preserves a monopolistic market structure, and thereby prevents the emergence of potentially important competition.

[298]  In his reply report, Dr. Baye opined that even if competition is only likely to be substantially prevented in the Contestable Area identified by Dr. Kahwaty, the welfare loss is likely to be significant. Specifically, Dr. Baye estimated that loss to be approximately [CONFIDENTIAL] annually. That estimate was based on an assumed price decrease of 10%, from [CONFIDENTIAL] to [CONFIDENTIAL] per tonne, and certain assumptions and estimates used by Dr. Kahwaty in calculating the market expansion efficiencies, discussed above. In making that calculation, Dr. Kahwaty assumed that the opening of a Secure Landfill facility at Babkirk would likely lead customers to dispose of approximately [CONFIDENTIAL] additional tonnes of Hazardous Waste, as forecast in CCS’ internal documents. As discussed earlier in these reasons, that forecast increase in demand concerned Legacy Waste and future waste that would not otherwise be transported to Silverberry, due to (i) the level of the current disposal cost (Tipping Fees plus transportation cost) and (ii) the risk that would be associated with transporting Hazardous Waste to Silverberry. Dr. Kahwaty estimated that the total disposal costs of customers located in the Contestable Area that he identified likely would decline by approximately [CONFIDENTIAL] per tonne, due to the closer proximity of the Babkirk Facility, relative to Silverberry.

[299]  Based on the foregoing numbers used by Dr. Kahwaty to estimate the market expansion efficiencies, and the linear demand that was assumed by Dr. Kahwaty, Dr. Baye estimated that a 10% price reduction (from [CONFIDENTIAL] to [CONFIDENTIAL]) for customers in the Contestable Area would increase the volume of waste disposed of by those customers from [CONFIDENTIAL] tonnes to [CONFIDENTIAL] tonnes, annually. He further estimated CCS’ unit costs to be approximately [CONFIDENTIAL], based on the average 2010 price at Silverberry of [CONFIDENTIAL] across all substances, and the [CONFIDENTIAL] landfill margin reported for Silverberry in 2009, which was used by Dr. Kahwaty in estimating the market expansion efficiencies.

[300]  Given the foregoing estimates, Dr. Baye calculated the area under the demand curve for the Contestable Area to be (i) a rectangle that is approximately [CONFIDENTIAL] tonnes multiplied by [CONFIDENTIAL], for a total of [CONFIDENTIAL], plus (ii) a right triangle that is [CONFIDENTIAL] high and [CONFIDENTIAL] wide, for an area of [CONFIDENTIAL]. Summing (i) plus (ii) yielded a figure of [CONFIDENTIAL]. From this latter amount, Dr. Baye deducted CCS’ unit cost of [CONFIDENTIAL] multiplied by [CONFIDENTIAL], to arrive at an estimated welfare loss of [CONFIDENTIAL].

[301]  The Tribunal is persuaded that, on a balance of probabilities, the approach adopted by Dr. Baye, and the numbers he used in reaching his estimate of the likely DWL, are reasonable for the purposes of the Tribunal’s assessment of Effects under section 96 of the Act. In the Tribunal’s view, the manner in which Dr. Baye proceeded in this regard is sound, and the inputs that he used are reliable and conservative. The fact that Dr. Baye relied on certain assumptions made by Dr. Kahwaty is not particularly important for the purposes of the Tribunal’s assessment under section 96. What is important is that there is reliable evidence before the Tribunal that permitted the DWL to be estimated.

[302]  The Tribunal acknowledges Dr. Kahwaty’s testimony that, to calculate the DWL, it is necessary to know the shape of the demand curve, and that, when prices are likely to differ across customers, it is necessary to have customer-specific elasticity data. However, the Tribunal is persuaded that, in the absence of such information, a reliable “rough” estimate of the likely DWL can be obtained based on information such as that which was used by Dr. Baye in reaching his estimated annual welfare loss of approximately [CONFIDENTIAL].

[303]  Accordingly, the Tribunal accepts Dr. Baye’s estimate of [CONFIDENTIAL], as being the minimum annual DWL.

[304]  Dr. Baye then speculated that, (i) if the average price decrease in that area was 21 percent, the annual DWL would be approximately [CONFIDENTIAL], (ii) if prices across all Hazardous Waste tipped at Silverberry in 2010 decreased by 10%, the DWL would be approximately [CONFIDENTIAL], and (iii) if prices across all such waste decreased by 21%, the DWL would be approximately [CONFIDENTIAL]. However, the Tribunal is not persuaded that these speculations about prices are reasonable.

Non-quantifiable Effects

[305]  The Tribunal is satisfied that the Merger likely would result in certain important qualitative or other non-quantifiable Effects.

[306]  In his initial report, Dr. Baye identified at least two important qualitative anti-competitive Effects of the Merger. First, at paragraph 157, he stated that lower Tipping Fees would induce waste generators to more actively clean up legacy sites in NEBC. At paragraph 91 of his report, he described this in terms of lower Tipping Fees inducing waste generators to substitute away from “delay,” or bioremediation, towards disposal at a Secure Landfill. As Dr. Kahwaty noted at paragraph 96 of his Efficiencies Report, increased site remediation from lower disposal costs benefits “area residents, wildlife, and the overall environment.”

[307]  Second, at paragraph 137(c) of his initial report, Dr. Baye stated that, to retain its waste volumes in the face of competition from an independently owned and operated Babkirk Facility, CCS “would have had an incentive to compete through ‘value propositions’ that, among other things, link prices on various services to provide customers with a lower total cost for waste services.” Although the services in question were not further discussed by Dr. Baye, they were addressed in “read-in” evidence adduced by the Commissioner and cited by Dr. Baye (at footnote 93 of his initial report). The Tribunal is satisfied, on a balance of probabilities, that competition between CCS and an independently owned and operated Babkirk Facility would have led to important non-price benefits to waste generators in the form of various “value propositions” that include either existing services being provided at lower prices, or new or enhanced services being provided that likely would not otherwise be provided if the Order is not made.

Are the Cognizable Efficiencies Greater than and do they Offset the Effects?

[308]  Section 96 requires the Tribunal to determine whether the cognizable efficiencies “will be greater than, and will offset” the cognizable effects of any prevention or lessening of competition that will result or is likely to result from a merger.

[309]  The Tribunal considers that the terms “greater than” and “offset” each contemplate both quantifiable and non-quantifiable (i.e., qualitative) efficiencies. In the Tribunal’s view, “greater than” connotes that the efficiencies must be of larger magnitude, or more extensive than, the effects referred to in section 96. This contemplates a balancing of commensurables, even if some of the efficiencies being balanced are not capable of accurate or rough quantification. By contrast, the term “offset” is broad enough to connote a balancing of incommensurables (e.g., apples and oranges) that requires the exercise of subjective judgment to determine whether the efficiencies compensate for the likely effects referred to in section 96.

[310]  In the case at bar, the Tribunal has found that the cognizable, quantifiable, efficiencies likely to result from the Merger will be a maximum of [CONFIDENTIAL] annually. Those are the overhead efficiencies estimated by Dr. Kahwaty. In addition, the Tribunal has found that CCS has not demonstrated, on a balance of probabilities, that the qualitative efficiencies it has claimed are cognizable. In other words, it has not demonstrated that those efficiencies would not likely be attained if the Order were made.

[311]  On the other hand, the Tribunal has found that the quantifiable Effects are likely to be at least [CONFIDENTIAL] annually. That is the value of the minimum DWL associated with the Contestable Area.

[312]  Based on these findings, it is readily apparent that CCS has not demonstrated that the cognizable, quantifiable, efficiencies likely to be brought about by the Merger will likely be “greater than” the quantifiable Effects that are likely to result from the Merger. Using a 5.5% discount rate, CCS estimated that the present value of these (overhead) efficiencies to be approximately [CONFIDENTIAL], in comparison with a present value of [CONFIDENTIAL] for the aforementioned Effects.

[313]  Given the Tribunal’s conclusion that the Merger would result in a number of important qualitative or other non-quantifiable effects, and that it would not likely bring about significant qualitative, cognizable, efficiencies, it is also readily apparent that the combined quantitative and qualitative efficiencies are not likely to be “greater than” the combined quantitative and qualitative Effects.

[314]  In addition, the Tribunal is persuaded, on a balance of probabilities, that even if a zero weighting is given to the quantifiable Effects, as CCS submitted should be done, CCS has not satisfied the “offset” element of section 96. In short, the Tribunal is satisfied that the very minor quantitative efficiencies, ([CONFIDENTIAL] annually) that are cognizable, together with any qualitative or other non-quantifiable efficiencies that may be cognizable, would not “offset” the significant qualitative Effects that it has found are likely to result from the Merger.

[315]  This conclusion would remain the same even if the Tribunal were to accept and give full weight to the Order Implementation Efficiencies, which only amount to a maximum of [CONFIDENTIAL] (which represents one year of transportation cost savings) plus [CONFIDENTIAL] (which represents one year of annual market expansion efficiencies).

[316]  This is because, in the Tribunal’s view, the qualitative Effects, when taken together merit substantial weight. That weight is greater than the weight attributable to the aggregate of the cognizable quantitative and qualitative efficiencies under any reasonable approach. In brief, those qualitative Effects are (i) reduced site clean-up and the benefits that such remediation would confer upon “area residents, wildlife, and the overall environment”; and, more importantly, (ii) reduced “value propositions” than would likely otherwise emerge in the relevant market, linking prices to various new or enhanced services.

[317]  Most importantly, in the absence of the Order, the Merger will maintain a monopolistic structure in the relevant market. In other words, the Merger will not only give rise to the qualitative effects summarized immediately above, but it will also preclude benefits of competition that will arise in ways that will defy prediction.

[318]  In summary, the Tribunal is satisfied that CCS has not met its burden to establish, on a balance of probabilities, the “greater than” or “offset” elements set forth in section 96.

ISSUE 9– WHAT IS THE APPROPRIATE REMEDY – DISSOLUTION OR DIVESTITURE?

[319]  An important question under this heading is whether SES is currently a willing purchaser for the Babkirk Site. Surprisingly, when Mr. Amirault of SES testified for the Commissioner, neither her counsel during questioning in chief nor counsel for the Vendors during cross- examination asked Mr. Amirault if SES is still interested in acquiring BLS.

[320]  The Commissioner’s position is that, once she showed that dissolution was an effective and available remedy, the burden of proof shifted to the Vendors to demonstrate that divestiture was an available, effective and less intrusive remedy. The Commissioner maintains that the Vendors were obliged to ask Mr. Amirault if SES is still interested and, because they failed to ask that question and because they failed to lead any evidence about other prospective purchasers, they have no basis to argue that divestiture will be an effective remedy.

[321]  The Tribunal does not accept the Commissioner’s characterization of the onus. In the Tribunal’s view, if the Commissioner proposes alternative remedies, as she did in this case, she bears the onus of showing that, although one may be preferable, each is available and effective. Accordingly, the Commissioner’s counsel should have asked Mr. Amirault about SES’ interest in purchasing the shares of BLS.

[322]  The Tribunal notes that, in her written final argument, the Commissioner asks the Tribunal not to infer that SES is an interested purchaser. However, in contrast, in final oral argument, counsel for the Commissioner suggested that SES is an interested buyer.

[323]  The Tribunal accepts the latter submission and has determined, for the following reasons, that SES is likely to make an offer to purchase the Babkirk Facility at some point during the divestiture process under the Order:

• SES has already decided to operate a Secure Landfill in NEBC. It tried unsuccessfully and at considerate expense to secure the Authorizations at its Heritage Site;
• Babkirk already has the necessary Authorizations and SES is confident that its plans to expand the permitted capacity at Babkirk and upgrade the cell design will be approved;
• SES has demonstrated an active and continuing interest in the Babkirk Facility since the Merger. Among other things, this is demonstrated by SES’ lawyers’ written submissions to the Commissioner and by the participation of its CEO, Mr. Amirault, as a witness in these proceedings.

[324]  We now turn to the proposed remedies.

[325]  The Commissioner wants the Babkirk Site operated as a competitive Full Service Secure Landfill and she believes that dissolution will produce this result more quickly than divestiture.

[326]  Her submission is that, once the Vendors again hold the shares of Complete and have repaid CCS the purchase price, they will be highly motivated to resell Complete or the shares of BLS because this will enable them to recover their funds as soon as possible. However, this submission assumes that the Vendors will immediately be offered a price they are prepared to accept. In the Tribunal’s view, there is no basis for this assumption. The evidence is clear that the Vendors have never been willing to be pushed into a quick sale.

[327]  The Commissioner’s submission also assumes that the Vendors will have an incentive to sell quickly because they will be short of funds as a result of having to repay CCS as soon as the shares of Complete are returned to them. This assumption is also questionable, in part because it appears that CCS has indemnified the Vendors against all claims arising from any investigation or actions by the Bureau with respect to the Merger. Given this background, it is possible that CCS may not insist on immediate payment.

[328]  Even if the Commissioner is correct and the Vendors are cash-strapped and anxious to resell BLS or Complete, the Tribunal still anticipates that they will want an attractive price. It is also important to remember that all five individual Vendors must agree to accept an offer and they will not necessarily be like-minded, in part because some are near retirement and others are in mid-career.

[329]  The Tribunal notes that two years will have passed since the Babkirk Facility was last for sale. This means that purchasers, other than SES, may show interest, especially given the increasing rate of gas production in the area northwest of Babkirk. Dr. Baye testified that he thought SES, Newalta and Clean Harbours were potential purchasers. As well, it is not unreasonable to think that an oil and gas producer may decide to own and operate a Secure Landfill. The Tribunal heard evidence that [CONFIDENTIAL] is considering becoming a part- owner of the Secure Landfill at Peejay. If the Vendors receive multiple offers, protracted negotiations may follow.

[330]  Finally, if they do not receive an offer they consider attractive, the Vendors are free to change their minds and resurrect their plan to operate a bioremediation facility with an Incidental Secure Landfill. This would not result in the competition the Commissioner seeks because it will only be realized if the Babkirk Facility operates as a Full Service Secure Landfill.

[331]  There is also the question of whether a purchaser after dissolution will be an effective competitor. In the proposed order for dissolution found at the conclusion of the Commissioner’s final argument, she does not seek the right to approve a purchaser and she only asks for notice of a future merger if it is “among the Respondents”. In our view, this makes dissolution a less effective remedy.

[332]  Given all these observations, the Tribunal is concerned that dissolution may not be effective in that it may not lead to a prompt sale and a timely opening of the Babkirk Facility as a Secure Landfill.

[333]  It is also the case that dissolution is the more intrusive remedy.

[334]  Three of the Vendors testified about the financial hardship they would face if dissolution were ordered by the Tribunal. Ken Watson’s share of the proceeds of the transaction was [CONFIDENTIAL]. He testified that if ordered to return the proceeds to CCS, [CONFIDENTIAL], he expects to face significant financial hardship.

[335]  Randy Wolsey’s share of the proceeds was approximately [CONFIDENTIAL]. He testified that almost half of the proceeds have been used to develop a property on which he is constructing a new family home. The balance has been invested in the purchase of various investment products. According to Mr. Wolsey, he expects to lose approximately [CONFIDENTIAL] if he is forced to make a quick sale on the residential property before the house under construction has been completed.

[336]  Karen Baker testified that if required to return her share of the proceeds, approximately [CONFIDENTIAL], then her ability to continue to provide financial support to certain small business will be compromised. She also indicated that if the transactions were to be dissolved, she expects that the “work required to reverse the sale and calculate the adjustments required to account for changes in Complete’s assets, working capital and lost opportunity costs, as well as the opportunity costs in time away from the other businesses in which [she is] involved, and cost to some of those businesses for replacement personnel to do the work that [she] should be doing, would cause [her] significant stress and emotional hardship.”

[337]  The Commissioner asserts that, in the particular circumstances of this case, hardship is irrelevant, because she warned the Vendors that she would seek dissolution before they sold Complete to CCS. However, in the Tribunal’s view it is the right of private parties to disagree with the Commissioner and make their case before the Tribunal. Accordingly, they are not estopped from raising issues of hardship.

[338]  The Tribunal is also of the view that dissolution is overbroad, since it involves Complete’s other businesses and not just BLS.

[339]  In the spring of 2007, Complete acquired the assets of a municipal waste management business based in Dawson Creek, British Columbia. As noted earlier, those assets included contracts for the management of the Fort St. John and Bessborough municipal landfills and the Dawson Creek Transfer Station, the supply and hauling of roll-off bins, and the provision of rural refuse collections and transfer services. At the time of the Merger, those contracts and related equipment were transferred to CCS. Hazco has been responsible for this business since then.

[340]  Mr. Garry Smith, the president of Hazco, testified that Hazco has upgraded Complete’s trucks and has sold some older equipment which it considered surplus. The two municipal landfill contracts have been extended and are now held directly by Hazco. Complete’s employees are now employed by Hazco and there have been personnel changes. At the hearing, Mrs. Baker testified about the impact of the sale of some of the assets. She stated:

Now, that equipment was older equipment. It wouldn't have brought big money, but the point is it was sufficient for us to do the work that we wanted it to do. Well, now the oil and gas industry is hot, hot up there. Trying to get equipment back, we certainly wouldn't get that equipment back. Any decent used equipment, I have no idea. The prices would be through the roof. Would we buy new equipment? I don't know. So right now, we don't even have the equipment to go back to work

[341]  To conclude, the Tribunal has decided that dissolution is intrusive, overbroad and will not necessarily lead to a timely opening of the Babkirk Facility as a Full Service Secure Landfill.

[342]  Turning to divestiture, the Tribunal finds that it is an available and effective remedy. If reasonable but tight timelines are imposed, it will not matter if, as the Commissioner alleges, SES and CCS are reluctant to negotiate because of their outstanding litigation. In the end, if they cannot agree, a trustee will sell the shares or assets of BLS, either to SES or another purchaser approved by the Commissioner. In other words, divestiture will be effective.

[343]  A divestiture with tight timelines has other advantages. The Commissioner will have the right to pre-approve the purchaser, the person responsible for effecting the divestiture will ultimately be CCS or a professional trustee, rather than five individuals, the timing will be certain, a sale will ultimately occur and the approved purchaser will compete with Silverberry on a Full Service basis.

[344]  For all these reasons, the Tribunal will order CCS to divest the shares or assets of BLS.

H. COSTS

[345]  The Commissioner chose dissolution as her preferred remedy when she commenced the Application. She made this choice because she believed that at the time of the Merger, the Vendors were about to construct and operate a Full Service Secure Landfill. For this reason she concluded that the most timely way to introduce competition was to return Babkirk to the Vendors.

[346]  However, for the reasons given above, the Tribunal has concluded that the Vendors did not intend to operate a Full Service Secure Landfill. This means that the Commissioner has failed to prove the premise which caused her to name the individual Vendors as parties to the Application. In essence she failed to prove her case against them and for this reasons she is liable for their costs.

[347]  However, during the Vendors’ motion for summary disposition which was heard two weeks before the hearing, they indicated that, if the motion was successful and they were removed as parties, four of them would nevertheless attend the hearing to give evidence. The Tribunal assumes that, had done so, they would have been represented by one counsel.

Accordingly, the Commissioner is to pay their costs less the legal fees which would have been incurred had they appeared as witnesses.

I. FOR THESE REASONS THE TRIBUNAL ORDERS THAT:

[348]  CCS is to divest the shares or assets of BLS on or before December 28, 2012 failing which a trustee is to effect a sale on or before March 31, 2013. If possible, the terms for this process are to be agreed between the Commissioner and CCS and are to be submitted to the Tribunal on or before June 22, 2012. If the agreed terms are accepted by the Tribunal, they will be incorporated in a further order to be called the Divestiture Procedure Order. If the Commissioner and CCS cannot agree to terms, each party is to submit a proposed Divestiture Procedure Order on or before June 29, 2012. If necessary, the Tribunal will hear submissions about each party’s proposal in early July and then make the Divestiture Procedure Order.

[349]  CCS is to pay the Commissioner’s costs and, because dissolution was not ordered, the Commissioner is to pay the Vendors’ costs less the fees they would have paid for legal representation if they had attended as non-parties to give their evidence. The Commissioner is to prepare a bill of costs to be submitted to CCS and the Vendors are to submit a bill of costs to the Commissioner both on or before August 31, 2012. Both are to be prepared in accordance with Federal Court Tariff B at the mid-point of column 3. If by September 14, 2011 no agreement is reached about lump sums to be paid, the Tribunal will hear submissions and fix the awards of costs.

DATED at Ottawa, this 29th day of May, 2012.

SIGNED on behalf of the Tribunal by the Panel Members.

(s) Sandra J. Simpson J. (Chairperson) (s) Paul Crampton C.J. (s) Dr. Wiktor Askanas

J. THE SCHEDULES

[350]  The schedules appear on the following pages:

 

Schedule A: Map Showing Secure Landfills (based on Exhibit 4-A to Dr. Baye’s Expert Report)

Source: CCS, SES, and Newalta company websites.

This map may be printed in colour.

Schedule B: The Evidence

Witnesses who gave oral testimony (in alphabetical order)

For the Commissioner of Competition

• Rene Amirault

President & CEO of Secure Energy Services Inc.

• Robert Andrews

Section Head- Environmental Management, Government Unit in the British Columbia Ministry of the Environment.

• Michael Baye

Expert Economist - Special Consultant at National Economic Research Associates, Inc. and the Bert Elwert Professor of Business Economics and Public Policy at the Indiana University Kelley School of Business.

• Chris Hamilton

Project Assessment Director at the British Columbia Environmental Assessment Office.

• Andrew Harrington

Expert on Efficiencies - Managing director of the Toronto office of Duff & Phelps.

• [CONFIDENTIAL]

Contracting and Procurement Analyst for the [CONFIDENTIAL].

• [CONFIDENTIAL]

Vice-President, Operations at [CONFIDENTIAL].

• Mark Polet

Associate at Klohn Crippen Berger Ltd. ("KCB"). KCB is a private, specialized engineering and environmental consulting firm with its head office in Vancouver.

• Del Reinheimer

Environmental Management Officer in the Environmental Protection Division at the British Columbia Ministry of the Environment.

• Devin Scheck

Director, Waste Management & Reclamation at the British Columbia Oil and Gas Commission.

For the Vendors

• Karen Baker

One of the founding shareholders of Complete Environmental Inc.

• Ronald Baker

One of the founding shareholders of Complete Environmental Inc.

• Kenneth Watson

One of the founding shareholders of Complete Environmental Inc.

• Randy Wolsey

One of the founding shareholders of Complete Environmental Inc.

For the Corporate Respondents

• Trevor Barclay

Landfill Manager of the Northern Rockies Secure Landfill.

• James Coughlan

Director of Sales and Marketing of CCS Corporation

• Henry Kahwaty

Expert economist - Director with Berkeley Research Group, LLC.

• Richard Lane

Vice-President of CCS Midstream Services, a division of CCS Corporation.

• Pete Marshall

Principal of Adelantar Consulting, an environmental consultancy based in Edmonton, Alberta.

• Daniel Wallace

Manager, Business Development of CCS Corporation's Midstream Services division

Other Evidence

• The witness statements from those who testified.

• Read-ins from Examinations for Discovery of Karen Baker and Kenneth Watson for the Vendors, Daniel Wallace for the Corporate Respondents and Trevor MacKay for the Commissioner of Competition

• The statement of agreed facts.

• The witness statements of Robert Coutts, President of SkyBase Geomatic Solutions Inc.and Garry Smith, President of Hazco Waste Management (owned by CCS). On consent these witnesses were not called to give oral testimony.

• A Joint list of agreed documents.

• The exhibits marked during the hearing.

Schedule C – Map of NEBC, the Contestable Area and the Babkirk Polygon

K. CONCURRING REASONS BY P. CRAMPTON C.J.

[351]  Although I participated in the writing of, and signed, the Panel’s decision in this case, I would like to comment on certain additional matters.

A. IS CCS’S ACQUISITION OF COMPLETE A MERGER?

[352]  At paragraph 56 of the Panel’s reasons, it is noted that it was not necessary to decide whether Complete’s Roll-off Bin Business or its management of municipal dumps could be a business for the purposes of section 91 of the Act. That said, the conclusion reached by the Chairperson on this point was articulated at paragraph 57. That conclusion was stated as follows:

“[A] business being acquired in a merger must have some relevance to a Commissioner’s application. In other words, it must have the potential to impact competition in the markets at issue. This observation means that, in this case, Complete’s Roll-off Bin Business and its management of municipal dumps would not have been caught by the definition in section 91 because they are not involved in any way in the disposal or treatment of Hazardous Waste.”

[353]  I respectfully disagree. In my view, the term “business”, as contemplated by section 91 of the Act, is not, as the Vendors maintained, confined to a business that competes with a business of an acquiring party. There is no such limitation in section 91 or in the definition of the term “business” that is set forth in subsection 2(1) of the Act.

[354]  The Vendors attempted to support their position by noting that section 92 of the Act requires that a “merger” prevent or lessen, or be likely to prevent or lessen, competition substantially. However, it is not necessary for a merger to involve two or more competing businesses to have the potential to prevent or lessen competition substantially. For example, the inclusion of the terms “supplier” and “customer” in section 91 reflects Parliament’s implicit recognition that a vertical merger may have such an effect. The words “or other person” in section 91 reflect that Parliament also did not wish to exclude the possibility that other types of non-horizontal mergers may also have such an effect.

[355]  Considering the foregoing, I am not persuaded that the Vendors’ position is assisted by reading the words of section 91 “in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament” (E. A. Driedger, Construction of Statutes (2nd ed. 1983), at p. 87, quoted in Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27, at 41; and Canada (Canadian Human Rights Commission) v. Canada (Attorney General), 2011 SCC 53, at para. 33 (“Mowat”)). In the absence of any apparent ambiguity, one must adopt an interpretation of section 91 “which respects the words chosen by Parliament” (Mowat, above). The principle that the Act be given “such fair, large and liberal construction and interpretation as best ensures the attainment of its objects” also supports the view that section 91 ought not be read in the limited manner suggested by the Vendors (Interpretation Act, R.S.C. 1985, c. I-21, s. 12).

[356]  Indeed, if anything, a reading of section 91 in a manner that is harmonious with the scheme and object of the Act and the intention of Parliament arguably further supports interpreting section 91 in a way that does not require the type of assessment of competitive effects that is contemplated by the interpretation advanced by the Vendors. That is to say, when viewed in the context of the scheme and object of the Act as a whole, it is arguable that section 91 was intended by Parliament to be a gating provision, in respect of which an assessment ordinarily is to be made relatively early on in the evaluation contemplated by sections 92 and 93.

[357]  For example, all but one of the assessment factors in the non-exhaustive list that is set forth in section 93 refer to the “merger or proposed merger” in respect of which an application under section 92 has been made. In my view, this suggests that the merger or proposed merger in question should be identified before the assessment contemplated by sections 92 and 93 is conducted.

[358]  If an agreement, arrangement or practice cannot properly be characterized as a merger, it will fall to be investigated under another provision of the Act, such as section 45, section 79, or section 90.1, each of which has a substantive framework which differs in important respects from the framework set forth in section 92. Indeed, in the case of agreements or arrangements that may be investigated under section 45, which is a criminal provision, there are important procedural implications associated with the decision to pursue a matter under that section, versus under section 90.1, 79 or 92. I recognize that there may be cases in which it may be appropriate to assess a matter under section 92 as well as under one or more of the other provisions mentioned immediately above, for a period of time before an election is made under section 98, 45.1, 79(7) or 90.1(10). However, the scheme of the Act and the interests of administrative efficiency arguably support the view that a determination as to whether a matter ought to be investigated as a merger, rather than a type of conduct addressed elsewhere in the Act, ordinarily should be made before the central substantive determinations under the applicable section of the Act are made. Among other things, such substantive determinations often take several months, and sometimes take much longer, to make.

[359]  In summary, for all of the foregoing reasons, I have concluded that the term “business” in section 91 is sufficiently broad to include any business in respect of which there is an acquisition or establishment of control or a significant interest, as contemplated therein. In the case at bar, this would include Complete’s Roll-off Bin Business, which was fully operational at the time of Complete’s acquisition by CCS. It would also include Complete’s management of municipal dumps.

B. MARKET DEFINITION

[360]  Market definition has traditionally been a central part of merger analysis in Canada and abroad for several reasons. These include (i) helping to focus the assessment on products and locations that are close substitutes for the products and locations of the merging parties, (ii) helping to focus the assessment on the central issue of market power, (iii) helping to identify the merging parties’ competitors, (iv) helping to understand the basis for existing levels of price and non-price competition, and (v) facilitating the calculation of market shares and concentration levels. In turn, changes in market shares and concentration levels can be very helpful, albeit not determinative, in understanding the likely competitive effects of mergers and in assisting enforcement agencies to triage cases and to provide guidance to the public.

[361]  In recent years, developments in antitrust economics have reached the point that the United States Department of Justice and Federal Trade Commission have begun to embrace approaches that “need not rely on market definition” (Horizontal Merger Guidelines (August 19, 2010), at § 6.1). Likewise, the MEGs, at paragraph 3.1, have been amended to stipulate that market definition is not necessarily a required step in the Commissioner’s assessment of a merger.

[362]  These developments can be accommodated within the existing framework of the Act and the Tribunal’s jurisprudence.

[363]  In discussing market definition, the Panel noted, at paragraph 92 of its reasons, that the Tribunal has in the past cautioned against losing sight of the ultimate inquiry, which is whether the merger being assessed prevents or lessens, or is likely to prevent or lessen, competition substantially. The Tribunal has also previously noted that the Act does not require that a relevant market be defined in assessing whether competition is likely to be prevented or lessened substantially (Propane 1, above, at para. 56). The logical implication is that defining a relevant market is not a necessary step in assessing whether a merger prevents or lessens, or is likely to prevent or lessen, competition substantially. Accordingly, it will be open to the Tribunal, in an appropriate case, to make this assessment without defining a relevant market.

[364]  That said, at this point in time, it is anticipated that such cases will be exceptional. Indeed, failing to define a relevant market may make it very difficult to calculate, or even to reasonably estimate, the actual or likely DWL associated with a merger, for the purposes of the efficiencies defence in section 96 of the Act.

C. THE ANALYTICAL FRAMEWORK IN A “PREVENT” CASE

[365]  At the outset of the Commissioner’s final oral argument, her counsel urged the Tribunal to clarify the analytical approach applicable to three areas, namely, (i) the assessment of whether a merger prevents, or is likely to prevent, competition substantially, (ii) the efficiencies defence, and (iii) the circumstances in which the Tribunal will entertain the remedy of dissolution, and what factors will be taken into account in determining the appropriate remedy in any particular case.

[366]  These topics are all addressed to some extent in the Panel’s decision. I would simply like to add some additional comments, particularly with respect to the analytical framework applicable to the Tribunal’s assessment of whether a merger prevents, or is likely to prevent, competition substantially.

[367]  The Tribunal’s general focus in assessing cases brought under the “substantial prevention of competition” and “substantial lessening of competition” branches of section 92 is essentially the same. In brief, that focus is upon whether the merged entity is likely to be able to exercise materially greater market power than in the absence of the merger. The same is true with respect to other sections of the Act that contain these words.

[368]  In determining whether competition is likely to be lessened, the more particular focus of the assessment is upon whether the merger is likely to facilitate the exercise of new or increased market power by the merged entity, acting alone or interdependently with one or more rivals. In determining whether competition is likely to be prevented, that more particular focus is upon whether the merger is likely to preserve the existing market power of one or both of the merging parties, by preventing the erosion of such market power that otherwise likely would have taken place if the merger did not occur.

[369]  In making its assessment in the latter context, and with respect to a proposed merger, the Tribunal compares (i) the state of competition that would likely exist if the merger were to proceed, with (ii) the state of competition that would likely exist if the merger did not proceed. Scenario (ii) typically is referred to as the “but for”, or “counterfactual”, scenario. In the case of a completed merger, that “but for” scenario is the market situation that would have been most likely to emerge had the merger not occurred.

[370]  When the Tribunal determines that a merger is not likely to enable the merged entity to exercise greater market power than in the absence of the merger, the Tribunal generally will conclude that the merger is not likely to prevent or lessen competition at all, let alone substantially. With respect to allegations that competition is likely to be lessened, this conclusion generally will flow from a finding that the merger is not likely to enable the merged entity to enhance existing, or to create new, market power. With respect to allegations that competition is likely to be prevented, this conclusion generally will flow from a finding that the merger in question is not likely to enable the merged entity to maintain greater existing market power than in the absence of the merger. Once again, the foregoing also applies with respect to other sections of the Act that contain the “prevent or lessen competition substantially” test.

[371]  With respect to sellers, market power is the ability to profitably maintain prices above the competitive level, or to reduce levels of non-price competition (such as service, quality or innovation), for an economically meaningful period of time. With respect to purchasers, market power is the ability to profitably depress prices below the competitive level, or to reduce levels of non-price competition, for such a period of time.

[372]  In assessing whether market power is likely to be created, enhanced or maintained by a merger or a reviewable trade practice, the Tribunal assesses the intensity of competition, as reflected in its price and non-price dimensions. Competition is a dynamic, rivalrous process through which the exercise of market power is prevented or constrained as firms strive, among other things, to develop, produce, distribute, market and ultimately sell their products in rivalry with other firms. That rivalrous process generates the principal source of pressure on firms to innovate new or better products or business methods, and to deliver those products at competitive prices. In turn, those innovations and competitive prices serve to increase aggregate economic welfare in the economy, the economy’s international competitiveness and the average standard of living of people in the economy.

[373]  In assessing the intensity of price competition, the Tribunal focuses upon whether prices are likely to be higher than in the absence of the merger. In assessing the intensity of non-price competition, the Tribunal focuses upon whether levels of service, quality, innovation, or other important non-price dimensions of competition are likely to be lower than in the absence of the merger. This focus ensures that the assessment of the intensity of price and non-price dimensions of competition is relative, rather than absolute, in nature (Canada Pipe, above, at paras. 36 – 38). In short, the assessment of levels of price and non-price competition is made relative to the levels of price and non-price competition that likely would exist “but for” the merger. The same approach is taken with respect to non-merger matters that require an assessment of whether competition is likely to be prevented or lessened substantially.

[374]  Competition may be said to be prevented when future competition is hindered or impeded from developing. Common examples of such prevention of competition in the merger context include (i) the acquisition of a potential or recent entrant that was likely to expand or to become a meaningful competitor in the relevant market, (ii) an acquisition of an incumbent firm by a potential entrant that otherwise likely would have entered the relevant market de novo, and (iii) an acquisition that prevents what otherwise would have been the likely emergence of an important source of competition from an existing or future rival.

[375]  In determining whether a prevention or lessening of competition is likely to be substantial, the Tribunal typically will assess the likely magnitude, scope and duration of any adverse effects on prices or on non-price levels of competition that it may find are likely to result from the creation, enhancement or maintenance of the merged entity’s market power. That is to say, the Tribunal assesses the likely degree of such price and non-price effects, the extent of sales within the relevant market in respect of which such effects are likely to be manifested, and the period of time over which such effects are likely to be sustained.

[376]  With respect to magnitude or degree, the Tribunal has previously defined substantiality in terms of whether customers are “likely to be faced with significantly higher prices or significantly less choice over a significant period of time than they would be likely to experience in the absence of the acquisitions” (Southam, above, at 285, emphasis added). However, given that the Tribunal has now embraced the hypothetical monopolist framework and the SSNIP test for market definition, it is necessary to revisit this definition of substantiality. This is because if the degree of market power used to define relevant markets is the same as the degree of market power used to assess competitive effects, a merger would not be found to be likely to prevent or lessen competition substantially unless the degree of new, enhanced or maintained market power of the merged entity is the same degree of market power held by as the hypothetical monopolist that was conceptualized for the purposes of market definition.

[377]  Accordingly, the degree of market power used in assessing whether competition is likely to be prevented or lessened substantially must be recalibrated downwards. That recalibrated degree of market power is a level of market power required to maintain prices materially higher, or to depress one or more forms of non-price competition to a level that is materially lower, than they likely would be in the absence of the merger. As a practical matter, in the case at bar, this distinction between “material” and “significant” is of little significance, because the Panel has found that prices are likely to be significantly (i.e., at least 10%) higher than they would likely have been in the absence of the Merger.

[378]  Turning to the scope dimension of “substantiality”, the Tribunal will assess whether the merged entity, acting alone or interdependently with other firms, likely would have the ability to impose the above-mentioned effects in a material part of the relevant market, or in a respect of a material volume of sales.

[379]  With respect to the duration dimension of “substantiality”, the Tribunal typically will assess whether the merged entity, acting alone or interdependently with other firms, likely would have the ability to sustain the above-mentioned effects for approximately two years or more, relative to the “but for” scenario. This explains why the Tribunal typically assesses future entry and the expansion of potential rivals to the merged entity by reference to a benchmark of approximately two years.

[380]  When, as in this case, the merger has already occurred and the Commissioner alleges that the merger is likely to prevent competition substantially, the Tribunal’s assessment of the duration dimension of “substantiality” will focus on two things. First, the Tribunal will assess whether the entry or expansion that was prevented or forestalled by the merger likely would have been sufficiently timely, and on a sufficient scale, to have resulted in a material reduction of prices, or a material increase in one or more non-price dimensions of competition, had the merger not occurred. If so, the Tribunal will assess whether the entry or expansion of third parties likely will achieve this result, notwithstanding the fact that the merger has occurred.

[381]  Before assessing whether a likely prevention of future competition would be “substantial,” the Tribunal also will assess whether that future competition likely would have materialized “but for” the merger in question. In this regard, the Tribunal will assess whether such competition likely would have developed within a reasonable period of time.

[382]  What constitutes a reasonable period of time will vary from case to case and will depend on the business under consideration. In situations where steps towards entry or expansion were being taken by the firm whose entry or expansion was prevented or forestalled by the merger, a reasonable period of time would be somewhere in the range of time that typically is required to complete the remaining steps to enter or expand on the scale described above. Similarly, in situations where the entry or expansion was simply in the planning stage, a reasonable period of time would be somewhere in the range of time that typically is required to complete the plans in question and then to complete the steps required to enter or expand on the scale described above. In situations where entry on such a scale cannot occur for several years because, for example, a new blockbuster drug is still in clinical trials, a reasonable period of time would be approximately the period of time that it typically would take for such trials to be completed, relevant regulatory approvals obtained, and commercial quantities of the drug produced and sold. In situations where entry on the scale described above cannot occur for several years because of long term contracts between customers and suppliers, a reasonable period of time would be approximately one year after a volume of business that is sufficient to permit entry or expansion on that scale becomes available.

[383]  In all cases, the Tribunal must be satisfied that the future competition that is alleged to be prevented by the merger likely would have materialized within a reasonable period of time. If so, the Tribunal will assess whether the prevention of that competition likely would enable the merged entity to exercise materially greater market power than in the absence of the merger, for a period of approximately two years or more, subsequent to that time.

[384]  Notwithstanding the foregoing, it is important to underscore that the magnitude, scope and duration dimensions of “substantiality” are interrelated. This means that where the merged entity is likely to have the ability to prevent a particularly large price decrease that likely would occur “but for” the merger, the volume of sales in respect of which the price decrease would have had to be experienced before it will be found to be “material” may be less than would otherwise be the case. The same is true with respect to the period of time in respect of which the likely adverse price effects must be experienced – it may be less than the two year period that typically is used. Likewise, where the volume of sales in respect of which a price decrease is likely to occur is particularly large, (i) the degree of price decrease required to meet the “materiality” threshold may be less than would otherwise be the case, and (ii) the period of time required for a prevention of competition to be considered to be “substantial” may be less than two years.

[385]  In conducting its assessment of whether a merger is likely to prevent competition substantially, the Tribunal also assesses whether other firms likely would enter or expand on a scale similar to that which was prevented or forestalled by the merger, and in a similar timeframe. Where the Tribunal finds that such entry or expansion likely would occur even if the merger proceeds, it is unlikely to conclude that the merger is likely to prevent competition substantially.

[386]  In summary, to demonstrate that a merger is likely to prevent competition substantially, the Commissioner must establish, on a balance of probabilities, that “but for” the merger, one of the merging parties likely would have entered or expanded within the relevant market within a reasonable period of time, and on a sufficient scale, to effect either a material reduction of prices or a material increase in one or more levels of non-price competition, in a material part of the market, for approximately two years. Alternatively, the Commissioner must establish a similar likely effect on prices or on levels of non-price dimensions of competition as a result of the development of another type of future competition that likely would have occurred “but for” the merger.

D. WHEN EFFICIENCIES CAN BE CONSIDERED

[387]  The Tribunal’s decision in Propane 3, above, has been interpreted as suggesting that cost reductions and other efficiencies can never be considered prior to the triggering of the defence set forth in section 96. This appears to be a misreading of Propane 3. The source of this misunderstanding appears to be found in paragraph 137 of that decision. The focus of the discussion in that paragraph was on the differences between the Canadian and American approaches to efficiencies, and, specifically, whether section 96 requires the efficiencies likely to result from a merger to be so great as to ensure that there are no adverse price effects of the merger.

[388]  There may well be situations in which any cost reductions or other efficiencies likely to be attained through a merger will increase rivalry, and thereby increase competition, in certain ways. These include: (i) by enabling the merged entity to better compete with its rivals, for example, by assisting two smaller rivals to achieve economies of scale or scope enjoyed by one or more larger rivals, (ii) by increasing the merged entity’s incentive to expand production and to reduce prices, thereby reducing its incentive to coordinate with other firms in the market post- merger, and (iii) by leading to the introduction of new or better products or processes.

[389]  There is no “double counting” of such efficiencies when it is determined that the merger in question is likely to prevent or lessen competition substantially and a trade-off assessment is then conducted under section 96. This is because, in that assessment, such efficiencies would only be considered on the “efficiencies” side of the balancing process contemplated by section 96. They would not directly or indirectly be considered on the “effects” side of the balancing process, because they would not be part of any cognizable (i) quantitative effects (e.g., the DWL or any portion of the wealth transfer that may be established to represent socially adverse effects), or (ii) qualitative effects (e.g., a reduction in dynamic competition, service or quality). Moreover, at the section 92 stage of the analysis, they typically would not be found to be a source of any new, increased or maintained market power that must be identified in order to conclude that the merger is likely to prevent or lessen competition substantially.

E. THE EFFICIENCIES DEFENCE

[390]  The analytical framework applicable to the assessment of the efficiencies defence has been set forth in significant detail in the Panel’s decision. I simply wish to make a few additional observations.

(i) Conceptual framework

[391]  In broad terms, section 96 contemplates a balancing of (i) the “cost” to the economy that would be associated with making the order that the Tribunal has determined should otherwise be made under section 92 (the “Section 92 Order”), and (ii) the “cost” to the economy of not making the Section 92 Order. The former cost is the aggregate of the lost efficiencies that otherwise would likely be attained as a result of the merger. The latter cost is the aggregate of the effects of any prevention or lessening of competition likely to result from the merger, if the Section 92 Order is not made.

[392]  Section 96 achieves this balancing of “costs” by (i) confining efficiencies that are cognizable in the trade-off assessment to those that “would not likely be attained if the [Section 92 Order] were made”, as contemplated by subsection 96(1), and (ii) confining the effects that may be considered in the trade-off assessment to “the effects of any prevention or lessening of competition that will result or is likely to result from the merger or proposed merger”.

[393]  In short, the efficiencies that are eliminated by this language in subsection 96(1), which is referred to at paragraph 264 of the Panel’s decision as the fifth “screen” established by section 96, are not considered in the trade-off assessment because they would not represent a “cost” to society associated with making the Section 92 Order. That is to say, the efficiencies excluded by this screen either would likely be achieved through alternative means in any event, or they would be unaffected by the Section 92 Order. This could occur, for example, because they would be attained in one or more markets or parts of the merged entity’s operations that would be unaffected by the Section 92 Order. It is in this sense that the assessment contemplated by section 96 is heavily dependent on the nature of the Section 92 Order.

[394]  That said, to the extent that there are efficiencies in other markets that are so inextricably linked to the cognizable efficiencies in the relevant market(s) that they would not likely be attained if the Section 92 Order were made, they are cognizable under section 96 and will be included in the trade-off assessment.

[395]  In assessing whether efficiencies are likely to be achieved through alternative means, the Tribunal will assess the realities of the market(s) concerned, and will not exclude efficiencies from its analysis on the basis of speculation that the efficiencies could possibly be achieved through such alternative means.

[396]  It bears emphasizing that, under section 96, the relevant counterfactual is the scenario in which the Section 92 Order is made. This is not necessarily the scenario in which the merger does not occur.

(ii) Socially adverse effects

[397]  At paragraph 284 of the Panel’s decision, it was observed that the Commissioner adduced no evidence with respect to what the Tribunal in the past has characterized as being socially adverse effects. The Panel also observed that the Commissioner conceded that the merger is not likely to result in any such effects. Accordingly, the Panel confined its assessment to the anti- competitive effects claimed by the Commissioner.

[398]  However, given that the Commissioner requested, in her final oral submissions, that the Panel clarify the analytical approach applicable to the efficiencies defence, the following observations will be provided with respect to the potential role of socially adverse effects in the trade-off analysis contemplated by section 96, in future cases.

[399]  At paragraph 205 of its final argument, CCS characterized the approach established by the Federal Court of Appeal in Propane 2, above, as being the “balancing weights approach.” This is the same terminology that was used by Dr. Baye at footnote 14 of his reply report, where he referred to the approach established in Propane 3, above, and Propane 4, above. However, as the Tribunal noted in Propane 3, at para. 336, balancing weights “is incomplete [as an approach] and useful only as a tool to assist in its broader inquiry” under section 96. With this in mind, the Tribunal characterized that broader inquiry mandated by Propane 2 in terms of the “socially adverse effects” approach. However, on reflection, the term “weighted surplus” approach would seem to be preferable.

[400]  As noted at paragraphs 281 – 283 of the Panel’s decision, the total surplus approach remains the starting point for assessing the effects contemplated by the efficiencies defence set forth in section 96 of the Act. After the Tribunal has assessed the evidence with respect to the quantifiable (i.e., the DWL) and non-quantifiable anti-competitive effects of the merger in question, it will assess any evidence that has been tendered with respect to socially adverse effects. In other words, if the Commissioner alleges that the merger is likely to give rise to socially adverse effects, the Tribunal will determine how to treat the wealth transfer that is likely to be associated with any adverse price effects of the merger. The wealth transfer is briefly discussed at paragraph 282 of the Panel’s decision.

[401]  As the Tribunal observed in Propane 3, above, at para. 372, “demonstrating significant adverse redistributional effects in merger review will, in most instances, not be an easy task.” Among other things, determining how to treat the wealth transfer will require “a value judgment and will depend on the characteristics of [the affected] consumers and shareholders” (Propane 3, above, at para. 329). It will “rarely [be] so clear where or how the redistributive effects are experienced” (Propane 3, above, at para. 329). In general, the exercise “will involve multiple social decisions” and “[f]airness and equity [will] require complete data on socio-economic profiles on [sic] consumers and shareholders of producers to know whether the redistributive effects are socially neutral, positive or adverse” (Propane 3, above, at paras. 329 and 333).

[402]  Where it is determined that the merger likely will result in a socially adverse transfer of wealth from one or more identified lower income group(s) to higher income shareholders of the merged entity, a subjective decision must be made as to how to weigh the relevant part(s) of the wealth transfer. (If the entire wealth transfer will involve a socially adverse transfer, then it would be necessary to decide how to weigh the full transfer.) If the income effect on some purchaser groups would be more severe than on others, different weightings among the groups may be required.

[403]  It is at this point in the assessment that the balancing weights tool can be of some assistance. As proposed by Professor Peter Townley, one of the Commissioner’s experts in Propane, above, this tool simply involves determining the weight that would have to be given to the aggregate reduction in consumer surplus (i.e., the sum of the deadweight loss, including any deadweight loss attributable to pre-existing market power, plus the wealth transfer) in order for it to equal the increased producer surplus that would likely result from the merger (i.e., the sum of the efficiency gains and the wealth transfer). (See the Affidavit of Peter G.C. Townley, submitted in Propane, above, (available at http://www.ct-tc.gc.ca/CMFiles/CT-1998-002_0115_38LES- 1112005-8602.pdf).)

[404]  For example, in Propane, the aggregate reduction in consumer surplus was estimated to be $43.5 million, i.e., the estimated $40.5 million wealth transfer plus the estimated $3 million DWL. By comparison, the aggregate increase in producer surplus was estimated to be $69.7 million, i.e., the sum of the efficiency gains accepted by the Tribunal, namely $29.2 million, plus the wealth transfer of $40.5 million. The balancing weight was therefore represented by w in the following formula: 1(69.7) – w ($43.5) = 0. Solving for w yielded a value of 1.6, which was the weight at which the consumer losses and the producer gains just balanced. (See Propane 3, above, at paras. 102-104.) Accordingly, for consumer losses to outweigh producer gains, they would have had to be given a weight of greater than 1.6, assuming that producer gains were given a weight of 1.

[405]  Professor Townley’s helpful insight was that members of the Tribunal often would be in a position to subjectively determine, even in the absence of substantial information, whether there was any reasonable basis for believing that a weighting greater than the balancing weight ought to be applied to the socially adverse portion(s) of the wealth transfer. If not, then notwithstanding an insufficiency of the information required to accurately calculate a full set of distributional weights, it could be concluded that the efficiencies likely to result from the merger would outweigh the adverse effects on consumer surplus. Unfortunately, there was not sufficient information adduced in Propane to permit the Tribunal to assess whether the estimated balancing weight of 1.6 was reasonable, given the socio-economic differences between and among consumers and shareholders (Propane 3, above, at para. 338).

[406]  Where the balancing weights tool does not facilitate a determination of the weights to be assigned to any identified socially adverse effects, other evidence may be relied upon to assist in this regard. For example, in Propane 3, the Tribunal relied upon Statistics Canada’s report entitled Family Expenditure in Canada, 1996, which suggested that only 4.7% of purchasers of bottled propane were from the lowest-income quintile, while 29.1% were from the highest- income quintile. The Tribunal ultimately determined that the redistributive effects of the merger on customers in the lowest-income quintile would be socially adverse, and included in its trade- off analysis an estimate of $2.6 million to reflect those adverse effects. Although it found that it had no basis upon which to determine whether the DWL should be weighted equally with adverse redistribution effects, the Tribunal ultimately concluded that, even if the $2.6 million in adverse distribution effects were weighted twice as heavily as the $3 million reduction in DWL and a further $3 million to represent the adverse qualitative effects of the merger, the combined adverse impact on consumer surplus would not exceed $11.2 million (Propane 3, above, at para. 371). Since that estimate was still far below the recognized efficiency gains of $29.2 million, it concluded that the defence in section 96 had been met. This conclusion was upheld on appeal.

(iii) Non-quantifiable/qualitative effects

[407]  The Panel’s assessment of the non-quantifiable effects that were considered in the section 96 trade-off assessment in this case is set forth at paragraphs 305-307 of its reasons.

[408]  I simply wish to add that where there is not sufficient evidence to quantify, even roughly, effects that ordinarily would be quantifiable, it will remain open to the Tribunal to accord qualitative weight to such effects. For example, in the case at bar, it would have been open to accord qualitative weight to the anti-competitive effects of the Merger expected to occur outside the Contestable Area, given that the evidence established that such effects were likely, but could not be calculated due to shortcomings in the evidence. As it turned out, it was unnecessary for the Panel to give those effects any weighting whatsoever.

[409]  Similarly, had the Panel not accepted the Commissioner’s evidence with respect to the quantitative magnitude of the DWL, such that there was then no evidence on this specific matter, it would have been open to the Panel to accord qualitative weight to the fact that there would have been some significant DWL associated with the adverse price effects which it determined were likely to result from the Merger. The same will be true in other cases in which either it is not possible to reliably quantify the likely DWL, even in rough terms, or the Commissioner fails to adduce reliable evidence regarding the extent of the likely DWL, at the appropriate time.

DATED at Ottawa, this 29th day of May, 2012.

(s) Paul Crampton C.J.

APPEARANCES:

For the applicant:

The Commissioner of Competition

Nikiforos Iatrou Jonathan Hood

For the respondents

CCS Corporation, Complete Environmental Inc. and Babkirk Land Services Inc.

Linda Plumpton Crawford Smith Dany Assaf Justin Necpal

Karen Louise Baker, Ronald John Baker, Kenneth Scott Watson, Randy John Wolsey, and Thomas Craig Wolsey

J. Kevin Wright Morgan Burris Brent Meckling