F~B-10-1900 15:13 P.02 CT - 2003-005 THE COMPETITION TRIBUNAL JN THE :MATI'ER OF the Competition Act, R.S. 1985, c. C-34; as amended; IN THE MATI'ER OF an application by Canadian Waste Services Holdings Inc., Canadian Waste Services Inc. and Waste Management Inc. under s. 106 of the Competi#rm Act;
AND IN THE MATIER OF the acquisition by Canadian Waste Services Inc. of the Ridge Landfill in Blenheim, Ontario from Browning-Ferris Industries Ltd.
BE'IWEEN:
CANADIAN WASTE SERVICES HOLDINGS INC., CANADIAN WASTE SERVICES INC. and WASTE MANAGEMENT, INC. Applicants
-and-COMMISSIONER OF COMPETITION Respondent Re1buttal Affidavit of Michael R. Baye Sworn October 10, 2003
F I 0 L D E U, D I REGISiRAR - R~GISf~AiRE T1 i--o-n~ w~ ~-;Nr-:--loo32- , 10/10/2003 FRI 09:46 [TX/RX NO 6702) ~002
F~B-10-1900 15:13 P.03 RESPONSE 2 I, MICHAEL R. BAY E, of the City of Bloomington, in the State of Indiana, one of the United States of America, MAKE OATH AND SWEAR:
1. I attach as Exhibit "A" to this affidavit my Rebuttal Report setting out my opjnion in response to the report of Professor Ware in this matter. SWORN BEFORE ME at the City of ) :Bloomington, in the State of Indiana, one ) of the United States of America, this ) .. --····re~~~ay. . pf~temeer, 2003. ) · . < - -·--"-·<'· · obEA. ) !. . . ... ' .( 'Sit8 ) ~--h R. Orn~ ) ) .~ .. ·.A Corrµn.i.ssioner. etc. ) .... ' .... ~ 10/10/2003 FRI 09: 46 [TX/RX NO 670'2']-~ OOS·--
F~B-10-1900 15:13 IN THE MATTER OF the Competition Act, R.S. 1985, c.C· 34: as amended; IN THE MATTER OF an application by Canadian Waste Services Holdings Inc., Canadian Waste Services Inc. and Waste Management Inc. under s. 106 of the Competition Act;
AND IN THE MATTER OF the acquisition by Canadian Waste Services Inc. of the Ridge Land.fill in Blenheim, Ontario from Browning-Ferris Industries Ltd.
BETWEEN: Canadian Waste Services Holdings, Inc., Canadian Waste Services Inc., and Waste Management, lnc.
Applicants -and-Commissioner of Competition Respondent
Affidavit of Michael R. Baye FRASER MILNER LLP 1 First Canadian Place 100 King Street West, Suite 3900 Toronto, ON MSX lB2
Donald B. Houston Tel: 416-863-4620 Fax:416-863-4S92
AFFLECK GREENE ORR LLP Barristers & Solicitors One First Canadian Place Suite 840, P.O. Box 489 Toronto, Ontario MSX IES
W. Michael G. Osborne Tel: (416) 360-5919 Fax: (416) 360-5960
DEPARTMENT OF JUSTICE Place de Portage, Phase 1 SO Victoria Street, 22nd Floor Hull, Quebec: KlA OC9
Andre Brantz Tel: (819) 997-3325 Fax: (819) 953-9267
Solicitors for the Respondent, the Commissioner of Competition
TOTAL P.04 10/10/2003 FRI 09: 46 [TX/RX NO 6702] 14! 004
P.04 CT - 2003-00S THE COMPETITION TRIBUNAL '
Exhibit A: Reply of Michael R. Baye to the Report of Professor Roger Ware 10 October 2003
1. At the request of the Commissioner, I have reviewed Professor Ware’s Report of 26 September 2003 to examine whether it provides any new evidence that might change my opinion in this case. It does not. 2. It is my understanding that the “change in circumstances” alleged by CWS is that excess capacity has yet to be realized in the market. The economic theory advanced by Professor Ware is not predicated on this alleged change in circumstances; rather, it is a claim that the market has been competitive all along. 3. The economic theory underlying Professor Ware’s analysis is essentially the same competitive supply and demand framework employed by Professor Hay (in the original proceedings) and by Dr. Vellturo (in the remedy hearing). 4. This theory, if applied to the market for waste disposal, implies a. “The market price is determined by the intersection of the supply and demand curve.” (Ware Report, paragraph 12). b. At the time of the Tribunal’s original decision – and in the current environment – Michigan landfills would thwart any attempt by CWS to increase price. c. Regardless of whether there is any excess capacity, the market price is independent of who owns the Ridge landfill. 5. Economists agree that the competitive supply and demand framework is appropriate for analyzing markets with many small sellers who are “price takers” and do not enjoy market power -- such as the market for wheat. Thus, were the issue at hand a proposed merger between two small wheat farmers, I would be in complete agreement with Reply of Michael R. Baye to the Report of Professor Roger Ware October 10, 2003 Page 1 of 5
Professor Ware and previous CWS experts regarding the competitive effects of the merger. 6. However, there are only a handful of independent landfills in southern Ontario that can accept ICI waste from the GTA, they are not “price takers 1 ,” and they do enjoy market power. 2 Economists recognize that it is inappropriate to use a competitive supply and demand framework in these circumstances. More generally, a competitive supply and demand framework is not useful for analyzing situations involving the potential exercise of monopoly power. The problem is fundamental; as Pindyck and Rubinfeld note in their best-selling microeconomics textbook: “A monopolized market has no supply curve.” 3 Thus, the competitive supply and demand framework is incapable of addressing the hypothetical monopolist test. 7. For these reasons, my analysis in this case is based on a game-theoretic model of spatial price competition that explicitly accounts for the fact that there are relatively few landfills, that they negotiate different tipping fees with different customers and strategically manipulate quality, service, and the volumes of various types of waste accepted at their sites to exploit the market power that distance creates in a spatial market. 8. After considering these points, arguments advanced by CWS and its previous experts, and other evidence, the Tribunal rejected the competitive supply and demand framework. The Tribunal wrote in its Reasons and Order:
1 Reasons and Order, [74], [83]. 2 Reasons and Order, [76], [152]. 3 Robert S. Pindyck and Daniel L. Rubinfeld, Microeconomics, New York: Macmillian, 1989, p. 340. Reply of Michael R. Baye to the Report of Professor Roger Ware October 10, 2003 Page 2 of 5
“Professor Baye’s theory appears to be consistent with the observed uniformity of combined transportation and disposal pricing although inconsistent with Professor Hay’s characterization of the industry as competitive. [77]… marketing and negotiating practices are not part of the idealized wheat market that Professor Hay uses as an example. In such a competitive market, the wheat price a farmer receives is not adjusted based on the transportation costs that the farmer incurs in getting the wheat to market. [83]…The Tribunal does not accept Professor Hay’s characterization of the industry as competitive. [86]” 9. Furthermore, the Tribunal concluded that Michigan sites did not constrain prices charged by landfills in southern Ontario at the time of the original hearing, nor would they constrain prices in the future. “The Tribunal does not regard the American sites as effective competitors now. Such non-directed ICI Waste that they currently receive from the GTA is largely due to the non-competitive Tipping Fees in Ontario. As these fees would likely fall due to the developing excess capacity, the Tribunal would expect the American sites to receive less such waste. In the Tribunal’s view, these sites do not constrain Tipping Fees for ICI Waste from the GTA currently or prospectively.” (Reasons and Order [211], emphasis added). 10. Thus, when the Tribunal viewed the market in its “current” state (without the Warwick and Richmond expansions) and when it viewed it prospectively (in anticipation of these expansions), it concluded that landfills in Michigan do not constrain the ability of CWS Reply of Michael R. Baye to the Report of Professor Roger Ware October 10, 2003 Page 3 of 5
to raise prices if it controlled the Ridge. Professor Ware’s characterization of the market in his Figures 1, 2 and 3 contradicts these findings. 11. In the Remedy Hearing, Dr. Vellturo used a similar competitive supply and demand framework to argue that the Essex-Windsor landfill would discipline the tipping fees set by CWS were it to acquire the Ridge. Paragraphs 7 and 9-14 of my Reply in the remedy hearing showed that this prediction of the competitive supply and demand model is at odds with the relevant economic theory. I also explained how “…CWS could profitably raise tipping fees for ICI waste from the GTA without pushing waste to Green Lane or EWSWA.” (See also Paragraph 64 in my Report in the current proceedings). Effectively, Professor Ware is now using a competitive supply and demand framework to argue that more distant Michigan landfills discipline prices. For the reasons articulated in my previous reports, CWS can raise tipping fees for ICI waste from the GTA without pushing waste to Michigan. 12. I fundamentally disagree with Professor Ware on the implications and effects flowing from price discrimination in disposal markets. My views on this issue are summarized in paragraph 64 of my Report of 26 September 2003. The differences in our opinions stem from the fact that my analysis is based on a game-theoretic model of spatial price competition, while Professor Ware’s analysis is based on the competitive supply and demand model. 13. In addition, and as I noted in paragraphs 17-18 of my Report in the remedy hearing, market power is not only reflected in the ability to profitably influence the pecuniary price, but also the ability to profitably influence implicit components of price such as quality, service, and other dimensions of competition. For example, a vertically Reply of Michael R. Baye to the Report of Professor Roger Ware October 10, 2003 Page 4 of 5
integrated firm can exercise market power by increasing the implicit price of disposal by forcing customers with poor outside options to wait in line to unload trucks or transfer trailers (perhaps under the guise of inspections for hazardous waste or to verify the type of waste), while minimizing the amount of time required for its own vehicles to unload waste. Professor Ware's competitive supply and demand framework ignores the fact that price discrimination also occurs in these dimensions. 14. In short, Professor Ware’s Report does not offer economic arguments that have not already been advanced by CWS or previous CWS experts and rejected by the Tribunal. In my opinion, the views expressed in his Report are not predicated on the change in circumstances alleged by CWS in this case. Professor Ware’s Report does not alter my opinion in this case.
Reply of Michael R. Baye to the Report of Professor Roger Ware October 10, 2003 Page 5 of 5