Hot Water Heater Suppliers In Ontario, Canada - A Case Study

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1 January 2013 competition bulletin tank suppliers in hot water with Canadian Bureau The Canadian Competition Bureau is continuing its relatively torrid pace of abuse of dominance and other reviewable practices cases. While the first decade of the 2000s saw a period of some eight years with no new cases filed, under the previous Commissioner, Melanie Aitken, four cases were filed under the abuse of dominance or related reviewable practices provisions in three years. There had been some speculation that with the handover from Ms. Aitken to John Pecman, the Bureau's enthusiasm for contested cases, including in particular abuse of dominance cases, might wane. The early evidence, at least, is to the contrary. In his speech of December 5, 2012, which we reported on in an earlier brief, the new Commissioner indicated that he would continue an aggressive enforcement stance where appropriate, although he advised that it would work to keep dialogue open with the Bar and other relevant stakeholders. Certainly that dialogue is ongoing, but so is the enforcement agenda. On December 20, 2012 Commissioner filed two separate but related abuse of dominance proceedings, against Reliance Comfort Limited Partnership and Direct Energy Marketing Limited. The cases relate to the alleged anti-competitive practices of these two companies, in various areas of Ontario, respecting their business of renting residential natural gas hot water heaters. Reliance Comfort Limited Partnership is the spun-off water heater rental business originally operated by Union Gas. Union Gas was the monopoly residential natural gas supplier in certain geographic areas of Ontario. Direct Energy Marketing Limited is the spun-off

2 Page 2 water heater rental business originally operated by Enbridge Inc., which was the monopoly residential natural gas supplier in other large parts of Ontario. That is, when the regulated entities operated as monopoly suppliers of natural gas they also rented water heaters to their customers. When that regulatory system ended, more than a decade ago, they spun-off the water heater rental business to affiliates now fully separate entitites. Despite the separation of gas supply from water heater rental, despite the deregulation of the markets, and despite a significant passage of time, Reliance and Direct, respectively, continue to represent a very large percentage of the supply of hot water heaters in their former territories. According to the Commissioner's Application, Reliance supplies at least 76% of all residential hot water heaters for "its" territories, and Direct supplies over 70% within "its" territories. The Application alleges that the product market is natural gas hot water heaters and ancillary services. The geographic aspect of the market is alleged to be local. It will be interesting to see how the geographic market issue is determined by the Tribunal, since other than the previous existence of monopoly supply territories for natural gas, it is unclear why the supply of hot water heaters should be a local market. Similarly, it is not entirely clear why electric hot water heaters would not be in the product market. This is not the first time that the Competition Bureau has expressed concern with regard to hot water tank supplier policies after deregulation of the natural gas business. In 2002, Direct Energy entered into a consent settlement with the Commissioner, registered with Competition Tribunal, prohibiting certain conduct including preventing competitors from disconnecting or returning in its hot water heaters, or imposing commercially unreasonable and discriminatory buyout schedules on customers. Apparently, as a result of this Tribunal Order, through to 2010, Direct's competitors regularly disconnected and returned Direct's rental hot water heaters on behalf of customers, and supplied those customers with water heaters themselves. In 2010, Direct

3 Page 3 introduced a return policy, allegedly making it more difficult to disconnect and return Direct's water heaters. The Bureau expressed concern to Direct with respect to this policy, and its possible conflict with the Tribunal Order. Direct suspended the policy. As soon as the ten year Tribunal Order registered against Direct expired, in early 2012, Direct allegedly introduced similar policies, including a requirement that the customer or a competitor could not return a water heater until the customer first obtained a return authorization number from Direct Energy; that the customer must sign and fully complete a residential rental removal order form; refusing to provide a return authorization number if the competitor and the customer were on the telephone call at the same time; refusing return authorization numbers to competitors on behalf of customers; refusing to honour return authorization numbers more than thirty days after their issuance; and refusing to recognize agency agreements between customers and competitors giving competitors the authority on behalf of the customer to disconnect and return the water heater. Direct Energy also allegedly restricted the hours of operation of its return centres, limited the number of rental removal order forms it would supply, arbitrarily restricted the circumstance in which water heaters could be returned, and levied "multiple and unwarranted exit fees and charges" including continuing to charge customers after they had switched to an alternate supplier and imposed "unwarranted" drain, disconnection and pickup charges. It also allegedly employed a collection process to harass customers to pay and unwarranted exit fees and charges. Similar allegations are made by the Commissioner against Reliance. The Application alleges that entry into the business of supplying potential hot water heaters would be relatively easy, but for the anti-competitive conduct challenged, which, the Commissioner asserts, raises barriers to entry. No doubt that will be a major issue in the contested case.

4 Page 4 One point that is interesting to note is that Direct did not have these allegedly exclusionary policies for a period of a decade, given the existence of the Tribunal Order against it, and yet it maintained a very high market share during that decade. This may represent some evidence that the alleged exclusionary policies are not in fact what creates barriers to entry at least that may be an issue which Respondents are likely to argue, given that the existence of the Order against Direct for a decade represents a kind of natural experiment typically unavailable in abuse of dominance cases. Finally, by way of noteworthy aspects of the applications, the Commissioner is seeking the maximum administrative monetary penalties $10 million against Reliance the maximum available against a company in the first instance and $15 million against Direct again, the maximum available in the case of a "subsequent order" against a company under the abuse of dominance provisions. These are very significant amounts of money, and while the Commissioner has shown willingness to seek maximum administrative monetary penalties in the misleading advertising setting previously, this is the first attempt to obtain penalties of this magnitude for abuse of dominance. These two hot water heater cases suggest that Commissioner Pecman intends to make good on his recent pledge to maintain an aggressive enforcement stance. It will be some time before we know if the Tribunal will endorse the Bureau's approach. by James Musgrove

5 Page 5 For more information on this topic, please contact any member of McMillan's Competition Group including: Toronto James Musgrove james.musgrove@mcmillan.ca a cautionary note The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained. McMillan LLP 2013 McMillan LLP Vancouver Calgary Toronto Ottawa Montréal Hong Kong mcmillan.ca