Canada: Insufficient Efficiencies: Competition Bureau Forces Divestiture In Newfoundland Propane Acquisition

Canada's Competition Bureau recently released a Backgrounder explaining the results of its review of the acquisition by Superior Plus LP of various propane assets of Irving Oil Limited/Irving Oil Marketing Limited. Notwithstanding acceptance by the Commissioner of Competition that the acquisition would result in efficiencies, the Commissioner forced Superior to divest itself of certain Irving propane-storage assets to another Newfoundland competitor.

Timeline And Remedy

In December 2007, the Bureau concluded that the transaction would likely prevent or lessen competition substantially in the retail supply of propane in Central and Western Newfoundland for commercial and industrial use. A consent agreement was registered with the Competition Tribunal in May, 2008, requiring Superior to divest two bulk propane storage tanks and a tank truck in the relevant markets, and to permit Irving customers to terminate certain supply agreements without penalty¹. Superior signed an agreement to sell the divested assets to North Atlantic Petroleum (NAP) on October 2, and the divestiture was completed on January 23, 2009.

Bureau's Analysis

Markets

The Bureau's concerns were confined to the effects on the retail sale of propane for commercial and industrial use (about 80% of total propane use in Newfoundland). The Bureau was not concerned about propane for home or motor fuel use because of provincial regulation of retail prices for these uses. The Bureau examined two relevant geographic markets: Western and Central Newfoundland.

Competitive Effects

The only remaining competitor in Central Newfoundland was in fact NAP, which although active, had no propane storage assets in the market. The merging parties were the only competitors in Western Newfoundland. The Bureau found that new competitive entry into either market was unlikely within its two-year window for analysis.

The Bureau concluded that Superior's post-merger market position would have allowed a significant unilateral exercise of market power in both markets. In Central Newfoundland, the Bureau also found the potential for coordinated effects due to the presence of a number of facilitating factors, including a degree of price transparency, frequent purchases by many small users, and multi-market competition between competitors. While the Backgrounder acknowledges that these factors continue to be present with the required sale of assets to NAP, it takes the view that coordination is now materially less likely.

The Backgrounder indicates that NAP's purchase of the divested assets represented an opportunity to significantly increase its presence in Central Newfoundland and to enter the business in Western Newfoundland. The Backgrounder does not address why, in view of NAP's significant upstream position (NAP has the only oil refinery in the province) and its retail propane operations in Eastern and Central Newfoundland, NAP would have been unwilling to enter the business in Western Newfoundland, absent acquisition of the divested assets.

Efficiencies

Superior and Irving provided the Bureau with detailed efficiencies claims that were considered by the Bureau and external experts during the review of the transaction. Although the Bureau agreed that efficiency gains would likely arise from the transaction, it concluded that such gains would not likely be sufficient to offset the effects of any substantial lessening or prevention of competition within the meaning of section 96 of the Competition Act.

Footnote

1. The public version of the Consent Agreement is available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.