Competition Bureau turns up the AMPs on water heater companies

The Competition Bureau is taking aim at two dominant players in the hot water heater market by seeking orders prohibiting the companies from engaging in further anti-competitive conduct and seeking administrative penalties of $15 million from Direct Energy and $10 million from Reliance Comfort Ltd.

“They are definitely trying to send a strong signal. It’s the first time they’ve sought the administrative monetary penalties in connection with the abuse of dominance provisions,” says Chris Hersh, a lawyer with Cassels Brock & Blackwell LLP in Toronto. “What’s novel is that they not only sought AMPs but they sought the maximum allowable, including the $15 million AMP against Direct Energy, which is the maximum AMP allowable for a company, which has already been dinged under the same provision before.”

The bureau announced Dec. 20 it was taking the action against the two companies that rent water heaters to residential customers in Ontario.

Following an investigation, the bureau determined Direct Energy and Reliance each engaged in practices that intentionally suppress competition and restrict consumer choice. Specifically, each company implemented water heater return policies and procedures aimed at preventing consumers from switching to competitors.

In a statement, the bureau said the conduct “affects consumers, other rental water heater companies, and businesses that sell water heaters, such as home improvement centres.”

This is the second proceeding the Competition Bureau has commenced against Direct Energy or its predecessor. In 2002, following a bureau investigation, the Competition Tribunal prohibited similar conduct by Enbridge Services Inc., now Direct Energy, under a 10-year consent order. The bureau’s investigation determined that Direct Energy re-engaged in similar conduct after the consent order expired in February 2012.

Interim competition commissioner John Pecman said: “These tactics are denying consumers the benefits of competition. Many customers have been forced to continue their rental agreements with either Direct Energy or Reliance, even if they want to switch to another provider, because of the anti-competitive practices we found in our investigation.”

The constitutionality of AMPs remains a question, points out Mark Paciocco of Gowling LaFleur Henderson LLP.

“The argument is that these AMPs are penal in nature and are more akin to a criminal penalty,” says Paciocco.

Penal sanctions attract special protection under the Charter — protections that are not available in Competition Tribunal hearings

The Investment Canada Act and Ontario Securities Commission can impose AMPs as well. Paciocco points to a recent decision in United States Steel Corp. and U.S. Steel Canada Inc. v. The Attorney General of Canada where the Federal Court of Canada upheld the AMP under the Investment Canada Act. Currently there is another case before the Ontario Superior Court involving  Rogers Communications under the Competition Act for misleading advertising. Rogers has advanced the constitutionality argument in that case.

“I would not say this issue is settled — it’s up in the air right now,” he says.

“These are massive penalties under a civil regime and the argument is that these are essentially penal sanctions and we’re waiting to see where that falls. We expect a decision in the Rogers matter will give us some kind of guidance as to how it will be perceived in the future for other provisions in the act, like the abuse of dominance.”

Hersh says while some may view the penalties the Competition Bureau is seeking as excessive, it’s really just putting into force what has been available since 2010.

“I think the bureau waited for a case where AMPs were appropriate and they’re sending a message that the abuse provisions have some teeth and you might get bitten,” says Hersh.

“These are the sorts of things that fall into the abuse of dominance provisions and what they’re intended to prevent, so I’m not so sure this is overly heavy-handed. This is the type of activity the bureau has taken action on in the past — the only thing that’s different is the administrative monetary penalties. The AMPs in the abuse context have been hanging out there for about three years or so without ever having been used.”

Just Energy Group Inc., whose subsidiary National Home Services is a retailer of energy efficient water heaters, said it welcomed the Competition Bureau’s applications to the Competition Tribunal seeking $25 million in administrative monetary penalties and other relief against Direct Energy and Reliance.

In a statement, Just Energy CEO Ken Hartwick said: “I believe fundamentally in competition and feel that the practices of Direct Energy and Reliance have significantly limited the ability of National and other competitors to expand in the market for water heater rental in Ontario by establishing artificial barriers to customer switching. These actions reflect poorly on the entire industry and, understandably, cause concerns for consumers. We believe that consumers deserve better and thank the Competition Bureau for its continuing efforts to promote competition in this industry.”

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