Unit 1: The Interplay of Competition and Telecommunication Policies

ICT Industry and Markets

Page 44 of 73 pages. Chapter: 5: OLD Unit 1: Fair Trade and Competition Policy

The Interplay of Competition and Telecommunication Policies

Some countries have both a general competition authority and a sector-specific telecommunications regulator. Where two or more authorities exist, it is important that they not subject an industry to duplicative or inconsistent intervention.

Not all counties have separate telecommunications regulators and competition authorities. For example, New Zealand has long had economy-wide competition law, but no sector-specific regulator. While New Zealand is an anomaly in this regard, other countries have telecommunications sector regulators, but no economy-wide competition law or authority. Some countries have neither. In any case, it is important for those involved in the regulation or supervision of the telecommunications sector to understand and have access to the basic tools proved by competition law and policy.

Sector-Specific Regulators and Competition Authorities

The roles of a sector-specific telecommunications regulator and a general competition law authority can be compared and contrasted in several ways.

Sector-specific regulation typically involves both prospective and retrospective activities. A telecommunications regulator, for example, will often render decisions that establish conditions for firms participating in telecommunications service markets, such as the approval of prices or the terms and conditions for interconnection between operators. Such conditions have forwarded-looking application. Telecommunications regulators are also typically authorised to respond to particular complaints, or to remedy existing or past behaviour which contravenes telecommunications policies or laws. Competition authorities, by contrast, tend to exercise their powers on a retrospective basis and with a view to correcting problems which result from actions by particular firms that harm competition.

The types of policies typically adopted by sector-specific regulators can also be contrasted with those of competition authorities. Sector-specific regulation is often unrelated to (and even inconsistent with) the key competition policy goals of facilitating competition and improving economic efficiency. Competition policy is typically directed at preventing market participants from interfering with the operation of competitive market. Traditional telecommunications regulation, on the other hand, often manipulated competitive market circumstances to achieve other public goals.

An example is the prices approved by telecommunications regulators. Most regulators traditionally supported price structures that were very different from prices that would prevail in a competitive market. Telecommunications regulators often supported such price structures in an effort to increase availability of basic telecommunications services. Examples include various types of cross-subsidisation: local service by long distance services, residential subscribers by business subscribers and rural subscribers by urban subscribers. These price structures were typically developed in a period of public monopoly supply. These structures are not sustainable in a competitive market. They require adjustment as competition develops. Table 1-1 set out the typical difference between a competition authority and sector specific regulator.

Rationale for a Telecommunications Sector Regulator

An industry-wide competition authority may play a useful role in overseeing the telecommunications industry. However, there are good reasons to establish and retain telecommunications sector-specific regulation, at least until the relevant markets are reasonably competitive. These reasons include:

The need for sector-specific technical expertise to deal with some key issues in the transition from monopoly to competition (e.g. network interconnection, anti-competitive cross-subsidisation);
The need for advance rules to clearly define an environment conducive to the emergence of competition, and not just retrospectively apply remedies to "punish" anti-competitive behaviour or restructure the industry;
The need to apply policies, other than competition-related policies, that are perceived important by national governments (e.g. universal service policies, national security and control policies).
The need for ongoing supervision and decisions on issues such as interconnection, qualify of service, and the establishment and enforcement of licence conditions, particularly for dominant operators.

These factors, among others, suggest that, even where an economy-wide competition authority exists, a telecommunications regulator can play an important role.

As a separate matter, it may be efficient to combine, in a single entity, the regulation of the telecommunications sector and other sectors, such as pipelines, electrical power, commercial water supply, etc.

Table 1-1:

Typical Differences Between a Competitor Authority and a Sector Specific Regulator

Feature	Competition Authority	Sector-Specific Regulation
Timing Process	Typically applies remedies retrospectively (i.e. after the fact)	Prospective as well as retrospective
	Specific complaint or investigation drive	Decisions or other processes of general application , as well as specific issue proceedings
	Formal investigative, other procedures	Mix of formal and less formal procedures
	Narrow scope for public intervention	Typically broader scope for public intervention
Policy Focus	Objective: To reduce conduct which impedes competition	Typically applies multiple policy objective
Policy Focus	Focus on allocative efficiency/preventing abuses of market power or other misconduct	Traditionally (monopoly) regulation likely to pursue social objectives other than allocative efficiency. (i.e. universal service)
Scope	Economy wide, multiple industries	Generally industry-specific (usually develops greater sectoral expertise
Scope	Powers of intervention and remedies tend to be narrowly defined.	Powers tend to be more broadly defined (correspond to breadth of policy objectives and procedures).

Implementation of Competition Policy by Telecommunication Regulators

Telecommunications sector regulators often apply competition law or policy in carrying out their mandates. Four examples from the UK, Malaysia, Canada and Australia are set out below.

United Kingdom

In the UK, Oftel has concurrent authority to deal with matters arising under the Competition Act. Oftel must coordinate its efforts with Director General of Fair Trading, who is primarily responsible for enforcing the competition Act. Oftel has also been responsible for enforcing the Fair Trading Conditions of UK telecommunications licensees, including BT.

Oftel has published Guidelines on the application of the competition Act in the Telecommunications Sector. The guidelines address subjects such as market definition, measures of market power, and the assessment of individual agreements and conduct. The guidelines reference conventional approaches to competition rules from a number of sources and jurisdictions, and anticipate how these standard tools will be applied in the telecommunications sector.

Malaysia

The Malaysian Communications and Multimedia Commission have prepared similar guidelines. These indicate how the Commission will apply competition law concepts such as "substantial lessening of competition" and "dominant position" in exercising its authority under the Malaysian Communications and Multimedia Act 1998. The guidelines identify the concepts and analytical processes that the Commission will use in evaluating certain conduct. The guidelines borrow conventional tools and concepts from competition theory and indicate how they will be applied in the context of the domestic telecommunications industry.

Box 1-1:
Substantial Lessening of Competition : Proposed in Malaysia

Define the Context	Define the Market	Assessment of Conduct
Ensure that the Commission has appropriate powers to act.	Define the boundaries of the relevant market	Determine whether there is (or may be) a substantial lessening of competition within the relevant market.
Consider which section of the Act the assessment if being made under	Identify all demand substitutes for the service.	Assess the likely changes in the degree of competitive rivalry in the absence of Commission intervention in the light of test criteria.
Identify the circumstances which initiated the assessment.	Determine the relevant geographical market.	Assess the likely changes in the degree of competitive rivalry in the case of Commission intervention in the light of test criteria.
Identified the key stakeholders in the process.	Determine the relevant temporal market.	Assess the difference in the level of rivalry between the difference is substantial in the light of the objects of the Act and national policy objective.

Canada

Canadian law provides for changes, in the extent of sector-specific telecommunications regulations, depending on the level of competition in specific telecommunications markets.

Under the Canadian Telecommunications Act, the sector-specific regulator, the CRTC, has a duty to forbear (refrain) from regulation where telecommunications services are subject to sufficient competition to protect the interests of users. Forbearance is also permissible in certain other circumstances. A forbearance order may not be made by the CRTC where such an order would likely impair the establishment or competitive market for a service.

Box 1-2:
Case Study: Canadian (CRTC) Forbearance Analysis

The CRTC should withdraw (�forbear�) from regulation of telecommunications markets or services when there is sufficient competition. In Telecom Decision CRTC 94-19, the CTRC set out the criteria for decisions to forbear from regulation pursuant to Section 34. The criteria for forbearance reflect standard competition policy concepts and principles. They can be summarised as follows:

1. The CRTC should forbear from regulation when a market becomes �workably competitive�.

2. A market cannot be workably competitive if a dominant firm possesses substantial market power.

3. Market share held by the dominant firm;

the market share held by a dominant firm
demand conditions affecting responses by customers to change in proce of the product or service in question
supply conditions affecting the ability of other firms in the market to respond to a change in the price of the product or service

4. High market share is a necessary but not a sufficient condition for market power. Other factors must be present in order to enable a dominant firm to act anti-competitively.

The CTRC�s method of assessing market competitiveness begins with a definition of the �relevant market�. The CTRC defines the relevant market as �the smallest group of product and geographic area in which a firm with market power can profitably impose a sustainable price increase�.

The CTRC then proceeds to an assessment of the market share held by the largest and other firms in the relevant market. In addition to an assessment of market share, the CRTC assesses other aspects of market power, including the availability of substitutes, whether a particular product or service is an essentials input or bottleneck and the extent of barriers to entry. Among the other indicators of competition highlighted by the CRTC is evidence of rivalrous behaviour (price competition and effective marketing activities for example).

The CRTC decided in Decision 94-19 to refrain from regulating the sale, lease and maintenance of certain forms of customer premises equipment. The CRTC subsequently applied Section 34 to forbear from the regulation of a number of other services, including wireless services provided by non-dominant long distance operators ad certain of the long distance services provided by the incumbent telephone companies. The CRTC has also forborne from the regulation of other services; including retail services provided by competitive local exchange operators and the supply of retail Internet services.

Australia

A more general example of the interplay of competition policy and telecommunications sector regulation can be found in Australia. In July, 1997, the Australian government implemented a package of statutory reforms to both its competition and telecommunications laws. These reforms changed the Trade Practices Act 1974 (the primary competition law) and introduced a new Telecommunications Act.

As a result of these reforms, the Australian Competition and Consumer Commission (ACCC) were given a significantly expanded role in telecommunications regulation. It became responsible for both (1) implementation of competition rules and polices in the telecommunications sector; and (2) economic regulation of telecommunications operators, including the incumbent operator, Telstra.

These four examples drawn from the experience of different countries illustrate the overlap of telecommunications and competition policy. The examples indicate how some telecommunications regulators apply standard competition policy and analysis, and how competition authorities must understand sector-specific telecommunications regulation.

Box 1-3:
Case Study:
The Telecommunications Mandate of the Australian Competition and Consumer Commission

The ACCC�s telecommunications mandate is performed by the Telecommunication Group, which is considered a part of both the ACCC�s Regulatory Affairs Division (for economic regulation) and the Compliance Division (for competition enforcement).

The revised Trade Practices Act 1994 (TPA) includes two parts which address telecommunications matters specifically. Part XIB gives the ACCC authority to issue competition notices in cases of anti-competitive conduct. Competition notices are enforceable in the Federal Court. Part XIB also governs tariff filing and record keeping requirements (the latter reinforce the ACCC�s implementation of accounting separation is appropriate cases).

Part XIC of the TPA establishes a framework for access to the networks of competing operators. The ACCC has power to declare a body to be a recognised �telecommunications access forum� or �TAF� (a facilitator of access arrangements); to approve any �access code� prepared by the TAF; to approve �access undertakings� or model terms and conditions submitted by individual operators; and to arbitrate access disputes.

The ACCC has complentary authority under the Telecommunications Act, the Radiocommunication Act 1992 and the Telstra Act 1991. Specifically, the ACCC has regulatory authority:

To oversee the conduct of international telecommunications operators;
To issue directions on technical issues such as the implementation of number portability and interconnection;
To arbitrate a range of operator dispute (i.e., in addition to interconnection disputes)
To administer price regulation, such as price caps, for those services of Telstra which remain subject to price regulation
To assess the acquisition of radio-frequency spectrum by incumbent operators to determine whether such acquisition is likely to have anti-competitive effects

The ACCC also has authority to monitor telecommunications markets and activity in order to determine whether the general provisions of the TPA should be applied to promote competition whether the general provisions of the TPA should be applied to promote competition and fair trading.