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THE RELATIONSHIP BETWEEN COMPETITION AUTHORITIES AND SECTOR REGULATORS

Published online by Cambridge University Press:  15 March 2011

Maher M. Dabbah
Maher M. Dabbah
Affiliation:
Barrister (of the Middle Temple); Director, Interdisciplinary Centre for Competition Law and Policy (ICC), Queen Mary University of London.
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The Cambridge Law Journal , Volume 70 , Issue 1 , March 2011 , pp. 113 - 143
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Copyright © Cambridge Law Journal and Contributors 2011

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References

1 Notable examples of these sectors include: telecommunications; water services; gas and electricity; aviation and airports; railways; also (depending on the country in question): postal services; banking; trucking; transport; tobacco; and shipping.

2 The term “natural monopoly” refers to situations in which a monopoly arises due to the nature of the sector. Economists define a natural monopoly in specific terms to refer to an economic sector where fixed costs are so high that it is not profitable for a second firm to enter and compete. See W. Sharkey, The Theory of Natural Monopoly (Cambridge 1982).

3 See studies by: the Organisation for Economic Cooperation and Development (OECD), “Relationship between regulators and competition authorities” (1998) and (2005); United Nations Conference on Trade and Development (UNCTAD), “Best practices for defining respective competences and settling cases, which involve joint actions by competition authorities and regulatory bodies” (2006); and the International Competition Network (ICN), “Interrelations between antitrust and regulatory authorities”, Report to the Third ICN Annual Conference (April, 2004) and “Interrelations between antitrust and regulatory authorities”, Report to the Fourth ICN Annual Conference (June, 2005).

4 Technical regulation involves the determination of standards – such as those relating to processes and products – and may extend to issues of safety, environment and privacy. The nature of technical regulation, in particular the fact that it requires consistent and on-going monitoring, has resulted in the belief that such regulation is best handled by sector regulators who have the necessary resources in terms of sector-specific knowledge and time.

5 Economic regulation extends to pricing issues and those concerning standard marketing practices such as advertising. Economic regulation, like technical regulation, is an on-going process. Sector regulators are considered to be suited to carry out economic regulation. However, unlike technical regulation, competition authorities can also be said to be capable of handling this type of regulation.

6 Access regulation covers issues of ensuring non-discriminatory access to necessary input, such as network infrastructure. Access regulation may require the processing of an enormous amount of cost data in order to determine access terms and monitoring of compliance with these terms by the relevant operators and this makes it arguable that sector regulators should handle this kind of regulation. On the other hand, many competition authorities have developed strong expertise in access issues in the context of “abuse of dominance” and so they can be said to have a key advantage in performing this type of regulation. See, for example: the European Commission's investigation and findings reached in 2004 against Microsoft (finding abuse of dominance on the part of the firm due its refusal to disclose interface information); and the South African Competition Commission's investigation and findings against Telkom in 2009 (for abusing its “near-monopoly” position by charging excessive prices for the basic infrastructure needed by its downstream rivals). Some competition authorities have published guidance on the application of provisions on abuse of dominance in relation to access issues: see the Canadian Competition Bureau Information Bulletin on the Abuse of Dominance Provisions as applied to the Telecommunications Industry (2008), in particular part 4.2.2.

7 In almost all jurisdictions around the world, mergers are assessed on an ex ante basis.

8 See Baton, F., “The Anatomy of Market Failure” (1958) Q.J.E. 351Google Scholar.

9 See P. Weiser, “Paradigm Changes in Telecommunications Regulation” (2000) U.C.L. Rev. 819.

10 Although overlap exists here, this does not mean that competition authorities and sector regulators necessarily approach the exercise of market definition in identical or similar fashion. See below for an example of how the two may differ in their approach.

11 There are many situations in the field of competition law where the application of the rules is not possible without a proper definition of the relevant market. See the judgment of the European Court of Justice in Case 6/72 Europemballage and Continental Can v. Commission [1973] E.C.R. 215.

12 See D. Gilo, “A Market-Based Approach to Telecom Interconnection” (2003) S.C.L. Rev. 1.

13 See Roehrich, N. and Armstrong, M., “Interconnect Outcomes: To Impose or Negotiate – The Experiences of Singapore, Hong Kong, South Korea and Australia” (2002) E.I. 37Google Scholar.

14 See generally C. Koenig, A. Bartosch and J-D. Braun, EC Competition and Telecommunications Law (Dordrecht 2009).

15 This can be seen most notably in the area of merger control.

16 See Ashford, N., Ayers, C. and Stone, R., “Using Regulation to Change the Market For Innovation” (1985) Harv. Envtl. L. Rev. 419Google Scholar.

17 See, for example, the position in countries such as the USA, Canada and France, among others.

18 Whether there is scope and sense in giving competition authorities a task of economic regulation depends on the situation at hand.

19 Under a rule of reason approach, a balancing exercise is conducted between the anticompetitive and pro-competitive effects of the situation at hand before determining whether the situation should be regarded unlawful. This is different from a per se approach, under which there is no balancing exercise and which is used in situations which are manifestly anticompetitive (such as cartel cases). For example, in Mexico the Telecommunications Law 1995 relies on per se prohibition of cross-subsiding and of discrimination. Under the Mexican competition law – the Federal Law of Economic Competition 1993 – however, cross-subsidising and discrimination are not treated as per se offences but are assessed using a rule-of-reason approach.

20 However, see the Australian experience; see note 101 below and accompanying text.

21 It is important to note that achieving this is not impossible: for example, in the UK a joint regulators group (JRG) has been established which brings together sector regulators. The JRG represents a workable thought not perfect mechanism for regulators to agree their strategy and coordinate their actions.

22 In the UK, for example, the Civil Aviation Authority (CAA) does not enjoy concurrent powers with the Office of Fair Trading (OFT) in relation to regulating airports: it has concurrent powers in relation to air-traffic services. Whilst there is a huge scope for arguing that the concurrent powers of the CAA should be extended to airports, the CAA itself has acknowledged that it may not have enough staff to cope with competition work.See Report of the House of Lords Select Committee on “UK Economic Regulators” (2007), available at: http://www.publications.parliament.uk/pa/ld200607/ldselect/ldrgltrs/189/189i.pdf. Bringing competition law and the regulation of airports under the remit of a single authority – i.e. the CAA – can be highly desirable to enable it to take advantage of the unique features of the airports market.

23 See Report of the House of Lords Select Committee, Ibid; and the Memorandum produced by British Energy (February 2007) towards the Report, available at: http://www.british-energy.com/documents/HofL_SCR_-_final_0207.pdf.

24 See J. Cooper, Zywick, T. and Pautler, P., “Theory and Practice of Competition Advocacy at the FTC” (2005) A.L.J. 1091Google Scholar. In several places around the world, one is able to see examples of useful advocacy by competition authorities in the telecommunications sector in particular. See, for example, the achievement of the Chilean competition authority (FNE) in advocating mobile phone number portability and explicit acknowledgment of convergence in telecommunications (FNE v. CTC Chile, Ruling 45).

25 Procedures and proceedings in the field of competition law (save for the area of merger control) are notoriously lengthy, especially in cartel and abusive dominance investigations.

26 In the UK, a market investigation reference mechanism exists under the Enterprise Act 2002: cases may be referred by the OFT and sector regulators to the Competition Commission (CC) for an in-depth investigation. The CC has felt “under-used” by sector regulators with regard to employing this mechanism. The CC has recognised that sector regulators have not warmed up to the idea because regulators, in the view of the CC, are sceptical about the ability of a body not familiar with their sector(s) to conduct a proper balancing exercise between different public interest considerations. See the submission of the Competition Commission to the House of Lords Select Committee, note 22 above, available at: http://www.competition-commission.org.uk/rep_pub/consultations/responses/pdf/cc_hol_covering_note_and_submission.pdf; see also the report of the (then) Department of Trade Industry and HM Treasury on “Concurrent competition powers in sectoral regulation”, URN 06/1244 (May, 2006).

27 For example, the telecommunications regulator in the UK, the Office of Communications (OFCOM) can be criticised for creating a radio unit within it. This can be said to have made it less likely that meaningful deregulation will be pursued because deregulation means that those working in this unit will end up doing nothing and so be likely to face redundancy or a material change in the terms of their employment, which will be unattractive to them after a long period of specialisation in radio matters.

28 See Telecommunications Decision 97-19.

29 See Report of the House of Lords Select Committee, note 22 above.

30 In Germany, the Telecommunications Act 2004 requires the Monopoly Commission to assess – periodically – whether regulation remains necessary and the continuing need for it.

31 This difficulty of overlap has been recognised by different competition authorities, including fairly young ones. See, for example, the situation in Jamaica, in which concurrent jurisdiction exists in the telecommunications sector between the Office of Utilities Regulation (the sector regulator) and the competition authority, the Fair Trading Commission.

32 See BAA's views in Report of the House of Lords Select Committee, note 22 above.

33 In 2007, the OFT made a reference to the Competition Commission under the Enterprise Act 2002 for an investigation into the supply of airport services by BAA into the UK. In the same year, the CAA referred Heathrow and Gatwick Airports to the Competition Commission under the Airports Act 1986 for the purposes of price control.

34 See Report of the House of Lords Select Committee, note 22 above. There are no concurrency powers shared, however, between the OFT and the FSA in the field of competition law.

35 The Joint Report was produced following an examination by the OFT and CAA of competition issues arising in the context of secondary trading of airport slots. The report is available at: http://www.oft.gov.uk/shared_oft/reports/oft_response_to_consultations/oft832.pdf.

36 This Memorandum was concluded in 2006 and it has 4 main objectives: promoting cooperation and coordination in areas of overlap of jurisdiction; minimising duplication of activity (where this is possible); enhancing understanding of the respective roles played by the authorities in the airport sector; and facilitating the treatment of anticompetitive situations in the sector. See http://www.caa.co.uk/docs/5/ergdocs/section41policy.pdf.

37 The authorities agreed on a revised Concordat which came into force in July 2006. Under the Concordat the authorities are committed to take necessary and proportionate action where evidence exists and points towards potential infringement of the Regulations causing consumer harm.

38 Some firms must seek authorisation from the FSA and in parallel a consumer credit licence from the OFT.

39 See: http://www.oft.gov.uk/shared_oft/about_oft/oft879.pdf.

40 Prior to the publication of the outcomes of their work, the authorities engaged in extensive sharing of knowledge, information and ideas.

41 See in particular here the collaboration in relation to the FSA's Insurance Conduct of Business Review.

42 The word “traditional” is used here to highlight that these are areas which traditionally have not been considered to constitute competition work; increasingly, however, these areas have come to assume competition relevance, albeit one that in many cases is rather extremely limited.

43 See Joskow, A., “Potential Competition: The Bell Atlantic/NYNEX Merger” (2000) R. I. O. 185Google Scholar.

44 See Report No. CC 97-42, published on 14 August 1997, available at http://www.fcc.gov/Bureaus/Common_Carrier/News_Releases/1997/nrcc7059.html.

45 Achieving deregulation in the sector is one of the goals behind the Telecommunications Act 1996.

46 The section provides for the prohibition of those transactions the effect of which “may be substantially to lessen competition, or to tend to create a monopoly.”

47 See Press Release by the Antitrust Division, published on 12 April 1996, available at http://www.justice.gov/atr/public/press_releases/1996/228084.htm. See D. Breen, “The Union Pacific/Southern Pacific Rail Merger: A Retrospective on Merger Benefits” (2004), FTC Bureau of Economics Working Paper No. 269.

48 Decision adopted on 3 July 1996.

49 See J. Karikari, Brown, S. and Nadji, M., “The Union Pacific/Southern Pacific Railroads Merger: Effect of Trackage Rights on Rates” (2002) J.R.E. 271Google Scholar.

50 Clearance was given in the case on 18 June 1996.

51 See Shelanski, H., “From Sector-Specific Regulation to Antitrust Law for US Telecommunications: The Prospects For Transition” (2002) Telecommunications Policy 335CrossRefGoogle Scholar.

52 See the FCC Pricing Flexibility Order (1999), 14 FCC Red 14221, paragraph 71.

53 See the judgement of the D.C. Circuit (reviewing the FCC Pricing Flexibility Order) in WorldCom v. FCC, 238 F.3d 449 (2001).

54 In the Canadian Telecommunications Decision mentioned in note 28 above, the Canadian Radio-Television and Telecommunications Commission (CRTC) defined the relevant market in a consistent manner to that of the Canadian Competition Bureau.

55 See Report of the House of Lords Select Committee, note 22 above.

56 See submission of the Netherlands in the OECD report “Relationship between regulators and competition authorities” (1998), note 3 above, at p. 189.

57 See submission of the USA in the OECD report, ibid.

58 See note 22 above and accompanying text, however, regarding the exact field in which concurrency between the OFT and the CAA exits.

59 See V. Smith, “Competition Concurrency Between the OFT and Sector Regulators” (2004) Utilities Policy 61. Special rules exist, namely the Competition Act (Concurrency Regulations) 2004 which provide statutory basis to coordinate the relationship between the OFT and the regulators within the framework of concurrency under the Competition Act 1998.

60 See OFT Guideline, “Concurrent application to regulated industries” (OFT 405, 2004), paragraph 3.13.

61 See also the position in Zambia, where the competition authority is represented on other regulatory authorities in the country.

62 See submission of Australia in the OECD report “Relationship between regulators and competition authorities” (1998), note 3 above.

63 See for example the position in France: the radio and television sector regulator must consult the Competition Authority when executing its remit.

64 See the report on “Regulation reform in Canada: From transition to new regulation challenges” (OECD 2002).

65 See submission of the USA in the OECD report, note 3 above.

66 See the report on “Regulation reform in Germany: Regulatory reform in telecommunications” (OECD 2004).

67 See C-H. Wallin and M. Wahlbeck, jurisdictional chapter on “Finland” in M. Dabbah and P. Lasok, Merger Control Worldwide (Cambridge 2005), Vol. 1.

68 See OECD report, note 65 above.

69 For an account of the position in different sectors, see B. Hawk et al, jurisdictional chapter on “USA” in M. Dabbah and B. Hawk, Anti-cartel Enforcement Worldwide (Cambridge 2009), Vol. 3.

70 See, for example, the Union Pacific/Southern Pacific merger discussed above.

71 In Finland, for example, the telecommunications regulatory authority (TRA), when applying the Telecommunications Market Act 1997, makes it clear which issues in the case were not addressed under the Act and so may be addressed by the Finnish competition authority (FCA). In an effort to eliminate overlap in their work, the FCA and the TRA signed a memorandum of understanding in 2003.

72 A notable example here is the UK Financial Services Authority.

73 In the UK, the OFT and sector regulators within the CWP are subject in some cases to the limitations imposed under Part 9 of the Enterprise Act 2002 on the exchange of information. Such cases are covered under section 238(1) of the Act: as a result, a public authority cannot disclose information concerning the exercise of functions it has under or as a result of the competition and consumer legislation listed in the section where this information (which is not already lawfully in the public domain) relates to the affairs of any living individual or any business of an existing firm and none of the “gateways” of Part 9 is inapplicable. Note, however, that because the OFT and sector regulators within the CWP are designated as national competition authorities under EU Regulation 1/2003 (see notes 107 and 108 below and accompanying text), they are entitled – by virtue of Article 12 of the Regulation – to exchange confidential information for the purposes of applying Articles 101 and 102 TFEU and UK competition law, where the latter is applied in the same case and in parallel with EU competition law and does not lead to a different outcome.It would be interesting to ask whether the creation of the Agency for the Cooperation of Energy Regulators (ACER) is likely to change the existing picture regarding the role of regulators as designated national competition authorities. Although it will be sometime before this is known with full certainty, it would be safe at this stage to say that one should not expect a material difference in this regard because the output of the ACER will feed into the European Commission, and this, it can be said, will facilitate the formation of a centre of gravity within the Commission for the purposes of ensuring proper coordination between the handling of strict competition issues and those concerning sectoral regulation.

74 As we saw above, in practice one is able to see that sector regulators are able to execute their duties under statute in a pro-competitive way; see note 29 above and accompanying text.

75 Two situations of governmental or ministerial involvement may be identified: first, where a sector regulator exists but the government or minister plays a key (sometime even decisive) role in regulating the sector; and, second, where the relevant minister is also the sector regulator (this means that in the relevant sector no special regulatory body exists). The discussion here focuses more on the former (and more common) situation.

76 See EU Drinking Water Directive 98/83 [1998] OJ L330/32. For a discussion, see S. Wolf and N. Stanley, Wolf and Stanley on Environmental Law (London 2010).

77 In particular, the fact that Postcomm is funded to a large extent by Royal Mail, the regulated operator, has been considered as the source of a potential problem. See Report of the House of Lords Select Committee, paragraph 6.46, n. 22 above.

78 See the views submitted on this matter by the Mail users' Association, ibid., paragraph 6.47.

79 See the conditions contained in Network Rail's licence, available at http://www.rail-reg.gov.uk/upload/pdf/netwrk_licence.pdf.

80 See section 8(1)(b) of the Railways Act 1983. ORR's power in this case however is to be exercised with the consent of or under the general authority given by the Secretary of State for Transport.

81 See section 9(2) of the Railways Act 1983.

82 See section 4(3) of the Railways Act 1983; the duty of health and safety here is also imposed on the Secretary of State.

83 See section 4(4) of the Railways Act 1983; see also the role played by the Secretary of State as described in notes 80 and 82 above.

84 See Regulation 5 of the Regulations.

85 See paragraph 14 of the OFT's response to the DTI and HMT report on “Concurrency competition powers in sectoral regulation”, available at: http://www.oft.gov.uk/shared_oft/reports/oft_response_to_consultations/oft900a.pdf.

86 See for example the position in Australia, the USA and several countries in Western Europe, though it remains the case that in some countries competition problems remain in existence. The latter includes several African and Middle Eastern countries.

87 See, for example, the energy market in the UK, which is widely regarded as one of the most competitive markets, at least in Europe.

88 One can mention here the aviation sector – especially in the international sphere – in the USA.

89 See Bailey, D., “The Emerging Co-Existence of Regulation and Competition in the UK Water Industry” (2002) 25 W. Comp. 127Google Scholar.

90 See the position in relation to some of these sectors in China, UK, USA and Portugal, among others. See the UK OFT's study prior to referring the supply of airport services by BAA in the UK to the Competition Commission in June 2006 for a market investigation to be conducted by the later (noting that Manchester airport was subject to competition from separately owned airports); OECD's Economic Surveys: Portugal (2008), particularly the discussion in chapter 3 on “Strengthening competition and improving infrastructure”; Pittman, R., “Chinese Railway Reform And Competition: Lessons From The Experience In Other Countries” (2004) J.T.E.P. 309Google Scholar; Borenstein, S., “The Evolution of US Airline Competition” (1992) J.E.P. 45Google Scholar.

91 The emphasis is put on developed countries here because the situation in less-developed countries has not been particularly satisfactory: in most of these countries sector regulators (where they exist) suffer from major weaknesses (mainly lack of independence and adequate resources). See Wallsten, S., “An Econometric Analysis of Telecom Competition, Privatisation and Regulation in Africa and Latin America” (2001) J.I.E. 1Google Scholar.

92 OFWAT has argued that the lack of competition in the sector in part reflects the nature of the water supply because water is heavy and its distribution occurs at a high cost (compared to its low value); See Report of the House of Lords Select Committee on, paragraph 7.21, note 22 above.

93 Under the access pricing – which is governed by the “costs principle” – the aim is to produce prices, which offer full compensation for operators in the sector for the net losses that they unavoidably incur when providing a common carriage or wholesale supply service as compared with continuing to supply final consumers themselves. This principle is used in cases where an incumbent supplier in the sector becomes displaced from part of its retail business by a new entrant, but retains a monopoly in some infrastructure provision which is required by any new entrant seeking to engage in any relevant retail supply.

94 See Report of the House of Lords Select Committee, note 22 above.

95 Ibid., chapter 3, paragraph 3.24.

96 See Defra's information bulletin, dated 17 September 2009, available at: http://www.defra.gov.uk/News/2009/090917b.htm; also see the report commissioned by the Chancellor, the Secretary of State for Environment, Food and Rural Affairs and the Welsh Minister for Environment, Sustainability and Housing and produced by Martin Cave, Independent Review of Competition and Innovation in Water Markets (April 2009), available at: http://www.defra.gov.uk/environment/quality/water/industry/cavereview/documents/cavereview-finalreport.pdf.

97 Within the existing statutory framework, OFWAT does not have a duty to encourage and support innovation in the sector. In light of the desire to achieve greater efficiency in the sector, this should be seen as a legislative failure which must be remedied.

98 In this regard, the Cave report (note 92 above) – whilst not commissioned by OFWAT – can be criticised for its failure to offer an international perspective by looking at the position in other regimes. Arguably, it is odd that the government would push for legislative changes and conduct consultation on the matter without a proper consideration of international experiences, especially to see whether the changes proposed have been put into place elsewhere, (and if so) how they have functioned in the relevant regime(s) and whether as a result valuable lessons can be drawn.

99 The Canadian experience shows that sectoral regulation in the telecommunications sector has not been an effective means for promoting economic efficiency because of the risk of dis-incentivising innovation and the difficulty this causes for the sector to revert to competition. See A. Gates, “Convergence and Competition: Technological Change, Industry Concentration and Competition Policy in the Telecommunications Sector” (2000) U.T.F.L. Rev. 83.

100 See Part XIC of the Trade Practices Act 1974.

101 The ACCC is armed with the power Part III.A of the Trade Practices Act 1974 to engage in arbitration and to make directions in “access” disputes as well as take all necessary steps for the purposes of ensuring speedy hearing and determination of such disputes.

102 See annual reports produced by the Australian Communications and Media Authority (ACMA), particularly the 2004/5 report, available at http://www.acma.gov.au/webwr/_assets/main/lib100097/cbr%20-%20part%203.pdf; and ACMA's Annual Telecommunications Performance Bulletins, available at: http://www.acma.gov.au/WEB/STANDARD/pc=PC_1402; Kerf, M. and Geradin, D., “Post-Liberalization Challenges in Telecommunications, Balancing Antitrust and Sector-Specific Regulation – Tentative Lessons From the Experiences of the United States, New Zealand, Chile and Australia” (2000) 23 W. Comp. 27Google Scholar.

103 See most notably the impact of the Modernisation Regulation, Council Regulation (EC) No. 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty [2003] OJ L-1/1.

104 Y. Montangie, “The Application of EU Competition Law by the Belgian Competition Authorities and Judges: Is Belgium Prepared for the ‘New Regime’?” (2004) C.L.R. 41.A recent illustrating example can be found in the European Commission's letter, dated 5 November 2009, to the Netherlands telecommunications regulator (OPTA) requiring the latter to align its method on cost accounting for calculating fixed termination rates with the Commission's Guidelines: Recommendation on the regulatory treatment of termination rates (May 2009).

105 Directive 2009/12 [2009] OJ L70/11.

106 The European Competition Network was created under EU Regulation 1/2003. See Commission Notice on “Cooperation within the Network of Competition Authorities” (2004) OJ C-101/43.

107 In the UK, OFCOM, OFGEM, CAA, OFWAT, ORR, and OFREG NI are designated as national competition authorities (in addition to the OFT).

108 Interestingly, the issue of cooperation had already arisen in the past prior to the creation of the ECN: in 1998, the German FCO launched an investigation into Deutsche Telekom's pricing practices concerning the provision of directory information in voice telephony. The FCO in this case looked towards the fees charged by British Telecommunications in the UK for directory services and approached the sector regulator (then OFTEL) in the UK in order to obtain information on pricing and the level of competition in this market.

109 See the position in the UK, where the OFT and the relevant sector regulators have informal contacts in order to manage their relationship in situations not covered by the Concurrency Regulations 2004 and the framework of the Concurrency Working Party.