1

Competition Policy and Sectoral Regulation

By Dr. Cezley Sampson

Head of Legal & Regulatory PracticeCPCS Transcom

CUTS 7UP4 Project Accra, Ghana June 2008

2

Background

• The introduction of competition into dominant firms creates a new problem.

• These firms were once natural monopolies with one vertically integrated player.

• The introduction of competition into the competitive sector leads to competition law being applied to the competitive sector and industry specific law applied to the natural monopoly sector.

• Telecommunications and electricity now experience this phenomenon.

3

Telecoms and Electricity

• Generation and retail is now competitive and subject to competition law, transmission and distribution remain natural monopoly, requiring regulation.

• One new role of the industry regulator is to facilitate competition - entry to the competitive parts as against the exclusion of new players as traditionally practised by regulators.

• In telecoms the last segment - connection to the home is no longer a natural monopoly - wireless on the local loop, fibre optic, cable, cable television, cellular and satellite.

4

Tension in the Industry

• The issue in the two industries now surrounds interconnection or access to the essential facilities by third parties.

• Regulators are now required to ensure free and non-discriminatory access.

• In some regimes, competition rules specifically prohibit misuse of dominant position or behaviour which lessens competition e.g New Zealand.

5

Difference Between Competition and Regulation Policies

• Competition is ex-post and regulation is ex-ante. • Anti-trust defines conduct after the fact whilst

industry specific regulators define rules for price setting, investments and service standards ex-ante.

• Ex-ante rules puts pressure to get decisions so as not to halt production, regulation however must be expedient.

• Ex-post does not call for such expediency except in predatory pricing.

• Ex-ante intervention forces firms to expose information it would not normally disclose ex-post.

• It is less risk for the firm to conceal or manipulate information ex-post rather than ex ante.

6

Differences Cont. • Anti-trust authorities assess the lawfulness of conduct,

regulators have more extensive powers and engage in very detailed proscription of conduct. Regulators have more discretionary powers.

• Private parties play a bigger role in antitrust matters than in the regulatory process – Most antitrust cases are brought by private parties.

• Interest groups tend to intervene in regulatory process to alter policy, whilst they intervene in competition cases to modify conduct.

• In anti-trust matters investigation and prosecution are separated. Regulators conduct regulatory hearings and adjudicate on their outcome. Anti-trust matters carries a high burden of proof.

7

Differences Cont.

• Competition rules apply economy wide and in a negative form – prohibiting activities: not to fix prices, not to rig bid and not to tie product sales etc.

• They emphsise what market agents should not do - they proscribe activities.

• Regulators do the reverse and tell market agents what to do - they prescribe activities.

8

Development of the Two Institutions

• Historically, the two institutions evolved separately with limited formal relationship.

• Most country rules are ambiguous. • The issue is which law or agency takes precedence. • Where the rules are not clear the environment for

excessive litigation develops. • The courts have jurisdiction to determine the

application of the respective law. • In South Africa for example the court decided that

Competition authority has jurisdiction over bank mergers.

9

Resolving the Problem

• Giving primacy to the sectoral regulator on competition law matters in the regulated industry.

• Giving precedence to the anti-trust regulator; requiring the industry regulator to refer competition issues in the industry to the competition authority for resolution.

• Concurrent jurisdiction or require consultation.

• The use of a single agency for antitrust and industry specific regulation e.g. Australia, New Zealand and Barbados.

10

Industry Law has Precedence

• In South Africa the government recognised the problem of overlapping jurisdiction and provided for industry regulatory act to be exempted from competition law.

• The result is that all regulated industry argue that they are not subject to competition law.

• Problem expose the system to inconsistency of decisions on competition matters – leading to lack of confidence in competition law.

11

Concurrent Jurisdiction

• In the UK, both the Director General of Fair Trade the competition regulator and the industry specific agencies have concurrent jurisdiction.

• Different agencies may interpret the rules differently creating the requirement for a consultative mechanism.

• Concurrency may lead to duplication. • The argument for concurrency is that: sectoral

regulators require authority to enforce competition; and competition agency norms are not always suitable for network industries. A firm with a 10 % share of the market can have significant market influence on prices.

12

One Agency to Handle Competition And Industry Regulatory Matters

• New Zealand until recently used only competition law - no industry specific law.

• Aptly termed - “light handed approach.”• Competition rules are too general - gives rise to

frequent intervention of the courts to interpret and provide certainty through judicial precedent.

• Very costly process - long drawn out cases. • Requires an environment where the judiciary has a

long tradition of competition matters.• New Zealand recently introduced industry specific

rules in the form of a Interconnection Dispute Commissioner.

13

Competition Law Carries Precedence

• Here, the Industry regulator conducts the investigation but refers competition matters to the Competition Authority for a decision.

• Ensures consistency of application across all industry – eliminates arbitrage.

• Ensures the higher skills of competition experts on competition matters are fully utilised.

• May slow down the process.

14

Conclusion

• Explosion of competition in certain industries like telecommunications; render industry regulation unnecessary.

• Regulation in the telecommunications industry involves the application of competition policy.

• Begs the questions: Is sectoral regulation still needed in telecommunications?

• Should competition law replace industry law where strong competition has developed?

• Regulation should not be seen as an intrusion but necessary to limit monopoly power and to promote conditions for effective competition- compelementary.