Regulation, Competition, and Essential Facilities

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Regulation, Competition, and Essential Facilities

• The Competition Bureaus Approach

Presentation to ECON 371, Queens University Matt
Kellison, Senior Competition Law
Officer Competition Bureau November 14, 2008
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Points for Discussion

• How the Bureau looks at regulated industries
• The interface between competition law and
  regulation
• A brief history of Bureau intervention
• Case study unbundling and essential facilities
• Disclaimer all views are my own

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What does the Competition Bureau do?

• Independent law enforcement agency responsible
  for the Competition Act
• Mergers
• Cartels
• Abuse of Dominance
• False and misleading advertising
• Competition policy advocate within government
• Statutory authority to intervene before federal
  and provincial boards, tribunals, commissions,
  etc.

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Philosophy

• Market forces should be relied upon to the
  maximum extent possible to protect consumer
  interests
• When market forces are insufficient,
  regulation/intervention should be designed to
  meet necessary objectives in the most direct and
  minimally-intrusive way possible
• When is this a problem? Usually in industries
  with persistent market power, such as natural
  monopolies (air, rail, post, communications)

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Market Power

• The Bureau uses competition law tools to define
  relevant markets and assess market power (the
  ability of a firm to price above competitive
  levels)
• The Bureaus advocacy usually involves the
  following
• Market power exists! We need regulation!
• Some market power still exists, but regulation
  should be modified! (postal services,
  electricity)
• Market power no longer exists! Time to forbear!
  (telecom)
• Theres no market power! Dont regulate! (the
  Internet?)

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Market Power in Competition Law vs. Regulation

• When enforcing the Act, the Bureau is concerned
  with market power in two cases
• A firm is engaging in anti-competitive behaviour
  to maintain or enhance its market power (abuse of
  dominance)
• Two firms are merging with the result that market
  power is likely to be created
• The first situation involves retrospective
  analysis what did/would the market look like
  without the conduct? Was it significantly more
  competitive but for?
• The second involves prospective analysis what
  will happen if the firms get together?

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Market Power in Competition Law vs. Regulation

• Regulatory concerns with market power are
  typically prospective what will happen if
  regulation is added/removed?
• When the Bureau advocates, we usually provide
  input on appropriate markets before assessing
  market power
• Given market power, the Bureau then focuses on
  the appropriate instrument of intervention in
  most cases, this is something short of full price
  regulation

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Exercise vs. Abuse of Market Power

• Competition advocacy is primarily done by the
  Civil Matters Branch of the Bureau, which also
  enforces the abuse of dominance provisions
• Market power, in and of itself, does not offend
  the abuse provisions of the Act (only its
  creation or artificial preservation)
• When regulators act in the public interest,
  however, they are concerned with the mere
  existence/exercise of market power
• This, combined with a more prospective approach,
  usually involves a modification of what the
  Bureau would do in an enforcement context

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Past Bureau Interventions

• Airlines
• 1980s fare deregulation, privatization of Air
  Canada
• 1990s open skies agreement with the US
• 2000s further liberalization end of foreign
  ownership?
• Postal services
• 1990s mandate review opening of some markets to
  competition
• Electricity
• 1990s deregulation and some competitive entry in
  retail services
• Rail
• The Bureau has been most active, however, in
  telecommunications

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Regulatory Framework

• Industry Canada
• Responsible for both the Telecommunications Act
  (administered by the CRTC) and the Competition
  Act (administered by the Bureau)
• Directly responsible for government telecom
  policy, CRTC appeals, and spectrum allocation
• CRTC
• Oversees regulated telecom markets access,
  service quality, wholesale and retail price
  regulation, universal service funding, dialing
  parity, number portability, etc.
• Quasi-judicial can impose regulation and
  adjudicate
• Competition Bureau
• Enforces competition law in unregulated markets
  advocates

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Forbearance

• The objectives of the Telecommunications Act
  include fostering increased reliance on market
  forces
• Under s. 34, the CRTC shall forbear from
  regulation when competition is sufficient to
  protect the interests of users it may also
  forbear if refraining from regulation would
  otherwise be consistent with any of its other
  objectives
• The Bureau and CRTC have an interface agreement
  to deal with jurisdictional issues once the CRTC
  no longer regulates (or regulates partially)

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Opening Up Telecom Markets

• Before the 1980s, almost all services were
  provided by interconnected local monopolies
  (ILECs)
• 1980s entry in wireless deregulated terminal
  equipment
• 1992 entry in long distance
• 1994 review of regulatory framework (price caps,
  rate rebalancing, forbearance criteria)
• 1997 first spectrum auction forbearance from
  long-distance regulation local competition
  (access and interconnection)
• 1998 price cap regulation replaces rate of
  return regulation
• 1999 exemption from regulation of new
  media/Internet

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• 2001 expansion and rate adjustment of wholesale
  access regime for local competition
• 2002 price caps revision
• 2005 CRTC decides to regulate ILEC VoIP
  offerings (later overturned by government)
• The Bureau participated in most of the
  proceedings leading up to these decisions,
  generally focusing on a maximum reliance on
  market forces, as well as market-based pricing
  and tax mechanisms to address social policy
  issues
• The Bureau has also consistently petitioned the
  government remove foreign ownership restrictions
  in telecom

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Recent developments local forbearance

• March 2006 TPRP Final Report recommends a
  reliance on market forces (not regulation) to the
  maximum extent possible, which the Minister of
  Industry issues as a Policy Direction to the CRTC
  in June
• April 2006 CRTC issues its decision on
  regulatory forbearance for local exchange
  services, requiring 25 market share loss and
  certain quality of service requirements
• The Bureau had recommended a test based on
  competing facilities-based providers and
  underlying competitive conditions in most
  residential markets, a cable entrant with equal
  or lower costs and some evidence of rivalry would
  be sufficient

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• April 2007 the Governor-in-Council varies the
  CRTCs decision, citing the Policy Direction
  forbearance can now be granted based on
  competitive presence (two facilities-based
  providers plus wireless) or the Bureaus test
• In practice, these two tests will usually come to
  the same result
• Summer 2007 widespread retail forbearance
  begins in local residential and business markets
  based on competitive presence. To date,
  approximately 70 of these markets have been
  deregulated
• Now long distance, wireless, Internet, and local
  service are no longer (or have never been
  regulated). Whats left? Wholesale access

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Wholesale Access

• In 1997, the CRTCs local competition decision
  established a wholesale access regime where
  competitors could rely to the ILEC to provision
  essential facilities and services
• The essential facility doctrine was established
  in s. 2 case law in the US, although never
  recognized by the Supreme Court
• The CRTC initially defined an essential facility
  as one that was monopoly controlled,
  non-duplicable, and which competitors required as
  an input (NXX codes, subscriber listings, local
  loops)

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Why Wholesale?

• If the problem is downstream market power, why
  use an upstream instrument? Why not just
  regulate at retail?
• More dynamic competition?
• Stepping stone theory
• What are the pitfalls?
• Getting the right set of facilities
• Setting the right price
• Preserving an efficient make-or-buy decision
• When local competition developed slowly, the CRTC
  broadened the set of facilities and lowered the
  price. . .

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Costs and Benefits

• Obviously facilities-based competition is better
  if you can get it, but has wholesale access
  helped us get there, or technology?
• How great are the benefits of competition from
  mandated access, and in which markets (e.g.
  residential, large business)? What have the
  costs been? Is there investment?
• What are the costs of over-mandating access?
  (Type I error) What about under-mandating
  access? (Type II error) Does this mean access
  should be ex ante or ex post?

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Some Numbers

• Wholesale access has met with limited success.
  There has been
• little growth in CLECs using resale or leased
  lines.
• Source CRTC Monitoring Reports, 2004-2008,
  Table 5.2.4 and Figure 5.2.2 (figures are in
  thousands of lines).

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• CLECs using their own facilities (largely cable
  companies) have
• become a significant competitive presence.
• Source CRTC Monitoring Reports, 2004-2008,
  Tables 5.4.2 and 4.2.5.

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Residential and Business

• The gains by facilities-based CLECs are strongest
  in residential.
• The share of facilities-based CLECs in business
  is more modest.
• Source CRTC Monitoring Reports, Tables 4.2.5
  and 5.4.2.

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Impact on Prices

• Average (local access) revenue of CLECs was
  significantly
• lower than ILECs. Comeptition did result in some
  reduction
• in avg. revenue per line (i.e., average price
  paid by consumers)
• Source CRTC Monitoring Reports, 2004-2008,
  Tables 5.2.3 and 5.2.4. Bracketed figures show
  percentage change in absolute value.

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Essential Facilities Proceeding

• September 2006 Bureau publishes the draft TAB
  with its approach to access to facilities under
  the Act, focusing on a firms ability to maintain
  or enhance dominance in retail markets by denying
  access
• December 2006 CRTC uses the Bureaus approach
  as a proposed definition for an essential
  facility in its review of mandated wholesale
  access Bureau recommends the scope of access be
  narrowed as it has been ineffective in generating
  retail competition

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Enforcement vs. Regulation

• The Bureau modified its TAB test slightly to
  reflect a regulatory context as opposed to
  enforcement (exercise of market power, not abuse)
• The Bureaus TAB test focuses on the effect of a
  denial of access versus access at the monopoly
  price the CRTC is concerned with whether
  granting access at a regulated price will
  generate effective downstream competition

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The Bureaus Test (1)

• (i) The firm controlling the facility in question
  is vertically integrated and dominant in two
  markets the upstream (wholesale) market, and
  the downstream (retail) market where the facility
  is used as an input. A necessary condition for
  upstream dominance is that the facility is that
  it is not practical or feasible for competitors
  to duplicate the facility
• In practice it is downstream dominance that is
  most important as a screen (and upstream demand
  is derived)
• Strong vs. weak interpretation of duplicable?

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The Bureaus Test (2)

• (ii) Withdrawing mandated access to the facility
  is likely to result in competitors exiting from,
  or contracting in, the downstream market
• (iii) Such exit or contraction is likely to
  result in a substantial lessening of competition
  in the downstream market
• These conditions can be applied retrospectively
  (withdrawing access) or prospectively (mandating
  access). In both cases, access must be the
  primary barrier preventing material competition
  from emerging

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Further Considerations

• Should we only mandate services with clear
  benefits now (call termination, support
  structures, listings) and mandate the rest later?
• How should access be priced?
• What if retail markets have already been forborne
  on the basis of wholesale access?

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The Decision

• March 2008 - CRTC narrows the scope of access
  somewhat but retains a wide regime in an attempt
  to maintain competition beyond two players in
  markets that are now deregulated (two is not
  enough?)
• Definition must be required by competitors in a
  downstream market must not be practical or
  feasible to duplicate must be controlled by a
  firm with upstream market power such that
  withdrawal will lead to an SLC downstream
• CRTC does not require downstream market power
  because many of those markets have been forborne

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Concerns?

• No relevant market definition (for product or
  geographic)
• How is the test applied? (CRTC buckets focus on
  duplicability, but on a national basis)
• ADSL duplicated, so it is mandated
  non-essential?
• Loops based on upstream, not downstream market
  power
• Business services (DS-0, DS-1, DS-3) where have
  these been duplicated?
• Will the markets look different for the next
  review?

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