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Competition Bureau of Canada

Competition Bureau

Regulatory Institutions

 

Role of Competition Law in Telecommunications Regulation

C.2      Should general competition law principles have a role in the regulation of the telecommunications sector? If so, to what extent should the provisions of the Competition Act apply and to what extent should sector specific regulation continue to apply?

91. As telecommunications markets become increasingly shaped by technological innovation and the advent of new services and suppliers, competition principles will need to play an ever greater role in the regulation and oversight of the industry. However, the characteristics of certain markets, and the continuing importance of supporting broader policy objectives, mean that market oversight and regulation for the industry as a whole cannot yet be left to competition law principles alone. The challenge for regulators and policy makers in planning for, overseeing and supporting the continuing transformation of the telecommunications industry from a fully regulated industry to one directed by market forces, is establishing a framework that will allow regulatory and competition authorities to work in unison.

92. Competition law principles already play a significant role in the regulation of the telecommunications sector. The Bureau has primary and direct responsibility for certain aspects of this sector (e.g., market oversight in those areas of the industry where the CRTC has completely forborne from regulation and for merger review) and shares responsibility with the CRTC in dealing with deceptive marketing practices and other anti-competitive concerns such as the control of predatory behaviour and abuse of dominant position. In addition to the role played by the Bureau directly, competition policy plays a significant role in market oversight and regulation by the CRTC, given the language in sections 7(c) and (f) of the Telecommunications Act, although, unlike the Bureau, the CRTC is also guided by a broader range of legislative goals and policy objectives.

93. While competition policy principles thus have a role to play in the regulation of the telecom sector, whether it is the Bureau or the CRTC that is exercising its jurisdiction, it is not always clear in which circumstances competition principles will take precedence over competing policy objectives.  In the Bureau’s view, it would be beneficial to the continued growth and development of the telecom sector if greater certainty could be provided as to when competition principles should prevail.

94. Prior to forbearing under subsection 34(2) from the exercise of its powers under subsection 27(1) to ensure just and reasonable rates, the CRTC must conclude that the service is or will be subject to competition sufficient to protect the interests of users. Once it reaches this conclusion, it follows that the Commission should equally forbear from the exercise of all of its powers under section 27 of the Telecommunications Act. This is the case since it is not clear how competition sufficient to protect the interests of users with respect to rates under subsection 27(1) would be insufficient to protect users’ interests with respect to subsection 27(2).  Indeed, once regulated companies are no longer found to have market power, reliance on the general provisions of the Competition Act, rather than sector-specific regulation under the Telecommunications Act would be more appropriate.  

95. The disadvantage of the CRTC retaining jurisdiction under subsection 27(1) is the uncertainty it creates as to which agency should address issues arising in areas of overlapping jurisdiction.  For example, allegations of denial of access to essential facilities, predatory pricing, margin squeezing of unintegrated competitors, and anti-competitive price discrimination could be pursued under the abuse of dominance provisions of the Competition Act and might also raise claims under subsection 27(2) of the Telecommunications Act.  In the Bureau’s view, such complaints concern the activities of a company that is abusing its dominant position in the marketplace in an anti-competitive fashion and would best be handled by the Competition Bureau, with its expertise in carrying out a competition analysis.23

96. The OECD also identified the disadvantages of partial forbearance.  In its 2002 report on regulatory reform in Canada, the OECD referred to conditional forbearance as a “Damocles sword for the market”24:

Unlike a number of regulators in the OECD area the CRTC has consistently tried to streamline regulatory processes and forbear from regulation.  However, it often forbears on a conditional basis creating uncertainty in the market as to whether competition policy will come into play if market competition issues arise, or if sector specific regulation will be reintroduced.  The CRTC should try and forbear unconditionally allowing the specified market to come fully within the ambit of the Competition Bureau.25

97. In addition to supporting a clarification of responsibility for handling allegations of anti-competitive behaviour, the Bureau believes that regulators and industry participants would benefit from a formalization and strengthening of the Bureau’s role in applying competition law analysis in telecommunications forbearance matters.

98. That role is currently defined by section 125 of the Competition Act which grants the Bureau a statutory right to participate in proceedings before the CRTC. Over the years, the Bureau has sought to share its economic expertise and analytical tools with the CRTC and to provide guidance to the CRTC in competition matters through participation in a broad range of CRTC proceedings. Notably, the Bureau has made submissions to the CRTC in connection with forbearance decisions, with a view to assisting the CRTC in conducting the competition analysis.
 
99. Applying the appropriate competition analysis is the most critical aspect of the forbearance process. Still, the CRTC is not required to give any special consideration to the Bureau’s submissions and must also carry out its own competition analysis, as well as its analysis of social and policy considerations. In addition, the CRTC is not permitted to share confidential information with the Bureau making it more challenging for the Bureau to contribute effectively to the CRTC’s competition-related decisions.
 
100. The Bureau believes that it is uniquely well-positioned to provide critical input into the competition analysis in forbearance proceedings. The Bureau has accumulated substantial expertise and experience in competition analysis through the application of its analytical tools to a numerous and diverse range of industries. The Bureau’s competition analysis considers a number of demand and supply factors including the market shares of the firms within the market; countervailing power; the availability of substitutes, the ease of customer mobility between competitors; the anticipated supply expansion responses of existing firms to price increases; the potential for new firms to enter the market; evidence of rivalry; the nature of innovation and technological change; and the potential impact of a behavioural or structural change on a firm or industry.
 
101. Moreover, the Bureau’s techniques and analytical tools are continually being updated and refined to incorporate advances in economic and antitrust analysis. In this regard, the Bureau’s Merger Enforcement Guidelines were recently significantly revised following a comprehensive consultation process with a broad range of stakeholders, policy makers, practitioners and researchers studying competition policy. The Bureau also frequently consults with, and relies on, outside economic experts to confirm and refine its application of these tools.  The competition authorities of Canada’s major trading partners all follow similar guidelines. 
 

102. The CRTC has itself demonstrated its preference for the Bureau’s approach to competition analysis in forbearance matters. In 1994, the CRTC outlined the criteria that it would apply in forbearance decisions, adopting the Bureau’s model.26 Similarly, in the 1997 landmark long distance forbearance case, the CRTC adopted a relevant product and geographic market consistent with the Bureau’s analysis.27 However, the CRTC’s competition analysis is limited by its own lack of resources and expertise in relation to competition matters and by statutory constraints that limit the Bureau’s ability to share its knowledge and expertise with the CRTC.

103. These constraints, and possible proposals for remedying them, are discussed in greater detail in the Bureau’s response to question C.3, dealing with proposals for a regulatory framework conducive to the application of competition law principles to the telecommunications sector.

 

Competition law Principles and the Regulatory Framework

C. 3     Taking into account the experience of other jurisdictions, what is the best regulatory framework for the application of competition law principles to the telecommunications sector?

104. The experiences of other jurisdictions can provide Canadian regulators and policy makers with important insights into the types of arrangements that may facilitate and promote effective interactions between competition law authorities and telecommunications regulatory bodies. Attached as Appendix A is a study commissioned by the Bureau, entitled Comparative Study on the Interaction Between Competition Law Authorities and Telecommunications Regulators in Australia, the United Kingdom, Germany and the United States of America (the “Comparative Study” or “Study”)28, which reviews the telecommunications regulation experiences of a number of foreign jurisdictions.

105. While some of the jurisdictions reviewed in the Study have established regulatory structures with substantial similarities to the Canadian system, other jurisdictions have adopted significantly different approaches. Not every situation reviewed in the Study concerns the roles and responsibilities of different government bodies for local telecom forbearance decisions but each jurisdiction reviewed does provide an illustration of a mechanism for co-ordinating the exercise of jurisdiction by the telecommunications regulator and the competition authority. The Bureau believes that this international experience can be helpful in developing possible solutions to some of the specific issues noted in the Bureau’s response to question C.2., namely, strengthening the role of the Bureau in telecommunications forbearance matters and abuse of dominance complaints.
 

106. As discussed in the Study, there is a continuum of possibilities to encourage better use of the Bureau’s expertise.  This ranges from an enhancement of the current role, through greater sharing of information, to the creation of a significantly more active role, whereby the Competition Bureau would be solely responsible for undertaking the competition analysis. 

 

Improved Sharing of Information

107.  As discussed in its response to question C.2, under section 125 of the Competition Ac, the Bureau has a statutory right to participate in proceedings before the CRTC. Through its involvement in a large number of telecom matters, the Bureau has sought to share its economic expertise and analytical tools and to provide guidance to the CRTC in competition matters, and particularly, in forbearance proceedings. However, there are several limitations in the current framework which diminish the quality of the competition analysis that the Bureau is capable of providing.

108. In particular, both the Competition Act and the Telecommunications Act establish restrictions on the disclosure of confidential information.  Section 39 of the Telecommunications Act prohibits the CRTC from disclosing information that is designated as confidential. While the Commission has on a few occasions allowed for limited access to such information on an in camera basis, such mechanisms are of limited use and represent a significant constraint on the Bureau’s ability to provide comprehensive and timely guidance to the CRTC on telecom matters involving competition issues. While it is possible for the Bureau to address interrogatories to parties in a specific telecom proceeding, the Bureau is unlikely to have access to a level of company-specific information that would allow a comprehensive competition analysis. The Bureau must, therefore, rely on the public data supplied by the CRTC about the state of competition in general. Such data are often a year or more out of date, do not include forecasts, and are not sufficiently disaggregated for the Bureau to carry out the relevant competition analysis.

109. The Bureau is also restricted in its ability to share information with the CRTC.  Section 29 of the Competition Act provides for no sharing of information except in very limited circumstances.  While there might be some very unusual situations, where the Bureau is of the view that it must provide information to the CRTC for the explicit purpose of administering section 125 of the Competition Act, this would occur on a highly exceptional basis.29

110. There are several options available to improve information sharing between the CRTC and the Bureau ranging from informal practices within the current framework to legislative amendments. For instance, informal consultations through regular meetings at senior staff levels on general policy matters, and staff exchanges between the Bureau and the CRTC, might help to improve information sharing under the current framework. However, as pointed out in the Comparative Study, informal consultations with respect to active files before the CRTC may give rise to issues of procedural fairness in light of the CRTC’s status as a quasi-judicial body.30

111. If the Bureau is to provide informed and comprehensive advice to the CRTC in telecom proceedings, it must have access to the confidential record before the CRTC. The express statutory prohibitions in the Telecommunications Act and the Competition Act on disclosure of confidential information mean that legislative amendments will be required to allow for adequate information sharing between the CRTC and the Bureau.

112. The Bureau notes that there is clear legislative precedent in Canada for the sharing of confidential information between agencies. With respect to access to confidential information from the Bureau, the Competition Act already contains exemptions, in certain circumstances, from the restrictions on disclosure of confidential information to the Minister of Transport (s. 29.1) and Minister of Finance (s. 29.2). Similar exemptions to allow disclosure to the CRTC could be built into the legislative framework.

113. With respect to access to confidential information by the Bureau, the Bureau has been granted statutory access, subject to certain safeguards, to the confidential record before the Canadian International Trade Tribunal (CITT).31 Bureau officers, counsel and retained experts working on a case before the CITT are required to sign a confidentiality agreement and the CITT requires the destruction of any copies of confidential materials in the Bureau’s possession after the end of the proceeding. The Bureau has found that this process has enhanced the effectiveness of its presentations before the CITT.
 
114. Internationally, there are several models that permit information sharing between competition and telecom authorities. In Germany, under the terms of the Telecommunications Act, both the telecommunications authority and the competition authority have full access to all information filed with the other agency.32 In Australia, a right to share information is implied by various statutory provisions that require consultation between the two agencies. In practice, the Australian agencies will ask parties for consent to the sharing of confidential information and consent is almost always given.33 The U.S. competition authority that has traditionally held the most extensive responsibility for telecommunications, the Department of Justice, has broad powers as a law enforcement agency to obtain information itself. Therefore, in practice, parties generally consent to the FCC releasing confidential information to the DOJ.34 In the European Community, the EU Modernisation Regulation gives the European Commission and designated competition authorities the power to provide one another with confidential information, subject to a number of safeguards, for the purposes of applying national competition law.35 Finally, in the U.K., the EU provisions for the sharing of confidential information have been expanded by the Enterprise Act  2002. The Enterprise Act permits the disclosure of information where such disclosure is required for the purpose of fulfilling an EU Community obligation, or to enable another public authority to carry out its statutory functions under certain enumerated statutes including competition legislation.36

            

115. All the national and international models described above provide for greater sharing of information than is permitted between the CRTC and the Bureau.  A number of them provide workable mechanisms for permitting access to confidential data and the Bureau recommends that they be explored with a view to finding the proper balance that would allow for greater use of the Bureau’s expertise while respecting the rules of natural justice. The appropriate models should then be embodied in amendments to the Competition Act and the Telecommunications Act.  

 

Strengthening of Bureau Involvement in Competition analysis

116. Improved information sharing would enhance the effectiveness of the Bureau’s involvement in CRTC proceedings, pursuant to the existing mechanism under section 125 of the Competition Act, which simply grants the Bureau the right to intervene and make representations. However, under the current framework, these representations are accorded the same status as other interventions. The international experience demonstrates that in many other jurisdictions, mechanisms exist to give special status to the views of the competition authority on certain issues. These range from a requirement to accord substantial weight to the views of the competition authority in some telecom matters, to the complete transfer to the competition authority of jurisdiction over competition issues in the telecom sector.  Several different models are outlined in some detail in Appendix A. 
 
117. One model that indicates a greater role for the competition authority can be found in the regime established in the United States whereby the FCC was required by section 271 of the Communications Act of 1934 to consult with the USDOJ and accord “substantial weight” to the USDOJ’s analysis before a finding that an incumbent’s local markets were open to competition to a sufficient degree to allow the incumbent to offer long distance services to its local customers.37 The “substantial weight” threshold meant specifically that if the FCC rejected the USDOJ’s analysis, the FCC would have had to explain the basis for its rejection.38 In the absence of information sharing between the two agencies, this type of mechanism would be much less effective and potentially detrimental since the competition authority’s views would not be based on the best available information. Therefore, any obligation to accord substantial weight to submissions of the competition authority should be accompanied by provisions that allow for adequate information sharing.  In addition, as noted in the Comparative Study, some attention must be paid to ensuring that the rules of natural justice are respected.39

 

118. Another model relating more directly to the roles and responsibilities for carrying out a competition analysis in the context of a forbearance application is found in the European Union.40  In 2003, the European Parliament and Council introduced a directive governing the telecommunications regulatory regime in Europe, with a view to encouraging greater competition both within domestic markets and across national borders.  As noted in the Comparative Study, one major aim of the directive was to limit sector-specific regulation to situations where there was evidence of significant market power.  Where there is not significant market power, national and EU competition law apply.41  The European Commission proposed a number of product and service markets that it thought appropriate for ex ante regulation and issued guidelines setting out the principles to be employed by domestic telecom regulators in defining relevant markets and assessing market power in those markets.

119. The particular interplay of domestic agencies is determined by individual EU members.  In the case of Germany, for example, the telecom regulator is required to obtain the agreement of the competition authority on decisions concerning the definition of markets, the assessment of market power, and principles of frequency allocation that are intended to correct competitive distortions.42 This statutory requirement entails extensive cooperation between the two agencies throughout telecom proceedings to ensure that sufficient market information is obtained, and ensures that the regulator’s decisions are sound from a competition standpoint.

120. The European Commission may review national determinations and require withdrawal of decisions on market definitions and market power if incompatible with European law.43

 

Determining the “best framework”

121. The “best framework” for the application of competition law principles to the telecommunications sector is a matter of public policy that must ultimately be determined by Government. In the view of the Bureau, the best framework will be that which makes the best use of existing knowledge and experience within our agencies; ensures timely and effective responses to industry change; is cost effective; and keeps government intervention to the bare essential.

122. As noted in the Comparative Study44, it might be possible for several steps to be taken to facilitate exchanges between the CRTC and the Competition Bureau, even in the absence of statutory amendments.  The authors suggest, for example, that informal consultations between the CRTC and the Bureau might take place on general competition issues or the Bureau might provide to the CRTC guidelines on market definition and assessments of market power.  However, such steps have already been taken in large measure45 and, in any event, these suggestions will have limited usefulness if the ultimate  objective is that the Bureau will carry out the full competition analysis.  In the Bureau’s view, legislative amendments would be preferable in a number of areas.  
 
123. At a minimum, the Bureau suggests that mechanisms to improve information sharing between the Bureau and the CRTC would give meaning to the involvement of the Bureau, under the current framework, in telecommunications proceedings.  In addition, the Bureau suggests that it might be worthwhile to legislate formal or structured mechanisms for drawing upon its expertise.  Two approaches are highlighted above, each with strengths and weaknesses. 
 
124.  In one case, the legislation could stipulate that “substantial weight” must be accorded the Bureau’s competition analysis, with an obligation on the CRTC to provide a detailed explanation of why it has rejected any of the determinations.  In this situation, the Bureau would be responsible for meeting the competition objectives in subsections 7(c) and (f) of the Telecommunications Act, while the CRTC would determine whether any other objective should be given greater consideration.
 
125. Alternatively, the legislation could provide that the CRTC must accept the Bureau’s conclusions concerning the definition of markets and the assessment of market power, or, at a minimum, secure the Bureau’s agreement on these matters.  In this case, such conclusions would determine whether or not the Commission’s continued exercise of its rate regulation and tariffing powers under sections 25 and 27 of the Telecommunications Act were warranted. For greater clarity, under this approach the CRTC could continue to exercise its powers under sections 24, 29 and 31 in appropriate circumstances. A number of procedural issues might arise with this model, as outlined in the Comparative Study.46
 
126. Whatever route is preferred, the Bureau believes that the legislative framework should provide it with a greater role in carrying out the competition analysis.

 

 
23. While the Bureau is better equipped to determine matters requiring a competition analysis, the CRTC should retain any jurisdiction to set prices, for example, should the Bureau conclude that access to an essential facility was denied.
 
24. OECD Report on Regulatory Reform in Canada, 2002, at p. 15.
 
25. OECD Report on Regulatory Reform in Canada, 2002, at p. 50.
 
26. Telecom Decision CRTC 1994-19.
 
27. Forbearance – Regulation of Toll Services Provided by Incumbent Telephone Companies, Telecom Decision CRTC 97-19, dated December 18, 1997.
 
28. Dunbar, L.J.E. & Milton, L.J., Comparative Study on the Interaction Between Competition Law Authorities and Telecommunications Regulators in Australia, the United Kingdom, Germany and the United States of America, August 12, 2005.
 
29. Comparative Study at p. 68.
 
30. Comparative Study at pp. 62-63.
 
31. S. 45, Canadian International Trade Tribunal Act, R.S. 1985, c. 47 (4th Supp.), as amended.
 
32. Comparative Study at p. 33.
 
33. Comparative Study at pp. 11-12.
 
34.  Comparative Study at pp. 43-44.
 
35. Council Regulation (EC) No. 1/2003, December 16, 2002, Article 12.3.
 
36. Comparative Study at pp. 25-29.
 
37. Comparative Study at p. 39 ff.
 
38. Comparative Study at p. 40
 
39. Comparative Study at pp. 57-58.
 
40. Comparative Study at p. 12 ff.
 
41. Comparative Study at p. 15.
 
42. Comparative Study at p. 31.
 
43. Comparative Study at pp. 16-17.  The authors indicate that this may have occurred with respect to four decisions of the German regulator. 
 
44. Comparative Study at pp. 61-63.
 
45. CRTC and Bureau staff have held several joint meetings over the last year or so and the CRTC has participated in Bureau initiated consultations with members of the telecom industry on the impact of technological change and globalisation in their sector.  Meanwhile, the Merger Enforcement Guidelines are available  on the Bureau’s website at: http://www.competitionbureau.gc.ca/internet/index.cfm?itemid=1245&lg=e.
 
46. Comparative Study at pp. 52-54.

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