Speaking Notes for Sheridan Scott Commissioner of Competition

Competition Bureau

Competition Law and Telecommunications

International Institute of
Communications 4^th Annual
Conference
Competition Panel

Westin Hotel, Ottawa, Ontario
December 9, 2004

Check against delivery

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I. INTRODUCTION

Good afternoon. It is a pleasure to be here at the Canadian Chapter of the International Institute of Communications and to see so many familiar faces again.

As a start, I'd like to thank those who made this conference possible and invited me to participate.

In bringing this particular group together, the organizers have created an opportunity for us to share views and exchange ideas about how we can better address the challenges that face the communications sector as we continue to move from regulation to competition.

This afternoon I'd like to share with you a few of my views about how, in a climate of globalization, deregulation, and rapid technological change, regulators and competition authorities may deal more effectively with the evolution from sector specific regulation to a reliance on market forces.

The organizers of this conference have asked a very thoughtful question about the current policy framework. Is the current relationship between the Competition Bureau and the CRTC working and, if not, what might be done to make it work better?

I have a number of suggestions about where the current relationship between the CRTC and the Bureau could be improved. It is not as effective as it could be and I propose specific ways that might enhance it on the telecom side and the broadcasting side, using both informal and legislative mechanisms.

However, before going into any details, I want to stress that there are very few examples of conflicts between our agencies in telecom and broadcasting. In the vast majority of cases there has been little disagreement, despite overlapping jurisdiction. Where problems do occasionally arise they are generally confined to telecom forbearance matters, issues of overlapping jurisdiction with respect to abuse of dominance complaints, and in the review of broadcasting mergers.

2. THE ROLE OF THE REGULATOR AND THE COMPETITION AUTHORITY ON THE ROAD TO DEREGULATION

As we all know, even in best-case scenarios the evolution from a regulated environment to one that is market-driven is not easy. In the case of communications, it is even more volatile because of the rapid pace of technological innovation. We are all aware of the impact the Internet, broadband, and Voice over Internet Protocol (VoIP) are having on traditional business models.

One of our greatest challenges is deciding what to do when there's been partial deregulation and companies are subject to more than one piece of legislation. Under such circumstances, firms face considerable uncertainty which affects their business, investment and decisions about choice of technology.

As we work our way forward in an environment of overlapping jurisdiction, I think it is useful to look at ways in which the CRTC and the Bureau can do more to share information, apply similar competition policy analysis, clarify roles, and identify and optimize know-how in both organizations. This, I believe, will best serve to assist businesses and consumers and reduce some of the uncertainty that is causing them concern.

Specifically I believe we need to:

• make the best use of existing knowledge and experience within our agencies;
• ensure timely and effective responses to industry change
• be cost effective; and
• keep government intervention to the bare essential.

In short, effective and efficient deregulation requires regulatory and competition authorities to work in unison to support the process. Otherwise, I believe our jobs become unnecessarily cumbersome.

3. WHERE ARE WE ON THE ROAD TO COMPETITION IN COMMUNICATIONS?

Before we talk about what changes might take place in the relationship between the Bureau and the CRTC, we should review the state of competition in communications markets in Canada.

I think it is essential to emphasize that deregulation is much further along than many might believe. Clearly we have come a long way from a world of monopoly telephone and cable television companies in every region of Canada. Since the early 1990s the CRTC and Industry Canada have done an admirable job of opening up communications markets to competition. Industry participants have responded to these opportunities with investment in networks and services to provide choice to consumers.

On the broadcasting side, consumers benefit from literally hundreds of channels and from competition between cable television, telephone and satellite companies to deliver broadcasting, interactive, and Internet services. And, while programming services remain subject to licensing requirements, the CRTC has shown some willingness to rely more on market forces to secure the success of new services.¹

On the telecommunications front, the CRTC has forborne from aspects of regulation in voice and data long distance communications and prices continue to fall. The same observation applies to terminal equipment, international, broadband, and wireless telecommunications. Consumers have choice and are taking advantage of their alternatives.

While it is true that incumbent telephone and cable companies still account for the large majority of revenues earned, a growing percentage of these revenues is flowing to new entrants. We must remember that market share, on its own, is not indicative of the competitiveness of markets. As I note later on, other factors, such as the height of entry barriers and the impact of ever changing technology, must also be considered.

Today, regulation of the telecom business is largely confined to local services and access by new entrants to telecom and cable networks. This includes the regulation of retail local telecom prices, wholesale access prices, and mandated interconnection of competing networks. I would note that even this area is becoming more competitive as new technologies such as broadband and VoIP evolve.

I might add that new technologies also make the deregulation analysis more complex. It is incumbent upon us at the Bureau to keep abreast of new technologies and services while not getting caught up in the latest gizmo. New technologies can widen or diminish competitive alternatives for consumers. Sometimes the new technology profoundly alters market structures and provides for immediate competition to incumbents; satellite television did this for broadcasting, and broadband is expected to have a significant impact as well. In other cases, the technology may be untested, not widespread, or simply too expensive to be considered a reliable substitute for products or services currently provided to consumers by the dominant firm. In those cases the Bureau may decide that it is premature to alter traditional market definitions.

4. THE CURRENT RELATIONSHIP BETWEEN THE BUREAU AND THE CRTC

Broadly speaking, the primary areas of interaction between the Bureau and the CRTC involve the examination of mergers, abuse of dominance complaints, and Bureau interventions in telecom and broadcasting proceedings.

Under section 125 of the Competition Act, the Bureau has a statutory right to participate in proceedings before the CRTC and has made submissions in a large number of telecom and broadcasting matters. In these interventions the Bureau has been recognized as both independent and impartial. Over the years, the Bureau has sought to share its economic expertise and to provide guidance to the Commission on matters related to competition.

In addition, the Bureau has attempted to provide greater clarity within the existing legislative framework to determine when a matter should be addressed by the CRTC or the Bureau. We have done this by recognizing areas where the CRTC has primary jurisdiction (access to essential facilities, interconnection), areas where the Bureau has primary jurisdiction (forborne telecom services, price fixing, bid rigging, price maintenance), and areas of shared jurisdiction (broadcasting mergers, marketing practices, abuse of dominance). It is our expectation that such a delineation minimizes costly duplication of scarce resources by both agencies.

5. ENHANCING OUR RELATIONSHIP

Now I wish to turn to areas where I believe our relationship can be improved. First, I think it is imperative that both agencies apply the same competition policy analysis to telecom and broadcasting matters so the business community is assured that their issues are being examined on a forward-looking basis with the most up to date economic analysis. Second, I see problems stemming from the current legislative framework surrounding Bureau participation in CRTC proceedings, particularly those pertaining to forbearance applications. Third, problems also arise from the overlapping jurisdiction between the Bureau and the CRTC with respect to abuse of dominance complaints. Finally, there is a need for clarity with respect to which agency has primary responsibility for the competition analysis of broadcasting mergers.

Both the CRTC and the Bureau must deal with competition policy issues – the CRTC under the Telecommunications Act and Broadcasting Act and the Bureau under the Competition Act. While our legislation has differing goals and objectives – with the CRTC's being broader than competition alone (e.g., social and cultural policy objectives) – we believe the analysis of competition issues should be the same. Industry should have confidence that on competition policy grounds, at least, there is consistency in approach when dealing with federal government agencies.

This means both agencies applying the same economic analysis and principles in a clear and transparent manner. This applies to telecom forbearance applications before the CRTC, abuse of dominance complaints before either agency, broadcasting issues before the CRTC, and broadcasting mergers before both the CRTC and the Bureau. A clear and transparent competition analysis will assist business, consumers and investors in making timely strategic decisions in a rapidly changing environment.

The Bureau has expertise in these matters. Market definition analysis is both an integral part of our mandate and an activity for which we have substantial expertise. Defining markets is in essence what we do.

Moreover, our techniques and analytical tools are being constantly updated and refined. To this end, in September, we released a revised version of our Merger Enforcement Guidelines, which incorporate advances in economic and antitrust analysis. We have accumulated expertise in market definition analysis by applying the same basic analytical test to a numerous and diverse range of industries spread throughout the economy. And, to assist us, we frequently hire outside economic experts to ensure we have given careful consideration to the issues at hand. Furthermore, we use our investigative expertise and tools to obtain current and forward-looking market information that includes obtaining the views of all industry participants and potential entrants.

In determining whether a firm possesses market power within a relevant market the Bureau looks at a number of demand and supply factors including:

Several of these factors require the Bureau to examine relevant product markets on a forward-looking basis. We must determine, in certain situations, whether there is sufficient competition in a market so as to provide viable alternatives. Such determinations generally require that we consider not just actual, but also potential competition from domestic sources and abroad, including the potential impact of a behavioural or structural change on a firm or industry. Therefore, we spend considerable time thinking about what the market is going to look like a year or two from now, not what it looks like today.

This analysis has fundamental importance for the Commission's telecom forbearance proceedings, in particular. As you are aware, under the Telecommunications Act the CRTC has the authority to forbear from the regulation of dominant firms when it finds there is or will likely be sufficient competition to protect the interests of end users.

Significantly, in Telecom Decision 94-19, that outlined its forbearance criteria, the CRTC adopted the approach taken in the Bureau's Merger Enforcement Guidelines to determine if a firm or group of firms still has market power and should continue to be regulated. The CRTC stated that it will forbear from regulation when it is satisfied that an incumbent no longer possesses market power within a relevant product and geographic market.

In Telecom Decision 97-19, the landmark long distance forbearance case, the CRTC adopted a relevant product and geographic market consistent with the Bureau's analysis, and concluded that the long distance market should be forborne.

The story will be very different for local telecommunications markets. While the analytical approach should be the same, it is my view that, in disposing of local forbearance applications, the issues raised are more complex.

Some of these challenging questions include the following. Is wireless a legitimate competitive alternative to wireline? Will VoIP be a real competitor for the product in question? In what manner do we take potential competition into consideration?

As for broadcasting, it is noteworthy that section 5 of the Broadcasting Act does not explicitly identify competition as an objective. Yet, the CRTC must address competition issues and competitive disputes as part of its administration of this legislation.

Keeping all this in mind, I believe that the Bureau can play an important role in examining telecom and broadcasting matters and can provide the CRTC with a more comprehensive competition analysis that can serve as the basis for its consideration of the matter. This could involve a joint Bureau-CRTC determination of market definition or the Commission's reliance on the Bureau's analysis.

On the international front, I note that other jurisdictions require the regulator to take established competition policy principles into account in their decisions.

For example, European law stipulates that competition and regulatory agencies within member states should consult and cooperate to ensure coherent analysis of relevant markets. Regulators are required to define relevant markets in accordance with the principles of competition law set out by the European Commission and the analysis is to be carried out in collaboration with the national competition authority. ²

In other situations, legislators have seen fit to require a sector specific regulator to give particular weight to the views of the competition authority. For example, the United States Congress required that the Federal Communications Commission (FCC), in examining any application by an incumbent local telephone company to enter the long distance market, consult with the Antitrust Division - Department of Justice (DOJ) and give substantial weight to the DOJ's views on the application. Moreover, the FCC was required to include the DOJ's submission as part of the record of its decision.³

These are possible models for us to draw upon to assist the CRTC in providing consistent, comprehensive and clear competition analysis in its decisions. In Canada, one possibility might be to amend section 125 of the Competition Act to require the CRTC to give substantial weight to the Bureau's analysis and to include the Bureau's submission as part of its telecom or broadcasting decision. Another possibility might be to give the Bureau exclusive responsibility for conducting the market analysis.

Currently the Competition Bureau's relevant market analysis is provided to the CRTC in telecom and broadcasting proceedings through a submission as an intervenor. As I see it, there are several limitations to the current approach which diminishes the quality of the competition analysis that the Bureau is capable of providing.

Specifically:

• The Telecommunications Act prohibits the CRTC from sharing confidential information with the Competition Bureau (section 39)
• Public data that are available about the state of competition in general, generated annually by the CRTC, are often a year out of date and do not include forecasts. In any event, the public data included in the CRTC's report on the state of competition are not sufficiently disaggregated to carry out relevant market analysis.
• While it is possible for the Bureau to address interrogatories to parties in the context of a specific CRTC telecom hearing, the Bureau is unlikely to have access to company specific information at a level that would allow a comprehensive competition policy analysis.

Access to the confidential record will be necessary if the Bureau is to provide more informed and comprehensive advice to the Commission in local telecom forbearance proceedings, for instance. I believe that before any of this can happen, amendments to legislation to allow such information sharing would be necessary. This would ensure that the Bureau has access to the most up-to-date information when it makes its submissions to the CRTC.

Again, internationally, other jurisdictions have put mechanisms in place to address the ability of the competition authority to obtain the necessary information to carry out a more meaningful competition analysis of communications issues before regulatory bodies.

In Europe the European Commission has directed the national regulatory authority and the competition policy authority to exchange information. The authority receiving the information is required to ensure the same level of confidentiality as the originating authority.⁴

Here in Canada, the Bureau has access to the confidential record filed before the Canadian International Trade Tribunal (CITT).⁵ The specific Bureau officers, counsel, and retained experts working on a case before the CITT sign a confidentiality agreement that allows only themselves to see confidential material. Upon conclusion of the proceeding, the CITT requires all confidential material in the Bureau's possession to be destroyed by a set date. This process has enabled the Bureau to make more effective presentations before the CITT.⁶

I have cited these examples because I think they clearly illustrate that better information sharing is possible between the Bureau and the CRTC, as we consider whether we have in place the best structures as we move from regulated to competitive markets.

Partial deregulation leaves open the question as to which agency addresses complaints about abuse of dominance by incumbents in telecom and broadcasting. These can be examined under section 79 of the Competition Act or the by the CRTC under its telecommunications and broadcasting powers.

These complaints include access to essential facilities, predatory pricing, margin squeezing of unintegrated competitors, and other actions that may have the effect of eliminating or disciplining existing competitors or deterring new entry. This uncertainty is expected to continue until deregulation in the communications sector is complete and market forces determine competitive outcomes.

Presently, it is unclear which agency has primary responsibility for addressing these issues. Clarity is desirable to ensure efficient use of scarce government resources, as well as to ensure that any complaint is dealt with by the agency with the appropriate tools to examine and remedy the issue in an expeditious manner. In addition, irrespective of the agency, we need to ensure any complaint is examined under the light of forward-looking competition policy.

Here I might note that some have questioned why the Bureau does not examine essential facility complaints involving communications companies. I must stress that one cannot address access and interconnection issues without resolving what is the appropriate price of access or interconnection. It is not enough to mandate access; one must mandate access at a price. What is that price?

In its 1997 Tele-Direct decision, the Competition Tribunal clearly stated that it is not a regulatory body and has no intention of regulating prices on an ongoing basis. In the Tribunal's words:

The Supreme Court of the United States reached a similar conclusion in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP. It agreed with the following proposition:

Given these considerations, we believe the CRTC is best equipped to address access and interconnection issues in the communications industry until it deems that regulation is no longer required. It has effective tools and has shown a willingness to use them.

When it comes to reviewing and approving electronic media mergers, the Bureau and the CRTC have both exercised jurisdiction. Such mergers could involve broadcasting distribution undertakings or radio and television broadcasters.

Currently, there has been some question as to which agency has primary jurisdiction in electronic media mergers and what are their roles and responsibilities. This arose in the context of the Astral-Télémédia decision, where the CRTC and the Bureau reached different conclusions on whether a merger should proceed. As noted earlier, such disagreements are highly unusual. However, they do create uncertainty in the business community, and represent an additional source of risk. Unfortunately, such uncertainty is unlikely to be resolved through expensive and time consuming litigation. Few companies could afford such action. In these circumstances, perhaps legislation might be the preferable route.

And, while the ultimate choice of model is debatable, one thing is clear: there must be a proper competition analysis irrespective of the agency responsible for overseeing broadcasting mergers. Before allowing a merger to proceed, the likely competitive effect on the relevant markets must be understood. This analysis and any trade-off should be transparent in the decision.

In examining such mergers, the Bureau focuses on the likely anticipated effects on competition in a relevant market – usually the market for advertising, broadcasting rights, and rates paid by subscribers. Specifically, we look forward to determine whether the merged entity will have an ability to raise prices or restrict other competitive elements such as variety and quality, and whether competitive entry into the industry is likely to occur within a two-year period.

The CRTC has a different mandate. As I mentioned previously, competition is not an objective set out in section 5 of the Broadcasting Act. In examining license transfers under the Broadcasting Act, the Commission looks primarily at the extent to which diversity of voices in our democracy might be affected and the implications for the creation or protection of Canadian culture. Indeed, the Commission may support a concentration of power as the new entity will be able to better fund and promote Canadian culture.

As others have noted, diversity of voices is a concept not readily addressed under the Competition Act. Diversity is more a cultural than an economic issue, and for that reason is a natural adjunct to the CRTC's mandate to maintain and enhance Canadian culture.

In my view, an effective policy framework requires that the same techniques and analytical tools should apply to broadcasting mergers as they do to mergers in other sectors, in accordance with the principles of competition law and economics. And the competition reasoning behind these decisions should be made explicit and transparent to Canadians, so that they can understand the trade-offs between competing policy goals.

6. WHAT IS THE BEST APPROACH?

So how does one decide on best approach to meet the goals of efficient and effective government oversight in the move from sector specific regulation to full reliance on competition and market forces?

I suggest that we consider what might be done within the current framework and what might be done in a revised framework.

Within the current framework, I see an opportunity for greater information sharing between agencies, such as regular meetings at senior staff levels. Charles Dalfen and I have met to discuss such exchanges, resulting in several meetings between the Bureau and the CRTC on both general policy matters and specific complaints and proceedings. I also see the value in staff exchanges, where a CRTC employee could spend time at the Bureau and vice versa.

In addition, a revised framework, through legislative change, could allow for the sharing of confidential information between the Bureau and the CRTC. Or it might stipulate that the competition authority define relevant markets, as is the case in Germany. Alternatively, it could require the Commission to give substantial weight to submissions from the Bureau, a model used in the U.S. As well, the government could clarify the respective roles of the CRTC and the Bureau in electronic media mergers, and define the extent and mechanism by which competition should be factored into these decisions.

In order to come to some conclusion as to what if any change is warranted, it would be useful for us to determine the criteria for deciding the best model in our move forward. Here are several elements one might consider:

• the best use of staff expertise (for example in terms of need for economic analysis);
• experience in analyzing the industry;
• sector specific knowledge; and
• the availability of tools

I believe that taking proactive steps toward more constructive cooperation will make us better able to navigate the remaining transition to competitive markets.

Thank you.

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¹ In both the creation of category-2 digital television licenses and its New Media decision, the CRTC has taken a major step to introduce reliance on market forces into the broadcasting environment.
Public Notice CRTC 2000-6; Licensing framework policy for new digital pay and specialty services
Broadcasting Public Notice CRTC 1999-84 / Telecom Public Notice 99-14; Report on New Media

²Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002, chapter iii, articles 15 and 16. Section 5.3 of the Commission Guidelines on market analysis and assessment of significant market power under the Community regulatory framework for electronic communications networks and services (Official Journal of the European Communities, July 7, 2002)

³Telecommunications Act of 1996, Sec. 271(d)(2)(A) Consultation with the Attorney General

⁴Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002, para 35

⁵An Act to Amend the Special Import Measures Act and the Canadian International Trade Tribunal Act, April 2000

⁶See, for example, the CITT Expriry Review decision with regard to Jarred Baby Food, April 28, 2003. (Certain Prepared Baby Foods Originating in or exported from the United States of America, CITT Epiry Review No. RR-2002-002)

⁷ Competition Tribunal, Reasons and Order, CT-94-3. February 26, 1997, The Director of Investigation and Research v. Tele-Direct Publications Inc. and Tele-Direct Services Inc., pp. 257-8.

⁸ 540 U.S. __ (2004), at page 15.