Speaking Notes for Sheridan Scott Commissioner of Competition

Competition Bureau

to the 2004 Canadian Telecom Summit

Toronto, Ontario
June 16, 2004

Check against delivery

---

I. INTRODUCTION

Good morning. I'm very pleased to be here at the 2004 Canadian Telecom Summit and to see so many familiar faces again.

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

In bringing this particular group together, the organizers have created a great opportunity for us to share views and exchange ideas about how we can better and more effectively address the challenges that face the telecom sector as it transitions to greater competition.

I can tell you that we're certainly seeing evidence of that at the Bureau, if the increase in telecom activity is any indication.

I understand there are some six matters before the Bureau. Ironically, I'm involved in none of them.

Because of my previous employment, I've been recused for a year on most telecom matters before the Bureau, so I'm getting my information from the same public sources you're getting yours from: the news.

My public sector career has also mirrored the transition I just mentioned, having moved from a regulatory agency to a competition authority. As a result of that, I'd like to share a few of my own views with you about how, in a climate of globalization, deregulation, and rapid technological change, regulators and competition authorities may deal most effectively with the transition from sector specific regulation to a reliance on market forces.

I want to talk to you about how we might construct the best bridge to take us from regulation to competition - how we might best use the skills, knowledge, analytical expertise and tools at the CRTC and the Bureau to help us do that.

As we know, even in the best-case scenarios the evolution from a regulated environment to one that is market-driven is not easy. In the case of the telecom industry, the transition is even more volatile because the pace of technological innovation is so quick. Uncertainty during such times often leads to considerable anxiety by all participants. As we work our way forward, I think it would be useful to look at ways in which both the CRTC and the Competition Bureau can share information, clarify roles and identify and optimize know-how in both organizations. This can serve the interests of businesses and consumers during the transition to competition more effectively, and perhaps reduce some of the uncertainty that can cause concern.

I say this because we're also very much aware that the transition from regulated to deregulated markets can cause upheaval and change in organizational cultures; can introduce whole new unanticipated business models and can lead to the destruction of well-known and established brands.

After all, look what happened to the airline sector.

Around the world incumbent air carriers with well-established brands and extensive networks have been forced to restructure their operations and in some cases to exit the market under competitive pressure from new low-cost entrants. For example, both Swiss Air and Ansett in Australia have exited the market, KLM and Air France have merged, and Delta and United are currently in bankruptcy protection in the United States while they restructure their operations.

One of the greatest challenges in navigating a transition such as the one we're in now, is determining what to do when there's been partial deregulation and companies are subject to more than one piece of legislation.

I think it is essential to ensure that regulators and competition authorities work in a complementary way to support the movement toward deregulation. Otherwise, I believe we make our jobs unnecessarily cumbersome.

It might do us good to remind ourselves that we're not alone in our dilemma. It's happening around the world and different countries are coming up with solutions that reflect their realities.

For example, in New Zealand, the telecom regulatory authority has been placed within the competition policy agency.

Prior to 2001, New Zealand relied solely on competition law for the telecommunications industry. But, in 2001 the Government passed the Telecommunications Act, which contains sector specific rules.

The Act created a Telecommunications Commissioner who is responsible for resolving access disputes, overseeing the subsidy of local access, monitoring the regulatory regime, and recommending changes to the list of regulated services. The Telecommunications Commissioner is a specialist commissioner within the New Zealand competition policy authority. In some situations he acts alone; in others, he must consult with two other commissioners.

On the other hand, the European Parliament has directed regulators and competition policy authorities within the member states to consult and co-operate to ensure that competition policy principles are being applied to market analysis in an effective fashion.

Our neighbour to the south has chosen both formal and informal linkages to ensure the Antitrust Division of the Department of Justice (DOJ) and the Federal Communications Commission (FCC) work together during the transition from monopoly to competition.

In other words, around the world regulators and competition authorities have constructed different frameworks to bridge the transition from monopoly to competitive telecommunications markets.

Several years ago, the Bureau initiated discussions with the CRTC develop an Interface Agreement. It was the first attempt to address some of the issues I'm talking about.

It is important to recognize that this is not a legal instrument; rather it's a reflection of existing legislation. The Agreement was a good start, but I think we should consider the structures found in other countries, and consider whether they would be more effective.

These various structures or approaches, including ours, reflect several common goals, the most obvious of which are:

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

I think we should consider keeping an open mind about defining our roles, about using the legislative process to assist us and about using the best expertise where it resides in order to give us the best shot at meeting the goals I just mentioned. Because, we know that meeting these goals may not be easy.

To explore this idea, I think it might be useful to look at three areas where I see overlap between the Competition Bureau and the CRTC to consider what we might improve in the future to meet them. Specifically, I want to look at how one determines the best way to address:

• forebearance analysis
• overlapping jurisdictions during the transition to market forces, and
• anti-competitive tactics slowing down the transition

II. FOREBEARANCE ANALYSIS

Let's look at forebearance to start with.

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.

In Telecom Decision 94-19, 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 determining whether a firm possesses market power the Commission stated it would look at a number of demand and supply factors including:

<>

(i) the market shares of firms within the market;

(ii) the ability of customers to switch to other service suppliers;

(iii) the availability of practicable substitutes;

(iv) the ease with which customers are able to switch between the products or services offered by competitors;

(v) the anticipated supply expansion responses of firms to price increases;

(i) the ability of competitors to enter the market;

(ii) the presence of entry barriers;

(iii) evidence of rivalry; and

(iv) innovation and technological change.

---

Essentially, the CRTC adopted the approach taken by the Bureau to determine market power in the context of mergers.

At the Competition Bureau, market definition analysis is both an integral part of our mandate and an activity for which we have substantial expertise.

As such, our techniques and analytical tools are being constantly updated and refined. To this end we have just released a draft version of the Revised Merger Enforcement Guidelines (MEGs), which attempt to incorporate advances in economic and antitrust analysis. Furthermore, the Competition Bureau has accumulated expertise in market definition analysis by applying the same basic analytical test to a numerous and a diverse range of industries.

The Competition Bureau looks at relevant product markets on a forward-looking basis. The Bureau must determine, in certain situations, whether there is sufficient competition in a market so as to provide viable alternatives. Such determinations generally require that the Competition Bureau consider not just actual, but also potential competition, including the potential impact of a behavioural or structural change.

Specifically, merger analysis requires the Competition Bureau to look forward to determine whether the merged entity will have an ability to raise price or restrict non-price dimensions of competition (i.e. such non-price examples include variety and quality) and whether competitive entry into the industry is likely to occur within a two-year period.

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

In disposing of any applications for forebearance in the local market, it is my view the issues will be more complex than for long distance telephony.

Indeed the issues raised are fundamental. Is wireless a legitimate competitive alternative to wireline? Will Voice over Internet Protocol be a real competitor for the product in question? In what manner do we take potential competition into consideration? To assess these questions, the CRTC and the Bureau need to make the best use of the expertise and experience that is available.

As I see it, an important public policy issue boils down to this - what is the most effective way to ensure that the best possible analyses using the Commission's test are brought to bear in forbearance decisions?

Under the status quo, the Competition Bureau's relevant market analysis is provided to the CRTC through a submission as an intervenor. I would note that there are several limitations to the current approach.

Specifically:

• The Telecommunications Act prevents 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 close to 2 years 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.
• While it is possible for the Competition Bureau to address interrogatories to parties in the context of a specific CRTC hearing, the Competition Bureau is unlikely to have access to company specific information at a level that would allow a comprehensive competition policy analysis.

In other jurisdictions mechanisms have been put in place to address the ability of the competition authority to obtain the necessary information to carry out a meaningful competition analysis of forbearance applications.

As I mentioned before, European law stipulates that competition and regulatory agencies within the member states should consult and cooperate in order to ensure coherent analysis of relevant markets¹.

For example, since 1998 the German regulatory authority for telecommunications is required by legislation to obtain the agreement of the competition authority for all market definition determinations in this sector.

In the United States, Congress legislated the Federal Communications Commission (FCC) to consult with the Antitrust Division - Department of Justice (DOJ) and give substantial weight to the DOJ's views on any application by an RBOC to enter the long distance market².In addition, on a case specific basis the US DOJ enters into a confidentiality agreement with the FCC to obtain access to information so as to enable it to make a substantive submission on matters before the FCC.

Since economic regulation is carried out under the authority of the competition policy authority in New Zealand, the issue of access to information does not arise.

But the ability for two agencies to share information is not unprecedented in Canada.

For example the Bureau does have access to confidential material filed before the Canadian International Trade Tribunal³ .

I have cited these examples because I think they clearly illustrate that closer cooperation is possible between regulatory and competition authority bodies. It is my hope that they can serve as models for us as we consider whether we have in place the best structures for making the transition from a regulated to a competitive market.

III. OVERLAPPING JURISDICTION DURING TRANSITION TO MARKET FORCES

The next area I want to talk about is overlapping jurisdiction during the transition to market forces.

Where there has been partial deregulation, there are several opportunities for complainants to look to both the Telecommunications Act and the Competition Act when dealing with anti-competitive behaviour.

For example, there could be complaints under predatory pricing, refusal to deal or abuse of dominance provisions of the Competition Act and, on the other hand, undue preference or unjust discrimination under the Telecommunications Act, all of which could arise from the same set of facts.

For example, a common complaint during a transition period is that of an incumbent setting wholesale prices for an access service required by a competitor at or above the incumbent's retail price to consumers. This results in a price squeeze on the competitor with the potential effect of limiting or eliminating competition.

Some of you will recall that Internet service providers have complained that incumbent telephone companies have set the retail price of high speed Internet service below the wholesale price for access to the incumbents' networks. In these situations, the retail price was deregulated while regulators still set the wholesale price. This issue has recently arisen in Canada, France, Germany and Australia.

In each case, the regulator, the competition authority or both agencies could have addressed the matter. Germany, France and Australia chose to apply their antitrust laws. In Canada the level of the wholesale price was addressed by the CRTC after both agencies concurrently determined that there was no impact on competition in the end user market. Since the CRTC was responsible for access issues, including the regulation of wholesale rates, this matter was referred to the CRTC for remedy.

The European Commission determined that the regulators in Germany and France had not sufficiently unbundled local loops to enable competitors to compete. Therefore, the EC chose to launch an action under the Community's competition legislation against the dominant firms in both countries as well as launching an action against state regulators.

Meanwhile, German legislation provides considerable guidance on reducing overlap between the national telecom regulator and the competition authority. According to the legislative framework, shared responsibilities exist only with respect to abusive practices in telecom. As a matter of practice, the two agencies consult on which one will take the lead on the matter. However, the relevant legislation⁴ then stipulates that the two agencies must provide an opportunity to each other to comment prior to the completion of the proceeding. They also grant each other full access to the relevant files.

It is important to remember that remedies available to the two agencies may differ as they are designed to address different problems. The CRTC has the ability to impose ex ante controls on the ability of telecom firms to exercise market power, whereas the Competition Bureau seeks to assure ex post that market forces reduce or eliminate the incentive to engage in abusive behaviour. The appropriateness of the remedy may be something to consider in assessing which agency is better situated to resolve a complaint.

At present, in the absence of legislative clarity, some guidance on which Canadian agency should take the lead may be found in the Bureau-CRTC Interface Agreement.

It attempts to minimize the potential for conflict by making it clear that the CRTC has primary responsibility for access to networks. But when the CRTC has exercised its authority to forbear from regulation or where the CRTC does not have jurisdiction (e.g. access to provincial hydro poles) the Competition Act will apply.

While this provides some guidance, it might be appropriate to consider whether the legislative amendments would be useful, in order to introduce more formal linkages, as is the case in several other countries.

IV. ANTICOMPETITIVE TACTICS SLOWING DOWN THE TRANSITION

Let me turn now to the question of anti-competitive tactics.

When competition is first introduced, it can sometimes lead to inappropriate behaviour in the heat of the competitive battle. Market practices introduced by incumbents or new entrants at the time of deregulation can lead to unanticipated effects on consumers and competitors and may delay the transition to competitive markets.

The Bureau has found this to be the case in long distance telephony, natural gas and airlines.

Examples of such practices include:

• Slamming and misleading representation
• Attempts by the incumbent to control the customer

As most of you know, slamming is the switching of a customer's service from one company to another company, usually with the customer's unwitting knowledge or approval. Misleading representation takes place when a company or its representative knowingly or recklessly makes a false or misleading representation to the public. Both the Bureau and the CRTC received many complaints about the use of slamming by some new entrants when the long distance market was open to competition. Meanwhile, misleading representation complaints were prevalent at the opening of natural gas markets to competition.

Incumbents will sometimes use other tactics to prevent their customers from moving to other competitors. For example, in the airline market, incumbents who owned computer reservation systems used them to bias ticket sales in favour of their own flights. This stunted the growth of new entrants.

In both Canada and the United States antitrust authorities were required to deal with this issue prior to regulators putting in place procedures to correct the practice. In Europe the regulator required the airline industry to adopt a code of conduct with respect to the operation of computer reservation systems.

Clearly regulators and competition authorities did not adequately foresee the pivotal role that the above-mentioned practices could play in a deregulated market and had to respond after markets were opened with appropriate rules as issues emerged. The lesson here is that regulators and competition authorities should strive to anticipate the effect of changes on markets and put in place appropriate policies before there is injury to the competitive process.

If the CRTC decides to forebear from regulating any local telecom services, we do not want a repeat of slamming and misleading representation or other practices that could weaken the development of a competitive marketplace.

It seems to me that at that time the Bureau and the CRTC should be anticipating the kinds of activities that might arise and what role the two organizations might play in addressing them.

V. 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 met recently to discuss such exchanges, resulting in another meeting between senior staff at the two agencies, where we shared information about activities of regulators in other jurisdictions who are looking at the interface between Telecom and Competition Law.

I also see the value in staff exchanges, where a CRTC employee could spend time at the Bureau and vice versa.

A revised framework, through legislative change, might 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 noted before.

In order to come to some conclusion as to whether any change is warranted and what that change might be, 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 transition to competitive markets.

We've got plenty of examples around the world and closer to home showing us how we can do it. We can learn from others successes and mistakes, we can learn from our own. The important thing is to keep moving forward and build bridges where we can.

Thank you.

---

1. 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)

2. Telecommunications Act of 1996, Sec. 271(d)(2)(A)

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

4. Telecommunications Act, section 82; Postal Act, section 48.