Evolution of the Regulatory Process "The Impact of Deregulation"

André Lafond
Deputy Commissioner of Competition
Civil Matters Branch
Competition Bureau

Canadian Telecommunications Policy Conference
Ottawa, Ontario

February 11, 1998

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Introduction

I would like begin by thanking the University of Western Ontario and the Richard Ivey School of Business for the invitation to participate in this important conference.

In my remarks this afternoon, I want to provide the Bureau's perspective on the transition to competitive markets in telecommunications and the interface between regulation and competition law at a time when the CRTC is increasingly exercising its forbearance powers under the Telecommunications Act.

Before I begin in earnest, I want to point out that although I have stylized the title of my remarks to the Conference Program "The Impact of Deregulation", I fully recognize that while regulatory barriers to competition in the long distance sector were removed in 1992, this did not equate, as is sometimes stated, to "deregulation." On the contrary, there was an unprecedented increase in regulatory activity in the post-1992 period. This fact is well known to those of you who are fortunate enough to be telecommunications consultants and lawyers or the unfortunate who have found it necessary to pay for the costs of participating in the regulatory process.

With the Commission's long distance forbearance decisions last December, as well as previous decisions in other areas of the industry such as the wireless sector, we are now seeing "light at the end of the tunnel" in the transition from regulation to competitive markets. While views may differ over certain aspects of the December decisions, on the whole, they are an important step toward the objectives of the Telecommunications Act of greater reliance on market forces and less regulation. As we are all learning, however, opening local markets to competition is proving to be technologically and economically an even more complex task than was the case in long distance. As such, the time when regulation of telecommunications can give way completely to the operation of market forces and the application of the Competition Act does not appear imminent.

Detailed Regulation or Framework Law?

Debate over the merits of telecommunications specific regulation verses anti-trust laws of general application is not unique to Canada. In the United States, the Department of Justice Anti-trust Division, the Federal Communications Commission and state regulators coexist in a state of certain tension. Clearly the action of the DOJ in the AT&T case was a pivotal event in bringing about telecommunications competition in the United States. Moreover, the current state of affairs in implementing new U.S. telecommunications legislation underscores that the Courts in the U.S. continue to play an activist role in shaping telecommunications policy.

New Zealand adopted what some call the "flash cut" approach of moving from monopoly and state control to open markets and reliance on the competition authority and the courts to resolve access and other issues. Australia has recently adopted a unique approach of creating a hybrid competition authority/industry regulator in the Australian Consumer and Competition Commission. Under this model, key functions of the telecom regulator, Austel, relating to access have been transferred to the competition authority. This reform was accompanied by specific changes to Australian competition law with respect to access and the powers of the competition authority to impose remedies, not just in telecommunications but in other network industries such as electricity.

In Canada, the model we have is that of the CRTC as the industry specific regulator with a mandate to foster development of competitive markets and the authority to forbear from regulation where competitive conditions warrant. Under the Competition Act, the Director of Investigation and Research is empowered to intervene before regulatory authorities on matters related to competition. Indeed the Director has been a frequent intervenor before the CRTC in numerous proceedings including Long Distance Competition, Review of Regulatory Framework, Information Highway, Local Interconnection and Network Unbundling and Regulatory Forbearance of Toll Services, as well as others.

There has been some debate in Canada regarding the transition from monopoly to competition and the relative jurisdiction of the Commission under the Telecommunications Act and the courts and the Competition Tribunal under the Competition Act to deal with competition issues. Overall, however, the regulatory framework in Canada has proved to be conducive to the creation of competitive telecommunications markets in long distance, wireless and, hopefully within the not too distant future, local telecommunications markets .

Regulatory Forbearance

An important objective of the Telecommunications Act which the Bureau strongly supports is fostering increased reliance on market forces and ensuring that regulation, where required, is efficient and effective. Under the Telecommunications Act, the Commission is required to forbear from regulation where it finds that a service or class of service is or will be subject to "sufficient competition" to protect the interests of users and where doing so will not impair unduly the establishment or creation of competitive markets. The Bureau believes that a forbearance decision should attempt to balance the degree to which the incumbent telephone companies possess "market power" against the costs of continued regulation. At some point, presumably well short of perfect competition, the costs of continued regulation will exceed the costs of relying upon market forces.

The main cost of regulation is that it inhibits competition by denying regulated firms the pricing and marketing flexibility needed to react to changing market conditions. In an industry as dynamic as telecommunications, where the pace of change seems to be constantly accelerating, regulators cannot possibly be expected to make better decisions as to service offerings and prices, than those that would be arrived at through the competitive process. Regulation also imposes direct administrative costs upon the government and the regulated parties and these costs are not insignificant.

Increased Role of Competition Law

Although the Competition Bureau and the CRTC have different legislative mandates, we share a common goal of fostering the growth of competitive communications markets. As such, the Bureau and the Commission have complementary roles in facilitating the transition from monopoly and regulation to competition and deregulation.

The Commission has faced the difficult if not impossible task of administering a tariff process and enforcing detailed competitive safeguards without regulating the competitive process itself. While a period of transition is clearly necessary, there are no bright lines or simple check lists to indicate precisely when to forbear from regulation. Moreover, there are costs to the economy and to the competitive process of maintaining a transition period longer than necessary to protect the interests of subscribers or foster the development of competitive markets.

Jurisprudence developed primarily under the criminal provisions of the Competition Act has generally held that where business activity or conduct is subject to oversight by a valid regulatory authority, such conduct deemed to be in the public interest and, therefore, beyond the application of the Competition Act. This has come to be known as the regulated conduct defence. The exercise by the CRTC of its forbearance powers will, however, place greater reliance on the Competition Act to safeguard competition. Indeed, the success of regulatory forbearance will depend, in part, upon the effectiveness of competition law as a deterrent to potential anti-competitive behaviour.

It is important to recognize, however, that competition law is not a substitute for regulation. It will be competition in the marketplace, not the Competition Bureau or the Tribunal, which will replace the role of regulation. Unlike economic regulation, competition law does not require prior approval for a course of business conduct. Competition authorities do not regulate levels of service, quality, prices or profits. Rather, these outcomes are determined by the influence of competitive market forces.

The role of the Competition Bureau and the Competition Act as a safeguard of the competitive process will increase as markets are deregulated. However, through the administration and enforcement of the Competition Act the Bureau will not attempt to micro manage the industry or predetermine economic outcomes as is the conventional role of economic regulation. To use a sports analogy, regulators generally have a tendency not only to want to set the rules of the game, but to referee it in a fashion that all participants come out as winners. As a competition authority, we take a more hands-off approach and are not concerned about who wins and who loses. We are concerned with ensuring that the participants don't fix the result of the game among themselves, buy up their opponents or create barriers to potential challengers.

Competitive Safeguards

In recognition of the fact that the Stentor companies provide a combination of monopoly and competitive services, are vertically integrated and control essential facilities to which competitors require access, the Commission implemented a set of competitive safeguards designed to facilitate the transition to competitive markets. For example, in addition to the tariff process, which has traditionally been used to protect consumers from unwarranted rate increases, the Commission established an imputation test or floor pricing standard to guard against "anti-competitive" pricing for long distance services. Among other safeguards, the Commission put in place rules to restrict the incumbent telephone companies from bundling or jointly marketing various services, particularly wireline and wireless services.

As competition in telecommunications has developed, deregulation implies not only reducing or eliminating traditional rate regulation. As evidenced by its December decisions, the Commission is also phasing out competitive safeguards, such as the imputation test. The Commission has shown recognition that certain regulatory measures which it felt were necessary at the outset of the transition, are no longer warranted in an increasingly competitive market. The Bureau anticipates that there may be further relaxation of joint marketing restrictions as a result of the review of these safeguards completed by the Commission last July.

As the Commission continues to move forward with an agenda of opening telecommunications markets to competition and reducing or eliminating regulatory oversight, we expect that competition issues relating to mergers or other forms of industry restructuring and abuses of dominance related to access or other forms of market foreclosure are likely to come before the Bureau. This will raise questions in the minds of some as to whether the Competition Act and the resources available to the Bureau are adequate to deal with these potential issues.

I will try and address some of these issues, beginning with access. The Commission is continuing to regulate interconnection and access to essential facilities related both to long distance and local services. In light of this, we do not anticipate that the Bureau will be required, in the near term, to deal with significant issues of abuse of dominance related to access. The experience in telecommunications suggests that the technical and economic issues related to interconnection and access to essential facilities requires ongoing regulatory supervision. However, as alternative facilities are constructed over time and markets develop, the Commission should be able to reduce the degree of regulatory oversight, placing greater reliance on the application of the provisions of the Competition Act. As evidenced by the Gemini and Interac cases which were resolved before the Competition Tribunal, there is scope within the Competition Act to address specific issues related to access.

It should also be noted that the abuse of dominance provisions of the Competition Act are applicable to a broad spectrum of anti-competitive practices. These include exclusive dealing, market foreclosure through vertical integration, the control of scarce facilities, predatory pricing and a wide variety of contractual practices that tend to have exclusionary effects or otherwise substantially prevent or lessen competition. These provisions have allowed the Bureau to remedy specific contractual terms or business practices of dominant market participants, and to mitigate the damaging effects of such practices on competition.

One of the principle concerns which the Commission has attempted to address during the transition is that of predatory or "anti-competitive pricing." This concern has been the basis for much of the argument for continued regulation. In the past, the Bureau has cautioned that regulatory measures only be implemented when a clear need for them has been established and that they should not be based on a disproportionate concern about predatory pricing. There is a risk that regulatory safeguards in this area can have the perverse result of chilling otherwise legitimate price competition.

The experience under the Competition Act indicates that predatory pricing is an expensive and extremely rare business strategy that is unlikely to be profitable in the long run if barriers to entry are low. Unless the firms engaged in a below-cost pricing strategy are able to recoup their losses at some future time, the effect is only one of transferring income from shareholders to customers.

In the Bureau's view, the potential for "predatory pricing" within the meaning of the Competition Act to occur on in the telecommunications industry is diminishing. In this regard, it is significant that in its recent long distance forbearance decision, the Commission concluded that "there are no significant barriers to entry into the toll and toll free markets." Moreover the Commission also noted that due to the competitive nature of the long distance market and declining revenue sources available to the Stentor companies to fund below cost pricing, an imputation or floor pricing test for toll and toll free services is no longer required.

The Bureau concurs with the Commission's conclusions with respect to the lack of significant barriers to entry into long distance services and the reduced opportunity and incentive for predatory pricing activity. Nevertheless, as is the case in any industry, specific complaints or allegations of predatory pricing in the telecommunications sector will be examined by the Bureau on a case-by-case basis to determine if grounds for an inquiry or proceedings under the Competition Act are warranted.

The Bureau's experience with the deregulation of other industries, such as the transportation sector, suggests that telecommunications deregulation is likely to be accompanied by a degree of industry restructuring through mergers and acquisitions and the formation of strategic alliances. In the area of communications, strategic alliances are becoming increasingly common as firms seek partners and new approaches to doing business in a changing competitive environment. The Bureau will be carefully examining mergers or other transactions to determine if they prevent or lessen competition substantially without giving rise to offsetting efficiency gains. The Tribunal has broad discretion to issue orders to overcome the effects of anti-competitive mergers or behavior and to restore competition in markets, including the divestiture of assets or shares if the circumstances so warrant.

Given the structure of the telecommunications industry as an oligopoly and the fact that telecommunications services are increasingly being viewed as a commodity for which price is the key competitive variable, the Bureau must be alert to the possibility that competitors may resort to collusion in a detariffed environment to fix rates and deny consumers the full benefits of competition. Were this to occur, it would raise very serious issues under the criminal provisions of the Competition Act.

Finally, another important area which should not be overlooked is misleading advertising and deceptive marketing practices. Issues which have arisen in the long distance sector relating to advertising claims as to consumer savings and discounts, performance and technical standards and so called "slamming" practices may carry over with the introduction of local competition and will have to be addressed under the Competition Act where they raise an issue.

The Objective of Compliance

The Competition Bureau's overall objective is to obtain as high a degree of compliance with the Competition Act as possible. The Bureau has a number tools available to assist it in achieving this goal. These include the publication of Enforcement Guidelines to assist the business community in understanding the Act and its rights and obligations under it. We also offer a Program of Compliance under which firms can obtain advisory opinions on whether or not a particular course of conduct which they are contemplating would be likely to give rise to an inquiry under the Act. Several years ago, the Bureau also implemented a Public Education Initiative (PEI) which consists of giving speeches, presentations to business groups and participating in trade shows. Much of the focus of the Bureau's work, however, remains carrying out investigations and the enforcement of the Act.

In addition to the information based approach to compliance, we have a continuum of remedies to resolve enforcement cases. These include alternative case resolution mechanisms such as undertakings, consent or prohibition orders from the courts or the Competition Tribunal and, ultimately, contested proceedings. While we strongly encourage voluntary compliance, where alternatives resolutions are not possible or evidence indicates conduct by firms involving serious offenses or a disregard for the law, we do not hesitate to prosecute with the full vigor that the legislation provides.

Conclusion

With the substantial progress which has now been achieved in opening telecommunications markets to competition, the Bureau has reached the stage where the focus of its telecommunications resources will be shifting away from intervention and policy activity toward greater emphasis on enforcement of the Competition Act as circumstances warrant.

In terms of the telecommunications industry, we recognize that markets are dynamic and that the future course of business strategy and competition will continue to be shaped by technological developments. Technological change, however, will not obviate the need for competition law enforcement. Firms will continue to have incentives to engage in anti-competitive conduct and dominant firms, in particular, will continue to have incentives to constrain new forms of competition.

In this era of rapid and profound transformation in telecommunications, it is especially important for the Bureau to understand the changes which are taking place and their consequences for competition. For this reason we are committed to maintaining an open dialogue with the industry. We want to understand the issues and work with industry participants and users to achieve greater compliance with the Act to ensure the benefits which competitive markets can provide.

Thank you.