Remarks by Konrad von Finckenstein, Director of Investigation and Research, Competition Bureau

International Bar Association Conference
Vancouver, British Columbia

September 15, 1998

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Introduction

Thank you for the invitation to participate in today’s panel discussion.

Mergers and joint ventures are occurring with increasing frequency in the telecommunications sector. These transactions can raise a broad range of competition policy issues. This morning, I would like to address four related topics they are:

I. The Bureau’s advocacy role;

II. The Bureau’s role in a competitive telecommunications market;

III. Trends and challenges in telecommunications mergers.

I - The Bureau’s Advocacy Role

The Competition Act gives the Competition Bureau the right to intervene before federal regulatory bodies and the power to intervene with leave before provincial regulatory bodies. These provisions (ss 125 and 126 of the Competition Act) give the Bureau the unique opportunity to influence regulatory policy from the outset. This has included advocacy of competiton policy principles before the CRTC as it has deregulated communications markets.

Our efforts have not been limited to telecommunications and broadcasting deregulation. We also actively intervene in other industries in transition such as transportation, gas, electricity and financial services.

Besides recognizing that market liberalization can provide real economic benefits in terms of lower prices for consumers and increased competitiveness of the Canadian economy,(1) the Bureau is very conscious that the way in which markets are deregulated can affect the state of competition down the road. For these reasons, we actively encourage government policy makers and regulatory bodies to place greater reliance on competition.

In all of our interventions and policy work, we strive to:

• take a responsible, long term view of the market, where appropriate, to encourage regulatory bodies like the CRTC to withdraw from regulation;
• recognize that there are some things competition law generally cannot address. For example, regulatory bodies normally have public policy goals beyond promoting competition (such as providing universal service or protecting Canadian content);
• realize that when industries such as telecom, financial services or energy are deregulated, there are major transition issues; and
• take into account the interests of the incumbents, new competitors, the regulated and the unregulated as well as the customers.

In Canada, the transition to telecommunications competition did not begin as early, or as suddenly, as in the United States where anti-trust proceedings were used to break up AT&T. Canada’s approach to deregulation has been much more gradual and incremental.

The Bureau has been instrumental in advocating and bringing about deregulation of these markets. Let me elaborate.

With regard to telecommunications policy, within the government as opposed to before the regulator, we have actively advocated competition policy in issues such as direct-to-home satellite policy, telecommunications legislation and spectrum auctioning.

In addition we have been a consistent intervener in regulatory proceedings before the CRTC(2). In fact, the Bureau has undertaken close to 100 regulatory interventions before the CRTC since the late 1970's. Generally speaking, those interventions have followed the same three stages as those in other regulated sectors.

In the first stage, our interventions emphasized that competition in telecommunications was not only feasible, but was also in the public interest. While this may now appear self-evident, this was certainly not the case even ten years ago. For example, in 1991 the Bureau successfully argued, against the opposition of the telephone companies, that the market for long distance service was intrinsically competitive and that entry should be allowed on an open and equal access basis.

In the second stage, once the CRTC decided to allow competition in a particular market, the Bureau advocated those changes to the regulatory framework necessary to facilitate, protect and accelerate the development of competition in those markets. In its 1994 Regulatory Framework Decision, for example, the CRTC accepted the Bureau's recommendation that a price cap regime should be adopted to end the incentive and opportunity for vertically integrated phone companies to assign costs to the regulated side of their businesses in order to claim higher tariffs. These higher tariffs can distort competition if revenues are used to cross-subsidize competitive services. Moreover, price caps will lead to more economically efficient outcomes than traditional rate of return regulation. (3)

In the final stage, most recently in reference to the long distance market, we have focused on assisting the CRTC in determining when to withdraw from regulation and leave markets fully open to competition.(4) In its December, 1997 decision, for instance, the CRTC agreed with the Bureau’s assessment of the state of competition in the long distance market and decided to deregulate the rates charged by the incumbent telephone companies.

Although Canada has had some catching up to do, we now have one of the most open and competitive telecommunications industries in the world. Long distance and international telephone services, as well as wireless communications and Internet services, are already competitive, while local service is in transition to competition. In terms of infrastructure, services and rates, Canada compares very favourably to our major trading partners, including the United States.

II - The Bureau’s role in a competitive telecommunications market

As the CRTC has gradually deregulated more and more services, the need for the Bureau to intervene and the scope of those interventions have diminished. At the same time, increased reliance has been placed on enforcement of the Competition Act to protect the competitive process. I should note that to date, deregulation in telecommunications has necessitated only limited enforcement of our competition law.

As deregulation has progressed, firms in these industries have stressed the importance of clarity, predictability and transparency of the roles of the Bureau and the Commission.(5) In fact questions about the roles of the Bureau and the regulator arise whenever markets are deregulated. The way we in the Competition Bureau see it, specific functions should remain with the regulator, while others should be gradually assumed by the Competition Bureau.

The principles we propose to apply to communications markets comprise three key elements. They are :

• Interconnection and Access
• Forbearance and Exemption
• Merger Review

Interconnection and Access

If a dominant firm controls a bottleneck or “essential” facility to which competitors must have access to compete effectively, issues are bound to arise concerning the technical feasibility of that access or interconnection. In addition the owner of that bottleneck, may have market power and incentives to slow down that access or diminish its quality. These access issues can be subtle and resolving them can demand a high degree of technological and economic expertise as well as flexible and timely dispute resolution mechanisms. They are also crucial to the success of competition in a deregulated market.

For all of these reasons, the Bureau and the Competition Tribunal are not well suited to deal with ongoing access and interconnection issues arising from pre-existing market arrangements in telecommunications and broadcasting markets. In these markets, access and interconnection should continue to be a main focus of economic regulation by the CRTC.

Forbearance and Exemption:

As markets are deregulated, determining where the jurisdiction of the CRTC ends and the Bureau’s begins can be problematic. It is a common source of uncertainty for business as well as the Bureau and CRTC. In order to maximize predictability, we believe it would be helpful if the CRTC in its decisions explicitly identified the powers and duties it will no longer exercise once it has decided to withdraw from regulating a market. In such cases, the Competition Act would apply unless, of course, the Commission rescinds its decision to forbear. The CRTC should also specify that in areas where it conditionally forbears the Competition Bureau applies unless the forbearance is lifted by reason of breach of conditions.

Merger Review

As I alluded to earlier, competition laws are not well suited to dealing with market power arising from previous regulation. The Bureau however, is well equipped to deal with anticompetitive conduct or behaviour that lessens or prevents competition (as opposed to supervising regulatory mechanisms aimed at increasing competition). This includes the examination of mergers.

Currently the Competition Bureau and the Commission have parallel jurisdiction with respect to telecommunication and broadcasting mergers.

The Bureau

The merger provisions of the Competition Act require advance notice of high-value mergers involving large firms.(6) But our jurisdiction is not limited to large transactions. The merger sections of the Competition Act, can be used to stop almost any merger that substantially lessens existing competition or prevents future competition in Canada. The effect of a merger on potential competition is of particular concern to the Bureau in deregulating markets where strategic mergers can easily pre-empt new entry from the start.(7)

Where we conclude that a merger is likely to prevent or lessen competition substantially, we can challenge the transaction by applying to the Competition Tribunal for a remedial order such as dissolution or divestiture.

The CRTC

Merger review by the CRTC in both telecommunications and broadcasting is triggered by the change in ownership or control of licenses from the acquiree to the new entity resulting from the merger. In telecommunications, the CRTC considers access, interconnection and compliance with Canada’s foreign ownership limits. CRTC review of broadcasting mergers is concerned with compliance with foreign ownership rules, Canadian content and the effect of the change in ownership on content variety.

The timing of our respective review processes has caused some uncertainty. As well, our parallel jurisdiction has resource implications for both the Bureau and the CRTC. A “no” decision by one could very well preclude the need for review by the other.

To deal with these issues, it would seem appropriate that the Bureau and the CRTC would exercise their authority concurrently for:

• telecommunication mergers, where there are foreign ownership issues; and,
• for broadcasting mergers.

However, for telecommunication mergers, where there are no foreign ownership issues it would seem appropriate for theBureau to review such mergers first.

The way we see it, these principles will ensure that the Bureau and the CRTC are not working at cross purposes and that approval by one cannot be used by parties to pressure the other. By understanding each other, the Bureau and the CRTC will be able to continue the efficiency of our current approval process.

Our Telecom Merger Experience So Far

Let me touch on our experience so far with mergers in the telecommunications sector.

It seems that almost daily, the business press reports announcements and stories related to mergers or strategic alliances involving firms in the telecommunications industry and to a lesser extent in broadcasting. So far we have mainly been occupied examining domestic transactions(8) and only a few international mergers, such as WorldCom’s acquisition of MCI and more recently the sale of Teleglobe’s INMARSAT business to Stratos Global. Canada’s foreign ownership requirements have meant that we have not yet seen transborder mergers on a large scale. Nor have we reviewed a transmedia merger as yet.

III - Trends and challenges in telecommunications mergers

First, the sweeping regulatory changes combined with technological innovation which have made competition in telecommunications and the distribution of broadcast services feasible have created a totally new environment for merger activity in these sectors. For example, less than ten years ago, telephone and cable companies co-existed in very distinct markets as regulated monopolies. Now, in an era of convergence, telephone and cable companies are direct competitors in high speed Internet service and are increasingly likely to enter into each other’s, core businesses.

Second, it appears that the merger activity which we are seeing in telecommunications is being driven more by business strategy than purely financial considerations. Incumbent service providers, whether they are cable or telephone companies, are not passively accepting reduced market shares in the face of competitive entry. Rather, they are pursuing strategies to expand their markets either by offering new services outside their core businesses or moving beyond their traditional geographic territories. In some cases, they will seek to do so by means of merger or joint venture. For example, the attempt earlier this year by Telus Corporation of Alberta to merge with AT&T Canada Long Distances Services was widely recognized as being motivated by a desire on the part of Telus to expand the scope of its operations beyond the province of Alberta and to become independent of the Stentor alliance. The cable television industry is moving aggressively to offer high speed internet services and has established a national alliance vision.com to facilitate this product expansion.

Third, new entrants are often seeking to exploit new technologies and may be looking for partners with compatible business strategies to share risk and develop markets. This trend is driven in part by the view that consumers will increasingly demand ?bundled services’ or ?one shop stopping’ for communications services. For example, a new entrant wireless PCS service provider, Microcell Telecommunications, has a shareholder base which includes international and domestic long distance carriers, (Telesystem and CallNet/Sprint Canada), and two major cable companies, (Shaw Communications and Videotron). Bundled service packages including Internet access with cable, or Internet access with long distance services, have become common in the marketplace and service offerings combining wireless communications with long distance and local exchange services are starting to emerge.

As a result of these trends, the Bureau will face a number of new challenges in its review of future mergers in the communications industry:

• First, as we get further along into the process of deregulation, we will begin to see a greater convergence among utilities, cable, and telephone companies. This will, in the long run, bring new and better choices to their customers. However, determining the competitive impact of this convergence will not be easy for regulators or the Bureau. For example, it will not be easy to assess the effect of the development of LMCS on traditional telephony and broadcast distribution in the future.
• Second, this change is taking place at an astonishing rate. It will become increasingly difficult for us to predict how markets will evolve within the two year framework we normally apply to mergers now. Query whether for telecom mergers, a shorter time frame would be appropriate. Moreover, keeping up with ongoing changes in this industry and correctly interpreting the effects of this change on competition will require a significant commitment and careful use of specialized resources.
• Third, as these technological advances take place, the regulatory framework will need to evolve to ensure that the benefits of convergence are passed on to consumers. We have to ensure that the regulatory framework is not a breaker on convergence.
• Fourth, as the telecom industry become increasingly more global, we will need special remedies to deal with transborder mergers. From a Canadian perspective, we appear to be moving toward a more closely integrated North American market for telecommunications services, which itself is part of an emerging global market for telecommunications. As foreign ownership limits are lowered I suspect, we will be faced with a transborder merger requiring transborder remedies (such as divestiture in another country). I hope we will have the tools, such as positive comity and international cooperation agreements (such as an IAEAA agreement) to get this job done.
• Finally, in communications as in all other industries, the increasingly global nature of telecommunications markets has significant implications for merger review and will heighten the need for cooperation among competition authorities.

Conclusion

In conclusion, I believe that our gradual approach to liberalization, combined with our cooperation with the CRTC and understanding of technological changes in communications markets will allow the Bureau to face these challenges and others posed in the future.

Thank you for your attention. I look forward to what I am sure will be a lively and enlightening discussion.

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Endnotes

(1)1 These benefits can be measured in many billions of dollars. For example, in a 1997 study The Benefits of Competition in Long Distance Telephone Services, KPMG estimated that the annual net benefits to Canada for 1998 would be in the range of $6 to $6.5 billion.

(2)2This intervention activity has been undertaken pursuant to authority contained in section 125 of the Competition Act which empowers the Bureau to make representations and call evidence before federal boards, commissions or tribunals on matters related to competition Under section 126 of the Competition Act, the Competition Bureau can also intervene before provincial regulatory authorities at their request or with their consent. Prior to 1989 telecommunications undertakings in a number of provinces in Canada were regulated by Public Utility Boards and the Competition Bureau intervened before these Boards.

(3)3 Telecom Decision CRTC 94-19, Review of Regulatory Framework, September 19, 1994.

(4)4 Under the Telecommunications Act, the CRTC must forbear from regulation where it finds that competition is sufficient to protect the interests of users and forbearance would not unduly harm the development of a competitive market. The Bureau advocated, and the Commission accepted , an approach to competition analysis for the purposes of exercising regulatory forbearance similar to that set out in the Bureau’s Merger Enforcement Guidelines. See end note 3 above. Also see Telecom Decision CRTC 97-19, Forbearance of Toll Services Provided by Incumbent Telephone Companies, December 18, 1997.

(5)5 One issue on which the business community and their legal advisors are seeking guidance is the applicability of what is known as the ?regulated conduct defence.’ Jurisprudence under the Competition Act has established that business conduct which is undertaken pursuant to a valid scheme of regulation is deemed to be in the public interest and, therefore, beyond the application of the Competition Act.

(6)6 Prenotification is required where the combined assets in Canada or sales would exceed $400 or where the value of assets to be acquired or revenues from the acquired assets exceed $35 million.

(7)7 Section 97 of the Competition Act provides for a three-year period following substantial completion of the transaction during which the Director of Investigation and Research may bring the matter before the Competition Tribunal. In this respect a merger review must take into account what the competitive environment in a particular industry or market will look like within this three year window.

(8)8 Merger negotiations between Telus Corporation of Alberta and AT&T Canada Long Distance Services Company were broken off by the parties in April, 1998. This proposed merger heightened speculation over the future of the Stentor alliance. Globe and Mail Report on Business, Stentor alliance ?unraveling’, August 10, 1998, page B- 1. In June, 1998 MetroNet Communications Corp. acquired the telecommunications assets of Rogers Telecom Inc. InJuly, 1998 CallNet Enterprises Inc., the parent company of Sprint Canada acquired fONOROLA Inc. Bell Canada Enterprises (BCE) acquired full interest in ExpressVu, a licenced DTH service provider, and Telesat Canada. BCE is the parent of Bell Canada and has numerous other holding in the field of telecommunications technology and service companies.