Competition Law and the Canadian Telecommunications Industry - New Directions

Notes for an Address by Gilles Ménard
Deputy Director of Investigation and Research
Civil Matters, Competition Act

To the Canadian Institute
1997 Canadian Resale/IXC Industry Congress
Toronto

February 17, 1997

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Thank you Don for your kind introduction. Some of you may not be aware that early in his career, Don was an officer in the Competition Bureau where he made a very substantial contribution to the Bureau's early work in advocating greater competition in Canadian telecommunications. I won't say exactly how many years ago that was, but certainly Don qualifies as a "pioneer" in the field of competition and regulatory reform of your industry.

Let me begin by expressing my appreciation to The Canadian Institute for the invitation to lead off the discussion this morning of some of the issues facing the long distance sector of the Canadian telecommunications industry. I will be spending most of the day with you and I encourage you to introduce yourselves and to feel free to approach me with any questions which you may have related to the activities of the Competition Bureau.

The brochure outlining the program for this conference posed the question: "How will the role of the Competition Bureau change in a competitive long distance environment and will it become the new regulator?" One of the panel discussions tomorrow morning will deal with the topic "Who should be the regulator - the CRTC vs. the Competition Bureau?"

My intention this morning is to provide you with an overview of the Competition Act and how the role of the Competition Bureau is evolving in response to the rapid change which has overtaken this industry in the last several years. At the risk of getting ahead of myself, I want to begin by offering some general comments on the interface between the Bureau and the CRTC.

First, despite their different mandates, the Competition Bureau and the CRTC share a common goal of fostering the growth of competitive communications markets. As such, I view our respective roles as complementary in facilitating the transition from monopoly and regulation to competition and deregulation.

Secondly, competition law is not a substitute for regulation. It will be competition in the marketplace, not the Competition Bureau, which will replace the role of regulation in determining pricing, profit levels and service offerings in telecommunications. While the role of the Competition Bureau and the Competition Act as a safeguard of the competitive process will increase as markets are deregulated, the administration and enforcement of the Competition Act will not attempt to micro manage the industry or predetermine economic outcomes as is the conventional role of regulation. The question, therefore, should not be "the Bureau vs. the CRTC", but rather "competition vs. regulation"?

Change and the Need to Adapt

The long distance decision in 1992 and the implementation of equal access in 1994 have facilitated the entry and expansion of facilities based carriers and resellers in the provision of long distance services. Competition has led to reductions in rates for long distance services and the introduction of new and innovative services, much to the benefit of consumers.

While regulatory barriers to competition in the long distance sector have been removed, this has not equated to "deregulation". In fact there has been an increase in regulatory activity in the short run. The introduction of competition has been accompanied by series of major regulatory initiatives including the Review of Regulatory Framework, the Split Rate Base and Price Caps, to mention just three. However, with the combination of these regulatory and market driven changes, together with the ongoing impact of technological innovation, we believe that there is "light at the end of the tunnel" in the transition from regulation to competitive markets.

A remarkable degree of consensus has been achieved that competition must be at the heart of telecommunications policy if the industry is to attract new investments, encourage innovation, speed the deployment of new technologies and make new services and applications available to consumers. Within a little over two years from the introduction of equal access, the Commission is now at the stage of determining whether competition in long distance services is sufficient to warrant deregulation of the services provided by the Stentor member companies.

Moreover, the potential for further competition from the development of wireless networks and from the cable industry is growing, not to mention the impact of the Internet on all sectors of the communications industry. Looking beyond the competition we already have in long distance services, reforms are underway to facilitate further competition in local telecommunications and in the distribution of broadcast services. Last Fall we saw the launch of Microcell's PCS service in Montreal and the first commercial deployment of MMDS wireless cable technology by SkyCable Inc. in Brandon, Manitoba. These developments demonstrate that the talk and promise of new technologies and competition are now being translated into action. As a competition policy official, I am tempted to say that "the fun is just beginning".

The Role of the Competition Bureau

The promotion of competition in Canadian telecommunications markets has been a priority for the Competition Bureau for over twenty years. During that period the Bureau's telecommunications resources have largely been devoted to interventions before industry regulators, including most notably the CRTC.

The Bureau has strenuously and consistently represented the benefits of competition in the provision of telecommunications services to industry regulators and in providing competition policy advice to the Government. As an advocate for competition, the Bureau has supported policy and legislative changes to promote privatization, competition, efficiency and deregulation not just in telecommunications, but in a number of key infrastructure industries.

In the recent past the Bureau has been at the forefront of advocating pro-competitive and more efficient alternatives for meeting the government's objectives for universal service in telecommunications and the cultural imperatives of the Broadcasting Act. The Bureau has also pointed out the potential benefits for competition in reducing foreign ownership restrictions. With the changes which technology has brought about and the implications of competition and globalization on all sectors of the communications industry, there is an increasing awareness of the need to reexamine existing policies and adopt new measures better suited to the realities of today's marketplace.

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

I recognize of course that the process of regulatory reform is not finished. The tasks of rationalizing the rate structure, opening local markets to competition and implementing the government's convergence policy have yet to be completed. The Bureau will continue to play a constructive role in regulatory and policy affairs related to competition. However, the greater challenge ahead for the Bureau will be to deal effectively with enforcement issues under the Competition Act which can have a significant impact on the success of deregulation and the development of competitive markets.

Increased Role of Competition Law

The exercise by the CRTC of its forbearance powers under the Telecommunications Act will place greater reliance on the Competition Act to safeguard competition in telecommunications. This is an issue of very real interest to the Bureau, as I am sure it is to those of you in the industry, and to users of telecommunications services.

As I indicated in my earlier comments, it is important to stress that competition law is fundamentally different in approach and application from regulation. Unlike the economic regulation to which the Canadian telecommunications industry has long been subject, 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 Competition Act is a general law of general application, which pertains equally to all industries within the economy. The Act sets out what Parliament has defined as boundaries between acceptable and unacceptable business conduct. The primary role of the Competition Bureau is that of an investigative agency. Cases under the Competition Act are adjudicated by the courts in the case of the criminal law provisions or the Competition Tribunal under the Act's civil provisions.

The Bureau's overall objective is to obtain as high a degree of compliance with the Competition Act as possible. The Bureau has a number of approaches for achieving this goal. These include the publication of Enforcement Guidelines to assist the business community in understanding the Act and their 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. The most significant part of the Bureau's work remains that of investigation and enforcement of the Act through the courts and the competition Tribunal.

The private sector can also play an effective role in ensuring compliance with the provisions of the Competition Act. One way in which they can do so is by insuring that management and employees of firms are familiar with the provisions of the Act, its potential application and consequences. The Bureau is prepared to cooperate wherever possible with the compliance initiatives of the private sector.

In this regard, we welcomed the creation and funding by a number of long distance firms of an ombudsman to deal with consumer issues in the marketing of long distance services. It is important to bear in mind that consumers as well as those of us in industry and government must adjust to the changing competitive environment for telecommunications services. We view innovative initiatives such as the ombudsman very positively, particularly to the extent that they serve to complement the work of the Bureau and effectively address the complaints and needs of consumers.

The substantive provisions of the Act relating to merger review and abuse of a dominant position provide grounds for the Competition Tribunal to impose orders where a merger or business conduct in question are likely to result in a "substantial" lessening or prevention of competition. Likewise, the criminal conspiracy provisions apply where an agreement or arrangement among competitors is found to result in an "undue" prevention or lessening of competition. There are also provisions in the Competition Act dealing with misleading advertising and deceptive marketing practices.

Subject to complying with the provisions of the Competition Act, firms are generally free to seek out market opportunities and conduct their affairs as they see fit. We strive to ensure that consumers derive the benefits which competition can deliver while maintaining an economic environment in which firms have the flexibility to exercise their entrepreneurial skills.

Regulatory Forbearance

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. The position which the Bureau has taken in the current CRTC proceeding relating to forbearance from regulation of the toll services of dominant carriers, is that a forbearance decision should consider the degree to which the incumbent telephone companies possess "market power" and assess that against the costs of continued regulation.

Regulation imposes direct administrative costs upon the government and the regulated parties. These costs are ultimately passed on to subscribers and to taxpayers. More importantly, however, regulation tends to inhibit competition by denying regulated firms the pricing and marketing flexibility needed to react to changing market conditions. Moreover, regulation can also discourage risk-taking and stifle the emergence of dynamic competition and innovation. 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.

The Bureau does not believe that it is necessary to find a complete absence of market power in order to conclude that there is "sufficient competition" to warrant forbearance from regulation. At some point short of perfect competition, the costs of continued regulation will exceed the costs of relying upon market forces. The success of regulatory forbearance will also depend in part upon the effectiveness of competition law as a deterrent to potential anti-competitive behavior.

The Application of the Competition Act

The jurisdiction of the CRTC under the Telecommunications Act and the application of the Competition Act is not always well understood. Jurisprudence in Canadian competition law has held that specific activity which is authorized or carried out pursuant to a valid scheme of regulation is deemed to be in the public interest. As such, the courts have concluded that such conduct cannot be found to be in violation of the provisions of the Competition Act. This doctrine has become known as the "regulated conduct defense".

It is important to bear in mind that regulated conduct is only a defence and not an exemption to the Competition Act. There is nothing in the Competition Act to preclude the Director from examining complaints of alleged anti-competitive conduct. Moreover, if there is evidence that complaints relate to conduct which is contrary to any of the substantive provisions of the Competition Act, the Director may initiate an inquiry, refer evidence to the Attorney General for prosecution under the Act's criminal provisions, or apply under the civil provisions for an order from the Competition Tribunal.

Where a particular matter goes forward to the courts or to the Competition Tribunal, it remains open to the accused companies or respondents, as the case may be, to attempt to rely on a regulated conduct defence. Moreover, recent jurisprudence established that a party whose conduct is under inquiry may challenge the Director's inquiry before the courts on grounds of regulated conduct.

Based upon the existing criminal law jurisprudence, a determination in any specific case of whether the regulated conduct defence might be available involves the consideration of a number of factors, including the following:

1. whether the relevant legislation is validly enacted;
2. whether the activity in question falls within the scope of the relevant legislation and has been specifically authorized;
3. whether the authority of the public body has been exercised;
4. whether the activity or conduct in question has frustrated the exercise of regulatory authority by the public body.

Ultimately, the courts and the Competition Tribunal must decide the full scope of the application of the Competition Act. There seems little doubt, however, that as the Commission exercises its authority to forbear from regulation, the Competition Act will be increasingly relied upon as a competitive safeguard and any remaining uncertainty which may exist over jurisdiction under the Competition Act to address competition issues will be reduced.

Enforcement of the Competition Act

Effective enforcement of the Competition Act in the telecommunications sector must establish the parameters of acceptable business practices while at the same time affording the industry the flexibility necessary to operate and adjust to changing market conditions.

The Competition Act contains substantive criminal and non-criminal provisions to deal with a broad range of anti-competitive conduct. This conduct includes agreements among competitors to lessen competition unduly, anti-competitive acts by firms which are in dominant market positions and mergers which prevent or lessen competition substantially. There are also provisions dealing with bid rigging, price maintenance, price discrimination, predatory pricing and misleading and deceptive marketing practices.

The Director has available a number of investigative powers, including search and seizure upon court order. In cases involving the criminal provisions, the Director refers evidence to the Attorney General of Canada who is responsible for taking appropriate action before the courts. On conviction, the courts have the authority under the Act to impose fines, imprisonment and prohibition orders. The criminal law enforcement operates on the basis of deterrence, not regulatory oversight. The Competition Act also allows private parties to sue for damages resulting from conduct that is contrary to the criminal provisions or failure to comply with an order of the Competition Tribunal or a court under the Act.

The criminal law provisions seek to punish firms by imposing fines and other penalties for past business conduct, which in most conspiracy and bid rigging cases is of a covert nature. The civil provisions, while they also deal with past conduct, provide greater scope for assessing and balancing complex economic questions related to efficiency and market power, and for implementing remedies to alter future conduct.

In matters involving the non-criminal provisions, the Director has the exclusive authority to apply to the Competition Tribunal for remedial orders. The Competition Tribunal Act requires that all proceedings before the Tribunal shall be dealt with as informally and expeditiously as the circumstances permit. The Tribunal's rules of practice and procedure provide for proceedings to be held in public and for the participation of interveners whose interests may be affected by proceedings before the Tribunal. The Tribunal has the broad discretion to issue orders to overcome the effects of anti-competitive behavior and to restore competition in markets, including the divestiture of assets or shares if the circumstances so warrant.

The abuse of dominance provisions of the Competition Act are applicable to a broad spectrum of anti-competitive practices. These include 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 limit 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.

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. Because strategic alliances can strengthen the position of firms in the Canadian market, their effect may be pro-competitive. Although they are not expressly referred to in the Competition Act, strategic alliances may be addressed under the criminal conspiracy provisions, the merger provisions or the abuse of dominance provisions where circumstances would warrant. The abuse of dominant position provisions can deal with concerns arising from both single firm dominance and joint dominance. However, in examining strategic alliances, the Bureau has no interest in unnecessarily forestalling arrangements which may have neutral or positive effects on competition and efficiency.

The civil provisions of the Competition Act provide a flexible and balanced approach for dealing with anti-competitive activity. For example, the abuse of dominance provisions require the Competition Tribunal to consider whether a practice which results in a "substantial lessening or prevention of competition" is the result of superior competitive performance. If such is the case, the Tribunal would not prohibit the practice in question. Similarly, the merger review procedures were crafted to facilitate, rather than inhibit, pro-competitive or neutral structural adjustment in the marketplace. Under the section, the Tribunal is required to consider whether the potential efficiency benefits of a merger offset the effect of substantially lessening or preventing competition, in which case it will not issue an order.

The evaluative factors used by the Bureau in assessing cases under the Act are broad enough to allow for a balancing of the pro- and anti-competitive effects of any proposed merger or form of business conduct. This includes the efficiency exception to allow mergers which would otherwise be prohibited because they substantially prevent or lessen competition. The efficiency exception recognizes that, in some cases, the efficiencies of a merger can be great enough to offset the negative effects of diminished competition.

Conclusion

The Telecommunications Act and the government's convergence policy signal a clear preference for competition as the driving force in the communications industry. No one, however, can predict with certainty where the forces of technology and competition will take the industry over the next few years.

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. Incentives will continue to exist for firms to engage in anti-competitive conduct. Dominant firms will continue to have incentives to constrain new forms of competition.

Where substantive issues arise under the provisions of the Act, the Bureau's objective is to deal with them in a timely, forceful and transparent manner. In this era of rapid and profound transformation, it is especially important for the Bureau to understand the changes which are taking place in telecommunications, and their consequences for competition.

We are committed to maintaining an open dialogue and to working with industry participants and users. Effective communication must be in both directions. As the long distance sector moves away from regulatory oversight by the CRTC toward greater reliance on competition, it is in the interests of firms in the industry to ensure that their management and employees understand the role of the Competition Act and its potential application to their activities. The consequences, financial and otherwise, of investigation and the costs in terms of a firm's management resources and reputation of a prosecution under the Competition Act can be substantial.

I hope that my remarks today have increased your understanding of the Competition Act and the role of the Competition Bureau in its administration and enforcement. As I mentioned earlier, the Bureau has a Program of Compliance under which we are prepared to consider proposed business activity and provide advisory opinions as to the potential for application of the CompetitionAct.

If your firm is embarking upon a new marketing program, considering a merger, or entering into a strategic alliance which you believe may raise competition issues in the context of our legislation, I would encourage you to communicate with the Bureau under the Program of Compliance. Likewise, if you observe business conduct which you believe raises an issue under the Act, please come forward with the relevant information so that we can consider it and take whatever steps may be appropriate. We want to understand the issues which you are facing and work toward achieving greater compliance with the Act to ensure the benefits which competitive markets can provide to consumers.

Thank you.