The Changing Interface of Regulation and Competition Law In Canadian Telecommunications

Notes for Remarks By Gilles Ménard
Deputy Director of Investigation and Research
Competition Bureau

Angus Telemanangement Conference
Reinventing Canadian Telecom

Toronto, April 30, 1997

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Introduction

I would like begin by thanking Lis and Ian Angus for the invitation to participate in this important conference.

Veteran conference participants among you will be relieved to know that I do not intend to use my time today to provide a clause by clause overview of the Competition Act or a detailed discussion of the "four pillars of the regulated conduct defence." That is not to say that these topics are unimportant, but we have addressed them in some detail in previous conferences as well as elsewhere. Moreover, a dissertation on the regulated conduct defence just doesn't go well with desert and coffee. I will strive for at least a slightly more lively topic!

What I would like to do is provide the Bureau's views on the transition to competitive markets and the interface between regulation and 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 know it is to those of you in the industry. We also recognize that there is a certain degree of apprehension on the part of some members of the industry regarding the transition to competition and the capacity of the Bureau and the adequacy of the Competition Act to deal with competition issues in a forborne environment. I hope to address at least some of these concerns.

I also think that it is important to promote a dialogue which will assist the Bureau in understanding the concerns of the industry and how best to address them. By the same token, I think that it is equally important for the industry to understand the differences between competition law and regulation and the role of the Bureau. I hope that my remarks today will contribute to this dialogue.

Progress to Date

A little over ten years ago, an eternity in this industry, the CRTC denied CNCP's application for an interconnection agreement and the prospects for competition in long distance services in Canada seemed to be, at best, remote. However, in 1992 the Commission determined that facilities based competition in long distance services was in the public interest and launched the Canadian telecommunications industry into an unparalleled period of transformation and change.

While regulatory barriers to competition in the long distance sector were removed, this did not equate to "deregulation." To the contrary, and I might add to the financial benefit of many industry consultants and telecommunications lawyers, there was a significant increase in regulatory activity in the short run. As we are all learning, the next major phase of opening local markets to competition will be a potentially more significant and undoubtedly an even more complex task. The ultimate goal, however, must be to eliminate regulation wherever possible and allow competitive markets to operate freely.

In long distance, as well as some other sectors of the industry we are seeing "light at the end of the tunnel" in the transition from regulation to competitive markets. Although its decision is pending, the Commission has now completed its proceeding regarding forbearance from regulation of the toll services of the Stentor companies. Depending upon the outcome of the Commission's decision, it could be an important step toward one of the objectives of the Telecommunications Act, greater reliance on market forces and less regulation. And 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.

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 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. 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 exercise by the CRTC of its forbearance powers willplace 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.

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. To use a sports analogy, regulators 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 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.

Detailed Regulation or Framework Law?

In recognition of the fact that the Stentor companies provide a combination of monopoly and competitive services, are vertically integrated and control bottleneck facilities to which competitors require access, the Commission has adopted 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 has also adopted an imputation test or floor pricing standard to guard against "anti-competitive" pricing for long distance services.

As competition in long distance services has developed, deregulation implies not only reducing or eliminating traditional rate regulation. What must also be considered is the phasing out of competitive safeguards, such as the imputation test, which may have been appropriate at the outset of the transition, but may no longer be warranted in a competitive market or in light of other reforms such as price cap regulation for monopoly services.

The Commission faces the difficult task of administering the 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 checklists 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.

For their part, competitors who have entered the industry and expanded under the regulatory regime established by the Commission would clearly prefer to see the Commission continue detailed regulation, rather than rely on framework competition law. This was made very clear in the recently completed long distance forbearance proceeding.

In coming to this position, competitors have contrasted the per se rules adopted by the Commission to the substantive provisions of the Competition Act under which the Director can only apply to the Competition Tribunal where he has grounds to believe that a merger or business conduct are likely to result in a "substantial" prevention or lessening of competition. Comparisons have also been made between the level of resources available to the Bureau as opposed to the Commission to deal with complex issues in the telecommunications industry. Additional concerns have been raised with respect to the relative processes of the Commission verses the Competition Tribunal and the Courts and length of time required too affect appropriate remedies.

To be candid, these are extremely important and very legitimate questions to ask as the Commission continues to move forward with an agenda of opening telecommunications markets to competition and reducing or eliminating regulatory oversight. In fact, we are constantly asking similar questions of ourselves. What are the emerging competition issues? Will there be mergers or other forms of restructuring? Abuses of dominance related to access or other forms of market foreclosure? Predatory pricing? Is our legislation adequate to deal with potential issues? Do we have adequate staff and industry expertise? What advantages and disadvantages does the Bureau have relative to the Commission to deal with these issues?

The questions of course are easy. As usual, its the answers which are not so straight forward! While I have no doubt that most reasonable people could disagree on the answers to most of these questions, I would nevertheless like to provide some comments on behalf of the Bureau in regard to the question of forbearance and competitive safeguards.

The first point which I want to make is that the issue of telecommunications regulation verses anti-trust law is not unique to Canada. In the United States, the Department of Justice Anti-trust Division and the Federal Trade Commission coexist with the Federal Communications Commission and state regulators. Clearly the action of the DOJ in the AT&T case was a pivotal event in bringing about telecommunications competition in the United States. New Zealand has adopted what some call the "flash cut" approach of abolishing the industry regulator in favour of open markets and reliance on the competition authority and the courts to resolve access and other issues.

The Australians are currently in the process of adopting 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 are being transferred to the competition authority. This is being accompanied by specific changes to Australian competition law in 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 which has a mandate to foster the 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.

Although there may be some uncertainty regarding 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, the regulatory framework has proved to be conducive to the creation of competitive telecommunications markets. There are, of course, some very difficult and obviously sensitive issues which are going to have to be resolved in respect to the interface of broadcasting and telecommunications regulation in a converged environment. However, that in itself is an issue for another speech, on another day!

A second point which I would like to make is that the Bureau has never advocated the "flash cut to competition" approach. For example, in the Regulatory Framework proceeding in 1993, we took the position that, in the absence of equal access and insufficient evidence of competition it was premature to deregulate the long distance services of the Stentor companies. The Bureau has consistently maintained that the Commission should continue to focus its regulatory activities on ensuring access to essential network facilities.

For example, in our most recent submission to the Commission on regulatory forbearance, we recommended that the Commission continue to regulate access to the Stentor companies transmission facilities and resale and sharing of their services for a period of two more years. This will provide competitors with a known time frame in which to install alternative facilities and reinforce the incentives for them to do so. This will further facilitate early forbearance from regulation Stentor's long distance services.

As a third point, I think that it is fair to say that the Bureau and certain market participants have a very different view of what competition issues are likely to arise in a forborne market environment. On one hand, competitive long distance carriers and the cable industry continue to hold long standing concerns regarding the potential for cross-subsidy and what they refer to as "anti-competitive pricing." This is the basis for much of their argument about the need for continued regulation.

On the other hand, the Bureau's view is that there is limited potential for "predatory pricing" within the meaning of the Competition Act to occur. 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 suppliers to customers. Our concern is that regulatory measures not be based on a disproportionate concern about predatory pricing. There is a risk that regulatory safeguards in this area could have the perverse result of chilling otherwise legitimate price competition.

As the Commission continues regulation with respect to interconnection access to essential facilities, we do not anticipate the Bureau will be required in the near term to deal with significant issues of abuses of dominance related to access. The experience in telecommunications suggests that the technical and economic issues related to timely access and interconnection to essential facilities requires ongoing regulatory supervision. Of course as alternative facilities are constructed and markets develop, the Commission will be able to reduce its regulatory oversight and allow firms to operate subject to the application of the provisions of the Competition Act. The Competition Act will be able to address remaining access issues as evidenced by the Gemini and Interaccases which were resolved before the Competition Tribunal.

It should 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 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.

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 Director will be carefully examining mergers or other transactions to determine if they prevent or lessens 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.

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.

Finally, given the structure of the market as an oligopoly, the fact that long distance minutes are something of 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.

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.

The Bureau's overall objective is to obtain as high a degree of compliance with the Competition Act as possible. We have 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 primary focus of the Bureau's work centers on investigation and enforcement of the Act through the courts and the Competition Tribunal, coupled with a vigorous compliance program. 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.

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. We want to understand the issues you are facing. We want to work with industry participants and users to achieve greater compliance with the Act to ensure the benefits which competitive markets can provide to your industry, to consumers, and to the Canadian economy as a whole.

Thank you.