The Role of the Competition Bureau

Speech by Robert G. Lancop
Assistant Deputy Director of Investigation and Research
Civil Matters, Competition Bureau

Insight Conference Toronto, Ontario

June 12, 1997

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Introduction

Let me begin by expressing my appreciation to Insight for the invitation to discuss the role of the Competition Bureau in a converging communications environment.

My intention this morning is to give you an overview of the Competition Act and how the role of the Competition Bureau is evolving in response to the rapid transformation the communications industry is currently undergoing.

We believe it is important to promote a dialogue which will enable the Bureau to understand the concerns of the industry and how best to address them. By the same token, we think it is equally important for the industry to understand the differences between competition law and regulation and the respective roles of the Competition Bureau and the CRTC. As a result, I will begin my remarks by offering some general comments and observations regarding the differences between regulation and framework competition law and the interface between the Competition Bureau and the CRTC.

Regulation Versus Framework Competition Law

Technological innovation is at the heart of the changes which are taking place in telecommunications and broadcasting and the regulation and policy framework within which they operate. Regulation of the telecommunications industry was predicated on the belief that the provision of telephone service was a natural monopoly. It has become increasingly clear in recent years that this is no longer the case and that competition is overtaking regulation in determining economic outcomes in telecommunications.

Likewise, regulation of broadcasting was predicated on the scarcity of spectrum or bandwidth and the need to ration this capacity in accordance with public policy objectives. The explosion in available bandwidth and innovations in wireless technologies has both created opportunities for competition and undermined the rationale for regulation. As these industries undergo this fundamental transformation, an important public policy issue which has emerged is the timing and management of the transition from regulation to competitive markets and the application of framework competition law to existing and emerging markets.

The issue of reliance on telecommunications regulation versus 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. New Zealand has adopted what some call the "flash cut" approach of moving directly from monopoly and state control to 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 with respect to access as well as 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 as part of its purposes, 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 competition related proceedings.

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

Competition Law Not a Substitute for Regulation

It is also important to recognize, that competition law is not a substitute for regulation. Competition in the marketplace, not the Competition Bureau or the Tribunal, will replace the role of regulation. Unlike economic regulation, competition law does not require prior approval 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 we see in a traditional regulatory environment.

To use a sports analogy, regulators not only want to set the rules, they tend to referee the game so that all participants come out winners. Regulators also prefer order and predictability. Competition authorities, are less concerned about who wins and who loses but are concerned that players abide by the rules of the game. In general terms, our role is to ensure that the participants don't fix the game's outcome, buy up their opponents or create barriers to potential challengers. Market forces will do the rest: set prices, output levels and determine the service offerings best suited to meet market demands. Order and predictability are not the hallmarks of competitive markets. The competitive process is dynamic, innovative, uncertain and in many respects, "messy" compared to regulation. However, it is now almost universally accepted that competition, through the incentives and opportunities which it creates, is the best means to maximize social and economic welfare.

The Road to Deregulation

Regulatory barriers to competition in long distance, more recently in local telecommunications and in the distribution of broadcasting services have been, or are now being removed at an accelerating pace. To date, this has not equated to "deregulation." To the contrary there has been arguably an increase in regulatory activity in the short run. However, this is not unexpected. Indeed, we are currently witnessing an evolution in the role of the CRTC from a regulator principally occupied with the business of approving tariffs to one primarily focused on issues associated with access and terms of access to essential facilities. To the extent that it moves forward decisively in this endeavour, I would submit that it is pursuing the goal of a communications policy which will enable markets to operate more freely and allocate resources more efficiently.

In long distance, we are seeing "light at the end of the tunnel" in the transition from regulation to competition. Although its decision is pending, the Commission has 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 key objectives of the Telecommunications Act, greater reliance on market forces and less regulation. Looking ahead, 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.

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, particularly the CRTC. With the substantial progress which has now been achieved in opening telecommunications markets to competition, the Competition Bureau has now reached the stage where the focus of its telecommunications resources will be shifting away from interventions before regulatory boards toward greater emphasis on enforcement of the Competition Act.

We recognize of course that the process of regulatory reform is not finished and the Bureau will continue to play a constructive role in regulatory and policy matters related to competition. However, the greater challenge ahead for the Bureau will be to deal effectively with enforcement issues under the Competition Act. Indeed, the success of regulatory forbearance will depend, in part, upon the effectiveness of competition law as a deterrent to anti-competitive behaviour.

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.

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 criminal provisions of the Competition Act. This doctrine has become known as the "regulated conduct defense." The law is less clear with respect to civil matters which has resulted in some uncertainty regarding the application of the Act. 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 Act to address competition issues will be reduced.

Administration and Enforcement

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 or the Competition Tribunal under the Act's civil provisions.

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 of approaches for 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. The Bureau's work remains focused on investigations and the enforcement of the Act through the courts and the Competition Tribunal, although again the emphasis is on compliance and resolving anti-competitive issues.

The substantive provisions of the Act relating to merger review and abuse of a dominant position enable the Competition Tribunal to make orders where a merger or anti-competitive business conduct by a dominant firm or firms is 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. 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.

The Director has available a number of investigative powers, including search and seizure and subpoena powers once authority has been granted by a judge. 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 provisions attempt to achieve deterrence by punishing firms and individuals for anti-competitive activity, the most egregious of which tend to be covert, such as bid-rigging and conspiracy.

The civil provisions, which 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. 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.

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 intervenors 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 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 anti-competitive business practices by dominant market participants, and to mitigate the damaging effects of such practices on competition.

As the Commission continues to regulate 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 should be able to address remaining access issues such as those at issue in the Gemini and Interac cases which were resolved before the Competition Tribunal.

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 lessen competition substantially without giving rise to offsetting efficiency gains. As with the other civil provisions, the Tribunal has broad discretion to issue orders to overcome the effects of anti-competitive mergers or behaviour 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 oligopolistic structure of telecommunications markets, 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.

The civil provisions of the Competition Act provide a flexible and balanced approach for dealing with anti-competitive activity. Moreover, the merger review procedures were crafted to facilitate, rather than inhibit, pro-competitive or neutral structural adjustment in the marketplace. The evaluative factors under each are broad enough to allow for a balancing of the pro- and anti-competitive effects of any proposed merger or abuse of a dominant position. 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 provisions include an efficiency exception to allow mergers which would otherwise be prohibited because they substantially prevent or lessen competition. The efficiency exception recognizes that, in som e cases, the efficiencies of a merger can be great enough to offset the negative effects of diminished competition.

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 efforts will be shifting away from intervention and policy activity toward greater emphasis on enforcement of the Competition Act as circumstances warrant. Within the context of increasingly open markets, effective enforcement of the Competition Act in the telecommunications sector will need to 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.

Where substantive issues arise under the provisions of the Act, the Bureau's objective is to deal with them on a timely basis and in a manner which enables the market to maximize economic welfare and allocate resources most efficiently. 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 that the benefits which competitive markets can provide to your industry, to consumers, and to the Canadian economy as a whole are achieved.

Thank you.