The Role of the Competition Bureau in the Communications Marketplace

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

Third annual Wireless communications congress
Toronto, Ontario

October 27, 1997

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Note: Remarks presented by Mr. R. G. Lancop for the Director of Investigation and Research, Competition Bureau.

Introduction

I would like to begin this morning by expressing my appreciation to the Canadian Institute for this opportunity to discuss the role of the Competition Bureau and the Competition Act in a rapidly evolving communications environment as wireless and wireline technologies converge.

For those of you who are not familiar with me, my staff and I have been responsible for much of the Competition Bureau's intervention and enforcement work in the communications field over the last number of years - whether it has involved cable television, broadcasting or telecommunications.

As a competition advocate, I must say that it is a pleasure to see so many new wireless competitors and technologies, ready to challenge the incumbent cable and telephone companies in their own backyard. Your presence in the market is evidence that the federal government's and CRTC's initiatives for opening cable television and local telephone markets to competition are beginning to take fruit. Some of you have already begun to offer new choices for video, voice and data. Others will soon be doing so. What many people once thought improbable, if not impossible, only a few short years ago is now becoming a reality.

I wish you well in your discussions over the next couple of days and I hope my comments this morning will assist you in understanding the Competition Bureau's role in encouraging competitive communications markets.

My intention is to give you an overview of the Competition Act and to discuss the Bureau's role in encouraging the evolution of competitive communications markets. In addition, I would like to highlight for you the primary differences between regulation and framework competition law and the respective roles of the Competition Bureau and the CRTC as we move from regulation to competition.

Regulation Versus Framework Competition Law

Technological innovation is at the heart of the dramatic changes which are currently taking place in communications markets both domestically and abroad. Not only have these changes begun to affect our daily lives, they are also affecting the regulatory framework within which wireless and other communications firms operate. Indeed, competition is now overtaking regulation as the principal determinant of economic outcomes in communications market.

For the majority of this century regulation of the communications industry in Canada and elsewhere was predicated on the belief that telephony and broadcasting were natural monopolies and that regulation of every aspect of these businesses was essential to the achievement of public policy goals. It is now clear that monopolies are for the most part no longer required or even desirable. Communications networks have been profoundly altered by developments in fibre optics, microelectronics, compression technology, the rise of the Internet, the explosion in available spectrum bandwidth, and innovations in wireless and digital technologies. Indeed, we have begun using in our everyday vocabulary a whole new set of acronyms such as DBS, LMCS, MDS and PCS.

It is now possible for competing network technologies to co-exist and to offer consumers a variety of broadcasting and telecommunications services. As the number of potential competitive communications networks increase, an important public policy issue to be confronted is the timing and management of the transition from regulation to competitive markets. Increasingly the question is being asked: How and at what point should regulation of communications by the sector specific regulator give way to oversight by framework competition legislation? This question is being addressed in a variety of ways in other countries.

In the United States, the 1996 Telecommunications Act created specific roles for the Anti-Trust Division of the Department of Justice, the Federal Communications Commission, and the state regulators for the transition to competitive communications markets. Like the Canadian model, this legislation permits the regulator to forebear from regulations that are no longer considered necessary to ensure just and reasonable rates, protect consumers or protect the public interest.The FCC is also required to give "substantial weight" to the Department of Justice evaluation of certain competition issues, such as the timing of entry by the RBOC's into long distance telecommunications.

New Zealand, on the other hand, has adopted a so-called "flash cut" approach of moving directly from regulated monopoly to open markets and relying on the competition authority and the courts to resolve access and other antitrust issues. As you may know, this change in regulatory structure resulted in a case regarding interconnection access pricing between the incumbent, Telecom New Zealand, and a new entrant, Clear, which went all the way to the Privy Council in Great Britain for resolution.

The Australians have adopted a unique approach of creating a hybrid competition authority/industry regulator by creating an Access Regime at the Australian Consumer and Competition Commission. In July of this year, oversight over access to telecommunications networks was transferred from the regulator, Austel, to the competition authority. This is being accompanied by specific changes to Australian competition legislation which empowers the competition authority to impose remedies, not just in telecommunications but also in other network industries such as electricity.

In Canada, we have the CRTC as the industry specific regulator operating under the Broadcasting and Telecommunications Acts and the Competition Bureau operating under the Competition Act as the federal antitrust legislation of general application. Under the provisions of the Telecommunications Act the CRTC has a mandate to foster the development of competitive markets and has authority to forbear from regulation when markets are sufficiently competitive. Under the provisions of the Broadcasting Act the CRTC has a broad mandate to regulate all aspects of broadcasting including the power to control entry.

The Competition Bureau, Its Role and Mandate

The Competition Act is a framework law, which applies to all industries within the economy. The objective of the Act is to promote competition and the benefits to the economy which flow from competitive markets. The Act sets out what Parliament has defined as boundaries between acceptable and unacceptable business conduct.

The Director of Investigation and Research, as the head of the Competition Bureau, has responsibility for competition policy in Canada through the administration and enforcement of the Competition Act. This involves carrying out investigations under the Act and, where grounds exist, referring criminal matters to the Attorney General for prosecution before the courts or, in the case of the civil matters, applying to the Competition Tribunal for remedial orders. The Director is also empowered to intervene before regulatory boards to make representations with respect to competition and the Bureau is frequently called upon to provide policy advice to government on matters related to competition.

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 as we move through the transition from regulated monopolies to a world of multiple competitive networks.

The Purpose of Competition Law

Competition law is founded on the belief that competitive market forces should act as the engine of growth for our economy. Sectors of the economy in which competition is not the driver should be the exception, not the norm. In a mixed economy such as ours it is essential to constantly re-examine and re-assess the continuing need for, and the costs associated with, sector-specific regulation.

In creating the Competition Act, Parliament identified four purposes:

• to maintain and encourage competition in order to promote the efficiency and adaptability of the Canadian economy;
• to provide consumers with competitive prices and product choices;
• to expand the opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada; and
• to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy.

Competition has a number of clear advantages over regulation. First, it is superior in creating the economic incentives for innovation, the development of new products, services, and methods of doing business. Second, competition is more effective in minimizing the costs of bringing products and services to consumers. This is particularly true in communications where rapid technological innovation is creating an explosion of new products and services at increasingly lower prices. Third, market forces drive the prices of goods and services toward their relative costs of production and minimize the misallocation of resources. This in turn enhances economic efficiency, competitiveness and overall economic welfare.

In contrast to regulation, firms are subject to the provisions of the Competition Act only if they cross the line into unacceptable behaviour. Otherwise, they 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.

Administration and Enforcement

It is our experience that most business people want to comply with the law. Indeed, the Competition Bureau's objective is to obtain as high a degree of compliance with the Competition Act as possible. We have a number of tools available to assist us 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. The message which I want to convey on behalf of the Director is we will use all of the means available to obtain compliance with the Act. While we strongly encourage voluntary compliance, where resolutions are not possible or there is evidence of serious offences or a disregard for the law, we will not hesitate to prosecute with the full vigor the law provides.

The Bureau has access to investigative powers, including search and seizure and subpoena powers once authority has been granted by a judge. In cases involving the criminal provisions, the courts have the authority on conviction 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 civil 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 be dealt with as informally and expeditiously as possible. 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. These provisions however, 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.

As the Commission continues to regulate access to essential telecommunications and broadcasting distribution 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 communications 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 merger provisions of the Competition Act were crafted to facilitate, rather than inhibit, pro-competitive or neutral structural adjustment in the marketplace. The evaluative factors are broad enough to allow for a balancing of the pro- and anti-competitive effects of any proposed merger. The merger review provisions also 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 some cases, the efficiencies of a merger can be great enough to offset the negative effects of diminished competition.

The Bureau's experience with the deregulation of other industries such as the transportation sector, suggests that communications deregulation is soon likely to be accompanied by a degree of industry restructuring through mergers and acquisitions and the formation of strategic alliances. Moreover, global strategic alliances are becoming increasingly common as firms seek partners and new approaches to doing business in a rapidly changing environment. The Director will be carefully examining mergers and other transactions in this sector to determine if they prevent or lessen competition substantially without giving rise to offsetting efficiency gains. The Competition Tribunal has broad discretion to issue orders to overcome the effects of anti-competitive mergers or behaviour and to restore competition in markets. This includes 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 of consumer savings and discounts, performance and technical standards, and so-called "slamming" practices may carry over into local competition and will have to be addressed under the Competition Act should they raise an issue.

Finally, given the highly concentrated structure of Canada's communications markets, the Bureau must be alert to the possibility that competitors may resort to collusion in a deregulated environment to fix prices 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.

Competition Law Is Not a Substitute for Regulation

If there is one message I want to leave with you today, it is this: competition law is not a substitute for regulation. Competition in the marketplace - not the Competition Bureau, the Competition Tribunal or the courts - will replace the role of regulation. Unlike economic regulation, the competition law does not require prior approval of business conduct. Competition authorities do not regulate or approve levels of service, quality, prices or profits. In deregulated markets, these outcomes are determined by competitive market forces.

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, predictability, and "fair and sustainable" competition. Competition authorities, on the other hand, can live with so-called chaos. We have a preference for "effective" competition. We are less concerned about who wins and who loses. In general terms, our role is to ensure that the participants don't fix the game's outcome, buy up their opponents in an attempt to monopolize markets, or create artificial barriers to potential challengers. As long as everyone abides by the rules of the game, market forces will do the job of setting prices and output levels and determining the service offerings best suited to meet the demands of users.

Order and predictability are not the hallmarks of competitive markets. The competitive process is dynamic, innovative and uncertain. However, it is now accepted in most countries that competition and free markets, through the incentives and opportunities which they create, are the best means to maximize social and economic welfare and enhance a nation's international competitiveness.

The Competition Bureau and the Competition Act will safeguard the competitive process as deregulation proceeds. This role will increase as the transition proceeds but we will not attempt to micro-manage the communications industry or otherwise attempt to directly influence economic outcomes. Rather, the Bureau will apply the enforcement provisions of the Competition Act as necessary to address specific business conduct which raises issues under the provisions of the law.

The Competition Bureau and Communications Markets

As you know, the Government and the Commission are embarked upon the process of opening broadcasting and telecommunications markets to competition. Regulatory barriers to competition in a multitude of wireline and wireless communications services are being removed. This includes local and long distance telephony, multi-channel video broadcasting, and data transmission. For the first time Canadian consumers are beginning to see competition much of which is coming from the wireless firms represented in this room.

To date, we have not seen true "deregulation." To the contrary there arguably has been an increase in regulatory activity during the transition to competitive markets. However, this is not unexpected as the CRTC evolves from a regulator principally occupied with the business of approving rates or licenses to one primarily focused on issues associated with the terms and conditions of access. 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 when economic deregulation inevitably arrives.

The promotion of competition in communications markets has been a priority for the Bureau and we have participated in numerous competition related proceedings and have strongly advocated the adoption of competition principles in CRTC proceedings related to regulatory framework, convergence, the opening of local telephone markets and cable television markets to competition, and the forbearance of long distance telephony.

We believe that competition should be technologically neutral and that all firms - whether wireless or wireline - should have an equal opportunity to compete for the consumer's dollar and be treated equally whether it involves access to incumbent's networks or participating in the achievement of social policy goals. In addition, we have argued that minimal regulation be placed on new entrants since they do not possess market power.

With the substantial progress now achieved by the CRTC in opening markets to competition, the Competition Bureau is changing the focus of its communications resources away from interventions before regulatory boards toward greater emphasis on enforcement of the Competition Act. In fact, despite the limited scope for doing so, the Competition Bureau has already taken enforcement action in communications markets to address issues such as cable company access to support structures owned or controlled by telephone companies and anti-competitive behaviour with respect to Yellow Pages advertising.

We recognize that the process of regulatory reform is not finished and the Bureau where appropriate will continue to play a constructive role in regulatory proceedings. 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 Regulated Conduct Defence

Canadian competition law jurisprudence 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 defence." The law is less clear with respect to civil matters which has resulted in some uncertainty regarding the application of the Act. However, 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.

The Phases of Deregulation

I would now like to comment on the pattern of firm behaviour during the phases of deregulation. Many of the issues associated with opening up communications markets in Canada to competition are not unique. We have observed a similar pattern in the transition of other industries from regulation to competition. In the first phase, technological change or some other factor undermines the "natural monopoly" assumptions which gave rise to regulation in the first place.

In phase two, incumbents invariably attempt to defend their monopoly position against potential new competitors with warnings of the dire consequences competition will hold for employment, public safety and security, universal service, cultural sovereignty, or other public policy goal.

In the third phase, having unsuccessfully defended their monopoly position, incumbents invariably "get religion" and demand to be relieved of regulation and "freed to compete." This is frequently met with resistance from new entrants who ask for some form of asymmetrical regulatory protection from the incumbents. Or they will argue: "Now that we're in, close the door because the market can't support any more players." Also, these new entrants often allege predatory pricing and other anti-competitive activity on the part of the former monopolists.

New entrants frequently have difficulty accepting our opposition to proposals for "competitive handicapping" or a "managed transition to fair and sustainable competition" and some competitors find it tempting to lay a portion of blame on the Bureau for their commercial difficulties.

Phase four invariably brings the necessary regulatory reforms to facilitate the transition to competition. The success of this phase is contingent on changes to the regulator's mandate and the willingness of governments and regulators to cede their authority and allow vigorous competition to determine market outcomes.

Ultimately, the economic and technological forces pushing for change can't be stopped. But they can be hastened or impeded, channeled or diverted by the policy decisions that are made as we move through the cycle.

In making these observations, I should be clear that I am not attempting to minimize the very real competition issues that face the Canadian communications industry today. A network industry where competitors must interconnect, and may rely upon access to essential facilities controlled by the dominant firms with whom they compete, clearly has important issues to address. There is ample room for differences of opinion as to how such issues might be resolved in the complex and difficult balance between regulation and competition.

Nonetheless, the pattern I just described is real and the objective of competition and eliminating the burden of regulation is worth the effort because it will deliver the benefits of lower prices, increased choice, innovation, greater efficiency and increased competitiveness.

Conclusion

With the substantial progress which has now been achieved in opening communications markets to competition, the Bureau has reached the stage where the focus of its efforts will be shifting away from interventions before public bodies toward greater emphasis on enforcement of the Competition Act as circumstances warrant. Effective enforcement of the Act will need to establish the parameters of acceptable business practices while at the same time afford firms in the industry the flexibility necessary to operate and adjust to rapidly changing market conditions.

Where substantive issues arise under the provisions of the Act, the Bureau will 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 and shrinking government budgets, it is especially important for the Bureau to understand the changes which are taking place in communications, and their consequences for competition.

For this reason, it is essential to promote an open dialogue between industry participants and the Competition Bureau as the transition to competitive markets proceeds. Through this dialogue we hope to better understand the unique characteristics of your industry so that we may readily respond to your competitive concerns. At the same time, it is equally important for you to understand the fundamental differences between competition law and regulation and the respective roles of the Competition Bureau and the CRTC. We are not regulators and have neither the mandate nor the inclination to become involved in the day-to-day operations of firms or industries.

In other words, we do not micro-manage business behaviour. Competitive markets do this much more effectively than we could ever hope to do. Rather, the Competition Act exists to address serious anti-competitive behaviour and to ensure the formation of competitive markets for the benefits of all Canadians.

Thank you.