Competitive Safeguards: The Role of the Competition Bureau In The Evolving Telecom Market

Notes for an Address by Robert Lancop
Assistant Deputy Director of Investigation and Research
Civil Matters Branch, Competition Bureau

Insight Conferences and Report on Business Conference
Regulating International Telecommunications
Toronto, Ontario

November 5, 1997

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

Introduction

Let me begin by expressing my appreciation to Insight for the invitation to discuss the role of the Competition Act as a competitive safeguard in a Canadian communications environment which is undergoing a profound transition away from regulation toward greater reliance on competition and market forces.

Every time I give one of these presentations I feel a bit like a member of the local constabulary who has been invited to attend the annual picnic of the Loyal Order of the Buffalo. Those in attendance are not really sure they're happy a law enforcement official was invited, particularly when talk turns to what they've been up to over the last little while. Well let me assure everyone, I'm just hear to give my remarks, maybe answer a couple of questions and if we have time argue a little with Richard here.

The theme of this conference is Regulating International Telecommunications. My intention today is to give you an overview of the Competition Act and its role as a competitive safeguard in the rapidly changing world of telecommunications. I would like to begin, however, with a few comments on the World Trade Organization agreement under which Canada has agreed to eliminate Teleglobe's monopoly on international (overseas) telephony and the CRTC's current proceeding to establish a new regulatory framework for international telecommunications.

WTO Agreement

Pursuant to the WTO agreement on basic telecommunications concluded in February of this year, Teleglobe Canada's monopoly on overseas telecommunications traffic will end on October 1, 1998. It will surprise no one that the Competition Bureau supports this decision. In 1995, we participated in the Governments review of Teleglobe's monopoly mandate recommending that Teleglobe's monopoly be eliminated and that traffic routing or "bypass" restrictions and special ownership rules pertaining to Teleglobe be phased out. The WTO agreement encompasses all of these elements.

In order to facilitate the transition to competition in international telecommunications, the CRTC has initiated a public proceeding to address issues related to a licensing regime, interconnection, settlements, resale, the use of facilities and contribution. The Bureau has filed a notice to participate in this proceeding. We will be reviewing the proposals to be filed with the Commission later this month in order to provide comments to the Commission on the implications for competition of formulating a new regulatory framework for international telecommunications.

Regulation Versus Framework Competition Law

Before discussing the role of the Competition Act as a competitive safeguard, I would like to highlight the differences between regulation and framework competition law and briefly explain the respective roles of the Competition Bureau and the CRTC.

Historically, regulation of the telecommunications industry was predicated on the belief that the provision of telephony was a natural monopoly. It has become increasingly clear in recent years that this is no longer the case and that competition should replace regulation as the best means of determining product and service offerings and price. An important public policy issue which has emerged is the timing and management of the transition from regulated 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 and it is being addressed in a variety of different ways in other countries. 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 a so-called "flash cut" approach of moving directly from monopoly to open markets and relying on the competition authority and the courts to resolve access and other issues. In July of this year, the Australians created a hybrid competition authority/industry regulator by transferring to the competition authority, key functions of the Telecom regulator, Austel, relating to access.

In Canada, the CRTC, as the industry specific regulator under the Telecommunications Act, has a mandate to foster the development of competitive markets and the authority to forbear from regulation where markets are sufficiently competitive. 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 is not a Substitute for Regulation

If there is one message I would like to leave with you today, it is this: competition law is not a substitute for regulation. Competition in the marketplace, not the Competition Bureau or the Competition 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.

The Competition Act will increasingly act as a safeguard of the competitive process as markets are deregulated. However, the Competition Bureau will not attempt to micro manage the industry or predetermine economic outcomes as we see in a traditional regulatory environment. 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.

Order and predictability are not the hallmarks of competitive markets. The competitive process is dynamic, innovative and uncertain. However, it is now almost universally accepted that competition, through the incentives and opportunities it creates, is the best means to maximize social and economic welfare and international competitiveness.

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 Bureaus 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 large part, upon the effectiveness of competition law as a deterrent to anti competitive behaviour.

Regulated Conduct Defense

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 unless it has involved an attempt to thwart the scheme of regulation. 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 by the Competition Tribunal under the Acts civil provisions.

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 the era of a global economy, there is an increasing international dimension to anti-trust enforcement. Trade liberalization can alter the definition of relevant markets and business activity and transactions which occur in one country can potentially impact on competition in other countries. This issue is all the more important for a country like Canada which has a heavy reliance on international trade. This phenomenon has created new challenges for competition authorities and increased the need for greater international cooperation to address these issues.

The Bureau has a number of avenues open to it to facilitate such cooperation. For example, Canada has agreed to cooperate with other OECD member countries on anti-competitive practices affecting international trade. In addition, the Bureau has entered into a bilateral agreement with the U.S. to facilitate cooperation and coordination in the application of competition and deceptive marketing practices law. A similar bilateral agreement will soon be finalized with the European Commission. In addition, the Mutual Legal Assistance Treaty in criminal matters between Canada and the U.S. provides a mechanism to request the use of compulsory powers by the U.S. authorities on the Bureaus behalf. Finally, Chapter 15 of the North American Free Trade Agreement includes competition law obligations and provides a formal communications channel to address trade and competition issues.

I would now like to talk about some of the key provisions of the Competition Act. 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 Tribunals 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.

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.

As I mentioned there is an increasing international dimension to anti-trust enforcement. In a recent case which resulted in the Competition Tribunal issuing an order prohibiting A. C. Nielsen from entering into exclusive contracts for the purchase of scanner data, similar litigation was brought in Europe and the United States. During the course of the investigation which led to the Directors application to the Tribunal, the Bureau communicated with our counterparts in the United States and elsewhere to improve our understanding of the issues.

In a criminal case concluded earlier this year, $3.5 million in fines were imposed in Canada against American and Japanese companies which had engaged in a conspiracy to fix the price of thermal fax paper. In this case an extensive investigation in Canada and abroad was undertaken in cooperation with the U. S. Department of Justice, Antitrust Division. Finally, a number of recent investigations of misleading advertising have involved communications from firms in foreign jurisdictions.

Encouraging Compliance

It is our experience that most business people want to comply with the law. Indeed, the Competition Bureaus overall objective is to obtain as high a degree of compliance with the Competition Act as possible. The Bureau has a number tools available to it to 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 Bureaus 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 Competition Bureau is that we will use all of the means available to obtain compliance with the Act. While we strongly encourage voluntary compliance, where alternatives resolutions are unattainable or evidence indicates conduct by firms involving serious offenses or disregard for the Act, we will not hesitate to prosecute with the full vigor that the legislation provides.

Emerging Competition Issues in Telecommunications

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 Bureaus experience with the deregulation of other sectors such as transportation, 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.

Given the oligopolistic structure of telecommunications markets and the fact that services are increasingly being viewed as 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 de-tariffed 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.

Legislative Amendments

To keep abreast of a changing economy, the Director of Investigation and Research recently established a permanent Amendments Unit to make sure the provisions of the Competition Act remain relevant. To that end, it is expected that the Government will reintroduce later this fall a Bill to modify the Competition Act . The proposed Bill will deal with the merger notification process, the provision of a non-criminal adjudicative mechanism with appropriate remedies to deal with misleading advertising and deceptive marketing practices, broader authority to make prohibitive orders and new sanctions against deceptive telemarketing.

Conclusion

With the progress which has been achieved in opening telecommunications markets to competition, the Bureau has reached the stage where the focus of its efforts will be shifting away from regulatory interventions 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 conduct while at the same time affording the industry the flexibility necessary to operate and adjust to changing market conditions.

Thank you.