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The Future Role of the Competition Bureau in the Telecom Sector

The 4th Annual Canadian Telecommunications Forum
October 30, 2006 – Ottawa, Ontario
Richard Taylor
Deputy Commissioner of Competition
Civil Matters Branch

(r-taylor-telecom-speech-2006-10-30-e.pdf (PDF: 19KB))

Overview

Update on Bureau's work since the Telecommunications Policy Review Panel (TPRP) Report including:
- CRTC/Bureau Working Group
- Bureau's Telecom Abuse Bulletin
- Future areas for the Bureau in telecom

TPRP Report Recommendations

The TPRP Report made 127 recommendations to the government.
The Bureau supports the central theme of the TPRP's recommendations, which is to place greater reliance on market forces.
The TPRP included recommendations on institutional reform and improving relationships.
- A catalyst for the formation of CRTC/Bureau working group.

CRTC / Bureau Working Group

Working Group's formation was announced by Chair of the CRTC in June 2006.
Broad Goals:
- to allow each organization to benefit from the other's expertise in areas of joint interest in the telecom sector;
- to develop better lines of communications between the two organizations.
Areas of Work:
- CRTC/Bureau Staff Interchange Program.
- Development of the Bureau's "Draft Bulletin on the Abuse of Dominance
- Provisions as applied to the Telecommunications Industry"(TAB).
Draft Telecom Abuse Bulletin:
- Describes the Bureau's approach to enforcing the abuse provisions as they may apply in the telecom sector.
- The Bureau is the author and is responsible for the Bulletin.
  - CRTC staff assisted with the document, but their input was not made on behalf of CRTC Commissioners and in no way binds the CRTC.

The Telecom Abuse Bulletin

This Bulletin is consistent with the enforcement approach outlined in the Bureau's Enforcement Guidelines on the Abuse of Dominance Provisions.
Bulletin was drafted in anticipation of an increased number of complaints in the sector as further forbearance is granted by the CRTC.
Three Part Test for Abuse of Dominance:
- The firm is dominant in a properly defined product and geographic market.
- The firm has engaged in a practice of anti-competitive act(s) that are intended to be exclusionary, predatory or disciplinary towards a competitor.
- The effect of the act(s) is or is likely to substantially lessen or prevent competition in that market.
Dominance = Market Power
- Market power is defined as the ability to impose a small but significant non-transitory increase in price (SSNIP) without fear of competitive reaction.
Is the Firm Dominant?
- Three steps: define product market, define geographic markets and assessment ability to exercise market power.
- Defining product and geographic markets:
  - Product market definition requires identifying all close substitutes for the product in question to which buyers would switch in the event of a SSNIP.
  - The relevant geographic market is the smallest region within which buyers are able to switch to alternative providers of the product in the event of a SSNIP.
Geographic Market:
- For many telecom services, the provision of service is tied to a specific location.
- To simplify analysis, where appropriate the Bureau will aggregate all locations where consumers face the same competitive alternatives.
- "Holes" may exist where there is only one supplier. These may be treated as separate markets.
Indicators used to assess market power:
- Market shares:
  - high market share is usually necessary, but not sufficient, to establish market power.
- Barriers to entry:
  - economies of scale; sunk costs; regulatory barriers; long-term contracts; market maturity; reputation of incumbents.
- Other market characteristics:
  - the extent of countervailing power; technological change and innovation.
Capacity to supply, where available, will be an important measure of market power.
Anti-competitive Acts
- S. 78 of the Competition Act sets out non-exhaustive list of acts.
- Three classes – exclusionary, predatory or disciplinary
- TAB addresses a number of common areas of complaint in the telecom sector:
  - Margin squeezing, predatory pricing, targeted pricing, bundling and denial of access of facilities.
Margin Squeezing
- S.78 "squeezing by a vertically integrated supplier, of the margin available to an unintegrated customer who competes with the supplier, for the purpose of impeding or preventing the customer's entry into, or expansion, in, a market."
- Margin erosion is not sufficient to establish that a dominant firm has engaged in margin squeezing.
- The Bureau will examine the underlying purpose of the alleged squeeze:
  - Its it a business practice that would be justified in other competitive markets?
Sequential approach to assessing predation complaints:
- Is price below the complainant's avoidable costs?
- Is the price below the alleged predator's avoidable costs?
- Is there opportunity for recoupment should the predation strategy succeed?
  - Requires assessment of entry barriers (notably the sunk costs of entrants).
Targeted Pricing:
- Offering certain customers better prices than those offered to other customers.
- Challenge: establish objective criteria to distinguish between truly competitive conduct (and resulting lower prices) from actions designed to induce exit and/or hinder entry of competitors.
  - Preventing targeting could chill price competition.
- The cost-revenue tests described for predation provides an objective starting point.
  - Should the targeted price exceed avoidable costs, to proceed with a case, the Bureau will require clear evidence that the targeted firm's network will not be used to provide a competing service.
Bundling:
- Generally bundling raises enforcement issues only in limited circumstances.
- Bundling could raise issues if used as means to:
  - Raise rivals' costs: may meet the competition law definition of tied selling that impedes entry or expansion of firms offering some or all of the bundled services.
  - Predate: when a firm offers below avoidable cost pricing for the bundle of products.
Denial of access to a facility:
- A firm is dominant in two markets: the upstream market (or wholesale market) for the facility and the downstream market (or retail market) in which the facility is an input.
- Dominance in the upstream market requires that competitors cannot practically or feasibly duplicate the facility in question.
- The dominant firm has denied access to the facility for the purpose of excluding competitors from entering or expanding in the downstream market.
- The denial has had, is having or is likely to have the effect of substantially lessening or preventing competition in the downstream market.
In such circumstances, the Bureau would seek an order before the Tribunal.
Substantial lessening of prevention of competition:
- Focus at this stage is on the impact of anti-competitive practices on competition, not on competitors.
- The Bureau uses a "but for" test:
  - "but for" the practice in question, would there be substantially greater competition in the relevant market, in the past, present, or future?
Not necessary to show that the prevailing level of competition is sufficient, only that the market would be substantially more competitive in the absence of the impugned practice (e.g., lower prices, better service, more choice).

Future Work for the Bureau in Telecom

Finalize TAB:
- Deadline for comments on Draft TAB is December 29, 2006.
- Finalize in early 2007.
Commissioner has announced that telecom is one of the Bureau's main priorities for the coming year.
- Bureau has formed an Industry Sector Team to proactively develop industry knowledge and contacts, seek advocacy opportunities, and assist in enforcement, interventions and policy matters.
CRTC related initiatives:
- Monitoring CRTC Public Notices to determine whether to intervene on matters.
  - We will intervene when we can contribute positively on the issues.
We will continue to explore new areas where we can benefit from CRTC's expertise.