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Regulation and Competition Law in Telecommunications and Other Network Industries

Abstract and Keywords

This article examines how regulation and competition law have been deployed to control the firms operating in the telecommunications sector, and how, in particular, regulation has been designed, particularly in the European Union, in such a way that it can be withdrawn in favour of the more widespread application of competition law. Examples are electricity generation, sewage treatment, long distance telecommunications services, and retailing. The question arises as to when traditional price regulation can give way to reliance on competition law. The trend in many countries, and especially in telecommunications in Europe, has been to move to ‘deregulate’ in this way. This article examines how such decisions are made and how well competition law works in such contexts.

Keywords: regulation, competition law, telecommunications sector, European Union, price regulation

20.1 Introduction

Almost all economic activity is subject to the application of competition rules but certain sectors are singled out for the application of specific regulatory regimes. In some cases, for example financial services, the motive for regulation may be consumer protection or the maintenance of macro‐economic stability. In the case of another group, sometimes referred to as ‘utilities’ or ‘network industries’, the motives are the control of market power and the equity‐based goal of ensuring that all households receive a basic level of a service which is considered essential to existence. (p. 501)

The regulation of network industries thus involves the pursuit of both economic and social objectives. In sectors such as communications (posts and telecommunications), energy, transport, and water, it often involves the imposition of price control obligations and obligations to supply. Where the relevant activity, for example, an energy local distribution network, is clearly a monopoly, such specific regulation is probably unavoidable. However, network industries typically have elements in their value chain where competition is quite feasible—including both retailing to end users, which basically comprises marketing and billing, and other more capital‐intensive ‘upstream’ activities, such as electricity generation or collecting and sorting post. This means that in many sectors, which started as across‐the‐board statutory monopolies, the competitive elements gain ground over time, thereby reducing the need for regulation which typically operates ex ante, imposing specific restrictions on firms' conduct in advance, and relying increasingly on competition law, which typically operates ex post, penalising infractions when they have occurred.

This raises the issue of how strategically to manage this process of deregulation. In the course of such deregulation, it may be appropriate to apply regulation and competition law in tandem, regulating monopoly elements and dealing with the growing competitive elements under competition law. This immediately raises the issues of scope, complementarity, and the extent of overlap of the two approaches.

These issues are particularly acute in the telecommunications sector, where the limits to competition are particularly uncertain due to the impact of technology. Accordingly, this chapter examines how regulation and competition law have been deployed to control the firms operating in the sector, and how, in particular, regulation has been designed, particularly in the European Union, in such a way that it can be withdrawn in favour of the more widespread application of competition law.

Section 20.2 describes the features of the telecommunications sector and its traditional means of regulation. Section 20.3 illustrates the application of a deregulatory strategy, used in the European Union. Section 20.4 shows how competition law can be used in parallel with or in succession to regulation; Section 20.5 notes how similar issues arise in other network industries, and Section 20.6 summarises the lessons of these experiences.

20.2 Traditional Telecommunications Regulation

20.2.1 Why regulate?

Until the 1980s, there was often unthinking acceptance that telecommunications services required regulation because they were based on a natural monopoly (p. 502) infrastructure. This meant that there was room for one network only. The North American model for dealing with this supposed attribute (as with similar more convincingly identified problems in energy, transport, and water) was via regulation of investor‐owned enterprises, usually on a cost‐plus (rate of return) basis (Brock, 2002). The ‘European’ model, widely followed elsewhere, rested upon public ownership, with services delivered through a government department or a company wholly owned by the government in question. It is also possible subsequently to detect a recent ‘Asian’ model, resting on thorough‐going government intervention (Ure, 2008).

In the absence of competition, a range of regulatory objectives could be delivered relating to the availability of services and to the terms and conditions of their supply. There was also no difficulty in principle in ensuring that the industry covered its costs: the monopoly firm could simply raise prices to do so. The US model of rate of return or cost‐plus regulation—setting prices to ensure cost recovery—had precisely this objective and effect.

However, the introduction of competition into many parts of the industry, accompanied by the privatisation process in Europe, compelled the need for a more rigorous analysis of potential market failures and led to a regulatory response which has been based on a clearer articulation of the objectives and instruments of regulation, which can be seen as addressing two types of problems:

  1. 1. Market failure, associated with high levels of monopolisation deriving from:1 economies of scale (unit costs falling as output increases); economies of density (associated particularly with the local copper access network, which connects customers' premises to the exchange); economies of scope (when two services, such as voice calls and broadband, or telecommunications and broadcasting, are provided more cheaply over a single network); demand‐side network externalities (where customers derive greater benefits from belonging to a network with more, rather than fewer members).

  2. 2. Non‐economic objectives, notably universal service, ensuring that service is available everywhere at a uniform price, redistributive objectives, designed to protect, for example, low income households or people with disabilities, and political inclusion. The alternative to these outcomes in the digital age is often captured by the phrase ‘the digital divide’.

Turning first to market failures due to monopolisation, it has proved difficult to replicate the fixed access network, except in areas where there are cable TV networks which can be upgraded also to provide voice and broadband services. Clearly, the development of wireless networks, which now have many more subscribers than fixed networks, is the most important feature of the last twenty years, but calls on mobile networks are not considered to compete directly with (‘fall within the same product market as’) calls on fixed networks.

However, other forms of telecommunications activities are capable of being replicated. Experience suggests that retailing, or reselling the incumbent's products, (p. 503) is effectively competitive; activities such as backhaul from local to main exchanges, and the high capacity transport among such main exchanges (making up the ‘core network’) are all widely replicated.

It follows from this that, as competition develops, entrants may progressively install some capacity, but will rely on the fixed incumbent to supply the rest. Thus, they may start from retailing, that is, reselling the fixed incumbent's services, progress via the installation of a core network connecting a small number of trunk switches, and later extend into backhaul and the replication of the incumbent's local exchange assets. A similar progression may occur in the supply of fixed broadband services: a competitor may move through several intermediate steps, from acting as a reseller of the incumbent's product, to relying on the incumbent only to lease the connection from the local exchange to the customer's premises (known as an ‘unbundled local loop’). This progression is known as ‘the ladder of investment’, and many regulators have encouraged competitors to move up that ladder (Cave, 2006a).

In these circumstances, the terms upon which competitors' access to the incumbent's facilities are based become the key instruments of regulation, replacing the control of retail prices as the major regulatory intervention. In fixed networks, this so‐called one‐way access is asymmetric: competitors need access to the incumbent's facilities, but not vice‐versa. This can be distinguished from the kind of two‐way access observed in roughly symmetric mobile networks, where each operator uses the other operator's termination facilities, but remains otherwise independent.2

Economies of scope play an increasing role in telecommunications as a result of technological developments, especially digitisation or the transport of information in digital form. Whereas broadcasting, voice telecommunications, and computer‐based data networks used to exist in separate service silos, they have now ‘converged’ technologically so that the relevant information or ‘bits’ underlying each service is carried indistinguishably. Thus, modern cable networks offer the ‘triple play’ of voice, broadband, and broadcast services. Existing copper‐based telecommunications networks now provide the same service range, provided they have been upgraded to have the capacity to convey video services. This is the same for fibre‐based ‘next generation’ networks described below. Increasingly, wireless networks, whether they be static, mobile, or nomadic, can offer similar combinations of service. As a result, markets are being broadened, creating the scope both for new competitive opportunities and for new practices such as the bundling of services by dominant operators in ways which may limit or distort competition.

The final possible source of market failure noted above arises from the demand‐side network effects associated with electronic communications networks. The number of potential interchanges between network members grows with the square of their number.3 Clearly, without the interconnection of networks, there would be a tendency either for customers to ‘multi‐home’, namely, to subscribe to (p. 504) many networks (which would be expensive) or for one network (the largest) to drive all others out. However, this danger can be averted, and the benefits of ‘any‐to‐any connectivity’ can be gained, by mandating interconnection.4

The non‐economic objectives of regulation noted above require a different approach (Wellenius, 2008).5 In essence, policy makers have imposed on regulators the pursuit of policy objectives which go beyond the avoidance of market failure and the replication, through regulation, of the outcome of a competitive market process. When telecommunications was a monopoly, non‐economic objectives could be pursued by cross‐subsidy, for example, by charging the same prices in low-cost and high-cost areas. However, when competition is present, no operator will want to serve high‐cost customers if they are only permitted to charge an average price. All operators will seek to ‘cherry‐pick’ low-cost areas. The resulting stresses created, and the ways to overcome them, are discussed below.

20.2.2 The sequence of regulatory reforms

Chronologically, three stages of market structure can be distinguished, characterised as ‘monopoly’, ‘transition’, and ‘normalisation’ (see Table 20.1). The first is self‐explanatory. The last is a stage where most markets, apart from a limited number of bottlenecks, have been successfully opened up to competition. Transition is the rather elastic period between monopoly and normalisation. As the account which follows makes clear, the third stage has proved elusive to date, but it remains a useful target for the design of transitional regulation.

The first key structural break occurs when entry into fixed networks and services is liberalised. This has taken place at various dates over the past 20–30 years in most countries.6 It should be pointed out that apparent liberalisation of entry can be deceptive, especially if the government or regulatory authority is seeking to maintain barriers to entry by imposing unnecessarily onerous licensing obligations.

As far as behavioural regulation is concerned, three instruments are usually required in the transitional stage, as shown in Table 20.1:

  1. 1. Control of retail prices is necessary where the dominant firm exercises market power at the retail level, since in the absence of retail price control, customers will be significantly disadvantaged. However, as competition develops at the retail level, possibly from firms relying largely on infrastructure belonging to the incumbent, the necessity for retail price controls in effectively competitive markets may disappear, although access price control may still be necessary.

  2. 2. In order to maintain any‐to‐any connectivity in the presence of competitive networks, operators require interconnection to one another's networks in order to complete their customers' calls. This requires the operation of a system of inter‐operator wholesale or network access prices noted above. Especially in the early stages of competition, entrants will require significant access to the (p. 505) dominant incumbent's network, and this relationship will almost inevitably necessitate regulatory intervention. However, as infrastructure is duplicated, the need for direct price regulation of certain network assets diminishes.

    Table 20.1 Stages of regulation

    Monopoly

    Transition

    Normalisation

    Retail price control

    Price controls on all services

    Relaxation of controls

    No controls

    Access pricing

    Not relevant, or arbitrary pricing of small range of services

    Introduction of cost‐based prices for disaggregated services; other prices deregulated

    Controls limited to some local access and call termination

    Universal service obligations

    Borne by incumbent

    Costed and shared (or ignored if not material)

    As in ‘transition’, with the possibility of a contest to be the universal supplier

  3. 3. Governments have typically imposed a universal service obligation (USO) on the historic telecommunications operator, based upon two requirements: an obligation to provide service to all parts of the country, and to provide at a uniform price, despite the presence of significant cost differences. Entrants coming into the market without such an obligation have a strong incentive to focus upon low‐cost, ‘profitable’ customers, thereby putting the USO operator at a disadvantage. Pressure may therefore build up to equalise the situation, perhaps by calculating the net cost of the USO borne by the dominant operator in serving loss‐making customers and then sharing the cost among all operators. There has been concern, first that such an arrangement would be used as a pretext for delaying competition, and second that high USO contributions imposed on entrants would choke off competitors. In practice, most regulators in developed countries have maintained the USO as an obligation on the fixed incumbent, without introducing cost sharing obligations. Many developing countries have established funds, which are often under‐utilised or misspent.

A strategy for moving towards normalisation is discussed in Section 20.3 below.

20.2.3 Technical developments

Copper has formed the basis of the local distribution network for fixed telecommunications for many decades. Over the past decade or so, technological developments have rendered it capable of providing current generation broadband speeds, (p. 506) of up to 20 megabits per second. However, copper has its limits, and increasingly operators are looking to replace it with new so‐called Next Generation Access networks (NGAs), which take fibre right up to, or much closer to customers' premises, and are capable of achieving speeds of an order of magnitude higher than copper networks are able to achieve.

The costs of installation are huge. It is estimated that the replacement by fibre of the existing ubiquitous copper networks in either the US or the EU would cost several hundred billion dollars. Such expenditure may require government subsidy, and in many jurisdictions public funding from both local and national governments is co‐funding fibre developments.

From a regulatory standpoint, NGAs present many challenges. Unlike copper networks, their costs have not as yet been sunk. Hence, absent contractual obligations resulting from government funding, investor‐owned operators have the option of delay in deploying them; by contrast, in return for deploying them, they will seek concessions from the regulator, certainly in the form of some kind of regulatory certainty and probably in the form of some relaxation of the obligations to provide access to competitors which they may be subject in respect of their copper networks (Lewin, Williamson, and Cave, 2009).

It is important to note that very high speed services can be provided by networks other than the fibre successor to a copper telecommunications network. Upgraded cable systems can provide broadly the same capabilities. New wireless technologies may also pose a competitive constraint on the services of NGAs. Customers of wireless broadband services have grown very sharply in recent years, and wireless technologies—3G, its likely successors, and WiMax—offer increasingly high speeds. Accordingly, one regulatory strategy, adopted in the United States, is to rely on competition between operators with NGAs (say, the cable company Comcast and the telecommunications firm Verizon), augmented by constraints offered by wireless networks, to protect end users from abuses and create incentives for fast diffusion. In Europe, such regulatory forbearance is unlikely to be adopted, but less intrusive regulation may be employed in order to enhance investment incentives (see, for example, Ofcom, 2009).

20.3 Implementing a Strategy for Heavier Reliance on Competition Law

Telecommunications regulators, faced with the opportunities for increasing competition described above, have converged on a strategy for deregulation which seeks to limit regulation to cases where there is a significant risk of abuse of market power. The (p. 507) most comprehensive of these is the one adopted in the European Union, which we now describe. Other countries, including Australia, Canada, New Zealand, and the United States, adopt or aspire to adopt broadly the same approach, in the sense that regulation is reduced over time by making its application to any service dependent in some way on a demonstration that market power or dominance would, absent regulation, create competition problems or market failures.

After a tortuous and prolonged legislative process, the new European regulatory framework came into effect in July 2003, and its fundamental basis emerged unchanged from revised legislation in 2009. It is based on four Directives and an array of other supporting documentation in the form of ‘soft law’ legal instruments, which lend themselves to modification and revision relatively quickly in response to technological and commercial innovation (Directives, 2002). At one level, the new regime is a major step down the transition path between the stages of monopoly and normal competition, to be governed almost entirely by generic competition law. Its provisions are applied across the range of ‘electronic communications services’, ignoring pre‐convergence distinctions. It represents an ingenious attempt to corral the regulators in the EU, the national regulatory agencies or NRAs, down the path of normalisation—allowing them, however, to proceed at their own speed (but within the uniform framework necessary for the EU's common or internal market). Since the end state is supposed to be one that is governed by competition rules, the regime is designed to shift towards something that is consistent with those rules. These rules are to be applied (in certain markets) not in a responsive ex post fashion, but in a pre‐emptive ex ante form. However, a screening mechanism is used to limit recourse to such ex ante regulation, insofar as it should only be applied when the so‐called ‘three criteria test’ has been fulfilled for any particular form of market‐based intervention. These criteria are:

  1. (1) the presence of non‐transient barriers to entry;

  2. (2) the absence of a tendency towards effective competition behind the entry barriers;

  3. (3) the insufficiency of competition rules to be able to address the identified market failures arising from the market review process.

The new regime therefore relies on a special implementation of the standard competition triumvirate of:

  1. (a) market definition;

  2. (b) identifying dominance;

  3. (c) formulating appropriate remedies.

According to the underlying logic of this regime, a list of markets where ex ante regulation is permissible is first established, the markets being defined according to standard competition law principles. These markets are analysed with the aim of identifying dominance (on a forward‐looking basis, and known as ‘Significant Market Power’). Where no dominance (expressed as the ‘lack of effective (p. 508) competition’) is found to exist, no remedy can be applied. Where dominance is found, the choice of an appropriate remedy can be made from a specified list of primary and secondary remedies which is derived from best practices.7 The practical effect of this is to create a series of market by market ‘sunset clauses’ as the scope of effective competition expands.

20.3.1 Market definition

In 2007, the Commission issued a revised Recommendation listing seven relevant product markets for which NRAs must conduct a market analysis (European Commission, 2007). This cut from 18 the number listed in the 2003 version, a reduction which supports the claim of deregulatory success. The list now comprises: one retail market (access to a fixed line); the termination of calls on individual mobile and fixed networks; wholesale access to physical infrastructure, including copper loops, fibre, and ducts; a broadband access wholesale product; and local sections of leased lines. NRAs can also add or subtract relevant markets, using specified (and quite complex) procedures.

European NRAs, as well as the European Commission and the courts, have undertaken many market definition exercises already, often using the now conventional competition policy approach. This often involves applying, at a conceptual level, the so‐called Hypothetical Monopolist Test, under which the analysts seek to identify the smallest set of goods or services with the characteristic that, if a monopolist gained control over them, it would be profitable to raise prices by 5 to 10 percent over a period, normally taken to be about a year (O'Donoghue and Padilla, 2006: 69–90). The monopolist's ability to force through a price increase obviously depends upon the extent to which consumers can switch away from the good or service in question (demand substitution) and the extent to which firms can quickly adapt their existing productive capacity to enhance supply (supply substitution). A consequence of the reliance of the proposed new regime on ex ante or pre‐emptive regulation is that it is necessary to adopt a forward‐looking perspective.

A more controversial aspect of market definition is the identification of the geographic dimension of a relevant wholesale product market (namely, those product markets in relation to which various forms of ex ante access remedy are prescribed). The conventional wisdom has been for all geographic markets in the telecommunications sector to be identified as being national in scope, but fundamental changes over time in the competitive conditions faced by fixed incumbent operators in certain regions in the provision of broadband services have meant that the competitive environment is no longer the same across the whole country. The response of some NRAs has been to define sub‐national geographic markets, in some of which regulation can be removed. Other NRAs (p. 509) have opted to achieve the same net result by a different means—namely, by continuing to define a wholesale market as being national in scope while at the same time targeting remedies only at those geographic regions which are not faced with any meaningful competition. Although both approaches are designed to achieve the same result (that is, the lifting of ex ante regulation in response to the creation of effective competition), the former is the more ‘purist’ approach, insofar as it is more compatible with the European goal of achieving a more harmonised analytical approach to regulation, as opposed to merely achieving a similar end result.

20.3.2 Dominance

The Commission proposed, and European legislators accepted the classical definition of ‘dominance’ (defined as the ability of a firm to behave to an appreciable effect independently of its customers and competitors) as a threshold test for ex ante intervention, using the term ‘significant market power’ or SMP to reflect its particular application in an ex ante environment. The dominance can be exercised either individually or collectively by operators, or leveraged into a vertically related market.

Although single firm dominance has come to be well understood, joint dominance (or tacit collusion) has been one of the more elusive concepts in European competition law. However, what is more noteworthy is the relative lack of candidates for joint dominance in fixed telecommunications markets. This arises because fixed markets in Europe are sometimes effectively competitive and sometimes dominated (singly) by the historic monopolist. Joint dominance has, however, been attributed to mobile markets in some countries, where a small number of operators shelter behind barriers to entry created by spectrum assignment procedures.

The regulatory framework also makes provision for those situations in which a vertically integrated firm finds it advantageous to distort competition downstream as a means of bolstering its upstream market power. This is achieved by a variety of means involving the interaction of particular features of each market. For example, in one market (say, for delivery platforms such as cable or satellite), there may be consumer switching costs, because consumers need to make significant investments in equipment. The second market may exhibit service differentiation. In such circumstances, making the content exclusive to the delivery platform may strengthen consumer lock‐in and provide the firm with the ability to distort competition. To take another example, a dominant firm in the provision of network services for broadband may seek to exploit that market power to extend its dominance into the retail broadband market, for example, by obstructing competitors in their efforts to use unbundled local loops rented from the fixed incumbent to provide an adequate service to their own retail customers (see the discussion of the functional separation remedy below). The existence of the ‘ (p. 510) leveraged dominance’ option has, at least to date, not been utilised by NRAs in practice. Instead, they have relied on a traditional analysis of dominance and have tailored the ensuing remedies accordingly. In other cases, instances of leveraged dominance have been addressed by competition rules, which accept the notion that market power can be abused in a market beyond the specific market in which the dominance has been identified.

20.3.3 Remedies

Under the Directives, NRAs have the power to impose obligations on firms found to enjoy Significant Market Power in a relevant market. The NRAs act within a framework of duties set out in Article 8 of the Framework Directive. The measures they take shall be proportionate to the policy objectives identified. This can be construed as meaning that intervention is appropriate no more than at a level than is necessary, and, by implication, satisfies a cost–benefit test, in the sense that the expected benefits from the intervention exceed the expected costs. Policy objectives are also specified, including promoting competition, eliminating distortions or restrictions to competition, encouraging efficient investment and infrastructure and protecting consumers.

The major approved remedies are described below:

  • Obligation of non‐discrimination. This requires the operator to provide equivalent conditions in equivalent circumstances to other undertakings providing similar services, and to provide services for its own services, or those of its subsidiaries or partners. The forms of discrimination which are prohibited have close similarities with those which are identified under competition rules.

  • Obligation to meet reasonable requests for access to, and use of specific network facilities. An NRA may impose obligations on operators to grant access to specific facilities or services, including in situations when the denial of access would hinder the emergence of a competitive retail market, or would not be in the end‐user's interests. This represents an obligation to be implemented in circumstances similar to, but significantly broader than, those in which the essential facilities doctrine is applied under competition rules. The extension to the test lies in the replacement of the precondition under competition rules for mandating access, that the asset is essential and cannot be replicated, by the much broader condition noted above. The obligation is silent about the pricing of such access, except to the extent that it prohibits ‘unreasonable terms and conditions’ having a similar effect to an outright denial of access. The range of pricing principles may therefore depart from simple cost‐based prices to include other approaches, such as retail minus pricing.8

  • Price control and cost accounting obligations. This implies the imposition of a cost‐oriented price, which is likely to be appropriate when dealing with an (p. 511) operator with SMP that is both persistent and incapable of being dealt with by other remedies, including particularly structural remedies.

  • Proposed remedy involving functional separation. This takes effect from 2010. It permits an NRA to impose an obligation on an operator dominant in several markets to place its activities relating to the provision of local access to competitors in a business unit operating independently within the group. This is designed to prevent systematic non‐price discrimination by the operator in favour of its affiliated units operating in competitive markets. Its application will be subject to certain safeguards. This remedy is proposed as part of telecommunications regulation. But this remedy, like others, bears a relationship to action which can be undertaken under competition rules. In a limited number of jurisdictions, the competition authority can require the divestiture of some of a dominant firm's assets, or it can accept undertakings offered by that firm in lieu of seeking full divestiture. BT, the historic monopolist in the UK, in 2005 offered functional separation as an undertaking to remedy a possible adverse competition law finding under that country's Enterprise Act 2002.

  • Retail price regulation. Until an NRA determines that a retail market is not effectively competitive and that other measures will not suffice to solve the problem, it can ensure that undertakings with significant market power in that market orient their tariffs towards costs, avoiding excessive pricing, predatory pricing, undue preference to specific users, or the unreasonable bundling of services. This may be achieved by the use of an appropriate retail price cap.

What has been presented in this section is a strategy for moving a sector from heavy reliance on sector‐specific regulation to reliance predominantly on competition law. A full appraisal of the European project described above will not be possible for several years. Early signs are promising, but the regime must also overcome the challenges associated with Next Generation Networks described in the previous section.

The strategy will only succeed if competition rules, applied in network industries such as telecommunications, can in fact serve the long term interest of end users. We now turn to consider this issue.

20.4 The Role of Competition Rules

By way of complementing sector‐specific regulation, ‘horizontal’ competition rules also apply with equal force to regulated network sectors. Within the European Union, it is not a question of deciding whether the ex ante or the ex post regime will apply, but more a question of determining which regime provides the more (p. 512) appropriate form of legal redress in the circumstances (in terms of speed, breadth of remedy, nature of market failures addressed) or whether both types of regime can apply in tandem (e.g. an ex ante transparency or costing remedy can be used to ‘expose’ the existence of a margin squeeze or predatory pricing, whereas the infringement can be prosecuted ex post).

In the European Union, the key provision in the ex post regulation of market power (and often in relation to an ex‐statutory monopolist) is Article 82 of the EC Treaty. Article 82EC does not prohibit the existence of a dominant position. Rather, it addresses the abuse of market power. The following three cumulative elements are required to be established in order to find that there has been a violation of Article 82:

  • The existence of a ‘dominant position’ in a relevant product and geographic market.

  • An ‘abuse’ of that dominant position in the relevant market or through the leveraging of market power into a related market.

  • Resulting in an ‘effect on trade’ between Member States (in order to determine Community, as opposed to national, jurisdiction).

Article 82 does not itself provide a definition of what constitutes an ‘abuse’. An abuse has been defined as the use of unjustified or non‐commercial (in the sense of not being objectively justifiable) means to prevent or inhibit competition in the market. Some commentators take the view that the prohibition should only apply to behaviour that reduces consumer welfare, while others view it as protecting the ‘process of competition’. Article 82 itself lists only four specific categories of abuse, namely:

  • ‘Directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions’.

  • ‘Limiting production, markets or technical development to the prejudice of consumers’.

  • ‘Applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage’.

  • ‘Making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts’, i.e. tying arrangements.

However, other conduct designed to strengthen or maintain market power may also infringe Article 82EC, particularly when one takes into account that a clearly dominant operator has a ‘special responsibility’ to the market in terms of the acceptability of its commercial actions, solely by reason of the existence of its market power. Commentators often categorise abuses as being either ‘exclusionary’ (i.e. practices that seek to harm the competitive position of competitors or to drive (p. 513) them from the market) or ‘exploitative’ (i.e. directly harming customers, for example by excessive prices).

Exclusionary abuses include refusals to deal, pricing practices, cross‐subsidisation, and structural abuses. These are the sorts of abuses which ex ante regulation is most concerned to address. Abuses must be objectively identifiable, and must be distinguished from competition on the merits (which is, or course, pro‐competitive). Exclusionary abuses must have the effect of hindering the maintenance of the degree of competition existing in a market, or the growth of that competition.

In the recent appeal involving Deutsche Telekom,9 the Court of First Instance (the ‘CFI’) made it clear that ex post competition rules will continue to apply despite the existence of ex ante regulation, unless the system of sector‐specific regulation confers upon the dominant firm no margin of freedom in which to pursue an independent pricing policy. This position differs quite materially from that taken by the US Supreme Court in Trinko,10 where the Supreme Court ruled that sector‐specific regulation trumps antitrust rules, and allows little or no scope for antitrust claims where that regulation ‘covers the field’. The CFI's approach arguably reflects the institutional and policy balances that have been struck since the introduction of liberalisation measures at European level in the early 1990s. Not only does EU‐level regulation not purport to ‘cover the field’,11 but it is also adopted in a manner that envisages the existence of a symbiotic relationship between the two disciplines. In striking the appropriate balance under the Community legal order, it is inevitable that competition rules will have a residual role to play, which will grow as the role of sector‐specific regulation declines.

By contrast, antitrust and regulatory policymaking in the US have developed along largely independent paths. There is no overall ‘coordination’ between the policy goals sought to be achieved under either discipline. It therefore comes as less of a surprise if a US court of law analyses an antitrust action on its own terms without recourse to the policy goals of another institution of the government, whose interventions will more likely than not be seen to be market distorting. Such an approach lies at the heart of the Trinko doctrine that there is little or no role for antitrust where sectoral regulation effectively ‘covers the field’ in its regulation of commercial interactions between competitors.

The recent LinkLine12 Judgment of the US Supreme Court takes that thinking one step further by clarifying that an obligation to deal, if imposed by an instrument other than an antitrust order, rules out the role of an antitrust action as regards that element of the offence. By the same token, the existence of regulation of some sort at the wholesale level does not mean that antitrust has no role to play as regards a predation claim at the retail level; indeed, the predatory pricing claim is still being pursued independently outside the case heard before the Supreme Court. Many US commentators feel that the net effect of the LinkLine Case will be to drive margin squeeze actions into the hands of the FCC (Federal Communications Committee), the federal regulatory agency responsible for telecommunications (p. 514) matters (see Alexiadis, 2008 and Alexiadis and Shortall, 2009). Other than through the use of the non‐discrimination remedy on an ex ante basis, that option is difficult to implement in the EU, where the logic of the regulatory framework for electronic communications suggests that ex post intervention is the most appropriate form of intervention where more than one functional level of competition is affected (i.e. wholesale and retail levels).

20.5 Experience From Other Network Industry/Utility Sectors

The flexible balance between ex ante and ex post intervention achieved in the telecommunications sector has not been replicated in other ‘network’ sectors, even though it is seen as a paradigm of how sector‐specific regulation should interact with competition rules.

Part of the reason stems from the fact that other sectors are less prone to fundamental disruption through the forces of innovation, and hence less likely to be capable of adaptation to market conditions. In addition, some sectors require that a greater emphasis be placed on the provision of universal service or the security of supply. Most fundamentally, the economics of other network sectors permit a clearer and more permanent distinction between ‘natural monopoly’ components, such as a gas distribution network or train tracks, which it is natural to deal with through ex ante regulation, and potentially competitive activities such as retailing, in relation to which ex post intervention via competition law should be adequate. In what follows it is assumed that ‘natural monopoly’ elements are regulated in this way, and a brief overview is given of how ex post disciplines are applied.

It is worth pointing out that how well or badly competition law and regulation interact depends on a key institutional feature of the arrangements—whether the same agency is applying both. In some jurisdictions, there are separate competition and regulatory authorities. In others, a single body wields both powers. In the former case, there may be rivalry and coordination failures. In the latter, competitors and end users have recourse to only one agency to seek redress for their complaints.13

20.5.1 Energy14

Energy is currently the network sector receiving the most attention from the European Commission's competition services, with emphasis being placed on the enforcement of Article 82 infringement actions and the implementation of (p. 515) regulatory policies through the medium of merger review under the Merger Regulation.15 The competitive dynamic in the energy sector is heavily influenced by two competing public policy goals, namely, the need to make different energy products available to the population at the cheapest possible price, while at the same time being mindful of the importance of conserving energy (i.e. restricting production) and promoting ecologically friendly energy products. The combination of these policy drivers means that economies of scale are critical, as is the ability to secure supply over a long period of time and with respect to a varied number of energy sources. Moreover, it also means that the international impetus for cooperation among NRAs is increased, as energy products are often sourced extra‐territorially (thereby increasing the importance of cross‐border interconnection relationships).

The Commission has adopted a series of liberalisation packages intended to open up the gas and electricity markets among Member States. The first liberalisation package entailed the adoption of directives on price transparency. The second liberalisation package encouraged investment in order to build electricity and gas lines, the unbundling of distribution operations, and the introduction of access to transmission networks. The third package provides for the ‘unbundling’ of energy infrastructure (albeit providing a number of alternatives—including approaches falling short of full ownership unbundling), and limits the ability of non‐European entities to acquire transmission networks (as distinct from producers).

In parallel with these regulatory measures, the Commission will use competition rules to help achieve three principal policy goals, namely:

  1. (1) the introduction and maintenance of a supply structure favourable to competition;

  2. (2) the introduction of an effective, transparent, and non‐discriminatory access regime to transmission networks (allowing customers to be reached by alternative suppliers); and

  3. (3) ensuring that customers are not prevented from switching suppliers (through lock‐in or long‐term exclusive supply contracts with incumbent suppliers).

The parallel application of the Community competition rules alongside sector‐specific measures can be seen in the Commission's investigations of EdF, E.ON, RWE and a number of other sector participants over the course of 2007 and 2008.16

20.5.2 Transport

There exists a fundamentally different regulatory model for each particular mode of transport. This reflects the historical role which each mode of transport has played in the history of each Member State.

For example, aviation was for many years regulated bilaterally by sovereign states in relation to international routes, and domestic routes were essentially closed and (p. 516) a matter of domestic regulation. Maritime transport, by contrast, was left virtually unregulated for international routes, was progressively regulated as regards intra‐Community routes and was subject to domestic regulation as regards domestic ferry services. In turn, commercial barges, given their very low rates of return, were subject to the taxi‐cab rule (i.e. no competition for services beyond a customer taking the first barge that arrives). Railway regulation was historically national, was imposed on a national monopolist, and was driven primarily by concerns about security and technical considerations. Road transport was, in turn, regulated by reference to health and safety concerns on a national basis, with rights of transit provided for vehicles from other countries. The growth in international trade by means of standard sized containers has assisted in alleviating at least some of the different technical considerations that used to drive fundamental technical differences in regulation across different means of transport, thereby allowing greater ‘interoperability’ (expressed practically in the concept of ‘inter‐modal transport’). Beyond this point, however, there has been widespread conflict between the application of competition rules and the operation of sector‐specific rules, as national Ministries of Transport in general have sought to preserve their rights to regulate along national lines all aspects of an industry falling within the scope of ‘transport’.

The liberalisation of markets has either occurred through the adoption of specific EU Directives in sectors such as rail, while recourse to the ‘essential facilities’ doctrine has been used as the initial basis upon which the airports and sea ports have been opened up to competition.17 In this way, fundamental questions of access have been governed by Article 82 of the EC Treaty, including the charging of excessive or discriminatory prices for access as well as the actual or constructive denial of access. Unlike other sectors, which are characterised predominantly by market power issues, the transport sector seems to generate more forms of cartelised behaviour. This is because the management of capacity, the scheduling of passage, the seasonal nature of certain types of travel and haulage, and the bilateral/multilateral nature of many relationships in these sectors, result in coordinated behaviour as regards pricing, timing, and availability which is in part necessitated by the very nature of the cooperation required rather than a desire to engage in ‘hard core’ infringements contrary to Article 81 of the EC Treaty (which prohibits multilateral anti‐competitive behaviour). Accordingly, a significant amount of leeway has been granted to operators in these sectors on an Article 81 analysis, and even special Procedural Regulations have been adopted by the European Council to ensure that such competition claims are evaluated in their proper industry context.

In addition, specific Block Exemptions have been adopted which grant immunity under the competition rules to certain types of practices in the maritime sector. Over time, the full force of the competition rules has progressively encroached into the maritime sector, to the point where the Block Exemptions (p. 517) previously adopted have been repealed, to be replaced by Commission Guidelines in 2008 which purport to implement the competition principles of the EC Treaty.18

As regards air transport, a series of liberalisation packages were introduced as early as 1987 and have been introduced at regular intervals since then, encroaching progressively into most sensitive aspects of the access and tariff aspects of air transport. During that period, a number of important infringement actions have been taken under Article 82 against various airlines for discriminatory pricing and for fidelity rebates,19 as well as a series of actions against the misuse of computer reservation systems and the abuse of ground handling monopolies. Most importantly, the Commission has been very active in developing regulatory policy de facto through the medium of merger review under the Merger Regulation, especially given the large number of acquisitions and strategic alliances that have taken place in the sector over the past few years. In addition, the Commission has been particularly active in ensuring that State aids packages to struggling national carriers and to regional airports are not distortive of competition. Although most new entrants offer point‐to‐point services, the relative importance of the hub‐and‐spoke aspect of competition in the sector means that the implications of the Open Skies Agreement with the EU's major trading partners still need to be explored in terms of their impact on broader competitive relationships.20

20.5.3 Postal services

The fundamental dilemma facing regulators entrusted with the liberalisation of the postal sector has been the need to strike the correct balance between maintaining an appropriate level of universal service to customers and promoting an effective level of competition. This has been achieved through the progressive liberalisation of the sector since 1991 with the opening up of courier services first, the progressive liberalisation of the ‘reserved sector’ based in the weight of letters and parcels, the liberalisation of all cross‐border mail and, under competition rules, the prohibition of the cross‐subsidisation of competitive services from universal services reserved services. In the context of postal services, this kind of cross‐subsidisation could lead to greater competitive problems such as predatory pricing and loyalty rebates.21

The application of competition rules has taken account of the special tasks of general interest in the sector, particularly with regard to Article 86(2) of the EC Treaty.22 Accordingly, aside from the prohibition against cross‐subsidisation, emphasis is placed on the importance of not discriminating between large customers and small users. By contrast, there is nothing to prevent them from charging postal rates which are necessary for them to be able to provide the universal postal service under economically viable conditions. (p. 518)

Market definition in competition cases distinguishes between the universal (or ‘basic’) postal service on the one hand, and the express postal service market: this latter category includes specific services such as home package collection; personal delivery; guaranteed delivery times; package tracking services, and so forth. Despite the relative importance of the universal postal service obligation, the enforcement of competition rules has been particularly aggressive over the years, with the Commission having brought a number of Article 82 actions against dominant postal operators because of their various pricing practices, including predatory pricing and various bundling practices.23 In addition, Member States have also been prohibited from extending the incumbent postal operator's monopoly in the reserved area into areas open to competition.24

By contrast, the Commission has been keen to promote the market integration goal, by granting clearance to a number of joint ventures for the provision of international courier services or the acquisition of minority shareholdings in private express courier services. In addition, the Commission has greater a series of exemptions under Article 81 of the EC Treaty to the series of REIMS Agreements entered into between many national postal operators in connection with their system of terminal dues (i.e. the fees paid by postal operators to one another for the delivery of cross‐border mail in the country of destination). On balance, the loss of competition in freedom to set prices for incoming cross‐border mail is considered to be more than offset by the contributions to the quality and speed of delivery of cross‐border mail deliveries by the adopted terminal dues arrangements.25

20.6 Regulation and Competition Law in Network Industries

Network industries face acute problems of market failure, and also provide services of particular social significance. As a result, they are subject to high levels of both economic and social regulation. Economic regulation can be accomplished either through sector‐specific ex ante intervention or through application of generic ex post competition law. The two approaches can be combined in several ways. In the United States, the Supreme Court Trinko Judgment concluded that there was no room for anti‐trust remedies when sector‐specific regulation was in place. In the EU, on the other hand, competition law operates side by side with regulation.

When network industries are liberalised, the development of competition occurs over a period, in the course of which regulation of access by competitors to the incumbent's network is likely to be required. However, potentially competitive activities such as retailing can be ‘turned over’ to competition law quite soon, and (p. 519) in telecommunications in particular, competition can penetrate further and further into the network, allowing the boundaries of regulation to shrink. Many regulators thus require a market to exhibit a high level of market power before intervening ex ante. The most elaborate regime of this kind for transitioning from regulation to reliance on competition law is found in the European Union, and is described above.

In other network industries such as energy and transport, a similar withdrawal from regulation is harder to accomplish, although the range of pro‐competitive concessions offered by operators in those respective sectors under the microscope of merger review has provided a very fertile basis for the introduction of greater competition. As a result, the migration from ex ante regulation to ex post intervention is becoming increasingly possible in other network sectors beyond telecommunications.26 The manner in which that migration is occurring is more complex than in the case of telecommunications, which is sufficiently innovative so as to justify use of a fully fledged market‐based approach to assess the role of ex ante regulation. Other network sectors, for example energy, have opted for simpler approaches, usually associated with the mandating access ex ante to a stable set of network components. In such cases competition rules tend to become focused particularly on exclusionary behaviour with a retail dimension, such as predation or margin squeezes.

References

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                                  Notes:

                                  (1.) For evidence of the cost characteristics of fixed telecommunications networks, see Fuss and Waverman (2002) and Sharkey (2002).

                                  (2.) See Chapter 19 by Hauge and Sappington in this volume.

                                  (3.) Although the value of those interchanges may grow more slowly, as we are less interested in talking to perfect strangers than to friends and relations.

                                  (4.) This consequence applies not only to voice services, but also to, for example, instant messaging and the sharing of content on networks, via companies such as ‘MySpace’. The ‘network effects’ problem has surfaced in another form in mobile networks. Mobile operators typically offer their customers lower prices for on‐net calls (to a mobile subscriber on the same network) than for off‐net calls (to another mobile network). This can enhance the attractiveness of belonging to the largest networks, or to one chosen by one's peer group. There has been debate about whether such prices are discriminatory or anti‐competitive, but no adverse regulatory decision about such so‐called ‘tariff‐mediated network externalities’ has so far been taken.

                                  (5.) Universal service may, of course, have economic as well as social objectives, as the spread of communications services can spill over into the economy more broadly.

                                  (6.) Entry into mobile services—or wireless services more generally—has been limited by the availability of spectrum. Most larger markets have had enough licences created to achieve something approximating ‘workable competition’, although the existence of barriers to entry does encourage tacitly collusive practices.

                                  (7.) Because the process is forward‐looking, there is no need to prove that abusive practices are taking place, although evidence that such practices have occurred in the past provides support for the view that ex ante regulatory intervention is necessary.

                                  (8.) See the discussion on access pricing in Chapter 19 by Hauge and Sappington in this volume.

                                  (9.) Deutsche Telekom AG v. Commission (NYR) (Judgment of CFI of April 10, 2008).

                                  (10.) Verizon Communications Inc. v. Law Offices of Curtis v. Trinko, LLP, 540 U.S. 398 (13 January 2004).

                                  (11.) Community law usually seeks to create harmonised regulatory conditions in newly liberalised markets through the adoption of directives, which leave a degree of discretion in the hands of the implementing Member States about the level of detail and the form which the implementing laws and regulations will take.

                                  (12.) Pacific Bell Telephone Co. DBA AT&T California v. LinkLine Communications Inc., 28 S. Ct. 1109 (25 February 2009).

                                  (13.) The UK's Ofcom and Greece's EETT, for example, are capable of exercising both regulatory and competition powers in the telecommunications sector. The great majority of sector‐specific regulators, however, do not exercise competition powers.

                                  (14.) On the regulation of access to energy networks, see Chapter 19 in this volume by Hauge and Sappington.

                                  (15.) Review under the Merger Regulation has been particularly helpful in the Commission achieving its market integration goal by allowing the industry to achieve pan‐European scale, while at the same time obtaining concessions from industry as regards access to networks by competitors.

                                  (16.) For example, Commission confirms sending Statement of Objections to EdF on French electricity market, 29 December 2008, (MEMO/08/809); E.On Energie AG—Case COMP/B‐1/39.326 (30/01/2008); Commission opens German gas market to competition by accepting commitments from RWE to divest transmission network, 18 March 2009, (IP/09/410).

                                  (17.) For example, refer to Sea Containers/Stena Sealink, 1994 OJ L15/8; cf. Port of Rodby, 1994 OJ L55/52. Refer to a review of the administrative practice of the Commission and the jurisprudence of the European Courts, see Whish (2008), chapter 17.

                                  (18.) Refer to Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty (General block exemption Regulation) and refer also to chapter 12 on Transport in The EC Law of Competition (Faull and Nikpay, 2007).

                                  (19.) See respectively Brussels National Airport, 1995 OJ L216/8, and Virgin Airlines/British Airways, 2000 OJ L30/1 (confirmed on appeal).

                                  (20.) The ‘Open Skies’ case in 2002 against eight Member States was the first step of the EC's external aviation policy. These cases led to the conclusion of bilateral agreements with the US, Canada, Australia, and New Zealand. The bilateral agreement with the US allows, for the first time, European airlines to fly without restrictions from any point within the EU to any point within the US. The US is also required to recognise all European airlines as ‘Community air carriers’ and to provide the right for EU investors to own, invest in, or control US airlines. The second stage of negotiations between the US and the EU regarding international aviation ended in May 2008. The end goal of ‘Open Skies’ objectives is to create a single air transport market between the US and the EU with no restrictions and the free flow investment. Since then, the Commission has taken a number of steps to introduce a cohesive ‘Single European Sky’ programme.

                                  (21.) Refer to German Post, 2002 OJ L 247/27.

                                  (22.) Services of general economic interest are those services where an undertaking is entrusted with the performance of specific tasks by a legislative economic measure. This would include the service of basic utilities. Refer to discussion in Whish (2008), at pp. 233–9.

                                  (23.) Refer to German Post, op. cit;, cf. Belgian Post, OJ L61/32.

                                  (24.) For example, see Dutch PTT, 1990 OJ L10/47.

                                  (25.) See REIMS I, 1996 OJ C 42/7; cf. REIMS II, 1999 OJ L275/17 (subsequently renewed).

                                  (26.) The European Commission's powers to extract behavioural ‘concessions’ or ‘undertakings’ from merging firms relating to access, for example, is matched by the similar powers of an institution such as the Department of Justice in the US to negotiate a Consent Decree with the parties to a merger.