Telecommunication Regulation and Competition Khalil Aburizik ITU Regional

Telecommunication Regulation and Competition Khalil Aburizik, ITU Regional Officer for Arab States aburizik@itu. int Dr. Abdelfattah ABUQAYYAS, Coordinator Co. E/ARB abuqayyas@itu. int ITU /BDT /ARO Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

USEFUL RESOURCES ITU Global Regulators Exchange (GREX). http: //www. itu. int/ITU-D/grex/register. asp ITU /BDT Regulatory Reform Unit http: //www. itu. int/ITU-D/treg/ Emergency Room regulator. hotline@itu. int www. infodev. org/projects/314 regulationhandbook/ Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

The Rationale for Competition Policy § When competition exists in market-based economies, Two or more different suppliers contend with each other to sell their goods or services to customers § In a competitive market, individual suppliers lack “market power” § Market power is defined as the power to set and maintain prices or other key terms and conditions to the market Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

The Rationale for Competition Policy § In a perfectly competitive market, there would be no reason for government intervention to implement competition policy; however no markets are perfectly competitive § Monopoly can be a result of market failure § Telecommunications has mainly developed in a monopoly environment, and a competition is introduced to its markets, there are concerns about the continuing of market power by the incumbent operator Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Government Intervention to implement Competition Policy § Objectives: In the case of competition law and policy, the main objectives are Ø To respond to market failures Ø To limit abuses of market power Ø To improve economic efficiency § Types of Intervention: Ø Behavioral – The public authority attempts to modify the behavior of a firm(s) through regulation, e. g price regulation Ø Structural – Affects the market structure of the industry, e. g prevent a merger and separation of operation § Flexibility: Ø Government intervention requires flexibility and an ability to tailor rules and principles to specific circumstances Ø Competition policies generally have no iron-clad rules and must be applied flexibly to suite the circumstances Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

The Interplay of Competition and Telecommunications Policies § Many countries have both a general competition authority and a telecommunication regulator – It is important not to duplicate measures and to understand tools provided by competition and telecommunication laws § Telecommunication regulator typically involves both prospective and retrospective activities, and its policies should be contrasted with those of competition authority § Competition authorities tends to exercise on a retrospective basis Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Why Telecommunications Regulator Keep in mind; The reasons to establish and retain telecommunications regulator are: Ø To deal with some key issues in the transition from monopoly to competition, e. g network interconnection Ø To clearly define an environment to the emergence of competition Ø The need to apply additional policies, e. g universal service policies Ø The need for ongoing supervision and decisions on issues such as interconnection, quality of service and license conditions Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Implementation of Competition Policy by Telecom Regulator - 1 § United Kingdom: Ø Oftel has concurrent authority to deal with matters arising under the Competition Act. Oftel should coordinate with Fair Trading (responsible for Competition) Ø Oftel has published guidelines on the application of the Competition Act in the Telecommunications sector § Malaysia Ø The Malaysian Commission issued guidelines, which indicates how it will apply competition law concepts in its authority Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Implementation of competition Policy by Telecom Regulator - 2 § Canada Ø Canadian law provides for changes, depending on the level of competition in specific telecommunications markets. The Regulator (CRTC) under the Canadian Telecommunication Act, has a duty to forbear from regulation where telecom services are subject to sufficient competition to protect the interests of users § Australia Ø In July 1997 the Australian government implemented a package of reforms to both its competition and telecommunications laws Ø The Australian Competition and Consumer Commission (ACCC) was given a significantly expanded role in telecommunications regulation Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Advantages of Incumbent Operators § Own and Control of Essential Facilities. Ø New entrants require access to these facilities. Control of Essential Facilities can give an incumbent numerous advantages over new entrants: increasing prices of these facilities, discriminate in their provision § Economies of Establishment National Networks: Ø The cost of duplicating incumbents facilities may be prohibitively high. Incumbent usually has a long history of providing local access at subsidizing cost, § Vertical Economies: Ø Many incumbents have vertical integrated facilities, e. g local access networks, national and long distance networks § Control Over Network Standards: Ø An incumbent network standards have become de facto to which all competitors must adapt their networks § Cross-subsidies: Ø Incumbent are often able to cross-subsidize some services from others § Customer inertia: Ø This is a particularly true for lower-volume customers Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Basic Concepts of Competition Policy - 1 § Market Definition – There are two aspects, the product (including services), and geographic area in which the product is sold Ø Product Market – Could the monopolist raise the price of the product for a non-transitory period? In this case could a sufficient of buyers switch to other product? Ø Geographic Market – Geographic areas are more important in defining some telecommunications markets than others, e. g local access and e-mail § Barriers to Entry Ø Ø Ø Government restrictions Economies of scale High fixed/capital costs Intellectual property rights Incumbent anti-competitive behavior Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Basic Concepts of Competition Policy - 2 § Market Power and Dominance Ø Market power • is defined as the ability to independently raise prices above market levels for a non-transitory period without losing sales Ø Factors determining whether a firm has a market power: • market shares; Barriers to market entry; Pricing behavior; profitability; and vertical integration Ø Significant Market Power (SMP) • European Commission defined the SMP if the share is more than 25% of a particular telecommunications market Ø Market Dominance: • high market share, 50% or more • significant barriers to entry § Essential Facilities Ø Generally defined as one which has the following characteristics: • it is supplied on a monopoly basis • it is required by competitors • it cannot be practically duplicated by competitors for technical or economical reasons Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Remedies of Anti-competitive Conduct § § § § § Abuse of Dominance Refusal to Supply Essential Facilities Cross-Subsidizing Vertical Price Squeezing Predatory pricing ﺣﺮﻕ Misuse of Information “Locking-in” customers Tied Sales and Bundling Other Abuses of Dominance Restrictive Agreements Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Abuse of Dominant - 1 § The Essential Characteristics of Abuse of Dominant Include: Ø A firm has a dominant market position in the relevant market Ø The firm uses that position to engage in”abusive” conduct which is or likely to be harmful to competition § When Does a Firm Dominate a Market? Ø A higher market share for a particular firm (>65%) Ø An appearance of greater dominance Conversely Ø The extent of barriers to market § When is a Firm Abusing the Dominant Position – Common Examples in Telecommunications: Ø Refusal or delay in providing essential facilities (EF) to competitors Ø Providing services or EF at excessive prices or on discriminatory terms Ø Predatory pricing and/or cross-subsidization of competitive services Ø Bundling of services Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Abuse of Dominant - 2 § Legal Prohibition Against Abuse of Dominance Ø Example of Broad and general prohibitions in EC: any abuse of a dominant position shall be prohibited as it may affect trade between members Ø Examples of more specific legal prohibitions are found in each country § Powers to Remedy Abuse of Dominance Ø Power to issue enforceable orders against him Ø Power to reduce the license Ø Power to fine the dominant entry Ø Power to order compensation Ø Power to restructure the dominant entity Ø Power to facilitate and approve informal settlements § The WTOs Regulation Reference Paper requires signatory countries to maintain appropriate measures to prevent “engaging in anticompetitive practices” Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Refusal to Supply Essential Facilities § Most of debates about Essential Facilities (EF) in the telecommunications context relates to interconnection facilities – the supply and unbundling of EF § Abuse of Dominance and Essential Local Networks Facilities – The EU Example: Ø The EC “Access Notice” illustrates how an incumbent can abuse in controlling network access facilities and build on guidelines on the application of competition rules in telecommunications sector Ø The EC identifies other abusive conducts such as: bundling network elements so that access by competitors becomes more difficult, Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Cross-Subsidizing § Incumbent will abuse their dominant position by engaging in anti-competitive crosssubsidization, by increasing or maintaining its prices above costs in that market, and use its excess revenues to subsidize lower prices in other more competitive market Ø This Cross-Subsidy between services can be significant barriers to competition Ø A new entrant may not be able to handle and may drive out of business Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Cross-Subsidizing § Regulatory treatment is complicated due to the patterns of “Social objectives” crosssubsidies § Prohibition against cross-subsidizing: Ø Many countries established as part of their obligations toward WTO Regulation Reference Paper Ø National prohibitions can be made at various levels: regulations, regulatory guidelines, rules orders and licenses Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Accounting Separations, Structural Separations and Divestiture § Accounting Separations Ø Can be used to determine the existence of cross-subsidizing Ø In order to determine the costs of providing each service. Ø This add transparency to the costing and pricing process of incumbent operator § Structural Separations Ø Tend to be used only where there is evidence of significant anti competitive conduct. Ø Structural separations generally refers to the separation of different lines of business into separate corporate entities (e. g cellular business can be operated by a separate company) Ø Regulatory conditions normally determine the degree of separation required § Divestiture Ø Divestiture is generally viewed as an extremedy that is only appropriate in cases of over-whelming dominance by very large operators (e. g AT & T) Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Vertical Price Squeezing § This form of conduct can occur, if the incumbent provides services in two or more “vertical” markets. § Vertical markets are sometimes labeled “upstream” and “downstream” markets or “wholesale” and “retail” § Vertical Price squeezing can occur when an operator with market power controls certain services that are inputs for competitors in downstream markets, and where those key inputs are used by the operator to compete in the same downstream market Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Vertical Price Squeezing § An operator can often squeeze the margins of competitors by raising wholesales prices paid by competitors, while lowering retail prices on competitive services (e. g internet access) § Dominant provider must provides evidence to the regulator that its retail prices are no lower than the sum of: Ø The price it is charging competitors for the whole services Ø The actual incremental costs Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Predatory Pricing § Predatory Pricing is the practice of providing services at prices that are low enough to drive competitors out of the market § Predatory Pricing is often prohibited under national competition laws, and it may also be prohibited by regulations § Remedies vary, predator may be penalized, competitors (victims) may be compensated or both § Price regulation is an other type of remedies Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Misuse of information Locking-in customers § Misuse of information: Ø Dominant providers of monopoly services are in a position to collect interconnecting competitors, so he should not be able to misuse the information in an anticomparative way (e. g induce the other customers to switch to him) § Locking-in customers Ø Operators may attempt to “Capture” particular subscribers through agreements and contracts Ø Not all agreements that lock-in customers are anticompetitive, but there are cases , where dominant competitor locks in customers in advance of introduction of competition, that merit regulatory review Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Tied Sales and Bundling § A tied sales is the sale of one product or service on condition that the buyer purchases another product or service § Bundling is the practice of assembling multiple products or services together in an integrated offer § Tied or bundled sales are not necessarily abusive or anti-competitive § Anti-competitive Aspects: Ø Tying a product or service offered in a competitive market to an other product in a monopolistic market Ø The incumbent provides the upstream services to competitors on a bundled basis, while he requires parts of those services only Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Other Abuses of Dominance § Excessive Prices - It is not anti-competitive but an exploitation of consumers § Restriction of supply – A monopolist may refuse to invest in network infrastructure and supply new customer, preferring to serve a limited range of customers § Refusal to Deal – The most common example involves refusal by an incumbent operator to provide essential facilities § Unjust Discrimination – A dominant operator may discriminate unjustly or unfairly between customers or competitors § Abuse Involving Intellectual Property – Anti-comparative abuses may occur, in exclusionary Intellectual Property arrangements, and in attempts to monopolize adjacent markets Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Restrictive Agreements § Most Regulators and Competition authorities are called upon, from time to time, to view anti-competitive agreements involving telecommunications operators (e. g interconnection agreements) § Two categories of agreements may raise concerns of anticompetitive conduct. Ø Horizontal agreements – are agreements between competitors Ø Vertical agreements – are agreements between upstream and downstream participants Ø Only agreements that have anti-competitive effects should be prohibited, such as: • price-fixing : they are designed to manipulate pricing (horizontal) • bid-rigging : is collusion among bidders in order to determine who will win (horizontal) • market allocation agreements : can be implemented by horizontal or vertical agreements Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Mergers § Concerns About Mergers: Ø The review and approval of mergers is normally entrusted to competition authorities, rather than regulators Ø Many mergers will have no negative impact on competition, the concern is that the new large firm may increase its market power, and to abuse the dominance position § Types of Mergers Ø Horizontal mergers, which take place between firms that are actual or potential competitors occupying similar positions in the chain of production Ø Vertical mergers, which take place between firms at different levels in the chain of production Ø Other mergers, such as those which take place between unrelated businesses Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Merger Analysis § Various competition authorities have published merger guidelines. The guidelines analyses the different stages of the mergers, such as: Ø Ø Ø Market definition Identifications of firms Identification of potential effects of the merger Analysis of barriers to market entry Evaluation of any efficiencies arising from the merger § As a part of the merger review process , the merging firms must provide information to the reviewing authority. Required information typically includes: The identity of the firms involved A description of the nature and commercial terms of the transaction Financial information of the firms involved Identification of related ownership interests and the organizational structure of the firms involved Ø A description of relevant products and service markets in which the firms operate Ø Ø § More detailed information is needed in the following stages Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Merger Remedies § The goal of the merger control law is to prevent or remove effects of mergers, three types of remedies are typically used: Ø Prohibition or Dissolution – Preventing the merger or dissolution of the merged entity Ø Partial Divestiture – Divest assets or operation sufficient to eliminate identified anti-competitive effects Ø Regulation/Conditional Approval – Regulation or modification of the behavior of the merged firm in order to prevent or reduce anticompetitive effects § Joint Venture – Same issues discussed under restrictive agreements and mergers Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

WTO Regulation Reference Paper - 1 § Annex to the 4 th Protocol in the GATS Agreement on “Basic Telecommunications” 2001 § Definitions Ø Essential Facilities means facilities of public telecommunications transport or service that: • Are exclusively or predominantly provided by a single or limited number of suppliers • Cannot feasibly be economically or technically substituted in order to provide a service Ø A major Supplier is a supplier which has the ability to materially affect the terms of participation in the relevant market for basic telecommunications services as a result of: • Control over essential facilities • User of its position in the market Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

WTO Regulation Reference Paper – 2 § Competitive Safeguards Ø Prevention of anti-competitive practices in Telecommunications: • Appropriate measures shall be maintained for the purpose of providing suppliers , who alone or togother , are a major supplier from engaging in or continuing anti competitive practices Ø Safeguards: The anti-competitive practices referred to above shall include in particular: • Engaging in anti-competitive cross-subsidizing • Using information obtained from competitors with anticompetitive results, and • Not making available to other services suppliers on a firmly basis technical information about essential facilities and commercially relevant information which are necessary for them to provide service Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL

Telecommunication Regulation and Competition Tha nk You For any further enquiries, please contact abuqayyas@itu. int or aburizik@itu. int and www. ituarabic. org Workshop on Sector Reform and Liberalization, Cairo – Egypt, 09 – 11 March 2004 www. ituarabic. org/coe/SRL