Sector-Specific Regulation vs. General Competition Law

A fundamental problem of reregulation concerns the appropriate level of external intervention. If we assume that governments set up programmes of privatization in order to effectively consolidate their national budgets, it is not completely unlikely that they try to maximize the revenues from privatization sales. The latter goal is largely incompatible

90 This development is largely due to the fact that not only the notion of regulation but also the relation between regulation and competition has changed over the past decades. While until the 1970s regulation was perceived as inhibiting competition, today new regulatory approaches are used to promote competition (OECD 2002: 23).

with strong reregulation because stricter regulatory rules make investment of third parties in the privatized company less attractive. In addition, new technology provides new opportunities for competition as in the cases of mobile telecommunications or decentralized solar power generation. As a consequence, regulation has evolved rather flexibly and incrementally over time (Welfens 1999: 25).

Basically, there are two alternative strategies for the regulation of markets under conditions of liberalization and privatization: sector-specific regulation and the application of general competition law. The term ‘reregulation’ leaves open which of the two modes are actually being employed for intervention. Thus, we need to introduce terms that are more precise, i.e. ‘regulation-of-competition’ and ‘regulation-for-competition’ (Jordana and Levi-Faur 2004a: 6).⁹¹ Based on their underlying principles, these two concepts differ in the scope of external intervention and in the possibilities to monitor and enforce competition. Nevertheless, both posit a positive relation between regulation and competition, stating that more and effective competition can be achieved through new regulatory provisions. This corresponds to the position that regulatory reform leads to reregulation instead of deregulation (cf. Vogel 1996).

Without intervention from a third party, the incumbent continues to be in a dominant position even after liberalization. This might lead to undesirable social and political outcomes (Héritier 2001b: 3). In addition, some infrastructures possess characteristics that allow exploitation by the network owner unless there are institutional provisions to curb abuse, i.e. predatory pricing or ‘cream-skimming’. Unless regulated, potential competitors will face insurmountable barriers to market entry because the ex-monopolist can freely determine the terms of access to his network. This provides the case for regulation-for-competition which employs proactive ex ante regulation. The latter means that prices, quality of service standards and conditions of access to the network are regulated before new providers enter the market. The criterion for intervention on an ex ante basis is usually

91 It is important to note at this point that competition policy is a distinct instrument or mechanism of regulation and thus only one alternative for regulating market transactions. It is therefore incorrect to compare ‘regulation’ with ‘competition policy’ because they are not located at the same analytical level.

the presence of SMP. In order to prevent unjustified intervention, the SMP-criterion has to be defined rather precisely.

The ex ante application of sector-specific rules by NRAs is closely connected to the question whether to employ symmetric or asymmetric regulation. Symmetric regulation means similar privileges and obligations for incumbents and new entrants alike. In most infrastructure sectors, however, asymmetric regulation was adopted as the dominant regulatory approach after liberalization (Knieps 1999: 133). The reason again is that newly liberalized markets are characterized by a continuing dominance of the former monopolist.

Asymmetric regulation, which puts stricter rules and provisions on the incumbent operator than on new entrants, is thus considered as a necessary means of enforcing competition.

The long-term goal, however, is a situation of symmetric regulatory conditions in which neither the network monopolist nor new service providers face advantages or disadvantages.

In the case of regulation-of-competition, intervention occurs reactively, thus on an ex post basis. The most well-know form of reactive regulation is general competition policy, codified in anti-trust law. Anti-trust law is defined by Pindyck and Rubinfeld (2001: 360) as “ a set of rules and regulations designed to promote a competitive economy by prohibiting actions that restrain, or are likely to restrain, competition, and by restricting the forms of market structure that are allowable”. Competition law works in markets which are already competitive because it usually lacks the capabilities and powers to actively create competition in former monopolistic markets. In contrast to sector-specific regulation its regulatory scope reaches beyond specific industries, so we could also categorize it as horizontal regulation.⁹²

However, competition policy is not restricted to antitrust measures but covers all market processes, including, for instance, pricing policies. According to most national competition laws, NCAs are allowed to intervene against dominant companies only if these

92 However, most national competition policies foresee ‘escape clauses’ which respect sector characteristics, thus allowing for industrial policy considerations (Müller 2002: 17).

companies actually abuse their market position.⁹³ In other words, the authority can become active only in case competition is de facto inhibited through anti-competitive behaviour. It is therefore that the ex post application of competition law is considered to be less interventionist in nature than the application of sector-sepcific ex ante regulation through NRAs. In addition, whereas NRAs possess clearly defined competencies within the boundaries of a certain sector, NCAs monitor regulatory compliance across all sectors of the economy.⁹⁴ Due to their broader focus, NCAs are usually unable to exert comparable influence on companies in the individual infrastructure sectors as their sectoral counterparts (Jordana and Levi-Faur 2004a: 6).

The basic question that NRAs and NCAs have to answer is to which extent there should be external interference in a sector of the economy. Is it better not to intervene and let it develop the most efficient arrangement without any external regulatory intervention?

There are two contrasting views. The first one posits that regulation is not just temporarily necessary but rather a permanent feature of a functioning market system. As markets do not arise spontaneously but are the conscious act of governmental intervention, their establishment needs to be supported by a sophisticated system of rules and institutions (Prosser 1999). A different perspective is more critical of regulatory intervention of the government. According to this perspective, any form of regulatory intervention will become excessive and in the end stifle the possibility of market solutions (Robinson 1999).

It seems to be broad consensus that preventing the abuse of an incumbent’s dominant position after liberalization through sector-specific regulation is only a medium-term solution. In the long run, market structures should evolve in a way that competitive forces automatically discipline companies and resources are allocated efficiently. Thus, the

‘ultimate’ regulatory goal would be to influence the conduct of market participants in a

93 Examples for this provision are § 22, Section 4 of the German ’Gesetz gegen Wettbewerbsbeschränkungen (GWB)’ or Article L. 420-2 of the French ’Code de Commerce’. Many competition laws, however, underwent significant transformation over the last years, i.e. the US or EU competition law.

94 Francois Souty, a member of the OECD Committee of Competition Law and Policy, identifies four characteristics regarding the relationship between NRAs and NCAs. First, there are specific regulatory regimes in many sectors of the OECD countries. Second, there is no unique model of relationship between NRAs and NCAs, neither across countries nor always within a country. Third, in countries which have started to reform regulation earlier than others, a rather pragmatic approach has been used. And finally, there is variation in the regulatory vocabulary used (Souty 2001: 12).

way so that sector-specific regulation can one day be replaced by general competition law.

This logic has recently driven multinational telecommunications companies to call for the end of sector-specific ex ante regulation. Their main argument is that a considerable level of competition has already been attained and that asymmetric regulation is no longer needed. However, as Burton (1997: 184) points out at least for the United Kingdom, there is evidence that sector regulation “will ossify into a perpetual system of ordered competition, in which regulation remains a permanent, […], feature of the industry landscape for the utilities.”

The Concept of Significant Market Power

The shift from sector-specific regulation to the application of general competition law is indeed taking place. The EU’s new common regulatory framework (CRF) for telecommunications constitutes a perfect example for this transformation. One of the major changes inherent in the new framework relates to the concept of SMP. While the old CRF uses a sector-specific approach, attributing SMP in case a company possessed 25 per cent market share, the new CRF ceases to employ any market-specific quantitative measure. It moves away from sector-specific regulation to a competition law approach and introduces a new SMP definition based on the concept of ‘dominance’ as in general EU competition law.

According to Article 14 II of the Framework Directive (FD),

“an undertaking shall be deemed to have significant market power if, either individually or jointly with others, it enjoys a position equivalent to dominance, that is to say a position of economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers” (European Parliament 2002b).

This is exactly the same definition that is used by the ECJ in its clarification of the term ‘dominant position’ employed in Article 82 ECT.⁹⁵ Thus, NRAs will have to make sure that their decisions are in line with the practice of the Commission and the

95 Case 27/76 United Brands vs. Commission (European Court of Justice 1978).

jurisprudence of the ECJ. In contrast to the provisions of the old regulatory framework, the new concept of SMP allows for a flexible interpretation by the NRAs, especially in combination with Article 16 FD.

However, there are several problems inherent in this new concept of SMP. One problem is the growing complexity of market analyses. The Commission Guidelines to the CRF suggest that market share can be measured using volume or value sales (European Commission 2002a). There is, however, a range of other measures for determining a company’s power in a market. If these different methodologies have to be applied in combination with such concepts as ‘leverage of market power’ and ‘joint dominance’, the complexity of market analysis will increase significantly.

Another problem is the determination of a ‘relevant market’. NRAs have to carry out market analysis on the basis of clearly defined standards set by the new CRF and a corresponding Recommendation issued by the Commission. In practice, however, it may be difficult for NRAs to determine whether the imposition of ex ante regulation is appropriate or not, and it will be interesting to observe whether different NRAs will be able to apply the provisions of the Recommendation in a consistent way across the EU. In addition, the ex ante assessment of SMP calls for certain methodological adjustments to be made. The reason is that the assumptions and expectations for assessing SMP ex ante are different from those applied ex post by competition authorities on the basis of Article 82 ECT.

Last but not least, there is the question of applying the SMP concept to emerging markets, i.e. broadband television or internet. In this context, there is a special risk as regards new services. The Guidelines recognize this in paragraph 32 by noting that emerging markets

“should not be subject to inappropriate ex-ante regulation. This is because premature imposition of ex-ante regulation may unduly influence the competitive conditions taking shape within a new and emerging market. At the same time, foreclosure of such emerging markets by the leading undertaking should be prevented” (European Commission 2002a:

10).

The background to this provision is the following: the provider of a new service in an emerging market might initially possess a large market share because he has the advantages of the first mover. If this were to be interpreted as SMP, there is a risk that the regulatory provisions impede technological progress and entry into existing markets instead of fostering it.