Addressing Overlaps and Conflicts between Competition A uthorities and S ectoral R egulators

1. Addressing Overlaps and Conflicts between Competition Authorities and SectoralRegulators CUTS-CIRC Biennial Competition Conference New Delhi, India 18 November 2013 Dr. Chris Decker Senior Associate Research Fellow CSLS, University of Oxford christopher.decker@wolfson.oxon.org

2. Why do such potential overlaps and conflicts need to be addressed? • Creates uncertainty for businessesand investors. • Unclear roles and responsibilities can encourage gaming and forum shopping. • If not resolved, conflicts can be left to the courts to interpret policy and determine jurisdiction. • Reduces effectiveness of policies. • Ultimately, more expensive for consumers!

3. Two types of potential conflicts and overlaps • Conflicts and overlaps between policies • Between different policies/legislation at the same level. • Between state and federal policies regarding competition and regulation. • Between competition policy, sectoralregulatory policy and other policies (i.e.:environment, social policies). • Conflicts and overlaps between agencies. • Competition authorities and sectoral regulators. • Federal agencies and state regulatory bodies. • Ministerial departments and competition authorities or regulators. • Economic regulators and non-economic regulatory bodies

4. A global problem • Various examples noted in the CUTS November 2012 report looking at India, South Africa, South Korea, Brazil and Spain. Objective to draw on experiences to tailor an effective regime for India. • Not just a developing or transitional economy issue, one that arises in many jurisdictions around the world, including those who pioneered reforms in infrastructure sectors, such as the United States, UK and Australia. • There does not appear to be a single set of policy solutions which can avoid conflicts arising altogether. • Suitability of different arrangements depends on factors such as the history of policy development and the institutional and political context in a jurisdiction.

5. What do competition agencies and regulators do? • Competition authorities functions typically includes: • Prosecuting dominant firms who abuse their position. • Prosecuting firms who enter into anti-competitive agreements or concerted practices. • Restricting mergers which will substantially lessen competition. • Market investigations or sector inquiries. • Regulators core functions typically include: • Setting ex ante/up-front price controls for dominant firms. • Determining the price and non-price terms of access to core network infrastructure or ‘competitive bottlenecks’ (such as mobile termination rates). • Establishing (and enforcing) various rules in relation to conduct – quality requirements etc. • Licensing of firms to operate in regulated activity. • But often charged with other goals under relevant statutes, which extend beyond pure competition law goals.

6. Differences between competition authorities and sectoral regulators • Timing of intervention ex ante vsex post. • Frequency of intervention • Sectoral regulation is typically enduring in nature and requires high level of sector-specific knowledge. • Competition law based on a suspected infringement often based on a complaint received. • Different information requirements. • Different investigative approaches and expertise required. • Competition investigations a legal process which must withstand scrutiny by a court. • Typically, lesser requirements on implementation of regulatory policy. • Remedies differ • Competition breach remedies are generally behavioural in nature (excl. mergers). • Different appeal rights and mechanisms • Full merits review versus judicial review.

7. Potential areas of overlap and conflict • Generally, most overlaps and conflicts arise in activities where there is competition, or competition is being introduced, and yet some regulation continues to apply. • Abuse of dominance • A regulated access price is considered too high or low under competition law. • Regulatory assurances about particular conduct. • Regulatory arbitration and essential facilities. • Agreements between competitors • Balance between competition and efficiency impacts. • Mergers in regulated sectors • A regulator may be concerned about structural issues. • Potential need for sector specific competition rules. • Different processes can be followed and different tests applied – SLC versus ‘public interest’ test. • Different proposed remedies (e.g.: in US energy sector). • CUTS (2012) also lists licensing requirements, market definition and restrictive practices as other potential areas of overlap and conflict.

8. Ways to address overlaps and conflicts How can policy overlaps and conflicts be addressed? • Concurrency: both competition agency and regulator can have the ability to apply competition law. • Only one policy appliesto a specific activity (i.e: if a sector is regulated than competition law does not apply). • Both apply, but one policy dominates another(a competition authority might be ‘slow to intervene’). • Develop regulatory policy using competition policy concepts. How can institutional overlaps and conflicts be addressed? • Create separate sectoral regulators and competition agency, each of whom has sole jurisdiction in its area of competence/expertise. • Create separate regulators and competition agencies, each of whom have concurrent jurisdiction to apply competition law. • Create a single multi-sectoral authority responsible for both sectoral regulation and competition law enforcement. • Use of a common specialist appeals court/review body.

9. Benefits of a separate agency model • Separate agencies each with exclusive competence/jurisdiction for a specific area. • In principle, there should be no (or limited) overlap between policies and jurisdiction. • Likely to be most effective in public utility industries (gas, electricity, water, rail etc.) where there are some natural monopoly type activities and some competitive activities. • Once an activity is ‘opened to competition’ or is deemed effectively competitive, then responsibility shifts from sectoral regulator to competition authority. • For example, the competition authority might focus only on competitive activities in the industry, and sectoral regulators focus principally on natural monopoly-like activities.

10. Limitations of a separate agencies model • May be difficult to implement in practice. • When should the transition occur: when is an incumbent firm no longer dominant? When there is two or more entrants? When price controls are removed? • What happens to disputes about high access prices: Is it a regulatory problem or a competition problem? • May be difficult to apply in some industries, like telecoms, where there is typically some competition between competing networks (e.g.: cable, mobile, fixed line). • Potentially lose the benefits/synergies of specialization. • Might raise the potential for capture of sectoral regulator by industry. • Particularly in the case where the regulator becomes responsible for regulating only one core network operator. See Macey (1992).

11. Benefits of concurrency • In principle, can allow for competition agencies and sectoral regulators to ‘share’ responsibility for certain activities and industries. • Could allow for a smooth transition from regulation to competition in those activities where competition is being introduced. • Allows for the benefits of specialisation by each agency, and potentially avoids the risk of capture. • Such arrangements typically underpinned by protocols as to how the two bodies will engage and interact with one another. • Might facilitate a form of ‘regulatory competition’.

12. Limitations of concurrency • Dangers of conflicting processes, and different decisions. • Can lead to ‘turf wars’ between agencies. • Can involve unnecessary duplication of effort and cost. • Can potentially lead to low levels of enforcement of competition law. • Mixed evidence of success in practice • Some US commentators suggest it be avoided, and suggest a ‘single agency’ approach. • In UK, arrangements being amended so that the CMA will ‘coordinate’ the use of competition powers by regulators. Also power of Secretary of State to remove concurrent powers of regulator. • Perceived problem of insufficient precedent in competition law (see UK NAO report 2010). Under proposed changes, sectoral regulators must consider anti-trust provisions before using their own sector powers.

13. Benefits of a single institution • Both competition law enforcement and sectoral regulation undertaken by the same organisation. • Avoids potential conflicts between agencies. • Allows for any disagreements to be voiced and resolved internally, and therefore maintains external confidence in regulatory system. • Potential for ‘economies of scale’ in terms of concentration of technical skills and specialisation. • Might be particularly important in developing countries with limited specialists. See Laffont(2005) and Estache and Wren-Lewis (2009). • Can potentially allow for a smoother transition from regulation to competition law in public utility industries. • Already exists in Australia and New Zealand, and a trend towards this in Europe (e.g.: Spain and Netherlands). • Spain: “clarifying responsibilities, reducing the number of bodies, simplifying their structure and functioning.” • Netherlands: New ACM focuses on consumer protection, industry-specific regulation, and competition oversight. Goal is that with a single Board will ‘bring coherence’ to these three areas of activity.

14. Limitations of a single institution • Combining quite different tasks: regulation involves the implementation of a specific policy agenda that can have wide distributional consequences, competition law involves an ‘enforcement activity’ which should be blind to distributional consequences (infringe/not infringe). • The agency can become a ‘conglomerate’. • Can create problems in terms of differences of culture: one pro-competitive, one more regulatory and on-going in nature. • Potential loss of benefits of specialisation/industry knowledge. • May not be feasible where competition authority is federal, and sectoral regulation occurs at the state level. • Potential for ‘capture’ might be increased. • See Laffontand Martimort (1999) and Laffont (2005). • As conflicts or differences of view are dealt with internally, this can make the regulatory system and decision making less transparent. • Poor performance in one area (e.g.: competition enforcement)can create wider reputational damage, which impacts on other activities.

15. Conclusions • Conflicts and overlaps are a global problem, and different ways of addressing the problem can be observed around the world. • Critically important that such overlaps and conflicts are addressed, particularly in developing or transitional countries.. • Three main ways for addressing institutional conflicts can be observed including: separate agencies; concurrency; and single institution. Each has advantages and disadvantages. • While concurrency seems attractive (and used in both US and UK) it must be underpinned by a clear delineation of powers and responsibilities. There must also be a mechanism for ensuring that each agency sticks to this understanding. • Consideration might also be given to the benefits of a single agency approach, particularly given limited resources and specialist skills in some developing and transitional countries. • Ultimately, the appropriate design will depend on contextual factors such as the history of policy development, and the institutional and political context in a jurisdiction.