294 32843 privatesector P U B L I C P O L I C Y F O R T H E NUMBER NOTE 2005 Controlling Market Power JUNE Michel Kerf, Isabel Neto, Balancing Antitrust and Sector Regulation in Telecoms and Damien Géradin Among the countries fully liberalizing their telecommunications Michel Kerf sector, some have chosen to rely mainly on sector-specific rules, (mkerf@worldbank.org) is an infrastructure policy often applied by sector-specific institutions, while others have adviser in the World depended on economywide antitrust rules and institutions to control Bank's East Asia and Pacific Region and a market power. This Note describes the choices made by five notable visiting professor at the PRESIDENCY reformers: Australia, Chile, New Zealand, the United Kingdom, and the University of Liège. United States. Drawing on their experiences, it then assesses whether VICE Isabel Neto is a telecommunications antitrust or sector-specific processes have dealt more quickly and specialist. Damien Géradin effectively with key regulatory issues. is a professor at the University of Liège and at The regulatory frameworks for telecommunica- largely on general antitrust rules and institu- DEVELOPMENT the College of Europe, tions adopted at different times by the five coun- tions. This framework was modified in 2001 to Bruges. tries reflect different balances between antitrust introduce sector-specific rules, such as those on SECTOR and sector-specific approaches (table 1). interconnection, number portability, carrier This is the first of three Notes evaluating how best The United States has emphasized a sector- preselection, and roaming. In addition, a to balance antitrust and specific approach. It adopted the Telecommu- telecommunications commissioner with spe- PRIVATE sector-specific approaches nications Act of 1996 to bring down all barriers cialized staff was appointed to the antitrust in regulating to competition in the telecommunications mar- authority. telecommunications. ket and, especially, to enable long-distance oper- Chile, the United Kingdom, and Australia The second focuses on ators to enter the local markets previously adopted what were in effect compromises GROUP the regulation of monopolized by the regional local operators. between the more radical U.S. and (pre-2001) interconnection. The third The Telecommunications Act contains no less New Zealand approaches. BANK discusses how the balance than 335 pages of sector-specific regulations, A pioneer in liberalizing telecommunications, between antitrust and and the Federal Communications Commission Chile had to learn largely by trial and error. The sector-specific regulation (FCC), the sector-specific agency in charge of rules adopted in the early 1980s to allow multi- affects competition. applying these rules, employs more than 2,100 ple entry into each market segment contained WORLD staff. few sector-specific provisions (and few licenses In New Zealand, by contrast, the regulatory were awarded early on to new entrants). Addi- THE model adopted at the end of the 1980s relied tional sector-specific provisions were adopted in C O N T R O L L I N G M A R K E T P O W E R B A L A N C I N G A N T I T R U S T A N D S E C T O R R E G U L A T I O N I N T E L E C O M S Table Balance between antitrust and sector-specific regulation of telecommunications 1 Country Rules Institutions Australia Mix of sector-specific and antitrust rules, Antitrust authorities with telecommunications with most sector-specific rules integrated into group general antitrust legislation Chile Mix of sector-specific and antitrust rules Sector-specific regulator Distinct antitrust authorities New Zealand Before 2001, predominantly antitrust Before 2001, antitrust authorities 2 Since 2001, a mix of sector-specific and Since 2001, antitrust authorities with antitrust rules telecommunications commissioner United Kingdom Before 2003, predominantly sector-specific Sector-specific regulator with antitrust powers (included in licenses) Since 2003, general authorization regime with increasing reliance on competition law United States Predominantly sector-specific Sector-specific regulator Distinct antitrust authorities 1987 (on tariff setting) and in 1994 (on inter- Successes of antitrust connection, vertical separation between the local Reliance on antitrust yielded some good results and long distance markets, and choice of long when the courts intervened to stop clear abuses distance carriers on a call-by-call basis). While a of dominant positions. In a dispute over local sector-specific regulator was established as early loop interconnection in New Zealand, for exam- as 1977, antitrust authorities remain important, ple, judges agreed that the incumbent, Telecom, since they determine, for example, whether the was abusing its dominant position relative to its prices of particular telecommunications services competitor Clear when it forced Clear's cus- need to be regulated. tomers to dial an access code and imposed on In the United Kingdom until very recently, Clear the same interconnection price paid by sector-specific rules were mostly included in any of Telecom's large end users with their own operators' licenses and implemented by Oftel, switches. In Chile antitrust authorities took the telecommunications regulator. But the action to prevent the incumbent provider of sector regulator could also enforce economy- local services (CTC) from offering discounts to wide antitrust rules contained in the Compe- its own subscribers, but not to others, on certain tition Act of 1998. Since 2003 individual fixed-to-mobile services.1 licenses have been replaced by a general Antitrust provisions have also been successfully authorization regime, and sector-specific reg- applied in merger controls. In Australia operators ulation is being curtailed in favor of general chose to cancel merger plans when antitrust competition law. In addition, Oftel has been authorities announced that the proposed merg- replaced by Ofcom, a somewhat broader com- ers would probably violate the antitrust law. Sim- munications regulator also responsible for ilarly, in the United States MCI WorldCom and broadcasting and cable. Sprint decided to call off their planned merger In Australia the Telecommunications Act of after antitrust authorities declared that the trans- 1997 removed all restrictions on entry into the action would reduce competition. And in Chile a telecommunications market and introduced a statement by antitrust authorities that a merger sophisticated set of access rules as well as other between the local operations of the incumbent specific rules relating to, for example, number and those of a cable operator would eliminate a portability, operator preselection, and override promising source of local competition persuaded dial codes. These sector-specific rules are the two operators to substantially revise their applied by antitrust authorities. merger plans. Shortcomings of antitrust ter competition in sectors where no competition Antitrust-based regulation appears to have some existed before. In the United States, for exam- drawbacks, however. Interconnection issues, for ple, where the local market was divided into example, have often been difficult to resolve regional monopolies before adoption of the through antitrust. In New Zealand the Clear- Telecommunications Act of 1996, antitrust pro- Telecom case posed a big challenge to the regu- visions cannot prevent a merger between two latory model before the 2001 reforms: judicial incumbent local operators. processes aimed at determining a fair intercon- Antitrust provisions are also ill suited to nection price lasted several years, different courts imposing general structural remedies such as 3 took different positions on the same issues, and vertical separation between different segments in the end judges refused to set a price, leaving of the telecommunications market. In Chile, the parties to reach a specific agreement con- after long antitrust proceedings in the courts to forming to broadly defined principles. determine whether the incumbent provider of Unbundled access to the local loop and local services and the incumbent provider of resale of local services have generally not taken long distance services could compete in each place under an antitrust-based regime such as other's market, it was the legislature that clari- that adopted in New Zealand. For unbundling, fied the situation by imposing some vertical sep- however, specific regulation has not necessarily aration between the two market segments. yielded better results. One main reason is that All five countries have relied on sector- determining adequate pricing and other condi- specific rules to ensure that universal service tions of access to distinct unbundled elements objectives are met and to regulate the allocation of a given network is far from straightforward. and use of the radioelectric spectrum. In both Agreement on number portability, carrier cases such rules are needed to optimize the allo- preselection, and roaming also proved difficult cation of scarce public resources: public subsi- to reach in New Zealand without sector-specific dies funding universal service schemes in the rules. Some operators reached an agreement on first case, and the spectrum in the second. number portability in 1999, but the government had to threaten to intervene at several stages Striking the right balance and the process took a long time. Preselection The experiences of the five countries suggest agreements for long distance fixed-to-fixed calls that sector-specific rules are needed to: were also negotiated commercially before the Specifyinterconnectionpricesandconditions. 2001 reforms. But preselection for fixed-to- Set the prices of resale services and perhaps mobile calls did not exist, nor did roaming. the conditions under which the incumbent Control of retail prices also proved problem- should provide unbundled access to the local atic under antitrust. In Chile, for example, the loop (though experience suggests that design- pricing provisions of the 1982 General Law of ing and implementing adequate unbundling Telecommunications were vague, and prices rules is extremely difficult). were set through informal negotiations between Allow number portability, carrier preselec- incumbent companies and the Ministry of Econ- tion, and roaming. omy. Prices were set at inefficient levels, cross- Control end-user prices in market segments subsidization between services was maintained, where competitive pressures remain weak, and antitrust authorities did not intervene to such as that for fixed local calls. correct the situation. Only after the adoption of Impose certain types of structural remedies, more specific provisions were these problems such as vertical separation between different corrected. market segments. Even in merger controls, applying antitrust Define and fund universal service objectives provisions may not always promote competition. and allocate rights to use the radioelectric In many countries antitrust merger provisions spectrum. are designed to prevent behaviors that would Antitrust rules also remain essential in all five lessen competition and so are inadequate to fos- countries, to: C O N T R O L L I N G M A R K E T P O W E R B A L A N C I N G A N T I T R U S T A N D S E C T O R R E G U L A T I O N I N T E L E C O M S Deal with a range of issues of economic reg- Greater competition in the local loop may ulation not addressed by the sector-specific also eliminate the need to regulate end-user rules above (for example, to ensure merger prices. Indeed, as competition has taken hold, reviews and prohibit anticompetitive prac- the Australian, Chilean, and U.S. regulators have tices). progressively reduced the number of telecom- viewpoint Fill any gaps in sector-specific regulatory munications services subject to price regulation. regimes. More intense competition in the local loop The experiences of the five countries also sug- would thus shift the appropriate balance is an open forum to gest that specialized entities are needed to deal between the two regulatory approaches toward encourage dissemination of with some of the most complex issues requiring economywide rules. And a move toward greater public policy innovations for regulatory intervention in telecommunications. reliance on economywide rules would bolster private sector­led and Both a sector-specific agency (with or without the case for entrusting an economywide rather market-based solutions for antitrust powers) and an economywide antitrust than a sector-specific regulator with controlling development. The views entity with sufficient expertise in telecommuni- market power in telecommunications. Some published are those of the cations may be well suited to the job.2 steps in that direction have already been taken. authors and should not be There appears to be growing convergence Australia opted to entrust its competition attributed to the World among the five countries toward the balance authority with responsibility for regulating Bank or any other affiliated suggested here between sector-specific and telecommunications. New Zealand has now fol- organizations. Nor do any of antitrust regulation. For example, Chile and lowed suit. And the United Kingdom recently the conclusions represent New Zealand, which had few sector-specific rules replaced its telecommunications-specific regu- official policy of the World when they liberalized their telecommunications lator with a broader communications regulator, Bank or of its Executive markets, have subsequently adopted such rules. emulating the United States, where the FCC's Directors or the countries Conversely, the United Kingdom, whose frame- competence extends to both telecommunica- they represent. work initially relied heavily on sector-specific tions and broadcasting. provisions, has shifted toward more emphasis on To order additional copies antitrust. contact Suzanne Smith, Convergence can also be observed on insti- managing editor, tutional issues. Indeed, since the 2001 reforms Notes Room F 4K-206, in New Zealand, all five countries have estab- The World Bank, 1. What constitutes an abuse of dominant position 1818 H Street, NW, lished either a sector-specific regulatory agency varies with market conditions and with the intensity of Washington, DC 20433. or a specialized department within an econo- competitive pressures. Free or discounted on-net calling mywide antitrust authority. between fixed and mobile phones is now allowed in some Telephone: countries where there is enough competition. 001 202 458 7281 The way forward 2. This does not mean, however, that the authority of Fax: The spread of new technologies is likely to facil- a specialized regulator should necessarily extend to every 001 202 522 3480 itate competition in the local segment of the sector-specific rule listed. For example, given the broad Email: telecommunications market in the five coun- socioeconomic implications of universal service regimes, ssmith7@worldbank.org tries. This, in turn, is likely to allow progressive specialized regulators--especially if they focus on one sec- relaxation of some sector-specific regulation. For tor only--may not be best placed to administer such Produced by Grammarians, example, as new local service providers become regimes. Inc. more numerous and more competitive, the incumbent will face greater incentives to offer Reference Printed on recycled paper them equitable interconnection conditions. Géradin, Damien, and Michel Kerf. 2003. Controlling Long distance and mobile operators will also Market Power in Telecommunications: Antitrust vs. Sector- find it easier to conclude favorable intercon- Specific Regulation. New York: Oxford University Press. nection agreements when they can negotiate with any one of a number of local service providers. As a result, a sector-specific intercon- nection price regime may some day become unnecessary. T h i s N o t e i s a v a i l a b l e o n l i n e : h t t p : / / r r u . w o r l d b a n k . o r g / P u b l i c P o l i c y J o u r n a l