Handout 7

Seminar 7: Competition and Sector Specific Regulation

This seminar will be led by a presentation from Dr Veljko Milutinovic (Jean Monnet Fellow, EUI). He will present his research on the relationship between comeptition and sectoral regulation.  The issue has been dealt differentlt in various legal systems. Just a quick point to bear in mind: in EU Law the issue arises, usualy, when national utilities regulation overlaps with EU competition law. This is the way the issue is presented even if the national law implements Directives. In the US, or in national law, the conflict is somewhat different because one deals with a conflict of two laws that have, ostensibly, the same hierarchy in the scale of norms. This might affect the way we think about this particular intersection.

I would be happy for participants to provide examples of national practices that might have a bearing on this topic, we can discuss them in the seminar.


ECJ in Case C 280/08 P Deutsche Telekom v. Commission, available, inter alia, at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62008J0280:EN:HTML

US Supreme Court in Verizon Communications v. Trinko 540 U.S. 398 (2004) (whole judgment), available, inter alia, at: http://www.law.cornell.edu/supct/html/02-682.ZS.html

Giorgio Monti, Managing the Intersection of Utilities Regulation and EC Competition Law, LSE Law, Society and Economy Working Papers 8/2008, available at: http://www.lse.ac.uk/collections/law/wps/WPS2008-08_Monti.pdf;

Additional reading:

John Temple Lang, “European Competition Policy and Regulation”, In F. Leveque and H. Shelanski (eds), Antitrust and Regulation in the EU and US: Legal and Economic Perspectives. Cheltenham; Northampton: Edward Elgar (provided as .pdf document).

Pier Luigi Parcu, “The Surprising Convergence of Antitrust and Regulation in Europe” EUI Working Papers RSCAS 2011/35, available at: http://cadmus.eui.eu/bitstream/handle/1814/17934/RSCAS_2011_35.pdf?sequence=1;

5 comments on “Handout 7

  1. Jotte says:

    In addition to the more fundamental considerations relating to the parallel application of sector specific regulation and general competition law, one should also consider problems of a more technical nature that may arise in the parallel application of these rules. For example with respect to the question of what is a valid test for margin squeeze situations in recently liberalized markets such as telecoms. In these markets the incumbent dominant firm may have a degree of market power because of historical state measures. The exclusive use of an essential upstream facility (such as cable networks) may have led to certain user advantages and consequent cost reductions in downstream activities. One of the key questions in determining anti-competitive dominant behavior is how to determine the efficiency benchmark of a firm that is forced out of a downstream market. In recently liberalized markets, taking the cost structure of the incumbent firm as a relevant benchmark may be unwarranted. The level of efficiency of the incumbent firm is not achieved through competition on the merits and it does not make a lot of sense to take its own cost structure as a benchmark for efficiency. Hence, an application of a form of a reasonably efficient competitor test may be considered as a more valid test in recently liberalized markets, where it may make sense to encourage entry. This would be demonstrated when the margin is insufficient to allow a reasonably efficient firm in the downstream market to obtain a normal profit. In transitory markets, it may make more sense to adopt such a test in stead of the equally efficient competitor test because the market may benefit from entry of rival firms regardless of short-term inefficiency. The objective of such an approach would be to provide a level of equality of opportunity for new entrants (Clerckx and De Muyter 2009). Specific market circumstances could justify the promotion of entry of slightly inefficient operators in the short-term, in the expectation that they will become more efficient in the long run. Consequently, technical considerations in the case of a parallel application of general competition rules to recently liberalized markets. However, a clear disadvantage of this test is that the concept of ‘the reasonably efficient firm’ has to be created by the regulator or competition authority. This significantly increases the margin of error and inefficient outcomes plus it leads to legal uncertainty because the dominant undertaking cannot be expected to estimate a reasonable cost structure. Therefore, this test would only function in regulatory situations. Such ‘technical considerations, do, however, lead to a need for extra scrutiny when applying general competition rules to recently liberalized markets since it may not be warranted to exclude anticompetitive effects solely on the basis of an equally efficient competitor test. Such considerations become relevant in situations where sector specific regulation is not functioning. It could be argued that this is the case in The Netherlands, where decision of the telecoms regulator (OPTA) are more often than not destroyed in appeal, consequently leading to situations of an absence of sector specific regulation and a potential need for general competition rules to fill a gap.

  2. Karin Floistad says:

    An example from national law in my field of research is the sectoral regulation based on cultural aims in Norway. Norways biggest commercial broadcaster has entered into an agreement with the Government (combined with sectoral regulation) where the company is obliged to deliver the signals of the main channel to all distributors on cable at the price set by an administrative organ if the parties cannot agree on the terms for the transmission. Strangely this was viewed upon as been avantageous for the broadcaster and the price decided by the authority also turned out to be advantagous compared to results from previous commercial negotiations. The question in the setting of this seminar would then be if the broadcaster charging the price set administratively can risk questions by the competition authority investigating possible misbehaviour of a dominant firm. .

  3. Emma says:

    In the UK, the system seems to be rather different from most (perhaps all?) other EU countries, in that there is concurrent application of the competition provisions by certain sectoral regulators and the OFT. This is provided for by the Competition Act 1998 (Concurrency) Regulations 2004 and the regulators with this power cover communications, electricity and gas, water, rail and civil aviation. The Deutsche Telecom case arose because in Germany, national law contains specific provision to exclude the national competition provisions from applying in areas where there is already regulation at sectoral level. This is not the case with the UK system, which effectively gives the regulator the function of both competition enforcer and sectoral decision-maker (but note that the power of the regulator to apply competition law is not to the exclusion of the OFT). This is seen in the UK as a rather natural position, given that both competition authorities and sectoral regulators deal with situations where competition is affected, particularly situations of market power. In this respect, think that the UK situation is at the opposite end of the spectrum from the US system; whereas in the US there is a strict division – regulation and antitrust law should not overlap – in the UK there is definite blurring and possible overlaps.

    However, in order to avoid duplication of effort and overlaps, the ‘best placed authority’ should deal with the case – according to a recent article on the subject, where a sector is regulated, usually the regulator is considered best placed (J. McInnes, Concurrent Exercise of Competition Powers by the Secotral Regulators: Is it time for a more radical approach? [2012] Comp Law 37).

    Also, recent consultations in the UK appear to indicate that sectoral regulators who share competence with the OFT to apply competition law should tend more towards the application of the competition regime over and above sectoral regulation. As such, one proposal for reform involves ‘strengthening the primacy of competition law’.

    Briefly, on another point, I agree with Giorgio and the paper by Pier Luigi Parcu that
    politics are unstable and cannot provide a solid foundation for sectoral regulations. Not only may policy attitudes change, but the regulator itself may be forced to merge with other entities and change remit many times. As such, the competition regime – in particular the EU regime through the Commission – appears much more stable as a platform for economic regulation. I think that using the ‘primacy of competition law’ as a benchmark like in the UK is useful given the reliable economic foundations of competition law. Also, since the concurrent system which favours the secoral regulator in cases of overlap, this is also beneficial given that the regulator is closer to the industry and can best decide whether a solution using general competition law is viable. Without competition as a benchmark in this way, the problem may always arise that the regulator may partake in ad hoc decision making.

  4. Chloé says:

    What I found interesting in the readings is the strong difference with respect to the interaction between antitrust/competition law and sector specific regulation in the US and in the EU legal systems.
    In the US, in Trinko case, the Supreme Court held that in the presence of sector specific regulation, the scope of application of antitrust rules remain very limited. The rationale behind the decision was that the Telecommunications Act 1996 “was designed to create a more competitive market” (Monti) and also was specific, strong and effective enough to protect antitrust law. As the Supreme Court put it, following a cost-benefit analysis, “when there exists a regulatory structure designed to deter and remedy anticompetitive harm, the additional benefit to competition provided by antitrust enforcement will tend to be small, and it will be less plausible that the antitrust laws contemplate such additional scrutiny”. In other words, under US law, antitrust law and sector specific regulation could be seen, according to me, as a lex generalis for the former and a lex specialis for the latter. Antitrust rules are not considered as complete, detailed and adequate enough to the specific circumstances of a regulated sector. Hence, sector specific regulation constitutes a substitute to antitrust law, “an effective steward of the antitrust function” (Scalia J.). Therefore there is neither parallel application nor conflict of the two sets of rules. If existent, sector specific regulation will apply and antitrust law will be set aside since sector specific regulation provides for more adequate supervision and sector specific remedies.

    On the contrary, under EU law, there is a parallel application of competition law and sector specific regulation which can lead to potential conflict (see the Deutsche Telekom case where although the national regulatory authority had approved the undertaking’s prices, the Commission applied Article 102 concluding that the competition rules may be held applicable where the sector specific rules do not preclude the undertakings from engaging in autonomous anticompetitive conduct). As a result, under EU law, the overlap between the two fields of law often takes the shape of a conflict between the two and generally leads to the application of EU competition law.
    Certainly, one may find many reasons for this difference between the US and the EU legal systems: supremacy of primary EU law (EU competition law) over national legislations transposing secondary EU legislations, weaker and under-developed sector specific regulation, application of the two sets of rules at different period in time (ex-ante, ex-post), etc.
    However, it seems that under EU law, EU competition law will always remain predominant over specific sector regulation (despite for example the developments brought by the last Package in the different regulated sectors and the independence and powers gained by the NRAs).
    The recent tendency of the Commission in the energy sector to apply ex-ante far-reaching remedies in the case of mergers in order to encourage liberalisation and competition in the energy market is a good example. By applying competition rules and prioritizing those rules over sector specific regulation, I think that the Commission renders sector specific regulation meaningless or at least much less credible. The latter indeed denies the ability of sector specific regulations – which primary aims were to promote liberalisation and develop and safeguard internal market and undistorted trade – to protect competition in the specific sector concerned.
    Consequently, contrary to US law and the Supreme Court’s case law which construed the two fields of law as being substitutes and complementary, EU legal system seems, according to me, to be willing to clearly separate spector specific obligations and general Treaty obligations. Thus, following this approach, a regulated sector will always remain subject to the competition rules, as enshrined in the TFEU.

  5. Argyri says:

    I was able to follow the reasoning of the US SC in Verizon v. Curtis much more than the one of the ECJ in Deutsche Telekom.

    Even though the European court has tried to make a distinction between anti-competitive conduct required by national legislation (where 81 and 82 EC do not apply) and undertakings’ conduct when the national legislation ‘leaves open a possibility of competition’ (paras 80-83), I find the distinction very unclear. I do not understand why should antitrust cover the inefficiencies of the sector- regulation putting the burden on undertakings if the regulation is inefficient in achieving its overall goal as to how a market that it regulates should function. All the more so in cases of unbundling and enforced sharing between competitors.

    Thus, I believe that the SC approach whereby where there is a regulatory structure designed (already having an antitrust function) additional antitrust scrutiny can be unnecessarily costly is more consistent.
    I also agree with the argument that application of competition law in the utilities regulation undermines the effectiveness of the regulation.

    Whether a certain sector should be regulated with specific rules or maybe application of general competition rules would generate better results is a different question. My view is that, irrespectively of this question, at least when the legislator has decided to regulate in specific (even if that is not the best decision) the Courts must not shift the burden to the market players applying competition law when the regulation or its implementation is inefficient.

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