SWEDEN’S MARGIN SQUEEZING ACTION- THE TELIASONERA STORY

Early this month, the Stockholm City Court fined telecoms company TeliaSonera 144 million krone (€16million) for abusing its dominant position by squeezing its competitors’ margins. The Swedish Competition Authority dictated the amount after it gave a statement that it was one of the most important matters relating to abuse that they dealt with since the 1990s. The Competition Authority commenced the proceedings against the company in 2004 in the City Court for abusive action in the retail market for resale services for ADSL connections during the period from 2000-2003. The proceedings had been pending until last week since the City Court had requested a preliminary ruling from the European Court of Justice (ECJ) in 2009 on the interpretation of Article 102 TFEU (Formerly Article 82 EC).

Brief Overview of the Facts: At the end of the 1990s and the beginning of the 2000s, a growing number of Swedish end users of internet services moved from dial-up internet connections, with low transmission speeds, to various types of broadband connection with considerably higher transmission speeds. At that time the most widespread form of broadband connection was that achieved by asymmetric digital subscriber line (‘ADSL’). Telia­Son­era is the Swedish fixed tele­phone net­work oper­a­tor, and was the owner of the local loop to which almost all Swedish households are connected. It offered access to the local loop to other operators, in two ways. On the one hand, it offered unbundled access, in accordance with its obligations under Regulation (EC) No 2887/2000 of the European Parliament and of the Council of 18 December 2000 on unbundled access to the local loop (OJ 2000 L 336, p. 4). On the other hand, without being legally obliged to do so (hence unregulated), it offered to operators an ADSL product intended for wholesale users. At the same time, TeliaSonera offered broadband connection services directly to end-users. It was alleged by the Swedish Competition Authority that TeliaSonera was setting its wholesale/retail price spread so as to foreclose its competitors in the downstream market for end-user broadband connection.

Decision: In order to determine the nature and extent of abuse of a margin squeeze action by a dominant market player, the ECJ referred to the Deutsche Telekom v Commission case. It stated that a margin squeeze, in view of the exclusionary effect which it may create for competitors who are as efficient as the dominant undertaking, in the absence of any objective justification, is in itself capable of constituting an abuse within the meaning of Article 102 TFEU. It further stated that when such a dominant undertaking adopts abusive pricing tactics to drive efficient competitors out of the market and they cannot withstand such anticompetitive behaviour owing to their smaller financial resources, the former has abused its dominant position. Accordingly, the ECJ held that, in the present case there is such a margin squeeze since the spread between the wholesale prices for ADSL input services and the retail prices for broadband connection services to end users were either negative or insufficient to cover the specific costs of the ADSL input services which TeliaSonera has to incur in order to supply its own retail services to end users, so that that spread does not allow a competitor which is as efficient as that undertaking to compete for the supply of those services to end users.

However, the decision of the ECJ in this case has received much prominence because of its take on three very important issues. First, treatment of margin squeezing in the absence of any regulatory obligation to supply, second, its finding that margin squeezing is a separate category of infringement and merely a form of refusal to supply and third, that effect of indispensability of the input in establishing a case of abuse of dominance.

The ECJ came to a decision that a margin squeeze constitutes an abuse of dominance, contrary to article 102 TFEU even when the dominant market player does not have any obligation to supply its product to the downstream market. The reasoning accorded by the Court was that Article 102 TFEU applies if it is found that the national legislation does not preclude undertakings from engaging in autonomous conduct which prevents, restricts or distorts competition. This view was taken keeping in mind the decision in Commission and France v Ladbroke Racing, where it was held that, if anti-competitive conduct is required of undertakings by national legislation or if the latter creates a legal framework which itself eliminates any possibility of competitive activity on their part, Article 102 TFEU does not apply. In such a situation, the restriction of competition is not attributable, as those provisions implicitly require, to the autonomous conduct of the undertakings. Further, it was held in the Deutsche Telekom v Commission case that if a dominant vertically integrated undertaking has scope to adjust even its retail prices alone, the margin squeeze may on that ground alone be attributable to it. Therefore, the Court held in the present case that, the absence of any regulatory obligation to supply the ADSL input services on the wholesale market has no effect on the question of whether the pricing practice at issue in the main proceedings is abusive. This judgment thus defined a broader scope for margin squeezing even in the absence of a regulatory duty to deal.

The ECJ further rejected the argument that a margin squeeze action is a form of refusal to supply and held that it constitutes a stand-alone abuse. The Court stated that the conditions to determine margin squeezing and refusal to supply are not the same and such an understanding drawn by TeliaSonera while interpreting the Bronner case was inaccurate. Lastly, the Court also held that inorder to establish a case of abuse of dominance it is not necessary to show that the dominant player in the upstream market provides an input that is indispensible to the downstream competitor to compete. It is simply enough, if the market player holds a dominant position and the indispensible nature of the input is immaterial to determine abuse of dominant position by way of margin squeezing.

Based on all its findings, the ECJ held that TeliaSonera has abused its dominant position by imposing abusive prices on wholesale and retail broadband services such that there was an insufficient margin between the wholesale price and the price for private customers to cover Telia Sonera’s own costs of selling broadband to private customers. The City Court adopted a similar view and stated that in several cases the company had even applied a higher price in relation to its competitors than in relation to private customers. This margin squeeze restricted the opportunity for Telia Sonera’s competitors within dial-up Internet to expand in the broadband market and delayed their entry into the market. Thus, they had to sell either at a loss or with profitability that was so low that they could not engage in active marketing in order to win new customers.

While this judgment has been well received by the Swedish Competition Authority, the Advocate General has opined that such an approach may risk reducing incentives to invest in developing infrastructure and increases the risk to increase retail prices. The judgment of the City Court can however be appealed to the Market Court, which is the highest instance for competition cases.

[This post has been authored by Vidyullatha Kishor, a student of 5th Year, B.A. LL.B. (Hons.) at the W.B. National University of Juridical Sciences]

Sectoral Regulation Part II: Search for alternative models: Evaluation of the United Kingdom’s concurrence-based competition-regulatory regime

The leading authority for enforcement of competition law in the UK is the Office of Fair Trading (OFT). However, its powers to enforce both EU and UK competition law are shared with other sectoral regulators. The term ‘concurrent powers’ refers to the powers to apply competition law in particular sectors, exercisable by either the relevant sectoral regulator or the Office of Fair Trading (OFT). The sectoral regulators which have concurrent powers with the OFT are the Office of Communications (Ofcom), the Office of Gas and Electricity Markets (Ofgem), the Northern Ireland Authority for Energy Regulation (NIAER), the Director General of Water Services (Ofwat), the Office of Rail Regulation (ORR) and the Civil Aviation Authority (CAA).

The right to enforce competition law have been available to the sectoral regulators since March 2000. However, it was not until November 2006 that the first competition infringement decision was taken by a sectoral regulator. The decision by the Office of Rail Regulation (ORR) that English Welsh and Scottish Railways Limited (EWS) had breached Chapter II of the Competition Act of 1998 (abuse of a dominant position) and its EU equivalent, Article 82 of the EC Treaty, in relation to the market for coal haulage by rail. The ORR has imposed a penalty of £4.1 million on EWS. In calculating the level of penalty, the ORR has had regard to the OFT's Guidance as to the appropriate amount of penalty and the requirement that a penalty must reflect the seriousness of the conduct involved and serve to deter future infringement of the Act.

The policy intent informing this arrangement was to take advantage of the sectoral regulators’ considerable specialist knowledge of their particular sectors and to assist in coordinating the use of sector specific regulation and the exercise of general competition law functions. Sectoral regulation prescribes in detail the framework within which the market participants may operate, and creates standards and processes that define the behaviour of companies, as the emphasis is on the prevention of market abuse before it happens. The prohibitions in the Competition Act of 1998, and Article 81 and 82 of the EC Treaty also operate ex ante in that they seek to deter breaches of the prohibitions. On the other hand the existence of general competition law principles provides a framework that can and should be used by companies to guide their compliance even in the absence of clearly defined case law. However, they operate ex post in that they are only enforceable ex post in particular areas.

The interaction between sector-specific powers and competition powers raises a number of important policy questions. Any assessment of current practice needs to be placed in the context of the strategic objectives for sectoral regulation and the operation and enforcement of competition law in the economy generally. Sectoral regulation is to some extent required to ensure that objectives other than those related to the efficient functioning of the market (e.g. safety standards) are secured. With respect to market behaviour, application of general competition law is the norm, and that is reflected in the absence of any provisions to exempt markets that are subject to specific sectoral regulation from the operation of general competition law. Specific sectoral regulatory regimes in relation to competition primarily reflect the need to actively inject and promote effective competition into the sector. A distinctive feature of the concurrency regime is that it allows the regulators to use both sector-specific regulatory powers and general competition powers to regulate markets, as a result they have played a key role in opening up markets and stimulating market development, removing barriers to entry, regulating dominant players and in ensuring fair, transparent pricing.

The concurrent scheme of distribution of powers between the OFT and the sectoral regulators include the powers to make market investigation references under Section 131 of the Enterprise Act 2002 where sectoral markets appear to be displaying anti-competitive features are contained in the relevant sectoral legislation. Prior to the enactment of the Enterprise Act, sectoral legislation had given sectoral regulators similar powers to make monopoly references to the Competition Commission (CC) in respect of their particular regulated sector under the Fair Trading Act 1973. Regulators are invested with the powers to investigate infringements of the prohibitions in Chapter 1 and 2 of the Competition Act and Articles 81(1) and 82 of the EC Treaty in the UK. Section 54 and Schedule 10 of the Competition Act give sectoral regulators the same powers in relation to breaches of these provisions in individual cases by undertakings trading in the sectors they regulate, as the OFT has in all cases.

Regulators are empowered to investigate breaches by undertakings who they suspect to have breached these prohibitions. They also permit them to accept commitments from such undertakings, impose interim remedies, take decisions as to whether the prohibitions have been breached, and require infringements to be brought to an end and to impose financial penalties in relation to infringements where appropriate. The OFT has general powers to carry out such studies in relation to any market, and the sectoral regulators in effect have similar powers in the sectors they regulate, to conduct market studies as part of their general regulatory powers. Sectoral regulators have all the powers of the OFT to deal with individual cases under the Competition Act; but not certain general powers to issue general guidance on the application of the prohibitions and on penalties and to make and amend the Procedural Rules that set out the procedures to be followed when implementing the provisions of the Competition Act. The OFT alone has these powers, although it is required to consult with the sectoral regulators when undertaking these duties.

In India, the relationship between competition authorities and sectoral regulators has with alarming regularity involved disagreements over regulatory approaches. A recent instance of the same may be seen in the matter of Belaire Owner’s Association v. DLF Limited dated August 12, 2011. On the one hand, regulators have sometimes acted more in the interests of the firms they regulate than in the interests of consumers or with the objective of promoting competition. On the other hand, competition authorities have at times adopted a microcosmic approach which ignores broader social objectives and lacks technological expertise. This disturbing trend is also highlighted in the recent controversy regarding the conflict of jurisdiction between Competition Commission of India and another sectoral regulator, the Reserve Bank of India. By adopting a simplistic yet short-sighted response if the government experiments with and truncates the powers of the competition commission, it would be a serious setback to an institution which has the power to bring the true benefits of market economy to consumers in India.

The approach best-suited suited to the Indian competition climate, therefore, is one which involves meaningful co-operation and efficient co-ordination between sector regulators and competition authorities. A model under which both sets of laws governing sectoral regulators and competition authorities mandate, the need for the two agencies to confer with each other, while leaving behavioural issues to the competition agency and structural issues to the sector regulator, ensures joint resolution of jurisdictional disputes . To enhance growth and develop an economy that is better able to resist economic shocks, the ideal relationship between competition authorities and regulators is driven by a central government that promotes a broad review of existing regulations with a pro-competitive lens, leading to the emergence of ‘competition culture’ which encompasses the unique expertise of both sectoral regulators and competition authorities.

It is imperative that necessary amendment be introduced to the Competition Act and other sector-specific legislations so that a culture of regulatory consultation rather than conflict is fostered. The Competition Act, 2002 under Sections 21 and 21A envisages formal statutory framework for such interaction. Section 21 read with Section 19 and 20 provide that a statutory authority or regulator may make a reference to the commission and it may seek opinion of the commission, but other than this the Act does not provide for cooperation between the commission and the sectoral regulators. Therefore such provisions of the Competition Act, 2002, should be reviewed with a view to defining a workable division of labour between the regulator and the competition authority as also for eliminating the possibilities of forum shopping.

[This post has been authored by Madhulika Kanaujia & Parth Gokhale, students, B.A./B.Sc. LL.B., WBNUJS]

Part I: Comment on Sectoral Regulation within the Competition Law Framework in India

The command and control mode of governance in India which relied on state ownership gradually has gradually moved towards a regulatory governance framework where public-private partnerships and private sector participants have assumed the role of major-players. In aftermath of a securities scam in 1992 has seen several sector specific regulators emerging on the Indian regulatory horizon. As a result multitude of regulators, many a time, may regulate similar aspects of a corporate behaviour.

The Preamble of the Competition Act, 2002, mandates in light of the economic development of the country, for the establishment of a commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India. Specific provisions contained within the legislation further exemplify the possible tension. The nub of the interface between competition authority and sector specific regulators in India lies on the four limbs of Sections 18, 21, 60 and 62 of the Competition Act, 2002. Section 18 of the Competition Act, 2002 entrusts the competition authority with an overarching duty of sustaining competition in the market. The amplitude of the duty suggests that the competition authority is vested with a comprehensive, overall vantage point on the economy, an advantage unavailable to any other sector-specific regulator.

Section 60 of the Competition Act, 2002 is the usual non obstante provision asserting the supremacy of competition legislation within the domain of competition enforcement, although Section 62 of the Act declares that competition legislation ought to operate in tandem with other enactments. Both sections are mandatory in nature. Further Section 21 of the Act, suggests that in any proceedings before a statutory authority, if such a need arises, the statutory authority may make a reference to competition authority In spite of an authoritative declaration of legislative intent in the Act, in practice, the electricity sector regulator, Central Electricity Regulatory Commission, for instance, has been empowered by statute to deal with competition issues in the power sector. Therefore, while the statutory framework provided for in the Competition Act, 2002 provides for a mechanism of reference between competition Commission and sectoral regulators, the same in this case is optional in nature and the regulator may choose not to do so. Many such similar nebulous competion-sectoral regulator interface arrangements give rise to an imperative need to reconcile the role of the regulator and the competition commission.

Operational framework of the competion-sectoral regulator interface in India

Para. 6.2 of the Revised Draft National Competition Policy aims to ensure competition in regulated sectors, and to create an institutional mechanism for synergized relationship between and among the sectoral regulators and/or the CCI and prevent jurisdictional grid locks. It further provides under Para. 7.1, that where a separate regulatory arrangement is set up in different sectors, the functioning of the concerned sectoral regulator should be consistent with the principles of competition as far as possible. Also there should be an appropriate coordination mechanism between CCI and sectoral regulators to avoid overlap in interpretation of competition related concerns.

The Policy recognises in Para. 10.2.2 that the objective of a sectoral regulator is to provide good quality service at affordable rates, but the promotion of competition and prevention of anticompetitive behaviour may not be high on its agenda or the laws governing the regulator may be silent on this aspect. The conflicts between CCI and the sectoral regulators could be caused by legislative ambiguity or jurisdictional overlap or legislative omission. Interpretational bias of the bureaucracy involved could further aggravate the conflicts. Such conflicts are bound to hurt consumers and the uncertainties that go with them can increase investment risks, and their resolution by a court of law may perhaps be time consuming, and therefore, be only the last alternative. A sectoral regulator may not have an overall view of the economy as a whole and may tend to apply yardsticks which are different from the ones used by the other sectoral regulators. As a result this may lead to a lack of consistency across sectors as regards competition issues. The CCI, which is expected to have developed the core competence, expertise and capacity in competition related issues, will be able to apply uniform competition principles across all sectors of economy. Also penalising violations of Competition Act is the exclusive area of the CCI.

Sector specific regulation presents distinct challenges in competition law and policy. While the role of a competition authority and sector specific regulator can be complimentary, the interface between the two may also manifest into a source of tension. Sectoral regulation typically, focuses only on the main aspects of business conduct such as access or final pricing, providing the ex-ante framework that regulated firms need to follow. Evidence of the complementary role of anti-trust and regulation can be traced in recently liberalised sectors, where regulation tries to ensure that the growth of competition is not impeded by incumbents holding a significant market power. While sectoral regulations are specific, competition law is generic, but both are intended to be complementary. However, the intended complementarity between sectoral regulation and competition law may suffer on account of legislative ambiguity.

Regardless of sharing a common goal, sectoral regulators and competition authorities generally have significantly different legislative mandates. Sector regulators typically have extensive, contemporary knowledge of the technical aspects of the products and services that are regulated. Enforcement by sectoral regulators may be better suited when fast, definitive resolutions are needed; when ex post enforcement creates excessive uncertainty; scientific and technical expertise is required to assess merits of arguments; the standards of proof required for competition law cases would not be sufficient for achieving the socially desired regulatory outcomes; structurally similar situations are repeated and consistent basic rules are desired. On the other hand, competition authorities can provide valuable input for those tasks for which they are not primary enforcers, as the skills necessary for delineating relevant markets, assessing likelihood of harm to competition, assessing entry conditions and assessing significant market power are particularly well-suited to their expertise. Therefore, enforcement by competition authorities may be better suited when: defining markets for regulatory purposes is necessary; ex ante regulatory enforcement risks distorting market outcomes; stifling new products and more generally creating costly errors; markets will not require ongoing oversight; and products of interest are subject to strategic manipulation that cannot be foreseen through regulation.

When establishing or re-evaluating such a complex regulatory framework, it is crucial that the decision on the division of labour between regulators and competition authorities be based on efficiency considerations. Such an optimal, sui generis model must be rooted within the context of the socio-economic exigencies prevailing in India. The Revised Draft Policy in Para.10.2.5, enumerated the benefits which such a framework for an interface between a competition regulator and a sectoral regulator should deliver: appropriately identify issues of concern; ensure appropriate channelisation of various concerns to the appropriate forum and obtaining corrective action at the earliest; establish a framework that avoids duplication of effort; conserve the Commission's resources and limit its ambit only to matters of competition; and promote capacity building and developing expertise both at the level of the competition regulator and the sectoral regulator.

[This post has been authored by Madhulika Kanaujia & Parth Gokhale, students, B.A./B.Sc. LL.B., WBNUJS]