Bureau Consults On Abuse Of Dominance Provisions As Applied To Telecommunications Industry

On September 26, 2006, the Competition Bureau released its Draft Information Bulletin on the Abuse of Dominance Provisions as Applied to the Telecommunications Industry (the "Draft Bulletin"). The Draft Bulletin sets out the Bureau’s approach to reviewing complaints under sections 78 and 79 of the Competition Act (the Act) – the abuse of dominance provisions – in respect of conduct that is not regulated by the Canadian Radio-television and Telecommunications Commission (the CRTC). Stakeholder comments on the Draft Bulletin must be submitted to the Bureau by December 29, 2006.

In order for the Competition Tribunal to find under section 79 of the Act that a firm (or group of firms) has abused its dominant position, the Commissioner of Competition must establish three elements: (1) the person(s) substantially or completely controls a class or species of business (i.e., has market power); (2) that person(s) has engaged in or is engaging in a practice of anti-competitive acts; and (3) the practice has had, is having or is likely to have the effect of substantially lessening or preventing competition in a market. Section 78 lists several "anti-competitive acts" for the purposes of section 79, however the list is not exhaustive and other conduct the purpose of which is exclusionary, predatory or disciplinary may also be "anti-competitive".

The Draft Bulletin reviews the Bureau’s enforcement approach to section 79 as set out in its Enforcement Guidelines on the Abuse of Dominance Provisions, highlighting considerations specific to the telecommunications industry. While the Bureau continues to regard a "sector-specific" focus as "the exception rather than the rule,"¹ the Bureau believes that the Draft Bulletin will assist with the telecommunications sector’s transition from sector-specific regulation to greater reliance on market factors, including greater reliance on the Act. In this regard, the Bureau states that "[g]iven the complex relationships that exist within the industry and the history of competitive disputes which the CRTC has considered, the Bureau may receive a significant number of complaints within the sector." "Nothing in the [Draft] Bulletin," however, "deviates from the enforcement approach outlined in the [Bureau’s more general] Enforcement Guidelines on the Abuse of Dominance Provisions."

A product and geographic market generally must be defined in order to assess whether a firm possesses market power. The principles underlying relevant product and geographic definition do not differ when applied to the telecommunications sector. The Draft Bulletin does, however, highlight certain features of the telecommunications sector that, while not unique to it, may be relevant to the question of market definition in the telecommunications sector.

The Draft Bulletin states, for example, that a bundle of telecommunications services may constitute a separate product market if consumers would not purchase the services on a stand-alone basis in the face of a small but significant and non-transitory price increase. This is only true, however, if all competitors can offer a comparable bundle, otherwise the bundle may not be a distinct product market. With respect to geographic market definition, "the Bureau would define the relevant geographic market based on a specific location if subscribers to services provided at that location were not willing to substitute to services supplied at a different location." Thus, "[i]n essence, a household or place of business theoretically could be defined as a relevant geographic market." That said, the Draft Bulletin states that "the Bureau would aggregate all locations that have the same competitive alternatives … into a single geographic market", such that "a geographic market can be defined around the network of a dominant firm based on its overlapping footprint with competing networks that provide the relevant telecommunications services".

The Draft Bulletin also highlights "other" market characteristics that can be important features of the sector and are relevant to the question of whether market power exists. In addition to market share and barriers to entry, the Draft Bulletin identifies "countervailing power, and technological change and innovation" as "particularly important to the assessment of telecommunications markets." Moreover, with respect to market share, the Draft Bulletin, noting that the provision of telecommunications services is "tied to a location and [that] the number of competitive alternatives that are available to consumers can differ depending on where they live or carry on business," suggests that capacity, rather than market shares, represents an important measure of market power in the telecommunications sector. The Draft Bulletin states: "When substantial excess capacity remains in a market, allowing firms to easily increase supply in response to an increase in price, the ability to raise price[s] above competitive levels may be considerably lower than what a simple concentration measure might suggest."

The Draft Bulletin notes that "[c]ertain types of anti-competitive acts may be more common in, or perhaps even unique to, the telecommunications industry." Actual or constructive denial of access to an "essential" facility, for example, may be anti-competitive, according to the Draft Bulletin, if (i) the firm that controls the facility is dominant in the upstream (wholesale) market for the facility and also the downstream (retail) market in which the facility is an input, and (ii) the denial of access is for the purpose of excluding competitors from entering or expanding in the downstream market (i.e., because it is "difficult or impossible" for the competitor to "practically or reasonably duplicate the facility").

The Draft Bulletin states that predatory pricing can also be an anti-competitive act if (i) "the alleged predatory price is below the average avoidable costs of the firm that is alleged being driven from the market", (ii) the alleged predatory price is below the alleged predator’s avoidable costs, and (iii) the alleged predator will likely be able to recoup its losses by charging prices above competitive levels. That said, the Draft Bulletin states that "[a]s a general principle, where a dominant telecommunications service provider’s response to competition consists only of reducing prices to levels which match, but do not undercut those of a competitor ("meeting the competition"), the Bureau will not take enforcement action when considering allegations of predation."

With respect to "targeted pricing" – the "practice of offering certain customers a significantly better price than charged previously, or that deviates from what it usually charges other customers in the market" – the Draft Bulletin notes "the inherent difficulty in establishing objective criteria that can distinguish between targeted pricing that is harmful and that which is beneficial competitive conduct." The Bureau will require "considerable ancillary evidence" in support of a claim where the targeted price exceeds avoidable costs. Bundling could constitute an anti-competitive act if it meets the Act’s definition of tied selling or amounts to predation.

The Draft Bulletin confirms that the Bureau will apply its "but for" approach² to assessing anti-competitive effects in the telecommunications industry. More particularly, the Bureau will ask: "’but for the practice in question, would there be substantially greater competition in the relevant market, in the past, present or future?"

In addition to being of special interest to those in the telecommunications industry, the Draft Bulletin will no doubt serve to stimulate continued discourse on the Act’s abuse of dominance provisions more generally.

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