SPEECH/09/202
Neelie Kroes
European Commissioner for Competition Policy
The interface between regulation and competition law
Bundeskartellamt conference on 'Dominant Companies – The Thin Line between Regulation and Competition Law
Hamburg, 28thApril 2009
Good morning ladies and gentlemen,
Regulation and competition policy are very close relatives. As you probably all know relationships between close relatives can be quite complicated. That is also the case with regulation and competition.
If the current financial and economic crisis has taught us anything, it is that there is a high price to pay when regulation fails, and that competition policy is essential for keeping our economy working well.
The wider lesson for all policymakers and public authorities is that those who share common goals must work together. For example, competition authorities and central banks cannot afford to operate in their own little worlds – we must work together on issues like bank recapitalisations and restructures.
Financial sector
The current financial crisis is a good illustration of one of the ways regulation and competition law are connected.
The crisis in the financial sector was to a large extent a product of reckless behaviour by banks in combination with poor and insufficient regulation, and it has made even the strongest supporters of the free and unregulated markets rethink their position. I am a strong believer in the market economy, but more convinced than ever that it must go hand in hand with smart regulation.
There was unrestricted and exaggerated risk taking. There was not enough oversight and now we all pay the price. The first victims are the employees who lose their jobs and taxpayers are now at great risk through the enormous funds committed to the financial institutions. But in the midst of the massive government interventions, we need to make sure that we do not - along the way - also lose the level playing field and the future dynamism that comes from competition.
If we lose the level playing field and if competition is replaced with government controlled 'zombie' banks, then we can be sure that the lost jobs are not going to return and that the bill to taxpayers will grow even higher in the future.
So due to among other things imperfect regulation, we have got more work to do with controlling state aid and we will have a lot of work to do with ensuring that the necessary restructuring takes place, so that trust in the market can return.
Telecoms and Energy
In the fields of telecoms and energy there are many other interesting lessons to draw about the relationship between competition and regulation. While quite different, these two markets have a lot in common.
In sectors with persistent market failures, competition law is rarely going to be sufficient. Without question, sectors like energy and telecoms have proven that competition law alone does not create competition.
In these cases the old monopolist usually controls an infrastructure that itself was built with state finance, and which is necessary for competing downstream. It might completely refuse access or, when forced, grant access in such a way that no room for competition is left; this amounts to refusal to supply.
In these situations you have a structural problem. And regulation will likely be a more efficient and effective way of enabling entry of more competitors into the market. This is turn leads to competition, lower prices and enhanced consumer welfare - the things that competition enforcers can then go on to monitor and protect.
But just as competition alone won’t make liberalisation work - regulation will not automatically generate change or ideal behaviour either. So it needs to be combined with frequent competition law intervention – at both national and European level.
It is crucial that we divide the work between the two in the most effective way so that consumers get the best possible outcomes. Getting that balance right requires hard work.
We need both regulation and competition law
Working together
The telecoms sector offers a good illustration of what successful joint work looks like. It is one of our best examples of the benefits that liberalised but well regulated markets can deliver - we got the balance right, so to say.
In the telecoms sector there is intense cooperation between regulators and competition policy enforcers both at the national level and at the European level.
This cooperation is of paramount importance. Distribution of work, re-allocation of complaints or cases and mutual consultations take place already, but can always be improved.
Besides enforcing competition law in selected cases, the role of the Commission is to foster a consistent application of competition rules and to ensure a common regulatory strategy based on Competition Law principles across the EU through the common regulatory Framework and the Art. 7 notification procedure.
So it is essential to understand from the beginning that regulation and competition law are parallel processes, not competing processes.
Creating self-sustaining competition
Liberalising the telecoms sector had to go hand in hand with strong regulation. Otherwise one could never expect the incumbent operators to be subject to competitive pressure. Then, as competition has built up, we have been able to let some of that regulation give way to self-sustaining competitive forces.
While competition enforcement has contributed to building up the competitive landscape in the first place, it remains in force even as regulation becomes gradually less intrusive
While we will never eliminate anti-competitive practices, by carefully designing regulation, we minimise the risk of these problems.
The Framework sets out three criteria which have to be cumulatively met before national regulators can step in and regulate:
-the markets are characterised by high and non-transitory barriers to entry
-the market structure does not tend over time towards effective competition and
-competition law is by itself insufficient to deal with the market failures identified.
This is known as the ‘three criteria test’ and regulation is imposed only in those markets where the three criteria are met and where Significant Market Power is found.
This approach keeps regulation and the risk of anticompetitive conduct to a minimum. It also means that regulation will be phased out as competition develops - an important principle of the framework.
With more focused regulation, regulators are now targeting the worst bottlenecks in the sector such as access to broadband services, including next generation broadband services.
Deciding which territories and markets can move to 'ex post' regulation can be complicated, however. In the case of wholesale broadband markets, the Commission supported the proposal of several national regulators to de-regulate in parts of their national territory.
We supported this because it meant regulation would be better targeted at those geographic areas where structural competition problems persist. This move also demonstrates that the more effectively a national telecoms watchdog regulates, the faster the move to competition law can be.
The principle at stake in that case was ensuring that any adjustment to the geographic scope of regulation is based on sound competition law principles. This is what will ensure a smooth transition from ex ante to ex post enforcement.
Some telecoms issues are enduring economic bottlenecks however - such as non-replicable legacy facilities. In this case access regulation is indispensable to allow market entry.
So, while regulatory intervention must be justified and based on competition principles – it no doubt has a role.
But even in regulated markets, companies have a margin of manoeuvre in defining their business conduct. Like any other business they are obliged to conduct themselves according to the competition rules.
If we suspect an abuse then we have room to act as the competition enforcer. We did this, for example, with the Telefonica margin squeeze decision in 2007.
Telefonica
Ex-ante regulation is by definition based on forecasts. As it should have, the Spanish Telecom Regulator (CMT) put in place ex ante regulatory mechanisms on the basis of market and cost forecasts. But when examining Telefonica's actual ex-postbehaviour on the Spanish broadband markets, the Commission realized there was a big competition problem - and was obliged by the EC Treaty to act.
Telefonica misused its margin of manoeuvre to abuse its dominant position. The data showed that over five years Telefonica's wholesale broadband prices were so high they did not allow competitors to compete on the retail broadband market without making losses. Small businesses and consumers in Spain were paying far too much. So it was clear that Telefonica was undermining competition and hurting the Spanish economy.
It is worth noting actually that the Commission had previously taken action against France Telecom and Deutsche Telekom for similar behaviour in similarly regulated markets.
And the work continues. Just yesterday, the Commission formally opened proceedings against the incumbent telecom operators in Poland and Slovakia. The suspicions in these cases relate to behaviour that may prevent competition in relation to broadband internet access.
Energy
Looking back at the evolution over the last decades, it is striking to observe the difference between telecoms and energy. In the telecoms sector, we have seen a transition from state owned monopolies to fierce competition. Prices have dropped and innovation has provided new and better products to consumers.
In the energy field it has been much harder to see the progress, to put it mildly. Since I took office, it has been one of my main goals, together with Commissioner Piebalgs and the rest of the Commission, to try to move the process forward towards better and more competitive energy markets.
When we launched the sector inquiry in the energy sector, it became very clear why competition was not delivering results. The structure of the market and the behaviour of the incumbents did simply not allow competition to flourish.
Europe’s energy sector is essentially made up of fragmented national markets with dominant incumbents who often own both supply and transmission businesses.
These vertically integrated companies do not have incentives to invest in interconnection capacity and network capacity since this would expose them to more competition. As a result market entry is low, choice is limited, and security and sustainability of supply is lower than it could be.
And the tricks dominant companies can play to avoid having to compete result directly from the regulatory framework in which they operate.
Many of the cases we have had - and are still pursuing - in the energy field are to some extent a result of the imperfect regulatory systems or its implementation. Just last week we opened formal proceedings in relation to the use of Swedish electricity interconnectors to neighbouring countries.
Last month we sent a Statement of Objections to ENI in Italy, which raises concerns about refusing access to the network and strategic underinvestment.
The RWE decision we adopted last month was based among other things on concerns about RWE refusing access to its gas transmission network.
The case against E.ON dealt among other things with how they called on themselves to deliver balancing services when they ensured balance between demand and supply in the electricity grid.
Although Articles 81, 82 and 86 of the EC Treaty are higher in the legal hierarchy than regulation, these cases originate in the specific context of the specific sector regulation.
Once we have a better structure in the energy markets with real and effective unbundling, all these cases about how the incumbents misuse their control of the network to avoid competition would be easier to detect by regulators or the Commission and no longer have to eat up as many of our resources.
With the Third Energy Package we have taken an important step in the right direction.
Conclusions
So in conclusion I hope I have made clear today that there are valuable roles for both regulation and competition law in helping markets work better.
We have to get the front end and the back end of market supervision right. Key to that is understanding the limits and roles of regulation and competition law.
Our experience is that regulation which respects competition principles is the most efficient type of regulation. When that regulation succeeds in enabling a competitive market, there is less to worry about both for the consumers and for the enforcers of competition rules.
But even the most perfectly designed regulation will not eliminate the risk of abuses, so there will always be a role also for competition enforcement.
Getting this balance right requires constant dialogue between regulators and competition enforcers.
It is not easy – the relationships change from sector to sector, and the balance between ex ante regulation and ex post enforcement will also depend upon the state of each market.
But the principles remain the same: regulation and competition law only work when they work together.
Without these consistent and continuous relationships it is much harder to deliver the self-sustaining competition that Europe needs to remain competitive and to get back to growth.
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