RELATIONSHIP BETWEEN COMPETITION AUTHORITY AND REGULATORY AUTHORITY REGARDING THE POWER TO REGULATE ABUSE OF MARKET DOMINANCE

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1 RELATIONSHIP BETWEEN COMPETITION AUTHORITY AND REGULATORY AUTHORITY REGARDING THE POWER TO REGULATE ABUSE OF MARKET DOMINANCE Contribution by the REPUBLIC OF KOREA Submitted to UNCTAD's Seventh Session of the Intergovernmental Group of Experts on Competition Law and Policy, Geneva, 30 October to 2 November

2 Intergovernmental Group of Experts on Competition Law and Policy, seventh session Relationship between competition authority and regulatory authority regarding the power to regulate abuse of market dominance 1 Suju Kim Deputy director Korea Fair Trade Commission October 31, 2006 Palais des nation, Geneva 1 The views expressed here are the author s alone and not those of the Korea Fair Trade Commission. 2

3 Relationship between competition authority and regulatory authority regarding the power to regulate abuse of market dominance Ⅰ. Overview Since 2000 up until now, Korea Fair Trade Commission has had a total of six cases where it imposed corrective measures or surcharge against abuse of market dominance. The reason why the Commission has handled such a small number of abuse of dominance cases seems to be that competition law enforcement against the legal violation usually requires extensive investigations and in-depth economic analyses over a long period of time. Probably because of the small number, there has not been any serious conflict between the competition authority and the regulatory authority with regard to abuse of market dominance. Since most of the regulated industries in Korea are monopolistic/oilgopolistic industries, jurisdictional conflict over jurisdiction between the competition authority and the regulatory authority is closely related to regulations against dominant companies in the monopolistic/oilgopolistic industries. In other words, the conflict between the two parties is over who will have the authority to regulate behaviors constituting abuse of market dominance. This paper will introduce Korea s laws and regulations against abuse of market dominance and actual law enforcement cases against it, and then, I will move on to conflicts that generally occur between the two sides when investigating and deliberating competition laws violations by market dominant companies. Lastly, I will briefly talk about what solutions there could be to the conflicts. Ⅱ. Korea s regulations against abuse of market dominance 1. Regulations against Abuse of Market Dominance Korea enforces regulations against abuse of dominance by companies that are either suppliers or consumers in a certain transaction area and can determine, maintain, or change terms for transactions such as price, quantity, and quality for products and services on its own or with other companies. Market dominant position is determined by taking into consideration a wide-range of factors including market share, existence and height of entry barriers, relative size of competing companies. 3

4 A company with annual turnover or purchase is 1 billion Won or more that falls under any of the followings shall be presumed to be a market dominant company: 1. Market share of the enterpriser is 50 % or more 2. The total market share of not less than three enterprisers including the company is 75 % or more Abuse of market dominance is committed in varying forms: price abuse, output control, obstructing competitors business activities, blocking market entry by new competitors, excluding competing companies, undermining consumer interests, etc. The competition authority can issue corrective measures against abuse of market dominance such as price reduction, cease and desist order, public announcement of corrective measures imposed by KFTC, and other measures necessary to correct the competition law violation. On top of this, KFTC has the authority to impose surcharge of not more than 3 % of the respondent s average turnover of the immediately preceding three years or to subject the respondent to a prison sentence of three years or a fine of 200 million Won or less. 2. Incorporation of Provisions on Essential Facilities Amendments to the Enforcement Decree of the Monopoly Regulation and Fair Trade Act in March 2001 introduced provisions on essential facilities. Article 5 of the Enforcement Decree bans an act refusing, discontinuing or limiting, without justifiable reason, the use of or the access to essential facilities for the manufacturing, providing and selling of the products or services of other enterprises. The central value of the provisions on essential facilities in the Enforcement Decree lies in that they are effective means in correcting legal violations that can hardly be corrected by provisions on abuse of market dominance or unfair business practices. The essential facility provisions hold dominant companies responsible for not only impeding their competitors business activities, but also not working hard enough to facilitate competition of competitors. In other words, the provisions impose the obligation to facilitate competition on market dominant companies. In this sense, the provisions are meaningful in that they open monopolistic markets by imposing the active duty to deal on market dominant companies. Here, the duty is a special one borne by dominant companies only as it is aimed at preventing monopolization of essential facilities from leading to monopolization in upstream and downstream markets as well. The significance of the provisions on essential facilities can be recognized only when the essential facilities are interpreted within the scope confined to networks, infrastructure or other facilities with 4

5 strong natural monopoly characteristics and also when the essential facilities are judged to be truly essential ones fulfilling strict conditions. Ⅲ. KFTC s Decisions on Cases of Abuse of Market Dominance KFTC has had almost no prominent conflict with the regulatory authority regarding its decisions against abuse of dominance cases. This seems to be because the regulatory authority also recognizes regulations against abuse of market dominance to be falling under the jurisdiction of the competition authority. Here, I would like to provide you with just some of the abuse of dominance cases handled by KFTC. 1. POSCO s Abuse of Dominance POSCO is a monopolistic supplier in the domestic hot rolled steel coil market. HISCO Co., Ltd - POSCO s competitor in the cold rolled steel sheet market - requested POSCO to provide it with hot rolled steel coil, an essential material in producing cold rolled steel sheets, but POSCO declined the request. KFTC found the POSCO s unreasonable refusal to supply HISCO Co., Ltd with hot rolled steel coil constituting obstruction of the competitor s business activities undermining competition in the market. In the end, KFTC imposed corrective measures and surcharge on POSCO. (Decision No ) 2. Microsoft s Abuse of Dominance Microsoft is a dominant company enjoying monopoly-like market dominance with a 99% market share of the domestic PC OS market. KFTC issued corrective measures and surcharge on the respondent for obstruction of competitors business activities and undermining consumers interests through bundling of Windows Media Service, Windows Media Player, and Windows Messenger with the Server and the PC Operating System. (24 th Feb 2006) 3. Regulations against M&As with Essential Facilities involved In 2001, the KFTC made a decision on a case where SK Corp.(SK), Korea s largest oil refinery, became the largest shareholder of the Daehan Oil Pipeline Corporation (DOPCO), gaining control over DOPCO 2. DOPCO is a company that exclusively owns and manages oil pipelines used for transporting petroleum products. The Korean government, once took control of DOPCO as the largest shareholder, sold its stake in the company to oil refineries as part of privatization efforts. As a result, SK, the largest refinery in Korea, became the largest shareholder holding 34.04% of DOPCO s shares, and shared control of DOPCO with other refineries such as LG(22.59%), S- 2 Korea Fair Trade Commission Decision No

6 Oil(15.57%), Hyundai Refinery(12.90%), Inchon Refinery(4.75%). S-Oil, one of the shareholders of DOPCO, filed a complaint for Korea Fair Trade Commission (KFTC). The complaint asserted that the stock purchase of SK from Government increased the possibility of discrimination among users of the pipeline and revealing business secrets of users. Besides oil pipelines, other means such as oil tankers, tank truck and tank cars are used to transport oil products from refineries to gas stations. Therefore, to determine whether SK s conduct of securing control over pipelines restricts competition, it was necessary to judge whether oil pipelines are essential facilities for refinery companies. The KFTC determined that a market for petroleum product transportation using pipelines is a separate market from one for petroleum product transportation using other means such as oil tankers and tank cars, and that oil pipelines are essential facilities in the pipeline-based transportation market. The following is the reasons for this decision. First, due to a considerable difference of transportation costs between oil pipelines and other means, there is not a great possibility of substitution among these means. Second, oil pipelines should be used if a refinery wants to transport oil products to inland areas. Third, it is not likely for refineries to establish oil pipelines for their own needs, because construction of these facilities requires huge capital investment. Fourth, unlike other transportation facilities, oil pipelines are strategic national infrastructure and, particularly, common carriers. KFTC found that there is a high possibility of restriction on the access to the pipeline facilities because the user who took control of the pipeline facilities maintains the incentive to increase its profit by the restriction. Therefore, KFTC decided that the transfer of share of DOPCO from government to SK would lessen competition in the market of oil products transportation and the market of oil products sales. At the same time, KFTC issued following remedies to guarantee open access to the oil pipeline facilities. First, SK should include a ban on restrictions with regard to use of the facilities, such as refusal to use, restriction on the amount of transportation, discrimination in the order of use, the rental fee, and other contract conditions, in DOPCO s Articles of Incorporation and comply with it. Second, SK should establish and operate a council for deliberation and decision on the matter of the use of the facilities owned by DOPCO. Participants of the council are representative of DOPCO, users of the facilities, and persons represent public interest. Vertical separation had been regarded as an effective structural form for a privatization of publicly owned facilities for the purpose of ensuring access to the facilities by new entrants of the market. However, because it failed to draw attention from other investors, the oil pipeline was privatized by the way of selling the government share to the users of the facilities. 6

7 Consequently, the facility was owned in the structure of Club Ownership. However, in the case where users share ownership of the facilities, owners who obtain control of the facility have incentive to restrict access of other users. Therefore, KFTC issued behavioral rules on the user who took control of the facilities in order to prevent the possible anticompetitive activities. It is considered that the decisions of KFTC were effective in preventing anticompetitive restriction on the access to the facilities because there were no anticompetitive activities until now, 5 years after issuance of said remedies. Ⅳ. Conflict between Competition Authority and Regulatory Authority 1. Jurisdictional Conflict and Overlaps in Regulation In Korea, the regulatory authority has been in charge of economic and technical regulations, while the competition authority, enforcement of competition laws. Some of the once regulated industries that were understood as natural monopoly, such as telecommunications and energy industries, are being deregulated thanks to changing economic environment and technological development. These developments have heightened the need for dissemination of competition principles in these industries as well. Meanwhile, changes and expansion in the role of sector regulators have increased the chance for their conflicts with the competition authority. For instance, in the telecommunications industry, overlaps in regulations by the competition authority and the regulatory authority have been pointed out since the enactment of the legal provisions banning telecommunication companies unfair business practices. Even though the two sides signed an agreement on this issue on three occasions, they are still at odds with each other over amending and enforcing Telecommunications Business Act and the notification on types and criteria of prohibited behaviors in the telecommunications industry. Moreover, the competition authority has raised questions from the perspectives of competition policies about a couple of the regulatory authority s policies including subsidies for mobile handsets and authorization of telecommunications service charges. As for KFTC s attempt to reinforce its law enforcement in the broadcasting industry, Korean Broadcasting Commission is planning to incorporate competition law-related provisions in the Broadcasting Act to block KFTC s intervention in the industry. Especially, the telecommunications industry is suffering from overlaps in regulations, so I would like to cite some of the major cases in detail in the followings: 7

8 KFTC conducted investigations into the alleged abuse of market dominance by mobile telecommunication service providers in The companies involved had been already investigated by Korea Communications Commission. KCC opposed KFTC s investigations arguing that any investigation into unfair business practices committed by mobile telecommunication service providers should be executed by the sector regulatory authorities only. The companies subject to the KFTC s investigations also claimed that the KFTC s investigations were a typical example of redundant regulations and also that these overlaps were increasing the burden on them. 2. Administrative Guidance by Regulatory Authority and Exemption from Application of Competition Laws Jurisdictional conflicts between industry regulators and the competition authority have been often out there. Recently, in the telephone service charge cartel between dominant telecommunications companies and latecomers, the respondents argued that they had just followed the industry regulator s administrative guidance. With this, the competition authority has had heated discussions over conflicts between regulations by industry laws and those by competition laws in the regulated industries with the regulatory authorities and companies respectively 1). Prior to the case, all the discussions over the jurisdictional conflict were on the administrative agency level. However, what was at the center of controversies surrounding this case was whether the MRFTA shall not be applied to companies illegal behaviors if they had been abetted by sector regulators or committed in accordance with the regulators administrative guidance with no clear legal justification. Though this case was not a dominance abuse case, the sector regulator s administrative guidance was indirectly involved in the cartel of the respondents. The followings are the detailed descriptions of the case: In the domestic local telephone service market whose size was trillion Won in terms of turnover, two companies with a market share of 94.5% and 5.5% respectively committed price collusion. The regulatory authority claimed that its administrative guideline was aimed at fulfilling policy goals such as consumer protection and establishing and maintaining effective competition in the market, not at encouraging the respondents to reach an agreement on price. Regardless of whether the Ministry of 1) Unfair collusion between two local telephone call service providers (KFTC Decision No 호, ). 8

9 Information and Communication had directly ordered the respondents to form price cartel or indirectly led them to do so, it is true that the Ministry s guidance was the starting point of the cartel. It seems to be the case that the Ministry was deeply involved in the adjustment of the market share and in price setting activities of the respondents as part of means to achieve its policy goal of securing effective competition in the telecommunications market. Despite the claims by the respondents that the price collusion was in line with the Ministry s administrative guidance, KFTC judged their cartel to be in violation of the MRFTA and subsequently imposed corrective measures and surcharge on the respondents. The decision later led to a lot of controversies. On this case, the stance of the Commission is that behaviors conducted in line with administrative guidance with clear, consistent, and detailed justifications defined in laws shall be considered as legitimate actions taken pursuant to the MRFTA and its subordinate statues as stipulated in Article 59 of the MRFTA and therefore shall be exempted from the application of MRFTA. Meanwhile, those behaviors pursuant to administrative guidance with no legal justifications or just general statement of the regulators authority shall not enjoy the exemption. The Supreme Court of Republic of Korea ruled that exception to the application of the MRFTA shall be allowed only when companies behaviors were committed pursuant to either laws recognizing exceptions to free competition in great detail or orders issued under the laws. Ⅴ. Solutions to Conflict between Competition Authority and Regulatory Authority In the midst of the global trend of deregulation, competition laws are more and more in conflict with industry laws that have had the comprehensive authority to govern regulated industries. If this problem remains unsolved, this could unfairly impose burden on individual companies to cope with redundant government regulations and, more importantly, hamper sound development of the industries as a whole. The approaches to resolve the problems could be divided into an interpretative approach and a legislative approach. As for the interpretative approach, it is aimed at resolving the conflicts through reasonable interpretation of provisions of the MRFTA and those of the concerned industry laws. Meanwhile, the legislative approach first is to refine both industry laws and MRFTA s provisions on exception to the application of the Act, and then we could think about harmonizing the MRFTA and other 9

10 competition laws with industry regulations unique to the regulated industries through enactment or amendment of laws and regulations. It is true that the latter looks attractive, but we need to acknowledge difficulties in actually putting the idea into practice. Most of the discussions on this issue have centered on the legislative approach, but the talks have proven not so productive. Then, we should positively consider making the most of the MRFTA s provisions on exception to the application of the Act, while taking reference to legal theories on the exception to the application of competition laws developed by the U.S. and other countries with advanced competition laws. I believe this is the most realistic and convenient means to resolve the clash between industrial regulations and competition laws. Under the current competition laws, Article 58 of the MRFTA is actually the only legal basis that can be of help in resolving the problems in applying the MRFTA to the regulated industries. Ample precedents and legal theories on this issue of the U.S. and Japan and especially, the recent legal amendments in Japan will be of great help to KFTC in making reasonable interpretation of the MRFTA s provisions on the exception. When interpreting and enforcing the provisions, the followings should be fully taken into consideration: First of all, industrial regulations do no always clash with or violate competition laws. In the regulated industries, as a matter of fact, competition laws and regulations can contribute to achieving the goals of sector regulators in individual regulated industries as they make up for the deficiency of industrial regulations. Meanwhile, they can achieve harmony with industrial regulations by helping the market to function in a more competitive way or by thoroughly monitoring and strictly punishing companies behaviors that can t be effectively regulated by industrial regulations only. Second, the exceptions to the application of the MRFTA are directly related to the status of the MRFTA in Korea, the country that has adopted market economy as the basic economic principle. To put this differently, this is a matter of whether the MRFTA will be able to maintain its status as the primary law defining the Korean economy or will just degenerate into a set of perfunctory rules. Lastly, when discussing the provisions, we need to ponder upon what policy impacts they will have. More specifically speaking, amid the global trend of deregulation and promotion of competition in the regulated industries, we need to thoroughly review what message such discussions would send to sector regulators and individual companies subject to government regulations and also what impact they would have on the incentives for companies to commit anti-competitive behaviors. 10