CERRE CENTRE ON REGULATION IN EUROPE

Transcription

1 Market power and market definition in the network industries Summary of presentations and discussions, CERRE Regulation Forum 21 June 2011, Brussels Speakers: Prof. Pierre Larouche (CERRE & TILEC- Tilburg), Catherine Rutten (Member of the Council, BIPT) and Dr Clara Poletti (CERRE & IEFE- Bocconi) Professor Bruno Liebhaberg welcomes all participants to this CERRE Regulation Forum meeting on the subject of market power and market definition in the network industries. He points out that these issues are at the core of CERRE interests, because of their crucial importance for all regulated sectors. Professor Pierre Larouche, CERRE Joint Academic Director and Director of the Tilburg Law and Economics Center (TILEC), focuses on market definition and market power assessments in competition policy, since they have influenced sector- specific regulation. He first stresses the importance of market definition for the outcome of a competition case. In his own words, cases are won or lost on market definition. Because of the paramount importance of market definition, Pierre Larouche first provides the audience with a broad overview of its principles. First, market definition is conducted by assessing the competitive constraints of a given firm. This is done primarily by looking at demand- side substitutability, but it can be complemented by assessing supply- side substitutability and prospective entry. Second, even though both qualitative (e.g. product use and product characteristics criteria) and quantitative (e.g. SSNIP test) methods have been used for defining relevant markets, Pierre Larouche points out that European courts have always had a marked preference for qualitative methods. Prof. Larouche also reminds the audience that the way in which markets are defined in a given legal case does not have any precedential value, because market definition is considered to be idiosyncratic. In the speaker s opinion, these simple principles can already be problematic when transposed to network industries. Whereas demand- side substitution is easy to gauge for goods, because of their clear differentiation in uses and characteristics, services can have widely varying uses depending on the class of customers. Rapid technological change in network industries also makes substitution harder to pin down at a given point in time. Another problem arising in network industries is related to the geographic aspects of market definition. Markets could both be defined based on network competition and transactional competition. The speaker provides an interesting illustration from the airline sector: the relevant market could both be defined at the level of a single route (e.g. Paris- Milan) or at the level of an airline s whole network of connecting flights (e.g. Air France s network). This issue is of the utmost importance, as different relevant market definitions will inevitable lead to diverging assessments of market power. CERRE Centre on Regulation in Europe asbl/ vzw Rue de l Industrie 42 Box 16 - B Brussels - Belgium Ph: +32 (0) Fax: +32 (0) info@cerre.eu

2 A further issue arising from the application of market definition principles from competition law to network industries is that there is, often, no market for bottleneck infrastructure, when it is not traded. This issue has been solved in the jurisprudence by what has come to be known as the access market construction. This implies that, if a request for access has been filed by a firm, there exists a demand for the bottleneck infrastructure, and by construction, this demand can be seen as indicating a relevant market (even if only potential). Regarding the assessment of market power, Pierre Larouche points out two particularities of network industries. First, some network industries are characterised by gatekeepers (e.g. the pay- TV platform operators). These are firms that control direct access to customers because of their presence in termination markets. They are characterised by what may be called situational monopolies: even though there exist competing platforms, for a given transaction, the customer is forced to use a given platform. (e.g. for one single movie, you cannot change pay- TV providers, even though there is competition in the longer run between pay- TV operators to attract customers). A second particularity of network industries is the existence of two- sided platforms (e.g. credit cards with on one side the card users and on the other side the merchants). So far, regarding relevant market definition, both sides have been considered. The two- sidedness comes into play later (if at all), in the assessment of market power. Yet it is clear from theory and practice that, in two- sided platforms, behaviour which might in the abstract be objectionable (e.g. distributing credit cards at a discount) might be required to balance the two sides of the platform (i.e. have enough cardholders for merchants to come on board) and kickstart it. As an alternative, Pierre Larouche suggests to investigate how to integrate relevant market definition and market power analysis into a single assessment. This could be done by first assessing the competitive constraints of a firm and looking at whether a firm can extract rents from the market. If this is the case, the analysis could move to the determination of the harm arising from this anticompetitive behaviour. In Prof. Larouche s view, this would greatly simplify the application of competition law to network industries. As questions for further discussion, Pierre Larouche proposes to reflect on whether relevant market definition and market power assessment should be integrated. He also raises the question of the adequateness of competition law for sector- specific regulation. Catherine Rutten, Member of the Council at BIPT, the Belgian telecommunications and post regulator, first introduces the Belgian market for internet- telephone- TV bundles to the audience. The most striking feature of the Belgian telecoms infrastructure is that almost all homes are connected to both the fixed- line (copper) telephone network and the TV cable network. However, this has up to now not led to infrastructure- based competition at all levels of the market because of the absence of a cable wholesale market, prohibiting alternative operators from entering the market using the cable infrastructure. This is due to change as the Belgian telecoms and media regulators have proposed new decisions to impose the opening of the cable infrastructure. Catherine Rutten illustrates the _CERRE_Report_CRF_MktDefMktPower 2

3 practice of relevant market definition and market power assessment, based on the experience from this recent draft decision. She explains that, in telecoms, aside from the European Commission s list of seven markets susceptible to ex ante regulation, other markets can be identified by the NRA, as long as the assessment is forward- looking, based on competition law principles and carried out using demand and supply side substitutability. Furthermore, in order to qualify for ex ante regulation, a market must pass the three criteria test, namely, 1) the market shows high and non- transitory barriers to entry; 2) market structures do not tend towards effective competition in a relevant time horizon; 3) application of competition law alone does not adequately address the market failure. Before presenting the relevant market definition and market power assessment carried out by the BIPT, Catherine Rutten first provides the audience with an overview of the structure of the market for bundles in Belgium. First, it is noteworthy that 55% of broadband internet users in Belgium have subscribed to bundled services. On the TV market, 37% of analog TV users, and 62% of digital TV users, have subscribed to a bundle. A recent survey carried out by the BIPT to understand this keen interest of consumers for bundles shows that the main arguments for switching to bundles are the discount rate and the simplicity of getting a single invoice for all services. In its definition of the relevant market for TV services, the BIPT (along other Belgian media regulators) has first defined the relevant product market. For this purpose, it has carried out substitutability tests on the different types of TV services offered in Belgium (Analogue TV, Digital Cable TV, Copper Digital TV, Satellite TV, Mobile TV, Web TV, etc.). The relevant product market has accordingly been defined as the retail market for analogue and digital (both cable and copper) TV. It is also noteworthy that, despite the significant market share of bundles in the Belgian market, the BIPT has not identified a separate market for bundles after having followed the relevant EC and BEREC recommendations in this regard. Regarding the geographic definition of the relevant market, Catherine Rutten notes that Belgium has 5 Cable TV operators, whose offers are neither demand- substitutable (because they operate in separate areas), nor supply- substitutable (due to the enormous cost of duplicating a cable network). There also does not appear to be any clear evidence of chain substitution between cable operators (i.e. a price decrease of cable operator A could force Belgacom TV, the copper digital TV provider with a national coverage, to lower prices nationally, thus forcing cable operator B in another region to lower prices also). Finally, regarding the three criteria test, carried out with a relevant time horizon of three years, it appears that the relevant TV market in Belgium is susceptible to ex ante regulation. Therefore, the BIPT proposes to force cable TV operators to resell wholesale access to their analog TV services, digital TV services and broadband services, thus creating a wholesale cable services market _CERRE_Report_CRF_MktDefMktPower 3

4 Catherine Rutten concludes with an interesting note on the Belgian institutional regulatory landscape. On top of the telecoms regulator (BIPT), Belgium has 4 media regulators with regional scope and competences. In developing its regulatory framework for a wholesale cable market, the different regulators managed to overcome this institutional complexity by proposing the same coherent set of regulatory measures with the same implementation timetable across all regions. As questions for further discussion, Catherine Rutten proposes to reflect on the boundaries for imposing ex ante regulation on newly emerging markets. She also asks whether a separate market for bundles should be envisaged when assessing market power in telecommunications and whether similar bundling issues arise in other network industries. Dr Clara Poletti, CERRE Joint Academic Director and Director of IEFE- Bocconi, explains why the existence and possible abuse of market power is such an important feature of energy markets. First, due to high inelasticity of both demand and supply in the electricity market, market power is possible even for firms with extremely low market shares. Second, the transport constraints of the infrastructure network lead to strong geographic market segmentation. Third, electricity (but not gas) is non- storable, which leads to additional segmentation of the market over time. Last, but certainly not least, the energy sector is very capital intensive, leading to high barriers to entry. Furthermore, the exercise of market power is hard to detect ex post, making the threat of regulatory intervention less effective in constraining market players. This is mainly due to significant start- up costs for generation and volatile fuel costs, blurring the line between voluntary capacity withdrawal and physical and technical constraints. According to Dr Poletti, all these characteristics of market power in the energy sector could make the transition phase towards fully competitive markets very long and costly for customers. Therefore, it becomes paramount to increase the coordination between competition authorities and energy regulators, both for the monitoring of market power and for the assessment of mergers. Since market shares have been shown to be of little help in assessing market power in energy markets, two types of analysis have been developed to this end: residual demand analysis and capacity withholding analysis. The aim of residual demand analysis is to calculate the share of hourly demand where a producer is pivotal (i.e. when this producer is the marginal producer and thus has price- setting power). Capacity withholding analysis aims at measuring the share of available capacity withheld from the market by a given producer. To conclude, Clara Poletti discusses the rapid change of the electricity market due to the deployment of renewable technologies. Nowadays, competition in the wholesale electricity market is based on marginal cost pricing. This means that firms exploit market power by pushing the price above the marginal cost of their generation capacity. However, since renewable energy sources have a marginal cost close to zero (wind, sunlight, etc. being free), competition (and the possible abuses of market power accompanying it) will shift more upstream from the generation _CERRE_Report_CRF_MktDefMktPower 4

5 process to the investment phase in new capacity. The exercise of market power will thus move from the control of marginal generation costs to the control of fixed costs of investment. As questions for further discussion, Clara Poletti proposes to analyse whether ex post punishment for abusive conduct is sufficient to protect energy consumers or whether ex ante regulation is also required. She also asks participants to reflect on the future modes of competition in the energy sector following the deployment of renewable energy sources. During the dinner workshop discussions, many participants acknowledged that merging market definition and market power assessment could offer valuable gains both in terms of time and effectiveness, but also recognized the sizeable legal risk as courts would go through a period of trial- and- error before the relevant jurisprudence would emerge. Most participants also note that despite some clear theoretical shortcomings, the current competition policy approach has worked reasonably well in practice. All participants agree that ex post competition policy remedies are not sufficient to address market failures in network industries. They all recognise the need for complementary ex ante regulation to guide the market in its transition to effective competition. Furthermore, many participants from the energy sector note that the need for ex ante regulation is even stronger in the energy sector because the high up- front investment costs imply that the transition to a fully competitive market could take a lifetime or longer. Some participants also point out that some decisions taken by regulators and public authorities aim at achieving other goals than promoting competition and can sometimes even be detrimental for the market transition (e.g. the planned phase- out of nuclear power in Germany). Regarding the question of the identification of a separate market for bundles, most participants from the telecommunications sector agree that even though offering bundles seems to be a necessary condition to compete in the market, the regulator should restrain from recognising separate markets for bundles as they can more easily be assessed through the competitive pressure they exert on the individual services comprised in the bundle. Some practitioners also mention that the theoretical distinction between competition policy (with its separate market definition and market power assessment phases) and sector- specific regulation (with its more integrated approach) is much weaker in practice. This is due to the fact that most competition authorities analyse a case on its merits first (by often integrating the market definition and market power assessment phases), and then formalise their decisions in the relevant legal framework once their analysis has been finalised. Finally, regarding the question of how competition will evolve in the electricity market with the advent of zero marginal cost renewable energy sources, some participants predict that this will revive interest in the Single Buyer, floated in early drafts of the energy directives, but removed from later proposals, because it had been deemed inadequate _CERRE_Report_CRF_MktDefMktPower 5

6 Professor Bruno Liebhaberg thanks all participants for their extensive contributions and looks forward to meeting all members in September at the next session of both the CERRE Expert Workshop and the CERRE Regulation Forum, on Quantitative techniques for regulatory benchmarking and Regulating for efficiency: is benchmarking enough? respectively _CERRE_Report_CRF_MktDefMktPower 6