Speaking Notes for Sheridan Scott Commissioner of Competition

Competition Bureau

C.D. Howe Institute Policy Conference
Competition Policy in Regulated Industries:
Principles and Exceptions

Regulation and Competition:
Moving to a more Productive Future

Toronto, Ontario
November 6, 2006

(Check against delivery)

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Regulation and Competition: Moving to a More Productive Future ¹

I want to begin by thanking the C.D. Howe Institute for organizing this event, and for the opportunity to speak to you today. I have long admired the work of the Institute and from the outset would like to recognize the importance of the sound, independent research that you provide in the quest for improved policies to serve Canadians.

Today, you are focusing on a subject near and dear to my heart - the interaction between industrial regulation and competition policy. As some of you may know, my career includes work in the government with a regulator, the CRTC, and work in the private sector as a regulatee, with Bell Canada. Now, as Commissioner of Competition, I deal frequently with the challenges of regulated markets and regulatory policies.

Out of these experiences, I know three basic truths: first, competition policy is a complex field; second, regulatory policy is a complex field; and third, the interaction of these two is, you guessed it, a very complex field.

And markets themselves are often very complicated systems. David Laidler, Fellow-in-Residence at the C.D. Howe Institute and Professor Emeritus at the University of Western Ontario, reflects on this point. In his recent paper for the Institute, Doctor Laidler observed that: "The financial system is a set of social arrangements whose performance has a profound influence on our economic well-being" . ²

That the financial system has a profound influence on our economic well being is obviously true. But for our purposes, his comment on the nature of the system as a set of “social arrangements” is more pertinent. While we tend to focus daily on the legal, economic and technical structures that define markets, the reality is that markets are first and foremost made up of people and their “social arrangements”.

These include the complex melange of customs and habits, ethics, laws, technology, institutions and disciplines and so on. These combinations are not static but evolve, sometimes smoothly and sometimes with jarring rapidity.

And it is within this complex stew of relationships that competition policy and regulatory frameworks co-exist. The question is whether this is a productive co-existence, or one discouraging innovation and progress?

I cannot pretend that this is a simple question. And we won't be well served by simple prescriptions. As the 'Sage of Baltimore', H.L. Mencken, famously observed: "For every complex problem, there is a solution that is simple, neat, and wrong". ³

So without prescribing simple, neat and wrong solutions, I want to explore three challenges that I see as surrounding the search for productive coexistence between competition and regulation.

First, I want to explore the general relationship between competition policy and regulation.

This will set the stage for some thoughts on how regulatory regimes and competition authorities should interact.

Finally, I want to spend some time thinking about the thorny issue at the centre of much current debate: how do we manage the transition from tightly regulated, non-competitive markets to the thrust and parry of fully competitive marketplaces.

Let me begin with the relationship between my world of competition, and the seemingly conflicting world of regulations.

All of my personal and professional experiences favour strongly the workings of the competitive marketplace. Competition is clearly the dominant source of low prices, high quality and innovative products and services. Effective competition can and will deliver many of the objectives governments ascribe to regulations.

Now this won't come as news to the people in this audience. I have already spoken elsewhere about the benefits of competition, including its crucial impact on innovation in our economy.⁴ In fact, an OECD study just released in September ⁵ deals directly with the linkages between marketplace regulation and productivity. Amongst other findings, the study of productivity growth across OECD countries finds that relatively restricted market regulations slow the adoption of information and communication technologies, and foreign investment. The result is lower productivity for those countries with more restrictive marketplace frameworks.

For those of you who are wondering how this applies to Canada, the OECD estimates that the “productivity dividend” from “product market reform” in Canada would have resulted in annual productivity growth more than 0.75% percentage points higher than we experienced in the 1995-2003 period ⁶.

Findings such as these are not justifications for the abandonment of regulatory goals, however.

Effective competition itself can only take place in a healthy society, and healthy societies are not anarchies, but are built on social laws and regulations that develop and support our all too human aspirations. And even our markets depend on certain economic regulations – think of the importance of contract and intellectual property laws, for example.

In short, we need to recognize and accept that some forms of regulation, especially social regulation, are inevitable and often desirable. And given that we will have to live with some degree of regulatory intervention in the marketplace, we need to look at ways for regulatory policy and competition policy to complement, rather than negate, each other.

Or as Edmund Burke said: "Laws, like houses, lean on one another". They should lean for support, however, not in opposition to each other.

In particular, we need to ensure that those laws that are intended to support the marketplace, such as intellectual property laws, enhance rather than restrict competition. And we need to ensure that while pursuing other social objectives, we interfere minimally with market functioning.

In short: regulation only if necessary but, if it is necessary, make sure that it is competition friendly. Indeed, Dr. Laidler, to whom I referred earlier, establishes one of his key regulatory principles for financial services as follows: “...regulation and supervision should encourage competition, actively promoting, or at least not limiting, the sector's ability to offer whatever variety of services the diverse requirements of investors and savers call for. Crucially, its regulation and supervision should not obstruct the system's ability to adapt its offerings as these requirements change, or as the technology available to the sector itself changes.” ⁷

This sounds like a logical proposition, not just for financial services, but for all regulated markets. So why is it so tough in practice?

In a speech earlier this year, I spoke about how some regulations can be likened to speed bumps in our economic neighbourhoods. Some neighbourhood groups like these devices. Others believe that they are unnecessary, occasionally hazardous intrusions into the free flow of traffic.

Regulations can be like these speed bumps on our marketplace roads. While they may provide some degree of certainty to some marketplace participants, they can and do slow down the functioning and efficiency of the system. And once these “speed bumps” are installed, they are very hard to get rid of.

We recognize this challenge at the Competition Bureau, but we are not shy about asking hard questions to assess whether regulation is truly needed and, if so, whether it is narrowly defined to interfere minimally with the marketplace. We believe that legislation should be scrutinized through such a “competition lens”. A number of jurisdictions, including the U.K., Australia and the EU are figuring out how to do this more effectively; Canada should do so as well.

That said, we are not simply advocating for greater reliance on market forces. We are also taking a more aggressive stance with respect to the ‘exceptions' referred to in the title of this conference. These are situations where a regulatory scheme may appear to permit behaviour which would otherwise be inconsistent with the Competition Act.

Simply put, our new approach is that we do not accept that the existence of a regulatory regime is sufficient to override all parts of the Competition Act. This is based on the Bureau's recognition that it is obliged to administer and enforce the Act, that the Act is a framework law of general application, and that Parliament “… is not presumed to depart from the general system of law without expressing its intention to do so with irresistible clearness…”. ⁸

In practice, what this means is that; where there is uncertainty regarding whether competition laws apply to anti-competitive behaviour in a regulated sector, I intend to proceed to seek clarity, through the courts or the Competition Tribunal if appropriate, rather than conceding the point. We may win some and lose some cases, but at a minimum we will have clarity for marketplace participants. And legislators will know with greater certainty where and when they have sacrificed competition to other objectives. Maybe, just maybe, this alone will result in improved regulation.

Those of you interested in the technical analysis underlining our approach to the regulated conduct question can refer to our “Technical Bulletin on “Regulated” Conduct”, which we issued in June of this year, and which is available on our web site. ⁹

Now I know I have covered a lot of points in this first part of my speech. But I can summarize our views in just a few points:

• First, regulation should exist only where absolutely necessary - a presumption in favour of the market, if you will.
• Second, where regulations are needed, they can and should be designed to interfere as little as possible with the marketplace.
  Taken together, these first two points make up the “competition lens” I referred to earlier.
• Finally, the existence of regulation is not an excuse to engage in anti-competitive behaviour and circumvent the Competition Act.

Now as you know, just getting better regulation is not enough. Where regulations are justified, they should also be enforced, to the extent possible, in harmony with competition principles, which brings me to the second challenge I spoke of at the outset of this presentation: how can we ensure that the enforcement of the Competition Act and the operations of various regulatory bodies are both effective and efficient, while serving the needs of Canadians?

Inevitably, there will arise cases where there is some overlap, and perhaps even conflicting views emerging from the enforcement of the Competition Act and a regulatory regime. These conflicts take place in an all too human milieu, personal and organizational self-interests and goals can exacerbate already complex issues, and make cooperation and coordination difficult at best. Such challenges can extend from the political level, especially where there is a need for legislative changes to resolve issues, to day to day cooperation at the official level.

We won't get far by wishing these issues away – remember my commitment to no simple solutions today. Instead, we need to recognize that, like Edmund Burkes' laws, our competition and regulatory agencies must lean on each other for support. We must aim to have in place systems and processes that make cooperation and coordination a committed part of our work, not an optional best practice. And we need to check on an ongoing basis to make sure that our systems are functioning and functioning well in the light of changing market and other circumstances.

As I said, there are no simple solutions to making this happen. But I do have in mind certain broad principles that I believe should apply:

• First, it is vitally important to define our roles as clearly as possible, perhaps even including such clarifications in legislation.
• Second, when an issue engages both the Bureau and a regulator, we need to cooperate to share information where it is needed to perform our duties concerning the issue at hand and with due regard to ensuring confidentiality.
• Third, we need to respect and use each others' areas of expertise. I don't expect Bureau personnel to become instant experts on all technical issues that arise in regulated markets; we need to draw on the expertise of the regulatory agencies and outside experts. So, too, I doubt that many regulatory agencies would develop the expertise to conduct or assess competition analyses to the standards of the Competition Bureau staff. They should be willing to draw on us for that work.
• My fourth principle is one of process pragmatism: no two significant cases will be the same. We need to be pragmatic and adjust our practices on a case by case basis where regulation and competition issues overlap.

These principles guided our submission to the Telecom Policy Review Panel in respect of our relationship to the CRTC. Our report stated that: “...the best regulatory framework will be that which makes the best use of existing knowledge and experience within our agencies; ensures timely and effective responses to industry change; is cost effective; and, keeps government intervention to the bare essential.” Those of you familiar with our input, and I know there are a number of you here today, should see in it a very practical application of the principles I have set out above.

Okay, I know you face a full afternoon, so let me move on to the final question I will address today – the transition from a tightly regulated, non-competitive marketplace to a fully competitive situation.

Alfred North Whitehead captured this challenge best in his observation that: "The art of progress is to preserve order amid change, and to preserve change amid order". Note his word: the “art of progress”, not the science. Change in regulatory areas is always a fine mixture of detailed technical analyses and very real and powerful political and economic forces. The stakes are high, the infighting intense and the adversaries usually well funded and committed.

All of which explains why achieving change in our regulatory regimes is difficult at best, and why we rarely anticipate the need for change but often are reacting to events beyond our control. But the delays in arriving at more appropriate regimes cost Canada dearly in terms of higher costs, slower innovation and lower productivity.

Can we do better? I think so. To be blunt, we need to make the leap to recognize that the decisions of consumers and investors will generally provide better results for our economy than government regulations will permit. Consumers and investors will be faster to respond to changing circumstances. They will be better informed about their needs and wants. And they will have better insight into possible future changes, especially in rapidly evolving sectors and markets.

They won't be perfect. Investors and consumers will err. But overall, they will get it more ‘right' than regulation will.

Of course, we will have to take that difficult first step to trust in the marketplace. And we won't have the semblance of certainty that comes with regulation to make us feel more secure. But in rapidly changing sectors, where the participants, competitive factors and technologies are changing rapidly, that regulatory certainty is surely more illusory than real. We can and should release the false security blanket of regulation.

In short, whenever and wherever possible, we should free up consumers and investors to determine their own courses.

Of course, like Rome, competitive markets cannot be built in a day. We will need transition strategies and interim regimes for both competition and regulation.

But we don't have to design such transitions in a vacuum. Countries around the world are trying new approaches to achieve these outcomes. We can and should learn from their successes and occasional failures. For example, as part of the work of the International Competition Network, I co-chaired a working group which brought together competition experts representing some 30 authorities from all parts of the world plus non-government advisors. This effort allowed us to benefit from leading thinking on the issues facing competition in telecommunications and will assist all countries who are grappling with the transitions from regulated to competitive telecommunications markets. ¹⁰

One lesson we can certainly draw from our international discussions is the need for government to be as transparent as possible about the conditions that must be met in evolving to competition as well as the rules of engagement, once regulation is removed.

To my mind, this transparency can be increased if regulators, or enforcement agencies such as the Competition Bureau, ground our work clearly and explicitly in economic principles. While other factors may enter into the debate, economic principles can provide the starting point. I believe this can contribute to the predictability of our action and hence transparency.

I am also an advocate of articulating publicly and as clearly as possible how these principles are applied in practice. To this end, we publish technical backgrounders on cases that deal with important issues; for example, in terms of the industries discussed here today, you may find the analysis of Rogers' acquisition of Microcell ¹¹ to be of interest. Meanwhile, in anticipation of greater reliance on market forces, we have published a draft set of guidelines on how we will consider potential abuse of dominance in the telecommunication industry ¹² once deregulation has taken place.

These steps will be quite useful in aiding in the transition process, but they do not overcome the challenge of reducing delays in moving to competition-based regimes. I believe legislators may have a role to play here. For example, when establishing regulatory regimes, it might be useful to legislate as explicit criteria as possible for deregulation, possibly including mandatory review or sunset provisions, where appropriate. Such an approach may very well help reduce industry uncertainty, and make for much more rapid progress to market based sectors.

Now I have covered a lot of ground today. But as you well know, there is much more to do, both with respect to the specific sectoral challenges you are looking at today, and with respect to some horizontal issues. For example, we are still grappling with the impact of “dynamic competition” on the competitive landscape. This is an issue you will be discussing later this afternoon and is also the subject of the work of the Competition Committee at the OECD and will be discussed in depth next year.

And let's face it. For the general public and even for many industry participants, we are dealing with issues of enormous complexity and importance. There is a clear need for ongoing research, consultations and dialogue on many issues and questions in order to achieve a greater general understanding and acceptance of the need for changes to our current approaches.

But we should not let this become an excuse for inaction today. So called “paralysis by analysis” is a constant threat in public policy, and we should avoid it here.

We have the capacity right now to create a more productive Canada if we focus on reducing regulation, improving linkages between our competition and regulatory agencies, and paving the way for transitions to competitive markets through the courage to proceed and a grounding in economically-based principles. Not small easy steps. But critical ones.

I want to leave you with a quote from a keen observer of mankind – Groucho Marx, the cynical sage of Hollywood. Groucho claimed that: "Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies".

Now I believe strongly that politics is a far nobler and important art than Groucho suggested. But when it comes to the challenges of getting the interplay between competition policy and regulatory regimes right, we need to be mindful of his comment. We should not go looking for trouble, but for opportunities for Canadians to innovate, grow and prosper. We need to make sure our decisions are informed and timely, not just for conditions as they are, but for conditions as they may evolve. And we must ensure that our remedies are implemented intelligently, with due regard for the transformations being brought about by globalization, technological change and deregulation.

These are not simple challenges. But through the kinds of dialogue and analyses that the C.D. Howe Institute has sponsored at this Conference, I am optimistic that we can bring about productive changes for Canada's future.

Thank you for your time and I look forward to further discussions this afternoon, and beyond.

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¹ Presentation to the C.D. Howe Policy, Conference, Competition Policy in Regulated Industries: Principles and Exceptions, Toronto, November 6, 2006

² Laidler, David. Grasping the Nettles: Clearing the Path to Financial Services Reform in Canada C.D. Howe Institute Commentary 238 (September 2006), p. 4

³ H.L. Mencken (1880-1956)

⁴ Speeches.

⁵ Regulation, Competition and Productivity Convergence, OECD Economics Department Working Papers No. 509, Paul Conway, Donato de Rosa, Giuseppe Nicoletti and Faye Steiner

⁶ Ibid, Figures 2, 3.

⁷ Laidler, David. Grasping the Nettles: Clearing the Path to Financial Services Reform in Canada C.D. Howe Institute Commentary 238 (September 2006), p. 6

⁸ Goodyear Tire & Rubber Co. of Canada v. T. Eaton Co., [1956] S.C.R. 610 at 614.

⁹ Technical Bulletin on “Regulated” Conduct, June 2006.

¹⁰ Report of the ICN Working Group on Telecommunications Services

¹¹ Acquisition of Microcell Telecommunications Inc. by Rogers Wireless Communications Inc.

¹² Draft - Information Bulletin on the Abuse of Dominance Provisions as applied to the Telecommunications Industry.