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Interface between Competition &
Sector Regulation
Manas Kumar Chaudhuri, Advocate,
Head Competition Law & Practice,
J Sagar Associates, New Delhi,
India
8 – 10 August, 2007
Mauritius
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Electricity Sector Context
• Generation : Production of electricity
• Dispatch: Coordinated control of generation and
transmission to meet demands, subject to physical
laws and constraints
• Transmission: Wires, equipment and services
associated with high-voltage electricity transportation
• Distribution: wires, equipment and services
associated with low-voltage electricity transportation
• Customer services: Metering, billing, energy
efficiency and energy purchasing services
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Electricity Sector (contd.)
• Historically and traditionally a vertically
integrated, regulated monopoly provided all
five elements
• Natural monopolies – tremendous economies
of scale exhibited by transmission and
distribution systems
• Generation and customer services are at least
potentially subject to competition
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Electricity Sector (contd.)
• In restructured electricity system both
competitive and regulated elements co-exist
following deregulation of competitive
elements
• Re-regulation necessary to ensure electrical
reliability
• Consumer protection and public values
• Continuing regulation of the remaining
monopoly elements
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Electricity – Technological issues
• As a source of power is taken for granted by
users
• Capable of delivering instantaneously on
demand to millions of consumers
• The development and management of an
integrated electricity system, however, is a
highly complex undertaking
• Applying laws to regulate this sector is equally
complex
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Technological issues (contd.)
• Electricity cannot be stored, therefore, supply and
demand must be continuously kept in balance
• Minute to minute fluctuations in the amount of
electricity being consumed by homes and businesses
must be matched economically
• Electricity follows the path of least resistance hence
cannot be directed on a particular line or to a
particular area – consequently event taking place at
one place has a tremendous impact on another area
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Competition issues in electricity
• Complex nature derives from the nature of
electricity supply and demand
• Requirements for operating a reliable
electricity system
• Difficult to separate high prices that are caused
by normal generation or system occurrences
from high prices caused by the exercise of
market power.
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Competition issues (contd.)
• Depending on system conditions, such as peak
demand in relation to supply, regional transmission
constraints and generation or transmission outages,
generators may have large amounts of market power
for some hours of time of year – may not be
competition issue
• Preventing and/or detecting market power in
electricity markets is not an easy task
• It may exist for certain hours or days or during certain
system conditions
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Competition issues (contd.)
• Market design is yet another complicating factor in
electricity
• Though open access is more important than market
design in case of electricity yet lack of market design
can affect competition
• Wholesale trading is the selling and buying of
electricity in bulk
• Competitive wholesale markets generate efficiencies
in the overall performance of the sector by providing
price signals to market participants
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Benefits of competitive wholesale
electricity markets
• Competitive wholesale markets reduce entry
barriers for independent generators and
retailers; otherwise new entrants might be
obliged to enter both the generation and the
retail markets at the same time
• Competitive wholesale markets provide price
signals for both demand and supply – thus
encourage new investment
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Wholesale market participants
• Inherent physical positions – generators and suppliers
• Without inherent physical positions – traders
• Interest of generators to trade stems mainly from the need to
sell their generation output and optimize the operation of their
generation portfolio
• In comparison, traders buy and sell to exploit price differences
between two geographical areas (arbitrage) and may take a
speculative positions
• EC’s report (Jan 2007) shows that larger electricity companies
take part in active trading so as to engage in arbitrage deals or
take speculative positions. On the contrary, smaller companies
tend to be active on the wholesale market only to optimize
their physical portfolios.
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Policy consideration
• Potential for restructuring and competition issues to
be dealt with vary from country to country and from
province to province within a country
• For pro-competitive restructuring, consideration must
be given to each country’s and provinces’ unique
circumstances
• There may be common elements for restructuring,
there is no single approach that can be applied across
all the countries and provinces within a country
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Telecommunications
• In India in the early 1990s an ordinary mobile
handset was sold at approximate $ 900
• In 2007 an ordinary mobile handset is sold at
$30
• Competition Commission did not exist in 1990
and is not fully functional in 2007 – but the
prices of handsets had fallen almost 30 times
• Reasons: competitive market forces
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Telecommunications (contd.)
• Outgoing call charges in mobile telephony in early
1990s in India were around Rs.40/- per minute and
for incoming calls the same were about Rs.26/- per
minute
• In 2007 the incoming call charges are free and
outgoing are Re 1/- per minute (approx.)
• Number of service providers are more so are handsets
and common man in India is able to afford mobile
handset and connectivity now than in early 1990s
when it was meant for affluent Indians
[ 1 USD = Rs.41] – at current exchange rate
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Telecommunications (contd.)
• The incumbent government-owned fixed line
telephone service providers were law unto
themselves in early 1990s but due to changed
scenario are chasing customers to remain in
the market in 2007
• The scenario is identical in case of internet
services
• The crux of the factual narration is, benefit of
competition without an enforcing agency
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Telecommunications (contd.)
• The Telecomm Regulatory Authority of India
(TRAI) came into being beyond 1997 but the
market became competitive before that
• Opening of the telecom sector is a success
story in India and the process is continuing in
spite of strong Government-aided competitors
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OECD Findings of 2000 Telecommunications
• Despite widespread privatization and liberalization,
large segments of the industry still dominated by
incumbents
• A small but rising share of new entrants exerting
significant competitive pressure on the incumbent
• Most liberal countries: Canada, Japan, UK, USA,
Sweden and Australia and the most restrictive –
Greece, Switzerland, Austria, Luxembourg, Iceland
and Turkey
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OECD Findings of 2000 –
Telecommunications (contd.)
• The prospect of competition generally has
strong positive effect on the productivity and
the quality of services and a strong negative
effect on prices.
• From policy point of view, the results confirm
that the economic benefits of liberalization and
regulatory reform in the telecommunications
industry are large and relatively quick to come
about.
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Competition Law –vs- Regulatory Law
Competition Law
Regulatory Law
Off-market regulatory
In-market regulatory
Prevents market failure through
enforcement
Sets ‘rules of the game’ – entry
conditions, technical details, tariff,
safety standards, access etc.
Mostly ex-post investigations except
for M&As
Mostly ex-ante
Applies to all sectors of the industry
Applies to the specific sector only
Economists, Lawyers and
Accountants are main source of
manpower
In addition, technical experts are
essential to implement the purpose of
the law
Focus on allocative efficiency
Pursue social objectives other than
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allocative efficiency
International Scenario
• In Australia, the Competition Authority
incorporates industry-specific technical
regulators
• In UK, the OFT and the sectoral regulators
have concurrent jurisdictions with a common
appellate tribunal (CAT) – appeals from sector
regulators lie to the UK Competition
Commission in the first instance
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International scenario (contd.)
• In South Africa, sector regulators were initially
exempted from the jurisdiction of the
competition authority but later the exemption
was withdrawn
• In Zambia, the competition authority is
represented on other regulatory boards.
Besides, all sector regulators are required to
consult the competition authority
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International scenario (contd.)
• The jurisdictions of the Competition Authorities and
Sector Regulators are not so well-defined in India, Sri
Lanka, Kenya, Botswana and Pakistan
• In the Indian Competition Law under section 21, the
Commission is empowered to look into a competition
issue provided the sector regulator decides to refer the
same
• But the opinion of the CCI will not bind the regulator
in disposing of the matter finally – forum shopping
appears inevitable
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International scenario (contd.)
• In Canada, the Canadian Competition Bureau is
legally empowered to intervene policy determination
of federal and provincial regulatory bodies
• In France, latest law provides for mandatory
consultation between radio & television sector
regulators and competition authority.
• In Germany, the Competition Agency (FCO) and the
Regulatory Authority for Telecom and Posts exercise
jurisdictions with minimum interference so as to
minimize parallel competencies
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Co-operation between
authorities
• Since competition concerns apply to all
commercial and trading activities unlike a
specific sector, statutory powers should be
given to competition authorities to assess
competition issues in a given inquiry of an
industrial sector
• There can be concurrent powers
• Mandatory consultation can also be a good
option to avoid turf war
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Co-operation (contd.)
• Most sector regulatory legislations aim to promote
competition but do not have the adequate statutory
support to implement this objective
• A legal link is essential to implement this objective
• Some sector regulatory laws provide for a sunset
clause
• Ultimate aim of all economic legislations are
economic growth and consumer welfare
• Should we continue with turf-war or steadily progress
towards consumer welfare – is the moot point that all
of us must ponder over
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Thank you
[email protected]
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