The Role of Competition Law in Network Industries Subject to Sector-Specific Regulation

AuthorLivia Lorenzoni
ProfessionPh.D. Candidate in Administrative Law

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1. Introduction

The liberalisation of network utilities has led to an increased overlap between competition law and economic regulation. With the emergence of competitive markets in former monopolised sectors, competition law started to apply alongside economic regulation. When sector-specific regulation leaves margin for abusive conduct, the application of competition law to curb these abuses cannot be objected in principle. Nevertheless, this phenomenon has been, interpreted differently in the European Union and in the United States. The US Supreme Court has endorsed a restrictive approach towards abuse of dominance in network industries, while the intervention in Europe has been wider.

In the light of these different approaches, this paper will attempt to examine the benefits and the drawbacks of competition law enforcement in recently liberalised sectors. The aim of the work is to assess, from a legal perspective, which role competition law enforcement should play in network utilities subject to sector-specific regulation.

As a matter of law, there are few doubts that, in the European constitutional framework, competition law prevails over sector-specific regulation. The European Court of Justice (hereinafter, ECJ) has further upheld competition law enforcement in liberalised sectors. From a policy perspective, moreover, the application of competition law to European network industries may be beneficial to counterbalance the limits of the regulatory framework.

Nonetheless, the US Supreme Court pointed up some serious risks which in practice may arise from the concurrent application of competition law and economic regulation. A closer analysis will show, however, that most of the concerns examined by the US jurisprudence derive from the peculiarity of the American antitrust system, thus they are less relevant in European law. The main risk which should be addressed more carefully by the European institutions appears to be that of over-enforcement, even though, also in this case, the issue presents different features on the two sides of the Atlantic.

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The first section describes the main reasons for the concurrent application of competition law and economic regulation. The analysis addresses in general terms some of the problematic issues concerning antitrust intervention in regulated network industries. This section attempts to make sense of the European Commission’s approach towards liberalised utilities through the analysis of the European and American case law. The main concerns over the enforcement of competition law for regulatory purposes, as well as the benefits of the concurrent application are examined. It will be argued that the action of the Commission was overall consistent with the aim of European competition law.

The second section examines the main institutional concerns that drove the American Court to exclude antitrust enforcement in regulated sectors. It will be shown how these considerations cannot be outright transposed to the European system. It will also be argued that the Supreme Court position seems to be grounded on institutional and policy considerations, rather than on the substantive issue of the different functions of economic regulation and competition law.

As a consequence of the above analysis it will be argued that, in the European context, the benefits of competition law enforcement in network utilities alongside sector-specific regulation outweigh the risks both from a substantive as well as from an institutional point of view.

Two caveats are in order. First, this paper shall not attempt to analyse whether from an economic perspective the concurrent application may lead to greater efficiency, as it will only analyse the issue from a legal and institutional viewpoint. Second, it will be argued that in some instances an effective regulatory enforcement has successfully put an end to abuses, thus making unnecessary the intervention of the Commission. In these cases, limits to antitrust intervention seem desirable, especially in light of the Commission’s limited budget.

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2. The concurrent application of competition law and economic regulation: substantive issues
2.1. Standards of intervention under competition law and sector-specific regulation

The traditional distinction between economic regulation and competition law is based on the assumption that the former operates ex-ante as a means to regulate sectors with natural monopoly features, whereas competition law operates ex-post to punish some types of illegal conducts by the undertakings which operate in competitive markets. Therefore, regulation is supposed to impose positive, prescriptive rules on market players, while competition law is assumed to mainly prohibit and sanction certain unlawful behaviour. With the liberalisation of network utilities (telecommunications, railways, electricity, gas and so on) competition law started to apply alongside regulation. Market regulation and competition law began to serve similar functions. Network regulation was designed also with the aim of introducing and sustaining competition in monopolistic sectors, and thus, in the long-run, to enhance efficiency and consumer welfare.

As a consequence, the remedies applied under the two sets of rules tend to converge. For example, sector-specific regulation often requires the dominant firms to engage in some form of unbundling and to provide third parties with access to their upstream input; these provisions overlap with the structural and behavioural remedies which may be imposed under competition law. Competition law, on the other hand, often applies in a prospective way1. In the case of merger control, for example, the evaluation of the anticompetitive effect of a concentration takes place in advance

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respect to the conduct2. Furthermore, in Europe, the Commission may exercise its power to intervene in an ex-ante fashion, for example by means of soft law instruments such as sector inquires or guidelines which may strongly influence the firms‘ behavior3.

Despite these elements of convergence, the objectives of competition law do not coincide with those of economic regulation. Generally speaking, competition law is designed with the aim of preserving competition in a given market, whereas economic regulation is intended to shape the market structure in order to promote the entrance of new players in a former monopolistic market. Thus, market regulation commonly operates through asymmetric measures which favour new entrants. Conversely, competition law should apply equally to all market players.

The divergences in the objectives of competition law and regulation lead to different standards of intervention under the two sets of rules. Regulatory intervention is subject to less strict conditions than antitrust enforcement, given that economic regulation is aimed at promoting entry in a liberalised market while competition law is, in principle, aimed at preserving the existing market structure from being distorted4.

The administrative practice of the European Commission, as well as the Luxembourg Courts’ interpretation of article 102 TFEU on abuse of dominance, has challenged these assumptions. The ECJ has attributed a “special responsibility” to an undertaking enjoying a dominant position

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not to engage in conducts that may distort competition5. Moreover, the Commission, upheld by the ECJ, has interpreted broadly this special responsibility in recently liberalised markets6. This approach hints to a different treatment of dominant undertakings compared to non-dominant firms. This does not mean however that competition law is aimed at sanctioning the dominant position itself and at protecting small competitors7, which conversely, might be a legitimate purpose of economic regulation.

The case law on refusal to supply and margin squeeze is particularly relevant with regard to this aspect. At first sight, it appears that in the presence of sector-specific regulation, the European Commission (with the placet of the ECJ) has lowered the threshold for sanctioning unilateral conduct. This approach contrasts with the one endorsed by the US Supreme Court, which conversely, substantially restricted the limits of application of antitrust remedies in sectors subject to economic regulation. A closer look at the recent American case-law shows, however, that the aim of keeping the objective of competition law distinct from those of economic regulation, was not the actual main concern of the Supreme Court, while institutional and policy considerations seemed to have played a greater role.

From the analysis of those two different positions, some of the drawbacks and the benefits of the application of competition law in sectors subject to economic regulation will...

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