Interface between Competition & Sector Regulation

1. Interface between Competition & Sector Regulation Manas Kumar Chaudhuri, Advocate, Head Competition Law & Practice, J Sagar Associates, New Delhi, India 29th – 31st August, 2007 Lilongwe, Malawi

2. 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 Electricity Sector Context

3. 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 Electricity Sector (contd.)

4. 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 Electricity Sector (contd.)

5. 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 Electricity – Technological issues

6. 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 Technological issues (contd.)

7. 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. Competition issues in electricity

8. 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 Competition issues (contd.)

9. 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 Competition issues (contd.)

10. 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 Benefits of competitive wholesale electricity markets

11. 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. Wholesale market participants

12. 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 Policy consideration

13. 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 Telecommunications

14. 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 Telecommunications (contd.)

15. 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 Telecommunications (contd.)

16. 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 Telecommunications (contd.)

17. 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 OECD Findings of 2000 - Telecommunications

18. 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. OECD Findings of 2000 – Telecommunications (contd.)

19. Competition Law –vs- Regulatory Law

20. 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 International Scenario

21. 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 International scenario (contd.)

22. 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 International scenario (contd.)

23. 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 International scenario (contd.)

24. 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 Co-operation between authorities

25. 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 Co-operation (contd.)

26. Thank you manas@jsalaw.com