Dominant Carrier Regulation: Why and When it is Necessary
When telecoms companies capture large portions of the market, supplementary regulatory intervention is appropriate. This is the case when companies achieve Significant Market Power (SMP), which might be equated to acquiring about half the market share in a given telecommunications sector. In Europe, carriers are said to have or not to have SMP; while in the United States, common carriers are classified as either dominant or non-dominant. While satellite operators or service providers are unlikely to be deemed dominant carriers, they are likely to have business dealings with large customers and suppliers that have SMP. Therefore, it is important to understand the government restrictions placed on these telecoms companies.
During the past two decades, telecommunications services have moved from government-protected monopolies to free market models with minimal regulation. Yet, even when competition is present, markets alone are insufficient to achieve a social optimum. When a company enjoys a dominant status, there is a tendency to abuse that position at the expense of the public interest. This abuse may take the form of excessive or predatory pricing, cross-subsidization of services or a refusal to share facilities. To prevent this, National Regulatory Agencies (NRAs) commonly intervene through SMP regulation.
The decision of whether to impose SMP regulation depends on the NRAs of each country. Usually the decision hinges on the percent market share that a company has captured. However, this is not always the gauge and other tests have been employed. According to the European Court of Justice, a company is deemed to have SMP if it enjoys a position of economic strength, affording it the power to behave independently of competitors, customers and consumers. This gives a lot of discretion to European Union NRAs. Other factors to consider are the financial resources and the experience of the dominant carrier.
What are the SMP Obligations?
When a company is determined to be a dominant carrier, it must abide by certain obligations imposed by the NRA. These obligations range from a requirement for transparency, access and interconnection obligations, accounting separation for different product lines, non-discrimination requirements and price controls. Ultimately, the NRA, in conjunction with other government agencies, may break up the dominant carrier in a divestiture action.
When Should SMP Obligations be Imposed?
There are two general steps that NRAs take in the determination of whether to impose SMP obligations:
1. Define the Relevant Telecommunications Markets. Not all markets are appropriate for regulation; particularly those with high technological innovation. For instance, in the United States, ISPs are unregulated. Yet, other markets, particularly those that once were monopolies, are regulated (e.g., fixed voice). A case-by-case analysis is done for markets in between these two extremes. Examples are mobile telephony, satellite telephony, VoIP telephony, data services, etc.
2. Determine if Those Markets are Competitive. The next step in the analysis is determining if the selected markets are effectively competitive and whether antitrust regulation is sufficient. If so, the NRA should not impose SMP obligations. In some cases, markets might not be sufficiently competitive, but market forces could be already pushing them toward competition. Barriers to entry (not ones imposed by the dominant carrier) might be falling. If the market is already heading towards competition, SMP regulation is not appropriate. If not, dominant carrier regulation is at hand.
Dominant carrier regulation is an additional tool for improving competition in liberalized telecommunications markets. This has been used when, despite antitrust regulation, carriers achieve SMP and abuse such power at the expense of the public interest. NRAs are primarily responsible for delimiting relevant markets and assessing SMP. Certain NRAs, like the FCC in the United States, have the power to impose specific obligations on carriers that have been designated as dominant. This added flexibility, when appropriate, allows for surgically styled regulatory measures on a carrier-by-carrier basis.
Raul Magallanes runs a Houston-based law firm focusing on telecommunications law. He may be reached at +1 (281) 317-1397 or by email at raul@ rmtelecomlaw.com.