5.2 Fundamental principles applying to anti-competitive behaviour of state monopolies monopolies
5.2.1 Approaches to the application of competition rules to state
Countries may employ different approaches to the application of competition rules to state monopolies and this is determined by such factors as the theoretical groundwork;
77 Ibid. See also David T Scheffman and Richard S Higgins, „20 Years of Raising Rivals‟ Costs: History, Assessment and Future‟ 12 (2) George Mason Law Review (2003) 371
<http://www.georgemasonlawreview.org/doc/12-2_Scheffman-Higgins.pdf>.
78 David E M Sappington and Gregory J Sidak, „Incentives for Anticompetitive Behavior by Public Enterprises‟ 22 Review of Industrial Organisation (2003)
<http://www.springerlink.com/content/l510108833125137/fulltext.pdf>.
79 Eleanor M Fox, „US and European Merger Policy--Fault Lines and Bridges: Mergers That Create Incentives for Exclusionary Practices‟ (2001-2002) 10 George Mason Law Review 471, 474 cited in Swedish Competition Authority, The Pros and Cons of Competition, above n 62, 61.
80 David E M Sappington and Gregory J Sidak, „Incentives for Anticompetitive Behavior‟, above n 78.
171 objectives of competition policy; the situation and the development of state monopolies as well as their importance in each country, etc. Not only do state monopolies matter in developing and transitional countries, they are important in developed countries.
Generally, competition rules apply to state monopolies in the same ways as they do to other firms. Standards for determining dominance/substantial market power, for that reason, are applied in the same way to state monopolies.81 The enforcement of competition law is also neutral as to the firm‟s ownership.82 For example, in many OECD countries, it is stated that public sector businesses are not excluded from competition law.83 In the EU, it is required that all economic sectors, the public sector, must be governed by the same rules, even though state members are free to determine the extent and the internal organization of public sectors, as is provided in Article 295 of the EC Treaty.84 This requirement is applied consistently in the practices of the EU members.85 Countries may assert clearly in their law that the same set of competition rules are applicable to state monopolies. Normally, the scope of the competition law is stipulated as covering the conduct of any „person‟ or „undertaking‟ engaged in a commercial activity regardless of the character of its ownership or financing. These terms are generally
81 ICN, Objectives of Unilateral Conduct Laws, above n 44. In a number of OECD countries, the investigation and imposition of sanctions against abuse of dominance and monopolisation conducted by SOEs are based on common competition rules. See Background Note of the Secretariat in OECD, „State- Owned Enterprises and the Principle of Competitive Neutrality‟ (Policy Roundtable, DAF/COMP (2009)37, 2009), 25 <http://www.oecd.org/dataoecd/43/52/46734249.pdf>.
82 See Contribution of the European Commission in OECD, „Principle of Competitive Neutrality‟, above n 40, 235.
83 OECD, „Principle of Competitive Neutrality‟, above n 40, 325
84 Erika Szyszcak, The Regulation of the State in Competitive Markets in the EU (Hart Publishing, 2007) 107.
85 ICN, Objectives of Unilateral Conduct Laws, above n 44, 68-69.
172 interpreted to include state monopolies.86 This can also be done by amendments to extend the scope of their competition laws to state monopolies in those countries where competition rules previously did not apply, such as the case of Australia.87
However, while competition rules are basically applied to state monopolies, there are some circumstances that they are subject to exemptions. It is also observed that exemptions are reserved for those state monopolies in strategic or crucial areas of the economy.88 Countries may specify circumstances, where competition laws do not apply to state monopolies, for example, when they carry out „services of general interests‟.89 Countries may also provide some special cases that will be regulated by a number of
86 For example, Article 101 and 102 TFEU (ex Article 81 and 82 TEC) apply to „undertakings‟ regarding to agreements between them which have as their object or effect the prevention, restriction or distortion of competition and conduct by one or more undertakings which amounts to an abuse of a dominant position.
The concept of „undertaking‟ is applied in EU member competition laws, for example, the UK Competition Act 1998 and the question whether the firm in question is privately or publicly owned (controlled) is irrelevant. This shows that the application of prohibitions is therefore neutral to the ownership of the firms.
According to Competition Act of 1996 art 1 of the Republic of Hungary, the Act applies to „market practices carried out on the territory of the Republic of Hungary by natural and legal persons and companies with no legal personality, including branches in Hungary of undertakings domiciled abroad...‟ In that sense, the aim of this practice is the application of same competition rules against public and private ownership. See ICN, Objectives of Unilateral Conduct Laws, above n 44, 68-69.
Similarly, in the Czech Republic, the Competition Act 1991 generally applies to all subjects falling within the notion of undertaking as defined in the Act. As the Article 2(1) does not distinguish between private and public entities, the Act covers all enterprises, including those are owned or controlled by the government or other public authority. See contribution of the Czech Republic in OECD, „Principle of Competitive Neutrality‟, above n 40, 114.
87 The extension of scope of application of the Australian Competition and Consumer Act 2010 (Cth) (formerly the Trade Practices Act 1974 (Cth)) to government business entities and the dismissal of the Crown immunity in Australia are discussed in detail in the next section of this part.
88 For example, firms that hold power sourced from a statute in New Zealand will not be subject to the prohibitions arising from the application of the competition act and any conduct specifically authorized by a statute is exempt from the prohibition.
In Mexico, monopolies belonging to the „strategic sectors‟ are exempted from the monopoly prohibition while they are still subject to other legal restrictions. In Pakistan, the Competition Act lays down exemptions for those sectors regulated by sector specific regulators and the government entities. See ICN, Objectives of Unilateral Conduct Laws, above n 44, 75.
89 For examples, in Italy, public enterprises and state-controlled firms are fully subject to the Italian Competition Act‟s basic prohibitions. Exemptions in this regard are such activities relating to „general interest services‟. Prohibitions in the Italian Competition ang Fair Trading Act 1990 do not apply to firms that provide „services of general economic interest‟ that they are entrusted to do. ICN, Objectives of Unilateral Conduct Laws, above n 44, 68-69.
173 separate regulations90 or subject to individual reviews and application.91 Besides, exemptions reserved for state monopolies are reasoned by the doctrine of „state action defence‟.92 The application of competition rules is also complicated in federal countries where state monopolies are created on the basis of both federal and state statutes. This case will be determined by the arrangement of application between federal and state statutes.93
For example, even though most OECD countries apply competition rules to both private and public firms, a few specific firms are exempted. There may be partial exemptions aimed at protecting some types of public sector businesses or some aspects of their business activities.94 In Canada, state monopolies are regulated by competition rules as long as they are engaged in commercial operations, otherwise more specific federal law
90 For example, in Korea, competition law applies with no exemptions to state monopolies as it is stated that any commercial activities conducted by an enterprise in the market, including public corporation monopoly are subject to the Monopoly Regulation and Fair Trade Act (MRFTA) . However, some public corporations may be granted monopoly rights by other laws, for example Korean Gas Corporation is granted a monopoly statute under the Urban Gas Business Act or Korea Electric Power Corporation is granted monopoly right in power transmission, distributions and sales. See contribution of Republic of Korea in OECD, „Principle of Competitive Neutrality‟, above n 40.
91 For example, in France, any anti-competitive practice of an entity providing a public service is in principle subject to the general provisions of antitrust rules enforced by the French competition agencies. Exemption is provided in a case where the anti-competitive practice can be deemed to result from an administrative act or measure. In this case, the control of such practice will be performed by the French administrative courts. In Germany, the scope of a possible „state action defence‟ is quite limited; it could only apply where a conduct does not affect trade between EU member states and state action defence may be rejected. See ICN, Objectives of Unilateral Conduct Laws, above n 44, 68-69.
92 „State action defence‟ is also called „state action doctrine‟ which was originated from the US antitrust law. According to the Black’s Law Dictionary, it refers to „the principle that the antitrust laws do not prohibit a state‟s anti-competitive acts, or official acts directed by a state‟. See Black’s Law Dictionary (Thompson West, 8th ed, 2004). See also OECD, Competition Law and Foreign- Government Controlled Investors (2009), 3 <http://www.oecd.org/dataoecd/30/42/41976200.pdf>;
Opinion of Advocate General Jacobs delivered on 22 May 2003 in joined cases C-264/01, C-306/01, C-354/01 and C-355/01 (2003) (Competition - Undertakings - Sickness funds - Agreements, decisions and concerted practices - Interpretation of Articles 81 EC, 82 EC and 86 EC - Decisions of groups of sickness funds determining maximum amounts paid in respect of medicinal products)
<http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62001C0264:EN:NOT>.
93 For example, in the US, the application of federal antitrust law to those monopolies created by the federal government is determined by statute. If such monopoly is regulated by a state law, it is subject to the court- created doctrine of „state action‟. Under „state action defence‟ doctrine, immunity is granted from federal antitrust liability for certain private or state actors for certain conduct that would otherwise violate the national antitrust laws. Federal antitrust law will not obstruct the state law so long as that decision is made at the highest levels of state government and implemented by state actors or by private actors „actively supervised‟ by the state. See ICN, Objectives of Unilateral Conduct Laws, above n 44, 76.
94 OECD, „Principle of Competitive Neutrality‟, above n 40, 44
174 prevails over the Competition Act.95
5.2.1.1 State monopolies in the European Community, Australia and the United States
Unlike the US practice, the existence of SOEs was a common phenomenon and their roles were clearly recognized in the EU before the liberalisation of state monopolies started took place in the mid-1980s,96 and Australia before the release of the Hilmer Report in 1993.97 This has strongly influenced the development of competition law concerning state monopolies, with many similarities found in both places. The growing concern regarding the existence of public monopolies and their influence on competition was one of the major reasons for bringing wide-ranging reforms and adjustments to competition policy.
European Union
The EU competition law shows great concern regarding public undertakings (public monopolies or state monopolies) and the high degree of state involvement in the market.98 A number of reasons were put forward by European states to justify this. For example, state monopolies were often granted monopoly status and exclusive rights to provide
„universal services‟ or „service of general economic interests‟. They were also created to achieve some „public‟ objectives such as consumer equality.99
95 ICN, Objectives of Unilateral Conduct Laws, above n 44, 70.
96 Damien Geradin (Ed), The Liberalization of State Monopolies in the European Union and Beyond (Kluwer Law International, 2000) ix; Damien Geradin, The Liberalisation of Network Industries in the European Union: Where Do We Come from and Where Do We Go? (2006), 8
<http://www.vnk.fi/hankkeet/talousneuvosto/tyo-kokoukset/globalisaatioselvitys-9- 2006/artikkelit/Geradin_06-09-20.pdf >.
97 In 1992, the Council of Australian Governments commissioned Professor Fred Hilmer to undertake an
„Independent Committee of Inquiry into National Competition Policy‟. The subsequent report, known as the Hilmer Report, was released in August 1993. Based on the Hilmer Report‟s recommendations, a number of reforms were drawn up in 1995 to form a package called the National Competition Policy. See Independent Committee of Inquiry in Australia, National Competition Policy (AGPS, Canberra, 1993). This report hereinafter is referred as Hilmer Report throughout chapters of this thesis.
98 Before the large scale liberalisation of state monopolies in the mid 1980s, major sectors of European industry were dominated by state monopolies such as telecommunications, postal services, energy and transport. Some sectors of strategic importance were often run by a single company, preferably controlled by the state. See Geradin, The Liberalization of State Monopolies, above n 96, ix. They have currently been operated in these areas where most of them have been privatised.
99 According to Geradin, a monopoly could maintain a uniform tariff throughout the territory because it can benefit from cross-subsidies between profitable and non-profitable services. See Geradin, The
Liberalization of State Monopolies, above n 96, ix.
175 Competition rules concerning state monopoly firms in the EU illustrate the historical character of state enterprises and reflect their importance. While the US antitrust law was originally influenced by the fear of the rapid expansion of private economic power, EC competition rules embodied in Articles 85 and 86 of the EC Treaty 1957 (currently Articles 101 and 102 TFEU ) were established because of concern about the existence of state monopolies and powerful public enterprises during that time. The strong prohibition of anti-competitive behaviour such as unfair pricing and refusal to deal reveals concern about the fact that many monopolies and dominant firms were created by government regulations, not by innovation and internal growth of the most efficient firms. That Article 102 dealing with abuses of market dominance appears to be stricter than Section 2 of the US Sherman Act is a good example.100 The cautiousness about state firms under EU law is illustrated by the fact that not only does EC competition law apply to the behaviour of SOEs, it also imposes obligations on the member states themselves.101 EU members are under obligation not to enact any legislative measure which could risk endangering the effectiveness of the EC Treaty.102
Due to increasing liberalisation, EU public firms have reduced their monopoly position in many areas.103 This accounts for the fact that the application of EU competition rules, particularly to public monopolies, is not a major concern; rather how competition rules are utilised to deal with anti-competitive activities of public firms has become more common.
United States
In the US the application of antitrust law to SOEs reflects a different attitude.
Historically, the US public enterprises mostly were formed in the early days of the nation‟s founding to meet the demand for infrastructural construction and providing
100 Geradin, „Limiting the scope of Article 82 EC: What Can the EU Learn from the US Supreme Court‟s Judgment in Trinko in the Wake of Microsoft, IMS and Deutsche Telekom‟ (2004) 41 Common Market Law Review 48 - 89, Thomas Eger, Michael G Faure and Naigen Zhang (eds), Economic Analysis of Law in China (Edward Elgar Publishing, 2007) 98.
101 OECD, „Roundtable on the Application of Antitrust Law to State-owned Enterprises‟ submission by the European Commission‟ (Working Party No.3 on Cooperation and Enforcement, DAF/COMP/WP3/WD (2009)42, 2009), 2 <http://ec.europa.eu/competition/international/multilateral/antitrustlaw.pdf>.
102 Ibid. In this regard, such state measures as the requirement or encouragement of firms to create cartels or the grant to the firms the responsibility for taking decisions about the boundaries of competition may constitute a breach of competition rules, for example Article 101 TFEU.
103 Geradin, The Liberalization of State Monopolies, above n 96.
176 public goods such as banks, transportation system and schools.104
In other countries such as the EU, Australia and Newzealand, the development of competition law, in part, has originated from the prevalence of state enterprises in sectors involving the provision of public goods.105 In contrast, government ownership of enterprises in the US has never been embraced, the government generally has refrained from nationalizing and from directly managing private industries, except in wartime.106 Hence, state-owned, state-controlled, or state-enabled or facilitated monopolies are quite rare.107 The concept of „state monopoly‟ appears to be absent and the matter of application of competition law for SOEs has not received much contribution from the US courts and legislators.108 Competition rules governing SOEs are virtually limited in American jurisprudence109 and the US Constitution is said to immunise from US antitrust law much anti-competitive behaviour by SOEs.110 As a result, legal and economic principles for regulating anti-competitive behaviour by private enterprises have been the focus of the US antitrust law.111
Besides, the involvement in commercial activities by various levels of government (federal, state and local) in the US is not popular, or it is undertaken with special objectives and the extent of competition between the government and private sector in
104 Jerry Michell, „Public Enterprises in the United States‟ in Ali Farazmand (ed) Public Enterprise Management: International Case Studies (Greenwood Press, 1996) 69.
105 In these places, the state routinely owns and normally operates such industries as railroads, telephone companies, electric utilities, banks, airlines, steel mills, automobile factories and aircraft plants. See David E.M Sappington and Gregory J Sidak, Anti-competitive Behavior by State-Owned Enterprises: Incentives and Capabilities (2004), 2-3 <http://media.hoover.org/documents/081793992X_1.pdf>.
106 Ibid 3.
107 ICN, Response of the United States Federal Trade Commission and Department of Justice to Unilateral Conduct Working Group Questionnaire (2007), 20
<http://www.internationalcompetitionnetwork.org/media/library/unilateral_conduct/questionnaire/US_FTC- DOJ_UCWG_Questionnaire.pdf>; and
<http://www.internationalcompetitionnetwork.org/media/library/unilateral_conduct/questionnaire/ICC_US_
NGA-Howrey.pdf>.
108 Sappington and Sidak, „Competition Law for SOEs‟, above n 45, 479-523.
109 The question of why the US antitrust law does not to take seriously into consideration the matter of the public sector has been explained by several writers. For example, as found by Epaminondas Spiliotopoulos, there are few cases of direct entry into industry or commerce by either the Federal or the States authorities.
However, government corporations have been used as a form of special centralised agencies for the Federal Government to carry out industrial and commercial activities. See Epaminondas Spiliotopoulos, „The Nature of the Public Undertaking‟ (1966) 37 (3) Annals of Public and Cooperative Economics 7
<http://www3.interscience.wiley.com/cgi-bin/fulltext/119729100/PDFSTART>.
110 Sappington and Sidak, Competition Law for SOEs‟, above n 45, 522.
111 Sappington and Sidak, Anti-competitive Behavior by SOEs, above n 105.
177 those cases is indirect and often negligible or non-existent. There are, however, some cases where the government gets involved in commercial activities and thus competes with the private sector (e.g. the operation of national parks, transportation facilities, some major sports facilities and colleges and universities). In such cases, the products offered are distinct and the government‟s involvement is not controversial.112
Currently, there is only one state-controlled monopoly, which is the US Postal Service (USPS).113 The USPS is not subject to antitrust law. This is due to the view that the USPS does not have legal status as a „person‟.114
Australia
In Australia, public monopoly structures115 (state monopolies) were popular until recently. As in the European Community, public monopolies were often found in the provision of public utilities.116 Government business enterprises held monopolies in key areas of the economy which had monopoly characteristics e.g. water supply, telecommunication117 and electricity. The role of government trading enterprises was
112 OECD, „Regulating Market Activities by the Public Sector‟ (Competition Policy Roundtable, DAF/COMP (2004)36, 2005), 263 <http://www.oecd.org/dataoecd/61/5/34305974.pdf>.
113 The USPS has existed since the beginning of the United States. It was firstly known as the United States Post Office, a predecessor to the current USPS and was a cabinet level department of the U.S. government.
Since 1970 the USPS has been an independent establishment of the executive branch charged with financing its own operations and providing postal services to the nation in a business-like manner. The USPS has become a monopoly on the pick-up and delivery of non-expedited letters under Federal law, while its rates are reviewed by the Postal Rate Commission (PRC). See ICN, Response of the United States Federal Trade Commission and Department of Justice, above n 107, 20.
114 In United States Postal Service v Flamingo Indus, it was held that the Postal Service is not a separate person from the United States and thus not subject to suit, under the Sherman Act. The PRA‟s designation of the Postal Service as an „independent establishment of the executive branch of the Government of the United States,‟ is not consistent with the idea that the Postal Service is an entity existing outside the Government. See United States Postal Service v Flamingo Indus., 540 US 736 (2004).
115 The term „public monopoly structure‟ is mentioned in the Report to Parliament of the Commonwealth of Australia, National Competition Policy: Overview and Assessment (1994). See also Commonwealth of Australia, National Competition Policy: Report by the Independent Committee of Inquiry (the Hilmer Report) (1993) <http://ncp.ncc.gov.au/docs/Hilmer-001.pdf>.
116 Ibid.
117 For example, Australian telecommunications services were provided until the 1980s by a government- owned monopoly. See John Quiggin, „The Premature Burial of Natural Monopoly: Telecommunications Reform in Australia‟ (1998) 5 (4) Agenda 430 <http://epress.anu.edu.au/agenda/005/04/5-4-A-4.pdf>.