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p. 27 of 62 BACK | NEXT Purpose and Structure of the Toolkit Overview of Practices Controlled by Competition Law Countries with Competition Law Systems Benefits of Competition Policy Practices Controlled by Competition Law Key Concepts and Tools Competition, Privatization, and Regulation OECD's Work in Utility Industries Work of the ICN Structural Separation in Regulated Industries Ex Ante Regulation and Competition When Competition Law Replaces Ex Ante Regulation Sector-Specific Regulator or Competition Authority? Essential Facilities Doctrine and Interconnection Problems Non-commercial Service Obligations Banking and Finance Emerging Economies Enforcement Mechanisms ADB Resources and Projects Other Resources Glossary and List of Abbreviations

Competition Law Toolkit : Competition, Privatization, and Regulation

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C. Structural Separation in Regulated Industries

A typical issue that arises in utility sectors is that there may be some activities that are or could be competitive, whereas others may be natural monopolies. It is easy to think of examples. In the electricity sector, there is often no reason undertakings cannot compete in the generation of electricity from a variety of inputs—e.g., coal, gas, water (hydroelectricity) or nuclear fuels—whereas it may only be possible to operate one national grid for the transmission of electricity around the country. Similarly, in the case of telecommunications, it is possible for many firms to compete to provide a range of services over a telecommunications network, (e.g., voice telephony, data transmission, or broadband Internet access) but it may be impossible to duplicate the so-called "local loop"—the last part of the network from the final local exchange—to shops, offices, and homes. Other natural monopolies may be gas distribution networks, railway lines, or a nationwide system for the delivery of post.

In 2001, the OECD published Restructuring Public Utilities for Competition [ PDF ]. This report noted the key impact that industry structure has on competition, particularly the problems that can arise where a vertically-integrated undertaking carries on both competitive and non-competitive activities. It drew on submissions that had been made to the OECD by a number of countries, as well as the various sectoral studies that the Competition Law and Policy Committee had conducted. This 2001 report, as well as other individual and collective experience from member countries, led the OECD to adopt a Recommendation Concerning Structural Separation in Regulated Industries [ PDF ] in the same year. In the recommendation, the OECD refers to an agreement that was reached at ministerial level in 1997, which states that it was appropriate to reform economic regulations in all economic sectors, to separate potentially competitive activities from regulated utility networks, and to guarantee access to essential network facilities to all market entrants on a transparent and non-discriminatory basis. The recommendation goes on to recognize a number of features of utility sectors, particularly that a vertically-integrated undertaking that operates a network and that also provides competitive services across that network has an ability and an incentive to restrict the ability of other firms to compete in activities upstream or downstream from the network. It also recognizes that restrictions of competition of this kind generally harm efficiency and consumers. The recommendation then explains that it may be difficult to overcome this particular problem through behavioral policies, (e.g., by trying to ensure that non-discriminatory access is available to market entrants on fair and reasonable terms) and notes that structural approaches may therefore be preferable. As a result of this, the OECD recommends that, when faced with a situation in which a regulated firm is or may be operating simultaneously in a non-competitive activity and a potentially competitive complementary activity, member countries should carefully balance the benefits and costs of structural measures against the benefits and costs of behavioral measures. It also invites non-member countries to associate themselves with the recommendation.

One structural measure would be to ensure operational and accounting separation between the non-competitive and competitive activities. Of course, the ultimate measure would be ownership independence: to have no link of any kind between the activities in question.

Insight in the issues discussed in this section can be obtained by looking at the position of telecommunications in the Philippines. Legislation providing for the demonopolization of telecommunications was introduced in 1994. A 2000 study by Ramonette Serafica for the Philippine APEC Study Center Network discussed the experience, noting the success of the policy. The objectives of the study [ PDF ] are

• to provide a clear and workable definition of competition policy especially as it applies to the telecommunications industry,
• to evaluate the state of competition in the Philippines telecommunications industry,
• to identify threats to the competitive provisioning of telecommunications services, and
• to suggest policy and regulatory measures to ensure a contestable telecommunications market.

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