Competition News, Edition 12, June 2003

Competition News, Edition 12, June 2003 Page of

Competition News, Edition 12, June 2003

IN THIS EDITION

1. 
   OECD Peer Review
   
2. 
   Competition Conference 2003
   
3. 
   Restructuring the Electricity Supply Industry in SA
   
4. 
   Assessing Code-share Markets in Aviation
   
5. 
   Foreign Direct Investment (FDI) in Mergers and Acquisitions
   
6. 
   Merger Cases
   
7. 
   Implications for Commission Investigations
   
8. 
   Commission Investigates the Private Healthcare Industry
   
9. 
   The Carrot or the Stick? (Enforcement vs. Advocacy)
   
10. 
    Contact Details
    

1
1. OECD Peer Review Finds Competition Authorities
'Impressive and Sophisticated'
For the first time, a global peer review panel has assessed South Africa's competition policy institutions. In the peer review submitted by the Organisation for Economic Co-operation and Development (OECD) Global Forum on Competition, its findings stated that "the competition policy bodies are recognised in South Africa as notably competent and serious.” The summary paragraph that follows is reviewed by competition authorities from around the world - representing both developed and developing nations:
"South Africa aspires to a modern competition policy regime, to deal with the well-resourced sophistication of much of the South African economy. Its new institutions, whose novelty responds in large part to the post-1994 imperative for fundamental restructuring of government institutions, have shown a confident capacity to deal with complex structural issues in deciding dozens of merger cases. A legalistic business and government culture has challenged these new bodies to prove their competence and tested their jurisdiction. Now that the merger review process has been established, more attention should be paid to non-merger matters and probably to advocacy as well. Resources are stretched, and there is a critical need to improve the depth and strengthen the capacity of the professional staff."

Trade and Industry Minister, Alec Erwin, said he was particularly pleased with the outcome of the survey. "In line with the objectives of NEPAD, to adopt and indeed surpass international best practices and subject our institutions to the rigor of ongoing peer reviews, the assessment by the OECD of our competition authorities against the most entrenched and mature in the world was highly favourable and well timed." The Minister cited one comment from the OECD in particular, which he believed accurately described the current arena: "They (competition authorities) are striving to follow best practices from the experience of other enforcement agencies around the world, knowing that is the measure being applied to them by South Africa's legal and business communities."

The survey found that "To a surprising extent, competition policy in South Africa is merger policy. The decisions to date show that, in terms of substantive economic analysis and sensitivity to policy context, merger review in South Africa is done at a high level of sophistication...the range of issues the Tribunal and the Commission have addressed is impressive, as is the economic sophistication of their approach. The decision-making independence of the Commission and the Tribunal is well established and the new system of pre-notification and control produces a stream of public decisions demonstrating quickly how the law is making a difference."
The authorities are addressing several areas for improvement that were noted in the report. The shortage of personnel in the Commission's Enforcement and Exemptions division, for example, has been rectified with only two positions remaining to be filled. The Commission has also stepped up its advocacy role and has been working with both parastatals and government departments to help unravel anti-competitive practices, some of which flow from government policies. The review is positive in that it vindicates the Government's decision to review competition policy in South Africa and to put in place strong competition authorities. "This shows - contrary to earlier domestic criticism - that our efforts and practices are in line with those of competition authorities in the rest of the world," says Adv. Simelane, Competition Commissioner.
The Commission has already concluded agreements in respect of concurrent jurisdiction with other regulators and is increasingly focusing on enforcement and exemptions to improve turnaround time for investigations. It has also spent considerable effort increasing the skills-base and professionalism of our staff through training. The Commission is confident that its attentions will continue to extend beyond that of merger review and is committed particularly to educational and outreach programmes to various stakeholders.

The recommendations for policy options from the OECD are listed below:

1. 
   Complete the agreements with other regulatory bodies providing for concurrent jurisdiction, to ensure consistent application of competition policy in all sectors.
   
2. 
   Improve handling and increase priority and resources for non-merger matters.
   
3. 
   Bolster resources by accepting offers of third-party support.
   
4. 
   Discourage abuse of the interim relief process.
   
5. 
   Make more use of formal substantive guidelines.
   
6. 
   Use economic resources of the Commission more effectively in advocacy settings.
   

The OECD Peer Review Report - 2003 can be viewed on the Commission's website at www.compcom.co.za

2. Competition Conference 2003
On the 6th of March the Commission and the Tribunal hosted the third Competition Authorities Conference at the Hilton Hotel in Sandton. As in the past, the 2003 Conference drew speakers from around the globe. As specialists in their respective fields they greatly contributed to the insightful discussions that ensued. The theme of the conference was "Competition and Development: promoting competition in a protected economy".
Stakeholders invited included practitioners, parastatals, regulators, trade unions, consumer organisations, SMEs and selected others. One hundred and ninety five people attended the conference. The speakers comprised international and local speakers, with a wealth of experience on competition issues. Amongst the speakers was Mr. Michael Wise, an OECD consultant, who spoke on the importance of peer review and its benefits. He also discussed the recent South African competition authorities' peer review.
Mr. William Kovacic, the General Counsel of the Federal Trade Commission, USA (FTC) in his talk entitled "Does Competition Law promote Economic Development?", asserted that Competition Law does indeed promote economic development for many reasons. Some of these are listed below.
A competition policy system:

• 
  Can be an effective bridge to economic liberalisation, especially in a country such as South Africa making the move from heavy state control towards one of less control.
  
• 
  Can be a barrier to more intrusive regulation by acting as a political shock absorber; for example preventing the introduction of more intrusive forms of control such as price fixing.
  
• 
  Promotes market entry by giving those with good business ideas a chance to test those ideas in the market.
  
• 
  Impedes the private exercise of market power through cartels.
  
• 
  Discourages corruption by upsetting corrupt deals.
  

Mr. Kovacic said that analysis of data indicates that competition law reduces the vulnerability to cartels, limits the acquisition of private market power and can work to curb public restraints on rivalry. There is also evidence to suggest that well-designed competition policy promotes market entry, reduces corruption (especially in public procurement markets), and has desirable distributional consequences.

Answering the question on how the US economy would have unfolded if it hadn't introduced competition policy in 1890, he said that a no-ban on cartels would mean that today America would have had powerful, durable cartels with a profoundly negative impact on new entrants to the market. Data suggests that without merger control policies there can be no growth. The conference gave delegates a balanced overview on restructuring, privatisation and competition considerations.
The presentations made at the conference can be viewed on the Competition Commissions’ website at www.compcom.co.za under events/conferences.

3. Restructuring the Electricity Supply Industry in SA:
Competition Considerations
The restructuring of Eskom forms part of a broader initiative by government to restructure its four largest state-owned enterprises: Eskom, Telkom, Transnet and Denel. The electricity industry plays a crucial role as a driver of economic growth. As such, policies around the industry should send clear signals to investors and avoid some of the pitfalls witnessed elsewhere in the recent past. This article gives an overview of the restructuring initiative in the electricity supply industry (ESI) in South Africa, and some of the policy concerns around the process.
Restructuring at the generation stage will involve the following:

• 
  Establishment of Eskom Generation as a wholly owned subsidiary of Eskom Holdings.
  
• 
  Eskom Generation will retain 70% of the market.
  
• 
  30% will go to private sector through bidding process.
  - Private independent power producers will have 20% of the market.
  - BEE to be allocated 10% of the market.
  
• 
  Eskom's 24 power stations will be grouped into a few competing clusters.
  
• 
  Generators (IPPs & Eskom Generation) will not be allowed to be involved in transmission or distribution.
  
• 
  In order to ensure meaningful participation of the private sector in the electricity market, Eskom might not be allowed to invest in new generation capacity in the domestic market.
  

Reform at the transmission level in South Africa will involve setting up an independent state-owned transmission company, Transco. In the long term, Transco may be privately owned. The rationale behind unbundling transmission from generation is to avoid discrimination and other anti-competitive behaviour. A transmission owner who is also involved in generation has an incentive to discriminate against other generators in terms of access to the grid. Such discrimination can take various forms:

• 
  Setting high access prices for competitors.
  
• 
  An outright refusal of access to the grid.
  
• 
  Reserving transmission capacity for its own generation businesses.
  
• 
  Permitting unequal access to crucial technical information.
  
• 
  Cross-subsidising between regulated and unregulated activities where these were previously jointly operated.
  

In order to facilitate wholesale competition, the establishment of a multi-market model (MMM) has been proposed. Here, the various market participants (generators, traders and buyers) will interact through a variety of mechanisms including bilateral agreements, futures markets, day-ahead markets and real-time markets. The existing Eskom power pool (EPP) with some modifications, is considered an appropriate basis for forming the MMM. However, this might put Eskom's generation clusters at an advantage since they are already familiar with the functioning of the power pool.

Approximately 360 municipalities, Eskom and about 13 private distributors¹ are currently engaged in the business of distributing electricity in South Africa. Municipalities are required by law to provide infrastructural services like roads, water and sanitation, health services, and electricity. Since few municipalities generate their own power, the majority of them purchase power from Eskom for resale to consumers within their boundaries. Amongst the municipalities there are a small number of large distributors² and a large number of small distributors. At the moment the sector is facing numerous difficulties that need immediate attention if the reform process is to succeed. These relate to financial instability, the inequitable treatment of customers and operational/management inefficiencies.
With regard to distribution, the EDI blue-print report³ recommends the establishment of a holding company (EDI Holdings), with a 100% ownership by government, to which municipalities and Eskom distribution will be transferred. These will form six regional electricity distributors (REDs) who will be responsible for the distribution of electricity to consumers within their respective boundaries. EDI Holdings will be mandated to consolidate the fragmented and inefficient distribution industry and to oversee its restructuring.
EDI Holdings will be established for an initial period of six years after which its role will be reviewed to determine whether it should continue, and if so what role it should fulfil. As a starting point, large customers (consuming at least 100GWh of electricity per annum at a single site)⁴ will be able to purchase power directly from generators of their own choice. In the short term, smaller customers will remain captive under a particular RED, and hence will require some form of regulatory protection through control over tariffs and quality of service.⁵ Eventually, full retail competition should be possible where all customers, of all sizes, should be able to choose their supplier.