Scrutinising the Digicel-Claro merger

Darron Thomas, Guest Columnist

On March 11 when news broke of an impending merger between Jamaica's wireless telephone giant, Digicel, and one of its competitors, Claro, it immediately triggered a debate. Analysts, academicians, policymakers and the general public have expressed strong opinions on the merger.

While the verdict is still out on the impact on competitive conduct and consumer welfare, there is no uncertainty that the merger has been approved. Fear that Digicel will have a virtual monopoly post-merger should now be heightened. In the Jamaican context, prior to 2001, Cable & Wireless, now LIME, had a monopoly which, in most people's opinion, was harmful to consumers. It is probably this experience which has consumers and experts alike most fearful of the possible outcome.

While the Government argued that the merger is a commercial transaction which it ought not to interfere with under normal circumstances, international best practices suggest that the appropriate regulatory authority subject the deal to analysis and sanction accordingly. As such, the Government appropriately intervened to sanction the transaction. In Jamaica, the Fair Trading Commission (FTC), the Office of Utilities Regulation (OUR) and the minister with responsibility for telecommunications comprise the regulatory authority responsible for this transaction. The minister, Prime Minister Bruce Golding, has already spoken on the matter and has summarily approved the merger and passed the ball to the OUR and the FTC, or some "single wireless telephony regulator" yet to be established.

An overarching concern surrounding this merger is that it has been approved prior to establishing the appropriate regulatory framework to govern the industry. Despite not approving Digicel's business plan, the merger was still approved. What these two broad pillars of uncertainty suggest is that the unknown may be with stakeholders, such as consumers, for some time to come. Some of the most crucial concerns under the approval are the direction in which competitive outcomes will be driven; the operation of Digicel and Claro's pre-merger networks as separate networks; the passing of the 12-point set of amendments to give the regulator enhanced powers within six weeks; and the strength of the regulator as is, or, when the new regulatory powers are brought into force.

Cause for concern

While issues such as number portability and the sharing of facilities, as well as the enforcement of regulations, augur well for the competitive environment, the weak FTC is cause for concern in the near term, as no specific plans have been outlined for buttressing it. It is also difficult to be sanguine about meeting the six-week deadline as it seems ambiguous as to whether the FTC and the OUR will continue to be the regulatory arm, or if some new authority will be established.

Some of the new powers articulated by the PM seem to have been in existence but were simply not being enforced.

In approving the Digicel-Claro merger, Prime Minister Golding last Wednesday articulated a 12-point set of amendments which should better allow "the regulator" to discharge its functions. He further stated: "Given the urgency of the need for these amendments, efforts are being made to have the appropriate bill brought to Parliament within the next six weeks. The Fair Trading Commission is considering specific steps that may be taken within its statutory functions to ensure that the acquisition of Claro by Digicel does not adversely impact on the consuming public."

Items one through five on this list seem to have already been on the books, and as such, these steps announced by the Government must imply greater enforcement. The OUR, in a publication, reported that "mobile interconnection rates are presently unregulated." In the same document, however, the OUR conveyed its power over the wireless telephony industry as follows:

The OUR's general power to regulate these sectors is established by the OUR Act; however, the OUR has specific powers and functions in relation to the regulation of the telecommunications sector under the Telecommunications Act 2000.

A.2.3 The legal framework governing all aspects of interconnection between telecommunications service providers is set out in the act at Sections 27 to 37 inclusive. Section 29 (1) of the act states: "Each carrier shall, upon request in accordance with this part, permit interconnection of its public voice network with the public voice network of any other carrier for the provision of services."

A.2.4 Section 29 (4) of the act states as well: "The Office may, either on its own initiative in assessing an interconnection agreement, or in resolving a dispute between operators, make a determination of the terms and conditions of call termination, including charges."

A.2.5 The act further goes on to state the basis of charges, in subsection (5) of Section 29: "When making a determination of an operator's call-termination charges, the Office shall have regard to the principle of cost orientation ... ."

A.2.6 At Section 30, the act imposes the duty on a dominant public voice carrier to provide interconnection in relation to a public voice network in accordance with, among others, the following principles:

"... Charges shall be cost orientated and guided by the principles specified in Section 33."

A.2.7 These principles of cost orientation stated at Section 33 are:

"(1) Where the Office is required to determine the prices at which interconnection is to be provided by a dominant carrier, it shall, in making that determination, be guided by the following principles:

(a) Costs shall be borne by the carrier whose activities cause those costs to be incurred;

(b) Non-recurring costs shall be recovered through non-recurring charges and recurring costs shall be recovered through recurring charges;

(c) Costs that do not vary with usage shall be recovered through flat charges and costs that vary with usage shall be recovered through charges that are based on usage;

(d) Costs shall include attributable operating expenditure and depreciation and an amount estimated to achieve a reasonable rate of return;

(e) Prices for interconnection shall be established between the total long-run incremental cost of providing the service and the stand-alone cost of providing the service so that the prices shall be so calculated as to avoid placing a disproportionate burden of recovery of common costs on interconnection services; ...

(2) Where the Office has been unable to obtain cost information that it is reasonably satisfied is relevant and reliable, it may take into account comparable international benchmarks."

It seems to me that this discussion covers items one through five, as well as 10 and 11. Then why were these rules not being enforced and adhered to? Possibly, it was the lack of a prescription such as that found in item nine. However, item nine must be executed according to a set of carefully crafted guidelines to ensure that the law will have teeth. Introducing the FTC into this discussion turns the focus on items six, seven and eight on the PM's list. Items six through eight are essentially the mandate of the FTC. Probably some court ruling has assisted in the FTC's softer side being exposed publicly, however, it seems that under Section III of the Fair Trading Act (FCA), the FTC should have more powers than are currently being exercised. Section 17 is articulated as follows:

PART III. Control of Uncompetitive Practices

17. (1) This section applies to agreements which contain provisions that have as their purpose the substantial lessening of competition, or have or are likely to have the effect of substantially lessening competition in a market.

(2) Without prejudice to the generality of subsection 1, agreements referred to in that subsection include agreements which contain provisions that: (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development or investment; (c) share markets or sources of supply; (d) affect tenders to be submitted in response to a request for bids; (e) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (f) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts, being provisions which have or are likely to have the effect referred to in subsection 1.

(3) Subject to subsection 4, no person shall give effect to any provision of an agreement which has the purpose or effect referred to in subsection 1; and no such provision is enforceable.

(4) Subsection 3 does not apply to any agreement or category of agreements the entry into which has been authorised under Part V or which the commission is satisfied: (a) contributes to: (i) the improvement of production or distribution of goods and services; or (ii) the promotion of technical or economic progress, while allowing consumers a fair share of the resulting benefit; (b) imposes on the enterprises concerned only such restrictions as are indispensible to the attainment of the objectives mentioned in paragraph (a); or (c) does not afford such enterprises the possibility of eliminating competition in respect of a substantial part of the goods or services concerned.

Calls have come from several quarters for a single regulator to be established for the telecommunications industry, but as stated above, this is not the case. In fact, if the FTC is weak, the OUR, with its own regulatory powers, is a good thing, especially if the now-consummated merger, left unfettered, will adversely affect consumers. Generally, the OUR has responsibility for overseeing the technical aspects of the telecommunications industry. However, it deals with some specifics of price regulation, as articulated above and intended by the PM's statements, which in other jurisdictions would be the responsibility of a competition authority such as the FTC.

In lieu of a possibly weak position in which the FTC finds itself, one may wonder why the FTC has not sanctioned Digicel under sections 19, 20 and 21 (these sections deal with market dominance, abuse of dominance, and sanctions for such abuse) given that Digicel is said to have between 70 and 80 per cent market share and charges cross-network fees which are high relative to its competitors. It is also curious why the OUR has not been more active in regulating the wireless telephony industry since the powers were already vested in it.

Tomorrow: How can Digicel run two networks?

Darron Thomas is an economist. Email feedback to columns@gleanerjm.com and darron.thomas@gmail.com.

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  PM's 12-point edict

(1) Empowering the regulator to obtain information from licensees without a formal enquiry or the burden of proving reasonable grounds for requiring same.

(2) The application of the provisions of the act regarding interconnection not only to voice but also data and other services.

(3) The right of licensees to submit their interconnection disputes to the regulator for resolution.

(4) The automatic amendment of the terms and conditions of all interconnection agreements to conform to the most current Reference Interconnection Agreement authorised by the regulator, including applicable rates and charges as approved from time to time by the regulator.

(5) Enabling the regulator, in determining applicable rates and charges, to take into account all relevant factors, including cost orientation and local and international benchmarks.

(6) The power of the regulator to prescribe, after consultation with the FTC, competitive safeguards aimed at preventing anticompetitive activity in the telecommunications market.

(7) Special provisions to protect small service providers in utilising services offered by large carriers, including the power and responsibility of the regulator to examine and approve customer contracts for wholesale and retail services.

(8) Provisions to protect non-facilities-based licensees and other wholesale customers against discriminatory and unfair treatment by service providers and carriers.

(9) In addition to judicial remedies that may be pursued, enabling the regulator to secure quick and efficient compliance with statutory rules and directions by giving it direct enforcement powers to impose behavioural remedies, including:

- Financial penalties on licensees;

- Orders for compensation to persons adversely affected by actions of licensees that are in contravention of the act;

- Orders to terminate, modify or nullify agreements.

(10) The power of the regulator to prescribe, by order published in the Gazette, rules that are of a purely regulatory nature.

(11) The power of the regulator to determine the terms and conditions of access to, and sharing of, telecommunications facilities and infrastructure by telecommunications providers.

(12) Regulations to govern the efficient use and operation of spectrum frequency and the authority of the regulator to take decisions and give directions in relation thereto.