Can Digicel realistically operate two networks?

Darron Thomas, Guest Columnist

This the final of a two-part analysis of the impending Digicel-Claro merger. The first part was published in yesterday's Gleaner.

While the 'regulator' - I suppose the Office of Utilities Regulation (OUR) - has been dealt with in specific terms, no specifics have been articulated for enhancing the Fair Trading Commission's (FTC) ability to discharge its functions. This is important because enforcement of Section 17 is likely to be called into force by an issue that continues to puzzle most analysts.

This issue, most curious among the conditions set out for the approval of the merger, is the idea that Digicel will continue to operate with two separate networks. This is so as it seems that most attempts to carry out operations on this basis will almost certainly be in contravention with subsections of Section 17 of the Fair Competition Act (FCA).

The two subsections are 2(c) and 2(e). 2(c) speaks specifically to the "sharing of markets or sources of supply - being provisions which have or are likely to have the effect of [ ... lessening competition]".

How will one firm, acting as two separate entities, not share or be prevented from sharing markets or sources of supply? How will this issue be monitored?

Turning to subsection 2(e), it says "apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; being provisions which have or are likely to have the effect referred to in subsection (1)".

The enforcement of this provision will require, at the very least, that all interconnection rates in the industry be the same, as Digicel (Claro - the separate network operated by Digicel) cannot charge a different rate to connect to LIME than it charges to connect to Claro (Digicel). Will Digicel then impose the premerger Digicel or Claro interconnection rate? How soon will the regulator be able to sanction the rate that is charged?

Watchdog critical

The question of how soon an effective regulator will be in place is by no means trivial, as the creation of a single regulator has been thrown into the mix. If this is the case, the power the OUR (and possibly those of the FTC) has over the wireless telephony industry must be dissolved and vested in the new regulatory authority.

How long will it take to set up this new authority?

Of course, an ocean of other questions is attendant with the creation of this new authority, which makes six weeks an impossibility. If the regulatory functions continue to be discharged by the OUR, the FTC and the minister, the issue of why the OUR and the FTC were not acting, given the powers outlined in yesterday's article, is left begging.

What specific provisions are being put in place to enhance the powers of the FTC? Will sections 19, 20 and 21 of the FCA be called into action if Digicel abuses its dominant position? At this time, there are more questions than answers, and consumers can only hope that the FCA's Section 17 subsection 4(a)(i) and (ii) were considered and will be called into action should Digicel attempt to abuse its dominant position. These sections state:

• 4(a)(i) "Improvement of production or distribution of commodities;
• (ii) Promotion of technical economic progress;
• While allowing consumers a share of the benefits."

In summary, this consummated merger between Digicel and Claro threatens to reduce the wireless telephony industry in Jamaica to a virtual monopoly. The well-known inefficiencies and potential abuses of monopoly have resulted in significant calls for regulation of the industry.

However, monopolies could improve efficiencies by taking advantage of economies of scale and scope and passing on some, if not all, of the benefits to consumers. Suggestions are that the optimal regulation rules should be pursued by way of long-run incremental cost analysis, price-cost margins, and the methods of the new empirical industrial organisation.

Short of Digicel's benevolence and/or a big-time comeback by LIME, consumers must rest their hats on Section 4(a) (i) and (ii), among other provisions under the now-existing and new regulatory provisions, when finally enacted.

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