The Essential Facilities Concept 1996 The OECD Competition Committee debated the essential facilities concept in February 1996. This document includes an analytical note by Ms. Sally Van Siclen of the OECD, written submissions from Australia, Canada, the European Commission, Italy, Japan, Sweden, the United Kingdom, and the United States and an aide-memoire of the discussion. An essential facilities doctrine specifies when the owner(s) of an “essential” or “bottleneck” facility must provide access to that facility, at a reasonable price. For example, it might specify when a railroad must be made available on reasonable terms to a rival rail company or an electricity transmission grid to a rival electricity generator. Topics covered include the access regime, interoperability (that different systems, products, and services work together transparently), standards, the importance of market definition in defining an essential facility, single versus joint ownership of an essential facility, legitimate reasons to deny access and possible remedies. There is an important distinction among public, private but regulated, and private unregulated facilities because mandatory access can diminish private incentives to invest and to innovate. OECD Guiding Principles for Regulatory Quality and Performance (2005) Regulating Market Activities by the Public Sector (2004) Competition Issues in the Electricity Sector (2003) Recommendation of the Council concerning Structural Separation in Regulated Industries (2001) Restructuring Public Utilities for Competition (2001) General Distribution OCDE/GD(96)113 THE ESSENTIAL FACILITIES CONCEPT ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT Paris 1996 40918 Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format Copyright OECD, 1996 Applications for permission to reproduce or translate all or part of this material should be made to: Head of Publications Service, OECD, 2 rue André-Pascal, 75775 - Paris Cedex 16, France. Copyright OCDE, 1996 Les demandes de reproduction ou de traduction doivent être adressées à : M. le Chef du Service des Publications, OCDE, 2 rue André Pascal, 75775 Paris Cedex 16, France. 2 FOREWORD This document comprises proceedings in the original languages of a roundtable on the essential facilities concept which was held by Working Party No. 2 of the Committee on Competition Law and Policy in February 1996. It is published as a general distribution document under the responsibility of the Secretary General of the OECD to bring information on this topic to the attention of a wider audience. This is the fifth compilation published in a new OECD series named “Roundtables on Competition Policy”. PRÉFACE Ce document rassemble la documentation, dans la langue d’origine dans laquelle elle a été soumise, relative à une table ronde sur le concept des installations essentielles qui s’est tenue en février 1996 dans le cadre du Groupe de travail n°2 du Comité du droit et de la politique de la concurrence. Il est mis en diffusion générale sous la responsabilité du Secrétaire général afin de porter à la connaissance d’un large public les éléments d’information qui ont été réunis à cette occasion. Cette compilation est la cinquième diffusée dans la nouvelle série de l’OCDE intitulée “Les tables rondes sur la politique de la concurrence”. 3 TABLE OF CONTENTS BACKGROUND NOTE......................................................................................................................... 7 Sally Van Siclen, OECD Secretariat NOTE DE RÉFÉRENCE.......................................................................................................................21 Sally Van Siclen, Secrétariat de l’OCDE NATIONAL CONTRIBUTIONS Australia .................................................................................................................................37 Canada....................................................................................................................................49 Italy ........................................................................................................................................55 Japan.......................................................................................................................................61 Sweden ...................................................................................................................................65 United Kingdom .....................................................................................................................69 United States - Federal Trade Commission (FTC) ...................................................................81 United States...........................................................................................................................87 Commission of the European Communities.............................................................................93 AIDE-MEMOIRE OF THE DISCUSSION..........................................................................................109 AIDE-MÉMOIRE DE LA DISCUSSION............................................................................................121 OTHER TITLES IN THE SERIES “ROUNDTABLES ON COMPETITION POLICY”......................133 5 BACKGROUND NOTE Sally Van Siclen, OECD Secretariat 1. Introduction The term "essential facilities doctrine" originated in commentary on United States antitrust case law and now has multiple meanings, each having to do with mandating access to something by those who do not otherwise get access. The variance in definitions is great. Indeed, commentators cannot even agree on which U.S. cases come within the purview of "essential facilities."1 Among countries, the variance is even larger. Hence, one purpose of this note is to make readers aware of that variance. An "essential facilities doctrine" (EFD) specifies when the owner(s) of an "essential" or "bottleneck" facility is mandated to provide access to that facility at a "reasonable" price. For example, such a doctrine may specify when a railroad must be made available on "reasonable" terms to a rival rail company or an electricity transmission grid to a rival electricity generator. The concept of "essential facilities" requires there to be two markets, often expressed as an upstream market and a downstream market. (The case of two complementary products is logically the same, but confusing in exposition.) Typically, one firm is active in both markets and other firms are active or wish to become active in the downstream market. (See below for a fuller discussion of the market configurations found by some commentators to be relevant to an EFD.) A downstream competitor wishes to buy an input from the integrated firm, but is refused. An EFD defines those conditions under which the integrated firm will be mandated to supply.2 While essential facilities issues do arise in purely private, unregulated contexts, there is a tendency for them to arise more commonly in contexts where the owner/controller of the essential facility is subject to economic regulation or is State-owned or otherwise State-related.3 Hence, there is often a public policy choice to be made between the extension of economic regulation and an EFD under the competition laws. Further, the fact of regulation of pricing through economic regulation, State-control, or a prohibition of "excessive pricing" in the competition law, has implications for the nature of an EFD. The remainder of the note proceeds as follows. Section 2 presents concise formulations of the EFDs in the United States, Australia, and the European Union, illustrating the variation found within the OECD area. Section 3 presents a basic economic analysis of the issues. Section 4 is a discussion of some other relevant issues. Section 5 concludes the note. 2. Three statements of essential facilities doctrines Essential facilities doctrines vary significantly among legal regimes. They may vary according to the types of "facilities," ownership and market structures to which they may apply, and according to who makes the determination that a facility is "essential." This section very briefly looks at three of the EFDs that apply within the OECD area. The first one examined is that of the United States, where the term originated and on which much commentary is available. The relatively uncrystallized EFD of the European Union is examined second. The third EFD presented is that of the "Hilmer Report" of Australia, which is a recent re-examination of the Australian approach to competition and regulation. 7 United States The leading U.S. essential facilities case is MCI Communications Corp. v. AT&T. (708 F.2d 1081, 1132 (7th Cir.), cert. denied, 464 U.S. 891 (1983)) The Seventh Circuit said that there were four elements necessary to establish liability under the essential facilities doctrine: 1) control of the essential facility by a monopolist; 2) a competitor's inability practically or reasonably to duplicate the essential facility; 3) the denial of the use of the facility to a competitor; 4) the feasibility of providing the facility. (708 F.2d at 1132-33) Commentators do not agree on which cases constitute the EFD cases. If one takes the American Bar Association commentary as the closest thing to consensus regarding the identity of cases, then the facilities deemed essential have included: railway bridges, etc. into the city of St. Louis, a nationwide telecommunications network, a local electricity