The Interface between S ector Regulation and Competition Law —The China’s choice Shiying Xu Professor,East China University of Political Science and Law Shanghai,China 2011 CUTS Conference on Reviewing Global Experiences of Economic Regulation, Delhi April 18-20, 2011

Brief Introduction  The experience of countries shows that there are two approaches to regulating the anti- competitive conducts by enterprises: sector-specific regulation enforcement of competition law

Brief Introduction  The objective of enforcement of competition law is to maintain the effective market mechanism.  The objective of sector-specific regulation is to intervene and remedy the market failure.  Regulation and competition law are parallel process. Both plays valuable roles in helping markets work better. Well interface and coordination between regulation and competition law is the solution of keeping sustainable development of economy.  How to apply the competition law into the regulatory industries has become a big challenge to all countries.

Ⅰ. The Puzzle of China-- How to Interface between Regulation and Competition Law  As a biggest transition economy, China has its special characteristics. It is more harder for China to figure out the solution than any other countries. Competition has been introduced in more regulatory industries telecommunication electronic power industry other utility industries. Those enterprises which owns market dominance position have been released more competitive energy from severe administrative regulation and now are playing as a competitor in the market. Their anti-competitive behavior has been conducted due to the commercial intention. -- Ownership system (most of them are SOEs) -- Economic system （ some areas has not been reformed eg. railway, Oil )

1. The Puzzle of China-- How to Interface between Regulation and Competition Law During the process of competition legislation （ AML ） the debate has been raised  Some more favored to the advantages of sector regulation: -- Sector-specific regulation can adjust in advance. -- Sector-specific regulation can adjust initiative. -- Sector-specific regulation can be more directive. The regulatory sectors applied for being exempted from AML

1. The Puzzle of China-- How to Interface between Regulation and Competition Law Some more favored to the advantages of Enforcement of Competition Law: --The neutrality. No discrimination and avoiding the phenomenon of being both athlete and referee at the same time. -- The public participation. Consumers have become the strong motive force to speed up economic growth. --The comprehensive application. The enforcement of competition law also regulates the natural monopoly and administrative monopoly

Ⅱ. The China’s Choice of Legislation Mode It is inadequate to maintain the market competition order by either sector regulation or enforcement of competition Law alone. Chinese government is also facing the puzzle problem of how to interface between competition law and the sector Regulation especially in the transitional stage.

Ⅱ. The China’s Choice of Legislation Mode The difficulties: -- Lower level market competition in regulatory industries. Most sectoral regulations of China were established before the market-oriented reform. These regulations can not catch up with the change of competition intensity. -- Lack of specific provisions in AML. It does not clearly stimulates the relationship between competition law and sector regulation. -- Lack of the independence of regulatory and competition law authorities. The goal of competition policy has not be clearly made. Ⅱ.The China’s Choice of Legislation ModeⅡ.The China’s Choice of Legislation Mode

Ⅱ. The China’s Choice of Legislation Mode It can be clearly proved by two matters: 1. The changes of AML drafts related relationship between two: drafts : AML authority has the power to give modification suggestion on those regulation rule making which relating to the competition matters law: It changed as below: If administrative power by government and organizations to which laws and regulations grant rights to administer public issues abuse administrative power, to eliminate or restrict competition will be handled by another regulation, shall be applied to another regulation.

Ⅱ. The China’s Choice of Legislation Mode 2. Deal with the regulatory sector Art. 7 of the AML: “With respect to the industries controlled by the State-owned economy and concerning the lifeline of national economy and national security or the industries implementing exclusive operation and sales according to law, the State shall protect the lawful business operations conducted by the business operators therein, and shall supervise and control the business operations of and the prices of commodities and services provided by these business operators, so as to protect the consumer interests and facilitate technological progress.”

Ⅱ. The China’s Choice of Legislation Mode  2. The choice of Legislation Mode of China Dual-regulation based and exclusive application supplemented. -- Abusing dominant power & monopoly agreements: could be applied to both sectoral regulation and AML); -- Merger & Acquisition should be exclusively applied to AML; -- Specific restrictive practices: exempted from competition law but regulated by specific sectoral regulation.

Ⅱ. The China’s Choice of Legislation Mode Exclusive application of Competition Law: market concentration control The concentration of enterprises certainly will have direct impact on market structure. Sector regulations probably will consider the industry policies mainly. In contrast, the competition law enforcement agencies mainly consider the interest of the overall social benefits, rather than a particular industry. It is better to entitle the competition law enforcement agencies the exclusive right in the field of market concentration.

Ⅱ. The China’s Choice of Legislation Mode Regulatory Sectors Exempted from Competition Law : Specific Restrictive Competition Action Considering the overall efficiency of society. It is reasonable to entitle the specific restrictive competition action in certain industry the exemption from competition law. However, the overall competition level in China is lower than that in developed countries, so we need to emphasize some points : -- highlight the function of introduction of competition by sector regulation mechanism; -- recognize of different intensity of conditional exemption in different industries. -- stipulate that the competition law should be give the priority by law

Further reform in monopoly Industries separate government functions from enterprise management Major measures: separate government functions from enterprise management —— introduce private investment into monopoly industries —— break up monopoly enterprises —— construct modern regulatory system Examples: China Telecom China Telecom China Mobile China Union China Rail-com. State Power Corp. State Power Southern Power Grid China Huaneng China Huadian Corp. etc. (11 Corporations)

Further reform in monopoly Industries Regulation Mode: Direct Regulation ( Government Supervision ) Indirect Regulation ( Appliance of Monopoly Law )

Ⅲ. The China’s Choice of Enforcement Mode  Premises Regulated sectors in China: from monopoly to competition None of the sectoral regulation authorities and competition law enforcement authorities can fulfill this task by alone. Cooperation and jurisdiction allocation is extremely needed.

Ⅲ. The China’s Choice of Enforcement Mode  1. Division of Authority in Static State: Power Configuration  -- the exclusive jurisdiction of competition law enforcement agencies.  -- the exclusive jurisdiction of sector regulation agencies.  -- dual jurisdiction. 

Ⅲ. The China’s Choice of Enforcement Mode  2. Jurisdiction Allocation in Dynamic Changes Cooperation and coordination between this two kinds of authorities. -- information exchange system -- consultation system ( competition reviw) -- judicial review system

Conclusion  It is hard to draw a fixed and clear line between competition law and sector- specific regulation due to the mixing of them.  The best way to achieve the maximum efficiency lies in the applicable allocation of jurisdiction between sector-specific regulation and competition law authorities according to the specific national circumstances.  China now is in the initial stage of market economy. It need three steps as follows: -- economic reform ( to introduce competition in regulatory sector; -- ownership reform ( to introduce multi-owned investors) -- unify the enforcement of both regulation rules and competition rules -- Allocate the rights ( authorities) between two kind of agencies relating laws

Thank you for your attention ! Xu Shiying East China University of Political science and Law