Competition Issues in Network Monopolies

1. Introduction

A network monopoly exists where one company controls an infrastructure network that would be economically inefficient or extremely expensive to duplicate. Electricity transmission and distribution networks are common examples. Other examples include telecommunications networks, pipelines and rail infrastructure.

Electricity networks are particularly important because generators, retailers, industries and households depend on them to participate in the electricity market. Therefore, competition law must prevent a network monopoly from using its infrastructure position to unfairly restrict competition in related markets.

2. Why Electricity Networks Become Monopolies

Electricity transmission and distribution require large investments in:

transmission lines;

substations;

transformers;

distribution cables;

control systems; and

maintenance infrastructure.

Building competing networks over the same geographical area may duplicate expensive infrastructure without producing equivalent economic benefits. This creates natural-monopoly characteristics.

The solution is generally not to create several physical networks, but to regulate access to the existing network.

3. Monopoly Does Not Automatically Mean Illegal Conduct

An important principle of competition law is that having a monopoly or dominant position is not itself necessarily unlawful.

Under South Africa's Competition Act 89 of 1998, the legal concern is generally the conduct of a dominant firm. Section 8 identifies various forms of prohibited conduct by dominant firms.

Therefore, a transmission or distribution operator may lawfully have substantial market power because of the economic characteristics of the network. Problems arise when that power is abused in a manner prohibited by competition law.

4. Discriminatory Network Access

One major competition concern is discriminatory access.

A network operator may potentially favour its own generation or retail business by providing:

faster connections;

better network information;

lower charges;

preferential capacity allocation; or

more favourable technical conditions.

Independent competitors may then face higher costs or delays.

Transparent access rules and independent regulatory oversight can reduce these risks.

5. Essential Facilities and Exclusion

A network may become an essential facility where competitors cannot realistically reproduce it and need access to compete in related markets.

The Constitutional Court's decision in Competition Commission of South Africa v Senwes Ltd is useful by analogy. The case concerned control over grain-storage facilities and related markets. The Court examined exclusionary conduct and the relationship between infrastructure control and competition.

Although Senwes was not an electricity case, its reasoning demonstrates why control over an important facility can have consequences for downstream competitors.

6. Telkom and Network Infrastructure

Competition Commission v Telkom SA Ltd provides another important comparative precedent.

The case involved alleged exclusionary conduct connected with telecommunications infrastructure. It illustrates the competition concerns that may arise when a company controls an important network while also operating in markets that depend on that network.

The same economic concern may arise in electricity where a network owner has interests in generation, electricity trading or retail supply.

7. Raising Rivals' Costs

A network monopoly can potentially restrict competition by raising the costs of competitors.

Examples include:

excessive connection charges;

unnecessary technical requirements;

delays in grid connection;

discriminatory balancing charges;

refusal to provide essential information; and

unreasonable network-service conditions.

Competition analysis must determine whether these practices are legitimate network-management measures or whether they have the purpose or effect of unlawfully excluding competitors.

8. Excessive Pricing

Another possible concern is excessive pricing by a dominant network operator.

Network charges may legitimately be high because networks require substantial investment, maintenance and reliability expenditure. Therefore, a high tariff does not automatically establish excessive pricing.

In Sasol Chemical Industries Ltd v Competition Commission, the Competition Appeal Court considered excessive pricing under section 8(a) of the Competition Act. The case demonstrates the importance of economic analysis when assessing whether prices charged by a dominant firm are excessive.

9. Regulation and Competition Law

Because electricity networks are natural monopolies, competition law normally works together with sector regulation.

The electricity regulator can establish rules concerning:

network tariffs;

connection procedures;

grid access;

reliability;

technical standards;

capacity allocation; and

information transparency.

Competition authorities can address conduct that falls within competition-law prohibitions.

This complementary approach is important because competition law alone cannot regulate every technical aspect of a monopoly network.

10. Vertical Integration

Vertical integration can create additional competition risks.

For example, if a company controls a distribution network and also owns an electricity retailer, it may have an incentive to disadvantage independent retailers.

Possible safeguards include accounting separation, functional separation, transparent access conditions and restrictions on discriminatory treatment.

However, vertical integration can also create efficiencies, such as better coordination and lower transaction costs. The economic effects must therefore be examined rather than assuming that integration is automatically harmful.

11. Innovation and Network Monopolies

Network monopolies can also affect technological innovation.

A dominant network operator might favour its own smart-grid technology or exclude competing technologies through unnecessarily restrictive technical standards.

Competition policy should therefore encourage:

technology-neutral standards;

open procurement;

interoperability;

fair access to network data; and

opportunities for innovative firms to participate.

12. South African Electricity Context

In South Africa, electricity networks operate within a combination of competition law and electricity-sector regulation. NERSA plays an important regulatory role, while the Competition Act provides the general competition framework.

The constitutional principles of lawful, reasonable and procedurally fair administration can also become relevant when public entities exercise regulatory or infrastructure-related powers.

13. Conclusion

Network monopolies create a special competition problem. Direct competition between duplicate electricity networks may be economically inefficient, but network control can give an operator substantial power over connected competitive markets.

The main competition issues include discriminatory access, exclusionary conduct, excessive pricing, raising rivals' costs, preferential treatment of affiliates and restrictions on innovation.

Senwes, Telkom, and Sasol Chemical Industries provide useful principles concerning infrastructure dependence, exclusionary conduct and pricing by dominant firms. Effective governance therefore requires a combination of competition law, independent regulation, transparent access rules and fair network management. The goal is not