| The "essential facilities doctrine" originated in commentary on United States Antitrust case law. It has featured prominently in a number of decisions made by Competition authorities around the world. In South Africa the Competition Commission has yet to conclude a case applying the essential facilities doctrine. | |
The doctrine may be applied to a number of sectors, even to facilities protected by intellectual property rights. As more utility and regulated markets open up throughout the world, the scope for applying the doctrine increases, thereby creating the potential of freeing up essential resources that are fundamental to economic growth and development.
Defining an Essential Facility
Under antitrust law, the leading US essential facilities case has been MCI Communications Corp. v AT&T, in which the Seventh Circuit identified four elements necessary to establish liability under the "essential facilities doctrine". These are:
Control of the essential facility by a monopolist
Inability of the competitor seeking access to practically or reasonably duplicate the essential facility
The denial of the use of the facility to the competitor.
The feasibility of providing the facility The European Commission has defined an essential facility as "a facility or infrastructure, without access to which competitors cannot provide services to their customers, and which cannot be replicated by any reasonable means". What actually constitutes essential facilities will depend upon the presence of technical, legal or even economic obstacles, which prevent the would-be competitor from competing in the relevant market.
Under UK Competition law, the fundamental characteristics of an essential facility are:
Competitors must have access to the facility because it is essential for the provision of goods or services in that related market
It is not economically efficient, or may not be feasible, for new entrants to replicate the facility.
In South Africa, in terms of Section 8 (b) of the Competition Act, "It is prohibited for a dominant firm to refuse to give a competitor access to an essential facility when it is economically feasible to do so".
An essential facility is defined under Section 1(viii) as "an infrastructure or resource that cannot be reasonably duplicated, and without access to which competitors cannot reasonably provide goods, or services to their customers".
What Constitutes an Essential Facility?
An essential facility can be a product such as a raw material, or a service, including access to a place such as a harbour or a distribution network such as a telecommunication network. Essential facilities do not require "infrastructure". It may be a service connected to infrastructure, e.g. ground handling, or a service with no such connection e.g. interlining. It may also be technical information necessary to competitors such as competitors in the computer peripherals market. Copyright protected daily TV listings used in weekly TV guides (Magill case) or data on Telco customers needed for telephone directory publishers. Under antitrust case law some of the following facilities have been deemed essential: railway bridges, telecommunications network, local electricity transmission network, sports stadium and a multi-day ski-pass scheme. Under EU case law some facilities deemed essential are: ports (see Sea Containers v Stena Sealink and Port of Rodby), telecoms network infrastructure, electricity and postal networks, gas or fuel pipelines, computer reservations systems for airport airlines (see LEA v Sabena), ground handling services at airports, interlining (see Aer Lingus v British Midland) and payment systems in the financial sector.
Applying the Essential Facilities Doctrine
The concept implies the existence of two markets: an upstream market and a downstream market. One firm, which is dominant, is active in both the upstream and the downstream market. While the competitor seeking access is operational in the downstream market, the dominant firm is usually vertically integrated and owns an input (the essential facility), and uses that input to compete in the downstream market.
The first step of the analysis is to define the downstream market in order to establish whether the dominant firm and the firm seeking access are really competitors. The second step is to define the upstream market, the market in which the essential facility lies. The market must be reasonably defined taking into account supply and demand side substitutes. An incorrect market definition results in an erroneous definition, thereby declaring a facility essential when it may not be the case.
The firm operating in both markets must be dominant in the upstream market in which the competitor is seeking access. There must be barriers to entry in this market. If there are barriers to entry, then entry is likely and competition can be enhanced through entry and innovation.
Ownership or control over a "facility": The "monopolist" or dominant firm must have control over the facility.
Essentiality of a facility: Access to the facility must be essential for the competitor to conduct its business. This raises the question of what is essential? The word "essential" under the "essential facilities doctrine" implies that access to the facility must be essential or crucial for the competitor seeking access to survive in that market. The refusal of access to that facility must constitute a barrier to entry. Secondly, "essential" implies that the facility must be incapable of being duplicated by the competitor or anyone else as discussed below.
For example, farming land for potatoes meets the first requirement but does not meet the second requirement of inability to be duplicated.
Central to the determination of whether a facility is essential or not, is both the product market and the geographic market definition. A number of approaches can be adopted in defining the relevant product market in a case. Asch, in Economic Theory and Antitrust Law, observed that "monopoly power does not exist in relation to a product, but to a relevant product market, and the definition of this relevant product market must meet two criteria: it should be sufficiently narrow to exclude non-substitutes and it should be sufficiently broad to include all substitutes." If the product market is not properly defined a facility may be defined as "essential" when it may not be the case, and there may be substitutes to that facility.
The facility cannot be reasonably duplicated: The facility must be extremely difficult or impossible to duplicate due to physical constraints, (there may be no other port facilities for the competitor to operate its business), geographical constraints (the geographic outlay or landscape of that specific area will not tolerate the building of another port facility), or legal constraints (IP rights, copyrights). If a competitor can duplicate the facility at reasonable cost, then granting access to the facility is not considered to be essential for its competitive viability. For this reason, most facilities found to be "essential" have been utilities, natural monopolies or other assets involving large sunk costs that would be expensive and inefficient to duplicate. However, there is no clear answer as to how "reasonableness" should be measured. The competitor seeking access must have no other reasonable alternative.
Eliminating all competition on the part of the company seeking access: The competitor seeking access to the facility deemed essential must have been refused access to that facility by the dominant firm. It must be impossible or impractical for the competitor to duplicate the facility. Denial of access to a facility must create a handicap so that the competitor's activities in the relevant market are impossible, or seriously uneconomic, thereby creating a huge barrier to entry.
No objective justification for the refusal: The onus of objective justification rests on the facility owner. Under EC law, any justifications submitted by the dominant party for its conduct are weighed against the effect on competition. It can either be a technical or commercial reason. The incidence of objective justification is rare and must be regarded as exceptional. Some common justifications for refusal are; that the competitor is a bad debtor or is technically ill-equipped to deal with the product in question.
In exceptional circumstances, due to the nature or technical characteristics of the market, an essential facility owner may refuse to provide access because there is no spare capacity and no additional capacity can be created. The Competition Authorities can, on these grounds, choose to accept the refusal of access to be objectively justified. However, it may need to further explore whether the facility is being used efficiently and whether the potential for abuse exists.
Feasibility of granting access: This raises the question of whether it is feasible to provide access to the essential facility and how feasibility should be defined? Feasibility may refer to technical feasibility, but may also refer to feasibility as a business matter.
When the capacity of the essential facility is not fully utilised or the facility is unlimited, then the justification for refusing access is more difficult to prove. In such an instance granting access may be feasible. However, even if there is spare capacity, there is no duty for the firm to supply if the downstream market is competitive, unless the firm seeking access can show that it can provide a different product not provided by its competitors.
Furthermore, granting access may not be a feasible option if the facility is already being used by a number of competitors. Introducing another competitor into that market may hamper competition whereby each competitor may have to produce below its capacity to allow another entrant into the market.
In the case where the facility is being fully utilised, it is necessary to determine whether the facility is efficiently used, whether it can be used more efficiently by introducing another competitor to that market, or whether there are long term contracts that render that facility unavailable to new entrants.
Finally, a feasibility test should always consider whether granting access to an essential facility would enhance competition or hinder competition in the relevant market.
Conclusion
Applying the essential facilities doctrine can assist in the competitive process and break up monopolies created during the apartheid era in South Africa. It can be used as a tool to break up monopolies protected by legal rights and to open up regulated and utility markets that are protected. Breaking up monopolies can have a positive effect whereby previously unavailable scarce resources are made available to more competitive and efficient usage that inevitably leads to more efficient costing and pricing structures.
Seema Nunkoo
Policy and Research
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