Senate Bill No. 3197 (Competition Act): De-fanging market predators

The concept of anti-trust stems from the idea that markets properly function if no distortions take place and the ‘invisible hand’ of the market are free to dictate how much of the goods are to be produced and at what price.

Senate Bill No. 3197, a consolidation of SBs 123, 1122, 2544, and 3099, lays down the policy against anti-competitive and market distorting practices by providing for penalties and strengthening regulatory power over unfair market behavior.

In brief, the measure aims to enhance free and full competition in trade, industry, and other commercial pursuits through the following –

Definition of market-distorting practices. SB3197 defines several practices as anti-competitive. These practices include cartel and cartel-like activities, monopolies, abuse of market power, price fixing, bid rigging, limitation of markets, market allocation, arrangements to share markets or sources of supply, price discrimination, exclusivity arrangements, tie-in arrangements, and boycotts.

Penalties. The bill provides for penalties when natural persons and corporations violate the anti-trust provisions. These range from fines to imprisonment not exceeding 10 years. For natural persons violating the law, fines range from Php1 million to Php10 million. For corporations, fines range from Php10 million to Php100 million.

Enforcement. The bill invests the Department of Justice (DOJ) with additional responsibility to enforce the anti-trust bill. It gives the DOJ inquisitorial powers to investigate and prosecute violators both in the courts and in the concerned regulatory agencies.

Artificial versus natural monopoly

Monopoly is a form of market distortion wherein the free flow of the market is distorted by practices of certain firms to manipulate prices through activities like price fixing and price discrimination, bid rigging, limitation and control of markets, agreement to limit and or control markets, and tie-in arrangements.

No market is perfect that interventions are unnecessary. The assumption by free marketers is that through market competition, consumers will have greater choice, better quality goods at lower prices. Further, competition can prevent undue concentration of economic power and the consequent concentration of political power in an elite class who can use their economic and political powers to have their inefficiencies subsidized by the majority of consumers and taxpayers.

The Constitution bars monopolies, any combination in restraint of trade, and unfair competition (Article XII, Section 19). It seeks the dispersal of market power by the expansion of the ownership base of corporations. Further, the Revised Penal Code likewise provides for penalties against monopolies and any combinations in restraint of trade (Article 186, Act No. 3815).

SB3197 addresses violations of free markets by monopolists. But it doesn’t particularly address ownership structures in natural monopolies like electric power, water utilities, and telecommunications. An example of this is in the electric power industry, wherein one family dominates the largest electric power distribution utility.

Electric power distribution, together with electric power transmission, is considered a ‘natural monopoly’ because there is only one service provider in a captive market. Ownership of the utility by one or two groups with potential interests in related industries like electric power generation and telecommunications may be considered an exercise of monopoly power by ‘bundling’ its services through vertical integration.

The bill should address ownership structures within known monopoly industries to ensure that owners do not capture their captive market by integrating with their other complementary services.

Yet, SB3197 can be potentially used to test the recent realignment in the Board of Directors of the Manila Electric Company (Meralco). The entry of the First Pacific group, the same group controlling the Philippine Long Distance Telephone Company (PLDT) can be a potential flag point under SB3197 if First Pacific uses its control in the distribution utility to control the markets in a possible complementary industry of telecommunications.

A contradiction

Another issue related to natural monopolies is the concept of ‘economies of scale’, which takes place when cost per unit falls as a firm expands. In such cases, consumers may benefit because lower production costs by firms can translate into lower priced goods.

There is a thin line in SB3197 that tolerates, but at the same time, contradicts the build-up of a natural monopoly due to economies of scale. Quoting the relevant portions of Section 6: “As prohibited in this Act, the essential elements of the crime of monopolization are the possession of monopoly power and its willful acquisition, maintenance, or abuse to exclude competitors from any part of trade, commerce or industry as distinguished from natural growth or development of a firm as a consequence of a superior product, business acumen or historic accident… (Underscoring provided)”

This situation is contradictory because all firms willfully and deliberately exert efforts to develop their firm by investing in better technology and better business processes to produce a superior product or service. That is the natural instinct of firms. The bill should therefore clarify this issue.

Regulatory capture

In Regulatory Governance in the Philippines, the late University Professor and former Dean of the National College of Public Administration and Governance of the University of the Philippines Dr. Ledevina Cariño (2005) points out the regulatory capture of the Energy Regulatory Commission as a result of “the interlocking and familial connections of industry and government leaders, and even outright corruption.”

In the same paper, she also says, “The relatively smaller voices of civil society and consumer organizations whose advocacy for the wider public was drowned by the power of the big guns. What resulted was a law that had many provisions that effectively stilled possibilities of competition.”

The bill does not address the ‘regulatory capture’ that is apparent in most regulatory agencies. In the absence of reforming the regulators, any anti-trust suit has a large probability of being dismissed, or put in the back-burner until the heat dissipates and a possible settlement is concluded.

Aside from addressing regulatory capture, the bill should also provide for technical capacity-building for regulatory agencies in order to understand and discharge their powers of intricate and complex corporate structures commonly used in anti-trust cases.

Beefing up the bureaucracy

The wordings in Section 9 (Preliminary Inquiry) may provide potential conflict on jurisdiction. The text reads: “The Department of Justice (DOJ), in coordination with the Department of Trade and Industry (DTI), other regulatory and/or appropriate government agency shall… initiate a preliminary inquiry for the enforcement of this Act based on reasonable grounds. (Underscoring provided)”

To prevent possible conflicting jurisdictions, the measure must indicate specific agencies that can initiate preliminary inquiries of possible anti-trust violations. Further, the bill must clearly indicate the standards to trigger an inquiry to prevent the possibility of frivolous lawsuits being filed.

The bill must invest in upgrading the technical capability of the Securities and Exchange Commission – as the regulator of corporations and their practices, including mergers and acquisitions, securities regulation, and the protection of investors – in handling anti-trust cases.

Further, SB3197 must provide for the creation of an Anti-Trust Division within the DOJ as the permanent office in-charge of investigating and prosecuting anti-trust violators. This division, similar to the United States’ Anti-Trust Division with its Justice Department, can be a specialized agency with the necessary know-how and technical training and experience to understand complex corporate structures in anti-trust cases.

Since the bill creates additional jurisdiction for Regional Trial Courts to try penal cases related to anti-trust violations, there is the need to further beef up the lower courts by increasing its numbers to prevent clogging of the court dockets. There is also the necessity to build up capacity of court personnel and research to understand intricacies of corporate structures related to anti-trust litigations.

Positive enforcement

As one form of positive enforcement, SB3197 should provide firms a set of guidelines of how to structure their businesses in accordance with anti-trust principles in order to avoid being subject to litigation, and to create a sense of legal certainty in organizing their business structures.

Further, an anti-trust legislation should not be distinct and separate from an anti-racketeering legislation. There is a pending bill in the Senate, SB1023, authored by Senator Manny Villar, defining monopolies and combinations in restraint of trade as ‘racketeering’ activities. By passing SB1023 alongside SB3197, there will be more teeth and institutional pressure in reforming the market and ridding it of predators.

The ball is now in the House to approve its respective versions of the bill – House Bills No. 1678, 3009, and 3856 – before the end of Third and last Regular Session.

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