Sector regulators given call to arms in competition law enforcement
The DTI has published a report (PDF, 33 pages) that examines concurrent competition powers in sectoral regulation. Concurrency is the regime through which regulators such as Ofcom, Ofwat, Ofgem and ORR are given powers alongside the Office of Fair Trading (OFT) to enforce the Competition Act 1998 (and the corresponding provisions of the EC Treaty), to carry out market studies, and to make market investigation references to the Competition Commission under section 131 of the Enterprise Act 2002.
The report encourages the regulators to adopt a more pro-active approach, and argues that “aggressive” use of general competition law is necessary in order for sectoral regulatory regimes to be rolled back effectively.
The report was prepared jointly by the DTI and the Treasury. It finds that the processes for concurrency between the OFT and sector regulators have been working well, but expresses concern that the sector regulators are not making sufficient use of their competition law enforcement powers. Between January 2001 and September 2005, the sector regulators investigated 38 cases under the Competition Act 1998; none resulted in infringement decisions. And the regulators are yet to make any market investigation references to the Competition Commission (Ofcom accepted undertaking’s from BT in lieu of such a reference).
The lack of competition law infringement decisions is explained, in part, by regulators tackling competition issues through sectoral legislation (as well as by regulators ceasing investigations following a change in behaviour by the firms under investigation): where regulators have a choice “they usually choose to use their regulatory powers and do not use their concurrent competition powers.” The report highlight problems with this approach, including the missed opportunities to develop case law under the Competition Act and the concern that without infringement decisions it will be (even) harder for third parties harmed by anti-competitive behaviour to seek damages. The development of precedent, especially through appeals against a regulator’s decision, is valuable because it builds expertise within the regulators and provides guidance to enable companies to better comply with competition law. Thus, the report emphasises that:
“The limits of the competition powers cannot be fully tested if regulators pursue a strongly risk-averse strategy. Regulators need to acknowledge that cases that they take to the Competition Appeal Tribunal and lose will nevertheless be valuable.”
This statement in itself provides a call for regulators to investigate more cases, and to ensure that cases are followed through to an infringement or non-infringement decision. Whether this actually happens will depend on how resources are prioritised within the regulators.
The report discusses various differences between addressing competition concerns through competition law and through the application and modification of sector-specific licence conditions. For instance, competition law enforcement can take much longer than resolution through sector-specific powers, but the report suggests that the speed of the process should not be a deciding factor.
However, the report underplays the substantive differences between competition law and sectoral regulation. In drawing a distinction it focuses on the usual “ex post” versus “ex ante” taxonomy: that in sectoral regulation the emphasis is on “the prevention of market abuse before it happens” whereas competition law only comes into play once prohibited conduct has taken place. This distinction doesn’t really work, and risks clouding the dimension on which the most fundamental difference lies: the discretion afforded to the regulator. Competition law enforcement is directed and constrained by UK and EC case law. For instance, it is not sufficient for a Competition Act infringement decision that the regulator judges that a firm’s conduct does not best promote the interests of a particular group of consumers or does not guarantee the existence of a particular form of competition. But these can provide the motivation for parts of sectoral regulation (e.g. Ofcom’s price control on mobile termination or its revised rules on cross promotion).
The issue of discretion is related to one of the benefits of regulatory withdrawal identified in the report: “competition law sets a higher hurdle for intervention which can help avoid undue regulatory intervention in a market that is broadly competitive”. However, the DTI/Treasury are not simply looking for better competition law enforcement, but also for regulators to be more pro-active in undertaking market studies and making market investigation references to the Competition Commission. Yet market investigation references place a good deal of discretion in the hands of the members of the Competition Commission, and it is not clear why they represent a better mechanism to address competition concerns than sectoral regulation (other than because the Competition Commission might impose remedies that a regulator could not implement directly).
The report provides a well-reasoned prod for regulators to pay more attention to (visible) competition law enforcement, but does not explain why regulators should look to remove aspects of sectoral regulation in favour of making (or threatining to make) market investigation references to the Competition Commission.
The report does not compare the approaches and performance of different regulators, but highlights Ofgem’s successful regulatory withdrawal in gas and electricity supply markets, as well as some of Ofcom’s withdrawals (e.g. mobile origination). It also recommends that sectoral regulators should follow Ofcom in providing in their annual reports an assessment of progress in rolling back regulation where competition has developed.
