Oftel - A PROHIBITION APPROACH TO ANTI–COMPETITIVE AGREEMENTS AND ABUSE OF DOMINANT POSITION : DRAFT BILL



	A PROHIBITION APPROACH TO ANTI–COMPETITIVE AGREEMENTS AND ABUSE OF DOMINANT POSITION : DRAFT BILL



			Oftel'S RESPONSE ISSUED BY THE DIRECTOR GENERAL CONTENTS Summary of Oftel's comments and areas of outstanding concern Chapter 1 – General comments on the prohibition approach to competition law 1.1 Oftel's response Chapter 2 – The prohibition of anti-competitive agreements 2.1 Oftel's response 2.2 Appreciability Test 2.3 Small and Medium Sized Enterprises Chapter 3 – Exclusions from the prohibition on anti-competitive agreements 3.1 Oftel's response 3.2 Vertical agreements 3.3 Land 3.4 Mergers 3.5 Other exclusions Chapter 4 – Exemptions from the prohibition on anti-competitive agreements 4.1 Oftel's response Chapter 5 – Notification: applying for exemption or negative clearance from the prohibition on anti-competitive agreements 5.1 Oftel's response Chapter 6 – The prohibition on abuse of dominant position 6.1 Oftel's response 6.2 Remedies 6.3 Exclusions 6.4 Small and Medium Sized Enterprises 6.5 The Fair Trading Act: The scale monopoly provisions Chapter 7 – Institutions and rights of appeal 7.1 Oftel's response 7.2 The Competition Commission 7.3 Appeals 7.4 Third Party Rights Chapter 8 – Investigation and Enforcement 8.1 Oftel's response Chapter 9 – The prohibitions and sector regulation 9.1 Oftel's response 9.2 Guidelines 9.3 Statutory Duties 9.4 Scope of concurrent powers 9.5 Monopoly references under current legislation 9.6 Utility Regulation Review Chapter 10 – Transitional arrangements 10.1 Oftel's response Chapter 11 – Changes to the Fair Trading Act regime 11.1 Oftel's response Chapter 12 – Compliance Costs 12.1 Oftel's response 12.2 Industry's compliance costs Conclusions Summary of Oftel's comments Oftel warmly welcomes the Government's emphasis upon the importance to consumers and to economic development of effective competition. It fully supports the proposal to move to a prohibition-based approach to competition law. Oftel concurs with the comments of the President of the Board of Trade that present competition law does not work well; that is the reason why, as an interim measure, pending reform of legislation, Oftel incorporated the Fair Trading Condition (which is based on Articles 85 and 86 of the European Community Treaty) into telecommunication licences. Oftel has consistently argued in favour of the introduction of a prohibition on abuse of a dominant position as well as a prohibition on anti-competitive agreements. Oftel therefore wholeheartedly supports the decision to introduce a direct prohibition on abuse of market power. Oftel also supports the introduction of third party rights, stronger investigative powers, interim measures and effective enforcement powers. Oftel believes that the decision to give concurrent powers to sector specific regulators is also to be warmly welcomed and marks a further step in the evolving nature of the regulatory bodies. The new prohibitions will allow Oftel to deal speedily and effectively with many types of anti-competitive behaviour in telecommunications, thereby reducing the need for other forms of regulation. The telecommunications industry has changed dramatically since the privatisation of BT and the formation of Oftel in 1984. Oftel's role has increasingly evolved into that of a competition authority regulating the 'new world' of the telecommunications markets. The new Competition Bill will assist the Director General of Telecommunications in fulfilling Oftel's goal: "To provide the best possible deal for the customer in terms of quality, choice and value for money" Oftel does have some concerns about particular elements of the current proposals; these concerns are highlighted in this submission. Oftel considers that if there is to be an exclusion from the prohibition on anti-competitive agreements for vertical agreements this exclusion should not apply in the telecommunications sector. Oftel's detailed comments on this point are set out at paragraph 3.2. Oftel also believes that the scale monopoly provisions under the Fair Trading Act should be retained in full. The scale monopoly provisions would complement the new prohibitions but would also allow action to be taken in circumstances where the prohibitions do not apply. In addition, the scale monopoly provisions provide for the remedy of divestment; this is not available for a breach of either of the Competition Bill prohibitions. Oftel's detailed comments on this point are set out at paragraph 6.5. At present, it is proposed that scope of the Director General's concurrent powers should extend to "commercial activities connected with telecommunications". This will need amendment. Sections 50(1) and 50(3) of the Telecommunications Act 1984 provide such a template. Oftel's detailed comments on this point are set out at paragraph 9.4. At present, the Secretary of State alone can make monopoly references in relation to the running of a telecommunications system (by virtue of a specific exclusion in Part 1 of Schedule 5 of the FTA). Oftel believes that such a restriction is no longer appropriate and should be removed. Oftel's detailed comments on this point are set out at paragraph 9.5. 1. General Comments on the prohibition approach to competition law. 1.1 Oftel's response Oftel welcomes the introduction into UK competition law of both an Article 85 style prohibition on anti-competitive agreements and an Article 86 style prohibition on abuse of a dominant position. In the past, the Director General has not relied upon the general competition law in carrying out his duties. Action under the Competition Act or the Fair Trading Act (the FTA) has been considered on a number of occasions but, due to certain weaknesses of aspects of this legislation (as commented upon by the President of the Board of Trade), Oftel concluded in each case that enforcement action was preferable under the licence modification or enforcement procedures of the Telecommunications Act 1984 (the 'Act'). The advantages of a prohibition approach have long been recognised by Oftel and it is for this reason that Oftel devised the Fair Trading Condition (the FTC), itself based on the prohibitions contained in Articles 85 and 86 of the European Community (EC) Treaty, for incorporation as a standard condition in all licences. The Competition Bill will also introduce third party rights, interim measures, stronger investigative powers and significant penalties for breach of the prohibitions counterbalanced by appeals on substance. Under this new regime, the prohibitions should act as a strong deterrent to anti-competitive behaviour, thereby reducing the need for other forms of regulation. 2. The prohibition on anti-competitive agreements 2.1 Oftel's response Oftel supports the replacement of the current form based regime with an approach based on the anti-competitive effects (and wider economic benefits) of an agreement. 2.2 Appreciability Test Under the European Community competition rules, in order to be in breach of the prohibition, an agreement must have an appreciable effect on competition, this is however not stated on the face of the prohibition. Oftel endorses the current proposal that there should be no specific appreciability test on the face of the Bill. There is no need for such a test and to impose such a requirement would represent a departure from consistency of the legislation with European law as applied to the EC competition rules. 2.3 Small and Medium Sized Enterprises Under the European Community competition rules, there are no thresholds as regards the imposition of fines where the prohibitions have been breached by small and medium sized enterprises. There are informal internal guidelines which the Commission applies in assessing the quantum of a fine e.g. period of the infringement, profit made from the breach, the degree of co-operation of the party with the Commission investigation. Oftel considers that this approach is the appropriate one, rather than there being a formal 'de minimis' threshold for fines. The Commission's recent notice on cooperation in investigations shows the need to retain flexibility on fines as policy develops. 3 Exclusions from the prohibition on anti-competitive agreements 3.1 Oftel's response Oftel believes that in the telecommunications sector there should be no exclusion from the prohibition for vertical agreements. Oftel considers that if vertical agreements are excluded, such exclusion should not apply to those agreements that come within the concurrent powers of the Director General of Telecommunications. This matter is discussed in detail below. 3.2 Vertical Agreements Vertical agreements in telecommunications can be a major source of anti-competitive behaviour. The debate on vertical agreements in other industries (and in the responses to the Commission's Green Paper) focusses on one particular type of agreement - exclusive distribution agreements or goods for resale. There are however, other types of vertical agreements where to disapply the prohibition on anti-competitive agreements could have serious consequences. In the telecommunications sector, and in the future, in the converged communications world, given the high entry costs associated with the building of networks, services and their components are likely to be provided by a number of companies each of which may have market power but none having overall dominance (ie they will have many of the features of an oligopolistic market). The existence of high economic barriers to entry (including the sunk costs associated with infrastructure investment and the economies of scale of wire and cable based technologies) means entry for new network operators is not easy and consequently there will be firms who, whilst perhaps not dominant in EU jurisprudence terms, will have market power.⁽¹⁾ It is therefore not difficult to foresee circumstances where vertical agreements could be used to foreclose markets to new entrants. In the networked telecommunications markets, operators are interdependent on each other (and yet at the same time compete in the same markets). In order to provide a service, it is necessary to interconnect with other networks. The services provided by those firms with market power will be supported by a number of agreements which are both horizontal and vertical in nature. A typical distribution chain would include content providers, packaging/distribution companies, the operators of the network/transmission system and suppliers of receiving equipment for the home. Given that most network operators also seek to compete at the retail level, there is considerable incentive for firms to impose anti-competitive vertical restraints. There is a danger that firms with market power (but that are not dominant) will include within agreements for the mutual supply of services of services (that are both horizontal and vertical in nature but do not involve the simple resale of product) conditions which restrict the terms on which either party can trade with others or limit the ability of the parties to terminate the agreements on reasonable notice. Operators may, for example, "tie" customers through long term contracts. By such an action, a network operator can foreclose the market to emerging network operators who do not have a significant retail base. There is also the related issue of unduly long-term supply agreements imposed on consumers, either with fixed terms or with onerous penalties for early termination. It is therefore essential that vertical agreements in the telecommunications sector should fall within the scope of the prohibition on anti-competitive agreements. If vertical agreements were excluded from the prohibition in all economic sectors, there is a strong possibility that telecommunications companies will try to exploit this exemption by using vertical agreements as a vehicle for their anti-competitive behaviour. Oftel believes that if the Government proceeds with its proposal to issue an exclusion for vertical agreements, such exclusion should not apply to those agreements that come within the concurrent powers of the Director General of Telecommunications. It has been argued that there is no need to catch vertical restraints if the scale and complex monopoly provisions of the Fair Trading Act are retained. However, in order to trigger the complex monopoly provisions of that Act, there would have to be at least two companies entering into similar restrictive agreements. More importantly, the procedures under the FTA are recognised to be slow, the investigation and resolution process under the FTA is more cumbersome and lengthy than those for an Article 85-type investigation. 3.3 Land Oftel agrees with the proposal that careful consideration needs to be given to the scope of an exclusion for land agreements. In the telecommunications markets there is potential for anti-competitive or abusive use of land rights, particularly in relation to co-location (this involves the siting of switches or other equipment on premises owned by BT or other network operators) and facility sharing. Although an exclusion may be appropriate to prevent the disruption of normal land transactions, this should not be so wide that the land rights can be misused. 3.4 Mergers Oftel agrees with the proposal that mergers should be excluded from the prohibitions in order to avoid both unnecessary duplication and potential double jeopardy. Oftel considers that the Government's proposed approach of defining mergers by reference to section 65 of the FTA would seem to be sensible, and for such mergers to be excluded from the new legislation if they fall to be considered under the merger control provisions of the FTA or those of the EU. 3.5 Other exclusions Oftel considers that there is no need for an Article 90 (2) exclusion (exemptions for undertakings entrusted with the operation of services of general economic interest) within the Bill. Such an exemption might be open to mis-use by undertakings attempting to rely upon the exemption as a means of seeking to circumvent the prohibition. The European Community's restrictive approach to Article 90(2) means that in practice there is little conflict with Articles 85/86. In addition, Article 90 (2) has a function in the EC Treaty which does not apply in a domestic context. Article 90 (2) seeks to deal with the tension between the Community competition policy and each Member State's national public interest in ensuring that certain services are provided in a particular way. This tension does not exist within an individual Member State and this therefore renders nugatory the need for a specific exclusion. 4 Exemptions from the prohibition on anti-competitive agreements 4.1 Oftel's Response Oftel agrees with the proposals in relation to countervailing benefits and block exemptions. Oftel concurs with the view that individual and block exemptions under Article 85(3) should be exempt from the UK domestic prohibition; however, it is essential that the regulatory authorities have the ability to withdraw the automatic 'parallel' exemption. Oftel believes that even if an agreement benefits from a Community block exemption it is important that the sector specific regulators and the DGFT should have the ability to withdraw this automatic 'parallel' exemption (granted by the legislation) where the tests for the exemption are no longer satisfied. This power should be identical to the Commission's power to withdraw the benefit of a block exemption for individual agreements that no longer satisfy the criteria for exemption under Article 85(3). Oftel considers that it may be necessary to introduce a block exemption for certain types of telecommunications agreements, for example, interconnection agreements. DG IV is currently considering the issue of interconnection agreements and whether they may be under the prohibition of Article 85 ⁽²⁾ or the subject of an appropriate exemption from Article 85. 5 Notification: applying for exemption or negative clearance from the prohibition on anti-competitive agreements 5.1 Oftel's response Oftel is concerned that the proposed system of notification of agreements may be too complex. Oftel considers that the current provisions on notification may, by comparison to the procedures under the European Community implementing regulations, appear opaque. Oftel would suggest that consideration should be given to collapsing the proposed process into one procedure involving a simple application for negative clearance on the basis that the prohibitions do not apply at all, leading to informal closure of the case or that they are suitable for, or may be given, a formal exemption. It is important that the public at large, and in particular an undertaking's own regulatory affairs advisors, need to be able to easily and quickly understand on the face of the legislation the procedure for obtaining informal clearance or formal exemption. Oftel considers that it would be preferable to have one central computerised register (against which a search can be made) with a corresponding Internet web site allowing access both by the sector specific regulators and the public. 6. The prohibition on abuse of dominant position 6.1 Oftel's response Oftel warmly welcomes the introduction of an Article 86 prohibition on abuse of dominant position. A prohibition to control abuse of market power, supported by strong penalties and third party rights will provide a powerful deterrent to anti-competitive behaviour. Oftel also believes that the scale monopoly provisions under the FTA should be retained. 6.2 Remedies Oftel welcomes the proposal for fines to be imposed on companies in breach of the prohibition of up to 10% of UK turnover. To provide the necessary deterrent to anti-competitive behaviour, it is vital that companies should be aware that such behaviour could result in serious penalties. This is rightly counterbalanced by the right to appeal to the Competition Commission in relation to the level of the penalty. Moreover, the DGFT will be issuing specific guidelines on fines. 6.3 Exclusions Oftel concurs with the proposal that there should be as few restrictions as possible from the prohibition on abuse of a dominant position. Oftel is of the opinion that the introduction of a specific 'Article 90 (2)' type exemption is, as set out in paragraph 3.5, unnecessary. 6.4 Small and Medium Sized Enterprises. European jurisprudence has operated satisfactorily without any 'small operator' exemption. Oftel considers that there is no need for a threshold for this prohibition either in relation to exemption from the whole prohibition or in relation to the power to fine a company. There is already the requirement to prove dominance in the relevant market; for most small and medium sized companies the prohibition will therefore very rarely apply. However, abuse of dominance can occur in niche markets and it would be inappropriate to issue a blanket exemption. Even if the prohibition applies to small firms, there is administrative flexibility in the system of penalties that are imposed. 6.5 The Fair Trading Act: The complex monopoly provisions Oftel agrees with the conclusion that the complex monopoly provisions of the FTA should be retained. As fully explained in the DTI's consultation document, reliance on the two Competition Bill prohibitions may leave a regulatory gap where the competition problem arises due to the structure and operation of the market or parallel behaviour in the absence of agreements between the parties. 6.6 The Fair Trading Act: The scale monopoly provisions Oftel believes that it is also important to retain the scale monopoly provisions. Although the prohibitions in the Competition Bill are an important step in strengthening competition law and give additional powers to act against anti-competitive behaviour, the retention of the complementary provisions of the FTA is still necessary. The scale monopoly provisions allow action to be taken against those firms that are behaving anti-competitively and which have market shares of between 25% to 40% (given that in EU jurisprudence dominance has never been found below a market share of 40%). Without the scale monopoly provisions, another 'regulatory gap' could be created, allowing firms that have market power but which are not dominant to behave anti-competitively, against the interests of consumers. In addition, in light of the ECJ's present position on the interpretation of joint dominance⁽³⁾, Article 86 does not wholly deal with the unilateral behaviour of the non-dominant operator who nevertheless has market power (which will often occur in an oligopolistic market structure). Anti-competitive behaviour is not the only reason for the need to retain the scale monopoly provisions. There may well be market failure because of a structural problem in the industry which does not involve breach of one of the prohibitions. The scale monopoly provisions allow such situations to be investigated and, if necessary for appropriate remedies to be applied (which need not be divestment). Without the scale monopoly provisions it may not be possible to control such market failures. Structural solutions are not available as a remedy for breach of one of the Competition Bill prohibitions. There is therefore a need to retain the power to impose the structural remedy of divestment where appropriate (and where it is in the public interest). In certain circumstances, divestment may be the only long-term remedy to problems arising from a firm's dominant position. The absence of divestment as a remedy for breach of Article 86 is widely recognised as a defect in Community competition law. 7 Institutions and rights of appeal 7.1 Oftel's response Oftel supports the proposal for there to be an Appeals Tribunal within the Competition Commission. Oftel believes that the Competition Commission should be governed by rules of procedure similar to those that would apply in the High Court. 7.2 The Competition Commission/The appeals function of the competition Commission Oftel believes that the rules of procedure of the Competition Commission should be similar to those that would apply in the High Court. Oftel considers that in formulating the practices and procedures of the Competition Commission transparency and accountability should be the guiding principles. Oftel considers that there may be advantages, such as financial independence from another Government Department, in formulating the Competition Commission as a Non-Ministerial Government Department (like Oftel). 7.3 Appeals Oftel agrees with the proposal that parties should have the right to appeal against both the substance of a decision and the penalties imposed. Oftel supports the proposal that there should be oral hearings and cross-examination of witnesses (where appropriate under oath). Oftel considers that, save in exceptional circumstances, there should be a requirement that a fully reasoned decision be published. Oftel welcomes the proposal that there be a requirement for leave to appeal for third parties. In relation to appeals, it is essential that any interim measures which have been imposed remain in force whilst an appeal is conducted, so that firms are not encouraged to appeal merely to delay enforcement action. 7.4 Third Party rights Oftel welcomes the granting of rights of third parties to take action for breach of the prohibitions although its preference would be for this right to appear on the face of the Bill. Oftel concurs with the view that third party actions will play an important role in ensuring the full deterrent effect of the prohibitions. Oftel agrees that the appropriate forum to hear such claims is the Courts. Oftel also welcomes the proposal that third parties with a sufficient interest will be able to appeal decisions of the DGFT or the sectoral regulators. 8 Investigation and enforcement 8.1 Oftel's response. Oftel supports the granting of the additional powers of investigation which will greatly assist the Director General in enforcing the prohibitions. Oftel considers that the current test in relation to interim measures may prove too severe. The Bill proposes that the Director General should take action if it is necessary as a matter of urgency for the purpose of preventing serious, irreparable damage to a person or category of persons for protecting the public interest. The current definition raises the issue of how satisfied does the Director have to be and what is meant by "for the purpose of preventing" such damage? Oftel would support the concept of some balancing test based on "likelihood" of damage, so as to avoid the difficulties that the European Commission had in La Cinq⁽⁴⁾, where it was criticised by the European Court for being too cautious as to whether or not serious or irreparable damage was likely, and declining to order interim measures. 9 The prohibitions and sector regulations 9.1 Oftel's response Oftel warmly welcomes the decision to grant concurrent powers to the sector specific regulators for the enforcement of both prohibitions; these new powers will greatly assist Oftel in its developing role as a competition authority for telecommunications. 9.2 Guidelines Oftel supports the principles of concurrency in the Bill and recognises the need for consultation and a common approach between the sectoral regulators and the DGFT. Oftel is committed to working closely with the DGFT (and other regulators) to ensure that there is consistency in guidelines. 9.3 Statutory Duties Oftel agrees with the proposal that the Director General should be able, but not required, to exercise his functions under the prohibitions in accordance with his general duties (to the extent these do not conflict with his duty to apply the prohibitions in accordance with the governing principles of the Bill). 9.4 Scope of concurrent powers At present, it is proposed that the scope of the Director General's concurrent powers should extend to " commercial activities connected with telecommunications". This will need amendment. It is essential that Oftel can effectively counter any behaviour which significantly impacts on the markets for the supply of telecommunication services and the interests of users. Sections 50(1) and 50(3) of the Telecommunications Act 1984 provide a template for such a definition. 9.5 Monopoly references under current legislation At present, the Secretary of State alone (and not the DGFT nor the Director General of Telecommunications) can make monopoly references in relation to the running of a telecommunications system (by virtue of a specific exclusion in Part 1 of Schedule 5 of the FTA). Oftel believes that such a restriction is no longer appropriate. There are now 30 national PTO licences, over 120 broadband cable licences (all of which permit the provision of telecommunications services) and 50 international (facilities) licences. Furthermore, the Government has recently relinquished its golden share in BT. Oftel therefore considers that the current constraints on the DGFT and the Director General making monopoly references should be removed. 9.6 Utility Regulation Review Oftel agrees with the conclusion that the Competition Bill and the Utility Regulation Review are very closely linked. The Competition Bill will markedly strengthen UK competition law. The impact of this legislation on the sector specific regulators is likely to be significant. Once the Competition Bill is law, there will be incentives on industry to press regulators such as Oftel to act under the new Competition Act whenever possible (rather than under sector specific legislation for breach of licence conditions) because of the strong investigative powers and penalties it contains. 10 Transitional arrangements 10.1 Oftel's response Oftel believes that the period of transitional arrangements should be as short as possible. Oftel considers that the prohibition on abuse of a dominant position should apply as soon as possible from the date of Royal Assent. Oftel accepts that there may be a need for a longer transitional period in relation to the prohibition on anti-competitive agreements but considers that the exclusion should not be in excess of the one year currently proposed and should, if possible, be a shorter period. 11 Changes to the Fair Trading Act regime 11.1 Oftel's response Oftel agrees that it is important to ensure that the members of the MMC (and its staff) have a wide breadth of experience so that there is effective investigation of appeals against decisions made under the new competition legislation. Oftel considers that there should be more full-time members of the Competition Commission (augmented by part-time members who would bring fresh insights gained from their continued practice in their field of expertise.) This would allow members of the Commission to be involved in competition matters across a spectrum of issues rather than simply having individuals with expertise in a narrow field. In turn, this should allow the Competition Commission to have a consistent view of what constitutes anti-competitive behaviour. Oftel believes that it is very important that all the competition authorities should share information gained in the course of investigations with each other and believes that each authority should have as its guiding principle the need for transparency and accountability in its processes and procedures. 12 Compliance costs 12.1 Oftel's response Oftel believes that the benefits to be gained from the promotion of more competitive markets will be considerable, particularly given the deterrent effect of the prohibitions. Oftel does not consider that the prohibitions should have any significant adverse effect on pro-competitive behaviour (the so called "chilling effect"). In relation to compliance costs, Oftel considers that industry's compliance costs may even be reduced rather than increased. 12.2 Industry's compliance costs With the abolition of the Restrictive Trade Practices Act (the 'RTPA'), the compliance costs to industry may well be reduced. At the moment firms spend a disproportionate amount of time both trying to assess whether the RTPA applies to their agreements and in taking measures to ensure that it does not (this is in addition to the analysis as to whether or not Articles 85(1) and 86 apply). The convergence of UK and EU competition law should involve meaningful cost savings to industry. In telecommunications, the introduction of new competition law should allow a reduction in other forms of regulation; this will also mean further savings in compliance costs. Conclusion Oftel considers that the introduction of a prohibition based approach to competition legislation is an extremely positive move, which will have major beneficial effects on the competitive nature of British industry. Oftel therefore warmly welcomes the new Bill. Oftel also welcomes the granting of concurrent powers to the sector specific regulators as this will enhance Oftel's ability to respond, speedily and effectively, in respect of anti-competitive behaviour in telecommunications. In turn, this should reduce the need for other forms of regulation. As set out in this response, Oftel has a few specific concerns about certain proposals in the draft Bill. Oftel believes that it is vital that vertical agreements in the telecommunication sector should be subject to the prohibition on anti-competitive agreements. In addition, Oftel is firmly of the opinion that the Fair Trading Act provisions on scale monopolies should be retained. Oftel also believes that further consideration needs to be given to the scope of Oftel's concurrent powers and to the removal of the restriction, in the FTA, on the Director General of Telecommunications making monopoly references. These and other issues have been highlighted because Oftel believes that its proposals will strengthen the Bill and help ensure that the prohibitions form the basis of a pro-competitive regime which will provide considerable benefits to all consumers. Footnotes 1. Market power is the ability of a firm to raise prices for a non-transitory period without losing sales to such a degree as to make this unprofitable. 2. The draft notice on the application of competition rules to access agreements in the telecommunications sector (OJC 76, 11 March 1997). 3. Societa Italiano Vetro SpA and other v European Commission T-68/89 (1992) 4. La Cinq v European Commission T-44/90 (1992)