1 July 2002

Contents

  Chapter 1 Introduction
Chapter 2 The advantages of using the Competition Act
Chapter 3 Oftel’s approach to using the Competition Act
Chapter 4 Consistency with the future regulatory framework

Chapter 1

Introduction

1.1 Oftel has a choice when investigating behaviour that may be anti-competitive of using the Competition Act 1998 ("CAct") or powers under the sectoral regime. This document sets out Oftel’s strategy and outlines the approach to using the CAct that we intend to adopt.

1.2 Oftel’s goal is the best deal for the consumer in terms of quality, choice and value for money. The prevention of significant anti-competitive behaviour is an important objective.

1.3 Our objective is to use the CAct wherever possible. With two years’ experience of using the CAct we can update our approach.

1.4 In the past we have often started investigations under the sectoral regime, and at a later stage decided whether it would be more appropriate to use the CAct. Our approach from now when faced with behaviour that could contravene both the CAct and the sectoral regime, will be to investigate under the CAct from the start. This approach will be adopted immediately.

1.5 The statement sets out our reasons and explains how this will work in practice. The statement:

• defines the relationship between the CAct and the existing sectoral regime;
• describes how the sectoral regime will change, following the new EC Directives. When the new regime comes into force we will adopt a broadly similar approach to using the CAct, moving more towards applying general competition law rather than using sector-specific powers;
• explains that under the existing sectoral regime we will not generally use the CAct to resolve interconnection disputes;
• does not explain how we will decide whether there has been a breach of the CAct. For more information about the CAct and the way in which it will be applied see the CAct guidelines The Application of the Competition Act in the Telecommunications Sector (see note 1) and the other CAct guidelines that have been published by the Office of Fair Trading (see note 2);
• the Director General will be able to investigate a complaint more quickly and effectively if the complainant explains why it believes the relevant provision to have been infringed (rather than simply asserting that there has been an infringement) and provides supporting documentation. This applies regardless of whether Oftel carries out the investigation under the CAct or using sectoral powers. Further guidance is given in the Oftel publication Making a formal complaint to Oftel – guidance for the telecommunications industry (see note 3). Also available on Oftel’s website is guidance on how to request the Director General to resolve an interconnection dispute;
• has no application beyond the telecoms sector and has no bearing on when other regulators with concurrent powers are likely to use the CAct as opposed to relying on sectoral powers. Other regulated sectors have different characteristics, are at different stages of liberalisation and are governed by different legal frameworks. The circumstances in which the CAct will be used will inevitably be different.

Notes

1 March 2000 (OFT 417) www.oftel.gov.uk/publications/ind_guidelines/cact0100.htm
2 All the guidelines relating to the Competition Act that the OFT have published are available on the OFT's website. www.oft.gov.uk/Business/Legal+Powers/ca98+publications.htm#guide
3 www.oftel.gov.uk/publications/ind_guidelines/foco0301.htm
4 www.oftel.gov.uk/publications/ind_guidelines/disp1101.htm

Chapter 2

The advantages of using the Competition Act

2.1 Oftel believes that greater use of the CAct as opposed to sectoral powers should encourage operators and service providers to take compliance even more seriously. There are four main reasons:

• the CAct provides us with increased powers of investigation, including the power to carry out unannounced visits, and non-compliance with information requests can lead to criminal sanctions;
• under the CAct, we can impose substantial financial penalties;
• the CAct enables us to punish past behaviour without having to show a continuing breach of an operator’s licence or the likelihood of future breaches;
• moving more towards reliance on competition law should make it easier for operators to develop compliance systems and cultures by replicating successful examples from other sectors.

Improved compliance should in turn lead to fewer instances of anti-competitive behaviour and ultimately lead to less intervention by the regulator.

2.2 By adopting this approach to using the CAct we consider that we can deal with anti-competitive behaviour more effectively than we can under the sectoral regime. The following table compares and contrasts the two regimes.

Chapter 3

Oftel’s approach to using the Competition Act

3.1 Since 2000 the Director General has had powers to apply the CAct, a jurisdiction exercised concurrently with the Director General of Fair Trading. The Director General generally deals with cases relating to telecommunications. The CAct prohibits anti-competitive agreements ("the Chapter I prohibition") and abuses of a dominant position ("the Chapter II prohibition").

3.2 The Director General also has powers under the Telecommunications Act 1984 ("the TAct") to enforce the conditions contained in the licences of telecommunications operators. Some licence conditions, such as those prohibiting undue discrimination and unfair cross subsidy, are designed to prevent anti-competitive behaviour. These conditions are contained in the licences of most major operators. This means that when faced with an allegation of anti-competitive behaviour, Oftel will often have a choice between applying the CAct and enforcing a licence condition.

3.3 Section 16 of the TAct imposes a duty on the Director General to make orders to secure compliance with licence conditions, whereas he has a discretion as to whether to take action under the CAct. This duty does not apply, however, where the Director General is satisfied that it is more appropriate to proceed under the CAct and gives notice to that effect.

3.4 With two years’ experience, Oftel has decided that as a general rule, when faced with individual instances of anti-competitive behaviour that have not arisen in the context of an interconnection dispute, we will investigate under the CAct rather than using sectoral powers. This general rule will not apply, however, to interconnection disputes, which will normally be resolved using sectoral powers (the rationale for treating interconnection disputes differently is set out below). The following types of behaviour will generally be dealt with using the CAct rather than sectoral powers (although the list is not exhaustive):

• predatory pricing;
• price squeezing;
• price discrimination;
• excessive pricing;
• refusal to supply (outside the context of an interconnection dispute);
• bundling.

3.5 In some cases it may be appropriate to use sectoral powers. However, in the majority of cases that could potentially be caught by the CAct, but which do not arise from interconnection disputes, the Director General now expects to investigate, and where appropriate take enforcement action, under the CAct rather than under the sectoral regime. The proportion of cases dealt with under the CAct will increase.

3.6 The decision to use sectoral powers need not be taken at the beginning of an investigation. It is possible to switch to the use of sectoral powers at a later stage. As was stated in paragraph 4.7 of the CAct guideline The Application of the Competition Act in the Telecommunication Sector, information obtained under the CAct can be used to support a decision made using sectoral powers, and vice versa.

3.7 Oftel may decide at any stage in an investigation that it is more appropriate to carry out the investigation under the sectoral regime rather than under the CAct. If such a decision is made it will be communicated to the parties and reasons will be given.

3.8 As mentioned in the introduction, interconnection disputes will generally be resolved using sectoral powers. The Director General has a statutory duty to resolve interconnection disputes and it will generally be more appropriate for this duty to be fulfilled using sectoral powers rather than the CAct. The rationale for treating interconnection disputes differently is that interconnection plays a crucial role in promoting effective competition in the telecoms sector and the existing sectoral regime provides a coherent ex ante framework. This creates predictability about the way that the interconnection rules will be applied (see note 5).

3.9 In short, Oftel believes that it will generally be more appropriate to fulfil the Director General’s duty to resolve interconnection disputes by using sectoral powers rather than by using the CAct. However, we do not rule out using the CAct to resolve interconnection disputes in appropriate cases.

3.10 In some cases there will not be a choice, as no sectoral rule covers the behaviour in question. Price fixing, for example, will often only be in contravention of the CAct. It was for this reason that the ‘Fair Trading Condition’ was added to operators’ licences. This mirrored Articles 81 and 82 of the EC Treaty in the same way that the CAct does, but ceased to have effect when the CAct came into force.

3.11 This approach to using the CAct means that where behaviour could be a breach of either the CAct or a sectoral rule, there will be a presumption (except in the case of interconnection disputes) that the investigation will be carried out under the CAct from the start. In any case, the potential breach that Oftel is investigating will be made clear to the parties.

3.12 The gathering of information is a crucial part of any investigation. An important reason for using the CAct is that where there is a reasonable suspicion of an infringement we have greater powers to request information than under our sectoral powers. Requesting information using the CAct, with provision for criminal sanctions for non-compliance, should produce more comprehensive and cogent responses. This should in turn lead to better decision-making.

3.13 It is not necessary for Oftel always to request information using formal powers. As a sectoral regulator to request information from a fairly limited number of stakeholders and for all information requests to be made formally is burdensome for the recipients. In some cases it will be appropriate to use our powers under the CAct from the outset, for example, where information is needed as a matter of urgency. During the initial phases of an investigation we will generally request information informally to establish whether there is a case to answer that requires fuller investigation. Where we request information informally we will make clear that the information is being requested in the context of an investigation into whether there is a breach of the CAct. Where there is a case to answer, we will conduct a more in-depth investigation and will generally use our formal powers to gather information (see note 6). Where we decide to close an investigation because the Director General has concluded that the CAct has not been infringed, we will continue with our policy of publishing a non-infringement decision. Such decisions will appear simultaneously on the public register held by the OFT.

Notes

5 This reasoning is supported by recital 6 of the new Access and Interconnection Directive (see paragraphs 4.3-4.6), which states that, "In markets where there continue to be large differences in negotiating power between undertakings, and where some undertakings rely on infrastructure provided by others for delivery of their services, it is appropriate to establish a framework to ensure that the market functions effectively. National regulatory authorities should have the power to secure, where commercial negotiation fails, adequate access and interconnection and interoperability of services in the interest of end-users."
6 Oftel's approach to gathering information during investigations is an area where we shall continue to keep policy and practice under review.

Chapter 4

Consistency with the future regulatory framework

4.1 The telecoms regulatory framework is set to change significantly. First, the EU legislative framework changes substantially as a result of the directives that came into force in April this year and which must be implemented by July 2003. Secondly, in December 2000 the government published a White Paper A New Future for Communications, in which it set out a new framework for communications regulation in the UK, and the Communications Bill has now been published. Thirdly, as a result of the EC Commission’s proposals to modernise the EC competition regime, national competition authorities will be able to apply EC competition law.

4.2 In essence, the future regulatory framework envisages greater use of competition law to prevent anti-competitive behaviour in electronic communications markets that are deemed to be effectively competitive. Sector-specific rules will still be applied, however, in those markets where effective competition has not yet developed and competition law remedies on their own are insufficient to remedy market failures.

A. The new EU framework

4.3 From July 2003, the key legislative measures will be:

• the six harmonisation Directives consisting of the Framework Directive and four additional Directives on Authorisation, Access, Universal Service and Data Protection (see note 7) plus a Commission Competition Directive;
• the Regulation on Local Loop Unbundling that is currently in force (see note 8).

4.4 The existing legislative framework was designed primarily to manage the transition from monopoly to competition in the telecoms sector. The new proposals are designed to:

• introduce a flexible framework that can evolve as technology develops and markets change;
• allow regulation to be rolled back when markets become competitive;
• create a level playing field across the EU (thus facilitating market entry) by simplifying the regulatory rules;
• ensure the harmonised application of the regulatory rules;
• recognise that competition is increasing by ensuring that for the most part only undertakings that are dominant (as defined in EC competition law) are designated as having Significant Market Power ("SMP") and are therefore subject to regulation;
• ensure that regulatory obligations are generally imposed only where effective competition is absent from a market and it would not be appropriate to rely solely on competition law.

4.5 Where an undertaking is designated as having SMP under the new framework, Oftel must impose such regulations as are appropriate. The Access Directive sets out the obligations that can be imposed in wholesale markets. These are access, price controls, transparency, non-discrimination and accounting separation. The new Universal Service Directive contains other provisions which relate to the obligations applicable to SMP operators.

4.6 The regulatory framework is therefore set to change significantly in the next few years. The concept of SMP will become more closely aligned with competition law principles. There is likely to be a more streamlined, clearly focused set of regulatory rules. Also, the areas where Oftel has a choice between the application of the regulatory rules and the CAct will be reduced.

B. Communications White Paper

4.7 In recognition of the increasing convergence of the telecoms and broadcasting industries a new regulator, the Office of Communications ("Ofcom"), will be created. The government set a target date of 2003 for the establishment of Ofcom and it is intended that the new body will have powers, held concurrently with OFT, to apply and enforce the CAct in the communications sector. Ofcom will also be responsible for economic regulation of communications, content regulation and spectrum management.

4.8 Ofcom will have sector-specific powers to promote effective competition in the communications sector for the benefit of consumers. The framework of sector-specific regulation will be consistent with the new EU framework for the regulation of electronic communications networks and services. As competition becomes more pervasive the government expects Ofcom to rely more on its competition law powers than on its sector-specific powers (see note 9).

C. Modernisation of EC competition law

4.9 Following the White Paper on Modernisation (see note 10), in September 2000 the EC Commission proposed a new procedural regulation (see note 11) which will replace Regulation 17/62. Under the new regime, there will no longer be a system of ex ante notification. Instead, undertakings will need to decide for themselves whether they comply with Articles 81 and 82 of the EC Treaty. The draft regulation gives Member States greater scope to apply EC competition law directly, allowing the European Commission to focus on those cases that are most important, such as cross-border cartels. The major aspects of the proposed new regime are that National Competition Authorities and national courts will be given the power to apply Article 81(3) and to decide whether an agreement should be exempt from the Article 81(1) prohibition. It is also proposed that EC competition law will apply when an agreement or conduct is capable of affecting inter-state trade to the exclusion of national competition law.

4.10 At the moment the new regime is expected to come into effect in 2003. As a result, Oftel is likely to have an increased role as a competition authority, applying both UK and EC competition law.

4.11 Oftel’s greater emphasis on the CAct is therefore consistent with the wider developments that will influence the regulatory framework that governs the UK’s telecoms sector in the coming years.

7 The directives are available on the European Commission's web-site http://europa.eu.int/eur-lex/en/oj/2002/l_10820020424en.html
8 The Regulation will remain in force at least until the point when it is due to be reviewed. Under the new framework it will be possible for LLU to be mandated under Article 12 of the Access Directive.
9 See paragraph 2.1 of the White Paper A New Future for Communications (December 2000).
10 White Paper on modernisation of the rules implementing articles 85 and 86 of the EC Treaty Commission programme No. 99/027, approved on 28 April 1999.
11 Proposal for a Council Regulation on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty COM(2000) 582 of 27 September 2000.