A New Competition Policy for Britain

In his Budget speech on 9 March 1999, the Chancellor of the Exchequer, Gordon Brown, announced details of "a new competition policy for Britain". This announcement was followed by complementary statements by the Secretary of State for Trade and Industry, Stephen Byers, and the Minister of Transport, Dr John Reid. In this Briefing, we set out the key points of the Government’s proposed new policies on:

• a more active role for the Office of Fair Trading (OFT)
• review of the water industry
• review of the airports industry
• reform of UK merger control

In December 1998, the Government promised a review of the effectiveness of current merger control policy in the UK and consideration of the case for reform.1 As had been widely expected, the Secretary of State for Trade and Industry, Stephen Byers, has now announced plans to reduce the role of Ministers in the merger assessment process in the UK.2

At present, the Secretary of State for Trade and Industry (the Secretary of State) decides whether a merger should be referred to the Monopolies and Mergers Commission (MMC) for investigation, or whether to accept undertakings (divestment or behavioural) as an alternative to a reference. He makes this decision taking into account advice received from the Director General of Fair Trading (DGFT). The DGFT’s advice is an independent assessment of all the relevant factors of the case, taking into account representations from interested parties, including competitors, customers, suppliers and government departments.

When considering whether a reference should be made, the Secretary of State takes into account certain "public interest" criteria which are set out in the Fair Trading Act 1973 (FTA).3 While adverse effects on competition are not the only grounds on which a merger reference may be made, in practice, references are made primarily on competition grounds.

If the Secretary of State decides to make a reference, the MMC is asked to report on whether there is a qualifying merger situation under FTA, and if so whether it operates against the public interest.

The Secretary of State is responsible for publishing the MMC’s report and, if the report identifies adverse effects on the public interest, for deciding what action, if any, should be taken in response to the report. If the MMC identifies adverse effects on the public interest resulting from the merger, the Secretary of State may decide to (i) block the merger; (ii) allow the merger to proceed subject to conditions; or (iii) allow the merger to proceed unconditionally.

The Government proposes that in the future decisions on mergers will normally be taken by the OFT and the Competition Commission (as the Monopolies and Mergers Commission will become on 1 April this year) acting as "independent competition authorities against a competition-based test".

It is proposed that Ministers will "continue to have a role" in exceptional cases only, where mergers raise "important and wider public interest issues". Stephen Byers said he expected these exceptional cases to make up only a "small minority of merger cases" and gave the example of mergers in the defence industries.

The Government’s proposal to largely depoliticise merger control should lead to a greater degree of consistency in decision-making and therefore to a greater degree of certainty that merger strategies will not be thwarted at the last minute at political level. Announcing the Government’s plans in the House of Commons, Stephen Byers acknowledged that businesses need "stability and confidence that decisions [on mergers] are not taken for short-term political considerations".

The Government intends to consult on its proposals for reform of merger control before finalising the details and implementing its new policy. There is likely to be a good deal of debate on a number of key issues, including about how narrowly the "wider public interest" exception is likely to be drawn and the scope of Ministers’ role in these exceptional cases, and about how the "competition-based test" is to be framed.

The DTI intends to publish a consultation paper in July setting out further details of its proposals on the reform of merger control. The consultation will run through to October, and the outcome of the review will be announced in May 2000. Norton Rose will be taking a close interest in the consultation process. Our competition law specialists will be happy to advise you on the implications of the proposed changes as further details emerge, and to raise with the DTI any of your comments.

On publication of its White Paper on Competitiveness4, the Government promised to use the Competition Act 1998 and a boost in OFT funding to "get tough on anti-competitive behaviour".5 It promised to provide the OFT with an extra £15 million over three years to enforce the Competition Act 1998 effectively.6

In his Budget speech, the Chancellor noted that the OFT is already investigating prices in a number of UK markets, including cars, supermarkets and private medical insurance, and that the DGFT has referred resale price maintenance on over-the-counter medicines to the Restrictive Practices Court for review. Nonetheless, the Chancellor believes that comparatively high prices in the UK are the result of a continuing lack of competition.

The Government therefore intends to take steps to give the OFT "a pro-active remit to root out cartels and restrictive behaviour". A 20 per cent increase in OFT funding is intended to support these steps.

Stephen Byers has announced details of the steps he intends to take. He intends to exercise powers under the FTA which allow him to give the DGFT directions to indicate issues that he should take into account in determining his priorities when investigating monopoly situations.7 He also intends to exercise powers under the Competition Act 1980 to ask the DGFT to investigate prices "of major public concern".8 The DGFT, John Bridgeman, has welcomed the Government’s intention to exercise these powers, powers which have never previously been used.9

Monopoly investigations

The FTA gives the OFT the power to investigate complex or scale monopoly situations. The OFT’s investigatory powers to conduct monopoly investigations will be strengthened by amendments made to the FTA by the Competition Act 1998.

A complex monopoly situation exists where companies with a collective share of at least 25 per cent of the supply or consumption of goods or services of the same description in the UK, or a part of the UK, act in such a way as may prevent, restrict or distort competition. The OFT has initiated investigations into a wide range of activities, including parallel conduct or restrictive arrangements in circumstances in which there is no evident agreement to do.

A scale monopoly exists where a business accounts for at least 25 per cent of the supply or consumption of goods or services of the same description in the UK, or a part of the UK. Scale monopoly investigations focus on whether businesses have acted to exploit or maintain their monopoly positions at the expense of customers or suppliers, or on whether they are acting to prevent, restrict or distort competition. The Government has indicated that it intends that these powers be used principally as a way of remedying conduct prohibited by the Chapter II prohibition under the Competition Act 1998 (the prohibition on abuse of a dominant position). Their use is expected to be confined to circumstances in which abuse has been established, and the DGFT believes that structural remedies are necessary to preclude further different abuse.

In practice, the decision whether to refer a monopoly situation to the MMC/Competition Commission is taken within the OFT in the light of information which it draws from its own monitoring of prices, profits, performance levels and the extent of competition prevailing in the various sectors of industry, and in the light of complaints made to it about specific instances of anti-competitive behaviour. Where there is evidence of particular anti-competitive practices being widespread across different industrial sectors, these practices may be made the subject of a general reference.

Section 12 of the FTA allows the Secretary of State to give general directions to the DGFT as to how to prioritise his powers to conduct monopoly investigations. This is the power which Stephen Byers intends to exercise. He may, for example, direct the DGFT to give priority to the investigation of certain types of anti-competitive practices, or to certain goods or services. He may also give the DGFT general directions as to the considerations to which he should have regard in deciding whether to refer a monopoly situation to the MMC/Competition Commission. This power has never been used in the past.

Investigation of prices of "major public concern"

Section 13 of the Competition Act 1980 gives the Secretary of State power to ask the DGFT to investigate and report on prices "of major public concern". No penalties attach to these investigatory powers. However, evidence of monopoly abuse may emerge which could lead to further investigation and a reference to the MMC/Competition Commission. Or, additionally, the OFT may, in the light of its investigation, initiate an investigation into anti-competitive practices.

In deciding whether a price is one of major public concern, the Secretary of State is required to consider whether (i) the provision or acquisition of the good or service is of general economic importance; or (ii) whether customers are significantly affected directly or indirectly by the price. If he is satisfied that an investigation is required, the Secretary of State can ask the OFT to publish a report setting out its findings of fact and any other observations it wishes to bring to the Secretary of State’s attention.

In his Budget speech, the Chancellor indicated the Government’s determination to tackle what it sees as a lack of competition in some UK markets by announcing reviews of the airports and water industries. The Chancellor promised "Wherever there is monopoly power we will open the way to competition and new entrants". The Deputy Prime Minister, John Prescott, has been charged with conducting these reviews.

Water

It is expected that the water industry review will focus on industrial and commercial users. Further details are expected to be announced over the coming weeks.

Airports

Dr John Reid, Minister of Transport, has announced10 that a study of airport issues in the south east and east of England is designed to complement the six regional airport studies announced in the Government’s Integrated Transport White Paper.11 The study will examine the economic, environmental and social implications of a wide range of options looking 30 years ahead. The study will consider airport capacity, the implications of possible developments for the planning of airspace capacity and air traffic control and for surface access to airports.

The airports study will be conducted jointly by the Government and the Civil Aviation Authority and is expected to run for two years. This will be followed by public consultation on options arising from the work and the results will be incorporated in a White Paper on UK airports policy.

At the press conference announcing details of the new airports review, Dr John Reid said that the Government was approaching the study with an open mind, and added "If we find there are courses of action that would benefit the consumer, we might involve the MMC".

In 1996, the MMC was asked to investigate whether BAA plc had, over the previous five years, pursued any course of conduct at Heathrow, Gatwick and Stansted airports which operated against the public interest.12 The MMC suggested appropriate remedies for a number of courses of conduct that it found were against the public interest. These included charges for airside licences for catering and cleaning services supplied from off the airport; quantitative restrictions on the use of employment agency staff at Heathrow; restrictions on the sale of airline tickets at Gatwick; and failure to allow prominent positioning of information desks at Heathrow other than at very high rentals. The MMC also noted airlines’ concerns about other aspects of BAA’s performance (including, the absence of service standards at airports, poor baggage handling facilities at Heathrow and shortcomings in BAA’s investment programme). However, these concerns did not fall within the MMC’s terms of reference. The MMC could only note these concerns and recommend that BAA "maintain current progress on issues which are so important to the effectiveness of its user airlines over the next five years". A further investigation into BAA’s ownership of London airports is therefore expected.

NOTES

1. Our Competitive Future - Building the Knowledge Driven Economy, at para 4.7; and DTI press release P/98/1034 of 16 December 1998
2. Our Competitive Future - Building the Knowledge Driven Economy - Implementation Plan, at page 24; and DTI press release P/99/226 of 10 March 1999
3. Section 84 of the Fair Trading Act 1973
4. See note 1 above
5. DTI press release P/98/1034 of 16 December 1998
6. Our Competition Future - Building the Knowledge Driven Economy, at para
7. Section 12 of the Fair Trading Act 1973
8. Section 13 of the Competition Act 1980
9. OFT press release No. 6/99 of 10 March 1999
10. DETR press release 227 of 11 March 1999
11. A New Deal for Transport: Better for Everyone - The Government’s White Paper on the Future of Transport, July 1998
12. BAA plc - A report on the economic regulation of the London airports companies (Heathrow Airport Ltd, Gatwick Airport Ltd and Stansted Airport Ltd), June 1996

This note is intended to provide general information about some recent and anticipated developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.