Select Committee on Transport, Local Government and the Regions Appendices to the Minutes of Evidence

Memorandum by the Office of Fair Trading (Bus 42)

  1.  The Office of Fair Trading welcomes the opportunity to submit a memorandum to the Transport Sub-committee of the Transport, Local Government and the Regions Committee. Before turning to the specific points the Committee has asked the OFT to address, it may be helpful to put into context the work we do. All of the work is carried out with a view to ensuring as far as possible that markets work well for consumers. That may mean using powers available under competition legislation, consumer protection powers, or assessing whether some piece of legislation or regulation is, itself, not working in the best interests of consumers.

  2.  Competition lies at the heart of any successful market economy and is crucial to the protection of consumers' interests and promoting economic efficiency and innovation. It is a process whereby businesses constantly try to gain an advantage over their rivals and win more business by offering more attractive terms to customers or by developing better products or more effective ways of meeting their requirements. Competition has several dimensions of which price is only one, albeit in many markets the most important. It encourages the development of new products, processes or services and enhances economic growth and living standards.

  3.  In the context of public transport, competition and choice between operators are key forces working for passengers. Competition brings wide benefits in terms of price (fares), innovation and quality of service, and even the threat of potential competition to a particular market may act as a value-for-money discipline on incumbent operators. This has happened most notably in recent years in the aviation market where, even though competition in aviation remains restricted in important respects, entry to the market by new, low cost "no-frills" airlines has changed the market considerably and provided competition to the incumbent operators.


  4.  There is, rightly in our view, no regulator for the bus industry. The Competition Act 1998, which came into force on 1 March 2000, contains two prohibitions, which allow the OFT to take action against anti-competitive agreements between operators and against abusive behaviour by dominant operators. [7]The prohibitions are specifically of:

    —  anti-competitive agreements between operators preventing, restricting or distorting competition ("the Chapter I prohibition"). Such agreements are prohibited if they have an "appreciable" effect on competition, unless they are exempted having met the criteria set out at section 9 of the Act. In the transport industry, likely examples of prohibited agreements include those under which operators agree the fares they will charge on jointly-served routes, or agreements under which operators decide which part of a given geographic area each will operate, or not operate; and

    —  abuse of a dominant market position ("the Chapter II prohibition"). There is no prohibition on the holding of a dominant position, but the abuse of that position is prohibited. In the transport industry, likely examples of abusive behaviour by a dominant firm include setting fares at a "predatory" level with a view to removing an existing competitor from the market or deterring new entry to the market.

  5.  The Act provides for the imposition of financial penalties on undertakings that are found to have acted in breach of either prohibition. The OFT operates a policy of leniency for "whistleblowers" in relation to cartel activity. An undertaking that comes forward with information and co-operate with a cartel investigation may be granted a reduction in the amount of a penalty that would have been imposed on it if it had not co-operated. OFT decisions under the Act are appealable to the Competition Commission Appeals Tribunal.


  6.  These Acts provide for the OFT to apply a competition test in certain circumstances where local authorities make quality partnership schemes, ticketing schemes or award tenders for subsidised services under the Transport Act 1985. The competition test to be applied is whether the exercise of one of these functions has, or is likely to have, a significantly adverse effect on competition.

  7.  The competition test is broadly similar to that applied under the Chapter I prohibition in the Competition Act and has essentially three elements. First, if the exercise of the function has no significantly adverse effect on competition, no further action will be taken. If, on the other hand, the exercise of the function does have, or is likely to have, a significantly adverse effect on competition there are two further questions to consider:

    —  whether the restriction on competition is justified because it secures improvements in the quality of vehicles or facilities used, or it secures improvements in local transport services of substantial benefit to users, or it reduces or limits traffic congestion, noise or air pollution; and

    —  whether the effect on competition is "proportionate" to the benefits achieved.

  8.  If the test is not met, the OFT may prohibit the scheme, require that it be revoked or varied, or, in the case of use of the tendering procedures, require the variation or withdrawal of the invitation to tender. The OFT may apply to the High Court or, in Scotland, the Court of Session for an order requiring compliance, in the event that an authority fails to comply with directions it gives.


  9.  Although changes are proposed in the Enterprise Bill currently before Parliament, under the merger provisions of the Fair Trading Act 1973, the Secretary of State for Trade and Industry currently has overall responsibility for merger control, the policy framework in which it operates, and for making references to the Competition Commission. For a merger situation to qualify for investigation by the Commission, it must either create or enhance a market share of at least 25 per cent of goods or services of a particular description in the United Kingdom or a substantial part of it, or the gross value of the assets acquired must exceed £70 million. The OFT advises the Secretary of State on whether a qualifying merger should be referred to the Commission for investigation. (In September 2000 the OFT started publishing its merger reference advice.) After receiving this advice, the Secretary of State decides whether a reference to the Commission should be made. The then Secretary of State announced in October 2000 that he would follow OFT advice, "save in exceptional circumstances".

  10.  The Commission investigates mergers referred to it to determine whether there is, in fact, a merger situation qualifying for investigation, and, if so, whether it operates, or may be expected to operate, against the public interest. The Commission reports to the Secretary of State, including recommendations on how any perceived detriments from the merger might be remedied. The Secretary of State then decides what action to take following an adverse report by the Commission, again having regard to OFT advice. All merger reports are published. These procedures have not been changed significantly by the implementation of the Competition Act 1998.


Market sharing by Arriva plc and FirstGroup plc

  11.  The OFT received an anonymous letter on 21 July 2000 containing allegations that senior managers from Arriva Yorkshire (a subsidiary of Arriva plc, operating bus services in Leeds and the surrounding area) had agreed with senior managers from First Leeds (a subsidiary of what was then FirstGroup plc, now First plc, which also operates bus services in the Leeds area) that they would each withdraw services from certain bus routes. The letter referred to specific routes in Leeds.

  12.  Enquiries into the allegation led to a formal investigation under the Act. [8]The OFT was granted warrants to carry out unannounced visits to the premises of the companies which took place on 10 and 11 October 2000. Copies of documents were taken.

  13.  At the end of October, FirstGroup applied for leniency. By making that application FirstGroup agreed to co-operate with the OFT's investigation, in accordance with the leniency programme set out in the Director General's Guidance as to the Appropriate Amount of a Penalty ("Guidance on Penalties")[9] First Group provided the OFT with witness statements setting out details of a market sharing agreement in relation to four bus routes in the Leeds area, resulting from meetings between Arriva and FirstGroup staff on 14 March and 17 March 2000. Those meetings were held in a hotel (one in a private room) and were not reported as contacts with competitors in accordance with internal company competition compliance procedures. FirstGroup, as the first applicant for leniency, was granted 100 per cent leniency; any fine subsequently imposed for breach of the Chapter I prohibition would therefore be reduced to nil.

  14.  In November 2000, Arriva also applied for leniency, but, as the second applicant, received an offer of only 36 per cent reduction in any fine on the basis of its co-operation. Witness statements from Arriva staff confirmed the two meetings with FirstGroup staff and the agreement that Arriva would withdraw five buses from two complete routes leaving FirstGroup with no competition on those routes, with FirstGroup withdrawing from two routes that Arriva would take on.

  15.  On 12 October 2001 Notices under Rule 14 of the Competition Act 1998 (Director's rules) Order 2000[10] that the OFT proposed to make a decision that the Chapter I prohibition had been infringed were issued. Arriva and FirstGroup had six weeks in which to respond by way of written representations. They were also given an opportunity to make oral representations. After considering the law and the evidence, including the respective admissions of the parties and their written and oral representations, the OFT found that there had been a market sharing agreement as a result of the meetings between Arriva and FirstGroup staff. The OFT considered that the relevant product market was the supply of commercial local bus services. The object of the agreement between Arriva and FirstGroup had been to share markets geographically by each withdrawing from two bus routes and Arriva taking on those given up by FirstGroup. The parties had de-registered and registered the bus routes a number of weeks apart. The OFT found that the agreement had prevented, restricted or distorted competition thereby infringing the Chapter I prohibition and that the infringement had been intentional or negligent.

  16.  In accordance with the Guidance on Penalties, the starting point for determing the level of penalty is calculated by applying a percentage rate to the "relevant turnover" of the undertaking, [11]up to a maximum of 10 per cent. The OFT considers market sharing to be among the most serious infringements of the Chapter I prohibition because of the significant harm it may inflict on the competitive process. The result of withdrawal of one operator from each route was to increase the market share of the other to near monopoly levels. The OFT therefore set the starting point for the penalties at 10 per cent of "relevant turnover".

  17.  The OFT considered the other matters in the Guidance on Penalties, including deterrence, aggravation and mitigation. It also took into account that it was a relatively minor breach of the law and that the turnovers on the affected routes were relatively small. The case did, however, involve two major national companies who had compliance programmes to ensure the law was followed, to which the staff concerned had failed to adhere. The OFT imposed a financial penalty of £318,175 on Arriva and £529,852 on FirstGroup, the difference being due solely to the levels of turnover in the relevant markets. The figure for deterrence was the same, as the undertakings were considered to be equally at fault. After the leniency provisions, the penalty for FirstGroup was reduced to nil and that for Arriva to £203,632. The OFT issued its decision on 30 January 2002. This decision has not been appealed and the financial penalty has been paid.

Other cartel cases

  18.  Under the Restrictive Trade Practices Act 1976, the OFT maintained a register of restrictive agreements and took cases to the Restrictive Practices Court. Since the last report of the Committee, further action has been taken in the Restrictive Practices Court in respect of a number of cartel cases involving bus operators. In July 1999, the Court accepted undertakings from eight operators of home-to-school services in Kingston-upon-Hull who had entered into a secret market-sharing and price-fixing agreement. These undertakings prevented the operators from giving effect to any of the agreements to which they were parties and from entering into similar agreements in future. The Court also made orders to the same effect against two operators. The Court was told, in an undefended action, that the operators met secretly to agree minimum prices at which they would tender to supply school bus service and the routes for which each operator would tender.

  19.  In November 1999, the Court struck down three price-fixing and market-sharing agreements between three operators of school bus services in the Stafford area. The operators each agreed in 1996 and again in 1997 not to bid for certain home to school transport contracts put out to tender by Staffordshire County Council or to bid only at agreed levels. The Court accepted undertakings from one operator and made an order against the other two operators in each case not to give effect to any agreements to which they were parties, not to enter into similar agreements in future, and not to enforce any agreements registrable under the Restrictive Trade Practices Act which had not been furnished to the OFT.


Comments on merger activity in the bus market since 1999

  20.  There has not been a significant number of bus and coach mergers in the last three years. Merger activity has fallen off considerably from previous years (1995 alone saw four bus cases referred to the then Monopolies and Mergers Commission (MMC)). Three public merger cases in the bus market and one in the coach industry have been considered since 1999, detailed below. As noted, only one of the cases raised competition issues, which were resolved by undertakings. The parties have complied with these.

Acquisition by Arriva plc of MTL Services plc

  21.  The market involved bus services on Merseyside (excluding the Wirral). The Minister for Consumer and Corporate Affairs announced that he intended to refer the acquisition to the MMC unless suitable undertakings in lieu were received from Arriva. He believed that the merger would have led to a significant loss of actual and potential competition in view of the very high market shares that would have resulted. New entry to the market was unlikely, particularly in Liverpool. Arriva gave undertakings to the Secretary of State for Trade and Industry in lieu of reference to divest a bus garage as a going concern, together with most of the routes operated from the garage, supported by behavioural undertakings on fares.

Rapsons Group/Morrisons Coaches

  22.  This case involved tendered bus services in Caithness and Sutherland. The OFT recommended that the Secretary of State should not refer the acquisition to the MMC. No third party concerns were expressed. The Secretary of State agreed.

Arriva plc/Wycombe Bus Company

  23.  In this case, the market was for commercial bus services in High Wycombe. The OFT again recommended that the Secretary of State should not refer the acquisition to the MMC. The Secretary of State agreed.


  24.  In this case, the market was for commercial coach services to and from London airports and local cities. The OFT recommended that the Secretary of State should not refer the acquisition to the MMC. The Secretary of State agreed.

1999 Select Committee Recommendation

  25.  Two of the recommendations contained in the 1999 report of the Transport Sub-committee related to merger control:

    (i)  In the light of the evidence that we have taken, the OFT's view that mergers rarely raise competition concerns, because the barriers to market entry are low, looks increasingly inappropriate and should be reviewed urgently.

  26.  Mergers are looked at on a case by case basis and there is no presumption as to whether mergers in the bus industry will raise competition concerns. As circumstances vary from case to case it is not possible to lay down general rules.

  27.  In the light of this recommendation, in considering bus merger cases since 1999, the OFT has looked carefully at barriers to entry falling under the headings of capital, bus depots, bus stations, pre-paid tickets, concessionary fares and the reputational effects of aggressive retaliation to new entry. In the Arriva/MTL case referred to above, pre-paid tickets and lack of access to a depot for competitors were seen as significant barriers and those issues were therefore addressed by the undertakings.

    (j)  It is essential that thorough consideration be given to the local, as well as the regional and national, implications for competition of a proposed acquisition of an operator in any investigations. We recommend that the [MMC]'s approval of the purchase of Star Line by British Bus (now Arriva) should be re-examined in view of the possible Arriva monopoly in the Macclesfield area.

  28.  Merger cases are always examined for their impact on the relevant geographic market. In bus cases this is usually local. In the cases since 1999 this has been as narrow as High Wycombe. In Arriva/MTL special attention was paid to the Liverpool, within a broader Merseyside market.

  29.  The acquisition by Arriva of Star Line was referred to the MMC in 1995. In their report published in March 1996 (British Bus Plc and Arrowline (Travel) Ltd), the MMC defined the market as bus services in the districts of Vale Royal, Congleton, Macclesfield, Crewe and Nantwich and Trafford. The merger was seen as giving efficiency benefits and incentives to deliver a better quality of service, but with some loss of actual competition. This was particularly the case in relation to commercial services in Maccelsfield, and for tendered services in most of the area. In Macclesfield, there was found to be less competition for commercial services than in the other areas and fewer bidders for tendered services. The MMC concluded, however, that the district could sustain only one sizeable commercial operator providing a full network of services and that any detriment arising from this merger was limited to the loss of competition on a few individual routes. On the tendered side, the MMC felt that there was scope for small operators to bid and that FirstBus and Greater Manchester Buses South were potential entrants. Accordingly it cleared the merger.

  30.  The Secretary of State has no power to take action in respect of a merger if it has been found not to operate against the public interest by the MMC.

  31.  It is thus not possible to re-examine a merger once it has been reported on by the MMC or, now, the Competition Commission. If, however, following a merger that creates a dominant position, that position is abused, the OFT can now take action under Chapter II of the Competition Act 1998. In the case of the behaviour of Arriva in Macclesfield, no complaints have been received from other operators that might suggest that Arriva has abused any dominant position it holds in the area by, for example, adopting a predatory pricing strategy.

  32.  In September 1999, the Environment, Planning and Operations Sub Committee of Cheshire County Council resolved to ask the OFT "to re-examine the question of whether there is a monopoly for the supply of bus services in the Macclesfield district and whether this is operating against the public interest". Examination of financial information from the Arriva subsidiary operating in the area and details of all bids for tendered services in the area for the previous five years supplied by the County Council showed that in some instances, tender prices had risen at a rate in excess of inflation, and that the number of bidders for tenders had decreased. The situation was, however, no different, by and large, from that experienced in other parts of the United Kingdom.

  33.  In looking at the tendered bus market in Macclesfield, we also noted that the 1999 report of the Transport Sub-committee identified a number of factors which had led to increased tender prices, including higher staff costs, higher tender specifications in terms of more services, longer operating hours and more routes on more days of the week, with newer, higher specification, vehicles. The report also noted that tender prices had risen through a general catching-up exercise following artificially low tenders submitted in the early 1990s in response to rural bus subsidy grant conditions and also simply in order to obtain the work. The report went on to say that bus operators' costs had clearly risen and the number of operators available to bid for tenders had fallen through merger activity.

  34.  The OFT therefore concluded, given that the overall increases in tender prices reflected the position in the United Kingdom as a whole and was not peculiar to Macclesfield, that there were no "reasonable grounds for suspecting" (as the Competition Act requires, before the OFT can carry out a formal investigation) that Arriva had abused its dominant position in the area. There was similarly no evidence or suggestion of any cartel activity likely to infringe the Chapter I prohibition in the Act.

  35.  Under the Fair Trading Act 1973, the OFT may refer a "scale" monopoly[12] to the Competition Commission to investigate whether the monopoly operates, or may be expected to operate, against the public interest. While it may be the case that Arriva holds a monopoly position (within the meaning of the Fair Trading Act) in the Macclesfield area, the OFT has said that "The scale monopoly provisions are intended for dealing with a situation where a prior infringement of the prohibitions in the Competition Act has already been proven, but where the Director General believes that there is a real prospect of further abuse by the same company. The structural remedies available under the scale monopoly powers may be the only effective means of preventing those further abuses".[13] It did not appear that a scale monopoly reference would be appropriate in this case.

  36.  The OFT also considered whether a "complex" monopoly position[14] qualifying for reference to the Competition Commission might be appropriate. The Commission would be required to consider whether a complex monopoly situation did, indeed, exist, and, if so, whether it operated against the public interest. Even if the Commission found the existence of a complex monopoly, we considered that it would be very unlikely that it would find the position any different from that identified by the Transport Sub-committee or, indeed, any abuses which could be remedied under competition legislation. We did not therefore believe that a reference to the Competition Commission was warranted.


Common Fare Structures

  37.  Common fares that are brought about through competitive pressures, where common quality standards apply, are, of course, acceptable, and indeed not unnatural where competition is working on the road. The Competition Act does not prohibit bus operators charging the same fares, where this is the result of independent companies making their own commercial decisions. Similar or identical fares are not inconsistent with strong competition if, say, no operator is able to charge fares above the competitive level.

  38.  The Competition Act does, however, prohibit operators colluding to fix prices because this will usually result in passengers paying higher fares than if each operator determined their level of fares independently.

  39.  Price-fixing is prohibited throughout the EC by Article 81 of the EC Treaty where there is an effect on inter-state trade and domestically in the United Kingdom by the Chapter I prohibition contained in the Competition Act. It is one of a number of types of agreement which the OFT considers to be capable of having an appreciable effect on competition irrespective of the market shares of the parties to the agreement. [15]It is not inconceivable that an agreement of this sort might be granted an individual exemption, but it is unlikely.

  40.  No industry or market in the United Kingdom is able to agree prices across the board. The OFT and the Department of Trade and Industry recognised, however, that the transport industry was different from other industries in that travelcard schemes, for example, simply could not work unless the operators involved were able to agree the prices at which the different travelcards were sold. Travelcards are, in effect, new products that each operator wouldn't be able to offer individually and which wouldn't be available at all unless agreement on price were possible.

  41.  We also recognised that there are clear benefits to passengers from other ticket types which involved some degree of price-fixing and which would therefore have an appreciable effect on competition and normally be prohibited by the Chapter I prohibition, such as through tickets, [16]multi-operator individual tickets (MITs) [17]and add-ons.[18]. While it was clear that the ability of operators to agree prices for travelcards was essential to the effective working of such schemes, it was not obvious that it was equally essential for these other ticket-types. It was not necessary that operators should agree the prices of MITs, for example, but there clearly is a need for an agreement between them to facilitate acceptance of the tickets. It appeared to us, however, that there was a need for operators to continue to provide single and/or return tickets, depending on the class of MITs made available, available only on their own buses to act as a price discipline on the MITs. It was also apparent that to allow distribution of the revenue received from such sales to be on any basis other than of the operator who sold the ticket retaining the revenue could at least dampen competition between them. There was, however, a clear need for revenue from sales of add-ons and through tickets to be distributed: the only fair way of doing that, while preserving competition, was to allow a "posted" price system to be used.

  42.  The OFT therefore recommended to the Secretary of State that a block exemption should be given to these specified types of ticketing scheme agreements. The Secretary of State agreed and the Ticketing Schemes Block Exemption came into force on 1 March 2001. [19]The effect of the block exemption is that any agreement which meets the criteria set out in the block exemption order is automatically exempt from the Chapter I prohibition, without needing to be notified to the OFT. The block exemption does not extend to agreement on prices of operators' existing products, the "building blocks" of single operator single and return tickets which discipline the price of all other types of inter-operator tickets. The order extends provision for agreement on price only to travelcards as the only type of ticket for which it is considered to be absolutely essential. The block exemption does, however, provide different regimes for the other different products referred to above. While the OFT encourages competition whenever possible, it does not do so simply for the sake of having competition, but for the benefits it brings to consumers. This flexible approach to ticketing—where the benefits for passengers are demonstrable, and where the alternative would be to require the notification for individual exemption of many hundreds, and probably thousands, of ticketing schemes throughout the country—will be of significant assistance to the industry and will allow such schemes to continue even though they contain what would otherwise be regarded as clearly anti-competitive provisions.

  43.  In recommending to the Secretary of State that a block exemption Order should be made, the OFT accepted that agreement on travelcard prices was essential to the effective working of such tickets. We did not believe then, and do not believe now, that other ticket types must necessarily incorporate agreement on price. We did, however, accept that some agreement or discussion on, for example, through tickets and MITs, must take place. There is therefore provision in the block exemption for agreement on MITs (as long as the revenue from sale of the tickets "lies where it falls"—that is, that it remains with the operator who sold the ticket), and for agreement in relation to through tickets and add-ons to include provision for non-discriminatory posted prices to be charged.

  44.  The provision allowing agreement on the price of travelcards requires that the revenue from such schemes is distributed by reference to passenger miles, "as far as is reasonably practicable". This is distinct from, for example, concessionary travel schemes operated by local authorities that are required by regulations made under the Transport Act 1985 to use revenue forgone to distribute revenue. In recommending such a distribution scheme to the Secretary of State, the OFT was mindful that using revenue forgone as a measure could provide an incentive to operators to increase the price of their own single and return fares so as to increase their share of the travelcard revenue "pot". We were aware that, while revenue from travelcards was not at present a high proportion of most operators' total revenue, the proportion was likely to increase in the light of operators' policies of marketing such tickets, and especially in the light of developing smartcard technology when sales may be expected to increase significantly. We are aware that some Passenger Transport Executives have encountered precisely that problem and that one, at least, has changed the method of reimbursement for that reason.

  We would expect that existing sampling techniques used to estimate the revenue forgone through use of a travelcard could be relatively easily and cheaply adjusted to estimate passenger miles, particularly when smartcard technology is widely available and used.

  45.  Regular meetings have been held with the Confederation of Passenger Transport in relation to the block exemption and the guidance thereon, especially the extent to which the condition "as far as is reasonably practicable" may apply to revenue distribution by reference to passenger miles. In addition, the OFT is always available and willing to discuss individual cases informally, at no cost, with operators or local authorities under either the Competition Act or the Transport Act regimes. We are discussing problems stemming from subsidised railway fares, "tapering" fares (the greater the distance travelled, the lower the fare per mile), how revenue from "Explorer" type tickets should, or may be apportioned between operators, and the obligation in the block exemption to offer own brand single and return tickets when MITs are offered.

Co-ordinated Timetabling

  46.  It has been suggested that, if an agreement between operators on the timings of their services on a common route so as to provide equal headways between buses is caught by the Competition Act, a block exemption would be appropriate. Market-sharing in any dimension—whether of the product, geographical or temporal markets—is another of the types of agreement which the OFT considers are prohibited by competition law whatever the market shares of the parties. Agreements between operators relating to equal headways on jointly-served routes fall into the temporal, or time, dimension. Such agreements may bring some benefits to passengers, but through reduced competition, may also bring detriments.

  47.  Customers benefit from having bus services that run at reasonably even intervals, particularly when services are infrequent. It may well be that, in practice, operators do actually run buses at even headways, without agreement, and it is likely that where two or more operators run on the same route they will settle into such a pattern. Operators may have concluded that scheduling a bus two minutes in front of a competitor's is likely to be self-defeating as the other operator may well react by changing his schedule so that his bus arrives first. This type of behaviour simply alienates passengers.

  48.  There is, however, a difference between patterns of even headways arising through independent decisions by operators and through operators agreeing their schedules. An agreement between operators is likely to make the market less responsive to changes in circumstances. The agreement is likely to make it easier for operators to resist changing their services in response to new entry or additional frequencies by rivals, and such resistance can provide disincentives for innovations to occur. Allowing operators to agree headways may also enable them to reduce capacity, leading, ultimately, to a poorer service for bus passengers. Indeed, an agreement on headways is close to being an agreement on supply levels. This would not be dissimilar to allowing agreement on fares: it might be convenient to passengers to know that the fare will be the same whichever bus comes along first, but, as noted above, the common, agreed, price is likely to be higher than the competitive price.

  49.  Because of these concerns about the anti-competitive effects of agreements on headways, and because operators can independently achieve a sensible pattern of services to the extent that the benefits of allowing agreement are limited, the OFT would not be prepared to recommend that the Secretary of State should make a block exemption order covering frequency agreements. That is not necessarily to say, however, that a particular agreement might not meet the criteria for individual exemption contained in section 9 of the Act, if it could be shown that the agreement provided benefits to consumers while having as little adverse effect on competition as possible.

  50.  Competition law, being concerned with anti-competitive agreements, leaves operators free to co-ordinate timings of non-competing services—for example, timing a bus service to a railway station so as to meet the train, or bus operators timing connecting bus services to facilitate through ticketing. The fact that the block exemption covers MITs, though tickets and add-ons is a clear signal to the industry that such tickets are acceptable in competition law.

  51.  Again, the Office is always prepared to discuss individual cases with parties to agreements. In addition to informal contacts, two applications for formal guidance on agreements involving market-sharing agreements have been considered by the Office under the Early Guidance procedures laid down in the Competition Act for agreements which came into effect before implementation of the Act. Because of the confidential nature of the guidance, and of the fact that it had been given at all, the OFT is unable to reveal or discuss details of the cases.


  52.  The OFT discourages notifications unless the agreement has an appreciable effect on competition and the parties require the legal certainty of individual exemption so that resources can be concentrated on the really damaging activity inherent in cartel activity. Experiences in most Member States of the EC has shown that the amount of anti-competitive behaviour identified through notifications is, in reality, very small and that cartel investigation is significantly more effective. Retrospective exemption is always possible, in any event. It is much more important for the OFT to be aware of anti-competitive practices through complaints made about particular industries and markets and particular undertakings within those industries. It is only through acquiring such market knowledge that serious market cartelisation can be tackled.

  53.  The OFT has reached no adverse findings since 1 March 2000 when the Competition Act came into force on cases involving the bus industry other than the Leeds case noted above. There are, however, a number of complaints still under consideration, any of which could lead to an adverse finding against the company about which the complaint was made.

  54.  Under the Act the Secretary of State may, by order, make block exemptions which exempt particular categories of agreement that he considers are likely to satisfy the statutory exemption criteria. An agreement which falls within the scope of the block exemption is automatically exempt from the Chapter I prohibition, and such an agreement should not be notified to the OFT. The purpose of a block exemption is to relieve those parties to the class of agreement block exempted of the need to notify each such agreement for individual exemption, and the associated cost. With all industries and markets in the United Kingdom, the onus is on the parties to an agreement to decide, first, whether their agreement does, in fact have an appreciable effect on competition and is thus potentially in breach of the Chapter I prohibition, and if so, what action to take in consequence. That might be to do nothing and, if necessary, notify the agreement at a later date for retrospective exemption. The parties may, however, decide that they require the legal certainty of an exemption as soon as possible and notify the agreement immediately. The parties to a ticketing scheme agreement will, however, further have to consider whether the agreement meets the conditions in the block exemption. If it does, they need to take no further action. If it does not, they will need to consider whether to amend the agreement so that it does meet the terms of the order or to notify it for individual exemption if they cannot amend the agreement to meet the conditions.

  55.  The OFT has adopted a clear, and public, line in the light of the "do complain, don't notify" policy of being available for informal discussions about general issues or particular cases with operators, local authorities and trade bodies. We have discussed, and are continuing to discuss, whether particular ticketing schemes fall within the conditions in the block exemption, and if not, how they might be tailored to meet its conditions. We also discuss whether particular schemes may constitute statutory schemes under the Transport Act 2000 or the Transport (Scotland) Act 2001.

  56.  We have discussed with the National Federation of Bus Users the implications of the block exemption for passengers, and the implications of competition law for operators agreeing equal headways on jointly-served routes. We have also produced answers to a series of frequently-asked questions, which the Federation intends to publish in its Bus User magazine, and for briefing its local user groups.

  57.  For publication as part of an interview with an OFT official with Transit magazine, one of the major trade publications, we are working on a list of our own frequently-asked questions. A copy of the list of questions and answers will shortly be placed on the OFT web-site and we will send a copy to the Sub-committee at the same time.

  58.  The fact that the block exemption exempts a whole class of agreements means that there is no requirement on operators or local authorities to notify schemes to the OFT. We therefore have no information on how many schemes are considered by the operators to meet its conditions and thus not require individual notification. There are many thousands of ticketing schemes in operation, and we have discussed probably 20 or 30 with the operators. The balance therefore presumably either believe they meet the conditions or are awaiting the result of the discussions referred to above. It is impossible to gauge how effectively or otherwise the block exemption is working. It is clear that the main reason why existing schemes might fall outside the scope of the block exemption is where they do not at present meet the passenger miles criterion for revenue distribution under travelcard schemes. We have taken considerable steps to point out to the industry that the Order specifies that revenue should be distributed according to passenger miles "as far as is reasonably practicable", and that that term may have wider application than might at first be thought. In addition there are many examples of existing schemes that apportion revenues based on passenger miles and using this method does not in practice appear to raise as many problems as has sometimes been suggested.

  59.  Again, the OFT is always available and willing to discuss the issues with the parties on an informal basis, at no cost whatsoever.


  60.  For the reasons noted above, the OFT believes that co-ordinated timetabling constitutes sharing of the temporal market. It is therefore prohibited by the Chapter I prohibition and is of a type which the OFT considers to be capable of having an appreciable effect on competition whatever the market shares of the parties to the agreement may be. The OFT does not therefore regard the issue as suitable for a block exemption, but it is conceivable that a particular agreement might meet the criteria for individual exemption contained in section 9 of the Act. [20]In practice however, no notifications have been received (for either Decision or Guidance) about co-ordinated timetabling. Similarly, no notifications for a Decision or for Guidance have been received about joint fare-setting, for example.


  61.  Because complaints and notifications under the Competition Act in the rail industry are dealt with by the Rail Regulator under the concurrency arrangements in the Act, the OFT has little direct knowledge of the industry. This section has therefore been compiled with substantial contributions from the Office of the Rail Regulator (ORR), whose assistance is gratefully acknowledged.

  62.  The United Kingdom bus market outside London and Northern Ireland is fully deregulated and open to competition. Services are provided on a commercial basis except where a local authority offers a subsidy for particular routes or services which would not otherwise be provided in the absence of a subsidy. The routes and frequencies provided, the vehicles used, and the fares charged on the routes are matters for the commercial judgement of the operators. [21]When the National Bus Company and the Scottish Bus Group were privatised, no sector regulator was created. Instead, the bus industry became subject, for the first time, to the competition law applying in other sectors of the UK economy—at that time, the Restrictive Trade Practices Act 1976 and the Competition Act 1980, both since repealed by the Competition Act 1998...

  63.  Because of the particular characteristics of the rail industry, however, sector regulation was established when the industry was privatised and there are unique features of the rail industry arising from the way that the privatisation was accomplished. These are the franchising process and the national fare structure.

Market Structure

  64.  Railways offer an extensive network of city centre to city centre connections and more limited networks of suburban commuter rail services offering connections between centres of population within towns. In most cases, there is only one route by rail appropriate for travel between two towns or cities, although more than one train operator may offer services over a route or part of a route. The operation of the railway involves a number of companies that contribute to the operation of any single service, including the network operator (Railtrack), the train operating company (TOC) and the rolling stock company which owns the trains that are leased to the operator.

  65.  The regulatory regime within which the rail industry operates is unique. Many TOCs receive a subsidy from the Strategic Rail Authority (SRA) or local Passenger Transport Executives (PTEs). TOCs are licensed by the ORR, having taken any necessary advice from the Health and Safety Executive. Monitoring of performance under the licence is, however, shared between the ORR and the SRA. Conditions of the licence require that the TOC must be a party to industry-wide agreements providing for matters such as standard conditions of carriage, through ticketing, allocation among railway operators of liabilities to third parties and arrangements for handling of claims by third parties. By and large, these agreements had the benefit of a direction under section 21(2) of the Restrictive Trade Practices Act 1976 and so are excluded from the Chapter I prohibition in the Competition Act 1998. [22]

  66.  The bus industry is funded largely on commercial revenue from fares and from subsidies received from local authorities. The railway infrastructure, on the other hand, is funded through access charges. All TOCs (both passenger and freight operators) pay a fee for the use of the network and fees for the use of stations and depots. When a train is delayed a performance regime contained in each passenger operator's track access agreement provides for payment of liquidated damages by the company causing the delay. Those contemplating involvement in providing train services see this as a considerable risk.


  67.  There are significant differences between bus and rail services in the scope for effective competition to take place. In particular, the scope for new entry is far more constrained in rail than in bus services.

  68.  First, unlike the bus market where second-hand buses are often readily and relatively cheaply, available, one of the most severe constraints on new passenger train operator entry is the cost and availability of rolling stock. Trains and carriages, even second hand, are expensive and take time to bring onto the network because of stringent health and safety requirements. There is also a national shortage of train drivers, who are expensive to train, and it can be many months before they begin useful service. Bus drivers, on the other hand, are relatively easily obtained and trained.

  69.  Secondly, any bus operator who wishes to operate either a new route or on an existing route, is able, subject to giving the appropriate period of notice to the Traffic Commissioner, to operate whatever routes or services it wishes. Given the nature of the railway infrastructure and the fact that free and open competition is largely impossible on fixed railway lines, the same mechanism is not possible. The industry is therefore governed by the letting of franchises for different geographical operating areas. Passenger rail franchises are contracts with the SRA, and are let at the end of a competitive tendering process conducted by the SRA. Under the franchising process, potential operators compete to offer a range of services over a group of routes. In doing so, potential franchisees need to assess their expectation of the overall costs and revenues which they will be able to achieve, and any adjustment and rebalancing of individual fares that may be appropriate for the purpose. When franchises are let by the SRA, certain fares are controlled by having price caps placed on them ("regulated" fares) while others are left unregulated.

  70.  Franchises are for a specified period of time and demand that the operator meets a minimum level of service to the passenger. At present there are 25 franchises covering England, Scotland and Wales. Most of the franchises create, in effect, monopolies, as the franchise holder will almost invariably be the only passenger operator providing services within the franchise area. To this extent, the franchise holder is not subject to the disciplines of competition on price or level or quality of service, except to the extent that "open access" to the network means that some limited actual competition is conceivable. In order to bring new operators onto the network to meet demand not being served by existing franchisees, open access to the network is required from Railtrack where capacity allows. This means that, in principle, if an operator without a franchise can find an available path on the network which it thinks it can use to offer a commercially viable service, it can apply for access to the network, and providing that it has a passenger operating licence, a safety case accepted by the Health and Safety Executive, and it pays the appropriate access charges, it can run a passenger service.

  71.  For the term of the franchise, therefore, there are limits on the amount of actual competition the holder faces, and there is therefore a virtual lack of potential competition through new entry to the market. This contrasts with the position of many bus operators in the deregulated market.

Agreement on Timetabling

  72.  While, given open access to public roads and the unregulated state of the market, bus service timings and frequencies are not, or, at least, should not be, the subject of agreement, constraints on railway track capacity and the necessary interaction between one service and another create another peculiarity of the rail industry, namely the national timetabling conference. The railway network is a finite resource and there are constraints on the number of trains that can be run. This is a particular problem over busy sections of the track, for example in London and the South East region. In order to try to ensure that track is used to its optimum level, a bi-annual meeting is held when operators and Railtrack negotiate access to the track on a "use it or lose it" basis: an operator with an existing service keeps that slot in the timetable until it no longer uses it. The rail network, like roads, needs to be regularly maintained and upgraded and this work is undertaken during "possessions" of track by Railtrack. It is, however, usually difficult to find alternative routes while work is carried out on the line. To minimise disruption on the network, Railtrack plans its possessions well in advance, and known possessions are incorporated into the timetable at the conference.

Agreement on Fares

  73.  One of the supply side characteristics of the passenger rail industry is the fact that a relatively high proportion of its costs are fixed or common, or both. Fixed costs are the same however many seats are offered to the travelling public. Common costs are incurred when two or more products which cannot be separated are offered: some costs are common between fare types, or between times of day, or between routes, for example. Operators have to recover the costs somehow, and it is likely to be efficient for them to seek to recover more of these costs from groups of customers who are willing and able to pay higher prices, and less from groups who are not. Passenger TOCs therefore seek to price-discriminate. Unlike the bus industry, where fares are generally the same at any time of day, such price discrimination means, for example, that peak fares are more expensive than off-peak. Such discrimination is possible only because the demand side characteristics of the rail industry allow operators to identify the preferences of different groups of travellers and distinguish between them. Where price discrimination is entered into by a dominant firm, however, it may be prohibited by the Chapter II prohibition if it constitutes an abuse of a dominant position.

  74.  As noted above, the fares to be charged by bus operators are not regulated and should be determined independently. Any operators who agree the fares they charge on, for example, common stretches of route will be subject to action under the Chapter I prohibition (unless the agreement falls within the terms of the block exemption). The Railways Act 1993 and Transport Act 2000, however, gave the SRA the power to regulate train fares through franchise agreements. The SRA must regulate fares where it "appears . . . that the interests of [passengers] so require . . . for the purpose of securing that . . . fares . . . charged are . . . reasonable in all the circumstances of the case".[23] The SRA regulates most fares used by commuters and long-distance "Saver" tickets by imposing a "cap" on increases over the price that was charged in June 1995. TOCs are free to set other fares including all first class fares, which are aimed at a premium market, most cheap day returns (generally only available for off peak travel) and advance purchase fares according to normal commercial considerations, subject to the requirements of the Competition Act. Approximately 40 per cent of fare revenue comes from regulated fares.

  75.  The Association of Train Operating Companies (ATOC) operates a number of mandatory and voluntary schemes facilitating integration and national standards within the rail industry. These agreements generally benefit either from an exclusion from the Competition Act (by virtue of having benefited from a direction under the Restrictive Trades Practices Act) or fall within the terms of the block exemption. The agreements cover a range of practices such as the "Railcard" schemes but the most comprehensive and important is the Ticketing and Settlement Agreement (TSA). Among other things, the TSA makes provision for fares types, through fares and inter-available tickets, the retailing of fares and methods of payment, common conditions of carriage and the settlement of accounts. The TSA was seen as essential to the maintenance of a national railway network on privatisation. Any operator wishing to have a passenger licence is effectively required to sign up to it.

Complaints about fares

  76.  Fares do not normally give rise to specific concerns but in 2001 the Rail Regulator received a number of complaints regarding the fares policy of Virgin West Coast following changes made to the level and conditions applying to certain unregulated fares. The complaints alleged excessive prices on various routes. Particular complexity and difficulty attaches to the examination of allegedly excessive prices in the railway industry in circumstances where individual relevant markets comprise part of an overall network, and where particular fares form part of an overall charging matrix, and any determination of the economic value of individual services is likely to call for the allocation of high fixed and common costs.

  77.  The Rail Regulator considers, first, any evidence of excessive profits over the franchise as a whole as an indicator of excessive pricing, and, secondly, a comparison of prices against cost. In the absence of evidence of excessive profits over the whole franchise, the Regulator would proceed with the second tier investigation only where other evidence suggested that the level of a particular fare had no reasonable relationship to the real costs or real value of the product offered. In the absence of such evidence, the Regulator considers he would have no reasonable grounds to suspect a train operator of behaving abusively through charging excessive prices. This was the case in the complaints against Virgin West Coast.


  78.  In the Conclusions and recommendations of its 1999 report into Tendered Bus Services, the Transport Sub-Committee said:

  (g). . .There is confusion about who should be responsible for exposing any anti-competitive practices and this must not be allowed to continue. We recommend that the Office of Fair Trading takes a clear lead in this matter and develops much closer relationships with the tendering authorities in order to gather evidence of illegal activities.

  79.  Prior to publication of the report, the OFT wrote in January 1999 to every local authority in the United Kingdom offering presentations on the powers contained in the then new Competition Act. Seventy-eight authorities had taken up that offer by August 1999, and as a consequence of the recommendation in the 1999 report, my predecessor as Director General then wrote to every tendering authority in the United Kingdom in August 1999 reinforcing his concerns and advising them on action they should take if they suspected that tenders were being rigged. Further presentations have taken place since that time and are still carried out when requested.

  80.  Finally, we would make a general observation about competition and regulation. While the OFT is the key point of reference for (non-rail) transport operators when issues of competition are raised (as we are for virtually all other industries in the UK without a sector regulator), we do not see ourselves as a regulator of the bus industry. We are not, and would not want to be, an "Ofbus", and we do not have the resources to take on such a role. The OFT's role in buses, as in other industries, is to ensure that markets work well in the interests of the general public as consumers.

  81.  Competition is crucial to this. We believe that deregulation has brought large benefits to passengers. The OFT has the job of, among other things, promoting and maintaining the benefits of competition by applying competition law. As well as our activities investigating markets and enforcing the law where breaches are found, that task involves continuing efforts to widen and strengthen understanding of how competition law does, and does not, apply to commercial activity.

John Vickers

Director General Office of Fair Trading

25 April 2002

7   In this memorandum, powers and duties that in law formally belong to the Director General of Fair Trading are for simplicity described as OFT powers and duties. The Enterprise Bill now before Parliament proposes to transfer these powers and duties to the OFT, which will have a board structure, in any event. Back

8   Section 25 of the Act: "The Director may conduct an investigation if there are reasonable grounds for suspecting-(a) that the Chapter I prohibition has been infringed..." Back

9   OFT 423 March 2000. Back

10   SI 2000/293. Back

11   The turnover of the undertaking in the relevant product market and relevant geographic market affected by the infringement in the last financial year. Back

12   that is, where at least one quarter of all the goods or services of a particular description are supplied by or to one and the same person. Back

13   Competition Act 1998 guideline: The Major Provisions, paragraph 13.4. Back

14   that is, where it appears that a number of companies with a collective share of at least a quarter of all the goods or services of the particular description which are supplied in the United Kingdom each follows a practice or practices which prevent, restrict or distort competition in some way. Back

15   The others being market-sharing (considered further elsewhere in this Memorandum), agreements imposing minimum resale prices, and an agreement which is part of a network of similar agreements which have a cumulative effect on the market in question. Back

16   defined for the purposes of the block exemption as "a ticket (or tickets) entitling the holder to make a particular journey on two or more. . . services provided that such a journey is made on complementary services" (that is, services which are not in competition with each other over a substantial part of the route covered by the ticket) Back

17   defined for the purposes of the block exemption as "a ticket (or tickets) entitling the holder, where a journey could be made provided by any two or more operators, to make that journey or any part of it on whichever service the holder chooses". Back

18   either "long distance" or "short distance" add-ons to tickets entitling the purchaser, in effect, to make further journeys on connecting or complementary services. Back

19   The Competition Act 1998 (Public Transport Ticketing Schemes Block Exemption) Order 2001 (SI 2001 No 319). Back

20   that the agreement (i) contributes to improving production or distribution or promoting technical or economic progress; Back

21   The Transport Act 2000 and the Transport (Scotland) Act 2001, however, provide for local authorities to make "quality contract schemes" under which an authority (or authorities acting together) grants an operator exclusive right to provide services in a specified geographical area if that is the only practicable way of implementing the policies set out in the authority's (or authorities') bus strategy. Back

22   Paragraph 2 of Schedule 3 to the Competition Act 1998. Back

23   Railways Act 1993, section 28. Back

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