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.
COMPETITION ACT
1998
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.
THE TRANSPORT
ACT 2000 AND
THE TRANSPORT
(SCOTLAND) ACT
2001
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.
THE MERGER
PROVISIONS OF
THE FAIR
TRADING ACT
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.
1. DETAILS OF
RULINGS MADE
ON ANTI-COMPETITIVE
BEHAVIOUR SINCE
THE 1999 TRANSPORT
COMMITTEE REPORT
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.
2. THE OFT'S
VIEW AND
RECENT EVIDENCE
ON COMPETITION
CONCERNS RESULTING
FROM MERGERS
WITHIN THE
BUS INDUSTRY
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.
Airlinks/Airbus
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.
3. OFT'S POLICY
AND RULINGS
ON COMMON
FARE STRUCTURES
AND CO
-ORDINATED TIMETABLING
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.
4. IN THE
LIGHT OF
THE "COMPLAIN,
DON'T
NOTIFY" POLICY,
INFORMATION ABOUT
JUSTIFIED COMPLAINTS,
REQUESTS FOR
INFORMATION ETC
PARTICULARLY AS
TO HOW
WELL THE
BLOCK EXEMPTION
IS WORKING
IN PRACTICE
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.
5. A SUMMARY
OF THE
NUMBER OF
APPLICATIONS (FOR
DECISION OR
GUIDANCE) ON
MATTERS SUCH
AS CO
-ORDINATED TIMETABLING
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.
6. THE DIFFERENCES
BETWEEN THE
BUS AND
RAIL MARKET
THAT MAKE
THE APPLICATION
OF THE
CA98 TO COMMON
FARE STRUCTURES
AND TIMETABLING
DISTINCT BETWEEN
THE TWO
MODES
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.
Competition
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.
7. ANY OTHER
FURTHER BACKGROUND
INFORMATION AND
DETAILS ABOUT
OTHER ASPECTS
OF REGULATION
OF THE
BUS INDUSTRY
WORTHY OF
ATTENTION
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
on....services 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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