Examination of Witnesses (Questions 395-399)
31 MARCH 2004
MS PENNY
BOYS, MR
ALAN WILLIAMS,
MR BOB
GADDES AND
MR COLIN
FARTHING
Q395 Chairman: Good afternoon, everyone.
Firstly, could I apologise for keeping you waiting. Unfortunately,
in this place there are occasionally things which get in the way
of a Select Committee inquiry. I think you are very aware of what
we are doing and I hope you are aware of the reason for calling
you in, because it seemed as though you were rather like Banquo's
ghost where all the time everybody kept referring to you in not
always flattering descriptions but you were there. So we thought
it was very important to extend our inquiry and to take evidence
from yourselves. Just to help us on our way, I think it would
be very useful if you could each introduce yourselves and just
say which area within that OFT or Competition Commission you tend
to reside within.
Ms Boys: Thank you very much and
thank you for the opportunity to dispel misconceptions. I am Penny
Boys, the executive director of the Office of Fair Trading.
Mr Williams: I am Alan Williams.
I am the director of the Competition Enforcement branch which
has responsibility for agricultural industries.
Mr Gaddes: I am Bob Gaddes. I
am a deputy director within the Mergers Branch of the Office of
Fair Trading.
Mr Farthing: I am Colin Farthing,
representing the Competition Commission. I am an inquiry director.
Q396 Chairman: I know it is three to
one, but you will chip in, I am sure, as needed. Could I just
start with a very obvious question. Because we are represented
by two organisations I think it would be very useful to get just
an overview of what you have done in recent times with regard
to milk price inquiries and also the relationship between yourselves
because sometimes the OFT is used in evidence when we are talking
about the Competition Commission and visa versa.
Ms Boys: Shall I start off with
a brief outline of our role in relation to the dairy sector and
then leave Colin to speak for the Competition Commission? In the
OFT our role centres on markets and effective competition, so
we do not hold a brief for any particular part of the economy.
What we are concentrating on is the competitive process and aiming
at it delivering best value to consumers. On mergers we are the
frontline authority, so we clear the great majority of mergers
but if we see that there might be a problem involving the substantial
lessening of competition, which is now the test for mergers, we
refer those mergers to the Competition Commission. One recent
example of a clearance in the dairy sector is a merger between
three milk cooperatives and their acquisition of a processing
plant in Westbury, which we cleared because there were no competition
problems that we foresaw. Apart from our mergers work, we enforce
competition law, which is European competition law applying throughout
Europe, not especially to the UK. Competition law prohibits anti-competitive
agreements (most obviously price-fixing) and also it prohibits
the abuse of a dominant position. For those parts of the law we
make decisions in accordance with European law and those decisions
are subject to appeal and challenge through a separate body, the
Competition Appeal Tribunal, and the court system, not the Competition
Commission. I do agree with you there does seem to be a perception
amongst farmers that we are somehow anti vertical deals or expansion
by cooperatives or efforts by farmers to secure better value down
the supply chain for their produce, but nothing could be further
from the truth so far as we are concerned. Most forms of vertical
collaboration bring benefits and they very rarely cause competition
problems unless the people concerned have significant market power.
There are other forms of collaboration between farmers which do
not necessarily involve anti-competitive features in agreements
or where special arrangements can be made. We have also got to
bear in mind, of course, the objectives of the Common Agricultural
Policy when we make our competition assessment. There have not
been any decisions by us that particular agreements between farmers
offend the prohibitions, nor have we had an abuse of dominance
case. We have investigated allegations of cartels and an abuse
of dominance amongst dairy companies (not farmers) and at least
two of those cases are presently before the Competition Appeal
Tribunal. Another of our roles where we do have a closer relation
with the Competition Commission is in enforcing and negotiating
remedies which come out of Competition Commission reports into
the market as a whole. An example of that, which I am sure you
will probably want to hear more about, is the supermarkets code
That results from a report the Competition Commission did in the
year 2000 and our role has been in negotiating the code and then
most recently in reviewing it and deciding that it was an open
question whether it was effective or not and that the best thing
to do in those circumstances was to commission a compliance audit.
We will be reporting further on that in the autumn. There is a
lot more I could say but I suspect it will come out in questions.
Q397 Chairman: It would be useful to
hear from Mr Farthing.
Mr Farthing: The Competition Commission
is an independent body which was established under the Competition
Act in 1998 and superseded the old Monopolies and Mergers Commission
in 1999. It is made up of about 50 members, who are part-timers.
They serve eight year periods and they are headed by a chairman
and two deputies. Our role is simply to carry out inquiries and
produce reports. We work in three areas, one is mergers, another
is what is now called market inquiries (formerly monopoly inquiries)
and the third is economic (including price) regulation inquiries
for some of the regulated industry sectors. Over the last few
years, since 1992, we have looked at five cases which have involved
milk. Three of them have related to proposed mergers and the other
two have been monopoly inquiries. I think it is important to stress
that we have no powers to conduct inquiries on our own initiative.
Everything we do, every inquiry we undertake is a response to
a reference made to us by somebody else. This is normally the
Office of Fair Trading but under certain circumstances the Secretary
of State for Trade and Industry or other ministers, or industry
regulators can make references to us, but we cannot do anything
on our own initiative. We have had a number of changes in our
role and powers as a result of the Enterprise Act, which came
into effect in June of last year. One of these is that we are
now determinative in mergers and market investigations which are
referred to us by the OFT and ministers who used to have this
role have now relinquished it except in a few public interest
cases. We have also had a change in the test that we have to apply
in carrying out our inquiries. We used to look at whether or not
something was against the public interest. We now have two separate
tests, one for mergers, where we have to decide whether the thing
before us is likely to result, or can be expected to result, in
a substantial lessening of competition, and if it is a market
case we have to judge whether any features or combination of features
in a UK market prevent, restrict or distort competition. The final
thing is that we have now been given responsibility, as I think
Penny said, for negotiating and implementing our own remedies
in future. This is something the OFT did in the past. So ministers
will no longer be responsible for taking decisions about remedies
on the basis of our recommendations and the OFT will no longer
have to implement or negotiate them, although the OFT will retain
a monitoring role. As for the issue of vertical integration in
the dairy industry, which I know you are interested in, the only
one of our reports to have addressed this issue in any direct
way is one which we produced in 1999, a milk inquiry. In this
we decided that Milk Marque, which was the main body in England
and Wales at the time, was a scale monopolist by virtue of its
size. It had 49.6% of the supply of milk. We also identified that
it had been exploiting this monopoly position in the way it price
discriminated and in the way it sought to control the supply of
milk being made available to the market. So in that case vertical
integration per se was not an issue. I think this becomes
clear if you then go on to read the remedy in the report, which
was that Milk Marque should be divided into a number of independent
quota-holding bodies with an approximately equal share of the
old Milk Marque supply of milk. The report then goes on to explain
that the smaller bodies, the successor bodies, should be allowed
to engage in their own processing as in the absence of market
power this should not prove to be a threat to competition. The
report also makes it clear that the MMC in those days shared Milk
Marque's view that vertically integrated structures in the milk
industry may be desirable if they facilitate the passing on of
CAP subsidies to farmers. It also added that vertical integration
set within a competitive framework may have potential to align
the interests of producers and processors, provide incentive to
innovation and win shares in the final product market and that
this should be likely to encourage a more commercial approach
that respected consumer's needs. So I think it is clear from what
we said in that report that we have no predisposition against
vertical structures in the dairy industry. We have also produced
some general guidelines which indicate our attitude to vertical
integration across the piece, not just in the dairy sector, and
again I think that makes it clear that generally vertical integration
will only raise competition issue where the firms involved are
able to exercise a substantial level of market power in one or
more markets along the supply chain. So I think in our general
approach too it would be difficult to identify any kind of predisposition
against vertical structures.
Q398 Chairman: Thank you for that. I
think it would help the Sub-Committee if you were to both send
us just a list of the number of inquiries in relation to the milk
industry you have been involved in over the last decade. I was
given information before this session, for example, that OFT is
involved in an inquiry looking into the British Friesian Association.
I do not quite know what that implies but it would be useful to
know the degree to which you have had that number of inquiries.
Ms Boys: Certainly.
Q399 Chairman: Could I just add one quick
follow up, which fascinates me. You have done an awful lot of
work on milk. To what degree is milk fixed within a normal industry
situation where you have a small number of relatively large performers?
Is that the norm of other industries or is milk very much an industry
which sits in its own isolated situation?
Ms Boys: There are very distinctive
features that one does see in the milk market. There are 25,000
farmers, a much smaller number of large processors, of course
not exclusively so but three large processors. Then so many sales
have switched to supermarkets and the supermarkets' reliance almost
exclusively on the three dairy companies for buying in their milk
supplies. Of course that is not a description which is intended
to eliminate other things, but those are the main features. Whether
one can think of other situations where production is as fragmented
is a difficult question. There are certainly many other suppliers
and producers selling through supermarkets who think they have
problems, as was evinced in the Competition Commission's supermarkets
report and which led to the decision to have a supermarkets code.
Alan, would you like to add anything from your perception?
Mr Williams: Yes. Milk market
certainly has distinctive features. I would doubt whether it is
unique, though, and probably other agricultural markets have some
similar features as well. There may be others in other sectors,
though offhand I could not say which. It is not the norm but I
doubt whether it is the only industry with that kind of structure.
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