Supplementary memorandum by the Office
of Fair Trading (RR 34)
RURAL RAILWAYS
PURPOSE OF
THIS DOCUMENT
1. In this memorandum, we clarify and expand
on some of the issues raised during the above inquiry which we
hope will aid the Committee's understanding of the role of the
OFT in transport issues. We first provide some background information
on the legal framework which underpins the OFT's work and how
the OFT applies competition law to the bus and rail industries.
We then provide some further information on some of the specific
issues raised during the inquiry, including the ticketing schemes
block exemption, whether coordination of bus services is allowed,
the approach to benefits assessment employed by the OFT and whether
journeys by car and bus can be considered substitutes.
BACKGROUND INFORMATION
The legal framework
2. The Competition Act 1998 (CA98) contains
two prohibitions. The Chapter I prohibition is against agreements
between undertakings, decisions by associations of undertakings
or concerted practices which have the object or effect of preventing,
restricting or distorting competition in the UK.[4]
The Chapter II prohibition is against conduct by one or more undertakings
which amounts to the abuse of a dominant position in a market
in the UK. Abuses may be exploitative (such as excessive pricing)
or exclusionary, designed to exclude competitors from the market.
The OFT considers it is unlikely that an individual undertaking
will be dominant in its market with a market share of less than
40%.[5]
3. Since the introduction of the Enterprise
Act 2002 (EA02) the OFT is now also the first decision making
body for UK mergers. Mergers are either cleared by the OFT, or
referred to the Competition Commission for further analysis. Under
the EA02, the OFT also has the power to investigate markets that
may not be working well for consumers. This can be done either
if a "super-complaint"[6]
is made to the OFT or the OFT has reason to believe that a particular
market may not be working well. The EA02 also makes dishonestly
engaging in cartel activities—agreeing with competitors
to fix prices, limit production, rig bids or share markets—a
criminal offence.
4. In addition, the OFT is responsible for
competition functions established for the transport sector under
the Transport Act (2000) and the Transport (Scotland) Act 2001.
How the OFT applies competition law to the bus
and rail industries
5. The OFT applies competition law to the
transport sectors as it would to any other industry. However,
with respect to the rail industry, the OFT has concurrent powers
with the Office of the Rail Regulator (ORR) to apply the CA98.
The OFT has an understanding with the ORR that in purely rail
related matters, the ORR will take the lead. However, the ORR
consults with the OFT on matters that may be of mutual interest.
6. The OFT's role is to ensure firms' behaviour
is consistent with competition law, and to promote consumer benefit
by making markets work well. The OFT does not have power to implement
wider transport policy objectives but it may, where those objectives
are consistent with competition law, explain to industry how best
to meet them. This is consistent with its role in making markets
work well. The OFT also meets regularly with the relevant teams
at the Department for Transport to discuss issues of policy and
implementation.
7. The OFT has published a number of guidelines
which explain the application of competition law, a pamphlet outlining
how competition law applied to the bus industry and some answers
to Frequently Asked Questions.
SPECIFIC ISSUES
RAISED BY
THE TRANSPORT
SELECT COMMITTEE
Public Transport Ticketing Schemes Block Exemption
8. Although agreements that restrict competition
are prohibited under Chapter I of the CA98, the prohibition does
not apply if the agreements also deliver benefits to consumers
and do not impose unnecessary restrictions or eliminate competition
(as set out in section 9(1) of the CA98). In addition, the OFT
may recommend that the Secretary of State make a "block exemption"
which specifies that a particular category of agreement will be
automatically exempt from the Chapter I prohibition, providing
certain conditions are met.
9. The Public Transport Ticketing Schemes
Block Exemption (PTTSBE) relates to schemes providing various
types of inter-operator tickets. The PTTSBE sets out a number
of conditions as to how compliant schemes must operate,[7]
which are designed to ensure that the schemes actually benefit
consumers and competition concerns are minimised. Participants
in a scheme do not need to apply to the OFT for a decision as
to whether a compliant scheme meets the conditions, but the OFT
is prepared to give informal guidance to operators, local authorities
and other relevant parties. Most of the ticketing agreements that
the OFT has advised on do meet the conditions for the block exemption,
with only a few requiring minor modification.
10. The PTTSBE came into force on 1 March
2001 and will expire in April 2006. In 2003 however, the OFT conducted
a wide ranging review of the PTTSBE to examine its effectiveness.
The conclusion was that the PTTSBE is working, but there are some
key conditions that could be relaxed to facilitate establishing
integrated ticketing schemes while maintaining the benefits of
competition. The OFT intends to consult on these changes in early
2005.
Co-ordination of timings
11. There is some concern within the bus
industry that the Chapter I prohibition on anti-competitive agreements
prevents operators from coordinating timings. This is not accurate
in a wide number of cases. Operators are free to coordinate timetables
for connecting services which do not overlap, as this will not
dampen competition between these operators. However, on routes
that do overlap significantly, and therefore are in competition,
the OFT's position is that coordination on such routes is a form
of market sharing and is thus caught by the Chapter I prohibition.
This is because coordination of timetables, like any form of market
sharing, is likely to lead to restrictions in capacity in the
long-term and may push up prices for passengers. In addition,
agreements between existing operators on timetables can make it
difficult for potential new operators to join the market, and
hence undermine the competitive process.
12. As part of our 2003 review into the
PTTSBE, we considered the issue of equal headways and did not
find evidence that any problems concerning "bus-bunching"
arise from competition law. However, the OFT has recognised that
co-ordination may be hampered by the 56 days' notice period required
for timetable changes. In order to overcome this while ensuring
that competition is not dampened, we have suggested operators
may communicate their changes to other operators at the same time
as they inform the Traffic Commissioner. More guidance will be
available on this when the OFT consults on the PTTSBE.
Approach to benefits assessment
13. There are different approaches to assessing
the benefits of any proposed arrangement. Such approaches include
public interest tests and economic benefits tests. Economic benefits
tests aim to quantify the benefits to consumers that will directly
result from a proposed agreement.
14. As noted above, the Chapter I prohibition
does not apply if agreements deliver benefits to consumers and
do not impose unnecessary restrictions or eliminate competition.
For benefits to be included in the OFT's analysis, they must flow
directly from the agreement. The most important benefits are usually
reductions in price or improvements to service or quality levels,
but wider benefits, such as environmental ones, may be considered.
The benefits do not need to be received by the direct customers,
but can be received by potential future customers or others affected
by the agreement. For example, in the case of public transport
ticketing schemes, the OFT takes into account the reductions in
road congestion and pollution that arise as well as the lower
fares and improved services that passengers receive.
Cars and buses as substitutes
15. The Committee has questioned the conclusion
reached by competition authorities regarding the degree of substitutability
between cars and buses. Firstly, the conclusions reached regarding
market definition are specific to the facts of each case[8]
so a general conclusion is not possible. However, in the markets
analysed to date, the OFT has concluded that cars and buses are
not generally substitutes. These conclusions relate to whether
buses and cars are sufficiently substitutable to be part of the
same "economic market". This would require buses and
cars to be close enough substitutes to discipline the fares that
can be charged by bus operators. In our experience, most bus passengers
are not able to (or find it difficult to) switch to using cars
instead (for example, because they do not have access to a car
or parking facilities at their destination) and this limits the
constraint that potential car use exercises on bus fares.
16. It is important to recognise that, in
concluding that cars and buses are not part of the same economic
market, OFT is not making any conclusions about the overall desirability
or feasibility of encouraging greater use of public transport.
However, as noted above, OFT has taken account of the economic
benefits that encouraging such a shift can have (through the establishment
of integrated ticketing schemes) both for the passengers that
use these services and for the public more generally.
24 January 2005
4 Agreements do not have to be written down and may
be in the form of "gentlemen's agreements". Back
5
European Guidance suggests dominance can be assumed if the undertaking
has a market share of more than 50%. Back
6
A super-complaint is a complaint made by a designated consumer
body, such as the Consumers Association. Back
7
Failure to comply with the conditions means the block exemption
in relation to that particular agreement will not apply. Back
8
For each case, the characteristics of the journeys, relative
prices of cars and buses and other factors are all considered
by the OFT in arriving at its final decision. Back
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