Joint Committee on Draft Communications Bill Report


(a) The state of competition law

199. One of the foremost and potentially most significant characteristics of OFCOM is that it will exercise a range of powers under competition law across the communications sector.[379] This is a novel development in two ways. First, the application of competition law to broadcasting has hitherto largely been the concern only of the OFT. In future, it will be a concern of OFCOM as a sectoral regulator and of the OFT. Second, competition law in the United Kingdom is changing and, when the Enterprise Bill receives Royal Assent later this year, it will have undergone a transformation in recent years.

200. The main relevant aspects of competition law by the time OFCOM assumes its functions will be as follows:

  • powers in respect of practices that prevent, restrict or distort competition under Chapter 1 of Part 1 of the Competition Act 1998 reflecting EC jurisprudence;
  • powers in respect of conduct abusing a dominant position under Chapter 2 of Part 1 of the Competition Act 1998, also underpinned by EC jurisprudence;
  • powers to refer matters to the Competition Commission for market investigation where the structure of a market, the conduct of firms operating in a market or the conduct of their customers prevents, restricts or distorts competition;
  • powers for the Competition Commission (upon reference by the OFT, but not OFCOM) for the first time to examine mergers against a competition-based test centred around the concept of "a substantial lessening of competition";
  • powers for the OFT to investigate, and the Serious Fraud Office to prosecute, individuals who dishonestly engage in cartel agreements (the so-called "hard-core cartels" offence); and
  • powers to strengthen consumer protection by giving enforcement bodies enhanced powers to obtain court orders against businesses not complying with their legal obligations to consumers.[380]

201. The novelty and range of these powers was emphasised by several witnesses. The ITC said that, "in place of the hotchpotch of current competition powers held by the existing regulators, OFCOM will have the modern, best-practice competition powers" with "real bite" that can be used "along the value chain from rights acquisition, through programming, infrastructure and distribution".[381] Competition law gives those exercising such functions extensive powers in the conduct of investigation - including the right to undertake "dawn raids" - and in the punishment of past behaviour.[382] Since the Competition Act came into force in 2000, competition law has had "serious penalties" with the potential for deterrent effect.[383] It includes a capacity to impose interim measures that respond to past concerns that competition law shut the door after the horse had bolted. As Don Cruickshank argued, only now is the United Kingdom acquiring a system of competition law "worthy of its name" and developing a culture of enforcement to match.[384]

202. For many years economic regulation of the communications sector has been hamstrung by the deficiencies of competition law and its enforcement. The modernisation of that law, coupled with the creation of OFCOM as a sector-specific regulator with competition law powers across the communications sector, provides a crucial opportunity to transform the context in which sector-specific powers, licensing powers and media ownership controls are judged.

(b) The balance of sector-specific and competition law powers

203. As we have already noted when considering SMP conditions, concern has been expressed about the balance in usage between the sector-specific powers granted to OFCOM and powers under competition law. The Government's position is as follows:

204. John Vickers, the Director-General of Fair Trading, agreed that there were features of the communications industry, including the presence in telecommunications of a former nationalised monopoly, that made sector-specific regulation "important to retain for the time being".[386] David Edmonds of Oftel supported the trend towards greater use of competition law powers and stressed the value of being able to choose between the two different approaches.[387] Since he gave evidence, David Edmonds has made a statement that Oftel's objective "is to use the Competition Act wherever possible", with investigations being conducted in accordance with that Act from the start when possible contravention of both regimes is under consideration.[388]

205. We view this very recent announcement by Oftel as a welcome development. David Melville of Freeserve thought that, in recent times, Oftel had been uncertain which route to follow. He said that this had meant that "companies who wish to bring complaints are facing a serious difficulty as well".[389]

206. The switch in focus of regulatory action from sector-specific powers to competition law powers may provide a basis for due consideration by the appropriate authorities of an issue that arose in our inquiry. It was suggested by more than one witness that problems of dominance, and potentially of abuse of dominance, would continue to arise even in new markets while BT retained its ownership of the key components of the telecommunications infrastructure.[390] BT argued that any attempt to divide the infrastructure from services to the customer would be economically counter-productive.[391] Given the current significance of the development of broadband, this debate about the position of BT remains of crucial importance. We are convinced that all these arguments could and should be considered more effectively by OFCOM from inception, with the competition authorities, by applying the new competition laws.

207. In the light of the experience of Oftel, we are sympathetic to the argument that OFCOM ought to be encouraged down the path to competition law regulation wherever possible and required to signal clearly its decisions on which path to follow.[392] The Better Regulation Task Force noted concern that competition law would remain under-used by sectoral regulators without further measures to encourage its use.[393] The Government argues that this judgement is ultimately for regulators.[394] We consider that the legislative framework can influence this judgement, for better or for worse. We have already made recommendations with a view to strengthening the duty on OFCOM to assess whether markets are "effectively competitive" and thus subject to competition law and not sector-specific regulation. We also consider that the draft Bill could be clearer in emphasising the value of exercising competition law in some cases where a market is not effectively competitive. In some circumstances, a reference to the Competition Commission for market investigation may facilitate remedies wider in scope and more structural in nature than sector-specific conditions. Clause 74(10) requires OFCOM, before enforcing contravention of conditions, to decide whether or not "the most appropriate way of proceeding in relation to the contravention in question would be under the Competition Act". There appears to be no equivalent provision relating to the setting of conditions. We recommend that, before setting conditions of a discretionary character under Clause 35, OFCOM be required to decide whether the more appropriate way of proceeding would be under the Competition Act or Enterprise Act and to give reasons for their decision.

208. During our inquiry several witnesses expressed concern about the potential for confusion arising from the exercise of competition law powers by both OFCOM and the OFT. NTL feared divergent interpretations of competition law.[395] Reference was also made to "jurisdictional overlaps" and potential for "double jeopardy".[396] The OFT and Oftel, who operate with concurrent powers at the moment, denied that there is or will be a problem. They argued that the principle of "the best-placed acts" worked satisfactorily. In general terms, except where OFT's specialist skills relating to cartels are called for, responsibility will normally fall to OFCOM.[397] A system of guidelines and secondary legislation, together with the Concurrency Working Group, are in place to ensure full co-ordination and transparency.[398] We have seen no convincing evidence to indicate that there will be a problem for the regulators or those in the market with regard to the division of labour between OFCOM and the OFT and we see no need for further provision in the Bill on this matter.

209. A more practical problem was raised by Don Cruickshank and others about whether OFCOM would have sufficient specialist skills in competition law to perform those functions effectively.[399] We see it as absolutely essential, if the arrangements proposed in the draft Bill are to work and if the shift that the Government wishes to see away from sector-specific regulation towards competition law is to happen, that OFCOM's structure and resources reflect the high priority of competition law functions. We have already recommended that separate arrangements for Exchequer funding of competition law functions be established. Although the internal structure of OFCOM should not be set out in the Bill, we view the proposed place for competition law functions in the proposals of the Towers Perrin Report as wholly unsatisfactory. The establishment at the very heart of OFCOM's structure of a properly resourced competition unit, with the full complement of skills and the will to use competition law functions effectively, will be crucial to the new regulator's success. If the Government's aim for less regulation is to be achieved, there must be swifter and better regulation under competition law. If OFCOM lacks the expertise to use competition law optimally, it will fall back on the devil it knows in the form of sector-specific powers, whether or not it is appropriate to do so.

(c) Competition law and broadcasting

210. The debate about the role of competition law and the balance between sector-specific and competition law powers is sometimes conducted as if it relates solely to networks and services. This is partly because Oftel already has concurrent powers and because there is a clear relationship between concepts in the sector-specific powers under Chapter 1 of Part 2 and those of competition law. However, the same principles of competition law powers held by a sector-specific regulator and a balance needing to be struck with sector-specific powers (namely licensing) will apply in future in the broadcast sector, where competition law powers have been exercised hitherto almost exclusively by the OFT.[400] In the future, on the principle that "best-placed acts", most broadcasting cases will fall to OFCOM.[401]

211. Patricia Hodgson of the ITC argued that OFCOM's combination of media expertise and competition law powers could lead to a significant change in the way broadcasting is affected by competition law: "I would expect and hope that [OFCOM] will act swiftly and effectively and we may see quite an impact as a result of that".[402] Derek Morris also referred to the possibility that OFCOM might refer broadcasting matters to the Competition Commission for market investigation.[403]

212. The impact of competition law in broadcasting is greatly affected by the dominant market role of a publicly-funded broadcaster in the shape of the BBC. In essence, the BBC is subject to competition law insofar as it is acting as an "undertaking"; this concept includes all of the BBC's commercial activities, and does not necessarily exclude its public service activities.[404] As far as the BBC's behaviour in the market is concerned, all BBC economic activities are subject to consideration, but the competition authorities must have regard to the extent to which enforcement of competition law would obstruct performance of the BBC's public service broadcasting functions.[405] Derek Morris of the Competition Commission argued that such judgements could be made more easily if the public interest role of the BBC were more clearly laid down.[406] In reply, the BBC contended that the Royal Charter, the Agreement and approvals for individual services provided a clear remit already.[407]

213. As we understand it, the effect of scrutiny of the BBC through competition law can be threefold:

  • to ensure that there is no contravention of State Aid rules by subsidisation of commercial activities from licence fee income;
  • to ensure that, where public services are publicly funded by the licence fee, the impact on the market (strictly the adverse effects on competition) are the minimum necessary for delivery of the BBC's public service obligations; and
  • to ensure that, in its economic impacts or commercial activity, the BBC does not enter into agreements which are intended to prevent, restrict or distort competition (the Chapter I prohibition) or exercises its dominance in a market in a way which prevents, restricts or distorts competition (the Chapter II prohibition).

214. In addition, the BBC's own Fair Trading Commitment and commercial policy guidelines do two things: (a) reflect how, in practice, the BBC ensures its compliance with competition requirements; and (b) reflect the BBC's own view of how its public services purposes should additionally be reflected in its activities, for example, by protecting the BBC brand against inappropriate use. Although the Board of Governors is responsible for enforcement of the Fair Trading Commitment, there is no external accountability for it in doing so. However, insofar as the Fair Trading Commitment, or commercial policy guidelines, represent a recognition by the BBC that fulfilment of its public service remit is fully consistent with arms-length trading internally, market pricing and commercial-style agreements, then it will be relevant to a competition-based investigation of any complaint and the judgement of the extent to which the BBC may be required to act without any anti-competitive effects.

215. Insofar as the purpose of the BBC Fair Trading Commitment is to reflect how the BBC complies with Competition and State Aid requirements, we believe that, in future, it will be directly relevant to consideration by OFCOM of complaints of anti-competitive effects resulting from BBC activities and will therefore, to that extent, be enforced by OFCOM in applying its concurrent powers. More generally, there remain a number of unanswered questions about the precise extent to which the BBC's public service broadcasting functions justify market behaviour that might otherwise be subject to examination under competition law. We return to an important aspect of this problem at a later stage in this Report in relation to the BBC's operations in the programme supply market.

216. The application of competition law to broadcasting by a sectoral regulator has the potential to play a part in the regulatory response to some of the economic challenges facing broadcasting that we will examine in more detail later in this Report. We consider it particularly important that this application extends to broadcasting and related activities as a whole, including those concerned principally with the creation of content, and not simply to the regulated broadcasters. Tessa Jowell agreed that OFCOM should be able to look at the content supply market.[408] We are concerned that the term "broadcasting and related matters" in Clause 246(1)(e) may create doubt about the scope of OFCOM's powers in this regard. We recommend that Clause 246 be amended to provide OFCOM with appropriate discretion in interpreting the scope of its competition law functions in broadcasting and related matters, including the creation and distribution of broadcast content.

217. We consider clarification and certainty on the scope of competition law powers of OFCOM in respect of the content supply market important, because we return to the role that such powers could play in future when we examine the economics and regulation of content production.

379   Policy, para 5.3.1; Clauses 246-249. Back

380   Ev 410-412; Enterprise Bill Explanatory Notes, paras 126, 445. Back

381   Ev 3, para 7. Back

382   Oftel's Competition Act Strategy, A statement by the Director General of Telecommunications, 1 July 2002, pp 5-7; Ev 457, para 4.2. Back

383   QQ 157, 175, 181. Back

384   QQ 872, 876. Back

385   Policy, para 5.3.3. Back

386   Q 162. Back

387   QQ 92, 97-99. Back

388   Oftel's Competition Act Strategy, p 3. Back

389   Q 352. Back

390   QQ 221, 263-264; Ev 87-89. Back

391   Q 291. Back

392   Q 232. Back

393   Economic Regulators, p 22. Back

394   Economic Regulators: Government Response, para 49. Back

395   Q 231. Back

396   Q 233; Ev 85. Back

397   QQ 105-107, 153, 165, 189; Policy, para 5.3.2. Back

398   Competition Act 1998: Concurrent application to regulated industries, OFT 405, January 2001; EN, paras 420-422. Back

399   QQ 235, 382, 876. Back

400   Policy, para 5.3.2. Back

401   "Competition policy and broadcasting", speech by John Vickers at the Institute of Economic Affairs conference on the future of broadcasting, 24 June 2002. Back

402   QQ 12, 13. Back

403   Q 175. Back

404   Ev 383; QQ 166, 167. Back

405   Ev 383; Memorandum submitted by BBC. Back

406   Q 175. Back

407   Memorandum submitted by BBC. Back

408   Q 1019. Back

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