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Lord Avebury: My Lords, perhaps I may ask the Minister one question. Are there any implications for the pension rights of employees in the two halves that are coming together? Are their pension rights at present identical; or will there be a scheme to assimilate the rights of both sets of employees? If that is so, will there be there a "no detriment" clause?

Lord Sainsbury of Turville: My Lords, I believe the situation is that employees will retain the pension rights that they currently have and that there will not be a change. There is no significant difference between the DTI and the Inland Revenue on that point.

The Government believe that the transfer will be warmly welcomed by the oil companies which pay royalty on their production from North Sea oilfields. The established success of the province owes a great deal to the pragmatic partnership that government has formed with producers. This modest proposal is very much in that spirit of practicality and pragmatism. The order will permit an important rationalisation of royalty collection functions. I commend it to the House.

On Question, Motion agreed to.

Competition Act 1998 (Determination of Turnover for Penalties) Order 2000

Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000

9.15 p.m.

Lord Sainsbury of Turville rose to move, That the draft orders laid before the House on 19th January be approved [7th Report from the Joint Committee].

The noble Lord said: We are here to debate two orders which will complete the overhaul of our competition regime that we promised in our manifesto. We said that we would adopt a tough "prohibitive"

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approach to deter anti-competitive practices and abuses of market power. The Competition Act, when it comes into force on 1st March 2000, will deliver that.

The two orders before us are concerned with helping to build an efficient, focused and effective regulatory system to enforce the prohibition. One obstacle to that is the risk that the competition authorities, the Director-General of Fair Trading and the utility regulators with concurrent powers under the Act, will be faced with the notification of a large number of benign agreements and will inevitably spend their time processing those rather than, as we would wish them to do, tracking down cartels. It is, of course, in the nature of cartels that they themselves will not be notified!

There is practical evidence of the existence of such a risk of excessive precautionary notifications. When what are now Articles 81 and 82 of the treaty came into force, the European Commission received thousands of notifications. And when the Irish Government introduced a domestic prohibition modelled on Article 81, their Competition Authority was inundated with notifications of leases for shops.

I know that your Lordships recognised that risk during the passage of the Bill, and Section 50 was incorporated to give express power to define and exclude land and vertical agreements from the Chapter I prohibitions.

The Land and Vertical Agreements Exclusion Order does that. Its purpose is to remove any need to notify such agreements to the OFT or regulators on a precautionary basis, while putting in place mechanisms to deal with any agreements within the categories that do raise competition concerns. The regulatory system will be more efficient if the competition authorities are able to focus on and deal with those agreements that do affect competition significantly and adversely.

So far as land agreements are concerned, the order will disapply the prohibition in respect of agreements which create, alter, transfer or terminate an interest in land--for example, a lease--together with certain obligations or restrictions which are part of the agreement and which are accepted in the party's capacity as holder of an interest in land, or benefit him in that capacity. Examples of these are the usual covenants in commercial property agreements relating to the payment of rent, service charges, obligations to insure the property and clauses on the use to which the property is to be put. Our purpose is to exclude the normal restrictions and obligations to be found, for example, in shopping centre leases which we do not think are likely to affect competition appreciably but which may well be notified to the OFT on a precautionary basis.

There is, similarly, a good case to exclude vertical agreements. Broadly, these are agreements between a supplier and business customer or dealer concerning the use or marketing of the goods or services supplied. They are less likely to raise competition concerns than horizontal agreements between businesses at the same level of trade, for example, two manufacturers of a

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product. The prevailing view among economists is that vertical agreements will have only beneficial effects, such as stimulating inter-brand competition, except in some cases where one or more of the parties has market power or, sometimes, there is a network of similar agreements. Even in such cases careful examination of the market and the other circumstances is needed to establish whether the vertical agreement has a harmful effect. We need to exclude the mass of vertical agreements from scrutiny while providing powers to investigate and deal with those which may cause competition concern.

The text of our definition of vertical agreements is closely modelled on the new Commission block exemption for vertical agreements which will apply from 1st June. In particular, I draw your Lordships' attention to the definition of price-fixing, which we have largely drawn from the Commission, in Article 4 of the order. It is the possibility that vertical agreements may facilitate price-fixing, such as resale price maintenance, which has led some to look at them suspiciously. We and the Commission have adopted wide definitions to ensure that not only the most overt forms of price-fixing but also the more subtle forms of pressure or incentives cause an agreement to fall outside the exclusion and hence within the prohibition.

We have, however, thought it right to go wider than the Commission in excluding vertical agreements. We have not adopted all of the qualifications that the Commission has in its block exemption, such as market share tests, and that approach was supported when we consulted on a draft order. We can be more relaxed than the Commission because its concern that vertical agreements do not divide the single market on national grounds is not relevant to the Chapter I prohibition. In almost every case in which the Commission has taken action against vertical agreements single market considerations have been the predominant or only concern.

We also believe that we have more effective safeguards than those available to the Commission to deal with any vertical agreements that cause competition concerns domestically. In particular, we have provided a more effective withdrawal power in Article 7 which will enable the director-general to "clawback" from the exclusion and deal with individual agreements that raise competition concerns. We also have the complex monopoly power in the Fair Trading Act, to which there is no real equivalent at Community level, which will enable networks of vertical agreements, which may in combination have an effect on a market, to be investigated and remedies imposed.

With these powerful safeguards in place, we conclude that to exclude land and vertical agreements will enable the new competition regime to be more effective and efficient in dealing with matters of real competition concern, including any vertical and land agreements which fall into this category, than it would be if the OFT and the regulators became bogged down in the detailed scrutiny of what will usually prove to be benign agreements.

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I turn now to the turnover for penalties order. Section 36 of the Act enables the director-general to require an undertaking to pay him a penalty in respect of an infringement of either of the Act's prohibitions. Subsection (8) provides that no penalty fixed by him may exceed 10 per cent of the turnover of the undertaking as determined in accordance with such provisions as may be specified by the Secretary of State. This order specifies how the turnover is to be determined.

I should emphasise that the actual penalty in any particular case will be determined by the circumstances and in the light of the DGFT's guidance on the appropriate amount of any penalty. This sets out the steps which the director will follow when calculating the amount of penalty in any case. The steps encompass, among other factors, consideration of such matters as the undertaking's turnover in the relevant product and geographic market, the nature and duration of the infringement, and the size of any gain made. One step involves adjustment for any aggravating factors such as the involvement of directors and senior managers and repeated infringement, and any mitigating factors such as acting under duress, genuine uncertainty as to whether an agreement constituted an infringement, and negligent, as opposed to intentional, infringement. Any penalty may then need to be adjusted to take into account the ceiling of 10 per cent. The order is concerned with determining that ceiling.

Under the corresponding EC regime, the maximum fine is 10 per cent of the undertaking's world-wide turnover in the preceding business year. We have departed from that approach in two significant respects, just as elsewhere in the Act we made changes where we thought the EC regime could be improved.

First, we have decided that, since this is a piece of domestic legislation concerning trade within the UK, the turnover should be confined to turnover arising in the UK. Secondly, subject to a minimum of one year's and a maximum of three years' turnover, turnover is to be that arising for the entire period of the infringement.

We know from the cartels that the OFT has uncovered under its existing powers that they can be long lived, often enduring for years. We believe that the punishment should fit the crime. Those who have engaged in a long-running cartel should face a higher potential penalty than a business which commits a one-off infringement.

I said at the start that these orders were about creating an efficient, focused and effective regulatory system. The provisions in the Act and this order will provide a regulatory system with real teeth. Taken with the other order and the Act, we shall have established a modern competition system, one which is efficient and effective in dealing with matters of significant competition concern and one which is able to punish those who transgress and to deter those minded to follow in their path. I commend the orders to the House.

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Moved, That the draft orders laid before the House on 19th January be approved [7th Report from the Joint Committee].--(Lord Sainsbury of Turville.)

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