Select Committee on Constitution Minutes of Evidence

Memorandum by Sir Derek Morris, Chairman, Competition Commission

  1.  This note and its annexes describe the functions of the Competition Commission (CC) in relation to the regulated sector, set out the CC's work on references in the regulated sector over the last five years and address questions 5 to 8 posed by the Committee on which the CC's statutory responsibilities and its experience enable it to make a contribution.


  2.  The CC is one of several bodies with competition and regulatory responsibilities under UK law. It is an independent public body established by the Competition Act 1998 and superseded the Monopolies and Mergers Commission (MMC) on 1 April 1999. The CC consists of members, who are supported by staff. The Chairman of the CC, himself a member, selects members for inquiry groups; and also chairs the Council (its board) which includes the Deputy Chairmen and the Chief Executive and two non-executive CC members appointed to the Council.

  3.  All members are appointed by the Secretary of State for Trade and Industry for an eight-year term following an open competition. Members are appointed for their individual experience, ability, and diversity of background, not as representatives of particular organisations, interests or political parties. There are usually around 50 CC members, and except for the Chairman, they work part-time. The Chief Executive (and Secretary) is the Accounting Officer for the CC and heads the staff.



  4.  The CC's task is to conduct in-depth inquiries into:

    —  mergers (both anticipated and completed);

    —  markets (the law currently provides for monopoly inquiries but the Enterprise Act 2002 from 20 June 2003 substitutes market inquiries for monopoly inquiries—(see paragraph 5)); and

    —  the economic regulation, including price regulation, of the major regulated industries (regulatory inquiries).

  5.  The CC has no power to conduct inquiries on its own initiative.

    —  Every inquiry the CC undertakes is in response to a reference made to it by another authority: usually by the Office of Fair Trading (OFT) or Ministers, but in certain circumstances by the Secretary of State, or by the regulators under sector-specific legislative provisions relating to regulated industries.[3] In future the CC may receive market references from the OFT or from sector regulators having concurrent powers[4] if they have

    reasonable grounds for suspecting that any feature, or combination of features, of a market in the United Kingdom for goods and services prevents, restricts or distorts competition in connection with the supply or acquisition of any goods and services in the United Kingdom or a part of the United Kingdom.[5]

  6.  For regulatory inquiries, the CC's decisions answer those questions specified in the reference and those required by the relevant legislation; the Act makes no substantive change to the way these references are considered. Its decisions are published in a report.

  7.  Annex 1 lists the types of inquiry which the CC undertakes, their statutory basis, and the body which refers them.


  8.  The CC receives references relating to issues in some regulated industries under the relevant regulatory statutes. There are broadly six types:

    —  Licence modification references and references concerning non-licensable activities in the gas and electricity sectors;

    —  Price determination references;

    —  Water merger references;

    —  Airport references;

    —  References under the Financial Services and Markets Act 2000; and

    —  References under the Broadcasting Act 1990.

  Annex 2 describes how each of these types is handled by the CC.


  9.  Since 1985 the CC and its predecessor the MMC have reported on 43 references involving regulated industries. Annex 3 gives brief details of the last 10 references over the five years March 1998 to March 2003 (including for the sake of completeness one "normal"" gas industry merger which is not a regulatory reference).


    5.   To what extent are regulators both prosecutors and juries on an issue; what rights of appeal are there against decisions made by regulators?

  10.  When a regulator first investigates an issue, and decides that action must be taken, he discharges the functions assigned to him by the relevant statute. In an investigation by the regulator, to talk of the regulator being prosecutor and jury is neither entirely accurate nor wholly inaccurate. The regulator normally has a statutory duty to act if he thinks that certain criteria are found to exist. Notably however the regulator has normally been unable simply to impose a decision (often a licence modification) on a regulated company or sector. As Annex 2 shows, the pattern is for statutes to provide for parties who may be aggrieved by a regulator's proposal to regulate to require the regulator to refer that proposal to the CC for investigation. That investigation is not a judicial process. Rather, the investigation takes the form of a close examination over a number of months of the issues that arise in a case. The CC will seek new evidence as well as review what was available at the time of the regulator's decision. In such an investigation, the regulator is neither prosecutor nor juryman. He is simply a person, albeit a very important person, from whom the CC takes evidence. Of course the CC may prefer the views of the regulator to those of the other parties, but there is no presumption that the regulator is correct. The group of members undertaking the inquiry bring to it relevant business expertise, commercial experience or academic achievement in a relevant field and are supported by a staff team of economists, accountants, lawyers and business advisers. Their decision may very well be, and often is, different from that sought either by the regulator or the regulated. In this respect the determinations of the CC differ from those of a court.

  11.  If the subject of a regulatory decision has no statutory right of appeal it may choose to exercise its right to seek judicial review in the High Court of that decision. Any party aggrieved by the CC' s decisions in its report may also seek judicial review in the High Court.

  12.  The Committee will be aware that there are proposals in the Communications Bill currently before Parliament (clauses 187 and 188, Bill print 53/2) to assign jurisdiction over full appeals on merits against certain decisions by the new regulator OFCOM to the Competition Appeal Tribunal (CAT) except that price control matters must be referred by the Tribunal to the CC for determination. This is because a continuing role for the CC is widely recognised as important to ensure consistency of price controls across the regulated sector and the CC's methods and experience, evidenced by its professional staff, enable it to apply sound and consistent economic principles. The cases that the CC has reported on during the last five years (Annex 3) and earlier make it well placed to continue to do so. Thereafter the CAT must decide that price control matter in accordance with the CC's determination except that on a challenge to the CC by the parties to the appeal it may apply normal judicial review principles and set the decision aside on judicial review grounds.

  13.  The availability of these various appeal provisions means that even if regulators can be represented as prosecutors and juries, expert and efficient review is available from the CC, the High Court or the CAT.

  14.  The CC has noted the arguments put forward in Professor Prosser's memorandum for a right of appeal on merits on a defined dispute between a regulator and a regulated enterprise to a judicial body, the CAT being his favoured option, and allowing rights of appeal to interested third parties instead of providing for a reference to the CC which can result in a substantial expenditure of money, management costs and delay. Such a change would be a policy matter for government and require extensive statutory amendment but the following remarks may prove helpful to the Committee.

  15.  The question of scope for a fast track procedure has been discussed several times previously. The CC is ideally suited to a fast track procedure. It is an expert body with experience of deciding issues in regulatory disputes. Its members and staff are well versed in the issues which arise in such disputes. The parties to such disputes, and their advisers, are familiar with the CC's approach to regulatory issues. The CC has relative freedom in the procedures it adopts, and the timetable it sets, for the resolution of a dispute. All these factors tend to demonstrate the suitability of the CC to act as a fast track appeal body. Of course, in the past the CC's role has been that of a wide-ranging investigator because of the terms of the references made to it. But a different and additional set of statutory obligations to perform a fast track procedure is one that CC would welcome.

  16.  If it were thought right as a matter of policy to provide third parties with sufficient interest with the right to put a reference to the CC, that is something that the flexibility of CC's procedures could easily accommodate.

  17.  As to whether the CAT would be an appropriate body to take over such "appeals", the Committee should be aware that in other contexts, as already explained (CC's decisions on mergers, markets and OFCOM price control appeals), the CAT already acts as the body of judicial review for many CC decisions. It would not therefore seem appropriate—indeed it would create confusion about the CAT's role—for the CAT to decide, on full appeal, matters which are analogous to matters currently investigated by the CC. Indeed it should be noted that it was to preserve consistency in price regulation matters, which make up the bulk of regulatory references to the CC, that the CC is being required to hear appeals on price control matters under the Communications Bill.

  18.  In summary, if fast track appeals were to be made to CC, it would be able to deal with them. The advantages would be:

    —  such appeals would be heard quickly;

    —  CC members with appropriate expertise, supported by a cadre of well-qualified professional staff (including economists, accountants, business advisers and lawyers) are well placed to reach decisions on often complex regulatory issues;

    —  consistency of approach to common issues in the regulatory sector such as price control and the cost of capital would be maintained; and

    —  the CAT or the High Court would be available for judicial review of the CC's decisions.


    6.   How are regulators held to account by Parliament; what other accountability do regulators have to auditors, Government departments or other public bodies?

    7.   How are regulators accountable to those whom they regulate; what is the impact of regulation on the economy; how transparent are their methods of working?

    8.   How are regulators accountable to the public other than through Parliament; what opportunities do the public have to express particular concerns to regulators; how do regulatory bodies relate to their associated consumer watchdogs?

  19.  These questions have to be addressed in the context that within a policy framework set by government the law has established regulators independent of government and assigned to them certain statutory duties. The CC provides a mechanism to review some important decisions on receiving a reference. The work of the CC assists the accountability of regulators in a number of ways. First, the availability of its powers to review regulators' decisions may influence them to reach those decisions with care and full regard to all the evidence and all the relevant factors. Secondly the range of matters and the views and interests of various parties which CC typically considers when conducting its investigations and writing its reports exposes those decisions to wider scrutiny. Thirdly, insofar as CC decisions do provide economic precedents or benchmarks which go wider than the industry to which they relate, they make it easier for other bodies to judge regulated industries' performance and can be said to contribute to stability in the regulated sector.

Competition Commission

1 May 2003

3   The sectors concerned are airports, air traffic services, financial services, electricity, gas, postal services, railways, telecommunications and water. Back

4   The Director General of Telecommunications, the Gas and Electricity Markets Authority, the Director General of Water Services, the Northern Ireland Authority for Energy Regulation, the Rail Regulator and the Civil Aviation Authority. Back

5   Enterprise Act 2002 section 131(1). Back

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