IBC Conference Wednesday 24 November 1999

"A NEW DAWN FOR COMPETITION POLICY IN THE UK"

By Derek Morris, Chairman of the Competition Commission

All those involved in competition policy—the companies which are subject to it, the institutions charged with implementing it, the lawyers and others who advise, and possibly even consumers and the public at large—are likely to have recognised by now that the 1998 Competition Act heralds a new dawn on 1 March 2000.

The introduction of a prohibition based system, new powers for the DGFT, and provision for potentially large fines for those who break the prohibitions are all designed to bring about a sea-change in the way business is conducted in the UK.

I do not intend, however, to dwell on the new Act, primarily because latest developments are going to be covered by two distinguished UK lawyers later today—Peter Freeman, co-author with Richard Whish of an invaluable guide to the Act; and Christopher Bellamy who, I am delighted to say is to be the first President of the Appeal Tribunals of the Competition Commission. I could not wish for a more able colleague or for someone with more appropriate expertise than him.

Rather, by way of an introduction to the conference, I want to highlight the current momentum for improving economic well-being in the UK through a new, broader competition-related agenda. Certainly the new Competition Act is likely to be the most important element but it is far from being the only initiative. In addition there are:

And even this is not an exhaustive list.

These initiatives have different origins: they have emerged from different bodies for different reasons and in respect of different concerns. Yet there are some themes, some broader tides in the affairs of man (which threaten perhaps to flood us?) which will undoubtedly change the climate and culture within which business is done in the UK, and which underpin these diverse initiatives.

What are these themes? Clearly a belief in the paramount importance of competition—though that of course covers a multitude of not always compatible virtues—to an extent unparalleled in the UK this century. But beyond this three others.

First, the tenor of the times asserts our primacy as consumers over all other hats we might wear—producer, supplier, manager, citizen etc. The Utilities Bill envisages a new primary statutory duty of regulators to promote the interests of consumers. The new criterion rehearsed in the merger reform consultation document relates to competition and efficiency gains which accrue to consumers. In the theme of rip-off-Britain that has played so well in the UK press, who is it who is alleged to be ripped off?

Indeed, why do we want competition? Economists are trained to respond that it typically improves productive and allocative efficiency, thereby increases the capacity of the economy to generate economic well being, and is, therefore, a good thing, irrespective of to whom the benefits accrue. Whether it is consumers, employees or shareholders, and whether the latter are managers, individual shareholders or pension funds is regarded as a quite separate matter, to be addressed by distributional policies of various kinds. But in sharp contrast, in the policy arena, there is pressure to shift away from a public interest criterion, which could permit any broader efficiency gains to be recognised, towards a consumer interest one which requires that consumers be the recipient of such gains, and this reflects a clear distributional priority in favour of consumers in competition policy.

The second change is a clear shift towards a much more independent competition policy. The new 1998 Competition Act provides no role for Ministers to be involved in control of anti-competitive practices. The purpose behind proposed reform of merger control is as far as possible to take Ministers out of the process. The utility regulation regime has for fifteen years been built on the concept of independence of action by regulatory bodies. Disputed licence modifications go to the Competition Commission which, equally, carries out this function independently.

This concept of independence is not an easy one, in theory or practice. Competition and regulation unavoidably affect people’s livelihood and well-being not only in aggregate but as between different groups and different aspects of their well-being—purchasing power, quality of service, their health and safety, their environment and so on. These are inherently political issues (no less of course than interest rates). The shift to greater independence relies on the proposition that the benefits will be greater to society—by excluding scope for sectional interest pressure, for populist or short-term considerations to dominate, or for media pressure or agendas to hold sway—and thereby providing greater coherence and consistency.

The Competition Commission properly has no view or preference on the question of independence. Where the balance of advantage lies is unavoidably a political question, and the Commission’s only concern and indeed duty is to implement whichever approach is chosen in an efficient and effective manner All I would observe is that there is a real and inherent tension here and therefore, when in due course decisions are made on this issue, it will be important for the credibility of process that the underlying rationale is clear and explicit.

The third new theme is informational; that in general far more information should be available than has been the case to date. This is partly an issue of substance, partly of process. On the former neither competition nor the consumer’s interest can easily be furthered if people and organisations do not know or understand the options they face or the likely consequences of their decisions. There is a very basic theorem in economics, but it is also very evident in practice, that lack of information can, and generally will inhibit competitive processes and leave many consumers unprotected.

Equally, processes to implement competition law and regulation are increasingly thought unlikely to be fair and effective without much greater transparency of process. Utility regulators have been setting the pace here in their approach to price controls; both the OFT and the Competition Commission are also exploring ways of improving transparency of process; and the Freedom of Information Bill is also relevant to improving accountability and public confidence in our processes.

This then is the new world we face; a much greater emphasis on creating pervasive conditions of intense competition throughout the economy; an abiding belief that the consumer is sovereign; an emerging perception that government should set the framework, the criteria, the terms of policy but largely or, in some areas, entirely remove itself from the operational decisions through which policy is actually implemented; all in conditions of the maximum information which are consistent with individual privacy and commercial sensitivity.

All these changes have been in the air for some while; certainly there has been much greater emphasis on competition and consumer interest criteria in MMC and now CC reports for several years. But most of the key elements which will drive these changes forward are still to come, predominantly in the year 2000, and together will generate a world unrecognisable to anyone involved even five years ago.

Against this background, I would like to make three brief points. All relate to important distinctions or decisions which, by design or default must be made as the new regime develops.

First, the new regime preserves, and rightly so, what for want of a better term I will call a structure-versus-conduct distinction. A key characteristic of the new Act is that Chapters I and II define illegal conduct—that is why breaches lead to fines (albeit this is unusual in civil law)—and this is only possible because there are sound, generally applicable principles of economics that allow us to identify ex ante various classes of conduct, be these restrictions on competition or various abuses of market power, which typically will damage competition.

This development is well overdue, and no doubt already having a pro-active effect on how companies will conduct themselves in future, but it could never be, nor was ever intended to be the whole story. Some situations, some sectors, even whole industries may exhibit inadequate competitive pressure, for historical, structural or indeed regulatory reasons; and it is right that these can be addressed and indeed remedied even though there is no question of illegal conduct.

The FTA allows general references to be made; remaining clauses of the 1980 Competition Act allow key prices to be investigated by the OFT; and government departments can initiate individual sector investigations, as the Treasury has done in relation to banking. But action, unless voluntarily agreed by the companies concerned, cannot occur without legislation or a Competition Commission investigation under the monopoly provisions of the FTA, and their retention for these wider, more deep seated and in many cases more structural problems is an essential part of an effective competition policy. Many have commented that the European Commission would love to have comparable weapons in its armoury.

Mergers fall into the same category. Mergers have not had a good press and at one stage there was pressure to switch to a prohibition regime in which companies had to demonstrate that mergers were beneficial if they were to be allowed. This would be akin to the prohibition regime enshrined in the new Competition Act. This, however, has not found favour, and here also I believe the government’s stance looks right. A compulsory notification regime may have certain advantages; but a prohibition regime for structural issues does not easily read across from legislation on restrictive or abusive conduct.

The basic problem here is that economic analysis is much more ambiguous in relation to mergers and industry concentration than anti-competitive practices. Applicable ex ante principles are much more difficult to find and would be much more contentious. The theory that a merger is just the ultimate restrictive agreement is questionable, not just because the latter typically conceals the fact that activities are co-ordinated, whereas a merger does not; but because typically few of the potential benefits of merger, such as economies of scale and other types of synergy are available in a restrictive agreement. That is one of the main reasons why ex ante prohibition subject to exceptions is clearly appropriate to restrictions but  may well not be for mergers. In practice there will be some blurring of the lines, but a prohibition system primarily concerns whether certain conduct did or did not occur. Merger inquiries, in contrast, are mainly about the current and future consequences of different types of cost and market structure and their effect on consumers.

In passing, the supposedly widespread evidence that mergers are more often unsuccessful than successful is, I believe, on the basis of more recent research, potentially flawed, certainly unreliable therefore and quite possibly misleading. Many mergers are in response to anticipated decline in profits or demand, or growing competition as a result, for example, of growing international integration of markets. That profits still declines afterwards by no means necessarily implies that the merger was undesirable. What limited evidence there is on efficiency, as opposed to profitability, suggests that it may well increase. In any event it is ironic that elsewhere in the competition policy arena we tend to regard higher profits as jeopardising economic well-being but conventionally in merger analysis have somehow regarded declining profits as having the same effect.

That does not mean mergers should not be subject to intense scrutiny. Quite a number of mergers referred to the Competition Commission recently, leaving aside statutory newspaper references and consolidation in the bus industry, have been found to be against the public interest on competition grounds and some prohibited. But that is not by any means the same as a prohibition regime, which might have a much more significant impact on industry re-structuring than the present one.

In short, it is sensible to review the precision of the criteria for merger, and the degree of independence of the authorities in the process, but I am not currently aware of any groundswell of views from any interested parties—in industry, amongst consumer bodies or in government—who wish to change the general stance of policy towards mergers.

The second distinction is between competition and regulation. Beesley and Littlechild’s aim with RPI–X, as is well known, was to ‘hold the fort’ to constrain newly-privatised monopolies until competition could arrive. The wait may have been somewhat longer than they envisaged, but huge swathes of the former nationalised industries now operate in more or less competitive conditions; all our utility regulators are publicly committed to maintain the process; and, in time, it seems likely that only the irreducibly minimum network or distribution elements of these industries will remain as monopolies—though even here there may be scope for less traditional forms of franchise-based competition to develop.

But this process raises important questions. Have we got the right framework for implementing policy in these turbulent times? I would suggest that we have in that regulators can use the licence regime to deal with control of monopoly situations, subject only to referral to the Competition Commission; can use the 1998 Act to deal with anti-competitive behaviour in emerging or fully fledged competitive areas, subject to appeal to the Appeals Tribunal of the Commission; and can progressively switch from the one to the other as competition develops. Throughout, the monopoly and merger provisions of the FTA are available to deal with structural problems or to bring about structural change.

In practice matters may not be so clear cut. The telecoms and energy regulators have considered or are considering greater use of the licence regime to prevent anti-competitive behaviour and it therefore remains to be seen how best these matters will work out. But there seems no reason to believe that the overall regime is not adequate or flexible enough for the changes to come.

So, will regulation wither and die as competition becomes more prevalent? Undoubtedly price control regulation will recede, indeed it already has in certain areas. But some have complained that the transition is far too slow, or even that the spread of competition is, paradoxically, being accompanied by even more regulation.

On this I would make one observation. The belief that growing competition should or will be accompanied by the disappearance of regulation is not self-evidently true and might even be thought a little simplistic. The products and services involved are not just significant items of household expenditure but for the most part fundamentally important to a person’s well-being. Many regard them as essential irrespective of a person’s ability to pay; significant health and safety issues abound; and switching between suppliers may be more difficult than for many commodities. Even the notion that they are legitimate objects of profit-making activity has fully yet to sink into the deeper psyche of some sections of the population. Questions of income distribution, access, discrimination and the like abound in such a world.

All these factors may make it inevitable that regulation, of a whole range of aspects of utility provision, will remain. Far from becoming just privately and competitively supplied commodities, which can sensibly be left to the market to allocate, a possible guide might be found in the financial sector. Few have argued that the structure of the mortgage, pensions or insurance industries are not in broad terms competitive; but that by itself is unlikely to remove the need for quite detailed regulation, some of it indeed stemming primarily from the practices that intense competition can generate. This may reflect a degree of complexity in the products, and hence a crucial role for adequate information, which doesn’t apply to most utilities. But service and reliability matter; switching costs at least psychologically speaking, may be high; and even if they aren’t, switching only changes the relatively small element in the cost represented by supply.

This is not unimportant. Many believe that these types of regulatory burden are growing and, worse still some say, it is not clear that the regime properly integrates decisions on quality, service and social need with the allowed cost and price decisions with which they are inextricably linked. This in turn feeds back to the issue of independence—who, and more specifically how, in practice, will the trade-offs be made? Some such dilemmas may well come before the Commission. If they do we will have a duty to resolve them within whatever statutory regime applies, and therefore we will do; but no-one could regard them as other than immensely difficult issues.

It also needs stressing that regulation may well, indeed is very likely to restrict competition. As Don Cruickshank has been urging, effective regulation must therefore be seen not only in terms of the objectives of the regulation but also the competition consequences. This has now culminated in proposals which would allow the OFT to refer FSA regulations to the Competition Commission to determine whether they are anti-competitive and, if so, whether their regulatory purpose nonetheless justifies them.

Moreover, it is noteworthy how often resolving issues of competition in inquiries referred to the Commission collides with major regulatory regimes, often of very long standing. Milk Marque and the recent BA/CityFlyer merger are but two recent examples.

Competition and regulation therefore are increasingly going to co-exist, not always easily. Although I have suggested that a sound and robust legal framework is emerging together with a rational and coherent institutional framework for implementing it, this by no means guarantees success. As with any regime it will require good will and good sense to work. But a core of consistency across anti-competitive conduct, monopoly issues, mergers and regulatory matters, will be critical, and the current structure, role and independence of the Competition Commission means it is well placed to help deliver this.

These changes and the challenges which they bring might be thought quite enough to cope with during the next 12 months, and of course they are. But the momentum for more transparency is not one that can be put on hold—indeed the emergence of a new regime only heightens the case for openness and clarity of process.

The origins of this initiative were two-fold: the initial moves in this direction by the sector regulators to which I have already referred; and anecdotal and survey evidence that, while in many respects the Commission was well regarded, there was significant concern over what was perceived to be its rather opaque nature. Companies often did not know much about our procedures, the progress of our inquiries, our main concerns etc; and the public more generally, who ultimately finance us, often did not know who we are, what we do or how we do it, still less have any basis for determining whether we are doing it effectively.

Our response was three-fold: to issue a consultation document to those most directly involved in competition policy, the responses to which are now in and analysed; to conduct a wider survey of views using Opinion Leader Research, the results of which are also now in and analysed; and, in individual inquiries where appropriate, to employ more transparent methods in order to judge their fairness and effectiveness before finalising procedural reforms. These have included issuing timetables for inquiries, providing progress reports, publishing statements of issues and remedies, and holding both joint and open hearings, though these have been in addition to our normal hearings conducted in private.

While most of these initiatives have generally received a rather enthusiastic response, none is entirely devoid of drawbacks. All have resource implications some quite significantly so. Some may have timing implications. None must be allowed to inhibit our statutory duties or jeopardise commercially sensitive material. But I am now very close to finalising my guidance under the Act to inquiry groups on procedures, and these will be publicly available. It is intended to provide fairness and increased transparency, while continuing to ensure that we produce thorough and accurate reports in a timely fashion and protect as far as possible confidential material. All these initiatives need careful handling—in particular the scope for publishing statements of possible remedies, and open hearings—but I believe that, when finalised, the guidance will help to ensure the fairness, effectiveness and, in a broad rather than specifically legal sense, our accountability for what we do. (Note: this guidance is now available)

In conclusion, the new Act, significant developments in the utility field, a potentially new approach to mergers and a new era in transparency of process all mean that the next 12 months will see the emergence of radical changes in the implementation of competition policy. It is manifestly a pro-competition agenda; and it is clearly seeking to promote consumer interests at all points. But it is also, I believe, very much a pro-business regime—not any business of course, not those which use dominance or anti-competitive conduct to maintain or improve their position; nor those which, through inefficiency, or inability to innovate, respond or adapt, lose out in the competitive process; but those which are efficient, which can respond directly, fairly and effectively to consumer wants under competitive conditions will have nothing to fear, indeed will have everything to gain from this new era.

Back to list of speeches