Letter from John Vickers, Director General
of Fair Trading, Office of Fair Trading (Bus 42A)
At the oral hearing with the Transport Sub-Committee
on 15 May, we were asked to forward information about the survey
the OFT had conducted into the perceptions of the public concerning
the value of competition in the wider economy, and details of
merger cases considered since the Sub-Committee's last report
in 1999. You subsequently confirmed the request in your letter
of 21 May, when you also asked for clarification of the rules
regarding the application of the ticketing schemes block exemption.
Further information on the survey of consumer
perception of the benefits of competition is attached. The Sub-Committee
asked particularly about the size of the survey: the views of
over 1,000 adults in the United Kingdom were sought on the advantages
of competition between businesses.
As I believe you have since discussed with Gover
James here, I attach a short additional memorandum about the Competition
Act: this includes a section on the ticketing scheme block exemption,
the types of ticket to which it applies and the conditions contained
within the exemption. We should, of course, be very happy to answer
any further questions members of the Sub-Committee may have.
I also attach information on the four qualifying
merger cases considered by the OFT since 1999. You have asked
for an estimate of the proportion of mergers referred, but I understand
from Mr James that you are seeking a view on the proportion of
cases the OFT has looked at in the bus industry as a proportion
of the total number of all bus mergers (irrespective of size)
that have taken place. As we explained to the Sub-Committee in
the course of our oral evidence, there is no requirement in the
merger provisions contained in the Fair Trading Act 1973 for notification
of mergers to the OFT. Moreover, as we said in our oral evidence
before the Sub-Committee, in order for a merger to qualify for
reference to the Competition Commission, either the gross assets
of the enterprise being acquired must exceed £70 million,
or the merger must create or enhance a share of supply of 25 per
cent or more in the United Kingdom or a substantial part of it.
We can, of course, investigate mergers that
have not been notified to us, and we track merger activity through
the trade press and other sources, but it is invariably the case
that the parties to a qualifying merger will approach the Office
if there are perceived competition issues. This may be either
for confidential guidance as to whether a proposed merger which
was not yet public knowledge would be likely to be referred to
the Competition Commission for investigation if it went ahead,
or, in the case of a published merger, for a decision on reference.
The latter is more likely in cases involving quoted companies,
where a decision not to refer the merger is usually a condition
of the share offer. (I should mention that merger reference decisions
are, at present, made by the Secretary of State for Trade and
Industry on the advice of the OFT).
Having said that, we cannot, of course, say
with any certainty how many (qualifying or non-qualifying) mergers
may have escaped our scrutiny. Our view is that it is unlikely
that any qualifying mergers have taken place without our knowledge,
and none that might have raised serious competition issues. The
trade press is alert to the merger provisions and significant
coverage can be relied upon where competition problems are foreseen.
As requested in your letter, I also enclose
a copy of the list of frequently asked questions, with answers,
and of the article that appeared in Transit magazine on
3 May 2002 following an interview with Gover James.
In your further letter of 24 May, you asked
for our reaction to evidence put to the Sub-Committee by the Association
of Transport Co-ordinating Officers (ATCO), by the Minister of
Transport and by the Institute of Logistics and Transport.
ATCO has suggested a "clean sheet review"
approach which seems to envisage the bringing together of local
bus services, schools, work and social services movements specifying
minimum service levels and maximising vehicle usage, and to consider
the potential for "an attractive fares policy to improve
affordability for certain groups". The incumbent operator(s)
would be given the first opportunity to run the resulting network
of services. The result, ATCO says, would be a network better
able to meet public needs, and would be more co-ordinated and
Given that this is a high level proposal, it
is difficult to assess with any certainty whether it might infringe
competition law. However, the creation of the network might involve
an agreement between operators that fell within the scope of the
Chapter I prohibition in the Competition Act, assuming that the
Act applied. In that case, there would be concern if such an agreement
covered the setting of faresunless it could be shown that
such agreement on fares was indispensable for the creation of
clear benefits to passengers. The OFT would also be concerned
at a proposal that only existing operators would be allowed to
participate in the scheme. This would appear to prevent any scope
for competition from new operators. It is difficult to see how
excluding other operators from a fair opportunity to compete for
the right to provide the relevant services could be in passengers'
best interests. While the proposals put forward by ATCO specifically
refer to what amounts to agreement on fares and to exclusionary
provisions, there would also be competition law concerns if, for
example, elements of market-sharingwhether of the geographic
or of the temporal marketwere involved.
Alternatively, or in addition, the resulting
scheme might be covered by the competition test in Schedule 10
of the Transport Act 2000. In that case there would be similar
concerns over any attempt to fix prices or exclude new operators,
or, indeed, to share markets, unless the adverse effects on competition
could be shown to be justified and proportionate as required by
In the course of oral evidence, the Institute
of Logistics and Transport seems to be making a similar point
to that made by ATCO in advocating some form of agreement between
operators and local authorities. The position on that is likely
to be similar to that expressed above, but without more information
on the precise nature of the suggested discussions and agreements
between operators and local authorities, however, we can give
no views, at this stage, on how they might be assessed under competition
law. I note, however, that while Mr Carr asserted that in a number
of areas joint fare agreements have failed because of the operators'
concerns about OFT's views of the schemes, he does not say whether
the operators talked to OFT about them. Although it is for the
parties to an agreement to decide for themselves whether the agreement
falls within the Chapter I prohibition, we are always quite happy
to give informal views to operators, and local authorities where
relevant, on particular cases.
In giving his evidence to the Sub-Committee,
Mr Spellar noted the difference between a quality partnership
and a number of operators agreeing matters between themselves
where there might, as he put it, "be a danger of that being
a collusion against the public". Even if the local authority
orchestrated an anti-competitive agreement between operators,
it would nevertheless still be subject to the Chapter I prohibition
in the Competition Act. As Mr Spellar notes, it is important to
distinguish between whether the agreement would operate in passengers'
best interests, or whether it operates merely in the interests
of the bus companies involved. I emphasise Mr Spellar's concern
that operators and local authorities can talk to OFT if they are
unsure about the competition law position of proposed agreements.
On a separate point, the question arose during
the oral hearing of possible collusion by the major operators
on tender prices in the London market. Since giving oral evidence,
we have discussed the matter with the Performance Director at
TransportforLondon. TransportforLondon has not noticed
any parallel increases in tender prices and has said that there
is no evidence of collusion by operators. TransportforLondon
made clear that, if any such evidence had been available, the
matter would have been reported to the OFT. As stated in the course
of giving our oral evidence, we have received no such information.
I hope this is helpful. Do please let me know
if we can provide any further information or views on particular
31 May 2002
OFT SINCE 1999
(This list does not include any reference to
any confidential guidance cases: the OFT and the Secretary of
State for Trade and Industry each has a policy of not confirming
or denying whether confidential guidance has been sought or given
in respect of any particular case.)
As noted in the written Memorandum submitted
to the Sub-Committee under cover of the letter from the Director
General of 26 April 2002, merger cases considered by OFT in the
bus and coach industry since 1999 have been as follows:
March 2000: the acquisition by Arriva
plc of MTL Services plc. Undertakings as to divestment of one
bus garage plus associated business as a going concern and on
competitive fares to be charged were given by Arriva in lieu of
reference to the then Monopolies and Mergers Commission;
May 2000: the acquisition by Airlinks
(owned by National Express Group) of Airbus; the OFT advised that
the merger should not be referred to the Commission and the Secretary
of State agreed;
December 2000: the acquisition by
Rapsons Group of Morrisons Coaches: the OFT recommended non-reference
and the Secretary of State agreed;
April 2001: the acquisition by Arriva
plc of The Wycombe Bus Company; the OFT recommended non-reference
and the Secretary of State agreed.
The Competition Act 1998
The Act contains two prohibitions
based on the prohibitions found in EC lawwhich have operated
successfully throughout the EC since its inception. The Act requires
enforcement consistent with EC law;
The prohibitions apply across all
sectors of the UK economy, including to other transport services
such as rail and airline services.
Chapter I prohibition
The Act prohibits anti-competitive
In particular, the Act prohibits
anti-competitive agreements between bus operators that agree fares
and share out markets;
It is nevertheless unlikely that,
in competitive situations, fares may well be the same for identical
journeys, and that buses may well operate at approximately equal
intervals, in each case without an agreement between operators.
In addition, agreements that have
significant anti-competitive effects but benefit consumers, including
passengers, can receive an exemption from the Chapter I prohibition
(provided they meet the criteria set out in section 9 of the Act).
In particular, the public transport
ticketing schemes block exemption allows price fixing for travelcards
and permits operators to co-operate on other ticketing schemes
which would otherwise be in breach of the Act, including through
tickets, multi-operator individual tickets, and add-on tickets.
Agreements that do not meet all the
conditions of the block exemption may still meet the criteria
for individual exemption.
Chapter II prohibition
The Act prohibits the abuse of a
dominant position, for example where a dominant operator attempts
to drive out smaller competitors. The holding of a dominant position
is not, of itself, an infringement of the prohibition.
The Competition Act 1998
1. The Act came into effect on 1 March 2000.
It contains two prohibitions: the first (``the Chapter I prohibition")
prohibits anti-competitive agreements between two or more persons
or firms which prevent, restrict or distort competition in the
United Kingdom or in any part of it. The second (``the Chapter
II prohibition") prohibits the abuse of a dominant position
in a market in the United Kingdom or in any part of it.
2. The two prohibitions are based on EC
competition law, which has operated successfully throughout the
EC since its inception. Section 60 of the Act imposes on the OFT,
the Competition Commission Appeal Tribunals and the courts a duty
to act consistently with EC case law in most circumstances.
The Chapter I prohibition
3. The Act includes a non-exhaustive list
of agreements to which the prohibition applies. Included in these
examples are agreements under which the parties agree to fix prices,
directly or indirectly, or to share markets.
4. An agreement infringes the Chapter I
prohibition only if it has as its object or effect an "appreciable"
prevention, restriction or distortion of competition in the United
Kingdom. Apart from any agreement which fixes prices or share
markets or imposes minimum resale prices (which will always have
an appreciable effect on competition, whatever the market shares
of the parties to the agreement), an agreement generally has no
appreciable effect on competition if the parties' combined share
of the relevant market does not exceed 25 per cent. Other factors,
for example the content of the agreement and the structure of
the market or markets affected by the agreement (such as entry
conditions), are taken into account in considering whether the
agreement has, or may have, an appreciable effect on competition.
Some further information about defining markets is contained in
the section of this document about the Chapter II prohibition.
5. Agreements between local public transport
operators are subject to the Act in the same way as agreements
in other sectors of the economy in the United Kingdom (including
other transport sectors such as airlines).
6. Agreements between operators to, for
example, agree the fares which each will charge, to decide which
routes each will serve, or the times that each will operate services
on a route they both serve, as likely to be prohibited under the
Chapter I prohibition.
7. In a competitive market, however, the
OFT recognises that it is likely that fares will, in practice,
be the same for identical journeys irrespective of the operator
with whom the journey is made. However, the resulting competitive
price is likely, in most situations, to be lower than the fare
that operators who conspire to fix prices would be likely to charge.
It is only where fares are the same through agreement that the
prohibition will be breached.
8. Similarly, in practice, that operators
serving a common route or part of route will each make commercial
decisions to operate buses at more or less equal headways so that
buses are spaced approximately evenly though the clock-face. Most
operators now accept that it does not make commercial sense to
register a service two minutes in front of a competitor's bus
when the only likely reaction will be that the competitor will
move its bus forward by four minutes. So, again, the OFT accepts
the reality that buses will, in practice, operate at roughly even
headways. Again it is only where equal headways are achieved through
agreement between the operators that the prohibition will be infringed.
9. Although the Act generally prohibits
agreements that prevent, restrict or distort competition, the
Act recognises that some of these agreements should, nevertheless,
be permitted because of the benefits they bring to consumers.
Section 4 of the Act therefore provides that the OFT may grant
an individual exemption from the Chapter I prohibition if the
agreement meets the criteria set out in section 9 of the Act.
Specifically, an agreement will satisfy the criteria for exemption
only if it:
contributes to improving production
or distribution or promoting technical or economic progress;
allows consumers a fair share of
the resulting benefit;
does not impose on the persons or
firms involved restrictions which are not indispensable to the
attainment of those objectives; and
does not afford the persons or firms
involved the possibility of eliminating competition in respect
of a substantial part of the relevant market.
10. The OFT has always recognised that some
of the agreements on fare levels, routes served and timings referred
to at paragraph 6 above could bring benefits to passengers or
other consumers through improvements in the efficient use of resources,
for example. Where consumers benefit through, for example, cost
or time savings, or reductions in external costs such as atmospheric
or noise pollution, and provided that the restrictive provisions
are indispensable and do not go so far as to make possible the
elimination of competition, such agreements generally should meet
the criteria for exemption.
The block exemption
11. In order to reduce the need for notification
of large numbers of similar agreements for individual exemption,
the Act provides that the OFT may recommend that the Secretary
of State for Trade and Industry make an Order that exempts a specified
class of agreements from the Chapter I prohibition. An agreement
which meets the terms of the block exemption is automatically
exempt from the Chapter I prohibition, without any need to notify
12. The OFT advised the Secretary of State
for Trade and Industry early in 2001 that certain ticketing schemes
for local public transport services should receive a block exemption.
The Secretary of State agreed with this advice and the block exemption
Order was laid before Parliament on 8 February 2001 and came into
effect on 1 March 2001. Between 1 March 2000 (when the Act came
into effect) and 1 March 2001 ticketing schemes which were already
in place on 29 February 2000 were not caught by the Act under
its transitional provisions.
13. The essential provisions of the block
exemption are as follows:
the block exemption is limited to
ticketing schemes, made in writing, covering multi-operator travelcards,
through tickets, multi-operator individual tickets (those available
to make a specific journey on the vehicles of any operator on
a route), and "add-on" tickets (where travelcards or
a through ticket or a ticket for use on the services of only one
operator are available as an add-on to a ticket allowing for a
particular journey to be made);
smartcard technology and other innovative
ticketing documentation are covered;
no operator or potential operator
may be excluded from a ticketing scheme without "objective,
transparent and non-discriminatory" reasons;
operators must be free to decide
which routes they will operate, and to set the prices or availability
of their own single, return or individual operator season tickets;
operators must be free to take independent
commercial decisions on the frequency and timing of their services;
operators must not exchange commercially
sensitive information, but they may exchange information that
is "directly related and indispensable" to the effective
operation of the particular ticketing scheme;
revenue under a travelcard scheme
must be distributed, "as far as is reasonably practicable",
to reflect the actual passenger miles travelled on the vehicles
or vessels of the parties to the agreement;
prices for multi-operator individual
tickets, though tickets and add-ons must not be fixed by the parties,
but reimbursement by way of a "posted price" arrangement
operators who offer multi-operator
individual tickets must concurrently make available their own
equivalent tickets. Revenue from sales of multi-operator individual
tickets must remain with the operator who sold the ticket.
14. Agreements that do not meet all the
conditions in the block exemption may, nevertheless, meet the
criteria for individual exemption in section 9 of the Act. It
is for the parties to an agreement to consider, first, whether
the agreement meets the conditions in the block exemption. If
it does not, they should consider whether it meets the criteria
for individual exemption and, if so, whether to notify it to the
OFT for legal certainty. There is no requirement to notify agreements,
and individual exemptions can be back-dated.
The Chapter II prohibition
15. Conduct in a market by one or more firms
which amounts to the abuse of a dominant position, and which may
affect trade in the United Kingdom, is prohibited. This is a two-stage
test: whether the firm is dominant in the market; and, if so,
whether it is abusing that dominant position. The Act contains
a non-exhaustive list of conduct to which the prohibition applies.
16. Whether a firm is dominant depends on
a number of factors, including market share and whether there
are opportunities for new entry. EC case law (which, as noted
above, must generally be followed under the Act) states that dominance
can be presumed if a firm has a market share persistently above
50 per cent. The OFT considers it unlikely that a firm will be
dominant if its market share is less than 40 per cent.
17. In order to calculate market shares,
the OFT first has to decide which services fall inside, and which
fall outside, of the relevant market. This must be done on a case
by case basis. For both Chapter I and Chapter II cases, the relevant
market in cases involving local public transport services will
generally be local public passenger transport supplied by operators
in the relevant local area. That area may be the relevant network
of services, or it may be a single route. In bus cases, other
forms of public transport will be included in the definition of
the relevant market if they provide a real alternative to the
bus services: for example, competing rail, tram or underground
services will be included if they constrain bus fares. As previously
explained in oral evidence put to the Sub-committee, the private
car is not generally included in the market definition because,
for a large number of bus passengers, the private car is still
not an available option. (That is not to say that those who use
cars at present could not be encouraged to use bus services instead.
However, our focus is on the interests of, and options faced by,
existing bus users.)
18. If the OFT establishes that a firm is
dominant, it then has to consider whether the behaviour complained
of is, in fact, abusive. Abuse may take a number of forms, but
it usually either exploits customers by charging excessively high,
or discriminatory prices, for example, or is designed to remove
smaller competitors, for example through predatory pricing.
19. It is, however, only the abuse of a
dominant position that is prohibited. However large a share of
the particular market a bus operator may hold, the OFT can take
action under the Competition Act only if a dominant position has
20. The prohibitions are explained in detail
in the guidelines and booklets about the Act issued by the OFT.
The attached copies of the guidelines "The Major Provisions",
"The Chapter I Prohibition" and "The Chapter II
Prohibition" and of the booklet "What your business
needs to know" may be of interest to the Sub-committee.