Select Committee on Transport, Local Government and the Regions Appendices to the Minutes of Evidence


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 more efficient.

  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 fares—unless 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-sharing—whether of the geographic or of the temporal market—were 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 the test.

  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 issues.

31 May 2002

MERGER CASES CONSIDERED BY 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.

ADDITIONAL MEMORANDUM TO THE TRANSPORT SUB-COMMITTEE

The Competition Act 1998

Executive Summary

    —  The Act contains two prohibitions based on the prohibitions found in EC law—which 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 agreements;

    —  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.

Exemption

  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 the OFT.

  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 is acceptable;

    —  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 been abused.

Further information

  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.


 
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