Joint Committee on the Draft Communications Bill Minutes of Evidence


Examination of Witnesses (Questions 180-195)

MR JOHN VICKERS, MS MARGARET BLOOM AND DR DEREK MORRIS

MONDAY 27 MAY 2002

  180. Just finally, one of the things that worries me about the whole Competition Act and the enterprise of doing it after the fact is we have a market out there with the Internet. If I were a company that wanted to get round some of the rules, I would be setting up an ISP with different bases in different countries and applying the rules in different countries according to what I could get away with at any one time. How are you going to cope in a world like that rather than the slow-moving world that you are used to?
  (Mr Vickers) I am not sure it is that slow moving. There are all sorts of ways in which national competition authorities and supra-national competition authorities like DG Competition in Brussels (and I would say the same for consumer protection agencies as well) are increasingly working together, and there are a number of examples in the consumer protection area where European Directives have been implemented in the UK where we not only can but have taken cross-border action. That would be part of the answer to the question. You spoke also about how fast-moving circumstances can be and I think one of the merits of what is sometimes called ex post regulation is that it can, to a substantial degree, deal with issues of that kind. The Microsoft matter in the US is being pursued under the 1890 Sherman Act passed nearly a century before Microsoft was thought of.

  181. The reality is that by the time that is resolved, the issue that Microsoft is trying to protect itself from will be long gone.
  (Mr Vickers) That also links to the point about deterrence which we had earlier on. The so-called ex post legislation has ex ante effects via deterrence.
  (Ms Bloom) We have a lot of complaints and in a not insignificant number of them somebody will complain to us for example about refusal to supply. We will be investigating a case and a bit later they will phone up and say, "You can drop that case now because the company we were complaining about is now supplying us because we had complained to you and they had realised the strength of your powers." That was a quite rapid self-enforcement. That only happens in some cases and we have to go right through some of the cases. So far we have only had four which have gone through to a prohibition decision and we have fined companies, but self-enforcement is quite a useful mechanism.

Baroness Cohen of Pimlico

  182. It strikes me as rather odd that you can appeal against an awful lot of things to the Competition Appeals Tribunal against a background where it has been made clear in competition that things will go to OFCOM because they know the industry. There is going to have to be an awful lot of people under the auspices of the Competition Appeals Tribunal who know enough to deal with these appeals. Is the Competition Appeals Tribunal ready for this?
  (Dr Morris) I should preface my answer by saying that the Competition Appeals Tribunal, which is currently part of the Competition Commission, will be completely split off from the Competition Commission under the Enterprise Bill. That is in order that there will be an appeal against the decision by the Commission that will go to the CAT.

  183. How many of them are there?
  (Dr Morris) How many people in the Tribunal?

  184. What does the Appeals Tribunal look like?
  (Dr Morris) It has a President and 21 members part time and on any particular appeal the President and two others will sit. They come from a variety of backgrounds. Some of the others are lawyers, but they are also economists and accountants from the industry and so on. Then there is a relatively small support staff, a registrar and I am not sure of exact number, 15 or 16 support staff. It is quite small but, of course, at the moment it is only dealing with appeals largely against decisions of the Office of Fair Trading under the 1998 Competition Act.

  Baroness Cohen of Pimlico: I think the answer to that question was no, but I am not really quite sure.

Mr Lansley

  185. On appeals the EU legislation requires there to be a full appeal on the merits of the case and that is provided for on decisions of OFCOM under this legislation, but if OFCOM uses the powers under the Competition Act there is an appeal on merits to the Competition Appeals Tribunal. If OFCOM were to use the powers of the Enterprise Bill when it becomes an Act there would be an appeal not on merits but only on grounds of judicial review. Does that cause a problem in relation to the EU legislation or are the kinds of decisions covered by the Enterprise Bill, ie merger decisions of market investigations, not intended to be appealable on the merits by the EU Directive?
  (Dr Morris) That is quite a complicated area unfortunately. If we take the Competition Act, first of all, as you say, there is scope for a full appeal and if we look at what is proposed under this Act where there are decisions about the existence of significant market power or possible remedies under that, there will once again be (because of the European Directive) scope for appeal. In each of those cases there is a first tier decision body, OFCOM, and then there is an appeal. There is a particular problem which perhaps I could come back to in that area. To try and answer your question on mergers, the situation is different, there is a first tier body which would make a reference to the Competition Commission in order to investigate a merger and then there is a second tier full investigation by the Competition Commission. In normal circumstances it would be single determinant with no relevance at all, unless there is a so-called public interest gateway, and then there would be a right of appeal. At that point it would be essentially JR. That all fits because in the merger case you have already had a two-stage process and therefore the appeal is JR. Under, for example, the Competition Act essentially that says certain things ex ante have been deemed to be illegal, they are prohibited and the only question for the OFT is has the company or particular set of companies breached that prohibition? If they decide they have they fine them and therefore it is right in that situation with a single decision at that point that the appeal should be a full appeal.
  (Mr Vickers) In both cases there is a two-tier structure. In one case we decide subject to appeal and in the other case we refer. That is subject to JR but everything in public administration is subject to that in any event.

Paul Farrelly

  186. I wanted to pick up a thread I wanted to explore earlier on which I want an opinion and where sadly I got, in Lord Pilkington's words, a not very clear answer. You must as a body spend a considerable amount of your time and resources looking at competition issues to do with the communications industry as will come under this Bill. As people have pointed out, there are concurrent powers with Oftel and OFT. This legislation is going to extend that hugely across the sector potentially to newspaper mergers of the smallest variety, so there will be an awful lot of people looking at similar issues to the OFT and potentially second-guessing who is best to act or co-operating as to who is best to act. OFCOM run the danger of becoming a huge monitor rather than the fleet-of-foot, nimble regulator it is supposed to be focusing on specific issues of its duties. Do you not think as an opinion that it would be more effective to give OFT all the sector specific powers in the various bits of sector specific legislation and let the OFT get on and pursue the enforcement of competition issues whilst drawing on the expertise on sectoral regulators, so that bodies like OFCOM can sharpen their focus and get on with the business of being faster and fleeter of foot?
  (Mr Vickers) As a first point, please do not underestimate the range of activities that the OFT has. There are two ways you can do it. You can have concurrency arrangements with sector regulators applying competition law in their areas, or you can cut it the other way and have competition powers exercised by one body right across the piece. Either way of doing it could be made to work. I think the way things have worked in the concurrency arrangements under the Competition Act, although it is early days, is so far so good. I would expect the same in the OFCOM world.

Lord McNally

  187. Just something that is slightly intriguing me. Mr Morris said, "I suppose you will be getting on to newspapers later" and of course we have not. I just wondered whether that was prompted by the fact that he had some wise piece of advice to the Committee perhaps on cross-media ownership that he wanted to get on the record.
  (Dr Morris) I do not think so. It was more that this is an area in which the Competition Commission's involvement has not been that great. I should restrict my comments to areas where we have some competence. I think that boils down to two areas, one of which is we do have experience of the newspaper merger regime. We do not have draft provisions yet, but there are the broad proposals that have been spelt out and essentially they say that the newspaper merger regime should rely and build upon the standard merger regime that exists more generally, and that does seem to me to be a very sound way forward. The problem—and it is quite a problem—is how do you specify the new exceptional public interest gateway that will need to be specified to deal with the obvious public interest issues that do arise under newspaper mergers? At the moment the legislation under the FTA under the special newspaper regime requires us to look at competition issues, but also issues of the accurate presentation of news and the freedom of expression of views. We do that, but the precise meaning of those words is not critical because the overriding criterion at the moment under which we are required to operate is a public interest criterion, and so if we felt there were problems of that nature but not necessarily precisely fitting those words it would not matter because we could come to a public interest finding more broadly. Under the new regime for mergers in the Enterprise Bill the test will be whether a merger leads to substantially lessening of competition or not. If we adjudge that it does not lead to a substantial lessening in competition, it has passed the test. However, for newspapers that would not be sufficient, so there is a proposal that there will be a special provision to deal with public interest issues. The wording now becomes absolutely critical because if some public interest issue is not properly picked up under that wording, there is no way in which the Commission under the Act will be able to allow for it under the primary test. That is a pure competition test. I think there are relatively few problems about applying the accurate presentation of news conditions. We have operated that since 1965. We largely have to rely on whether there have been complaints on that issue, we cannot go checking stories ourselves, but where it is an issue, and the Sullivan Post (?)case was one issue where it came up, I think we have been able to deal with that. Hopefully that was alright. When we get to freedom of expression of views, traditionally the Commission has regarded that as an issue of whether there has been editorial independence or not, and we go to great lengths to check that editors do have independence in that respect. Of course, that does beg the question that perhaps no editor has ever had any pressure put upon them because owners appoint editors which they do not need to put pressure on because they are like-minded. That pushes the issue one stage further back to the issue of the owners. In general it is not a problem provided you have a plurality of views. In particular we have found that in the local newspaper area—basically we have never had a national newspaper merger case—there is the commercial necessity that you appeal to a very wide spectrum of views at local level, and therefore the notion that an editor will be pushing one very virulent, persistent, hard-line case is relatively rare. We did have the Kidderminster hospital case but there, in a sense, the problem was not too little freedom of expression, I think people thought there was too much freedom of expression. The key thing is you have got a plurality of views. There was a proposal to bring, as I understand it, plurality into EPI, but it is very difficult to see quite how that would work. I do not think there is a great problem at the level of national newspapers. We as a competition authority could relatively easily ensure that there is sufficient competition and hence plurality of views. At the local level it is quite difficult. There are vast swathes of Britain where essentially it is only one local newspaper that has any editorial content. When we get a merger we look at the degrees of overlap and we try to preserve diversity in the area of overlap. One is often aware that in all of this area and all of that area there is no problem with the merger because there is no diversity to start with and the merger does not make a difference to that. We have even had cases where there has been diversity of overlap, but it is quite clear if the merger does not go through that one set of titles will fail and therefore again the merger does not make a difference to diversity. I think the Bill ought to be an opportunity to stand back and say quite what is happening on the issue of plurality and diversity of views, particularly at the local level.

  188. Do you only do this in isolation to the print media or do you look across sources of news to radio news and to television news in the localities?
  (Dr Morris) In every local newspaper merger that we have had—and we have had a large number—we always consider the question to what extent might there not be a competition or a plurality problem because of local radio, local television and other media. To date we have always concluded that local newspapers are still sufficiently distinct, but in recent years that judgment has been getting a much finer judgment, it is much less obvious. I suspect there will come a point where using the usual sorts of the tests of market definition we will conclude that newspapers and other types of media have now started at the local level to merge into a single market, but we have not hit that point yet.

Mr Lansley

  189. Is it your expectation—and perhaps this is something we should discuss subsequently with the Bill team—that this is something that will be dealt with by of specifying as public interest some form of words that deals with the issue of plurality of local or indeed other media ownership in the Enterprise Bill or subsequently amending the Enterprise Bill through the Communications Bill?
  (Dr Morris) At the moment the proposal is to do this in relation to mergers. That is fine, but it is just that one can only then tackle it where you have a merger and where there is an element of overlap. It is quite possible that the vast majority of people in the country could be faced with only one local newspaper with editorial comment. One can ensure—

  190. Sorry to interrupt, it is not newspaper transactions as with the local case, it might be just the case with acquisition under the Fair Trading Act?
  (Dr Morris) I am sorry, I missed that point.

  191. Essentially a merger can only be conducted with the consent of the Secretary of State. If you align this with the merger provisions you require a merger for that to happen in the first place.
  (Dr Morris) There is a potential problem there under the proposals which is if there is a merger it involves two enterprises ceasing to be distinct. That would mean that if someone bought a newspaper chain and they opened a fish shop that would be sufficient, but if a wealthy individual with no other interests just bought a newspaper there might be concerns about whether he or she is a fit and proper person but, as I understand it, that could not be caught under the merger regime because it is about convergance of control not transfer of control.

Mr Grogan

  192. We approach the 9 o'clock watershed so I will be brief. To put the opposite view to Mr Farrelly's, could you argue, as Patricia Hodgson did last week, that there is a tradition of taking quicker decisions in the communications sector than there is in the competition sector? You said there are very good reasons why these things take a longer time, but given the duty of promptness and given that you will have a section of lawyers and economists and specialists looking at the communications sector, should it be possible to come to decisions quicker? I know you will not want to go into the detail of the recent decisions that have been referred to, but did satellite decisions, regarding access and so on, to channels take rather longer than the other sorts of decisions you take? Was it above average or was it about par for the course?
  (Mr Vickers) With the Competition Act, as we have said previously, it is early days so the track record under that Act is not a lengthy one. There is, however, the experience of the European Commission which goes back several decades and there are other authorities around the world which have longer experience still. I do not see any reason necessarily to presume that cases would be taken forward more quickly under one set of institutional arrangements or another. What needs to be done under the Competition Act involves various staging posts of the case. The first is a decision as to whether there are reasonable grounds to suspect that an infringement has occurred. When that hurdle is crossed various powers of investigation and information gathering come in. Then if it comes to it one gets to the so-called rule 14 notice stage where there is a proposed decision and then parties have rights to make representations, which they do sometimes voluminously in writing and also at oral hearings. And then all these need to be taken into account of course before any final decision is reached, whichever way it goes. That is rightly part of the process. Any competition authority in the United Kingdom obviously has to go through steps like that or exactly that if we are talking about the Competition Act.
  (Ms Bloom) Those are the steps if you are leading to an infringement decision with potential significant powers to fine or impose directions requiring the company, for example, to lower its prices or do something very significant in terms of future business. John mentioned early days. We have only had four prohibition decisions and the most recent one, quite a small case, was the fastest and it took ten months to go through the process he described. It would be difficult for anybody to get it much shorter than ten months just because of the need to observe the rights of defence which John described.
  (Mr Vickers) That process is not the end of the story because then there are appeal rights to the Competition Appeal Tribunal and on points of law potentially above that to the Court of Appeal, and similarly in the European context appeal rights from the Commission to the European court system.
  (Dr Morris) Could I raise one difficulty about the appeals mechanism because it comes from a number of questions from Baroness Cohen and it relates to this. Under the new regime, appeals, for example, about substantial, significant market power will go to the Appeals Tribunal and that seems very sensible. Also it is envisaged that price control cases will be appealed to the CAT. I think that is rather like a lose rivet on a plane. It is a very small part of the craft but it would be extremely damaging to the whole regime. At the moment those appeals come to the Commission and I hasten to say this is in no sense trying to cling on to work. We have had three such cases of any significance over the last 280 and we need more work like a hole in the head. There is a very fundamental point here which is on price controls. We act as the appeal body across the whole regulatory regime—gas, electricity, telecoms, and recent acts have extended that to postal services, airports, air traffic, rail traffic, the whole works—and we have therefore developed the expertise and the resources to deal with that. We have had 17 cases. The proposal now is in one sector and one sector only where there have only been three significant cases, to take that appeal function away and place it with the CAT. I think splitting it off and placing it anywhere would be very damaging. It will certainly require increased resources and raise the possibility of inconsistency. To place it with the CAT, which I think is an extremely competent and able body, would be particularly disastrous because, firstly, it is not designed to deal with such cases, it has no economists or accountants or business people on its staff, but much more importantly it is the one body in the UK to which we cannot provide any advice. We cannot even liaise with them because it is the appeal body for our own decisions, so there would be no possibility of testing whether this inconsistency was emerging. I think it therefore flies in the face of everything the Better Regulation Taskforce is talking about. I think it has only come about because people have said under the European Directive there has to be a full appeal, but that is precisely what we will provide, and then it is said, yes, but it has got to be a judicial procedure. It has not. It is quite clear that a quasi judicial or non-judicial procedure is right provided we publish our decision, which we do.

  193. I think you are saying there is a danger it could take even longer with that particular clause in there. I am sorry to harp on about the satellite channel and the other premium channels but they are of some public interest. Can I ask you for the record how many people you had working on that particular case and could you see some merit in the platform and content being separated for transparency to enable you to investigate these sorts of cases in the future, or indeed OFCOM?
  (Ms Bloom) Just on the numbers, it is something of the order of up to six people on the team, but that is not six full time because, for example, some of the economists would be working on other work as well. I would have to come back on what the full-time number would be.[2]

  194. I would be interested to know.
  (Mr Vickers) On the other hand, there might be some people not on the team as such who have been contributing something to that case. The issues having to do with the relationship between content and infrastructure are among the questions in that case. You were moving on to a much wider issue about the structural arrangements, and issues of that kind arose in some of the regulated industries post privatisation. I do not think I can usefully say anything in the context at hand on this.

  195. Just one final question then, do you think what we are embarking on will last ten years or is there any way we could make it last a little bit longer? Is there anything Parliament should look at in particular? What are our prospects of not coming back to this in ten years? As a marginal seat I am not sure I will be here in ten years, but what are our chances?
  (Mr Vickers) I am tempted to say pass!

  Chairman: Thank you. You really have been more than helpful. I am very sorry that we took so much of your time. I am particularly grateful to you for being here, it has been very helpful. Can I also apologise to the transcriber and thank her for testing her incredible patience. Thank you very much indeed.



2   Note by witness: There are currently eight members of the immediate team. We estimate this is equivalent to around four full-time staff. The team includes lawyers, economists and financial analysts. Most of these have considerable experience on competition analysis.

In addition to the immediate team, the investigation is drawing on significant external consultancy advice in accounting and economic analysis.

Lastly, the Director General and various senior staff play a role at key points in the investigation.

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