Select Committee on Constitution Minutes of Evidence


Annex 2

REGULATORY AND OTHER REFERENCES

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

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

    —  Price determination references.

    —  Water merger references.

    —  Airport references.

    —  References under the Financial Services and Markets Act 2000.

    —  References under the Broadcasting Act 1990.

Licence modification references

  2.  Each company regulated under the telecommunications, gas, water and sewerage, electricity, postal communications, or railways legislation or providing air traffic services has a formal instrument setting out the terms of its operation, normally described as a licence. An industry regulator may modify the conditions of a company's licence if the company agrees to the changes. If the company does not agree to a proposed modification and the regulator nevertheless wishes to proceed, the regulator must refer the matter to the CC. This is expressed as a question, generally, whether any matter referred to in the reference may be expected to operate against the public interest and if so, whether the matter could be remedied by modifications to the licence. These references can involve the price control applied to the company, since some price controls are provided for in the licences.

  3.  The CC report must answer the questions in the reference giving the CC's reasons for its conclusions together with supporting evidence. If the CC makes an adverse public interest finding, it must report on whether the adverse effects could be remedied or prevented by modifications to a licence and, if so, specify what those should be. Its report is to the relevant regulator.

  4.  If the CC finds that no matter operates against the public interest, its decision is final. If the CC makes an adverse public interest finding, the regulator must make any changes to the licence which he considers necessary to remedy or prevent the adverse effects identified by the CC. In doing so, he must bear in mind, but is not bound by, the modifications specified in the CC's report. Under the relevant statutes the CC is required, following a regulatory report under the gas, electricity, railways or postal services legislation, to decide whether the regulator's proposals are adequate to remedy the adverse effects, and if not, to exercise its power of veto and make the modification itself.

  5.  The Secretary of State may, on application by the regulator, make an order for certain non-licensable activities in the gas and electricity sectors to become licensable. If an objection is made by any person carrying on the activities or if the regulator otherwise considers it appropriates he may make a reference to the CC. The reference would specify the activities concerned and the conditions which the regulator would expect to be determined to be standard conditions for licences authorising the undertaking of the activities specified in the reference and any other conditions which he would expect to be included in such licences. The question the CC will be required to answer in relation to these references is whether the activities are not licensable activities and whether they operate or may be expected to operate against the public interest. If the CC makes an adverse public interest finding, the CC will also specify modifications to the conditions specified in the reference. Following the report the regulator considers whether to make an application to the Secretary of State to make an order.

Price determination references

  6.  In many regulated industries, the price control is a key element of regulation. When that is the case, some of the sector regulators review the charges made by the licensed service supplier, generally at set periodic intervals. The mechanisms for review vary between the regulated sectors but in general they include a mechanism by which in the event of disagreement with the regulator's determination the regulator may or must refer the matter to the CC.

  7.  The CC sets out its findings in a report to the regulator. The mechanisms following the CC's report vary. For example, in the water and sewerage sector the CC's decision is binding while in other sectors, the regulator must consider what action to take and the CC has the power to veto the regulator's proposed action and to take action itself.

Airport references

  8.  There are two types of inquiry under the Airports Act 1986, applicable to designated airports under section 34(1) and to non-designated airports under section 34(2).

Section 43(1) References: Designated Airports

  9.  The Civil Aviation Authority (CAA) imposes conditions on designated airports (currently Heathrow, Gatwick, Stansted and Manchester) regulating airport charges for a period of five years and reviews the charges generally every five years. Before it imposes any conditions or makes any modification to any pre-existing conditions, the CAA must, unless the Secretary of State otherwise directs, make a reference to the CC.

  10.  A quinquennial review reference has two parts:

    (a)  It requires the CC to investigate and report on the maximum airport charges that the airport operator can levy for the next five-year period in the form of recommendations to the CAA, which are not binding; and

    (b)  The CC is required to determine whether the airport operator has, at any time during the five-year period since the previous reference, pursued a course of conduct which relates to airport charges, the operation of the airport, or the subcontracting or licensing of operations on the airport, which has operated or might be expected to operate against the public interest.

  11.  If the CC finds that a course of conduct is against the public interest, the CAA must impose appropriate conditions to remedy or prevent the adverse effects the CC has identified. In doing so the CAA must bear in mind, but is not bound by, the conditions or modifications specified in the report.

Section 43(2) References: Non-designated Airports

  12.  The CAA may wish to impose conditions on a non-designated airport or modify the terms of any existing conditions to remedy or prevent the adverse effects of certain anti-competitive conduct on the part of the airport operator in relation to its business. If the airport operator does not agree to the proposed modification, the CAA may refer the matter to the CC.

  13.  The CC must decide whether the airport operator has pursued the course of conduct referred to by the CAA, whether the course of conduct may be expected to operate against the public interest and, if so, whether the adverse effects could be remedied or prevented by imposing or modifying conditions in the licence.

  14.  Where the CC makes an adverse public interest finding, the CAA must impose a condition or modify any existing condition already in force to remedy the adverse effects identified by the CC. In doing so it must bear in mind, but is not bound by, the conditions or modifications specified in the CC's report.

The Financial Services and Markets Act 2000

  15.  The CC has two roles under the Financial Services and Markets Act 2000 (FSMA). The first concerns the rules, guidance and statements of principle made or given by the Financial Services Authority (FSA) and the second relates to the regulatory provisions and practices of recognised investment exchanges and recognised clearing houses. The OFT is responsible for keeping, under review in the first case, the FSA's rules etc. and in the second case, the regulatory provisions and practices of the recognised bodies. [6]In both cases it must make a report if it considers that one or more rules etc or one or more regulatory provisions and practices have a significantly adverse effect on competition: it may also make a report if it considers that there is no such effect on competition.

  16.  Any report made by the OFT must be sent to the CC. The CC must investigate the subject matter of the OFT's report. If that report concluded that there was a significant adverse effect on competition and the OFT has asked the CC to consider the report, the CC must make its own report unless it considers, giving reasons, that no useful purpose would be served by a report. If the CC does make a report and concludes that there is an adverse effect on competition, it must also state whether it considers that the effect is justified and if not, state what action the Treasury ought to direct the FSA to take. The Treasury will then consider whether to direct to the FSA to take action.

References under the Broadcasting Act 1990[7]

  17.  The Independent Television Commission (ITC) has to refer to the OFT any arrangements in relation to, or modifications of, licence conditions, the code giving guidance as to the rules to be observed for programmes included in the licensed services of appeals for donations, and rules in relation to licensed services.

  18.  The OFT has to consider and report on whether the arrangements proposed satisfy the competition test set out in Schedule 4 to the Broadcasting Act. Where the arrangements do not satisfy the competition test, the report must specify modifications in order to satisfy that test.

  19.  Where the OFT report has concluded that the arrangements do not satisfy the competition test and has specified the modifications required in order to satisfy the competition test, a reference may be made by the ITC or the holder of a Channel 3 licence to the CC to investigate and report on:

    (a)  whether the arrangements or any particular provision of the arrangements satisfy the competition test; and/or:

    (b)  whether the modifications specified in the report, or any particular modification specified, should be incorporated in the arrangements in order to satisfy the competition test.

  Any modification proposed by the CC in its report or any affirmation by the CC of any modification proposed by the OFT must be incorporated as specified.




6   Sections 160 and 304 FSMA. Back

7   The Communications Bill currently (April 2003) before Parliament is expected to alter these provisions. Back


 
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