(g) Significant market power
164. Clauses 35(7) and (8), 36(7) and (8), and 63
to 73 relate to the procedure for imposing "significant market
power" (SMP) conditions where an undertaking has SMP in a
specific, defined market. SMP is defined in Clause 63 as equivalent
to dominance, where dominance implies a position in which an operator
can, to an appreciable extent, act independently of competitors,
its own customers and other potential customers. This definition
broadly reflects that in Article 14 of the Framework Directive,
while maintaining the aversion to the concept of "consumers"
(used in the Directive) that we remarked upon earlier. Where there
is any doubt as to interpretation of SMP, the Framework Directive
makes it clear that the definition of SMP is equivalent to the
concept of dominance as defined in the case law of the European
Court of Justice and the Court of First Instance of the European
165. The concept of dominance as established by European
Community law and jurisprudence is already transposed into United
Kingdom law in the Competition Act 1998. The OFT has reflected
Commission procedures in its own guidance on Assessment of
However, procedures under the Competition Act and those proposed
under the draft Bill are quite distinct. The OFT (and, in future,
OFCOM) exercise powers under the Competition Act in relation to
abuse of dominance. The procedures of the Framework Directive
and the draft Bill are engaged by the mere existence of dominance
and are thus pre-emptive in character.
166. Unlike the procedures for the other conditions
that we have examined in this chapter, a crucial role in SMP procedures
is played by the European Commission. Under Article 15 of the
Framework Directive, the European Commission, after consultation
with the public and NRAs, will issue guidelines on identifying
markets, analysing markets and determining what constitutes SMP.
David Edmonds acknowledged that a more harmonised approach was
being sought across the European Union and that there would be
more centralised direction, but was confident that proper discretion
for decisions about markets would remain with OFCOM, rather than
such matters being decided in Brussels.
167. The next stage of the process is the identification
by OFCOM of markets, which may or may not be national markets,
in which the procedures may be engaged, taking account of the
According to the Government, "Oftel will be embarking as
soon as possible (once the Commission guidelines have been published)
on the necessary market reviews envisaged by the Directives".
Initial decisions on notification of SMP conditions are to be
made at this stage. Notification sets out the market OFCOM is
proposing to identify for the purpose of a market power determination,
the market power determination that they are proposing to make
and the reasons for these proposals. Notification is passed both
to the undertaking concerned and to the European Commission.
At this stage, during the consultation process, the European Commission
can require OFCOM to withdraw its proposal, either because the
market identification does not comply with the Commission recommendations
or on internal market grounds.
At the conclusion of the consultation period, OFCOM may make a
market power determination under Clause 64.
168. In general terms, and subject to remarks we
make shortly about Clause 67 that may affect earlier provisions,
the provisions of Clauses 64 to 66 appear to establish satisfactorily
the requirements of the Framework Directive and the roles of OFCOM
and the European Commission in these activities. BT raised one
concern. In reaching decisions on market identification and on
market power determination under Clause 64, OFCOM is required
"to have regard, to such extent as they consider appropriate,"
to Commission guidelines and recommendations. Under Article 15
of the Directive, NRAs are enjoined to take "the utmost account"
of these documents.
Given the Commission's power of veto, it would be strange indeed
if OFCOM did not take full account of the Commission's position.
Nevertheless, we recommend that the Government consider whether
it is satisfied that the current drafting of Clause 64 fully reflects
the spirit of OFCOM's obligations in respect of European Commission
recommendations and guidelines.
169. We have slightly broader concerns about the
terms of Clause 67. This seeks to give effect in United Kingdom
law to requirements arising from Article 16 of the Framework Directive,
Article 7 of the Access Directive and Articles 16 and 18 of the
Universal Service Directive.
We are not convinced that the Clause does so effectively. The
kernel of most of the Articles that we have listed is the onus
they seek to place on NRAs to review markets to see whether sector-specific
controls are still necessary or whether a market is "effectively
competitive". This is to be read in the context of the preamble
to the Framework Directive which states:
"It is essential that
ex ante regulatory obligations should only be imposed where
there is not effective competition, i.e. in markets where there
are one or more undertakings with significant market power, and
where national and Community competition law remedies are not
sufficient to address the problem."
Patricia Hewitt summarised this policy
herself concisely and clearly and thought that there was a clear
"duty on OFCOM to review the markets and withdraw from sectoral
regulation when competition is operative".
The mobile phone operators did not agree. They expressed concern
that this underlying principal purpose of market analyses was
not reflected in the draft Bill.
This was understandably linked to their view, endorsed in some
measure by the Better Regulation Task Force, that the market in
which they operated was "effectively competitive" and
not in need of sector-specific regulation.
170. The draft Bill does make reference to "the
need to secure effective competition in the long term", but
only in the more specific context of SMP conditions about access.
We recommend that Clause 67 be amended to place it beyond doubt
that the aim of market analyses is to determine whether a specific
market is "effectively competitive" and to ensure that
SMP conditions are only imposed where there is not effective competition.
We further recommend that other provisions on SMP and sector-specific
regulation more generally be reviewed to ensure that they reflect
the same principle.
171. We have two further points about Clause 67 as
it stands. Article 16(1) of the Framework Directive requires NRAs
to undertake market analyses as soon as possible after Commission
recommendations are adopted or updated and this is properly reflected
in a duty on OFCOM under subsection (4). However, Article 7(3)
of the Access Directive imposes an additional requirement as follows:
"Member States shall ensure that, as soon as possible
after the entry into force of this Directive, and periodically
thereafter, national regulatory authorities undertake a market
Subsection (2) merely states that OFCOM "may from time to
time, as they think fit, carry out further analyses of the identified
market". This does not appear to us to be a proper translation
of the provision of the Access Directive we have just quoted,
since subsection (2) implies a discretion in undertaking periodic
recommend that Clause 67 be amended to make clear the mandatory
character of periodic market analyses.
172. BT has pointed out that Article 16(1) specifies
that "Member States shall ensure that this analysis is carried
out, where appropriate, in collaboration with the national competition
authorities". It expresses concern that the draft Bill does
not make reference to this duty, given the value of involvement
by OFT in market analysis.
A clue to the Government's intentions is provided by two letters
in its Table on the transposition of the Framework Directive -
We presume this means that the Government intends to give effect
to this duty by statutory instrument. We recommend that the
Government clarify this matter in its response to our Report and
ensure that the main terms of any secondary legislation giving
effect to this provision are made known to Parliament at an early
stage of the Bill's passage.
173. Clauses 68 to 73 make more detailed provision
about SMP conditions relating to access, pricing, services for
end-users and leased lines. As we noted before in the context
of access-related conditions generally, these provisions have
attracted surprisingly little comment given their crucial importance
in OFCOM's regulatory toolkit. Freeserve was concerned that Clause
69 was couched in terms of circumstances when obligations are
not to be imposed, rather than requiring their imposition to prevent
price distortions arising.
We remain to be convinced either that there is a substantive difference
between these positions or that Clauses 68 and 69 fail to mirror
the provisions of Article 13 of the Access Directive. Although
the provisions of Clause 68(4) very closely follow those of Article
12(2) of the Access Directive, we are concerned at the adequacy
of the concept of "feasibility" in paragraph (b) of
both provisions. We recommend that the Government (a) consider
whether it would be compatible with the terms of the Access Directive
to enable OFCOM to have regard to the costs of provision of the
proposed network access, as an explicit aspect of feasibility
under the terms of Clause 68(4), (b) report on the outcome of
that consideration in its response to this Report, and (c) reflect
that factor in the final Bill if it considers it possible and
appropriate to do so.