(b) The balance of sector-specific
and competition law powers
203. As we have already noted when considering SMP
conditions, concern has been expressed about the balance in usage
between the sector-specific powers granted to OFCOM and powers
under competition law. The Government's position is as follows:
"As competition becomes
more pervasive in the supply of communications services, it is
expected that OFCOM will be able to rely increasingly on [competition]
powers, rather than powers specific to the sector, in addressing
concerns about competition. However, many aspects of the sector-specific
framework, e.g. universal service provision, will remain necessary
and will not disappear or become redundant in the foreseeable
204. John Vickers, the Director-General of Fair Trading,
agreed that there were features of the communications industry,
including the presence in telecommunications of a former nationalised
monopoly, that made sector-specific regulation "important
to retain for the time being".
David Edmonds of Oftel supported the trend towards greater use
of competition law powers and stressed the value of being able
to choose between the two different approaches.
Since he gave evidence, David Edmonds has made a statement that
Oftel's objective "is to use the Competition Act wherever
possible", with investigations being conducted in accordance
with that Act from the start when possible contravention of both
regimes is under consideration.
205. We view this very recent announcement by Oftel
as a welcome development. David Melville of Freeserve thought
that, in recent times, Oftel had been uncertain which route to
follow. He said that this had meant that "companies who
wish to bring complaints are facing a serious difficulty as well".
206. The switch in focus of regulatory action from
sector-specific powers to competition law powers may provide a
basis for due consideration by the appropriate authorities of
an issue that arose in our inquiry. It was suggested by more
than one witness that problems of dominance, and potentially of
abuse of dominance, would continue to arise even in new markets
while BT retained its ownership of the key components of the telecommunications
BT argued that any attempt to divide the infrastructure from
services to the customer would be economically counter-productive.
Given the current significance of the development of broadband,
this debate about the position of BT remains of crucial importance.
We are convinced that all these arguments could and should be
considered more effectively by OFCOM from inception, with the
competition authorities, by applying the new competition laws.
207. In the light of the experience of Oftel, we
are sympathetic to the argument that OFCOM ought to be encouraged
down the path to competition law regulation wherever possible
and required to signal clearly its decisions on which path to
follow. The Better
Regulation Task Force noted concern that competition law would
remain under-used by sectoral regulators without further measures
to encourage its use.
The Government argues that this judgement is ultimately for regulators.
We consider that the legislative framework can influence this
judgement, for better or for worse. We have already made recommendations
with a view to strengthening the duty on OFCOM to assess whether
markets are "effectively competitive" and thus subject
to competition law and not sector-specific regulation. We also
consider that the draft Bill could be clearer in emphasising the
value of exercising competition law in some cases where a market
is not effectively competitive. In some circumstances, a reference
to the Competition Commission for market investigation may facilitate
remedies wider in scope and more structural in nature than sector-specific
conditions. Clause 74(10) requires OFCOM, before enforcing contravention
of conditions, to decide whether or not "the most appropriate
way of proceeding in relation to the contravention in question
would be under the Competition Act". There appears to be
no equivalent provision relating to the setting of conditions.
We recommend that, before setting conditions of a discretionary
character under Clause 35, OFCOM be required to decide whether
the more appropriate way of proceeding would be under the Competition
Act or Enterprise Act and to give reasons for their decision.
208. During our inquiry several witnesses expressed
concern about the potential for confusion arising from the exercise
of competition law powers by both OFCOM and the OFT. NTL feared
divergent interpretations of competition law.
Reference was also made to "jurisdictional overlaps"
and potential for "double jeopardy".
The OFT and Oftel, who operate with concurrent powers at the moment,
denied that there is or will be a problem. They argued that the
principle of "the best-placed acts" worked satisfactorily.
In general terms, except where OFT's specialist skills relating
to cartels are called for, responsibility will normally fall to
OFCOM. A system
of guidelines and secondary legislation, together with the Concurrency
Working Group, are in place to ensure full co-ordination and transparency.
We have seen no convincing evidence to indicate that there
will be a problem for the regulators or those in the market with
regard to the division of labour between OFCOM and the OFT and
we see no need for further provision in the Bill on this matter.
209. A more practical problem was raised by Don Cruickshank
and others about whether OFCOM would have sufficient specialist
skills in competition law to perform those functions effectively.
We see it as absolutely essential, if the arrangements proposed
in the draft Bill are to work and if the shift that the Government
wishes to see away from sector-specific regulation towards competition
law is to happen, that OFCOM's structure and resources reflect
the high priority of competition law functions. We have already
recommended that separate arrangements for Exchequer funding of
competition law functions be established. Although the internal
structure of OFCOM should not be set out in the Bill, we view
the proposed place for competition law functions in the proposals
of the Towers Perrin Report as wholly unsatisfactory. The establishment
at the very heart of OFCOM's structure of a properly resourced
competition unit, with the full complement of skills and the will
to use competition law functions effectively, will be crucial
to the new regulator's success. If the Government's aim for less
regulation is to be achieved, there must be swifter and better
regulation under competition law. If OFCOM lacks the expertise
to use competition law optimally, it will fall back on the devil
it knows in the form of sector-specific powers, whether or not
it is appropriate to do so.
(c) Competition law and broadcasting
210. The debate about the role of competition law
and the balance between sector-specific and competition law powers
is sometimes conducted as if it relates solely to networks and
services. This is partly because Oftel already has concurrent
powers and because there is a clear relationship between concepts
in the sector-specific powers under Chapter 1 of Part 2 and those
of competition law. However, the same principles of competition
law powers held by a sector-specific regulator and a balance needing
to be struck with sector-specific powers (namely licensing) will
apply in future in the broadcast sector, where competition law
powers have been exercised hitherto almost exclusively by the
OFT. In the future,
on the principle that "best-placed acts", most broadcasting
cases will fall to OFCOM.
211. Patricia Hodgson of the ITC argued that OFCOM's
combination of media expertise and competition law powers could
lead to a significant change in the way broadcasting is affected
by competition law: "I would expect and hope that [OFCOM]
will act swiftly and effectively and we may see quite an impact
as a result of that".
Derek Morris also referred to the possibility that OFCOM might
refer broadcasting matters to the Competition Commission for market
212. The impact of competition law in broadcasting
is greatly affected by the dominant market role of a publicly-funded
broadcaster in the shape of the BBC. In essence, the BBC is subject
to competition law insofar as it is acting as an "undertaking";
this concept includes all of the BBC's commercial activities,
and does not necessarily exclude its public service activities.
As far as the BBC's behaviour in the market is concerned, all
BBC economic activities are subject to consideration, but the
competition authorities must have regard to the extent to which
enforcement of competition law would obstruct performance of the
BBC's public service broadcasting functions.
Derek Morris of the Competition Commission argued that such judgements
could be made more easily if the public interest role of the BBC
were more clearly laid down.
In reply, the BBC contended that the Royal Charter, the Agreement
and approvals for individual services provided a clear remit already.
213. As we understand it, the effect of scrutiny
of the BBC through competition law can be threefold:
- to ensure that there is no contravention of State
Aid rules by subsidisation of commercial activities from licence
- to ensure that, where public services are publicly
funded by the licence fee, the impact on the market (strictly
the adverse effects on competition) are the minimum necessary
for delivery of the BBC's public service obligations; and
- to ensure that, in its economic impacts or commercial
activity, the BBC does not enter into agreements which are intended
to prevent, restrict or distort competition (the Chapter I prohibition)
or exercises its dominance in a market in a way which prevents,
restricts or distorts competition (the Chapter II prohibition).
214. In addition, the BBC's own Fair Trading Commitment
and commercial policy guidelines do two things: (a) reflect how,
in practice, the BBC ensures its compliance with competition requirements;
and (b) reflect the BBC's own view of how its public services
purposes should additionally be reflected in its activities, for
example, by protecting the BBC brand against inappropriate use.
Although the Board of Governors is responsible for enforcement
of the Fair Trading Commitment, there is no external accountability
for it in doing so. However, insofar as the Fair Trading Commitment,
or commercial policy guidelines, represent a recognition by the
BBC that fulfilment of its public service remit is fully consistent
with arms-length trading internally, market pricing and commercial-style
agreements, then it will be relevant to a competition-based investigation
of any complaint and the judgement of the extent to which the
BBC may be required to act without any anti-competitive effects.
215. Insofar as the purpose of the BBC Fair Trading
Commitment is to reflect how the BBC complies with Competition
and State Aid requirements, we believe that, in future, it will
be directly relevant to consideration by OFCOM of complaints of
anti-competitive effects resulting from BBC activities and will
therefore, to that extent, be enforced by OFCOM in applying its
concurrent powers. More generally, there remain a number of
unanswered questions about the precise extent to which the BBC's
public service broadcasting functions justify market behaviour
that might otherwise be subject to examination under competition
law. We return to an important aspect of this problem at a later
stage in this Report in relation to the BBC's operations in the
programme supply market.
216. The application of competition law to broadcasting
by a sectoral regulator has the potential to play a part in the
regulatory response to some of the economic challenges facing
broadcasting that we will examine in more detail later in this
Report. We consider it particularly important that this application
extends to broadcasting and related activities as a whole, including
those concerned principally with the creation of content, and
not simply to the regulated broadcasters. Tessa Jowell agreed
that OFCOM should be able to look at the content supply market.
We are concerned that the term "broadcasting and related
matters" in Clause 246(1)(e) may create doubt about the scope
of OFCOM's powers in this regard. We recommend that Clause
246 be amended to provide OFCOM with appropriate discretion in
interpreting the scope of its competition law functions in broadcasting
and related matters, including the creation and distribution of
217. We consider clarification and certainty on the
scope of competition law powers of OFCOM in respect of the content
supply market important, because we return to the role that such
powers could play in future when we examine the economics and
regulation of content production.
379 Policy, para 5.3.1; Clauses 246-249. Back
Ev 410-412; Enterprise Bill Explanatory Notes, paras 126, 445. Back
Ev 3, para 7. Back
Oftel's Competition Act Strategy, A statement by the Director
General of Telecommunications, 1 July 2002, pp 5-7; Ev 457, para
QQ 157, 175, 181. Back
QQ 872, 876. Back
Policy, para 5.3.3. Back
Q 162. Back
QQ 92, 97-99. Back
Oftel's Competition Act Strategy, p 3. Back
Q 352. Back
QQ 221, 263-264; Ev 87-89. Back
Q 291. Back
Q 232. Back
Economic Regulators, p 22. Back
Economic Regulators: Government Response, para 49. Back
Q 231. Back
Q 233; Ev 85. Back
QQ 105-107, 153, 165, 189; Policy, para 5.3.2. Back
Competition Act 1998: Concurrent application to regulated industries,
OFT 405, January 2001; EN, paras 420-422. Back
QQ 235, 382, 876. Back
Policy, para 5.3.2. Back
"Competition policy and broadcasting", speech by John
Vickers at the Institute of Economic Affairs conference on the
future of broadcasting, 24 June 2002. Back
QQ 12, 13. Back
Q 175. Back
Ev 383; QQ 166, 167. Back
Ev 383; Memorandum submitted by BBC. Back
Q 175. Back
Memorandum submitted by BBC. Back
Q 1019. Back