I. INTRODUCTION
With the advent of privatisation and major regulatory reforms introduced in the 1980s and 1990s in many countries around the world, the issue of sectoral regulation in its entirety has increased in significance. However, sectoral regulation has a particular resonance in respect of competition law and policy because the adoption of non-generic competition regulatory instruments in some sectorsFootnote 1 has also become a common feature in many regulatory environments across the globe. The adoption of such measures – which, among other things, primarily necessitated the creation of special regulatory bodies and/or arming the relevant minister with sectoral regulatory powers – has been considered essential for the regulatory framework of these sectors for several reasons: their history of state control and planning; the existence of natural monopolies in these sectors;Footnote 2 and the desire to move towards introducing and promoting competition. At the same time, this remarkable development has triggered some highly challenging questions, the most difficult of which perhaps concerns the relationship between competition authorities and sector regulators. This relationship has been the subject of controversy and heated debate in recent years;Footnote 3 though this debate has not been settled and it does not look likely that it will in the foreseeable future: if anything, the debate seems only likely to intensify. The relationship carries fundamental importance for most countries around the world – whether developed or developing.
This article offers a critical analysis of the relationship between competition authorities and sector regulators. The focus of the article is on the most challenging question concerning this relationship, which revolves around determining the parameters in this relationship, namely: how to manage the interface between competition law and sectoral regulation. This question is of fundamental importance and it goes to the heart of this unique but difficult relationship. In addressing the question, this article demonstrates that competition authorities have a vital role to play in managing the interface. On that basis, it advocates two scenarios, within which competition authorities should play this role and within which reliance on the market mechanism and reduced regulation represent an ultimate destination for the sectors.
The article is structured as follows. Part two briefly puts the topic at hand in its proper context. Specifically, it highlights important issues underpinning the relationship between competition law and sectoral regulation. Part three describes the different “options” which exist for handling competition enforcement and the different forms of regulation in the sectors. Part four raises two questions which rest at centre of the interface between competition law and sectoral regulation: who is better placed and better suited to handle competition enforcement in the sectors: competition authorities or sector regulators; and can or should competition authorities engage in access, economic or technical regulation in the sectors? Part five deals with the role of the government and/or a minister in sectoral regulation and the influence such role has on determining the parameters in the relationship between competition authorities and sector regulators. Part six addresses the prospects of the sectors developing effective competition and of sector regulators eventually disappearing. Finally, part seven offers a set of conclusions.
II. CONTEXUALISING THE DISCUSSION: SOME FUNDAMENTAL ISSUES
The term “regulation” in the sectors can belong to one of three different categories: technical regulation;Footnote 4 economic regulation;Footnote 5 and access regulation.Footnote 6 These three types of regulation differ from competition law and policy in some significant respects. Specifically, sectoral regulation embraces goals beyond those recognised within the framework of competition law; competition law largely relies on ex-post regulation (save for the area of merger control)Footnote 7 whereas sectoral regulation is basically ex-ante in its operation and therefore competition law is mostly reactive while sectoral regulation is pro-active; and competition law aims at protecting competition through preventing anticompetitive situations whereas sectoral regulation aims (inter alia) at structuring the market in order to facilitate and establish competition. The differences between the two types of measures can be attributed to the different ways in which these measures attempt to resolve issues: under competition law reliance is placed mainly on the market mechanism with the law being used in situations of market failure,Footnote 8 whereas in sectoral regulation reliance is placed on the regulator and intervention is intended to be frequent and sometimes heavy because intervention is thought to achieve the desired outcomes behind regulation.Footnote 9 This is a key point of difference because, as will be shown below, it can mean that outcomes reached by competition authorities and sector regulators in one and the same case can differ sharply.
However, when approaching the issue of differences, it is important to keep an open mind because overlap can easily exist in the approaches underpinning competition law and sectoral regulation. There are several areas in which such overlap can be readily identified: with the issue of market definition and assessing market power,Footnote 10 under competition law these two steps are important in order to determine whether a competition problem existsFootnote 11 and under sectoral regulation they are important in order to determine a multitude of matters, for example which operator in a sector such as telecommunications must offer interconnection;Footnote 12 in respect of pricing, how the price for interconnection or access is set using sectoral regulation will determine what kind of competition in price will exist in the downstream market;Footnote 13 with licensing, the volume of licences offered using sectoral regulation and the conditions under which they operate will have an impact on the level and scope of competition which will emerge;Footnote 14 finally, with the issue of remedies, both behavioural and structural remedies may be possible in competition enforcement and sectoral regulation – although almost all competition authorities prefer structural remedies.Footnote 15 Beyond these points, technical, economic and access regulation can also be said to share some common goals with competition law, most notably the goal of consumer welfare and protection.Footnote 16
The existence of fundamental differences and at the same time overlap and common goals between competition law and sectoral regulation means that the picture in practice is complex. This complexity has mushroomed with different countries globally having developed different “options” for regulating the sectors and for determining the parameters in the relationship between competition authorities and sector regulators. The most notable and workable of these options are:
• OPTION A: The exclusive allocation of competition enforcement in specific sectors to sector regulators in addition to technical, economic and access regulation;
• OPTION B: The coordination of competition enforcement between the sector regulators (who also enforce technical, economic and access regulation) and the competition authority;
• OPTION C: The allocation of economic regulation and access regulation – in addition to competition enforcement – to competition authorities with technical regulation (perhaps with significant aspects of economic regulation) being handled by sector regulators;
• OPTION D: The allocation of competition enforcement and access, economic and technical regulation to competition authorities;
• OPTION E: The exclusive allocation of competition enforcement in the sectors to competition authorities with technical, economic and access regulations being given to sector regulators;
• OPTION F: The allocation of competition enforcement in the sectors in a concurrent manner to competition authorities and sector regulators with the latter also performing technical, economic and access regulation.
This list of options is not exhaustive and one can (perhaps unnecessarily) be creative here. For example, one may propose removing economic regulation from the sectors altogether. However, these options do not necessarily stand as rigid alternatives: it is possible that in one and the same country different options may be followed in different sectors. This has happened in a number of countries.Footnote 17
III. COMPETITION AUTHORITIES OR SECTOR REGULATORS?
The different options identified in the previous part raise two particular questions. The first question asks whether competition authorities or sector regulators should handle competition enforcement in the sectors. The second question concerns whether competition authorities can or should engage in access, economic or technical regulation in the sectors. Obviously, the first question is the main one whilst the second question can be said to be complementary.
It should be noted at the outset that there are no easy answers, which can be readily given to these questions. The tasks of determining what the parameters in the relationship between competition authorities and sector regulators should be, are extremely challenging. One must realise, in particular, that there is no perfect “model” which can – using exact science – be devised for this purpose. The determination primarily depends upon four factors: experience and practical application, because these are vital in identifying what can and cannot work in the relevant sector or country; the institutional culture prevailing in the relevant country; the type and goals of the relevant competition law regime; and, very importantly, the choices made by politicians and policy-makers in the country concerned.
The centre of gravity in managing the interface is found in the role of competition authorities in the sectors. In placing the emphasis upon the role of competition authorities, however, it must not be thought that the key to all the complexities underpinning the interface is found in the hands of competition authorities. Competition authorities may be seriously constrained in terms of the room available to them to act, especially because of decisions and actions taken by politicians and policy-makers. These actors formulate the policy on what model(s) should be used for regulating the sectors and for managing the interface, as well as what the remit of competition authorities (and sector regulators) should be.
The view put forward here favours giving competition authorities a major role to play in the sectors. This view receives expression in two scenarios:
• as a first, ultimate and best, scenario, it is proposed that competition authorities should handle competition enforcement in the sectors in an exclusive manner. Additionally, a mechanism may exist for transferring – over time – aspects of access and economic regulationFootnote 18 from sector regulators to competition authorities; issues of technical regulation – primarily those relating to important public interests such as health and safety – may be handled by public bodies with relevant expertise;
• As a second-best scenario, it is proposed that competition authorities should handle competition enforcement in the sectors in concurrent manner with sector regulators. The mechanism for transfer of competence mentioned in the previous scenario may also be employed here.
These two scenarios will be considered in turn.
A. The Exclusivity Model
There are strong arguments in favour of arming competition authorities with the exclusive power to handle competition enforcement in the sectors. The list includes, but is not limited to: the independence of competition authorities which reduces the risk of capture by industry; in a similar vein to the preceding point, the ability of a competition authority to take an economy-wide perspective; consistency in competition enforcement across all sectors of the economy; enforcement by competition authorities minimises the prospects of unnecessary distortion of competition which can arise from heavy intervention by sector regulators; the likely savings in administrative time and costs and the minimising of duplication in enforcement efforts; and the promotion of competition through rigorous actions by specialist bodies of competition law. Furthermore, competition authorities can use a “rule of reason” approach, which is not the norm (nor always considered to be possible) in sectoral regulation.Footnote 19
Against the advantages mentioned above, a number of disadvantages can be identified and these must be mentioned in order to provide a complete picture of these situations. These disadvantages include: lack of technical expertise in the relevant sector(s) on the part of competition authorities; lengthy procedures which are typical in competition enforcement; the risk of a competition authority becoming embroiled in overly detailed and complex regulatory issues which do not have a sufficient link to competition; the fact that competition law is concerned with protecting competition and in the sectors the action needed in many cases is to facilitate competition because it is usually absent, not to mention the fact that regulating the sectors is considered to revolve around the protection of the public interest and achieving other important social objectives; and the lack of a specialised mechanism for resolving disputes between market players which can easily arise in the sectors.Footnote 20
The fairly obvious conclusion that should be drawn in light of the existence of advantages and disadvantages to the exclusivity model is that the best scenario is not a perfect one. This makes it desirable, if not necessary, to consider the second-best scenario of concurrent competition enforcement.
B. The Concurrency Model
In moving from “exclusivity” to “concurrency”, it is obvious that a third scenario – namely that of exclusively allocating competition enforcement to sector regulators – is discounted. This scenario is not considered viable due to the fact that there are serious shortcomings inherent in this scenario which cast serious doubts over the prospects of reaching the ultimate destination of reliance upon the market mechanism and reduced regulation in the sectors. One such shortcoming is revealed by the simple and obvious fact that sector regulators are not competition authorities. Another shortcoming is the uncertainty of whether regulators will cooperate among themselves in a structured and meaningful manner, especially when cross-sectoral issues arise and when competition law is applied by regulators in different sectors.Footnote 21 A third shortcoming arises because sector regulators may not be able to conduct competition work because of resource constraints.Footnote 22
More crucially, however, there is also the uncertainty over whether sector regulators can be relied upon to explore the full extent of their remit and to execute their task effectively. This uncertainty is particularly important to note in the context of the statutory framework within which sector regulators exist and operate: because sector regulators are created by specific statutes (the sectoral law), they – quite understandably – feel that they must adhere extremely closely to their duties as set out in the statute. This can give rise to a potential problem with far-reaching consequences, because the statute may contain a range of duties and objectives. The regulator may struggle in terms of prioritising or even reconciling between these duties and objectives, and ultimately may become over-burdened and lose focus in executing its remit; and this is not to mention the risk to achieving consistency in decision-making and undermining the legitimacy of the relevant sector regulator. In the UK, this problem can arise in relation to at least three specific sector regulators: the Office of Rail Regulation (ORR); the Civil Aviation Authority; and the Gas and Electricity Markets Authority (OFGEM). In relation to OFGEM, for example, the regulator itself has admitted that there is potentially a conflict between its social duties and environmental duties.Footnote 23 It is submitted that this situation can give rise to serious consequences if exclusive competition enforcement is allocated to sector regulators: the existence of a range of different objectives can enhance the risk of having competition considerations marginalised in the work undertaken by sector regulators or undermining the quality and extent of competition enforcement by them.
One must, nonetheless, recognise the existence of an important advantage when sector regulators handle competition enforcement in the sectors: the advantage of an integrated approach of technical, economic, access regulation and competition enforcement, thus enabling sector regulators to develop a broad and comprehensive perspective on how best to regulate the sectors. Additionally, there is the advantage of getting sector regulators to embrace a competition perspective and operate in a way that would move the relevant sector in the direction of reduced regulation and greater reliance upon the market mechanism. These advantages, however, do not necessitate exclusivity on the part of sector regulators to handle competition enforcement in the sectors. On the contrary, the effect of these advantages can be considerably enhanced with competition authorities having an involvement in competition enforcement in the sectors alongside sector regulators.
The true value of the concurrency model, however, can only be ascertained by identifying the different pros and cons related to this second best scenario.
1. Benefits of Concurrency
Concurrency between competition authorities and sector regulators is vital for a number of reasons. Concurrency maximises the advantages enjoyed by competition authorities and sector regulators and at the same time addresses the different disadvantages from which they suffer. Specifically, concurrency enables competition authorities to carry out a number of competition advocacy tasks.Footnote 24 The benefits of advocacy in this context are key in placing the sectors on the road to effective competition or, where they are already on this road, in speeding up the process and enhancing the chances of reaching this ultimate destination. Among these tasks, the following are important to highlight.
Guiding sector regulators
Competition authorities can guide or even direct sector regulators to use competition law analysis and procedures vigorously. There is one particular advantage that can result from this: it can encourage and hopefully cause sector regulators to build a decisional practice in the field of competition law and establish important precedents. It is worth emphasising here that sector regulators do not always naturally have such tendencies and may not always opt to utilise existing procedures in the competition law regime due to concerns over: the uncertainty inherent in these procedures; the delays usually experienced in these procedures before decisions are reached;Footnote 25 the costs involved; the likely effect following from this, such as reversal of compromises often achieved between sector regulators and regulated players; and the doubts sector regulators may have over the suitability of competition law procedures and competition authorities to handle sector-specific issues.Footnote 26
In the same vein, competition authorities can guide sector regulators to move away from the traditional rule-based regulation towards risk-based and principles-based regulation. Such move will no doubt help in having sector regulators embrace an ex post approach. To take such a step, sector regulators need to feel that it is safe enough to allow competition forces to take charge. The extent to which sector regulators feel this way in practice is ambiguous. Sector regulators may sometimes prefer the status quo due to pressure from industry and consumers. For example, one can imagine how operators who have grown used to regulation over a long time may feel some comfort and security as a result and so prefer to keep the status quo. Moreover, if the regulator adopts a “light touch” approach in a given sector and undesirable consequences follow from that, it is not too difficult to imagine how that regulator is likely to be subjected to serious criticism. In the case of some sector regulators, a claim – or even a charge – can be levied against them that they have kept the status quo unnecessarily through continuingly looking for things to do and structuring themselves along the lines of having discrete units dealing with special sub-sectoral matters.Footnote 27
Competition authorities can play an influential role in making the case for “inaction” on the part of sector regulators, most notably where there is an existing level of competition in the relevant sector which merits this. The Canadian regime has such a mechanism, referred to as “forbearance”, and it was used in 1996 in the telecommunications sector for long-distance telephone services. This was a call sponsored by the Canadian Competition Bureau and eventually answered by the Canadian Radio-Television and Telecommunications Commission (CRTC), which found forbearance to be consistent with the actual objectives of regulation in the telecommunications sector.Footnote 28
Finally, concurrency enables a competition authority to promote the adoption of a pro-competition approach by sector regulators even where the sector regulators' statutory duties do not include the promotion of competition in their sectors. Such an outcome can be valuable and it should be considered possible that sector regulators may adopt such an approach. In the UK, for example, through a strong pro-competition role, the CAA has influenced important decisions by the government in relation to de-designating airports for price control purposes. This has been a promotion of competition by pushing for the removal of unnecessary regulation.Footnote 29 It is indeed highly important for sector regulators to perform a pro-competition role. In many situations, sector regulators are well-placed to do so effectively because – unlike competition authorities whose competence is limited to the field of competition – the scope of their work extends to a range of issues, from social to economic ones, as covered by the sectoral law. Thus, they are able to influence policy and work conducted in areas outside the field of competition law and to ensure that competition considerations are taken into account in the work of the legislative and executive branches.
Guiding policy and decision-makers
The fact that sector regulators operate within a legislative framework presents competition authorities with an opportunity to opt for robust competition advocacy at the legislative level, either to push for pro-competition changes or ensure that competition considerations are taken into account when new legislative instruments or amendments to existing ones are proposed. At the same time, through concurrency a competition authority will be able to advocate that sector regulators be given discretion under statute to elect not to intervene in specific cases, especially if competition considerations would favour this or if there is an existing level of competition meriting this. This point overlaps with the point mentioned above, concerning encouraging “inaction” where appropriate on the part of sector regulators.
Moreover, through active involvement in the sectors, competition authorities will be in a better position to understand what level of competition exists in the sectors and whether continued regulation is necessary. Competition authorities should enjoy the power (and where they do have it, should use it) to undertake studies – perhaps on a periodic basis – on the state of competition in the sectors. This will be helpful for the purposes of pushing for a reduction in the scope of sectoral regulation to the minimum level desirable.Footnote 30 At a more general level, competition authorities have an important “supervisory” role. One of the good practices which a competition authority can develop is to report to the relevant bodies – most notably parliament – on whether competition law is being applied consistently across the board in the sectors and the performance of sector regulators in terms of their adherence to principles of good regulation.
2. Difficulties Associated with Concurrency
The necessity for concurrency and the major advantages found in this model, however, must be looked at in light of the difficulties to which it may give rise.
Jurisdictional overlap and duplication of work
One of the major concerns over concurrency is the possible overlap of jurisdiction and the unnecessary duplication of the work of the competition authority and sector regulators.Footnote 31 In some cases, sectoral players have claimed that there is a lack of adequate coordination between the competition authority and the relevant sector regulator. For example, in the investigation into UK airports the British Airports Authority (BAA) expressed concerns over the involvement of the OFT and the CAA and considered that there was lack of proper dialogue between the two authorities:Footnote 32 BAA was subjected to two references to the Competition Commission, one by the OFT and the other by the CAA.Footnote 33 A similar claim has been made by the Association of British Insurers (ABI) and the Association of Independent Financial Advisors (AIFA) with regard to the OFT and the Financial Services Authority (FSA) in relation to the investigation into the payment protection insurance market.Footnote 34
The fact that such serious claims have been made (and by such key sectoral players) means that they cannot be dismissed without adequate consideration, in particular, of their strength and validity. Specifically, it is crucial to consider whether the way in which the relevant sector regulator (the CAA and the FSA) and the competition authority (the OFT) operate (especially in areas of overlap) shows proper coordination and points towards the existence of a dialogue between them. When considered carefully, it would not be accurate to say that there is a complete lack of proper cooperation or coordination between the OFT and the CAA or between the OFT and the FSA. Indeed, there are key instances which may be cited as evidence of proper joint work and cooperation between the OFT and the CAA. These include the authorities' collaborative work in the publication of their Joint Report on Slot Trading (2005)Footnote 35 and their efforts to conclude a Memorandum of Understanding between them.Footnote 36 Evidence of joint work and collaboration is also found in the relationship between the OFT and FSA. This includes: deep interaction between the authorities in the area of consumer protection as can be seen from their involvements under the Unfair Terms in Consumer Contracts Regulations 1999;Footnote 37 extensive collaboration in relation to licensing of consumer credit;Footnote 38 the joint publication of educational material for consumers explaining the effects of the Annual Percentage Rate; the adoption of a Joint Action Plan (2006);Footnote 39 the publication of studies in relation to Payment Protection Insurance in October 2006;Footnote 40 and continuous cooperation concerning the future regulation of this sector.Footnote 41 It should be noted that a significant part of the work here falls outside the traditional boundaries of competition law and policy;Footnote 42 and as noted above the authorities do not enjoy concurrent powers in the sector. In relation to the latter point, if anything, this makes it important to have greater appreciation of the cooperation and coordination in existence between the two authorities. At the same time, this point casts doubt over the real strength of the concern over duplication and jurisdictional overlap.
The role of non-competition considerations and differences in approach
Another concern over concurrency is the inconsistency which may occur, mainly due to the fact that: greater emphasis by sector regulators may be put on non-competition considerations; sector regulators may use public interest test or considerations to assess competition issues; or because they may approach key issues differently from competition authorities. For example, in the USA in 1996 a merger occurred between Bell Atlantic and NYNEX, two of the largest local telephone firms at the time. The parties served different but neighbouring geographic areas. The US Department of Justice, Antitrust Division reviewed the merger and decided to clear it unconditionally: it accepted that the merger was likely to lead to real efficiencies.Footnote 43 The US Federal Communications Commission (FCC) – the sector regulator – however, took a different view: using its public interest standard, the FCC felt that commitments had to be sought from the parties to open local markets.Footnote 44 In the circumstances, the view of the FCC prevailed and the merger was completed after the parties made the necessary concessions, which were designed to enhance the likelihood of entry into the relevant market. It is interesting to reflect on the reasons for the different stance taken by the FCC in the case, which can in fact be explained with reference to the main aim behind the FCC's policy in the area of merger control, namely the desire to create conditions of competition that will facilitate eventual deregulation in the telecommunications sector.Footnote 45 Arguably, the use of the public interest test in the case was decisive, because by employing this test to evaluate the competitive affects of the merger, the FCC sought to examine whether the merger was likely to enhance competition as opposed to lessen competition; the latter was the focus of the Antitrust Division, given that when the Division conducts substantive merger appraisal it applies the test contained in section 7 of the Clayton Act 1914.Footnote 46
Another interesting illustration can be found in the regulation of the railroads sector in the USA. In 1995, Union Pacific and Southern Pacific sought to merge, leading to a reduction in the number of operators from three to two in the Western part of the USA. In its assessment of the situation, the Antitrust Division concluded that the merger was going to harm competition, that remedies submitted by the parties were insufficient and that their efficiencies claims fell short of outweighing the likely anti-competitive effect of the transaction. Therefore, the Division's recommendation to the sector regulator – the Surface Transportation Board – was to block the merger.Footnote 47 The Board, however, disagreed. It did not consider the reduction from three-to-two to be a problem and was satisfied by the claims of the parties that their commitment to grant trackage rights to their only rival would ensure that no competition problem would arise. On that basis, the merger was cleared.Footnote 48 Apparently, this eventually resulted in serious problems in practice, including: breakdown of services; and ineffectiveness of trackage rights to compensate for the loss of competition.Footnote 49
In another sector in the USA – banking – the Antitrust Division and the Federal Reserve have on occasions disagreed on the issue of market definition. In the 1996 merger between Boston Corp and BayBanks, the Antitrust Division cleared the transaction subject to divestiture due to competition issues identified in the market for banking services given to small and lower-middle size businesses.Footnote 50 The Federal Reserve later decided, however, to clear the merger unconditionally because it defined a different market using its “cluster of banking services”.
It has been said that sector regulators are likely to differ from competition authorities in their approach to market definition due to their tendency to prefer regulatory convenience, which is considered helpful in broadening their scope for rule-making.Footnote 51 Considering the experience of some countries, this view seems to be highly plausible. In the USA, for example, the FCC has stated in no uncertain terms that the relevant (geographic) market for regulatory purposes should be defined “narrowly enough so that the competitive conditions within each area are reasonably similar, yet broadly enough to be administratively workable.”Footnote 52 This approach has been endorsed by some US courts on the ground that the FCC should be allowed a margin of appreciation as the expert authority when setting its policy and adopting specific decisions.Footnote 53
Whilst one understands the unique “demands” of policy formulation in the sectors and the difficulties sector regulators encounter in carrying out their functions, let alone their efforts to build coherent and consistent approach in their work, preferring regulatory convenience in this context (of market definition) carries a certain degree of risk. Confusion can easily be caused between defining the relevant market under competition law and defining an “administratively workable” market under sectoral regulation, with the outcome that the distinction between the two can become blurred. This has serious implications, especially when one takes into account the ultimate goal of building competitive environments in the sectors which by nature will necessitate – when this goal is sought and/or realised – the adoption of proper economic analysis, including defining the relevant market using the principles as established in the field of competition law. A sector regulator preferring regulatory convenience can find itself ultimately building no proper expertise for handling the task of economic analysis in the long term, not to mention the likely reduction of legal certainty enjoyed by operators in the sectors. Because of the special nature of sectoral regulation, maintaining an appropriate level of legal certainty must be upheld as a primary objective.
At the same time, however, it is important not to make overly general statements, which may convey a not-fully-accurate impression that all sector regulators rely upon regulatory convenience when defining the relevant market in actual cases. Such statements can only be possible when proper and sufficiently comprehensive empirical studies have been conducted on this issue in relation to different sectors and covering different jurisdictions. It is probably unrealistic to expect that such studies are likely to emerge in the literature in the foreseeable future. As things stand, nonetheless, instances may be found where sector regulators have engaged in a market definition exercise when handling competition issues in their sectors, along the lines seen in the practice of many competition authorities.Footnote 54
Causing frictions and forum shopping
A third concern over concurrency is that firms may play the competition authority and the sector regulator(s) against one another. This is a serious matter and unfortunately it does happen in practice. In the UK, potential entrants in the water sector have tried to do this by claiming that the Water Services Regulation Authority (OFWAT) – because of its rigid interpretation of the sectoral legislation – has been ignoring the competition authorities, principally the OFT.Footnote 55 The concern over this kind of tactics has also been highlighted by the Netherlands competition authority.Footnote 56
Related to this issue is that of forum shopping by firms. This is a more delicate issue, however, because giving firms – especially complainants – a choice of authorities can be a good thing, especially where they feel that a sector regulator is unable to give sufficient attention to the importance of facilitating and maintaining effective competition, so that the competition authority is better placed and equipped to deal with the matter at hand. At the same time, such choice can be disadvantageous due to possible conflicts and inconsistencies. In the US banking sector, four regulatory bodies may be involved in conducting competition appraisal of merger transactions: the Department of Justice, Antitrust Division; the Federal Reserve; the Office of the Comptroller of the Currency; and the Federal Deposit Insurance Corporation. This can provide fertile grounds for firms in the sector to forum shop in order to enhance their chances of regulatory approval of their transactions.Footnote 57
3. Overcoming the Difficulties
The difficulties identified above are important to take on board because they highlight, among other things, that concurrency will not work well by simply having it. However, these difficulties are possible to overcome with adequate arrangements in place to ensure proper coordination between the competition authority and the sector regulator(s). A number of “examples” exist around the world of models built by countries which seek to achieve this. The following six models must be noted.
The common forum model
The most high profile model is perhaps the one found in the UK: the OFT shares the power to enforce the UK Competition Act 1998 (and Articles 101 and 102 of the Treaty on the Functioning of the European Union) in the sectors with six regulators, namely OFCOM, OFGEM, CAA,Footnote 58 OFWAT, ORR, and Northern Ireland Authority for Energy Regulation (OFREG NI). These regulators and the OFT are brought together within a Concurrency Working Party (CWP), a common forum established in 1997 for the parties to: consider and agree practical working arrangements concerning concurrency matters; share information under appropriate circumstances and address matters of common interest; and coordinate the ways in which the members will offer one another advice and information on the application of the provisions of the Competition Act 1998 and Articles 101 and 102 TFEU.Footnote 59 Among the primary objectives of the CWP is the desire to facilitate a consistent approach in the way its members carry out their functions and powers of enforcement of these instruments. The CWP includes “case allocation criteria” which are used when deciding which authority – namely the OFT or the sector regulator – is better placed to take action or lead in the investigation.Footnote 60 These criteria include: the knowledge of the sector regulator; whether the situation produces effects in more than one sector; previous dealings between the firms concerned (including complainants) and the sector regulator or the OFT; and any previous experience on the part of the sector regulator or the OFT in dealing with the issues at hand.
The cross-membership model
A second model uses the idea of cross-memberships. In Australia for example, heads of various sector regulators are also associate members of the Australian Competition and consumer Commission (ACCC) and some members of the ACCC serve as associate members in some sector regulators.Footnote 61 The ACCC has defended this model on the ground that this helps to bridge any possible knowledge gap when the different types of regulation are handled by different bodies.Footnote 62
The intervention, representation and consultation model
A third option involves giving the competition authority intervention and representation powers before the sector regulators or mandating or recommending that the latter consult the competition authority.Footnote 63 This can be a good channel through which the competition authority can influence regulation of the sectors and engage in important competition advocacy. A number of competition authorities have made use of this. The Canadian Competition Bureau has made many such interventions, especially in the telecommunications sector.Footnote 64 In the USA, over the years the Department of Justice, Antitrust Division and the Federal Trade Commission have filed many written comments with the FCC on a range of issues, from the deregulation of AT&T to the extent of effective competition in the markets for cable television.Footnote 65 In Germany, the Telecommunications Act 2004 specifically provides that the Federal Cartel Office (FCO) must be given the opportunity by the Telecommunications Regulatory Authority (TRA) to be heard in its proceedings and the FCO must give the TRA the right to be heard before it issues decisions in its proceedings in abuse of dominance cases in the telecommunications sector.Footnote 66
The customary “best practices” model
A fourth model can be found in Finland, which has concurrency in a number of sectors. For example, in the electricity sector, both the Finnish Competition Authority (FCA) and the Electricity Market Authority (EMA) have concurrent powers in relation to pricing by producers and distributors and the pricing policies of dominant transmission firms and dominant retailers in the sector. The authorities have a customary practice of reserving to each other the opportunity to comment on draft decisions reached by them individually. In merger cases in the sector, the FCA must ask for a statement from the EMA. They also have an opportunity for “case-allocation” through the transfer of cases from the EMA to the FCA.Footnote 67
The dis-application model
A fifth option is the dis-application mechanism, which can be found in Germany. The Telecommunications Act 2004 may displace the Act against Restraints of Competition 1958 (ARC) in a number of cases, which means that the German FCO will not be able to act in such instances. This includes: (a) regulating situations of abuse of dominance in relation to giving competitors non-discriminatory access to the relevant network (known as horizontal restraints); and (b) supervising violations of EU rules on open access to such network.Footnote 68
The immunity model
A sixth option is found in the USA, which incorporates a principle of “competition law immunity”. The operation of this principle is notable in relation to the regulation of mergers in the railroads sector, in which merger regulation is handled by the Surface Transportation Board (STB). The principle, however, does not totally rule out an involvement by the competition authorities. For example, in the railroads sector, the Antitrust Division may pursue cases falling outside the STB's competence, such as price fixing matters. One must appreciate, however, that the scope and extent of the principle have shrunk in recent years and that US competition authorities have come to extend their competence to sectors and situations previously falling outside their reach.Footnote 69
A comment on the models and the concurrency scenario
The existence of different models for determining the division of labour between competition authorities and sector regulators is very interesting. What should be noted about the existence of different models, however, is that – individually – these models are not watertight and do not necessarily on their own offer a blueprint for managing the interface between competition law and sector regulators. Each model has its own disadvantages. For example, a customary “best practices” approach is one that is based on informality (with discretion enjoyed by both sets of authorities) and this reduces the level of certainty over whether these best practices will always be followed in actual cases. The same is true concerning the intervention and consultation model: it is uncertain whether this will be exercised by a competition authority, and even where it is utilised, it is uncertain whether such intervention will yield material results or help to influence the decision of the relevant sector regulator.Footnote 70 On the other hand, models such as those of dis-application and exclusivity can mean that in many cases the desirable input of a competition authority can be limited or not even possible to inject into the assessment conducted by the sector regulator.
What these points show is that a country seeking to devise a model for managing the interface between competition enforcement and sectoral regulation needs to consider these different models carefully. Here, it is crucial to retain an open mind, because this interface is complex and multi-dimensional, but more importantly because it is possible that in some countries a sector-by-sector approach is the sensible or necessary option to adopt, meaning that different models should be followed in different sectors as opposed to one single approach for all sectors. Moreover, countries considering the different models ought to give adequate consideration to formalising the relationship between its competition authority and sector regulators. In particular, establishing a common forum is highly interesting and the UK experience in this regard has – on the whole – been successful. Nothing in this articulated view, however, should be understood as meaning that formalising the relationship is necessary or desirable under all circumstances.
Some of the models, thus, may be considered to be better than others. What is important, however, is that the arrangements for the division of labour, and crucially for concurrency where this exists, must be clear and detailed. Harmony must exist between competition authorities and sector regulators. The lack of adequate arrangements where concurrency exists may reduce the chances of achieving this harmony and can be a shortcoming as firms may be left in positions of uncertainty. Competition authorities and sector regulators in some countries have tried to remedy the situation by providing guidance in their decisions.Footnote 71
On the other hand, for meaningful cooperation and coordination between competition authorities and sector regulators to exist it will be important to consider and address three key limitations: not all sector regulators have a statutory duty to promote competition;Footnote 72 limitations upon exchange of confidential information between the competition authority and sector regulators may exist;Footnote 73 and, as noted above, there is an overwhelming tendency on the part of sector regulators to adhere closely to the relevant statute. However, it is important not to exaggerate the actual extent of such limitations, especially the third limitation.Footnote 74
IV. THE ROLE OF THE GOVERNMENT
In some cases, the government or the relevant minister may play an important role in sectoral regulation.Footnote 75 This has a number of implications, one of which is the risk that regulation of the sectors in certain cases might be seen as politically-motivated and not really handled on proper economic grounds. Furthermore, governmental or ministerial involvement may cause lack of clarity about the respective roles of the government or the minister and the sector regulator. In the UK, in the water industry the Secretary of State for Environment Food and Rural Affairs and the Welsh Assembly government have specific roles in relation to some of the very functions performed by the water regulator, OFWAT. One notable area is the guidance issued on matters relating to the approval of charges schemes put in place by firms and the environmental and drinking water quality programme, which is required in order to fulfil the UK's obligations under EU law.Footnote 76
The involvement of a government or a minister may be less objectionable if sector regulators are sufficiently independent. Many sector regulators believe themselves to be independent from government and there is no reason to doubt this in most cases. However, in some cases upon closer investigation the position is not so clear, at least from the perspective of some stakeholders and observers (although even they occasionally have difficulty in proving the lack of independence). In the UK, organisations such as Postwatch and the Mail Users' Association have raised questions over whether it would be wholly accurate to describe the Postal Services Commission, Postcomm, as a fully independent regulator.Footnote 77 Such organisations have invariably attributed the reluctance of Postcomm to reprehend Royal Mail (in respect of the quality of service standards that Royal Mail was required to meet in the bulk service compensation scheme) to the pressure placed on Postcomm by the then Department of Trade Industry, the predecessor of the Department of Business, Innovation and Skills.Footnote 78 The exact weight that should be given to such claims, however, is very much open to question. It is difficult to say that in practice Postcomm has not acted as an independent regulator. The lack of concrete evidence pointing towards lack of independence on the part of Postcomm renders such arguments by Postwatch and the Mail Users' Association as mere perceptions.
Putting the issue of independence to one side, there are areas in which the remit of sector regulators – as economic regulators – overlaps with the functioning of government. Such overlaps can give rise to two major problems. First, non-economic governmental considerations may interfere with the economic considerations of regulators. For example, in the energy sector non-economic considerations – such as fuel poverty, security of supply, effects on climate change and affordability – may be particularly prominent. As a result, there is room for conflict to arise between the policy pursued by sector regulators and that of the government. Second, even where there is no scope for governmental non-economic considerations to filter through sectoral regulation, the government may exercise ultimate control over the sector.
The UK rail industry provides a good example. In the UK, a single firm – Network Rail – operates and maintains the national rail infrastructure. Network Rail grants access to the network in return for regulated access charges.Footnote 79 ORR – which has concurrent powers with the OFT – is responsible for regulating Network Rail's activities. ORR grants licences to operators of railway assets;Footnote 80 it approves agreements for access by operators to, among others, stations and tracks;Footnote 81 and it regulates health and safety issues in the sector.Footnote 82 However, the activities of the Department for Transport (primarily the Secretary of State for Transport) and its role in the sector are far-reaching: it has responsibility for awarding, monitoring and enforcing franchises and for rail strategy as well as for regulating fare levels.Footnote 83 To appreciate the importance of this last point, the passenger railway network is funded by passenger fares, in addition to a government subsidy to train operators and government grants to Network Rail. Looking at this situation causes one to wonder whether ORR can be really considered the regulator in the sector in relation to these important matters! Arguably, such involvement of the Department of Transport in these cases gives it ultimate control, notwithstanding the role performed by ORR in the sector. This situation is not satisfactory because it means that in practice the “complementarities” found between these functions and those actually performed by ORR are missing and this deprives ORR of the power to perform a task which the regulator can be said to be in a better position to handle than the Department of Transport.
A final observation to be made on the involvement of a minister concerns the position on another matter in the UK. Under the UK's Competition Act Concurrency Regulations 2004, in a case where the OFT and the relevant sector regulator are unable to agree – within the framework of the Concurrency Working Party – on the division of competence according to the rules contained in the Regulations, the matter will be transferred to the Secretary of State for Business, Innovation and Skills in order to decide whether the OFT or the sector regulator should handle the case.Footnote 84 This provision is interesting (if not controversial) given that one of the major goals behind the radical reform introduced in the UK competition law regime – with the enactment of the Competition Act 1998 and the Enterprise Act 2002 – was to “remove” the Secretary of State from competition enforcement. It seems that the UK government opted for arming the Secretary of State with this particular decision-making power out of a desire to provide for neutral grounds for solving these potential disputes effectively and swiftly whilst ensuring that no third party would become involved in handling this, which might be a cause of more bureaucracy in the system, not to mention the added expense in time and resources. The OFT, however, has recommended that this situation should be remedied by transferring the dispute-settlement power from the Secretary of State to a non-government arbiter.Footnote 85 Whilst worthy of consideration, this suggestion of the OFT seems to have been opted for without proper consideration: specifically, without considering who such a non-government arbiter should be and without identifying and balancing the benefits and costs likely to result from involving such a body.
V. SOME FURTHER ISSUES
An examination of the interface between competition law and sectoral regulation can never be complete without proper consideration of two particular questions: whether the sectors can develop effective competition and whether sector regulators will eventually disappear. These are interrelated questions.
The first question assumes enormous importance. In different countries, competition has emerged in several sectors in recent years, though to varying degrees: at one end of the spectrum, an impressive degree of competition has emerged in sectors such as telecommunications,Footnote 86 energyFootnote 87 and aviation,Footnote 88 whereas at the other end of the spectrum, some sectors have seen little development on this front.Footnote 89 Between these two extremes, one finds sectors such as airports, postal services and rail in which the pressures of competition are felt but there is scope for greater competition to emerge.Footnote 90
On the whole, sector regulators in an increasing number of developed countries have taken important steps to establish competition as a standard in these sectors.Footnote 91 In relation to some sectors, however, there has been a problem in this regard. The Water sector in the UK offers an interesting example. Different explanations have emerged as to why effective competition has been lacking in this sector. On the one hand, there is some belief that the specific nature of water supply has been a notable cause, among others. A high profile voice in this regard has been that of OFWAT.Footnote 92 It is unclear, however, to what extent this view is fully accurate, not least because this is not the only (nor necessarily the most crucial) factor as to why the UK water sector has not developed the same level of competition seen in other sectors. First, there is the fact that the demand for water has developed and is arranged along distinct regional and local lines; second, the sector has been characterised by heavy dependence upon capital market funding; third, there are barriers preventing the liberalisation of markets for essential inputs in the sector, most notably abstraction (of water) licences issued by the Environment Agency, which means that such licences are not tradable; and, fourth, the sector is subject to important environmental considerations, such as the pressure to lower the consumption of raw water.
Moreover, firms seeking to enter the sector have contended that the major obstacle facing the emergence of effective competition in the water sector case lies with OFWAT's performance of its regulatory role. They feel that OFWAT must, among other things, do three specific things: not concentrate too heavily on its duty to finance efficient firms because this can come at the expense of customers; change the way it interprets the legislation so as to attract new entry into the sector; and specifically change the access pricing rule because some firms – such as Albion Water and Aquavitae – have considered the rule to have the effect of protecting incumbents and raising barriers to entry.Footnote 93 Interestingly, it is widely agreed that the latter rule on access pricing must be changed, but because there has been little action on the issue, a situation of stalemate has been allowed to develop and as a result serious disagreement has emerged on the kind of change needed.Footnote 94
In fairness, OFWAT itself has acknowledged that there are serious hurdles limiting its ability to introduce effective competition into the water industry. It has argued, however, that these hurdles have been caused by statute, the Water Act 2003 and the Water Industry Act 1991.Footnote 95 OFWAT's view seems to be shared by the Department for Environment, Food and Rural Affairs (Defra) and the Welsh Assembly Government, as can be seen from their recent consultation and their proposals to adopt new legislative measures to enhance competition and innovation in the sector.Footnote 96
Nonetheless, it is open to debate whether introducing more competition into the UK water sector is necessarily desirable. What must be acknowledged is that in regulating the sector the emphasis must be placed upon the need to achieve benefits for consumers and protect the environment as primary goals. This means that competition must be seen as a means for achieving these goals. Incidentally, insisting on having competition – as an end in itself – is not necessarily desirable and one must be aware of the likely impact that this may have upon OFWAT's ability to regulate the sector in the most efficient manner. It should be noted that regulation in the UK water sector – whilst clearly, as seen above, not immune from all criticism – has led to important benefits, most notably the impressive investment levels in the sector. Over the past 20 years, operators in the sector in England and Wales have invested a total of £80bn in infrastructure and improving the quality of service which they offer. This in fact should be attributed in large part to the existence of a sectoral regulatory regime. In introducing (more) competition, therefore, it is important that such investment levels will not be lowered and market access issues will not be caused as a result.
Moreover, it is important to give due weight to the facilitating of collaboration between firms operating in the sector. Such collaboration may be established using market or regulatory principles as its foundation to: enhance efficiency in the sector; facilitate greater innovation; and deliver the desired consumer and environmental benefits. Collaboration can be most beneficial in relation to research and development activities, which can help to achieve greater innovation in the sector.Footnote 97 This option of collaboration and that of competition, however, should not be seen as rigid alternatives: given the uniqueness of the sector it would be sensible to suggest the adoption of an integrated approach, which would combine elements of both options. OFWAT has a key role to play in this regard: the regulator must develop a strategy which enables it to strike the necessary balance between competition and collaboration in the sector. In this respect, it is highly important for OFWAT to conduct empirical studies looking at international experiences, in particular to see what fruitful lessons may be learnt from such experiences. There has been an inexplicable lack of such studies.Footnote 98
With regard to the second question – of sector regulators eventually becoming extinct – this depends upon one's own perspective but more crucially upon a host of factors, such as: whether natural monopolies will be seen as likely to be rendered simply irrelevant in the sectors as a result of various changes, primarily those in technology; the conduct of sector regulators themselves; the views and actions of policy and decision-maker; and the contribution and influence of competition authorities on the advocacy front at both the legislative level and vis-à-vis sector regulators.
An argument that can be advanced and which probably would enjoy broad appeal is that sector regulators should remove sectoral regulation in those areas in which effective competition has emerged, and this is the rule in practice. It is important to do this, because continuing with regulation is very costly and wastes resources when done unnecessarily. The principal costs here can be direct costs, such as the administrative costs to operate the sector regulator(s) and the compliance costs with the regulatory framework by the players operating in the sector, or indirect costs, such as the costs resulting from distortions caused by regulation, for example possible reduction in incentives for innovation and the costs related to the difficulty of reverting to competition after prolonged regulation (where this happens).Footnote 99
It is possible that sector regulators will disappear but it is rather obvious that this is not likely to occur in the foreseeable future. It must be accepted that, ultimately, no regulator can really keep pace with the fast-developing technological changes in its sector. For example, in the telecommunications market the boundaries have become blurred between telecommunications, computing and TV distribution, which at one stage were very distinct from each other. This fact, coupled with having more and more players in the sectors, may lead one to conclude that having sector regulators is unnecessary. One may feel that the wait here is probably not too long: it is feasible that competition authorities may be able to assume the tasks of regulating natural monopoly networks, and other non-economic tasks – most notably protecting public health and safety – could be handled by a public body with relevant expertise. In Australia, for example, when a new regime was introduced in the telecommunications sector in 1997, part of the most experienced staff (and the competition functions) of then the telecommunications regulator, Austel, were moved to the Australian Competition and Consumer Commission (ACCC) in order to arm the ACCC with sufficient technical expertise. Incidentally, the ACCC has considered this to be a major step because it gave the ACCC both the power to act in competition matters and discretion under the legislated access regime to “declare” those networks that the ACCC believes should be opened to all operators.Footnote 100 The ACCC has noted that its ability to intervene regulatorily in this way has produced a deterrence effect because threats to take action – coupled with its arbitration procedures –Footnote 101 has produced results in practice, most notably: reduction in price; improvement in services; and reduction in the market share of Telstra, the largest provider of local and long distance telephone services.Footnote 102
VI. CONCLUSIONS
This article has argued that determining the parameters in the relationship between competition authorities and sector regulators should happen in one of two scenarios: the first best scenario (of exclusivity on the part of competition authorities) and the second best scenario (of concurrency) in handling competition enforcement in the sectors. The latter scenario is expected ultimately to lead to the former scenario.
The article chose concurrency as the best model. Out of the different options available, concurrency stands out as a very practical and pragmatic approach to managing the interface between competition enforcement and sectoral regulation. Concurrency has a real potential in helping to overcome many of the tough challenges raised by the remarkable changes witnessed in many of the sectors which have caused access and economic regulation in particular to overlap with competition law and policy, and which have exerted pressure to determine what the respective roles of competition authorities and sector regulators should be.
However, the choice of concurrency as a model needs to be sensitive to, among other things: the wider institutional culture prevailing in the country concerned in relation to addressing economic and non-economic issues; the vision held by the government of the country concerned on the deregulation question in the sectors and the role the government or a minister may play in sectoral regulation; and, finally, the particular competition law regime in the country, especially in terms of the goals sought behind competition law and the choices made by the relevant competition authority at policy formulation and enforcement level.
In some situations, such sensitivity needs to extend to additional considerations which are unique to certain parts of the world. This is the case regarding the position in the EU. Within EU Member States, no public body – regardless of its remit or nature of work – can ignore developments at EU level: the influence of EU developments has been extremely strong in the field of competition law,Footnote 103 but it has also been so in relation to sectoral regulation.Footnote 104 In the majority of cases, Member States' domestic legislation covering the sectors – whether individually or collectively – has its foundation in EU legislation, especially EU Regulations and Directives. EU Directives in particular can have an impact by developing new horizons for sectoral regulation at the domestic level, when perhaps the direction in which the relevant Member State had moved prior to the relevant Directive was towards narrowing the regulatory horizon; or it may be that in such a Member State there was no horizon at all. A good illustration can be found here in the case of the Airport Charges Directive 2009.Footnote 105 During the legislative process, this Directive was expected to turn the CAA in the UK into an independent national regulatory authority for the purposes of the Directive, with responsibility for 20 UK airports. However, in relation to at least 16 of these airports, the CAA had no previous involvement at all. Moreover, it is important to consider in this context EU Regulation 1/2003 and the European Competition Network (ECN) which it created.Footnote 106 Sector regulators may be designated as national competition authoritiesFootnote 107 within the ECN and this obviously raises important issues of consistency of the decisions adopted by them with EU law and the issue of the application of Articles 101 and 102 TFEU in the sectors (by such regulators), as well as the issue of cooperation between such sector regulators and other members of the ECN (most notably competition authorities) who are based in other Member States.Footnote 108 It is important to provide, among other things, for an appropriate system of checks (perhaps to be performed by the competition authority in the relevant Member State) to assess whether, and ensure that, decisions adopted by national sector regulators are compatible with EU competition law.
Finally, what kind of concurrency arrangements should be adopted – in particular whether the arrangements should be formal or informal – is something which depends upon the situation at hand. In a concurrency setting, formalising the relationship between competition authorities and sector regulators may be particularly helpful, although it should be acknowledged that formalising the relationship – through, for example, the creation of a framework for operation – may not necessarily deal with all issues of concurrency comprehensively. So it may remain necessary for competition authorities and sector regulators to deal with concurrency on an informal basis outside the formal framework.Footnote 109 At any rate, in practice there must be adequate communication channels between the competition authority and sector regulators; and there must be clearly articulated guiding principles and policies addressing areas of jurisdictional overlap. Concurrency is not an act of magic. For concurrency to work, competition authorities and sector regulators must conduct themselves in a constructive manner and must show flexibility when working together, and perhaps even accommodate one another, because the way in which they conduct themselves will have a decisive impact in ensuring the existence of harmony in the way that competition enforcement, technical, economic and access regulations are handled and more generally in shaping the future outlook of the (relevant) sector(s).
