Ofwat secures water infrastructure remedies from Bristol Water

 

Ofwat has confirmed that Bristol Water has committed to change its procedures and structures to address an alleged abuse of dominance in the provision of water infrastructure.

Companies operating in the regulated industries in the UK will be familiar with the “concurrent” application of competition by the competition authority – currently the Competition and Markets Authority – and the various sector regulators, including Ofwat.

The sector regulators share, broadly, the same powers as the CMA to enforce UK and EU competition law in their respective sectors (i.e. Article 101/102 TFEU and their national law equivalents under Chapter I/II of the Competition Act 1998).

Ofwat’s investigation into Bristol Water concerns competition in the market for building new water connections.  In broad summary, where a new development needs water connections a developer may ask the regional water company to install the mains or grant the contract to another contractor (‘self-lay organisation’).  Once the self-lay organisation has completed the work, the regional water company will take over the responsibility for operating it.  Due to the structure of the UK water industry this is one of the few areas where the sector is open to competition.

Ofwat received complaints that downstream infrastructure providers were being forced out of the local market for self-lay connections and contrary to Bristol Water’s duty to act fairly.

Bristol Water has given a commitment to ensure the functional separation of its downstream development business - which competes with the self-lay organisations - and its upstream business.  It has also agreed to provide greater consistency and transparency for the calculation of costs for its own infrastructure service and the work of a self-lay organisation.

As a result of these commitments, Ofwat has stated that it is satisfied that the ability for Bristol Water to discriminate between its own downstream business and competitors is reduced.

The case highlights the opportunities and incentives that may be presented to a vertically integrated business which operates in non-contestable (upstream) and contestable downstream businesses. 

As competition is expected to increase when the relevant provisions of the Water Act 2014 come into force in 2017 these issues will become more significant.

As a wider reflection this investigation was launched in 2013 before the CMA came into operation.  The Ofwat decision is especially relevant in the wake of the reforms introduced by the Enterprise and Regulatory Reform Act 2013 which are expected to contribute to a greater use by the sector regulators of their competition powers.

This is only the second time that Ofwat has secured commitments under the Competition Act 1998.  In 2013 Severn Trent offered to divest certain assets in order to address concerns of below-cost pricing.

When concurrency was introduced, arguments were made both for and against the system. In favour of concurrency it was argued that: (i) sector regulators had developed specialist expertise and knowledge of their sectors that could be applied effectively in competition cases; (ii) there was overlap between the sector licensing regimes and competition law; and (iii) concurrency would encourage sector regulators to move away from reliance on ex ante regulation to using ex post competition law.

Against concurrency it was argued that: (i) concurrency is rare in other jurisdictions including in the EU; (ii) the sector regulators lacked expertise in EU competition law analysis and investigations experience; (iii) there would be less efficient use of regulatory resources given the number of bodies that could potentially apply competition powers; (iv) there was a risk of inconsistency in decision making; and (v) there was a risk of “double jeopardy” where companies operating in more than one sector might face multiple investigations.

It was initially expected that reliance on regulatory powers would be lessened in favour of a more general application of competition law. However, in general, and with some exceptions, sector regulators have tended to favour use of sector regulatory powers.  The coming years will tell whether the new regime will bring in more use of competition powers by the sector regulators.  Against this there may still be cases which call for targeted and measured use of sector regulatory powers where, for example, competition law cannot be expected to bring benefits in a sufficiently timely or effective manner.

New Payment Systems Regulator issues Policy Statement

On 25 March 2015, and a week before its operational launch on 1 April 2015 the Payment Systems Regulator (PSR) issued a policy statement (PSR PS15/1).  This sets out the new regulatory framework for payment systems in the UK.  The PSR is an authority without peers domestically and internationally.  Businesses who have not previously been subject to regulatory scrutiny including interbank operators, payment service providers and infrastructure providers will now be subject to industry-wide economic regulation. 

The PSR has also issued an indicative programme of work for 2015/16 and announced the launch of market reviews into the supply of indirect access to payment systems and ownership and competitiveness of payments infrastructure provision.  

The PSR derives its powers from the Financial Services (Banking Reform) Act 2013.  The PSR is a subsidiary of the FCA with its own statutory objectives and board.

The PSR has three statutory objectives. These are:

•             to promote effective competition in the markets for payment systems and for services provided by those systems, including between operators, payment service providers and also infrastructure providers, in the interests of service‑users

•             to promote the development of and innovation in payment systems, in particular the infrastructure used to operate payment systems, in the interests of service‑users, and

•             to ensure that payment systems are operated and developed in a way that considers and promotes the interests of service‑users.

PSR has a range of powers including to:

•             require or prohibit a specific action or set standards

•             require operators to establish or change rules of payment systems, require them to notify the PSR of changes, or require that operators secure the PSR’s approval before making rule changes

•             require the operator of a regulated payment system or a PSP with direct access to grant access to that payment system

•             change the fees, charges, terms and conditions, or terms of access that operators or PSPs impose on their end-users

•             require the disposal of an interest in the operator of a regulated payment system, and

•             provide guidance. 

A related development is the application of competition law by the financial services regulators.  The fact that the Government has conferred concurrent competition law powers on both the FCA and the PSR is an indication of its sustained focus on competition law in the financial services sector.  As from 1 April 2015 the FCA will have concurrent competition law enforcement powers, including powers under the Competition Act 1998 and the Enterprise Act 2002 in relation to the provision of financial services. Similarly, and as from the same date the PSR will have concurrent competition law enforcement powers in relation to participation in payment systems. While cases may be transferred between concurrent authorities, only one authority can exercise prescribed functions in respect of a case at any moment.  The Concurrency Regulations and Concurrency Guidance set out how information will be shared between relevant competent authorities and how cases will be allocated. The general principle is that the regulator that will be responsible for a case depends on which one is better or best placed to do so.  The conferral of new competition law powers on the financial services regulators might augur well for the application of competition law by an authority that is able to take into account a wider range of regulatory tools in order to achieve its objectives.  There are high expectations.

See here for a link to the Payment Systems Regulator’s Policy Statement: https://www.psr.org.uk/sites/default/files/media/PDF/PSR%20PS15-1%20-%20A%20new%20regulatory%20framework%20for%20payment%20systems%20in%20the%20UK%20-%20Policy%20Statement.pdf

Highest EU Court rules that information exchange is anticompetitive by object

The Court of Justice has confirmed that the sharing of commercially sensitive information between competitors amounts to an infringement of competition law by its very object.  This means that the European Commission can sanction such practices under the EU competition law prohibition on restrictive agreements without having to show any negative effects on the market. 

The Court gave its ruling in an appeal by Dole Foods against the Commission’s decision and fine for the company’s participation in the banana cartel and follows the rejection of Dole’s appeal to the General Court.  The Commission had originally found that Dole, Weichert and Chiquita routinely discussed and disclosed to each other their pricing plans over a two year period (2002-2003) before implementing them.  The Court upheld the Commission’s finding that there was an anticompetitive concerted practice and said that this was so without having to show that there was any connection between the companies’ interactions and prices paid by consumers. 

The Court’s ruling is not unexpected and follows an opinion of the Advocate General. It reflects a tough stance under EU competition law towards information exchange by comparison with some other jurisdictions where the assessment of information exchange is more nuanced and effects-based.

On the substantive issues, I’m disappointed in the Court’s reasoning.  It is true that information exchanges between competitors should naturally raise the eyebrows of competition authorities and that they should be vigilant to the risks that the practices reduce market uncertainty to the detriment of consumers.  However, the approach now confirmed by the Court significantly reduces the probative burden on the authority as once an infringement is found to be anticompetitive by object it is very difficult to defend such practices.  Of particular concern is that the Commission’s case seems to have been largely founded on exchanges of information between more lower level employees.  While such contacts were evidently inadvisable it is not clear that the practices at issue should be treated in the same way as a blatant market sharing or price fixing cartel. 

The judgment settles one of the knotty areas around the circumstances in which information exchange or market intelligence gathering is acceptable under competition law.  However, the law on information exchange is far from settled.  Another area relating to information exchange which has been topical in national infringement decisions has been  so-called ‘hub and spoke’ arrangements where retailers exchange information through a common supplier.  This practice tends to have less of a cross-border angle, although it is a remaining source of uncertainty.    

Source:  Case C-286/13 P - Dole Food Company Inc and Dole Fresh Fruit Europe v Commission, judgment of 19 March 2015 and Commission MEMO/15/4637

Competition Commission of India fines two companies for failure to notify a minority acquisition

The Competition Commission of India (CCI) has penalised two companies for failure to notify and  seek advance clearance for their acquisition of minority interests which they claimed were passive investments and therefore exempt from the merger control requirements. The CCI has been aggressive in fining parties for breach of the notification requirements and fined Tesco last year 30 million rupees (approximately 450,000 euros) for delayed notification of its acquisition of Trent Hypermarket.

In the first case the agricultural company SCM Soilfert was fined 20 million rupees (approximately 300,000 euros) for failing to notify two creeping acquisitions in Mangalore Fertilizers & Chemicals.  SCM acquired a 24.46 per cent interest in Mangalore. It claimed that the deal fell outside the Indian notification requirements where acquisitions of 25 per cent or more need to be filed with the CCI. SCM argued that the transaction was exempt as this was aimed “solely as an investment”. The CCI disagreed and was persuaded by SCM’s press releases at the time which described the acquisition as a “very strategic” decision.  SCM then proceeded to acquire a further 0.8 per cent interest which was notified but the shares were placed in an escrow account on the understanding that the rights attaching to them would not be exercised until the CCI approved the transaction.  However, the CCI said that Indian law does not allow for any such exemption and SCM was in breach of the pre-notification requirement.  

The case is an interesting contrast with the position under EU merger control where there is an exception to the general suspensory rule in that public bids, or a series of transactions in securities admitted to trading on a market such as a stock exchange amounting to a creeping takeover, can be implemented prior to clearance from the European Commission provided two conditions are satisfied.  These are that the concentration is notified to the Commission without delay and the acquirer does not exercise the voting rights attached to the securities in question, or does exercise those rights but only to maintain the full value of its investments based on a derogation granted by the Commission. 

In another case Zuari Fertilizers & Chemicals was fined 30 million rupees for failing to notify its acquisition of a 16.43 per cent interest in Mangalore. Zuari also maintained that the acquisition was intended solely as an investment but the CCI was not persuaded.  The CCI said that no evidence had been provided to substantiate this claim.  Furthermore, an executive of the company publicly stated in a TV news interview that the motivation behind the acquisition was to enter a JV. 

These cases contain a number of lessons. First, under Indian law minority acquisitions even below 25 per cent can be treated as notifiable concentrations. Second, there is no flexibility to avoid the suspensory obligation by electing not to exercise the votes attaching to shares pending clearance, whether in public or private transactions. Third, the argument before the competition authority that a transaction is solely for investment purposes may be difficult to support if a different rationale has been put forward by the company or its officers in the media.

These cases illustrate the difficulties in applying the Indian merger control rules and the lack of clarity around the exemption rules.  Until the CCI comes out with a clear policy on this issue it may be inundated with failsafe applications by parties notifying their deal ‘just in case’.  For those who decide not to file the steady stream of fining cases comes as a reminder that the CCI is vigilant in enforcing its rules.  This is an area where an appellate body could provide useful clarification although, as yet, there has been no appeal of the CCI’s decisions to impose a penalty for breach of merger filing requirements.   

EU Court upholds Deutsche Börse/ NYSE merger prohibition

It is rare for a competition authority to block a merger outright. In its 9 March judgment the General Court has upheld the European Commission’s prohibition in 2012 of the Deutsche Börse/ NYSE merger which would have created the largest global exchange trading platform.  The Court found that the Commission had not made errors in its decision-making process and had rightly concluded that the merger would have eliminated healthy competition.

The Commission’s main concern was that the tie-up would have given the companies control of over 90 per cent of the worldwide market in European exchange-traded financial derivatives.  Some assessments place the parties’ combined share as much higher. 

Deutsche Börse argued that the Commission had failed to give proper consideration to horizontal competitive pressure on the parties and challenged the Commission’s approach to market definition.  It further argued that the Commission did not give sufficient weight to efficiencies that the parties put forward to seek to offset the competitive effects of the transaction.   

The Court concluded that derivatives and OTC products are in different markets and that the Commission was correct in its findings about the potential effects of the merger. It also rejected the contention that the Commission had not properly evaluated the commitments that the parties put forward including the disposal of their overlapping single-equity derivatives operations. 

The Court’s decision is not unexpected. In the absence of any obvious procedural irregularities it is rare for the Court to unsettle the Commission’s substantive findings. 

The full text of the Court’s judgment has not yet been published and it remains to be seen whether Deutsche Börse will bring an appeal to the Court of Justice.  Beyond the points of legal principle at stake, questions do need to be asked about the relevance of any Court of Justice finding several years after the attempted merger.  The prospects of overturning the General Court’s endorsement of the Commission’s findings also need to be seen against the 2012 takeover of NYSE by Inter-Continental Exchange. But this is a comment not so much about the history of this transaction but a comment on the reality that challenges to merger decisions may often reach closure long after the commercial rationale for the deal has either changed or even collapsed. 

Case T-175/12 - Deutsche Börse v Commission