Further information, including a list of our offices, can be found at www.cms-cmck.com © CMS Cameron McKenna LLP 2016. CMS_LawTax_CMYK_28-100.eps Competition Law, Collaboration and Maximising Economic Recovery – What’s Next Collaboration has become a top priority in the industry since the publication of Sir Ian Wood’s recommendations on MER in the 2014 Wood Review and it will continue to be a key focus for the industry going forward. This update summarises recent developments in this area including the CMA’s letter to Ministers on the impact of the Energy Bill on competition and the Industry Behaviours Charter. It also provides some practical pointers to industry participants when considering exchanges of information in the context of collaboration. The CMA’s Recommendations on the Energy Bill In December 2015 the Competition and Markets Authority (CMA) exercised its rights under the Small Business, Enterprise and Employment Act 2015 to make recommendations to ministers on the impact of proposed legislation on competition within a UK market. This is the first time the CMA has used its power since it came into force on 26 May 2015. In a letter to Government, the CMA has outlined recommendations to help identify competition issues in relation to the Energy Bill. The letter recognises that the Oil and Gas Authority (OGA) has been set up to promote the objectives of maximising economic recovery (MER) of oil and gas reserves but notes that the provisions of the Bill give rise to some risks to competition and suggests matters to which the OGA should have regard in discharging its obligations under the law. The letter highlights the potential competition risks of the OGA’s focus on collaboration – in particular that the OGA may inadvertently create an environment where companies may form anti-competitive agreements or exchange sensitive information. The CMA also notes the need to guard against the risk that unwarranted caution about the potential application of competition law to beneficial collaboration chills legitimate activity. The letter however focusses rather more on the former risk than the latter. The CMA has asked the government to ensure that the benefits of competition are properly considered by the new Authority. Although the OGA will have no specific remit to consider competition law it will have an obligation to act at all times in accordance with competition law and not to act in ways which might encourage or facilitate anti-competitive behaviour by others. To address the key risks the CMA makes four recommendations: Further information, including a list of our offices, can be found at www.cms-cmck.com © CMS Cameron McKenna LLP 2016. 1. Exchange of Information The CMA has alerted the Government to the inadvertent creation of circumstances that may facilitate anticompetitive exchange of information amongst the industry parties through the OGA’s requirements for collaboration, its power to attend meetings and its range of information gathering powers. The CMA has noted that the Bill neither obliges nor empowers the OGA to share sensitive information and suggests that OGA officials should take great care to ensure that such information is not shared by industry parties when working together with the OGA. For example, the CMA has highlighted the exchange of future pricing intentions or capacity utilisation information as an area that may give companies insight into the competitive constraints faced by their rivals and an indication of plans that would reduce competitive uncertainty. However, while exchange of pricing information should never be condoned, the CMA’s approach to this issue may well present problems for the OGA in ensuring effective development and use of shared infrastructure for which the exchange of future production and capacity utilisation information may be necessary – in these cases, seeking guidance from the OGA may be appropriate if the parties cannot satisfy themselves that they fall within the exemptions permitted under competition law. 2. Competitive Agreements The second CMA recommendation centres on the risk that collaboration may give risk to agreements which restrict competition and suggests that the OGA should guard against this risk by assessing agreements it is involved in and/or becomes aware of between industry parties. The fact that an agreement is sanctioned by the OGA does not necessarily prevent it from falling foul of national or European competition law. On the other hand, not all collaborative agreements will harm competition - in particular the CMA notes that (i) agreements on technical and operational matters and (ii) those which give rise to significant efficiencies are unlikely to raise concerns. The CMA notes that from what the CMA understands of its intentions, the OGA’s work with industry players to encourage improvements in efficiency of recovery could be expected to fall into this category. However, after this positive statement, the CMA then rather strangely states that agreements between regulated firms may still distort competition even if they do not breach competition law. For example, the CMA suggests that agreements may limit distribution channels or set industry standards that might restrict competition to the detriment of consumers. Such harm to the consumer will need to be investigated against the benefits i.e. collaborative agreements that improve overall efficiency of production and distribution. The OGA should consider how it will ensure that it assesses agreements to make sure that the benefits outweigh the potential harm from any competition restrictions. It is not entirely clear what the CMA has in mind here and to require the OGA to extend its scrutiny beyond potential breaches of competition law seems potentially chilling. This level of analysis will certainly require the OGA to develop a sophisticated level of competition law expertise. 3. Exercise of OGA Powers and Activities The OGA’s range of powers leave a large scope to affect behaviour in the energy sector. The CMA has expressed that it is imperative that the OGA takes into account competition considerations when exercising powers in order to incentivise competitive behaviour. Specifically, the CMA highlighted a few key areas where the OGA will need to exercise caution with its powers: — (1) Technical Standards: In the application of regulatory rules or technical standards the OGA will need to assess whether the application of such standards favours particular companies in the market to the detriment of other companies, that may subsequently find it more difficult to attain such standards. — (2) Levies: The OGA’s imposition of fees or levies in combination may raise costs significantly for smaller market participants, effectively acting as a barrier to entry. — (3) Licence Award Processes: Licensing award processes will need to take account of prevailing market circumstances, the relevant legal framework and the priorities of the government but the OGA will need to be wary of providing advantages to incumbent market participants. The letter refers with apparent approbation to UK and overseas regulators using auction based processes to capture the benefits of competition for licenses. Again it is not clear what the CMA is concerned about here as the OGA is bound by EU rules to run a transparent and objective process for the award of licences and already does so on the basis of an auction process but where bids are based on technical work commitments rather than financial offers. Further information, including a list of our offices, can be found at www.cms-cmck.com © CMS Cameron McKenna LLP 2016. 4. Maximising Economic Recovery Finally, reasserting the Government’s primary aim of maximising economic recovery, the CMA’s fourth recommendation is in respect of the OGA making full use of market incentives and competition mechanisms to achieve its objectives. The CMA refers to the OGA assessing the potential effects on competition of all activities and encouraging an environment of compliance within the companies in scope. The awards and competitions that the OGA has already initiated are good examples of this. It is disappointing that the CMA was not able to be more constructive in this letter but it must be recognised that industries in crisis have in the past used that crisis as a pretext for clearly anti-competitive conduct and it is against this context that the CMA seems to have felt obliged to issue a shot across the bows of the industry. Industry Behaviours Charter While the Energy Bill continues its passage through the Commons (due to commence its Committee Stage on 26th January) and DECC considers responses to its consultation on the OGA’s strategy which closed on 8th January, the industry has not stood still. On 11 December a taskforce of the oil and gas trade association, Oil & Gas UK, called for the industry to back a new charter that outlines collaborative behaviours for transformational change. The Industry Behaviours Charter requires companies to agree to: — Be an early adopter of efficiency initiatives and new technology, sharing learnings with others; — Provide access to decision makers through a specific, fast access point, in order to escalate issues; — Strengthen industry co-operation through continual improvement in and support for, industry codes of practice, forums and standards; — Contribute to performance improvement by ensuring transparent and time-bound legal, commercial and contractual engagements; — Commit to continuous improvement through regular review of the delivery of the Charter, across all levels of business. Flowcharts on information exchange In the CMA’s letter to government the focus is on ensuring that the OGA exercises its powers in a way which has pro-competitive impact whilst continuing to recognise and seek to achieve the OGA’s objective of maximising recovery in the UK Continental Shelf. It is important that competition law awareness is raised within industry in order to prevent fears of competition enforcement deterring participants from taking part in beneficial collaborative initiatives. The key will be in achieving the balance between achieving collaboration and ensuring compliance with competition law. In this respect we have developed some flowcharts to highlight some important questions that industry participants should ask themselves when trying to strike this balance. The attached document can be used as a first stage guide to assist in undertaking an assessment of the competition law issues when collaborating in the context of MER. Of course, it is only a general guide and no substitute for legal advice on any particular issue. Q1. Does the information exchange relate to price or future production information? (e.g. future shutdown information or decommissioning dates) Q2. Does the information exchange discuss terms of contracts with clients / vendors? No No No No Yes Yes Yes Yes Go to Q2. Go to Q3. Was it requested by the OGA under statutory powers? Was it requested by the OGA under statutory powers? Potentially legally justifiable – seek legal advice. Potentially legally justifiable – seek legal advice. STOP - Potentially significant issues. Seek legal advice on the use of historic / aggregated information in lieu of exchange. STOP - Exchange likely to be facilitated through clean teams / aggregation. Seek legal advice to ascertain allowable parameters. Further information, including a list of our offices, can be found at www.cms-cmck.com © CMS Cameron McKenna LLP 2016. Q3. Does the information exchange relate purely to technical / operational matters only? (e.g. no commercially sensitive information) No No No No No Yes Yes Yes Yes Yes INFO EXCHANGE LIKELY TO BE PERMISSABLE – beware of exchange of commercially sensitive info. Potentially justifiable, but may not be commercially viable / credible in the particular context. SEEK LEGAL ADVICE: potentially justifiable where the OGA does not facilitate exchange between parties. STOP – potentially significant competition issues. Seek advice before exchange. Consider benefits of the exchange for potential exemption. SEEK LEGAL ADVICE: potentially justifiable. CMA enforcement may not be a priority. Is info historic, aggregated and/or provided to a third party facilitator? Was the information provided to the OGA only? Is there a credible consumer harm arising from the exchange? Is the exchange in support of the maximising economic recovery objectives? Further information, including a list of our offices, can be found at www.cms-cmck.com © CMS Cameron McKenna LLP 2016.