On August 20, 2009 the Office of Fair Trading (OFT) published its market study into the supply of local bus services in Britain. The OFT proposes to refer the industry to the Competition Commission (CC) for an in-depth inquiry, prompted by concerns about bus prices, service levels and a perceived lack of competition.

This article discusses the background to competition concerns in the industry and what a CC inquiry will mean in practice.

What Issues Have Been Raised by the OFT?

The British bus market has rapidly consolidated following liberalization, excluding London, in 1986.

The OFT began its market study in March 2009. The OFT’s study has identified a number of features of local bus markets that could prevent, restrict or distort competition in the sector. These include:

  • a situation where the majority of local routes are operated by a small number of large players. The OFT found that nearly two-thirds of services are controlled by the large national groups – Arriva, FirstGroup, Go-Ahead and Stagecoach;
  • higher fares in areas where operators with a strong market position do not face significant competition;
  • many complaints alleging predatory behavior by incumbent operators designed to eliminate competition from new entrants. In 2008, the OFT ruled that Cardiff Bus had abused a dominant position and forced a smaller operator out of the market; and
  • low numbers of bids for tendered services, with just one bidder for a quarter of services.  

What Will Happen if there is a Competition Commission Inquiry?

The UK Enterprise Act 2002 makes provision for market inquiries or “references” to the CC by the OFT and certain sector regulators. This procedure is unique to the United Kingdom, although it has parallels with sector inquiries carried out by authorities in other jurisdictions, including the European Commission.

The OFT may make a reference to the CC where it has reasonable grounds for suspecting that any feature, or combination of features, of a market in the United Kingdom for goods and services prevents, restricts or distorts competition in the United Kingdom, or a part of the United Kingdom. If a reference is made to the CC, the CC will examine the market to decide whether competition is prevented, restricted or distorted. The CC will then consider what action, if any, is necessary to remedy the situation, or whether to recommend another body to do so.

The CC has a wide discretion regarding the action it may take following an inquiry. A range of potential outcomes are possible. Outcomes can range from a separate inquiry or enforcement action against companies or individuals for infringing competition laws or recommending changes to regulation, to giving the market a clean bill of health.

Experience of market references to date has shown a marked preference for behavioural (conduct-based) remedies, with the exception of the BAA inquiry, where structural remedies (divestment) were required.  

Click here to view a table which shows how remedies arising from a CC inquiry may be classified.

What Can the Industry Do Now? The OFT is seeking comments on its proposal to refer the sector to the CC by October 15, 2009.

Below is a summary of key issues to consider for businesses operating in the sector, faced with the prospect of a full CC reference.

  • Key drivers of outcome: the outcome will depend on a number of factors including (i)whether complaints, particularly from consumers but also competitors, can be substantiated; (ii) strength of evidence gathered; (iii) arguments and analysis presented by interested parties; and (iv) powers of the authority (for example, the CC can compel parties to submit particular evidence).
  • Business risks and opportunities: treat the process as an inquiry of suspected competition law infringement and establish where the business’ interests lie and how to respond. Consider whether there are any business-specific messages to get across or potential to work with trade bodies to improve the profile of the industry.
  • Evidence and documents: collate and asses potentially helpful and unhelpful evidence. Consider whether business documents could be misinterpreted and how best to defend them. Consider the impact of responses on the authority’s thinking.
  • Third party complaints: third party complaints will need to be addressed. Anticipate how third parties (customers, suppliers and competitors) may be concerned about industry practices and how best to address those concerns.
  • Media and PR: the inquiry may be high profile. Consider how to engage the business’ PR and media team to help influence public perception and deliver a consistent message.

Conclusion

The OFT has already consulted widely among industry players and has unearthed evidence which suggests that competition in the bus sector is not working as well as it should.

It may be difficult at the outset to see any benefits for businesses affected by an impending CC reference. However, such inquiries are not necessarily unwelcome. Incumbents with strong market positions may use the inquiry to seek to justify their business practices and potential new entrants may put forward arguments to seek to assist their entry and expansion on the relevant markets.