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Competition Law Toolkit
VII. Competition, Privatization, and RegulationOne of the most dramatic economic developments in the final two decades of the 20th century was the demonopolization and liberalization of industries which, for many years, had been the preserve of state-owned monopolies. In many cases, this process was coupled with privatization or partial privatization, also referred to sometimes as "disinvestment" of state-owned undertakings. Obvious examples are utilities such as telecommunications and postal services, gas, electricity, and water. The "release" of former monopolists into the free market poses obvious problems in competition policy: in so far as there is no effective competition, which is particularly likely to be the case in the early years, they may be able to charge excessive prices. There will be no incentive on them to become more efficient, to innovate, and to introduce new products and services; and they may also be able to adopt tactics intended to foreclose new competitors from entering the market. At the same time, it is necessary to ensure that utility operators provide adequate services of an appropriate standard. A complicating factor is that utilities are often subject to a requirement that they comply with a non-commercial service obligation (e.g., a duty to undertake the daily delivery of letters, or to maintain an electricity or water supply to business and residential premises.) Undertakings that are subject to a universal service obligation of this kind may need, or claim that they need, some immunity from competition so that they can make sufficient profits to enable them to perform the required service obligation. This is why, for example, postal operators such as Royal Mail Group Plc. in the UK (formerly the Post Office) have historically been given a legal monopoly over the delivery of letters of less than a certain weight and size, although this monopoly has now been abolished as a result of liberalization legislation adopted at the level of the European Union. There is a real danger that the utilities mentioned in this paragraph may significantly underperform if they are not subject to effective competition constraints or (as a second best option) to appropriate regulatory obligations, and that society at large will suffer as a result. Very often, it is the poor and disadvantaged members of society that suffer proportionately, the greatest detriment as a result of inefficient utilities. In the UK, the demonopolization and liberalization of utilities began more than 20 years ago, and a great deal of experience has been acquired there concerning competition, regulation, and these sectors. Detailed regulatory regimes have been established for the industries that were privatized in the 1980s and 1990s, namely telecommunications, gas, electricity, water, and rail transport. These regimes provide, among other things, price control where persistent market power means that the normal process of competition will not deliver competitive prices to consumers. The regulators—the Office of Communications, the Gas and Electricity Markets Authority, the Water Services Regulation Authority, and the Office of Rail Regulation—act as a surrogate for competition at least until effective competition develops, by imposing constraints on what the regulated undertakings can do; the regulators are charged with the responsibility of protecting consumers, promoting competition where possible, and controlling prices. In this sense, regulators "hold the fort" until competition arrives. Regulated undertakings operate subject to licenses that impose obligations upon them and that attempt to prevent conduct that would be anti-competitive, discriminatory, or exploitative. The regulators monitor these licenses and have powers to enforce compliance with them. In the event of disputes with regulated undertakings regarding the appropriate terms for inclusion in a license, the regulators can make a so-called modification reference to the Competition Commission. The commission will decide whether the matters referred operate, or may be expected to operate, against the public interest, and, if so, whether the effects adverse to the public interest could be remedied by modifications to the licenses. The sectoral regulators also have concurrent powers which are shared with the Office of Fair Trading, the UK competition authority, to apply the prohibitions of anti-competitive agreements and abusive behavior in Chapter I and Chapter II of the Competition Act 1998 in the sectors for which they are responsible. The websites of the sectoral regulators in the UK provide many useful resources concerning competition and regulation in relation to utilities. The following websites are recommended:
A particular problem in the regulated industries is the control of prices. A central proposition of competition policy is that price should be determined by the market, and not by the state or an agency of the state. Competition authorities take action against excessive prices only rarely. However, where there is monopoly or near-monopoly, particularly in relation to essential services such as voice telephony or the supply of electricity, price control may be necessary. In this case, various techniques can be deployed to determine what the price should be. One method of capping prices is to fix an upper limit on the rate of return permissible on the capital invested in an industry. This, however, may encourage regulated bodies to over-invest in order to expand the base on which profit can be earned; furthermore, this technique does nothing to encourage efficiency. In the UK, the price control function has therefore been exercised through the "RPI minus X" formula: regulated undertakings are allowed to increase their prices only by the increase in the Resale Prices Index less a particular percentage as fixed by the relevant regulator. Over a period of time, this formula leads to a reduction in prices in real terms, thereby benefiting the consumer and forcing the privatized industries to increase efficiency in order to continue to profit. The "RPI minus X" formula encourages firms to become more efficient since, if they can cut their costs, they will make a higher profit. A further benefit is that it is relatively simple to apply: the regulator simply sets the figure, after which all that is necessary is to check that the price is not being exceeded. When deciding the value of X, the industry regulator is asked, in effect, to determine the extent to which added efficiency is possible within the industry in question. The following issues associated with the difficulties just outlined will be discussed:
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