Initial report (210 pages, 4.0M PDF) from Ofgem's inquiry into the operation of retail competition in electricity and gas.

The focus is on allegation of a lack of effective competition and the oligopolistic structure of the industry, with most of the market taken by six large vertically-integrated companies (the Big Six: EDF, Centrica/British Gas, RWE/npower, E.ON, Iberdrola/ScottishPower and Scottish & Southern).

The document includes proposals for modifications to supply licences that would:

• Re-introduce regulatory accounting requirements for the Big Six, with separate accounting statements to be produced for generation and supply.
• Seek to improve customer bills and literature.
• Increase the regulation of marketing.
• Require surcharges for non-direct-debit payment to be “cost-reflective”.

Ofgem says that it will “begin, urgently, a programme of work to identify the underlying causes of low wholesale market liquidity” (particularly in electricity). However, the highlighted action is to “explore with the Big 6 suppliers how best to achieve a significant increase in liquidity”. The document does not prominently acknowledge any risk that the Big Six might be inclined to resist actions that increase liquidity (since smaller competitors would be likely to the main beneficiaries).

Ofgem will also consider reviving a market abuse licence condition in an attempt at controlling rising system balancing costs recovered through BSUoS (its last attempt at such a condition was thrown out by the Competition Commission in 2001), and possibly a “form of relative price control” on the Big Six to prevent “undue price discrimination” (between consumer groups).

Responses by Monday 1 December 2008.

Ofgem response (33 pages, PDF) to a Government consultation on changes to the renewables obligation. The document proposes to link the subsidies provided through the renewables obligation schemes to wholesale electricity market prices, so that total remuneration per unit for renewables power generators would not depend on electricity prices — essentially replicating the financial structure of a feed-in tariff. According to Ofgem, this would reduce the risk borne by these generators. There seems to be no discussion of the effect of the policy uncertainty that adopting and developing Ofgem's (currently fairly vague) proposals might entail.

Ofgem had previously advocated (here and here) other major changes to subsidies for renewables, arguing that the renewables obligation gives unnecessarily high subsidies to some renewable energy projects, at the undue expense of customers. The Government had not adopted these previous suggestions.

Consistency: Ofgem says that “more could be done to reduce consumption of energy within the UK” and “it is disappointing that the [Government's paper] reinforces the message that demand for energy will continue to increase by 1.5% per year”. A few days before this document was published, Ofgem imposed a 1% growth assumption for electricity demand on electricity distribution companies (against the view of some companies that this was too high) saying that “given all the evidence available [historic growth of 1-2% a year] we consider [that the figure of 1%] represents the most sensible global assumption to make” (paragraph 2.58 of this PDF).

Ofgem invitation (4 pages, PDF) to seminars on Friday 7 November 2008 (afternoon) in London and on Friday 28 November 2008 in Glasgow about its project to review the "RPI-X" approach to network price controls.

Ofgem proposals (74 pages, PDF) to direct electricity distribution network operators through new licence obligations (12 pages, scanned PDF) to implement specific methods for setting the structure of access charges to their networks.

The main proposals are:

• Access for EHV demand and EHV generation should be priced using WPD's long-run marginal incremental cost modelling method, with an increment size of 100kW for both demand and generation.

• In estimating long-run marginal incremental costs, a notional demand growth rate of 1 per cent a year should be used, irrespective of actual or prospective growth rates for a distribution network area or the relevant network elements. This global assumption is only said to be appropriate if “applied in a modelling context of a long run charging model”.

• The long-run marginal incremental cost should be converted into an annual charge using a 40-year annuity, irrespective of when the notional incremental investment expenditure is estimated by the model to be required.

• In estimating the notional costs of meeting the notional 1 per cent demand growth and the notional increments, network capacity should be calculated by reference to thermal constraints only. Costs associated with fault-level constraints should be recovered through connection charges. But “this is an area we would expect DNOs to keep under review”. The document does not say what happens to the new “common distribution charging methodology” if such reviews conclude that fault levels are important in some companies' networks and not in others.

• If applying Ofgem's model and assumptions “is considered to produce 'excessive' charges that are considered to be in breach of competition law”, distribution companies should “discuss the matter with [Ofgem]”, and (unless the common methodology is fixed) “propose suitable alternative arrangements ... based on their best assessment of the long run incremental cost of providing capacity at that point on their networks”.

• The 1 per cent notional growth figure is set by Ofgem, but “distributors should keep this growth rate under review” and it should be reset at each quinquennial price control review. The document does not say on what basis these reviews should take place, given Ofgem's decision to ignore companies' information on actual or prospective growth rates in setting a global notional number, or what should happen when different distribution companies' reviews find that different growth rates would be reflective of their circumstances.

• For HV and LV network elements, unit costs should be based on a bottom-up cost model for a 500 MW increment covering all aspects of its HV/LV network that are not covered by connection charges. The cost should be allocated between classes of customers on the basis of estimated peak-time load.

The main missing elements are:

• “[Ofgem] encourage[s] DNOs to develop a common methodology for IDNO charging as soon as possible” and “requires DNOs to work with IDNOs on this area of work”. But “given [Ofgem's] concurrent powers under competition law” Ofgem does not think that it would be “appropriate” for it to “determine the methodology”. According to Ofgem, “there is clearly need for further industry debate and discussion before [Ofgem] can make a decision on a common IDNO charging methodology”.

• “[Ofgem's] decision is for common tariff structures from 2010” (subject to potential derogations) but “the details of tariff structures is to be developed by DNOs”.

• Modification and governance arrangements are referred to in the proposed licence conditions but are not specified. Ofgem expects distribution companies to work together to develop theses arrangements, and put forward a document for approval by 1 September 2009. And proposals from Ofgem's review of governance for charging methodologies “may supersede the governance arrangements [whose core features only are] set out in this document”.

Companies have until Wednesday 29 October 2008 to decide whether to accept the licence obligations to implement these proposals. Unless three or more licence holders object (i.e. EDF or any two ownership groups), Ofgem has powers (presumably subject to judicial review) to impose the licence obligations without a Competition Commission inquiry.

Quick comment. The document contains (Appendix 3) some terms of reference for consultants. It seems that Ofgem would like DNOs to procure (and pay for) these services, but the terms of reference envisage most reporting to be to Ofgem. The document also says that Ofgem has “committed to help DNOs develop” some spreadsheets which seem to overlap with those specified in the terms of reference. All very strange. Message to the person in charge of procuring this work: Reckon is interested in making an offer. Contact Franck.

Ofcom consultation (111 pages, PDF) on the Sky Picnic terrestrial pay-TV proposal. This follows an October 2007 Ofcom consultation. Sky recently mothballed its Picnic business unit, complaining about delays in Ofcom's approval.

Ofcom also released a second consultation (472 pages in six PDF files) as part of its study of competition in the markets for pay TV in the UK. This follows its December 2007 paper.

The main proposal seems to be to force Sky to offer its premium channels to other retailers on a wholesale basis. The terms of supply would be regulated by Ofcom under Communications Act 2003 powers to include “conditions relating to competition matters” in broadcasting licences.

Responses by Tuesday 9 December 2008.

Competition Appeal Tribunal judgment (102 pages, PDF) in the appeals by BSkyB and by Virgin against the ministerial decision ordering Sky to reduce its shareholding in ITV plc, and the underlying Competition Commission report.

Sky lost. The Competition Commission and ministers (who followed the Competition Commission's advice) largely won.

The Tribunal rejected all of Sky's arguments against the finding that there was a merger situation because its likely ability to use its 17.9 per cent share to block some shareholder resolutions, the finding that this limited form of control gave rise to a substantial lessening of competition in television broadcasting, and the rationality and proportionality of the remedy to reduce its shareholding to 7.5 per cent (calculated as a share unlikely, on the Competition Commission's assumptions about shareholder behaviour, to enable Sky to block a special shareholder resolution).

The Tribunal also accepted a point by Virgin, against Sky, that the limited control of ITV strategy that Sky was found to have with its stake should have been taken into account as a potential loss of plurality. This point rests on the construction of the plurality issue in the Communications Act 2003. The question of whether this finding has any practical impact is deferred to further debate between the parties.

The Tribunal rejected Virgin's attempt at treating Sky's ability to frustrate a take-over of ITV with a 7.5 per cent share as relevant to the specification of the remedy.

OFT grounds (32 pages, PDF) for clearing Stagecoach's acquisition of Cavalier Contracts, a Cambridgeshire and Lincolnshire bus company.

Stagecoach and Cavalier were two of the three operators expected to use Cambridgeshire County Council's Guided Busway when it comes into service in 2009. The incumbent Guided Busway operators will have contractual protections against entry by competing operators. There are also overlaps between Stagecoach and Cavalier services on some normal bus flows.

The OFT determined that the existing overlaps did not lead to a substantial lessening of competition mainly because of other actual or potential competitors on these flows.

As regard the Guided Busway, the OFT rejected Stagecoach's arguments that the services will be effectively regulated by the Council, and found a realistic prospect of a substantial lessening of competition.

But the OFT cleared the merger on the ground that the markets affected were of insufficient importance to justify a Competition Commission reference, because:

... the size of the market is well below the £10 million threshold, there is only a relatively low probability of anticompetitive effects arising from the merger, and these, if they occur, will be of limited scope for the reasons discussed above.

This is the second time this year that Stagecoach convinces the OFT that the lessening of competition arising from its transactions is unimportant, and the fourth public transport merger disposed of in this way since the change in OFT guidance. The previous such cases were:

• Arriva / Cross Country passenger rail franchise
• National Express / East Coast passenger rail franchise
• Stagecoach / East Midland passenger rail franchise

In all these cases, as in Cambridgeshire, the relevant Government or local transport authorities had sponsored or supported the mergers. Note 2 of the OFT press notice recalls other previous cases in which the concept was considered.

OFT invitation (2 paragraphs) to comment on the proposed merger of HBOS with Lloyds TSB.

The ground for the Government's proposed intervention (subject to parliamentary approval) in the merger control process is formulated as “the stability of the UK financial system”.

Responses invited by Wednesday 8 October 2008. The OFT has been asked to report to ministers by Friday 24 October 2008.

Trivia: The OFT notice links to the Government announcement dated 9 am 18 September 2008 that it intends to intervene (see report and Franck's comment). This notice has in the right sidebar a link to the ministerial intervention notice (1 page, 6.1M PDF) dated 18 September 2008. There was no such link on that web page at 1:11 pm on 18 September 2008. The PDF of the intervention notice was apparently made at 3:23 pm on 18 September 2008 (by someone who did not have much of a clue about scanner settings, given the size of the file).

ORR decision (12 pages, PDF) in response to a complaint by rail freight operator EWS about the “lack of a proper charging scheme” for running freight trains on HS1, the high-speed rail line between London and the Channel Tunnel. There have been extended negotiations and consultations but no charges have been published so far.

The dispute was determined under the UK "access and management" regulations, which implement EU directives, as HS1 is not subject to the usual Railways Act 1993 access regime.

Under ORR's direction, the entities controlling access to HS1 have until Monday 17 November 2008 to publish charges.

European Commission press release announcing request that Germany and Portugal change certain aspects of the legislation on the ownership of pharmacies which it sees as contrary to the freedom of establishment set out in Article 43 of the EC Treaty.

With regard to Portugal, the Commission requests a lifting of the restriction that prohibits ownership of more than four pharmacies. This restriction is set out in Article 15 of Decreto-Lei 307/2007 dated 31 August (PDF in Portuguese) and is explained as striking a balance between the freedom to own pharmacies and the wish to avoid concentrating ownership.

The matter may be referred to the ECJ if Portugal and Germany do not respond satisfactorily within two months.

Comment. A lifting of the restriction on owning more than four pharmacies in Portugal would presumably be accompanied by a change in the current rules defining the awarding by public tender of licences for new pharmacies. Under these rules, set out in Chapter II of Portaria 1429/2007 dated 2 November (PDF in Portuguese), new licenses are awarded to the tenderer who owns the fewest number of pharmacies, with ties being decided by lottery, provided it meets the legal requirements to own a pharmacy. Pedro

UK Government notice (2 paragraphs) stating that the Government intends, subject to Parliamentary approval, to add something related to the “stability of the UK financial system” to the list of grounds under which ministers can intervene in the merger control process and take the final decision instead of the OFT or Competition Commission. The Government intends to invoke these new provisions in relation to the possible merger of HBOS with Lloyds TSB.

There would still be an independent review of the transaction by the OFT and, if referred, by the Competition Commission, with a published report advising ministers on both competition and public interest aspects.

There is no reason to doubt that the ministerial decision would be subject to judicial review (at the Competition Appeal Tribunal) under section 120 of the Enterprise Act 2002, in the same way as a merger control decision made by the independent competition authorities. The only ministerial decision that has been made under the Enterprise Act 2002's public interest regime for mergers (which the new proposals would extend) is the order for Sky to reduce its shareholding in ITV, and this is currently under appeal at CAT.

The right of appeal ensures that, if the grounds for the eventual ministerial decision are not clear and well reasoned, any aggrieved customers or competitors will be able to overturn the decision, or to force the Government to establish publicly its exact purposes about financial stability and the proportionality of any decision that it might make to allow a lessening of competition in order to meet these purposes.

Comment. There is a big gap between this proposal and the Chancellor's statement (or audio from BBC radio, 5:07-5:20) that the Government “will waive the competition requirements in relation to these two banks”. This discrepancy does not reflect a difference between Government departments: HM Treasury's press notice is consistent with the announcement reported above, not with the Chancellor's words. Franck

Ofgem consultation (33 pages, PDF) on options for the governance of network charging methodologies. This is only a small slippage from the published timetable for the review of industry codes governance.

The document outlines options for introducing governance arrangements similar to those of the BSC or CUSC for the structure of electricity and gas distribution and transmission charges. The focus is on procedural issues, for example whether and how rights of appeal to Competition Commission panel might be given. There is no analysis of interactions with Ofgem's proposal to direct distribution companies to adopt particular charging methods.

Responses by Friday 16 January 2009.

Preliminary ruling (about 11 pages) of the European Court of Justice on a series of references from a Greek court about the application of Article 82 to attempts by GSK to restrict parallel exports of its products from Greece. The dispute is related to the Syfait case in which the European Court declined jurisdiction.

In line with the Advocate General opinion, the court held that the supply restrictions imposed by GSK in this case were abusive unless objectively justified, and that the attempts at justification put forward by GSK to the ECJ were not valid.

The only circumstance endorsed by the court as capable of justifying a refusal to supply is if GSK “is confronted with orders that are out of the ordinary in terms of quantity”. This is drawn from United Brands. The question of whether the orders that GSK refused were out of the ordinary is left for the Greek court to determine.