Economic Regulation and Competitive Markets Make Uneasy Bedfellows

 (by Catherine Waddams )  In regulated UK industries, both the OFT and sector regulators can apply competition law (i.e. abuse of dominance or anticompetitive agreements).  The current UK consultation about reforming the competition regime asks for opinions about this concurrency of powers  across the Competition Authority and sector Regulators.  In particular, it seeks views on which agency should handle competition cases in the regulated sectors.  This question raises fundamental  issues about the relationship between economic regulation and competitive markets. Experience shows that they make uneasy bedfellows. 

Sector regulators are generally established to impose ex ante regulation in markets where monopoly is inevitable, desirable, or both, at least in the short term.  They have developed and refined tools for the purpose. Meanwhile some parts of the supply chain have become competitive, often as a result of the regulator exercising its duty to encourage competition where appropriate.  So UK regulators find themselves with responsibility for and expertise in sectors where suppliers compete for business and from which they have withdrawn ex ante regulation (for example in energy and telecoms retail).  

Potential tension arises because regulators also carry statutory duties for the sector, imposed by Parliament, particularly to meet environmental and social objectives. While such objectives may sometimes be delivered appropriately through monopoly networks, it is very difficult to achieve them in markets which are open to competition. Often, as in the case of the non discrimination clauses introduced in retail electricity[1], interventions are likely to undermine the competitive process and as a result often struggle to deliver both the competition and non competition objectives. Remedies to improve competition are usually concerned with process, while other objectives are much more focused on outcomes.  Where ex ante price caps remain, these can be used as an additional instrument for the regulator to exercise trade-offs between different statutory duties. Where markets have opened to competition, the regulator’s application of additional criteria will usually lead to different remedies and outcomes from those applied by a Competition Authority whose objectives are competition focused. 

Whether the Regulator or the Competition Authority should have primacy therefore depends on whether the Government believes that the non economic objectives should apply to the competitive part of the market, or only to the regulated monopoly part.  If the former, the Regulator should have primacy over competition issues, to ensure that the other objectives are considered (though the outcome for competition itself will, by definition, be poorer).  But if potentially competitive parts of the market are to be governed by competition concerns alone, then the Competition Authority should have primacy. The decision about priorities has important implications for delivering policy, and it belongs squarely with the government.  If the government does not bite this bullet and make clear its priorities, its agencies will behave as counterproductive rivals rather than effective complements.


[1] See Non-discrimination clauses in the retail energy market by Morten Hviid and Catherine Waddams Price, CCP Working Paper 10-18

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