| Authority finds its teeth as it prohibits a proposed merger for the first time |
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| 2004 was a remarkable year for the Competition Authority, as it marked the first time that the Authority prohibited a merger – the proposed merger of the business recovery services of IBM and Schlumberger. The Authority also processed some 70 per cent more merger notifications than in 2003, writes Gerald Fitzgerald, with some 81 mergers notified to the Authority in 2004. |
The Competition Authority’s recently published Annual Report shows that 2004 was a remarkable year for a number of reasons. It was the first in which the Authority prohibited a proposed merger, the first in which the Director of Public Prosecutions (with the support of the Authority) initiated criminal prosecutions under the Competition Act and the first in which the High Court upheld the Authority’s view that a dominant undertaking had abused its dominant position.
It was also a year of other, less spectacular, but nonetheless notable achievements. The Authority processed some 70 per cent more merger notifications than in 2003, it published significant reports on competition in the non-life insurance sector and on the non-investment banking sector, it worked closely with a number of sectoral regulators (particularly in the communications and electricity sectors), was closely involved in the establishment of the European Competition Network (a grouping of European competition agencies set up to facilitate the enforcement of EC competition law), extracted compliance undertakings from a number of undertakings and was closely involved in the review of a number of competition decisions taken by the European Commission.
 | | Gerald FitzGerald is head of McCann FitzGerald's EC and Competition Group. |
Despite the achievements of the last year, the Authority’s Annual Report reflects a degree of frustration with the low-level of competition in many sectors of the Irish economy. It notes that recommendations from the Authority and others for greater competition in electricity, grocery retailing, pharmacy, airport services, alcohol retailing and bus transport have been put aside or postponed. It singles out for mention the Groceries Order and the ‘perverse situation’ where supermarkets were prosecuted for cutting the price of nappies and baby food - thereby protecting competitors from competition and increasing prices for consumers. It notes that opponents of reform follow a predictable pattern of economic ‘NIMBYism’ where everybody supports competition in principle but then says it should not be allowed in their own backyards. It laments the weak representation of consumer interests, but draws hope from the recommendations of the Consumer Strategy Group, which has proposed the establishment of a new National Consumer Agency.
It is not possible to summarise all the Authority’s activities in a short article, but the following are of particular interest to those involved in the financial services sector.
Mergers
There was a substantial increase in merger activity, with some 81 mergers notified to the Authority. The vast majority were cleared in Phase 1 of the review procedure (i.e., within about a month after notification). However, full Phase 2 investigations, taking between 3 and 5 months, were undertaken in five cases (two of which were initiated in 2003).
One of the Phase 2 investigations led to the Authority’s first prohibition of a merger. This was a proposed merger of the business recovery services of IBM and Schlumberger. The Authority examined the market for ‘business recovery hotsites’ and concluded that the merged entity would enjoy a combined market share of between 69 per cent and 87 per cent (depending on how it is measured). More significantly, however, it examined the likely effect on competition of the proposed merger and found that for customers who required providers of business recovery services to offer mainframe computers as part of the package, the result of the merger would be to create a virtual monopoly. Since the barriers to entry were high, the Authority concluded that there was little realistic prospect of new entry and prohibited the merger on the ground that it would lead to a substantial lessening of competition in the market. In another case, the Authority made its approval subject to conditions, also for the first time, when it imposed divestiture obligations on Scottish Radio Holdings before permitting it to acquire FM104.
Studies of the insurance and banking sectors
In December 2004, the Authority published a consultative report as part of its ongoing investigation of competition in the provision of banking services (excluding investment banking) in Ireland. The Authority noted that the Irish banking market is highly concentrated and concluded that there are significant impediments to competition in the personal current accounts (PCA ) market and in the market for the provision of working capital to small and medium enterprises (SMEs). This is partly the result of high barriers to entry in the PCA market. The Report puts forward some 40 recommendations designed to address these issues. The Authority’s Final Report on the Provision of Non-investment Banking Services in Ireland is expected in the first half of 2005.
In February 2004, the Authority published, in conjunction with the Department of Enterprise, Trade and Employment, it’s a preliminary report and consultation paper on competition issues in the nonlife insurance market. The report’s findings focused on barriers to entry and rivalry in the insurance market and identified a number of specific issues giving rise to competition concerns. The Authority’s final report and recommendations are expected in the near future.
Other activities
In terms of the enforcement of competition law, 2004 was the most active year in the history of the Authority. The Authority applied for 24 search warrants, issued 58 witness summonses and saw the first criminal prosecution under the Act being initiated by the Director of Public Prosecutions (DPP) against 24 defendants across the west of Ireland allegedly involved in fixing the price of gas oil and kerosene.
The Authority was also involved in a number of civil cases before the courts. In October the High Court found in favour of the Authority in its proceedings against the Irish League of Credit Unions This was the first ever court decision in an abuse of dominance case brought by the Authority. Other cases involving newspaper pricing, cattle importation and advertising agencies were settled on the basis of compliance undertakings.
The Authority’s role in relation to the enforcement of EC competition law increased significantly when the new EC procedural regulation came into effect on 1st May 2004. This regulation provides for a significant devolution of enforcement powers to national competition authorities and set up a European competition network to facilitate coordination of enforcement activities between the European Commission and national competition authorities. This network seems to be operating very effectively and the Authority has been actively involved in implementing the new regime.
Specific sectors
On the domestic front, the Authority has worked closely with a number of sectoral regulators, particularly those involved in regulating the communications and electricity sectors. The Authority worked closely with the Commission for Communications Regulation in relation to its market review process, which resulted in a finding that Vodafone and O2 collectively have significant market power in the wholesale market for mobile access and call origination. The Authority made a number of recommendations during 2004 in relation to the structure of the Irish electricity. In particular it advocated full vertical separation of the ESB into its component parts (generation, transmission, distribution and supply); the horizontal separation of ESB’s generating capacity into a number of competing units; and greater interconnection with Britain and Northern Ireland.
Conclusion
While the Authority’s own resources have been increased significantly over the last few years, the level of output which the Report estimates can be expected from the Authority in any one year is relatively limited:
• One full cartel investigation leading to criminal enforcement proceedings
• A handful of other (mostly civil) investigations
• Reasoned decisions on all notified mergers within statutory deadlines
• One formal study, ongoing advocacy work on a small number of key sectors and submissions on new legislation or policy developments as required
The Authority recognises that this level of activity remains modest compared to the competition deficit arising from decades of anti-competitive, anti-consumer laws, regulations and practices. In short, its message seems to be ‘much done, but much still to do’. Having said that, given the resources available to the Authority, 2004 can be seen as a year in which it has made a significant contribution to altering attitudes among policy-makers and market participants alike by demonstrating the importance of competition law and policy to the overall health of the Irish economy. |
Gerald FitzGerald is head of McCann FitzGerald’s EC and Competition Group.
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| Article appeared in the May 2005 issue.
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