Understanding Regulation

Facts, Analysis and Comment

The UK Competition Regime: Regulatory Appeals

This note examines the background to an important government review of appeals against regulators' decisions.

The review was triggered by criticism, especially from Ofcom, that companies had become adept at using appeals to the Competition Appeals Tribunal (the CAT) to postpone much needed regulatory decisions (e.g. those aimed at promoting the roll-out of 4G mobile telecoms technology) with consequential damage to the UK economy.

But a somewhat different appeal, also involving Ofcom, provides an interesting case study.

Ofcom was not the only body to have expressed concern or exasperation with the CAT. Critics focused on three main areas:

Delay

The first and main concern was that CAT process simply took far too long, and so encouraged appeals mainly aimed at delaying the implementation of unwelcome regulatory decisions - Pay TV being a nice example. Critics argued that the Tribunal sometimes appears to see itself more as an alternative competition authority/regulator than as a court. It is too ready to see, with the benefit of hindsight, how regulators could have done a better job. There is none of the crisp cut to the chase approach seen in some courts, and especially in the CMA's Code Modification Appeal hearings. The Tribunal allows long and detailed arguments, delves into great detail, and produces enormously lengthy judgments, unintelligible to anyone other than real experts.

This is not a new problem. Back in 2008, after the first Albion Water appeal went on to the Court of Appeal, that Court said:

We conclude with a few more general observations on the proceedings before the Tribunal in this case. We recognise that the subject-matter is highly complex and that the merits jurisdiction of the Tribunal may call for extensive factual investigation in the course of appeals before it, all of which may contribute to the length of its proceedings and of its judgments . We are, however, concerned at the number of separate judgments in the case, the length of those judgments, the extent to which the sequential approach gave rise to duplication (which has made it more difficult for us to digest and analyse the Tribunal's reasoning for the purposes of this appeal), and the protracted nature of the proceedings overall. The interim judgment in December 2005 was 428 paragraphs long and, with headnote, takes up 90 pages of the printed law report. The main judgment in October 2006 was 985 paragraphs long and, with headnote and an annex, extends to 241 pages of the printed law report. The further judgment in December 2006 was 360 paragraphs long and, with headnote, takes up 91 pages of the printed report. Astonishingly, the judgment refusing permission to appeal in February 2007 was itself 133 paragraphs long. A yet further judgment on the issue of excessive pricing is still awaited.

We are sure that there must be a more efficient and speedier way of dealing even with complex cases of this kind. In particular, we urge the Tribunal to do its utmost to produce, if at all possible, shorter judgments for the benefit of everyone in the future. We recognise both that this court often produces judgments which are too long and that parties are inclined to take many points in cases of factual and legal complexity, but we cannot believe that it would not be possible to resolve the issues more concisely. We will try to do so ourselves and we urge others to do the same.

But the Tribunal does not appear to have taken much, if any, notice of this criticism. The follow-on Albion Water claim for damages was filed in June 2010 but did not receive its (12 day!) hearing until October 2012, and judgment was not handed down until March 2013.

(But it is only fair to note that the Tribunal moved a lot faster than the regulator. The original complaint was made in March 2001 - 10 years before the above-mentioned claim for damages reached the CAT. Ofwat had previously carried out a three year investigation but found no infringement. Subsequent appeals were fought by Dwr Cymru and United Utilities all the way through to the Court of Appeal. Huge costs were incurred and the CAT showed itself much more sympathetic than Ofwat to the arguments of tiny Albion Water. Follow this link for the full tortured history of this litigation.)

Other Criticisms

Second - this may be losers' sour grapes but - some critics argue that some CAT decisions appear decidedly odd, betraying a rather less than ideal grasp of competition principles and practice. The initial Sky Pay TV decision may be in this category.

Another strange decision was the finding of apparent bias in CC's Stansted Airport decision. Thankfully the Court of Appeal had more sense and reversed the decision - but only after the CAT had refused permission to appeal - in itself a somewhat strange decision, which had to be overturned by the Court of Appeal. But the Stansted appeal process, from the first appeal against a March 2009 CC decision, was not finally concluded until February 2013 - almost four years later, only seven months of which had been spent in the Court of Appeal. BAA, the appellant, was no doubt delighted at this delay, even though they finally lost.

Third, it is also alleged, by some, that the CAT has got into the habit of making very broad findings of fact. A higher court then takes these facts as uncontestable so the losing party cannot appeal using them. As a result, it is hard to appeal those decisions, which makes the court look rather good (as the Appeal or Supreme Courts seldom weighs in) but isn't necessarily in the interests of justice. Again, the Sky Pay TV case may be an example of this problem.

But ..

.. the CAT has some decent explanations and points to make in answering the above criticisms.

Against that background, it was no surprise that the Chancellor's 2012 Autumn Statement document included these announcements:

Economic regulators - The Government will take steps to reduce the regulatory burden that might constrain infrastructure investment by reviewing the appeals system for sector regulators to make appeals faster and more efficient ..

Reforming appeals of economic regulator decisions - The Government will reform the regulatory and competition appeals framework to support more streamlined regulatory decision-making, while providing appropriate rights of appeal. By summer 2013, the Government will consult on reforms, including:

And here is the Foreword and Executive Summary of the consultation document published in June 2013:


"Streamlining Regulatory and Competition Appeals - Consultation on Options for Reform

Foreword

Economic regulation and competition enforcement play a vital role in ensuring that markets operate for the benefit of consumers, and that firms are confident to invest and innovate. Firms and consumers need to have confidence that independent regulators and competition authorities are taking robust decisions in the interests of the wider economy and consumers. Appeals can provide a key route for holding regulators to account and giving parties a right of challenge.

While in many ways the UK's appeal regime is performing well, I believe we should be striving to make it even more efficient and effective, to support a world-class regulatory environment.

The UK is fortunate in having appeal bodies with expert knowledge and experience of reviewing economic regulation and competition decisions. The Competition Appeal Tribunal is frequently held up as a model in bringing together judicial scrutiny with expert knowledge of competition policy and economics. Similarly the Competition Commission has developed its practice of reviewing regulatory decisions over a long period, and has used this to good effect in scrutinising regulatory decisions across economic regulators.

At the same time, the Government is concerned that some appeals can be lengthy and expensive, increasing regulatory uncertainty. Appeals have developed in different ways across the various sectors for historic reasons, leading to a diverse range of appeal routes which does not make the best use of appeal bodies' expertise and can be confusing.

In the communications sector in particular, the Government is concerned that appeals may sometimes be seen as a one-way bet, and a chance to re-open regulatory decisions, encouraging lengthy and expensive litigation and holding back decision-making.

This consultation takes a broad look across regulatory and competition appeals, and invites views on the case for change and on a range of possible options for reforming appeals regimes.

In assessing these options, the Government is very conscious of the importance of maintaining and reinforcing regulatory certainty. The ultimate aim is to achieve better regulatory decisions, which are in the interests of the economy as a whole, and which firms in the market can have confidence in. The Government believes that proportionate changes to focus and streamline the appeals processes should help support regulators to take decisions more quickly and efficiently, providing greater certainty for firms. In deciding the way forward and reflecting on the responses to this consultation, the Government will be mindful to preserve the best features of the current regimes.

Executive Summary

Effective economic regulation and competition enforcement is a key driver of growth. Firms need an independent, stable regulatory regime to give them confidence to invest, innovate and compete. This stability relies on regulators and competition authorities taking robust, timely decisions, setting out the ground rules for how markets operate and enforcing these rules effectively.

The right of firms to appeal regulatory and competition decisions is central to ensuring robust decision-making and holding regulators to account in the interests of justice. Where firms are materially affected by regulatory decisions, they should have an effective right of challenge if they consider that the regulator has made a mistake or has not acted reasonably.

In many ways the appeals regime works well. The UK has specialist appeal bodies with valuable experience and expertise, providing independent scrutiny of regulators' decisions. However, appeals inevitably create costs for firms and regulators and can act as a drag on decision-making. Concerns have been expressed that there are a significant number of appeals in some sectors, with relatively little downside risk to a firm from lodging an appeal. In other sectors there are few appeals. Even where there are few appeals, those that are brought are often lengthy and in turn, costly. There is a significant degree of diversity in the way these issues are handled across sectors in terms of which appeal bodies hear which types of appeal and the standards by which those appeals are decided.

The purpose of this consultation is to seek views on whether the appeals frameworks for regulatory and competition decisions strike the right balance between providing a proper right of challenge and allowing regulators and competition authorities to make decisions in a timely way. It also considers ways that appeals might be streamlined.

In assessing the case for change and options for reform, the Government's objectives for the appeals regime are to:

  • Support independent, robust, predictable decision-making, minimising uncertainty.
  • Provide proportionate regulatory accountability - the appeals framework needs to be able to correct mistakes made by a regulator and provide justice to parties, but allow the regulator to set a clear direction over time.
  • Minimise the end-to-end length and cost of decision-making - partly through making the appeal process itself as streamlined and efficient as possible, but also by encouraging timely decision-making by the regulator or competition authority.
  • Ensure access to justice is available to all firms and affected parties - not just to the largest regulated firms with the most resources and experience.
  • Provide consistency, as far as possible, between appeal routes in different sectors - while acknowledging that the specific characteristics of each sector may require tailored approaches.

The appeals frameworks across different sectors have evolved over time, with the result that there is now a diverse range of appeal routes across the regulated sectors. Some of these differences reflect genuine differences in the nature of the decisions being made. This consultation seeks views on the case for streamlining the current appeals framework so that:

  • It is more focused on identifying material errors;
  • Appeal bodies' expertise is applied in the most appropriate way and appeal routes are more consistent across sectors, to provide greater certainty and better use of resources;
  • It is more accessible to all affected parties;
  • Incentives in the system are aligned with Government's objectives for the appeals framework;
  • Appeals processes are as efficient and cost effective as possible.

In order to achieve this, Government is consulting on a package of changes to the way regulatory appeals are handled. The proposals cover all steps in the appeals process, including the initial incentives on firms to launch an appeal, the grounds on which an appeal is heard, the body which hears the appeal, and streamlining the processes for conducting appeals. We have also taken into account EU Directives, where these specify appeal rights in certain sectors, and to the requirements of the European Convention on Human Rights where applicable.

First, Government is proposing that, where appeals are currently heard 'on the merits', these appeals should shift either to a judicial review standard, or to defined grounds of appeal setting out more clearly the basis on which firms can challenge a regulator's decision. The objective of these changes would be to ensure that appeals are focused on identifying cases where regulators have made mistakes which have a material impact on outcomes or where a decision is unreasonable. The specific changes being consulted on include:

  • Changing the standard of review for appeals under the Communications Act 2003 from appeal on the merits to a flexible judicial review or specifying more focused grounds for these appeals;
  • Making similar changes to the standard of review for appeals under the Competition Act 1998 (excepting decisions relating to the level of penalty);
  • Aligning the grounds of appeal for energy (in Great Britain), aviation and postal services decisions; and
  • Considering what the costs and benefits would be of moving to a similar appeal model for rail decisions.

Second, Government is proposing reforms to appeal bodies, including reviewing governance of the Competition Appeal Tribunal (CAT). The Government believes that there are significant benefits in retaining a specialist appeal body with expertise in competition and regulatory issues, and with the ability to progress appeals quickly. However, Government considers that some changes could be made to re-route appeals between different appeals bodies to increase the overall effectiveness of the system and make it easier to understand for firms and investors.

Third, Government is proposing a series of reforms to ensure that regulatory decisions are transparent and well-informed and that firms are not incentivised to make unmeritorious appeals. Government is consulting on measures including:

  • Making clearer rules on the admissibility of new evidence in an appeal, and awarding costs against new evidence which could have been brought earlier at the decision-making stage;
  • Increasing use of confidentiality rings by regulators and/or greater transparency and more effective consultation;
  • Encouraging regulators to claim their full costs and clarifying that courts will only award costs against a regulator where they have acted unreasonably.

Finally, Government intends to streamline processes for hearing appeals. The UK's specialist appeal bodies - the CAT and the Competition Commission - already have a good record in carrying out cases efficiently, but the Government considers that further steps can be taken to support a world-class regulatory system, including:

  • Introducing (and where they exist reducing) target case time limits and/ or fast track processes similar to those proposed for private actions in competition law;
  • Encouraging cases to be resolved on the papers wherever possible, for example for cost awards and straightforward matters.

The Government is committed to stable and predictable regulatory frameworks to protect consumers, facilitate efficient investment and contribute to sustainable growth. It is important that regulatory frameworks avoid adding undue uncertainty to the business environment. Therefore, any changes proposed in the light of responses to this consultation will be the subject of detailed engagement and consultation with representatives of the relevant regulators, industries and investor communities."

Next Steps - Appeals against Ofcom's Decisions

With one exception, there has been no further word from the Government since publication of the above consultation document. The exception is that the 2016 Digital Economy Bill provides that future appeals against Ofcom's decisions will be determined 'by applying the same principles as would be applied by a court on an application for judicial review' - in other words there will no longer be a rehearing of the merits of the decision.

 

Martin Stanley