A crude or refined approach?: Government disapplies competition law for fuel suppliers
October 2021Background
Faced with fuel supply shortages across the country, Secretary of State (“SoS”) for Business Enterprise and Innovation, Kwasi Kwarteng announced on 26 September that the Government had triggered the “Downstream Oil Protocol”, a mechanism which suspends the application of the Competition Act 1998 (“CA 98”) to the fuel supply industry for the purpose of optimising supply. In many quarters, the news was received positively, with markets across Europe rising in response to the development.
Why is Competition Law problematic in a crisis?
Competition law aims to protect the process of competition between rivals in the same industry. Chapter I of the CA 98 prohibits agreements between competitors which could have the effect of raising prices or otherwise disadvantaging consumers. Chapter I generally precludes rivals from sharing sensitive price or supply data as that may rig the competitive process. Equally, competitors are not allowed to agree to allocate markets or customers between each other.
In times of shortage, competition law restrains suppliers from working together to remedy deficiencies in supply. Through dialogue, competing sellers have the potential to ration supplies to different geographical areas, ensuring that no locality is left behind. Normally, such communications are problematic and could lead to fines of up to 10% of global turnover, criminal prosecution, director disqualifications or lawsuits from aggrieved parties.
Statutory powers to tackle fuel shortages
The Energy Act 1976 (“EA 76”) was enacted in part to grant the Government emergency powers to deal with sudden fuel crises. The 1970s saw the UK beset by a series of fuel shortages brought on by international geopolitical events. While it has been subject to a number of amendments, the EA is still on the statute books and bestows on the Government certain emergency powers to deal with fuel shortages.
The National Emergency Plan for Fuel (“NEPF”)[1] summarises these powers and sets out in more detail how the Government may use them. The following are tools available to maintain fuel supply:
- Downstream Oil Industry Protocol: when activated, this temporarily exempts the industry from the CA 98 for the purpose of optimising supply in the face of disruption and allows for information sharing, joint planning and co-ordinated supply action. It is unclear whether the Protocol exists as a standalone document. If it does, that does not appear to be publicly available.
- Reserve Tanker Fleet: Government has access to a reserve fleet of fuel tanker vehicles that can be deployed at short notice to provide additional capacity to industry contingency arrangements.
- Reserve Tanker Drivers: Government works with the downstream oil industry, including haulage companies, to maintain a capability within the Armed Forces to make fuel deliveries in the event of a serious disruption to normal deliveries. This work ensures that military personnel could be efficiently and safely deployed.
- Relaxation of drivers’ hours: This is usually in response to a specific incident and would be limited to specific transport operations within a confined time period. DfT consent is required.
- Oil stocks release: The UK is obligated to hold emergency oil stocks. These can be released to provide additional supply. This would only be used in the event of a significant disruption to global supply to calm the market.
The NEPF is said to be based on the emergency powers under the Energy Act 1976. Insofar as the Downstream Oil Protocol goes, the legal basis is not so clear. S 5 of the EA 76 empowered the Government to suspend the Restrictive Trades Practices Act 1976 (the predecessor to the CA 98) but was itself repealed by the CA 98[2]. The CA 98 contains mechanisms allowing the SoS to disapply the statute to certain industries where this is required in the national interest, although this must be brought into effect with a statutory instrument[3].
The Coronavirus precedent
You don’t have to go back to the 1970s to look for a previous example of competition law being suspended (or at least subject to modified enforcement) in order to address supply shortages. In 2020, the COVID crisis triggered an unprecedented spike in demand for certain medicines and personal protective equipment (“PPE”). Panic buying of essential items took hold in supermarkets across the UK, as consumers made provisions for the coming lockdown.
There were concerns that competition law could impede any effective measures to maintain supplies of essential goods. Competition law was relaxed in relation to certain industries. For example, a statutory instrument temporarily excluded supermarkets from the application of the CA 98, allowing them to collaborate in rationing scarce supplies to stores across the country[4].
The way in which the law was enforced was also temporarily adjusted. Competition regulators issued guidelines allowing increased leeway for co-operation between competitors (subject to conditions and limitations). The Competition and Markets Authority (“CMA”) issued guidance entitled “approach to business cooperation in response to COVID-19”[5]. This document set out the following key advice for those industries not benefiting from temporary disapplication:
“The CMA understands that this may involve coordination between competing businesses. It wants to provide reassurance that, provided that any such coordination is undertaken solely to address concerns arising from the current crisis and does not go further or last longer than what is necessary, the CMA will not take action against it.” (emphasis added)
In a similar set of EU guidelines permitting temporary co-operation, the EU Commission also made it abundantly clear that it would crack down on anti-competitive agreements or abuses of dominant position, masquerading as measures taken to help meet the challenges of the pandemic.
Fuelling anti-competitive behaviour?
The steps taken by the Government to combat the fuel shortages in 2021 lack transparency and structure in comparison with the relaxation of the regulatory regime in response to COVID-19. A number of observations can be made:
- So far, neither the CMA nor the SoS have provided any detailed guidance on the scope of permitted co-operation. There are suggestions that the aim is to optimise supply but nothing further. What information can be shared between competitors? Will that information be retained after shortages have ended? Will the immunity from competition law extend to price fixing activities if these are considered necessary to match supply and demand in certain areas? It may be that behind the scenes suppliers have been told price discussions are off limits but that has not been shared publicly;
- The SoS’s announcement on 26 September suggested that the Protocol had already entered into force (“[t]onight I activatedthe Downstream Oil Protocol which temporarily exempts the fuel industry from competition laws”). However, the legal base for such immediate activation is unclear. It appears to be based on the NEPF, itself based on emergency powers available under the EA 76. However, the relevant provision of the EA 76 (S 5) was repealed by the CA 98. Is the disapplication based on the relevant power under CA 98? If so, is the SoS intending to lay a statutory instrument before Parliament to bring the temporary exemption into force? His announcement would suggest not.
- When will the disapplication come to an end? The Government could at least have set out the conditions under which it would consider lifting the Protocol and re-activating the CA 98.
- Given the range of tools available to the Government to address the crisis, why did it move to disapply the CA 98 as its first port of call? Was there even a limited impact assessment? The NEPF provides a series of different options which may have had less potential for long-term harm. If, as reported, the problems stemmed from a shortage of drivers, could the Government not have given a greater priority to its Reserve Tanker Fleet powers? This measure now appears to be close to being triggered.
- What role does the CMA have (if any) in overseeing co-operation arrangements between fuel suppliers? Giving the regulator oversight over co-ordination activities between the fuel suppliers would provide reassurance that the suppliers could not go too far. Had a statutory instrument been laid, this could have spelt out the scope of permitted co-operation and set out a supervisory power for the CMA in relation to industry coordination.
There are tentative indications that the situation on the ground is beginning to improve, and supplies may be returning to normal. However, the communications allowed between rival fuel suppliers could have harmful anti-competitive effects which outlast the crisis. The sharing of sensitive commercial information may allow rival companies to align their commercial behaviour, inflate prices artificially, or at least reduce uncertainty as to their intended future conduct. Given the criticality of fuel to a range of industries as well as to motorists, the potential magnitude of that harm to the wider UK economy should not be underestimated.
[1] See summary available here.
[2] S. 5 repealed (1.3.2000) by 1998 c. 41, s. 74(1)(3), Sch. 12 para. 2, Sch. 14 Pt. I (with s. 73); S.I. 2000/344, art. 2, Sch.
[3] Under paragraph 7(1) of Schedule 3 of the CA 1998, if the Secretary of State is satisfied that there are exceptional and compelling reasons of public policy why the Chapter I prohibition ought not to apply to:
- A particular agreement, or
- Any agreement of a particular description,
they may by order exclude the agreement, or agreements of that description, from the Chapter I prohibition.
[4] The Competition Act 1998 (Groceries) (Coronavirus) (Public Policy Exclusion) Order 2020
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