Recently Ofgem produced a guidance note on cooperation between competitors on the smart meter roll-out. The guidance note can be found here: https://www.ofgem.gov.uk/publications-and-updates/guidance-note-cooperation-between-competitors-smart-meter-roll-out
Why competition law is important for the smart meter roll-out
Ofgem's publication raises some key questions:
- What is the issue when there is cooperation between competitors?
- Why would suppliers [1] need to cooperate with competitors on the smart meter roll-out?
- What can suppliers do to ensure that they don't fall foul of competition law?
Talking too much
These days, businesses are generally well aware that their discussions with competitors cannot include an agreement to fix their prices or limit their rivalry in the market in some fundamental way. Such discussions are likely to be in breach of competition law and can lead to fines by the competition authorities and damages actions by victims.
Less widely recognised or understood, in particular in middle management and by technical staff, is that other more subtle forms of interaction between competitors such as the exchange of information can lead to equally serious sanctions.
The smart meter roll-out obligation places an obligation on suppliers (for example, British Gas, EDF, SSE, SP, Eon, npower) to replace existing meters with smart meters in Great Britain by the end of 2020. This means that each supplier will need to contact their existing customers and make appointments with customers to visit households in order to swap their electricity and/or gas meters. This is a huge logistical operation requiring suppliers to communicate with the same parties; the makers of smart meters, the legal owners of smart meters (often the smart meters form the asset base of a third party), smart meter installers, companies responsible for transportation, storage and disposal of old meters, and companies responsible for building and maintaining IT systems that will allow suppliers to contact customers etc.
As suppliers undertake these logistical tasks, it is only reasonable to assume the information will be shared with third parties, between third parties, and between suppliers. One example could be discussions about lessons learned as suppliers ramp up their smart meter roll out. This exchange of information can be explicit – for example, suppliers speaking to each other; or tacit – third parties could relay the competing supplier information.
Information exchange can be positive and negative. Exchange of information solves problems of information asymmetries, thereby making markets more efficient. For smart meter roll-out, it may help bring about a more efficient roll-out; for example sharing of information about smart meter inventory in particular regions.
At the same time, information exchange may lead to restrictive effects on competition. Most importantly, information exchange can enable companies to be better aware of market strategies of their competitors, reducing their strategic uncertainty in the market and leading to explicit or tacit collusion.
Article 101
Information exchange falls within the scope of Article 101 of the Treaty on the Functioning of the European Union (TFEU). In relation to smart meter roll-out, a breach of Article 101 can be investigated by Ofgem, the Competition and Market Authority (CMA), or the European Commission (EC). Any such investigation will be a serious matter for any company. Companies and employees working on the roll-out should therefore be cognisant of the information exchange requirements under competition law. More information on competition law can be found here: http://ec.europa.eu/competition/antitrust/overview_en.html
A rule of thumb
In the UK, there is no definitive list information that can or cannot be exchanged. Each case is determined on its own merits. As Elton John said, "If the gift horse isn't smiling … common sense is a rule of thumb".
Some rules of thumb:
1. Exchanging information on the companies' intentions regarding recent, current, or future prices or quantities is considered a restriction of competition “by object”. In other words, this is an “absolute” and “intentional” offence.
Rule of thumb: Companies and employees should not exchange information regarding recent, current, or future prices or output.
2. Companies and employees may exchange information that does not have the object of restricting competition and still be in breach of competition law. This is known as "restrictions of competition by effect".
This can include disaggregated information, commercially sensitive or strategic information. In terms of the smart meter roll-out it may be any information that may reduce uncertainty of roll-out for a particular company (for example knowledge of your competitor's roll-out plan by region affecting the decision to delay roll-out in that region so as not to pay higher prices for the small pool of installers available in that region), smart meter future/quotation prices, smart meter price promotions, inventory capacity of smart meters, information about the state of negotiations with upstream third parties etc.
Rule of thumb: Companies and employees looking to exchange information not directly linked to generating sales for suppliers, but information that is directly linked to the smart meter roll-out, should assess whether that information exchange could lead to a potential competition law breach via restrictions of competition by effect.
3. Each supplier will have its own smart meter roll-out strategy. They are likely to share their strategy with their third party suppliers or contractors. Third parties and suppliers can be at risk if they then disclose this information to the supplier's competitors. Roll-out strategy is likely to be confidential to suppliers, or can be used to gain a competitive advantage over a competitor.
Rule of thumb: Third parties should ensure information shared by suppliers on roll-out strategy is not shared by third parties. Even if this information (or some of it) is/comes into the public domain, third parties should not engage in this information exchange.[2]
If in doubt, companies and individuals working on the smart meter roll-out should ask a competition lawyer for advice before explicitly or implicitly sharing any information. Or as Ofgem in its guidance suggests, have an experienced external competition lawyer present during any meetings where there is a risk of coordination.
If companies do not plan for this risk of a competition law breach, the consequences can be massive. To name a few, firms can face fines of up to 10% of group global turnover, see a fall in stock prices, Directors can be disqualified, and not insignificant company resources can be spent on the investigation process.
[1] The defined group that has the responsibility for installing smart meters in Great Britain (GB). Suppliers are broadly defined as companies who supply gas or electricity to any premises through pipes.
[2] As any further exchange may still reduce strategic uncertainty in the market and among competitors.