As regulators begin to flex their competition law muscles, an issue that is now arising in the courts – and particularly the Competition Appeal Tribunal (CAT) – is the extent to which the regulator can or should wear its 'regulator' and 'competition authority' hats at the same time.

Increase in competition enforcement by regulators

There is no doubt that the past year has seen a surge of competition law enforcement by the sectoral regulators, as they use the full panoply of powers under domestic and European Union (EU) law, which has been available to them since 2004.

Ofcom, which is both the regulator and the competition authority for the UK communications industries, is currently conducting three major competition investigations: into BBC Broadcast's provision of media access services; BT's residential broadband pricing; and BT's charges for Number Translation Service (NTS) call termination.

The Office of Rail Regulation (ORR), the competition authority and economic regulator for the railway industry in the UK, found in December 2006 that rail freight operator English Welsh & Scottish Railway (EWS) had infringed article 82 of the EC Treaty and the Competition Act 1998 by abusing its dominant position in the transport of coal to power stations. One of EWS' customers, E.ON, is currently appealing the directions imposed by ORR before the CAT.

Finally, Ofgem, the regulator and competition authority for the gas and electricity industries, has issued a statement of objections (the first formal stage in the infringement procedure) as part of its investigation under article 82 and the Competition Act into National Grid. Ofgem alleges that National Grid has entered into long-term, exclusive contracts for the provision of domestic gas meters with energy suppliers that foreclose the market and restrict competition.

Risks in dealing as regulator and competition enforcer

The sectoral regulators and their predecessors have been supervising and guiding their industries for years, but only recently have they had the power to enforce the full range of UK and EU competition rules. This latter role (and the whole of the EU competition modernisation regime) involves leaving companies to work out for themselves if their conduct is anti-competitive and for the authority (as competition enforcer) to intervene after the event, mainly in response to complaints. Formerly, the authority (as regulator) may have negotiated with the companies, from the planning to the execution stage, over what they were going to do on the market.

The risk is that a relationship built up over years between a regulator and former monopolist incumbent in a regulated sector may be perceived by the CAT as too cosy for the purposes of competition enforcement. If such a relationship spills over into competition enforcement, it may lead to misunderstandings and errors on the part of incumbents and regulators.

In Albion Water, where the main judgment was given on 6 October, 2006, the CAT took the view that Ofwat had accepted too readily the legal and economic arguments put forward by Welsh Water (the dominant incumbent) in dismissing a complaint by a new entrant to the market, Albion Water. Albion Water needed access to Welsh Water pipes and wanted to bulk-buy water for resale. It complained that Welsh Water's prices were abusive.

Ofwat had accepted Welsh Water's 'retail-minus' prices and had not demanded much costs information from the dominant company before dismissing the complaint. Ofwat argued before the CAT that it relied on its extensive experience of regulating retail prices and considering which options were most efficient and best for consumers.

The CAT found serious flaws in Ofwat's approach, holding that it had not approached the market or economic issues in the right way. The CAT concluded with a message for Ofwat with general application to antitrust enforcement: competition is what must be protected first, and regulatory goals – which the authority may have in a different guise – cannot alter that.

In the Floe litigation before the CAT, it was alleged that Ofcom had been too eager to accept the excuses of the mobile network operators, such as Vodafone, in dismissing the complaints of abuse of a dominant position by the global system for mobile communications gateway operators. It was alleged that, on market issues, Ofcom accepted with insufficient independent scrutiny the reasons offered by the dominant companies. This allegation was not ultimately accepted by the CAT.

These allegations fall short of bias but seek to plant in the mind of the tribunal the impression that because the incumbent and regulator are necessarily in constant dialogue in the regulated sphere, the temptation may exist on a competition investigation to do the kind of deal that would be commonplace in the other sphere.

Privileged access in consultations

In the sectors under their supervision, regulators engage in a large number of consultations that do not, of themselves, have obvious competition law implications. Regulators must take care, however, to avoid the risks set out above, not to provide dominant incumbents with the kind of inappropriate 'privileged access' rights criticised by the Court of Appeal in R (Corner House) v Export Credit Guarantees Department (ECGD) [2006] last year. In that case, the UK's export credit agency felt entitled to consult on foreign corruption issues with the companies that use its services and no more widely. The Court of Appeal found that a small non-governmental body had a right to be consulted and was entitled to equal treatment in this respect with ECGD customers.

Similarly, regulators (wearing their competition hats) must be careful not to engage in the kind of detailed, informal conversations at all levels that may be normal in a purely regulatory context.

The consequences of wearing the wrong hat

In competition litigation, such contact may be thrown back at a regulator by an aggrieved complainant as proof of procedural unfairness or, worse, may be relied on by an incumbent as evidence of prior approval. As regards infringement itself, informal clearance is unlikely to get a company otherwise in breach of the competition rules off the hook. The situation may be different if the regulator wishes to impose penalties, however. There is an argument that an undertaking is not guilty of negligent or intentional infringement if it reasonably relies on views communicated to it by the regulator.

These issues are likely to arise between regulators, incumbents and complainants and no-one will be surprised if the CAT is compelled to provide some guidance as to how these particular hats are to be worn on the same head without confusion.

Monica Carss-Frisk QC and Brian Kennelly are tenants at Blackstone Chambers.