Ofgem publishes customer-sharing competition infringement decision

Background

The background to the case is unusual in a number of respects.  The two energy suppliers, Economy Energy and E, were respectively owned by two individuals who had been a couple for many years and had children together.  Ofgem considered the links between the two businesses in some detail in the context of the parties' claim that the two suppliers formed part of the same undertaking (and that there could not therefore be an agreement between them for the purposes of competition law).  This issue is discussed further below.  The two businesses had previously been jointly owned and were then separated in 2014.  Both Economy and E focused mainly on Pre-Payment Meter (PPM) customers – generally in rented accommodation or with a poor payment history, less engaged in the energy market, harder to access and not generally targeted by the 6 large energy suppliers.  Economy and E relied primarily on face-to-face sales agents, using tablets populated with customer details, and Economy also used telesales.  Dyball provides software and consultancy services to suppliers.  Economy entered into administration in January 2019 and its customers were transferred to another supplier under Ofgem's supplier of last resort arrangements.

The customer-sharing arrangements

In February 2016, a Dyball senior manager emailed an E senior manager and E's owner, and two of his own colleagues, apparently reporting on a meeting between Dyball and E a few days previously.  The email noted that E and Economy would not acquire each other's customers after 1 March 2016.  Dyball then emailed the owners of Economy and E setting out the draft requirements for a new Customer Relationship Management (CRM) and billing system to be used by both suppliers.  The system would allow the rejection of customers from registration in the CRM system.  After a delay in implementing these arrangements, Dyball then circulated each supplier's customer lists to the other supplier, and each of the suppliers instructed its sales agents not to target each other's customers.  Initially customers identified as existing customers of the other were withdrawn manually, with Dyball continuing to act as a facilitator in some cases.  By May 2016, Dyball had implemented a means of automatically blocking the registration of E's customers in Economy's CRM system, and the parties were looking at checking customer lists via an API rather than through the manual sharing of a list of customers.  Dyball then developed additional functionality to allow active switchers to switch (while continuing to allow the two suppliers not to target each other's customers).  Dyball also introduced a means of blocking Economy's customers from appearing in E's system.  Alerted by anonymous sources and apparently by its own analysis of switching data (presumably the very low levels of switching between the two suppliers), Ofgem opened an investigation in August 2016.

Chapter I prohibition versus Article 101

Interestingly the decision was made under the Chapter I prohibition of the Competition Act 1998 (the UK domestic equivalent of Article 101 TFEU) alone, rather than under both the UK and the EU prohibitions as is more commonly the case for the UK competition authorities.  Ofgem explained that the nature of the products and the geographical scope and size of the two suppliers' activities meant that it was unlikely that the infringement was capable of appreciably affecting trade between EU Member States and that it therefore fell outside Article 101.  Ofgem also noted that the European Commission's guidance indicated that agreements involving small and medium-sized undertakings were not normally capable of affecting trade between Member States.  Brexit (in particular the uncertainty of an exit type and date) may also have affected this decision – as Ofgem would not have known exactly when it would finalise its investigation and issue its decision, it may have decided that it would be simpler to proceed under UK law alone.

An agreement between undertakings

A key element of the submissions by E and Economy was that the relevant arrangements fell outside the scope of the Chapter I prohibition, on the grounds that the suppliers formed part of the same economic undertaking.  Economy and E argued that Ofgem should take a "holistic approach": that their two owners held part of their shares in their respective companies on trust for each other, that they were a single undertaking based on a common economic project, that the two companies together constituted a family business and that they had been separated only in order to be able to adopt different strategies and hedge against risk. The decision provides a useful analysis of the relevant EU case-law in this area (the interpretation of the Chapter I prohibition is to be consistent with the interpretation of Article 101).

Ofgem rejected the two suppliers' submissions. In particular, it noted that the mere fact that the share capital of two companies is held by the same person or family unit is not sufficient to make the two companies part of the same undertaking.  There was no authority for the proposition that a couple in a long-term stable relationship could constitute an undertaking.  It noted that the companies had made various contemporaneous statements that there was no connection between the companies and that they were competitors, that the two individuals had entered into a demerger agreement separating their two companies, that they and their respective managers had acknowledged that the two companies were separate and competed with each other and that Companies House filings until after the issue of the Statement of Objections confirmed that the two companies were controlled independently.  Ofgem disregarded the two suppliers' numerous, sometimes contradictory, filings on the subject of their respective control, filed with Companies House after the issue of the Statement of Objections,.  Ofgem therefore concluded that the two companies constituted separate undertakings, and that the arrangements between them were capable of falling within the Chapter I prohibition.

Facilitation of collusion

A particularly interesting aspect of the decision, and one that is of much wider relevance, is the involvement of Dyball, and its development of software to facilitate the collusion.  Dyball acknowledged that it had provided the means whereby E and Economy were able to access each other's customer lists so that they could filter out the other's customers from the sale process.  It also introduced functionality into each company's CRM system that stopped sales from being processed.  Ofgem found that Dyball was aware that the suppliers were using its products to block registration of each other's customers and that they intended to restrict competition between them.  Dyball resolved IT issues so as to allow the infringement to be implemented more effectively.  It not only responded to requests from the two suppliers, but also pro-actively suggested more efficient ways of sharing information and allocating customers, for example by approaching E to offer it enhanced software solutions for blocking sales to Economy's customers.  It also suggested that customer lists should be refreshed daily rather than monthly. 

Many competition authorities worldwide are currently considering the application of competition rules to the use of various forms of algorithmic collusion.[ii] Much of the interest and debate has been around the extent to which algorithms might make markets more susceptible to collusion, or might be used to replace explicit collusion with tacit collusion, and whether existing competition rules are capable of addressing such practices.  In contrast, the use of algorithms to facilitate existing express collusion is less controversial and is generally accepted to fall squarely within the current rules.  Dyball's involvement fell into the latter category.  Its software merely made quicker and more efficient the process of checking customer lists and ensuring that the suppliers did not attempt to sell to each other's customers – something that could have been done, given enough time, with a paper list.  Nonetheless this decision marks one of the first instances of a competition authority imposing penalties for this type of behaviour, and also emphasises that it is not only the colluding competitors that are infringing the rules, but also – depending on the extent of its involvement and knowledge - the developer of the software or algorithm.  Interestingly, however, Ofgem granted Dyball a 5% reduction in the level of penalty imposed, reflecting the fact that there are relatively few cases in which the European Commission or a UK authority has found an infringement of competition law through facilitating an arrangement between other parties.  Dyball's penalty was £200,000, compared with Economy's penalty of £200,000 and E's of £650,000. 

Object of restricting competition

Ofgem concluded that this was a restriction of competition "by object" – an agreement of a type that can be regarded by its very nature as injurious to the proper functioning of normal competition such that there is no need to demonstrate an anti-competitive effect.  Economy and E argued that their agreement was in fact pro-competitive because it facilitated entry into the market by E, offering a lower-cost alternative to the 6 large energy suppliers.  Ofgem rejected this argument.  It was not necessary to consider the effect of the agreement.  Market-sharing and customer allocation are well-established categories of "by object" restriction, and that was exactly what this agreement did.  This conclusion was reinforced by the fact that the great majority of the two suppliers' customers were more vulnerable PPM customers, for whom higher prices or a lower quality of service would be particularly damaging (because they were less likely to switch or otherwise engage with the market). 

Procedural issues

Economy and E alleged a number of procedural irregularities on the part of Ofgem, arguing that they vitiated the investigation.  Some of them repeated issues raised in a complaint by Economy to Ofgem's Procedural Officer which resulted in a decision in May 2018[iii].  The most interesting allegation was that Ofgem had infringed Economy's privilege against self-incrimination.  During the investigation, Ofgem had used its power to compel the individual controlling and owning Economy to answer questions pursuant to section 26A CA98.  This provides that the Competition and Markets Authority and regulators with competition powers, including Ofgem, may "give notice to an individual who has a connection with a relevant undertaking requiring the individual to answer questions with respect to any matter relevant to the investigation".  Information provided in response to a section 26A notice may be used in criminal proceedings against the individual providing the information only in certain exceptional cases.  However, the CA98 imposes no restriction on the use of the information as evidence in CA98 proceedings against the undertaking with which the individual has a connection.  The information requested in this case appears to have related to the issue of whether or not the parties under investigation were separate undertakings.  The Procedural Officer concluded that this was a question "[going] to the heart of whether or not there can be a competition law infringement" and therefore a question  of substance falling outside his remit.

In the substantive decision, Ofgem found that there was no breach of Economy's privilege against self-incrimination because, according to Ofgem, it is clear that individuals who are required to answer questions under section 26A do so in their capacity as individuals, not as representatives of the undertaking concerned.  In any event, stated Ofgem, none of the questions fell within the categories which have been found to be in breach of the privilege (notably in the Orkemjudgment of the European Court of Justice).[iv]

Neither of these reasons is entirely satisfactory.  It is disingenuous to claim that individuals required to answer questions in an interview under section 26A do so only in their private capacity.  They are required to do so specifically because they "have a connection with a relevant undertaking", meaning either that they are concerned in its management or control, or that they work for it.  Ofgem can ask questions of an undertaking only by addressing a written request to the undertaking under section 26 – in which case it is acknowledged that the privilege applies – or by means of an interview under section 26A, in which case Ofgem can only ask its questions via an individual, and the privilege should equally apply – particularly where, as here, the individual owns and controls the company.  To exclude the privilege against self-incrimination in this situation denies the undertaking the rights guaranteed under EU and UK law (on the basis of the principles established in Orkem).  It is clear, of course, that the issue here is the wording of section 26A rather than Ofgem's interpretation of it, so any effective challenge on this issue would therefore involve a challenge to section 26A as being in breach of the Human Rights Act 1998, EU law (to the extent that it still applies in the UK at that point) and/or the European Convention on Human Rights.

As to the second point, it is unclear exactly how Ofgem's questions were worded, but if the Procedural Officer considered that they went to the heart of whether there could be an infringement, it is not unreasonable to suggest that, in the words of the Court of Justice in Orkem, they sought to compel "answers which might involve an admission… of the existence of an infringement which it is incumbent upon [Ofgem, in this case] to prove".  It seems clear, for example, that the question "do E and Economy form part of the same undertaking for the purposes of competition law" would infringe the privilege.  But it is also arguable that purely factual questions could equally require answers involving the admission of an infringement, for example "please describe the extent of the influence of individual X (who owns and controls Economy) over the activities of E"?[v] 

Conclusion

The facts of this case are highly unusual, and unlikely to be repeated.  However, it is of interest – and not only in the energy sector – for its analysis of a number of novel issues, particularly the rules on the definition of undertakings outside the context of traditional corporate groups, the privilege against self-incrimination, the role of a facilitator of a collusive arrangement and, perhaps of greatest interest in the context of the development of competition policy in the digital age, the application of the competition rules to algorithmic collusion (even if only, in this case, the use of software to facilitate existing explicit collusion).  It is clear, however, that this decision will be seen in future as one of the building blocks of what will be an increasingly important area of enforcement.

[i] https://www.ofgem.gov.uk/publications-and-updates/decision-impose-financial-penalties-economy-energy-e-gas-and-electricity-and-dyball-associates-following-investigation-infringement-chapter-i-competition-act-1998 

[ii] See, for a useful introduction to this area, the report of the 2017 OECD roundtable: https://www.oecd.org/competition/algorithms-and-collusion.htm

[iii] Procedural Officer Decision 2018/1 - Application by Economy Energy Trading Limited in relation to an Ofgem investigation under the Competition Act 1998 into a possible infringement of Chapter I by a small number of parties providing services to the energy industry: https://www.ofgem.gov.uk/system/files/docs/2018/10/procedural_officer_decision_dated_23_may_2018.pdf

[iv] Case 374/87 Orkem v. Commission EU:C:1989:387

[v] See also the Opinion of Advocate General Wahl in Case C‑267/14 P Buzzi Unicem SpA v. Commission EU:C:2015:696, in which the Advocate General expressed the view that purely factual questions not requiring any sort of legal assessment may infringe the privilege.