Channel Islands Competition and Regulatory Authorities: Annual Report 2016.

STATES OF JERSEY

CHANNEL ISLANDS COMPETITION AND REGULATORY AUTHORITIES: ANNUAL REPORT 2016

Presented to the States on 6th June 2017 by the Chief Minister

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FOREWORD

This is the fifth annual report of the Channel Islands Competition and Regulatory Authorities (CICRA) and is presented to Jersey's Chief Minister and Guernsey's Committee for Economic Development pursuant to provisions set out in the Competition Regulatory Authority (Jersey) Law 2001 and The Guernsey Competition and Regulatory Authority Ordinance, 2012. It also fulfils the requirements of the obligations on CICRA as set out in the Islands' competition laws and sector specific legislation.

What is CICRA?

CICRA is the name given to the Jersey Competition Regulatory Authority (JCRA) and the Guernsey Competition and Regulatory Authority (GCRA). The JCRA and GCRA were established as bodies corporate, under the Competition Regulatory Authority (Jersey) Law 2001 and Guernsey Competition and Regulatory Authority Ordinance, 2012, respectively.

By working together, sharing resources and expertise between the islands, CICRA's aim is to ensure markets work well for consumers.

CICRA's functions

Competition - CICRA is responsible for administering and enforcing competition law in Jersey and Guernsey. The aim of this legislation is to prevent consumers being harmed by anti-competitive or exploitative behaviour in the market (such as price-fixing or abuse of market power).

Advisory - CICRA can be called on to advise Jersey's Chief Minister and Guernsey's Committee for Economic Development on matters of economic regulation and competition.

Economic regulation - In common with many otherjurisdictions, Jersey and Guernsey have decided to structure particular previously States-run businesses as separate companies which are, with the exception

of Sure in Guernsey, wholly-owned by each island's States. CICRA is responsible for the economic regulation of the sectors in which these companies operate. In Jersey this decision was taken in respect of the sea and airports, and the telecommunications and postal businesses now run by Ports of Jersey, IT and Jersey Post respectively. In Guernsey this decision was taken in respect of the telecommunications, postal and electricity businesses now run by Sure, Guernsey Post and Guernsey Electricity respectively. Oversight of the postal and electricity sectors in Guernsey is expected to be formally transferred to a new body during 2017.

Who we are

CICRA is led by ajoint Board. As at 31 December 2016 the Board comprised a Chairman, two non- executive directors and two executive directors with seven staff and offices in Jersey and Guernsey.

flow to find out more

More information on CICRA and its activities can be found on its website www.cicra.je / www.cicra.gg.

CHAIRMAN'S STATEMENT

It was a privilege to be appointed, in July 2016, to Chair the Channel Islands Competition and Regulatory Authorities (CICRA). It is a relatively new body in one sense, with my predecessor, Mark Boleat, overseeing, in 2012, the successful combining of the Jersey and Guernsey bodies into a single pan-Channel Island competition and regulatory body. CICRA is a well- recognised institution in the Channel Islands, and certainly the level of media coverage of its work bears testimony to that. As the new Chair I look forward to advancing the work of the Authorities across the various areas where CICRA is tasked to play a role in ensuring markets work well for consumers.

I would also like to thank Mark Boleat for his hard work and achievements during his tenure.

During my first six months, I have been pleased to meet and discuss the work of CICRA with many of its stakeholders. It is my hope that this will continue and I, with the rest of my Board, look forward to continuing to so engage. The appointment of two new Board members, Paul Masterton and Peter Neville, will be a significant contribution to that engagement process given their local presence and it is with great pleasure that I welcome them to the CICRA Board.

The Chief Executive, Michael Byrne, discusses aspects of our 2016 work in further detail in his report. CICRA's strategic priorities reflect the nature of the sectors we regulate and the maturity of competition in those areas of the economy. But the importance of competition does not mean that there should not be pragmatic co-operation between competing telecoms firms in sharing infrastructure investment in order to avoid a situation where networks costs are duplicated without any additional benefits to consumers. Access competition, efficient wholesale charging and network sharing are matters which will therefore be high on our priorities and CICRA will be seeking policy guidance to ensure it is aligned with wider government priorities going forward.

Our role in enforcing competition law is largely in response to market events and we look to our own prioritisation principles in guiding our work in this area. The number of sectors of the economy where a few providers dominate is bound to be larger in such small economies as Jersey and Guernsey. Protection of competition where it is feasible is therefore even more important and we have shown that while we are prepared to be pragmatic we are also ready to act on behalf of business and consumers where their interests are under threat.

We continue to develop the economic regulatory mechanisms for Jersey sea and air ports at what is still a nascent stage of regulation and in a regulatory role that is fairly unique in this sector. It is essential that regulated companies understand what their customers want and that customers have trust and confidence that this will be reflected in the decisions that companies take on an ongoing basis. This is an area to which we will give priority.

We look forward to developing these aspects of our work in the interests of the wider Jersey and Guernsey economies.

Michael O'Higgins

CHIEF EXECUTIVE'S REPORT

Over 2016, the promotion of competition has been a significant focus for CICRA. This has afforded Islanders greater choice and in some cases has required former monopolies to compete for customers for the first time. Competition discourages complacency amongst businesses and ultimately consumers are better served. In telecoms, we have and will continue to look at options to support better choice for Islanders by further opening up the local telecoms market to competition across a wider range of telecom services. As a result of our actions in 2015 where we further opened up the fixed landline markets, a greater range of offers was increasingly evident over 2016.

The take up ofthose options by telecom customers over 2016 demonstrates that consumers in both islands will take advantage of choice when it is made available to them. In mobile telecoms, over 2016 we have sought to ensure that the competing 4G mobile providers deliver on their promises to provide world-class networks with high standards of coverage across the Channel Islands.

As the regulatory and competition authority in the Channel Islands, our preferred approach is one of advocacy rather than enforcement. Nevertheless, where this more pragmatic approach does not deliver an appropriate outcome for consumers we do take enforcement action. During 2016 we took enforcement action on a number of occasions. Connectivity is crucial to the success of the Channel Islands' economies with aviation fuel and air routes being areas of particular focus. In Jersey, we found that the aviation fuel provider had infringed competition law by damaging the ability of a rival to compete and serve its customers. The new arrangement between Blue Islands and flybe has been of significant public interest. We have afforded Blue Island and flybe the opportunity to commit to, demonstrate and deliver the benefits of their new arrangement to consumers. However we have reason to believe that the arrangement between them requires further scrutiny to ensure consumer interests are represented and our work in this area will continue into 2017.

JT has been found to contravene its telecoms licence obligations on a number of occasions over the recent past and in 2016 there were two further substantive cases. It is unhealthy for a market to experience the number of confirmed incidents of licence contravention seen in Jersey where a dominant provider is present and competition is fragile. We have urged JT to improve its approach to compliance and in one case issued a fine. It is the case that other concerns expressed to us by IT's competitors were not found to have merit or JT took swifi action to remedy concerns. While such a response is obviously helpful, the findings against IT support the view of other telecoms operators that JT's approach to compliance is simply not good enough and threatens competition. We note for example that despite a ruling by the ASA against JT it continues to ignore this decision by another regulatory body in respect of its advertising of 4G speeds.

Ensuring Islanders receive value for money from their telecoms provider is a significant part of our work. During 2016 we looked at charges for fixed telecom services including exchange line, voice calls, repairs and connection charges across the Channel Islands. We concluded that JT's charges for these services in Jersey, where it holds a powerful market position, were too high and we have required JT to reduce those charges by 13%; we expect to see fairer prices introduced as a result. We did not reach the conclusion that Sure in Guernsey should reduce its charges for similar services.

Over 2016 we reviewed 13 mergers of which one (Sandpiper/JMart) was referred to further scrutiny, with consideration of this transaction continuing into 2017. Where competitors seek to acquire their rivals and local markets are affected we will examine the proposed transaction carefully with consumers' interests a high priority.

CHIEF EXECUTIVE'S REPORT (CONTINUED)

We continue to look for ways to improve the regulatory and competition law framework. Channel Islanders benefit from an appropriate competition regime in line with best practice and we look to play our role in further reducing bureaucracy for local business wherever appropriate.

We identified significant improvements that should be made to the merger regimes in the Channel Islands, following an extensive series of engagements. The benefit to consumers of an improved framework is that it enables us to better focus our resources on matters that are more relevant to their interests. To that end, the changes are far reaching and were proposed to both the Jersey Chief Minister's department and the Committee for Economic Development in Guernsey. I would like to register my thanks to the Channel Island law finns in particular who committed a great deal of effort to this process and provided insights that were beneficial and insightful.

There are also what are termed, block exemptions', in countries that apply competition law but there are none in Jersey and Guernsey. These exemptions ensure that certain types of arrangements that present little risk to competition but would be technically caught by the law are allowed to proceed without incurring the administrative application otherwise required to approve such arrangements. We have therefore championed the introduction of these block exemptions in both Jersey and Guernsey; with proposals made to the above two States departments with the aim of ensuring we are more in line with best practice.

Much of 2017 will benefit from the foundations laid by engagement with industry across a range of areas such as broadband pricing, mobile related network charges and other measures that look to advance consumer interests, either through promotion of competition or measures such as price controls that protect their interests. It has been a busy and productive year for CICRA and I pay tribute to my excellent team and for the support ofthe Board whose expertise and guidance has been invaluable.

My sincere thanks and best wishes to Mark Boleat, the previous CICRA Chair, who came to the end of his term during 2016 and to Regina Finn who resigned her position, given other significant commitments. Michael O'Higgins has made an immediate impact on taking over as Chair and the CICRA team look forward to working with him and the rest of the Board in looking to ensure markets work well in Jersey and Guernsey.

Michael Byrne

THE BOARD

Michael O'Higgins - Chairman

Michael is Chairman of the Local Pensions Partnership and of Calculus VCT, a non- executive Director of Network Rail and of the pensions company Hedgehog. He became the Independent Person' for Tunbridge Wells Borough Council in October 2015.

Michael chaired The Pensions Regulator from 2011 to 2014, the Audit Commission from 2006 until 2012 and the MIS Confederation from 2012 to 2015. He was also a non-executive Director of HM Treasury and Chair ofthe Treasury Group Audit Committee from 2008 to 2014. Previously Michael chaired the youth homelessness charity Centrepoint, was a managing partner with PA Consulting, leading its Government and IT Consulting Groups, was a partner at Price Waterhouse, worked at the OECD and has held several academic posts.

Philip Marsden - Non-Executive Director

Philip is a competition lawyer with a particular interest in abuse of dominance, consumer welfare, innovation incentives and international competition issues.

He is a Deputy Chair of the UK Competition and Markets Authority, Professor of Law and Economics at the College of Europe, Bmges and is co-founder and general editor of the European Competition Journal and the Oxford Competition Law case reporter series. Philip is also a member of the Legal Services Consumer Panel.

Michael Byrne - Chief Executive

Michael has extensive experience applying regulation and competition law in the UK energy, media and telecoms sectors.

Michael holds a diploma in Company Direction from the loD, an MBA, a post graduate qualification in European Competition Law, and a BSc Honours degree in Mathematical Statistics.

Louise Read - Director

Louise is a chartered accountant, with extensive experience of managing finance, personnel and operational aspects of business. She is the Board and Audit and Risk Committee secretary.

Louise is a Chartered Director of the loD, a fellow ofthe Institute of Chartered Accountants in England and Wales and holds a BSc in Accounting and Management Sciences from the University of Southampton.

Hannah Nixon - Non-Executive Director

Hannah has extensive experience in economic regulation and competition issues, working across a range of industries in the public and private sectors.

She is currently Chief Executive ofthe UK Payment Systems Regulator. Hannah was previously a Senior Partner at Ofgem, the UK gas and electricity regulator, she was also Ofgem's Head of Profession for Economics.

THE BOARD (CONTINUED)

Mark Boleat immediate past Chair

Mark has extensive experience in regulatory policy and practice and the handling of complex public policy issues. He holds, or has held, numerous board level appointments in commercial, public and charitable organisations including Chairman of the City of London Policy and Resources Committee.

He has strong ties to Jersey having been born and educated in the island. He has written extensively on Jersey, has undertaken three significant reviews for the States of Jersey including one on consumer policy.

Regina Finn - Non-Executive Director resigned 3 August 2016

Regina has extensive experience in competition and regulatory regimes, including in the telecommunications post, electricity and gas sectors.

Between 2001 and 2005 she set up and ran the predecessor of the GCRA

Regina is also a non-executive Director of Mutual Energy Holdings Ltd, a Belfast based energy company and a Director of Luce rna Partners, a consultancy partnership specialising in regulation and public policy

MEETINGS Of THE AUTHORITIES, MEMEER FEES AND EXPENSES

Since 1 August 2012, CICRA has been led by a joint Board. The Chairman is appointed concurrently as Chair of the GCRA by the States of Deliberation in Guernsey and Chair of the JCRA by the States of Jersey. Members are appointed to the Boards of the GCRA and JCRA by the Committee for Economic Development and the Chief Minister respective'y.

1'Ieetings

During 2016, attendance at meeting of the Boards and their Committees was as follows: Member GCRA JCRA

Board Audit and Risk Board Audit and Risk

Michael O'Higgins* 4/4 4/4

MarkBoleat* 5/5 1/1- 3/3 1/1-

Philip Marsden 8/8 2/2 8/8 2/2

ReginaFinn* 5/5 1/1 5/5 1/1

Hannah Nixon 7/8 2/2 8/8 2/2

Michael Byrne 8/8 2/2** 8/8 2/2**

Louise Read 8/8 2/2** 8/8 2/2**

*2016 part year only * in attendance only

Member fees and expenses

The Chairman's and Members' fees are approved by the Chief Minister in Jersey and the Committee for Economic Development in Guernsey. Each member's fees are split equally between the GCRA and JCRA. There has been no increase in fees since the inception of the Authority in 2012. The following table s.hows the actual fees paid to each member by the two Authorities.

Member GCRA JCRA

2016 2015 2016 2015

£ £ £ £

Michael O'Higgins * 11,111 - 28,472**

Mark Boleat l" 16,539 26,406 8,018 26,406- Philip Marsden 12,000 12,000 12,000 12,000

Reginafinn* 7,130 12,000 7,130 12,000 HannahNixon 12,000 12,000 12,000 12,000

Total 5&7 24 62406 2U1b part year only inciudes additional work commissioned by Jedsey's Ubmet Ministers Department

Shared expenses 2016 2015

£ £

4,135 - 1,322 3,161 2,378 1,356 764 1,717 1,174 1,273

2ZZ Z2 non-co-terminus end dates

Michael Byrne and Louise Read are executive members, i.e. members of each authority and employees of the GCRA and JCRA respectively. They receive no fees as members of the authorities but do receive remuneration, which is split between the JCRA and GCRA as follows:

GCRA JCRA

2016 2015 2016 2015

£ £ £ £

Michael Byrne 82,500 82,500 82,500 82,500 Louise Read* 54,641 54,100 54,641 54,100

Total U&041 137,500 U&041 137,500

Excludes employers penston contribution 05 t3.b%

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FINANCIAL REVIEW 2016

Consistent with prior years, the Guernsey Competition and Regulatory Authority (GCRA) made an accounting surplus of £1 in 2016, effectively breaking even. The GCRA accounts for income only in order to meet its actual costs during the year. It must also ensure that it receives enough income during the year in each of the areas that it covers competition law administration and enforcement, and regulation of the

telecoms, postal and electricity sectors - to fund them separately given that cross-subsidisation is not permitted. A working capital balance and an appropriate level of reserves are maintained at all times, but for the purpose of the financial statements, deferred income adjustments are made to match income with costs.

Overall costs in 2016 were £579k, (2015: £620k). Expenditure continues to be closely controlled by the GCRA maintaining strict internal guidelines with regard to purchasing and tendering procedures which, combined with appropriate best practice corporate governance, helps to ensure that it is run as an effective and efficient organisation. Independent internal auditors audit policies and procedures annually, to ensure that high standards are maintained and that appropriate processes and procedures are in place.

In line with the service level agreement between the GCRA and the Committee for Economic Development (CfED), grant funding for work under The Competition (Guernsey) Ordinance, 2012 continued to be received on a quarterly basis. During 2016 a grant of140k (2015: £140k) was received.

Income of £21k (2015: £1 7k) was received from parties making applications for approval of notifiable mergers and acquisitions. These applications and costs are by their nature unpredictable. For 2016, the fees received were lower than the costs incurred in dealing with matters relating to mergers and acquisitions because of the particular nature of the notified transactions. This shortfall of £15k (2015: £46k) has to be funded from competition law grant funding.

During 2016 £580k (2015: £574k) in fees was received from telecoms licensees and at the year end telecoms licence fees exceeded costs by £117k (2015: £l2Ok). This balance was accounted for as deferred telecommunications licence fee income. Based on budgeted costs the licence fees for 2016 were set at 1.1% of relevant turnover.

In anticipation of the imminent removal of the post and electricity sectors from economic regulation by the GCRA to a new oversight framework, the licensees (Guernsey Post and Guernsey Electricity) were not charged licence fees during 2016. Deferred income balances brought forward from 2015 were used to fund activity during 2016. Costs incurred, and therefore deferred income released for 2016 was £4k each for post and electricity. Deferred licence fee income will be released as required to fund activity during 2017.

(Incorporated in Guernsey, Channel Islands)

NON EXECUTIVE MEMBERS

Michael O'Higgins Chair appointed Chair 7 September 2016 (appointed Member 21 July 2016 to 6

September 2016)

Philip Marsden

Hannah Nixon

Mark Boleat expired effective 19 August 2016

Regina Finn resigned effective 3 August 2016

Peter Neville appointed 6 february 2017

Paul Masterton appointed 13 February 2017

EXECUTIVE MEMBERS

Michael Byrne Chief Executive Louise Read Director

SECRETARY Louise Read

INDEPENDENT AUDITOR BDO Limited

P 0 Box 180

Place Du Pre

Rue Du Pre

St Peter Port

Guernsey

GY1 3LL

BANKERS

Barclays Private Clients International Limited Jersey International Banking Centre

P0 Box 8

St Helier

Jersey

JE4 8NE

REGISTERED OFFICE

Suite 4

1st Floor Plaiderie Chambers La Plaiderie

St Peter Port

Guernsey

GY1 1WG

MEMBERS' REPORT

The Members ofthe Guernsey Competition and Regulatory Authority (GCRA) present their report and financial statements for the year ended 31 December 2016.

MEMBERS

The Members in office during the year and appointed subsequently are shown on page 10.

ACTIVITIES

The principal activities of the GCRA during the year were the regulation of the telecommunications, electricity and postal sectors and the administration and enforcement of The Competition (Guernsey) Ordinance, 2012.

RESULTS

There was a surplus for the year of £1 (2015: surplus £1).

EVENTS AFTER THE END OF THE REPORTING PERIOD

There have been no events between the statement of financial position date and the date when the fmancial statements were authorised for issue that need to be disclosed or recognised in the financial statements.

LIKELY FUTURE DEVELOPMENTS 11W THE ACTIVITIES OF THE GCRA

Information on likely future developments in the activities of the GCRA has been included in the foreword on page 2.

INDEPENDENT AUDITOR

The auditor, BDO Limited, who was appointed in accordance with Section 13(4)(a) of The Guernsey Competition and Regulatory Authority Ordinance, 2012, has indicated its willingness to continue in office.

All of the Members have taken all the steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware ofthat information. The Members are not aware of any relevant audit information of which the GCRA's auditor is unaware.

APPROVAL

The Members' report was approved by order of the Members on 31 March 2017.

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Louise Read Secretary

STATEMENT OF MEMBERS' RESPONSiBiliTIES

The Members are responsible for preparing the members' report and the financial statements in accordance with applicable law and regulations.

The Guernsey Competition and Regulatory Authority Ordinance, 2012, (the Ordinance) requires Members to keep proper accounts and proper records in relation to those accounts. The Members therefore consider themselves responsible for keeping adequate accounting records that are sufficient to show and explain the GCRA's transactions and disclose with reasonable accuracy, at any time, the financial position ofthe GCRA and which enable them to ensure that these financial statements comply with the Ordinance. They also consider that they are responsible for safeguarding the assets of the GCRA and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Ordinance also requires Members to prepare accounts in respect of each fmancial year, and once audited by auditors appointed by the States of Guernsey on the recommendation of the Public Accounts Committee, to submit to the Committee for Economic Development, a statement of account giving a true and fair review ofthe state of the GCRA's affairs together with the auditor's report. The Committee for Economic Development, in turn, must submit the accounts and the auditor's report thereon to the States of Guernsey.

The Members have elected to prepare the GCRA's financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law).

In preparing the financial statements the Members are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the GCRA will continue in operation.

The Members confirm that these financial statements comply with these requirements.

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Louise Read Secretary

TO THE MEMBERS OF THE GUERNSEY COMPETITION AND REGULATORY AUTHORITY

We have audited the financial statements of the Guernsey Competition and Regulatory Authority for the year ended 31 December 2016 which comprise the Statement of Comprehensive Income, the Statement of Cash Flows, the Statement of Financial Position and the related notes 1 to 8. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice').

This report is made solely to the Authority's members, as a body, in accordance with Section 13 of The Guernsey Competition and Regulatory Authority Ordinance, 2012. Our audit work is undertaken so that we might state to the Authority's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Authority and the Authority's members as a body, for our audit work, for this report, or for the opinions we have formed.