Albion Water Ltd v Water Services Regulation Authority, Court of Appeal - United Kingdom Competition Appeals Tribunal, October 06, 2006, [2006] CAT 23

Reporting Judge: [2006] CAT 23

President: Albion Water Ltd v Water Services Regulation Authority

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Extract

Albion Water Ltd v Water Services Regulation Authority, Court of Appeal - United Kingdom Competition Appeals Tribunal, October 06, 2006, [2006] CAT 23

Note: this abridged version of the judgment is identical to the full version, save for the omission of sections I, IV, VI, VII and X, and Annex A.

Albion Water Ltd v Water Services Regulation Authority [2006] CAT 23 (6 October 2006)

Before:

Sir Christopher Bellamy (President)

The Honourable Antony Lewis

Professor John Pickering

Sitting as a Tribunal in England and Wales

BETWEEN:

ALBION WATER LIMITED

Appellant

supported by

AQUAVITAE (UK) LIMITED

Intervener

-v-

WATER SERVICES REGULATION AUTHORITY

(formerly DIRECTOR GENERAL OF WATER SERVICES)

Respondent

supported by

(1) DWR CYMRU CYFYNGEDIG

and

(2) UNITED UTILITIES WATER PLC

Interveners

JUDGMENT

(ABRIDGED VERSION)

APPEARANCES

Dr Jeremy Bryan, Managing Director of Albion Water Limited, and subsequently

Rhodri Thompson QC and John O'Flaherty appeared on behalf of the appellant, Albion Water Limited.

Michael O'Reilly (instructed by McKinnells, Lincoln) appeared on behalf of Aquavitae (UK) Limited.

Rupert Anderson QC and Valentina Sloane (instructed by the Director of Legal Services, OFWAT) appeared on behalf of the respondent.

Christopher Vajda QC and Meredith Pickford (instructed by Wilmer Hale) appeared on behalf of Dwr Cymru Cyfyngedig.

Fergus Randolph (instructed by the Group Legal Manager, United Utilities) appeared on behalf of United Utilities Water plc.

_________

TABLE OF CONTENTS

I summary: this case in a nutshell 1

[Omitted] 1

ii introduction 1

The main participants 2

History of the Ashgrove system 3

The present situation 4

The common carriage proposal 7

iII history and background 8

The original inset appointment 8

The various prices 9

The alternative pipeline 11

The First Access Price 12

Albion's complaint of 8 March 2001 and subsequent events up to April 2003 13

The attitude of the customers 15

The later stages of the Director's investigation 17

IV THE STATUTORY framework 18

[Omitted] 18

v Dwr Cymru and its customers 18

Dwr Cymru's network 19

VI THE DECISION 23

[Omitted] 23

VII THE INTERIM JUDGMENT AND THE SUBSEQUENT PROCEEDINGS 23

[Omitted] 23

VIII some MATTERS RELEVANT TO THE TRIBUNAL'S ANALYSIS 23

A. THE TRIBUNAL'S powerS AND DUTIES 23

b. some preliminary observations 25

Features of the industry 25

Attempts to introduce competition 26

The effect of the Decision 28

C. excessive pricing - the relevant law 29

iX treatment costs 32

x the parties' submissions on the average accounting costs of distribution of potable and non-potable water 34

[Omitted] 34

xI the tribunal's analysis as regards the average accounting costs of distribution of potable and non-potable water 34

a. general 34

Some confusing terms 35

Potable and non-potable systems generally 37

Lack of information on costs 39

Revenues as a proxy for costs 42

Disaggregating costs 43

Some difficulties with the data 44

b. certain cost drivers 45

Distance 45

Geographic location 47

Aspects of complexity 52

Renewals, maintenance and leakage 57

Summary on cost drivers 61

c. the lit justification 62

d. the raw water comparison 64

e. the costs attributable to THE ashgrove SYSTEM 70

The calculations produced by Dwr Cymru and the Authority 71

Findings on the calculations produced by Dwr Cymru and the Authority 75

Summary on the costs attributable to Ashgrove 80

f. regional averaging 81

g. conclusion on average accounting costs of distribution of potable and non-potable water 88

XII ECPR 91

A. introduction 91

General Background 91

Use of terms referring to ``Efficiency'' 96

b. summary of the expert evidence 99

Professor Armstrong's first report, March 2006 99

Dr Marshall's first report, April 2006 103

Professor Armstrong's reply of May 2006 107

Dr Marshall's reply to Professor Armstrong, May 2006 108

Mr Hope's witness statement of 27 March 2006 109

The oral evidence 110

C. SUBMISSIONS OF THE PARTIES 111

Albion's submissions 111

Aquavitae's submissions 113

The Authority's submissions 114

Dwr Cymru's submissions 116

D. THE TRIBUNAL'S ANALYSIS 117

(a) Comparative experience regarding ECPR 117

- The New Zealand telecommunications litigation 117

- The United States 119

- The United Kingdom 120

- Conclusion on comparative experience 121

(b) Preserving monopoly profits, inefficiencies or cost misallocations 122

(d) Difficulties with ``avoidable costs'' 135

(e) Dynamic effects of competition 138

(f) Justifications advanced for ECPR 142

- Recovery of infrastructure and related costs 144

- Stranded assets 145

- Cross-subsidies 147

(g) Conclusions on ECPR 152

xiII conclusion on excessive pricing 153

XIV MARGIN SQUEEZE 154

A. INTRODUCTION 154

B. THE PARTIES' ARGUMENTS 156

Albion's submissions 156

Aquavitae's submissions 157

The Authority's submissions 158

Dwr Cymru's submissions 160

C. the relevant law 160

d. the tribunal's analysis 164

(1) The First Access Price 165

(2) ECPR 166

(3) Water efficiency services 166

(4) The approach to determining a margin squeeze 171

Conclusion on margin squeeze 177

XV section 66E...

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