Albion Water Ltd & Anor v Water Services Regulation Authority & Anor, Court of Appeal - United Kingdom Competition Appeals Tribunal, November 07, 2008, [2008] CAT 31

Resolution Date:November 07, 2008
Issuing Organization:United Kingdom Competition Appeals Tribunal
Actores:Albion Water Ltd & Anor v Water Services Regulation Authority & Anor
 
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Neutral citation [2008] CAT 31

Before:

Sitting as a Tribunal in England and Wales

BETWEEN:

ALBION WATER LIMITED

ALBION WATER GROUP LIMITED

Appellants

-v-

WATER SERVICES REGULATION AUTHORITY

Respondent

- and -

DWR CYMRU CYFYNGEDIG

UNITED UTILITIES WATER PLC

Interveners

_____________________________________________________________________

JUDGMENT ON UNFAIR PRICING

_____________________________________________________________________

iii

APPEARANCES

Mr. Rhodri Thompson Q.C. and Mr. John O'Flaherty (instructed by Palmers Solicitors) appeared on behalf of the Appellants.

Mr. Rupert Anderson Q.C. and Miss Valentina Sloane (instructed by Pinsent Masons LLP on behalf of the Water Services Regulation Authority) appeared on behalf of the Respondent.

Mr. Christopher Vajda Q.C. and Mr. Meredith Pickford (instructed by Wilmer Cutler Pickering Hale and Dorr LLP) appeared on behalf of Dwr Cymru Cyfyngedig.

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

Table of CONTENTS

i. INTRODUCTION 1

The Tribunal's conclusions 3

  1. LEGAL FRAMEWORK 3

    Section 18: the Chapter II prohibition 3

    Section 60: principles to be applied in determining questions 4

    Jurisprudence and guidance on unfair pricing 4

  2. FACTUAL BACKGROUND 7

    The parties and background 7

    The Decision 9

    The Notice of Appeal 9

    The Tribunal's findings in its previous judgments 9

    Dwr Cymru's appeal 11

  3. THE QUESTIONS REFERRED BACK TO THE AUTHORITY 12

  4. THE REPORT TO THE TRIBUNAL 12

    AAC+ methodology 14

    LRIC methodology 15

    LAC methodology 15

    Results of the three methodologies 16

  5. PROCEDURE AND REMEDIES SOUGHT 20

    vii. THE TRIBUNAL'S GENERAL APPROACH 21

  6. THE applicable STANDARD OF REVIEW 22

    Parties' submissions 22

    The Tribunal's analysis 24

  7. THE EVIDENCE RELATING TO COSTS 25

    A. METHODOLOGY 26

    Background 26

    The Authority's approach 26

    Albion's submissions 27

    Dwr Cymru's submissions 28

    The Authority's response 29

    The Tribunal's analysis 29

    AAC+ methodology 31

    LAC methodology 33

    LRIC methodology 33

    The Tribunal's conclusion 34

    B. COST OF CAPITAL 35

    Introduction 35

    Albion's submissions 37

    Dwr Cymru's submissions 37

    The Authority's response 38

    The Tribunal's analysis 38

    C. COST OF SLUDGE DISPOSAL 42

    Introduction 42

    Albion's submissions 43

    Dwr Cymru's submissions 44

    The Authority's response 44

    The Tribunal's analysis 44

    D. COST OF DISTRIBUTION PUMPING 45

    Introduction 45

    Albion's submissions 46

    Dwr Cymru's submissions 46

    The Authority's response 47

    The Tribunal's analysis 47

    E. COST OF THE BACK-UP SUPPLY 49

    Introduction 49

    Albion's submissions 49

    Dwr Cymru's submissions 50

    The Authority's response 50

    The Tribunal's analysis 51

  8. THE first united brands question: was the first access price excessive? 59

  9. the second united brands question: WAS THE First Access Price UNFAIr? 62

    A. PARTIES' SUBMISSIONS 62

    Albion's submissions 62

    Dwr Cymru's submissions 63

    The Authority's response 64

    B. PRELIMINARY OBSERVATIONS ON UNFAIR PRICING 65

    C. THE ECONOMIC VALUE OF THE SERVICES TO BE SUPPLIED 68

    The extent of the sunk costs (and any intangible value) of the Ashgrove system 72

    The effects of the framework of economic regulation in place in 2000/01 and the social or economic desirability of regional average pricing 76

    The return on capital employed on the Ashgrove system compared with rates of return across similar industries 77

    Should the economic value of the Ashgrove system reflect the cost of the back-up supply? 78

    D. WAS THE FIRST ACCESS PRICE UNFAIR? 79

    Was the First Access Price unfair in comparison to competing products? 79

    Was the First Access Price unfair in itself? 81

  10. conclusion 85

    i. INTRODUCTION

    1. This appeal concerns the price for the partial treatment and transmission of non-potable water through an existing pipeline to a large paper factory on the North Wales coast. Despite the apparent simplicity of the concept of water flowing through a pipe, as will be seen below, the appeal has occupied many days of the time of the Tribunal, and the attention of the Court of Appeal. The issues of fact and law involved are far from simple. This judgment is longer than the Tribunal would have wished, and necessarily complex. Even as a specialist Tribunal, we would have liked to state the facts in a few paragraphs, and our reasoning and conclusion in not many more. Regrettably this has not been not possible.

    2. The appeal arises from a Decision issued by the former Director General of Water Services Since 1 April 2006 the functions of the Director have been assumed by the Authority pursuant to the provisions of the Water Act 2003. Where necessary, references in this judgment to the Authority are to be taken as referring to the Director and vice versa., now the Water Services Regulation Authority (``the Authority'') on 26 May 2004 (``the Decision''). The Decision concerned the proposed transport of water to be supplied by Albion Water Ltd (``Albion'' or ``the appellant'') to Shotton Paper Mill (``Shotton Paper''), which operates a paper mill in North Wales, using non-potable water Non-potable water is water that is of insufficient purity to be used as drinking, i.e. potable, water. supplied through that part of the water pipe network belonging to Dwr Cymru Cyfyngedig (``Dwr Cymru'') known as the ``Ashgrove system''. For the use of the Ashgrove system, in March 2001, Dwr Cymru proposed to charge Albion an access price for partial treatment and common carriage of that non-potable water (referred to in these proceedings as the ``First Access Price'') of 23.2p/m3. Albion complained that the First Access Price was so excessive as to amount to an abuse of a dominant position.

    3. In the Decision, the Authority rejected Albion's complaint that the First Access Price infringed the Chapter II prohibition contained in section 18 of the Competition Act 1998 (``the Act''), on the ground that Dwr Cymru's quoted price was not so excessive as to be unfair, and therefore unlawful.

    4. On appeal, the Tribunal has already found that parts of the Decision should be set aside for lack of reasoning and insufficient investigation (see the judgment of 6 October 2006 ([2006] CAT 23, [2007] CompAR 22) (hereafter ``the main judgment''). For the reasons given in the judgment of 18 December 2006 [2006] CAT 36, [2007] CompAR 328 (``the further judgment''), the Tribunal found that Dwr Cymru was dominant in what it considered to be the relevant market and, by quoting the First Access Price of 23.2p/m3, while at the same time offering retail supply at 26p/m3, had imposed on Albion a margin squeeze which constituted an abuse of a dominant position. To that extent, Albion's appeal has already been allowed.

    5. The Tribunal also decided to refer back to the Authority under rule 19(2)(j) of The Competition Appeal Tribunal Rules 2003 (S.I. No. 1372 of 2003) for further investigation the matter of the costs reasonably attributable to the service of the transportation and partial treatment of water by Dwr Cymru, generally and through the Ashgrove system in particular, together with the associated question of whether, in the light of those costs, the First Access Price was an unfair price within the meaning of the Chapter II prohibition (see sub-paragraph (iii) of paragraph [360] of the further judgment).

    6. On 18 June 2007 the Authority reported to the Tribunal that it had found the First Access Price to be excessive, since it exceeded the costs attributable to the services that Albion would have required in 2000/01 from Dwr Cymru for its common carriage proposal. The Authority did not consider that the First Access Price was, on the balance of probabilities, unfair in itself and that it was not, therefore, an abuse of a dominant position. The Authority's Report, together with the composite `Scott Schedule' of the parties' points of dispute in relation to the Report, is available on the Tribunal website (see paragraph [54] below).

    7. This judgment sets out the Tribunal's reasoning and conclusions on whether Dwr Cymru has infringed the Chapter II prohibition by unfair pricing in the form of an excessive common carriage charge. In this judgment, we distinguish between a price that is ``excessive'' in terms of the distinction between the price and the cost of supply (including the cost of capital); and a price that is ``unfair'' and thus an abuse in that it bears no reasonable relation to the ``economic value'' of the services to be supplied. In certain cases ``economic value'' may exceed the cost of supply where there are additional benefits not reflected in the costs of supply. An excessive price is therefore a necessary, but not sufficient, condition for an unfairly high price.

    8. This Tribunal's conclusions may be summarised as follows:

    (a) The First Access Price specified by Dwr Cymru in March 2001 materially exceeded the costs reasonably attributable to the service of the transportation and partial treatment of water by Dwr Cymru, generally and through the Ashgrove system in particular.

    (b) The economic value of the services to be supplied was not more, or not significantly more, than the costs reasonably attributable to the service of the transportation and partial treatment of water by Dwr Cymru, generally and through the Ashgrove system in particular.

    (c) The First Access Price bore no reasonable relation to the economic value of the services to be supplied, and had both an exclusionary and exploitative effect.

    (d) The First Access Price was unfair in itself and therefore an abuse of Dwr Cymru's dominant position within the meaning of section 18, and in particular subsection 18(2)(a), of the Act.

    9. In consequence of these conclusions, if necessary we shall hear further argument on the questions of relief and costs.

  11. LEGAL FRAMEWORK

    Section 18: the Chapter II prohibition

    10. Section 18(1) of the Act provides that any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a...

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