Albion Water Ltd v Water Services Regulation Authority, Court of Appeal - United Kingdom Competition Appeals Tribunal, December 18, 2006,  CAT 36
|Resolution Date:||December 18, 2006|
|Issuing Organization:||United Kingdom Competition Appeals Tribunal|
|Actores:||Albion Water Ltd v Water Services Regulation Authority|
Neutral citation  CAT 36
IN THE COMPETITION APPEAL TRIBUNAL
Case No: 1046/2/4/04
London WC1A 2EB
18 December 2006
Sir Christopher Bellamy (President)
The Honourable Antony Lewis
Professor John Pickering
Sitting as a Tribunal in England and Wales
ALBION WATER LIMITED
AQUAVITAE (UK) LIMITED
WATER SERVICES REGULATION AUTHORITY
(formerly DIRECTOR GENERAL OF WATER SERVICES)
(1) DWR CYMRU CYFYNGEDIG
(2) UNITED UTILITIES WATER PLC
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
1. Following an interim judgment on 22 December 2005  CAT 40 (``the interim judgment''), the Tribunal gave its main judgment in these proceedings on 6 October 2006  CAT 23 (``the main judgment''). The present judgment deals with the issues of substance and relief that now remain to be decided, following further submissions of the parties and hearings on 24 October and 20 November 2006. We use the same terms and abbreviations as in the Tribunal's previous judgments, in which the circumstances of this case are fully set out.
2. At paragraph 981 of the main judgment, the Tribunal summarised its conclusions as follows:
``(1) There is evidence before the Tribunal that the treatment cost of non-potable water on an average accounting cost basis was over-estimated in the Decision. However the Tribunal is prepared to assume, without deciding, that treatment costs are in the range 1.6p/m³ to 3.2p/m³.
(2) The matter of the ``distribution'' cost of non-potable water on an average accounting cost basis was not sufficiently investigated. In this respect the Decision is incorrect, or at least insufficient, from the point of view of the reasons given, the facts and analysis relied on, and the investigation undertaken, as regards in particular to the Director's conclusion in paragraph 302 of the Decision to the effect that it was not unreasonable to assume that the ``distribution'' costs of potable and non-potable water are the same.
(3) The evidence strongly suggests that the First Access Price was excessive in relation to the economic value of the services to be supplied, by reason of the absence of any convincing justification for the ``distribution'' costs included in the average accounting cost calculation.
(4) The cross-check as to the validity of the First Access Price by reference to ECPR in paragraphs 317 to 331 of the Decision cannot be safely relied on because (i) the `retail' price used in the calculation is not shown to be cost-related, as regards the distribution element; (ii) the evidence strongly suggests that that price was itself excessive; (iii) the particular method of ECPR used in this case would eliminate existing competition and, in effect, preclude virtually any competitive entry, because the margins are insufficient; and (iv) the approach of the Authority in its evidence and submissions was not the same as that in the Decision. None of the justifications for an ECPR approach advanced by the Authority persuaded us that we could safely rely on the approach set out in the Decision in the circumstances of the present case.
(5) As regards the allegation of margin squeeze, the existence of a margin squeeze was not seriously disputed. The Director's finding at paragraph 352 of the Decision that nonetheless there was no breach of the Chapter II prohibition was erroneous in law and incorrect, or at least insufficient, from the point of view of the reasons given, the facts and analysis relied on and the investigation undertaken.
(6) It is unsafe to assume, as the Director does in paragraphs 331 and 338 of the Decision, that the Costs Principle set out in section 66E of the WIA91 supports the conclusion which the Director reached in the Decision, since (i) the retail price used in the calculation in the Decision is not shown to have been reasonably cost-based, and the evidence strongly suggests that that price was itself excessive; and (ii) the Director's interpretation of ARROW costs under section 66E(4) is open to serious question, since that interpretation would on the evidence preclude virtually any effective competition or market entry, and give rise to a potential conflict with the consumer objective under that Act and with the Chapter II prohibition.''
3. As indicated at paragraphs 982 to 983 of the main judgment, there are essentially three matters left to decide: (1) the issues arising in relation to dominant position; (2) the issues arising in relation to the remedies or orders that the Tribunal should now grant or make in the light of the main judgment on the issue of abuse; and (3) the question of interim relief.
4. At the hearings of 24 October 2006 and 20 November 2006, in exercise of its powers under Rule 20(4)(e) of the Tribunal's Rules, the Tribunal stressed the desirability of the parties reaching a consensual solution to this case if possible. By letter of 17 November 2006 the Tribunal proposed to the parties the possibility of mediation in the context of Rule 20(5). Those possibilities were not acceptable to Dwr Cymru, who proposed instead an agreement with Albion as regards a re-determination by the Authority under section 40 WIA91 of the price for bulk supplies (``the Bulk Supply Price'') currently paid by Albion to Dwr Cymru under the Second Bulk Supply Agreement: see further below.
5. The Chief Executive of the Authority, Ms Regina Finn, attended the hearing on 20 November 2006 at the Tribunal's invitation, and told us that previous determinations under section 40 WIA 91 had taken between 4 and 10 months.
II dominanT position: background and arguments
6. It is a prerequisite to the application of the Chapter II prohibition that the undertaking in question has ``a dominant position in a market'' within the meaning of section 18(1) of the 1998 Act. Although it appears from a number of passages in the Decision that the Director had doubts as to whether Dwr Cymru was dominant (see e.g. paragraphs 113 to 211, summarised at paragraphs 213 and 214 of the Decision), the Director was prepared to assume dominance (paragraph 215). However, at paragraphs 216 to 225 the Director reached the conclusion that he did not believe that the Ashgrove system was an ``essential facility''.
7. In those circumstances, Albion asks the Tribunal to resolve any doubts there may be and make a clear finding to the effect that Dwr Cymru has or had a relevant dominant position. In Albion's submission, the evidence to that effect is overwhelming and the matter does not require further investigation. The Authority's position, although somewhat equivocal, as explained below, is that there are further matters to be investigated before the Authority would be in a position to make a finding of dominance. The Authority further contends that the Tribunal has no jurisdiction to make a finding on dominance. Dwr Cymru declines to concede dominance, and strongly contests the Tribunal's jurisdiction to make any ruling at all on the issue. Dwr Cymru also contends that there are many further matters to be investigated before any such ruling could be made. United Utilities supports Dwr Cymru, while Aquavitae, for its part, supports Albion.
8. We propose first to trace the somewhat unusual way in which the issue of dominance has presented itself in these proceedings, drawing largely on the summary already set out in Annex A to the main judgment, together with the arguments of the parties. We then set out the Tribunal's own analysis.
9. The Director devotes some 30 pages of the Decision to considering whether Dwr Cymru is dominant in a relevant market for the purposes of the Chapter II prohibition and the associated question whether the Ashgrove system is an ``essential facility'' (paragraphs 86 to 225).
10. As for the relevant market, the Decision states that the Director has been prepared to accept as a starting point for his analysis that the relevant product/service market is that for the transportation and partial treatment of water, and that the geographic market in which Albion alleges that Dwr Cymru is dominant is that ``for the transportation via the Ashgrove system, and the partial treatment of water abstracted from the Heronbridge abstraction point to Shotton Paper and Corus''. However, the Director has not found it necessary to carry out a more detailed analysis or reach a final view of the relevant market in this instance (paragraphs 93, 101).
11. As regards dominance, the Decision states that although ``there are certain factors which would point strongly to Dwr Cymru being in a dominant position on the relevant market'' (paragraph 212) and although ``it may be unusual'', according to the Decision ``we do have reservations about whether Dwr Cymru could actually be said to be in a dominant position'' (paragraph 215). Those reservations appear to be based on the possibility that the relevant geographic market may be wider than that suggested by Albion (paragraph 213), and/or that Albion or United Utilities could enter the market. The Director does not agree that it would be uneconomic to duplicate the Ashgrove system, a view based on certain documents and various ``desk top'' calculations set out in...
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