National Grid PLC v Gas & Electricity Markets Authority, Court of Appeal - United Kingdom Competition Appeals Tribunal, April 29, 2009, [2009] CAT 14

Resolution Date:April 29, 2009
Issuing Organization:United Kingdom Competition Appeals Tribunal
Actores:National Grid PLC v Gas & Electricity Markets Authority
 
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Neutral citation [2009] CAT 14

Before:

Sitting as a Tribunal in England and Wales

BETWEEN:

NATIONAL GRID PLC

Appellant

- v -

GAS AND ELECTRICITY MARKETS AUTHORITY

Respondent

supported by

SIEMENS PLC

CAPITAL METERS LIMITED

METER FIT (NORTH WEST) LIMITED

METER FIT (NORTH EAST) LIMITED

Interveners

Heard at Victoria House on 15 to 28 January 2009

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JUDGMENT (Non-Confidential Version)

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Note: Excisions in this judgment marked ``[...][C]'' relate to passages excluded having regard to Schedule 4, paragraph 1 to the Enterprise Act 2002

APPEARANCES

Mr Jon Turner QC, Mr Josh Holmes, Mr Meredith Pickford and Ms Laura Elizabeth John (instructed by Pinsent Masons LLP) appeared on behalf of the Appellant.

Ms Monica Carss-Frisk QC, Mr Brian Kennelly and Mr Tristan Jones (instructed by the Gas and Electricity Markets Authority) appeared on behalf of the Respondent.

Mr Christopher Vajda QC and Ms Kassie Smith (instructed by Hill Hofstetter LLP) appeared on behalf of Siemens plc.

Mr Christopher Vajda QC and Mr Ben Rayment (instructed by Slaughter and May) appeared on behalf of Capital Meters Limited.

Mr Fergus Randolph and Ms Sarah Abram (instructed by United Utilities Group plc) appeared on behalf of Meter Fit (North West) Limited and Meter Fit (North East) Limited.

TABLE OF CONTENTS

86

  1. BACKGROUND

    1. This appeal is brought by the appellant, National Grid plc (``National Grid''), under section 46 of the Competition Act 1998 (``the 1998 Act''). National Grid challenges a decision published by the Gas and Electricity Markets Authority (``the Authority'') on 21 February 2008. In that decision (``the Decision'') the Authority found that National Grid had abused its dominant position in the market in Great Britain for the provision of domestic-sized gas meters, contrary to section 18 of the 1998 Act and Article 82 of the EC Treaty. The Decision imposed a fine of £41.6 million on National Grid and ordered National Grid to put an end to the infringement. Under s. 36A(3) of the Gas Act 1986, the Authority is entitled to exercise functions under Part 1 of the 1998 Act in respect of conduct relating to activities falling within the Authority's remit. The Authority is also designated as a national competition authority for enforcing the competition provisions of the EC Treaty: see regulation 3 of the Competition Act 1998 and Other Enactments (Amendment) Regulations 2004 (S.I. 2004/1261) and section 54(1)(b) of the 1998 Act.

    2. The main hearing of this appeal took place in January 2009. Before that hearing, the parties submitted a large number of witness statements relating to many different aspects of the appeal. Some of the witnesses were cross examined during the hearing in January 2009. There is considerable movement of personnel among the companies operating in this market so that some witnesses now working for one of the parties gave evidence about what happened at a time when they were working for another company. In Annex 1 to this judgment we set out a dramatis personae explaining the witnesses' employment position at the time they signed their statements and their employment position at the time about which they gave their evidence.

      (a) The development of competition in metering

    3. The provision of natural gas to end consumers involves a number of distinct steps. The gas is extracted by gas producers and then sold to shippers. The shippers contract with gas transporters which own and operate the pipelines to carry the gas throughout Great Britain. Gas suppliers then purchase gas from the shippers and sell it to domestic and commercial end consumers.

    4. Under the Gas Act 1986, every domestic customer is obliged to receive their supply of gas through a gas meter. Meter operators, such as National Grid, typically buy the meters from manufacturers and retain ownership of the gas meter throughout its life. The meter operator provides the meter to the gas supplier so that the gas supplier can sell gas to a particular household. Installation costs are significant in comparison with the value of an individual meter. National Grid's average installation costs, in addition to the cost of buying the meter, are currently over £50 per meter. National Grid has traditionally sought to recover the costs of providing the meter, including any on-going maintenance, through the annual rental charges it sets for each meter. A similar business model has been adopted by competing meter operators (``CMOs'') which have recently entered the market. This means that in general Under their contracts with British Gas the CMOs charge a transaction fee for carrying out a functionality exchange. The significance of this is discussed further below. National Grid has charged upfront costs for the installation of new ``Category 2'' meters (that is a meter installed in a premises which did not previously have a gas meter) since October 2000. By January 2004, there were 700,000 installed meters for which an installation charge had been levied. there is no transaction charge for the initial installation of the meter at the premises - the meter is simply installed by the meter operator and the gas supplier starts paying the monthly rentals. If a householder decides to change gas supplier there is normally no need for the meter to be removed or adjusted. The meter operators and gas suppliers make arrangements whereby the rental payments for the meter are thereafter made to the meter operator by the gas supplier to which the customer has switched his or her supply.

    5. As at the date of the Decision there were approximately 22 million domestic gas meters installed in Great Britain. Of these, around 90 per cent are domestic credit meters (``DCMs'') and the remaining 10 per cent are prepayment meters (``PPMs''). Both types of meter measure the consumption of gas, but a PPM requires the consumer to pay in advance for gas for example by using a prepayment card. Consumers using DCMs are billed periodically either following a meter reading or based on an estimate of gas used over the preceding period. According to the Decision (paragraphs 2.14 and 2.16), a new DCM costs around £20 and typically lasts 20 years whereas a new PPM costs around £120 and typically lasts 10 years. In practice, the time for which both PPMs and DCMs remain installed at a property can be considerably longer than these periods. Because PPMs are much more expensive, it can often be economic to refurbish a PPM and install it at another property if it is removed before the end of its useful life. DCMs are generally installed only once and discarded if removed from a property even if they are still functioning properly.

    6. Historically, National Grid's predecessor (Transco plc) had a monopoly both of gas transportation and of the supply of gas meters and ancillary services. National Grid's meter related costs were recovered from the charges set by the regulator for National Grid's overall transportation business. Following the introduction of competition into the domestic supply of gas in 1998 the then regulator, Ofgas, began consulting the industry on how to enable other companies to compete with National Grid in supplying gas meters. In order for such competition to be possible, it was important to separate out the charges that National Grid set for its metering services from its charges for gas transportation. Ofgas therefore brought about the separation of National Grid's existing regulated transportation price control into three separate components: transportation, gas metering and gas meter reading. A new five year price control was put in place in April 2002. For the first time this set an identifiable price cap for National Grid's metering rental charges.

    7. In 2002 the Authority also launched an industry wide review, referred to as the Review of Gas Metering Arrangements (``RGMA''), designed to encourage competition in gas meter provision. According to the Decision (paragraph 2.61), RGMA was aimed at ``setting up standard, industry-wide processes and data flows to support all companies in the metering market and the competitive retail market''. Paragraph 2.63 of the Decision explains further:

      ``Central to the strategy for securing effective competition was the `supplier hub' principle. This principle places the responsibility on gas suppliers to appoint meter operators to provide and install meters at their customers' premises and to provide ancillary services (such as meter maintenance) in respect of those meters. The meter operator could be a gas transporter such as [National Grid], the in-house metering business of a gas supplier, or a third party. Suppliers were seen as being best placed to respond to customer demand for better service standards and more sophisticated meters, and, under the supplier hub approach, are able to select meter operators through competitive tenders.'' (footnote references omitted)

    8. Moving to the `supplier hub' principle required meter operators and gas suppliers to enter into new contracts. The new contracts entered into between National Grid and gas suppliers were known as Provision and Maintenance (``P&M'') contracts. The terms of these contracts had been developed multilaterally by the industry as part of the RGMA process. Under the P&M contracts there are no upfront charges for the installation of a meter. National Grid is remunerated by monthly rental payments from the time of installation until the meter is removed. Suppliers are able to replace National Grid's meters at 48 hours' notice without incurring any additional charges. The rental prices contained in the P&M contracts are in line with the cap set by Ofgem in the April 2002 price control.

      (b) The genesis of the National Grid MSA contracts

    9. Over the years prior to the setting of the price control in 2002, the...

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