Dwr Cymru Cyfyngedig v Albion Water Ltd & Anor

A margin squeeze may be an abuse of a dominant position where a vertically integrated undertaking controls an indispensable upstream input and sets upstream and downstream prices which leave an insufficient margin for an equally efficient downstream operator to trade profitably. Transformative activity, actual displacement of the incumbent’s downstream activity, and avoided costs are not independent elements of the test. They may, however, be relevant to objective justification.

The preferred inquiry is normally whether the dominant undertaking’s own downstream operation could profitably pay the upstream price. A zero or negative margin requires objective justification. Under Competition Act 1998, Schedule 8, the Competition Appeal Tribunal may decide an infringement issue on material before it, even if the regulator had previously made an assumption rather than a finding on that issue.

Albion, an inset water undertaker supplying Shotton Paper Mill, wished to buy water at its source and pay Dŵr Cymru for common carriage through Dŵr Cymru’s network. Dŵr Cymru’s proposed access price left Albion with no effective margin against Dŵr Cymru’s retail price.

The Director General of Water Services rejected Albion’s complaint under section 18 of the Competition Act 1998. The Competition Appeal Tribunal held in its main judgment, [2006] CAT 23, that the Director’s margin-squeeze analysis was erroneous. In its further judgment, [2006] CAT 36, it found that Dŵr Cymru was dominant and had abused that position by imposing a margin squeeze.

Dŵr Cymru appealed on two issues: the correct legal test for margin squeeze, and the Tribunal’s jurisdiction to determine dominance rather than remit it to the regulator.

1. Appeal dismissed. The Tribunal applied the correct legal test for margin squeeze. The recognised framework requires distinct upstream and downstream markets, a vertically integrated undertaking dominant upstream, access to an upstream input needed for downstream activity, and a price relationship that leaves an insufficient margin for efficient downstream trading, without objective justification.

2. The court rejected Dŵr Cymru’s proposed additional requirements of transformative activity, displacement of the incumbent’s downstream activities, or avoided downstream costs. Those features were not articulated as necessary ingredients in the guidance or authorities. The fact that earlier cases shared them did not turn them into elements of the legal test.

3. The appropriate context for displacement and avoided-cost arguments was objective justification. A zero or negative margin can foreclose competition, but the dominant undertaking is not required to subsidise an inefficient entrant. It may justify its pricing by showing that its own downstream operation, or an equally efficient operator, could earn a normal profit at the relevant prices. The Tribunal had considered the arguments and was entitled to find no objective justification on the facts.

4. The court preferred the equally efficient competitor test, based on the dominant undertaking’s downstream costs. Any error by the Tribunal in also applying a reasonably efficient competitor test was immaterial because it independently found abuse under the equally efficient competitor test. The Tribunal’s provisional reliance on an excessive upstream price was erroneous, but immaterial. Industries des Poudres Sphériques did not add a requirement that the upstream price be excessive or the downstream price predatory.

5. Although the Tribunal could not convert the regulator’s assumption of dominance into a finding merely by “confirming” it, Schedule 8 paragraph 3(2)(e) of the Competition Act 1998 gave it jurisdiction to make a decision of the kind the regulator could have made. That power is assessed on the material before the Tribunal, not by asking whether the regulator could lawfully have made that decision at the earlier date. The Tribunal therefore had jurisdiction to find dominance.

• Court of Appeal (Civil Division) — dismissed Dŵr Cymru’s appeal and upheld the Tribunal’s margin-squeeze and jurisdictional conclusions: [2008] EWCA Civ 536.
• Competition Appeal Tribunal — held that the Director’s margin-squeeze analysis was erroneous in its main judgment, [2006] CAT 23, and subsequently found that Dŵr Cymru was dominant and had abused that position by imposing a margin squeeze, [2006] CAT 36.
• Director General of Water Services — rejected Albion’s complaint under the Chapter II prohibition on 26 May 2004, while assuming dominance for the purpose of addressing the alleged abuses.