National Grid Plc v Gas & Electricity Markets Authority & Ors

Early-replacement charges may legitimately protect sunk installation costs, but they become abusive where their actual or likely foreclosure effect is disproportionate to that legitimate interest. The assessment is holistic and fact-sensitive. Whether conduct departs from normal competition is not a separate, hard-edged question of law, and no universal benchmark or counterfactual is required.

A specialist competition tribunal’s economic assessment attracts substantial appellate restraint, although its reasoning remains reviewable for legal error. Consumer harm need not be direct if the conduct damages competition and thereby reduces consumer benefits. Penalties require an independent broad-brush assessment, with appropriate weight given to regulatory involvement and genuine uncertainty.

The Gas and Electricity Markets Authority found that National Grid had abused a dominant position in the domestic gas-meter market, contrary to section 18 of the Competition Act 1998 and article 82 of the EC Treaty. It imposed a penalty of £41.6 million.

On appeal under section 46, the Competition Appeal Tribunal substantially upheld the finding of abuse in [2009] CAT 14, limited it to the Legacy Meter Services Agreements, and reduced the penalty to £30 million. National Grid appealed under section 49, challenging the finding of abuse and the penalty. The central issues were whether the early-replacement provisions unlawfully foreclosed competition and whether the penalty was excessive or wrong in principle.

Disposition. The appeal against the finding of abuse was dismissed. The appeal on penalty was allowed, and the penalty was reduced from £30 million to £15 million.

1. Under section 18 of the Competition Act 1998 and article 82 of the EC Treaty, payment-protection arrangements for long-lived rented assets may be legitimate where they protect customer-specific sunk costs. They may nevertheless constitute abuse if their foreclosure effect is too severe in relation to that legitimate interest. The issue requires an overall assessment of the arrangements and their economic effects.
2. Normal competition, or competition on the merits, is not a separate preliminary issue with a hard-edged legal definition. Its assessment overlaps with the effect of the conduct on competition and is principally a matter of expert appreciation for the specialist tribunal. No rule requires every abuse finding to use a benchmark. A counterfactual is an evaluative tool whose form, realism and weight are matters of judgment.
3. The Tribunal was entitled to find that the Legacy MSAs had actual and likely foreclosure effects, including through premature replacement charges and maintenance bundling. Its assessment concerning pre-payment meters was not shown to involve an error of law. Consumer harm need not be direct; harm through reduced competition may suffice.
4. On an appeal under section 49(1), factual and economic assessments by the Competition Appeal Tribunal attract considerable restraint. The court must nevertheless scrutinise whether the reasoning fairly considers the evidence and supports the conclusion. Expertise does not prevent judicial review of the decision-making process.
5. For penalty purposes, the Tribunal must make its own broad-brush assessment, while having regard to applicable guidance and the regulator’s approach as a cross-check. The Court of Appeal should hesitate before interfering, but may do so where material mitigation has been given insufficient weight. The Authority’s close involvement, the novelty of applying established foreclosure principles to early-replacement charges, and the exclusion of the N/R MSA justified reducing the penalty. Negligence remained established under section 36(3), so no nominal penalty was appropriate.

Lord Justice Dyson agreed. Lord Justice Pill agreed with the result and penalty, stressing that the cogency and fairness of the Tribunal’s economic reasoning remained open to scrutiny.

• Court of Appeal (Civil Division) dismissed the appeal against the finding of abuse, allowed the appeal on penalty, and substituted a penalty of £15 million.
• Competition Appeal Tribunal [2009] CAT 14 substantially upheld the Authority’s finding that the Legacy MSAs were abusive, excluded the N/R MSA from the finding, reduced the penalty from £41.6 million to £30 million, and extended the compliance period.