" Approach to cost assessment 4.9 Costs will be a key consideration in the assessment of pricing conduct in relation to the Act's prohibitions: their assessment will follow the approach outlined in the Competition Act guideline Assessment of Individual Agreements and Conduct. Where the Director has grounds to suspect that pricing conduct breaches either of the prohibitions in the Act, he will investigate the costs of providing the product or service in question. He will make use of cost information already available to him and will examine the consistency of approach used by undertakers in cost analyses for the purposes of setting tariffs and special agreements, arrangements for bulk supplies, resource development, leakage control and demand management. … Excessive prices 4.14 Where an undertaking is dominant in a market, it is possible that prices may be set at excessively high levels. Prices may be considered excessively high when the price charged bears no reasonable relation to the economic value of the good or service supplied. In this instance, such behaviour could be an abuse of a dominant market position under the Chapter II prohibition. In cases where there may be excessive pricing, the Director may have regard to measures of the profitability or the 'stand-alone costs' of an activity."
"4.16 The Director regards 'common carriage' as the shared use of assets by undertakings. In many circumstances it would be uneconomic for a competitor to duplicate the provision of large assets, such as a pipe network or treatment facility. Common carriage, therefore, has the potential to increase customer choice by facilitating the entry of competitors (whether existing undertakers or new entrants) into a local market. 4.17 There is no specific statutory framework for common carriage, but this does not prevent undertakings from agreeing to such arrangements, including the associated terms and conditions. In general, however, incumbent undertakers may have little incentive to offer access to their facilities to other suppliers. In some cases refusal to allow a competitor to access or share facilities may be objectively justifiable – where, for example, the competitor refused to give adequate assurances on water quality or refused to make a reasonable contribution to necessary reinforcement costs. In other cases the refusal may be without any objective justification. Under the Act, such a refusal by a dominant undertaking to grant access to facilities that would allow another undertaking to compete in a related market may be an abuse of a dominant position. Similarly, the imposition of unreasonable price or non-price terms for access could infringe the Chapter II prohibition. 4.18The Water Industry Act 1991 provides an effective legal framework for the development of common carriage in a manner that safeguards customers' interests. Undertakers' approaches to the development of common carriage should not endanger the ability of the Director or of undertakers to fulfil their respective statutory duties. In this regard there are a number of issues that undertakers should address in any common carriage agreements. These include: the protection of water quality standards; establishing liability in the event of supply failures or quality incidents; responsibility for leakage and maintenance; and reasonable terms of access (including price). 4.19 None of these issues should, however, be used merely as a means of restricting competition via common carriage. The Director recognises that undertakers currently address many of these issues within their own operations. 4.20 The Director will, therefore, use his powers under the Act to deal with abusive conduct by dominant undertakings. This will allow common carriage to develop where there are genuine opportunities for improved services to customers."
"The Competition Act 1998 (the Act) is an important milestone for the water and sewerage industries in England and Wales. From1 March 2000 , I will have stronger legal powers to remove barriers to competition. Within this new legal framework there are significant opportunities for market competition to develop. In particular, the Act opens up the scope for market competition through shared networks, ie common carriage."
"the Director General has a duty to facilitate effective competition.
"(2) The Secretary of State or, as the case may be, the Director shall exercise and perform the powers and duties mentioned in subsection (1) above in the manner that he considers is best calculated – (a) to secure that the functions of a water undertaker and of a sewerage undertaker are properly carried out as respects every area of England and Wales; and (b) without prejudice to the generality of paragraph (a) above, to secure that companies holding appointments under Chapter I of Part II of this Act as relevant undertakers are able (in particular, by securing reasonable returns on their capital) to finance the proper carrying out of the functions of such undertakers. (3) Subject to subsection (2) above, the Secretary of State or, as the case may be, the Director shall exercise and perform the powers and duties mentioned in subsection (1) above in the manner that he considers is best calculated – (a) to ensure that the interests of every person who is a customer or potential customer of a company which has been or may be appointed under Chapter I of Part II of this Act to be a relevant undertaker are protected as respects the fixing and recovery by that company of water and drainage charges and, in particular— (i) that the interests of customers and potential customers in rural areas are so protected; and (ii) that no undue preference is shown, and that there is no undue discrimination, in the fixing of those charges; (b) to ensure that the interests of every such person are also protected as respects the other terms on which any services are provided by that company in the course of the carrying out of the functions of a relevant undertaker and as respects the quality of those services; … (d) to promote economy and efficiency on the part of any such company in the carrying out of the functions of a relevant undertaker; and (e) to facilitate effective competition, with respect to such matters as he considers appropriate, between persons holding or seeking appointments under that Chapter."
"(1) Where, on the application of any qualifying person – (a) it appears to the Director that it is necessary or expedient for the purposes of securing the efficient use of water resources, or the efficient supply of water, that the water undertaker specified in the application ("the supplier") should give a supply of water in bulk to the applicant; and (b) the Director is satisfied that the giving and taking of such a supply cannot be secured by agreement, the Director may by order require the supplier to give and the applicant to take such a supply for such period and on such terms and conditions as may be provided in the order."
"(6) In exercising his functions under this section, the Director shall have regard to the desirability of – (a) facilitating effective competition within the water supply industry; (b) the supplier's recovering the expenses of complying with its obligations by virtue of this section and securing a reasonable return on its capital; (c) the supplier's being able to meet its existing obligations, and likely future obligations to supply water without having to incur unreasonable expenditure in carrying out works; (d) not putting at risk the ability of the supplier to meet its existing obligations or likely future obligations to supply water."
"Taking large users out of the tariff basket means that companies cannot automatically recoup from other customers lost revenue arising from reduced charges to their large users. These large users are part of a competitive market that does not require the same degree of regulation as other groups of customers. In response to competitive pressures, companies have continued to review their cost allocations between different classes of customers and develop tariffs for large user customers. Companies have either reduced the thresholds for larger user tariffs and/or reduced the volumetric rates for the tariffs concerned. In addition a few companies have introduced innovative tariffs for large users designed to align tariffs more closely to the costs of supply and to maintain incentives to efficient use. Notwithstanding this, companies must ensure that charges to large users are not unduly preferential or unduly discriminatory. They must also ensure that they are not acting anti-competitively."
"(2A) The Secretary of State or, as the case may be, the Authority [14] shall exercise and perform the powers and duties mentioned in subsection (1) above in the manner which he or it considers is best calculated – (a) to further the consumer objective; (b) to secure that the functions of a water undertaker and of a sewerage undertaker are properly carried out as respects every area of England and Wales; (c) to secure that companies holding appointments under Chapter 1 of Part 2 of this Act as relevant undertakers are able (in particular, by securing reasonable returns on their capital) to finance the proper carrying out of those functions; and (d) to secure that the activities authorised by the licence of a licensed water supplier and any statutory functions imposed on it in consequence of the licence are properly carried out. (2B) The consumer objective mentioned in subsection (2A)(a) above is to protect the interests of consumers, wherever appropriate by promoting effective competition between persons engaged in, or in commercial activities connected with, the provision of water and sewerage services."
"(3) The charges payable by a licensed water supplier to a water undertaker under an agreement under paragraph (a)(i) or (ii) of subsection (2) above or a determination under paragraph (b) of that subsection shall be fixed in accordance with the costs principle set out in section 66E below."
" Price related alleged breaches of the Chapter II Prohibition Excessive Pricing 74. Albion Water argued throughout its complaint that the First Access Price was excessive and that Dwr Cymru was making supra-normal profits. The specific allegations Albion Water made about the First Access Price are set out below. (a) Unreasonable cost recovery : Albion Water argued in a letter dated25 January 2001 that the First Access Price was excessive because of the extent to which it exceeded Albion Water's estimate of the direct costs of supply, based on Albion Water's belief that the relevant class of customer should comprise only Corus and Shotton. (b) Criticisms of Dwr Cymru's access price methodology: Albion Water criticised Dwr Cymru's basic approach of calculating the First Access Price by using revenue figures as a proxy for costs, and working backwards from those figures to calculate the individual elements which went to make up the First Access Price. In a letter to us dated8 March 2001 , Enviro-Logic stated that, "in the short run it is unreasonable to assume that current income is entirely representative of current network costs"
"(a) Did Dwr Cymru misallocate any costs when calculating the First Access Price? (b) Does the First Access Price bear no reasonable relation to the economic value of the service provided, when judged by reference to the difference between the costs actually incurred by Dwr Cymru and the price charged? (c) if the answer to (b) is in the affirmative, was the First Access Price unfair either in itself or when compared to competing services?" (paragraph 234) Dwr Cymru's calculations In reply to those questions, the Director considered first the methodology by which Dwr Cymru calculated the First Access Price of 23.2 p/m³, which was essentially based on an average accounting cost (AAC) method. As appears from paragraphs 250 to 307 of the Decision, Dwr Cymru's calculation was in seven steps. As we understand it, at Step 1 Dwr Cymru started with the average price charged by it for supplying water to its entire customer base (including both potable and non-potable water but excluding water supplied under a major agreement known as the Elan Valley Supply Agreement, and the water supplied to Albion Water), which was 73.3p/m³. This figure is apparently based on Dwr Cymru's total revenue in 1999/2000 (excluding "third party services") [21] divided by the total volume of water supplied, adjusted to 2000/2001 prices (paragraphs 258 to 260 of the Decision) [22] . Throughout the calculation Dwr Cymru equated the revenues it had received with its "costs"
"300. The main cost drivers for transporting water through pipes are linked to the size (diameter) and the material and smoothness of the pipe, required flow rate, distance, direction and change in altitude between the points at which the water enters and leaves the pipe. These cost drivers are largely independent of the quality of the water being transported. 301. In practice, the differences in the physical characteristics (density and viscosity) of partially treated non-potable water and potable water would be minimal in so far as they could directly affect the costs of water distribution. It does not therefore appear that the cost of transporting a given volume of water is fundamentally affected by whether the water is potable or non-potable. 302. We do not therefore believe that Dwr Cymru was unreasonable to assume that the cost of transporting non-potable water in bulk was the same as the cost of transporting potable water."
"Access prices calculated under an ECPR approach may be perceived as being more favourable to undertakers than prices derived from other approaches, including some alternative retail-minus approaches. This is because ECPR allows the undertaker to produce prices that fully compensate it for the net losses that it would incur when providing a common carriage or wholesale distribution service, as compared with continuing to supply the final customer itself."
"329. When considering any retail-minus approach, it is necessary to take the appropriate retail price, as a starting point. In this case, the appropriate retail price is that contained in the Second Bulk Supply Agreement at the time Albion Water made its complaint against Dwr Cymru (i.e. 2000/2001), as Albion Water had effectively become Dwr Cymru's customer in place of Shotton Paper itself. This price in 2000/2001 was 25.8p/m 3 . Although we did not formally determine the price in the Second Bulk Supply Agreement, the parties agreed exactly the same price (26 p/m 3 ) we indicated that we would be minded to determine, if we were required to do so. 330. Under a "retail-minus" approach, the access price would be 25.8p/m 3 minus the avoidable costs of resources. These avoidable costs would be the specific costs attributable to the assets used to supply the customer (in this case, the water supplied by United Utilities Water from the Heronbridge Abstraction Point to Dwr Cymru under the First Bulk Supply Agreement). 331. As noted in paragraph 65, historically Dwr Cymru has paid approximately 3 p/m 3 for the relevant water under the First Bulk Supply Agreement. In 2000/2001, the price was 3.3 p/m 3 . The access price resulting from an ECPR calculation would therefore have been approximately 22.5 p/m 3 (i.e. the retail price of 25.8 p/m 3 minus avoidable costs of approximately 3.3 p/m 3 ). We think that the Costs Principle would produce the same access price. The difference between this price and the First Access Price of 23.2 p/m 3 is very small: in percentage terms, it is only 3% of the First Access Price."
"335. The second question we considered was whether the First Access Price could be said to bear no reasonable relation to the economic value of the service provided, when judged by reference to the difference between the costs actually incurred by Dwr Cymru and the price charged. 336. There is no legal definition of the "economic value" of a service. In United Brands , the ECJ simply referred to examining differences between costs and prices. Similarly, there is no definition of "excessive" in the context of pricing. 337. We have considered how best to assess costs, and whether the First Access price is excessive in relation to those costs. On the one hand, Dwr Cymru adopted a particular approach to calculating the First Access Price which, with our adjustments to correct cost misallocation, would point to costs closer to 19.2 p/m³, than the 23.2 p/m³ of the First Access Price. 338. However, as discussed above, we think that there are dangers in accepting only one approach when assessing costs and whether or not an access price is excessive. We therefore had regard to the Second Bulk Supply Agreement, the Costs Principle, and ECPR. The access price resulting from an ECPR approach based on the Second Bulk Supply Agreement would be approximately 22.5 p/m³. We think that the Costs Principle would produce the same price. 339. In light of the above, and despite our dissatisfaction with the fact that the First Access Price did contain cost misallocation, we have doubts about whether the First Access Price could be said to bear no reasonable relation to the economic value of the service provided, when judged by reference to the difference between the costs actually incurred by Dwr Cymru and the price charged. 340. In Napp the Tribunal stated that they found, "it difficult to imagine, for example, this Tribunal upholding a penalty if there were a reasonable doubt in our minds" and that, "
"346. Prior to Albion Water's Inset Appointment, Dwr Cymru had been supplying the relevant water to Shotton direct through the Ashgrove System. When Albion Water was granted its Inset Appointment, it simply purchased the water from Dwr Cymru at the boundary of Shotton's premises (under the Second Bulk Supply Agreement), and sold it straight on to Shotton (under the Shotton Supply Agreement). It is difficult to see how, in practice, the nature of the "retail" activities carried out by Dwr Cymru changed. It simply ceased supplying one customer (Shotton) and replaced this customer with a second customer (Albion Water). 347. Further, as discussed above, on12 December 1996 we provisionally decided a price (26 p/m 3 ) as indicative of the price we would determine formally if we were asked to determine the Second Bulk Supply Agreement (although ultimately the parties agreed the same price without needing a formal determination). This price was based on other retail prices offered by Dwr Cymru at the time (as well as Dwr Cymru's estimated LRMC). The New Tariff, which is a retail tariff, is slightly below the price in the Second Bulk Supply Agreement. The price which Shotton agreed to pay Albion Water under the Shotton Bulk Supply Agreement is the same as that in the Second Bulk Supply Agreement. These are all consistent with Albion Water simply replacing Shotton as Dwr Cymru's retail customer. 348. Importantly, we have seen no evidence that the arrival of Albion Water has resulted in Dwr Cymru's ceasing to incur any retail costs."
"351. We do not have any evidence that Dwr Cymru ceased to incur any retail costs as a result of supplying Albion Water under the Second Bulk Supply Agreement, or that Dwr Cymru would make any similar saving under Albion Water's proposed new arrangement. In simple terms, Dwr Cymru will continue to supply the same water, through the same pipes, to the same premises. It will continue to issue one set of bills to one customer. Assuming that the relevant "upstream" and "downstream" operations are treatment/transport operations and retail operations respectively, it is not necessary to analyse the split, and relationship, between these operations carried out by Dwr Cymru, as Dwr Cymru will continue to provide both. 352. In summary, we do not believe that Dwr Cymru has abused a dominant position in breach of the Chapter II Prohibition in these circumstances, by engaging in price squeezing. In supplying Albion Water, Dwr Cymru is in practical terms carrying on precisely the same water supply service and incurring the same costs as it was doing when it supplied Shotton directly."
"There are a number of factors that make competition for large users practicable. Unlike household customers, cross-subsidies have been largely unwound. Large users often have individual service requirements that are suited to individual contractual arrangements. Large users are charged on the basis of measured volume and, therefore, it is easier to establish how much water a new entrant's customers are using and apportion distribution costs. There may also be opportunities for local competition where a small source of water, that might otherwise be uneconomic for an undertaker to develop, could be used to supply a particular customer."
"lacks key features of market competition, most notably the threat of market entry and customer choice. The incentives to increase efficiency, improve the quality of service, introduce innovative practices and drive down prices may, therefore, be somewhat weaker than those provided by direct market competition." (paragraph 17) As regards the benefits of competition for large users in the water industry, the Consultation Paper noted: "
"The competitor acts as a middleman, driving down the costs of supply. This has brought benefits with companies responding by introducing large user tariffs"
"248 The imposition by an undertaking in a dominant position directly or indirectly of unfair purchase or selling prices is an abuse to which exception can be taken under Article [82] of the Treaty. 249 It is advisable therefore to ascertain whether the dominant undertaking has made use of the opportunities arising out of its dominant position in such a way as to reap trading benefits which it would not have reaped if there had been normal and sufficiently effective competition. 250 In this case charging a price which is excessive because it has no reasonable relation to the economic value of the product supplied would be such an abuse. 251 This excess could, inter alia, be determined objectively if it were possible for it to be calculated by making a comparison between the selling price of the product in question and its cost of production, which would disclose the amount of the profit margin; however the Commission has not done this since it has not analysed UBC's costs structure. 252 The questions therefore to be determined are whether the difference between the costs actually incurred and the price actually charged is excessive, and, if the answer to this question is in the affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products. 253 Other ways may be devised – and economic theorists have not failed to think up several – of selecting the rules for determining whether the price of a product is unfair"
"107 It is necessary for the Commission to determine what the direct costs for the relevant product are. Appropriate cost allocation is therefore fundamental to determining whether a price is excessive. For example, where a company is engaged in a number of activities, it will be necessary to allocate relevant costs to the various activities, together with an appropriate contribution towards common costs. It may also be appropriate for the Commission to determine the proper cost allocation methodology where this is a subject of dispute."
"Non-potable mains are generally of low pressure and short length and are to be found in rural areas where construction costs are low. By contrast, the trunk potable network is of high pressure and must be of high integrity to protect the quality of the water. Potable trunk mains are usually laid under the roads, very often in urban situations, and their construction and maintenance costs are correspondingly high. It is inconceivable that non-potable mains could have a higher unit cost than potable mains; let alone a cost that is [20] times higher." (see also Albion's then solicitors' letter of14 May 2002 ) Although Albion has produced no specific witness statement in support of paragraph 179 of the notice of appeal, Albion's Managing Director Dr Bryan has signed a statement of truth in support of the facts stated in the notice of appeal (p. 2). Dr Bryan states in two witness statements dated23 July 2004 and11 March 2005 that he is a qualified water scientist with an honours degree in microbiology and chemistry and a doctorate in the biological processes associated with water pollution. He has been employed within the water and environmental sector for 32 years and has held senior posts for much of that time. He states that he has been able to gain experience across the full range of services provided by the water and sewerage industry, from scientific, operational, and regulatory perspectives, both nationally and internationally. The Tribunal therefore has at least some evidence before it to support Albion's contentions as to the physical differences between potable and non-potable distribution. No evidence on this issue has so far been filed on behalf of either the Director or Dwr Cymru. The key passage in the Decision is at paragraphs 300 to 301: "
"26. Very careful consideration has been given to whether to introduce measures to increase competition for household customers in the prospective Water Bill. There are a number of factors to be taken into account. Water is heavy and costly to distribute (compared to its final selling price) and there is no national grid to distribute it. There are also cross-subsidies within household tariffs which competition could unwind. Prices are averaged across undertakers' areas, for example, so that people who live where water is expensive to treat and transport, which includes many rural communities, pay the same tariff as those in areas where costs are lower. 27. Increasing competition for households, while at the same time seeking to ensure that the Government's public health, social and environmental objectives continue to be met, would require a complex and costly regulatory regime, which would still leave substantial uncertainties, particularly about the effects on individual customers' bills. The added complexity would militate against effective competition and the extra costs would have to be borne mainly by customers. The Government believes that, based on evidence currently available, the drawbacks of increasing competition for household customers are likely to outweigh the potential benefits. The legislative provisions in the Water Bill will therefore prohibit new entrants from supplying water to household customers through undertakers' distribution networks."
"…so for example take household customers, the people who live in terraced houses are not charged a lesser amount than the farmer who lives way out in the valley simply because he is way out in the valley. That is what average cost pricing is all about" (Day 2, p. 15). However, that example is in our view a long way from the present case, which concerns the largest industrial users of non-potable water. As paragraph 28 of the Consultation Paper, cited above, makes clear, competition for large users is considered to be practicable, not least because "
" – Undertakers' prices for distribution and wholesale supply should not, in themselves, deter potential licensees from seeking to supply customers. This implies that they should reflect the actual cost of providing the service, they should not be unduly discriminatory and they should be transparent. … – To the extent that undertakers' tariffs reflect a geographical averaging of costs, access and wholesale charges should generally be set in order to avoid the unwinding [of] the associated cross-subsidies"
"[ECPR] can be summarised by a simple equation in which the access price is given by the incumbent's final product price less the costs it would avoid by providing access. For example, a new entrant wishing to access an incumbent's arterial and local distribution network would be charged the difference between the incumbent's final product price and the avoidable costs of resources, treatment and customer service."
"Each company should charge entrants as it would charge itself and should be able to demonstrate this, both to entrants and the regulator, if asked to do so."
"The price for non-potable water is similar to prices charged by Dwr Cymru for other bulk supplies."
"On12 December 1996 we provisionally decided that a price of 26p/m³ would be given to the parties as indicative of the price we would determine formally, if required to do so. In calculating this indicative figure, we had regard to the prices charged by Dwr Cymru to an associate, Hyder Industrial, for non-potable water (an equivalent of 28.39 p/m³), the prices charged by Dwr Cymru to six non-potable large users including Shotton itself between approximately 26 p/m³ and 29 p/m³), and Dwr Cymru's estimated LRMC (approximately 26p/m³)."
"6.1 A margin squeeze may occur in an industry where a vertically integrated undertaking is dominant in the supply of an important input for a downstream market in which it also operates. The vertically integrated undertaking could then harm competition by setting such a low margin between its input price (e.g. wholesale price) and the price it sets in the downstream market (e.g. retail price) that an efficient downstream competitor is forced to exit the market or is unable to compete effectively. 6.2 To test for margin squeeze, it is usual to determine whether an efficient downstream competitor would earn (at least) a normal profit when paying input prices set by the vertically integrated undertaking. 6.3 In practice, in order to determine whether an efficient downstream competitor would make a normal profit, the test is typically applied to the downstream arm of the vertically integrated undertaking. Therefore, the test asks whether, given its revenues at the time of the alleged margin squeeze, the integrated undertaking's downstream business would make (at least) a normal profit if it paid the same input price that it charged its competitors. 6.4 A test for margin squeeze might require assessing the accounts of a 'notional business' as in practice the integrated undertaking's downstream business may not have separate accounts from its upstream business and would not usually treat its input prices as a cost in the same way that an independent downstream competitor would. Therefore, the details of how costs and revenues are allocated and/or calculated will depend on the circumstances of each case. For example, a margin squeeze investigation may raise issues such as the measurement and allocation of costs and revenues (both between products and between upstream and downstream operations), the appropriate rate of return, and the appropriate time period over which to measure profitability. 6.5 If there is evidence that a vertically integrated dominant undertaking has applied a margin squeeze and that it harmed (or was likely to harm) competition, this is likely to constitute an abuse of that dominant position."
"117. Where the operator is dominant in the product or services market, a price squeeze could constitute an abuse. A price squeeze could be demonstrated by showing that the dominant company's own downstream operations could not trade profitably on the basis of the upstream price charged to its competitors by the upstream operating arm of the dominant company. A loss making downstream arm could be hidden if the dominant operator has allocated costs to its access operations which should properly be allocated to the downstream operations, or has otherwise improperly determined the transfer prices within the organisation… 118. In appropriate circumstances, a price squeeze could also be demonstrated by showing that the margin between the price charged to competitors on the downstream market (including the dominant company's own downstream operations, if any) for access and the price which the network operator charges in the downstream market is insufficient to allow a reasonably efficient service provider in the downstream market to obtain a normal profit (unless the dominant company can show that its downstream operation is exceptionally efficient). 119. If either of these scenarios were to arise, competitors on the downstream market would be faced with a price squeeze which could force them out of the market."
"106. The Commission's practice in previous decisions has been to hold that there is an abuse of a dominant position where the wholesale prices that an integrated dominant undertaking charges for services provided to its competitors on an upstream market and the prices it itself charges end-users on a downstream market are in a proportion such that competition on the wholesale or retail market is restricted. 107. In the case of the local network access at issue here, there is an abusive margin squeeze if the difference between the retail prices charged by a dominant undertaking and the wholesale prices it charges its competitors for comparable services is negative, or insufficient to cover the product-specific costs to the dominant operator of providing its own retail services on the downstream market. 108. In such a situation, anticompetitive pressure is exerted on competitors' trading margins, which are non-existent or too narrow to enable them to compete with the established operator on retail access markets. An insufficient spread between a vertically integrated dominant operator's wholesale and retail charges constitutes anticompetitive conduct especially where other providers are excluded from competition on the downstream market even if they are at least as efficient as the established operator."
"126. … The margin squeeze test seeks to compare charges for two particular services at different commercial levels… The method used to determine whether there is a margin squeeze in this case is based on the principle that the established operator's tariff structure must enable competitors to compete with that operator effectively, and at least to replicate the established operator's customer pattern. It must not be assumed that the competitors' customer structure and range of services will necessarily be more profitable than those of the incumbent. The primary consideration here is the effect on market entry by competitors …"
"140. Where wholesale and retail services are comparable, as described above, a margin squeeze occurs if the spread between DT's retail and wholesale prices is either negative or at least insufficient to cover DT's own downstream costs. This would mean that DT would have been unable to offer its own retail services without incurring a loss if, during the period under investigation, i.e. since 1998, it had had to pay the wholesale access price as an internal transfer price for its own retail operations. 141. As a consequence the profit margins of competitors are squeezed, even if they are just as efficient as DT. This means that they cannot offer retail access services at a competitive price unless they find additional efficiency gains. A margin squeeze imposes on competitors additional efficiency constraints which the incumbent does not have to support in providing its own retail services."
"By proving the existence of a margin squeeze, the Commission has therefore done enough to establish the existence of an abuse of a dominant market position." (2) ANALYSIS Under section 60 of the 1998 Act the Tribunal (and the Director) are required to ensure that questions arising in relation to competition within the United Kingdom are so far as possible, and having regard to any relevant differences, dealt with in a manner which is consistent with the treatment of corresponding questions in Community Law: section 60(1). Similarly the Tribunal must decide any such question in a manner consistent with any relevant decision of the Court of Justice: section 60 (2). The Tribunal must also "have regard" to any relevant decision or statement of the European Commission: section 60(3). It appears to us that there is a clear potential conflict between the approach of the Commission in the Telecommunications Notice and in decisions such as Deutsche Telekom , on the one hand, and the ECPR approach used by the Director in the Decision on the other hand. The European Commission's approach looks at the difference between the price charged for the upstream input (common carriage) and the downstream retail price in order to determine whether an equally efficient competitor could compete with the dominant firm in the downstream market. If there is insufficient margin between the downstream and upstream prices, then at first sight this may constitute an abuse unless it can be justified on efficiency or other grounds. The ECPR rule, however, looks at the avoided costs of the dominant firm, and prescribes that entry can take place only if the entrant is more efficient than the dominant firm to the extent that it can fund the full cost of entry out of a margin calculated by reference to the dominant firm's avoided marginal costs. Subject to further argument, at present we see difficulties in reconciling these two approaches. Unless the present case is distinguishable, section 60 would apparently require us to follow the approach of the Commission, rather than that of the Director. At paragraphs 342 to 352 of the Decision, the Director refers to the Telecommunications Notice, but does not apply paragraphs 117 to 119 of that Notice. Instead, the Director argues that Albion has simply replaced Shotton Paper as "
"The tariff will include the following:- Customers, using over 50Ml/annum, will be given the following benefits:- • detailed water management data • advice on efficient use of water and benefits of seasonal use • leakage monitoring Additional benefits for users over 250 Ml/annum:- • water efficiency audits"
"No particular quality of water will be guaranteed but the source of supply will be River Dee water settled at Ashgrove Treatment Works with chemically assisted coagulation determined by raw water conditions."
"The price for non-potable water is similar to prices charged by Dwr Cymru for other bulk supplies."
"As I explained in our meeting on the10 July 2003 we are very unhappy with the current situation in the water supply industry and the lack of any real competition in the established regions. Having raised this matter with OFWAT they suggested that your company offers a realistic alternative to the large established operators. Will you therefore please confirm that you are able to bid for the supply of water to three of our larger plants situated in Wales. Namely, Llanwern, Trostre and Shotton."
"I wrote to you last year underlining our support for Albion and the reasons why the partnership of UPM Kymmene and Albion Water is so important to our UK operations. I wish to reiterate that support. We are very conscious that Albion is still the only active competitor in the market and that Ofwat has consistently failed to address issues relating to the price and non-price terms of water. This gives us some serious concerns about potential conflicts of interest faced by Ofwat. An independent Albion Water under Jerry Bryan will continue to fight vigorously for a better, more competitive water industry. That will undoubtedly make Ofwat's life more difficult… I have seen the business plan for Albion Water created by Jerry Bryan and his responses to the 19 questions from Ofwat. I am very conscious that that plan is based, overwhelmingly, on the supply of regulated water services to the Shotton Paper site. I am also conscious that it assumes a continuation of the current level of support from UPM Kymmene that allows Albion Water to cover its costs whilst it fights for fairer terms from Dwr Cymru. I wish to make it clear that UPM Kymmene is fully supportive of that plan."
"I wish to state that I believe this level of support to be unprecedented in the water industry. UPM has been forced to accept that it is necessary as the only method of ensuring the continuation of an independent Albion Water, which is committed to support UPM's operations in the UK and is determined to fight to deliver the benefits of greater competition."
" Approach to cost assessment 4.9 Costs will be a key consideration in the assessment of pricing conduct in relation to the Act's prohibitions: their assessment will follow the approach outlined in the Competition Act guideline Assessment of Individual Agreements and Conduct. Where the Director has grounds to suspect that pricing conduct breaches either of the prohibitions in the Act, he will investigate the costs of providing the product or service in question. He will make use of cost information already available to him and will examine the consistency of approach used by undertakers in cost analyses for the purposes of setting tariffs and special agreements, arrangements for bulk supplies, resource development, leakage control and demand management. … Excessive prices 4.14 Where an undertaking is dominant in a market, it is possible that prices may be set at excessively high levels. Prices may be considered excessively high when the price charged bears no reasonable relation to the economic value of the good or service supplied. In this instance, such behaviour could be an abuse of a dominant market position under the Chapter II prohibition. In cases where there may be excessive pricing, the Director may have regard to measures of the profitability or the 'stand-alone costs' of an activity."
"4.16 The Director regards 'common carriage' as the shared use of assets by undertakings. In many circumstances it would be uneconomic for a competitor to duplicate the provision of large assets, such as a pipe network or treatment facility. Common carriage, therefore, has the potential to increase customer choice by facilitating the entry of competitors (whether existing undertakers or new entrants) into a local market. 4.17 There is no specific statutory framework for common carriage, but this does not prevent undertakings from agreeing to such arrangements, including the associated terms and conditions. In general, however, incumbent undertakers may have little incentive to offer access to their facilities to other suppliers. In some cases refusal to allow a competitor to access or share facilities may be objectively justifiable – where, for example, the competitor refused to give adequate assurances on water quality or refused to make a reasonable contribution to necessary reinforcement costs. In other cases the refusal may be without any objective justification. Under the Act, such a refusal by a dominant undertaking to grant access to facilities that would allow another undertaking to compete in a related market may be an abuse of a dominant position. Similarly, the imposition of unreasonable price or non-price terms for access could infringe the Chapter II prohibition. 4.18The Water Industry Act 1991 provides an effective legal framework for the development of common carriage in a manner that safeguards customers' interests. Undertakers' approaches to the development of common carriage should not endanger the ability of the Director or of undertakers to fulfil their respective statutory duties. In this regard there are a number of issues that undertakers should address in any common carriage agreements. These include: the protection of water quality standards; establishing liability in the event of supply failures or quality incidents; responsibility for leakage and maintenance; and reasonable terms of access (including price). 4.19 None of these issues should, however, be used merely as a means of restricting competition via common carriage. The Director recognises that undertakers currently address many of these issues within their own operations. 4.20 The Director will, therefore, use his powers under the Act to deal with abusive conduct by dominant undertakings. This will allow common carriage to develop where there are genuine opportunities for improved services to customers."
"The Competition Act 1998 (the Act) is an important milestone for the water and sewerage industries in England and Wales. From1 March 2000 , I will have stronger legal powers to remove barriers to competition. Within this new legal framework there are significant opportunities for market competition to develop. In particular, the Act opens up the scope for market competition through shared networks, ie common carriage."
"The Government's consultation paper on competition in the water industry [10] said that the properly managed development of effective competition is desirable. Common carriage is one route through which competition can develop further. It presents a challenge to existing companies, but it also creates opportunities for companies to develop and grow their businesses. Many companies have recognized this and I welcome their positive response… Each company should charge entrants as it would charge itself and should be able to demonstrate this, both to entrants and the regulator, if asked to do so."
"(2) The Secretary of State or, as the case may be, the Director shall exercise and perform the powers and duties mentioned in subsection (1) above in the manner that he considers is best calculated – (a) to secure that the functions of a water undertaker and of a sewerage undertaker are properly carried out as respects every area of England and Wales; and (b) without prejudice to the generality of paragraph (a) above, to secure that companies holding appointments under Chapter I of Part II of this Act as relevant undertakers are able (in particular, by securing reasonable returns on their capital) to finance the proper carrying out of the functions of such undertakers. (3) Subject to subsection (2) above, the Secretary of State or, as the case may be, the Director shall exercise and perform the powers and duties mentioned in subsection (1) above in the manner that he considers is best calculated – (a) to ensure that the interests of every person who is a customer or potential customer of a company which has been or may be appointed under Chapter I of Part II of this Act to be a relevant undertaker are protected as respects the fixing and recovery by that company of water and drainage charges and, in particular— (i) that the interests of customers and potential customers in rural areas are so protected; and (ii) that no undue preference is shown, and that there is no undue discrimination, in the fixing of those charges; (b) to ensure that the interests of every such person are also protected as respects the other terms on which any services are provided by that company in the course of the carrying out of the functions of a relevant undertaker and as respects the quality of those services; … (d) to promote economy and efficiency on the part of any such company in the carrying out of the functions of a relevant undertaker; and (e) to facilitate effective competition, with respect to such matters as he considers appropriate, between persons holding or seeking appointments under that Chapter."
"(1) Where, on the application of any qualifying person – (a) it appears to the Director that it is necessary or expedient for the purposes of securing the efficient use of water resources, or the efficient supply of water, that the water undertaker specified in the application ("the supplier") should give a supply of water in bulk to the applicant; and (b) the Director is satisfied that the giving and taking of such a supply cannot be secured by agreement, the Director may by order require the supplier to give and the applicant to take such a supply for such period and on such terms and conditions as may be provided in the order."
"(6) In exercising his functions under this section, the Director shall have regard to the desirability of – (a) facilitating effective competition within the water supply industry; (b) the supplier's recovering the expenses of complying with its obligations by virtue of this section and securing a reasonable return on its capital; (c) the supplier's being able to meet its existing obligations, and likely future obligations to supply water without having to incur unreasonable expenditure in carrying out works; (d) not putting at risk the ability of the supplier to meet its existing obligations or likely future obligations to supply water."
"Taking large users out of the tariff basket means that companies cannot automatically recoup from other customers lost revenue arising from reduced charges to their large users. These large users are part of a competitive market that does not require the same degree of regulation as other groups of customers. In response to competitive pressures, companies have continued to review their cost allocations between different classes of customers and develop tariffs for large user customers. Companies have either reduced the thresholds for larger user tariffs and/or reduced the volumetric rates for the tariffs concerned. In addition a few companies have introduced innovative tariffs for large users designed to align tariffs more closely to the costs of supply and to maintain incentives to efficient use. Notwithstanding this, companies must ensure that charges to large users are not unduly preferential or unduly discriminatory. They must also ensure that they are not acting anti-competitively."
"(2A) The Secretary of State or, as the case may be, the Authority [14] shall exercise and perform the powers and duties mentioned in subsection (1) above in the manner which he or it considers is best calculated – (a) to further the consumer objective; (b) to secure that the functions of a water undertaker and of a sewerage undertaker are properly carried out as respects every area of England and Wales; (c) to secure that companies holding appointments under Chapter 1 of Part 2 of this Act as relevant undertakers are able (in particular, by securing reasonable returns on their capital) to finance the proper carrying out of those functions; and (d) to secure that the activities authorised by the licence of a licensed water supplier and any statutory functions imposed on it in consequence of the licence are properly carried out. (2B) The consumer objective mentioned in subsection (2A)(a) above is to protect the interests of consumers, wherever appropriate by promoting effective competition between persons engaged in, or in commercial activities connected with, the provision of water and sewerage services."
"(3) The charges payable by a licensed water supplier to a water undertaker under an agreement under paragraph (a)(i) or (ii) of subsection (2) above or a determination under paragraph (b) of that subsection shall be fixed in accordance with the costs principle set out in section 66E below."
" Price related alleged breaches of the Chapter II Prohibition Excessive Pricing 74. Albion Water argued throughout its complaint that the First Access Price was excessive and that Dwr Cymru was making supra-normal profits. The specific allegations Albion Water made about the First Access Price are set out below. (a) Unreasonable cost recovery : Albion Water argued in a letter dated25 January 2001 that the First Access Price was excessive because of the extent to which it exceeded Albion Water's estimate of the direct costs of supply, based on Albion Water's belief that the relevant class of customer should comprise only Corus and Shotton. (b) Criticisms of Dwr Cymru's access price methodology: Albion Water criticised Dwr Cymru's basic approach of calculating the First Access Price by using revenue figures as a proxy for costs, and working backwards from those figures to calculate the individual elements which went to make up the First Access Price. In a letter to us dated8 March 2001 , Enviro-Logic stated that, "in the short run it is unreasonable to assume that current income is entirely representative of current network costs"
"300. The main cost drivers for transporting water through pipes are linked to the size (diameter) and the material and smoothness of the pipe, required flow rate, distance, direction and change in altitude between the points at which the water enters and leaves the pipe. These cost drivers are largely independent of the quality of the water being transported. 301. In practice, the differences in the physical characteristics (density and viscosity) of partially treated non-potable water and potable water would be minimal in so far as they could directly affect the costs of water distribution. It does not therefore appear that the cost of transporting a given volume of water is fundamentally affected by whether the water is potable or non-potable. 302. We do not therefore believe that Dwr Cymru was unreasonable to assume that the cost of transporting non-potable water in bulk was the same as the cost of transporting potable water."
"Access prices calculated under an ECPR approach may be perceived as being more favourable to undertakers than prices derived from other approaches, including some alternative retail-minus approaches. This is because ECPR allows the undertaker to produce prices that fully compensate it for the net losses that it would incur when providing a common carriage or wholesale distribution service, as compared with continuing to supply the final customer itself."
"329. When considering any retail-minus approach, it is necessary to take the appropriate retail price, as a starting point. In this case, the appropriate retail price is that contained in the Second Bulk Supply Agreement at the time Albion Water made its complaint against Dwr Cymru (i.e. 2000/2001), as Albion Water had effectively become Dwr Cymru's customer in place of Shotton Paper itself. This price in 2000/2001 was 25.8p/m 3 . Although we did not formally determine the price in the Second Bulk Supply Agreement, the parties agreed exactly the same price (26 p/m 3 ) we indicated that we would be minded to determine, if we were required to do so. 330. Under a "retail-minus" approach, the access price would be 25.8p/m 3 minus the avoidable costs of resources. These avoidable costs would be the specific costs attributable to the assets used to supply the customer (in this case, the water supplied by United Utilities Water from the Heronbridge Abstraction Point to Dwr Cymru under the First Bulk Supply Agreement). 331. As noted in paragraph 65, historically Dwr Cymru has paid approximately 3 p/m 3 for the relevant water under the First Bulk Supply Agreement. In 2000/2001, the price was 3.3 p/m 3 . The access price resulting from an ECPR calculation would therefore have been approximately 22.5 p/m 3 (i.e. the retail price of 25.8 p/m 3 minus avoidable costs of approximately 3.3 p/m 3 ). We think that the Costs Principle would produce the same access price. The difference between this price and the First Access Price of 23.2 p/m 3 is very small: in percentage terms, it is only 3% of the First Access Price."
"335. The second question we considered was whether the First Access Price could be said to bear no reasonable relation to the economic value of the service provided, when judged by reference to the difference between the costs actually incurred by Dwr Cymru and the price charged. 336. There is no legal definition of the "economic value" of a service. In United Brands , the ECJ simply referred to examining differences between costs and prices. Similarly, there is no definition of "excessive" in the context of pricing. 337. We have considered how best to assess costs, and whether the First Access price is excessive in relation to those costs. On the one hand, Dwr Cymru adopted a particular approach to calculating the First Access Price which, with our adjustments to correct cost misallocation, would point to costs closer to 19.2 p/m³, than the 23.2 p/m³ of the First Access Price. 338. However, as discussed above, we think that there are dangers in accepting only one approach when assessing costs and whether or not an access price is excessive. We therefore had regard to the Second Bulk Supply Agreement, the Costs Principle, and ECPR. The access price resulting from an ECPR approach based on the Second Bulk Supply Agreement would be approximately 22.5 p/m³. We think that the Costs Principle would produce the same price. 339. In light of the above, and despite our dissatisfaction with the fact that the First Access Price did contain cost misallocation, we have doubts about whether the First Access Price could be said to bear no reasonable relation to the economic value of the service provided, when judged by reference to the difference between the costs actually incurred by Dwr Cymru and the price charged. 340. In Napp the Tribunal stated that they found, "it difficult to imagine, for example, this Tribunal upholding a penalty if there were a reasonable doubt in our minds" and that, "
"346. Prior to Albion Water's Inset Appointment, Dwr Cymru had been supplying the relevant water to Shotton direct through the Ashgrove System. When Albion Water was granted its Inset Appointment, it simply purchased the water from Dwr Cymru at the boundary of Shotton's premises (under the Second Bulk Supply Agreement), and sold it straight on to Shotton (under the Shotton Supply Agreement). It is difficult to see how, in practice, the nature of the "retail" activities carried out by Dwr Cymru changed. It simply ceased supplying one customer (Shotton) and replaced this customer with a second customer (Albion Water). 347. Further, as discussed above, on12 December 1996 we provisionally decided a price (26 p/m 3 ) as indicative of the price we would determine formally if we were asked to determine the Second Bulk Supply Agreement (although ultimately the parties agreed the same price without needing a formal determination). This price was based on other retail prices offered by Dwr Cymru at the time (as well as Dwr Cymru's estimated LRMC). The New Tariff, which is a retail tariff, is slightly below the price in the Second Bulk Supply Agreement. The price which Shotton agreed to pay Albion Water under the Shotton Bulk Supply Agreement is the same as that in the Second Bulk Supply Agreement. These are all consistent with Albion Water simply replacing Shotton as Dwr Cymru's retail customer. 348. Importantly, we have seen no evidence that the arrival of Albion Water has resulted in Dwr Cymru's ceasing to incur any retail costs."
"351. We do not have any evidence that Dwr Cymru ceased to incur any retail costs as a result of supplying Albion Water under the Second Bulk Supply Agreement, or that Dwr Cymru would make any similar saving under Albion Water's proposed new arrangement. In simple terms, Dwr Cymru will continue to supply the same water, through the same pipes, to the same premises. It will continue to issue one set of bills to one customer. Assuming that the relevant "upstream" and "downstream" operations are treatment/transport operations and retail operations respectively, it is not necessary to analyse the split, and relationship, between these operations carried out by Dwr Cymru, as Dwr Cymru will continue to provide both. 352. In summary, we do not believe that Dwr Cymru has abused a dominant position in breach of the Chapter II Prohibition in these circumstances, by engaging in price squeezing. In supplying Albion Water, Dwr Cymru is in practical terms carrying on precisely the same water supply service and incurring the same costs as it was doing when it supplied Shotton directly."
"There are a number of factors that make competition for large users practicable. Unlike household customers, cross-subsidies have been largely unwound. Large users often have individual service requirements that are suited to individual contractual arrangements. Large users are charged on the basis of measured volume and, therefore, it is easier to establish how much water a new entrant's customers are using and apportion distribution costs. There may also be opportunities for local competition where a small source of water, that might otherwise be uneconomic for an undertaker to develop, could be used to supply a particular customer."
"The competitor acts as a middleman, driving down the costs of supply. This has brought benefits with companies responding by introducing large user tariffs"
"107 It is necessary for the Commission to determine what the direct costs for the relevant product are. Appropriate cost allocation is therefore fundamental to determining whether a price is excessive. For example, where a company is engaged in a number of activities, it will be necessary to allocate relevant costs to the various activities, together with an appropriate contribution towards common costs. It may also be appropriate for the Commission to determine the proper cost allocation methodology where this is a subject of dispute."
"The main cost drivers for transporting water through pipes are linked to the size (diameter) and the material and smoothness of the pipe, required flow rate, distance, direction and change in altitude between the points at which the water enters and leaves the pipe. These cost drivers are largely independent of the quality of the water being transported. In practice, the differences in the physical characteristics (density and viscosity) of partially treated non-potable water and potable water would be minimal in so far as they could directly affect the costs of water distribution. It does not therefore appear that the cost of transporting a given volume of water is fundamentally affected by whether the water is potable or non-potable."
"26. Very careful consideration has been given to whether to introduce measures to increase competition for household customers in the prospective Water Bill. There are a number of factors to be taken into account. Water is heavy and costly to distribute (compared to its final selling price) and there is no national grid to distribute it. There are also cross-subsidies within household tariffs which competition could unwind. Prices are averaged across undertakers' areas, for example, so that people who live where water is expensive to treat and transport, which includes many rural communities, pay the same tariff as those in areas where costs are lower. 27. Increasing competition for households, while at the same time seeking to ensure that the Government's public health, social and environmental objectives continue to be met, would require a complex and costly regulatory regime, which would still leave substantial uncertainties, particularly about the effects on individual customers' bills. The added complexity would militate against effective competition and the extra costs would have to be borne mainly by customers. The Government believes that, based on evidence currently available, the drawbacks of increasing competition for household customers are likely to outweigh the potential benefits. The legislative provisions in the Water Bill will therefore prohibit new entrants from supplying water to household customers through undertakers' distribution networks."
" – Undertakers' prices for distribution and wholesale supply should not, in themselves, deter potential licensees from seeking to supply customers. This implies that they should reflect the actual cost of providing the service, they should not be unduly discriminatory and they should be transparent. … – To the extent that undertakers' tariffs reflect a geographical averaging of costs, access and wholesale charges should generally be set in order to avoid the unwinding [of] the associated cross-subsidies"
"[ECPR] can be summarised by a simple equation in which the access price is given by the incumbent's final product price less the costs it would avoid by providing access. For example, a new entrant wishing to access an incumbent's arterial and local distribution network would be charged the difference between the incumbent's final product price and the avoidable costs of resources, treatment and customer service."
"Each company should charge entrants as it would charge itself and should be able to demonstrate this, both to entrants and the regulator, if asked to do so."
"The price for non-potable water is similar to prices charged by Dwr Cymru for other bulk supplies."
"On12 December 1996 we provisionally decided that a price of 26p/m³ would be given to the parties as indicative of the price we would determine formally, if required to do so. In calculating this indicative figure, we had regard to the prices charged by Dwr Cymru to an associate, Hyder Industrial, for non-potable water (an equivalent of 28.39 p/m³), the prices charged by Dwr Cymru to six non-potable large users including Shotton itself between approximately 26 p/m³ and 29 p/m³), and Dwr Cymru's estimated LRMC (approximately 26p/m³)."
"6.1 A margin squeeze may occur in an industry where a vertically integrated undertaking is dominant in the supply of an important input for a downstream market in which it also operates. The vertically integrated undertaking could then harm competition by setting such a low margin between its input price (e.g. wholesale price) and the price it sets in the downstream market (e.g. retail price) that an efficient downstream competitor is forced to exit the market or is unable to compete effectively. 6.2 To test for margin squeeze, it is usual to determine whether an efficient downstream competitor would earn (at least) a normal profit when paying input prices set by the vertically integrated undertaking. 6.3 In practice, in order to determine whether an efficient downstream competitor would make a normal profit, the test is typically applied to the downstream arm of the vertically integrated undertaking. Therefore, the test asks whether, given its revenues at the time of the alleged margin squeeze, the integrated undertaking's downstream business would make (at least) a normal profit if it paid the same input price that it charged its competitors. 6.4 A test for margin squeeze might require assessing the accounts of a 'notional business' as in practice the integrated undertaking's downstream business may not have separate accounts from its upstream business and would not usually treat its input prices as a cost in the same way that an independent downstream competitor would. Therefore, the details of how costs and revenues are allocated and/or calculated will depend on the circumstances of each case. For example, a margin squeeze investigation may raise issues such as the measurement and allocation of costs and revenues (both between products and between upstream and downstream operations), the appropriate rate of return, and the appropriate time period over which to measure profitability. 6.5 If there is evidence that a vertically integrated dominant undertaking has applied a margin squeeze and that it harmed (or was likely to harm) competition, this is likely to constitute an abuse of that dominant position."
"117. Where the operator is dominant in the product or services market, a price squeeze could constitute an abuse. A price squeeze could be demonstrated by showing that the dominant company's own downstream operations could not trade profitably on the basis of the upstream price charged to its competitors by the upstream operating arm of the dominant company. A loss making downstream arm could be hidden if the dominant operator has allocated costs to its access operations which should properly be allocated to the downstream operations, or has otherwise improperly determined the transfer prices within the organisation… 118. In appropriate circumstances, a price squeeze could also be demonstrated by showing that the margin between the price charged to competitors on the downstream market (including the dominant company's own downstream operations, if any) for access and the price which the network operator charges in the downstream market is insufficient to allow a reasonably efficient service provider in the downstream market to obtain a normal profit (unless the dominant company can show that its downstream operation is exceptionally efficient). 119. If either of these scenarios were to arise, competitors on the downstream market would be faced with a price squeeze which could force them out of the market."
"106. The Commission's practice in previous decisions has been to hold that there is an abuse of a dominant position where the wholesale prices that an integrated dominant undertaking charges for services provided to its competitors on an upstream market and the prices it itself charges end-users on a downstream market are in a proportion such that competition on the wholesale or retail market is restricted. 107. In the case of the local network access at issue here, there is an abusive margin squeeze if the difference between the retail prices charged by a dominant undertaking and the wholesale prices it charges its competitors for comparable services is negative, or insufficient to cover the product-specific costs to the dominant operator of providing its own retail services on the downstream market. 108. In such a situation, anticompetitive pressure is exerted on competitors' trading margins, which are non-existent or too narrow to enable them to compete with the established operator on retail access markets. An insufficient spread between a vertically integrated dominant operator's wholesale and retail charges constitutes anticompetitive conduct especially where other providers are excluded from competition on the downstream market even if they are at least as efficient as the established operator."
"126. … The margin squeeze test seeks to compare charges for two particular services at different commercial levels… The method used to determine whether there is a margin squeeze in this case is based on the principle that the established operator's tariff structure must enable competitors to compete with that operator effectively, and at least to replicate the established operator's customer pattern. It must not be assumed that the competitors' customer structure and range of services will necessarily be more profitable than those of the incumbent. The primary consideration here is the effect on market entry by competitors …"
"140. Where wholesale and retail services are comparable, as described above, a margin squeeze occurs if the spread between DT's retail and wholesale prices is either negative or at least insufficient to cover DT's own downstream costs. This would mean that DT would have been unable to offer its own retail services without incurring a loss if, during the period under investigation, i.e. since 1998, it had had to pay the wholesale access price as an internal transfer price for its own retail operations. 141. As a consequence the profit margins of competitors are squeezed, even if they are just as efficient as DT. This means that they cannot offer retail access services at a competitive price unless they find additional efficiency gains. A margin squeeze imposes on competitors additional efficiency constraints which the incumbent does not have to support in providing its own retail services."
"The tariff will include the following:- Customers, using over 50Ml/annum, will be given the following benefits:- • detailed water management data • advice on efficient use of water and benefits of seasonal use • leakage monitoring Additional benefits for users over 250 Ml/annum:- • water efficiency audits"