Appeal court judgment (16 pages in French, PDF) reversing the Conseil de la concurrence decision that the pharmaceutical company GSK had committed predatory abuse through below-cost pricing of Zinnat (an antibiotic for surgery-induced infections).

The court endorses the Conseil's analysis of costs, including that GSK was not entitled to claim that the high transfer prices paid by its French business to its Swiss business (presumably for tax reasons) were irrelevant to the Akzo cost test.

The basis for the court's reversal of the finding of abuse is that the Conseil had not satisfactorily proved its assertion that below-cost pricing of one drug was part of a GSK strategy to establish a reputation for aggressivity so as to deter future competition in other markets. In reaching this view, the court relies on:

• The fact that other elements (e.g. threats to competitors, an intention to exclude) were present in the Akzo case and nothing similar is alleged here.
• Evidence from GSK that it had faced successful competitors in other markets, against the claim of a reputation for aggressive behaviour.

The matter may be appealed to the French supreme court (Court de cassation).

Comment, 22 April 2008: The Conseil's cost analysis, which survives the appeal court ruling, concluded that prices were below variable costs. The ECJ said at paragraph 71 of Akzo that “prices below average variable costs .... by means of which a dominant undertaking seeks to eliminate a competitor must be regarded as abusive”. I wonder whether the GSK case could have been decided on the basis of that first leg of the Akzo test: condemning the below-cost pricing behaviour simply because its object was to eliminate a competitor. But instead of that, the Conseil decided to launch into a general discussion (paragraphs 256-281 of the decision) on economic theories of predation and the alleged effects of GSK's strategy, drawing parallels with the strategy condemned in the Akzo case. That speculative section of the decision provided ample ammunition for GSK in this appeal. Franck

Ofgem announcement (1 page, PDF) that it will investigate allegations that Scottish electricity generators have abused a dominant position. According to this article in The Times, the allegations relate to high balancing mechanism payments to generators at a time where there was a shortage of power in Scotland due to scheduled plant outages (combined with the physical limitations of transmission capacity between England and Scotland).

Speculation, 17 April 2008: Ofgem's announcement is limited to allegations of “abuse of a dominant position in the electricity generation sector”. There is no allegation that ScottishPower and Scottish & Southern have in any way exchanged information to co-ordinate their prices or the outages that might have led to the supply shortage, or that their ownership of transmission networks has any relevance. Instead it seems that Ofgem wants to investigate the outage decisions that each company made individually, and the pricing strategies that each generator adopted once the unusual situation of a supply shortage had arisen.

For this to be characterised as an abuse of a dominant position, it seems to me that Ofgem would need to establish:

• that there was a relevant market limited to Scotland at the time (debunking any claim that establishing a single set of GB-wide trading arrangements through BETTA had led to a single market in economic terms);
• that ScottishPower and Scottish & Southern held a dominant position in such a market (presumably collectively, in the absence of relevant transmission constraints within Scotland); and
• that the prices offered were excessive or the withdrawal of supply through outages were unjustified, probably in an exploitative abuse sense.

This interpretation would be consistent with Ofgem's previous comments on the relevance of exploitative abuse to allegations of overcharging in the balancing mechanism. Franck

My article of a few days ago on the CAA's approach to the cost of equity included a conclusion that the CAA's error was not of great financial significance, because I thought that the CAA probably did not really need a reason to follow the Competition Commission's recommendations on return of capital, so that its reliance on a bad reason was probably not that important.

I am grateful to a reader of the original article (someone unrelated to BAA, CAA, the Competition Commission, airlines or any of their advisers) for pointing me to the evidence underpinning the Competition Commission's cost of capital estimates. I have not had time to chase every detail, but it is clear that my original beliefs about the Competition Commission's processes were misplaced. My previous view that it would be nearly impossible for BAA to challenge the CAA's reliance on the Competition Commission's recommendations was not right, and I have amended the article accordingly.

Article on the reasons put forward by the CAA in its decision on Heathrow and Gatwick price controls to dismiss an argument by BAA that the cost of capital had wrongly been estimated on the basis of a geometric mean rather than an arithmetic mean.

The CAA's reasoning turns out to be invalidated by a fairly simple error. This is something of a surprise and a disappointment, especially as the CAA was one of the clients for the 2003 Smithers & Co study which, I thought, had clarified these issues.

I have not had the time to write substantial articles in the past six months.

Instead my commentary has taken the form of occasional paragraphs on particular documents or news items. I try to keep comment clearly labelled as such and separated from fact, like a good journalist.

Articles containing some of my commentary are now included in the "viewpoint: Franck" feed . For my long articles only, use the Franck articles archive feed .

No existing URLs have been broken as a result of these adjustments.

Report (175 pages, PDF, including evidence and transcripts) of the transport committee of the lower house of the UK parliament from an inquiry into BAA plc.

The report endorses a break-up of BAA, seemingly asserting that the London airports if under separate ownership would be subject to effective competition and would not need to be price-controlled. It also recommends removing the automatic reference to the Competition Commission as part of any price control review process that remains.

According to the report (in response to easyJet's complaints about excessive charges allowed by CAA, and claims that each of Heathrow, Gatwick and Stansted on its own would still be a monopoly):

83. We agree that breaking up BAA's monopoly would not remove the need for effective regulation. What it would remove though — through the removal of substantial market power — would be the need for the kind of economic regulation in the form of price controls.

Much of the report was only agreed by a majority of the committee that included the chairman Gwyneth Dunwoody MP (Lab), with the minority apparently led by David Wilshire MP (Con). Statements that were only retained in the report after a majority vote include at paragraph 47:

The comparison of the regulation of BAA to an antitrust regime lends further weight to our view that BAA’s market position is fundamentally anti-competitive.

(The comparison referred to is a remark by the Competition Commission that large financial incentives for quality of service might be explained by analogy with the large fines considered necessary for competition law infringements.)

Comment. Loud-mouthed claims, but not a lot to back them up. Some of the report is just stuff and nonsense — e.g. the "fundamentally anti-competitive" claim quoted above. And look at the wild claim at paragraph 80 that “Any airport that were sold off [as part of a BAA break-up] would not be price-controlled, as it would [sic] be in a position of market power, and thus would be free to compete on price.” Leaving aside the typo (missing "not" in the sentence about market power), do they really mean any airport? Not much is left of the credibility of the report after that sort of statement. Franck

Ofgem notice (3 pages, PDF) that it will not make a decision on P211 (ex post unconstrained stack) until it is able to compare it with P217 (real-time tagging).

The BSC Panel came out against P211. Ofgem ran its own consultation in December 2007.

Comment 1: The letter states that “It is very disappointing that P217 was not raised much earlier” and “we urge the industry to prioritise progressing the assessment of P217 so that resolution of the identified defects can be implemented as early as possible”. This might as a simple comment about timing; but it might also be read as an indication that Ofgem thinks that the correct answer lies in the direction of P217. Franck

Comment 2: Ofgem also seems to endorse more commercial freedom for National Grid in the P212 decision: this refers to “the solution that works effectively in the gas market” in which “the [system operator] can also trade in the gas on-the-day commodity market”. This tends to reinforce the impression that P217 might be in favour. Franck

National Grid announcement that it intends to appeal Ofgem's decision that metering contracts made with gas suppliers by its Transco unit in 2004 infringed competition law.

The decision does not seem to be on Ofgem's or OFT's website yet.

Update, later on 25 February 2008: Ofgem has released a summary (3 pages, PDF) of the decision and said that “the full decision document will be published ahead of the Easter break [i.e. 20 March 2008] once commercially confidential information has been removed”.

Update, 19 March 2008: decision document.

Comment 1: I know it is only a stock market notice, but National Grid's arguments do not really seem to address allegations of competition law infringement. It draws attention to the fact that suppliers were not coerced into the contracts — without addressing the likely claim that National Grid's market position made such coercion automatic and invisible. It denies intention to break the law, but does not deny any intention to tie customers, or negligence. I will not be surprised if the focus of the appeal is on the fine and perhaps on the OFT penalty guidelines: £41.6 million does seem quite big, although presumably it was calculated correctly in accordance with the guidelines. Franck

Comment 2: There is an Ofgem press notice (2 pages, PDF) which states that the decision was for abuse of dominant position and makes no allegation of breach of the Article 81 or the equivalent UK prohibition (which only came into force on 1 May 2005). Given National Grid's keenness to claim that the contracts “remain in full effect”, there might well be a threat of litigation from the suppliers in question. See Can a contract be void under Article 82? | viewpoint: Franck for a case with some similarities. Franck

Office of Rail Regulation paper (15 pages, PDF) on its approach to analysing allegations of excessive pricing under the Competition Act 1998 or Article 82. This complements the plain English guide on complaints about rail fares and car park charges.

Comment. The paper rests in significant part on the assertion that:

22 ... high prices could not be illegal when the [train operating company] had competed away any supernormal profit by means of high premium/low subsidy payments at franchise let.

According to paragraph 13, this is consistent with the United Brands characterisation of exploitative abuse as behaviour to “reap trading benefits which it would not have reaped if there had been normal and sufficiently effective competition”. ORR appears to take the view that, whatever price is charged, if the money is passed on to Government then this guarantees that there has been no "reaping" by the train company in the United Brands sense. I am not so sure. Would this argument work for any commercial franchise operator passing on its abusive profits to its franchisor, or is it dependent on the fact that the franchisor is the Government? Franck

Ofwat consultation (28 pages, PDF) on a proposed revision to its 2000 Competition Act 1998 guidance. Responses by Wednesday 12 March 2008 or Thursday 13 March 2008.

Franck's comment. This focuses on procedures, cross-references to other guidance and generalities. But the following propositions might be of interest to those involved in competition disputes in the water sector:

4.33 The [water supply licensing] regime contains a dispute handling process. As a result, most complaints about anti-competitive behaviour relating to combined supply and retail competition will be dealt with under this specifically designed regime rather than the [Competition Act 1998]. However, there are some issues not covered specifically in the [Water Act 2003] and the relevant regulations and guidance. In those circumstances, Ofwat would apply the [Competition Act 1998] if it was appropriate to do so.

4.35 Insets are provided for in the [Water Industry Act 1991]. Ofwat publishes guidance on how to apply for an inset appointment application. As a result, Ofwat will usually seek to resolve disputes about insets using its specific powers under the [Water Industry Act 1991] and the information in its guidance. Nevertheless, there might be occasions when Ofwat will find it appropriate to apply the [Competition Act 1998] to such complaints about inset-related issues.

Ofwat request (6 pages, PDF) for information for a market analysis (5 pages, PDF) on competition in water and sewerage services in England and Wales, undertaken in conjunction with Ofwat's development of policy proposals to promote to the Government.

The focus of the market analysis appears to be on defining relevant markets and identifying some notion of market power, entirely in the abstract: for example considering whether potable and non-potable supplies are in separate markets without reference to any particular installation or even type of customer.

Responses by Wednesday 14 November 2007.

Comment: Ofwat's exercise is too far removed from any specific facts to make a useful contribution to the analysis of any competition law dispute. Ofwat appears to think that analytical tools such as market definition can be applied in a broad-brush manner in order to develop generic policies. I can see a logic in undertaking a desk-based study of the kinds of relevant markets that might be expected to be found, as a way of understanding the issues that statutory reforms might seek to address (and of preparing the ground for a rapid analysis in the event of an actual dispute). But I am not so sure that collecting masses of specific information from respondents helps this exercise. There seems to be a risk that the analysis gets side-tracked into a detailed review of some question to which there is no useful generic answer: the potable/non-potable point might well be an example. Franck

Annual report and accounts (86 pages, 4.4M PDF) of the Competition Commission for the financial year 2006/2007.

The Commission continues its campaign — started by its submission (12 pages, PDF) to a parliamentary committee in February 2007 — to be given larger, more important cases:

Looking forward, we see opportunities to improve the impact and quality of our workload yet further as the OFT consults on increases in its merger de minimis referral threshold. We would also welcome a review of the jurisdictional thresholds in the Enterprise Act, and in particular the appropriateness of the share of supply test, which has led to our being referred some relatively small mergers. We recognize the public interest in protecting consumers from exploitation by monopolies of any size and in any market, but it is far from clear to us that it makes sense to deploy the full might and expense of the CC (to the taxpayer and to the affected companies) in every small case.

This argument is linked to its argument for compulsory pre-notification of mergers.

The report also notes the absence of price control references from the utility regulators Ofgem, Ofwat and Ofreg in their recent price control reviews, and argues that some references are needed “for the strength and credibility of the regulatory framework and for the interest of consumers”.

Comment: The Commission acknowledges that its process of in-depth inquiry is expensive and demanding for businesses (and regulators) under investigation, to the point where it doubts the wisdom of imposing it on smaller companies in merger cases. With provisions such as Section 54 of the Water Act 2003 increasing the risk that shareholders, rather than consumers, will end up paying for the process, it may not be all that surprising that price controlled companies and their regulators prefer to settle directly without involving the Competition Commission, even if they do not agree on everything. Should the possibility of a regulatory appeals tribunal which would hear targeted criticisms of particular aspects of a price control decision without conducting a complete re-investigation of all aspects be reconsidered? Franck