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Disposal of landfill leachate

This entry was added to http://www.reckon.co.uk/headlines-franckblog on 22 May 2005.
Full blog table of contents available at Contents | viewpoint: Franck.

This article is an initial review of Ofwat's decision (PDF, 80 pages) under the Competition Act 1998 in a case triggered by a complaint from Quantum Waste Management Limited (QWM) against allegedly abusive methods employed by United Utilities plc (UU) in competing with QWM for the disposal of leachate from landfill sites.

UU's relevant businesses for the complaint are its licensed water and sewerage company, United Utilities Water plc (UUW), and its commercial waste disposal business Bioprocessing (which was transferred out of the licensed company during the events under investigation). Bioprocessing offers a variety of waste treatment services on a commercial basis. As regards the tankered leachate, Bioprocessing provides sampling, monitoring and other services involved in the reception of tankered leachate, and uses UUW treatment plants for the processing. Bioprocessing also offers full leachate tankering and disposal services, and its success in taking business from QWM in this segment was the trigger for the complaint. Bioprocessing uses transport services from Unifleet, another UU business.

QWM is a brokerage firm which arranged the disposal of leachate from landfill sites. QWM appeared to have been created with the backing of Northern Disposal Services, which was the haulage contractor for leachate tankering, as a corporate vehicle to handle the contractual arrangements involved in landfill leachate disposal. QWM contracted with Bioprocessing for the treatment of leachate at UUW plants. QWM ceased trading after losing the bulk of its business to Bioprocessing in the circumstances which triggered the complaint.

Overview of Ofwat's analysis

Ofwat's decision comprises 272 paragraphs with 173 footnotes, covering 80 pages, and is structured as follows:

Key shortcomings of Ofwat's analysis

General approach to the assessment of abuse

Paragraphs 161-164, which introduce the discussion of abuse, provide two examples of general issues with the style, and perhaps the substance, of the decision.

Paragraph 163 quotes part of a sentence from the ECJ judgment in Hoffman La Roche, and appears to invite us to see it as a universal definition of abuse. I think that this is a misreading and a misuse of the Hoffman La Roche judgment. It is not in dispute that in Hoffman La Roche and in many other cases the abuse could appropriately be characterised as a choice of the dominant undertaking that led to a lessening of competition. But it is not true that all abuse can be characterised in this way. The most obvious example is exploitative excessive pricing, which can be an abuse without lessening competition, as clearly explained by the CAT in Napp (the second abuse, relating to pricing in the community sector). Closer to competition concerns, the CFI judgment in British Airways is an example of a case where no lessening of competition needed to be established to establish abuse: exclusionary effect on some participants without an Hoffman La Roche-style impact on the structure of the market was enough.

The same thing happens in paragraph 164, where the special responsibility of an undertaking in a dominant position "not to allow its conduct to impair genuine undistorted competition" is taken out of the Michelin judgment, and we are asked to read it in connection with the Tetra Pak II remark that the scope of the special responsibility depends on circumstances to support the idea that the special responsibility is "particularly strong" if the dominant position is close to a monopoly position. Again, what of the special responsibility not to abuse a dominant position through exploitative pricing?

These two general paragraphs, which could have been taken out of any textbook on EC competition law, have arguably no relevance to the decision that Ofwat has reached on the facts of the case. However, the drafting approach of quoting some case law and treating it as if it was of universal applicability is widespread throughout the decision. I think that this is dangerous if it reflects Ofwat's reasoning; and unhelpful to readers if it does not.

In my view, it is misleading to think that the law on abuse of a dominant position can be encapsulated in a mishmash of a few paragraphs quoted from various famous judgments, and regulators surely have a special responsibility not to mislead the public about the law that they enforce.

Excessive pricing

The first case considered by Ofwat is the possibility of abusive excessive pricing by Bioprocessing for the treatment of tankered leachate at UUW treatment plants.

Paragraph 167, which invites us to believe that an abusive price is defined as one that has "no reasonable relation to the economic value", is a serious (if sadly widespread) case of a misleading generalisation of a truncated quote out of an ECJ judgment — see General Motors for a discussion of this point. But it is not clear what actual implication Ofwat has drawn from General Motors anyway since the analysis that follows appears to rely on the Napp/United Brands tests discussed below.

Paragraphs 168-171 quote various bits of case law and invite us to infer:

But Ofwat's discussion of excessive pricing is predicated on the assumption that UU holds a dominant position in the relevant market in question, and the decision does not suggest that this dominant position can realistically be hypothesised away. This is in sharp contrast to the authorities that the decision relies on, namely Napp and United Brands: in both these cases the dominant position which might have been abused by prices above the hypothetical competitive level was the result of clearly identified anti-competitive conduct, which could realistically be hypothesised away in order to assess whether the abnormal lack of competition was being unfairly exploited by the dominant undertaking.

I think that Ofwat fell into a similar trap as the Court of First Instance in Chronopost, where the CFI approach (to a State aid issue) based on a hypothetical "normal" market was found by the ECJ on appeal to have been an error of law since such a "normal" market in the particular case in question could not realistically be hypothesised.

Anyway, Ofwat then goes on to report in paragraphs 173 to 184 its findings on costs and on Bioprocessing's charging policy. All financial data are blanked out of the published decision, but we are told that Bioprocessing sets charges on the basis of its perception of market condition without a strict or exclusive reliance on any cost estimates. Paragraphs 185 to 203, also heavily redacted, provide findings on comparators (and some claims about competition which are presumably of limited relevance since we are operating under an assumption of dominance). These data are then used to support the following conclusions:

"204. UU's profit margin appears to be larger than that of most of its competitors. However this is not in the circumstances of this case strong evidence of excessive pricing because there are a number of difficulties in comparing profits between the firms in the market, and it remains entirely possible that UU's larger profit margin is due to its position as the only supplier able to carry out biological treatment (except for two [independent treatment works]). Further, the difference between UU and its closest competitor in 2001 was only [figure redacted]%."

"205. UU's actual prices for the treatment of landfill leachate do not appear to be significantly different from those charged by its competitors. [...]"

"206. The Director therefore has insufficient evidence [...] to serve as the basis for a statement of objections."

There is an obvious problem there: what if the Biffa/Severn Trent arrangement which Ofwat finds to be the closest competitor in terms of profit margin, and/or the other sewerage companies used in the price comparisons, were also abusing similar dominant positions to UU's in a similar way? They are for the most part similar companies in similar situations, so parallel abusive behaviour (whether deliberate, negligent or accidental) is not a hypothesis that can be rejected out of hand.

Going back to the big picture, I have suggested above that Ofwat adopted an incorrect approach to assess exploitative excessive price by Bioprocessing for the treatment of tankered leachate. Could using a more correct approach lead to a different finding? I doubt it, if only because there is nothing in the complaint or facts as reported by Ofwat to suggest any exploitative excessive pricing by Bioprocessing.

In fact, the analysis of exploitative abuse strikes me as a bit of red herring when the claim was of anti-competitive conduct by Bioprocessing through the way in which it took away QWM's main customers. So I don't need to clutter this article with my views about what a more correct approach to the assessment of exploitative abuses might be.

Price discrimination

Paragraphs 207-233 discuss the possibility of abusive price discrimination by Bioprocessing between different leachate treatment customers.

Ofwat tells us that Bioprocessing's charging policies are not justified by reference to costs (as already noted in the context of excessive pricing); and, more importantly, that there is nothing to suggest that the differentials have the object or effect of restricting competition. So no case to answer. Another red herring out of the way. (Why we needed to be told that "some elements of UU's prices are based on cost" (paragraph 230) remains unclear.)

Predatory pricing and margin squeeze

Paragraphs 234-261 appear (finally) to turn to the natural interpretation of the complaint: that Bioprocessing allegedly abused its dominant position in treatment, and the fact that it could simply take treatment services from itself whereas QWM was dependent on Bioprocessing for the purchase of these services, to compete unfairly with QWM in offering leachate transport and disposal services to landfill sites.

Paragraphs 235-247 (heavily redacted) recall the events. However, whether Bioprocessing's approach to QWM's customers was unsolicited, an allegation noted at paragraph 20(a) of the decision, is not addressed. This is surprising given that it seems only natural to suspect that Bioprocessing might have used the information about QWM's leachate customers that was available to it because of its (assumed) dominant position in treatment as part of the preparation of its unsolicited offers, and that such a use of information might be an abuse (this point is further discussed below).

Paragraphs 248-253 provide a "prices and profit analysis". From the data tables (not available in the public version), Ofwat concludes that "UU was not pricing below average total cost", that QWM had higher costs than Bioprocessing (presumably because the transfer price for treatment in Bioprocessing's accounts is lower then the price charged by Bioprocessing to QWM, which is what QWM is complaining about), and that any competitor of QWM other than Bioprocessing would be treated on the same basis as QWM. Another three red herrings.

Paragraphs 254 tells us that Ofwat investigated a possible margin squeeze despite the fact that it was not raised in the complaint. That is surely taking far too literal an interpretation of the complaint: paragraphs 19-20 tell us that the complaint was about "monopolisation" of the leachate disposal market by UU through abuse of a dominant position, and there does not seem to have been much doubt that the alleged dominant position was in tankered leachate treatment. All the ingredients of a margin squeeze are obviously there, and the fact that the phrase was not used in the complaint seems to me to be irrelevant.

Paragraph 255 quotes an OFT guideline. I am hardly a fan of these documents, which are often misleading in their attempt to cover all potential circumstances within a few paragraphs, but in this case the characterisation of a margin squeeze abuse that is quoted seems appropriate:

"[...] 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".

Paragraph 256 partially undoes that good work by telling us that the test based on an efficient downstream competitor is "typically" applied to the downstream arm of the vertically integrated undertaking instead. Despite the general proliferation of footnotes throughout the decision, no authority is given for the claim that this approach is typical, or more importantly that it is correct in law. It is always a good idea to remember that the fact that lots of people have done or thought something does not automatically make it right.

Paragraph 257 and the first sentence of paragraph 258 describe the margin squeeze issue raised by the complaint.

The second sentence of paragraph 258 states that:

"Given UU's profit margins in the treatment market UU has scope to lower its price in the tankering market to below cost whilst still making a profit on treatment and tankering combined."

Translating this into the terminology of the OFT guideline quoted at paragraph 255, this means that the vertically integrated undertaking charges a sufficiently high wholesale price to make the implementation of a margin squeeze through lowering prices in the downstream market below those that an efficient downstream competitor could afford relatively painless for the vertically integrated undertaking, since it would still be making good profits overall. So we are still on track for a possibility of abuse.

Paragraph 259 quotes the CAT judgment in Genzyme and highlights the fact that, in Genzyme, the margin squeeze abuse took the form of a zero margin (whereas an efficient downstream competitor would have positive costs). The quote also reminds us that the relevant EC precedents include Napier Brown/British Sugar and National Carbonising (two decisions of the European Commission which were not subjected to court scrutiny), and that the CAT saw the particular case of a zero margin for homecare services as falling within the principles derived from these cases. There is nothing in the decision to suggest that these precedents involved a zero margin. And despite the redactions it seems clear enough that the decision in Napier Brown/British Sugar found abuse with margins that were positive but nevertheless abusive as lower than the costs of an efficient downstream competitor (in that case the Commission used British Sugar's own downstream costs as a source of evidence about the costs that an efficient downstream competitor would incur). There is also a wider body of precedents about margin squeezes which the decision does not appear to take any account of: see for example this Practical Law Company article by Paolo Palmigiano and Beatrice Roxburgh of BT (hardly people likely to be trying to invent new forms of margin squeezes).

Paragraph 260 then tells us that there was a non-zero margin available to QWM. So the case is not similar to Genzyme. But the decision fails to assess whether there is an abuse within the principles of Napier Brown/British Sugar and National Carbonising which the CAT referred to, and the (redacted) data quoted in table 8 seem unlikely to provide evidence that there is no margin squeeze — if only because they do not include the bidding, customer relationship management and other costs and intangible assets which an efficient downstream competitor would need to be able to cover with the margin. I just cannot see how the decision that there was no case to answer could have been reasonably reached on the basis of the evidence reported. The emphasis in the decision on differences with Genzyme rather than the general principles set in other margin squeeze precedents and in OFT guidelines makes the alarm bells ring very loudly indeed.

The last sentence of paragraph 260 makes a point about intent which seems to be another red herring. The relevance of some concept of intent is established in predatory conduct cases where the prices are not so low as to "speak for themselves", but I don't think that it has the same significance in margin squeeze abuses. Ofwat's decision does not seem to establish that there is any necessity of showing intent (in particular, the test quoted at paragraph 255 has not intent element) and a quick scan through the 212 pages (PDF) of the Genzyme judgment shows that the evidence about margins was the predominant question for the margin squeeze abuse, and that intent issues were mainly discussed in connection with the statutory provision that a financial penalty for abuse can only be imposed if the infringement has been committed intentionally or negligently, rather than to address the question of whether there was actually abuse.

Summary? I do not understand how the decision that there was no margin squeeze abuse case to answer was reached by Ofwat. Something looks wrong.

Direct access

Paragraphs 262-271 discuss the possibility that UU may have a duty to offer direct access to UUW treatment facilities without requiring customers to use Bioprocessing's sampling, monitoring and other services.

Ofwat notes at paragraph 263 that it should not matter by itself whether access is given directly by UUW or provided though Bioprocessing. What matters is the availability and terms of access.

There are probably two substantive issues which are at the basis of QWM's request for direct access.

First, there appears to be a legitimate expectation that direct access would be charged on the basis of the Mogden formula (which is applied to the treatment of effluent under UUW's sewerage company licence), which we are told elsewhere in the decision is materially lower than Bioprocessing's aggregate charge for handling and processing of tankered leachate. Such an expectation would derive from the fact that, with direct access, the service offered would be the same as for regulated effluent treatment, and also from the fact noted elsewhere in the decision that UU uses the Mogden formula to set transfer prices between QWM and Bioprocessing. This is hinted at in paragraph 265.

Second, I would expect that direct access would enable companies such as QWM to secure greater confidentiality about their business, and therefore to be better able to maintain their competitiveness against Bioprocessing's offer to landfill site operators. If Bioprocessing is involved in the transaction it will be almost impossible to establish effective information control or Chinese Wall arrangements to avoid the misuse of information about customers, volumes, etc. whereas such arrangements would be more practical if the Chinese Wall is aligned with the boundary of the appointed business (UUW). Such Chinese Wall arrangements are, for example, an essential part of the competitive electricity supply industry, and it is important for independent suppliers that the information about their customers which has to be available to the distribution network operator for operational purposes cannot legitimately be passed on within the ownership group to a supply business that competes with them.

Ofwat's discussion of direct access is brief. It quotes letters from UU's solicitors pointing out the need for available capacity and adequate sampling, monitoring and health and safety arrangement, and asserting that there was no legal obligation on UUW to offer third party access. Ofwat concludes (paragraph 270) that UUW is not denying access, and therefore that there is no need to investigate further.

But we were told at paragraph 265 that:

"UU said that it would be inappropriate to enter into a discussion regarding direct access (as above) to its [waste water treatment works] due to the outstanding complaint."

So it seems that UUW has, in fact, denied direct access to QWM. The reason given for this denial is QWM's allegation that UU (in the shape of Bioprocessing) had previously acted illegally by abusing a dominant position to compete unfairly. So, in short, Ofwat implicitly tells us that whatever legal duty UU may have to offer access to QWM falls away when QWM complains about another allegedly illegal act by UU.

A criminal analogy may help here.

Let us assume that Mr Q and Mr U are in dispute about the ownership of a car. Mr U has possession of the car. Mr Q demands that Mr U return the car to him. Mr U claims to own the car and that he has no duty to return it. Mr Q claims that, at the outset of the dispute, Mr U came to his house with a baseball bat and beat him up. Having failed to resolve the matter, Mr Q reports the beating and the theft of the car to the police.

Suppose that the police is unable to find sufficient evidence of the beating. Mr U explains that he has not returned the car to Mr Q because of the dispute between them about the alleged beating. Would the police accept this as a justification and not investigate whether Mr Q's claim that he is the rightful owner of the car is grounded or not? I hope not.

Conclusions

My conclusions from all this?

I fear that Ofwat's decision may have failed to demonstrate that there is no case for Bioprocessing to answer, and may have been diverted by too many red herrings for it to establish that all reasonable relevant lines of inquiry have been fully pursued.

In particular:

I am also left with a feeling that Ofwat might have taken each word of QWM's complaint at face value (e.g. interpreting excessive pricing to mean only the second abuse in Napp, considering price discrimination because the phrase was (mis)used in the complaint) rather than seek to analyse the substance of the complaint (which was of unfair competition by Bioprocessing for QWM's customers).

If true, this would risk turning public enforcement of competition law into a lawyers' battle between complainants and Ofwat about terminology, rather than a public service by which regulators ensure, insofar as is reasonably practical, compliance with the law of the land.

If I can allow myself another police analogy: if I go to the police and say "I got beat up by Mr A outside the pub", I expect the matter to be properly investigated even if I fail to grasp the finer distinctions between assault, affray, battery, GBH or whatever. Should victims of competition law injuries not get a similar service?

Clearly, I do not know the facts and cannot say anything about the merits of QWM's complaint. But in the interests of public understanding of competition law, if nothing else, I wonder whether there might be something to be said for this decision document not to be allowed to be the bottom line of this sorry tale.

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Entry added by Franck Latrémolière on 22 May 2005

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Last changed by Franck at 8:25 AM on Thursday 29 December 2005.

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Reckon Open "Disposal of landfill leachate | viewpoint: Franck" 2005-12-29T08:25:55