Albion Water Ltd & Anor v Water Services Regulation Authority & Anor

Factual and Procedural Background

This appeal concerns the pricing of partial treatment and transmission of non-potable water through an existing pipeline system ("the Ashgrove system") owned by Company A, to a large paper factory located on the North Wales coast. The appellant, Company B, proposed to purchase water directly from another utility and use Company A's Ashgrove system for transportation and partial treatment, paying an access price termed the "First Access Price". Company A proposed charging 23.2p/m³ for this service in 2001, which Company B contended was excessive and abusive of Company A's dominant position.

The former Director General of Water Services (now the Water Services Regulation Authority, "the Authority") issued a Decision in 2004 rejecting Company B's complaint that the First Access Price infringed the Chapter II prohibition of the Competition Act 1998. On appeal, the Tribunal found parts of the Decision flawed for lack of reasoning and insufficient investigation and held that Company A was dominant in the relevant market. The Tribunal found that the First Access Price imposed a margin squeeze on Company B, constituting an abuse of dominance, and referred further issues regarding cost attribution and fairness of pricing back to the Authority for investigation.

In June 2007, the Authority reported that while the First Access Price was excessive relative to attributable costs, it was not unfair and thus not abusive under the Chapter II prohibition. The Tribunal subsequently considered this report along with detailed submissions and evidence from the parties, including three methodologies used by the Authority to estimate costs: average accounting costs plus (AAC+), long-run incremental cost (LRIC), and local accounting costs (LAC).

The procedural history includes refusals of appeals by Company A against earlier judgments, a Court of Appeal dismissal of Company A's appeal on points of law, and a reconstitution of the Tribunal panel following a chair's death. The Tribunal was tasked with determining whether the First Access Price was unfair and thus unlawful under competition law.

Legal Issues Presented

1. Whether the First Access Price charged by Company A for the transportation and partial treatment of non-potable water was excessive compared to the costs reasonably attributable to providing the service.
2. Whether, if excessive, the First Access Price was unfair within the meaning of the Chapter II prohibition of the Competition Act 1998, i.e., bore no reasonable relation to the economic value of the services supplied and thus constituted an abuse of dominance.
3. The appropriate methodologies and standards for assessing cost and economic value in the context of alleged excessive and unfair pricing.
4. The relevance and inclusion of specific cost components such as capital costs, sludge disposal, distribution pumping, and back-up supply costs in assessing the fairness of the First Access Price.
5. The standard of review the Tribunal should apply to the Authority’s report and findings.

Arguments of the Parties

Appellant's Arguments (Company B)

• The First Access Price bore no reasonable relation to the economic value of the services provided and was excessive and unfair.
• Company A holds a dominant position and has imposed a margin squeeze, abusing its position.
• The costs used by Company A and the Authority’s methodologies either overstate costs or are flawed, particularly regarding cost allocation and capital costs.
• The inclusion of costs such as sludge disposal and back-up supply in the cost calculations was inappropriate and led to inflated cost bases.
• The First Access Price had both exploitative and exclusionary effects, undermining competition and harming the end consumer.
• The Tribunal should apply a full merits review rather than a limited judicial review of the Authority’s report.

Respondent's Arguments (Company A)

• The costs reasonably attributable to the services exceeded the First Access Price, negating the claim of excessive pricing.
• The Authority's conclusion that the First Access Price was not unfair should be upheld as it was based on a comprehensive and expert regulatory assessment.
• The Authority’s methodologies were appropriate and the Tribunal should give due weight to the Authority’s report.
• Cost components such as distribution pumping and back-up supply were reasonably included or excluded as per regulatory practice.
• Any excess pricing was not unfair in itself or compared to competing products.
• The Tribunal should apply a standard of review akin to judicial review rather than a full merits reconsideration.

The Authority's Arguments

• The First Access Price was excessive but not unfair, as it bore a reasonable relation to the economic value of the services.
• The AAC+ methodology, supported by LRIC and LAC as cross-checks, was the preferred and appropriate approach to cost assessment.
• Costs such as sludge disposal and back-up supply were properly treated in the cost calculations based on regulatory accounts and practices.
• There were no suitable comparators for assessing unfairness by comparison with competing products.
• The Tribunal should give proper weight to the Authority’s findings but retain jurisdiction to decide the case on the merits.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal began by distinguishing between an excessive price and an unfair price, following the framework established in United Brands. It accepted that an excessive price is a necessary but not sufficient condition for unfairness. The Tribunal reviewed the Authority’s methodologies for cost estimation (AAC+, LRIC, LAC), finding AAC+ the preferred approach supplemented by LAC as a cross-check, while rejecting LRIC as unnecessary for this case.

Regarding cost components, the Tribunal excluded costs of sludge disposal and back-up supply from the cost base relevant to the First Access Price, as these were either already charged elsewhere or not reasonably attributable to the service in question. Distribution pumping costs were excluded for the Ashgrove system specifically, as it operates by gravity and does not require pumping, but included on a regional average basis for non-potable water customers generally.

The Tribunal accepted the Authority’s approach to the cost of capital, rejecting Company A’s argument for a higher, stand-alone cost of capital based on hypothetical new investment. Instead, it used a regulated cost of capital consistent with Company A's existing regulated business and historical returns, noting the complexity of valuing sunk assets and the need to avoid double counting risks.

Applying the adjusted cost calculations, the Tribunal found the First Access Price materially exceeded the costs reasonably attributable to the transportation and partial treatment of non-potable water both generally and specifically through the Ashgrove system, with excesses of at least 46.8% and 68.1% respectively.

On the question of unfairness, the Tribunal considered the economic value of the services to be approximately equivalent to the attributable costs, as no relevant non-cost-related factors justified a higher valuation. It rejected Company A’s arguments that sunk costs, regulatory frameworks, or rates of return on capital justified a higher economic value. The Tribunal also found no suitable comparator products for price comparison, making the assessment of unfairness primarily a matter of whether the price bore a reasonable relation to economic value.

The Tribunal emphasized the dominant position of Company A, the lack of effective competition, and the exclusionary and exploitative effects of the First Access Price. It noted that the excessive price would have undermined Company B’s ability to compete and deprived the end consumer (the paper factory) of choice and potential benefits from competition.

Concluding, the Tribunal held that the First Access Price bore no reasonable relation to the economic value of the services and was unfair in itself, constituting an abuse of dominance under section 18 of the Competition Act 1998.

Holding and Implications

The Tribunal holds that the First Access Price of 23.2p/m³ quoted by Company A in March 2001 was both excessive and unfair in itself, thereby constituting an abuse of Company A’s dominant position under section 18(2)(a) of the Competition Act 1998.

This decision means that the pricing practice challenged is unlawful and Company A is found to have abused its dominant position by imposing an unfair and excessive price for the transportation and partial treatment of non-potable water. The ruling reinforces the principle that dominant undertakings must not impose prices bearing no reasonable relation to the economic value of the services supplied, especially where such pricing distorts competition and harms consumers.

No new precedent beyond the application of established principles was set. The Tribunal noted that the parties may negotiate a resolution or the Tribunal may hold further hearings on remedies. The ruling underscores the need for careful and transparent cost-based pricing by dominant suppliers in regulated industries to avoid abuse of dominance.