A margin squeeze committed by a dominant undertaking, even if in a regulated market, ought to be considered as anti-competitive conduct and hence illegal, the EU’s General Court has recently confirmed. In its ruling, the court dismissed the actions brought by the Spanish telecoms operator Telefónica and Spain itself against a European Commission decision which had found Telefonica guilty of abusive behaviour in the Spanish broadband market.
The court’s ruling has serious implications for undertakings operating in regulated markets- Mariosa Vella Cardona
In a 2007 decision, the Commission had concluded that Telefónica was guilty of imposing unfair prices on its competitors, in the form of a margin squeeze between the wholesale prices it charged its competitors and the retail prices it charged its own customers. Telefónica is the only Spanish operator with a nation-wide fixed telephone network. ADSL, which is the provision of high speed internet access using a fixed telephone, is one of the main technologies used in Spain to provide broadband internet access services.
Therefore, as the only Spanish telecommunications operator that has a nationwide fixed telephone network, Telefónica controls the entire ADSL value chain in Spain. It is economically not viable for competitors to duplicate Telefónica’s local access network. In practical terms, this means that operators competing with Telefonica and wishing to provide retail broadband services have no option but to purchase wholesale broadband access products from Telefónica, namely local loop unbundling, regional wholesale access and national wholesale access.
The wholesale prices which were being imposed by Telefonica on its competitors were considered by the Commission to be insufficient to cover the costs that an efficient operator would have to incur to provide retail broadband access. This meant that competitors were forced to either exit the market altogether or operate at a loss if they wanted to match the prices that Telefonica offered its customers at retail level.
In its decision, the Commission had asserted that the fact that some of the wholesale prices relating to the regional wholesale market were regulated by the Spanish telecoms regulator did not in any way diminish Telefónica’s responsibility. Telefónica knew that the estimates made by the national regulator were not matched by its own business plan and its actual costs. Indeed, internal documents proved that the company was aware that it was engaging in a margin squeeze.
Moreover, the Commission maintained, Telefónica was at all times free to end the margin squeeze by lowering its wholesale prices. It could easily do so, since the national wholesale prices were not regulated and the regional wholesale prices were only subject to maximum prices. Telefónica failed to take such an initiative until it was obliged to do so by the Spanish regulator in December 2006.
Telefónica sought to annul the Commission’s decision or at least to annul or reduce the €151 million fine imposed upon it by the Commission. The Spanish State also sought to annul the Commission’s decision alleging, in particular, that the Commission had acted beyond the powers granted to it by EU law, thereby upsetting the balance between ex ante regulation conducted by national telecom regulators within each Member State and competition enforcement.
The General Court has now confirmed that the Commission was correct in coming to the conclusions that it did. It rejected Telefónica’s argument that the Commission had used incorrect methodology in assessing whether a margin squeeze actually took place. On the contrary, it confirmed that Telefónica’s conduct was likely to reinforce the barriers for entry or expansion of competitors in the retail broadband market.
In its ruling, the court re-iterated a conclusion arrived at in previous judgments, to the effect, that national legislation relating to the obligation of operators like Telefonica to comply with the decisions taken by national telecom regulators does not release dominant firms from their obligation to respect competition law. Indeed, the court maintained that Telefónica had sufficient discretion to determine its pricing policy.
The court’s ruling has serious implications for undertakings operating in regulated markets since it clearly asserts the power of competition authorities to intervene ex post against anti-competitive conduct committed in such markets. Indeed, both the Commission and the court alluded to the fact that this right stems from the fact that whilst national regulators put in place ex ante regulatory mechanisms allowing competition to develop, they can only do so on the basis of market and cost forecasts.
In so doing, regulators diminish but cannot entirely eliminate the risk of anti-competitive behavior. On the other hand, competition authorities assess, investigate and take decisions ex post, that is, after the illegal conduct has taken place and using factual data on incurred costs. It is therefore, pure logic that the two distinct authorities can arrive at different conclusions in taking decisions on the same facts at hand.
This decision also sets an important precedent for the assessment of similar cases in other sectors and not solely in the telecoms one. This is so, in the case of network industries that have been recently liberalised or are in the process of being liberalised and where incumbent operators may seek to abuse of the dominant position acquired from years on end of exclusive rights and monopolistic rents.
Abusive conduct such as the one undertaken by Telefonica creates serious obstacles to the entry of new operators on the market and this to the detriment of consumers who are bereft of choice in both the quality of services rendered and the prices imposed. Faced with such a situation, competition authorities have no choice but to use all their powers to eradicate such conduct in order to ensure that all undertakings, in any sector, can operate on a level playing field and this, ultimately, for the benefit of consumers and industry alike.
mariosa@vellacardona.com
Dr Vella Cardona is a practising lawyer and a freelance consultant in EU, intellectual property, consumer protection and competition law. She is the deputy chairman of the Malta Competition and Consumer Affairs Authority as well as a member of the National Commission for the Promotion of Equality.