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Antitrust Cases & Commitment Decision

European Competition Policy: Antitrust Cases and the Commitment Decision in the Energy Sector

The present article deals with a specific rule set out in Council Regulation (EC) 1/2003, frequently used by both the European Commission and undertakings in handling antitrust cases, especially in the gas market after the 2007 sector inquiry. More precisely, it refers to Article 9 – Commitments in antitrust cases. The text discusses the current state of affairs, examines the reasons that lead to the introduction of the commitment decision, as well as its main advantages and disadvantages. In addition, it offers a brief overview of the 2007 inquiry and the problems it revealed. The GDF and E.ON case studies illustrate a particular type of breach (long-term transportation infrastructure capacity booking) whereby market entrance and competition can be hampered to the advantage of incumbent firms, but also the solutions envisaged via the commitment decision to remedy the situation.

by Valentina Dimulescu, Romania Energy Center (ROEC)

In May 2004, the so-called “clearance procedure” was withdrawn and the “commitment decision” was introduced. The clearance procedure meant that the undertakings could notify the Commission of an agreement made between two or several companies in a certain market so as to obtain a so-called “negative clearance” (of non-infringement of Article 101(1) TFEU^[1]) or an individual dispensation (under Article 101(3)^[2] TFEU). In the latter case, the Commission would have to assess whether the restrictive understanding could be exempt from the competition rules provided the pro-competitive effects outweigh the negative market impact. This procedure was detrimental to both the Commission and the companies because of the administrative burden which it entailed. Consequently, the Commission reformed the system and pointed out that the objectives of effective supervision and simple administration were unbalanced (Recital 2, Regulation 1/2003) since the Commission monopolised the task of applying the legislation without involving the national courts and competition authorities (centralized enforcement). This strained the Commission’s resources and ability to concentrate on hard core infringement cases (Recital 3). Therefore, Articles 101(1), 102 and 101(3) TFEU were to be applied also at the national level via a directly applicable exception system (Recital 4) and a self-assessment system was introduced whereby the burden of proof for the exemption conditions was transferred to the companies seeking such a defence (Recital 5).

The commitment decision is rather used for Article 102 TFEU cases, i.e. abuses of a dominant position, since it aims at correcting the company’s future behaviour. The purpose of this instrument is to allow the undertakings under suspicion of an abuse to opt between the risk of paying a fine and the possibility to offer a pledge to the Commission that competition will be restored on the market in question. Thus, after being given a preliminary assessment in which the Commission presents its initial competition concerns, the company can table a proposal for a commitment (which can be behavioural or structural in nature) whereby it promises to stop the suspected infringement and negotiates the manner in which competition can be restored. Behavioural remedies are preferred since structural changes are used in special cases where the former “would be more burdensome” (Recital 12). Since its introduction, the number of commitment decisions has increased: in 2005 there have been two (DFB, Coca Cola), in 2006 four (Premier League Football Association, REPSOL C.P.P SA, ALROSA/DBCAG/City and West East, Cannes Agreement), in 2007 five (Distrigaz, Daimler Chrysler, Toyota, General Motors, Fiat), in 2008 two (on the German electricity wholesale market and the electricity balancing market – both involving E.ON), in 2009 five (Rambus, GDF, RWE, IACS Ship Classification, Microsoft) and in 2010 six (ENI, E.ON Gas, Svenska Kraftnat, EDF, Visa Europe MIF, British Airways/American Airlines/Iberia).

In order to understand why the commitment decision has become so popular, one must note that this instrument has both advantages and disadvantages for the parties involved. For the Commission, it offers “expediency and procedural economy” (Case C-441/07 Commission v. Alrosa), i.e. a faster conclusion of the case at hand and the use of less resources. In addition, it permits a more targeted outcome than Article 7 infringement decisions^[3] (used in “hardcore antitrust cases”) which are more cumbersome to implement and the fact that an appeal from the companies is unlikely since judicial review for the Commission’s preliminary assessment is limited only to “manifest incorrectness” (Case C-441/07 Commission v. Alrosa). The companies prefer this method since they are not accused of an infringement and fined accordingly – thus no negative publicity –, it saves them time and money, and private damage claims cannot be forwarded to national courts by those affected by an infringement (in contrast to Article 7 remedies). On the other hand, it is important to stress that once the commitment is accepted, the Commission “shall conclude that there are no longer grounds for action by the Commission”, i.e. the investigation is halted, there will be no case law, no public admission or rejection of the accusations and no infringement decision. In other words, there will be a standstill of all Commission infringement proceedings against the company which – without recognizing or denying any wrongdoing – legally commits itself to correcting its behaviour. Also, third parties, be they companies or clients, are at a disadvantage since they cannot push forward a damage claim.

Nevertheless, the Commission has discretionary power in accepting/rejecting and assessing the commitment, especially after the ECJ’s decision in the Alrosa case which expanded the scope of the Commission’s authority (Mische, Visnar, “The European Court of Justice confirms approach in De Beers commitment decision”, Competition Policy Newsletter, Antitrust, No.3, 2010). If the Commission accepts the commitments, it will adopt a decision making them legally binding for a certain period of time. Prior to adopting this decision, the proposed commitment must be made subject to a market test in order to assess whether it will have the desired effect of restoring competition. The test demands that, in a month’s time after the publication of an official public notice, the Commission invite interested third parties to submit their remarks on the tabled commitments – the end product of which the companies involved will have access to. After analyzing these comments, the Commission may request that any part of the commitments be changed or reject them altogether and go back to investigating a possible infringement. As would be expected, there is a monitoring process whereby the undertaking is obliged to send every six months a report documenting its observance of the commitment. However, the Commission has the possibility “upon request or on its own initiative” to restart the proceedings if there has been a breach of the undertaking’s own commitment.^[4] If any of the reasons found in Article 9(2) occur either intentionally or negligently, the Commission, according to Article 23(2-c), can impose fines on the parties involved up to 10% of the annual turnover. Moreover, the Commission may impose periodic penalty payments of up to 5% of the average daily turnover in the preceding business year per day if the undertakings do not comply with the commitment (Art. 24/1/c).

As a result of complaints coming from new firms and consumers, the 2007 electricity and gas sectors inquiry aimed at identifying possible breaches of competition law and limitations of the liberalization process (European Commission Communication, COM(2006) 851 final). The final report revealed eight substantial deficiencies (we selected the ones relevant for the gas sector):

1. market concentration, especially on the wholesale level, since major companies remained dominant by commanding upstream gas imports and/or domestic gas production; therefore, market entrance was very limited with new entrants dependent on vertically integrated undertakings throughout the supply chain;
2. vertical foreclosure and threats to the security of supply generated by inadequate unbundling between network administration and the supply operations which blocked new entrants’ access to networks in the context of discrimination in favour of the dominant company’s affiliates; in addition, long term contracts between gas producers and large importers stifled access on the upstream markets;
3. low market integration since incumbents seldom entered other national markets as competitors because of insufficient cross-border capacities (new entrants cannot establish secure transit and entry capacity into new markets also because the incumbents did not expand their capacity for new firms, but for their own supply needs) and different market designs;
4. low market transparency hindering new entrants due to an information asymmetry between newcomers and existing companies;
5. ineffective and non-transparent price formation in long term import contracts which harmed the consumer and posed as a market entry barrier;
6. limited competition and high concentration at the retail level (downstream market) caused by long contract durations between industrial customers and incumbent suppliers, restrictive supply contract practices coming from incumbents and the lack of competitive supply offers from new companies;
7. balancing markets in the gas sector are too small thus maintaining the incumbents’ market power and increasing the newcomers’ gas transport costs;
8. LNG markets are dominated by national incumbents, thus hindering downstream competition.

The most recent cases (GDF and E.ON Gas), where the commitment decision was passed in June 2009 and May 2010 respectively, refer to a specific type of infringement of Article 102 TFEU through the so-called long-term transportation infrastructure capacity booking. In other words, the dominant vertically integrated company had reserved the gas network’s capacity on a long-term basis to its own supply businesses (“transport system operators”). The result was that third parties could not gain access to the network – which was a natural monopoly – via the principal entry points in order to serve their customers. Therefore, because of this market foreclosure, the incumbent’s dominance was secured and consumers did not have a choice between gas suppliers. In its investigation, the Commission focused on the gas transportation deficiencies more than on consumer harm and found that the networks belonging to dominant firms can be seen as “essential facilities”, i.e. an infrastructure which has to be shared among different entities in order to ensure competition on a certain downstream market. The refusal to grant access can be considered as an abuse of a dominant position in denying access to competing gas companies which do not have the resources to create another grid and have therefore no other transportation network available. The remedies envisaged were obviously aimed at diminishing capacity bookings on the French and German gas markets in two steps: 1) both companies are to liberate 10-15% of total capacity at the essential entry points and 2) until 2014 (GDF) and 2015 (E.ON) the companies are to reduce their network share to 50% and not surpass these commitments for another 10 years.

The Commission pledged that it will persist in its enforcement action in the energy sector (in particular via Article 9 commitments) giving particular attention to the “refusal to supply” tendency since “access to energy infrastructure remains a major barrier to competition in European energy markets” (Cardoso, Kijewski, Koch, Lindberg, Nagy, “The Commission’s GDF and E.ON Gas decisions concerning long-term capacity bookings”, Competition Policy Newsletter, Antitrust, No.3, 2010).

It is important to remember that the antitrust procedure is an ex post approach, as it attempts to deal with an anticompetitive market behaviour. Prior to the introduction of commitment decisions, companies were granted a degree of legal certainty via the clearance procedure that an agreement would be exempt. Starting with 2004 the Commission significantly reduced this possibility, although together with the national competition authorities it can provide informal guidance. This left the market in a state of insecurity since the Commission can now intervene ex post at any moment. In conclusion, Regulation 1/2003 allowed the decentralization of enforcement, but it did not diminish the Commission’s authority in implementing competition rules across the European single market.

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FOOTNOTES:

1. Treaty on the Functioning of the European Union (TFEU). ↑
2. Article 101(3) allows for a restrictive agreement to be exempted provided that it respects four cumulative conditions: 1) the agreements must contribute to improving the production or distribution of products or contribute to promoting technical or economic progress, i.e. lead to efficiency gains; 2) the restrictions must be indispensable to the attainment of those objectives, i.e. the efficiency gains; 3) consumers must receive a fair share of the resulting benefits; 4) the agreement must not afford the parties the possibility of eliminating competition in respect of a substantial part of the products in question. ↑
3. Article 7 (1) states that where the Commission finds that there is an infringement of Articles 101 or 102, it may compel the undertakings to stop their anticompetitive activities by imposing “any behavioral or structural remedies which are proportionate to the infringement committed and necessary to bring the infringement effectively to an end”. In addition, the retroactive character of this legislation is made evident: “[i]f the Commission has a legitimate interest in doing so, it may also find that an infringement has been committed in the past”. ↑
4. More precisely, if: 1) there has been a material change in any of the facts upon which the decision was taken; 2) the company(-ies) do not respect the commitment; 3) the decision was taken based on incomplete, incorrect and misleading information ↑