Germany: Deutsche Bahn: Commitments End Margin Squeeze Investigation

European Commission, Case AT.39678/AT.39731 Deutsche Bahn I/II 18 December 2013

Abstract

Deutsche Bahn changes its prices for the supply of electricity for locomotives and allows third parties access to its electrical grid to avoid margin squeeze allegations.

Legal context

By the decision of 18 December 2013, the European Commission ('the Commission') accepted commitments offered by the German railway company Deutsche Bahn ('DB'), thereby ending proceedings for an infringement of Article 102 TFEU. The Commission had investigated DB's prices for the supply of traction current, which is the electricity necessary to power locomotives. The Commission's concern was that these prices created an anti-competitive margin squeeze by favouring DB's own operations over competitors in the markets for rail freight and long-distance passenger transport. To resolve these concerns, DB offered, and the Commission made legally binding under Article 9 of Regulation No 1/2003, several commitments, including a new pricing system for traction current and allowing third-party electricity providers access to DB's traction current network.

Facts

As the successor to the former state railways, DB is still the largest railway operator in Germany and the owner of the railway infrastructure, including the electrical grid necessary for the distribution of traction current. It is also the sole supplier of traction current, which it purchases from energy producers and resells to railway companies. DB has granted discounts on its prices for traction current depending on the volume of purchases and the duration of the supply agreements. These discounts have been such that only DB's own transport subsidiaries could benefit from the full amount. For years, DB's competitors have asked to be put on an equal footing with DB's subsidiaries. However, in 2006, a German court dismissed a legal challenge against DB's pricing practice finding that a dominant supplier may, under the German competition rules, discriminate against third parties in favour of its own group companies.

In 2011, reportedly acting on competitor complaints, the Commission carried out unannounced inspections at the premises of DB (the legality of which was confirmed by the General Court in Joined Cases T-289/11, T-290/11, and T-521/11 Deutsche Bahn v Commission 6 September 2013). The subsequent proceedings culminated in the adoption of a preliminary assessment on 6 June 2013 where the Commission expressed concerns that DB's pricing practice constitutes a margin squeeze and infringes Article 102 TFEU. Shortly afterwards, DB proposed commitments, which were market tested in August 2013 and eventually accepted, with minimal revisions, by the Commission.

Analysis

A 'margin squeeze' is a form of vertical leveraging where a vertically integrated company exploits a position of dominance in an upstream market to restrict competition in a competitive downstream market. The company, whose upstream products or services are a necessary input for the downstream market, can 'squeeze' the margins of its competitors by either raising its upstream prices or lowering its downstream prices or both.

In Deutsche Telekom (Case C-280/08 P [2010] ECR I-9555), the Court of Justice confirmed that a margin squeeze may constitute an abuse of dominance; and, in TeliaSonera (Case C-52/09 [2011] ECR I-527), it found that this is also true where the dominant company is under no obligation to supply the input product or service in the upstream market. This decision significantly expanded the scope of the concept in comparison to the Commission's Guidance on abusive exclusionary conduct where a margin squeeze had been linked to a refusal of supply. According to the Court's case law, the general standard for establishing a margin squeeze is the 'as-efficient competitor' test. This means that a margin squeeze exists where the spread between the dominant firm's upstream and downstream prices is insufficient to cover its own downstream costs. In addition, it is necessary to assess whether the margin squeeze has an actual or potential anti-competitive effect. Where the pricing practice is likely to foreclose the downstream market to as-efficient competitors, there will be an infringement of Article 102 TFEU, unless the conduct can be justified on the basis of efficiencies that benefit consumers. Such an anti-competitive effect is probable, in particular, where the upstream product is indispensable for the sale of the downstream product so that the downstream competitors are forced to operate at a loss or with reduced profitability.

In its preliminary assessment, the Commission came to the view that DB's conduct likely satisfied these requirements. As DB was the sole supplier of traction current in Germany, it was dominant in the upstream input market. The Commission also found that, on average over the period under investigation, the DB railway companies in the freight and in the long-distance passenger transport markets would not have been able to trade profitably had they had to pay the same higher prices for traction current as their competitors. Since traction current is an indispensable input for railway operators, the conduct was, therefore, likely to have an anti-competitor foreclosure effect.

To end the investigation, the Commission and DB have settled on a mixture of commitments that address the margin squeeze concerns principally in two ways: on the one hand, DB has agreed to promote the entry of third-party electricity providers into the market for the supply of traction current, thereby reducing DB's dominance in that market. To that effect, beginning on 1 July 2014, DB opens its grid to alternative suppliers, allows external customers to cancel their long-term supply contracts and introduces a new pricing system with separate prices for electricity and grid access. On the other hand, DB has also agreed to renounce volume- or duration-based discounts, thereby directly removing the cause for the unequal treatment of its traction current customers. In order to cover the transition period where the new pricing system is not yet in place and alternative energy suppliers are not yet available, DB makes a one-time payment effectively decreasing the traction current price by 4% for the period of 1 year before the introduction of the new pricing system. The Commission determined that this decrease is sufficient since it would have prevented a margin squeeze in the first place. The commitments will last for 5 years or until 25 per cent of the traction current volumes purchased by competitors of the DB group are sourced from third-party electricity providers. Finally, DB has entered into reporting obligations towards the Commission; and it will appoint a monitoring trustee.

Practical significance

The application of the margin squeeze concept to the case at hand appears to be straightforward—even under the more narrow effects-based approach of the Commission's Guidance on abusive exclusionary conduct since DB as the owner of the electrical grid is under a duty to supply traction current to its competitors. What is particularly interesting then is the commitments package. Arguably, the Commission could have requested no more than the decrease of the traction current prices to third-party customers since it had found that this adjustment would have prevented a margin squeeze during the period of the potential infringement. The offering of additional commitments could be seen as the price that DB had to pay to settle the allegations. Although, it should be noted that DB had already been ordered by the German Federal Network Agency to open its electricity grid; and the additional commitments now merely help to make this order more effective. The decision, thus, illustrates that companies may end up offering more in terms of commitments than might have otherwise been imposed against them under Article 7 at the end of a full investigation. However, the 'commitments path' also brings substantial benefits. DB avoided a final decision on the abusive nature of its pricing practice, which could have served as a basis for damages actions by its competitors (reportedly, some railway company have initiated civil proceedings against DB with the objective of recovering a part of their past payments).

However, it remains to be seen how effective the introduction of competition in the upstream traction current market will be for protecting competition in the downstream rail transport markets. If at some point in the future third-party electricity providers will have established themselves as an effective supply alternative, DB might no longer need to sell traction current to its railway competitors and might, then presumably still being the largest railway operator, negotiate with the energy producers particularly favourable prices for itself that might be unobtainable to its competitors.

Originally published by Journal of European Competition Law & Practice.

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