CFI confirms Deutsche Telecom margin squeeze decision

23 May 2008

Louise Banér

The Court of First Instance has upheld the European Commission’s 2003 decision that Deutsche Telecom abused its dominant position by operating abusive pricing in the form a margin squeeze. Deutsche Telecom had charged its competitors prices for wholesale access that were higher than its prices for retail access to the local network. The judgment also examines the relationship between decisions of sectoral regulators and compliance with competition law.

Deutsche Telecom is the incumbent telecommunications operator in Germany which operates the German fixed telephone network. Following liberalisation in 1996, it has offered access to its local networks to other telecoms operators (wholesale access) as well as subscribers (retail access). Wholesale access prices must be approved by the German sectoral regulator for telecommunications and post, RegTP, and retail access prices (except for broadband services) are subject to a price cap.

The European Commission (Commission) started investigating Deutsche Telecom’s pricing behaviour in 1999 following complaints from competitors. The Commission considered that the relevant markets in which Deutsche Telecom was dominant were the upstream market in local network access at the wholesale level and the downstream market for access to narrowband and broadband connections at retail level in Germany. The Commission found in its decision of 21 May 2003 that Deutsche Telecom had abused its dominant position by imposing a margin squeeze since it charged its competitors prices for wholesale access that were higher than its prices for retail access to the local network.

Deutsche Telecom appealed the Commission’s decision to the Court of First Instance (CFI) on the basis that as a regulated entity it did not have sufficient scope to avoid the margin squeeze. It claimed the Commission had acted unlawfully in the methods used to establish the margin squeeze, had committed errors in its calculations and lastly had not proved that the margin squeeze had any effect on competition in the relevant markets. Deutsche Telecom also claimed that the Commission decision infringed legal certainty and the protection of legitimate expectations since the alleged margin squeeze was a direct result of the regulatory decisions of the RegTP and Deutsche Telecom was simply complying with the binding decisions of RegTP.

Whilst the possibility for Deutsche Telecom to amend its wholesale prices to avoid the margin squeeze was not excluded, the Commission decision and hence the CFI judgment focuses on whether Deutsche Telecom had the ability to amend its retail prices. The CFI found that Deutsche Telecom had the scope to apply to RegTP for increases in the prices of its retail access services whilst staying within the price caps and therefore had sufficient discretion for its pricing policy to fall within Article 82 EC Treaty. On the contrary Deutsche Telecom had in fact used that discretion to lower its charges by much more than the reductions required by the price caps. The Commission accepted that due to changes in the price cap system imposed in January 2002, Deutsche Telecom only had the ability to raise broadband access prices after that date. However, the CFI upheld the Commission’s findings that Deutsche Telecom could have reduced the margin squeeze by raising broadband access prices since that would have resulted in a higher average retail price for narrowband and broadband services since broadband services are never provided alone.

EC case law has not explicitly ruled on the method to be applied in determining the existence of a margin squeeze. However, the CFI confirmed the Commission’s approach of determining a margin squeeze on the basis of Deutsche Telecom’s access charges and costs and disregarding the particular situation of competitors on the market as well as revenues earned from other services such as call services. This is because if there is not equality of opportunity between the incumbent operator and its competitors as regards access services, then competitors are obliged to offset losses incurred in relation to access charges by higher call charges which would distort competition in telecoms markets. Equally the CFI confirmed that since wholesale services are indispensable to enable a competitor to enter the downstream market, a margin squeeze will in principle hinder the growth of competition. This suggests that it might not be necessary to demonstrate anti-competitive effects to prove a margin squeeze is abusive although in this case the Commission did also analyse the effects.

The CFI also noted that the fact that Deutsche Telecom’s charges had to be approved by RegTP did not absolve it from responsibility under Article 82 and there was no indication that RegTP did in fact consider the compatibility of the charges under Article 82. The lawfulness of the Commission’s decision in relation to Deutsche Telecom’s abuse of a dominant position would not be affected by any failure by RegTP to fulfil its obligations under EC law to apply Article 82 to its pricing decisions.

The case is one of few margin squeeze cases to come before the EC courts and as such offers some useful clarification of the principles to be applied. However, the Spanish incumbent telecoms operator, Telefónica, has appealed the 2007 Commission decision that it abused its dominant position by means of a margin squeeze in the Spanish broadband market to the CFI. Therefore there are likely to be further developments in the case law. A related appeal to the CFI by Spain also contests the impact on the role of the Spanish telecoms regulator in this case. However, it is clear from the Deutsche Telecom decision that dominant companies also subject to sectoral regulation cannot rely on decisions by regulators to ensure that they comply with competition law unless the regulator is clearly applying Article 81 or 82 EC Treaty or national competition law.

Source: CFIjudgment dated 10 April 2008, Case T-271/03 found at www.curia.europa.eu