The Competition Appeal Tribunal has awarded damages in a follow-on action for only the second time. It awarded a total of approximately £1.85 million plus interest to Albion Water, a new entrant in the incumbent Dwr Cymru's water supply area for unfair pricing and margin squeeze by Dwr Cymru in respect of a network access charge, including also additional damages for loss of chance to gain a further contract.
Albion Water's action was brought under section 47A of the Competition Act 1998, which gives a person who has suffered loss or damage by virtue of an infringement of UK or EU competition law, the right to claim compensation before the CAT. In this case, the action followed on from two judgments of the CAT concerning substantive competition law infringements by the dominant incumbent provider, Dwr Cymru. The CAT had declared that a network access price charged by Dwr Cymru resulted in a margin squeeze and abuse of dominant position contrary to Chapter II of the Competition Act 1998, in December 2006. This judgment on margin squeeze was upheld by the Court of Appeal in May 2008.
The CAT also gave judgment, in November 2008, that the access price charged by Dwr Cymru was unfair in that it materially exceeded the costs of the services to be provided by Dwr Cymru and also bore no reasonable relation to the economic value of those services. These judgments have been explained in previous issues of this Bulletin: please see the issues for October 2008 and January 2009. In a further judgement on remedies in April 2009, the CAT ordered Dwr Cymru to bring the infringements to an end and to refrain in the future from conduct having the same or equivalent effect: please see the May 2009 issue of the Bulletin.
The background to the saga was that Albion Water sought to provide technical services comprising water supply using Dwr Cymru's network, to end customers to enable them to reduce their water consumption and therefore their overall water supply costs. Albion planned to purchase bulk water from an alternative supplier, United Utilities, and to arrange with Dwr Cymru for this to be transported under a common carriage agreement to its customer, Shotton Paper Mill.
Shotton Paper Mill was observed to have in effect sponsored Albion's entry into the market because it wanted to reduce it water costs. Therefore the original intention was that Albion would have shared any savings arising from the common carriage arrangement with Shotton Paper.
Under the margin squeeze judgment, the CAT had found in 2006 that based on the cost of buying the water from United Utilities and the access price quoted by Dwr Cymru, Albion could not profitably resell the water to Shotton at a price less than or equal to Dwr Cymru's retail price, and thus concluded that Dwr Cymru committed a margin squeeze.
Calculation of loss and damages
In order to award damages for the financial loss suffered by Albion as a result of the abuse of dominant position, it was necessary for the CAT to construct the counterfactual that would have existed absent the abuses of dominance by Dwr Cymru. The CAT stated there was a range of lawful access prices that could have been charged and the counterfactual must be based on a reasonable access price that Dwr Cymru would have offered. The CAT agreed that the counterfactual would have involved a common carriage price equal to that which Dwr Cymru would have proposed if it had undertaken a reasonable assessment of the cost of providing the service to Albion (a price of 14.4p/m3).
The CAT also concluded that for purposes of constructing the counterfactual, it should be assumed that Albion would have purchased the raw water needed to supply Shotton Paper, at the same price that United Utilities was selling it to Dwr Cymru.
In order to assess the revenue that Albion would have obtained from Shotton Paper, it was necessary to make certain assumptions about the price at which Albion would have supplied water to Shotton Paper, taking into account the terms of the supply agreement. This included a benefit-sharing clause which used, as a benchmark, Dwr Cymru's retail tariff. The CAT concluded on this basis that the savings (to the customer) in the cost of supply or services, net of financing and operating cost, would be shared between Shotton Paper and Albion Water in a 70:30 ratio.
On this basis, the CAT assessed damages for the period from the deemed date of common carriage commencement in the counterfactual situation (16th April 2001) to the date on which Dwr Cymru offered an acceptable common carriage price of 14.4p/m3 to Albion (7th November 2008) of £1,694,343.50.
Further award of damages for loss of chance of a further contract
In addition, the CAT awarded Albion damages for the lost opportunity to obtain a further water supply service contract from Corus which resulted from Dwr Cymru's abuse of dominant position. The CAT concluded that Albion was prevented from bidding to supply Corus because of the disruption at the relevant time resulting from the withdrawal of one of its investors, Pennon, which itself was shown on the evidence to have been attributable to Dwr Cymru's abuse of dominance and Albion's need to focus its limited resources on the relevant investigation by Ofwat, the water regulator, and the subsequent CAT proceedings.
The CAT concluded that but for Dwr Cymru's abuse of dominance, Albion would have tendered for the Corus contract and that it was reasonably foreseeable that Dwr Cymru's conduct would have caused loss through impeding Albion in the development of its business. The CAT concluded that Corus would have been aware that a contract with Albion would have enabled it to reduce its water consumption as a result of Albion's technical services and that there was therefore a substantial chance that, but for Dwr Cymru's abuse of dominance, Corus would have entered into a bulk supply agreement with Albion using common carriage provided by Dwr Cymru, based on the same terms as those applicable to Shotton Paper.
Applying the same quantum model as used for Shotton Paper, the amount of resulting damages would be £242,651. However, as it was not certain that a contract would have been concluded given that no formal negotiations were opened, the CAT found it appropriate to reduce this damages figure for its lost opportunity by 33%, resulting in this head of damages coming to £160,149.66.
Interest was awarded on both damages sums as from the mid-point of the relevant period, namely from 26th January 2005 until the date of payment. This was to reflect the fact that the loss was not suffered from the start, but rather over the period when Albion would have earned the increased revenues through the supplies based on common carriage.
Rejection of claim for exemplary damages
Albion Water also claimed exemplary or punitive damages from Dwr Cymru concerning the abuse of dominance. However, this head of claim was rejected because an award of this type of damages would in any event be made only in exceptionally circumstances, and there was in this case no indication on the facts that Dwr Cymru had intended to set an unlawfully excessive price or that it was reckless as to whether the price was excessive.
It was not possible to say that by using its chosen methodology, Dwr Cymru must have realised that the resulting price would be unlawfully high, and that there was no evidence that the board of directors had given instructions to pursue a high target price. Rather, it appeared from the evidence that the infringing access price was as a result of incompetence and inexperience rather than a cynical disregard for the legality of the resulting price.
The CAT further concluded that there was no evidence that Dwr Cymru had deliberately calculated that the profit it was likely to make from issuing an unlawful access price was likely to exceed any damages that it could ultimately be liable to pay Albion in the event that Albion made a successful claim for competition law infringement. On this basis, the compensatory awards of damages (plus interest) were not increased by any award of exemplary damages.