Can Existing Long-term Supply Contracts Objectively Justify Preferential Network Reservations under Article 102 TFEU?

So far this chapter has shown how ex-ante regulation facilitates the effective and fair allocation of cross-border interconnectors and pipelines through regulatory rules, and how EU competition law should in theory have a complementary role in the solution of the problem of discriminatory capacity allocation. Yet, it has also shown how, in practice, the Commission has developed a more interventionist approach through antitrust settlements. Given this strategic approach by the Commission, the case law implies several important outcomes. It clearly shows that the aim of the Commission is to eliminate market deficiencies as well as the infringement of EU competition law through antitrust enforcement. It also shows that the Commission attempts not only to increase scarce capacity of cross-border transmission networks by identifying investments as objective justifications under Article 102 TFEU, but also to promote efficient use of them by imposing capacity release commitments on the undertakings concerned. Moreover, it is indicated that the Commission has not been tempted to take into consideration existing cross-border long-term supply contracts as a justification within investigations into related priority access rights. Therefore, a question that arises is, to what extent is it possible to claim an existing cross-border long-term supply contract as an objective justification during the investigations of a related long-term preferential network reservation under Article 102 TFEU?¹⁴¹

140 Hauteclocque and Talus, supra n 114, 30-31

141 A dominant undertaking that engages in abusive anticompetitive conduct could avoid being subject to EU antitrust enforcement, if this conduct results in procompetitive effects by way of efficiency gains that outweigh the anticompetitive effects of the conduct, or if the conduct can be justified on the basis of objective necessity. The objective necessity of the conduct can be decided on the basis of factors external to the dominant undertakings. See The Guidance of the Commission’s enforcement priorities in

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Supposing a hypothetical context, similar to that within the VEMW decision, in which a cross-border transmission network operator preferentially reserves its network capacity in order to honour a long-term electricity import contract concluded with a nuclear electricity generator that has just entered an electricity generation market within a neighbouring Member State. Within this context, a likely competition concern of the Commission would be refusal to supply under the essential facilities doctrine as occurred in the GDF Suez and E.ON Gas decisions. An efficiency gain that could be claimed by the network company as an objective justification defence¹⁴² under this hypothetical question would be a cost efficiency resulting from the long-term contract¹⁴³ as the final price of electricity would be cheaper than the final price of domestic electricity (assuming that domestic electricity is produced through gas-power plants and thus, since the generation cost is higher than for a nuclear-based power plant, the consumer price is greater than the consumer price of imported electricity).¹⁴⁴ Moreover, the company could boost its defence by claiming that if there was not a long-term contract concluded due to the preferential network reservation, there would not be a new entrant investing in nuclear technology for electricity generation and thereby no cost efficiency would occur. Vice versa it could be argued that if the network company was not be able to preferentially book its network capacity there would not be a long-term contract promoting this new investment. In the light of these arguments, it should applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings 2009/C 45/02 para.30; On the other hand, it is argued that objective justification defence under Article 102 consists of two types of defences including efficiency defenced and social welfare defences. See R.

Nazzini, The Foundations of European Union Competition Law: The Objective and Principles of Article 102 (Oxford University Press 2011), pp. 304-317

142 The burden of proof for objective justification under Article 102 is open to debate. See P. J.

Loewenthal, ‘The Defence of “Objective Justification” in the Application of Article 82 EC’ (2005) Vol.28 World Competition 455, pp. 467-469; R. Nazzini, ‘The Wood Began to Move: An Essay on Consumer Welfare, Evidence and Burden of Proof in Article 82 Cases’ (2006) Vol.31 European Law Review 518, pp.

521-524; P. Akman, ‘The European Commission’s Guidance on Article 102 TFEU: From Inferno to Paradiso?’ (2010) Vol.73 The Modern Law Review 605, p. 622

143 The objective justification defence under Article 102 TFEU reflects Article 101(3) TFEU, although the accuracy of this approach by the Commission is open to debate regarding differences between the articles. Within this sense, the dominant undertaking concerned could ground its defence on cost efficiencies and qualitative efficiencies pursuant to Guidance on the application of Article 101(3) TFEU.

See Notice Guidelines on the application of Article 81(3) of the Treaty (2004) OJ C 101/08.

144 Certainly, in order to identify a cross-border long-term supply contract as an efficiency gain within the investigation of the associated preferential network reservation, it is necessary to develop comprehensive economic analyses of the effect of the supply contract on liquidity, competition levels in the relevant market and other market conditions such as the portfolio of technologies used for electricity generation so on.

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be underlined that, while assessing the legitimacy of preferential network reservations, the interconnection between long-term supply contracts concluded among Member States and preferential network reservations as well as possible efficiencies stemming from the contracts (if there are any) should be taken into consideration.

On the other hand, should there be a risk of elimination of effective competition in the relevant downstream market through preferential network reservations, it does not seem that any sort of economic efficiency linked to associated long-term supply contracts would be accepted as an objective justification, considering the Guidance on the enforcement priorities in applying Article 102. Accordingly, an undertaking under investigation should demonstrate that the efficiency is sufficient to guarantee that no net harm to consumers is likely to arise. The undertaking concerned is expected to show, with a sufficient degree of probability, and on the basis of verifiable evidence, that the following cumulative conditions are fulfilled: (i) the efficiency is likely to be generated as a result of the conduct subject to the investigation; (ii) the conduct is indispensable to the realisation of the efficiency; (iii) the likely efficiency brought about by the conduct outweighs any likely negative effects on competition and consumer welfare in the affected markets; and, (iv) effective competition in the market will not be eliminated.¹⁴⁵ Regarding the last condition, the Guidance explicitly states that a conduct can only be assessed under the scope of the objective justification defence if ‘the conduct does not eliminate effective competition removing all or most existing sources of actual or potential competition. … Where there is no residual competition and no foreseeable threat of entry, the protection of rivalry and the competitive process outweighs possible efficiency gains. In the Commission’s view, exclusionary conduct which maintains,

145 This provision has been criticised by scholars. While the Commission only needs to prove likely detrimental effects of refusal to supply so as to deem infringement of Article 102 TFEU the undertaking concerned must demonstrate the satisfaction of the conditions with a sufficient degree of proportionality and on the basis of verifiable evidence. Moreover, it must be guaranteed that no net harm to consumers is likely arise, while likely consumer harm is enough to determine the existence of the infringement. These conditions are found requiring ‘highly standard of proof’ from the undertaking. Akman, supra n 142, 620-624; A. Jones and B. Sufrin, EU Competition Law: Text, Cases, and Materials (5^th edn, Oxford University Press 2014) p. 391

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creates or strengthens a market position approaching that of a monopoly can normally not be justified on the grounds that it also creates efficiency gains.’¹⁴⁶

As regards this provision, even though cost efficiency occurs, it seems that the tendency of the Commission is to make a decision favouring competition in the energy markets, in particular, with the consideration of the fact that one of the main objectives of the market liberalisation policy in energy is to create a well-functioning competitive market. The market foreclosure of competitors may counter the liberalisation objective and decrease consumer welfare in the longer term.¹⁴⁷ As a result, it seems that the only possible justification to have an individual exemption for a preferential cross-border network reservation under EU competition law is an investment in network capacity regarding the scarcity of networks and the privileged objectives of the EU in the European energy markets.¹⁴⁸

VI. Conclusion

This chapter attempted to address the problem of long-term preferential network reservations of cross-border interconnectors and transmission pipelines, as granted preferential access rights are considered to be an obstacle to market integration and the development of competition in the energy markets in Europe.

The chapter first assessed the problem by taking into account two different angles: EU secondary law and EU competition law, since the Commission attempts to solve the

146 Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings (2009) OJ C 45/02, para. 30

147 P. Lowe, ‘The European Commission Formulates its Enforcement Priorities as Regards Exclusionary Conduct by Dominant Undertakings’ (2009) GCO The Online Magazine for Global Competition Policy Release: FEB-09 (1) <https://www.competitionpolicyinternational.com/file/view/5826 accessed 01 July 2014> accessed 17 October 2014, pp. 7-8

148 With the consideration of the finding of this section of the chapter, there may be further discussion on the objective of Article 102 TFEU and whether the Commission should change its attitude under objective justification defence in a way that favours consumer welfare. Regarding the scope of the thesis there will not be discussion over this conflict. For further readings see E. Roussena, ‘The Concept of ‘Objective Justification’ of an Abuse of a Dominant Position: Can it help to modernise the analysis under Article 82 EC?’ (2006) Vol.2(2) The Competition Law Review 27; L. L. Gormsen, ‘The Conflict between Economic Freedom and Consumer Welfare in the Modernisation of Article 82 EC’ (2007) Vol.3(2) European Competition Journal 329, and for further decisions see Case C-85/76 Hoffmann-La Roche v Commission [1979] ECR 461, para. 123, Case T-219/99 British Airways v Commission [2007] ECR II-5917, para. 293, Case T-203/01 Manufacture Francaise des Pneumatiques Michelin v Commission (Michelin II) [2003]

ECR II-4071, para. 239-40

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problem through these two legal tools. The chapter found that EU secondary law promotes transparent and fair network allocation through regulatory provisions such as third party access and vertical unbundling, whereas EU competition law aims at preventing market operators with market power from abusing their positions by engaging in unilateral anticompetitive conduct in the form of refusal to supply, discrimination, strategic under-investment and so on. Thus, the chapter indicated that, in theory, there is a complementary relationship between EU secondary law and EU competition law. However, in practice, regarding the competition decisions of the Commission, it was pointed out that the Commission tends to adopt a rather interventionist approach. Before analysing the decisions of the Commission and the Court of Justice, the chapter looked at the relationship between long-term supply contracts and preferential network reservations as network reservations can be made on the basis of existing long-term supply contracts. This section of the chapter concluded that these associated contracts might be taken into account while assessing preferential network reservations, in particular in certain situations where the long-term supply contracts generate economic efficiencies.

Under the case law section, the chapter first evaluated the VEMW judgment of the Court of Justice, since this judgment had an enormous impact on the approach that the Commission adopted to assessing the legitimacy of preferential access rights. In this case, an existing priority access right could not be justified by an association with long-term supply contracts signed before the first regulatory Directive entered into force. It was deemed discriminatory unless the Member State concerned had consulted for derogation from third party access under Article 24 of Directive 96/92/EC. This new trend was also adopted by the Commission through a staff working paper on the effects of the VEMW judgement, and pursued within investigations into long-term network reservations under EU competition law.

The GDF Suez and E.ON decisions of the Commission showed that preferential network reservations by a network company in favour of its affiliated supply company would be assessed under Article 102 TFEU and considered as an abuse of dominance in the form of namely, refusal to supply and discrimination. Also, the Marathon decision

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along with GDF Suez and E.ON, demonstrated that commitments with a quasi-structural effect, proposed through antitrust settlements, are more than welcomed by the Commission, as they are sufficient to eliminate the anticompetitive behaviour of the incumbents as well as market deficiencies. On the other hand, Viking Cable showed that the Commission seems to have a favourable opinion regarding the provision of a long-term priority access right to a dominant undertaking, if this granted priority access right results in an efficiency gain such as an investment in cross-border transmission capacity, which outweighs the anticompetitive effect of the right. Overall, the analysis of the case law showed that, according to the Commission, preferential cross-border transmission network reservations can only be objectively justified on the basis of an investment in network capacity or granted exemption from third party access through ex-ante regulatory provisions. This outcome indicated that the Commission pursues the objective of market regulation and aims at balancing equal and fair access to interconnectors by market players with the development of interconnector capacities through new investments, which are promoted by assessing them as objective justifications.

Finally, the chapter examined a hypothetical case in order to indicate that under some circumstances preferential network reservations might be objectively justified on the basis of long-term supply contracts concluded among Member States if these contracts produce efficiencies. Nevertheless, while carrying out this analysis, the chapter took into account the approach that the Commission has adopted in the newly liberalised markets. Accordingly, the Commission tends to take a view in favour of an improvement in competition, and states that effective competition in downstream markets cannot be sacrificed on the grounds of any kinds of efficiencies.

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