Tuesday, January 28, 2014

Competition Law, Sustainability, and Geography

The Ferry post raised an interesting issue that I'd only casually discussed elsewhere: if we are going to weigh the damage done by collusion against one or more associated benefits, which benefits for which consumers do we get to include? Inconveniently, it seems like the answer is benefits for the same set of individuals who are the (ultimate) consumers of the product or service.

The Energy Pact Case
On 6 September 2013, the Dutch energy industry made a pact with the government and a variety of other stakeholders about the future of energy supply in the Netherlands, under the auspices of the allmighty SER, the Social-Economic Council. As part of this pact, the industry promised to close five coal-fired power plants that were particularly unsustainable in their output of SO2, NOx and particulates.
Given that such an agreement to reduce supply is arguably problematic under competition law, the industry body Energy Netherlands asked the competition authority ACM for its opinion. In a non-binding "note" just 20 days later, the ACM tentatively concluded that this part of the pact was unlawful as contrary to the Competition Act. Evaluating the social costs and benefits over the duration of the pact (2016-21), the Authority found an estimated negative price effect for consumers of € 450 million and a benefit - in the form of avoided carbon abatement costs - of € 180 million. Given the imbalance between costs and benefits, the conclusion inevitably followed, much to the chagrin of the government.

The question of "which consumers" was actually relatively easy in this case: Given that for SO2, and NOx there are nationwide emissions limits, the ACM simply assumed that a given reduction in NOx output would save Dutch society the € 9.40 per kg that it would otherwise have had to spend on other kinds of abatement. Similarly, for SO2 it assumed a the "shadow price" of € 5.40. Both these values were taken from a study by the CPB. For particulates, where no emissions limit exists, the CPB study estimated a benefit to society from reduced output of € 44.30 per kg. While the shadow prices methodology makes perfect sense, the story on particulates raises an important question: Why count only benefits enjoyed by Dutch citizens? Is this even OK under the ECJ's precedents on the Temelin nuclear power plant (see this article) and on environmental impact assessments?

EU Law
Well, it is difficult to get around the clear text of art. 101(3) TFEU, which requires that any agreement, in order to pass muster, must "[allow] consumers a fair share of the resulting benefit". In its decision in CECED, an important precedent for the Energy Pact case, the European Commission talked about checking whether "the agreement is likely to deliver both individual and collective benefits for users and consumers" (par. 51) and "allowing users a fair share of the benefits" (par. 57), without explaining the distinction - if any - between users and consumers. (That case dealt with an agreement in the Belgian appliances manufacturing sector aimed at improving energy efficiency.) This interpretation of primary Treaty law seems difficult to square with the idea that benefits enjoyed by consumers in a different (geographical) market, or by non-consumers, should also be included. This is also the conclusion reached by the Commission in its Guidelines on the application of Article 81(3):
43. The assessment under Article 81(3) of benefits flowing from restrictive agreements is in principle made within the confines of each relevant market to which the agreement relates. The Community competition rules have as their objective the protection of competition on the market and cannot be detached from this objective. Moreover, the condition that consumers must receive a fair share of the benefits implies in general that efficiencies generated by the restrictive agreement within a relevant market must be sufficient to outweigh the anti-competitive effects produced by the agreement within that same relevant market. Negative effects on consumers in one geographic market or product market cannot normally be balanced against and compensated by positive effects for consumers in another unrelated geographic market or product market. However, where two markets are related, efficiencies achieved on separate markets can be taken into account provided that the group of consumers affected by the restriction and benefiting from the efficiency gains are substantially the same.
By way of exception, the Commission quoted Case T-86/95, Compagnie Générale Maritime and others:
130 (...) Regard should naturally be had to the advantages arising from the agreement in question, not only for the relevant market, namely that for inland transport services provided as part of intermodal transport, but also, in appropriate cases, for every other market on which the agreement in question might have beneficial effects, and even, in a more general sense, for any service the quality or efficiency of which might be improved by the existence of that agreement. Both Article 5 of Regulation No 1017/68 and Article 85(3) of the Treaty envisage exemption in favour of, amongst others, agreements which contribute to promoting technical or economic progress, without requiring a specific link with the relevant market.
However, the Commission explained away that seeming oddity by pointing out that "importantly, the affected group of consumers was the same" (Guidelines, op cit, fn 57). That seems right.

Product Market
Taking the Commission's guidelines at face value, even the ACM's analysis of the Energy Pact is too generous, since it weighs a price increase in the energy market against reduced abatement costs elsewhere in Dutch society, i.e. not necessarily in the energy market. After all, the Commission clearly said that an increase in the deadweight loss "cannot normally be balanced against and compensated by positive effects for consumers in another unrelated (...) product market". Since the ACM made no finding of where the reduction in abatement costs might occur, much less whether that other product market is somehow related to the energy market, the Authority seems to have fallen foul of the Commission's guidelines.

Fortunately, the Commission itself doesn't seem to go that far either. In CECED, it started by estimating the recoupment period for the average consumer, weighing the increased purchase price of the appliances against the resulting reduction in energy costs (par. 52-54). Arguably, that is a weighing of costs and benefits in the same or in related markets. (See p. 14 of the ACM's draft Position Paper on Competition and Sustainability.) But next it looked at "collective environmental benefits", using a methodology much like the ACM's relying on estimates of the Europe-wide (!) social benefits of reduced SO2 and NOx emissions. (For comparison: in 1999 the Commission put the shadow prices at € 4-7 per kg for SO2 and at € 3-5 per kg for NOx.) More generally, throughout the case law of the Commission and the European Courts, I am yet to encounter an example of a justification that is rejected because it concerns the same inviduals but on a different product market, or on no product market at all. (The consumer benefit may come in the form of reduced government spending, for example.)

Geographical Market
Geography is a different story. The problem with geograpy is that it is often (but not always, see the Compagnie Générale Maritime case above) a proxy for the actual individuals we are talking about. As long as the "fair share of the resulting benefit" is somehow enjoyed by the same individuals, competition law is unlikely to object. But if the beneficiaries are different individuals from the individuals paying the proverbial and literal price for the reduction in competition, we have a problem. As we saw in the Ferries case, competition law does not look kindly on cross-subsidisation. Even if such a scheme is (Kaldor-Hicks) efficient, from an economics point of view, there needs to be some kind of compensation, enough to achieve Pareto efficiency. If it is impossible to achieve this in the context of an agreement between market participants, there is no alternative to government intervention: it will either have to become a party to the pact, offering to take care of the compensation, or it will have to turn the agreement into a statutory scheme with compensation. (Without compensation, the statute would arguably constitute an unlawful infringement of EU law.)

Ancillary Restrictions
One final possibility that is mentioned in the ACM's draft Position Paper on Competition and Sustainability is the notion of "ancillary restrictions" mentioned by the Court of Justice in a few cases, which are restrictions of competition that are sufficiently "unavoidable" if some other beneficial thing is to be done that they are outside the ambit of art. 101 TFEU. The notion has its roots in the law on concentrations:
104 In Community competition law the concept of an `ancillary restriction' covers any restriction which is directly related and necessary to the implementation of a main operation (see, to that effect, the Commission Notice of 14 August 1990 regarding restrictions ancillary to concentrations (OJ 1990 C 203, p. 5, hereinafter `the notice on ancillary restrictions', point I.1), the notice on cooperative joint ventures (point 65), and Articles 6(1)(b) and 8(2), second paragraph, of Regulation No 4064/89). 105 In its notice on ancillary restrictions the Commission rightly stated that a restriction `directly related' to implementation of a main operation must be understood to be any restriction which is subordinate to the implementation of that operation and which has an evident link with it (point II.4).
Case T-112/99, Métropole. In its draft Position Paper , the ACM cites some more recent case law that concerns associations of undertakings, such as the Dutch Bar Association in Wouters and the international swimming association FINA in Meca Medina. In the former case, the Court said:
97. However, not every agreement between undertakings or every decision of an association of undertakings which restricts the freedom of action of the parties or of one of them necessarily falls within the prohibition laid down in Article 85(1) of the Treaty. For the purposes of application of that provision to a particular case, account must first of all be taken of the overall context in which the decision of the association of undertakings was taken or produces its effects. More particularly, account must be taken of its objectives, which are here connected with the need to make rules relating to organisation, qualifications, professional ethics, supervision and liability, in order to ensure that the ultimate consumers of legal services and the sound administration of justice are provided with the necessary guarantees in relation to integrity and experience (see, to that effect, Case C-3/95 Reisebüro Broede [1996] ECR I-6511, paragraph 38). It has then to be considered whether the consequential effects restrictive of competition are inherent in the pursuit of those objectives.
And in the latter:
42 Next, the compatibility of rules with the Community rules on competition cannot be assessed in the abstract (see, to this effect, Case C-250/92 DLG [1994] ECR I‑5641, paragraph 31). Not every agreement between undertakings or every decision of an association of undertakings which restricts the freedom of action of the parties or of one of them necessarily falls within the prohibition laid down in Article 81(1) EC. For the purposes of application of that provision to a particular case, account must first of all be taken of the overall context in which the decision of the association of undertakings was taken or produces its effects and, more specifically, of its objectives. It has then to be considered whether the consequential effects restrictive of competition are inherent in the pursuit of those objectives (Wouters and Others, paragraph 97) and are proportionate to them.
43 As regards the overall context in which the rules at issue were adopted, the Commission could rightly take the view that the general objective of the rules was, as none of the parties disputes, to combat doping in order for competitive sport to be conducted fairly and that it included the need to safeguard equal chances for athletes, athletes’ health, the integrity and objectivity of competitive sport and ethical values in sport.
44 In addition, given that penalties are necessary to ensure enforcement of the doping ban, their effect on athletes’ freedom of action must be considered to be, in principle, inherent itself in the anti-doping rules.
While this comes dangerously close to adopting some all-purpose rule of reason, it seems like the ACM was right to conclude that this doctrine is insufficiently clear for it to be included in the Position Paper. At least, it is insufficiently matured outside the context of concentrations and associations of undertakings. Moreover, it is clear that the Court will not easily consider a rule to be sufficiently inherent or necessary to qualify. Comparing the Wouters precedent with the Commission's CECED decision, for example, it is difficult to see how the scheme at issue in the latter case could fall under the doctrine of ancillary restraints.

Where competition for one group of consumers is reduced for the benefit of another group of individuals, competition law is likely to pose significant problems.  In that regard, the ACM's Energy Pact "note" was a useful shot across the bow. Environmental lobby, beware!

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