Introduction
Facts
Abuse of dominance by applying unfair prices
Authority's competence
Standard of proof in competition law cases
Comment
A first instance administrative court judgment is likely to prove significant for companies facing competition enforcement in Lithuania. Its judgment has substantial value for a number of reasons. The court:
- confirmed that in-depth economic analysis is needed in order to determine the existence of abuse of dominant position by applying excessive prices;
- clarified the standard of proof for the Competition Authority in competition law cases; and
- delineated the authority's responsibilities and those of the market regulators.
In 2002 the municipality of Vilnius awarded rights to Vilniaus Energija, a leading Lithuanian heating services provider, to manage a network of underground communication tunnels, which are mainly used for telecommunications cables and heating pipes. Vilniaus Energija also acquired rights to conclude lease contracts for tunnel space with telecommunications cable companies, and to collect lease fees. The fees were initially determined by the municipality according to a tariff methodology adopted in 1996.
One of the cable providers complained to the authority that Vilniaus Energija was charging unjustified prices for tunnel space leases and was discriminating against cable providers. As a result, in 2007 the authority fined Vilniaus Energija for abuse of dominant position on the grounds of unfair pricing. In 2009 the court annulled the decision and remanded the case to the authority for further investigation. On May 6 2010 the authority again imposed a fine on Vilniaus Energija. The decision was appealed and then annulled by the court. The authority can still appeal.
Abuse of dominance by applying unfair prices
The authority found that Vilniaus Energija was charging its lessors unfair or excessive prices. This conclusion was reached by comparing the profits received with the profit margin foreseen in the 1996 tariff methodology. The authority's analysis involved two steps. First, the authority calculated the profit by taking the difference between the actual income received from the lease contracts and the cost of the service. Costs were calculated according to the 1996 methodology and did not reflect the actual costs incurred. Second, the authority divided the costs by the total tunnel space in order to calculate the cost of 1% of the space. It concluded that the profit received for 1% of the space was higher than the profit margin for which the 1996 methodology provided.
The court did not approve of this analysis. It stated that excessive pricing constitutes an abusive practice only if the price is excessive in relation to the economic value of the service provided. According to the court, a different twofold test was required in this case. It was necessary to consider whether a cost analysis showed an excessive difference between final price and actual cost, and whether the price was excessive in itself when compared to competitors' prices.
The court observed that the analysis applied by the authority did not relate to prices, but instead compared profits against the cost calculated according to the 1996 methodology. The court emphasised that profits and prices are different economic factors; therefore, the authority's conclusions on excessive profits could not be used to show that prices applied by Vilniaus Energija were unfair or excessive. The court stated that the authority had failed to determine the actual economic costs. The calculation of costs according to the 1996 methodology was invalid because the methodology did not take all the costs into consideration; therefore, it did not reflect the actual costs incurred by Vilniaus Energija.
The court considered that as the authority had failed to determine the actual cost and had not provided an economic analysis of prices and costs, the conclusion that Vilniaus Energija was charging unfair prices and abusing its dominant position was unfounded.
The authority had concluded that prices applied by Vilniaus Energija were excessive because they did not correspond to the 1996 methodology. The court stated that the authority is competent to evaluate whether the actions of a dominant company may be abusive; therefore, verification of whether tariffs comply with legal acts (in this case, a methodology for setting tariffs) is outside its competence and should be conducted only by the relevant market regulator.
Standard of proof in competition law cases
According to the court, the authority must produce evidence based on objective factual data and must clearly state its reasons when penalising companies. In this case the authority failed to provide such evidence; therefore, the facts as presented were insufficient to conclude that Vilniaus Energija had infringed Lithuanian competition law. Moreover, the court concluded that administrative competition law procedures can result into heavy penalties for the companies concerned. Thus, a competition regulator's decision cannot be based on assumptions, and all doubtful aspects should be interpreted in the company's favour.
Compared to certain of its European counterparts, the authority is very active in abuse of dominance enforcement. However, its decisions are not always well reasoned and often raise problematic questions for Lithuanian competition law practitioners. The judgment in question was perceived as controversial because the authority did not conduct economic price and cost analyses; rather, it acted as a sector regulator in analysing whether the prices in question were consistent with legislative acts.
This judgment is a clear signal to the authority that such an approach cannot be applied in complicated abuse of dominance cases, where an economic analysis is essential. In annulling the authority's decision, the court clearly stated that the authority's conclusions must be based on economic reasoning, and that no ambiguity in prohibition decisions will be tolerated.
For further information on this topic please contact Marius Juonys or Lina Barauskaite at LAWIN Lideika Petrauskas Valiūnas ir partneriai by telephone (+370 5 268 1888), fax (+370 5 212 5591) or email ([email protected] or [email protected]).