Unilateral Conduct Committee E-Bulletin
Issue 52
May 02, 2007

The Section 2 Committee’s monthly E-Bulletin is intended to offer the antitrust community updates and information on the latest developments relating to monopolization law and policy. If you have any comments or suggestions on the E-Bulletin, please e-mail Jay Modrall (jmodrall@cgsh.com), Adam Nyhan (anyhan@constantinecannon.com), Tanya Dunne (tdunne@cgsh.com), and Alee Scott (ascott@constantinecannon.com).

U.S. DECISIONS

SUPREME COURT VACATES AND REMANDS JURY DECISION IN MONOPOLIZATION AND ATTEMPTED MONOPOLIZATION CASE INVOLVING PREDATORY-BIDDING

 Weyerhaeuser Company v. Ross-Simmons Hardwood Lumber Co., Inc. 127 S.Ct. 1069 (Feb. 20, 2007). Ross-Simmons Hardwood Lumber Co., a sawmill operator, brought suit against Weyerhaeuser Company alleging that Weyerhaeuser monopolized and attempted to monopolize the Pacific Northwest input market for alder sawlogs using predatory purchasing practices in violation of Section 2 of the Sherman Act. The Oregon District Court entered judgment on a jury verdict in favor of the plaintiff. On appeal, the Ninth Circuit rejected Weyerhaeuser’s argument that the same standard for predatory pricing should apply to claims of predatory bidding and affirmed the lower court’s decision. 127 S.Ct. 1069, 1070.The Supreme Court granted certiorari to decide whether the test applied to claims of predatory pricing in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 113 S.Ct. 2578, 125 L.Ed.2d 168 (1993), also applied to claims of predatory bidding. The Supreme Court held that it did. The Supreme Court vacated the Court of Appeals judgment and remanded the case for further proceedings. Id. at 1072.

Ross-Simmons alleged that Weyerhaeuser drove it out of business by bidding up the input costs for red alder sawlogs in the Pacific Northwest in violation of Section 2 of the Sherman Act. Ross-Simmons alleged, among other things, that Weyerhaeuser “used its dominant position in the alder sawlog market to drive up the prices for alder sawlogs to levels that severely reduced or eliminated the profit margins” of Weyerhaeuser’s alder sawmill competitors. Id. at 1073. Ross-Simmons argued that Weyerhaeuser overpaid for alder sawlogs to enable sawlog prices to increase to artificially high levels in order to drive Ross-Simmons out of business. Id.

As explained by the Supreme Court, predatory pricing is a scheme whereby a predator reduces the price of its products below cost in an attempt to drive its competitors out of business. Once its competitors have been eliminated, the predator raises its prices for these products to a supracompetitive level in order to recoup its short-term losses. Brooke Group established a two-part test to support a predatory-pricing claim. First, the plaintiff must prove that a rival’s reduced prices are below an appropriate measure of its rival’s costs. Second, the plaintiff must show that the predator had a dangerous probability of recouping its investment. Id. at 1070 (quoting Brooke Group, 509 S.Ct. at 224). The Supreme Court noted that the costs of erroneous findings of predatory pricing are high, because such findings “could, perversely, ‘chil[l] legitimate price cutting,’ which directly benefits consumers.” Id. at 1074 (quoting Brooke Group, 509 S.Ct. at 223-24).

Similarly, the Supreme Court found that actions taken in a predatory-bidding scheme (that is, “where a purchaser of inputs bids up the market price of a critical input to such high levels that rival buyers cannot survive or compete as vigorously and, as a result, the predating buyer acquires or maintains its monopsony power” Id. at 1075) are often an integral part of competition. Furthermore, the Court noted that it is possible that a failed predatory-bidding attempt could be beneficial to consumers (that is, increased inputs means increased outputs which, in turn, means lower prices). Id. at 1071. The Court found that predatory-pricing and predatory-bidding are analytically similar, as they both “involve the deliberate use of unilateral pricing measures for anticompetitive purposes and both require firms to incur certain short-term losses on the chance that they might later make supracompetitive profits.” Id. at 1076. Because of the risks of chilling procompetitive behavior, the Court held that the standard for establishing a predatory-bidding scheme and a predatory-pricing scheme are the same: predatory-bidding must lead to below-cost pricing of the output product, and the predator must have a dangerous probability of recouping its short-term losses resulting from the predatory-bidding. Id. at 1078. As Ross-Simmons conceded that it had not satisfied the Brooke Group standard, its predatory-bidding theory of liability could not support the jury’s verdict that Weyerhaeuser had engaged in predatory-bidding in violation of Section 2. Id.

SIXTH CIRCUIT AFFIRMS SUMMARY JUDGMENT DISMISSING PRICE DISCRIMINATION AND ATTEMPTED MONOPOLIZATION CLAIMS BY CIGARETTE WHOLESALERS

 Smith Wholesale Co., Inc . v. Philip Morris USA, Inc., 2007 WL 614237 (6th Cir. Feb. 27, 2007). Smith Wholesale Company, Inc., along with twenty-eight other full service cigarette wholesalers (collectively Smith), brought suit again Phillip Morris USA, Inc. (PM) alleging that PM had engaged in price discrimination in violation of Section 2(a) of the Clayton Act, as amended by the Robinson-Patman Price Discrimination Act, and attempted monopolization in violation of Section 2 of the Sherman Act. 2007 WL 614237 at *1. The District Court in the Eastern District of Tennessee granted summary judgment in favor of PM after concluding that there was no price discrimination claim, as PM’s discounts were available to Smith, both in theory and in fact, and that there was no attempted monopolization claim, as Smith had failed to establish any genuine issues of material fact relating to the three elements of an attempted monopolization claim. Id. at *2-3. On appeal by Smith, the Sixth Circuit affirmed. Id. at *1.

Smith are full-service wholesalers as well as direct distributors under distribution agreements with PM for the sale of PM tobacco products, among other brands. Id. at *1. In 2003, PM responded to its falling market share as a result of increased competition and the Master Settlement Agreement by realigning its discount program into what is now known as the Wholesale Leaders Program (WL 2003). The WL 2003 was open to all PM direct distributors and its terms were uniformly applied. The program had three performance levels, which were based on PM’s share of the distributor’s sales versus share targets based on PM’s overall market share in a particular geographic area (otherwise known as a Section). Thus, a distributor with a PM share below PM’s Section share was entitled to Level 1 discounts, a distributor with a PM share within a range of PM ’s Section share was entitled to Level 2 discounts, and a distributor with a PM share higher than PM’s Section share was entitled to Level 3 (the highest) discounts. Since the program began, distributors of all sizes have qualified for discounts at each level. Id. at *2.

On Smith’s attempted monopolization claim, the Sixth Circuit held that Smith failed to establish any genuine issues of material fact, in particular Smith failed to establish that PM had a “dangerous probability of success [of achieving monopoly power].” Id. at *10 (quoting Tarrant Serv. Agency, Inc. v. Am. Standard, Inc., 12 F.3d 609, 615 (6th Cir.1993)). A claim of attempted monopolization under Section 2 of the Sherman Act requires: “(1) a specific intent to monopolize; (2) anti-competitive conduct; and (3) a dangerous probability of success.” Id. To show the third factor, Smith had to demonstrate that PM had sufficient market strength to unilaterally control prices and exclude competition. Id. (citing Spectrum Sports Inc. v. McQuillan, 506 U.S. 447, 457 (1993)). Smith claimed that PM’s value share of the market was 56% and that PM’s market share probably understated its market power, because, when combined with R.J. Reynolds, they have a combined market share of 83%.

The Sixth Circuit rejected this argument. The court stated that combining market shares of more than one company is an inappropriate measure of PM’s market power, because market power under Section 2 of the Sherman Act is defined as “the ability of a single seller to raise prices and restrict output.” Id. (quoting Virgin Atl. Airways, Ltd. v. British Airways, 257 F.3d 256, 265 (2d Cir.2001)). PM cannot be said to have control over prices, because in response to losing market share, both before and after the implementation of the WL 2003, PM lowered its prices. The price of Marlboro cigarettes, the “must-carry” brand, is lower today than it was prior to the implementation of the WL 2003 program. The court held that PM also lacked the ability to restrict output. R.J. Reynolds and Lorillard had a combined market share of less than 30%, but they had the capacity to produce nearly 50% of the United States market. If PM were to raise prices above competitive levels, then its competitors could easy increase output and steal PM’s market share. Without the threat of actually achieving monopolization, a claim of attempted monopolization must fail. Id. at *11. The Sixth Circuit held that Smith’s attempted monopolization failed as a matter of law and thereby affirmed the lower court’s decision. Id. at *12.

ILLINOIS DISTRICT COURT DISMISSES CLAIMS FOR ATTEMPTED MONOPOLIZATION AND CONSPIRACY TO MONOPOLIZE

The Nat’l Black Expo v. Clear Channel Broad., Inc. , 2007 WL 495307 (N.D. Ill. Feb. 8, 2007). National Alliance of Black Expos, Inc. (NBE” brought suit alleging, inter alia, attempted monopolization and conspiracy to monopolize against media conglomerate Clear Channel Communications, WVAZ radio station, and an individual Merry Green, a consultant formerly working for NBE (collectively, defendants). 2007 WL 495307, at *1-2. Defendants moved to dismiss all of the claims. Id. at *1.

As the organizer of a large African American-centered trade exposition called the Chicago Black Expo (BE), NBE worked with vendors and sponsors such as radio stations, including the Clear Channel-owned WVAZ radio station. Id. The initial BE was a success, and it led to negotiations between NBE and WVAZ to increase WVAZ’s role in future BEs.Id. WVAZ eventually became a full partner and joint venturer in BE. Id. This role included conducting sales calls, contacting vendors, assisting in client development and providing radio airtime for advertising the BE. Id. NBE gave WVAZ client contact information, and WVAZ held meetings to discuss the future of BE with those clients. Id.

During the course of WVAZ’s partnership with NBE, WVAZ and Clear Channel were concurrently creating a competing African-American-centered trade exposition called “An Expo for Today's Black Woman” (ETBW). Id. In organizing the competing ETBW, WVAZ allegedly used the confidential information and contacts that it received from NBE.Id. Clear Channel then allegedly “used its influence in the media to entice [NBE’s] sponsors and vendors to sever ties with [NBE] and begin supporting ETBW.” Id. at *2. As a result, many sponsors and vendors switched to ETBW. Id. WVAZ also provided discounted airtime to ETBW and only offered BE airtime during periods of low listenership, while allowing advertising for ETBW during periods of high listenership. Id.

To prove attempted monopolization, a plaintiff must prove that defendants engaged in anti-competitive conduct with a specific intent to monopolize the relevant market and that they had a dangerous probability of success. Id. To prove conspiracy to monopolize, plaintiff must prove the existence of a conspiracy, overt acts in furtherance of the conspiracy, a substantial effect on interstate commerce, and a specific intent to monopolize. Id.

NBE alleged that the defendants attempted and conspired to monopolize a product market defined as “those consumer trade shows and exhibitions that target ‘urban’ or African-American audiences, communities or businesses”. Id. at *8. The alleged geographic market was “several states and metropolitan areas that boast high or significant concentrations of ‘urban’ African-American listeners, including but not limited to [a list of ten named urban areas].” Id. The court held that this allegation of a relevant market was pleaded sufficiently to survive a motion to dismiss. While the alleged market was broad in comparison to the facts alleged in the complaint, the court held, whether the alleged market was relevant was a factual issue not appropriate for disposal on a motion to dismiss. Id.

The court also held that NBE’s allegations of Clear Channel’s national “radio dominance” were irrelevant to the issue of market power in the allegedly injured market for African-American targeted trade expositions. Id. at *9. Additionally, the court held that NBE’s “conclusory statements of law that the conduct alleged [was] anti-competitive” were insufficient to sustain the allegations in light of the “pro-competitive” act of “creating competition between expos not previously present.” Id. at *10. As a result, the court dismissed NBE’s Section 2 claims for attempted monopolization and conspiracy to monopolize.

Finally, based on its Section 2 analysis, the court also dismissed NBE’s Section 1 claim for failure to properly allege market power and anti-competitive conduct. Id. at *12.

UTAH DISTRICT COURT DISMISSES REAL ESTATE DEVELOPER’S SECTION 2 CLAIMS

U.S. General, Inc. v. Draper City , 2007 WL 527771 (D. Utah Feb. 14, 2007). Plaintiff U.S. General, Inc. (USG) is a Utah real estate developer. 2007 WL 527771 at *1. There were additional unidentified associated plaintiffs. Defendants Suncrest, LLC and Westerra Management, LLC are competing developers. Draper City, Utah, a municipality, is also a defendant. USG sued defendants for monopolization and conspiracy to monopolize in violation of Section 2 of the Sherman Act. Defendants moved to dismiss for failure to state a claim and based on Noerr-Pennington immunity.

Plaintiffs alleged a market for the real estate development of Traverse Mountain. Id. According to the plaintiffs, geographical characteristics unique to the mountain (for example, its views and its position above the smog line) rendered it nonsubstitutable for other mountains. Id. at *1-*2. Plaintiffs also claimed that Draper City secretly favored one of the defendant real estate developers, Suncrest, to the prejudice of USG. As a result of this bias, Draper City allegedly forced UCG to surrender land that UCG owned on Traverse Mountain for the benefit of Suncrest. Id. at *2. The complaint did not specifically allege whether Draper City used eminent domain or some other mechanism to force UCG to surrender its land or how that surrender benefited Suncrest. Furthermore, Draper City allegedly conspired with both defendant developers to control the supply of water to remaining USG land on the mountain, depriving USG of the ability to develop the land. Id. In support of the conspiracy claim, the plaintiffs offered evidence that Westerra played a role in administering Suncrest’s website. Id. at *3.

The Utah District Court held that the plaintiffs’ alleged market was comparable to that in TV Comm. Network, Inc. v. Turner Network Television, Inc. (TVCN), 964 Fr.2d 1022 (10th Cir. 1992). Id. at *4. In TVCN, the 10 th Circuit held that a company does not violate the Sherman Act by holding a monopoly over its own product. Here, the Utah District Court held that the plaintiffs did not allege that the defendants had any duty to supply water to USG’s land or any other land not owned by Suncrest. Id. The court held, therefore, that the plaintiffs’ market definition failed under TVCN.

The Noerr-Pennington doctrine immunizes from antitrust liability any legitimate use of the political process by private parties. Id. at *4. The doctrine has an exception, however, for cases of fraudulent or illegal actions. Plaintiffs argued that their Section 2 conspiracy claims contained allegations of fraudulent or illegal conduct. The court rejected that argument, holding that while the plaintiffs alleged violations of Utah open-meetings laws, those allegations primarily targeted Draper City. In total, the allegations were insufficient to fall within Noerr-Pennington’s exception.

Finally, the court held that plaintiffs had failed to allege harm to competition. Id. at *5. Rather, they had simply alleged harm to the plaintiffs as competitors. Based on the faulty market definition, Noerr-Pennington immunity and the failure to allege harm to competition, the court dismissed the plaintiffs’ claims with prejudice. Id.

U.S. ANTITRUST ENFORCEMENT AGENCIES

FTC ENTERS REMEDIES DECISION IN RAMBUS

In the Matter of Rambus, Inc., United States Federal Trade Commission, Opinion of the Commission on Remedy, Docket No. 9302, Feb. 5, 2007
( www.ftc.gov/os/adjpro/d9302/070205opinion.pdf) Rambus Inc. is a developer and licensor of computer memory technologies. In August 2006, the Federal Trade Commission (FTC) held that Rambus violated Section 2 of the Sherman Act and Section 5 of the FTC Act in its dealings with fellow members of standard-setting organization. See Issue 45 of the E-bulletin, available here, for a summary of that decision.

The FTC’s 2006 decision ordered further briefings on the issue of appropriate remedies. The FTC issued its decision on those remedies on February 5, 2007. The remedies imposed require Rambus to refrain from making misrepresentations or omissions to standard-setting organizations and to license its SDRAM and DDR SDRAM technology. They also set maximum allowable royalty rates that Rambus can collect for the licensing, and bars Rambus from collecting more than those rates from companies that may already have incorporated its DRAM technology. Finally, they require Rambus to employ an FTC-approved compliance officer to ensure that Rambus’s patents and patent applications are disclosed to industry standard-setting bodies in which it participates. The FTC’s Opinion, Order and other docket information are available here.

Rambus petitioned the FTC to reconsider its order on remedies (available here). Rambus also moved to stay the FTC’s order pending the final disposition of Rambus’s appeals in the federal courts (available here).

FTC ESTABLISHES NEW OFFICE OF INTERNATIONAL AFFAIRS

FTC Chairman Deborah Platt Majoras has established a new Office of International Affairs (OIA). The OIA will improve the FTC’s coordination of international work in the areas of consumer protection, competition and technical assistance. Chairman Majoras appointed as its first Director Randy Tritell, who previously led the FTC’s International Antitrust Division. More information is available here.

INTERNATIONAL DECISIONS

UK COURT RULES IN EXCESSIVE PRICING CASE

On February 2, 2007, the UK Court of Appeal overturned a High Court judgment concerning the alleged abuse of a dominant position on the British Horseracing Board (BHB). The BHB administers and governs British horseracing. Through a third party, the BHB compiled and distributed pre-race data. Broadcaster Attheraces (ATR) attempted to access this information for two new broadcast services intended for bookmakers. However, the BHP demanded 50 percent of ATR’s profits from these two programs in exchange for its pre-race data.

ATR responded by initiating proceedings before the Chancery Division, claiming that BHP’s condition constituted excessive and discriminatory pricing, thereby constituting an abusive of its dominant position in the market for pre-race data. The High Court agreed, maintaining that BHB’s prices garnered profits for BHB far greater than the “cost-plus formula”- the cost incurred in compiling and distributing data combined with a reasonable return on these costs. The court found this to demonstrate an abusive practice on the part of BHB (see judgment).

BHB appealed to the Court of Appeal, arguing that the High Court had incorrectly determined its prices to be unfair. Attacking the cost-plus formula, BHB submitted that even in a competitive market, companies can set prices that exceed the sum produced by this formula. The court allowed BHB’s appeal, reasoning that Article 82 is about preventing the distortion of competition and protecting consumer interests in the concerned market. Evidence of suppliers earning “excessive profits” from a price greater than what a judge considers the competitive price level in itself is not an abusive practice. The economic value of a product, such as BHB’s pre-race data, can exceed the price derived from the cost-plus formula. Consequently, while the Court of Appeal agreed with the High Court’s assessment of BHB’s dominant position and the relevant market, it rejected its finding of abuse (see judgment).

AUSTRIA - EUROPAY AUSTRIA ZAHLUNGSVERKEHRSSYSTEME GMBH

On December 1, 2006, the Cartel Court fined Europay Austria Zahlungsverkehrssysteme GmbH €5 million for having implemented an anti-competitive agreement with a number of Austrian banks and for abuse of its dominant position on the market for payment card services in Austria between 1998 and 2004 (judgment not yet published). This is the highest fine ever imposed by the Austrian Cartel Court.

Europay Austria is 100%-owned by Austrian commercial banks, including Austria’s largest banks (Bank Austria, Erste Bank, Bawag‑PSK, Raiffeisen and Volksbank) and offers payment card services to consumers through its shareholder banks. The court found that Europay Austria had an 88% share of the payment card services market in Austria. Based on an agreement between Europay Austria and its shareholder banks, the banks charged an “interchange fee” to competing suppliers of payment card services when customers of the shareholder banks used these competing payment cards for retail transactions. The competing suppliers would only be charged an interchange fee if retailers used one of Europay Austria’s shareholder banks to process their payment card transactions. The court found this fee unreasonable and unrelated to the services offered by Europay Austria and its shareholding banks, which unnecessarily restricted competition in favor of Europay Austria.

INTERNATIONAL ANTITRUST ENFORCEMENT AGENCIES

EUROPEAN COMMISSION INITIATES INFRINGEMENT PROCEEDINGS AGAINST GERMANY FOR TELECOM LEGISLATION

On February 22, 2007, the European Commission launched “fast track” infringement proceedings against Germany regarding legislation that would grant Deutsche Telekom (DT) “regulatory holidays” despite its dominant position in the German broadband market (see IP/07/237 ) .

First, these “regulatory holidays” could proceed without consulting the Commission and regulatory agencies of other Member States. This contravenes EU telecom rules. Second, according to the Commission, this legislation would protect DT AG’s fast internet access network (VDSL) from competition. It would interfere with the implementation of remedies proposed by Bundesnetzagentur (BNetza) on July 21, 2006, and subsequently endorsed by the Commission. The proposed remedies would require DT to open its broadband networks to competitors by allowing them to buy high-speed access links to customers with transmission capacity for broadband data in both directions. This would enable competitors to provide broadband through the existing network at varying prices, speeds and bandwidths (see IP/06/1110). The new law would undermine BNetza’s ability grant access to the new VDSL network and address DT’s dominant position in the fast internet access market.

BELGIUM - TELE2/BELGACOM

On September 1, 2006, the President of the Competition Council dismissed Tele2’s application for an interim suspension order against Belgacom’s “Happy Time” retail offer regarding an alleged margin squeeze.

Belgacom is the incumbent telecommunication services provider in Belgium. On June 1, 2005, it introduced a retail offer whereby fixed line calls could be made for a one-time charge of €0.30 from 8am to 7pm and for free at any other time (the “Happy Time” offer). Tele2 is a new entrant on the retail market for fixed telephony services in Belgium, and while it operates a backbone network, it relies on Belgacom’s local loop for access to retail customers. Belgacom charges Tele2 interconnection fees to transport Tele2’s voice messages over its network.

In its application for interim measures, Tele2 alleged that Belgacom held a dominant position on the markets for wholesale and retail telecommunications services. This allegation was not contested. Tele2 also alleged that the level of interconnection fees charged by Belgacom for accessing its network, combined with its “Happy Time” retail offer, prevented Tele2 from earning any profit on its retail services or even from recovering its costs for such services.

Tele2 had initially received the support of the Auditor in charge of overseeing the investigation phase of the proceedings, as the Auditor’s report confirmed the presence of a margin squeeze resulting from Belgacom’s Happy Time offer. However, the President of the Competition Council found that the conditions for ordering interim measures were not fulfilled. The President held that there was no serious and irreparable harm, and no prima facie abuse of a dominant position. The President noted that Belgacom had introduced the Happy Time offer in response to competing retail offers, including from Telenet and Versatel. Moreover, the President found that Belgacom had no incentive to sustain temporary losses on its retail offerings in order to drive Tele2 out of the market. Indeed, Belgacom’s tariffs are bound to follow a cost orientation principle, subject to regulatory review, and would remain constrained in the future by competing offers by alternative operators.

DENMARK – ELSAM

On November 14, 2006, the Competition Appeals Tribunal annulled a decision of the Competition Council taken on November 30, 2005, which had found that Elsam had abused its dominant position on the wholesale market for electricity by applying excessive prices, and which had ordered Elsam not to notify prices exceeding a certain ceiling to NordPool, an electricity spot market.

Upon appeal by Elsam, the Tribunal confirmed the finding with regard to abuse of a dominant position, but held that the price control was likely to be detrimental to competition. Price controls presuppose certain market conditions, with no effective competition and with no prospects of effective competition. The electricity market at issue, however, was immature and in flux (for example, Vattenfall had recently entered the market) so the Tribunal found that there was no need for price controls.

DENMARK - TV2

On November 1, 2006, the Competition Appeals Tribunal annulled a decision by the Competition Council taken on December 21, 2005, which had found that TV2’s annual rebate schemes constituted an abuse of a dominant position. According to the Tribunal, the peculiarities of the market for national television advertisements should be taken into account in the assessment. The Tribunal found that annual rebates for television advertisements could not be compared with rebates in other sectors without further evidence to substantiate the facts. The Tribunal therefore held that the Council erred in finding an annual rebate with a progressive scale in the television advertisement market abusive, and that the alleged abuse was unsubstantiated.

DENMARK - WASTE HANDLING

On October 25, 2006, the Competition Council declared an agreement on the gradual dismantling of an exiting monopoly in waste handling services from two municipalities of the Copenhagen area compatible with competition law. The agreement had been notified with a view to obtain a so-called negative decision (a declaration of non-infringement of the competition law). The Council’s decision, which was discussed in the European Competition Network, was a result of a comprehensive review of service monopolies, reflecting the position adopted by the European Commission and other Member State regulators in respect of similar issues.  The waste handling services monopoly dates more than 30 years. The agreement requires a complete elimination of the monopoly in 2011.

SPAIN - VIESGO GENERACIÓN

On December 28, 2006, the Tribunal fined Viesgo Generación, a Spanish electricity producer belonging to the Italian Grupo ENEL SPA, €2.5 million for abusing its dominant position in the technical restrictions market by offering excessive prices in the day-ahead market during six non-consecutive days in 2002 and during eight non-consecutive days in 2003.

The Spanish spot market for electricity is designed as a sequence of markets, among which, the day-ahead market constitutes most of the volume traded. The day-ahead market is comprised of 24 hourly markets that clear once a day. Electricity producers, together with external agents on the supply side, submit offers to the pool. These offers specify the minimum price at which the producers are willing to produce a given amount of output from each of their production units. The operators on the demand side (such as distributors, retailers selling electricity to qualified consumers at unregulated prices, qualified consumers participating directly in the pool) submit their needs specifying the maximum price offered for a given amount of electricity. Once the supply and demand bids have been submitted, the Spanish market operator (OMEL) matches demand and supply for each of the 24 hourly periods and determines the equilibrium price for each period (the so-called System Marginal Price) and the amount traded. This matching is the base daily operating schedule (PBF). Once the PBF is cleared, the Spanish system operator (REE) evaluates the technical feasibility of the dispatch or assignment. If technical restrictions are not met, the dispatch is not feasible and the accepted offer is terminated. The dispatch then goes to suppliers that have obtained provisional feasible daily schedule (PVP). By 4:00 pm each day, PVPs are made final (PVD). The result is the final hourly schedule (PHF).

The technical restrictions market is a secondary market for back-up power for a given day in a particular area. In cases of technical restrictions, in order to satisfy the demand for power in one particular area, OMEL and REE request a generation plant (normally, the closest to the area affected by the energy shortage) to increase production. At the time of Viesgo’s conduct, the generation plant that entered into the operation as a result of technical restrictions was paid for its electricity, not at the marginal price resulting from the process of matching in the day-ahead market, but at the price that the relevant plant would have offered this energy for the hourly period in question. Thus, Viesgo allegedly offered unusually high prices on certain days on the wholesale market, conscious that these prices would not match at the day-ahead market. According to the Tribunal, the extra cost generated from Viesgo’s conduct amounted to €60 million.

The Tribunal defined the electricity production for the day-ahead market as national in scope (to the exclusion of the Balear and Canary islands), where Viesgo was at the time the fifth largest operator. The Tribunal found, however, that Viesgo held a dominant position in the technical restrictions market in the Centre-South region ( Ciudad Real, Córdoba y Jaén) and in the South region ( Algeciras, San Roque). The Tribunal held that, in order to define the geographic dimension of the technical restrictions market, it was essential to identify, amongst all the offers to the pool, which of those offers were provided by producers able to solve the technical restrictions. In this sense, based on the opinion and information provided by the National Energy Commission and by the REE, the Tribunal considered that the technical restrictions in the regions and the periods concerned could only be solved by the producers in those regions.

Regarding Viesgo’s dominant position, the Tribunal considered that, in those regions during the periods concerned, it was evident that Viesgo was the only operator capable of solving the technical restrictions. The Tribunal found that Viesgo’s energy was essential to meet the demand in the relevant regions, both in the day-ahead market and in the technical restrictions market. Further, the Tribunal held that Viesgo was actually aware of this fact and, as a result, submitted very high offers to the pool so that they could not be matched in the day-ahead market, but could be matched in the technical restrictions market where Viesgo would be paid at the bid price and not at the equilibrium price.

With respect to the evaluation of whether the prices offered by Viesgo were actually abusive, Viesgo argued that, considering the high costs of its power stations, its prices had to be high in order to cover the high risk of being excluded from the day-ahead market and called to the technical restrictions market where the power stations have to be in continuous operation. The Tribunal found, however, that Viesgo had not produced evidence on its actual costs. Further, Viesgo could not explain why its costs were almost three times the reference costs (that is, those costs revealed by competitors’ offers in the day-ahead market using equivalent power sources). The Tribunal held that the difference between the prices offered by Viesgo and those used as a reference was excessive.

One member of the Tribunal issued a dissenting opinion, arguing that the Tribunal had not provided sufficient reasoning as regards the choice of the reference costs to decide whether Viesgo’s prices were excessive and abusive. In particular, the dissent considered that the Tribunal had not sufficiently contrasted the argument put forward by Viesgo, according to which, if it had offered to the pool at prices equal to its average variable costs in normal conditions, it would have generated significant losses as a supplier in the technical restrictions market because production costs in the technical restrictions market are substantially higher than in the day-ahead market. The Tribunal was criticized for not considering that, in the technical restrictions market, average variable production costs could actually be higher than in the day-ahead market and that, consequently, it could be reasonable for an operator in a region objectively subject to technical restrictions to consider such higher costs as a reasonable reference on which to base offers to the pool.

SWITZERLAND - ELEKTRA BASELLAND

On November 6, 2006, the FCC discontinued its proceedings against Elektra Baselland (EBL), following EBL’s agreement to comply with certain principles enunciated by the FCC. The FCC had initiated its investigation in response to a complaint made by the largest Swiss retailer, Migros, alleging that three electricity suppliers, namely, EBL, Entreprises Electriques Fribourgeoises (EEF) and Services industriels de Renens (SIR), were abusing their dominant positions by not permitting competitors access to their electricity distribution networks.

In March 2001, the FCC issued a decision on principle against EEF, finding that EEF’s refusal to grant access was an abuse of a dominant position. The Swiss Supreme Court upheld this decision in June 2003. As a result of this decision, a measure of liberalization of the Swiss electricity market was introduced after prior attempts to legislate in this area had failed. This decision led SIR, and subsequently EBL, to grant third party suppliers access to their respective networks at market rates, following which the FCC discontinued proceedings.

SWITZERLAND – TICKETCORNER

On December 18, 2006, the FCC issued a decision closing its enquiry into certain practices by TicketCorner which the FCC had previously considered were abusive. The FCC found that TicketCorner has changed its practices and is no longer committing an abuse.

TicketCorner is Switzerland’s largest distributor of tickets for cultural and sporting events. On December 1, 2003, the FCC found that TicketCorner’s practice of imposing exclusivity clauses in contracts with organizers of cultural and sporting events constituted an abuse of a dominant position in the market for ticket distribution systems. TicketCorner challenged this decision before the Appeal Commission. In 2005, the Appeal Commission sent the file back to the FCC for a determination on whether, in view of recent market developments, there were grounds to revisit the finding against TicketCorner.

The FCC renewed its enquiry, and concluded that, since the December 2003 decision, TicketCorner had altered its conduct by not requiring exclusivity clauses in its contracts. Moreover, the FCC’s analysis demonstrated that the market had evolved significantly since the time of its decision. In particular, the Internet now plays a central role in facilitating new entry, and new ticket sales systems were in the process of being developed. The FCC therefore closed its enquiry.

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Jay Modrall
Vice-Chair, Unilateral Conduct Committee
Cleary Gottlieb Steen & Hamilton LLP
Rue de la Loi 57
B-1040 Brussels
+32 (0)2 287 2024
jmodrall@cgsh.com

Adam Nyhan
Constantine | Cannon LLP
450 Lexington Avenue
New York, N.Y. 10017
(212) 350-2772
anyhan@constantinecannon.com

Tanya Dunne
Cleary Gottlieb Steen & Hamilton LLP
Rue de la Loi 57
B-1040 Brussels
+32 (0)2 287 2057
tdunne@cgsh.com

Alee Scott
Constantine | Cannon LLP
450 Lexington Avenue
New York, N.Y. 10017
(212) 350-2796
ascott@constantinecannon.com