National Grid Plc v Gas and Electricity Markets Authority & Ors, Court of Appeal - Civil Division, February 23, 2010, [2010] EWCA Civ 114

Resolution Date:February 23, 2010
Issuing Organization:Civil Division
Actores:National Grid Plc v Gas and Electricity Markets Authority & Ors
 
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Neutral Citation Number: [2010] EWCA Civ 114

Case No: C1/2009/1573

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM

THE COMPETITION APPEAL TRIBUNAL

[2009] CAT 14

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 23/02/2010

Before :

LORD JUSTICE PILL

LORD JUSTICE DYSON

and

LORD JUSTICE RICHARDS

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Between :

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Jon Turner QC, Josh Holmes, Meredith Pickford and Laura Elizabeth John

(instructed by Pinsent Masons) for the Appellant

Monica Carss-Frisk QC, Brian Kennelly and Tristan Jones (instructed by the Gas and Electricity Markets Authority) for the First Respondent

Christopher Vajda QC and Kassie Smith (instructed by Hill Hofstetter LLP) for the Third Respondent

The other Respondents did not appear and were not represented at the hearing of the appeal

Hearing dates : 18-20 November 2009

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Judgment

Lord Justice Richards :

  1. In a decision published in February 2008 the Gas and Electricity Markets Authority (``the Authority'') found that National Grid plc (``National Grid'') had abused its dominant position in the market in Great Britain for the provision of domestic-sized gas meters, contrary to section 18 of the Competition Act 1998 (``the 1998 Act'') and article 82 of the EC Treaty (now article 102 of the Treaty on the Functioning of the European Union). The Authority imposed a penalty of £41.6 million and ordered National Grid to put an end to the infringement. On an appeal under section 46 of the 1998 Act, the Competition Appeal Tribunal (``the Tribunal'') substantially upheld the finding of abuse of a dominant position but reduced the penalty to £30 million. National Grid now brings a further appeal, under section 49 of the 1998 Act, against the Tribunal's decision. It contends that the Tribunal erred in law in upholding the finding of abuse and/or that the penalty set by the Tribunal was manifestly excessive and wrong in principle.

    The background

  2. The following summary of the background is drawn almost entirely from the Tribunal's decision, to which reference can be made for a fuller account: see [2009] CAT 14, at paragraphs 3-29.

  3. Every domestic customer for gas is obliged to receive the supply of gas through a meter. There are two types of meter: domestic credit meters (``DCMs'') and pre-payment meters (``PPMs''). Consumers using DCMs are billed periodically on the basis of a meter reading or an estimate of gas used over the preceding period. A PPM requires the consumer to pay in advance for gas, for example by using a prepayment card. In total, there are approximately 22 million domestic gas meters installed in Great Britain, of which about 90 per cent are DCMs and 10 per cent are PPMs. The typical life of a meter is 20 years for a DCM and 10 years for a PPM, though meters can in practice remain installed at a property for considerably longer than those periods. Whenever a DCM is removed from a property, it is generally discarded. A PPM, on the other hand, is a much more expensive item and, if removed before the end of its useful life, can often be refurbished economically and installed in another property.

  4. Although National Grid did not take over from its predecessor, Transco plc, until 2003, it is convenient to refer throughout to National Grid. Historically, National Grid had a monopoly of gas transportation and of the supply of gas meters and ancillary services. It installed, and retained ownership of, the gas meter and provided a gas metering service to the gas supplier, the cost of which was recovered from the charges set by the regulator for the overall transportation business. Following the introduction of competition into the domestic supply of gas in 1998, the regulator began consulting the industry on how to enable other companies to compete with National Grid in supplying gas meters. In order for such competition to be possible, it was important to separate out the charges for metering services from those for gas transportation. That was done for the purposes of price control. A new five year price control was put in place in April 2002, for the first time setting an identifiable price cap for National Grid's metering charges.

  5. In 2002 the Authority also launched an industry-wide review, referred to as the Review of Gas Metering Arrangements (``RGMA''), designed to encourage competition in gas meter provision. Central to the strategy was the supplier hub principle, which placed the responsibility on gas suppliers to appoint meter operators to supply and install meters at their customers' premises and to provide ancillary services, such as maintenance, in respect of those meters. This required gas suppliers and meter operators to move their existing arrangements onto a new contractual basis. The contracts entered into between National Grid and gas suppliers were known as Provision and Maintenance (``P&M'') contracts, the terms of which had been developed multilaterally by the industry as part of the RGMA process. Under the P&M contracts there were no upfront charges for the installation of a meter. National Grid was remunerated by monthly rental payments from the time of installation until the meter was removed. Suppliers were able to replace National Grid's meters at 48 hours' notice without incurring any additional charges. The rental prices contained in the P&M contracts were in line with the cap set in the April 2002 price control.

  6. Over the years prior to the setting of the price control in 2002, the prices charged for gas meters by the meter manufacturers had fallen substantially. By 2002 National Grid had become concerned that competing meter operators (``CMOs'') entering the industry following the RGMA would be able to undercut the rental rates in the P&M contracts, and that if this led to the replacement of National Grid's installed meters it would deprive National Grid of the rental income stream from which it had expected, prior to the introduction of competition, to be able to recoup its costs of installation. This would lead to an outcome that National Grid referred to as the ``stranding'' of its assets. It claimed to face the risk of losing about £600 million out of an investment of some £1.4 billion in meters. Having failed to secure an adjustment to the price control to compensate it for the risk of asset stranding following the introduction of competition, National Grid began negotiations with each of the gas suppliers for a new contract covering the continued rental of the meters that were already installed in customers' premises (generally referred to as the ``legacy'' meter stock). The proposed terms involved on the one hand a significant reduction in the rental price and on the other hand a commitment by the gas supplier to rent a certain number of meters each year.

  7. As a result of those negotiations, in January 2004 National Grid entered into two meter services agreements (``MSAs'') with British Gas plc, the principal supplier of domestic gas: (1) a contract covering the existing base of installed meters owned by National Grid as at 1 January 2004, pursuant to which British Gas would rent a declining minimum number of meters per year, with early replacement charges payable by British Gas if the number of meters rented fell below that minimum (``the Legacy MSA''), and (2) a contract covering any meters installed by National Grid on or after 1 January 2004 (the ``New and Replacement MSA'' or ``N/R MSA''). Between January and August 2004 National Grid entered into equivalent contracts with other gas suppliers, though one supplier (Electricité de France) chose to keep its legacy meters on the existing P&M terms.

  8. For its part, British Gas had decided to take advantage of the opening up of the market to competition by awarding some of its metering work to CMOs. Following a formal invitation to tender in August 2001, tenders were submitted by a number of potential CMOs. They included Capital Meters Limited (``CML''), which is partly owned by Siemens plc (``Siemens''). They also included Meter Fit (North West) Limited and Meter Fit (North East) Limited, a special purpose vehicle created by United Utilities plc and jointly referred to as ``Meter Fit''. Negotiations were also started with Utility Metering Services Ltd (``UMS''), a subsidiary of National Grid which trades as OnStream.

  9. Between May 2002 and December 2003 British Gas appointed Meter Fit as its meter services provider in North Wales and North West and North East England; UMS in Scotland, the Midlands, the South East and South West of England and South Wales; and CML in East Anglia and most of London. The contracts entered into between British Gas and the CMOs generally lasted for 20 years, including an initial period (usually 5 years) in which the CMO had the exclusive right to install meters for British Gas in the relevant region (subject to certain exceptions where the choice of installer was effectively outside British Gas's control).

    The meter services agreements (MSAs)

  10. Since the precise way in which the MSAs operate is important for an understanding of the issues in the appeal, it is helpful to set out the detailed description given by the Tribunal at paras 21-29 of its judgment:

    ``(a) The Legacy MSA

  11. The Legacy MSA terms apply to all domestic meters rented as at 1 January 2004 by National Grid to the gas suppliers who signed a Legacy MSA contract. The aim of the contract is to ensure that however quickly the gas supplier decides to replace National Grid's meters with those of the CMOs, National Grid's on-going income from that gas supplier is to some extent protected. The contract first identifies the number of meters that the gas supplier is renting from National Grid at the start date. The gas supplier commits either to rent from National Grid in each month a defined...

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