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Antitrust: Commission welcomes General Court judgments in Telefónica case


Antitrust: Commission welcomes General Court judgments in Telefónica case

The European Commission welcomes today’s judgments by the General Court (cases T-336/07 and T-398/07) dismissing the actions brought by Telefónica and Spain against a Commission decision of July 2007 fining Telefónica €151 million for a margin squeeze in the Spanish broadband market. The judgments are important, because they confirm the Commission’s methodology for determining the existence of a margin squeeze and the Commission’s power to intervene ex post against abuses committed on regulated markets.

On 4 July 2007 the Commission fined the Spanish incumbent telecoms operator Telefónica €151 million for a very serious abuse of its dominant position in the Spanish broadband market (see IP/07/1011). Between 2001 and 2006, Telefónica’s wholesale prices charged to competitors and retail prices charged to its own customers were set at a level that forced competitors to make losses if they wanted to match Telefónica’s retail prices, in breach of EU antitrust rules that prohibit the abuse of a dominant market position (Article 102 of the Treaty on the functioning of the EU – TFEU -, then Article 82 of the EC Treaty). The abuse has a negative impact on the entry of competitors in the growing broadband market and the accompanying harm caused to consumers was considerable.

Spain and Telefónica appealed this decision.

The judgments of the General Court

Telefónica sought to annul the decision or in the alternative to annul or reduce the fine. It claimed inter alia that its rights of defence had been infringed and that the Commission committed a number of manifest errors of assessment concerning in particular market definition and dominance, the application of Article 102 TFEU in relation to the conduct at hand and the impact of that conduct on competition

The Spanish State sought to annul the decision alleging in particular that the Commission had violated its duty to cooperate with the Spanish telecommunications regulator and that the Commission acted ultra vires in applying Article 102 TFEU, thereby upsetting the balance between ex ante regulation and competition enforcement. It also claimed that the Commission breached the principle of legal certainty and of legitimate expectations.

Today’s judgements confirm that Telefónica was dominant on the wholesale markets in relation to which a margin squeeze was established. Importantly, the Court rejects Telefónica’s argument that the Commission should have carried out a margin squeeze test based on an optimal mix of available wholesale products. The Court notes that such an approach would have amounted to holding that an alternative operator could compensate for the losses incurred because of the margin squeeze by the income resulting from the use, in certain more profitable geographical zones, of the unbundling of the local loop, which was not subject to a margin squeeze. The Court also confirms that the conduct of Telefónica was likely to reinforce the barriers for entry or expansion of competitors in the retail broadband market.

As regards the role of ex ante regulation, the Court confirms the position taken in the Deutsche Telekom judgment (case C-280/08 P of 14 October 2010) that national legislation concerning telecommunications – in this case, compliance with the decisions taken by the national telecom regulator CMT on the basis of the regulatory framework – does not release dominant firms from their obligation to respect EU competition law. In any event, Telefónica had sufficient discretion to determine its pricing policy. Importantly, the Court confirms that Telefónica must have known that the regulator never examined the existence of a margin squeeze in relation to the regulated regional wholesale access product on the basis of the actual costs of the undertaking, but rather on the basis of estimates which had not in actual fact been confirmed by the developments of the market.

The Commission’s Decision

The Commission’s decision defined three wholesale markets: unbundled access to the local loop, regional wholesale access and national wholesale access. It established that the margin between Telefónica’s retail prices and the prices for the two latter wholesale products was insufficient to cover the costs that an operator as efficient as Telefónica would have to incur to provide retail broadband access. It meant that a competing provider that was as efficient as Telefónica was faced with the choice of either exiting the market or incurring losses. This represented an important obstacle for competing providers, given that Telefónica was the only Spanish operator with a nation-wide fixed telephone network and that it was uneconomical to duplicate such a network.

The fact that some of the wholesale prices were regulated did not alleviate Telefónica’s responsibility. Telefónica knew that the estimates made by the national regulator were not matched by its own business plan and its actual costs. Internal documents show that the company was aware that it was engaging in a margin squeeze. Moreover, Telefónica was at all times free to end this margin squeeze by lowering its wholesale prices, given that its national wholesale prices were not regulated and its regional wholesale prices were only subject to maximum prices. However, Telefónica did not take this initiative until it was obliged to by the Spanish regulator in December 2006.

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