The Italian NTV/Fs/High speed trains case: which commitments for margin squeezes practices?

Under EU competition law margin squeeze is an autonomous competition infringement and it occurs when a vertically integrated firm dominant on the upstream market for an input sets its price at such level that competitors on the downstream market cannot compete with the latter. The dominant firm can apply a margin squeeze by setting a high price for the input, charging low prices on the downstream markets, or by combining of the two (Jones and Sufrin, EU Competition Law, 426). Under Article 9 of EU Regulation 1/2003 firms being investigated by the European Commission for anticompetitive conducts, including margin squeeze, can offer commitments to address the competition problems brought about by their conducts. If the Commission finds the commitments suitable, it makes them binding and closes the investigations without making a formal infringement decision. Similar powers are conferred by the Article 14-ter of the Italian Competition Act n. 297/1990 on the Italian Competition Authority (ICA). The question that now arises is which   commitments are suitable to bring to a halt a margin squeeze practice. Should a competition authority impose structural or behavioral commitments?

The question was considered by the ICA in the case A443, NTV/Fs/Ostacoli all’accesso al mercato dei servizi passeggeri ad alta velocità ( NTV/Fs/High speed trains). In this case the ICA closed by a commitment decision an Article 102 TFEU investigation it had opened against the previous rail monopolist, the Ferrovie dello Stato (FS) group. The ICA enquired into the abusive conducts carried out by the FS holding and its four subsidiaries, RFI (the rail network manager) Trenitalia (the train operator), Grandi Stazioni and Centostazioni that are entrusted with the management of rail stations. The relevant markets were the markets for access to the national rail network to advertisement spaces within rail stations as well as the market for the provision of high speed rail passenger services. FS and its subsidiaries RFI, Trenitalia, Grandi Stazioni and Centostazioni abused their dominant position through exclusionary and discriminatory practices frustrating the access of the new train operator NTV in the recently liberalized market for the provision of high speed rail passenger services. Margin squeeze was among the anticompetitive practices the FS group was alleged to have carried out. The ICA feared that FS engaged in a margin squeeze practice resulting from the spread between the access fees levied by the network manager RFI on NTV and the fares charged by Trenitalia on the passengers of its high speed trains in the downstream market for passenger rail services. As a consequence, the high speed trains run by NTV were unprofitable.

FS and its subsidiaries offered a number of behavioural commitments to resolve the competition problems arising out of their conducts. The commitments were successful at the market test the ICA subjected them. Then the ICA approved the commitments and closed the investigations with a decision adopted on the basis of Article 14-ter of the Italian Competition Act n. 287/1990. More specifically, both FS and Trenitalia submitted commitments to deal with the contested margin squeeze practice. FS committed to apply a 15% reduction on the access fee to the high speed rail network to every train operator. Trenitalia gave the undertaking to keep in the positive its EBIT (Earnings Before Interests and Taxes) for all its high speed train services until 30 June 2015. The ICA approved only the FS commitment and rejected that offered by Trenitalia as unsuitable for manifold reasons. First, the EBIT would not prevent aggressive pricing policies in the shape of margin squeeze. Indeed, prices generating a negative EBIT did not necessarily give rise to a competition infringement. Second, as the offered commitment referred to all the high speed trains run by Trenitalia, the latter would in any event apply exclusionary pricing on single links. That might be perceived as an indication of the Trenitalia inability to pursue a more aggressive pricing on those links, thereby favouring a tacit collusion. Finally, had Trenitalia carry out exclusionary pricing policies such conduct would fall within the reach of Article 102 TFEU.

So, to sum it up, the ICA only accepted the behavioral commitment given by the firm dominant in the upstream market for the provision of access to rail network to cut the wholesale access fees and rejected the commitment of the firm dominant in the downstream market for the provision of rail passenger services. Correctly, the ICA pointed out that a margin squeeze takes place when the spread between wholesale and retail prices is negative or insufficient to cover the costs incurred by competitors to supply their services in the downstream markets. What is necessary to do to bring a margin squeeze practice to an end is to vary either the wholesale or the retail prices to the extent to make the margin positive. By acting on the wholesale prices the RFI commitment widen the margin between costs and prices and it is then suitable to deal with contested conduct, unlike the Trenitalia commitment that referred to none of those factors.

Before concluding, it may be interesting to have a quick look at the approach taken by the European Commission on the question of which commitments impose to address anticompetitive margin squeeze in the case COMP/39.402 RWE-Gas Foreclosure. Here the Commission reproached RWE for abusing its dominant position in the market for gas transmission by, among other things, setting its transmission tariffs at such high level to squeeze the margin of competitors as efficient as RWE. To resolve this problem, the Commission accepted the RWE commitment to divest its high-pressure gas transmission network. Thus, contrary to the ICA which agreed on a behavioral obligation to cut wholesale prices, the European Commission required a structural commitment in the shape of divestiture of assets.