• Piibe Lehtsaar

Thoughts on Estonian case law concerning excessive pricing

Imagine a world where all products and services are sold with a profit margin capped at 5-10%. Does it feel like heaven or hell? The answer depends on whether you think like a buyer or seller of the relevant goods. Fortunately for sellers and unfortunately for buyers not all goods have a capped profit margin. Dominant sellers are not so lucky, especially in Estonia.

The Estonian Competition Authority (ECA) operates both as a tariff regulator and a competition law enforcement authority. For companies subject to sector specific tariff regulation, ECA publishes weighted average cost of capital (WACC) values and the companies have a general understanding of the limits to their profitability. The last WACC values were published in 2016 and ranged from 4.46% for the electricity transmission network operator to 5.55% for heating companies.

Dominant companies that are not subject to sector specific tariff regulation have a general obligation not to charge excessive prices for their products and services. What exactly is excessive is open for interpretation. The current approach of ECA is arguably too intrusive. Although dominant companies are not subject to sector specific tariff regulation, the approach taken to assessing whether their prices are excessive is essentially the same as the one ECA employs for regulated companies. The economic value of a product or service is equalled to the reasonable cost of providing the relevant product or service plus a WACC or operating profit margin deemed acceptable by ECA.

This has on one occasion led to a decision concerning waste management services where the line between an excessive price and a lawful price was drawn at the average cost of other allegedly comparable companies, not the actual costs of the dominant company in question, plus the average operating profit margin of companies operating in the same economic sector in previous years as published by Statistics Estonia. Anything above this line was considered to be excessive and as such an abuse of dominance. This decision was successfully challenged in court but the Supreme Court of Estonia did not comment on the methodology used for establishing excessive pricing. Instead, the Supreme Court took a position in its 25 April 2019 judgement that there was no economic activity which could be subject to competition law and ECA’s supervision authority.

Prices after ECA has successfully removed unreasonable costs and excess profit

This leaves dominant companies more or less in the same situation as before the 25 April 2019 Supreme Court judgment. ECA has in effect widened the list of regulated companies to include all dominant companies. The “only” problem is that dominant companies do not have the legal certainty afforded to expressly regulated companies. There is no list of dominant companies continuously kept up to date by ECA so there is a lot of room for interpretation as to whether your company is in fact dominant. There is also no clear methodology for price formation which dominant companies could follow to check that the prices include only allowed costs. Ultimately, there is no list of strict WACC or operating profit margin caps for each product or service which would be annually updated by ECA.

Fortunately, ECA has so far established excessive pricing mainly in cases where the dominant company was subject to no or very limited competitive pressure. Therefore, not all companies above the statutory presumption of dominance threshold (40% market share) in Estonia need to be equally fearful of ECA’s approach to establishing whether prices are excessive.

We are moderately optimistic and look forward to ECA’s interpretation of excessive pricing moving closer to that of the Court of Justice of the European Union. It should not be enough for ECA to establish that the difference between the cost actually incurred and the price actually charged is above the WACC or the average ROA or average operating profit margin of the industry. First, it should also be assessed whether the “excess” is appreciable. If the “excess” is in fact appreciable, the price should still not be considered automatically abusive. EU case law requires a further assessment whether the price is unfair either in itself or unfair when compared with competing products. This implies that the price is not unfair in itself solely because customers have to pay a price that contains an appreciable “excess”.