Excessive pricing: quo vadis?
Authors: Paul Anderson, Stephan Malherbe and Fathima Sheik
14 August 2009: Draft paper – not for quotation
Abstract
The Tribunal and Competition Appeal Court decisions in the Mittal case display sharply
divergent approaches to Section 8(a), which prohibits excessive pricing by dominant firms and
may be the section in the Competition Act with the most public support. The CAC decision is
based on the better legal interpretation of the existing legislation, and the Court had harsh
words for the Tribunal. But the CAC declined to engage with the very real policy and institutional
dilemmas that motivated the Tribunal's approach, flawed as it might have been. These issues
are not esoteric as many business decisions -- both pricing and investment -- will be guided, or
at least influenced, by our law on this point.
The paper will identify the policy dilemmas that led the Tribunal to rule in the manner it did,
before analysing the very real difficulties of, respectively, an economic, informational, financial
theory and regulatory best practice nature of applying Section 8(a) in keeping with the CAC
decision. This analysis is informed by the practical interaction we have had with companies
trying to get to grips with this interpretation of the Act. The paper then proceeds to identify
whether some of these problems could be addressed within the ambit of the competition
authority and the courts, or whether they may require a reconsideration by the legislator.
The authors of this paper are economists at Genesis Analytics. The views expressed in this
paper are those of the authors and do not necessarily represent the views of Genesis Analytics.
1
Introduction
Section 8(a) of the Competition Act prohibits dominant firms from charging “excessive prices to
the detriment of consumers”. To underscore the seriousness of this prohibition, excessive
pricing is one of only five prohibitions for which first time offenders can be levied an
administrative fine (of up to 10% of annual turnover). Although an excessive price is defined in
the Section 1 of the Act as “a price for a good or service which bears no reasonable relation to
the economic value of that good or service” this definition’s delphic ambiguity results in a heavy
burden for the bodies charged with interpreting the section. The process of developing the law
through case-driven interpretation can be a long one. In the meanwhile, firms are unclear as to
how to balance the mandate from shareholders to maximise profits with the imperative of
ensuring compliance with the Competition Act.
To date the only case of excessive pricing heard before the Tribunal is that of Mittal (brought
against it by Harmony and Durban Roodepoort Deep).1 The Tribunal’s approach in this matter
was, however, recently rejected by the Competition Appeal Court (“CAC”). 2 The CAC had harsh
words for the Tribunal, stating it had used a “fundamentally flawed” approach in their
assessment of the case and ordered it be referred back to the Tribunal for further analysis with
some guidelines on how to proceed. The long-awaited CAC decision is based on the better
legal interpretation of the existing legislation. But it unfortunately does not fully resolve the issue
of how excessive pricing should be assessed in practice; nor does it engage with the very real
policy and institutional dilemmas that motivated the Tribunal's approach, flawed as it might have
been. These issues are not esoteric business decisions – both pricing and investment – will be
guided, or at least influenced, by our law on this point.
This paper identifies the policy dilemmas that led the Tribunal to rule in the manner it did, and
analyses the very real difficulties of an economic, informational, financial theory and regulatory
best practice nature associated with applying Section 8(a) in keeping with the CAC decision.
This analysis is informed by the practical interaction we have had with companies trying to get
to grips with this interpretation of the Competition Act and lessons learned from broader
regulatory experience. This paper then proceeds to identify whether some of these problems
could be addressed within the ambit of the competition authority and the courts, or whether they
may require reconsideration by the legislator.
The Tribunal’s approach to excessive pricing
The parties and their economic experts involved in the Mittal matter submitted reams of cost,
price and profitability analysis to the Tribunal in their respective assessments of Mittal’s pricing.3
1
The Competition Tribunal of South Africa, Harmony Gold Mining Company, Durban Roodepoort Deep and Mittal
Steel South Africa , Macsteel International, Case no: 13/CR/Feb04.
2 Competition Appeal Court of South Africa, Mittal Steel South Africa , Macsteel International, Macsteel holdings and
Harmony Gold Mining Company, Durban Roodepoort Deep and, Case no: 70/CAC/Apr07.
3 The complainants in this matter primarily used various price comparisons to demonstrate that Mittal’s prices for flat
steel products were excessive relative to prices charged to other purchasers of steel and Mittal’s cost of production.
2
However, in its finding the Tribunal departed from the approaches put forward by both Mittal and
Harmony, as well as from the approaches commonly applied in international jurisprudence.
Instead the Tribunal took an unorthodox approach by applying what could be described as a
“structural” test to evaluate the charge of excessive pricing, stating:
“. . . [W]e treat excessive pricing as a phenomenon that may arise from a particular structure
and that itself may be the basis for ancillary conduct that is utilised in order to sustain supracompetitive prices.”4
In terms of this approach, the Tribunal indicated that the following would be required for a
finding of excessive pricing:
1. Super-dominance. The firm must be not only be dominant, but rather “super-dominant”
in the relevant market – this was seen to be an essential precondition for the practice of
excessive pricing. According to the Tribunal, section 8(a) of the Act should apply only to
those “rare beasts who are subject neither to the constraining presence of a regulator or
of a potential entrant”5. Hence the market in question should be (i) uncontested
(monopolised), (ii) incontestable (subject to overwhelming entry barriers), and (iii)
unregulated (not subject to price regulation).
2. Ancillary conduct. The firm must also have engaged in conduct designed to take
advantage of those structural opportunities for the purposes of higher pricing. This is
referred to by the Tribunal as so-called “ancillary conduct”. It is not entirely clear exactly
what the Tribunal intended “ancillary conduct” to constitute, however in the Mittal case it
related to the prohibition of Mittal’s export partner from reselling certain flat-steel
products in South Africa.6,7
The Tribunal justified this structural test and their approach of not engaging in the arguments of
the complainants and the defendants on the grounds that “…this would effectively have the
competition authorities adopt, by virtue of Section 8(a), the methodologies of price regulation.”8
Indeed the Tribunal offered opposition to any interpretation of the Section 8(a) which assigned a
role of de facto price regulator to the Tribunal where they would in essence be required to
“determine whether existing price levels are ‘right’ or ‘wrong’ (non-excessive or excessive) and ,
if ‘wrong’ (excessive) to determine and impose the ‘right’ (non-excessive) price.” 9 The Tribunal,
inter alia, pointed to the following policy and institutional dilemmas that would arise were
competition authorities to don the mantle of price regulator:
Mittal, on the other hand, seemed to suggest that a finding of excessive pricing requires a demonstration of excessive
profits; thus the defendants largely focused on the analysis of profitability.
4 The Competition Tribunal of South Africa, Harmony Gold Mining Company, Durban Roodepoort Deep and Mittal
Steel South Africa , Macsteel International, Case no: 13/CR/Feb04., par. 84
5 Ibid, par127
6 This, in turn, prevented arbitrage between the domestic and export markets, protecting domestic prices from erosion
to export parity levels.
7 In terms of this structural approach the Tribunal found Mittal to have contravened Section 8(a) of the Competition
Act by charging an excessive price for its flat steel products.
8 Competition Tribunal of South Africa, Harmony Gold Mining Company, Durban Roodepoort Deep and Mittal Steel
South Africa , Macsteel International, Case no: 13/CR/Feb04, par 37.
9 Ibid, par 76.
3
Firstly, the Tribunal highlighted the fact that the fundamental task of competition authorities was
to protect and defend competitive structures in a market and that price determination “is thus not
characteristically part of the armory of competition enforcement”10
Secondly, the Tribunal pointed to the fact that given its institutional setting and mandate it was
not well suited for the task of price regulation.
“. . . the requirement to enforce the proscription of excessive pricing is not accompanied by the sort of
powers and practices normally associated with price regulation. If the legislature had intended section
8(a) to convert a competition authority into a price regulator then it would surely have provided us with
the powers and resources appropriate to that considerable task. Consider the process by which the
sector regulators – each with their own statutory foundation and specialist powers and resources –
determine and police pricing in the telecommunications and electricity markets and then consider
whether the legislature can possibly have intended that this be replicated in the steel or any other
industry by way of the insertion of a single nine word clause in the Competition Act. This cannot be. . .
Indeed a survey of the European jurisprudence serves to confirm our view of the pitfalls of competition
authorities assuming a price regulating function as part of their excessive pricing jurisdiction. It is
precisely to avoid the confusion and uncertainty generated by the jurisprudential maze . . . that price
regulators are accorded a specific statutory basis which assigns them appropriate price determination
powers and indeed, often prescribes that specific price determination mechanism that is to be
employed.”11
Thirdly, the Tribunal seemed to also recognise (although in a footnote) that in a situation where
an excessive price were found – but where there was no intervention made to alter the structure
of a market – then competition authorities may need to continue the price setting function for
that market on an on-going basis.
“. . . if the price is determined without intervening in either the underlying structural conditions and the
ancillary conduct which cumulatively gives rise to the excessive price, the competition authority will
have to maintain its regulatory role because the administratively determined price cannot be ‘right’ for
all time. This, of course, precisely describes the modus operandi of an ex-ante price regulator but is
antithetical to that of an ex post regulator that responds to conduct that is allegedly in breach of a
statutory obligation.”12
The CAC’s approach to excessive pricing
The CAC’s Mittal ruling did not engage directly with the institutional concerns raised by the
Tribunal. Instead it assessed the Tribunal’s structural approach against the wording of the Act,
and found it wanting. The CAC stated that the Tribunal’s approach was “fundamentally flawed”13
and that the Tribunal’s structural test and notion of “super-dominance” found no support in the
Act.14 The CAC referred the matter back to the Tribunal to re-evaluate the evidence in line with
the requirements of the Act.
10 Ibid,
par 74-76.
Ibid, par 80 and 159
12 Ibid, page 30 footnote 73.
13 Competition Appeal Court of South Africa, Mittal Steel South Africa , Macsteel International, Macsteel holdings and
Harmony Gold Mining Company, Durban Roodepoort Deep and, Case no: 70/CAC/Apr07, par75
14 Ibid, par32
11
4
Having rejected the structural test, the CAC instructs the Tribunal to engage in four distinct
enquiries that emerge from reading Section 8(a) together with the definition of an excessive
price (as found in Section 1 of the Act):
(i)
(ii)
(iii)
(iv)
first, to determine the actual price of the good or service which is alleged to be
excessive;
second, to determine the economic value of the good or service expressed in
monetary terms;
third, to determine whether the actual price is higher than the economic value and
whether this difference is unreasonable;
fourth is to evaluate whether the charging of the excessive price is to the detriment of
consumers. 15
We have italicised the ‘economic value’ and ‘unreasonable difference’ as the application of the
prohibition turns on what is meant by these terms.
The CAC directed that the legislature must have intended the ‘economic value’ of a product to
be “the notional price of the good or service under assumed conditions of long-run competitive
equilibrium.”16 Drawing on European precedent and a thoughtful amicus curiae opinion written
by Petersen, Le Roux and Maenetje, the CAC concluded that the price under conditions of longrun competitive equilibrium, and hence ‘economic value’, would in effect equal the total cost of
providing the product. The cost would include a “normal rate of return” to providers of capital
without which in the long run the industry would not be sustainable.17 The CAC also points out
that the calculation of economic value relates, in part, to the costs faced by a firm in a
competitive market and is not “derived from circumstances peculiar to the particular firm”. 18
In adopting cost as the basis for its approach, the CAC echoed the decision of the European
Court of Justice in United Brands19, a decision that has a particular resonance in our law as it is
the source of the language used in our Act to define ‘excessive price’.20 The passage relevant to
the CAC’s reasoning is in para. 252 of that judgment (underscore added):
“The question therefore to be determined is whether the difference between the costs actually
incurred and the price actually charged is excessive and, if the answer to this question is in the
affirmative, to consider whether a price has been imposed which is either unfair in itself or when
compared to competing products.”
It follows that an empirical enquiry into the costs actually incurred is at the heart of the
determination of economic value. The CAC understands the ECJ in United Brands to have
15
Ibid, par32
Ibid, par 40
17 Competition Appeal Court of South Africa, Mittal Steel South Africa , Macsteel International, Macsteel holdings and
Harmony Gold Mining Company, Durban Roodepoort Deep and, Case no: 70/CAC/Apr07, par 40
18 Ibid, par 43
19 United Brands Company and United Brands Continental BV v The Commission of the European Communities
[1978] 1CMLR 429.
20 See para. 250 of that judgment.
16
5
rejected the European Commission’s finding of an ‘unfair price’ (in the lexicon of the European
law) because of its failure to make the necessary [factual] enquiry.21
Below, we return to the controversies that continue to swirl around the ‘unfair price’ rule in the
EU, and its application in United Brands and beyond. At this point it need merely be noted that
the CAC echoes the United Brands approach without the consideration of these.
Having confirmed the centrality of actual costs, the CAC goes on to indicate that the factual
enquiry can be directed by way of empirical exercises that fall short of a full enquiry into costs.
Possible “shortcuts” which could be used as indicators as to whether a price is greater than
economic value include:
(i)
(ii)
(iii)
(iv)
Instances where a price is “exorbitantly” higher than the “normal” price of similar
products.22
Instances where a firm raises their “normal” price substantially without a
corresponding rise in costs, or inversely if a firm’s costs fall dramatically without the
firm executing a corresponding reduction in prices.23
International price comparisons with firms facing a comparable cost and output
structure (and operating in a competitive market). 24
Instances where there is significant differentiation between export and domestic
customers and where the firm embarks on expansion of production capacity wholly
or mainly in order to increase export sales.25
Whilst there is an apparent contradiction between the CAC’s principal test and its pragmatic
endorsement of ‘short cuts’ it is not a real contradiction: the ‘short cuts’ are effectively proxies,
and would seem to be trumped by a comprehensive cost analysis:
“However, there may be no alternative to a detailed exercise in comparative costing. If expert
evidence has been given concerning cost data, the necessary adjustments to be made for
comparative purposes, the appropriate methodology needed to establish the opportunity cost
of capital and allow for depreciation and replenishment of plant etc, then findings based on an
evaluation of that evidence will need to be made.” 26
Having dismissed the Tribunal’s approach as unfounded in law and laid out a route to be
followed, the CAC excuses itself from issues of how the complex tasks implied in its principal
test ought to be applied. To name one example of many: the CAC expresses no opinion on the
critical issue of how to calculate a fair return on capital – even though this topic was
exhaustively traversed before the Tribunal. One assumes that this and other matters fall within
In fact, the CAC reads the ECJ as going further than that and rejecting the contention of the Commission that “the
assessment that a price actually is excessive and hence unfair, could be made purely by comparing that price to
other prices” (this is the CAC paraphrasing United Brands, in para. 39 of the CAC’s judgment).
22 Competition Appeal Court of South Africa, Mittal Steel South Africa , Macsteel International, Macsteel holdings and
Harmony Gold Mining Company, Durban Roodepoort Deep and, Case no: 70/CAC/Apr07, par 49
23 Ibid, par 50
24 Ibid, par 51
25 Ibid, par 52
26 Ibid, par 52
21
6
‘an evaluation of detailed technical and financial evidence’ which the CAC considers to be the
task of the Competition Tribunal rather than itself.27
More troubling is the CAC’s lack of consideration of difficulties intrinsic to the assessment of
excessive pricing and the very approach it favours that have emerged in the literature. Further, it
fails to deal with the difficulties created by thrusting the Tribunal into a role for which it is not
equipped, that of price regulator. We now turn to these issues.
The troubled concept of excessive pricing
There are two types of contraventions of excessive (or fair) pricing rules. Contraventions can be
exclusionary in nature, i.e. affecting either competition or the ability of a firm to compete – an
example would be charging a downstream competitor high price for an input, thus exerting a
margin squeeze so as to force the competitor from the market. In our law, exclusionary conduct
by dominant firms, including that related to pricing, is well captured by the other elements of
Section 8, in particular Section 8(b), Section 8(c) and Section 8(d), and is therefore not the
subject of this paper.
Contraventions of Section 8(a), by contrast, are exploitative in nature, i.e. are intended to extract
benefit from existing market power rather than to protect or add to market power. In a sense,
therefore, it is logically consistent to address excessive pricing in legislation that generally seeks
to maximise competition. However logically consistent, though, the ‘exploitative’ pricing rule
embodied in Section 8(a) is operationally different from the rest of the Competition Act: whereas
the rest of the Act is about protecting competitive processes, Section 8(a) is about simulating
competitive outcomes.
This, as numerous authors have pointed out, is where the difficulty comes in.28 If competitive
outcomes were easy to simulate, price controls generally (and not just specifically) would be an
accepted policy tool. But they are not, overwhelmed by calculation and other problems. It is also
generally recognised in the literature that getting prices wrong can impose significant societal
costs in the markets concerned. The most eloquent testimony to the difficulty of applying
excessive pricing rules is the reticence on the part of regulators to do so. In Europe – both at the
European Commission and at the many national-level competition regulators – resources have
only rarely been committed to excessive pricing cases, despite the self-evident appeal of such a
regulatory tool. In European cases where ‘unfair pricing’ has come up, it has mostly been in the
context of a larger set of complaints (such as margin squeeze) to which a complaint of unfairly
excessive pricing was added. A further signal of the inherent difficulty of accurate analysis is
27
Ibid, par 75
See Furse, M., “Excessive prices, unfair prices and economic value: the law of excessive pricing under Article 82
EC and the Chapter II prohibition”, European Competition Journal, June 2008, p59-83 ; Gal, M “Monopoly Pricing as
an antitrust offence in the US and the EC: Two systems of belief about monopoly?”, Antitrust Bulletin, 2004, vol 49 ,
p343-384 ; Evans A. & Padilla J , “Excessive prices: using economics to define administrable legal rules” , CEMFI
Working Paper no 0416, September 2004 and Motta M & de Streel A “Exploitative and Exclusionary Excessive
Prices in EU Law” 2003 Presented in the 8th Annual European Union Competition Workshop, Florence (June 2003).
28
7
that European authorities have also been loath to find, or even allege, unfair pricing unless there
were very large discrepancies between the price and what was chosen as the benchmark for
fair pricing. European authorities have also struggled to formulate a simple and consistent test
for unfair pricing.
We now turn to the principal objections against excessive pricing rules. It is apparent that the
three major problems are fairly deep-seated, and are in any event not eliminated by the United
Brands test as adopted by the CAC.
The static nature of the test may result in outcomes destructive of competition and social value
– The standard tests for excessive pricing, including the United Brands cost-based test, are
essentially static, and do not accommodate certain common competitive dynamics – and indeed
may discourage certain forms of competition. Many authors, for example Motta and De Streel,
point out that in contestable markets high prices charged by incumbents are likely to attract
entry; absent higher than normal prices entry in such markets is less likely and competition
ultimately weakened. Further, the United Brands style cost-based test does not reward
innovation: innovation often carries large risks, and hence requires at least the possibility of
larger rewards – a point which can be generalised to any large investment which carries
significant risks. By definition such ex ante risk does not equal – and will often be greater than –
the ex post risks which are identified by the normal application of financial models. In settings
where multiple firms compete ‘for the market’, each firm’s entry decision factors in the possibility
that it might not be the firm that wins, a risk for which the ultimate reward needs to compensate.
This means that the appropriate reward is one which would be significantly in excess of the
costs of the winning firm – indeed, assuming that firms are fairly realistic, the ultimate prize
should compensate not for the costs of the winning firm, but for the cumulative costs of the
entrants. Network industries and other markets which are characterised by substantial sunk
investments are example of where this form of dynamic competition is commonly exhibited. 29
These dynamic considerations are the reason why some commentators believe that excessive
pricing rules should only be considered in markets which are incontestable30 – a view echoed in
the Tribunal’s now maligned concept of super-dominance. Further, we note the recent entry of
so-called ‘demand side’ factors into the assessment of economic value in cases such as
Scandlines.31 We venture that this is in fact an attempt to escape the straight-jacket of
observable cost in order to deal with dynamic considerations. The CAC decision does not
acknowledge, let alone engage, these problems – perhaps a signal that our legislation is not
flexible enough to accommodate and internalise the evolving international discourse on
excessive pricing?
See Motta M & de Streel A “Exploitative and Exclusionary Excessive Prices in EU Law” 2003 Presented in the 8th
Annual European Union Competition Workshop, Florence (June 2003) : p15-17
30 Ibid
31 European Commission, Scandlines Sverige AB vs Port of Helsingborg, Comp/A.36.568/D3, 23 July 2004. In this
case the European Commission indicated that the determination of economic value should also take into account
other non-cost related factors. However no further guidance was provided in this regard. For further comment see
Furse, M., “Excessive prices, unfair prices and economic value: the law of excessive pricing under Article 82 EC and
the Chapter II prohibition”, European Competition Journal, June 2008, p59-83.
29
8
The complexity of calculations makes consistent and practical application difficult – The
approach adopted by the CAC in Mittal is fraught with data and methodological issues.
Commonly cited problems include:
 Costing of the asset base.
 Dealing with the business cycle and business conditions that fluctuate over time.
 Dealing with business models predicated on servicing different markets with differing
‘willingness to pay’.
 Estimating fair returns.
 Allocating common costs and fixed costs.
Institutional suitability – The third major problem is that competition authorities are ill-suited to
play the role of quasi price regulators. We now turn to this issue in more detail.
The tension between sound pricing regulation principles and excessive
pricing enforcement in the competition context
The CAC dismissed the Tribunal’s concerns of conflating the competition authority’s role with
that of a price regulator in these words:
“The powers and duties of the competition authorities, and their limitations, are contained in
the Act. The authorities are not called upon to set a price for a good or service. It is incumbent
on the Tribunal, if necessary to determine whether a specific price is ‘excessive’ in
contravention of s 8(a). There is no suggestion in the Act that the competition authorities
should regulate and set prices. To the extent that the enquiry requires the examination of a
possible excess of the charged price over economic value, as defined, that enquiry is required
by virtue of the express formulation employed by the Act.”32
This view does not withstand scrutiny. Under the CAC’s approach the Tribunal cannot escape
indicating the boundary between compliant and non-compliant pricing. Absent such guidance,
dominant firms would find it very difficult to understand how to conduct themselves. Motta and
De Streel observe33:
[A]n excessive pricing action de facto amounts to telling a firm that a price above a certain
level would not be acceptable. On top of that, the intervention occurs only at a given point in
time, and leaves open the issue of how prices should evolve over time. Unless a structural
remedy is imposed (a measure which might have other important drawbacks), the antitrust
authority should impose behavioural remedies, or continue to monitor prices over time,
therefore converting itself into a regulator.
Therefore we need to consider the experience of price regulation generally. Price regulation is
most prevalent within infrastructure sectors (such as electricity, telecommunications, gas and
water) and it is within this utilities context that many of the lessons regarding good and effective
price regulation can be gleaned.
32
Competition Appeal Court of South Africa, Mittal Steel South Africa , Macsteel International, Macsteel holdings and
Harmony Gold Mining Company, Durban Roodepoort Deep and, Case no: 70/CAC/Apr07, par 47
33 Motta M & de Streel A “Exploitative and Exclusionary Excessive Prices in EU Law” 2003 Presented in the 8th
Annual European Union Competition Workshop, Florence (June 2003):15
9
Perhaps the main lesson is that it is a difficult and complex task for any regulator to determine
the appropriate price to be charged by a firm. The literature on how and when price regulation is
best applied has become increasingly sophisticated and rich. The heart of the issue is that any
form of price regulation needs to balance the necessity to protect consumers and drive
efficiency within the regulated firm but also send the right pricing signals so as to stimulate
investment. It is further widely recognised that inappropriate price regulation can have
disastrous consequences for an industry. A regulated price set too high will directly harm
consumers and could discourage efficiency within a firm. A regulated price set too low will
hamper investment in the industry – possibly to the point where efficient firms are forced to exit
– and therefore ultimately also harm consumers.34 However, even the best price regulation is
generally accepted to be a poor substitute for the operation of a competitive market.35
Sound price regulation requires a good grasp of the dynamics underlying the industry and the
careful application of the principles of regulatory best practice. The following principles, amongst
others, stand out:

Certainty and predictability essential. In regulated industries operating firms require a
high degree of certainty as to how their activities will be regulated – and indeed how their
prices will be set. Greater certainty and predictability assists in attracting investment, and
also lowers the cost of funds. In some cases increased certainty extends the pay-back
period. It is partly for this reason that the methodology applied to determine a regulated
price is frequently set out upfront in a transparent manner.36 Such information is
generally detailed and specific, covering issues such as: which costs would be allowed
for in the price calculation; how depreciation would be treated; what level of return would
be allowed for; how common costs would be allocated; how cost of capital would be
calculated; and under what circumstances a price review would take place.

Comprehensive information gathering process. Regulated firms have private information
regarding their own costs and operations which puts regulators at a disadvantage.
Therefore good price regulation usually requires a comprehensive process of obtaining
from the firm accurate (and normally very detailed) information. Financial accounts
relating to the regulated activity are a key input. Firms are commonly required to submit
financial statements prepared in accordance with a uniform approach determined by the
regulator. These regulatory accounts set out what information must be provided and in
34
It should be noted that a regulated price which is either too low or too high will also result in an inefficient allocation
of resources within the economy.
35 For example, competition is particularly effective in limiting distortions created by asymmetric information as well as
avoiding political rent seeking, and generally providing better incentives to serve customer interests (See Body of
Knowledge on Infrastructure Regulation, Chapter I Section D, http://www.regulationbodyofknowledge.org – last
accessed 11 August 2009). For further discussion also see Newbery, D. “Privatization, Restructuring, and Regulation
of Network Industries”, Cambridge, MIT Press, 1999.
36 This can take various forms such as guidelines, public notices, specifications for the drawing up of regulatory
accounts or formal regulations. Alternatively certain aspects of the price regulation process are often contained in the
legislature under which the regulator operates.
10
what format, as well as the accounting rules and practices the firm should follow. 37 This
framework is particularly important as common costs need to be allocated.38

On-going monitoring and evaluation. Effective price regulation requires on-going
monitoring and evaluation by the price regulator. Costs and production techniques
change over time building inefficiencies into the pricing mechanism that is not regularly
updated. For this reason price regulators conduct periodic pricing reviews. Such reviews
could also be triggered by a request for review from various stakeholders. In utilities
regulation, price reviews are usually conducted (at least) on an annual basis. Prices39
are sometimes set for a multi-year period with annual adjustments for expected changes
to costs and efficiency levels. Periodical review also affords the regulator the chance to
adjust a price that had been set too high or low for the previous period.

Dedication of substantial time and resources. Sound price regulation requires the
regulator to have a complete understanding of production costs, demand characteristics,
level of return required by investors and the incentives of the firm as they pertain to the
industry (and even the firm) at hand. Even single-sector price regulators require
substantial resources. A utilities regulator commonly establishes a team dedicated to
managing the price setting function for the firms in that sector. This job is made easier by
these markets generally having few players and fairly homogenous products. Where
markets are characterised by product differentiation the task of price regulation becomes
more difficult.

Use of various forms of price regulation. In order to most effectively drive economic
efficiency, the approach to price regulation is often tailored to a specific sector or
industry; in terms of good price regulation there is not a ‘one size fits all’ approach. Price
regulators generally have a menu of pricing mechanisms which they can choose to apply
depending on the sector being regulated and the particular behavior the regulator wishes
to drive. The most common approaches to regulating overall price level are rate of return
regulation, price cap regulation, revenue cap regulation and benchmarking regulation.40
These regulatory instruments have somewhat different impacts on the firm’s incentives
to expand investment and drive internal efficiencies41, and thus are more appropriate for
certain industries than others.42 In practice, infrastructure sector regulators sometimes
37
Body of Knowledge on Infrastructure Regulation, Overview Section D, http://www.regulationbodyofknowledge.org
– last accessed 11 August 2009
38
Establishing a framework for the provision of regulatory accounts based on regulator-determined accounting rules
and procedures also gives the regulated firm a fair amount of certainty as to how their financial information will be
treated by the regulator.
39 This normally relates to certain forms of price-cap regulation.
40 Body of Knowledge on Infrastructure Regulation, Chapter 4, http://www.regulationbodyofknowledge.org – last
accessed 11 August 2009
41
For further discussion see Alexander I and Irwin T, “Price caps, Rate-of-return regulation, and the cost of capital”,
Public Policy for the Private Sector paper, The World Bank Group, note no 87, September 1996 ; Berg S.,
“Introduction to fundamentals of incentive regulation” , Public Utility Research Center University of Florida, paper for
international training program on utility regulation and strategy, 23 January 2003 and Joskow P. “Incentive regulation
in theory and practice: electricity distribution and transmission networks”, MIT working paper, 21 January 20006.
42 The use of these various regulatory instruments is also shaped to some degree by the priorities of the regulator.
11
apply a hybrid of these approaches to incentivise the desired behavior of the regulated
firm. 43
Given the institutional setting of the Tribunal, and the very nature of a Section 8(a) complaint,
many of the elements required for good price regulation would not be available to the Tribunal.
Firstly, although the recent CAC decision has provided a broad theoretical construct of what
constitutes a good’s economic value, there is (at present) no clear indication as to how the
Tribunal in practice will make such a calculation. This is pertinent as any calculation of
economic value (and therefore appropriate pricing level) is likely to be highly sensitive to the
treatment of key financial information (such as the identification of recoverable costs and
allowed return; the method of valuing capital stock; the allocation of common costs and the
treatment of depreciation, etc.).44 This creates significant uncertainty for dominant firms as to
what price level they can legally achieve; this in turn is likely to diminish their appetite for
investment.
Secondly, the Tribunal is not able to engage in many of the regulatory processes and
procedures (as discussed above) which result in sound price regulation. Therefore, it is likely
that in certain instances any form of price regulation imposed by the Tribunal in terms of Section
8(a) may be of poor quality. For example, the ex-post and ad-hoc nature of Section 8(a)
complaints would not appear to allow any scope for ongoing monitoring and evaluation of prices
in an industry. Nor does it allow for the Tribunal to easily gather specific and accurate
information in a readily usable form (such as is the case with regulatory accounts). 45 Given the
Tribunal’s multi-sector mandate and limited resources it may not have the tools, resource pool
or time to properly grapple with the complexity of identifying the appropriate pricing levels in
each sector brought to it. If excessive pricing rules were to be widely applied (as seemingly,
post-CAC, intended by the legislator) the Tribunal would have to adjudicate sectors and
businesses significantly more complex and less well-understood than the classical utilities.
Thirdly, competition law (in particularly Section 8(a)) is a blunt instrument for regulating prices.
In industries where prices are indeed excessive, there would be little scope for competition
authorities to make use of, for example, incentive-based price regulation tailored to that
industry.
Body of Knowledge on Infrastructure Regulation, Chapter 4, http://www.regulationbodyofknowledge.org – last
accessed 11 August 2009
44 It should be noted that the exact methodology appropriate for calculating economic value may differ to some
degree from industry to industry (although the general principles could be fairly consistent).
45 The adversarial and discovery process associated with a competition investigation may assist in clarifying
information pertinent to calculations of economic value. However, such a process is still likely to be imperfect and
difficult for the Tribunal to grapple with. This is evidenced in the Tribunal’s Mittal judgment where it is noted “We have
been introduced to the arcane and thoroughly unresolved – debates surrounding the question of profitability and its
measure” (The Competition Tribunal of South Africa, Harmony Gold Mining Company, Durban Roodepoort Deep and
Mittal Steel South Africa , Macsteel International, Case no: 13/CR/Feb04)
43
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Conclusions
Compared to the Tribunal decision, the recent CAC judgment in Mittal is based on the more
accurate interpretation of Section 8(a) of the Act. But for all its faults, real and imagined, the
Tribunal decision is the more profound survey of the challenges of applying an excessive pricing
rule. One is tempted to say that the one decision represents the voice of the punctilious lawyer,
the other the voice of the seasoned regulator.
Uncertainty – Practitioners and the firms expected to comply with Section 8(a) are left with a
great deal of uncertainty. For many firms it will be virtually impossible to know whether they are
in fact compliant; for many investors, it will be even more difficult to know what compliance
might mean in the future.
Firstly, as recognised by the CAC, the construct of economic value reflects a notional value. In
practice its calculation can be highly complex and often open to fierce debates. The CAC gives
little guidance as to how its theoretical approach should be applied in practice. For example, the
CAC indicates that firms should be able to make a reasonable return on investment. But no
guidance is offered as to how this should be calculated in practice, despite this having been a
highly contested area during the Mittal hearings. Secondly, no direction is provided as to what
constitutes a “reasonable” relationship to cost. That is to say there is no indication in the CAC
judgment as to what size gap between economic value and price would be considered as
appropriate.
The “shortcuts” provided in the CAC judgment do give some practical guidance. However these
are of limited assistance. The shortcuts only apply in certain situations where the various forms
of comparison are available and empirically robust. Further, the “shortcuts” would seem to
largely shift the onus from applicant to respondent whilst the fundamental test for excessive
pricing proposed by the CAC still requires a full empirical analysis of costs and economic value
– around which uncertainty remains.
Guidelines and future case precedent may clarify some of the uncertainties. But the application
of these general rules will remain difficult.
The policy and institutional problems are, if anything, more intractable that those of
methodological uncertainty – and perhaps more important, as they signal that the policy
outcomes of widely applying the excessive pricing rule will be variable, and sometimes strongly
negative. Experience in utility regulation teaches the lesson that if prices are to be regulated,
then they need to be regulated well; poor price regulation can have disastrous effects on an
industry and even the broader economy.
Dominant firms are left uncertain as to where their profit maximising behaviour (which is a
cornerstone assumption of micro-economics) becomes a contravention of the Competition Act.
No other provision in the Competition Act would seem to be dogged by this level of uncertainty.
This level of uncertainty will diminish these firms’ appetite for investment in markets with
dominant firms.
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The CAC judgement does not address these policy and institutional dilemmas. This is perhaps
because the language of the Act does not allow it to do so. If the ability of adjudicating bodies to
address the intrinsic problems of the legal rule is limited, the question arises whether
amendment to the Act should be contemplated. Such amendment need not be abolition of the
rule; circumscribing it appropriately could also be considered.
Failing that, some measures can be taken. For example, the competition bodies could provide
some guidance, whether in decisions or guidelines, as to how excessive pricing will be
assessed in practice. This would assist firms to ensure their own pricing is in compliance with
the Act. A higher level of certainty could also facilitate investment decisions. The Competition
Commission could issue guidelines indicating the type of markets where investigating excessive
pricing ought to be a priority, and where not.
Further, some of the foundational problems identified around the static nature of the test could
possibly be addressed by developing the notion of ‘reasonable relationship’ in a way that
accounts for dynamic forms of competition. This would no doubt make the provision somewhat
more workable over time, but would do little to bring certainty to firms needing to comply.
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