Latvia: economist perspective

Competition Council is the enforcement authority for Latvia. Read their profile


In this article, we discuss the use of competition economics in public enforcement competition cases and private enforcement damage cases in Latvia. We focus on the most notable cases from the past year, identified in interviews with the most prominent Latvian competition lawyers. Based on the interviews, the Competition Council’s (CC) economists have, in the past, mainly prioritised merger investigations. The lawyers were generally satisfied with the speed of the CC’s merger investigations. In addition, the lawyers noted a potential demand for economic analysis in follow-up damage cases linked to the recent article 101 rulings issued by the CC in the construction sector.

This article is based on interviews conducted in July 2022 with the law firms Ellex, Poga.Legal, Sorainen, and TGS Baltic. These cases were selected for their relative magnitude (eg, the construction cartel) and/or the complexity of the economic analyses performed.

The CC cleared the acquisition of the Alfa shopping centre by the Akropolis Group after conducting a closeness of competition analysis[1]

On 25 November 2021, the CC decided to allow the Akropolis Group, a company registered in Lithuania, to acquire a controlling interest in Delta Property, Ltd, which manages the Alfa shopping centre. According to the CC, the market affected by the merger was the market for renting retail space at multifunctional shopping centres in Riga and its vicinity.

As part of the case, the CC performed a closeness of competition analysis. First, the CC interviewed competing multifunctional shopping centres and tenants. The CC found that store owners are not limited to renting premises from only one service provider; as a result, the store owner can provide services in several centres. The shopping centres and tenants surveyed indicated that Akropolis and Alfa were not their closest competitors and that their premises were interchangeable with those of other competitors. Moreover, most surveyed tenants and centres indicated that competition in the market has increased in the past four years. Second, the CC performed a before-and-after assessment based on the buyer’s multifunctional shopping centre’s Akropolis entry into the market in 2019. The CC found that the entry of Akropolis did not significantly impact the operation of the targeted multifunctional shopping centre Alfa and thus concluded that the merging parties were not the closest competitors on the market.

The CC referred to the principles of the as-efficient competitor test when updating the legal obligations imposed in the thermal energy wholesale market

Following the CC’s decision in the Juglas Jauda case in 2009, Latvenergo has been subject to certain minimum pricing and bidding commitments in the thermal energy supply market in Latvia. The purpose of these commitments has been to secure and promote viable competition in Riga’s thermal energy supply market. The CC’s main concern or theory of harm was that Latvenergo might engage in a predatory pricing strategy with the intent of limiting effective competition in the market for a thermal energy supply.[2]

In 2020, Latvenergo approached the CC with a proposal to amend (relax) the legal obligations established in 2009, as new additional thermal energy supply capacities had been added to the market. However, according to the CC, there was no reason to believe that Latvenergo’s market power had significantly decreased compared to 2009, when the original commitments were imposed. The CC noted that the energy supply capacities added by newcomers to the market were significantly lower than those of Latvenergo, and that the capacity of Latvenergo in the thermal energy market in Riga still accounted for more than 90 per cent of the total volume.

When assessing the need to update commitments imposed on Latvenergo, the CC considered the contributions of several competing market participant – SIA Juglas Jauda, SIA Energia verde, AS Rīgas Siltums, SIA Rīgas Energija – as well as the opinion of the Public Services Regulatory Commission. The lawyers interviewed noted that the contribution of several competing market participants included an economic report explaining the relevant interpretation of the as-efficient competitor test in the context of thermal energy supply. In particular, the economic report highlighted the importance of (i) distinguishing between the contestable and non-contestable shares of demand, and (ii) setting an appropriate cost threshold for the price-cost test. The conclusion of these analyses was that Latvenergo’s proposed amendment of the legal commitments did not secure or promote viable competition in Riga’s thermal energy supply market.

As a result, the CC decided to maintain but update the legal obligations of Latvenergo. The updated legal obligations state that in the wholesale thermal energy supply market in Riga, Latvenergo:

  • cannot set prices that are lower than specific costs and cannot set predatory prices;
  • must follow a certain procedure for making an offer, thus providing an opportunity for any competitor to compete on equal and fair terms;
  • is obliged to identify the costs that are attributable to the production of thermal energy before acting on the market; and
  • has to evaluate how to determine or calculate the price for thermal energy.

Latvenergo had to start fulfilling the updated legal obligations from 5 August 2021.

The CC sanctioned a local municipality for abusing its dominant position in the waste management services market[3]

On 22 July 2021, the CC decided to fine the Municipality of Jelgava for abuse of a dominant position in the market for waste collection and transportation. The CC concluded that the municipality had infringed on competition law by granting its capital company Jelgavas komunālie pakalpojumi, Ltd an exclusive right to operate in the waste collection and transportation market in the administrative territory of Jelgava city for more than seven years.

Based on the Latvian Waste Management Law, the municipalities may, since 2006, enter into an agreement with a waste manager only for a definite term: not shorter than three and not longer than five years. According to the CC, the Municipality of Jelgava did not comply with this law. As a result, the CC concluded that the municipality had abused its dominant position by transferring the rights in the relevant market to Jelgavas komunālie pakalpojumi, Ltd for more than seven years. This allegedly excluded other potential municipal waste management service providers from the market.

The lawyers interviewed noted that the CC’s decision presented a novel interpretation of the market dominance assessment. The CC’s interpretation allegedly provides it with the discretion to determine dominance in any market characterised by public procurement.

Ten construction companies in Latvia were fined €16 million for being a part of a bid-rigging cartel[4]

On 30 July 2021, the CC adopted a decision in the “construction companies’ cartel” case. The CC found that the cartel lasted between 2015–2018 and affected at least 70 out of almost 90 public procurement contracts worth €687 million in total. The allegedly rigged contracts extended into all manner of private and public construction projects, including some of the highest-profile ones in the country. The potential losers included educational institutions, shopping centres, medical institutions, sports centres, stadiums, radioactive waste bins and even law enforcement agencies.

As a result, a total fine of €16.65 million was imposed on nine companies (one company was not fined). The fines differed according to how long the companies involved had been part of the cartel, their individual turnover, and how cooperative they were during the investigation.

The interviewed lawyers noted that the CC’s decision relied mainly on the transcripts of the audio recordings of the top executive members of the alleged cartelists, and no economic analysis was performed as part of this case. Economic experts may be involved at a later stage when this case reaches Latvian courts for expected damage claims from the parties (mainly public institutions) harmed by the alleged cartel.


Notes

[1] https://www.kp.gov.lv/en/article/lithuanian-company-akropolis-group-acquires-shopping-centre-alfa.

[2] Competition Council’s 2009 decision, section 10, page 21, available at: https://lemumi.kp.gov.lv/files/lemumu_pielikumi/PJ53Mjc90l.pdf.

[3] https://www.kp.gov.lv/en/article/cc-punishes-jelgavas-municipality-abuse-dominant-position-organization-waste-management.

[4] https://www.kp.gov.lv/en/article/competition-council-fines-10-construction-companies-participating-cartel.

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