Excessive pricing prosecutions under fire
IN A critical judgment of the Competition Commission’s competence in managing its investigations and the Competition Tribunal’s ability to manage its processes, the Competition Appeal Court upheld the appeal of Sasol Chemical Industries (SCI), a subsidiary of Sasol, against the decision of the tribunal that it had contravened section 8(a) of the Competition Act, by charging excessive prices for propylene and polypropylene.
Enforcement against excessive pricing by dominant firms is one of the more controversial areas of competition policy and law.
The South African competition authorities’ history with enforcing excessive pricing provisions has been fraught with controversy. In the first landmark case against Mittal Steel SA, the tribunal found that Mittal, a firm super dominant in the production and supply of flat steel products, had contravened section 8(a), as it had reduced supply to the domestic market to increase prices. The tribunal found super dominance is a prerequisite for a finding of excessive pricing.
Mittal appealed/reviewed the tribunal’s decision that it had contravened section 8(a) to the Competition Appeal Court. The court criticised the tribunal for not applying the specific language of the Competition Act to its assessment of excessive pricing and stated that the wording of section 8(a) requires four steps to determine whether an excessive price has been charged. First, the determination of the actual price charged; second, the determination of the economic value of the good or service; third, if the actual price exceeds economic value, it must be determined whether the difference between them is unreasonable; and if so, fourth, it must be determined if the charging of the excessive price is to the detriment of consumers. Importantly, the Competition Appeal Court gave guidance and indicated that what was “intended by ‘economic value’ is the notional price of the good or service under assumed conditions of long-run competitive equilibrium”. In addition, the court stated that “‘economic value’ is a notional objective competitive-market standard, and not one derived from circumstances peculiar to the particular firm”. The court found that the tribunal had not applied the correct legal test in the Mittal matter and remitted the matter to the tribunal for re-assessment on the basis of the four stage test. The matter did not proceed before the tribunal as the parties settled.
In the 2014 excessive pricing case against SCI, the tribunal found against SCI and stated that SCI’s prices for propylene and polypropylene during the relevant period bore no reasonable relation to the economic value of the products. The tribunal found that SCI’s mark-ups of purified propylene prices over actual costs were 39.9%-41.5% and 25.1%-26.5% and SCI’s mark-up of its polypropylene price over actual costs was 26.9%-36.5%. The tribunal also found that the excessive prices that SCI charged had a detrimental effect on and caused harm to local plastic converters and the industry.
The tribunal, when it assessed the economic value of the products, took into account the significant cost advantage that SCI enjoys in the procurement of polypropylene feedstock from Sasol Synfuels. The tribunal also took into consideration the significant state support and the protection which Sasol received over the years. In essence, the foundation of the tribunal’s finding of SCI engaging in excessive pricing arose from the fact SCI was not passing on to consumers the cost advantage it enjoyed.
Unsurprisingly, the appropriate measurement of costs to determine economic value as a notional, competitive standard transpired to be a major area of disagreement between the commission, tribunal and SCI. The biggest dispute between the parties was the issue of the appropriate value to be allocated to the cost of propylene feedstock. The Competition Appeal Court found that a determination of whether an excessive price has been charged must be predicated on the actual feedstock price that Synfuels charged, being the actual cost that SCI incurred, and that there was no reasonable basis to adopt a hypothetical price.
The Competition Appeal Court upheld SCI’s arguments as regards the evaluation of capital assets, the appropriate rate of return on capital, the allocation of group costs and the allocation of common costs. The court indicated that it had to accept the well reasoned and plausible arguments of SCI’s experts and lamented the disadvantage that it suffered because it did not benefit from adequately reasoned evidence from the commission. On the basis of these revised cost assumptions, the court concluded that the correct price-cost mark-up for the purposes of assessing whether excessive prices had been charged was about 12%-14% for propylene.
The court further accepted that SCI’s polypropylene prices were only 16% above the world’s cheapest polypropylene.
In its assessment of whether SCI’s prices were reasonably related to the economic value of the products, the court held that returns above economic value are not per se unreasonable.
Despite upholding SCI’s appeal the Competition Appeal Court was careful to disavow any suggestion that excessive pricing cases can never succeed before South African courts. The court pointed out the outcome of SCI’s appeal may have been different had the commission provided expert evidence that plausibly rebutted that of SCI’s in respect of its costs of production.
The court concluded by highlighting its growing frustration with prevailing investigative and adjudicative practices at the commission and tribunal respectively and sounded a further warning to the tribunal in respect of its future treatment of expert witnesses. The court set out basic guidelines on experts’ duties and responsibilities, being to provide independent, uninfluenced evidence to the court; to provide objective unbiased opinion in relation to matters within the expert’s expertise; and the boundaries of evidence (that an expert should not assume the role of an advocate).
Competition Appeal Court critical of Competition Commission and tribunal in wake of excessive pricing provisions judgments
Lizél Blignaut is an executive in the ENSafrica competition department.