LPG inquiry could lead to safety concerns
THE Competition Commission published on May 10 its preliminary findings and proposed recommendations emerging from the liquefied petroleum gas (LPG) market inquiry, and invited stakeholders to comment on it.
While some of the commission’s recommendations could affect the LPG industry and the use of LPG in SA positively, others are troubling and could present significant practical difficulties that could have significant ramifications for the LPG industry, particularly in relation to safety concerns.
Since the 2009 amendment to the Competition Act, No 89 of 1998 (which came into effect on April 1 2013), the commission has been empowered to conduct market inquiries into any market if it believes any feature of a market prevents, distorts or restricts competition in that market.
Since the introduction of these new powers, the commission has initiated three market inquiries in just two years. In addition to the LPG market inquiry, the commission has also initiated inquiries into the healthcare market and the grocery retail market.
Unlike the ongoing healthcare and grocery retail inquiries, the commission has not included any public hearings in the LPG inquiry, but has engaged with stakeholders individually. This approach seems to have had some immediate benefits, especially regarding the speed at which the inquiry has progressed.
The commission categorised its findings under four headings:
The long-term supply agreements offered by refineries; The high costs of switching; The sale of LPG through cylinders; and
The regulatory environment and limited domestic supply.
Regarding the long-term supply agreements offered by refineries, the commission found refineries tend to prefer long-term supply agreements, which can provide certain LPG wholesalers with a competitive advantage.
The commission found some LPG wholesaler supply agreements have been in effect for more than 25 years, include automatic renewal clauses, and grant discounts off the maximum refinery gate price (the regulated maximum price that refineries can charge).
The commission says this competitive advantage allows established players to maintain their positions in the market and constrain the ability of smaller wholesalers to compete effectively. There is a link between consistently being able to secure sufficient volumes of LPG and the ability to compete, the commission found.
The commission has recommended a decrease in the duration of the supply agreements with refineries, alternatively, the cancellation of the automatic renewal clauses. The commission has also proposed the development of a new LPG allocation mechanism, which requires all wholesalers to bid for LPG volumes and that a minimum percentage of available supply be allocated to small wholesalers by each refinery.
Regarding high switching costs, the commission found that switching between bulk LPG suppliers does not occur seamlessly. It is due to a combination of a risk of disruption in supply at the time of the changeover, contractual restrictions on switching suppliers, vagueness regarding the ownership of installed equipment and the period over which such equipment can be fully amortised, an inability to determine the value of installed equipment and differences between agreement durations for landlords and tenants.
The commission has recommended a decoupling of the LPG supply and equipment installation components of bulk LPG supply agreements. The commission has also advocated that end users should be able to own the installed LPG equipment; alternatively, the equipment should be transferred to the new supplier at the end of the agreement.
To facilitate this transfer, the commission has invited submissions on a methodology for the calculation of the installed equipment value and the establishment of a dispute resolution body that can resolve disputes about the equipment value.
The sale of LPG in cylinders is important for residential end users and enterprises that supply LPG to residential end users, the commission found.
While cylinder exchange between LPG wholesalers has a range of advantages, it is the commission’s view that it might lead to anticompetitive behaviour.
The commission is concerned about the frequent interaction between wholesalers that is facilitated by the practice.
Regarding cylinder cross-filling, through which LPG wholesalers fill cylinders that are owned and branded by another wholesaler, the commission found the safety checks by wholesalers are relatively standard across the industry. It has suggested that cross-filling could be a solution to its concerns about cylinder exchange in the market.
The commission recommended that the practice of cylinder exchange be abolished, and that customers should be able to fill any LPG cylinder at accredited LPG filling sites. This would occur in conjunction with the legalisation of cross-filling without consent as currently required by law.
The commission’s findings about the regulatory environment and limited domestic supply cover a wide range of topics. The commission says the LPG industry’s regulatory environment could be improved. It identified bottlenecks in the regulatory environment that hinder competitors’ ability to enter or expand in the LPG industry. The bottlenecks concern import and storage facilities, refinery shutdowns, wholesale licenses, import aggregation and price regulation, among others.
The commission proposed measures aimed at easing the administrative burden associated with gaining regulatory approvals to import LPG, the prohibition of import aggregation and better management and planning of refinery shutdowns. It has also recommended the Department of Energy should actively monitor adherence to business plans submitted by wholesalers.
The commission has recommended that the LPG price should move towards deregulation, ie the removal of the maximum refinery gate price and maximum retail price caps currently in place.
Many of the recommendations seem to be potentially positive for the LPG industry, including the proposed measures to facilitate the import process to increase imports and the purported move towards the deregulation of the LPG price.
Some recommendations raise concerns, particularly about safety issues. If the cross-filling of cylinders is permitted, who will take responsibility for the maintenance of the cylinders and who will be liable for an accident?
The commission has invited stakeholders to comment on its findings. It is to be hoped these and other concerns will be addressed through this process and recommendations that enhance the industry for the benefit of consumers can be put forward without jeopardising their safety.
Competition Commission findings after the liquefied petroleum gas market inquiry have been published
Aidan Scallan is a senior associate and Minenhle Sambo a candidate attorney in the ENSafrica anti-trust/ competition department.