LPG in­quiry could lead to safety con­cerns

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Ai­dan Scallan & Mi­nenhle Sambo

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.

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