Restructuring South Africa’s gas sector
The Competition Commission has released its final report on practices in the South African liquefied petroleum gas market. The findings point to a structure conducive to collusion and inhibiting growth.
theCompetition Commission is of the view that deregulation of the price charged for liquefied petroleum gas (LPG) could lead to greater competition and lower prices for consumers, which would boost uptake of the product. However, it also insists that the South African LPG market is not ready for deregulation yet. In fact, it is calling for greater monitoring and regulation.
A 2012 department of energy (DoE) survey highlighted the fact that only a small number of highincome households uses gas for cooking and heating.
This was one of the concerns for the commission when it launched a market inquiry into the sector in 2014. In its final report, released at the end of April, the commission argues that the sector’s structure is conducive to collusion and has numerous bottlenecks that need to be addressed.
The commission argues that the LPG market is highly concentrated, with only five refineries currently producing LPG in South Africa: Enref, Chevref, Natref, PetroSA and Sapref.
At a wholesale level, the market has four large wholesalers in Afrox, Totalgaz, Oryx and Easigas, accounting for 90% of the market share, with new entrants and small existing firms having to overcome high barriers to entry in the wholesale market.
The commission recommends the market needs to be “monitored” as its structure is “conducive for collusive behaviour”. The report makes a number of recommendations to address these concerns in the market, calling on sector players to comply between now and 2019. However, these recommendations are non-binding.
The commission also claims to have uncovered some evidence of existing collusion. It announced on 24 April that a separate investigation into an alleged gas cylinder cartel had been launched in response to information received during the market inquiry.
The gas cylinder cartel
“Joe Soap” is the name given by the commission to its informant, an anonymous distributor who has spilt the beans on an alleged gas cylinder cartel in the LPG market.
Joe Soap forwarded a number of letters from his LPG suppliers to the commission that were dated between 28 February 2014 and 4 June 2015.
“The letters, coming from Afrox, Totalgaz, Oryx and Easigas, all notified their distributors of a pending increase in the cylinder deposit fee, while at the same time introducing a non-refundable rental fee for using their cylinders,” reads the commission’s report. As the commission points out in the document, the DoE is the regulatory authority responsible for the determination of the cylinder deposit fee applicable in the LPG sector. The body approached the DoE to enquire whether it had reviewed and changed the cylinder deposit rate in June 2015. It emerged that the department had not reviewed the rate since 2010 and had not mandated any changes to the deposit rate. “The commission has reason to believe that collusion in fixing cylinder deposits has taken place in this sector and that this conduct is likely to be continuing,” the body noted in its report. The commission recommends shifting regulation away from the DoE to the National Energy Regulator of South Africa (Nersa), because the national department does not seem to have the capacity to fulfil the regulatory role. It recommends that Nersa, rather than the DoE, should be responsible for the determination of deposit fees and the subsequent annual reviews.
History of the inquiry
In August 2014, the commission initiated a market inquiry into the LPG sector after it observed certain features of the sector that prevented, distorted or restricted competition.
Part of the features identified as a cause for concern in this sector were concentration of the market structure, high switching costs, the regulatory environment and its impact on competition, as well as the limited usage of LPG at the household level.
On 24 April minister of economic development Ebrahim Patel called on all organisations named in the report to take action to grow the LPG sector.
Patel said the recommendations would be tabled in the National Assembly within two weeks.
Competition Commissioner Tembinkosi Bonakele said he hoped the LPG market inquiry will raise further awareness of the state of competition in the sector and stimulate debate on how to address the challenges identified: “I am hopeful that the identified stakeholders will implement all the recommendations, and the commission will periodically review the progress of the Head of communications at Afrox Minister of economic development