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.

Finweek English Edition - - THE WEEK IN THE NEWS - By Lloyd Gedye

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

Jo­hann Cil­liers

Ebrahim Pa­tel

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