The gas industry is in the hot seat
The Competition Commission has released draft proposals for changes in the liquid petroleum gas industry that should bring down prices
The Competition Commission is proposing changes to the liquid petroleum gas (LPG) sector, which it believes could be more competitive, leading to lower prices for consumers.
The proposals are in the commission’s recently-released request for comments on draft recommendations stemming from its LPG market inquiry, which began in late 2014 and is expected to be concluded by September.
It is examining whether features of the market lessen, prevent or distort competition. South Africa produces about 300 000 tonnes of LPG annually, with a turnover of about R1.5-billion.
In the face of power shortages and rising electricity prices, LPG has been identified as an alternative energy source, particularly for heating and cooking.
But domestic users account for only 3% of its consumption, according to the commission, and its relatively high price and the limited supply could be keeping its usage low.
The bulk of LPG is used by industry and commercial users, such as shopping centres, which may have a reticulated supply for restaurants.
Along with its preliminary findings, the commission is recommending changes to, among other things, the practice of long-term supply agreements between major wholesalers and refineries.
These include decreasing the duration of these contracts, which it said entrenched the advantage of large wholesalers.
The commission found that 30% to 70% of LPG produced is used by refineries for their internal operations. The rest is allocated for contractual agreements – making up 80% of the LPG available to the local market – and spot sales.
Smaller players rely on spot sales, but, says the commission, the amount made available has declined steadily since 2010, from 22% to about 15% in 2014.
The commission is recommending changes to the practice of long-term supply agreements between major wholesalers and refineries, including decreasing the duration of these contracts and doing away with “evergreen” renewal clauses.
Some of these agreements allow discounts on the regulated maximum refinery gate price (MRGP) of up to 10%. Smaller wholesalers, whether in a supply agreement or not, do not get the same price discounts.
The commission has also proposed a new allocation mechanism in which wholesalers could bid for their LPG requirements or the refineries could set aside a minimum allocation for them.
In a response to questions, the commission said smaller dealers are restricted to the spot market, where there are no discounts, constraining their competitiveness.
The competitive ability of a wholesaler, whether large or small, depends on a sufficient, consistent supply of LPG. The commission says if this is ensured the market would be more competitive.
“The commission believes that end customers are likely to benefit from price competitiveness if smaller wholesalers are able to access LPG directly from the refineries with discounts off the MRGP,” it said.
The high cost of switching between suppliers, particularly for commercial and industrial end users of bulk gas supplies, is problematic, the commission found.
This is because of issues such as the significant capital investment needed to install LPG bulk and cylinder manifolds, and because the LPG supplier and not the end user typically owns this equipment. The supply contracts between LPG wholesalers and end users were also deemed “highly restrictive”.
In relation to the contracts, the commission noted that the clauses include provisions that allow the incumbent supplier the first right of refusal for the sale of its equipment and restrict the incoming supplier from installing equipment until the incumbent supplier has decommissioned its own.
The commission recommends separating these agreements into those pertaining to the cost and usage of the installed LPG equipment and those relating to the supply of gas.
In a bid to ease the hurdles of switching, the commission recommends establishing a dispute resolution mechanism “to allow for the transfer of ownership of the LPG equipment between the incumbent supplier and the i ncoming LPG supplier”.
On the regulatory front, the commission found that there are “significant bottlenecks in the regulatory environment, which may hinder the ability of potential competitors to enter or expand in the LPG industry”.
One of these included the issues of price regulation.
The commission’s assessment showed that the MRGP is lower than the landed import price of LPG in small volumes. The higher price was driven by logistics, particularly the fact that South Africa imported smaller parcels of gas. Import efficiency and optimisation are key to sourcing LPG at lower costs. The commission recommended that the industry focus on building larger import and storage facilities.
The department of energy, which regulates LPG prices at refinery and retail level, has limited resources to monitor and enforce the regulated prices which had led to “some pricing abuses” by market participants, the commission noted.
It has not been able to conduct promised regular reviews of the MRGP pricing policy, the commission found.
As an interim measure, the commission has asked for submissions “on whether the department is best placed to deal with this function or whether another regulator should assume this role”.
Alternatively, in its call for comments and submissions, it asked how the department “can better conduct effective monitoring and review of pricing methodology”
Afrox’s spokesperson, Simon Miller, said: “We are studying these preliminary findings and will be in a position to comment to the commission once the company has fully understood any and all implications contained in these preliminary outcomes.”
Easigas declined to comment until it had presented its comments to the commission.
Market participants have until June 7 to provide comments on the preliminary findings and recommendation, after which the commission will release its final recommendations.