Is price reg­u­la­tion strike three or a home run?

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Mark Gar­den

The chal­lenge in prov­ing a charge of ex­ces­sive pric­ing is in rec­on­cil­ing its def­i­ni­tion in the Com­pe­ti­tion Act with the the rel­e­vant facts and eco­nomic ev­i­dence

ASINGLE sen­tence, the length of which be­lies the com­plex­ity of the un­der­ly­ing pro­hi­bi­tion, is con­tained within sec­tion 8(a) of the Com­pe­ti­tion Act. It reads sim­ply that “it is pro­hib­ited for a dom­i­nant firm to charge an ex­ces­sive price to the detri­ment of con­sumers”. The leg­isla­tive in­tent is equally ap­par­ent — a firm whose com­par­a­tive size in a par­tic­u­lar mar­ket means that it is less con­strained by com­pe­ti­tion than would or­di­nar­ily be the case, is pro­hib­ited from abus­ing this en­vi­able po­si­tion by charg­ing con­sumers ex­ces­sive prices for the goods it sells or the ser­vices it pro­vides. It is para­dox­i­cal, there­fore, that one of the short­est pro­vi­sions in the Com­pe­ti­tion Act con­tin­ues to flum­mox com­pe­ti­tion law prac­ti­tion­ers, reg­u­la­tors, judges and ju­rists alike.

The com­plex­i­ties in­volved in suc­cess­fully pros­e­cut­ing an ex­ces­sive pric­ing com­plaint are per­haps best il­lus­trated by that fact that the re­cent de­ci­sion against Sa­sol Chem­i­cal In­dus­tries (SCI) marks only the third at­tempt at an ex­ces­sive pric­ing com­plaint since the in­cep­tion of the Com­pe­ti­tion Act in 1998.

The first at­tempt, which en­tailed an ex­ces­sive pric­ing com­plaint lodged by Har­mony Gold Min­ing Com­pany and Dur­ban Rood­e­poort Deep against ArcelorMit­tal, was suc­cess­ful be­fore the Com­pe­ti­tion Tri­bunal, but over­turned by the Com­pe­ti­tion Ap­peal Court on ap­peal and ul­ti­mately set­tled out of court.

The sec­ond at­tempt, in which Telkom faced al­le­ga­tions of ex­ces­sive pric­ing brought by the Com­pe­ti­tion Com­mis­sion, was un­suc­cess­ful on the ba­sis of in­suf­fi­cient ev­i­dence.

When one con­sid­ers the case law in re­la­tion to ex­ces­sive pric­ing in SA, the great­est chal­lenge fac­ing any com­plainant seek­ing to es­tab­lish a charge of ex­ces­sive pric­ing is the def­i­ni­tion of ex­ces­sive price in the Com­pe­ti­tion Act. A price is ex­ces­sive if it bears no rea­son­able re­la­tion to the eco­nomic value of a good or ser­vice and is higher than that value.

In 2009, the Com­pe­ti­tion Ap­peal Court for­mu­lated the le­gal pa­ram­e­ters for an ex­ces­sive pric­ing anal­y­sis. First, the ac­tual price of the goods or ser­vice must be as­cer­tained. Sec­ond, the eco­nomic value of the goods or ser­vice must be es­tab­lished. Third, it must be de­ter­mined whether the dif­fer­ence be­tween the ac­tual value and the eco­nomic value is rea­son­able or not. Fourth, if the dif­fer­ence is un­rea­son­able it must be de­ter­mined whether the ex­ces­sive pric­ing harms con­sumers.

In the SCI mat­ter, the tri­bunal was called on to ad­ju­di­cate whether or not SCI charged ex­ces­sive prices for propy­lene and polypropy­lene in the do­mes­tic mar­ket, to the detri­ment of con­sumers. In so do­ing, the tri­bunal con­ducted its anal­y­sis within the frame­work of the four-part test set out above.

The first part of the test, which re­quired a fac­tual de­ter­mi­na­tion of the ac­tual prices for propy­lene and polypropy­lene in the do­mes­tic mar­ket over the im­pugned pe­riod, was dis­charged with rel­a­tive ease on the ba­sis of ev­i­dence re­flect­ing his­tor­i­cal prices charged. Since the Com­pe­ti­tion Act pro­vides no def­i­ni­tion for the term “eco­nomic value”, nor does it pro­vide guid­ance as to how one should go about cal­cu­lat­ing the “eco­nomic value” of a good, the tri­bunal re­lied on the ev­i­dence of ex­pert wit­nesses to dis­charge the sec­ond part of the ex­ces­sive pric­ing test.

The hy­brid ap­proach adopted by the tri­bunal was to em­ploy a range of price cost tests; con­duct a com­par­i­son of do­mes­tic prices with prices in other ge­o­graphic mar­kets; and con­duct a com­par­i­son of SCI’s ex­port prices with do­mes­tic prices for each prod­uct, to ar­rive at the eco­nomic val­ues of propy­lene and polypropy­lene. As re­gards propy­lene, the tri­bunal held that the price cost test pro­vided the most re­li­able method of de­ter­min­ing the eco­nomic value of pu­ri­fied prod­uct sold by SCI in SA dur­ing the com­plaint pe­riod. A com­bi­na­tion of these meth­ods was em­ployed by the tri­bunal to as­cer­tain the eco­nomic value of polypropy­lene.

The tri­bunal’s next chal­lenge was to as­cer­tain whether or not the re­la­tion­ship be­tween the ac­tual val­ues and the eco­nomic val­ues were rea­son­able. Once again, the Com­pe­ti­tion Act pro­vides no as­sis­tance in this re­gard, hence the lead­ing of ev­i­dence from 13 wit­nesses, in­clud­ing eight ex­pert econ­o­mists (both in­ter­na­tional and lo­cal), in­dus­try an­a­lysts, busi­ness an­a­lysts and fi­nan­cial ex­perts dur­ing the pro­ceed­ings.

The tri­bunal placed tremen­dous store on the “ul­ti­mate ob­jec­tive and the pol­icy and prin­ci­ples un­der­ly­ing the pro­hi­bi­tion on ex­ces­sive pric­ing in the con­text of our act”. In so do­ing, the tri­bunal’s ap­proach to in­ter­pret­ing the pro­hi­bi­tion against ex­ces­sive pric­ing in sec­tion 8(a) of the Com­pe­ti­tion Act was to con­tex­tu­alise the im­pugned con­duct within South African eco­nomic his­tory.

The tri­bunal found, in this re­gard, that SCI “ben­e­fited from sig­nif­i­cant state sup­port over an ex­tended pe­riod of time and its mar­ket po­si­tions in pu­ri­fied propy­lene and polypropy­lene are a con­se­quence of that”.

Af­ter hav­ing re­gard to the char­ac­ters of the prod­ucts con­cerned; their im­por­tance as in­ter­me­di­ate in­puts in in­dus­trial devel­op­ment; his­tor­i­cal and pre­vail­ing mar­ket char­ac­ter­is­tics; the pol­icy ob­jec­tives of the Com­pe­ti­tion Act un­der­stood in the con­text of the South African econ­omy; and the his­tory of SCI and how it achieved its dom­i­nant mar­ket po­si­tion, the tri­bunal con­cluded that the propy­lene and polypropy­lene prices charged by SCI dur­ing the rel­e­vant pe­riod bore no rea­son­able re­la­tion to the eco­nomic val­ues of those prod­ucts.

This re­sulted in the im­po­si­tion of a R534m ad­min­is­tra­tive penalty and be­havioural reme­dies de­signed to re­duce the prices of propy­lene and polypropy­lene to lo­cal cus­tomers.

While var­i­ous of the more es­tab­lished com­pe­ti­tion law regimes have ei­ther es­chewed en­tirely, or sub­se­quently dropped, the of­fence of ex­ces­sive pric­ing from their re­spec­tive canons, the tri­bunal’s de­ci­sion has breathed new life into this be­lea­guered sec­tion of our Com­pe­ti­tion Act.

Given that SCI has ex­pressed an in­ten­tion to pros­e­cute an ap­peal against the tri­bunal’s de­ci­sion to the Com­pe­ti­tion Ap­peal Court, how­ever, only time will tell whether or not that de­ci­sion will ul­ti­mately pre­vail.

Mark Gar­den is a direc­tor in ENSafrica’s com­pe­ti­tion law de­part­ment.

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