Ex­ces­sive pric­ing pros­e­cu­tions un­der fire

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Lizél Blig­naut

IN A crit­i­cal judg­ment of the Com­pe­ti­tion Com­mis­sion’s com­pe­tence in man­ag­ing its in­ves­ti­ga­tions and the Com­pe­ti­tion Tri­bunal’s abil­ity to man­age its pro­cesses, the Com­pe­ti­tion Ap­peal Court up­held the ap­peal of Sa­sol Chem­i­cal In­dus­tries (SCI), a sub­sidiary of Sa­sol, against the de­ci­sion of the tri­bunal that it had con­tra­vened sec­tion 8(a) of the Com­pe­ti­tion Act, by charg­ing ex­ces­sive prices for propy­lene and polypropy­lene.

En­force­ment against ex­ces­sive pric­ing by dom­i­nant firms is one of the more con­tro­ver­sial ar­eas of com­pe­ti­tion pol­icy and law.

The South African com­pe­ti­tion author­i­ties’ history with en­forc­ing ex­ces­sive pric­ing pro­vi­sions has been fraught with con­tro­versy. In the first land­mark case against Mit­tal Steel SA, the tri­bunal found that Mit­tal, a firm su­per dom­i­nant in the pro­duc­tion and sup­ply of flat steel prod­ucts, had con­tra­vened sec­tion 8(a), as it had re­duced sup­ply to the do­mes­tic mar­ket to in­crease prices. The tri­bunal found su­per dom­i­nance is a pre­req­ui­site for a find­ing of ex­ces­sive pric­ing.

Mit­tal ap­pealed/re­viewed the tri­bunal’s de­ci­sion that it had con­tra­vened sec­tion 8(a) to the Com­pe­ti­tion Ap­peal Court. The court crit­i­cised the tri­bunal for not ap­ply­ing the spe­cific lan­guage of the Com­pe­ti­tion Act to its as­sess­ment of ex­ces­sive pric­ing and stated that the word­ing of sec­tion 8(a) re­quires four steps to de­ter­mine whether an ex­ces­sive price has been charged. First, the de­ter­mi­na­tion of the ac­tual price charged; sec­ond, the de­ter­mi­na­tion of the eco­nomic value of the good or ser­vice; third, if the ac­tual price ex­ceeds eco­nomic value, it must be de­ter­mined whether the dif­fer­ence be­tween them is un­rea­son­able; and if so, fourth, it must be de­ter­mined if the charg­ing of the ex­ces­sive price is to the detri­ment of con­sumers. Im­por­tantly, the Com­pe­ti­tion Ap­peal Court gave guid­ance and in­di­cated that what was “in­tended by ‘eco­nomic value’ is the no­tional price of the good or ser­vice un­der as­sumed con­di­tions of long-run com­pet­i­tive equi­lib­rium”. In ad­di­tion, the court stated that “‘eco­nomic value’ is a no­tional ob­jec­tive com­pet­i­tive-mar­ket stan­dard, and not one de­rived from cir­cum­stances pe­cu­liar to the par­tic­u­lar firm”. The court found that the tri­bunal had not ap­plied the cor­rect le­gal test in the Mit­tal mat­ter and re­mit­ted the mat­ter to the tri­bunal for re-as­sess­ment on the ba­sis of the four stage test. The mat­ter did not pro­ceed be­fore the tri­bunal as the par­ties set­tled.

In the 2014 ex­ces­sive pric­ing case against SCI, the tri­bunal found against SCI and stated that SCI’s prices for propy­lene and polypropy­lene dur­ing the rel­e­vant pe­riod bore no rea­son­able re­la­tion to the eco­nomic value of the prod­ucts. The tri­bunal found that SCI’s mark-ups of pu­ri­fied propy­lene prices over ac­tual costs were 39.9%-41.5% and 25.1%-26.5% and SCI’s mark-up of its polypropy­lene price over ac­tual costs was 26.9%-36.5%. The tri­bunal also found that the ex­ces­sive prices that SCI charged had a detri­men­tal ef­fect on and caused harm to lo­cal plas­tic con­vert­ers and the in­dus­try.

The tri­bunal, when it as­sessed the eco­nomic value of the prod­ucts, took into ac­count the sig­nif­i­cant cost ad­van­tage that SCI en­joys in the pro­cure­ment of polypropy­lene feed­stock from Sa­sol Syn­fu­els. The tri­bunal also took into con­sid­er­a­tion the sig­nif­i­cant state sup­port and the pro­tec­tion which Sa­sol re­ceived over the years. In essence, the foun­da­tion of the tri­bunal’s find­ing of SCI en­gag­ing in ex­ces­sive pric­ing arose from the fact SCI was not pass­ing on to con­sumers the cost ad­van­tage it en­joyed.

Un­sur­pris­ingly, the ap­pro­pri­ate mea­sure­ment of costs to de­ter­mine eco­nomic value as a no­tional, com­pet­i­tive stan­dard tran­spired to be a ma­jor area of dis­agree­ment be­tween the com­mis­sion, tri­bunal and SCI. The big­gest dis­pute be­tween the par­ties was the is­sue of the ap­pro­pri­ate value to be al­lo­cated to the cost of propy­lene feed­stock. The Com­pe­ti­tion Ap­peal Court found that a de­ter­mi­na­tion of whether an ex­ces­sive price has been charged must be pred­i­cated on the ac­tual feed­stock price that Syn­fu­els charged, be­ing the ac­tual cost that SCI in­curred, and that there was no rea­son­able ba­sis to adopt a hy­po­thet­i­cal price.

The Com­pe­ti­tion Ap­peal Court up­held SCI’s ar­gu­ments as re­gards the eval­u­a­tion of cap­i­tal as­sets, the ap­pro­pri­ate rate of re­turn on cap­i­tal, the al­lo­ca­tion of group costs and the al­lo­ca­tion of com­mon costs. The court in­di­cated that it had to ac­cept the well rea­soned and plau­si­ble ar­gu­ments of SCI’s ex­perts and lamented the disad­van­tage that it suf­fered be­cause it did not ben­e­fit from ad­e­quately rea­soned ev­i­dence from the com­mis­sion. On the ba­sis of these re­vised cost as­sump­tions, the court con­cluded that the cor­rect price-cost mark-up for the pur­poses of as­sess­ing whether ex­ces­sive prices had been charged was about 12%-14% for propy­lene.

The court fur­ther ac­cepted that SCI’s polypropy­lene prices were only 16% above the world’s cheap­est polypropy­lene.

In its as­sess­ment of whether SCI’s prices were rea­son­ably re­lated to the eco­nomic value of the prod­ucts, the court held that re­turns above eco­nomic value are not per se un­rea­son­able.

De­spite up­hold­ing SCI’s ap­peal the Com­pe­ti­tion Ap­peal Court was care­ful to dis­avow any sug­ges­tion that ex­ces­sive pric­ing cases can never suc­ceed be­fore South African courts. The court pointed out the out­come of SCI’s ap­peal may have been dif­fer­ent had the com­mis­sion pro­vided ex­pert ev­i­dence that plau­si­bly re­but­ted that of SCI’s in re­spect of its costs of pro­duc­tion.

The court con­cluded by high­light­ing its grow­ing frus­tra­tion with pre­vail­ing in­ves­tiga­tive and ad­ju­dica­tive prac­tices at the com­mis­sion and tri­bunal re­spec­tively and sounded a fur­ther warn­ing to the tri­bunal in re­spect of its fu­ture treat­ment of ex­pert wit­nesses. The court set out ba­sic guide­lines on ex­perts’ du­ties and re­spon­si­bil­i­ties, be­ing to pro­vide in­de­pen­dent, un­in­flu­enced ev­i­dence to the court; to pro­vide ob­jec­tive un­bi­ased opin­ion in re­la­tion to mat­ters within the ex­pert’s ex­per­tise; and the bound­aries of ev­i­dence (that an ex­pert should not as­sume the role of an ad­vo­cate).

Com­pe­ti­tion Ap­peal Court crit­i­cal of Com­pe­ti­tion Com­mis­sion and tri­bunal in wake of ex­ces­sive pric­ing pro­vi­sions judg­ments

Lizél Blig­naut is an ex­ec­u­tive in the ENSafrica com­pe­ti­tion depart­ment.

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