South Africa's Competition Tribunal has dismissed a complaint referred by the Competition Commission against Totalgaz Southern Africa (Pty) Ltd, Oryx Oil South Africa (Pty) Ltd, KayaGas (Pty) Ltd, Easigas (Pty) Ltd and African Oxygen Ltd (collectively referred to as the "Respondents").
Following a dawn raid and an application by African Oxygen Ltd for corporate leniency, the Commission alleged that the Respondents had entered into an agreement and/or engaged in a concerted practice to fix deposit fees for liquified petroleum gas ("LPG") cylinders to first-time buyers, which would be in contravention of section 4(1)(b)(i) of the Competition Act, 1998.
However, the Tribunal dismissed the case, finding that the conduct of the Respondents could not be characterised as a "hardcore cartel". The decision is significant, in that it develops the case law on "characterisation". According to the Supreme Court of Appeal ("SCA") in American Natural Soda Ash Corporation v Competition Commission, characterisation requires that the character of the conduct complained of coincides with the character of the prohibited conduct.
The Commission argued that during the South African Petroleum Industry Association ("SAPIA") meetings, the Respondents concluded an agreement to simultaneously increase the deposit fees paid on 9kg – 48kg LPG cylinders for first time buyers from ZAR150 to ZAR300.
The respondents countered that their conduct was based on unilateral (and not collusive) conduct and was taken as a result of commercial decisions. Some respondents argued that for purposes of the setting of the cylinder deposit fee, they were in a vertical relationship. Others argued that the cylinder deposit fee did not form part of the price or competitive offering of the supply of LPG. Totalgaz's main argument was that the Cylinder Exchange Program ("CEP") benefitted consumers and new or smaller entrants and was not designed to restrict competition in the sale of LPG. It also argued that the CEP cannot operate without a uniform cylinder deposit fee. Therefore, their conduct was not that of a hardcore cartel when properly characterised and ought not fall within the scope of section 4(1)(b) of the Competition Act. Totalgaz was the only respondent to undertake an economic analysis by expert economists, RBB Economics to show that the conduct was rational, pro-competitive behaviour.
In its assessment, the Tribunal assumed a worst-case scenario in terms of which the deposit fee was a component of pricing and that the Respondents were in a horizontal relationship, and asked the ultimate question first – i.e. whether the conduct (the setting of a uniform cylinder deposit fee), properly characterised, fell foul of section 4(1)(b) of the Competition Act.
The Tribunal looked at the background and history of the CEP, a system that allows customers to exchange their empty LPG cylinders for full ones from any retailer, with the exchange of cylinders for refilling subsequently taking place at a wholesaler level. The Tribunal also evaluated the factual and economic circumstances surrounding the increase in the deposit. The Tribunal then assessed the benefits of the CEP, drawing on a number of arguments advanced by Totalgaz. The Tribunal found that the benefits of the CEP to consumers, as elaborated upon by Totalgaz's expert witness, include the following:
- convenience for the consumer;
- reduced barriers to switching for consumers;
- increased competition for the sale of LPG due to reduced barriers to switching;
- an expansion in the LPG supply, which also puts downward pressure on prices; and
- a reduction in variable costs to be passed down to the consumer.
The Tribunal noted that all the witnesses, even the Commission's, agreed that a uniform deposit fee is essential for the effective functioning of the CEP. A uniform fee facilitates the smooth administration for the exchange of cylinders and prevents increases in costs for wholesalers relative to their competitors. It also prevents a cash flow crunch for smaller players.
The Tribunal concluded that even in a worst-case scenario, "common sense and logic" indicate clear benefits of the CEP for both consumers and firms in the CEP, including smaller suppliers and new entrants. A uniform fee is both pro-competitive and consumer welfare enhancing. The Tribunal therefore found that the Respondents' conduct cannot be associated with a "hardcore cartel", which is what section 4(1)(b) is aimed at prohibiting. Even if the Respondents were assumed to be in a horizontal relationship, their conduct is not the type of conduct envisaged to be prohibited by section 4(1)(b)(i).
This case is notable in that it develops the case law on characterisation in South Africa. Although the Commission has publicly expressed its disapproval of characterisation, this case affirms and further develops the characterisation principle as outlined in cases such as American Natural Soda Ash Corporation v Competition Commission and Competition Commission v South African Breweries Limited and Others. In the former case, the Supreme Court of Appeal stated that "price-fixing inevitably involves collusive or consensual price determination by competitors, it does not follow that price-fixing has necessarily occurred whenever there is an arrangement between competitors that results in their goods reaching the market at a uniform price". In the latter case, the Competition Appeal Court described characterisation as ensuring "that section 4(1)(b) is so construed that only those economic activities in regard to which no defence should be tolerated are held to be within the scope of the prohibition".
The approach adopted by the Tribunal in its decision re-affirms the principle that section 4(1)(b) of the Competition Act should catch only the most egregious types of cartel conduct and not conduct that is not designed to avoid competition.
Despite the Respondents' success in this matter, it is important to remember that firms that contravene section 4 of the Competition Act may be liable for, amongst other things, an administrative penalty of up to 10% of their annual turnover (and up to 25% for repeat offences). Directors and people with management responsibility may be subject to criminal prosecution with individual fines and/or jail time.
Should you be uncertain as to whether you may fall foul of the Competition Act, please do not hesitate to reach out to the Competition team at ENSafrica.
ENSafrica represented the first respondent, Totalgaz.
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