26 May 2017

Price fixing probe in petrol in Hong Kong

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The Hong Kong Competition Commission (the “Commission”) believes there are "highly unusual" practices in the local petrol market, which has some of the highest prices in the world. The Commission therefore released a "Report on Study into Hong Kong’s Auto-fuel Market" (the “Report”) on 4 May 20171. The Report may herald future potential enforcement action in this sector. The Report has identified a number of issues which the Commission believes to be hindering competition in the auto-fuel market in Hong Kong, and contains several recommendations to address these issues. Most of the issues are uncommon in other auto-fuel markets, such as the lack of oil refinery facilities in Hong Kong, the unavailability of petrol products other than "98 RON", the land costs associated with the insufficient number of petrol filling station ("PFS") sites available, and the strong emphasis on discounting.

The Commission was unable to conclude in its Report whether there had been any collusion among auto-fuel companies in Hong Kong. The Commission has noted the difference between "price fixing" and "parallel pricing". Price fixing means market players agreeing on certain arrangements such that the price can be fixed, maintained, increased or otherwise controlled. Price fixing is usually regarded as a serious anti-competitive conduct. On the other hand, parallel pricing refers to the phenomenon (which is particularly obvious in an oligopolistic market setting and especially when products are virtually identical), where a firm changes its prices, all others follow within a short period of time, until they are all at the same level again. As stated in the Report, parallel pricing is “an almost universal feature of homogeneous product markets”. Therefore, it is possible that parallel pricing occurs in the Hong Kong auto-fuel market, which has only 5 principal retailers at the moment, namely Esso, Shell, Caltex, Sinopec and PetroChina.

The Commission's Report emphasized that it is necessary to take into consideration the wide prevalence of discounting in the Hong Kong context2. From a competition law perspective, “price” does not refer only to the selling price, it also includes, for example, the applicable payment terms and discounts. While the headline pump prices are usually the same across auto-fuel companies, various discounts are applied to customers, who are mainly categorised as either private vehicle owners or commercial transport operators (e.g. franchised bus operators). “Walk-in discounts” are readily available to any customers and are non-exclusive, i.e. customers are not restricted from buying auto-fuel from other market players. Other forms of discounts include credit card discounts, loyalty discounts and coupons. For commercial transport operators, they are granted more discounts which are usually negotiated on a case-by-case basis.

Given the paucity of publicly available information about the size of discounts, the number of customers that receive them and their overall impact on retail prices, the Commission was unable to tell whether the prevalence of discounts meant there was vigorous competition in the Hong Kong auto-fuel market. It is probably one of the reasons why the Commission was unable to conclude whether there was collusion among the auto-fuel companies despite the fact that Hong Kong has some of the most expensive auto-fuel in the world and headline prices are always the same across the auto-fuel companies. In fact, the Commission is of the view that the opacity of discounts alleviates the competitive pressure on the auto-fuel companies to compete on price.

Given that opacity, the Commission has recommended that the auto-fuel companies should display the prevailing pump prices and walk-in discounts prominently, so that they could be read by consumers easily. The Commission believes the risk of facilitating greater price coordination by such recommendations is minimal, given the prevalence of other undisclosed discounting. It therefore seems that the Commission is not very worried about what is commonly known as "price signalling". While the public disclosure of prices is usually legitimate, as it allows customers to compare prices before making purchasing decisions, it may sometimes be deemed as "price signalling". Price signalling may have the same effect as parallel pricing, yet it may be anti-competitive as market players are able to explore the pricing intentions of each other through their public disclosures and to coordinate their behaviour. Hong Kong's competition law is partly modelled on European competition law. In its guidance, the European Commission has said that in certain circumstances, genuinely public announcements may still amount to unlawful "concerted practices" where they "could prove to be a strategy for reaching a common understanding about the terms of coordination"3. An illustration of how price signalling may inhibit competition can be seen from the investigation by the European Commission into certain container liner shipping companies in 20164. The container liner shipping companies had publicly announced the intended future increase of freight prices on a regular basis. The European Commission believed those announcements were not necessarily for the primary benefit of customers and may have raised prices on the market for container liner shipping services on routes to and from Europe, in breach of EU competition rules. 14 companies therefore agreed to legally binding "commitments" to increase price transparency and reduce the risk of price coordination.5

The Report has revealed a potential issue in relation to the scope of discounting by auto-fuel companies in Hong Kong, which the Commission may choose to investigate further.

On the one hand, if the auto-fuel companies offered similar discounts to customers, it might constitute stronger evidence of anti-competitive collusion, as parallel pricing is less likely to be achieved when the market is opaque about discounts (particularly when there are a variety of types of discounts). The Commission might also wish to consider if there were any market sharing agreements by the market players.

On the other hand, if the auto-fuel companies had been competing vigorously through discounts to customers, the Commission may then consider whether there may be "predatory pricing" or "exclusive dealing" by any market player. This might have the object or effect of preventing new parties from entering the market, i.e. a potentially unlawful "abuse" of a substantial degree of market power. Stanley Chiang Chi-wai, spokesman for the truck drivers’ group Land Transportation Alliance, had said on an RTHK programme that “the discounts offered by oil companies are unfair…[for diesel,] some large companies are charged less than HK$5 per litre nowadays6. As stated in the Report, around HK$3 to 4 per litre is typically spent on product costs and duty before any diesel enters the storage facilities in Hong Kong, not to mention the costs subsequent to entering the storage facilities (such as transportation costs from storage facilities to PFS sites, PFS site costs, and other operational costs). The Commission may therefore wish to investigate whether there is pricing below an appropriate measure of cost, or whether there are any exclusive dealing arrangements in exchange for a high discount on the auto-fuel price. Having said that, predatory pricing and exclusive dealing are not automatically anti-competitive, unless they involve the abuse of a substantial degree of market power. In addition, any buyers’ strong countervailing bargaining power may explain why the discounts offered are high to a particular group of customers and accordingly there may not be anti-competitive behaviour.

One should note that the Report is classed as a "market study", instead of an "investigation" under the Competition Ordinance (Cap 619) (the “Ordinance”). Under the Ordinance, the Commission has the power to conduct an investigation when it has reasonable cause to suspect that a contravention of a competition rule has occurred (see section 39 of the Ordinance). “Reasonable cause” only requires that there may have been a contravention of a competition rule at least beyond mere speculation, and it does not require evidence to a standard that on balance tends to suggest a contravention has occurred (see the Guideline on Investigations by the Commission dated 27 July 2015). The Commission could then invoke its power to gather information under Part 3 of the Ordinance, which includes the power to obtain documents and information and the power to require relevant persons to attend before the Commission, instead of merely relying on information provided on a voluntary basis.

The Commission did not comment on whether there was any investigation into the auto-fuel companies in Hong Kong. Such investigations are neither new nor uncommon in other jurisdictions worldwide, such as the EU, the US and Australia. Instead, what the Commission has done is to make a recommendation under the Report that it should be provided with information gathering powers to compel the production of materials when undertaking market studies. The Commission believes that such powers will be helpful to its future market studies as long as no undue burden is placed on the parties and confidentiality is protected appropriately.

In the meantime, it remains to be seen whether Hong Kong drivers will benefit further from the Commission's enforcement actions.

1 For the Report, click here
2 It may be interesting to note that the Report did not mention anything about rebates.
3 See paragraph 63, Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements (2011/C 11/01) here
4 Case 39850 Container Shipping here
5 See European Commission Press release "Commission accepts commitments by container liner shipping companies on price transparency", Brussels, 7 July 2016 here
6 Please see Tony Cheung (6 May 2017). Call for probe on oil companies over Hong Kong rule prices as competition watchdog reveals “unusual” market practices. South China Morning Post. Retrieved from here
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