Irish Competition Authority Decisions

1. Notification was made by Flogas Ireland Limited on 14 April 1992 with a request for a certificate under Section 4(4) of the Competition Act, 1991 or, in the event of a refusal by the Competition Authority to grant a certificate, a licence under Section 4(2) in respect of the standard agreements Flogas Ireland Limited have with bulk customers. Notice of intention to grant a licence was published in The Irish Times on 9 December 1994, but there were no submissions from interested parties.

2. The notification concerns a standard agreement by Flogas with its industrial LPG customers, which provides for exclusive purchase by the customers of all of their LPG requirements from Flogas for a maximum period of five years.

3. Flogas Ireland Limited is one of the major suppliers of LPG in the State. It is a wholly owned subsidiary of Flogas plc, a publicly quoted company. Flogas acquired Ergas in 1989. It operates in the State, in Northern Ireland and in Great Britain.

4. The principal activity of Flogas is the supply and distribution of LPG under the Flogas and Ergas brand names. From three terminals in the State - Drogheda, Cork and Ballyhaunis - bulk LPG customers are supplied directly by Flogas. Industrial LPG customers include those involved in industrial processing and heating, commercial heating, water heating and catering, agricultural/horticultural heating, fish farming and road marking, private households, forklift trucks and private automotive use. These customers purchase LPG for their own use. In addition, bulk LPG is supplied to retail petrol stations who in turn supply the motorist. Flogas also supplies bottled LPG through distributors to retailers who resell it to domestic consumers and to the industrial market. The relevant agreements for LPG dealers have been covered by the category licence (1) and those for distributors are the subject of a separate notification.

5. The characteristics of the product and the market were described at length in the Authority's category licence for agreements with cylinder LPG dealers. Since LPG is distributed throughout the State, the appropriate geographic market is the State.

6. Under the notified Flogas industrial LPG agreement, Flogas agrees to supply, and the buyer agrees to purchase from Flogas for consumption at the buyer's premises, the buyer's total requirement of LPG for a maximum period of five years. Flogas provides equipment for the use and storage of LPG, for which the buyer pays an annual rental. The agreement contains provisions relating to delivery, price, termination, indemnity, insurance and force majeure, among others.

7. The main provisions of the agreement are as follows:

It is agreed that the seller shall sell to the buyer and the buyer shall purchase from the seller for consumption at the buyer's premises...... the buyer's total requirement of LPG.... during the period and at the price rates specified in said First Schedule and upon the terms and conditions specified in the Second Schedule hereto.

Clause 9. Rental. The buyer during the continuance of this agreement will pay to the seller an annual rental of £..... for the equipment.

Clause 1 This agreement shall commence on.... and shall terminate not later than the fifth anniversary of the date of its commencement without prejudice to the right of the parties if they mutually so wish to enter into a new agreement to take effect following such termination.

Clause 2 Delivery. Delivery to be in bulk or by cylinders, at seller's option, to the installation named in the First Schedule.

Clause 3 The seller will furnish equipment.... for the use and storage of the product. The equipment shall remain the property of the seller, and the buyer hereby consents to the installation and maintenance of the equipment by the seller, at the expense of the buyer..... During the term of this agreement:-

(a) The buyer shall use the equipment at all times exclusively for the storage of the product....

Clause 9 The product and the equipment supplied under this agreement shall be for the buyer's own use and the buyer undertakes that the same shall not be resold, exchanged, decanted or otherwise dealt with and the buyer further undertakes that the product will not be used as fuel in mechanically propelled vehicles constructed or adapted for use on roads unless such mechanically propelled vehicles comply with all statutory provisions and regulations relating to such use and subject to the written permission of the seller. The buyer also assures and guarantees to Flogas Ireland Limited that there is no agreement in existence (either oral or in writing) for the supply of LPG between it/him/her, and a third party for the period, or any part thereof, of the proposed agreement.

The Authority is aware that previous versions of the agreement provided that it would last for an initial period of five years, but would remain in force thereafter from year to year unless notice of termination was given at least 90 days prior to the expiration of the initial period, or at least 30 days prior to the end of each succeeding one-year period.

8. Flogas stated that the purpose of the standard Flogas industrial LPG agreement was to provide its bulk customers with a stable source of supply, and to place the relationship between the company and its purchasers, who used the product for their own purposes and not for resale (except for use in motor vehicles), on a sound commercial basis. Almost all customers were supplied directly in bulk by tanker from Flogas, except that bulk LPG was supplied to retail petrol stations who in turn supplied the motorist.

9. The company argued that the agreement improved the distribution of bulk LPG in Ireland by making it commercially feasible for Flogas to make a sizeable investment in the premises of each purchaser. Such investment consisted of the provision of storage tanks, cylinders and pressure regulators, as well as technical advice and safety support services. In addition, the company frequently underwrote the installation costs of the bulk user. Any rental or other fees were only nominal amounts, and did not cover interest charges and maintenance costs.

10. The company argued that these agreements allowed a fair share of the resulting benefit to go to the consumers who were the purchasers in that the investment by the company in the services as outlined above was not recouped by rental payments charged to the purchaser under the terms of the agreement.

11. Flogas claimed that the industrial purchasers were not subject to unreasonable restrictions. The restrictions which were imposed on them were necessary: (a) to ensure the safe use of LPG, a substance which could be dangerous if handled improperly, and (b) to make it commercially feasible for the company to make significant investments in each industrial purchaser. In addition, the company had to make sizeable investments in its own infrastructure, such as shipping terminals and storage facilities. Such outlay was only commercially viable if the company had a stable distribution network.

12. The company claimed that the agreements did not eliminate competition since the market for LPG was a very competitive one. Flogas had a market share of 30% which was less than one-half the market share of the market leader.

13. In response to queries from the Authority, Flogas stated in a letter of 20 July 1993, that, in the majority of industrial agreements, the customer was supplied with a bulk tank and serviced directly by Flogas, with bulk gas being delivered by road tanker. In a number of cases, however, Flogas had to instal a cylinder supply as it might be neither practicable nor safe to supply and instal a bulk tank or to service it with a road tanker. There were stringent safety regulations covering the siting of bulk tanks, and it was not always feasible to instal one. There were also sites where it was not possible to deliver with a bulk tanker (narrow lanes, archway entrances, etc.) or effect a safe delivery (high street locations). In these cases, Flogas provided a cylinder supply system instead of a bulk tank in order to service the same needs of the customer. Some customers specifically requested a cylinder supply system while others were provided with one while they developed or established a sufficient load for a bulk tank. In exceptional circumstances, where a customer substantially reduced its consumption of bulk gas, Flogas might substitute a cylinder supply. The cylinders were filled by the distributors, and supplied by the distributors or authorised dealers to the customer on behalf of Flogas. They considered the supply of gas in cylinder form to this market sector as a very necessary and integral part of the industrial agreements, otherwise they would be discriminating against those with similar needs who were only eligible to use a cylinder rather than bulk supply. Flogas stated that exclusive supply in cylinders could be justified under Section 4(2) of the Act, in the same way that bulk supply had been justified.

14. Following the publication of the Flogas notifications by the Authority, Blugas transmitted two lengthy submissions to the Authority, at the end of July 1992, prepared by economists and lawyers respectively. The main points made in the economic submission were as follows:

(a) the nature of the product involves relatively high sunk costs (that is investment which is not recoverable if a firm leaves the industry) on behalf of suppliers;

(b) the two main suppliers have a market share of about 95%;

(c) there is a lengthy period for the exclusive purchasing contract;

(d) customers must give a certain period of notice, normally three months, before switching to another supplier;

(e) the relevant market is that for LPG, which is distinct and well-defined;

(f) LPG is important for certain industrial processes;

(g) the hypothesis cannot be rejected that there is not collusion between Flogas and Calor Kosangas;

(h) there are switching costs in changing to a new supplier, which represent a barrier to entry to the market;

(i) customers may not refill tanks with the products of other firms;

(j) ownership of tanks by the suppliers may increase a rivals' costs of entering the market;

(k) the LPG market does not appear to be competitive, and uncompetitively high prices could be maintained over a long period.

15. The main claims made in the submission from the lawyers of Blugas were that:

(a) the common law traditionally rendered unenforceable covenants in agreements that represented an unreasonable restraint on trade which were considered to be contrary to public policy;

(b) prima facie, exclusive purchasing agreements offend against Section 4(1);

(c) the Flogas agreement does not meet the criteria specified in Section 4(2) because:

(i) the bulk customer is prohibited from taking any other product by means of a separate tank;

(ii) the agreements are not capable of termination within any reasonable period;

(iii) the clauses are unnecessarily severe and beyond what might be required to protect reasonable interests; and

(d) it is not open to the Authority to grant the licence/certificate sought by Flogas as the use of such agreements by Flogas and the market leader Calor amounts to an abuse of a dominant position by either or both of these entities.

16. The submissions by Blugas have been taken into account by the Authority, insofar as they relate to the notified agreements. It should be pointed out that, subsequent to its submissions, Blugas notified its bulk distribution agreements to the Authority (CA/540/92E) with a request and arguments for a certificate or a licence. These agreements, which followed industry practice, provide for the exclusive purchase of Blugas by the bulk customer for five years, with no dealing permitted in other brands of LPG. Calor Kosangas also subsequently notified its bulk agreements (CA/154/92E and CA/155/92E), which provide for exclusive purchase of Calor Kosangas. The Authority is aware that there has been litigation between Flogas and Blugas and others in respect of bulk customers and dealer outlets.

17. In response to the Blugas submissions, Flogas claimed in short that consumption of LPG had risen to a peak of 176,000 tonnes in 1982, but had declined to 133,000 tonnes in 1990; that there were competitive alternatives to LPG in the case of hotels, factories, etc., (electricity, natural gas, solid fuel and oil); while some manufacturers might have unique requirements which could only be met by LPG, they accounted for only a small portion of the total LPG market; and that LPG suppliers could not maintain uncompetitively high prices over a long period without losing customers. Blugas, with its connection with Esso and its three major shareholders, was a strong competitor. Blugas had in a short time signed up a large number of customers and had secured a market share, its performance comparing favourably with the original growth and penetration of the market by Flogas. Flogas maintained that the Blugas submissions contained a number of factual errors, and that they were based upon agreements which pre-dated the Competition Act and not upon the notified agreement. Flogas denied that the arrangements represented an abuse of a dominant position, but claimed that there was keen competition in the market, particularly between Flogas and Calor.

18. Section 4(1) of the Competition Act, 1991 prohibits and renders void all agreements between undertakings which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State.

19. According to Section 3(1) of the Act, 'undertaking means a person being a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service.' Flogas is an incorporated body engaged for gain in the supply and distribution of LPG, both to resellers and to final consumers. Accordingly, Flogas is an undertaking within the meaning of the Act. Bulk customers are not resellers of the product but consume it themselves. A number of the bulk customers are engaged in the production, supply or distribution of other goods, or the provision of services, for gain, being engaged in farming, manufacturing, retail trade, catering, motor service stations, and so on. These customers are also undertakings within the meaning of the Act. A number of bulk cutomers may not come within the definition of an undertaking and supply agreements with them are not therefore covered by the Act. This decision does not apply to such agreements. With the exception of these agreements, the notified agreements are agreements between undertakings within the meaning of Section 4(1) of the Act.

20. The industrial LPG agreement provides that the customer shall purchase from Flogas his total requirement of LPG. The customer also assures Flogas that there is no agreement in existence for the supply of LPG with a third party. The agreement has a maximum term of five years, with the possibility of renewal (Second Schedule, Clause 1). It also provides that equipment supplied by Flogas shall be used exclusively for the storage of Flogas. The agreements apply to exclusive purchase of LPG in cylinders as well as to bulk supplies of LPG.

21. For the duration of the agreement, the customer can only purchase LPG from Flogas, and from no other supplier, and no other supplier can sell the product to the customer. This limits the commercial freedom of the customer to buy LPG from any source he wishes, and the ability of others to supply him, and denies him supplies unless he accepts the exclusive purchase requirement. While each individual agreement might have relatively little effect upon competition, all the agreements together form a network of restrictive agreements for the distribution of Flogas to bulk customers. This is reinforced since Calor and Blugas also have similar exclusive purchase agreements, thus forming a restrictive system of distribution in the LPG market as a whole. No customer can purchase LPG from anyone other than the exclusive supplier for a relatively long period of time. This tends to introduce a considerable degree of rigidity into the market, and it makes it difficult for a new entrant to enter the market quickly on any significant scale since a large number of potential customers, including many large users, are not available, at least until their exclusive agreements have expired. The Authority considers, therefore, that the standard Flogas bulk supply agreement has the object and the effect of preventing, restricting or distorting competition in goods in the State, and thus it offends against Section 4(1). The Authority would take the same view of the clauses in older agreements, which were not notified, which provided for an indefinite period for exclusive purchasing after the first five years, subject to a period of notice of termination of 90 days before the end of the initial period or 30 days before the end of each succeeding one year period.

22. Clause 3(a) of the Second Schedule provides that the equipment supplied, which is the property of Flogas, shall be used exclusively for the storage of Flogas. The customer must pay for the installation and maintenance of the storage equipment, usually a pressurised bulk storage tank, but Flogas is entitled to remove it on termination of the agreement. The views of the Authority in respect of exclusive use of equipment requirements which represent exclusive purchasing obligations have been given in its decision on certain Burmah Castrol agreements (2).

23. In the present case, the requirement that the equipment only be used for the storage of Flogas, while it means that it cannot be used for the products of competitors, does not in itself have the object or effect that the customer must purchase LPG exclusively from Flogas. The customer is already subject to an exclusive purchasing obligation. Its purpose is to prevent competitors from securing a 'free ride' in the costly equipment which has been supplied by Flogas, thus giving them a competitive advantage. There would usually be space in the customer's premises for the installation of a competitor's storage tank, or they could purchase cylinder gas from another supplier. While this might be less convenient, it does not, of itself, prevent the customer from buying from suppliers other than Flogas, it does not have the effect of representing an exclusive purchasing agreement, and the requirement does not offend against Section 4(1).

24. The Authority considers that the other clauses in the notified agreement do not offend against Section 4(1) of the Act. In particular, while the buyer pays a rental for the equipment (First Schedule, Clause 9), this was claimed to be very small, and not capable of meeting interest and maintenance costs. Clause 9 of the Second Schedule provides that the product and equipment shall be for the buyer's own use and that the product shall not be resold. Since the agreement is specifically with the final consumer, and for reasons of safety, the Authority does not regard this requirement as offending against Section 4(1). Clause 9 also limits use of the product in motor vehicles unless they are properly adapted and with the permission of Flogas. This is essentially for safety reasons, and is not considered to offend against Section 4(1).

25. Under Section 4(2), the Competition Authority may grant a licence in the case of any agreement or category of agreements which, 'having regard to all relevant market conditions, contributes to improving the production of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not -

(i) impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;

(ii) afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question.'

26. In the opinion of the Authority, the industrial LPG agreement notified by Flogas fulfils the conditions provided for in Section 4(2).

27. The Authority is aware that LPG is volatile and can be dangerous, and that safety considerations are of great importance, often being laid down by statute. In addition, the supplier provides pressurised equipment, particularly storage tanks, for bulk customers. These features are not sufficient, however, to persuade the Authority that any exceptional treatment can be justified for the supply of bulk LPG to customers.

28. The Flogas industrial LPG agreement produces an appreciable improvement in distribution. It enables the supplier, who distributes bulk LPG direct usually to a specialised pressure storage tank on the premises of the customer, to plan the sales of his goods with greater precision and for a longer period, and to justify the investment in costly storage and distribution equipment. It ensures that the customer's requirements will be met on a regular basis for the duration of the agreement. It permits a reduction in distribution costs, compared to a situation where the customer purchased less frequently from two or more suppliers of LPG, for each of which he would need a separate storage tank. These benefits apply to well over half of LPG purchased in the State, the remainder being accounted for by retail sales of cylinder LPG. The agreement also contributes to technical progress by virtue of adherence to safety standards and the provision of technical advice.

29. In the Authority's view, the term consumers refers to the users of a product, who, in the present case, are bulk customers. Such customers gain a fair share of the benefits by being assured of regular supplies of LPG. This is especially important to customers who wish to use gas but who are not adjacent to the natural gas grid. Being generally fairly large purchasers, certainly larger than domestic consumers, they are able to use their buying power to secure some of the benefits of reduced distribution costs in their purchase prices for LPG. They also benefit from the fact that they do not need to invest in the essential pressurised storage equipment, which is not needed for other fuels, but they are charged a rental which does not represent the full cost of buying and maintaining the equipment, though this cost is probably recovered over time in the price of the LPG. Customers also benefit from the continuing attention to safety, by way of technical advice and safety support services.

30. There are special circumstances in the supply and distribution of LPG, where expensive storage equipment is required and is supplied by Flogas, and where safety factors are important. Since the Flogas equipment may be restricted to LPG from Flogas only, the benefits of the savings in distribution costs would not be obtained if the exclusive purchasing obligation was not imposed, and if one or more other LPG suppliers could also instal tanks and supply their brand of LPG. The exclusive purchasing obligation, in this situation, is considered to be indispensable in securing the benefits outlined above. (The Authority does not believe that exclusive purchasing obligations generally upon end-users or final customers could be justified except in special circumstances). The maximum five-year period of the agreement is justified by the size of the investment made by Flogas. These customers are generally located away from the national gas grid, and tend to be smaller than the major users of gas, which are located close to the natural gas grid. The Authority, however, would not regard a period for exclusive purchase of longer than five years as indispensable to secure the above benefits.

31. Given the structure of the LPG industry, the Authority considered carefully whether the exclusive purchasing system represented a significant barrier to entry which could result in the foreclosure of new entrants. The long-established firms, Calor and Flogas, have a combined market share of over 90%. Between them, they have exclusive purchase agreements with almost [ ] bulk customers, excluding domestic consumers. Not surprisingly, these customers include those which regard gas as an essential fuel, but which do not have access to natural gas, though they are few in number. Establishment of a presence in the market as a supplier of LPG is an expensive operation. Nevertheless, in spite of the fact that the LPG market has been dominated by only one or two firms since its establishment nearly 60 years ago, the Authority considers that the following facts are also relevant:

(a) while several thousand customers in total are bound to purchase exclusively from one supplier for up to five years, there are a large number of other potential customers available to a new entrant for the supply of LPG;

(b) it might be expected that, on average, up to 20% of the tied agreements expire every year, and these customers are free to sign a new agreement with the existing supplier or with another supplier;

(c) the industry has been marked by the occasional successful entry of new suppliers, such as Ergas in 1971, Flogas in 1978, Tervas in 1987 and Blugas in 1990. Although Ergas ceased to exist as a supplier independent of Flogas in 1989, Blugas does appear to have built up a network of bulk customers and to have achieved a not insignificant market share in a relatively short period.

The Authority concludes, therefore, that, while the existence of networks of tied customers with exclusive purchasing agreements might make it more difficult to enter the LPG market than in the absence of such arrangements, access to the market is not entirely ruled out, and the exclusive purchasing systems do not operate to foreclose new entry. At the same time, the establishment of a large exclusive customer network by Blugas, in addition to those of Flogas and Calor, would make it more difficult for another supplier to enter the market than it has been for Blugas to enter.

32. As already noted, customers should be powerful enough to ensure that they were not paying excessive prices for Flogas LPG compared to that from a competitor. In addition, it is always possible for customers to use another fuel in alternative equipment with relatively little delay, and to cease purchasing LPG entirely. There is thus no possibility of eliminating competition in respect of a substantial part of the products in question as a result of the notified agreement.

33. While the above consideration of the requirements of Section 4(2) has related primarily to the supply of LPG to bulk storage tanks, the Authority considers that it is equally applicable in the case of supply in cylinder form, even where the cylinders are obtained from distributors or dealers and not directly from Flogas. Furthermore, a customer which obtains cylinder LPG has the option of obtaining the cylinders from dealers on foot of the normal Flogas cylinder and regulator agreement, rather than under the industrial LPG agreement.

34. The Authority has decided to grant a licence in this case to agreements which involve the exclusive purchase of bulk LPG for a period of up to five years, whereas in the LPG dealer category licence it only permitted exclusive purchasing agreements provided that these did not exceed two years in duration (3). This is because the Authority considers that the market conditions differ between the two situations. In particular, the dealer agreements resulted in the tying of a large proportion of all available retail outlets, which is not the case with the bulk LPG agreements.

35. For the sake of completeness, the Authority considers that an agreement which provided for an indefinite period of exclusive purchase after an initial five-year period, subject to 30 days notice at the end of each year, would not satisfy all the conditions of Section 4(2), and would not therefore qualify for the grant of a licence.

36. In its assessment, the Authority has had regard to the approach adopted by the EU Commission to exclusive purchasing agreements, particularly those where the product is to be used in the production of another product, rather than for resale. In its Seventh Report on Competition Policy (4), the Commission stated:

(a) 'Exclusive purchasing agreements may endanger competition, because they limit the purchaser's freedom of choice and therefore at least potentially restrict the sales outlets open to other suppliers.' (p. 21).

(b) 'The applicability of Article 85(1) to exclusive purchasing and other such arrangements depends on whether or not the arrangement, either alone or in conjunction with other similar arrangements between the same or different firms, may appreciably affect entry to the market and sales by third parties.' (p. 23).

(c) 'The Commission considers that exclusive purchasing agreements can contribute to improving the production and distribution of goods, because they make it possible for the parties to the agreement to plan their production and sales more precisely and over a longer period, to limit the risk of market fluctuation and to lower the cost of production, storage and marketing.' (p. 23).

(d) 'However, exemption can only be given where the firms involved do not retain the whole of the benefit. Consumers must be allowed their fair share as well. The benefits must also be great enough to balance out the restrictions of competition they bring with them. These tests are not satisfied if the exclusive arrangements make it more difficult for other firms to sell on the market, and especially if they raise barriers to market entry.' (p. 24).

37. Flogas and their industrial customers are undertakings within the meaning of the Competition Act. The industrial LPG agreement is an agreement between undertakings. Because of the exclusive purchasing requirement in the agreement, it offends against Section 4(1) of the Act. Nevertheless, the Authority is of the opinion that all the conditions set out in Section 4(2) of the Competition Act have been fulfilled in respect of the agreement.

38. The Authority therefore grants a licence under Section 4(2) in respect of the notified standard Flogas industrial LPG agreement.

39. The licence shall apply from the date of this decision, that is 10 April 1995. It appears appropriate that the period specified for the licence should be ten years, that is until 9 April 2005.

40. Under Section 8(1) of the Competition Act, the Authority may grant a licence subject to such conditions as may be attached to and specified in the licence. Given the very large market share possessed by Flogas and Calor, the Authority considers that it is necessary to monitor developments in the market for bulk LPG in order to ensure that the conditions of Section 4(2) continue to be satisfied.

Accordingly, the licence is issued subject to the following reporting conditions:

that Flogas, every year before the end of April, submit to the Authority the following information:

(a) the total number of industrial LPG agreements (that is non-domestic bulk supply agreements) in operation at the end of the preceding year; and

(b) the total volume of sales, in tonnes, of industrial LPG to those customers in the preceding year.

The first of these reports, however, shall be submitted before the end of May 1995.

41. The Authority therefore grants the following licence to the agreement notified by Flogas:

The Competition Authority grants a licence to the standard Flogas industrial LPG agreement notified to the Competition Authority on 14 April 1992 (CA/16/92E), insofar as the buyers are undertakings within the meaning of Section 3(1) of the Competition Act, 1991, on the grounds that, in the opinion of the Authority, all the conditions of Section 4(2) of the Competition Act have been fulfilled. This licence shall apply from 10 April 1995 to 9 April 2005.

Flogas shall every year before the end of April, send a report to the Authority covering the preceding year. The first of these reports, however, shall be submitted before the end of May 1995. The reports shall contain the following information:

(a) the total number of industrial LPG agreements (that is non-domestic bulk supply agreements) in operation at the end of the preceding year; and

(b) the total volume of sales, in tonnes, of industrial LPG to those customers in the preceding year.

1. Decision No. 364 of 28 October 1994.

2. Decision No. 361 of 13 October 1994.

3. Op. cit.

4. EC Commission, Seventh Report on Competition Policy, 1977, Brussels, Luxembourg, April 1978.