An Evaluation of the Benefits of Liberalizing Chinese Taipei's Liquefied Petroleum Gas Market and its Relevance to the Fair Trade Act

Abstract

Chinese Taipei's liquefied petroleum gas (LPG) market can be divided into four segments: production (importing), distribution, bottling, and delivery. When the market was government-regulated, LPG distribution was a monopoly under the LPG Supply Division of the Veterans Affairs Commission, while production and importing were another monopoly, run by the Chinese Petroleum Corp. Thus the market was mired for decades in what economists call an “ongoing monopoly,” and did not benefit from the efficiency that would otherwise have come from market competition.

With the rising international trend toward liberalization and privatization, the idea of deregulation began to take root in the various industries that had thus far been subject to government regulation, and the LPG industry was no exception. The distribution, production and importing sectors of the market were deregulated one after the other in 1993 and 1999 in the hope of achieving the efficiency that comes with fair competition.

However, when the Fair Trade Commission (FTC), acting in the public interest, conducted an investigation into the market, it discovered that bottlers and distributors were violating the Fair Trade Act by acting in concert and that the price of LPG for the end consumer had yet to show the clear decline that had been expected to result from market deregulation. Following in-depth research on the structure of the LPG market and the benefits of deregulation, it was found that deregulation of the distribution and importing sectors of the market did indeed benefit the economy by helping to bring about increased LPG transaction volume. Nevertheless, despite this positive effect of deregulation, retail prices did not show the decline that had been expected from market liberalization. This was due in large part to inappropriate statutory and regulatory restrictions, non-transparency of trading information, and monopolization of the LPG bottling market. The result is that the benefits of vertical competition did not trickle down to downstream vendors or to the end consumer.

In researching and analyzing the FTC's dispositions on cases involving the LPG market, in this report we make the following two major recommendations:

(1) Eliminate inappropriate statutory and regulatory restrictions:

In a competitive market, factors such as transport costs and transport time prompt LPG vendors to choose the nearest bottling facility as their supplier. At the same time, the market mechanism prompts market players to achieve minimum delivery distance, and to raise the functionality and aims of storage facilities. Unfortunately, the current “Regulations Governing the Establishment Criteria and Safety Management at Facilities Where Publicly Hazardous Materials and Flammable High-Pressure Gases are Handled” require that all sales outlets be located within 20 kilometers of the nearest storage facility. These regulations have done a marvelous job in terms of restricting choice of trading partners and putting a clamp on market competition. Since vendors must have a storage certificate for the conduct of legal business operations, and this can only be obtained from a small number of LPG suppliers (sometimes only one) within the legally designated distance, the regulation restricts the choice of trading partners. It is also a problem for bottlers, who can only do business with a limited number of customers. The result is restricted competition. This is the prime reason why the retail market prices of bottled gas have frequently been in excess of NT$600 or more per bottle in recent years despite bottling overheads of only NT$200 to NT$300. The situation has restricted market competition and prejudiced the rights and interests of the general public. What is more, the unlimited discretionary authority of fire fighting agencies has sparked political firestorms, and illegal business practices have become a virtual norm in the LPG industry. These negative effects have greatly distorted the market mechanism and affected the interests of the consuming public. The competent authority's most urgent priority at this point should thus be to amend the relevant regulations as soon as possible, so that they read as follows: The horizontal distance between the storage facility and the point of sale shall not exceed 60 kilometers, and the amount of LPG stored at the point of sale outside business hours (or after 8 pm) shall not exceed 128 kilograms.

(2) Transparency of trading information

The LPG market is still characterized by an asymmetry of trading information. Consequently, the benefits of vertical upstream/downstream competition and horizontal competition among bottlers have yet to fully make their way to downstream vendors. The end price paid by consumers has therefore yet to reflect the benefits of the decision to open up the market to competition. This research report consequently recommends that the price quoted by the distributor to the bottler and the transport costs incurred by the bottler shall be disclosed through the issuance of receipts that reflect actual transaction prices, thus ensuring transparency of price information for transactions among upstream and downstream enterprises and preventing the use of commission rebates or discount systems from causing asymmetry in trading information. This would not only prevent bottlers from inappropriately profiting as a result of the monopolization of trading information, but would also spur competition in the LPG market and eliminate tax evasion.

Written by:

Tien-Liang Tso, Hsiu-Lin Hsieh, Chung-Chieh Huang, Chin-Chih Liu, Chia-HsienYang（Second Department）