A Study on the Regulations for the LPG Market

1. Background of Study
Besides electricity, national gas (NG) and liquid petroleum gas (LPG) are the two main sources of heat energy in Taiwan.
Despite their being the main sources of heat energy in the country, the two energy products differ in the heating value they generate, the way they are distributed, and the how they are purchased. Therefore, the corresponding markets are considered different in industry classification for administration and market differentiation under the competition law.
Pipelines need to be installed and deployed to distribute NG and huge amounts of sunk costs are inevitable. This creates an entry barrier and the industry involves economies of scale. To prevent over-competition from rendering the market unable to have the benefits of economies of scales, the business is classified as a public utility in administrative regulations, making such operations regional monopolies under government supervision. At present, there are only 25 NG companies in the country and the Act on the Supervision of Private-run Public Utilities, the Regulations for the Administration of Gas Businesses, and the Regulations for Natural Gas Enterprises have been enacted to give the Ministry of Economic Affairs, the competent authority of the industry, to oversee the management, quality standards, facility standards, and sales of natural gas businesses and also to establish a set of charge criteria to prevent disputes. Hence, not many problems have occurred.
In comparison, LPG needs to be pressurized and bottled before the public can use it. The transportation, bottling and use of the product give the general impression that it is not as safe; therefore, LPG has been classified as a hazardous object. Moreover, as the market structure is complicated (with 3 importers and producers at the upstream, 10 distributors, 110 bottling plants, and around 3,400 retailers in the country), it is rather difficult to establish a complete set of regulations. Hence, currently the related regulations scatter in different laws. For example, those regarding the administration of LPG management are in the Petroleum Administration Act and the ones concerning safety management are in the Fire Services Act.
For decades, the domestic LPG market remained rather closed as a result of tight government control. Due to the increasing tendencies of trade liberalization and privatization across the globe, the concept of deregulation grew stronger and stronger in industries that were placed under government control. The LPG market was no exception. In consequence, government control was removed to open the market to competition in sales and production and importation respectively in 1993 and 1999. In subsequence, however, one after another concerted action between LPG businesses occurred and the investigations and sanctions imposed by the competition authority seemed impossible to eradicate the incentives for illegal concerted actions and the retail prices seemed unable to reflect the prices expected after the market was open to competition. Was it the market structure or policy inconsistency between the supervisory and administrative agencies that made concerned businesses unable to do the right thing Or was it related to the competent authority’s frequent announcement of suggested LPG price ranges for LPG for household use, the regulation that the LPG bottles belonged to LPG businesses (to be purchased by LPG businesses), or the policy of increase of the LPG bottle replacement rate and change of the LPG bottle valve that caused cost rises for LPG businesses and in turn pushed up LPG prices Should the supervisory and administrative mechanisms be revised or the competition authority urged to tighten its enforcement to stop concerted actions and disruptions of trading order Apparently, further understanding and examination of structural changes in the market were required to identify the causes that rendered the market competition mechanism useless, made it impossible to carry through the policies and created the chaotic phenomena in the market, so that countermeasures or suggestions could be established to cope with the these problems.

2. Methods and Process of Study
Initially, the focus of this study is on the competition regulations for the LPG industry and the administrative regulations for the supervision of the industry. Jurisprudential methodology such as definition, induction and comparison are applied to compare and analyze the development of the supervisory and administrative systems adopted in Japan and Taiwan.
The Japanese LPG market structure, laws and regulations, and administrative measures are compared with those in Taiwan for two reasons. First, 75% of Japan is mountainous areas. This makes installation of NG pipelines a very difficult task. Although use of NG is more common in cities, LPG remains household fuel in old communities and buildings. In suburban areas and the countryside, LPG remains the primary source of household heat energy, like in Taiwan. Second, the structure of the Japanese LPG market is extremely similar to the one in Taiwanese. The differences are the flexibility of distribution levels, completeness of administrative measures, and changes and innovativeness in the pricing system in Japan. Taiwan can learn from these remarkable achievements; therefore, the Japanese LPG market is adopted for comparison.
Initially, the legislative history of the Japanese LPG regulations and administrative practices are provided in this study. Then, the liberalization of the LPG market in Taiwan, market definition, and production and market structures are introduced before the supervisory and administrative measures and competition regulations established after the said market was opened to competition are described. The interventions of the competition authority Cases in cases of serious violations and the problems in the domestic LPG market as a result of structural or systemic factors are presented before suggestions with regard to improvement of the supervision and administration or competition mechanism can be proposed to put the trading order of the said market on the right track.

3. Suggestions
(1) Suggestions regarding management and safety administration
A. Place the management and safety administration under the jurisdiction of a single agency.
B. Develop pipelines that are easier to install, set up NG storage tanks to supply household use, and establish a volume-based price calculation system.
C. Promote de-layering to allow flexible reduction of production and distribution processes.
D. Remove the regulation on the upper limit of LPG retailers are allowed to keep in store and upgrade the corresponding safety and hazard prevention measures.
E. Stop government interference with market prices to allow free competition.
(2) Suggestions for the competition authority
One of the most serious problems in the domestic LPG market is concerted actions between LPG businesses to increase prices. The interests of consumers are jeopardized and market prices cannot return to reasonable competitive rates after manmade manipulation has been done. How can the interests of consumers be protected and market competition be maintained when the FTC finds itself out of options to cope with such situations These have been fundamental issues behind the doubts from various sectors about the effects of the FTC’s law enforcement.