Complaint alleging Chinese Petroleum Corp. had improperly raised the price for fuel oil in violation of the Fair Trade Law.
Case:
Complaint alleging Chinese Petroleum Corp. had improperly raised the price for fuel oil in violation of the Fair Trade Law.
Key Words:
cross-subsidy; joint products
Reference:
Fair Trade Commission Decision of September 27, 2001 (the 516th Commissioners' Meeting)
Industry:
Petroleum Refineries (1910).
Relevant Laws:
Article 10(1)(ii) of the Fair Trade Law
Summary:
1. This case arises from a complaint filed by the Taiwan Cogeneration Association, and is summarized as follows: On 28 March 2000, the Chinese Petroleum Corp. (Chinese Petroleum) raised its prices for fuel oils by 12.5% to 16%, then on the following day (29 March), citing rising global petroleum prices, raised its prices for gasoline, diesel, and kerosene products by 2.99%. The Energy Commission of the Ministry of Economic Affairs has stated: "Since the first phase of the opening of Chinese Taipei's markets to imported fuel oils, aviation fuels, and liquefied petroleum gas (LPG) in January 1999, petroleum price controls only apply to petroleum products for which Chinese Petroleum enjoys a market monopoly. Fuel oil prices are determined by the market, and Chinese Petroleum was within its rights in this case to adjust its fuel oil prices." However, until competitors enter the Chinese Taipei fuel oil market, Chinese Petroleum will continue to enjoy a monopoly. To adjust gasoline, diesel, and kerosene prices on the basis of market competition while leveraging the company's monopoly position to raise fuel oil prices much more sharply was improper. Petroleum products are joint products. As such, the production costs and prices of fuel oils are closely linked to those of gasoline, diesel, and kerosene products. Assuming that the average costs of Chinese Petroleum rose by 3% or more, then it would appear that Chinese Petroleum, by raising the price of its price-controlled gasoline, diesel, and kerosene by slightly less than 3%, was relying on a larger fuel oil price hike to make up for the difference. In effect, the company used its fuel oil income to subsidize losses on gasoline, diesel, and kerosene products. This created illegal cross subsidies, and constituted an abuse of the company's monopoly position.2. The Fair Trade Commission investigated this matter and found that when Chinese Petroleum took the action at issue (in March 2000), it still had a market monopoly for fuel oils. There was nothing improper about the company's fuel oil pricing strategies, or the considerations upon which these strategies were based, either before the opening of the fuel oils market in January 1999 or afterwards. When the company raised its fuel oil prices on 28 March 2000, it did so in response to fluctuating international crude oil prices and changing petroleum purchasing costs. When the company's selling, general, and administrative expenses are taken into account, the fuel oil price adjustment would seem to fall within reasonable bounds. Moreover, Chinese Petroleum's fuel oil prices were never set strictly on the basis of petroleum prices in the first place, and various related costs had gone up. In view of these factors, it cannot be inferred simply from Chinese Petroleum's monopoly position and the extent of the price hike that Chinese Petroleum improperly set fuel oil prices in violation of the law. As for the question of whether Chinese Petroleum violated the Fair Trade Law by cross-subsidizing its gasoline, diesel, and kerosene products, an examination of figures provided by Chinese Petroleum on its net profit ratios for fuel oils, vehicle-use diesel, and gasoline from July 1999 to December 2000 revealed that net profits on fuel oil sales were significantly lower than for other petroleum products. The evidence is thus insufficient to substantiate the complainant's claim that fuel oil income was used to subsidize other petroleum products.3. It was only in 2000 that Chinese Petroleum stopped basing its fuel oil prices strictly on petroleum prices. As this is a very recent change, it is still too early at this point in time to discuss price hike patterns. As such, Chinese Petroleum's arguments in defense of its price hike, and the evidence provided to support these arguments, are to be regarded as valid. Moreover, there is no concrete evidence to support the claim that Chinese Petroleum's March 2000 fuel oil price hike constituted an abuse of the company's monopoly position, or that the company improperly set its prices or engaged in cross-subsidization. Accordingly, the Fair Trade Commission found that Chinese Petroleum did not violate the Fair Trade Law.Appendix:Chinese Petroleum Corp.'s Uniform Invoice number: 03707901Summarized by Yang, Chia-Hui; Supervised by Lin, Gin-Lan