Chinese Petroleum Corporation

Chinese Petroleum Corporation

1231st Commissioners' Meeting (2015)

Case:

The FTC initiated an ex officio investigation into the reasonableness of CPC’s LPG price calculation formulas and suspected concerted action of LPG businesses

Keyword(s):

Chinese Petroleum Corporation (CPC), liquefied petroleum gas (LPG), price calculation formula

Reference:

Fair Trade Commission Decision of June 10, 2015 (the 1231st Commissioners' Meeting), Letter Kung Zhi Tzu No. 1041360370

Industry:

Gas Supply (3520)

Relevant Law(s):

Article 15 of the Fair Trade Law

Summary:

Yeh Chin-ling and three other legislators put forward a proposal at the Legislature Yuan to urge the FTC to investigate whether CPC’s LPG price calculation formulas were reasonable and whether LPG businesses had engaged in any concerted action. Legislator Yeh Chin-ling and two other legislators representing Taiwan Solidarity Union also held a press conference to point out that CPC and Formosa Petrochemical Corp. did not lower LPG prices according to the rates they adopted before they were sanctioned for joint monopolization and LPG businesses did not lower LPG prices according to the rates they adopted before the sanction was imposed for their joint price increase. The FTC therefore launched an investigation to look into both matters simultaneously.

Findings of the FTC after investigation:

(1) The structure of the domestic LPG market was divided into four levels, namely production and importation (suppliers), distribution, bottling, and retailing (LPG shops). The businesses at each level had their personnel and operating costs that eventually reflected on the retail prices of bottled LPG.

(2) CPC began to implement the “LPG Price Monthly Review and Adjustment Mechanism” in January 1997. Prices were reviewed and adjusted according to the agreed contract price of the month announced by Saudi Arabia Oil Company, ocean freight rates, operating cost and the international oil market prices. The results were posted on the websites of the Bureau of Energy of the Ministry of Economic Affairs and CPC. However, CPC was also required to take into consideration the policies of the Executive Yuan and the Ministry of Economic Affairs as well as the decision of the Legislative Yuan when making its price adjustment decisions.

Grounds for non-disposition:

(1) Regarding whether CPC’s LPG price calculation formulas were reasonable: CPC calculated its LPG prices in accordance with the contract price, ocean freight rate and exchange rate fluctuations. That is, the contract price was only one of the factors behind list price changes. The Ministry of Economic Affairs invited specialists and scholars to review and revise the price adjustment mechanism and the decisions made in such meetings held in December 2009 and January 2011 were to maintain the existing adjustment mechanism. In the meeting held in February 2013, the periods to be included in ocean freight rate and exchange rate calculation were revised. In other words, the said mechanism had been reviewed by the competent authority for several times. Besides, to comply with government policy, CPC did not fully adjust the list price in 2013 and 2014 and only gradually recovered later the costs the company had absorbed. For this reason, it was difficult to conclude that the price calculation formulas of CPC were unreasonable merely based on the comparison made between the contract price and list price increase and decrease margins.

(2) Regarding whether Formosa Petrochemical Corp. was in violation of concerted action regulations by following CPC in price adjustment: The domestic LPG market was an oligopolistic market dominated by two major suppliers. CPC publicly announced market information through its price adjustment mechanism and Formosa Petrochemical Corp. could easily estimate CPC’s LPG prices for the following period according to the adjustment mechanism and avoid the risk of making its own price decisions. In other words, as long as Formosa Petrochemical Corp. followed the price of CPC, it would become the company’s best price adjustment plan. There would be no additional cost of analysis or the question of lagging in its decision-making. Iy is not necessary for the company to worry about loss of customers and could at the same time safeguard its business profits. This is a characteristic of oligopolistic markets. Moreover, the LPG prices and price adjustment margins of CPC and Formosa Petrochemical Corp. in the past three years were not consistent at all. Even if the two companies intended to establish a “mutual understanding,” they would still be unable to change the adjustment mechanism that was open, transparent and subject to government policy. Therefore, the price strategies of the two major suppliers had to be treated as price leadership strategy and price follower strategy. There was no concrete evidence to prove that CPC and Formosa Petrochemical Corp. had entered into any contracts, agreements or mutual understandings of any form to jointly determine LPG prices in the country.

(3) Regarding whether domestic retail prices of bottled LPG failed to reflect list price changes after CPC finally recovered in December 2014 the costs it had absorbed earlier: After CPC finally recovered in December 2014 all the costs it had absorbed earlier, the amount of list price increase or decrease each month between January and April 2015 was generally consistent with the increase or decrease of average retail price of 20kg bottled LPG in the country according to the result of random checks conducted by the Bureau of Energy of the Ministry of Economic Affairs. However, the increase and decrease margins of CPC’s list price were larger than those of the retail price of bottled LPG. In other words, “upstream price change margins were large and downstream price change margins were small.” The cause of this phenomenon was that the cost changes at every stage of the sales process eventually reflected on the retail prices of bottled LPG. Hence, the retail prices of bottled LPG already reflected the list price adjustments of CPC and it was difficult to conclude that LPG businesses had violated the concerted action prohibition provisions set forth in Article 15 of the Fair Trade Law based on existing evidence.

(4) Regarding LPG businesses did not go back to previous price standards after they were sanctioned by the FTC for jointly increasing prices: The FTC is not a commodity price regulator. Statutorily, the FTC is not given the authority to control commodity prices and order businesses to adjust prices to earlier levels. Moreover, when sanctioning LPG businesses earlier, the FTC already ordered them to stop their unlawful practice. When the FTC inspected LPG trade associations, it did not discover any violation of regulations prohibiting concerted actions. Meanwhile, according to statistics released by the Bureau of Energy, the average retail prices of bottled LPG in different areas varied, indicating that free competition existed in the bottled LPG market. As the situation of the market was constantly changing, “original prices” were not necessarily the reasonable prices in the market at present. Besides, how much price decrease was reasonable was not for the government to decide. The prices of bottled LPG should be determined in accordance with the supply and demand on the market. It would be inappropriate for the government to impose direct price control.

Summarized by Wang ,Hung-Chu; Supervised by Liou ,Chi-Jung

(1)	Regarding whether CPC’s LPG price calculation formulas were reasonable: CPC calculated its LPG prices in accordance with the contract price, ocean freight rate and exchange rate fluctuations. That is, the contract price was only one of the factors behind list price changes. The Ministry of Economic Affairs invited specialists and scholars to review and revise the price adjustment mechanism and the decisions made in such meetings held in December 2009 and January 2011 were to maintain the existing adjustment mechanism. In the meeting held in February 2013, the periods to be included in ocean freight rate and exchange rate calculation were revised. In other words, the said mechanism had been reviewed by the competent authority for several times. Besides, to comply with government policy, CPC did not fully adjust the list price in 2013 and 2014 and only gradually recovered later the costs the company had absorbed. For this reason, it was difficult to conclude that the price calculation formulas of CPC were unreasonable merely based on the comparison made between the contract price and list price increase and decrease margins.
(2)	Regarding whether Formosa Petrochemical Corp. was in violation of concerted action regulations by following CPC in price adjustment: The domestic LPG market was an oligopolistic market dominated by two major suppliers. CPC publicly announced market information through its price adjustment mechanism and Formosa Petrochemical Corp. could easily estimate CPC’s LPG prices for the following period according to the adjustment mechanism and avoid the risk of making its own price decisions. In other words, as long as Formosa Petrochemical Corp. followed the price of CPC, it would become the company’s best price adjustment plan. There would be no additional cost of analysis or the question of lagging in its decision-making. Iy is not necessary for the company to worry about loss of customers and could at the same time safeguard its business profits. This is a characteristic of oligopolistic markets. Moreover, the LPG prices and price adjustment margins of CPC and Formosa Petrochemical Corp. in the past three years were not consistent at all. Even if the two companies intended to establish a “mutual understanding,” they would still be unable to change the adjustment mechanism that was open, transparent and subject to government policy. Therefore, the price strategies of the two major suppliers had to be treated as price leadership strategy and price follower strategy. There was no concrete evidence to prove that CPC and Formosa Petrochemical Corp. had entered into any contracts, agreements or mutual understandings of any form to jointly determine LPG prices in the country.
(3)	Regarding whether domestic retail prices of bottled LPG failed to reflect list price changes after CPC finally recovered in December 2014 the costs it had absorbed earlier: After CPC finally recovered in December 2014 all the costs it had absorbed earlier, the amount of list price increase or decrease each month between January and April 2015 was generally consistent with the increase or decrease of average retail price of 20kg bottled LPG in the country according to the result of random checks conducted by the Bureau of Energy of the Ministry of Economic Affairs. However, the increase and decrease margins of CPC’s list price were larger than those of the retail price of bottled LPG. In other words, “upstream price change margins were large and downstream price change margins were small.” The cause of this phenomenon was that the cost changes at every stage of the sales process eventually reflected on the retail prices of bottled LPG. Hence, the retail prices of bottled LPG already reflected the list price adjustments of CPC and it was difficult to conclude that LPG businesses had violated the concerted action prohibition provisions set forth in Article 15 of the Fair Trade Law based on existing evidence.
(4)	Regarding LPG businesses did not go back to previous price standards after they were sanctioned by the FTC for jointly increasing prices: The FTC is not a commodity price regulator. Statutorily, the FTC is not given the authority to control commodity prices and order businesses to adjust prices to earlier levels. Moreover, when sanctioning LPG businesses earlier, the FTC already ordered them to stop their unlawful practice. When the FTC inspected LPG trade associations, it did not discover any violation of regulations prohibiting concerted actions. Meanwhile, according to statistics released by the Bureau of Energy, the average retail prices of bottled LPG in different areas varied, indicating that free competition existed in the bottled LPG market. As the situation of the market was constantly changing, “original prices” were not necessarily the reasonable prices in the market at present. Besides, how much price decrease was reasonable was not for the government to decide. The prices of bottled LPG should be determined in accordance with the supply and demand on the market. It would be inappropriate for the government to impose direct price control.