Competition Authority Decision of 19 November 1998, relating to a proceeding under Section 4 of the Competition Act, 1991.

Notification No. CA/224/92E - Nitrigin Eireann Teoranta/Irish Fertilizer Industries Ltd.

Decision No. 526 

 Introduction

1	An agreement dated 23rd October 1987, whereby Nitrigin Eireann Teoranta (NET) sells on to Irish Fertilizer Industries Ltd. (IFI) natural gas which it purchases from Bord Gais Eireann, was notified to the Authority by NET on 30 September 1992. The notification requested a certificate under Section 4(4) of the Competition Act or, in the event of a refusal by the Authority to issue a certificate, a licence under Section 4(2).

The Facts
 
(a) Subject of the Notification

2	The agreement is one of two which were notified together on 30 September 1992 by NET. One (CA/225/92E) is a long-term agreement dated 1976 whereby NET, a state company, agrees to purchase certain quantities of natural gas from Bord Gais Eireann, another state company. This agreement will be the subject of a separate decision by the Competition Authority. The agreement under consideration here (CA/224/92E) concerns the onward sale by NET of this gas to IFI.

(b) The Parties

3	NET is a company wholly-owned by the State and was, until 1987, the only producer of fertilizer in the State. In 1987, NET entered into a joint venture with ICI, a UK company, to form IFI. The share capital of IFI is owned 51% by NET and 49% by ICI. As part of the formation of this joint venture, NET hived down to IFI the fertilizer business. According to NET’s accounts, “NET is the holding company in the group with a 51% shareholding in Irish Fertilizer Industries ... NET purchases natural gas from Bord Gais Eireann and sells the gas to IFI. NET is also involved in debt management and administration of medium and long-term borrowings.”

IFI is described in its accounts as a subsidiary of Nitrigin Eireann Teoranta. Its principal activities are the manufacture and sale of nitrogen-based fertilizers and associated chemical products.

(c) The Products and the Market

4	The subject of the agreement is natural gas. BGE is the only supplier in the State of natural gas. The quantities of gas which are the subject of the agreement between BGE and NET, and hence of the agreement between NET and IFI, represent about 20% of the total market of natural gas in the State.

(d) The Notified Arrangements

5	The Agreement provides that IFI shall purchase from NET and NET shall sell to IFI all quantities of natural gas supplied by BGE to NET under the 1976 Agreement. IFI agrees that it will not use any natural gas supplied to it other than in the production of ammonia and/or fertilizer or any intermediate products therefor and that it will not resell any natural gas supplied to it to any other party.

(e) Submissions of the Parties

6	The notifying party argued that the agreement was eligible for a certificate because it was between undertakings which formed a single economic unit. NET had a majority shareholding in IFI and due to the presence of the gas supply arrangements, NET and IFI had integrated their respective economic functions. As such, NET effectively controlled IFI. It would be unrealistic to regard IFI and NET as separate economic units. The Agreement was not one between undertakings and therefore did not fall within Section 4 of the Act. Under the circumstances, the Agreement was eligible for a certificate from the Authority.

7	The notifying party also made arguments in respect of the granting of a licence. As the Authority does not consider that these arguments are relevant in this case, they are not reproduced here.

(f) Submissions of Other Parties

8	Mr James Cogavin, an industry consultant, wrote to the Authority on 4 June 1998 stating that significant changes were now about to take place in these arrangements. BGE could be seen as having a dominant position in that it had been a supplier of gas to NET. A pricing policy would now have to be worked out for gas to the fertilizer business. NET had been in a dominant position as it had only one supplier and one customer. Mr Cogavin stated that NET seemed to have had a strange methodology in the prices it paid. He mentioned the possibility that illegal state aid had been used at the time of the IFI formation. Mr Cogavin also stated that IFI’s dominance in the Nitrogen/High Nitrogen compounds sector in the Republic/Northern Ireland markets was likely to be proven. In that event, various aspects of their commercial dealings might need to be examined, to ensure that there was no exploitation of that position. IFI’s 49% shareholder ICI was now fully out of the fertiliser business and would be keen to depart the scene here in good order.

(g) Notification to Commission of the European Communities.

9	The notifying party stated that the joint venture agreement between NET and IFI had been notified to the Director General for Competition by memorandum dated 9th June 1986, and by supplemental memorandum to the Director General on 26th June 1986. A copy of the Director General’s reply was provided, confirming the Commission’s opinion that no contravention of Article 85 of the Treaty of Rome occurred by virtue of the joint venture agreement.

The Assessment

(a) Section 4(1)

10	Section 4(1) of the Competition Act, 1991, as amended, states that “all agreements between undertakings, decisions by associations of undertakings and concerted practices, which have as their object or effect the prevention, restriction or distortion of competition in goods or services in the State or in any part of the State are prohibited and void.”

(b) The Undertakings and the Agreement

11	Section 3(1) of the Competition Act defines an undertaking as “a person, being an individual, a body corporate or an unincorporated body engaged for gain in the production, supply or distribution of goods or the provision of a service.” NET is, inter alia, engaged for gain in the purchase and sale of natural gas and is an undertaking. IFI is engaged for gain in the manufacture and sale of nitrogen-based fertilizers and associated chemical products and is an undertaking. The agreement is an agreement between undertakings. 

(c) Applicability of Section 4(1)

12	The Authority considers that the essential issue in this case is the fact that NET is the parent company of IFI. The question of whether two companies are economically independent undertakings or constitute a single economic entity must be explored. According to Whish (Competition Law, 3rd edition), the crucial issue is whether in substance the firms in question, although related to each other, are really independent in their decision-making, or whether one has control over the other. For this purpose it is necessary to examine various factors such as the shareholding that a parent company has in its subsidiary, the composition of the board of directors, the extent to which the parent influences the policy of or issues instructions to the subsidiary, etc.

13	In this case, NET has 51% of the shares in IFI. According to the Articles of Association of IFI, the number of directors must not be less than three. The share capital of the company is £30,000,000 divided into 15,300,000 ‘A’ shares of £1 each and 14,700,000 ‘B’ shares of £1 each. For as long as an Irish State entity has a majority of the ‘A’ shares, the Minister (for Industry and Commerce) has the right to appoint up to four directors (“the ‘A’ Directors”). Any member or members who has a majority of the ‘B’ shares can appoint up to three directors (“the ‘B’ Directors”). The Directors can themselves appoint other directors, known as ‘C’ Directors, but these are not entitled to vote at meetings of directors.

14	In its Decision on AGF/Irish Life Holdings plc, the Authority considered in detail the question of whether an agreement between companies which were members of the same group could be regarded as preventing, restricting or distorting competition within the meaning of Section 4(1) of the Competition Act, 1991. The Authority concluded that:

“A group relationship normally arises where there is common ownership or control of undertakings. The individual undertakings within a group would not normally enjoy commercial independence in such circumstances. The group would therefore normally be regarded as constituting a single economic entity even though it may be composed of a number of separate undertakings. Clearly an economic entity does not compete with itself.”

15	In that decision the Authority quoted precedents from the European Commission and the European Court of Justice which found that agreements between a parent and a subsidiary, although they might, strictly speaking, be agreements between undertakings, did not offend against Article 85(1) if the “undertakings” formed an economic unit within which the subsidiary had no real freedom to determine its course of action on the market, and “if the agreements or practices were concerned merely with the internal allocation of tasks as between the undertakings.”

16	In this case NET has “hived down” the fertilizer business to its subsidiary, IFI, but has retained its role in the purchase and onward sale of natural gas. The Authority considers that these arrangements merely involve a reallocation of functions within the group.

(d) The Decision

17	In the Authority’s opinion, NET and IFI are undertakings within the meaning of Section 3(1) of the Competition Act, 1991, as amended, and the notified agreement is an agreement between undertakings. The Authority considers that, in view of (i) NET’s majority shareholding in IFI and (ii) the nature of the relationship and activities of IFI and NET, the two companies are not separate entities and are therefore not in competition with each other. The Authority therefore considers that the notified arrangements do not prevent, restrict or distort competition within the meaning of Section 4(1) of the Competition Act.

The Certificate

The Competition Authority has issued the following certificate:

The Competition Authority certifies that, in its opinion, on the basis of the facts in its possession, the natural gas supply agreement between Nitrigin Eireann Teoranta and Irish Fertilizer Industries Ltd. notified under Section 7 of the Competition Act on 30 September 1992 (notification no. CA/224/92E) does not contravene Section 4(1) of the Competition Act, 1991, as amended.

For the Competition Authority,

Isolde Goggin
Member
19 November 1998.