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Cite as: [1994] IECA 364

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Flogas Irl Ltd authorised Licence dealer agreement Calor Teoranta authorised dealer agreement & Blugas Ltd [1994] IECA 364 (28th October, 1994)

COMPETITION AUTHORITY

Cylinder LPG Category Licence

Price £2.20

£2.90 incl. postage

Cylinder LPG Category Licence

Competition Authority Decision of 28 October 1994 granting a licence under Section 4(2) of the Competition Act, 1991, to a category of exclusive purchasing agreements in respect of cylinder liquified petroleum gas.

Decision No.364

Introduction

1. Under Section 4(2) of the Competition Act, 1991, the Competition Authority may grant a licence for the purposes of Section 4 of the Act to any category of agreements:

1. ´which in the opinion of the Authority, having regard to all relevant market conditions, contributes to improving the production or distribution of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not -

(i) impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;

(ii) afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question.'

2. Several agreements have been notified to the Authority concerning exclusive purchasing arrangements for the resale of cylinder liquified petroleum gas (LPG) by dealers. The Authority issued Statements of Objections to two suppliers in respect of their notified agreements. Having considered certain notified agreements at length and the relevant market, the Authority has decided to grant a category licence under Section 4(2) of the Act. The Authority published a draft of the category licence on 24 June 1994, and several submissions were received.

The Subject of the Decision

3. This decision concerns the supply and exclusive purchasing agreements between suppliers of cylinder LPG and resellers at the retail level, subsequently referred to as dealers. It does not cover agreements for the exclusive distribution of cylinder LPG to dealers, nor to agreements for the purchase of bulk LPG by end-users.

The Product Concerned

4. LPG is the term commonly used to describe butane or propane gases or a mixture of both. These gases can be readily liquified by applying moderate pressure. This gives LPG its unique advantage - it has the clean-burning characteristics of a gaseous fuel while at the same time it can be transported and stored as a concentrated liquid with a high energy content. LPG has a very broad range of applications including domestic and commercial cooking, heating and water-heating; process heating, space and water-heating in industry; the rearing of poultry and farm animals; atmospheric growth enrichment of plants; vehicle propulsion, power generation and finally as a chemical feedstock. LPG is supplied in cylinder or bulk form, cylinder LPG being mainly used for domestic cooking and heating. It is a volatile fuel, and is subject to stringent safety Regulations in storage, handling and use.

The Market

5. LPG forms part of the overall market for energy in Ireland. There are a wide variety of energy products including LPG, oil, coal, turf, electricity and natural gas. The consumption of the different fuels in recent years is shown in Table 1.

Table 1

Final Energy Consumption in Ireland

Fuel Tons of Oil Percent of Total

Equivalent (000's)

1988 1991 1988 1991

Coal 976 845 14.9 11.5

Peat 679 659 10.3 9.0

Oil 3,343 3,966 50.9 54.0

LPG 146 153 2.2 2.1

Gas 485 644 7.4 8.8

Electricity 934 1,084 14.2 14.7

Town Gas 1 - * -

TOTAL 6,564 7,351 100.0 100.0

2. Source: Department of Energy

*Negligible

3. Oil accounts for well over 50% of final energy consumption in Ireland, and electricity for over 14%, while the share of LPG in the total is only around 2%. While total energy consumption has increased between 1988 and 1991, this is largely due to an increase in oil consumption. Consumption of LPG was slightly higher in 1991 compared to 1988.

6. The Authority agrees with the often stated view of the EC Commission that "A relevant product market comprises in particular all those products which are regarded as interchangeable or substitutable by the consumer, by reason of the products' characteristics, their prices and their intended use", in situations ranging from application of the merger control Regulation to the Notice on agreements of minor importance. (1) The substitutes for LPG depend to some extent upon the usage to which the energy is put. For domestic cooking, electric cookers and, where the product is available, natural gas cookers are alternatives to LPG, as are oil-fired and solid fuel cookers. For domestic heating, the alternative fuels are also electricity, natural gas, oil and solid fuel, by means of central heating installations or single appliances or fireplaces. Two or more fuels may be used in a single household. While most fuels are substitutes in the medium to long run, there appears to be a much lesser degree of interchangeability in the short term. Once a particular appliance or system has been purchased, only one form of fuel can normally be used. Thus, for example, only LPG can be used in an LPG cooker or heater. In many households, cylinder LPG is used as a supplementary heating fuel. Some households have more than one appliance or system, each using a different fuel, though this can be costly. Over time, any appliance or system can be replaced by one using a different fuel. If a person wishes to use a cylinder LPG appliance, there is no substitute for a cylinder of LPG. In addition, safety obligations and a cylinder distribution system impose significant extra costs on LPG suppliers compared to other fuels, putting LPG at a relative price disadvantage compared to these fuels. Over the past 12 years, the price of other energy sources, according to Calor, has fallen in relation to LPG. Nevertheless, while mindful of the fact that LPG forms part of the total energy market, the Authority considers that cylinder LPG constitutes a distinct product market on its own.

7. The total consumption of LPG in Ireland since 1975 is shown in Table 2.

Table 2

LPG Consumption in Ireland (´000 tonnes)

Year Consumption Year Consumption

1975 148 1983 170

1976 148 1984 145

1977 168 1985 147

1978 149 1986 146

1979 166 1987 136

1980 169 1988 130

1981 163 1989 130

1982 176 1990 133

4. Source: Flogas, Davy Stockbrokers, November 1991.

5. Note : The above figures relate to tonnes of LPG, as compared to tonnes of oil equivalent in Table 1.

6. While changes in consumption of LPG as a whole have been marked in some years compared with the previous year, over the period there appears to have been an upward trend in consumption from 1975 to a peak in 1982, with a decline thereafter, so that 1990 consumption was more than 10% below that in 1975 and around 25% lower than the peak level in 1982. A number of reasons was advanced for the fall in LPG consumption over the last ten years, the demand for cylinder LPG for domestic purposes, in particular, having suffered a substantial decrease.

8. The structure of the LPG market has changed over the years. The first supplier was Calor, which entered the Irish market in 1936. Kosangas entered in 1951, and Calor took over Kosangas in 1971. That year also, Ergas (later associated with Shell) commenced operations, followed by Flogas in 1978 and Tervas in 1987. Flogas acquired Ergas in 1989, and in 1990 Blugas entered the market, Blugas being formed by three distributors of Esso products.

9. The main suppliers in the market at present are Calor Teoranta, Flogas Ireland Ltd and Blugas Ltd. Calor, which also owns Kosangas, has four import terminals - at Dublin, Cork, Whitegate and New Ross - and distribution terminals at Claremorris and Sligo, and its LPG cylinders are filled at Dublin and Cork. Flogas, which also owns Ergas, has three terminals in the State - at Drogheda, Cork and Ballyhaunis. From these, Flogas supplies a network of distributors, mainly by road tanker, and the distributors ´bottle' the gas in cylinders. Blugas was founded by three firms which were all involved in the oil distribution business. Its LPG is mainly supplied by Esso, and is stored at a terminal in Dublin, where it is bottled. Distribution was initially done by the three founder members, but Blugas itself has now replaced one of these. These three suppliers operate nationwide. Tervas operates mainly in the Cork area, with a small market share. Another firm, Trugas, was reportedly operating in the Drogheda area. Most LPG is imported, with some supplies being obtained from the INPC refinery at Whitegate.

10. The main suppliers have invested heavily in storage and filling equipment at depots, in road tankers and other delivery vehicles, and in small and medium-sized cylinders and bulk storage tanks. Part of the reason for this is that LPG is highly flammable, and has been designated a dangerous substance and is subject to extensive regulation and supervision. LPG is bottled centrally or locally, and is distributed by the supplier or by exclusive distributors to a large number and variety of retail outlets for resale to final consumers. Retail outlets include hardware, grocery, fruit and vegetable shops, builders' providers, newsagents, domestic appliance sales centres, garage forecourts, fuel depots and roundsmen of various sorts, e.g. milk, coal, etc.

11. It is understood that Calor sells through some 3,000 dealers, Flogas through some 3,400, and Blugas through over 1,000, although there was some dispute over these figures. A sizeable number of dealers sell small quantities of LPG, on average less than 10 cylinders a week. Generally each dealer has an exclusive purchase agreement with the supplier, even if supplies are obtained from distributors. Dealers are usually tied to a brand for five years, and are subject to certain safety standards. Suppliers have invested in dealer outlets in the form of hardware, such as cylinders, signs and storage cages, and they provide marketing, technical advice and safety support systems.

12. It is generally accepted that Calor is the market leader, with a share of the total market for LPG in excess of 60%, followed by Flogas with over 30% of the market. Blugas is considered to have a market share of more than 5%, with Tervas having under 1%.

13. LPG can only be used in specific appliances, and suppliers usually insist on approving these. Appliances can use any brand of LPG, although a special adaptor is needed in the case of Ergas.

14. Up to January 1986 the retail price of cylinder LPG was subject to strict price control by way of a Maximum Prices Order. Since then, there has been no statutory control of retail prices for LPG.

The Dealer Agreements

15. According to the notifications received, each dealer in cylinder LPG has an exclusive purchase agreement with its supplier. The dealer is required to purchase cylinder LPG exclusively from the supplier, or from a distributor appointed by the supplier, and is required not to engage, directly or indirectly, in the sale, distribution or advertising of any other brand or brands of LPG. The dealer is also obliged not to sell the product from any premises other than the premises specified in the agreement. In the case of the Calor (and Kosangas) and Blugas agreements, the agreement remains in force for a period of five years, with no period specified for notice of termination. The Calor agreement, where it has expired, has been replaced by an agreement which provides for such alternative period of exclusive purchase as may be licensed or certified under the Competition Act. (Previous versions of the Calor agreement provided that the agreement would remain in force indefinitely until terminated by either party giving 12 months' notice). The Flogas (and Ergas) agreement provides that the agreement remains in force for two years, and from year to year thereafter, subject to the right of either party to terminate the agreement on giving 12 months' notice, provided that the agreement terminates after five years. All agreements may be renewed after they have been terminated. The agreements do not confer any exclusive territorial rights on the dealer. None of the agreements contain a post-termination non-compete clause, though previous versions of the Calor agreement prohibited the dealer, for 3 months after termination of the agreement, from selling other brands of LPG within a one mile radius of the premises.

16. While not explicitly stated in the agreements, dealers are only appointed by the three main suppliers if they meet certain safety standards, as provided in Irish safety standards, I.S. 3213 of 1987, concerning the storage of LPG cylinders and cartridges.

17. Under the terms of the notified agreements, dealers are required not to engage in any activity which might prejudice the promotion and sale of the supplier's brand. They are also required to promote sales and to obtain new customers. Dealers are required to display approved signs, both outside and inside the premises, identifying the dealer as an approved dealer of the supplier. Dealers may be required to display advertising and publicity material, and only to advertise and publicise the product in a form approved by the supplier. They may be required to provide window space to display approved appliances. Dealers are required to sell cylinders under the supplier's trademark.

18. Dealers agree to keep stocks of cylinders and regulators, and in some cases, recognised appliances. They are required to provide suitable storage facilities and to allow access to the premises by the supplier. They may be required not to supply any customer unless that customer has signed an agreement with the supplier. Dealers are required to maintain an up-to-date list of the names and addresses of all customers, which may be inspected by the supplier at any time on request, although this requirement largely does not operate in practice.

19. Dealers may be required not to permit any other person, who is not authorised, to engage in the sale, delivery or service of the product. They may be required to ensure that cylinders are not filled by unauthorised persons. Dealers are required to comply with statutory safety provisions, and with specified standards, and with regulations established by the supplier. Dealers accept that the cylinders and regulators remain the property of the supplier at all times, and that they may not sell or transfer the cylinders other than in accordance with the agreement. Dealers agree that they are not constituted agents or servants of the supplier, though they may describe themselves as authorised dealers. They are required to maintain insurance, including public liability insurance.

20. All the notified agreements provided that the supplier would furnish the dealer with a notification showing the current retail price of the product, and that the dealer was obliged to display this notice in a prominent place on the dealer's premises. The Calor/Kosangas agreements provided that the dealer was required not to exceed the official retail prices in effect at the time of the delivery. (A similar provision was included in the previous Flogas/Ergas agreements).

21. The Calor and Flogas agreements provided that the dealer was not to permit their cylinders to be used other than in recognised appliances. The Calor agreement required the dealer not to sell or advertise appliances other than those recognised by Calor, and not to purchase appliances other than from Calor. The Flogas agreement required the dealer not to sell or advertise appliances which Flogas had notified were unsuitable for use with Flogas or for use in association with or close to Flogas.

EEC Regulation 1984/83

22. EEC Regulation No. 1984/83, of 22 June 1983, is a block exemption regulation which applies Article 85(3) of the Treaty of Rome to categories of exclusive purchasing agreements. The regulation entered into force on 1 July 1983 and it expires on 31 December 1997.(2)

23. Exemption is granted to agreements involving only two parties whereby the reseller agrees to purchase specified goods only from the supplier, or from a connected undertaking or one entrusted by the supplier with the sale of his goods. No exclusive territory is allotted to the reseller, but the supplier may be obliged not to distribute the contract goods or competing goods in the reseller's principal sales area and at the reseller's level of distribution. There are general provisions regarding what is and is not permissible. The exclusive purchasing agreement must have a definite duration which may not exceed five years, although it may be renewed, and it must not cover more than one type of goods which are not connected to each other either by their nature or by commercial usage. The reseller must be allowed freedom to determine his resale prices. The benefit of exemption may be withdrawn by the Commission from an individual agreement, if the conditions of Article 85(3) are not satisfied.

24. In this latter connection, the decision in 1992 of the EU Commission in the Scholler and Langnese-Iglo cases is of considerable relevance.(3) These German ice-cream manufacturers had exclusive purchasing agreements with a large number of retail outlets. Each had a leading position and a substantial share of the market. The Commission found, inter alia , that the agreements restricted inter-brand competition and restricted the choice available to consumers. There were barriers to entry, and there was not effective competition on the relevant market. The Commission accordingly refused to exempt the Scholler agreements under Article 85(3) of the Rome Treaty, and withdrew the benefit of the block exemption in Regulation 1984/83 from the Langnese agreements.

Subsequent developments.

25. Following publication of the draft category licence, a number of submissions was made to the Authority. Calor and Flogas maintained that a licence should be granted for five-year exclusive purchasing agreements. Blugas and Tervas, however, argued that there should not be any exclusive purchasing agreements with LPG dealers. The conflicting arguments are dealt with in the assessment below, and account has been taken of other points made in the submissions.

Assessment

Applicability of Section 4(1)

26. Section 4(1) of the Competition Act, 1991 prohibits and renders void all agreements between undertakings which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State.

(i) Agreements between undertakings

27. According to Section 3(1) of the Act, ´undertaking means a person being a body corporate or an unincorporated body of persons engaged for gain in the production, supply or distribution of goods or the provision of a service.' The suppliers are corporate bodies engaged for gain in the supply and distribution of LPG, both to resellers and to final consumers. Accordingly, the suppliers are undertakings within the meaning of the Act. The dealers may be either bodies corporate, unincorporated bodies of persons or sole traders, all of whom purchase LPG for resale to consumers, and they are thus engaged in the supply and distribution of LPG for gain. They also are undertakings within the meaning of the Act. The dealer agreements are agreements between undertakings. The relevant product market is that for cylinder LPG. Since the product is distributed, and the dealers are located, throughout the State, the relevant geographical market is the State.

(ii) The exclusive purchasing requirement

28. The essential feature of the notified agreements is that the dealer must purchase LPG exclusively from the supplier for a specified period, generally for five years, although, in the case of Flogas, the agreement may be terminated after two years, provided that 12 months' notice of termination is given. This exclusive purchasing requirement is accompanied by an obligation not to deal in LPG supplied by another supplier. The exclusive purchasing requirement limits the freedom of the dealer to obtain supplies of LPG from other suppliers, and of other suppliers to supply him, and denies him supplies unless he accepts the exclusive purchase requirement. The arrangements restrict competition in a number of ways. Given the bulky nature of the product, the market is essentially a localised one. This is in contrast to the view taken by the Authority in the case of shopping centres. Consequently, the requirement that the retailer purchase LPG from only one supplier limits competition, particularly in rural and certain suburban areas where there are relatively few other outlets. The Authority accepts that in many instances other brands of LPG may be available from other retail outlets nearby. In many instances, however, this will not be true and the restriction means that the consumer's choice as to which brand of LPG to buy will be greatly limited.

29. While each individual agreement might generally have relatively little effect upon competition, all the agreements together form a network of restrictive agreements for the distribution of each brand of LPG at the dealer level. A significant proportion of all retail outlets in the State is obliged to purchase LPG only from a particular supplier by virtue of these agreements thereby restricting competition throughout the State. In addition, the large number of retailers tied to a specific brand means that in some instances competing retail outlets may be tied to the same brand, effectively reinforcing the restriction on competition in the particular area of the individual agreements. Finally, each supplier's agreements are themselves part of a wider restrictive system for distribution in the cylinder LPG market as a whole. No dealer can purchase LPG from anyone other than the exclusive supplier for a relatively long period of time. This tends to introduce a considerable degree of rigidity into the market, and it makes it difficult for a new entrant to enter the market quickly on any significant scale since a large number of retail outlets for LPG, including most if not all of the best outlets, are not available, at least until their exclusive agreements have expired. The fact that retailers are tied to a particular supplier for up to five years may also prevent other suppliers gaining access to retail outlets in particular local markets. The Authority considers, therefore, that the standard LPG dealer agreements have the object and the effect of preventing, restricting or distorting competition in goods in the State, and thus they offend against Section 4(1). This view of the Authority applies whether the exclusive purchasing requirement applies for a fixed number of years only, or whether it applies for a fixed or indefinite number of years subject to a lengthy period of notice to terminate the agreement.

30. This view about exclusive purchasing agreements is consistent with that taken by the Authority in the Esso decision (4), and also with that in US and EU cases. In the US, for example, the Supreme Court ruled in Standard Fashion v. Magrane-Houston (5) that an exclusive purchasing agreement was illegal under Section 3 of the Clayton Act which prohibits such arrangements if their effect is to ´substantially lessen competition or tend to create a monopoly'. In that case, 40% of retailers of the products in question were covered by such agreements. Scherer and Ross report that subsequent court decisions found exclusive purchase agreements involving lower market shares to be illegal (6). In addition, the Authority agrees with the judgment of the EU Court of Justice in the case of Delimitis v Henniger Brau (7). The Court stated that an exclusive purchasing agreement must be considered in its economic and legal context, and as part of a network of such agreements by one supplier, and as part of a series of networks of several suppliers, as part of its overall assessment. The Court decided that access to the market or increasing market share by competitors must be made difficult, because of the cumulative nature of such agreements, and that the agreement in question must make a significant contribution to the sealing-off effect produced by the totality of these agreements in order for Article 85(1) to be applicable. The Authority believes that such considerations apply in this instance and consequently, in its view, exclusive purchase agreements for cylinder LPG have the effect of restricting competition within the State. In addition, the Authority believes that the object of the agreements is to restrict competition within the State by restricting dealers to selling only one brand of LPG and preventing other suppliers from gaining access to retail outlets. The Authority also considers that any period of notice to terminate an agreement which lasts for a fixed period of time, and which must terminate at the end of that period, inhibits the freedom of the dealer in deciding whether or not to renew the agreement. For these reasons the exclusive purchase agreements notified by Calor, Flogas and Blugas and any other exclusive purchase agreements for cylinder LPG offend against section 4(1).

(iii) Selection of dealers

31. While the criteria for the selection of dealers were not included in the notified agreements, they do form an integral part of the arrangements for the distribution system of LPG. As in the Esso and other Authority decisions, and in line with the views of the EU Commission and the Court of Justice, the Authority considers that related arrangements should be considered together as one.

32. It appears that not every dealer who wishes to sell a particular brand of LPG will be appointed, and that the arrangements have some of the features of a selective distribution system. In the Metro (No. 1) case, the EU Court of Justice upheld the view of the EU Commission that selective distribution systems based on objective qualitative criteria were not contrary to Article 85(1). The Court said: "selective distribution systems [constitute], together with others, an aspect of competition which accords with Article 85(1), provided that resellers are chosen on the basis of objective criteria of a qualitative nature relating to the technical qualifications of the reseller and his staff and the suitability of his premises and that such conditions are laid down uniformly for all potential resellers and are not applied in a discriminatory fashion."(8) The Authority considers that a selective distribution system which is based on objective qualitative criteria does not offend against Section 4(1), provided these criteria are not applied in a discriminatory fashion.

33. The Authority considers that refusal to appoint a dealer unless the dealer's premises comply with the Irish safety standards for the storage of LPG is an objective qualitative criterion. A requirement for the dealer to have a reasonable commercial presence in the locality and to have minimum financial capabilities, provided these criteria are not applied discriminatorily, are also accepted as objective qualitative criteria. Given the bulky nature of the product, a requirement that dealers in areas where delivery is necessary should have the ability to deliver LPG cylinders is also considered to be an objective criterion. It is relevant that, despite an element of selection of dealers being present, a large number of dealers in LPG has been appointed. None of these requirements is considered to offend against Section 4(1).

34. Requirements that the dealer has the ability to generate a minimum turnover and that appointments be commercially viable for the dealer do, however, represent quantitative criteria which, by excluding some potential dealers from obtaining supplies of LPG, restrict them in exercising complete freedom to operate their business. Where such restrictions are imposed as part of an agreement or concerted practice between a supplier and other dealers, they represent restrictions on competition which offend against Section 4(1). This accords with the judgment of the Court of Justice in the Binon case where it held that ´a selective distribution system.....is prohibited by Article 85(1) of the Treaty if resellers are chosen on the basis of quantitative criteria.'(9)

(iv) Price Maintenance

35. The notified agreements contained a clause requiring the dealer not to exceed the supplier's official retail prices, and to display prominently a notice showing the current retail prices. These notices did not indicate that the prices were recommended, or that they were not binding on the dealer, or that the dealer was free to set resale prices. The specification of a fixed or a maximum price limits the freedom of the dealer to set prices in accordance with his own judgment. It is not for suppliers to take it upon themselves the role of setting fixed or maximum resale prices for their product. Setting a maximum price on its own can lead to the situation where this becomes the minimum price also, and thus to the only price being charged. Thus the requirement not to exceed the official retail price offends against section 4(1) in the Authority's opinion. The requirement to display prominently the supplier's notice showing the current retail price represents a further restriction of competition. In the Authority's opinion the object of this requirement is to try to ensure that this is the price charged by dealers thereby leading to uniform retail prices for cylinder LPG. These views are supported by considerable evidence that most dealers charge the price on the supplier's display notice most of the time. This price appears, frequently at least, to have been the same for all LPG suppliers in the market. The requirement to display this price virtually ensures that it is the price which will be charged. The Authority regards anything which constitutes, or which enforces or is conducive to, resale price maintenance as a serious restriction upon competition, indeed as the elimination of price competition, and therefore as a serious infringement of the prohibition in Section 4(1) of the Act. It tends to ossification of the price structure, and hence to higher prices. This is in line with the general attitude of the EC to resale price maintenance. In the GERO-Fabriek case, for example, the Commission stated that:

7. ´Likewise, the system of imposed retail prices makes it impossible for dealers to fix their own retail prices by reference to their own costs and commercial policy. The free formation of prices and the ability to pass on to purchasers any possible resulting benefits are hindered or at least substantially reduced. The system is thus clearly contrary to the prohibition in Article 85(1)'.(10)

8. Thus, requirements to display a notice containing the supplier's current retail prices, and requirements not to exceed the supplier's recommended prices, offend against Section 4(1).

36. As it stated in the Esso decision (11), the Authority does not regard the recommending of resale prices by the supplier as amounting to resale price maintenance, provided that there is no agreement or concerted practice that the dealer observe these prices, and provided that the dealer is informed that he is free to set his own prices, and it considers that this does not offend against Section 4(1). Unless these conditions are satisfied, the recommendation of prices by a supplier would offend against Section 4(1).

(v) Post-termination clauses

37. Some older agreements imposed an obligation on the dealer not to compete with the supplier by selling another brand of LPG for a stated period after termination of the agreement. Such a non-compete clause offends against Section 4(1).

(vi) Sale of appliances

38. While dealers may be required to purchase LPG exclusively from one supplier, and may be required to sell only approved appliances, they must be free to purchase appliances from any source. Any obligation on dealers to purchase appliances only from the LPG supplier, or from a source specified by the LPG supplier, limits the freedom of the dealer to purchase appliances, and limits the ability of appliance suppliers to supply dealers, and interferes with competition. Such a requirement offends against Section 4(1).

(vi) Other clauses

39. The Authority considers that none of the other clauses in the notified agreements come within the scope of the prohibition in Section 4(1) of the Act, and in particular:

(a) an obligation on the dealer to operate from specified premises in an area which may be designated by the supplier, since the premises must be approved by the supplier on safety grounds, and since the dealer is not given exclusive rights in any area;

(b) obligations on the dealer to promote sales of the product, to seek new customers and not to prejudice the promotion of the brand, and to keep adequate stocks of LPG cylinders (and appliances where applicable), and to sell under trademarks, do not restrict competition, but rather encourage it;

display space for appliances, and to secure the supplier's approval for advertising material, do not restrict the dealer's ability to advertise and compete;

(d) obligations on the dealer to ensure that no cylinder will be refilled other than by the supplier or distributor, and to ensure that cylinders are only issued on a service basis, or for the purposes of the agreement, and that the dealer will not dispose of or decant any cylinders, reflect the fact that the supplier is entitled to ensure that its product is used exclusively in its equipment. They also ensure that its property rights are not infringed, that competing products do not get a ´free ride' in equipment for which other suppliers have not had to pay, thus giving them a competitive advantage, and that there is adherence to safety factors. These do not restrict competition within the meaning of Section 4(1);

(e) the acceptance that the dealer is not a servant or agent of the supplier, and that appliance customers are customers of the supplier not of the dealer, are designed to limit the liability of the supplier, on safety grounds;

(f) an obligation on the dealer to ensure that each new customer signs a cylinder service agreement reflects the relationship between the supplier and the customer, and does not restrict competition;

(g) an obligation on the dealer to keep a list of names and addresses of customers for inspection by the supplier could be used for anti-competitive purposes, for example to ensure the integrity of a distribution system which offended against Section 4(1). The Authority considers that this is not the object or effect of the requirement in the LPG agreements, but rather for reasons of ensuring safety. In case of a complaint or an accident, it is necessary for the supplier to be able to ascertain the source from which the customer obtained the cylinder in question. In addition, the obligation appears rarely to have been enforced, and is virtually redundant, and it does not affect competition;

(h) an obligation on the dealer not to permit others to deal in the product is imposed for reasons of safety, and does not affect competition;

(i) obligations to provide suitable storage facilities and to allow access to these by the supplier, to comply with statutory safety provisions, standards and regulations of the supplier, and to maintain insurance, including public liability insurance, do not affect competition; and

(j) obligations on the dealer to sell only approved appliances or not to sell unsuitable appliances, and to ensure that cylinders are used only in recognised appliances, are for reasons of safety, and do not interfere with competition.

Applicability of Section 4(2)

40. Under Section 4(2), the Competition Authority may grant a licence in the case of any agreement or category of agreements which satisfies all the requirements of the Section, as quoted in para 1 above.

41. In the Authority's opinion, exclusive purchasing agreements by dealers for cylinder LPG for a lengthy period of time do not fulfil the conditions set out in Section 4(2) and cannot therefore qualify for a licence. Any benefits and efficiencies produced by such arrangements are, in the Authority's view, quite limited in this instance, and a lengthy period of exclusivity is not essential for their attainment. The Authority believes that exclusive purchase agreements for a limited period of time, i.e. no more than two years, may satisfy the requirements for a licence, although it considers that, given the nature of the trade, the operation of such more limited restrictions would need to be closely monitored to ensure that the requirements of Section 4(2) are in fact met.

(i) The exclusive purchasing and related requirements

(a) Improvements in distribution and benefits to consumers

42. There are a large number of LPG dealers in the State, most of whom sell only a fairly small number of cylinders. Very many dealers sell, on average, less than ten cylinders a week. There would thus not appear to be any economic or efficiency gains as a result of the exclusive purchasing arrangements. The Authority accepts that there may be some limited improvements in the distribution system arising from the agreements to the extent that they facilitate forward planning by the suppliers. It also recognises that the agreements may contribute to technical progress by virtue of adherence to safety standards. It accepts that LPG is distributed throughout the country, although it believes it would continue to be distributed throughout the State in the absence of any exclusive purchase agreements. The Authority believes that there is some benefit from the agreements in which consumers can share, although these would seem to be rather limited.

(b) Indispensability of the arrangements

43. The Authority does not consider, however, that five year exclusive distribution agreements are indispensable to achieve the limited benefits described above. The Authority accepts that the suppliers have made a substantial investment in terminals, equipment, transport, cylinders and storage tanks. It does not consider that this investment can only be viable if the distribution system for cylinder LPG relies upon exclusive purchase by dealers of the product of one supplier for a five-year period, especially for well-established firms. In the case of many other products, suppliers undertake substantial investments without imposing such exclusive requirements on their customers. It is relevant also that cylinder LPG represents only about 40% of total LPG sales. While exclusive purchasing agreements for a long period might be helpful for a new entrant, as stated in Regulation 1984/83, this does not apply to firms which have become established in the market. It would be more advantageous for consumers, and for the suppliers themselves, if suppliers attempted to justify their investment by competing for customers rather than by tying dealers for lengthy periods.

44. The Authority does not believe that regular, stable and convenient supplies of LPG would not be made available to consumers on a widespread basis were exclusive purchasing agreements to be limited to a two-year period. Indeed, competition for market share by suppliers, and attempts to sell to dealers who had formerly been tied to another brand, and increased competition by dealers, could all produce significant benefits to consumers, especially in terms of price, if dealers were free to change supplier more frequently than at present. The Authority considers that market forces should be permitted to determine which LPG brands are sold through which dealer outlets. Any disadvantage to a supplier from the risk of losing a dealer at the end of a two-year period of exclusive purchasing would be offset by its access to other dealers who would only be tied to other suppliers for two years.

45. The Authority does not accept that an exclusive purchasing system is indispensable to ensure adherence to adequate safety standards. Dealers may be selected on the basis of Irish safety standards, as laid down in I.S. 3213 of 1987, and be subjected to the same degree of surveillance thereafter as they have been in the past. There are other ways of ensuring adherence to safety standards than by means of restrictive trading agreements. The Health and Safety Authority, following representations from two of the suppliers, has given its view that the storage of LPG cylinders from more than one supplier in a retail premises should not represent a greater hazard than storage from a single supplier, provided there is adherence with the Regulations and the Approved Code of Practice. The H.S.A. has also stated that the Regulations have no requirements in respect of single, as opposed to multiple, sources of supply, requiring primarily safe storage. The Authority is also aware that some LPG suppliers, and the retailers' association RGDATA, have expressed opposition to exclusive purchasing arrangements for cylinder LPG. The Authority believes that whatever limited benefits are provided by exclusive purchase agreements for cylinder LPG can be achieved with a much shorter period of exclusivity. In particular it can see no reasons why an exclusive purchase requirement for more than two years is necessary to secure such benefits. Thus it concludes that, while some period of exclusivity may well be necessary to achieve such benefits, an exclusive purchasing requirement for more than two years is not indispensable for the achievement of the limited benefits which such arrangements bring about.

(c) Elimination of competition

46. Given the structure of the LPG industry, the Authority considered carefully whether five year exclusive purchasing agreements represented a significant barrier to entry which could result in the foreclosure of new entrants. The long-established firms, Calor and Flogas, have a combined market share of around 90%. Between them, they have exclusive purchase agreements with well over 6,000 dealers. Not surprisingly, these dealers are considered to be those best suited to sell LPG. Establishment of a presence in the market as a supplier of LPG is an expensive operation. Nevertheless, in spite of the fact that the LPG market has been dominated by only one or two firms since its establishment nearly 60 years ago, the Authority considers that the following facts are also relevant:

(a) while some 8,000 dealers are bound under the notified agreements to purchase exclusively from one supplier for up to five years, there are a significant number of other potential outlets available to a new entrant for the sale of LPG, even though many might not be as attractive as the tied outlets;

(b) it might be expected that, on average, up to 20% of the tied agreements expire every year, and the dealer would be free to sign a new agreement with the existing supplier or with another supplier, although it appears than many existing agreements have been signed recently and will not expire for some years, and will then expire at around the same time;

(c) in the case of Flogas, every agreement can be terminated from the end of the second year of the agreement, although the need to give 12 months' notice of termination reduces the scope for taking advantage of this possibility;

(d) when an outlet is sold to a new owner, the latter is not bound by the supply agreement, and the dealer is free to obtain supplies from any supplier;

(e) it has been claimed that dealers are changing suppliers more readily, or are negotiating better deals before renewing an agreement, with competition between suppliers for dealers becoming more intense; and

(f) the industry has been marked by the occasional successful entry of new suppliers, such as Ergas in 1971, Flogas in 1978, Tervas in 1987 and Blugas in 1990. Although Ergas ceased to exist as a supplier independent of Flogas in 1989, Blugas appears to have built up a widespread network of dealers and to have achieved a not insignificant market share in a relatively short period. It was undoubtedly better placed to do so given its links with distributors of one of the major oil companies.

9. The Authority concludes, therefore, that, while the existence of networks of tied dealers with exclusive purchasing agreements for five years makes it more difficult to enter the LPG market than in the absence of such arrangements, access to the retail market is not entirely ruled out and the exclusive purchasing systems do not operate to absolutely foreclose new entry. At the same time, the establishment of a large exclusive dealer network by Blugas, when viewed in conjunction with the Calor and Flogas networks, has made it more difficult for another supplier to enter the market than it was for Blugas to enter. On balance, the Authority considers that there is a significant risk that such five-year arrangements as are contained in the notified agreements could afford the undertakings the possibility of eliminating competition in respect of a substantial part of the products in question. A two-year exclusive purchasing agreement, however, would ensure that all dealer agreements had to be renewed over a two year period rather than over five years, and it would be much easier for a new supplier to enter the market, thus easing the concerns of the Authority in this regard. The Authority considers that two year agreements would not afford the possibility of the substantial elimination of competition.

(d) Notice of termination

47. A period for notice of termination, particularly one as long as 12 months, and in the context of a two year agreement, would appear to make it difficult for a dealer to change supplier, and it confers no benefit which could be shared with consumers. A dealer who terminated the agreement at the end of two years could be replaced by a dealer who had been tied to another company but whose agreement had also expired, and, according to the submissions by the two main suppliers, there are a large number of other potential dealers. A period of notice of termination, in the Authority's opinion, is not indispensable. There would, of course, be nothing to prevent the supplier from attempting to negotiate a new agreement before the current agreement had expired.

(e) Summary

48. The Authority considers that exclusive purchasing agreements for five years in respect of cylinder LPG do not satisfy the conditions specified in Section 4(2), and a licence may not be granted for such agreements. Agreements which contain a period for notice of termination do not satisfy the conditions of Section 4(2), and a licence cannot be granted for these either. The Authority considers that LPG dealer agreements which oblige the dealer to purchase exclusively from the supplier for not longer than two years, and not to deal in competing products for the same period, and which do not oblige the dealer to give prior notice of termination before the end of the agreed period, satisfy the conditions of Section 4(2), and they may be made the subject of the grant of a category licence.

(ii) Selection of dealers

49. The Authority has indicated above that suppliers are entitled to refuse to supply a dealer who does not satisfy safety requirements without offending against Section 4(1). It has indicated, however, that, in certain circumstances selection of dealers on a quantitative, subjective or discriminatory basis may offend against Section 4(1).The Authority does not consider that selection of dealers on such grounds conveys any benefits which may be shared with consumers, or that it is indispensable. Since the conditions of Section 4(2) are not satisfied, arrangements of this nature do not benefit from this category licence.

(iii) Price Restrictions

50. Dealer agreements have required the dealer not to exceed the supplier's official retail prices and to display a notice showing the current retail prices in a prominent place, and some have obliged the dealer not to exceed a specified price. Such clauses in agreements can produce no benefit which could be shared with consumers, they are not indispensable to the exclusive purchasing obligation, and they tend to eliminate competition in respect of a substantial part of the products in question. They satisfy none of the conditions required for a licence under Section 4(2) of the Act, and this category licence does not apply to agreements which contain any such requirements.

(iv) Post-term non-compete clauses

51. Agreements which contain any obligation on the dealer not to compete with the supplier after termination of the agreement produce no benefits which can be shared with consumers, and they are not indispensable. They do not satisfy the conditions of Section 4(2), and this category licence does not apply to such agreements.

(v) Limitations on dealing in appliances

52. Agreements which contain any obligation on the dealer to purchase appliances only from the LPG supplier, or only from an undertaking specified by the supplier, produce no benefits which can be shared with consumers, and they are not indispensable. They do not satisfy the conditions of Section 4(2), and this category licence does not apply to such agreements.

Miscellaneous considerations

Only two undertakings party

53. This category licence applies to agreements to which only two undertakings are party - the supplier and the exclusive purchaser. The benefit of the licence is not lost if the supplier enters into exclusive purchase agreements with many different resellers. The licence also applies if the supplier has delegated certain functions, such as filling cylinders with LPG and/or distributing cylinders to dealers, to connected or independent undertakings. The category licence also applies if the agreements do not contain some of the permitted restrictions, or if the arrangements are less restrictive than those specified, provided that the essential exclusive purchasing nature of the agreements remains.

Withdrawal of the category licence

54. Section 8(3) of the Competition Act states:

10. ´Where the Authority is of the opinion that, having regard to the requirements of Section 4(2) and to the basis upon which a licence under that subsection was granted -

(a) there has been a material change in any of the circumstances on which the decision was based,

(b) any party commits a breach of any obligation attached to the decision,

(d) any party abuses the permission granted to it by the licence,

the Authority may revoke or amend the licence and, without prejudice to the generality of this subsection, may in particular insert in a licence conditions the effect of which is to prohibit specific acts by any party thereto which would otherwise be authorised pursuant to such a licence.'

11. The Authority considers that it also has the power, in accordance with Section 8(3), to withdraw the benefit of the category licence in individual cases. This would be the case where an individual agreement had effects incompatible with Section 4(2).

Section 5 of the Act

55. This category licence, being granted in accordance with Section 4(2) of the Competition Act, does not exclude the application of Section 5 of the Act.

Exclusive distribution

56. The licence does not apply where, in addition to the exclusive purchasing obligation on the reseller, the supplier undertakes with the reseller to supply only to the reseller certain goods for resale in the whole or in a defined part of the State. Such an agreement would constitute an exclusive distribution agreement rather than an exclusive purchasing agreement.

Entry into force of category licence

57. The Authority considers that the notified agreements would all have to be amended in order to satisfy the conditions of the category licence, at least to ensure that the maximum term of each agreement does not exceed two years. From now on, any new agreement should have a maximum term of two years, in order to benefit from the category licence. Many agreements which are already in existence have not yet been in effect for more than two years. Each of these would need to be amended so as to expire not more than two years after they were made. Such agreements would terminate over the next two years, after which new agreements will have to be negotiated. Most existing agreements, however, have already been in effect for more than two years. On the coming into force of the category licence, such agreements, since they do not satisfy the conditions for a licence, including this category licence, would have to be terminated forthwith. They could, of course, be replaced by a new two-year agreement with the same supplier. The category licence shall enter into force on 28 October 1994.

Notification

58. In accordance with Section 4(3)(b) of the Competition Act, where a licence covers a category of agreements, agreements within that category which comply with the terms of the licence need not be notified under Section 7 to benefit from the licence while it is in force.

59. The Authority hopes that suppliers of LPG who wish to benefit from this category licence in future will ensure that new exclusive purchasing agreements satisfy the conditions specified in the licence. Agreements which were in existence on 1 October 1991, and which have been notified to the Authority before 1 October 1992, but which do not fulfil the conditions of the licence, do not qualify for the benefit of the licence, and the grant of this licence constitutes a refusal to grant a licence to such existing agreements.

Duration of category licence

60. The Authority considers that the operation of this category licence should be subject to early review. The specified period for the category licence should be five years. At the end of this period, the duration of the category licence may be extended, with or without amendments to the licence, if it is considered that the requirements of Section 4(2) continue to be fulfilled. The category licence shall expire on 31 October 1999.

Reporting conditions

61. In order to facilitate this early review of the category licence, the Authority considers that it is necessary to attach certain reporting conditions to the licence. The suppliers will be required to make an annual report to the Authority, at the end of each calendar year, in respect of dealers supplied and sales of cylinder LPG to dealers, so that the Authority can monitor developments in the market. Thus all suppliers who take advantage of the category licence will be required, every year before the end of March, to send a report to the Authority covering the preceding year. The first of these reports shall be submitted before the end of March 1995. The reports shall contain the following information:

(a) the total number of dealer LPG agreements in operation at the end of the preceding year;

(b) the total number of new dealer agreements made during the preceding year;

(d) the total volume of sales, in tonnes, to dealers in standard domestic cylinders

(i.e. 11.343 kg) during the preceding year.

The Decision

62. The Competition Authority considers that exclusive purchasing agreements by dealers for cylinder LPG constitute agreements between undertakings which have the object and effect of preventing, restricting or distorting competition in goods in the State, and thus they offend against Section 4(1) of the Competition Act, 1991. In the opinion of the Authority, having regard to all relevant market conditions, such agreements, provided that they are of fairly short duration, that is not more than two years, generally satisfy all the conditions required for the grant of a category licence under Section 4(2)of the Competition Act. Accordingly, the Competition Authority grants a licence to the specified category of agreements, subject to the specified period and specified conditions as required under Section 8(1) of the Competition Act, as follows:

The Category Licence

Article 1

Pursuant to Section 4(2) of the Competition Act, 1991, and subject to the provisions of this licence, the Competition Authority grants a category licence to agreements to which only two undertakings are party and whereby one party, the reseller, agrees with the other, the supplier, to purchase only from the supplier, or from another undertaking entrusted by the supplier with the distribution of his goods, cylinder liquified petroleum gas (LPG) for resale.

Article 2

1. Apart from the obligation referred to in Article 1, no restriction on competition shall be imposed on the reseller other than the obligation not to sell cylinder LPG which is supplied by other undertakings in the premises designated in the agreement while the agreement is in force.

2. Article 1 shall apply notwithstanding that the reseller undertakes any or all of the following obligations:

(a) to purchase minimum quantities, or to take minimum deliveries, of goods which are subject to the exclusive purchasing obligation;

(b) to sell the contract goods under trademarks, or only in cylinders owned by the supplier;

- to advertise;

- to maintain a stock of LPG cylinders and regulators and, where relevant, of LPG appliances;

- to provide customer services;

- to provide display space for appliances.

(d) to sell only from the premises specified in the agreement;

(e) to meet safety standards, and to comply with statutory safety provisions, specified standards, and regulations laid down by the supplier;

(f) to provide suitable storage, and to allow access by the supplier;

(g) not to prejudice the promotion and sale of the goods;

(h) not to permit any other person to deal in the goods;

(i) to ensure that cylinders are not filled by unauthorised persons;

(j) to maintain adequate insurance;

(k) to supply only customers who have signed an agreement with the supplier;

(l) to maintain a list of names and addresses of customers, for inspection by the supplier;

(m) to sell only recognised appliances and not to sell unsuitable appliances; and

(n) to permit LPG cylinders to be used only in recognised appliances.

Article 3

12. Article 1 shall not apply where:

(a) the agreement is concluded for an indefinite duration or for a period of more than two years;

(b) the supplier agrees with resellers to limit the number of resellers selected for reasons other than those related to objective grounds of safety, and in particular where dealers are selected on the basis of quantitative, subjective or discriminatory criteria;

(c) the supplier imposes on the reseller exclusive purchasing obligations for goods other than cylinder LPG, or for services;

(d) the supplier imposes any restriction on the reseller after the date of expiry of the exclusive purchasing agreement, and in particular imposes an obligation:

- to conclude a further exclusive purchasing agreement for a fixed or indefinite period, or

- not to engage in the purchase and resale of competing goods.

(e) the supplier obliges the reseller to sell at a fixed price, or at not less than a minimum price or at not more than a maximum price;

(f) the supplier recommends to the reseller a specified resale price or a specified maximum resale price, unless the reseller is informed that he is free to determine his own resale prices;

(g) the supplier obliges the reseller to display a list of resale prices notified by the supplier;

(h) the supplier obliges the reseller to give any advance notice of termination of the agreement.

Article 4

13. The Authority may withdraw the benefit of this category licence, pursuant to Section 8(3) of the Competition Act, 1991, when it finds in a particular case that an agreement which is exempted by this licence nevertheless has certain effects which are incompatible with the conditions set out in Section 4(2) of the Competition Act.

Article 5

14. This category licence constitutes a refusal to grant a licence to notified agreements which do not fulfil its conditions. In particular, the following agreements, as notified, do not fulfil these requirements:

15. CA/14/92E - Flogas Ireland Ltd/dealer agreement;

16. CA/213/92E - Calor Teo/dealer agreement; and

17. CA/538/92E - Blugas Ltd/dealer agreement.

Article 6

18. This category licence shall not apply to agreements by which the supplier undertakes with the reseller to supply only to the reseller cylinder LPG, or LPG for use in cylinders, for resale, in the whole or in a defined part of the State, and the reseller undertakes with the supplier to purchase these goods only from the supplier.

Article 7

19. Suppliers who take advantage of this category licence are required, every year before the end of March, to send a report to the Competition Authority in respect of the following:

(a) the total number of dealer LPG agreements in operation at the end of the preceding year;

(b) the total number of new dealer agreements made during the preceding year;

(d) the total volume of sales, in tonnes, to dealers in standard domestic cylinders

(i.e. 11.343 kg) during the preceding year.

20. The first of these reports shall be submitted before the end of March 1995.

Article 8

21. This category licence shall enter into force on 28 October 1994. It shall expire on 31 October 1999.

For the Competition Authority

Patrick M. Lyons

Chairman

28 October 1994.

Notes

1. See, for example, Commission Decision of 2 October 1991 declaring the incompatibility with the common market of a concentration - Aerospatiale-Alenia/de Havilland, (OJ L334, 5.12.91, p. 42, at p.44); and Commission Notice on agreements of minor importance which do not fall under Article 85(1) of the Treaty (OJ C231, 12.9.86, p.2).

2. OJ No. L173, 30.6.83, p.5, as corrected in OJ No. L281, 13.10.83, p. 24, and Commission Notice concerning the Regulation, OJ No. C101, 13.4.84, p. 2.

3. Commission decisions of 23 December 1992 under Article 85 - Scholler Lebensmittel GmbH & Co. KG, OJL 183, 26.7.93, p 1; and Langnese-Iglo GmbH, OJL 183, 26.7.93, p 19.

4. Decision No. 4 of 25 June 1992, Esso solus and related agreements, para. 57.

5. Standard Fashion Co v. Magrane-Houston Co, 258 US 346 (1922).

6. F M Scherer and D Ross (1990): Industrial Market Structure and Economic Performance, Houghton Mifflin, Boston.

7. Judgment of the Court of Justice of 28 February 1991 in the case of Stergios Delimitis v Henniger Brau A.G. [1991] ECR I-935.

8. Judgment of the Court of Justice of 25 October 1977 in the case of Metro v EC Commission [1977] ECR 1875, at p. 1904.

9. Judgment of the Court of Justice of 3 July 1985 in the case of SA Binon and Cie V SA Agence et Messageries de la Presse [1985] ECR 2015, at p. 2044.

10. Commission decision of 22 December 1976 in the case of GERO-Fabriek, OJ No. L16, 19.1.77, p. 8, at p. 11.

11. op cit at para. 57.