THE COMPETITION TRIBUNAL
REPUBLIC OF SOUTH
AFRICA
CASE NO:
72/CR/Dec03
In the matter
between:
Nationwide
Poles
Complainant
And
Sasol
(Oil) Pty Ltd
Respondent
DECISION AND ORDER
Background
1.
The complainant, Nationwide Poles CC (‘Nationwide’), is
a small producer of treated wooden poles based in the Eastern
Cape province. It
procures supplies of untreated pine poles from the sawmills and
then impregnates the poles with a wood preservative.
In the case of Nationwide the preservative employed is
creosote, or, to be more specific, SAK K, the brand name of a
wax-additive creosote produced by Sasol. Although the Nationwide
plant is based in the Eastern
Cape the
bulk of its customers are vineyards in the Western Cape.
2.
The respondent, Sasol Oil (Pty) Ltd
(‘Sasol’),
a major subsidiary of the Sasol group of companies, is
responsible for the marketing of Sasol's liquid fuels and
lubricants. The process of producing synthetic fuel releases a
tar by-product which is then utilised as the feedstock for the
production of a range of other products manufactured through
Sasol’s carbo-tar division. The carbo-tar division comprises a
number of business units corresponding to the range of products
generated from the tar feedstock these being wood preservatives,
DIY and black disinfectants and surface coatings. The wood preservative, creosote, produced by Sasol
is utilised by its customers for a range of different uses
including the treatment of poles.
3.
Nationwide Poles was acquired by Mr. Jim Foot
on the
31st May 2002
at a time when its business was ailing. Mr
Foot
brings this complaint on behalf of Nationwide Poles.
4. In
about August 2002 Foot became aware that Sasol was charging him
a higher price for his purchases of creosote than that charged
to his competitors. Foot approached Sasol for a price list
which, after some apparent reluctance on Sasol’s part, was
furnished. The price list confirmed that the price charged by
Sasol for creosote supplied to Nationwide was notably higher
than that levied on Woodline, a very large pole manufacturer in
the Eastern and Western Cape
and Nationwide’s most important competitor.
It is, indeed, common cause that Sasol’s price schedule
for the sale of creosote allows for discounts based on purchase
volumes, with its largest customers receiving the most preferred
prices while its smallest customers, of whom the complainant is
one, charged the highest price on Sasol’s price schedule.
5.
On 30 April 2003
Nationwide lodged a complaint against the respondent with the
Competition Commission. It alleged
contravention of sections 4(1)(b) and 9(1) of the Competition
Act (‘the Act‘). It received a Notice of Non-referral from the
Commission on the 12 November 2003. Nationwide then elected to approach
the Tribunal directly. In the
present proceedings Nationwide is only pursuing a claim in terms
of Section 9 of the Act, the section that proscribes ‘prohibited
price discrimination’. In essence, Nationwide
alleges that the discount structure utilised in the pricing of
Sasol’s wood preservative, creosote, meets the test of
prohibited price discrimination and it requests that the
Tribunal makes a finding to this effect.
Nationwide also asks the Tribunal to order Sasol to
supply it on the same price terms as those available to its
competitors.
Section 9 of the
Competition Act
6. Section
9 provides:
(iv)
a sale
in good faith in discontinuance of business in the goods
or services concerned.
7.
Section 9 is contained in Part B of Chapter 2 of the
Act, that part dealing with abuse of a dominant position.
Hence in order to sustain an allegation of price
discrimination the complainant must first establish that the
respondent is indeed dominant in the relevant market.
Having discharged this onus, it is then for the
complainant to establish that the price differentiation
complained of is indeed ‘prohibited price discrimination’. The Act requires that in order to make
this finding we must be persuaded, firstly, that the complained
of action ‘is likely to have the effect of substantially
preventing or lessening competition’. Secondly,
we must be satisfied that the transactions in respect of which
price discrimination is alleged are ‘equivalent’ transactions. Thirdly, the discriminatory action in
question must relate to price, discounts provided, services
provided or to payment for those services.
8.
If the complainant succeeds in establishing that a
dominant firm is indeed engaging in ‘prohibited price
discrimination’ in terms of Section 9(1), then Section 9(2)
entitles the respondent to mount a defence.
In order to mount a successful defence the respondent
must show that the differentiation in question either reflects
cost differences that attach to the transaction in question, or
that the differential is an act, in good faith, to meet
competition, or is dictated by particular market conditions such
as obsolescence of the good or service in question or the
discontinuance of the business.
9. We
will first describe the price structure for Sasol’s creosote.
Sasol’s
creosote:
a description of the price structure
10. Sasol
sets the prices of its products by way of a price list. Sasol
reviews or adjusts its pricing annually, usually on about the 1st
of July of each year.
11.
Much evidence was lead about the transparency of the
published price list. Sasol claims that its price list is made
available to all its customers in order to allow its customers
easy access. However, the evidence that the price list is marked
“For Internal Use only” would indicate otherwise.
It appears also from the evidence that Foot only acquired the
pricelist after asking specifically for it in relation to the
Commission’s investigation.
12.
Sasol estimates how much creosote the customer is going
to buy over the next year, based
on previous months’ sales. This is evaluated every three
months based on purchases actually made, that is, Sasol
determines how much a customer has ordered in the previous three
months and then determines a price in terms of its pricing
structure by reference to the purchasing volumes of those three months. The three-month
purchasing pattern is annualised and Sasol then evaluates into
which category the customer falls on its price list.
This is then used to determine a price that will be
applicable for the next three months. In other words, every
three months Sasol sets the customer’s
future
price for three months at least and then re-evaluates the price.
Therefore, Sasol argues, the price list dictates what price that
customer will be charged for prospective purchases.
Once reaching a particular price threshold, the
customer will continue to get the lower price for at least three
months.
13. Sasol
has a range of customers classified as small, medium and large
depending on the size of their orders in a given month.
According to Mr. Van Wyk, it had about 5 large customers in
2004. Sasol contends that, although it has several large
customers, the spread of its customers across size categories is
even, with no single customer having achieved the maximum price
break that is reflected in the pricing structure. The evidence in Exhibit 1,
Creosote Monthly Sales Volumes at 2004,
would appear to bear out that testimony.
However the complainant’s evidence reflects that
between 2001 and 2003, Sasol had at least one customer in the
maximum price category.
Sasol’s Creosote Sales Volumes as at February
2004
Category
|
No. of Customers
|
Volume (tons/annum)
|
Percentage of uptake from
Sasol accounted for by customers
|
1
|
4
|
0-450
|
5%
|
2
|
3
|
451-1000
|
13%
|
3
|
6
|
1001-2500
|
60%
|
4
|
1
|
2501-3600
|
22%
|
5
|
|
3601-5500
|
0
|
6
|
|
More than 5500
|
0
|
Source: Table derived from Exhibit 1 , Sasol’s
figures as at February 2004
14.
In other words:
Customers representing 5% uptake
from Sasol fall into category 1.
Customers representing 13% uptake from Sasol fall
into category 2.
Customers representing 60% uptake from Sasol fall
into category 3.
Customers representing 22% uptake from Sasol fall
into category 4.
15.
What this illustrates is that, based on Sasol’s own
figures, Sasol’s large customers (those that buy more than 1000
tons per annum) account for more than 80% uptake of creosote
while its small customers account for only 5% of uptake.
Mid-size customers account for 13% of Sasol creosote. This
accords generally with Mr. Foot’s analysis based on data on page
9 of his supplementary info bundle (“CSI”).
He states that in 2003, 5 plants (or customers) accounted for
81% of market (by volume). Similarly, in 2004, 5 plants
accounted for 87% of the market (by volume). In the above
analysis based on Sasol’s own figures, 7 plants accounted for
about 82% in 2004.
16.
On Nationwide’s analysis of creosote uptake per
customer, large firms fall between categories 3-6.
The split between large and small customers is therefore,
approximately, 80/20.
What seems clear from these contentions and the table above is
that the smaller firms account for a relatively small proportion
of Sasol’s total revenue from creosote.
17.
Genesis, the firm of consultants retained by Sasol in
this matter, reproduced a table reflecting Sasol carbo-tar’s
price schedules for creosote between 2003 and 2004. Genesis
computed the cumulative percentage difference between price
bands or categories, which are reflected in columns 4 and 5:

18. According
to
the Genesis figures, the larger customers enjoyed discounts of
between 10% and 15% relative to the base price charged to small
customers between 2003 and 2004.
The Genesis table also reveals that the difference between the
prices received by the firms in the first category and those in
the last category of Sasol’s discount structure, who received
the maximum discounts in 2004, is approximately 15%. The
complainant’s figures go further than this and suggest that
between 2001 and 2003 the differential between the highest and
lowest price categories ranges from 26% (2001) to 16% (2003). On both sets of figures there is a
significant difference between the lowest and highest levels of
price categories.
19. Evidence
was led that in 2001 Sasol announced to its customers that in
the impending several years it would switch from utilising the
tar feedstock generated by the production process at its
Sasolburg plant to the feedstock generated by its Secunda plant. For various reasons which are
elaborated below, this resulted in a major shift in the way in
which Sasol priced the creosote feedstock, that is, the tar
stream – the price for the feedstock charged by Sasol to its
carbo-tar unit increased from R350 per ton to R1800 per ton. This was to be passed on to Sasol’s
customers. Sasol’s carbo-tar unit
claims to have offered its customers the choice of absorbing a
very significant price increase once the change in the feedstock
had been effected, this being some years down the line, or of
phasing in the increase over a number of years.
In Mr. Van Wyk’s words:
“So
the alternatives, we put them all on the table. We did our own
calculations as well. And we asked the industry would they
prefer us keeping the price on the normal PPI increases and so
on and then after 4 years you give them a 500% or whatever
increase. Or do you want us gradually increasing it to a point
where we believe we can start doing normal business again. And
that happened in the past 3 years. And what they told us is
they prefer us phasing it in, because it won’t give them a
total shock, because on their contracts as well they won’t be
able to negotiate their contracts on a big increase. They can
maybe incorporate it in a phased manner.”
20. The
customers consulted apparently preferred the latter option.
What we
have to determine
21.
We will examine each of the constituent elements of
Section 9. We will commence the
analysis by identifying the relevant market. As commonly occurs
in anti-trust litigation, this requires us to decide major
factual and analytical disputes between the parties. Nationwide
prefers a narrow relevant market – indeed it argues that the
relevant market is that for the product named SAK K, a
particular wax-additive creosote produced by Sasol alone.
On
this version of the relevant market Sasol is a monopolist. Sasol, for its part, contends for a
significantly wider market. It
insists that the market is that for wood preservatives, and that
this market, far from being confined to SAK K, includes not only
all creosote but also a product called CCA or ‘copper chrome
arsenate’, a product that, alleges Sasol, is directly
substitutable for creosote. This
involves an examination of certain of the technical
characteristics of the products concerned. Having determined the
relevant market we then ask whether, in that market, the
respondent, Sasol, meets the Act’s definition of a dominant
firm.
22.
Because, as we elaborate below, we do find that the
respondent is indeed a dominant firm, we then go on to ask
whether the complainant has successfully established that the
practice in question conforms to the elements of prohibited
price discrimination provided for in Sections 9(1)(a), (b) and
(c). Sasol has made much of the
proper interpretation of Section 9(1)(a), in particular the
nature and extent of the evidential burden that the complainant
has to discharge to show that the price discrimination is
‘likely to have the effect of substantially preventing or
lessening competition’.
23.
Because we do conclude that Sasol is engaged in the
practice of prohibited price discrimination, we then proceed to
examine whether or not the respondent has successfully invoked
the defences provided for in Section 9(2).
24.
The matter was heard on the 4-6 August , 22nd,
23rd, 31st August and
1st December 2004. The
following witnesses testified:
25.
For the complainant
i.
Mr.
Jim Foot, owner, Nationwide Poles
ii.
Ms.
Tammy
Bruno, Botar Enterprises CC
iii.
Mr.
Angus
Currie, CEO, South African Wood Preserver’s Association
(“SAWPA”)
iv.
Dr.
Simon Roberts, Wits University, expert for Nationwide Poles
26.
For the
respondent
v.
Mr
AB
Stears, from South African Timber Auditing Services
vi.
Mr
Fanie
Van Wyk, Sasol Manager
vii.
Mr.
Stephan
Malherbe,
Genesis, expert for Sasol
The relevant market
27.
Three possible relevant product markets have been
proposed. As already indicated,
Nationwide has proposed that wax-additive creosote be considered
the relevant market, alternatively creosote.
Sasol is the only manufacturer of wax-additive creosote
in South Africa, the relevant geographic market.
There is only one other producer of creosote in South
Africa, this being Suprachem/ICC, part of the large iron and
steel producer, ISPAT/ISCOR (Iscor), now named Mittal Steel. Suprachem distils
and refines crude tar, which is a by-product of Iscor’s coke
production, and manufactures and markets coke, tar and related
by-products. The company is engaged in the distilling of tar and
crude benzol into 40 different industrial chemicals.
28.
Sasol, for its part, insists that the relevant market
is that for wood preservatives. This
market, avers Sasol, essentially comprises two substitutable
products, creosote and copper-chrome-arsenate or CCA.
There are other products employed as wood preservatives
but their share is marginal and does not affect our conclusions. If CCA is part of the relevant market
then it is common cause that Sasol’s share
would fall below 35% and, in order to establish dominance, the
complainant would have to prove market power.
29.
We do not accept the narrower of the market definitions
proposed by Nationwide. This is the market for wax-additive
creosote. It
appears that there is only one such product, that being SAK K,
which is produced by Sasol. Accepting
this definition of the relevant market would effectively render
Sasol a monopolist in the market in question. While we have no
reason to doubt Mr. Foot’s stated preference for SAK K or even
the superior quality of his preferred product – indeed it seems
reasonably clear that the wax additive confers certain
advantages on SAK K - we have not been presented with any
evidence that suggests that it cannot be relatively easily
substituted by other creosote products or that the addition of a
wax additive is beyond the capacity of creosote users like
Nationwide.
30.
However, Nationwide is on considerably firmer ground
when it argues for a creosote market in opposition to Sasol’s
insistence that the market be defined as that for wood
preservatives. As noted, Sasol’s
broader definition would incorporate the second product, CCA,
into the relevant market. We must
then consider the substitutability of CCA for creosote.
31.
It is instructive to note at the outset that Sasol did
not initially argue for the substitutability of CCA for
creosote. There
is no mention of CCA in the Commission’s notice of non-referral.
When this omission was put to Mr.
van Wyk, the Sasol executive who testified at the hearing and
who had, in the relevant period, headed the Sasol division
producing creosote, he could not offer an explanation short of
insisting that the Commission had been provided with a full
exposition of the market. More telling is the omission of any
reference to CCA in Sasol’s answering affidavit filed in the
present proceedings. Again van Wyk
could offer no explanation for this omission. Indeed the first
mention of CCA is made in Nationwide’s replying
affidavit.
However the existence of CCA loomed large in the oral evidence
presented by Sasol’s witnesses at the hearing.
In
this belated fashion, the substitutability of CCA for creosote,
by providing the basis for Sasol’s denial of dominance, emerged
as one of the two main pillars of Sasol’s defence, the other
being Sasol’s insistence that its opponent had not established
that the complained of price differentiation had compromised
competition.
32.
Given the extent to which the alleged substitutability
of CCA and creosote has subsequently been relied upon by Sasol,
its failure even to make mention of CCA in its initial pleadings
is nothing short of startling. It
certainly tends to support the inferences sought to be drawn by
Mr. Foot from persistent reference in Sasol’s internal documents
to a ‘creosote market’ as well as to the marked absence of
reference to CCA in these documents. While
ordinarily we are prepared to accept that the term ‘market’ is
frequently used in everyday commerce in a manner that is not
intended to identify a relevant market for anti-trust purposes,
the fact is that even for anti-trust purposes the
respondent appears to have decided only belatedly to incorporate
CCA into its own definition of the relevant market.
On the other hand, Foot’s testimony denying the
substitutability of CCA for creosote was consistent with his
earlier filed affidavits and, in this important matter,
certainly, he emerges as a significantly more reliable witness
than van Wyk.
33.
The relevant South African Bureau of Standards (SABS)
regulations stipulate the use of either CCA and creosote for
preservation of the wood of products in contact with the ground. Vineyard poles have to comply with the
H4 SABS specification, which will therefore be fulfilled by the
use of either CCA or creosote. As far as creosote is concerned,
the standard does not differentiate between SAK 100 and SAK K.
34.
However, it appears that, notwithstanding the SABS
regulation, the actual degree of substitutability between
creosote and CCA is largely dependent upon the intended end use
of the wood product that is subject to the treatment.
It is clear that the possibility of substituting
CCA-treated poles for creosote-treated poles for use in
telephone or electricity transmission is highly limited – the
former are unable to withstand veldt fires as successfully as
the latter and this is the major reason for the well-nigh
exclusive use of creosote treated poles by these important
consumers.
It was suggested that there is some recent evidence of
CCA-treated poles being used in these applications, but it
appears to be common cause that this remains limited and that
the purchasers of poles for these uses will continue to insist
on creosote-treated poles.
35.
Sasol has made rather more of the fact that the
complainant does not produce poles for use in telephone and
electricity transmission, and, hence, that the lack of
substitutability of CCA for creosote in this use has no bearing
on the selection of the relevant market. We
reject this argument. This appears to be the largest segment of
the poles market and we have little doubt that any pole
manufacturer wishing to expand its business would want to bid
for a slice of this market segment. Nationwide
avers that the reason why the electricity transmission and
telephone poles market is effectively reserved for the larger
pole manufacturers is because the wood suppliers refuse to
provide the complainant and other smaller pole manufacturers
with the wood input that would allow them to produce poles for
these purposes. Leaving aside this
limitation – itself a prima facie contravention of the
Competition Act
– there seems to be no reason why Nationwide or any other pole
manufacturer would not wish to contest this important market
segment and, should this happen, there would be no effective
substitute for creosote in the treatment process.
36.
Creosote-treated poles have also been favoured for use
in vineyards, the market segment in which Nationwide is active. It appears that the reason why
creosote- treated poles have historically been favoured in this
segment is because the superior moisture retention capacity of
creosote poles renders them less brittle than CCA- treated poles
and so better able to withstand the pressure exerted by the
mechanical grape-harvesting process. However
Sasol avers that this consideration – and hence the
non-substitutability of CCA for creosote in this application –
only applies to the limited number of vineyard poles that are at
the end of the line and that must accordingly bear most of the
pressure of mechanical harvesting. Moreover,
insists Sasol, technological developments have enhanced the
moisture retention capacity of CCA- treated poles, rendering
them less brittle and more suitable for vineyard use. Sasol
avers that major wine-producing vineyards have switched from
creosote to CCA-treated poles.
37.
However, issues related to the toxicity of the
respective products appear to resolve this debate in favour of
the narrower definition of the relevant market.
Although both creosote and CCA clearly have toxic
qualities, it appears that relevant EU regulations are moving
decisively in the direction of prohibiting the importation of
wines from vineyards that utilise CCA-treated poles.
Several witnesses insisted that this was a purely
protectionist measure, that, in other words, CCA-treated poles
had no substantive impact on the safety of the vineyard’s
product and that the regulation prohibiting this wood
preservative was cynically designed as a protectionist measure.
This is certainly the view of Mr. Angus Currie, the head of the
South African Wood Preservers Association (“SAWPA”) who
testified at the hearing, but he nevertheless conceded that
continued use of CCA-treated poles in vineyards are likely to be
used as an environmental barrier to the entry of South African
wines into export markets. He
referred to the case of the Nederberg estate which, he averred,
was told not to use CCA-treated timber any longer. Another of Sasol’s witnesses, Mr
Stears, from South African Timber Auditing Services, while
insisting that the issue of CCA toxicity was based on ‘emotional
issues’ conceded that CCA-treated poles were likely to be phased
out of use in South African vineyards within the next six to
eight years.
38.
It appears that CCA’s toxic qualities are an issue in
other areas of treated pole usage as well.
Ms.Tammy
Bruno of Botar Enterprises, who also testified at the hearing,
averred that the World Bank has refused to fund projects that
use CCA-treated transmission poles because of the arsenic
content of the preservative, a requirement that had effectively
precluded CCA poles from being used in Zambia.
39.
Certainly it would be wholly unreasonable to expect a
producer in the position of Nationwide to incur any cost of
switching from the use of creosote to CCA if it is accepted in
the segments of the market that serve the telephone and
electricity providers and also the agricultural sector that
creosote-treated poles are, for one reason or another, the
preferred product, particularly when it appears certain that
regulatory requirements will protect and extend creosote use in
the immediate future.
40.
We should add here that we heard lengthy submissions
concerning the cost of switching between CCA and creosote in the
pole treatment process. In essence Nationwide insisted that
because it operated a creosote treatment plant, the fact that
CCA was technically substitutable for creosote was of little
relevance to it and to the definition of the relevant product
market with which it engaged. Nationwide,
at
any rate, was stuck with creosote - its reality was that of a
purchaser in a market for creosote. Sasol
argued that switching a pole treatment plant from creosote to
CCA was a technically simple and relatively costless exercise. Nationwide, for its part, insisted
that switching involved considerable expense and downtime. This debate generated significantly
more heat than light. However we
are able to conclude that while the larger firms generally
operate parallel CCA and creosote treatment facilities in their
plants, and while there appears to be some evidence of firms
switching permanently from one wood preserver to another, there
is no evidence of a firm alternating a single treatment facility
between creosote use and CCA use.
41.
However, Sasol has, in order to support its contention
that creosote and CCA belong in the same relevant market, placed
considerable reliance on data which, it insists, demonstrate
that when it increased the price of creosote, demand for its
product fell off significantly and purchases of CCA increased
concomitantly. However, the
data relied upon are open to question.
42.
It is common cause that the price of creosote has
increased, relative to the price of CCA. Sasol insists that in
consequence of this movement in relative prices it has lost
market share to CCA. Sasol contends that evidence of the
two products being substitutes is found in the SAWPA statistics,
which reflect that the use of CCA increased relative to that of
creosote. Its expert, Mr. Malherbe of Genesis,
produced a table entitled “Changes in Sales” which is reproduced
and discussed below. Sasol also claims to have lost market share
to Suprachem, the other producer of creosote. The
reliability of these data is open to question for various
reasons:
i.
There
is evidence that the SAWPA data relied on by Genesis may include
export figures, therefore we do not know what the extent of
local demand actually was.
ii.
We
have to rely on estimates by Genesis as to Suprachem/ICC’s sales
volumes for 2000 and 2001 because no evidence of this was
submitted.
iii.
The
CCA volumes are also derived estimates and are open to question.
43.
Sasol produced at the hearing a handout prepared by its
experts, Genesis, based on SAWPA and Suprachem sales volumes,
documenting changes in sales for creosote, CCA and a third
product, Boron, between 2001 and 2003. This is reproduced below:
Sasol’s Changes in Sales
Figures (in 000 m3)
|
CCA
|
Boron
|
Suprachem
|
Sasol
|
2001
|
133
|
2
|
163
|
210
|
2003
|
190
|
7
|
184
|
152
|
Absolute
Change
|
57
|
5
|
21
|
-58
|
Percentage
Change
|
43%
|
250%
|
13%
|
-28%
|
GenesisTable produced at hearing sourced from SAWPA
data (shaded areas represent creosote sales)
44.
Sasol utilises this in an attempt to show that during
the period documented in the table, Sasol’s sales losses were
taken up by both Suprachem and CCA. It contends that over the
period 2001 to 2003, there was a rise in the demand for CCA of
43%; further that there was a rise in demand for the creosote
offered by Suprachem of 13%, while Sasol’s creosote product
suffered a 28% decline over the same period.
45.
It is common cause that the SAWPA data include pole
volumes for domestic and export sales. Nationwide
contended that insofar as the SAWPA data included pole volumes
for both domestic and export purposes, they could not be
considered a reliable indicator of local demand for creosote: in
other words, that the figures were flawed.
46.
At the second set of hearings Mr. Foot cross-examined Sasol’s expert, Mr Malherbe, on
Sasol’s sales figures. He asked whether Sasol had extracted
export orders from its analysis.
Malherbe indicated that the figures on which Sasol relied did
not include export orders.
He confirmed then and later, in response to a question from the
Tribunal, that Sasol’s figures had extracted export sales which
had been stripped out by his team.
However, it was later put to him by the Tribunal that in the
earlier hearings, Mr. Currie, the
SAWPA representative, in response to a question from the panel
as to whether the SAWPA
sales figures reflected sales in
South Africa or whether they were sales by South African
producers for export as well, had confirmed that the SAWPA
figures did in fact reflect both local and export sales.
This was put to Mr. Malherbe, Sasol’s expert witness, and he
could not confirm the reliability of either the SAWPA or Sasol
sales figures:
“MR MANOIM:
This is, Mr Currie is in the witness box and I asked him a
question, I said: “Sorry, just as a point of clarity on the
Sawpa figures that Mr Unterhalter has shown you, are these
figures of sales in South Africa, or are those figures of
sales by South African producers either in South Africa or for
export as well?” and he says: “It’s the latter.” I say: “The
latter?” and he says: “Yes.”
MR MALHERBE: So in other words he said it included export
sales.
MR MANOIM: Yes that’s how I would understand that
exchange.”
MR MALHERBE: Yes let me just confirm that. Okay I think that
the thing to say here is that we believe that our Sasol
numbers do not include exports, but it’s not exactly the same
calculation as we did for ICC.
MR MANOIM: Where did you get the Sasol numbers from? Were
they given to you, are they part of the record, or were they
given to you under instruction …[end of tape]…
MR MALHERBE: Well here is a possible issue. The way that we
derived at the Sasol figures for these purposes was from the
sulpha [this should
read “SAWPA”] figures less our ICC figures for domestic
market and our understanding from Mr Currie was that the
numbers that he provided us did not include exports and on
that basis we assumed that that number that we have,
effectively was equivalent to Sasol’s domestic sales. Now
it seems as if our impression from him and what he said in
the record might be inconsistent and that might have an
impact on the numbers. I’m not sure.”
(Our emphasis)
47.
Sasol later submitted that while the SAWPA figures
reflected sales of creosote-treated poles, they included sales
of creosote-treated poles destined for export. However, Sasol
argues that this is irrelevant, because even if the poles are
exported, they are still an accurate reflection of local
demand for creosote. However, apart from the doubt that this unresolved
debate casts on the reliability of the data, the question of
whether the treated poles are for the domestic market or for
export markets has implications for substitutability.
For example, we have no knowledge of the use to which
the exported poles are put. It
is conceivable that they were for use in housing construction
where CCA poles may have been favoured for reasons of creosote’s
odour rather than because of changes in relative price. What is
clear is that Mr. Currie of SAWPA conceded that the gain in
creosoted poles in 2001 could have been attributed to an
increase in exports and that this calls into question the
analysis of substitutability and its relationship to movements
in the relative prices of CCA and creosote.
48.
There is similar confusion surrounding the
Suprachem/ICC figures. Not
all of the Suprachem/ICC figures were disclosed during
discovery, and it seems that Sasol estimated the export figures
for 2000 and 2001 based on the proportion of creosote that
Suprachem/ICC exported in 2002. Sasol
argued that export sales were removed from these “estimated”
sales figures for 2000 and 2001.
We agree with the complainant’s contentions that, because
we do not have hard evidence of what Suprachem’s 2000 and
2001 export creosote figures actually
were, there is no way
to deduce exactly what Suprachem’s local sales of creosote were
in 2001.
49.
Similarly, we do not know what the CCA volumes in the
market were, therefore cannot accurately compute the degree to
which creosote sales declines were attributable to rises in
sales of CCA.
50.
In summary then we must approach with considerable
caution the assertion that Sasol’s data in the above table
indicate substitution from Sasol creosote to CCA or to
Suprachem’s creosote product, and assertions about the extent by
which Sasol’s market share was reducing, if at all. Firstly, it
is clear that even Sasol’s own expert was confused as to what
data had been used and on which a fundamental component of
Sasol’s case was based. Secondly,
since the figures included local and exported poles, we have no
way of knowing to what extent demand was driven by price or the
physical use to which the poles were put. Dr Roberts,
Nationwide’s expert, pointed out that the demand for the
alternative product could have been changing for a host of other
reasons unrelated to price.
Thirdly, Dr Roberts pointed out that the analysis of switching
encompassed a two year period, which was an inappropriately long
period in which to assess substitutability, as it would increase
the percentage change during that period. He argued it would
have been better to assess year-by-year changes over a longer
period of time, to get an accurate picture of substitutability.
51.
Dr Roberts also pointed out that it is, in this case,
particularly difficult to determine whether or not the
pre-increase price of creosote was set at the competitive level. In our discussion of market power we
will show that Sasol’s pricing of creosote has not responded to
that of its competitors. In these
circumstances it is reasonable to infer that Sasol’s price level
prior to the significant increases was already
supra-competitive. An increase from
a supra-competitive price level may well give rise to a sharp
decline in demand for the product in question and a concomitant
increase in the demand for an alternative without suggesting
that at competitive price levels the two products are
substitutes. This is the
well-documented operation of the ‘cellophane fallacy’.
52.
The technical characteristics of the two products –
creosote and CCA – indicate that substitutability is, at best,
limited in key applications and, because of regulatory
interventions, is being further constrained in favour of
creosote use. The evidence of
substitutability that Sasol produced based on, inter alia, the
SAWPA data is inconclusive and clearly unreliable. We
conclude then that the relevant market is that for creosote.
53.
We will proceed to examine whether or not Sasol is
dominant in that market. We will show that Sasol’s market share
exceeds 45% and that it is, therefore, presumptively dominant in
terms of Section 7(a) of the Act.
Dominance
54. Section
7 of the Act provides:
A firm is dominant in a market if
–
(a)
it has
at least 45% of that market;
(b)
it has
at least 35% but less than 45% of that market, unless it can
show that it does not have market power; or
(c)
it has
less than 35% of that market, but has market power.
55.
The Act defines ‘market power’ as
‘..the
power of a firm to control prices, or to exclude competition, or
to behave to an appreciable extent independently of its
competitors, customers or suppliers.’
The creosote market – market share data
establish Sasol’s dominance
56. The evidence clearly
establishes that Sasol’s share of the creosote market exceeds
45% and is therefore presumptively dominant.
i.
SAWPA levies
SAWPA extracts levies from the two
manufacturers, Suprachem and Sasol, based on a percentage of
their sales. Therefore Nationwide contends that the levies
represent a reasonable approximation of what their market shares
must be. If we assume that the SAWPA levies do represent a
reasonable proxy of what the volumes would have been then we
must conclude that Sasol had 66% of the creosote market in 2001
and 53% in 2004.
ii.
Iscor/ICC figures :
Nationwide
relies on information submitted by Iscor, based on creosote tonnages sold, and computes Sasol’s market share
as follows:
2002 total market: 36,543 tons
Sasol share:
18, 251 tons
Sasol % :
50%
2003 total market: 37,644 tons
Sasol share :
19,250 tons
Sasol %
:
51%
57. In 2004,
Sasol’s own figures indicate that, as at February 2004, it had
56% of the total creosote market.
Furthermore, its own information - once again forming part of
the Tribunal record - indicates a South African market share of
56% for the 2003 year. In the business plan of the Sasol
Carbo-Tar division it places its own share of the creosote
market at 53%.
We are satisfied then that Sasol is, by virtue of
its market share alone, clearly dominant in the creosote market
because all evidence establishes a share in excess of 45% of the
market throughout the relevant period up until 2004, that is
from April 2001 until August 2004.
58. Although
we are satisfied that Sasol’s market share establishes that it
is presumptively dominant in terms of Section 7(a) of the Act,
we will also show that it is has exercised market power in this
market insofar as it has, in setting the price of its creosote,
‘behave(d) to an appreciable extent independently of its
competitors, customers or suppliers’.
59.
Sasol has traditionally manufactured petrol and diesel
from coal. This process involves converting coal into a gas
stream which is converted into liquid fuel. This process leaves
both ash and tar as by-products. The tar stream is then utilised
to produce a bouquet of products which are, in turn, utilised in
a variety of applications. These products make up Sasol’s
carbo-tar business which produces a range of value-added tar and
carbon products at both its Secunda and Sasolburg plants and is
a relatively small business unit within the entire Sasol group. As indicated earlier the product
categories in the carbo-tar division are creosote, a wood
preservative, a product for the raw tar market, DIY and black
disinfectants, and surface coatings, mainly comprising primers
for road bases and the binder pitch which is sold to aluminium
smelters.
60. The
Sasolburg plant has the capacity to produce approximately
50 000 tons of the tar feedstock each year.
Of that raw feedstock, between 20% and 40% could be
converted to creosote. In 2002 and 2003, Sasol produced between
20 000 and 23 000 tons of creosote per annum.
61.
Mr. van Wyk’s testimony revealed an important
distinction between the economic drivers of the Sasolburg and
Secunda plants, a distinction that critically influences Sasol’s
pricing behaviour. The
Sasolburg plant was designed to produce petrol and
diesel from the gas stream only and not from
the raw tar stream. As
indicated the Sasolburg production process generates some
50 000 tons of the tar feedstock annually. By contrast,
Secunda was later designed so that the total tar stream could
also be converted to a diesel stream – hence although Secunda
produces an annual tar stream of 500 000 tons all of it was
intended to be utilised in the production of liquid fuel.
Two important consequences flow from this:
62.
Firstly, although there is considerable tar feedstock
available at Secunda, the plant is not set up to utilise this
feedstock in the production of the tar based products such as
creosote. The Secunda feedstock has
to be transported to Sasolburg to produce the various tar
products.
63.
Secondly, because Secunda was designed, and the capital
was invested, to produce liquid fuel from its tar stream
by-product, the alternative value of the Secunda tar stream is
the value of petrol and diesel. Therefore the opportunity cost
of using that supply is the international dollar price of petrol
or diesel referred to as the ‘fuel equivalent price’.
Moreover, a key element of Sasol’s strategic plans is
the importation of natural gas from Mozambique through a
pipeline, the construction of which is to be completed 3 or 4
years hence. One of the core business units which is to utilise
the gas is the Sasolburg plant. The end result is to
be the elimination of the gasifiers because the plant will no
longer be coal-based, hence the by-product of raw tar would fall
away. Therefore Sasol predicted that in 3 or 4 years’ time
Secunda would be the only source of tar feedstock all of which
would be priced at the fuel equivalent price. It was this set of
factors that underpinned Sasol’s decision to hike massively the
price of its feedstock and, hence, the price of creosote and the
other products emanating from this feedstock.
64.
Mr. Foot avers that there is no semblance of
negotiation between Sasol and its customers over the price of
its creosote. The
price is laid down – for a year at a time – in a schedule
supplied by Sasol. Customers are
then informed of Sasol’s decision and they either adhere to
Sasol’s price or they purchase their product elsewhere. There is
evidence in Van Wyk’s testimony on how prices are determined
year-by-year. Sasol determines an
overall price increase, which is then allocated between the
different price categories, and they are enforced in that
manner, with little room for negotiation.
65.
In similar vein, Mr. Foot has made much of Sasol’s
ability – demonstrated in the substantial price hikes flowing
from the anticipated changes in the source and price of Sasol’s
feedstock – to massively increase prices and, although presented
as a concession to accommodate the wishes of its customers, then
to announce a price increase well in advance of its actual
implementation and then to pre-announce a series of price
increases over a period of several years, well in advance of the
implementation of the increase in the price of the feedstock. This is certainly a pattern and
mechanism of price-setting that indicates a comprehensive
disregard for the responses of both customers and competitors.
66.
Indeed Sasol’s witnesses insisted that they had no
knowledge of the prices charged by their competitors, even by
Suprachem, the only competing producer of creosote. It appears
that this was presented in an effort to gainsay allegations of
collusion with Suprachem. However
it seems extraordinary that Sasol should not know the price of
its only competing producer of creosote – it is extraordinary
that, in the process of setting its prices with its customers,
it was never told by them what price Suprachem was charging for
its creosote. We must either
conclude that Sasol’s witnesses were not telling the truth, or
we must regard this as bearing out Mr. Foot’s contention that
prices were set independently of any interaction with customers
and without regard for the price-setting behaviour of
competitors.
67.
Indeed Mr. Van Wyk
clearly conceded that the pricing of creosote is not influenced
by its competitors.
He averred that customers are visited and “informed” of price
increases, but insisted that this did not allow for the
negotiation of the price but was rather as an opportunity to
explain the rationale for the price increase.
Note the following exchange between the tribunal panel and Van
Wyk:
“MR
MANOIM: So if a customer says
Suprachem has given me a better price; can you beat it, what
do you say then?
MR VAN WYK: We
don’t deviate from this price, because we feel it’s not
ethical because it’s an open policy. We are transparent. So
it’s a choice for the customer.
MR MANOIM: Okay,
so that stays from year-to-year.
MR VAN WYK: We
don’t negotiate any of these prices.”
68.
In his closing argument, Sasol’s counsel attempted to
mitigate this by arguing that in fact, Sasol is influenced by
lower prices of competitors, insofar as prices are adjusted
after negotiations with customers. In other words, according to
him, Sasol’s prices are indirectly referenced, via its
customers.
However, we find the above-mentioned references to the fact that
no comparison is made with Suprachem’s prices overwhelmingly
strong evidence that Sasol sets its prices independently of
competitors and does not negotiate with any of its customers in
this regard.
69.
The range of factors and practices outlined above lead
Mr. Foot to characterise Sasol’s price-setting as reflecting a
‘take it or leave it’ attitude. Indeed so flagrantly does
Sasol’s price-setting behaviour depart from the practice
associated with price determination in competitive markets, that
it appeared to defy explanation by the learned experts retained
on both sides of this matter. Both
suggested that the Sasol approach appeared to reflect a
‘bureaucratic’ style of management where successive price levels
were simply derived from the last prevailing price.
It was even suggested that Sasol’s behaviour is
‘irrational’.
70.
However, in our view, Sasol’s price setting behaviour
is not rooted in ‘arrogance’ or some other attitudinal
pre-disposition. Neither
is it irrational or bureaucratic. It
rather reflects Sasol’s decision to price at fuel equivalent
prices or, conversely, to price without regard to conditions in
the wood preservative market. In
short, the price of creosote and the other tar-based products is
determined in the liquid fuels market. Indeed
in the course of the hearings it became clear that the fuel
equivalent price is not the only exogenous determinant of
Sasol’s creosote price although it is the most important factor
and it does set the price framework. It
appears that, with the fuel-alternative price as the framework,
Sasol attempts to optimise the composition and prices of the
bouquet of products (of which creosote is one) produced from the
tar feedstock and this process also influences the price of
creosote. What is clear, though, is
that whether it is bureaucratic inertia or irrational whim or a
highly rational optimisation exercise – and the evidence
strongly favours the latter – that drives Sasol’s determination
of the price of creosote, its decision in regard to the pricing
of creosote is not influenced by the competitive behaviour of
its customers or competitors, and this fact alone is sufficient
to sustain an allegation of market power.
71.
We conclude therefore that by dint of a market share in
excess of 45% Sasol is dominant in the market for creosote, the
relevant market in casu. Although
this is sufficient to sustain a finding of dominance, we have
gone further and shown that Sasol has evidenced its dominance by
its exercise of market power in setting the price of its
creosote. As already noted, we
should add that this not only bolsters our finding on dominance,
but it also supports our finding on the relevant market.
That
is, Sasol would not be able to exercise market power in the
pricing of creosote if the boundaries of the relevant market
extended beyond the creosote market.
The
elements
of price discrimination – Section 9(1)
72. As already
noted, having established the respondent’s dominance, we must
now examine the elements of price discrimination each of which
must be present in order to sustain a finding of prohibited
price discrimination. We must be
satisfied:
i.
that the practice complained of ‘is likely to have
the effect of substantially preventing or lessening
competition’.
ii.
that the transactions in respect of which price
discrimination is alleged are ‘equivalent’ transactions.
iii.
that
the
discriminatory action in question must relate to price,
discounts provided, services provided or to payment for those
services.
73.
If the first pillar of Sasol’s defence may be
characterised as its denial that it is dominant, then the second
pillar is its insistence that Nationwide has not discharged its
onus to establish all of the elements of Section 9(1).
In particular, argues Sasol, the provisions of Section
9(1)(a) which requires evidence of a likely prevention or
lessening of competition have not been satisfied. It rests its
defence primarily on these two pillars.
74.
We have established that the first of Sasol’s pillars
of its defence - its denial of dominance – is without merit. We turn then to sections 9(1) (a), 9
(1) (b) and 9 (1) (c). However, a purposive interpretation of
section Section 9(1) requires that we step back and examine the
place of price discrimination in anti-trust generally and in our
Act in particular.
Price
Discrimination – its place in anti-trust
75.
Much of the argument in this matter centres upon the
impact of price discrimination on competition and, in
particular, on the nature of the test mandated by Section
9(1)(a) which provides that in order for an action by a dominant
firm to constitute prohibited price discrimination, it must be
shown that such action ‘is likely to have the effect of
substantially preventing or lessening competition’.
Before turning to a detailed examination of Section
9(1)(a) some prefatory remarks regarding the place of price
discrimination in anti-trust are in order.
76.
Whilst some contemporary anti-trust scholars are highly
sceptical of the negative impact of price discrimination on
competition, lawmakers, on the other hand, have generally held –
and still do hold – that price discrimination offends the
principles and objectives of anti-trust and so have proscribed
certain forms of its practice in terms of anti-trust law.
This
is because price discrimination is viewed as a threat to the
underlying competitive structure of the market in which it is
perpetrated, in other words it is viewed as promoting a market
structure conducive to anti-competitive conduct.
We will show that our Act mandates this broad
interpretation of anti-trust’s mandate and that this conclusion
is powerfully bolstered by the policy context within which the
Competition Act is located.
77.
Anti-trust decision makers in other jurisdictions –
notably the US and European courts – have generally and, we
shall argue, appropriately, taken their lead from the
legislation that they are required to uphold.
Accordingly, the misgivings of some eminent scholars
notwithstanding, the courts and other anti-trust decision makers
have continued to uphold the legislative proscription of price
discrimination. While the
Department of Justice in the US has prosecuted few price
discrimination actions, private access to the US courts has
ensured a continuing trickle of price discrimination litigation. In those instances where private
action has afforded the US courts the opportunity of pronouncing
on the legality of price discrimination, they have honoured the
express wishes of their legislators by continuing to enforce the
prohibition on price discrimination.
78.
Significantly, though, in key anti-trust jurisdictions
– notably the United States – legislators have carved out a
special place for price discrimination in the armoury of
anti-trust legislation. Hence, as already noted, in the United
States price discrimination is not enforced through the Sherman
Act, the general anti-trust statute of that country, but rather
through the Robinson-Patman Act, a statute dedicated to dealing
with price discrimination. Clearly
price discrimination is, in US anti-trust history, regarded as a
particular species of anti-trust offence, one not adequately
accommodated even within the very broad umbrella of the Sherman
Act.
79.
In this regard the South African competition statute,
the Competition Act, embodies an approach to price
discrimination not entirely dissimilar to that of the United
States. While our legislature has
not created a statute dedicated to dealing with price
discrimination alone it has nevertheless chosen to distinguish
the treatment of price discrimination from the standard approach
adopted in the Act for dealing with conduct contraventions. As noted, the Act treats price
discrimination as a species of abuse of dominance, and, as such,
accommodates it within Part B (‘Abuse of a Dominant Position’)
of Chapter 2 (‘Prohibited Practices’). However,
it has not been accommodated within the very broad ambit of
Section 8 of the Act, that section of the Act detailing the
variety of instances of abuse of dominance.
Section 8 manages to provide for the prohibition of a
wide-ranging set of practices construed to abuse market
dominance, a section that manages to effectively capture both
specific practices and general practices, that provides for the
adoption of a rule of reason approach to certain conduct while
proscribing other forms of conduct per se, and that
tailors the operation of onuses in an effort to fine-tune the
treatment of the multitude of potential offences that arise
under the broad rubric of an abuse of a dominant position, or,
in US parlance, monopolisation. And
yet the legislature did not see fit to extend the coverage of
this already very broad provision to include reference to price
discrimination. It rather
chose to create a section of the Act – Section 9 – dedicated to
dealing with price discrimination.
80.
Why is price discrimination accorded this special
treatment? We would venture to
suggest, even at the risk of some simplification, that,
regardless of the very different conditions underlying the
anti-trust legislative histories of each of these divergent
economies and societies, the particularity of treatment accorded
price discrimination has strikingly similar roots.
81.
It is our view that the proscription of price
discrimination reflects the legislature’s concern to maintain
accessible, competitively structured markets, markets which
accommodate new entrants and which enable them to compete
effectively against larger and well-established incumbents. This set of concerns points directly
to problems confronting small and medium sized enterprises
(SMEs) which, in the absence of a ‘level playing field’, or,
what is the same thing, in the presence of discrimination, may
well find it difficult to enter new markets and even more
difficult to thrive, to compete effectively ‘on the merits’. The
influence of SME-related considerations in the legislative
history of the Robinson-Patman Act is absolutely clear.
Equally clear is our own Act’s concern with the
development of small business – it is telling that one of the
stated purposes of our Act is to ensure the ‘equitable’
treatment of small and medium-sized enterprises.
82.
There are, to be sure, considerations of ‘fairness’
that underlie this bid to ensure ‘equitable treatment’ for small
and large business. It is
manifestly clear that the drafters of the Robinson-Patman Act
also responded to the perceived inequity embodied in the
inability of small traders to acquire stock at the same prices
as those available to their larger competitors.
83.
While incorporating considerations of equity into
anti-trust analysis may be anathema to an anti-trust approach
that insists on the sole claim of a ‘pure’ consumer welfare
standard, one that is solely referenced by a reduction in output
or an increase in price, the utilisation, in selected, though
important, instances of a fairness standard is not alien to our
Act and practice. Certainly, in
merger analysis, considerations of public interest – which are
partly, if not entirely, driven by considerations of ‘equity’–
are explicitly present and the needs of small business find
expression in the definition of public interest.
Moreover, SMEs are specifically given consideration in
exemption proceedings, whereby they are afforded immunity from
prosecution under the exemption provisions under Section 10 of
the Act. The mere fact that equity considerations sit
uncomfortably in competition economics orthodoxy is no warrant
for ignoring our legislature’s express desire that they play a
role in our decisions.
84.
However, the element of equity that underpins certain
of the Act’s concerns to protect small business – and it is
precisely the element of ‘protection’ that most offends
anti-trust orthodoxy – should not detract from the substantive competition
considerations that accord small business a special place in
anti-trust history and in its contemporary practice.
85.
It is the oft-proclaimed mantra ‘protect competition,
not competitors’ that is usually invoked by those seeking to
deny small business a special place in anti-trust
considerations. As with many frequently repeated pieces of
rhetoric, this one contains more than a grain of truth and
serves as a valuable cautionary for anti-trust authorities who
are regularly confronted by competitors opportunistically
seeking to invoke competition legislation to advance their own
narrow interests even when the conduct of their opponents is
manifestly pro-competitive or pro-consumers.
86.
It is however often a feature of even good pieces of
rhetoric that they camouflage at least as much as they reveal. In this instance, the obvious
rejoinder to the ‘protect competition, not competitors’ mantra,
is one that insists ‘no competitors, no competition’.
And just as those who adhere to the better-known mantra
can claim a solid intellectual foundation for their views – one
that rests on a narrow, focused view of the meaning of
competition – so too can those more anxious to secure the
underpinnings for a robust population of SMEs find support in
anti-trust history and in its contemporary practice.
In short, those who deem anti-trust’s mandate to extend
to the securing of pro-competitive market structures, may
be less troubled at using competition enforcement to secure
conditions favourable to the entry and strengthening of SMEs,
particularly when the practices that disfavour the latter are
themselves not practices that promote competition on the merits.
87.
In our view the relevant, that is, the South
African, legal and political economy context favours
competition enforcement that is concerned to protect the market
mechanism from conduct that has the effect of undermining it. The expressed concerns of the South
African lawmakers and the policy planners support this finding. This is powerfully manifest, inter
alia, in an industrial policy that places the development of
SMEs at the centre of attempts to improve the workings of the
market mechanism. This
conclusion is grounded not only in an examination of the general
industrial policy context in which concern for SME development
looms large but also in an examination of the Act itself.
88.
The Competition Act is, itself, punctuated with
references to the legislature’s desire that the statute should
promote market access and equality of opportunity particularly,
in this field, where small enterprise is concerned.
As noted references to equality of opportunity are to
be found in the Preamble to the Act, and the promotion of small
business is specifically provided for in Section 2(e), which
expresses one of the ‘purposes’ of the Act, as well as in the
consideration of applications for exemption (Section
10(3)(b)(ii)) and the evaluation of mergers (Section 12A(3)(c). In fact the Explanatory Memorandum
which accompanied the publication of the draft Competition Bill
explicitly notes the intention of the policy-makers to support
SME developments through the instrumentality of the Competition
Act. The Department of Trade and Industry
has recently released a report surveying SME development in South Africa and it concludes
that while entry barriers for SMEs are relatively low, the
long-term success rates of these entrants is markedly low. Even the President’s address at the
opening of Parliament in 2005 saw fit to record the urgency with
which Government viewed support for SME development.
89.
The Act is clearly concerned to promote market access
for SMEs and an important mechanism by which it seeks to do so
is by ensuring ‘equitable treatment’. Price
discrimination – conduct that is, per definition, inequitable -
is explicitly proscribed by the Act, it is not, in other words
part of a general category of exclusionary practices.
In short, the legislature proscribed price
discrimination perpetrated by dominant firms because of the
threat it poses to its victims, these being a competitive and
accessible market structure and the small firms that animate it,
potentially robust, though still slender, saplings that will not
take root in the face of treatment that is manifestly
inequitable relative to that accorded their better resourced
competitors. This then is why Section 9 has been carved out of
the general abuse of dominance provisions: it is uniquely
concerned with the structural impact of abuse of dominance and
it is recognised that its victims are most likely to be small
customers.
90.
However, in the Act’s formulation of the prohibition of
price discrimination, certain limiting principles are embodied. There
is, in other words, no basis to conclude that Section 9
constitutes a blanket prohibition on price differentiation or on
the commercially important and widespread practice of
discounting even when these pricing practices explicitly favour
large firms over small firms. Hence, and in significant contrast
with the Robinson-Patman Act, in our Act the offence of price
discrimination is limited to dominant firms. Moreover, Section
9(1) specifies certain elements to which any act of price
differentiation must conform if it is to constitute prohibited
price discrimination. And
then a series of defences, many of which were developed
piece-meal over the course of many years of US and European
jurisprudence, are explicitly provided for in Section 9(2).
Section 9 cannot therefore be read as an omnibus prohibition of
the practice of differentiating on price. Rather,
proscription of the practice of price differentiation is
confined to particular, specified circumstances.
Section
9(1)(a)
- A substantial lessening of competition
91.
Sasol’s case, as we have already noted, rests heavily
on disposing of Nationwide’s case on the interpretive hurdle of
section 9(1)(a) of the Act. Sasol advances an interpretation of
section 9(1)(a) that would require the complainant to prove
actual harm to consumer welfare. Granted Sasol does not say so
in so many words, but its critique of this lacuna in the
complainant’s evidence amounts to exactly this. Because, on this
standard, because Nationwide cannot demonstrate that the
increased production costs incurred in consequence of Sasol’s
discrimination harm the market for treated poles, it must fail.
92.
Mr Foot for his part concedes that he has not been able
to show that the price discrimination has led to higher prices
or lower output in the market for treated poles. But he does not
concede Sasol’s interpretation of Section 9(1)(a).
93.
Mr. Foot’s rejection of Sasol’s interpretation of
Section 9(1)(a) finds support in the entire architecture of the
Act. Chapter 2 deals with
prohibited practices in four categories. Section
4 deals with restrictive horizontal practices, Section 5 with
restrictive vertical practices, Section 8 with abuse of
dominance and Section 9 with price discrimination – as we have
already stated, the act of prohibited price discrimination can
only be committed by a firm that is dominant as defined in
Section 7 of the Act. Each of
sections 4, 5 and 8 define two types of prohibited practices. On
the one hand there are a number of clearly identified acts that
are prohibited – hence Section 4(1)(b) prohibits a number of
specified horizontal agreements; Section 5(2) specifically
prohibits the practice of minimum resale price maintenance;
Sections 8(a), (b) and (d) prohibit a number of identified
abuses of dominance. Section 9
which specifically prohibits price discrimination by a dominant
firm belongs to this genus of restrictive practice.
For convenience we refer to these as the ‘named
anti-competitive acts’.
94.
On the other hand each of sections 4,5 and 8 also
prohibits a general category of acts whose effect is to
undermine competition – these are to be found in Sections
4(1)(a), 5(1) and 8(c). We will
refer to these as the ‘general anti-competitive acts’.
95.
Note the difference in the way that these two
categories of anti-competitive acts are treated.
Where
the general anti-competitive acts are concerned the complainant
has, in order to secure a conviction, to establish that the act
complained of is anti-competitive in its effect.
This is the complainant’s onus – it does not avail him
to simply describe the elements of the act, he must establish
the anti-competitive consequences that flow from it.
96.
However where the named anti-competitive acts are
concerned the onus imposed upon the complainant is simply to
establish the elements of the act. In
respect of Sections 4(1)(b), 5(2) and 8(a) and (b) this alone is
sufficient to secure a conviction. In
respect of the named anti-competitive acts in the sub-sections
of Section 8(d), should the complainant successfully establish
the elements of the acts there named, the respondent is entitled
to defend itself by showing that the anti-competitive effect
which is presumed by the acts named in sections 8(d)(i)-(v) is
outweighed by ‘technological, efficiency or other
pro-competitive gains’. However in
respect of each of these acts named in 8(d)(i)-(v)
the anti-competitive effect is presumed once the
elements of the act have been established although it is
contemplated that countervailing pro-competitive gains may lead
to a net pro-competitive effect and so the respondent is invited
to prove these countervailing gains if he can.
97.
Section 9 is a clear example of a named
anti-competitive act – it is price discrimination that is so
named. Section 9(1)(a)-(c)
establishes the elements, all of which have to be established in
order for the act of price discrimination to constitute prohibited
price discrimination, in much the same way as Section
4(b)(i)-(iii) specifies the elements, one of which must be
established, for a horizontal practice to constitute a prohibited
horizontal practice. In short the
architecture of the act suggests strongly that Section 9(1)(a)
is not structured to constitute the demanding hurdle that Sasol
contends for. Certainly
the other two elements that must be established – ‘equivalence’
in Section (9)(1)(b) and the subject matter of the
discrimination in Section (9)(1)(c) – cannot, at the wildest
stretch of the imagination, be construed as similarly onerous
hurdles as that contended for in respect of 9(1)(a)..
There can be no doubt about their status as simply
elements of the act and it would be peculiar, to say the least,
to incorporate under a single subheading two elements and a
defence – this is completely at odds with the rest of the
architecture of the Act.
98.
However, it is the presence and the contents of Section
9(2) that, in our view, puts this matter to rest.
This is the sub-section of Section 9 in which the
defences are specifically incorporated. They
are defences interestingly distinct from the countervailing
pro-competitive gains contemplated in the defence made available
to Section 8(d) defendants. The
defences in 9(2) relate to cost-based justifications and several
incidental phenomena – in other words our Act does not even
contemplate the prospect of pro-competitive consequences flowing
from price discrimination. Once the
dominance of the perpetrator and the elements of the act are
established it is prohibited price discrimination unless one of
the justifications listed in 9(2) can be proven.
99.
Why, though, was it thought necessary to create a
special section of the act to deal with price discrimination? There were undoubtedly practical
considerations. It is a long and
cumbersone section and the elements of the act and the defences
are specified in considerable detail – this was done, we will
argue, precisely to limit the instances of price differentiation
that are proscribed. But, in our
view, the overriding reason for the separation is given by the
policy context that accounts for the legislature’s concern with
price discrimination in the first place and provides further
reason for why the legislature could not have intended the
complainant to establish the anti-competitive effect of price
discrimination. Mr. Foot has
clearly articulated this argument and, in so doing, is on all
fours with the legislature’s concern with the prospects of small
business.
100.
Mr. Foot argues that a small business is the most
likely complainant in a price discrimination case.
Foot points out that on a consumer welfare test small
business will always fail, precisely because it is not able to
correlate harm that is inflicted upon it to harm that is
inflicted on the broader market. A
small firm will always be met with the response that its
troubles are, in relation to the market as a whole, de
minimus, that is, that they have little, if any, effect on
competition in the market as a whole.
101.
We agree. It is unlikely that a discriminator will
discriminate against a large customer unless that customer is
also a competitor. However were
such an instance of discrimination to occur it is more likely to
be met by a claim based upon section 8(c), one of the category
of general restrictive practices where an anti-competitive
effect has to be established by the complainant.
This is why we have a separate section 9.
The legislature indeed contemplated that complainants
under section 9 – who will generally be small enterprises -
would not be able to show the sort of consumer welfare harms
that Sasol contends are contemplated as the test, but who
nevertheless need to have a remedy against conduct that might
exclude them from access to markets or limit their ability to
compete in those markets on the merits. Thus
Section 9 was enacted.
102.
In short, what the legislature wanted in section
9(1)(a) was to create a threshold, but a low one that related
not to competitive harm but to
competitive relevance. The legislature in
availing small firms to bring cases and to switch the onus to
the dominant firm did not want them faced with an evidential
burden they could never meet. It did not want them to become
non- suited at the very next hurdle after establishing dominance
by the discriminator.
103. Had
Section 9(1)(a) been omitted in its entirety, that is if it had
not been included as one of the elements of the act of
prohibited price discrimination, then Section 9 would have been
consumer protection legislation pure and simple. A mere act of
discrimination that met the tests in Sections (9)(1)(b) and (c)
but not that in Section 9(1)(a) would be unlawful even if the
complainant was not itself a player in a market but just an
ultimate consumer of the products of the dominant firm. Thus
subsection 9(1)(a) invites a complainant to establish a
competition relevance to his complaint but does not require
proof of some standard of harm as contended for by Sasol.
When the legislature asks is it ‘likely’ it is asking
us to situate the complaint as one relevant to competition. When
it asks is it ‘substantial’ it invites us to distinguish the
trivial effect from the weightier.
104.
Mr Foot effectively responds by demonstrating that he
is not merely an individual consumer of creosote who purchases
it to coat his fence on the weekend. If that were the case he
would have no basis for approaching the Tribunal, he would found
no cause of action under the Competition Act.
What distinguishes Foot from that individual consumer
is that he is a competing producer of goods, treated poles, in
which the subject-matter of the discrimination, creosote, is a
crucial input in his production process and thus Sasol’s
quantitatively substantial discrimination, persisting year after
year, places and other small customers at an ongoing
disadvantage relative to other competing producers of treated
poles. Hence he has established the relevance of the act
of discrimination to competition and meets the element
of likely. If something is not relevant to competition –
as would be the case of the individual consumer cited above - it
is for that reason not likely to have an effect on it. This lack of ‘relevance’ is also
likely to apply in respect of discrimination between consumers
in separate markets.
105.
Moreover, the sub- section also requires substantiality
as an element. Thus if Mr Foot was being discriminated against
by the Post Office in the price of his stamps for his envelopes
that accompany the invoices to his customers this would not be
considered a substantial input cost, albeit an input
cost. In contrast a more significant input cost that might put
him at a competitive disadvantage to those of his competitors
who benefit from the discrimination may meet the standard of
substantiality.
106.
Does this interpretation embody the danger that the
absence of a harm test may make competitively neutral price
discrimination an offence?
107.
We say that it does not. In the first place such an
argument would ignore the fact that the legislature has required
the complainant to clear some still considerable
hurdles of proof as
provided for in Section 9(1). And
it would also ignore the fact that, after all is said and done,
Section 9(2) leaves the discriminator with some important
defences, those most commonly invoked in justification of price
discrimination, albeit confined, in terms of Section 9(2), to a
closed list.
108. It is noteworthy as
well that despite its per se elements – that is despite
belonging to that category of acts in which the complainant does
not have to establish an anti-competitive effect - section 9 is
not one of those for which a first offender would be liable to a fine.
This points as well to its unique treatment in the Act, as a
hybrid of antitrust and public interests, when compared to the
other per se or quasi per se prohibitions where fines are
levelled as in sections 4 (1)(b), 5(2) and
8(a),
(b) and(d).
109.
Thus to recap, the complainant, apart from what is
required under 9(1)(a), has not only to establish dominance but
also discrimination and equivalence. Subsection 9(1)(a) is about
removing the irrelevant and the trivial; it is not about placing
in front of the complainant a hurdle that it can never hope to
clear if it is a small firm.
110. Moreover,
in this case, as we will show when we discuss the evidence, in
addition to the elements of relevance (‘likely’) and
substantiality, Mr Foot has also demonstrated a theory
explaining why Sasol has engaged in the discrimination, one that
suggests that the purpose of the price discrimination in which
it is engaged is anti-competitive. This evidence of intention
bolsters the notion of likelihood. We do not need to decide
whether evidence of this nature will always be required to meet
section 9(1)(a), but it certainly bolsters the showing of
likelihood.
111.
In summary then Mr Foot’s rejection of Sasol’s approach
to Section 9(1)(a) has both textual and contextual support. If
one has regard to the policy to which the legislature gave
expression in the Act generally and in the enactment of a
stand-alone provision dealing with price discrimination, we see
that Mr. Foot’s approach is also consonant with a purposive
approach to the interpretation of the Act.
112.
Having now determined the appropriate contextual and
purposive approach to Section 9(1)(a) we proceed to examine the
evidence that has been led in relation to this section.
Section 9(1)(a) – the evidence
113. Nationwide has
provided evidence that purports to establish that the price
differential under which it labours substantially impairs its
ability to compete effectively with its larger and, by dint of
the price regime, more privileged competitors.
It is common cause that creosote purchases constitute a
significant portion of Nationwide’s costs of production.
114. Nationwide claims
that the price discrimination – the difference
between the price at which it procures creosote compared to
price charged to its larger rivals - adds between 3%
and 4% to Nationwide’s total cost structure.
Creosote accounts for about 25% of Nationwide’s
total costs.
Nationwide argues that the higher cost it pays for its
inputs lessens its ability to compete in that market because of
the higher variable costs of production that it imposes.
We
should add that in a market characterised
by low margins the imposition of an additional 3-4% on a firm’s
cost structure should not be construed as inconsequential.
115.
Mr. Malherbe, the respondent’s expert witness,
calculates that at the present differential between the price at
which Nationwide purchases creosote and that at which its
largest competitors receive creosote – the level of discount
between the purchasers amounting to some 14,3% - were Nationwide
to receive the discounted price, its cost of production would
reduce by some 3,6%. Therefore Nationwide has an overall
increased cost, according to Sasol’s expert of between 3.6% and
3.8%.
116. Sasol attempts to
counter the implication of this evidence by pointing out that,
despite this disadvantage Nationwide is able to compete
successfully on the price of its poles with its larger
competitors, that, indeed, having acquired a failed firm, Mr.
Foot has managed to establish his company on a sound footing. Thus competition, even assuming that
its maintenance requires the continued existence of Nationwide
Poles, has not been impaired because, avers Sasol, Nationwide
has remained an active competitive force. We heard considerable
argument on this point. Mr. Foot insists that he is, in
consequence of the price discrimination and the competitive
poles market, obliged to accept lower margins than his more
privileged larger competitors. Mr. Foot argues, quite
persuasively, and points to his audited accounts as evidence,
that he as the owner/manager of the business has little to show
for the alleged success of his efforts, indeed that it is only
sacrifices of this nature that have enabled the business to
continue functioning.
117. It has not been
possible to arrive at any firm conclusion on the basis of this
evidence and argument. Nor,
given our interpretation of 9(1)(a), do we believe that much
turns on it. But it does indicate
the absurdities of Sasol’s interpretation. It is simply
impossible to even identify the appropriate counterfactual.
Would Mr. Foot have to show that his business was failing in
order to establish that its competitiveness had been impaired by
the price disadvantage under which he laboured? Does
the
fact that he has managed to keep a very small enterprise going
indicate that Nationwide Poles has suffered no competitive harm? Is his manifest failure to grow from a
struggling small enterprise into a stable medium sized
enterprise, capable of challenging the largest players in the
market, evidence of competitive harm? We
are persuaded that price discrimination clearly disadvantages
Nationwide relative to its major competitors.
118. We
have already rejected as a matter of law Sasol’s argument that
the complainant must prove harm to consumer welfare. However
Sasol goes further, and argues that the impact of the price
discrimination was so trivial that it could not have had an
adverse effect on the competitive structure of the market. That
is, it argues that
even if the price discrimination reduced the ability of
Nationwide and other small producers to compete, indeed even if
it caused their demise, the intensity of competition in the
market for poles would not be substantially lessened.
Sasol points out that only a small number of its
customers are in the highest price band, the band occupied by
Nationwide, and that competition is adequately secured by those
pole manufacturers who are not disadvantaged by the price
discrimination. Here is where the ‘protect competition, not
competitors’ mantra referred to above comes into play: the
Tribunal’s concern, insists Sasol, should not be with the
fortunes of a few competitors, but rather with the intensity of
competition in the pole market. Sasol attempts to bolster its
argument by insisting that it, as a supplier, would have no
interest in reducing the level of competition in the market of
its customers. Note however, and we
will return to this later, Sasol has not argued that its price
discrimination actually promotes competition, that it is an
instance of ‘competition on the merits’.
119.
Sasol has raised the question of its own interest in
impairing competition in a downstream market in which it has no
interest other than as a seller. Indeed
Sasol asserts that as a seller of an input it is positively
interested in maintaining competition in the downstream market. Recall, however, that Sasol has
previously asserted that competition in the downstream pole
market will not be diminished by the demise of the small
producers and so the interest it asserts in a competitive
downstream market is, on its own estimation, not compromised by
action that diminishes the competitiveness or even causes the
demise of the small players in the downstream market.
Be
that as it may, we are of the view that certain of the evidence
submitted to us does indeed establish Sasol’s interest in
discriminating against its smaller customers and favouring its
larger customers.
120.
Monopolists – or, in the parlance of our Act, dominant
firms – extract their rents in one of two forms:
supra-competitive profits or, as the eminent British economist,
Sir John Hicks, famously termed it, the ‘quiet life’.
In this case we have a very large producer of petroleum
and chemical products seeking to dispose of a product – creosote
- that is marginal relative to the firm’s total output.
It has no particular interest in expanding output of
this product. In fact it appears
that technical considerations limit this option.
As we have shown, the commercial considerations of the
greater Sasol subordinate decisions regarding the pricing and
output of creosote to far weightier issues, namely the fuel
equivalent price of the feedstock and the need to optimise the
composition of the bouquet of products derived from the
feedstock. Sasol’s primary
interest is in disposing of its variable output of creosote, the
variances being driven by exogenous factors.
121.
These considerations, apart from dictating a low level
of interest on Sasol’s part in its smaller customers, also
dictate that its focus is on satisfying its larger customers. To some extent this latter purpose is
achieved by giving these larger customers a preferential price
relative to the smaller players in the pole market.
In a market – the poles market – in which entry
barriers are, it is common cause, low, the price differential
assists in limiting the entry of new and small entrants and
their ability to thrive. This is
borne out by evidence presented above on the impact of the price
differential on the competitiveness of small firms.
It is also starkly confirmed by Sasol’s treatment of
‘twilight treaters’.
122.
‘Twilight treaters’ are very small players who are not
able to purchase their creosote requirements by the lorry load,
as in the case of the complainant and the larger customers, but
rather in drums supplied by retailers who are, in turn, supplied
by Sasol. It appears – and this is
conceded by Sasol – Sasol’s larger customers requested that
Sasol increase the price of drum loads in order to limit access
and growth on the part of these micro-producers.
Sasol readily acceded to this demand.
Mr. Van Wyk’s evidence in this regard was instructive.
Though he averred that the industry association (SAWPA) had
advised Sasol to increase prices to the micro treaters to ensure
the integrity and safety of the product chain downstream,
Sasol’s other motives are apparent:
“VAN
WYK:…..So
they are trying to get those guys out of the industry, but then
the industry came to us and said but you’re promoting the
twilight treaters, because you’re selling in drums to the
co-ops. So the twilight treater can come back and buy from the
co-op and treat, if you can call it treat it or dip it or
whatever, and sell it against our customers. And they requested
us to increase the price drastically so that it doesn’t make it
economical for that guy to buy creosote. It’s too expensive for
him to do his twilight treating. So that’s one reason the market
requirement or they asked us to do it. It is to prevent the
twilight treaters to be active in your market.”
123. If
Sasol’s
large customers fear of new entry is sufficiently great for them
to have demanded Sasol’s assistance in deterring the entry of
micro-treaters, we readily infer that their interest in
suppressing competition from established small producers such as
the complainant, is even greater. This,
bolstered by the evidence elaborated above that establishes the
competitive harm that accrues to small producers as a result of
the price differential, exposes Sasol’s interest in maintaining
a discriminatory pricing structure.
124. Our
conclusions are underpinned by Sasol’s failure to assert a
pro-competitive argument in favour of price discrimination. While we concede that Sasol is not
required to prove a pro-competitive effect – in fact, as already
elaborated, the Act does not admit of a pro-competitive defence
– we are certain that had there been a pro-competitive effect we
would have been told of this. Certainly
the competitive position of the larger poles producers is
enhanced but this is done by way of a practice – price
discrimination – that is not competition on the merits but
rather that excludes small operators from the market or that, at
the very least, compromises their ability to compete
effectively.
125. In summary we are
satisfied that –
- The
discount structures for the sale of creosote exhibit a
material differentiation as between the most and least
favoured customers;
- Creosote
is a significant input cost of firms such as the complainant
who compete in the treated poles market against rivals who
benefit from the price discrimination;
- That
it is ‘likely’ that the complainant and firms similarly
situated presently in the market and new entrants, will be
less effective competitors as a result of the discrimination;
- This
is a market where small firms, absent price discrimination,
can be effective competitors to their larger rivals.
126. It
follows that if firms such as the complainant are rendered less
effective competitors that this will have an effect on the
competitive structure of the market and so it is likely that
this will substantially lessen or prevent competition in the
market, in the sense understood by the legislature for the
purpose of section 9 (1) (a).
Section
9(1)(b)
- Equivalent transactions
127. The
concept of equivalence is not found in the Robinson Patman Act.
It appears that the requirement of ‘equivalence’ was introduced
into the legislation during the Parliamentary process -
sub-section 9(1)(b) was not in the original Bill.
Clearly the legislature sought to limit the ambit of price
discrimination by introducing another limiting feature to price
discrimination, one not found in the United States legislation.
128. ‘Equivalence’ is not
defined in the Act and must be interpreted by the adjudicator
from its ordinary meaning and its purpose in the Act.
129. The Concise Oxford
Dictionary provides several meanings for the word equivalent. We
will consider only the two that might be relevant here:
1. equal in value, amount,
function, meaning etc. 2. (equivalent to) having
the same or similar effect “
130. We would suggest
that this second definition is the more useful as it also fits
the purpose of the sub-section.
131. Translating the
dictionary meaning into the purpose of this subsection, we would
suggest that transactions are equivalent if they have the same
or similar economic effect.
132. Thus transactions
may be functionally equal – one business class seat or
one telephone call between Cape Town and Johannesburg may be
functionally equal to another business class seat or telephone
call, but they may not be equivalent (a call or a flight
made in a peak time as opposed to one made during a non-peak
period) in the sense that their economic effect is different and
hence the legislature, recognising this, chose not to bring
‘non-equivalent’ transactions under the rubric of prohibited
price discrimination despite the fact that in other respects
they may be regarded as equal.
133. Sasol seems to
accept this approach. Certainly its
expert, in attempting to explain the basis for the price
gradations, appears to argue that sales to large customers are
not the business equivalent of sales to small customers.
“I would say at a general level this would refer
or reflect the change in value to the seller or the firm of
moving from smaller to larger customers. Now exactly what that
curve of additional value looks like, it will depend on a few
things. I mean it will depend on their perception of risk, of
the relative level or risk of the smaller and the larger
customers, the risk to them of losing a smaller versus a
larger customer.”
134. The problem for
Sasol is that this has been a post hoc argument by its economist
and is not supported either by way of any direct evidence of
Sasol or by the way the discrimination in question actually
operates. If Sasol reflected the reduction of value to it of the
loss of the large customer by way of a long term contract, as
opposed to spot market transactions, this might make
transactions not equivalent even if they were equal (sales of
creosote effected by truckload) and so justify a price
discrimination in favour of the long-term contract customer.
Here the non-equivalence is reflected by the value of the future
legal obligation imposed on the long-term customer to which the
spot customer is not subject. Sasol’s
present
discount structure rewards the customer for past purchases, as
we have seen in the previous section, not its future purchases
as would a long-term contract. Having enjoyed a past benefit the
customer is free at any stage to switch to a rival, indeed since
it receives its discount determination in advance of a three
month period, if it does not resume business it could even
commence negotiations with a new rival of Sasol whilst enjoying
the last quarter of its discounts with Sasol.
135. So the economist’s
theory of distinctiveness or non-equivalence is not supported by
the manner in which the discrimination is practised . Indeed the
alternative theory for its existence as posited in the previous
discussions of 9(1)(a) is the more plausible, namely that it
serves to protect large customers against the threat of smaller
entrants expanding in the market at their expense.
136.
When pressed Mr Malherbe was frank enough to concede
that:
“To what extent the intermediate levels or
thresholds and indeed discounts were determined on the same
basis, I don’t know. But what also seems to appear from his
evidence is that they’ve basically taken the structure that
was designed 5 or 6 years ago or even more and they’ve just,
in a quite mechanical year, updated it every year.”
Section
9(1)(c)-
The content of the discriminatory action
137. It is common cause
that the discrimination in question relates to the price
differential engendered by differential discounts based on past
sales volumes. Different prices are charged to small and large
customers, by dint of the volume of their purchases from Sasol.
This is sufficient to bring Sasol’s conduct within the ambit of
Section 9(1)(c).
Defences
–
Section 9(2)
138. Sasol has chosen not
to avail itself of the defences provided for in Sections
9(2)(a)-(c). Some of Sasol’s
earlier submissions suggested that such a defence would be
forthcoming. However this does not appear to have
materialised – certainly Sasol’s Heads of Argument make no
mention of Section 9(2). In
fact, Sasol’s expert, specifically denied any relationship
between the lower price charged to the larger customers and the
costs of that provision:
“So we needed to try to understand what really
lay behind this and the first possibility was that this simply
reflected the costs of transacting with different sizes of
customers in an administrative sense. And it became quite
clear from our interviews with management that this was not
the case; that although this is a factor, as we heard today,
these price differences weren’t based on cost, on differences,
in invoicing cost, in market costs and so on.”
139. There
was
some discussion regarding scale economies in distribution. Mr. Foot insisted that there were no
scale economies in distribution because creosote was delivered
in standard 32-ton truckloads and that a purchaser was required
to purchase at least a single truck load. In
other
words, he argued that there were no economies to be gleaned in
dispatching, say, ten 32-ton trucks to a large customer over a
single 32 ton truck to a small customer as might exist were
Sasol to able to utilise larger trucks for delivering to its
larger customers. While this
argument appears to have been rejected by Sasol, no attempt was
made to present evidence of actual scale economies in
distribution.
Finding and
remedies
140. We find that in the
period in question Sasol was a dominant firm whose conduct meets
the test required in establishing prohibited price
discrimination. Sasol has not
provided a justification for its conduct that meets the
requirements of Section 9(2). Sasol
has thus contravened Section 9 of the Competition Act.
From the evidence placed before us we are able to
conclude that the prohibited price discrimination occurred
between April 2001 and August 2004.
141.
We re-iterate our view that Section 9 should not be
construed as imposing a blanket prohibition of price
differentiation. We underline that
a finding that price differentiation constitutes prohibited
price discrimination requires, firstly, a finding of dominance. In this case, we have found that, in
the relevant period, Sasol is dominant in the market for
creosote by virtue of a market share that exceeds 45%.
We have also shown, although not strictly speaking
necessary, that it has market power in this market.
Once a finding of dominance has been made the three
threshold elements provided for in Section 9(1) have to be
present. While, in our view, this
threshold is not intended to impose a full rule of reason test,
nor are the requirements of Section 9(1) inconsequential.
Finally there are the Section 9(2) defences.
These were not invoked by Sasol and we believe that the
absence of scale economies in serving large as opposed to small
customers – for this is what we must infer from Sasol’s failure
to make a case for scale
economies – is exceptional. If
proven, such a case would serve as a defence to most instances
of price discrimination.
142.
We also note again that this section of the Act is a
hybrid of public interest and anti-trust. The
poles market appears to be a market with unusually low entry
barriers: it is a market in which small players could easily
enter and thrive. As
such it seems to be a powerful example of the sort of sector
that the legislature had in mind when it outlawed price
discrimination the better to realise one of the express purposes
of the Act, namely ‘to ensure that small and medium-sized
enterprises have an equitable opportunity to participate in the
economy’.
Remedies
143.
Nationwide has asked for two forms of relief. In the
first place it seeks a declaration that ‘ a prohibited practice
has occurred as is contemplated in terms of section 65(6)(b).’
144.
Given the finding that we have made we have no
hesitation granting this prayer for relief. This declaration
allows Nationwide, should it so elect, to found a claim for
damages in the High Court.
145.
The second prayer for relief is in the form of an
interdict. Nationwide seeks an order ‘that
Respondent be ordered to supply it with SAK K at the same price
afforded to Respondent’s most favoured customer.’
146.
What this means in effect it that we have also been
asked to instruct Sasol to place Nationwide on a footing
identical, in relation to the price of creosote, as that of its
largest competitors. This we cannot
do. Our decision is derived from
the facts relevant to a particular period.
Similar facts – notably as to the question of dominance -
would have to pertain into the future to justify the granting of
an interdict. However, should Sasol
be found to be to be in continuing contravention of the Act, its
conduct, were it once more to be proved before this Tribunal,
would lay it open to the imposition of an administrative
penalty.
Costs
147. In proceedings
between private litigants we have generally followed the
practice of awarding costs to the successful party.
We see no reason to depart from that practice in this
instance. Mr. Foot alone has
represented Nationwide, undoubtedly at considerable direct as
well as indirect cost. It
seems only just that Nationwide be awarded costs on the basis
that Mr Foot is treated on taxation as if his services had been
those of a qualified professional legal representative.
We accordingly order Sasol to pay Nationwide’s costs of
the cause on that basis.
____________________
31 March 2005
D.H.
Lewis
Date
Concurring: N. Manoim, L. Reyburn
Van Wyk testified
that mid size customers typically purchase approximately 60
tons per month.
Address of the President of South Africa, Thabo
Mbeki, at the Second Joint Sitting of the Third Democratic
Parliament Cape Town: February 11, 2005 at page 8 where
reference is made to ‘progress made in setting up the Small
Enterprise Development Agency, to improve our government’s
performance in the critical area of the development of small
and medium enterprises.’
Updated
29th April 2005
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