AdC identifies barriers to entry in the bottled gas market

Press relase 3/2017
AdC identifies barriers to entry in the bottled gas market
The Portuguese Competition Authority (Autoridade da Concorrência - AdC) identified barriers to entry and expansion in the distribution of bottled liquefied petroleum gas (LPG), likely to reduce the competitive pressure in the market, in a Report on the Industry of Bottled LPG in mainland Portugal, published following a request by the Secretary of State of Energy.
The Report of the AdC shows that the bottled LPG (butane and propane) industry is concentrated in a small number of market players (Galp, Rubis, Repsol, OZ Energia, and Prio, which is still active in propane distribution), with a stability in the market shares of the main players over time which is consistent with a lack of competitive pressure. Since the liberalisation of the market in September 1990, only two new entries took place in the industry: Repsol, in the mid 1990’s and Prio, in the last five years.
Galp is the market player with the largest market share, and the owner of the two sole refineries in Portugal as well as of the majority of the storage capacity of the country.
Access to LPG storage facilities is one of the key factors for competition in the sector. This aspect is particularly relevant since the AdC’s study demonstrates that access to maritime imports is a factor in competitiveness of the storage cost.
However, currently, the three main market players, Galp, Repsol and Rubis, currently detain ownership of the entire share capital of the Sines (Sigás) and Perafita (Pergás) storage facilities.
To address these structural barriers to entry and expansion, the AdC recommends that the Portuguese Government grant a public interest status to the Perafita and Sines storage facilities, such as that established for the CLC storage facility, to ensure that negotiated access to these storage facilities.
The AdC further identified other potential barriers to new entrants that may be mitigated through regulatory provisions, namely:
  • non-standardised LPG reducers (that make it difficult for a consumer to switch from one operator to another which offers more competitive prices);
  • the logistics of empty bottles, as a new entrant holding a smaller sized bottled-gas depot will depend on his competitors to obtain empty bottles that will allow for refilling and distributing of new bottles.
The AdC report further shows that LPG import costs decreased significantly since 2014. However, the pace of the retail price decrease was slower than that of import costs, leading to the growth of gross margins. The analysis of the AdC also demonstrated that the wholesale prices of bottled LPG of the two largest operators, which account for more than two thirds of supply, are generally approximated.
The profit margins associated with the pricing strategy of the main market players show that they exercise market power to some extent, that likely follows from the high degree of concentration in the market together with the rigidity of demand for bottled gas with respect to price.
These characteristics of the demand for bottled gas reinforce the concerns regarding the impact of the lack of competitive pressure, in terms of consumer welfare.
Regarding the comparison with the prices of bottled LPG in Spain, the AdC highlights that caution must be taken as prices of bottled gas in the neighbouring country are regulated, while the Portuguese market has been liberalised in 1990. Moreover, Spanish courts have already rendered judgements pointing to regulated prices that have circumstantially been set below cost.
In terms of restrictive practices, the AdC issued a decision in February 2015 against companies of the Galp Energia group for anticompetitive practices in the Portuguese bottled LPG market, namely in contracts with distributors. The Competition, Regulation and Supervision Court confirmed the AdC’s decision, but reduced the fine from €9.29 million to €4.1 million.
31 March 2017