NMa: Oil Companies Keep Prices Artificially High through Agreements with Filling station Owners

The Netherlands Competition Authority (NMa) has established that the larger oil companies (Shell, BP, Esso, TotalFina and Texaco) keep the price of petrol, diesel and LPG artificially high through a system of agreements with independent filling station owners. Since all oil companies use systems for supporting filling station owners in almost identical ways, filling station owners are not given an incentive to charge prices below their suppliers' national recommended prices. This lack of mutual competition results in higher consumer prices and obstructs entry to this market. These agreements between oil companies and filling station owners are so-called vertical agreements. These are governed by the European block exemption in relation to vertical agreements. Since the European exemptions also apply to the Competition Act, such agreements are not prohibited. Since, in NMa's opinion, the cumulative effect of these agreements considerably restricts competition on the Dutch market, the Director-General of NMa today notified the oil companies of his intention to render this exemption inoperative. As a result, the agreements will still be subject to the prohibition on cartels and, if these agreements are continued, this would constitute an infringement of the prohibition on cartels, for which NMa may impose a fine or sanction.

Market

The Dutch market is characterised by a closely-knit system of filling stations alongside motorways and provincial and local roads. Petrol (Euro95, diesel and LPG) is a product which does not lend itself to brand differentiation (homogenous product). In addition, petrol is not sensitive to price changes: demand remains stable even if prices increase.

The market share of the market leader, Shell, is far higher in the Netherlands than that of market leaders in neighbouring countries and the difference between the market leader and the company with the second-largest market share (BP) is much greater in the Netherlands. Entry to this market by new entrants is very limited due to the scarcity of new locations and strict environmental standards.

Price formation on the fuel market is very transparent. All the oil companies base their procurement prices on the same international quotation. The differences between the recommended prices of the various oil companies are marginal. Shell publishes changes to the recommended prices on its website.

The larger oil companies, Shell, BP, Esso and TotalFina, have most of the filling stations, which may be subdivided into three types: filling stations owned and operated by the oil companies; filling stations owned by the oil companies and operated by independent filling station operators; filling stations owned and operated by the filling station proprietor. NMa's investigation focused on the supply of petrol through the last two types, which accounts for 41% of the total sales of petrol and diesel in the Netherlands.

Support System

The oil companies enter into exclusive supply contracts. As a result, filling station operators are often bound to their suppliers for a long period. In addition, the oil company issues recommended retail prices for Euro95, diesel and LPG. The standard margins for filling station operators are agreed beforehand. Consequently the portion for every litre sold that is retained by the filling station operator and the portion that goes to the oil company are fixed. The oil company's margin is higher than that of the filling station operator. Additional discounts are agreed for some filling station operators. In comparison with other countries, the margins on petrol prices are the highest in the Netherlands. This higher gross margin can only partially be explained by higher costs in the Netherlands, such as environmental and wage costs.

All the oil companies have support systems. Through a system of support discounts, the oil companies make it possible for filling station operators to follow competitors' price reductions. This support system is specified in the contract that the oil company enters into with the filling station operator. In principle, support is given on the basis of scales, which stipulate the amount of the discount on the recommended price and the contribution made to this by the oil company and the filling station operator. NMa's investigation has shown that support is not given in cases where a filling station operator decides independently to reduce his retail prices. In practice, this means that no single filling station operator will voluntarily adjust his prices downwards. Support is given if the filling station operator notifies the oil company that a filling station in the vicinity has reduced its prices, so threatening the filling station's turnover. The oil company gives support for the duration of the campaign on condition that the filling station operator passes the discount on to the consumer. As soon as the competitor ceases its campaign, the support also ceases. NMa's investigation has shown that such support campaigns occur frequently and for lengthy periods. The oil company plays a central role in directing the provision of support. The consequence of this support system is that, on the one hand, the oil company has a strong grip on the price charged by the filling station operator and, on the other, the filling station operator has no incentive to offer bargain prices. After all, he knows that he will not generate additional turnover since he may assume that the neighbouring filling stations can and will follow his price reductions. Oil companies also use the system to protect their own filling stations. In the case of new entrants, this system raises an additional barrier to entry, in addition to the existing high barriers to entry. This means that, as a result of these agreements, consumers have paid considerably more than they would have paid under normal competitive conditions.

Some filling station operators who operate a filling station owned by an oil company have a contract in which the oil company guarantees a fixed entrepreneur's income: if turnover is lower than estimates determined beforehand, the oil company will cover the shortfall and, if turnover is higher, most of the profit will be creamed off. As a result, there is even less incentive to deviate from the recommended prices.

As a result of the combined effect of the support system used, the transparency of the market, the small number of players, the characteristics of petrol as a product and the high barriers to entry by newcomers, the effect of the agreements between the oil companies and the filling station operators is that competition on the Dutch market is very restricted.

Procedure

Since a European exemption applies to vertical relationships, such as those between oil companies and filling station operators, these agreements are exempted from the prohibition on cartels. NMa has established, however, that the consequences of the agreements between the oil companies and the filling station operators have the effect of considerably restricting competition on the Dutch market. In situations where NMa establishes that competition is affected by restrictions of this nature, which only have a bearing on the Dutch market, the Director-General of NMa has the possibility of declaring that the European exemption shall not apply to the Dutch prohibition on cartels. Today he notified the parties involved of his intention to do so. Following this, they may present their opinions. NMa will then take a final decision. In the meantime, NMa will monitor developments on this market closely.