Questions are often asked about the how legitimate SMES retailing in LPG gas are compared to larger companies who have been in the industry for decades. Here’s an overarching background on the LPG Market and the competition dynamics underpinning it.
Formal Market (Wholesale & Retail)
Major Resellers (MRs), according to the Petroleum Products Act 1977 (“PPA”) are firms that play a distribution role for bulk LPG, either distributing it in bulk or repackaging LPG to better suit customer demands. Bulk LPG is purchased by the MRs, either from the oil refineries or imports. The LPG is then transported either by rail or road to three possible destinations, namely:
1.1. Directly to industrial and commercial end-user. These customers would generally store the LPG in bulk storage tanks provided by the MR on their premises. The supply to commercial entities often involves the reticulation of LPG to multiple end-users through a system of pipes connected to one or more storage tanks. Generally, the MR would also provide other equipment such as vaporizers, fire-fighting equipment and gas meters.
1.2. The MR’s storage facilities and/or cylinder filing plants located in different parts of the country. The primary use of LPG supplied to these facilities would be to fill the cylinders at an adjacent filling plant owned by the MR. The cylinders are then supplied to commercial customers and end-users in LPG cylinders. Alternatively the LPG is supplied by the MR from the storage facility to bulk LPG industrial and commercial end-users such as shopping centres.
1.3. LPG is stored in equipment supplied by the Dominant Supplier/ MR at the premises of the retailer who then fill the LPG into gas cylinders. All equipment, including filling platforms, cylinder filling scales, fire extinguishing equipment and ancillary equipment required to fill the gas cylinders is provided by the MR. LPG cylinders are then sold off to individual end-users and private households.
(Ref: Competition Commission, August 2014)
Most independent LPG gas retailers, get their supply from the same refineries as the MR (Major Retailers) get theirs. The only distinction is in whose cylinder this LPG gas is filled. If Independent Gas fillers had their own brand and propriety on cylinders, the question of “illegal filling” or “Cross filling” would be no more. Cross filling is
MARKET INQUIRY INTO THE LPG SECTOR FINAL REPORT (NON-CONFIDENTIAL) MARCH 2017 (COMPETITION COMMISION REPORT)
Sale of LPG through cylinders
1.34. The Commission analysed:
(i) The effects of the cylinder exchange practice;
(ii) Allegations received regarding cross-filling cylinders; and
(iii) Allegations received regarding hoarding cylinders and the effect this has on competition. Cylinder exchange practice
1.35. Cylinder exchange practice functions as follows: when one supplier or distributor receives cylinders belonging to another supplier, the supplier that received the cylinders returns the cylinders to the other supplier and in turn receives any of its own cylinders which the first-mentioned supplier may have in its possession.
1.36. The Commission found distortions to competition derived from using the cylinder exchange practice. The cylinder exchange practice acts as a potential barrier to entry into the cylinder market as it is governed through bilateral agreements and these agreements have made participation by new entrants difficult. Cylinder deposits
1.37. To gain access to a cylinder, end-users may choose to either purchase the cylinder outright or pay a deposit fee on it. In the latter instance, the end-user becomes entitled to use the cylinder, whilst the wholesaler retains ownership thereof. According to the DoE, the deposits were put in place to help lower the cost of acquiring a cylinder for domestic end-users. The DoE’s MRP Working Rules (2010) state that “deposits on cylinders will be limited to a maximum amount of 45% of the cost of a cylinder and will be adjusted annually”.
1.38. The Commission found evidence indicating that the uniform deposit fee applied until 2015 was not equivalent to the 45% maximum cylinder deposit fee prescribed by the DoE. In addition, the DoE has not reviewed the deposit fees annually since 2010, as stipulated in the working rules.
1.39. The Commission has found evidence suggesting collusion among wholesalers to increase cylinder deposit fees. The Commission received information from an anonymous distributor indicating possible collusion by the four main wholesalers, Afrox, Totalgaz, Oryx and Easigas, through co-ordinated increases in their deposit fees for the various gas cylinder sizes. These wholesalers all notified their distributors of a pending increase in the cylinder deposit fee, while at the same time introducing a non-refundable rental fee for using their cylinders. Following these allegations, the Commission has thus initiated an investigation. 10
1.40. The Commission found that using a uniform deposit fee across all cylinder sizes is not justified, as domestic end-users (using the smaller-sized cylinders below nine kg) are paying the same deposit as commercial customers using larger cylinders (19 kg and above).
Cylinder cross-filing practices
1.41. The Commission found that cross-filling is prevalent in the sector and occurs through either legal or illegal means. Safety was noted as a key concern related to the filling of cylinders illegally. Filling and distributing another wholesaler’s cylinders in the absence of an agreement (or some form of consent) is unlawful.6
1.42. The Commission is of the view that both safety and competition considerations are important to the long-term sustainability of and investment in the LPG sector. To foster an environment where competition amongst wholesalers may thrive, a customer’s ability to fill their cylinder(s) at any accredited filling site is important. Accreditation of the sites and training of fillers is crucial. 1.43. The Commission recommends the following: Cylinder deposit fee
1.43.1. NERSA must be responsible for the determination of the cylinder deposit fees and must review same on an annual basis, so that they are aligned with changes in market conditions.
1.43.2. The deposit fee for each cylinder size must be linked to the cost of the cylinder.
1.43.3. The Commission will continue with its ongoing cartel investigations separate from the market inquiry process. Cylinder exchange
1.43.4. The cylinder exchange practice must be more inclusive. No wholesaler should unreasonably deny another party the opportunity to enter a bilateral agreement to facilitate the exchange of cylinders. Any wholesaler who has 5 Cross-filling, within the current legislative framework, is legal if permission is granted (in writing) by another wholesaler to fill its cylinders. The Commission has noted instances where cross-filling is done for a fee. Most of these instances have occurred amongst established players. 6 The courts have relied on the SANS 100019:2001 regulation in establishing this. This means that South African wholesalers and distributors are unable to engage in cross-filling without the consent of their competitors. The courts found that wholesalers derive an unfair advantage in refilling competitors cylinders mainly related to the loss in revenue (as the wholesaler would then lose the opportunity to use their own cylinder to sell LPG). 11 invested in cylinders and complies with all relevant regulations, including those relating to safety, should not be barred from participating in cylinder exchange.
1.43.5. The current hybrid cylinder ownership model must continue to enhance customer choice. More specifically:
220.127.116.11. For 9 kg cylinders and below, customers must have the choice to either lease a cylinder from a wholesaler or purchase a cylinder directly from a wholesaler or retailer.
18.104.22.168. If a customer chooses to lease the cylinder, they may only fill their cylinder at the respective wholesaler or its designated distributor or they may exchange the cylinder at any accredited cylinder exchange site.
22.214.171.124. If a customer chooses to purchase a cylinder, they may fill their cylinder at any accredited filling site. Cylinder cross-filing 1.43.6. Cross-filling of LPG cylinders should occur within the confines of the law, which under section 10(4) of the OHSA requires written consent prior to a wholesaler filling the LPG cylinders of another wholesaler. The Commission is of the view that this practice must continue and the responsible enforcement authorities must impose the necessary sanctions to curtail any violation.
1.43.7. The responsible enforcement agencies must impose sanctions against illegal cross-filling. The Commission recommends cross-filling LPG cylinders must continue to the extent that it is practised legally. Where it occurs illegally, the relevant enforcement agencies must step in and curtail the illegal behaviour.