COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 64/CR/Sep02
In the matter between:
FFS Refiners (Pty) Ltd Complainant
and
Eskom First Respondent
EB Cochrane South Africa (Pty) Ltd Second Respondent
EThekweni Municipality Third Respondent
National Electricity Regulator Fourth Respondent
DECISION ON EXCEPTION APPLICATION
In this matter we have to consider several exceptions that have been taken to the
sufficiency of allegations made in a complaint referral.
Factual background
1. This complaint was referred to the Tribunal by the complainant FFS, on
10 September 2002, following a notice of nonreferral by the
Commission.1
2. FFS supplies industrial furnace fuels to customers who utilise this energy
source for steam generation. Eskom, the first respondent, whom we shall
refer to as Eskom, is a statutory corporation that produces and distributes
electricity. One of its customers is EB Steam which supplies steam to
customers. FFS alleges that Eskom is supplying electricity to EB Steam at
a price that is so low, in comparison to other rates which Eskom charges
to other customers, including FFS, that this practice amounts to a
contravention of several provisions of the Competition Act viz. sections,
8(c), 8(d) (i), 8(d)(iv), 9(1), and 5(1).
1 The certificate of nonreferral was issued on 7 th August 2002.
3. Eskom has not filed its answering affidavit, but has instead raised a
number of exceptions to the complaint referral, which we consider in this
decision.
4. We have decided to accept the suggestion that we decide all the
exceptions taken together. We will deal with each exception separately.
Approach to exceptions
5. We have previously, in our Botash and Glaxo Welcome decisions
indicated our approach to exceptions. 2
6. We most recently restated this position in AACMED/USAP:
“That being said this does not mean that a respondent is required to
answer to any type of pleading proffered, regardless of its impoverishment
of fact or legal averment. Fairness is also a standard that our procedures
must meet. Respondents are entitled to understand the case being made
out against them. The standard set out in Rule 15 of the Tribunal Rules
must be adhered to. ”3
7. In this case we find that that standard has not been met and we have
upheld all the exceptions.
Dominance
8. The first and most fundamental exception raised by Eskom is that FFS
has failed to properly define Eskom as a dominant firm.
9. Only a dominant firm can contravene sections 8 or 9 of the Act. 4 In order
to establish that a firm is dominant it must meet one or more of the
requirements set out in section 7 of the Act, which states:
2 American Natural Soda Ash Corp CHS Global (Pty) Ltd and the Competition Commission,
Botswana Ash (Pty) Ltd et al 49/CR/Apr00; National Association of Pharmaceutical Wholesalers
& Others vs Glaxo Wellcome & Others 45/CR/Jul01; AACMED and USAP 04/CR/Jan02
3 AACMED and USAP 04/CR/Jan02
4 This is because section 8 states that, “It is prohibited for a dominant firm to …”. In section
9(1)the formulation is “ An action by a dominant firm …is prohibited price discrimination..”
2
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.
10. FFS alleges that Eskom is dominant in the energymarket in that it has
more than 45% of that market. It relies for this proposition on Eskom’s
selfstated claim that it supplies 98% of the countries
electricityrequirements. It alleges that the energy market consists of four
energy sources, oil, coal, gas and electricity and that these sources are
substitutes for one another. However it makes no allegations of
dominance in the energymarket, the market which FFS identifies as the
relevant market and in respect of which FFS relies on an abuse of a
dominant position. In other words, in respect of the relevant market it has
identified, the energy market, FFS has simply not made the material
averments necessary to establish Eskom’s dominance therein.
11. As Eskom correctly points out it does not follow that because Eskom is the
preponderant supplier of one of four substitute sources that it is
necessarily dominant. There is a gap missing in the pleadings to link the
preponderance in the segment to dominance in the market.
12. To cure this, counsel for the complainants attempted to construct an
argument on the basis that since there are other sources of energy,
comprising fuel, oil, coal and gas, these submarkets should be taken to
designate the energy market as a whole. What is described as the energy
market incorporates the other energy sources, which are substitutable for
one another. We should therefore interpret the energy market as that
market where energy is produced by one or the other fuel sources. It is
market where energy is produced by one or the other fuel sources. It is
therefore in respect of this broad market that Eskom is dominant.
Alternatively, complainant’s counsel conceded that in the event of
uncertainty, referral to evidence may clarify the market definition.
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13. We do not accept this view. It is quite possible that in addition to Eskom,
there may be one or other dominant player/s in either of the submarkets,
which would dilute Eskom’s position in the broader energy market. The
fact that Eskom is manifestly dominant in one of the four legs of their
expansive definition does not necessarily make it dominant in the entire
energy market. The complainant’s inability to correctly align the market in
respect of which they allege abuse with that in respect of which they
allege dominance creates confusion, not only for the parties who are
required to answer the complaint, but also the Tribunal. Moreover, in
terms of the framing of section 8 of the Competition Act, parties are
required to establish dominance before they can move onto the abuse leg
of the provision. This is a necessary prerequisite specified by the
language of the section if there is no dominance, the party cannot be
guilty of an abuse of dominance. Therefore, in order to succeed on an
abuse of dominance claim, it is essential that the complainants plead
dominance in respect of the market in which they allege abuse. This must
be alleged in the complaint referral – it would not assist the respondent for
this to be clarified only at the hearing or some later stage.
14. Dominance can be established by alleging the respondent firm falls into
any of the three categories set out in section 7 or if the complainant is
uncertain, to allege more than one as alternatives. Mere repetition of the
language of the section is insufficient to afford a respondent some basis
for understanding the case against it and how it should answer. What is
noticeable about section 7 is that the onus varies depending on the
subsection the respondent is alleged to fall into. Since this has a material
subsection the respondent is alleged to fall into. Since this has a material
consequence on the nature of the answer, in particular whether the
respondent needs to deny it has market power (7(1)(b)) or whether the
complainant, can irrebuttably presume that fact (7(1)(a)) or has the onus
to prove it (7(1)(c)), it must be properly set out. 5
15. In this case the factual allegations made out concerning the respondent ‘s
market share relate to a segment of the market that on the complainant’ s
version is but a subset of the relevant market. The failure to link the two
notions makes the pleading incomplete and hence excipiable.
In respect of a contravention of section 8(d)(iv) – selling goods or
services below their marginal or average variable cost:
5 It might be possible for a complainant, relying on section 7(1)(c), who is not certain of the
boundaries of the market eg whether the market is for blodgets alone or for widgets as well as
blodgets to allege instead that the respondent has market power. Yet even on this approach the
complainant would still need to plead the facts that support the allegations of market power and at
the very least offer some permutations of a possible market where that power is exercised.
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16. The complainant alleges that Eskom is selling electricity to its customer at
below marginal or average variable cost. To substantiate this assertion, it
relies on a price comparison of prices at which Eskom sells electricity to
FFS and a selection of other customers o n the one hand, and EB Steam
(“EBS”), on the other. In view of the vast difference in price charged to
FFS and EBS, the complainant asserts Eskom is undercutting it and
therefore selling electricity to its customer at below marginal or average
variable cost. In essence the complainant is seeking to make out its claim
under this section by way of inference.
17. Eskom argues that in order to sustain a claim under section 8(d)(iv), the
complainant must make some reference to the respondent’s cost
structure, in order to enable an evaluation of whether its prices fall below
this cost base. Complainant’s counsel pointed out that they requested
such information from the respondent and were denied it.
18. While we accept that precise costing information is hard to come by and
that this information in most cases is jealously protected by respondent
firms, nevertheless, at the very least, the respondent must allege facts that
enable us to draw an inference that the respondent is pricing at an
abnormally low level. In this referral the complainant has done no more
than to show that Eskom prices differently to different customers albeit
that the rate varies greatly. Yet there is no allegation that these
transactions are even equivalent to one another let alone below marginal
or average cost. Indeed on the papers the discrepancy in the rate that
Eskom charges two of the complainant’s plants, one in Durban and one in
Secunda is more marked than the discrepancy between the Secunda
plant and EBS.
plant and EBS.
19. It is not an offence under the Act merely to undercut one’s competitor, no
matter how stark the discrepancy in prices. Price competition is after all
the essence of healthy competition.
20. An allegation that a respondent has contravened section 8 (d)(iv) may be
made out by way of inference as opposed to direct allegations that the
respondent costs are below marginal or average variable cost. But the
inference must be founded on some reasonable factual basis in the
pleadings and not amount to mere speculation.
21. The present complaint referral falls short of that standard in this respect
and hence this exception is upheld.
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Price Discrimination Section 9(1)
22. Eskom complains that a mere price comparison between those prices
charged by Eskom to FFS and EBS separately do not ground a case for
price discrimination. We agree with this view. The wording of the act sets
out specifically the requirements to substantiate an allegation of price
discrimination. These are:
An action by a dominant firm, as the seller of goods or services is
prohibited price discrimination, if –
a. it is likely to have the effect of substantially
preventing or lessening competition;
b. it relates to the sale, in equivalent transactions,
of goods or services of like grade and quality to different
purchasers; and
it involves discriminating between those purchasers in terms of –
i. the price charged for the goods or services;
ii. any discount, allowance, rebate or credit given
or allowed in relation to the supply of goods or
services;
iii. the provision of services in respect of the
goods or services; or
iv. payment for services provided in respect of the
goods or services.
23. FFS has not alleged that the transactions are equivalent, nor that there is
an substantial lessening of competition occasioned as a result of such
alleged price discrimination. The exception is upheld .
Vertical relationship – section 5(1)
24. The complainant alleges, without stating anything further that the same
facts alleged in terms of section 8(d)(iv), also in the alternative give rise to
a contravention of section 5(1). Eskom complains that there are no
material allegations made as to why the prices charged by Eskom to EBS
have the effect of “ substantially preventing or lessening competition in the
market’ the essential element of a section 5 claim. Again, we endorse this
view and uphold this exception.
Exclusion of competitor – section 8(c )
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25. Here too, the complainant alleges that the same facts alleged in term of
section 8(d)(iv) give rise to a contravention of section 8(c). Eskom alleges
that insofar as the complainant has merely reproduced the language of the
section, no substantiating allegations are made in respect of this section of
the Act. We can see how it would be difficult for a respondent to plead in
response to a broad assertion with no substantiating factual allegations.
26. Since the complainant relies on the same set of facts to found this
allegation, we assume that the generalised exclusionary act relied upon is
a form of predatory conduct that differs in specie from section 8(d)(iv), the
statutory form for predatory pricing. In the Nationwide case we considered
that section 8(d)(iv) may not be exhaustive of the forms of predatory
conduct that the Act proscribes and that predation may still be actionable
under section 8(c). 6
“On the other hand the complainant is not bound to follow the
prescribed cost formula suggested in 8(d)(iv). In other words if a
complainant, relying on section 8(c), can show that a respondents
costs are below some other appropriate measure of costs not
mentioned in the section, it may prevail provided it adduces
additional evidence of predation beyond mere evidence of costs.”
27. Yet as counsel for the respondent rightly argued, some flesh needs to be
placed on such an allegation, under 8(c) it is not self evident. 7 In the
referral no further allegations are made to found the complaint under
section 8(c) and accordingly the exception here too is well founded.
Inducing a customer not to deal with the Complainant – section 8(d)
(i)
28. Again, the complainant alleges that the same facts alleged in term of
section 8(d)(iv) give rise to a contravention of section 8(d)(i). Eskom
section 8(d)(iv) give rise to a contravention of section 8(d)(i). Eskom
maintains that the supply of cheap electricity to EBS does not constitute
an inducement in terms of this section. We accept this view. The section
requires a deliberate act on behalf of the respondents, to induce
customers not to deal with a competitor. There may well be reasons other
than inducement for FFS’ clients electing to deal with EBS over the
complainant. More substantiation is required in this regard.
6 Nationwide Airlines (Pty) Ltd and SAA (Pty) Ltd – 92/IR/Oct00
7 Counsel for the respondents conceded that even if this is correct, complainants would still need
to show an element of intention to eliminate competitors from the market and to recoup its losses.
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Conclusion and Order
We accordingly uphold all the exceptions.
The Complainant is given 20 days from the date of this decision to cure
the defects in the complaint referral.
Costs
The first respondent is awarded costs of this application including costs
occasioned by the employment of two legal representatives.
21 February 2003
____________________
N. Manoim Date
Concurring: M. Holden; P Maponya
For the parties: D. Gordon SC, instructed by Adams & Adams
Attorneys (Complainant)
D. Unterhalter SC, instructed by Deneys Reitz Attorneys (Respondents)
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