Article 101 TFEU

CDB1985

The two biggest energy companies in the market raise their prices by the exact same percentage within hours of each other and nobody mentions Art 101 TFEU?

According to the Article:

The following shall be prohibited as incompatible with the internal
market all agreements between undertakings, decisions by associations of
undertakings and concerted practices which may affect trade between
Member States and which have as their object or effect the prevention,
restriction or distortion of competition within the internal market, and
in particular those which:


(a) directly or indirectly fix purchase or selling prices or any other trading conditions;


Article 101 has been construed very widely to include both informal
agreements (gentlemen agreements) and concerted practices where firms
tend to raise or lower prices at the same time without having physically
agreed to do so.

This isn't the first time this has happened either as last year Airtricity raised their gas price by 20% within weeks of a 22% raise by Board Gais both having previously raised their electricity prices by 12%.

As one article written after the Bord Gais price increase this week put it...'While Electric Ireland, Airtricity and Flo-Gas have not announced any price increases, they all followed Bord Gais Energy’s lead last year when it last increased its prices.'

I'm sure their is a simple answer as to why the strikingly similar price increases don't offend the Article but I'm curious as to why?

NoQuarter

CDB1985 wrote: »

The two biggest energy companies in the market raise their prices by the exact same percentage within hours of each other and nobody mentions Art 101 TFEU?

According to the Article:

The following shall be prohibited as incompatible with the internal
market all agreements between undertakings, decisions by associations of
undertakings and concerted practices which may affect trade between
Member States and which have as their object or effect the prevention,
restriction or distortion of competition within the internal market, and
in particular those which:


(a) directly or indirectly fix purchase or selling prices or any other trading conditions;


Article 101 has been construed very widely to include both informal
agreements (gentlemen agreements) and concerted practices where firms
tend to raise or lower prices at the same time without having physically
agreed to do so.

This isn't the first time this has happened either as last year Airtricity raised their gas price by 20% within weeks of a 22% raise by Board Gais both having previously raised their electricity prices by 12%.

As one article written after the Bord Gais price increase this week put it...'While Electric Ireland, Airtricity and Flo-Gas have not announced any price increases, they all followed Bord Gais Energy’s lead last year when it last increased its prices.'

I'm sure their is a simple answer as to why the strikingly similar price increases don't offend the Article but I'm curious as to why?

It very well might do, its up to the competition authority to investigate into "unusual" circumstances like this one and to take an action against the companies.

Have a look here and you can learn quite a lot about how they operate: http://www.tca.ie/

You can submit a report of any anti-competitive behaviour on the website.

Tom Young

One must look at Regulatory guidelines in respect of precisely what restrictions, read: remedies, have been applied to/in the sector.

If one entity is subject to SMP controls, at the retail and wholesale markets, depending on the nature of the increases allowed by the Regulator, there may have been an input cost/wholesale cost increase. A logical corollary being increased prices.

Exemptions to Article 101 behaviour fall into three categories. First, Article 101(3) creates an exemption where the practice is beneficial to consumers, e.g., by facilitating technological advances (efficiencies), but does not restrict all competition in the area. In practice very few official exemptions were given by the Commission and a new system for dealing with them is currently under review. Secondly, the Commission has agreed to exempt 'Agreements of minor importance' (except those fixing sale prices) from Article 101. This exemption applies to small companies, together holding no more than 10% of the relevant market in the case of horizontal agreements and 15% each in the case of vertical agreements (the de minimis condition). In this situation as with Article 102 (see below), market definition is a crucial, but often highly difficult, matter to resolve. Thirdly, the Commission has also introduced a collection of block exemptions for different types of contract and in particular in the case of vertical agreements. These include a list of permitted contract terms, and a list of those banned in these exemptions (the so-called hardcore restrictions).

CDB1985

Thanks,

I did think that that it could be said that the cause of the price increase was something which applied to all companies in the market. This would explain similar price movements as being the result of something other than anti competitive agreements. Falling value of the euro, transmission and distribution tariffs increasing etc.

However, would this justification not be undermined by the fact that the movements in price follow a similar pattern. Bord Gais leads after being given permission by the Regulator. The other companies can act without regulatory approval so if the cause of the price increase exists independently (eg strength of Euro) should those companies not raise prices independently of the Bord Gais regulatory applications/rulings.

Also if these are forwarded as the sector wide justification for price movements are they not undermined as legitimate/genuine justifications rather than convenient/disingenuous justifications when the Euro strengthens and prices do not fall.

I'm probably moving outside of legal are with above but I'm trying to understand the scope of the Article and how it my be interpreted.

Tom Young

There are a number of publications that might assist you. I recommend looking at European Law by Chalmers.

CDB1985

I will have to do more research but I think that it would need to focus more on the reasons for the price movements, history of price movements etc.

On the electric Ireland website they announce the price increase and directly link it to the increase that is to be imposed by Bord Gais. Lets remember that these two companies are meant to be competitors in the market and that market competition and European Union obligations relating to competition were the justifications for the market being manipulated to allow for more operators.

Direct quote from the electric Ireland website:

"Residential gas prices will also be increasing in line with the Bord Gais Energy gas price increase of 8.50% announced on 4th September 2012."

The term concerted practice (no need to prove agreement) was considered in ICI v. Commission..... " a form of co-ordination between undertakings which, without having reached the stage where an agreement properly so-called has been concluded, knowingly substitutes practical co-operation between them for the risks of competition"

If you take statements like that actually published by those companies involved and add the proximity of announcements of price increases by the companies (and not just on this occasion) then surely the activities could be viewed as being evidence of policies which could come under the heading of concerted practices.

Obviously then the defences are available but the first stage is surely to identify practices which could satisfy the concerted practice.

Tom Young

There may be no infringement of that Artilce at all in a regulated sector. Go look at the CER website and see if there is any documentation relating to it.

CDB1985

I was looking at their website. The fact that it is a regulated industry is obviously a major element that needs to be considered.

One thing is that from what I understand is that in the Gas market Bord Gais is the only company in the gas market that needs approval to increase prices where the other companies can act independently. Yet they seem to be acting not independently but in tandem.

So its partly regulated but not a fully regulated market?

CDB1985

On the CER website the say re ecletricity market that...

"The retail electricity market opened fully to competition on 19 February 2005 and independent companies now supply almost half of electricity consumed (by volume) in Ireland. "

On August 01 2011 Bord Gais increased their electricity prices by 12%.

On August 08 2012 Airtricity announced that they would increase their prices by ???.......yes 12%.

CDB1985

1st October 2011

The price charged for Gas by both Bord Gais and Airtricity increases by 21%.

Is there co-ordination between undertakings which relates to price increases?

Does this co-ordination, if it does exist, amount to the substituting of the risks of competition for practical co-operation?

In a competitive market if you increase price the decision creates a risk that your market share will decrease as a result of consumers switching to companies that have not increased the price they have charged?

What if you knew that when you announced the price increase your closest competitors would almost instantaneously announce an almost exact replica percentage increase. Have you now substituted the risk that exists in a competitive market with practical co-operation?

Predalien

There is an added difficulty in that the market is an oligopoly. Wholesale gas prices are the same for all suppliers too. Although I personally believe there are anti-competitive practices in the market,it would probably be very hard to prove.

CDB1985

Leaving aside the legitimate, potentially legitimate, reasons for the price increase (more research needed) and focus instead on the timing of the price increase announcements by the competitors.

Why announce and increase price almost eactly in tandem? Why not allow your competitor to announce their price increase and allow for the market impact of that announcement i.e. consumer switching. Benefit from it and then as the price increased was caused by a factor which affects all operators in the market, increase your price. You have received the benefit of the price increase by your competitor but are protected from the same market reaction as your customers have no incentive to switch as no price difference.

By almost instantaneously increasing your price by the exact replica percentage you are negativing the effect of your competitors announcement. Almost as if you don't want their customers to switch to your company.

Tom Young

Depends on wholesale input costs.

CDB1985

Yes and why they increased the price is one aspect but the timing is also relevant.

Zero time for impact of the announcement was allowed. And this is not the first time. It could be described as quiet a reassuring position to be in to be able to announce an increase in price and know that your competitors will instantly follow. Multiple examples within past year.

I can see the benefit for the company announcing the price increase initially but I can not see what the company following so instantaneously gets form it. In fact the logical understanding is that it is a negative decision to follow so quickly.

There are two factors one can be explained , wholesale input prices, the other, lessening impact on competitor by announcing in tandem, seems less easy to explain.

There are two activities which should be considered. The percentage price increase is the obvious, but not the only consideration.

evercloserunion

There is also the possibility that this is legitimate oligopolistic behaviour rather than anti-competitive collusion, surely? The energy market in Ireland seems like it would fit the oligopolistic market model pretty well; many buyers, few sellers, and transparency in price movements.

Victor

Are we doing your homework or your work?

CDB1985 wrote: »

I can see the benefit for the company announcing the price increase initially but I can not see what the company following so instantaneously gets form it.

Money.

If the other companies didn't increase their prices, they would be at a substantial financial disadvantage - buying at a similar price, but selling at a lower lower. Given the inertia in the residential utilities market, the price difference might not be a competitive advantage.

They may also have the problem of users moving to them and locking-in at the lower price, leaving the competitor stuck with the disadvantage for the next year.

Each of the companies do have differences in their price plans, so there is competition in the market. In some industry sectors, companies will increase / adjust their prices on 11 January every year.

CDB1985

Ok, fair point I was quite naive there. I was thinking of the theoretical efficient market in which consumers would adjust behaviour and switch suppliers when the price increased. Free market capitalism is much more impressive in theory. Theoretically banks that lend too much money to people who don't pay it back go out of business. Obviously in reality neither happens. Consumers sit there immobile as price increase after price increase is announced and banks just knock on the door of the government and in return get handed a blank cheque.

You say that they have different price plans and that then there exists competition. If undertakings compete with each other in one area of the business does that mean that they are allowed engage in concerted practices in other areas?

Would the fact that there is price plan differences between the companies not indicate that the determinant of price is not as rigid as would appear by the tandem price increase announcements. If competition in price is possible then why are they raising prices by the same percentage rates at the same time?

The setting of the rates at the beginning of the winter period is a valid point. This would explain the timing of the announcements.

On the CER website they have copies of communications between the regulator and the companies aswell as the reasons given for the price increases.

CDB1985

Victor wrote: »

Are we doing your homework or your work? :)Money.

Given the inertia in the residential utilities market, the price difference might not be a competitive advantage.

QUOTE]


Apparently Bord Gais agree my theoretical version of the market place.

In their submission for the price increase they say...."

Evidence from the CERs latest customer survey clearly shows that residential gas customers are aware of the competitive choice available in the market, are proactively engaging in it and are satisfied with the level of competition that has emerged"

Proactively engaging no less. Inertia me a**e !

Carawaystick

I wonder how many residential gas customers know BGE asked for a 7.5% price rise and the CER said sher have 8.5% instead

cer is a joke, and not a funny one

Victor

CDB1985 wrote: »

Ok, fair point I was quite naive there. I was thinking of the theoretical efficient market in which consumers would adjust behaviour and switch suppliers when the price increased.

While one might change for 10 or 50%, will one change for 1%? That is assuming you don't have the cheapest supplier in the first places.

There are barriers to moving - 12 month contracts, the hassle, more onerous terms and conditions, some suppliers insist on deposits, etc.

If undertakings compete with each other in one area of the business does that mean that they are allowed engage in concerted practices in other areas?

Who said that? Obviously some technical cooperation is desirable and indeed necessary.

Would the fact that there is price plan differences between the companies not indicate that the determinant of price is not as rigid as would appear by the tandem price increase announcements.

Pardon?

If competition in price is possible then why are they raising prices by the same percentage rates at the same time?

Who says they are? Are they?

CDB1985 wrote: »

Apparently Bord Gais agree my theoretical version of the market place.

In their submission for the price increase they say...."

Evidence from the CERs latest customer survey clearly shows that residential gas customers are aware of the competitive choice available in the market, are proactively engaging in it and are satisfied with the level of competition that has emerged"

No, they are selling a price increase to CER.

CDB1985

Victor,

This is probably too complicated an issue to be trying to sort out through this medium. The real question is whether you can actually have competition in the energy market. Competition seems to be be limited to administration costs although the duplication created by multiple companies makes a bit of a joke of it.

I'll deal with your points just quickly if I can..

1) We are not talking about 1% either... we are talking about 12%...21%...8.5% increases and potential savings. Thats is in your 10-50% range. Barriers to change is a relevant point.

2) You did. You said that because they had competition in there price plan their is competition. I wasn't referring to price plans I was referring to percentage increase movements between alleged competitors. Your comment suggested that the price plan competition dealt with the percentage increase concerns.

3) Admin cost competition.

4) Examples already provided

5) I thought I was being sarcastic. Your not american by any chance? Obviously it was in their interest to promote the idea that there was real choice for consumers and a competitive market and therfore the price increase would result in the engaged consumer proactively deciding to move supplier if they did not like the change. Obviously we are aware now that the next day their biggest competitor announced an exact replica price increase so the imaginary proactive consumer didn't have time to adjust in the imaginary competitive market.


Generally I think its an example of how difficult it is to distiguish a naturally uncompetitive market from companies behaving in an anti-competitive way.