Competition Case Studies for Senior Russian Competition Officials Cartel Investigation & Abuse of Dominance
Competition Case Studies for Senior Russian Competition Officials Cartel Investigation & Abuse of Dominance
Seminar
27-30 September 2005
Rostov, Russian Federation
Seminar carried out with funding by the European Union
This document has been produced with the financial assistance of the European Union. The views expressed herein can in no way be taken to reflect the official opinion of the European Union nor of the OECD nor of its member countries.
Contents
I. CASE STUDIES 7
ASTRAKHAN DIRECTORATE OF THE FAS - 9
Case No. 24-K-03-04 of 17.09.2004 on Violation of the Antimonopoly Legislation (Art. 5 (1) of the RSFSR Law on Competition) - 9
ASTRAKHAN DIRECTORATE OF THE FAS - 11
Case No. 09-K-03-05 of 18.04.2005 of Violation of the Antimonopoly Legislation (Art. 5 (1) of the RSFSR Law on Competition) - 11
BELGOROD DIRECTORATE OF THE FAS - 13
Case concerning MUE Ritualbytservis - 13
BRYANSK DIRECTORATE OF THE FAS - 21
On Violation of Art.5 of the RSFSR Law «On Competition…» by Refusal to Allow a Customer to Select a Tariff for Settlements for the Received (Consumed) Electric Energy - 21
DAGHESTAN DIRECTORATE OF THE FAS - 24
Description of the Case of Violation of Art. 5 and 6 of the RF Law «On Competition…» by OJSC Gazprom, LLC Mezhregiongaz, LLC Kaspiygazprom, LLC Deghestanregiongaz, and JSC Daghestanregiongaz - 24
IRKUTSK DIRECTORATE OF THE FAS - 27
Case of Violation of the Antimonopoly Legislation by a Group of Entities (LLC YUKOS M Trading House, OJSC Angara Polymer Plant) - 27
IRKUTSK DIRECTORATE OF THE FAS - 31
Information Brief on the Violation of the Antimonopoly Legislation by OJSC UILK - 31
KARACHAEVO-CHERKESSIA DIRECTORATE OF THE FAS - 35
Problems of Access of Public Energy Companies to the Federal Electric Energy Wholesale Market - 35
KRASNODAR DIRECTORATE OF THE FAS - 38
Case concerning «Kuban-GSM» - 38
KRASNODAR DIRECTORATE OF THE FAS - 42
Case concerning the «Post of Russia» - 42
KURSK REGIONAL DIRECTORATE OF THE FAS - 45
Case of violation of Article 6 of the Russian Federation Law «On Competition…» by ZAO «LVZ Kursky» and OOO «KurIASEB», OOO «TD Vneshtorgservice», OOO «TC Sodruzhestvo», OOO «Limas» - 45
LIPETSK REGIONAL DIRECTORATE OF THE FAS - 47
Description of Case Initiated and Considered According to Article 6 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» - 47
MOSCOW REGIONAL DIRECTORATE OF THE FAS - 50
Description of Case № 07-28/2004 involving OAO «Mosenergo» - 50
NORTH OSETIAN REGIONAL DIRECTORATE OF THE FAS - 53
Case Involving «Alaniaregiongas» and Zildincky Brick Factory - 53
ST. PETERSBURG DIRECTORATE OF THE FAS - 55
Description of a Case of Possible Abuse of a Dominant Position on the Market of Services of Localisation, Collection and Utilisation of Petrochemicals - 55
SAMARA DIRECTORATE OF THE FAS - 58
Case Description: JSC Samara City Electric Networks and JSC SaMMer - 58
SARATOV DIRECTORATE OF THE FAS - 61
Description of Case No. 20-52 - 61
STAVROPOL DIRECTORATE OF FAS - 66
Case № 28 Considered in Connection with the Fact of Violation of Article 6 of the RSFSR Law «On Competition…» - 66
STAVROPOL DIRECTORATE OF FAS - 72
Case № 41 Investigated in Connection with the Fact of Violation of Clause 1, Article 5 of the RSFSR Law «On Competition…» - 72
TAMBOV DIRECTORATE OF THE FAS - 76
Description of Case No. 10 of 20.05.2003 (Dominance Abuse) - 76
ULYANOVSK DIRECTORATE OF THE FAS - 79
Description of the Case of Violation of Art. 18 of the Law «On Competition and Restriction of Monopolistic Activity on Product Markets» by Economic Entities Engaged in Retail Sale of Oil Products - 79
VOLGOGRAD DIRECTORATE OF THE FAS - 82
Problems of Detecting Monopolistically High Prices on the Example of Analysis of the Volgograd Market of Socially Significant Bread Brands - 82
VOLOGDA DIRECTORATE OF THE FAS - 90
Description of the Case on Concerted Actions on the Product Market of Technical Maintenance of Cash Registers - 90
VORONEZH DIRECTORATE OF THE FAS - 94
Voronezh Department of the Russian FAS vs. JSC AC Polet (Art. 5 of the Law on Competition) - 94
LEGAL DEPARTMENT OF THE FAS - 98
Description of a Case of Violation of the Antimonopoly Legislation by OJSC CentrTelecom - 98
DEPARTMENT FOR TRANSPORT AND COMMUNICATIONS MONITORING AND CONTROL OF FAS - 103
Consideration of Case No. 1-05/1 05 of Violation of the Antimonopoly Legislation in the Form of Dominance Abuse by OJSC RZhD - 103
DIRECTORATE OF CONTROL AND SUPERVISION IN FUEL AND ENERGY COMPLEX - 108
Abuse of Dominant Position on the Coal Processing Market - 108
UNIDENTIFIED - 110
Possible Dominance Abuse on the Sales Market of Liquefied Hydrocarbon Gases - 110
UNIDENTIFIED - 112
Report on the Case of Violation of the Antimonopoly Legislation by OJSC United Trade Company on the Product Market of Caustic Soda - 112
II. BACKGROUND NOTES - 115
III. PARTICIPANTS - 118
IV. AGENDA - 126
I. Case Studies
Astrakhan Directorate of the FAS
Case No. 24-K-03-04 of 17.09.2004 on Violation of the Antimonopoly Legislation (Art. 5 (1) of the RSFSR Law on Competition)
The Astrakhan Department of the Russian FAS has received a complaint from OJSC Metallist against the actions of LLC PF Streletskoe - Terminal.
OJSC Metallist owns a railway branch adjacent to the railway tracks owned by LLC PF Streletskoe - Terminal. The transport of cargoes from common use railway tracks to the OJSC Metallist branch is possible only via the railway tracks owned by LLC PF Streletskoe - Terminal.
LLC PF Streletskoe - Terminal has dismantled part of the railway tracks (as a matter of fact, not only its own, but also part of the tracks owned by OJSC Metallist) and blocked the exit from the territory of OJSC Metallist, thus depriving this enterprise of a possible access to common use railway tracks, and hence, the possibility of normal business activity.
LLC PF Streletskoe - Terminal has explained its actions with the following reasons, backing them with documents:
· an act on unsuitability of the railway tracks owned by OJSC Metallist, drawn up by the chief of the Right Bank distance of the route - A.A. Nasrullaev, track foreman - N.I. Petrova, and chief of the Right Bank railway station I.O.Lisitsin;
· repeated derailment of cars and locomotives (dump cars) on the OJSC Metallist tracks;
· absence of agreements on the serving of cars and their transit via the LLC PF Streletskoe - Terminal tracks;
· absence of security guards on the OJSC Metallist territory, resulting in constant penetration of outsiders to the territory of the state border post and customs territory, situated on the LLC PF Streletskoe - Terminal territory;
· repair jobs at railway tracks adjacent to OJSC Metallist;
· demands of the border guard services to install safeguards in order to prevent the penetration of outsiders on the territory of the border post.
The Commission of the Astrakhan Department of the Russian FAS considered these explanations unconvincing for the following reasons:
· the Astrakhan department of the Russian Transport Inspection (letter No.1136/1-15 of 09.09.2004) and the Astrakhan railway track maintenance department (letter No.03/1511 of 08.09.2004) have notified the Astrakhan Department of the Russian FAS that they did not inspect the technical condition of the OJSC Metallist railway tracks. Therefore, the act on the disrepair of the OJSC Metallist railway tracks is void of legal force, as it has been drawn up by unauthorised persons;
· the instruction of the border guard service contains no requirements of prohibiting the passage of cargo cars (flat wagons) for OJSC Metallist vie the LLC PF Streletskoe - Terminal railway tracks;
· the safeguards installed by LLC PF Streletskoe - Terminal on railway tracks prevent only the passage of railway cars to the OJSC Metallist territory, but do not prevent the penetration of people to the LLC PF Streletskoe - Terminal territory'
· LLC PF Streletskoe - Terminal has failed to back the allegations of derailment of trains on the OJSC Metallist tracks with relevant documents;
· The argument presented by LLC PF Streletskoe - Terminal that the railway tracks dismantled at the border with OJSC Metallist is under repair was not been confirmed by inspection held by the Astrakhan Department of the Russian FAS.
Therefore, the actions of LLC PF Streletskoe - Terminal to block the OJSC Metallist railway tracks constitute a violation of Art. 10 of the RF CC, prohibiting title holders from using their property right for purposes of inflicting damage on other persons, and Art. 5 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» prohibiting dominant economic entities to take actions infringing lawful interests of other economic entities.
Guided by Art. 27 (1) of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» and item 2.12 of the Rules of Considering Cases of Violation of the Antimonopoly Legislation, the Commission decided to qualify the actions of LLC PF Streletskoe - Terminal, consisting in the blacking and dismantle of part of the railway tracks owned by OJSC Metallist and prevention of OJSC Metallist access to common usage railway tracks as a violation of Art. 5 (1) of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» and issued an instruction to LLC PF Streletskoe - Terminal demanding the following:
· to unblock the railway tracks bordering on the section owned by OJSC Metallist;
· to return the railway tracks bordering with OJSC Metallist to the state existing before the violation of the antimonopoly legislation.
LLC PF Streletskoe - Terminal has filed a claim to the Astrakhan regional arbitrazh court to invalidate the decision and instruction of the Territorial Department of 29.09.2004, No.24-K-03-04.
The Astrakhan regional arbitrazh court passed a decision of 18.01.2005 dismissing the LLC PF Streletskoe - Terminal claim to invalidate the decision and instruction of the Territorial Department of 29.09.2004, No.24-K-03-04.
In connection with non-fulfilment by LLC PF Streletskoe - Terminal of the instruction of the antimonopoly authority, on 22.04.2005 the Territorial Department initiated an administrative case against LLC PF Streletskoe - Terminal.
In the period of preparation of the case for consideration, LLC PF Streletskoe - Terminal has unblocked the railway tracks bordering on the section owned by OJSC Metallist and restored the railway tracks on the border with OJSC Metallist.
As LLC PF Streletskoe - Terminal has fulfilled the instructions, the consideration of the case of administrative offence was terminated, and the Company was given an oral reproof.
Astrakhan Directorate of the FAS
Case No. 09-K-03-05 of 18.04.2005 of Violation of the Antimonopoly Legislation (Art. 5 (1) of the RSFSR Law on Competition)
The Astrakhan Department of the Russian FAS received a complaint from the agricultural department of the Astrakhan regional administration against the actions of OJSC Astrakhanenergo (the successor to the rights and liabilities of which since 11.01.2005 is OJSC Astrakhan Energy Company) against the inclusion of requirements stipulated by item 3.4 in the draft additional agreement to energy supply contracts with agricultural companies of the Astrakhan region Akhtubinsk district - OJSC Stepnoe, SPK Novonikolaevsky, SPK Udachensky, SPK Pirogovsky, and SPK Kirovets.
This item of the draft agreement stipulates that in the event of increase or decrease of electric energy consumption established by the contract by more than 10% of the target, the deviation value shall be calculated on the basis of a 1.5 mark-up coefficient.
At the Commission session a representative of OJSC Astrakhan Energy Company expressed disagreement with the applicant's complaint for the following considerations:
The Decree of the USSR Council of Ministers No.929 of 30.07.1988 «On Adjustment of the System of Economic (Property) Sanctions Applicable to Enterprises, Associations, and Organisations» is still valid, and its item 10 (»B») stipulates: «Energy consumers shall pay to energy supplying organisations a ten-times value of electric energy and electric power capacity used above the volume stipulated by contract over a relevant period.»
The Astrakhan Department of the Russian FAS established that OJSC Astrakhan Energy Company is the only supplier of electric energy to agricultural enterprises of the Akhtubinsk district - OJSC Stepnoe, SPK Novonikolaevsky, SPK Udachensky, SPK Pirogovsky, and SPK Kirovets, which is confirmed by the letter of the Technological and Ecological Monitoring Department of the Federal Service for Ecological, Technological, and Nuclear Control for the Astrakhan Region, No.289-02/12 of 11.05.2005.
According to the Federal Law «On State Regulation of Tariffs on Electric and Thermal Energy in the Russian Federation No, 41-FZ of 14.04.1995 (with amendments of 30.12.2004), the Basis of Electric and Thermal Energy Pricing in the Russian Federation approved by Decree of the RF Government No.109 of 26.12.2004, tariffs on electric energy supplied by power supplying organisations to consumers are subject to state regulation. According to the above regulations, state regulation of prices of electric energy shall be exercised by the executive authorities of the Russian Federation Subjects (the Astrakhan Regional Tariffs Service).
In keeping with Art. 62 of the Basis of Electric and Thermal Energy Pricing in the Russian Federation approved by Decree of the RF Government No.109 of 26.12.2004, the amount of payment for electric energy consumed above the amount stipulated by contract shall be calculated on the basis of tariffs on electric power (capacity) supplied by energy supplying organisations to consumers, approved by a regulating authority with the use of mark-up (mark-down) coefficients. The calculation and institution of such coefficients constitutes the competence of the Federal Service for Tariffs. So far, the regulator has not introduced any such coefficients.
Considering that the 1.5 mark-up coefficient included by OJSC Astrakhan Energy Company to item 3.4 of the draft additional agreement to an energy supply contract was not introduced by relevant regulatory authorities, it is unlawful and unjustified.
Therefore, the actions of OJSC Astrakhan Energy Company to include conditions stipulated by item 3.4 to the draft additional agreement to the energy supply agreement with agricultural companies of the Akhtubinsk district - OJSC Stepnoe, SPK Novonikolaevsky, SPK Udachensky, SPK Pirogovsky, and SPK Kirovets - constitute a violation of Art. 5 (1) of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» No.948-1 of 22.03.1991, prohibiting a dominant economic entity to violate the pricing procedures established by regulations and infringe the interest of other economic entities.
Proceeding from the above and guided by Art. 27 (1) of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» No.948-1 of 22.03.1991 and item 2.26 of the Rules of Considering Cases of Violation of the Antimonopoly Legislation, the Commission decided to qualify the actions of OJSC Astrakhan Energy Company consisting in inclusion in the draft additional agreement to the energy supply contract with agricultural enterprises of the Astrakhan region Akhtubinsk district - OJSC Stepnoe, SPK Novonikolaevsky, SPK Udachensky, SPK Pirogovsky, and SPK Kirovets - of requirements stipulated by item 3.4 , as infringing the interests of economic entities and violating Art. 25 (1) of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» No.948-1 of 22.03.1991, and issued an instruction to OJSC Astrakhan Energy Company to terminate the violation of the antimonopoly legislation, for which purposes:
· to strike from the draft additional agreement to the energy supply contract with agricultural enterprises of the Astrakhan region Akhtubinsk district - OJSC Stepnoe, SPK Novonikolaevsky, SPK Udachensky, SPK Pirogovsky, and SPK Kirovets - of item 3.4, stipulating the application of a 1.5 mark-up coefficient for exceeding energy consumption or under-consumption of electric energy within a 10-percent deviation of the actually consumed energy from the contractual consumption amount over the calculation period applicable to the area tariffs.
The instruction of the Astrakhan Department of the Russian FAS has been fulfilled.
Belgorod Directorate of the FAS
Case concerning MUE Ritualbytservis
1. Resume.
The main problem for competition on the product market of ritual services within the geographic borders of the city of Belgorod is the dominant position of one of the economic entities operating on the said product market - the municipal unitary enterprise (MUE) Ritualbytservis. This is connected both with the purposes of creation of the enterprise, and with provisions of Art. 9, 25, and 29 of the Law «On Burial,» and RF Presidential Edict «On Guarantees of Citizens' Rights to Provision of Burial Services of the Deceased» No. 1001 of 29.06.1996, according to which the state shall render a guaranteed list of ritual services, the duty of free provision of which is assigned to special funeral services created by the executive authorities of the Russian Federation Subjects or bodies of local self-government.
The most difficult aspect in examining the situation on the said product market is the establishment of the capacity of the market of the basis types of ritual services and the share of a concrete economic entity on this market. As ritual services are not fungible, the department has analysed only the market of burial ritual services. It was impossible to examine the other ritual services markets due to the lack of the necessary information: these types of services are accounted by economic entities only in value terms, and the Belgorod Regional Department for Statistics does not keep any statistics of them.
2. Fact and Legal Content.
The Belgorod Territorial Department of the Russian MAP received an application on 26 March 2004 from the Belgorod subsidiary of JSC Military-Memorial Company (hereinafter JSC VMK) located at the address: 308006, Belgorod, 52 B.Khmelnitskogo St.
According to the application, MUE Ritualbytservis (308010, Belgorod, 10, Portovaya St.) addressed an offer to JSC VMK on 10 March 2004 - two copies of contract No.9 on the rendering of services of deceased servicemen burial for 2004 - for its acceptance. It was stipulated that in the event of non-conclusion of the said contract MUE Ritualbytservis would not render JSC VMK the services of burial of the deceased servicemen.
JSC VMK noted in its application that MUE Ritualbytservis used its dominant position on the funeral services market to unjustifiably include in the contract the terms in which the company was not interested, specifically:
· providing temporary equipped grounds during the burial;
· digging a grave during the burial;
· singular tidying up of the grave after the burial;
· inspection of the site for purposes of installing a gravestone and arrangement of the grave of the deceased, control over the observance of technical requirements during the installation of gravestones;
· on additional agreement of the parties, the Customer shall render free assistance in the tidying up and improvement of the territory of the military section of the cemetery where JSC VMK makes the burial.
In addition, the Belgorod Department of the Russian FAS received an application from JSC VMK on 19.07.2004 concerning the fact that MUE Ritualbytservis refuses to accept orders from JSC VMK on the rendering of services of burial civilians, although the concluded contract does not envisage such restrictions.
Having accepted the application for consideration, the Department, guided by the Law on Competition, the Decree of the Russian Federation Government No.154 of 19.02.1996 «On the Register of Economic Entities Holding over 35% Share on a Certain Product Market» (hereinafter - the Register), orders of the Russian MAP of 20.12.1996 No.169 «The Procedures for Holding and Analysis and Appraisal of the Status of Competitive Environment on the Product Markets» and No.67 of 03.06.1994 «On Methodological Recommendations for Determining an Economic Entity's Dominance on Product Markets,» on the basis of materials provided by the Belgorod Regional Department for Statistics, JSC VMK, and MUE Ritualbytservis, has analysed the situation on the product market of ritual services within the geographic dimensions of the city of Belgorod.
The analysis of the market of ritual services connected with the burial of the deceased has demonstrated that the share of MUE Ritualbytservis on the territory of the city of Belgorod in providing this type of services in 2002 and 2003 was 88.9% and 83%, respectively. Therefore, this economic entity is dominant on this product market.
In accordance with Art. 8, 9, 12 of the Law «On Burial and the Funeral Business,» No. 8-FZ of 12.01.1996, MUE Ritualbytservis is the only economic entity within the geographic borders of Belgorod rendering the following types of ritual services:
· rendering a guaranteed list of ritual burial services;
· allocating a plot for burial or reburial;
· issuing documents needed for the burial.
By Decree of the Belgorod Department of the Russian FAS No.61 of 30.06.2004 MUE Ritualbytservis was included in the Register within the geographic borders of the city of Belgorod, holding over 65% of the product market of burial services (OKUN code 019505).
According to Art.9, 25 and 29 of the Law «On Burial and the Funeral Business,» No. 8-FZ of 12.01.1996 and RF Presidential Edict «On Guarantees of Citizens' Rights to Provision of Burial Services of the Deceased» No. 1001 of 29.06.1996, the state shall render a guaranteed list of ritual services, the duty of free provision of which is assigned to special funeral services created by the executive authorities of the Russian Federation Subjects or bodies of local self-government.
The Law «On Burial and the Funeral Business,» No. 8-FZ of 12.01.1996 does not envisage any restrictions on conducting activity connected with the burial of the deceased by other economic entities, except services stipulated in Art.9 and 12.
The list of ritual services rendered to the population by a specialised funeral service on the territory of the Belgorod region and their cost are determined by resolution of the Belgorod regional governor No. 215 of 24.12.2003 «On Prices and Tariffs on Ritual Products and Services,» with amendments introduced by resolution of the regional governor of 16.03.2004, No.72. The right to regulate prices of ritual services is granted to the Russian Federation Subjects in keeping with the RF Governmental Decree No. 239 of 07.03.1995 «On Measures for Improvement of State Regulation of Prices (Tariffs).»
On results of analysis of all the above circumstances, the Department issued a determination of 16.06.2004 to initiate case No.029-04-AZ against MUE Ritualbytservis based on the elements of a violation of Art. 5 of the Law n Competition.
The Commission has examined the case on 18.08.2004 and arrived at the following conclusions:
MUE Ritualbytservis includes in the contracts on the rendering of funeral services (contract No. 9 of 20.03.2004 with JSC VMK) an obligatory list of nine types of ritual services, out of which only four are obligatory as per Art. 9 of the Law «On Burial»: issuing documents needed for the burial, issuance of a burial passport, inspection and allocation of a plot for burial or additional burial, installation of a grave registration number. The other services, including the digging of a grave and burial can be performed by JSC VMK on its own.
MUE Ritualbytservis has not presented documents confirming its right of ownership and usage of the land plots allocated for the organisation of cemeteries or of obligatory rendering of ritual services stipulated in item 1.3 of contract No.9 of 20.03.2004 concluded between MUE Ritualbytservis and JSC VMK only by this particular economic entity.
The Commission qualified such actions of MUE Ritualbytservis as attempted imposition of contractual terms on JSC VMK, unprofitable to the latter and irrelevant to the subject of the contract. On results of consideration of the case, the Commission passed a decision to recognise the fact of violation of Art.5 of the Law on Competition by MUE Ritualbytservis and issued an instruction to terminate the violation of the antimonopoly legislation. For this purposes, MUE Ritualbytservis should within three days from the moment of receiving the instruction:
1. terminate the actions connected with a refusal in registering documents on fulfilment of jobs on the burial of civilians by the Belgorod subsidiary of JSC VMK;
2. strike from contract NO. 9 on the rendering of services of burial of the deceased concluded with the Belgorod subsidiary of JSC VMK on 7 June 2004 the following items:
· 1.3.4 Providing temporary equipped grounds during the burial.
· 1.3.5 Digging a grave and burial.
· 1.3.6 Singular tidying up of the grave after the burial.
· 1.3.9 Inspection of the site for purposes of installing a gravestone and arrangement of the grave of the deceased, control over the observance of technical requirements during the installation of gravestones.
· 1.6 On additional agreement of the parties, the Customer shall render free assistance in the tidying up and improvement of the territory of the military section of the cemetery where the Belgorod subsidiary of JSC VMK makes the burial.
The instruction of the Belgorod Department of the Russian FAS No. 7 on termination of violation of the antimonopoly legislation issued to MUE Ritualbytservis on case No. 029-04-AZ of 18.08.2004 was fulfilled in the stipulated period, of which the company notified in writing (letter No. 173 of 14.09.2004).
Simultaneously MUE Ritualbytservis filed a claim with the Belgorod regional arbitrazh court on 12.11.2004 to invalidate the decision and instruction of the Commission of the Belgorod Department of the Russian FAS of 18 August 2004 on case No. 029-04-AZ.
On 24.12.2004, MUE Ritualbytservis has also filed a claim with the Belgorod regional arbitrazh court to recognise as unlawful item 2 of Order No. 61 of the Belgorod Department of the Russian FAS of 30.06.2004 on inclusion of MUE Ritualbytservis in the Register within the geographic borders of the city of Belgorod with a share exceeding 65 percent on the product market of burial ritual services. As a result of consideration of the case by the Belgorod regional arbitrazh court, the claims filed by MUE Ritualbytservis have been dismissed. This decision was not contested by MUE Ritualbytservis and entered into legal force.
On 12.01.2005, in connection with the consideration of the case of appeal against the Order on inclusion in the Register, the Belgorod regional arbitrazh court suspended proceedings on the case of contesting the decision and instruction of the Belgorod Department of the Russian FAS. So far, this case has not been considered.
3. Competitive Analysis. General.
The analysis and appraisal of the status of the competitive environment on the product market of ritual services in the city of Belgorod have been fulfilled in accordance with «The Procedures for Holding and Analysis and Appraisal of the Status of Competitive Environment on the Product Markets» approved by Order of the Russian MAP No. 169 of 20.12.1996 (hereinafter - the Procedures).
In keeping with Art. 4 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» of 22.03.1991 No. 948-1 (in edition of 09.10.2002, No. 122-FZ):
«A product is the result of activity (including jobs, services) destined for sale, exchange, or another form of circulation.»
«A product market is the sphere of circulation of a product having no substitutes, or fungible products on the territory of the Russian Federation or its part, determined on the basis of economic possibility of the purchaser to acquire the product on the relevant territory and back of such a possibility outside its borders.»
According to item 1.4 of the Procedures, to evaluate the status of the competitive environment on a certain product market, calculation and analytical jobs shall be conducted to determine:
· the product dimensions of the product market;
· the subjects of the product market (the quantity and composition of sellers and buyers);
· the geographic dimensions of the product market;
· the volume of the market product resource;
· the share of an economic entity on the market;
· quantitative characteristics of the product market structure;
· qualitative characteristics of the product market structure;
· the market potential of an economic entity.
The analysis and appraisal of the status of the competitive environment on the product market of ritual services in the city of Belgorod has been conducted for 2002 and 2003.
Considering the specific nature of the product market in question, the regulatory framework is presented below.
In accordance with Art. 25 of the Federal Law «On Burial and the Funeral Business,» No. 8-FZ of 12.01.1996 (in edition of 30.06.2003), the burial of a deceased and rendering funeral services shall be conducted by special funeral services created by the executive authorities of the Russian Federation Subjects or bodies of local self-government.
In keeping with Art. 29 of the above Law, the procedures for such activity are determined by the executive authorities of the Russian Federation Subjects or bodies of local self-government.
According to Art. 16 of the Federal Law «On General Principles of Organisation of Local Self-Government in the Russian Federation» of 06.10.2003 No. 131-FZ, the organisation of ritual services and maintenance of burial sites constitutes the issues of local significance of a municipality.
In accordance with Art. 10 of the Charter of the Belgorod City of the Belgorod Region of 26.06.1997, one of the issues referred to municipal jurisdiction is the organization of ritual services and maintenance of burial sites.
According to Art. 9 of the Federal Law «On Burial and the Funeral Business» and the RF Presidential Edict «On Guarantees of Citizens' Rights to Provision of Burial Services of the Deceased» No. 1001 of 29.06.1996, the state guarantees free provision of the following list of funeral services:
· issuing documents needed for the burial;
· provision and delivery of a casket and other items needed for the burial;
· transportation of the body (remains) of the deceased to the cemetery (crematorium);
· burial (cremation with subsequent handing over of the mortuary urn).
These burial services are provided by a specialised funeral service, which may be supplied by the executive authorities of the Russian Federation Subjects or bodies of local self-government with recoverable circulation funds in the amount necessary for rendering such services during one month at the expense of budgets of the Russian Federation Subjects and local budgets.
Art. 10 of the above Law envisages the payment of a social burial allowance in the amount equal to the cost of the services provided according to the guaranteed list of funeral services stipulated in Art. 9 (1) of this Federal Law, but not in excess of 1,000 roubles.
Citizens who have received a guaranteed list of funeral services are not eligible to a social funeral allowance.
The payment of the cost of services granted above the list of funeral services is made at the expense of the person assuming the responsibility to organise the burial of the deceased.
Specialised funeral services are legally responsible for the arrangement and maintenance of the burial grounds, and providing a guaranteed list of funeral services.
In accordance with the RF Governmental Decree No. 239 of 07.03.1995 «On Measures for Improvement of State Regulation of Prices (Tariffs)» (in edition of 02.04.2002), the tariffs on ritual services is subject to state regulation.
The institution of tariffs on ritual services is referred to the competence of executive authorities of the Russian Federation Subjects.
Product Dimensions of the Product Market
In accordance with item 2.1 of the Regulations, the identification of a product starts with identifying its classification group, applying effective classifiers of produce, services, types of activity, … GOST (state standards) of relevant types of products.»
According to the Russian National Classifier of Types of Economic Activity (OKVED), approved by Decree of the RF Gosstandart (the State Committee for Standards) of 06.08.1993, servicing of organising funerals, burial, and cremation (9313000) are referred to public utility services (9300000) and include a considerable spectrum of services.
Proceeding from the variety of services included in the category of «ritual services,» as well as the fact that these services are not fungible, the following product markets of ritual services in the city of Belgorod have been analysed:
1. Burial services (OKUN code 019505).
2. Manufacture of tombstones (OKUN code 019512-019516).
3. Rendering a guaranteed list of burial ritual services.
Identifying the Sellers and Buyers
In keeping with item 3.1 of the Regulations, all sellers operating on the analysed product market should be identified.
The information basis for the analysis of the product market of ritual services in the Belgorod city consisted of materials provided by:
· the Belgorod Regional Committee for State Statistics;
· the Belgorod municipal administration;
· economic entities operating on the said market.
According to the information received, 14 economic entities operate on the product market of ritual services in the city of Belgorod:
1. MUE Ritualbytservis (308010, Belgorod, 94, Portovaya St.);
2. the Belgorod subsidiary of JSC Military-Memorial Company, JSC VMK (308006, Belgorod, 52, B.Khmelnitskogo St.);
3. LLC Kristall Granit (308019, Belgorod, 7v, Krasnoarmeiskaya St.);
4. LLC Glasis (308600, Belgorod, 56v, Popova St.);
5. LLC Granit (308600, Belgorod, 36a, Narodnaya St.);
6. Private enterprise Zhigalova (308001, Belgorod, 21, Litvinova St., Apt.59);
7. Private enterprise Yegorova (308600, Belgorod, 56g, Popova St.);
8. Private enterprise Makagonova (308001, Belgorod, 133, Zheleznodorozhnaya St.);
9. Mramor (308024, Belgorod, 56a, Gorkogo St.);
10. Private enterprise Dudina (308010, Belgorod, 13, Urozhainaya St.);
11. Private enterprise Rozgina (308010, Belgorod, 1, 3rd Portovy per.);
12. LLC Ritual-Service (308010, Belgorod, 77, Chelyuskintsev St.);
13. LLC Recital (308013, Belgorod, 14, Mikhailovskoe Shosse);
14. Private entrepreneur Kulin (308, Belgorod, 22, Chekhova St.).
In addition, three economic entities operate on the product market of burial ritual services (OKUN code 019505):
1. MUE Ritualbytservis (308010, Belgorod, 94, Portovaya St.);
2. the Belgorod subsidiary of JSC Military-Memorial Company, JSC VMK (308006, Belgorod, 52, B.Khmelnitskogo St.);
3. Private entrepreneur Kulin (308, Belgorod, 22, Chekhova St.).
Some 25 economic entities operate on the product market of the ritual services of tombstones manufacture (OKUN code 019512-019516). The qualitative and quantitative parameters of this market have not been determined.
Rendering guaranteed burial ritual services.
In the city of Belgorod, the guaranteed list of ritual services of burial is provided only by MUE Ritualbytservis.
The population of the city of Belgorod is considered as the consumers of the said services.
Geographic Dimensions of the Product Market
According to item 4.4 of the Regulations, the following factors are to be taken into consideration for determining the geographic dimensions of a product market:
a possibility of shifting of the demand between territories presumably constituting one territorial market.
Proceeding from the requirements of item 4.4 of the Regulations, the geographic dimensions of the product market of ritual services have been identified within the geographic borders of the city of Belgorod.
Determining the Volume of the Market Product Resources and the Economic Entities' Share on the Market
In keeping with item 5.1 of the Regulations, the quantitative characteristic of the volume of the market product resources is the total product sales volume within the geographic dimensions of the market by an identified group of buyers in value terms or in kind.
The calculation of the share of buyers on this product market is conducted on the basis of the actual market structure (without considering potential competitors), as this analysis was conducted on the basis of materials of the application files with the Department by the Belgorod subsidiary of JSC VMK for purposes of detecting the elements of dominance abuse on the market by MUE Ritualbytservis.
The share of MUE Ritualbytservis on the product market of burial ritual services in 2002 and 2003 was 88.9% and 83%, respectively, which is much higher than the 65% margin.
According to Art. 4 of the Law on Competition, such a position of an economic entity is defined as dominant.
In keeping with effective law, MUE Ritualbytservis is the only economic entity providing certain types of ritual services on the following product markets:
· Rendering a guaranteed list of burial ritual services;
· Allocating a land plot for burial or reburial;
· Issuing documents needed for the burial.
Quantitative Parameters of the Product Market Structure
In keeping with item 6.1 of the Regulations, quantitative characteristics of a product market structure include:
· the number of sellers operating on this product market;
· shares occupied by the sellers on this product market;
· market concentration indices.
The concentration rate of the analysed market was not determined, as it is usually determined for 3, 4 and more major market participants. As already stated above, three economic entities operate on the burial ritual services market, and the share of one of them - MUE Ritualbytservis - in 2002 and 2003 was 88.9% and 83%, respectively.
Conclusions
The analysis of the market of some types of ritual services conducted in accordance with the methodology of evaluating the status of the competitive environment on product markets approved by the Order of the Russian MAP of 20.12.1996 No.169 «On Approval of the Procedures for Holding and Analysis and Appraisal of the Status of Competitive Environment on the Product Markets» has shown:
1. In keeping with effective law, MUE Ritualbytservis is the only economic entity providing certain types of ritual services on the following product markets:
· Rendering a guaranteed list of burial ritual services;
· Allocating a land plot for burial or reburial;
· Issuing documents needed for the burial.
2. MUE Ritualbytservis occupies a dominant position on the product market of burial ritual services with a share on this market exceeding 65%.
Under such circumstances, it is possible to assume that MUE Ritualbytservis has abused its dominance on the analysed product market, which was manifested in imposing on a counterparty of unprofitable contractual terms and terms irrelevant to the subject of the contract.
The effect of the supposed dominance abuse by MUE Ritualbytservis consists in the gaining of additional profit and elimination of competitors from the market in question.
Bryansk Directorate of the FAS
V.S. Rogachev
On Violation of Art.5 of the RSFSR Law «On Competition…» by Refusal to Allow a Customer to Select a Tariff for Settlements for the Received (Consumed) Electric Energy
Resume: The Bryansk Territorial Department of the Russian Federation Ministry for Antimonopoly Policy and Support of Entrepreneurship has considered case No. 13 of the violation of the antimonopoly legislation by a natural monopoly in the electric energy sphere. A decision on the case has been adopted on 16.05.2003, and an instruction issued to OJSC Bryanskenergo.
OJSC Bryanskenergo is an entity operating in the sphere of natural monopolies rendering electric energy supply services within the geographic borders of the Bryansk region.
The case was considered on the application of OJSC Klintsovsky Autocrane Plant, which OJSC Bryanskenergo has denied an opportunity to choose a tariff for payment for the consumed electric power, a possibility of choosing which was envisaged by the Russian Federation Governmental Decree No.226 of 02.04.2002 «On Electric and Thermal Energy Pricing,» valid at that moment.
According to item 24 of the said Decree, regulated tariffs (prices) of electric and thermal energy supplied to consumers (except the population) are established simultaneously in three options, and the consumer can choose one of these three options for conducting settlements for the consumed electricity, giving prior notice of its choice to the energy supplying organisation.
OJSC Bryanskenergo and OJSC Klintsovsky Autocrane Plant have concluded an electric energy supply contract No. 12 of 10.02.2002, according to which the subscriber was to pay for the consumed electric power according to a two-rate tariff.
In keeping with item 24 of Governmental Decree No. 226 of 02.04.2002, OJSC Klintsovsky Autocrane Plant in its letter of 29.12.2002 has notified OJSC Bryanskenergo represented by its subsidiary Energosbyt to the transfer to a single-rate tariff.
OJSC Bryanskenergo replied to this notification that the transfer to settlements on the basis of a single-rate tariff may be permitted only during the approval of new tariffs by the Bryansk Regional Energy Commission (REC) and after the signing of a new energy supply contract with the energy supplier.
REC Regulation No. 3/1-E of 05.02.2003 has introduced new tariffs, in connection with which OJSC Klintsovsky Autocrane Plant sent its draft contract to OJSC Bryanskenergo on 17.02.2003.
OJSC Bryanskenergo left this proposal on conclusion of a contract envisaging settlements on the basis of a single-rate tariff unanswered, and presented payment orders to OJSC Klintsovsky Autocrane Plant based on the two-rate tariff, as it assumed that before a new contract is concluded the parties were to conduct settlements on the basis of the energy supply contract No. 12 of 10.02.2002.
In an attempt to justify its actions OJSC Bryanskenergo referred to Art. 310 of the Russian Federation Civil Code, reflecting the principle of interminability and invariability of contract in the form of inadmissibility of unilateral alteration of its terms: a unilateral refusal from fulfilling obligations and unilateral alteration of its terms are admitted only in cases stipulated by law and contract.
To substantiate its position, OJSC Bryanskenergo was also referring to other provisions of the civil law, including Art. 450 (1), alleging that in the case under consideration the existing contract could not be altered unilaterally, as Art. 450 (1) stipulates that a contract may be unilaterally altered or terminated, if it is envisaged by the Russian Federation Civil Code, other laws, or the contract. A governmental decree is not a law and for this reason it cannot be used in the implementation of a contract.
At the same time, in keeping with Art. 426 (4) of the RF Civil Code, in cases stipulated by law the Russian Federation Government may issue binding instructions to all parties during the conclusion and implementation of public contracts. Art. 544 (2) says that the order of conducting settlements for energy shall be determined by law, other legal acts or agreements between the parties. Art. 454 (3) also says that in cases envisaged by this Code or another law the details of the purchase and sale of certain types of products shall be determined by laws and other legal acts.
Art. 424 (2) says that the alteration of a price after the conclusion of a contract shall be admitted on terms stipulated by the contract, the law or in the legally prescribed manner.
Art. 539 (3) stipulates that laws and other legal acts on energy supply shall be applied to relations not regulated by this Code.
Therefore, Art. 424, 426, 454 stipulate that the application of the Government Decree requires the existence of Laws, and two articles (Art. 539 and 544) make direct reference to other legal acts.
The fundamental law enabling the application of the Government Decree is the Law of 14.04.1995 No. 41-FZ «On State Regulation of Electric Energy Tariffs in the Russian Federation,» Art. 5 of which stipulates that the Russian Federation Government shall establish the fundamentals of electric and thermal energy pricing on the territory of the Russian Federation, and Art. 15 says that the order of state regulation and application of tariffs shall be established by the Russian Federation Government.
Having considered the presented materials, including the contract concluded between OJSC Bryanskenergo and OJSC Klintsovsky Autocrane Plant, the correspondence between them, the REC Regulation on the introduction of new tariffs, and other materials, the Bryansk Territorial Department has arrived at the conclusion that OJSC Bryanskenergo has violated Art. 5 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» by imposing unprofitable contractual terms and unjustified demand of transfer of finances in the amount of RUR 324,576.
Having disagreed with the issued decision and instruction on the case, OJSC Bryanskenergo applied to the Bryansk regional arbitrazh court with a claim to invalidate the decision of 16.05.2003 and instruction No. 1 of 15.05.2002 on grounds that they do not comply with the Rules of Considering Cases of Violation of the Antimonopoly Legislation, have been issued with exceeding office and violate the principle of freedom of contract, stipulated by Art.421 of the Russian Federation Civil Code, as well as Art. 310 and 450 of the CC.
The Bryansk regional arbitrazh court in its first instance has recognised as inconsistent the reasoning of the applicant concerning the non-compliance if the appealed non-regulatory acts with requirements of the Rules of Considering Cases of Violation of the Antimonopoly Legislation. It has been established that the decision and instruction comply with items 2.12 and 2.16 of the Rules. The applicant's allegation that control over the sphere of activity in the electric energy supply sector does not constitute the competence of the antimonopoly authority, as well as the argument on the supposed violation of Art. 421 of the Civil Code have been waived, as Art. 5 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» envisages an exception from the principle of freedom of contract with respect of a dominant entity on the product market abusing its dominance.
The decision and instruction have been recognised justified and legal.
The court of appeals of the Bryansk regional arbitrazh court has also appraised the applicant's reasoning in the first instance court and the contract, including item 5.4 of the contract mentioned by the Bryansk Territorial department in its review.
The contract stipulates that the contractual price is formed by the tariffs introduced by other acts of the Russian Federation, According to item 5.4 of the Contract, a change of tariffs in the period of the Contract's validity does not require its re-registration, they become binding as of the date of introduction of new tariffs both for the energy supplying organisation and for the subscriber, and the energy supplying organisation should have taken into consideration the subscriber's right to the choice of a tariff.
Having disagreed with the decision and instruction of the Bryansk regional arbitrazh court in the first and appeals instances, OJSC Bryanskenergo has filed a cassation to the Federal Arbitrazh Court of the Central District to verify the lawfulness and soundness of the legal decisions.
The applicant also claimed that item 5.4 envisages the possibility of changing the price of a tariff, but not the choice of its option. This comment was not taken into account by the cassation court, as in accordance with Art. 1 of the Federal Law «On State Regulation of Electric Energy Tariffs in the Russian Federation,» electric and thermal energy tariffs constitute a system of price rates according to which settlements for electric energy are conducted.
The application of Art. 421 of the RF Civil Code in the case under consideration has also been assessed, as a result of which it has been stated that in keeping with Art. 421 (part 4) of the RF Civil Code, contractual terms shall be determined at the discretion of the parties, except cases when the content of a relevant term is prescribed by law of other legal acts.
Allegations that the Bryansk Territorial Department was not authorised to control the activity of OJSC Bryanskenergo was recognised inconsistent.
Therefore, in the course of a year, from May 2003 to May 2004, the Bryansk Territorial Department had to defend in three court instances the subscriber's right to choose a tariff for payment for the consumed electricity, envisaged by a Government Decree.
Daghestan Directorate of the FAS
Description of the Case of Violation of Art. 5 and 6 of the RF Law «On Competition…» by OJSC Gazprom, LLC Mezhregiongaz, LLC Kaspiygazprom, LLC Deghestanregiongaz, and JSC Daghestanregiongaz
1. Main problem for competition.
Competition, or the rivalry of economic entities in naturally monopolistic segments of the economy such as natural gas transportation is seriously complicated by technological and production specifics of the manufactured product (service). Access to the transportation infrastructure enables the company that owns or uses it to abuse its position on the relevant product market.
2. Fact and legal content.
On 20 May 2004, a group of entities (OJSC Gazprom, LLC Mezhregiongaz, LLC Kaspiygazprom, LLC Deghestanregiongaz, and JSC Daghestanregiongaz) has concertedly stopped the supply of natural gas to the Karabudakhkentsk district of the Republic of Daghestan. The reason for the natural gas disconnection consisted in constant non-payments for the consumed gas by the residents and enterprises of the Karabudakhkentsk district. However, along with persistent non-payers, the subsidiaries of OJSC Gazprom and LLC Mezhregiongaz - LLC Kaspiygazprom, LLC Deghestanregiongaz, and JSC Daghestanregiongaz - have shut off gas supplies also to bona fide payers who had made advance payments (debit balance) for gas. These economic entities mainly operate on the agricultural production, manufacture and sales markets. The abuse of market dominance on the gas supply market by a group of gas suppliers has inflicted damage on the interests on consumer organisations operating on other product markets.
The restriction of supplies of natural gas to bona fide consumers contradicts a whole number of laws and bylaws, as well as in-house corporate regulations of the Gazprom group. This includes Art. 5 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» No. 948-1 of 22.03.1991, Art.523 and 546 of the RF Civil Code, Art. 26 of the Federal Law «On Gas Supply in the RF,» etc.
The antimonopoly authority - the Daghestan Department of the Russian FAS - has initiated case No. 46/51 based on the applications of legal and physical persons situated on the territory of the Karabudakhkentsk district of the Republic of Daghestan, on the elements of a violation of Art. 5 and 6 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» No. 948-1 of 22.03.1991.
3. Procedures.
Case No. 46/51 was initiated and investigated by the antimonopoly authority in compliance with the then effective Rules of Considering Cases of Violation of the Antimonopoly Legislation, approved by Order of the RF State Committee for Antimonopoly Policy No. 91 of 25.07.1996 (in edition of 25.11.2003). The investigation and evidence gathering was conducted by requesting the necessary documents and information from OJSC Gazprom, LLC Mezhregiongaz, LLC Kaspiygazprom, LLC Deghestanregiongaz, and JSC Daghestanregiongaz, receiving consultations and recommendations of the Russian FAS, and using the information databases available at the Department. The investigation revealed that the actions of the Gazprom group in restricting gas supplies to the Karabudakhkentsk district were concerted. The materials of the case make it evident that OJSC Gazprom, LLC Mezhregiongaz, LLC Kaspiygazprom, LLC Deghestanregiongaz, and JSC Daghestanregiongaz comprise one group of entities - 100% of the authorised capital of LLC Mezhregiongaz and LLC Kaspiygazprom belong to OJSC Gazprom; 51% of the authorised capital LLC Deghestanregiongaz belongs to LLC Mezhregiongaz; 100% of the authorised capital of JSC Daghestanregiongaz belongs to OJSC Regiongazholding, 54% of the authorised capital of which belongs to LLC Mezhregiongaz. This is confirmed by the fact that during the disconnection of gas, the regional subsidiaries of OJSC Gazprom were acting in pursuance of binding telegraph instructions of the mother companies - OJSC Gazprom and LLC Mezhregiongaz. These facts detected in the course of the investigation were pooled into one proceeding on the case initiated by the Daghestan Department of the Russian FAS firstly against LLC Kaspiygazprom, LLC Deghestanregiongaz, and JSC Daghestanregiongaz, and later against OJSC Gazprom and LLC Mezhregiongaz.
Upon the results of consideration of case No. 46/51, the antimonopoly authority issued an instruction to the Gazprom group to immediately resume gas supplies to bona fide payers who have no arrears for gas.
OJSC Gazprom and LLC Mezhregiongaz appealed against the instruction with the Moscow city arbitrazh court, whose decision of 03.02.2005 confirmed the lawfulness of actions of the Daghestan Department of the Russian FAS on initiating a case and issuance of instructions to the OJSC Gazprom group to terminate the violation of the antimonopoly legislation.
Having disagreed with the decision of the Moscow city arbitration court on this case, OJSC Gazprom and LLC Mezhregiongaz appealed against it with the court of appeals. The appeals instance of Moscow city arbitration court No. 9 issued a ruling leaving in force the decision of the Moscow city arbitration court of 03.02.2005 on case No. A40-39584/04-121-347 without changes, and dismissing the appeal filed by OJSC Gazprom and LLC Mezhregiongaz.
Analysis of the product market.
In accordance with the definition of the product market made in Art. 4 of the RF Law on Competition, the geographic dimensions of the product markets of transport, supply, and sale of natural gas were determined on the basis of the buyers' (consumers') economic possibility to purchase the product on a relevant territory (the Karabudakhkentsk district of the Republic of Daghestan) and lack of such a possibility outside its borders.
The shares of economic entities LLC Kaspiygazprom, LLC Deghestanregiongaz, and JSC Daghestanregiongaz on the market of transportation, supply, and sale of natural gas within the geographic borders of the Karabudakhkentsk district exceeded 65%.
Order of the Russian GAK of 21.01.1998 No. 16 has included the OJSC Gazprom group, including LLC Mezhregiongaz, in the Register of Economic Entities Holding over 35% Share on a Certain Product Market as a dominant entity on the service market of natural gas sale (within the geographic borders of the RF).
Orders of the Territorial Department of the Russian MAP for the Republic of Daghestan of 30.03.2001 No. 17, of 30.08.2004 No. 31, and 24.06.1996 No. 8 have, respectively, included LLC Kaspiygazprom, LLC Deghestanregiongaz, and JSC Daghestanregiongaz in the regional section of the Register as economic entities occupying a dominant position on the service market of natural gas sales (within the geographic borders of the Republic of Daghestan).
The said economic entities carried out concerted actions in violation of requirements of effective law, including the antimonopoly legislation, by terminating gas supply to all consumers in the Karabudakhkentsk district of the Republic of Daghestan, including those fulfilling obligations on payment for and collection of natural gas supplied by JSC Daghestanregiongaz in good faith.
Considering the above and guided by Art. 27 (1) of the Law «On Competition and Restriction of Monopolistic Activity on Product Markets» and item 2.12 of the Rules of Considering Cases of Violation of the Antimonopoly Legislation, the Commission passed a decision:
1. To recognise the actions of the group of entities consisting of OJSC Gazprom, LLC Mezhregiongaz, LLC Kaspiygazprom, LLC Deghestanregiongaz, and JSC Daghestanregiongaz as violations of Art. 5 and 6 of the RF Law in Competition, manifested in concerted actions of economic entities comprising one group of entities of OJSC Gazprom, which result (can result) in restriction of competition and infringement of the interests of economic entities, and elimination of other economic entities from the gas supplies market.
2. To issue an instruction to OJSC Gazprom, LLC Mezhregiongaz, LLC Kaspiygazprom, LLC Deghestanregiongaz, and JSC Daghestanregiongaz on case No. 46/51 to terminate the violation of Art. 5 and 6 of the RF Law on Competition.
Irkutsk Directorate of the FAS
Case of Violation of the Antimonopoly Legislation by a Group of Entities (LLC YUKOS M Trading House, OJSC Angara Polymer Plant)
The Irkutsk Territorial Department of the Russian MAP received an application from OJSC Sayanskkhimplast (the Applicant) against the actions of a group of legal entities including YUKOS M Trading House and OJSC Angara Polymer Plant (OJSC AZP), manifested in imposing unprofitable contractual terms, namely, setting a monopolistically high price on gaseous ethylene GOST 25070-87.
The Territorial Department conducted an antimonopoly investigation (by interviewing experts, economic entities, territorial departments on whose territory ethylene manufacturers are located) and arrived at the following conclusions.
A) The existing technology of ethylene production is strongly dependent on the terms of supply of raw material for petrochemical processing, the process of further processing into ethylene, the technology of ethylene supply to the Applicant. In other words, it is tied to a fixed infrastructure of pipelines, excluding physical connection to the transportation and processing process of other economic entities, except OJSC ANHK, OJSC AZP, and OJSC Sayanskkhimplast.
B) Ethylene is sold to the end consumer by YUKOS M Trading House (wholesaler); OJSC ANHK (virgin gasoline manufacturer), OJSC AZP (ethylene manufacturer), and YUKOS M Trading House (seller) belong to one major oil company (OJSC YUKOS Oil Company).
C) The Russian market does not have free ethylene resources and no technological possibility of supplying gaseous ethylene to the Applicant by other ethylene manufacturers (the ethylene pipeline system existing in Russia firmly binds the manufacturer with the consumer).
· Overall expenses connected with the Applicant's switch over to liquefied ethylene consumption are not less than USD 15-200 million (infrastructural and other expenses, including, in expert opinion, the construction of an ethylene liquefying device at the enterprise manufacturing gaseous ethylene; expenses on the rent (or purchase) of special means of delivery (thermos tanks) with a temperature minus 101 degrees C; expenses on construction at the Applicant's enterprise of a special reservoir for liquefied gas acceptance and storage; ethylene regasification (restoration) costs from liquid to gas for further processing by the Applicant (into polyvinylidene chloride);
· The prices of liquefied and gaseous ethylene are incomparable (the quoted price of liquefied ethylene is 30-40% higher than that of gaseous ethylene).
Therefore:
· liquefied ethylene cannot be a substitute product of gaseous ethylene;
· only the manufacturer (OJSC AZP) can supply gaseous ethylene with the temperatures from minus 20 degrees to minus 30 degrees;
· the product can be supplied only by ethylene mainline owned by the Applicant (OJSC Sayanskkhimplast).
Consequently, only gaseous ethylene with the temperatures from minus 20 degrees to minus 30 degrees can be regarded as the product dimensions of the product market. The geographic dimension of the product market is the block of entrance to the ethylene mainline on the border of the manufacturer's (OJSC AZP) production territory.
Being the only possible seller of ethylene, in the absence of competitors on the ethylene sales market due to the technological pattern of the product supply to the buyer and high market entry barriers for new sellers and manufacturers of gaseous ethylene, YUKOS M Trading House occupies a dominant position (with 100% share) and has an opportunity to dictate the price of the product, including in it a profit considerably higher than would have been possible in comparable conditions.
To prove the fact of a monopolistically high price the seller's pricing policy was analysed in accordance with the cost-based pricing methodology and proceeding from the situation on the initial and end product markets.
Proceeding from direct expenses connected with the processing technology and sufficient profit rate, the price of 1 tonne of ethylene for the end consumer should be formed by the cost of the initial raw material (virgin gasoline), the cost of its processing, and the cost of the necessary chemical agents and catalysts, minus the value of by-products produced as a result of processing. Expenses applicable to ethylene should be proportionate to the overall ethylene return. Calculations revealed that the actual profitability of sales of YUKOS M Trading House was 43%, i.e. exceeded the average profit rate in the industry by 23%.
Proceeding from pricing with account of changes of the situation on the product markets of the initial resource (virgin gasoline) or the end product (polyvinylidene chloride), the comparison of the dynamics of prices on the said markets in 2001 and 2002 has shown that the pace of price increase of the produce (ethylene) of YUKOS M Trading House, occupying a dominant position, in no way depends on the changes (fluctuations) of prices on the markets of initial and end products:
· the pace of ethylene price increase is always ahead of the pace of growth of prices of petrochemical produce;
· during the period in question, prices on the ethylene market were persistently growing, whereas the prices on the markets of gasoline declined, and prices on the market of polyvinylidene chloride were changing both ways.
Conclusion:
1. The seller's (YUKOS M Trading House) pricing method was established, which does not reflect the objective situation on the product markets of both the initial raw material and ready produce (polyvinylidene chloride).
2. The amount of profit (profitability) in the ex-price has been determined as 43% per 1 tonne of gaseous ethylene, exceeding the industrial average by 23%.
3. The amount of profit used in the calculations is not a consequence of objective changes of the market situation, but a manifestation of dominance abuse by the seller on the market of gaseous ethylene sales, containing the elements of a violation of Art. 5 of the RF Law on Competition in the form of:
· setting and maintaining and monopolistically high price, manifested in a considerable excess of profit rate (43%) over the profit rate formed on competitive markets (20%);
· imposing unprofitable conditions by arbitrary pricing, not connected with the evaluation of the market offer or demand situation.
The main criteria for proving the fact of monopolistically high pricing included:
· provisions of Art. 4 of the Law on Competition, enabling to establish the fact of monopolistically high pricing on the basis of two independent aspects: proving the possibility of compensating for unjustified expenses; proving the possibility of gaining a considerably higher profit. The wording used in the Law (»or») makes it possible to use only one of the conditions included in the definition. The Irkutsk Territorial Department of the Russian MAP used the second part of the definition: … can receive a much higher profit than possible in comparable conditions. As a matter of fact, neither the Law nor any other regulations restrict the actions of the antimonopoly authority in the choice of comparability criteria;
· the initial raw material movement chain, its processing into a semi-finished product (polyvinylidene chloride) and further processing into the end product (polyvinylidene chloride) by OJSC Sayanskkhimplast is tied to a fixed infrastructure of pipelines, excluding physical connection to the transportation and processing process of other economic entities, except OJSC ANHK, OJSC AZP, and OJSC Sayanskkhimplast; therefore, the calculation of fair price of 1 tonne of ethylene for the end consumer (OJSC Sayanskkhimplast) can only be based on actual expenses (made by OJSC ANHK, OJSC AZP);
· as the seller on the market is a wholesale intermediary, the average petrochemical industry indices were taken as the basis for comparison (including the profit rate).
Instruction No. 61 of 26.08.2003 was issued on results of consideration of the case to terminate the violation of the antimonopoly legislation by streamlining the price with the level of actual expenses and the profit rate equal to the industrial average, based on the current figures published by Goskomstat.
The instruction was contested in court of the first and second instances. In both cases the court left the decision of the Territorial Department in force, confirming its lawfulness and reasonableness.
The court hearings held in April - May 2004 agreed with the conclusions of the Department that:
· the method of cost calculation used by the Department does not contradict the law, as there are no regulations introducing obligatory requirements for such calculations, and also that in the course of the antimonopoly investigation the Applicant failed to present the evidence refuting the cost and profit calculation method used for the adoption of the decision;
· the analysis of the Russian ethylene market (conducted by the KORTES centre for oil and petrochemical market research) presented to the court by the offenders has no direct connection to the circumstances considered during the issuance of the decision;
· the Department has lawfully used as a comparable factor the amount of industrial average profit rate in the petrochemical industry received from a public source;
· as the conclusion on more than double excess of the profit rate is substantiated by calculations of the Irkutsk Territorial Department of the Russian MAP, the qualification of YUKOS M Trading House actions as dominance abuse in the form of setting monopolistically high prices and a violation of Art. 5 (1) of the RF Law on Competition is absolutely grounded.
· The decision and instruction do not propose a specific price to be set by YUKOS M Trading House, including the profitability rate, and the instruction contains a requirement to streamline the ethylene prices with the actual expenses taking into account the average industrial profit rate, which is fact an instruction to introduce a fair price and, as a consequence, change contractual terms.
As a result of consideration of the case the Department has detected the following problems:
· a total lack or a lack of sufficiently up-to-date information sources on comparable terms of competition (price, profit, profitability, etc.). Statistic sources publish the said information practically with 1 - 2 years delay;
· the enterprise accounting policy prevents the identification of economic characteristics for particular types of produce;
· the legal definition of a monopolistically high price contains a number of parameters requiring additional explanation (e.g. «a considerably higher profit»: firstly, what does «considerably» exactly mean? secondly, from the economic viewpoint, profit is expressed in concrete monetary terms, therefore for purposes of antimonopoly control it would be better, perhaps, to apply the term of «profit rate»);
· in the opinion of the Territorial Department, the setting of a monopolistically high price of ethylene by the seller was a consequence of inclusion in the product price of unjustified expenses, not related to objective outlays of ethylene manufacture and marketing, but causes by an artificial chain of re-sales within the Oil Company through the formation of quasi-wholesale markets, closed by «exclusive» contracts. The termination of such practice is possible by direct ban on intermediary (exclusive) agreements on the markets of product resources, not requiring agency.
Irkutsk Directorate of the FAS
Information Brief on the Violation of the Antimonopoly Legislation by OJSC UILK
On 11 September 2002, the Irkutsk Territorial Department of the Russian MAP received an application from the General Director of LLC Trailing complaining against unlawful actions of OJSC Ust-Ilimsk Timber Industrial Complex Production Association (OJSC PO UI LPK), manifested in imposing contractual terms of using timber transportation trunk roads.
OJSC PO UI LPK and LLC Trailing have concluded a contract on the use of OJSC PO UI LPK timber transportation trunk roads No. 306/1322 of 16.08.2002, item 1.1 of which stipulates that the Complex (OJSC PO UI LPK) obligates to fulfil the current repair and maintenance jobs of the Kapayevskaya trunk road, and the client (LLC Trailing) assumed part of the expenses of the Complex on the road current repair and maintenance. Item 1.3 of the above contract regulates the settlement procedures between OJSC PO UI LPK and LLC Trailing - the amount expenses assumed by the client equals RUR 8.91 per one tonne (VAT not included) on 20 km of road. In keeping with the contract, the client shall transfer an advance non-cash payment of 85% of the monthly fare to the Complex's settlement account 5 days prior to the transportation month, as a result of which LLC Trailing loses part of its operating assets. The said contract with the term of validity from 01.08.2002 to 30.09.2002 was signed by an LLC Trailing branch due to business necessity, as the presentation of claims might have produced a genuine threat of banning the use of the Kapayevskaya trunk road. After the expiration of this contract no new contract on the use of the trunk roads has been concluded between OJSC PO UI LPK and LLC Trailing.
On 20.09.2002 the LLC Trailing branch company sent a letter to the OJSC PO UI LPK General Director, stating LLC Trailing refusal from extending contract No. 306/1322 of 16.08.2002 on the existing terms and offering the conclusion of a new contract regulating the issue of compensating the costs of Kapayevskaya trunk road maintenance and operation jointly with the other users of the road with establishing a reasonable (justified) amount of payment for the services, presenting calculations, and making payment after the actual provision of services. In its reply letter, OJSC PO UI LPK informed that contract No. 306/1322 of 16.08.2002 on the use of OJSC PO UI LPK timber transportation trunk roads expires on 30.09.2002, and starting 01.10.2002 the passage of LLC Trailing vehicles by the OJSC PO UI LPK roads is prohibited, without the conclusion of a new contract. The letter contained a clause stating that in the event of conclusion of a new contract the terms of payment will be much tighter, both from the point of view of increase of the cost of the services, and by introducing 100% advance payment for the road usage.
The Commission of the Irkutsk Territorial Department of the Russian MAP has established on the basis of analysis of the product and geographic dimensions of the market that OJSC PO UI LPK, the owner of the Kapayevskaya trunk road with a length of 98.6 km occupies a dominant position on the local market of the service «passage by the Kapayevskaya trunk road on the 20-kilimetre section from the Zheronsk coal deposit,» being the only seller on this market (the share of the Complex is 100%, which exceeds the 65% margin, which, according to Art. 4 of the Russian Federation Law «On Competition and Restriction of Monopolistic Activity on Product Markets,» enables to draw a conclusion on unconditional dominant position of OJSC PO UI LPK on the market of the service «passage by the Kapayevskaya trunk road on the 20-kilimetre section from the Zheronsk coal deposit»).
Explaining to the Commission the reasons for non-conclusion of a new contract with LLC Trailing upon the expiration of contract No. 306/1322 of 16.08.2002 on the use of the OJSC PO UI LPK timber transportation trunk roads and revoking the offer of 04.10.2002 previously sent by OJSC PO UI LPK to the LLC Trailing branch company (according to letter No. 110-06/4652 of 08.10.2002), a OJSC PO UI LPK representative referred to the conclusion of Deputy General Director for industrial safety of the Complex, stating that LLC Trailing uses the Kapayevskaya trunk road for the transportation of a dangerous cargo (mineral coal) with violations of safety requirements, creating an accident hazard. However, the Commission waived this conclusion, as in keeping with the Federal Law «On the Safety of Road Traffic» No. 196-FZ of 15.11.1995 (in edition of the Federal Law No. 41-FZ of 02.03.1999), such conclusion may be issued by specially authorized federal agencies.
A representative of LLC Trailing said that LLC Trailing is willing to conclude a contract with OJSC PO UI LPK on the use of the Kapayevskaya trunk road in the volumes of cargo transportation formerly agreed with OJSC PO UI LPK according to the offer sent to the LLC Trailing branch company, on terms of partial compensation of capital repair and maintenance expenses on the section of the Kapayevskaya trunk road used by the LLC Trailing branch. The representative of OJSC PO UI LPK, in turn, explained that this contract with the LLC Trailing branch can be concluded only on condition of inclusion of a 100% advance payment term. The OJSC PO UI LPK representatives motivated this requirement that the demand of advance payment is the usual business practice in the region. OJSC PO UI LPK also expressed disagreement with the opinion of LLC Trailing concerning the determination of the price of the service of using the Kapayevskaya trunk road section by the LLC Trailing branch, as the tariff on the usage of roads is formed by the Complex with account taken of expenses on the maintenance and operation of all roads in its ownership, and considering the entire volume of the transported cargoes. However, the calculations of tariff formation on the usage of OJSC PO UI LPK roads constitute commercial secret, as these data concern the interests of the Complex's counterparties, which are not in contractual relations with LLC Trailing.
The Commission of the Irkutsk Territorial Department of the Russian MAP has examined the documents presented by OJSC PO UI LPK and dismissed the reasoning of OJSC PO UI LPK representatives concerning the inclusion in the contract of the advanced payment condition. Besides OJSC PO UI LPK and the LLC Trailing branch, 21 other enterprises (legal entities and entrepreneurs operating without the formation of a legal person) use the Kapayevskaya trunk road. OJSC PO UI LPK uses a standard form of contract on the use of timber transportation trunk roads, envisaging 100-percent advance payment five days prior to the transportation month. In the opinion of OJSC PO UI LPK, charging 100-percent advance payments from its counterparties is the usual local business tradition, as such practice has existed for a long period of time and is connected with the fact that the parties know in the advance the supposed volume of cargo transportation, and the composition of the cargo transportation companies is traditional. However, as per Art. 5 of the RF CC, a rule of behaviour not prescribed by the legislation, but widely used in some sphere of entrepreneurial activity, is recognized as normal business practice, regardless of whether it is fixed by any document. The requirement of advance payment before the beginning of the transportation month set by OJSC PO UI LPK infringes the interests of counterparties, as advance payment results in withdrawal of a counterparty's operating assets, and constitutes in fact the use of a counterparty's assets received for a not yet provided service. The infringement of a counterparty's interests cannot be normal business practice, as in keeping with Art. 10 (3) of the RF CC, the exercising of civil rights shall be based on reasonable action and good faith of participants in civil relations. Art. 10 (1) of the RF CC does not admit the use of civil rights for purposes of competition restriction, as well as dominance abuse on the market. Therefore, the argument of OJSC PO UI LPK that a demand of advance payment for the usage of the Kapayevskaya trunk road is a local business tradition was qualified by the Commission as groundless.
In accordance with item 1.1 of contract No. 306/1322, the subject of the contract for OJSC PO UI LPK consists in fulfilment of road maintenance and current repair jobs of the Complex, including the Kapayevskaya trunk road. The subject of the contract suggests the participation of the LLC Trailing branch company in expenses on the maintenance and current repair of the 20 km section of the Kapayevskaya trunk road. Item 1.3 of contract No. 306/1322 stipulates that the amount of expenses assumed by the Client (the LLC Trailing branch) constitutes RUR 8.91 per one tonne (VAT not included) at a 20 km distance. Concrete jobs and expenses should be regulated by the balance of expenses on the maintenance and operation of a concrete road, in our case, the Kapayevskaya trunk road. In other words, expenses are determined on the basis of particular volumes of maintenance and current repair jobs on a concrete road. The comparison of expenses on the maintenance and current repair of the 20 km section of the Kapayevskaya trunk road , which should in fact constitute the subject of the contract between OJSC PO UI LPK and the LLC Trailing branch, with the presented calculations based on the volumes of the transported cargoes shows that the calculations for the actually rendered services are substituted with other calculations, not connected with the compensation of damage inflicted on the trunk roads by motor transport during cargo transportation. Expenses on the maintenance and current repair of the 20 km section of the Kapayevskaya trunk road are much lower than the costs calculated on the basis of the volumes of cargo transportation, which infringes the interests of the LLC Trailing branch by imposing unprofitable contractual terms irrelevant to the subject of the contract.
Having examined the documents presented by OJSC PO UI LPK, specifically, the tables of distribution of actual expenses on the maintenance and repair of timber transportation trunk roads by the transportation volumes, the Commission learned that OJSC PO UI LPK keeps records of actual expenses on the maintenance of each road in the OJSC PO UI LPK property, including the Kapayevskaya trunk road. Therefore, OJSC PO UI LPK has an opportunity to calculate the expenses on the maintenance of the section of the Kapayevskaya trunk road used by the LLC Trailing branch company.
Consequently, the Complex, owning the only trunk road enabling the Applicant to transport the extracted coal, used the opportunity to impose unprofitable contractual terms on its counterparty, both in the time of validity of the contract, and the price of the service. Therefore, during the conclusion of the contract the interests of the LLC Trailing branch were infringed.
The Commission came to the conclusion that the actions of OJSC PO UI LPK contain the elements of a dominance abuse, as OJSC PO UI LPK is an entity occupying a dominant position on the market, which, in keeping with Art. 5 of the RF Law «On Competition and Restriction of Monopolistic Activity on Product Markets,» is prohibited to take actions which result or can result in infringement of the interests of other economic entities, in this case, the infringement of the interests of the LLC Trailing branch company.
On results of consideration of the case on 16.10.2002, the Commission adopted decision No.59 and issued instruction No. 60 to terminate the violations of the antimonopoly legislation.
Essence of the decision: to recognize OJSC PO UI LPK as having violated Art. 5 of the RF Law «On Competition and Restriction of Monopolistic Activity on Product Markets» by including in a contract of terms unprofitable for the counterparty, namely, a demand of advance payment and transportation fee calculated on the basis of the entire volume of cargo transportation by all roads of the Complex, i.e. irrelevant to the subject of the contract and including in the cost of the service of using the Kapayevskaya trunk road the outlays on the maintenance and repair of all roads of the Complex.
Essence of the instruction: OJSC PO UI LPK shall terminate the violation of the antimonopoly legislation by concluding a contract with the LLC Trailing branch to the rendering of the service of passage by the Kapayevskaya trunk road to the cargo transportation volumes formerly agreed with OJSC PO UI LPK and determining the cost of the service on the basis of compensation of costs connected with the operation of the section of the trunk road used by the LLC Trailing branch company, in accordance with normal business practice and regulations of the Russian Federation for establishing the methods of payment for the rendered service.
The decision and instruction were appealed against. The courts at three instances supported the position of the antimonopoly authority and recognized its decision and instruction lawful and reasonable.
Karachaevo-Cherkessia Directorate of the FAS
Problems of Access of Public Energy Companies to the Federal Electric Energy Wholesale Market
1. The Russian Federation legislative authorities have adopted regulations on reforming the electric energy sector, in accordance with which competitive conditions shall be formed in the sphere of electric energy manufacture and sale. The implementation of this task becomes problematic due to strong opposition on the part of administrations of natural monopolies and a lack of approved regulations for allotment of economic entities to the competitive sector.
2. Electric power supply of the public sector and municipal enterprises in the capital city of the Karachaevo-Cherkessian Republic, the city of Cherkessk, is carried out by OJSC Cherkessk City Electric Networks. This company was formed by privatisation of a municipal unitary enterprise and currently has the status of a re-seller of electric energy. Electric energy is supplied to it by RAO UES subsidiary, OJSC Karachaevo-Cherkesskenergo.
On decision of the Russian Federation Federal Energy Commission of 4 December 2002 No. 89-e/b OJSC Cherkessk City Electric Networks was included in the List of commercial organisations - participants of the federal wholesale market of electric energy as of 1 January 2003. In accordance with the established order of entry to the federal wholesale market of electric energy, on 20 January 2003 OJSC Cherkessk City Electric Networks submitted a draft contract to OJSC Karachaevo-Cherkesskenergo on the rendering of electric energy and capacity transmission services over the OJSC Karachaevo-Cherkesskenergo networks. OJSC Karachaevo-Cherkesskenergo for unmotivated reasons declined it and up till now has not concluded the contract.
On the application of OJSC Cherkessk City Electric Networks, the Karachaevo-Cherkesskenergo Territorial Department of the RF MAP (presently the FAS Department for the Karachaevo-Cherkessian Republic) has initiated a case against OJSC Karachaevo-Cherkesskenergo on the elements of a violation of Art. 5 of the RF Law «On Competition and Restriction of Monopolistic Activity on Product Markets» and issued an instruction to terminate the violation of the antimonopoly legislation, manifested in non-conclusion of a contract.
3. The Antimonopoly Department has examined the materials presented by OJSC Cherkessk City Electric Networks (Gorelektroset), specifically, the draft contract on the rendering of electric energy transmission services on the OJSC Karachaevo-Cherkesskenergo networks, and materials of the correspondence. In dealing with the merits of the case the parties were suggested to be guided in all matters by effective law, the Civil Code, RF Governmental Decrees, the Rules of Electric Device Installation, decisions of the Regional Energy Commission, etc. OJSC Gorelektroset obligated timely and complete payment of the regional subscribers' fee for electric energy transmission established for it in keeping with effective law. At the same time, OJSC Gorelektroset has notified the counterparty of its readiness and acceptance of equipment for commercial account of the purchased electric energy.
OJSC Karachaevo-Cherkesskenergo left the request of this organisation unanswered. Upon the expiration of two months, OJSC Gorelektroset applied to the Antimonopoly Department. The instruction of the Antimonopoly Department obliging OJSC Karachaevo-Cherkesskenergo to conclude a contract has not been fulfilled within the prescribed period.
Starting from the moment of appealing against the instruction of the Antimonopoly Department and until obtaining a decision of the last legal instance, OJSC Karachaevo-Cherkesskenergo directed maximum of its effort to extend the time of consideration of the case by each instance. An administrative case was initiated against the offender and a penalty imposed. OJSC Karachaevo-Cherkesskenergo appealed in one of its court claims against the instruction of the Department and the administrative penalty. The court at first instance considered both claims of the applicant during one session. It has become clear during preliminary hearings that the applicant is trying to convince the court of the need to cancel all decisions of the Antimonopoly Department on procedural pretexts (untimely receipt of the instruction, etc.). In order to settle the main task of concluding a contract with the supplier of electric energy, the Department revoked its administrative penalty. The first instance court left in force the decision and instruction of the Department on the considered case. After that, OJSC Karachaevo-Cherkesskenergo was filing petitions and appeals to court on the last day of the appeals, as a result of which the court in the last instance considered the case practically after the expiration of one year (a decision was also passed in favour of the Antimonopoly Department). After all this, arguments were made that since the contract was offered for the period of 2003 and this year has expired, a new contract should be offered, in which court hearings will also be initiated.
4. The principal motive for refusal from concluding a contract by OJSC Karachaevo-Cherkesskenergo at the moment of the court hearings was the unprofitability of transferring of one of the main electric energy consumers to the regime of self-supply of electric energy and the corresponding reduction in profits. In addition, the regulatory authorities have not introduced the tariffs on transmission of electric energy over the OJSC Karachaevo-Cherkesskenergo networks. OJSC Karachaevo-Cherkesskenergo is an economic entity occupying a dominant position on the republican market of electricity supply and is included in the Register of Monopolistic Enterprises. 100% of electric energy consumer in the Karachaevo-Cherkessian Republic is supplied by OJSC Karachaevo-Cherkesskenergo. OJSC Gorelektroset with the status of reseller of electric energy supplies electricity to over 65% of consumers in the republican capital.
OJSC Karachaevo-Cherkesskenergo profits gained as a result of violation of the antimonopoly legislation were to be collected in favour of the federal budget through court procedure on the claim of the antimonopoly authority, in keeping with Art. 23.1 of the RF Law «On Competition and Restriction of Monopolistic Activity on Product Markets.» The amount of profit gained by OJSC Karachaevo-Cherkesskenergo in 2003 as a result of violation of the antimonopoly legislation and unjustified retaining of OJSC Cherkessk City Electric Networks as its direct customer was calculated by the Antimonopoly Department in the absence of tariffs on energy transmission and any approved methodology, on the basis of its own method and exceeded RUR 30 million. However, the legal claim of the Antimonopoly Department on collecting the profit in favour of the federal budget has not been satisfied due to the absence of transmission tariffs. Moreover, the court accepted as the basis the OJSC Karachaevo-Cherkesskenergo calculations made on the basis of the electric energy transmission tariffs for 2004. According to these calculations, the supply of electric energy to OJSC Gorelektroset is unprofitable to OJSC Karachaevo-Cherkesskenergo.
The absurdity of this situation consists of the following. The supplier does not sign the contract and does not allow its consumer to enter the federal wholesale market of electric energy, at the same time trying to prove that electric power supply to this consumer inflicts losses. In any regular situation the supplier would inevitably refuse to sell to such a consumer. In our case, all patterns of electricity supply to potential subscribers of the federal wholesale market of electric energy are being artificially made unprofitable for the latter by the administration of the natural monopolist and the regulatory authorities.
This makes it dubious that the legal acts adopted in 2003 - 2004 to reform the energy supply system have laid effective grounds for shifting this industry towards a competitive economy.
5. The federal regulatory authorities have introduced tariffs on transmission of electric energy via the networks of subsidiaries in such volumes that it is more profitable for the public services enterprises to receive electricity from the traditional supplier rather than from the federal wholesale market of electric energy. In our case, the entry of OJSC Cherkessk City Electric Networks onto the federal wholesale market of electric energy could result in a considerable tariff decrease for the consumers. Favourable decisions were issued by all court instances. However, because of insignificant procedural conditions, not stipulated by legal acts and imposed by RAO UES and its subsidiaries, entry on the wholesale market becomes impossible.
The matter is not so much that the legal acts adopted do not fully reflect the problems of creating genuine competitive sectors. The situation is being steered by the administrations of natural monopolies, which are practically uninterested in the emergence of competitors in the sector of public energy supply. Shocking arithmetic surfaces in mutual relations with potential competitors, introduced by the regulatory authorities, disregarding economics, logic, and any sort of common sense. It is rather difficult to imagine that an independent participant of the wholesale market of electric energy would have to pay over RUR 50 million for the transmission of electricity by the JSC-Energo networks to the total value of RUR 100 million. No sort of magnificent project of electric energy sector reform can overcome such arithmetic. However, it exists in our reality, and it prevented the Antimonopoly Department from punishing the monopolist failing up till now to fulfil the decisions of the court instances in the least amount.
When the seminar was announced we received material on similar cases considered in 2005 by the other antimonopoly departments. We would like to warn our colleagues that in many cases, despite the favourable results of economic entities' entry on the federal wholesale market of electric energy, regulatory authorities can introduce such tariffs on electric energy transmission by the JSC-Energo networks that would bring to naught the entire benefit of public utility and other enterprises entry to the federal wholesale market of electric energy.
In our opinion, it is necessary to improve the legal acts on reforming the electric energy sector, introduce regulations determining the entire cycle of economic entities entry on the federal wholesale market of electric energy, adopt laws and regulations establishing justified tariffs on electric energy transmission by the JSC-Energo networks, and eliminate the requirement of coordinating economic entities' entry on the federal wholesale market of electric energy with RAO UES.
(candidate to participation in the seminar)
Babaev Kair Abutalibovich, PhD (economy),
Deputy Head of the FAS Department
For the Karachaevo-Cherkessian Republic
Krasnodar Directorate of the FAS
Case concerning «Kuban-GSM»
Resume: The main problem for competition was caused by the actions of «Kuban-GSM» that abused its dominant position to limit competition of the mobile communication services market, preventing fair competition between «Mobicom-Caucasus», the Krasnodar branch of «Vimpelcom-Region» and «Kuban-GSM» by limiting the aforesaid operators' access to mobile communications market.
The Directorate was contacted by the Krasnodar region administration in connection with complaints of «Vimpelcom-Region» (Krasnodar branch) and «Mobicom-Caucasus» about «Kuban-GSM» creating barriers for them as mobile communications operators.
The investigation of mobile communications market was conducted for the 9 months of 2002 - to determine the borders of the market (commodity and geographical), the volume of commodity resources and the share of each economic subject in the market.
In 2003 the following operators were active in the Krasnodar region mobile communications market, all licensed by the Ministry for Communication and Information of the Russian Federation to supply mobile radio and telephone communication services: «Mobicom-Caucasus», «Krasnodar mobile communications», «SMARTS», «Telecom Eurasia», «Kuban-GSM», «Vimpelcom-Region» (Krasnodar branch).
These operators of mobile communication services had different zones of coverage: «Mobicom-Caucasus» - territories of the Krasnodar region, Rostov region, Stavropol region, Adyg republic, Karachevo-Cherkessia, Kabardino-Balkaria, Chechen republic, republic of Dagestan, North Osetia; «Krasnodar mobile communications» - territories of the Krasnodar region and Adyg republic; «SMARTS» and «Telecom Eurasia» - territory of the Krasnodar region; «Kuban-GSM» - territory of the Krasnodar region, Adyg republic; with the Krasnodar branch of «Vimpelcom-Region» - territory of the Krasnodar region and Adyg republic.
Despite these differences among the operators' respective the zones of coverage, the geographical borders of the commodity market had been determined in accordance with article 4 of the Regulations for the analysis and estimation of the condition of competition on the commodity markets (taken the specificity of the mobile communications market) within the borders of Krasnodar region. Consumers would purchase the services (in accordance with prior agreement) and pay for those services at the places where they live (as physical persons) or function (as legal persons). This means that consumers in the Krasnodar region are not likely to go to Adyg republic, Stavropol region or Rostov region looking for mobile communication services, since this would mean additional (transportation) expenses and loss of time. This has been proved through interviewing the consumers selectively with the view to determine the commodity and geographical borders of the consumer market as of 09.01. 2004: all the interviewees stated their desire to purchase mobile services from local operators within the territory of Krasnodar region.
Conducting this investigation the Directorate determined the commodity and substitute commodity in question with relevant consideration of their functional equivalence and the consumers' opinion. The commodity was defined as mobile communication service - in accordance with the currently operative All-Russian Classifier of types of economic activities (64.20.11- activities in telephone communications, including mobile telecommunications) established by Gosstandart of the Russian Federation (06.11. 2001, № 454-ст) and backed by the relevant licenses issued by the Ministry of the Russian Federation for communication and information.
The substitute commodity was first defined as the services supplied by local telephone networks. But survey conducted among the population of the city of Krasnodar showed that these services are hardly interchangeable since they have different sets of consumer qualities. Both supply communications but these are mobile, in one case, and stationary, in the other. Transmission and reception of signals, voice information, graphic texts, pictures, sounds and messages of any kind would, in one case, be conducted through a radio system and in the other - by wire (article 2 of the Law of the Russian Federation «On Communications» adopted 07.07. 2003, №126-ФЗ). Difference between in- and out-coming calls was taken into account as well, particularly the fact that local telephone communication can only be used in places where telephones are installed. Using a taxophone may be an option but in this case a consumer has no possibility to receive an in-coming call.
In accordance with the Regulations for the analysis and estimation of the condition of competition on the commodity markets, if the two commodities are not functionally equivalent, it follows that they do not belong to the same commodity market.
It was thus concluded that local telephone services and mobile communications services cannot be considered as substitutes for each other.
According to the information on key economic indices (forms № 8,11) supplied to the Directorate by «Kuban-GSM», the volume of mobile communication services provided by «Kuban-GSM» in the region of its registration in 2002 was 2941365,0 thousand roubles and for the 9 months of 2003 it was 3338593,0 thousand roubles; whereas the volume of mobile communication services for the region on the whole for 2002 was 3449569,3 thousand roubles and for the 9 months of 2003 - 3910971,6 thousand roubles (data of the Krasnodar regional committee for state statistics). The share of «Kuban-GSM» in the Krasnodar regional mobile communications market thus constituted in 2002 85,27% and in the 9 months of 2003 - 85,36%.
This led to define the position of «Kuban-GSM» on the mobile communication market in the geographical borders of the Krasnodar region - as dominant.
The facts of dominance abuse on the part of «Kuban-GSM» were the following.
The commission of the Ministry for Antimonopoly Policy has analyzed the tariff plans of «Kuban-GSM», «Mobicom-Caucasus», Krasnodar affiliate of «Vimpelcom-Region». The operating tariffs of «Kuban-GSM» for out-coming local calls into the fixed communication operator network ranged from 2,40 roubles to 7,20 roubles per minute depending on the time of the day, while with other mobile communication operators in the Krasnodar region tariffs for out-coming calls were undifferentiated - at the rate of 7,20 roubles per minute.
Operators «Mobicom-Caucasus» and «Vimpelcom-region» (Krasnodar branch) have provided differentiated tariffs for out-coming calls from other mobile communication operators and into fixed communication networks: for «Mobicom-Caucasus» - from 1,50 to 7,00 roubles per minute; for Krasnodar branch of «Vimpelcom-Region» - from 0,80 to 4,70 roubles per minute.
The Directorate has analyzed tariffs for analogous services in the Stavropol, Volgograd and Rostov regions. With mobile communication operators in these regions tariffs were differentiated and there was no difference between the tariffs for out-coming calls - those into the networks of other mobile communication operators and those to the fixed communication networks.
It thus appears that a consumer has access to a conveniently differentiated tariff plan and can choose to call the network of another operator at the rate, e.g., of 1,5 - 7, 0 roubles per minute (»Mobicom-Caucasus) or 0,80 - 4, 70 roubles per minute (Krasnodar branch of «Vimpelcom-Region»). A subscriber to «Kuban-GSM» has no such choice and could only contact the networks of other mobile communication operators at the rate of 7, 20 roubles per minute.
An agreement was reached between «Kuban-GSM» and «Mobicom-Caucasus» to bundle channels between their commutation centres and thus to ensure the better coherence of the technological process, to raise the quality of communication, to broaden the range of licensed services offered, to more effectively exchange net resources and provide for inter-network conversational and signal traffic.
«Kuban-GSM» and Krasnodar branch of «Vimpelcom-Region» have reached a similar agreement.
As communication networks of «Kuban-GSM», «Vimpelcom-Region» (Krasnodar branch) and «Mobicom-Caucasus» get integrated, expenses of each of the operators for the organization of out-coming calls to the networks of other mobile communication operators do not exceed those going to fixed communication networks.
«Kuban-GSM», owner of the largest net on the territory of Krasnodar region can influence unilaterally the general conditions of providing services on the regional mobile communications market and thus limit the competitive potential of «Vimpelcom-Region» (Krasnodar branch) and «Mobicom-Caucasus». «Kuban-GSM» would fix the tariff for out-coming calls to other mobile communication networks at the rate of 7, 2 roubles which, under conditions of networks' mutual integration and with tariffs for out-coming calls to fixed networks remaining at the level of 2, 4 - 7, 2 roubles infringes upon the interests of «Mobicom-Caucasus» and «Vimpelcom-region» (Krasnodar branch). «Kuban-GSM» attracts since they can make calls within the network at lower cost, but compromises the services offered by «Mobicom-Caucasus» and «Vimpelcom-region», Krasnodar branch and thus infringes upon their interests.
«Kuban-GSM» abuses its dominating position, limiting competition on the market of mobile communication services violating point 1 article 5 of the law «On Competition»; it limits competition on the market of mobile communication services and does not provide for fair competition among «Kuban-GSM», «Mobicom-Caucasus» and «Vimpelcom-region» (Krasnodar branch) hindering the latter operators' access to the market.
The MAP Krasnodar Territorial Directorate Commission resolved that «Kuban-GSM» actions have been in violation of point 2 Article 5 of the Law on Competition. «Kuban-GSM» was directed to cease the violation of the anti-monopoly legislature and hindrance to other economic subjects' access to the market by removing the barrier erected in the form of undifferentiated tariff for out-coming calls for operators of mobile communication «Mobicom-Caucasus» and «Vimpelcom-Region» (Krasnodar branch).
This resolution and the directions of the MAP Commission were taken to the Arbitrazh Court of the Krasnodar region and by its decision the demands put forward by «Kuban-GSM» were satisfied whereas the resolution and the directions were judged invalid. An appeal was submitted by the Directorate and the appeal instance of the Arbitrazh Court of the Krasnodar region the first instance decision was repealed, the resolution and the directions were confirmed as in full accordance with federal legislature. This decision of the appeal instance was left without change by the Federal Arbitrazh Court of the North-Caucasus territory.
As a result of the measures taken at present in the Krasnodar region the cost of «Kuban-GSM» out-coming calls into other mobile communication operators' networks has been reduced and brought down to the level of out-coming local calls. Conditions have been created for fair competition among mobile communication operators.
Krasnodar Directorate of the FAS
Case concerning the «Post of Russia»
Resume: The main competition-related problem arose from the actions of the Federal State Unitary Enterprise (FSUE) «Post of Russia», constraining the competition in the market of subscription services to disseminate periodical print editions in the Krasnodar region. Regional publishers were offered no other choice but to make contracts with a single subscription agency (Interregional Subscription Agency - ISA) since the possibility of direct subscription contracts with FSUE «Post of Russia» was denied.
The Directorate of the Federal Antimonopoly Service (DFAS) for Krasnodar region was contacted by the regional agency «Komsomolskaya Pravda-Kuban», «Press-Kuban» and publishing house «Krestyanin» with complaints related to the actions of FSUE «Press of Russia» and the subscription for the first half of 2005, - namely, refusal to make direct subscription contracts and enforcing those through ISA. Krasnodar DFAS has started a case dealing with the violation by FSUE «Post of Russia» of clause 1 of article 5 of the Russian Federation Law «On competition and restriction of monopolistic activities at the commodity markets» (Law on Competition).
The Directorate in preparation to dealing with this case conducted an investigation of the market of print editions' subscription and dissemination services in the Krasnodar region.
The commodity was defined as the service of subscription for a periodical edition. Functionally this type of service includes a number of technological operations including acceptance of subscription for a specified number of editions and their delivery, if envisaged by contract. There is no substitute for this commodity.
Services of dissemination of print materials through retail are functionally close, but the technology in this case is different. Dissemination through subscription relies on the organization of sites where subscription is taken, means of transportation, centres of distribution, personnel for delivery to consumers. Dissemination through retail relies only upon the retail sales network plus, in some cases, centres for commodity distribution. When printed matter is disseminated by subscription the publishers can better plan circulation, buy paper and expendable materials well in advance of production when money is available, they can also deliver their products to consumers in the localities where retail network is unavailable. Dissemination through retail has no such advantages.
Therefore the service of dissemination of printed materials by subscription in accordance with point 2 Article 4 of the Law on Competition (On conducting investigation of the competitive environment at the commodity markets) is considered as a commodity in itself.
Geographic borders of the market in question are those of the Krasnodar region where the service needs be provided to consumers (subscribers).
The structure of the market for the dissemination of printed materials by subscription in the Krasnodar region is the following. This service is now being provided on the territory of the region by the affiliate of «Post of Russia» and «Rospechat» of the Krasnodar region.
The total volume of subscription for the second half of 2004 on the territory of Krasnodar region was 219 963,1 thousand roubles, with the share of the «Post of Russia» affiliate equalling 217 928,3 thousand roubles (which is 99,1%) and that of Krasnodar «Rospechat» - 034,8 thousand roubles.»
«Post of Russia» is thus enjoys dominant position on the commodity market for dissemination of print matter through subscription in the Krasnodar region and is subject to all the norms stated in the Law on Competition.
Facts of dominance abuse on the part of «Post of Russia» can be described in the following way.
As shown by the Commission, the «Post of Russia» affiliate has sent out letters to the regional agency «Komsomolskaya Pravda-Kuban», «Press-Kuban», publishing house «Krestyanin» and other regional publishing bodies stating that in accordance with the regulations issued by «Post of Russia,» subscription for the first half of 2005 would be carried out exclusively on the basis of direct contracts between publishing houses and the operator that puts out the Catalogue of Russian Press «Press of Russia», i.e. interregional subscription agency.
An agreement was designed, in accordance with which a publisher would trust ISA to make contracts with a third party in its own name and at the publisher's expense to disseminate subscribed editions on the territory of Krasnodar region in the first half of 2005. In accordance with this agreement ISA has an obligation to make a contract with FSUE «Post of Russia», i.e. in fact, the service would be provided by «Post of Russia».
The fact that the draft of the agreement with ISA for subscription in the first half of 2005 in the Krasnodar region was sent out to the publishers testifies to the fact that «Post of Russia» refuses to offer them direct subscription contracts.
There is one more proof to this fact. Publishing house «Krestyanin» has submitted documents showing that FSUE «Post of Russia» had been offered an agreement for subscription for 2005. At the time the resolution was taken by the Krasnodar FAS Directorate those drafts were still not accepted, no disagreements were stated or discussed, no alternatives were suggested by FSUE «Post of Russia» which proves amply its refusal to conclude any such agreement.
The refusal on the part of «Post of Russia» to extend a direct subscription contract for 2005 and pressure to forward an agreement with ISA violates the publishers' interests in the following ways.
A third party entering the relationship between publishers and «Post of Russia» entails additional expenses on the publishers' part. In accordance with the ISA agreement the order of subscription payments is changed - it is now to be submitted every half year following the subscription campaign instead of in monthly instalments. This is a strain on the publishers' circulating assets and entails financial losses. The agreement does not envisage any fines or sanctions for delayed transference of subscription money by ISA to publishers which may prevent them from meeting their subscribers' expectations. According to the same agreement ISA has the right to change catalogue prices. Their increase may be followed by the fall of subscription and decrease of the income from advertising, largely dependent on the circulation.
FSUE «Post of Russia» refuses the publishers a direct contract imposing upon them the mediation of a single subscription agency (ISA) and it is thus is abusing its domination. According to the agreement proposed to the publishers subscription sums must be transferred to ISA which would be thus getting additional assets even though both, FSUE «Post of Russia» and ISA, function as co-founders of the subscription catalogue of Russian press «Post of Russia».
The actions of FSUE «Post of Russia» were qualified by the Commission of the Krasnodar FAS Directorate as violating point 1 article 5 of the Law on Competition. FSUE «Post of Russia» was directed to cease the violation of the antimonopoly legislature and make contracts with publishers about dissemination of print editions on the territory of Krasnodar region through subscription.
This resolution and directions of the Krasnodar FAS Directorate were taken to the arbitrazh court of the Krasnodar region. The main arguments put forward by FSUE «Post of Russia» were the following: FSUE «Post of Russia» dominates on the Krasnodar regional market of subscription services for periodical print editions; the agreement on subscription services for periodical print editions cannot be qualified as public and therefore according to article 426 of the Russian Federation Civil Code is not obligatory for conclusion; dissemination of periodical editions through subscription is not a post service.
The Arbitrazh Court of Krasnodar region refused to satisfy the demands of FSUE «Press of Russia» and recognized the resolution and the directions of the Krasnodar FAS Directorate as lawful and justified. The appeal instance of the Arbitrazh Court of Krasnodar resolved to leave the first instance decision unchanged. The Federal Arbitrazh Court of the North-Caucasus territory annulled this decision of the Krasnodar Arbitrazh Court, the case has been sent to the first instance for new consideration.
Kursk Regional Directorate of the FAS
Case of violation of Article 6 of the Russian Federation Law «On Competition…» by ZAO «LVZ Kursky» and OOO «KurIASEB», OOO «TD Vneshtorgservice», OOO «TC Sodruzhestvo», OOO «Limas»
1. Vertical agreements concluded between business entities placed at different levels of production and sales of products involve the decline of market functioning efficiency reducing competitiveness of entities not participating in the agreement and limiting the unanimity of economic space of the Russian Federation.
2. An application regarding non-compliance with a number of provisions of distribution agreements concluded by ZAO «LVZ Kursky» (further, «Kursky») with business entities operating excise warehouses (OOO «KurIASEB», OOO «TD Vneshtorgservice», OOO «TC Sodruzhestvo», OOO «Limas» - further -business entities) with the norms of the acting Law was sent to the Kursk region FAS directorate form Police department #1 of the Interior Ministry Department of Kursk town.. The actions of the mentioned business entities were qualified by the Kursk region Directorate of the Federal Antimonopoly Service according to the Article 6 of the Law of the Russian Federation «On Competition and Restriction of Competition on Product Markets» as a conclusion of agreement by non competing business entities which may have as result a restriction of competition (limitation of access of several suppliers to the Kursk regional market of alcoholic beverages).
3. During the investigation of the case initiated according to indications of violation of the Article 6 of the Russian law «On Competition…» the regional directorate collected necessary information from the Interior Ministry Department of Kursk town, Tax Service Department of the Kursk region, Kursk Region Committee of State Statistics, ZAO «LVZ Kursky» and OOO «KurIASEB», OOO «TD Vneshtorgservice», OOO «TC Sodruzhestvo», OOO «Limas». The directorate's own database was also used.
4. In the course of investigation FAS directorate of the Kursk region analyzed the market for the production of vodka and other liquor production market as well as the market for the storage, distribution and production of alcoholic beverages by wholesale (excise) warehouses. The geographical boundaries of the studied markets were defined as the territory of Kursk region.
«Kursky» occupies a dominant position on the market for the production of vodka and other alcoholic beverages in the Kursk region. It has been included in the «register of business entities with a market share of more than 35%» by an administrative order of the Kursk region FAS directorate of 26.06.96 # 32. «Kursky's» share on the market of vodka and other strong alcoholic beverages was 45,3% in the period analyzed.
According to the analysis results, the share of OOO»TC Sodruzhstvo», OOO «Limas», OOO «TD Vneshtorgservice» and OOO «Kuriaseb» on the market of sales of vodka and other strong alcoholic beverages by wholesale organisations having a license to set up excise warehouses was 58,7%.
«Kursky» and the business entities licensed to set up excise warehouses have signed distribution contracts. These contracts limit the volume of alcoholic beverages of a quality and pricing equal to products by «Kursky» (i.e. competing with «Kursky's» products) which a distributor may distribute through its excise warehouse over defined time and territories. These contracts also contain a list of producers and prohibit the distributors to sell alcoholic beverages produced by any other producers not on the list.
The limits contained in the agreement can have the result of limitation (restriction) of access to the market of Kursk region by other producers, thus restricting competition. Moreover, the agreement by the parties of the distribution contract on the prices at which «Kursky's» alcoholic beverages may be sold to third parties, and also on the volumes of sales, can depress the intra-brand competition among distributors of «Kursky's» products.
5. The commission of the Kursk region FAS directorate concluded that a number of provisions of distribution contracts signed between ZAO «LVZ Kursky» and business entities contradict requirements of the Article 6 of the Law «On competition….». The parties of the contracts were given orders to alter the contracts' terms or to cancel them.
The orders have been fulfilled in due time.
Lipetsk Regional Directorate of the FAS
Description of Case Initiated and Considered According to Article 6 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets»
Summary: The Monopolistic activity in the form of coordinated actions of business entities acting on a single product market, which causes the setting (upkeep) of prices of alcoholic beverages and restriction of access to the market for other business entities as purchasers or sellers.
Description of the case
The Lipetsk territorial directorate of FAS of Russia, in accordance with the claim of OAO «Lipetskaya konstruktsya,» in August 2003 initiated a case on the violation of clause 1 of Article 6 of the Russian Federation law «On competition….» by OOO «Lipetsk-Alko» and Federal State Unitary Enterprise (FSUE) «Rosspirtprom» represented by its branch «Lipetskspirtprom» (further - Branch) in the form of co-ordinated actions by business entities acting on a single product market, which causes the setting (upkeep) of prices of alcoholic beverages and restriction of access to the market of other business entities as purchasers or sellers of alcoholic beverages (excise warehouses).
FSUE «Rosspirtprom» was set up in accordance with the Act of the Government of the Russian Federation #390 of 06.05.2000, Decision of the Government of the Russian Federation#1471-P of 17.10.2000 and functions according to the Statute of FSUE «Rosspirtprom». The branch of FSUE «Rosspirtprom», «Lipetskspirtprom» acts according to the Statute of the Branch endorsed by the general director of FSUE «Rosspirtprom» on 24.07.2001 and agreed with the Registration Chamber of the city of Lipetsk administration on 31.07.2001. The mail goal of the Branch's activities is to gain profit from the production and sales of alcoholic beverages.
An analysis of the alcoholic beverages' production market conducted in 2002 showed that the Branch occupies a dominant position on the market of production of alcoholic beverages with a proof of more than 25%. Its share on this market in the Lipetsk region exceeds 56,4%.
According to Articles 196, 197 of the Tax Code of the Russian Federation, storage, transport and delivery (transfer) to purchasers or a structural part of a taxpayer involved in retail trade of alcoholic beverages with proof of more than 9% produced on the territory of Russia is conducted in conformity with conditions of a tax warehouse regime.
Data of the Consumer Market department of the Lipetsk regional administration show that there were eight excise warehouses in Lipetsk region in 2003: OOO «Lipetsk-Alko», OOO «Prodsoyuz», OOO «TD Rosinka», OOO «Soyuzopttorg», OOO «TD Vinard-Lipetsk», OOO «Muskat-Plus», OAO «Lipetskaya konstruktsya», OAO «Lipetskoblsnab».
More than 99% of the Branch's production of alcoholic beverages with proof over 25% in the first half of 2003 was sold by OOO «Lipetsk-Alko». Other excise warehouses do not sell these Branch products.
This situation resulted from the following.
FSUE «Rosspirtprom» represented by its branch «Lipetskspirtprom» and «Lipetsk-Alko» signed the Contract for alcoholic beverages' delivery #250 of 22.10.2002. Under Agreement #250/1 of 04.01.2003 the parties agree that all alcoholic beverages are sold at a specially set discount to list prices.
To show that it also offered its products to other excise warehouses, the Branch submitted its' letters to excise warehouses and wholesale organisations (of 08.05.2003 ## 473-489) containing conditions for distributing Branch's products according to an attached price list. The price list was valid from 08.05.2003 through 20.07.2003. At the same time, the price list quoted the prices at which «Lipetsk-Alko» was selling those products to excise warehouses, other wholesalers, and to retail customers. Moreover, the Branch required 100% advance payment and of a minimum lot of 1000 decilitres.
As the warehouses explained, the mentioned conditions were a priori unacceptable and contradicted business traditions developed on the market of alcoholic beverages of the Lipetsk region.
In addition, despite the inclusion of the advance payment and the minimum lot size requirements in the Contract #250 between the Branch and «Lipetsk-Alko», an analysis of books of sales and purchases, books of invoices and acts of verification of mutual settlements between the entities gives enough grounds to insist that these conditions were not observed. According to acts of verification of settlements between the Branch and «Lipetsk-Alko» provided in paragraph 3.6 of sales contract #250, the arrears of «Lipetsk-Alko» before the Branch for the delivered products were more than 28 million roubles.
Therefore the Branch and «Lipetsk-Alko» quoting identical prices of alcoholic beverages in their price lists conduct coordinated activities geared to maintain the prices of alcoholic beverages produced by the Branch. The coordinated actions to impose contract conditions of alcoholic beverages' sales contracts on terms of payments and minimum lots contradicting business traditions and not observed by the Branch and «Lipetsk-Alko» themselves, are aimed at the restriction of market access for other business entities as purchasers of alcoholic beverages (excise warehouses).
The revealed circumstances testify to the fact of violation of paragraph 1 of the Article 6 of the RSFSR Law «On competition and restriction of monopolistic activity on product markets». Business entities acting on a single product market are prohibited to conduct coordinated actions resulting in setting (upkeep) of prices of alcoholic beverages and restricting market access for other business entities being either purchasers or sellers.
The commission of FAS territorial directorate by its decision of 28.07.03 has admitted the fact of coordinated actions, their deliberateness and aim to restrict competition. A decision to issue a warrant on the termination of antimonopoly law violation has been issued.
The commission's decision has been appealed in the Arbitrazh Court of the Lipetsk region.
The court hearings were rescheduled several times. The court has defined that the dissemination of price lists (with identical conditions regarding prices, lots and payments for alcoholic beverages) to excise warehouses of the region could not be considered of coordinated actions on the alcoholic beverages' market.
Excise warehouses and the Department of Consumer Market of the Lipetsk region were involved in the case as third parties. The Branch and «Lipetsk-Alko», dragging their feet on the judicial procedure, filed a request for conducting an economic evaluation to define the losses incurred by the excise warehouses when selling alcoholic beverages produced by the Branch at the proposed prices and a claim on suspension of the decision and the warrant of the antimonopoly body aimed at property interests' protection. The request on the injunctive relief was satisfied by the court.
The court proposed to entities participating in the case to consider the mentioned issue in spite of the antimonopoly body's statement that the submitted materials on the antimonopoly case permit it to conclude that the applicants conducting coordinated actions had a capacity to influence conditions of turnover on the market of production and sales of alcoholic beverages produced by the Branch.
The third parties supported the legitimacy and validity of the decision and the warrant of the antimonopoly body and have not supported the claim on the necessity to conduct the economic evaluation. However, the said issue was considered by the court at several hearings.
Since it was impossible to choose appropriate experts to conduct the economic evaluation, several times the court proposed an amicable solution. Having made steps to reconcile the parties, the court on 1 June 2004 issued a Ruling obliging the Branch and excise warehouses of the region to agree on conditions of contracts for the supply of alcoholic beverages in the period from 14 to 18 June.
In the framework of the enforcement of the mentioned Ruling the FAS territorial directorate analyzed the developments on the market of production and sales of alcoholic beverages with proof of more 25 % during five months of 2004. The analysis revealed that, besides «Lipetsk-Alko» six more business entities functioned as excise warehouses in Lipetsk region. In 2004 the Branch «Lipetskspirtprom» renewed the supply contract with «Lipetsk-Alko». Contracts on deliveries of alcoholic beverages were also signed on mutually acceptable conditions with excise warehouses OOO «Ptrodsojuz», OOO «Muskat +», OAO «Lipetskoblsnab». The antimonopoly body concluded that the main goal defined by the decision and the warrant had been attained.
As a result, FSUE «Rosspirtprom» represented by the Branch «Lipetskspirtprom» and «Lipetsk-Alko» have declared that they withdrew their claims and the request to conduct the economic evaluation.
Having studied the materials of the case and the evidence submitted, the Arbitrazh Court of the Lipetsk region on 24.06.2004 issued a Ruling on the termination of case proceedings.
Head of Unit of Supervisionand Control of Observance ofthe Competition Law on Product Marketsand Financial Services' Markets - L.A. Cherkashina
Moscow Regional Directorate of the FAS
Description of Case № 07-28/2004 involving OAO «Mosenergo»
Abuse of dominant position on product markets by business entities as a form of monopolistic activities is the most typical and common violation of antimonopoly Law. The major part of dominant position abuses in the Moscow region are generated by business entities that are part of natural monopolies. A typical violation by dominant enterprises is a denial to sign contracts as a tool to make a new owner pay for the previous owners' debts relevant to resources consumed.
One can consider a case pertaining to OAO «Mosenergo» as an example of control and supervision of antimonopoly law observance.
A claim regarding the actions of «Mosenergo» refusing to sign a contract for electric power supply with OOO «NFT» was sent to the Directorate from the Naro-Fominsk City prosecutor's office.
The claim of the business entity says that «NFT» is an owner of a property complex with the address: Moscow region, Naro-Fominsk, Svobody square, 2, which was acquired from ZAO «Narfomtextil» according to purchase and sale contract at a bidding session performed in the framework of bankruptcy proceedings. The complex is not a legal successor of «Narfomtextil» and is not responsible for its liabilities to its creditors.
At the beginning of the bankruptcy proceedings «Narfomtextil» had an outstanding debt to «Mosenergo» in the sum of 6 420 234,33 roubles (as of 10.12.2004) which was included in the list of creditors' claims according to the decision of the Moscow Region Arbitrazh Court of 25.06.2004. The bankruptcy proceeding procedure has been accomplished according to the definition of the Moscow Region Arbitration Court of 10.12.2004, and the mentioned legal entity was liquidated by its exclusion from the Integrated State Register of Legal Entities.
«NFT» requested «Mosenergo» to provide them with a list of documents necessary to sign a power supply contract for 2004. OAO «Mosenergo» did not reply.
In May 2004 «NFT» approached «Mosenergo» regarding the power supply contract. According to the explanations of «NFT's» representative, before a contract can be signed both a permission to connect facilities and an act of delimitation of property (both issued by a network branch of «Mosenergo») need to be submitted to «Mosenergo.» This information is confirmed by the order of «Mosenergo» № 577 of 24.12.2001 «On the list of documents required for the power supply contract».
In May 2004 «NFT» submitted all necessary documents for the power supply contract. However, the documents were not examined by «Mosenergo» and «NFT» could not sign the power supply contract.
In the opinion of the «NFT» representatives, the denial to sign the power supply contract by «Mosenergo» is verbally explained by the fact that «NFT» has not submitted a certificate confirming the absence of arrears of «NFT» vis a vis «Mosenergo».
According to documents submitted to Moscow Federal Antimonopoly Service Directorate, «NFT» has approached branches of «Mosenergo» several times requesting them to issue to «NFT» a certificate confirming the absence of current arrears vis a vis «Mosenergo» necessary to connect facilities and to sign the power supply contract.
Based on documents submitted by «NFT» the Directorate determined that in the period from 27.01.2004 through 10.06.2004 «NFT» paid to «Mosenergo» a current debt of «Narfomtextil» (in the sum of 6 420 234,33 roubles) of the power supplied and has made current payments in the sum exceeding 11 000 000 roubles (a certificate on the absence of arrears of «NFT» vis a vis «Mosenergo» was issued to «NFT» on 27.10.2004).
On 22 September 2004 «Mosenergo» sent to «NFT» a warning on the cut of power supply related to the liquidation of «Narfomtextil» according to the arbitration court definition and in connection with the arrears in power supply payments. On 23 September the power supplies to «NFT» were cut.
As a result of «Mosenergo's» actions, a production process was stopped, the enterprise suffered losses, a number of tenants of «NFT» were left without power supply. In addition, since «Mosenergo» cut power supplies to «NFT» just before the heating season (01.10.2004), municipal housing facilities (two municipal apartment houses) and social facilities, primarily an orphanage for underaged «Nadezhda», were threatened with the cut-off of their heating and hot water supply.
On 15.10.2004 «NFT» sent to a branch of «Mosenergo» an offer with an annexed draft of the power supply contract signed by «NFT».
On 28.10.2004 «NFT» sent to the Western sales branch of «Mosenergo» a notification on the draft legal act necessary to restore the power supply and to pay for electricity actually consumed. The act has a purpose to provide temporary power supplies to the enterprise before the principal contract is signed, and to effectuate payments for currently consumed electricity.
On 04.11.2004 «NFT» applied to the Connection and Consumer Relations Department of «Mosenergo» with the request to increase the permitted watts consumption of «NFT» as a new owner of the property complex up to 13 700 kW.
«Mosenergo» did not consider «NFT's» requests, letters and applications. «Mosenergo» has not submitted evidence that «NFT's» applications regarding the power supply contract were considered.
Having examined the mentioned application and the submitted materials, the Unit of Control and Supervision of Antimonopoly Law Observation by Business Entities has stated that actions of «Mosenergo» contain an evidence of violation of clause 1, Article 5 of the RSFSR Law «On Competition and Limitation of Monopolistic Activities on Product Markets», notably a derogation of interests of «NFT» in the form of denial to sign the power supply contract.
In the period of consideration of the application of «NFT», «Mosenergo» occupied a dominant position on the market of power and heat supply services for the connected networks of business entities and was included in the regional section of the Register of Business Entities Occupying a Market Share of more than 35%.
Basing on the information mentioned above, the Commission of the Moscow Directorate of Antimonopoly Service has concluded that the actions of «Mosenergo» contain violations of clause 1, Article 5 of the RSFSR Law «On Competition and Limitation of Monopolistic Activities on Product Markets» by a business entity (Mosenergo), meaning the abuse of dominant market position in the form of a derogation of interests of another business entity by denying to sign a power supply contract with customers (»NFT») in the circumstances of the supply availability.
The Commission of the Moscow Directorate of Antimonopoly Service has admitted that «Mosenergo» violated clause 1, Article 5 of the RSFSR Law «On Competition and Limitation of Monopolistic Activities on Product Markets» and issued an order to «Mosenergo» to terminate the violation.
«Mosenergo» was ordered to:
- terminate the violations of clause 1, Article 5 of the RSFSR Law «On Competition and Limitation of Monopolistic Activities on Product Markets» by a business entity (Mosenergo), meaning the abuse of dominant market position in the form of derogation of interests of another business entity by groundlessly denying to sign a power supply contract with customers (»NFT») in the conditions of supply availability:
- agree on the act of property delimitation and exploitation responsibility of power facilities between «Mosenergo» and «NFT»; to issue to «NFT» a permission to connect its facilities to the grid of «Mosenergo» at the availability of power supply;
- sign a contract with «NFT» on the supply of power to facilities belonging to «NFT».
Fulfilling the order on the termination of the antimonopoly Law violation of 14.12.2004 issued by the Commission of the Moscow Directorate of Antimonopoly Service of Russia, «Mosenergo» has submitted to the Directorate documents confirming the fulfilment of the said order.
According to the submitted information, «Mosenergo» sent to «NFT» an act on the delimitation of property, the contract on temporary power supply, the permission to use power of 600 kW for the supply of a boiler house.
The mentioned power was agreed upon with the business entity since «Mosenergo» lacks the technical capacity to connect «NFT» to the requested power source of 13 700 kW. This is backed by appropriate documents.
The order of the Moscow and Moscow Region Directorate of Antimonopoly Service has been fulfilled by «Mosenergo» and was not appealed in court. The conflict situation has been resolved.
North Osetian Regional Directorate of the FAS
Case Involving «Alaniaregiongas» and Zildincky Brick Factory
Case Summary
The main problem in competition, which exists within the framework of the described case, is an unjustified limitation of contract volumes of product deliveries by business entities occupying dominant market positions in order to gain additional income by applying multiplying ratios to product prices in case of additional consumption of the product without an agreement with the supplier, which leads to the derogation of interests of business entities.
Zildincky brick factory addressed the North Osetian FAS Directorate with a claim about violations of the antimonopoly law and a request to sanction OOO «Alaniaregiongas». The claim mentions actions of «Alaniaregiongas» by which «Alaniaregiongas» avoids signing a contract to deliver natural gas in 2005 in the required volumes.
To support its claim, the applicant refers to the following circumstances. The applicant sent in a request for gas deliveries in 2005 (sent to «Alaniaregiongas» on 19.08.2004 with the registration number 113). The request was for a total of 5.8 million cubic meters (m3), of which 1.5 million m3 in the first quarter, 1.4 million m3 in the second quarter, 1.4 million m3in the third quarter, 1.5 million m3 in the fourth quarter. The factory has a continuous production process. Therefore, the gas is consumed evenly over the course of a year. «Alaniaregiongas» included the following delivery volumes in its contract: total of 2406 m3, with 100, 46, 73 and 63 m3 delivered in each quarter respectively. The volumes cannot meet the needs of the applicant, all the more so at such quarterly breakdown. A similar situation took place in the preceding years: Since 2002, «Alaniaregiongas» has not included in the draft delivery contracts the volumes requested by Zildinsky brick factory.
At the Commission meeting, a representative of Zildinsky brick factory supported the arguments of the claim and explained that the diminishing of contract volumes of gas by the company «Alaniaregiongas» has a character of deliberate actions. In recent years Zildinsky brick factory's requests were not fully satisfied and «Alaniaregiongas» provided no explanations. At the same time the enterprise consumed gas in volumes comparable to the ones requested and necessary to maintain the uninterrupted production process. However, according to paragraph 17 of the Rules of Gas Deliveries in the Russian Federation, «Alaniaregiongas» has a right to apply multiplying ratios [to the price] - from 15 April through 15 September -1,1; from 16 September through 14 April - 1,5. «Alaniaregiongas» annually decreases the contract volumes of gas deliveries to Zildinsky brick factory in order to gain additional income. The representative is confident that the regular understatement of the gas delivery volumes is being made with the purpose to get an additional income. There are no other suppliers.
A representative of «Alaniaregiongas» voiced his disagreement with the applicant's statements. «Alaniaregiongas's» request for gas for 2005 sent to OOO «Mezhregiongas» was not satisfied in full. Therefore «Alaniaregiongas» was forced to curtail actual deliveries below its consumers' requests. It had to limit gas deliveries to its clients in 2005 to the volumes defined in Contract № k-5-39-0111/05 signed with «Mezhregiongas». According to the annual gas delivery contracts between «Mezhregiongas» and «Alaniaregiongas», the latter also has to pay marked-up prices (with multiplying ratios) for gas received excess to the contracted volumes.
The commission requested «Alaniaregiongas» to provide information on the reasons for changes in the annual and quarterly gas delivery volumes indicated in the request of Zildinsky brick factory, on the measures taken by «Alaniaregiongas» to fully satisfy the request, and on the payments by «Alaniaregiongas» to «Mezhregiongas» at marked-up prices. The representative of «Alaniaregiongas» explained the cuts in the annual gas deliveries by the fact that «Mezhregiongas» did not satisfy the requests of «Alaniaregiongas». Therefore «Alaniaregiongas» was forced to limit gas deliveries to its clients in 2005 down to volumes defined in Contract № k-5-39-0111/05 signed with «Mezhregiongas». The representative of the defendant has no information on its actual payments to «Mezhregiongas» at marked-up prices, presuming that the creditor (»Mezhregiongas») has a right to request the mentioned payments from «Alaniaregiongas» within the length of time allowed for filling a claim. Explanations on the changes in quarterly delivery volumes were not submitted.
Having examined the materials of the case, the Commission has come to the following conclusions.
«Alaniaregiongas» was founded in order to assure steady gas deliveries to consumers of Alania republic and was included in the list of business entities of Alania occupying a share of more than 35% on a single product market (actual share on the market of natural gas sales is 65%). Having a demand of 5.8 million m3 of gas in 2005, Zildinsky brick factory has indicated this volume in the request sent, on time, to «Alaniaregiongas». According to permission to use natural gas (letter of Gosplan of the USSR of 27.09.1984 3 13/93-2829) Zildinsky brick factory was authorised to consume 12.317 million m3 of gas annually. Therefore the applicant has a permission to use the requested quantity of gas (5.8 million m3). Having indicated in a draft delivery contract of 16 December 2004 a volume of 2406 cubic meters and having declined the protocol of discordances, «Alaniaregiongas» has rejected the request of Zildincky brick factory to deliver gas in the required quantities without any explanations.
The Commission considers the arguments of «Alaniaregiongas» regarding the deliveries of insufficient volumes of gas (1750,261 million cubic meters were requested while 1409,3 million cubic meters were delivered) and the inability to fulfil the needs of Zildinsky brick factory in natural gas to be unjustified because of the following. During preceding years (2002 - 2005) the requests of Zildinsky brick factory also were not completely fulfilled. Zildinsky brick actually consumed gas in quantities close to the ones indicated in the requests for the respective years. The Commission believes that having been able to deliver the product - natural gas in quantities exceeding the ones stipulated in the 2002-2004 contracts - «Alaniaregiongas» has a capacity to sign a contract with Zildinsky brick factory for 2005 for the full requested volume of gas deliveries. Being a commercial entity «Alaniaregiongas» taking into account the goals of its activity (provision of a steady gas supply to customers of Alania and the generation of profit) is obliged to take steps to increase the volume of gas sales. In spite of this «Alaniaregiongas» did not make effort to look for additional sources of gas supply. The mentioned inactivity of «Alaniaregiongas» can result in the application of multiplying ratios to gas prices consumed by Zildinsky brick factory with regard to the integrity of production process and steady consumption of necessary gas volumes. This in turn can lead to losses suffered by Zildinsky brick factory. In accordance with Article 26 of the Federal Law «On Gas Supply», it is prohibited to unreasonably refuse to sign supply contracts with individual consumers if the required gas resources and transportation capacities are available. «Alaniaregiongas» disposes of natural gas acquired according to Contract № k-5-39-0111 signed with «Mezhregiongas» for a volume of 1409,3 million cubic meters of which 388,741 million cubic meters are available for deliveries to industrial consumers (paragraph 1.1 of the Contract). This volume considerably exceeds the needs of Zildinsky brick factory (5.8 million cubic meters).
Therefore, the limitation of gas delivery volumes by 2,4 times is not grounded and contradicts the requirements of clause 1 of Article 5 of the Law of the Russian Federation «On Competition….».
In connection of the indicated fact, the Commission of North Osetian Directorate of FAS of Russia has decided to issue a warrant on the termination of the antimonopoly Law violations to OOO «Alaniaregiongas».
St. Petersburg Directorate of the FAS
Description of a Case of Possible Abuse of a Dominant Position on the Market of Services of Localisation, Collection and Utilisation of Petrochemicals
The St. Petersburg Directorate of the Federal Antimonopoly Service of Russia has received an appeal from the public joint stock company OOO «Elien» which, as one of its business activities, transports passengers by sea and river vessels. The appeal was generated by the unreasonably high prices charged by the state unitary enterprise GUP «Pilarn» for its services of prevention and liquidation of hazardous oil spills. In addition, the rates are differentiated depending on the customer's pattern of ownership: The prices are overrated for enterprises of a private property form against rates quoted for state enterprises.
In the process of the case consideration it was found that on 07 July 2004 at about 20.00 a vessel «Elien-Maria» belonging to OOO «Elien» and moored at a pier in the water area of St Petersburg yacht club of trade unions. Responding to a call from the regional unit of the Ministry of Emergency Situations (MES) of Russia at about 23.00, representatives of GUP «Pilarn» arrived and began the work of localisation and collection of petrochemicals. On the termination of work, OOO «Elien» was offered a contract on service provision. The rates of the services provided annexed to the contract depended solely on the form of legal entity's incorporation of a customer of such services.
Market definition
The materials submitted by the North-West regional centre of the MES of Russia indicate that according to an operational plan of hazardous spills of petrochemicals liquidation in the aquatic zone of St Petersburg for 2002 - 2006 (further - HSPL plan) endorsed by a vice Governor of St Petersburg, GUP «Pilarn» conducts work on localisation and collection of petrochemicals in a navigable part of the water zone of St Petersburg rivers (rivers Neva, Big and Small Neva, Big, Medium and Small Nevka).
Other organisations are not authorised to conduct emergency work in the designated water zone since, according to the results of an annual tender, the Committee for the Use of Natural Resources and Ecological Security of the Government of St Petersburg has signed the government contract for the mentioned work in the designated water zone exclusively with «PILARN».
In accordance with conditions of the contract, «PILARN» commits to work on the liquidation of petrochemicals spills and cleaning of a part of the city's aquatic zone (rivers Neva, Big and Small Neva, Big, Medium and Small Nevka) and getting in return funding from St Petersburg's budget.
«Pilarn» according to specific features of government regulation of activities of ecological emergency services is considered to be a dominant business entity on the market of the services of localisation, collection and utilisation of petrochemicals within the boundaries of the indicated part of the St Petersburg's rivers' aquatic zone with the market share of 100%.
It is necessary to note that any organisation irrespective of property form and meeting certain qualifications (possession of licenses, certificates of conformity, vessels of specific capacity and category, etc.) can participate in a tender.
Therefore the barriers to the access to market of services of localisation, collection and utilisation of petrochemicals are primarily those attributable to legally-established limitations in the form of licensing and certification. In addition, if activities on a definite segment of this market are budget funded, the tender itself serves as an additional barrier.
The Commission of the St Petersburg FAS Directorate has determined that rates calculated and endorsed by the State Maritime Rescue Service were applied to the settlement with «Elien». For private companies they were: 2000 USD for oil spill collectors and 7000 for a purifying vessel. At the same time rates quoted to state owned organisations were respectively 20704,6 and 25780,1 roubles.
The following arguments were submitted by «Pilarn» to explain the introduction of differentiated rates: the base rate was calculated by the State University of Water Transportation at the request of «Pilarn». The application of such rates while working with the state-owned organisations were explained by the fact they did not have to bear the burden of expenses of «Pilarn's» development.
According to the opinion of «Pilarn», the application of rates calculated by the State Maritime Rescue Service while working with commercial organisations is justified since these rates were calculated basing on the international experience and on the «Manual on Co-operation in Fighting Sea Environment Pollution» (Helsinki Commission «HELCOM»). The rates take into account daily costs of using technical means with the respect of the length of rescue oil collection vessels and auxiliary equipment.
It is necessary to note that price rates for work and services in localisation , collection and utilisation of petrochemicals are not subject to government regulation in accordance with the Act of the Government of the Russian Federation of 7 March 1995 № 239 «On the Measures of Streamlining of Government Regulation of Prices (Tariffs)».
The use by «Pilarn» of rates of services developed by the State Maritime Rescue Service in relations with commercial organisations is not prescribed or required by any normative or recommendation documents since this enterprise is not a part of the State Maritime Rescue Service of Russia and is the own choice of «Pilarn».
«Pilarn» uses, at its own initiative, rates for both state-owned and private organisations which are not based on actual costs.
Charging different rates on the basis of the form of property puts private business entities in a position unequal to this of state owned entities.
The abuse by «Pilarn» of the dominant position on the market of work and services in localisation, collection and utilisation of petrochemicals can have as a consequence a restriction of competition on the market of passenger transportation by river and maritime vessels where the applicant acts.
Problems
1. One of the problems which arose in the course of the case consideration was a definition of the product market. On one the state defining work and services in localisation , collection and utilisation of petrochemicals as a government procurement operation funds this work from the budget and therefore such service has to be free for a direct consumer. In this case such a service cannot be considered as a merchandise. The case is currently in the stage of consideration. It is necessary before making decision to clarify what volume of services the dominating business entity «Pilarn» provide in the framework of government procurement contracts without collecting payments for market participants responsible or not responsible for casualties. Where does the market relation really begin…?
2. The definition of types and nature of payments collected from accident participants (payments for services, fees for environment pollution).
The representative of the St Petersburg FAS Directorate for the participation in the seminar:
Irina Petrovna Sokolova, Deputy Head, Ph.D., Tel. 315 40 52
Contact phone: 571 79 16 M.I. Kondratenko
Samara Directorate of the FAS
Case Description: JSC Samara City Electric Networks and JSC SaMMer
1. During the conclusion of a contract on supply of electric energy in previously agreed volumes to JSC SaMMer occupying the premises the energy receiving devices of which have already been connected to the networks of JSC Samara City Electric Networks, the latter has unlawfully issued technical specifications for connecting the capacities to an operating transformer plant.
2. The Samara Department of the Russian FAS was addressed with an application against the actions of JSC Samara City Electric Networks (hereinafter - JSC SCEN) by JSC SaMMer.
According to the JSC SaMMer application, for purposes of concluding contracts on electric power supply to its shops at the addresses: Samara, 201, Novo-Vokzalnaya St., «Volgar» shop, and Samara, 33, Novo-Sadovaya St., «Beryozka» shop, JSC SCEN has issued technical specifications (No. 4956 of 10.08.2004 and No. 1845 of 09.04.2004, respectively) for connecting capacities to operating transformer plants containing requirements irrelevant to the subject of the contract and unnecessary for supplying the shops with electric energy.
The application contained the elements of a violation of Art. 5 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» prohibiting the actions of a dominant economic entity which result or can result in the infringement of the interests of other economic entities, including unjustified demands of transfer of financial assets or other property.
3. A case was initiated on the basis of the application concerning the elements of a violation of Art. 5 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets,» the necessary evidence and explanations were requested.
The Samara Technological and Ecological Monitoring Department was attracted to participate in the case for giving an expert opinion on the lawfulness of issuance of technical specifications to JSC SaMMer for connecting capacities to an operating transformer plant for supplying electric energy to facilities already connected to a transformer plant.
4. The investigation revealed the following:
Electric power supply of the «Volgar» and «Beryozka» shops has been provided since 1978, but JSC SCEN and JSC SaMMer did not have a contract on electric power supply of these facilities.
A contract on electric power supply has been concluded with another economic entity, to which JSC SaMMer is a successor.
In 2004, JSC SaMMer applied to JSC SCEN for conclusion of a contract on electric energy supply to its shops.
JSC SCEN issued technical specifications (No. 4956 of 10.08.2004 and No. 1845 of 09.04.2004, respectively) for connecting capacities to operating transformer plants.
According to the technical specifications issued to the «Volgar» shop, JSC SaMMer should have installed a 630 kWA - 6.3/0.4 kW transformer in transformer plant 6425 and supplied electric energy to the shop from this transformer plant according to the existing scheme. In addition, both technical specifications contain a requirement of conducting repair of the distribution stations 608 and 147 construction parts on the basis of a repair list, which includes: painting the entrance doors, gates, air diffusers, restoring plasterwork inside the building, etc.
In the applicant's opinion, JSC SCEN requirements of installing a transformer are unreasonable, as the shop is not a newly connected facility, and all the necessary technical requirements of its connection to the JSC SCEN networks have already been fulfilled earlier, while the requirements of repair of the buildings are irrelevant to the subject of the concluded contract on electric energy supply, therefore the demand of their fulfilment contradicts the antimonopoly legislation.
According to the JSC SCEN explanation, in keeping with Art. 539 (2) of the RF CC, the contract on energy supply may be concluded with a subscriber which has energy receiving devices meeting technological requirements, connected to the networks of an energy supplying organisation. In this connection, technical specifications were issued to JSC SaMMer to connect the shops to the JSC SCEN networks. In this connection, the requirement to install a 630 kWA - 6.3/0.4 kW transformer is connected with the fact that the load from household consumers (the population) has increased substantially, which necessitated the installation of an additional transformer.
As for the requirement of conducting repair jobs inside the distribution stations, according to the JSC SCEN explanations, this requirement has been recalled by letter No. 7358 of 22.10.2004.
In the course of consideration of the case the Commission learned that the electric energy supply schemes of the shops were implemented in 1978 on the basis of technical specifications received by the house construction customer as the address: 201, Novo-Vokzalnaya St. - trust 11, and by the house construction customer at the address: 33, Novo-Sadovaya St. - KPO ZIM.
According to the explanations presented by JSC SaMMer, the consumed capacity of electric energy receiving installations of the «Volgar» and «Beryozka» shops has not been increased and no such increase is being planned, the schemes of external energy supply have not changed and their change is not being planned either.
Representatives of the Samara Technological and Ecological Monitoring Department have confirmed the unlawfulness of issuance of technical specifications by JSC SCEN. The Commission disagreed with the JSC SCEN argument of the need for JSC SaMMer to install an additional transformer in transformer plant 6425, as an increase of the load on the operating transformer is connected with the growth of energy consumption by the population rather than the applicant.
The Commission came to the conclusion that the issuance by JSC SCEN of technical specifications for connecting capacities for electric energy supply of shops located at the addresses: Samara, 201, Novo-Vokzalnaya St., and Samara, 33, Novo-Sadovaya St., is unjustified as these facilities are already connected to the networks of the energy supplying organisation, therefore no increase of the load occurs.
JSC SCEN renders the applicant the service of electric energy transmission by its own networks, which is referred by Art. 4 of the Federal Law «On Natural Monopolies» to the sphere of natural monopolies, which occupy a dominant position on the product market due to the nature of their activity.
Art. 5 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» prohibits the actions of a dominant economic entity, which result or can result in the infringement of the interests of other economic entities, including unjustified requirement of the transfer of financial assets and other property.
Therefore, the actions of JSC SCEN violate Art. 5 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets.»
Proceeding from its decision, the Department issued an instruction to JSC SCEN to terminate the violation of Art. 5of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets,» consisting in unreasonable demand of fulfilment of technical specifications for connecting to transformer plants the capacities of facilities whose connection has already been implemented, for which purpose:
1. Not to present to JSC Samara Mercury requirements on fulfilment of additional jobs for organising energy supply of shops at the addresses: Samara, 201, Novo-Vokzalnaya St., and Samara, 33, Novo-Sadovaya St.;
2. Recall technical specifications No. 4956 of 10.08.2004 and No. 1845 of 09.04.2004 from JSC Samara Mercury;
3. Conclude a contract with JSC Samara Mercury on electric energy supply to the said shops.
JSC SCEN appealed against the decision and instruction of the Department with the Samara regional arbitration court.
The case was terminated in connection with the applicant's renouncement of its claims.
The instruction has been fulfilled.
Saratov Directorate of the FAS
Description of Case No. 20-52
1. Resume:
The main competition-related problem consists in the fact that under effective law the market of burial services is not competitive, as the land allocated for burial is administered by municipal specialised companies, which abuse their dominance on this market and infringe the interests of economic entities rendering other ritual services to the population, which are their competitors on the market of ritual services.
2. Factual and Legal Content
On 11 July 2003, the Saratov Territorial Department of the Russian MAP received an application from LLC SPS Hyacinth against the actions of MUSE Ritual (Engels, Saratov region) refusing to admit LLC SPS Hyacinth to the cemetery for installing gravestones without concluding an agreement according to which LLC SPS Hyacinth would be obliged to transfer to MUSE Ritual 3% of the revenue from each registered gravestone order, and also charging a fee for the passage of motor transport to the territory of the cemetery.
The Antimonopoly Department considered the case on the basis of the following legal acts:
· the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets»
· the Federal Law «On Burial and the Funeral Business»;
· Decision of the Saratov regional government No. 55-P of 26.05.2003 «Matters of the Funeral Business in Saratov Region.»
3. Procedure and Competition Analysis
In the course of the investigation, the Commission requested from persons participating in the case written explanations of the facts presented in the application filed by LLC SPS Hyacinth, documents and information on this issue.
The Commission established the following.
MUSE Ritual is the only municipal specialised enterprise in the town of Engels, Saratov region, granted the right in accordance with the Federal Law «On Burial and the Funeral Business» to carry out the burials of the deceased and administer the land allocated for burial sites handed in perpetual use of MUSE Ritual by the Engels town administration (decision of the Engels town administration No. 2364 of 13.07.1994). Consequently, MUSE Ritual occupies a dominant position on the market of burial services in the town of Engels.
At the same time, MUSE Ritual renders to the population other ritual services, besides burial, including the manufacture and installation of gravestones, acting as a competitor on this market to other economic entities exercising the activity of rendering ritual services to the population on the territory of the town of Engels (LLC SPS Hyacinth, LLC Diabaz, LLC Elton, the Saratov subsidiary of OJSC Military-Memorial Company, etc.).
MUSE Ritual addressed an offer of an agreement to LLC SPS Hyacinth (outgoing No. 156/1 of 25.06.2003). In accordance with item 1 of the Agreement, MUSE Ritual grants LLC SPS Hyacinth the right to carry out construction jobs at its own expense and using its own equipment to install gravestones on the territory of cemeteries in the town of Engels.
According to item 2 of the Agreement, for purposes of partial compensation of MUSE Ritual expenses connected with the maintenance and improvement of alleys on the territory of the cemetery, LLC SPS Hyacinth is to pay MUSE Ritual a fee for each passage of its motor vehicles (crane, support vehicles, etc.) to the cemetery according to the established tariffs (annex No. 1 to the Agreement);
· entry of a motor vehicle with the carrying capacity of 5 tonnes - 60 roubles;
· entry of a special vehicle (crane) - 90 roubles;
· entry of a cycle-car - 20 roubles;
· entry of a passenger car - 30 roubles.
According to item 4 of the Agreement, the superintendent of the jobs is to transfer on a monthly basis 3% of the revenue from each gravestone ordered according to contract for cemetery maintenance purposes.
Similar agreements have been concluded by MUSE Ritual in the MUSE Ritual edition:
· with LLC Diabaz (agreement of 30.04.2003, valid until 01.10.2003);
· with LLC Elton (agreement of 21.04.2003, valid until 01.10.2003);
· with the Saratov subsidiary of OJSC Military-Memorial Company (agreement of 29.04.2003, valid until 01.10.2003).
LLC SPS Hyacinth provided a copy of a memorandum of differences to the Agreement with MUSE Ritual, supplemented with documents confirming the fact of its address to MUSE Ritual.
MUSE Ritual presented at the Commission session agreement No. 156/1 of 25/07/2003, already concluded by the parties, with item 4 stricken from it. The validity period of the agreement was 30.11.2003.
A representative of LLC SPS Hyacinth explained that the limited liability company was compelled to sign this agreement, otherwise MUSE Ritual refused to admit the LLC SPS Hyacinth workers to the territory of cemeteries in the town of Engels for conducting construction jobs on the installation of gravestones.
A representative of MUSE Ritual explained that the tariffs had been approved by decision of the Engels municipal assembly of deputies of the Saratov region No. 365/22-02 of 04.07.2002 «On Approval of Tariffs on Ritual Services Rendered by MUSE Ritual.»
At the same time, the Commission learned that decision of the Engels municipal assembly of deputies of the Saratov region No. 365/22-02 of 04.07.2002 has lost legal force as of 1 January 2003. It was cancelled by decision of the Engels municipal assembly of deputies of the Saratov region No. 450/28-02 of 26.12.2002 «On Approval of Tariffs on Ritual Services Rendered by MUSE Ritual,» with the section «Entry of motor transport to the cemetery» stricken from the list of tariffs on ritual services as of 1 January 2003.
The Engels municipal assembly of deputies in its written explanations on case No. 20-52 of 02.10.2003 stated that the section «Entry of motor transport to the cemetery» was stricken from the list of MUSE Ritual services as the Engels municipal assembly of deputies does not refer the entry of motor transport on the territory of a cemetery to ritual services and, considering this circumstance, MUSE Ritual was not to apply the legal act invalidated as of 01.01.2003 during the conclusion of agreement No. 156/1 of 25.07.2003.
The Engels municipal assembly of deputies has also presented a letter at the Commission session from the financial committee of the Engels municipal entity of the Saratov region (outgoing No. 738 of 02.10.2003) stating that in 2002 the public utilities committee has allocated RUR 995,300 for the maintenance and improvement of cemeteries (with the plan of RUR 995,300), and in nine months of 2003 - RUR 1,082,800 (with the plan of RUR 1,082,800).
However, in violation of the Engels municipal assembly of deputies' decision No. 450/28-02 of 26.12.2002, MUSE Ritual continued charging from economic entities and individuals a charge for the passage to the territory of cemeteries from 01.01.2003 to 01.10.2003, and from LLC SPS Hyacinth - until the expiration of the agreement.
MUSE Ritual presented to the Territorial Department:
· reference (outgoing No. 317 of 28.11.2003) that over the period from 01.01.2003 to 28.11.2003 the sum received from economic entities and individuals as a charge for the passage to the territory of cemeteries in the town of Engels amounted to 35,220 roubles (thirty-five thousand two hundred and twenty roubles);
· order of acting director if MUSE Ritual No. 117/1-P of 01.10.2003 prohibiting the entry of motor vehicles to the territory of cemeteries, except specialised transport vehicles, and cancelling the charge for the entry of motor transport to the territory of cemeteries.
In keeping with Art. 17 of the Federal Law «On Burial and the Funeral Business,» activity at burial sites shall be exercised in accordance with sanitary and ecological requirements and rules of burial site maintenance, established by the executive authorities of the RF Subjects and bodies of local self-government. Art. 18 of the Law prescribes that the order of operation of public cemeteries shall be determined by the executive authorities of the RF Subjects and bodies of local self-government.
The decision of the Saratov regional government No. 55-P of 26.05.2003 «Matters of the Funeral Business in the Saratov Region» is currently valid on the territory of the Saratov region. This decision approved the Provision on the order of activity of specialised services on matters of the funeral business in the Saratov region and the Provision on the order of allocating burial sites on cemeteries in the Saratov region.
In accordance with item 37 of the Provision on the order of activity of specialised services on matters of the funeral business in the Saratov region and item 3 of the Provision on the order of allocating burial sites on cemeteries in the Saratov region, the maintenance of cemeteries shall be exercised by specialised funeral services at the expense of the regional or local budgets.
The Federal Law «On Burial and the Funeral Business» and decision of the Saratov regional government No. 55-P of 26.05.2003 do not contains any bans on the entry of motor vehicles on the territory of cemeteries either, including for purposes of installation of gravestones.
Therefore, MUSE Ritual was not entitled to compel LLC SPS Hyacinth to conclude agreement No. 156/1 of 25/07/2003 under the pretext of the need of «partial compensation of expenses connected with the maintenance and improvement of roads on the territory of the cemetery.»
It is also necessary to note that according to Art. 31 of the RF Law «On General Principles of Organisation of Local Self-Government,» bodies of local self-government shall exercise the regulation of prices and tariffs on the produce (services) of enterprises in municipal property. According to item 6.3 of the MUSE Ritual Articles of Association, approved by decision of the committee for property management of the Engels district administration No. 143 of 07.10.1999, process and tariffs on all types of jobs fulfilled, services rendered, and produce manufactured are established by decision of the Engels district administration in keeping with the laws and regulations of the RF, Saratov region, and Charter of the Engels district administration. Therefore, MUSE Ritual is not entitled to establish prices and tariffs at its own discretion.
Over the period from 01.01.2003 to 28.11.2003 the sum received by MUSE Ritual as a result of violation of the antimonopoly legislation as a charge for the passage to the territory of cemeteries amounted to 35,220 roubles (thirty-five thousand two hundred and twenty roubles).
Therefore, MUSE Ritual:
· by imposing on economic entities rendering ritual services the conclusion of agreements on the compensation of MUSE Ritual expenses connected with the maintenance and improvement of roads on the territory of the cemetery, containing conditions on the transfer to MUSE Ritual of 3% revenue from each order concluded in the installation of a gravestone and on the payment of charge to MUSE Ritual for each entry of motor transport on the territory of the cemetery.
· By charging fare from economic entities and individuals for the passage of motor vehicles to the territory of cemeteries,
· By issuing order No. 117/1-P of 01.10.2003 prohibiting the entry of motor transport on the territory of cemeteries,
has violated Art. 5 of the Law on Competition, as occupying a dominant position it has committed actions restricting competition and infringing the interests of economic entities rendering ritual services to the population of the town of Engels of the Saratov region.
4. Conclusions
Upon the results of consideration of the case the Commission decided:
1. To recognise MUSE Ritual as having violated Art. 5 of the Law on Competition.
2. To issue an instruction to MUSE Ritual to prevent the actions creating a threat of violation of the antimonopoly legislation, to eliminate the consequence of violation of the antimonopoly legislation and transfer in favour of the federal budget the profit gained as a result of the violation of the antimonopoly legislation.
Essence of the instruction:
1. MUSE Ritual is to eliminate the consequences of the violation of the antimonopoly legislation within the period until 12 January 2004, specifically: cancel item 1 of MUSE Ritual order No. 117/1-P of 01.10.2003;
2. starting from the moment of receipt of this instruction, MUSE Ritual should prevent the actions creating a threat of violation of the antimonopoly legislation, namely: the imposition on economic entities rendering ritual services the conclusion of agreements on the compensation of MUSE Ritual expenses connected with the maintenance and improvement of roads on the territory of the cemetery, containing conditions on the transfer to MUSE Ritual of charge for each passage of motor transport to the cemetery and each installed gravestone.
3. Within the period until 30 January 2004, MUSE Ritual is to transfer the profit gained as a result of violation of the antimonopoly legislation in the sum of 35,220 roubles (thirty-five thousand two hundred and twenty roubles) to the federal budget.
MUSE Ritual appealed against the decision and instruction of the Saratov Territorial Department of the Russian MAP No. 20-52 in the arbitrazh court.
On 01.06.2004, the decision of the court in first instance dismissed the claim of MUSE Ritual to invalidate the decision and instruction of the Saratov Territorial Department of the Russian MAP No. 20-52.
On 29.10.2004, the appeals instance of the Saratov regional arbitrazh court ruled to leave in force the decision of the Saratov regional arbitration court of 01.06.2004, dismissing the claim of MUSE Ritual.
MUSE Ritual filed a cassation to the Federal Arbitrazh Court of the Volga District against decision of 01.06.2004 and the ruling of the court of appeals of 29.10.2004 of the Saratov regional arbitration court, which it later revoked. On 15.03.2005 the cassation instance of the arbitrazh court issued a determination to terminate proceedings on the cassation filed by MUSE Ritual.
On 17.12.2004 the Saratov Department of the Russian FAS initiated a case of administrative offence against MUSE Ritual in connection with the non-fulfilment of the instruction of the antimonopoly authority. During the preparation of the case for consideration, MUSE Ritual has fulfilled instruction No. 20-52 in full. The profit gained as a result of the violation of the antimonopoly legislation was transferred to the federal budget. MUSE Ritual explained the untimely fulfilment of the instruction with a change of its management and the company's tough economic situation.
On 13.01.2005, proceedings on the case of administrative offence with respect of MUSE Ritual were terminated in connection with the insignificance of the committed offence. MUSE Ritual was issued an oral reproof.
Stavropol Directorate of FAS
Case № 28 Considered in Connection with the Fact of Violation of Article 6 of the RSFSR Law «On Competition…»
1. Summary
The reason for using antimonopoly tools to terminate coordinated actions was a juridical fact of simultaneous elevation of prices up to a uniform level on the market of sales of petrochemicals and its maintenance in the situation of different economic indicators of business entities. The Law currently in force has no clear criteria for the definition of coordinated actions.
2. Factual and legal content
In April 2004 nine independent business entities - retail petrochemicals' market operators: OAO «Stavropolnefteproduct» (NK «Yukos» group); OOO «Lukolil-Yougnefteproduct»; OAO «Rosheft-Stavropolie»; OOO «Rokada-Kavminvody»; OAO NGK «Stavropolie»; OOO «Stavneft»; OOO «Bashoil-KMV»; ZAO NK «Kondor»; OOO «FLER» began to pursue a price policy resulting from coordinated actions. Retail prices of petrol of brands AI-92 and AI-95 were elevated respectively up to 12,5 and 13,5 roubles per litre simultaneously by all companies in the period of 26 April - 28 April 2004. The companies started to maintain the established price level.
The mentioned fact falls under the qualifying features of the Article 6 «Agreements (coordinated actions) of business entities restricting competition» of the Law «On Competition and Limitation of Monopolistic Actions on Product Markets» which prohibits to conclude a contract, other transactions, agreement (further - agreement) or to conduct coordinated actions by business entities acting on a market of a single product (or substituting products) which lead or can lead to the establishment (maintenance) of prices (tariffs), discounts, mark-ups (surcharges), premiums.
Taking into account the market's specific features, the fact of the price increase and maintenance has been immediately detected by the FAS directorate. Appeals of citizens, mass media and government bodies were also taken into consideration.
To terminate the actions undermining competition, a case on the violation of antimonopoly law has been initiated and considered in accordance with the Article 6, point 12 of the RSFSF Law «On Competition….».
3. Procedural aspects
The FAS directorate has conducted an antimonopoly investigation, which encompassed:
- The analysis and evaluation of the state of competitive environment on the retail market of petrochemicals. The analysis was based on the Manual of analysis and evaluation of competitive environment on product markets endorsed by the Act of the State Committee of Antimonopoly Policy of 20.12.1996 № 169 (edition of the MAP administrative act of 11.03.1999 № 71).
- The analysis and synthesis of information and materials submitted by government bodies and regional government possessing required information resources and economic data: Ministry of Industry, Transportation and Communications of the Stavropol region; Committee of Prices of the Stavropol region; the Stavropol region Directorate of the Ministry of Taxes and Dues of the Russian Federation; State Oil Inspectorate of the Stavropol region.
The FAS directorate conducted and conducts price monitoring of wholesale and retail sales of petrochemicals by basic operators of this market in the region.
The following information was requested from enterprises acting on the retail market of petrol :
· Contracts for 1) deliveries of automotive fuel( brands AI-92, AI-95); 2) commission contracts signed for 2004; 3) concessions.
· Purchase prices dynamics for January-May 2004 of petrol AI-92, AI-95.
· Costs of sales (calculations) of AI-92, AI-95.
· Dynamics of retail prices for January - May 2004 of petrol AI-92, AI-95.
· Dynamics of sales volumes for January - May 2004 of petrol AI-92, AI-95.
· Volumes of residual stocks of Ai-92 and AI-95 petrol as of beginning of each month for the period of January - May 2004.
· Receipts and profit of sales of AI-92 and AI-95 petrol after the price elevation.
· Explanations on (reasons for) the simultaneous and uniform elevation of prices of Ai-92 and AI-95 petrol within the investigated time period.
The synthesis evaluation of all materials of the case including the explanations of the oil companies was reviewed on 3 July 2004 at the FAS Directorate Commission meeting which resulted in decision № 28 on the confirmation of the fact of violation of the Article 6 of the RSFSR Law «On Competition….».
4. Competition analysis
The analysis of the situation and the evaluation of competition environment on the retail market of petrochemicals was based on the Manual of analysis and evaluation of competitive environment on product markets endorsed by the Act of the State Committee of Antimonopoly Policy of 20.12.1996 № 169 (edition of the MAP administrative act of 11.03.1999 № 71).
In the course of the analysis the product and geographical boundaries of the product market, mix of sellers and buyers, market product resources and market shares of business entities, market potential of business entities were determined.
The final assessment of the state of the competition environment on the product markets has shown that the parallel price policy of independent oil companies could be considered as indirect evidence of coordinated actions. The actions of the companies in April 2004 had features of coordination because of the following:
· the actions were conducted on a product market having similar product boundaries (retail sales of petrochemicals) as well as geographical boundaries (Stavropol region);
· petrochemicals are delivered to Stavropol region from outside of the region's boundaries. The suppliers including producing companies and intermediary firms are located in various regions of Russia.
· more than 500 fuel stations are involved in retail sales of petrochemicals in the region. The biggest companies on the petrochemicals' retail market are the ones made accountable. They own the majority of the filling stations.
· At the moment of the price elevation the oil companies had different stocks of petrochemicals bought at old lower prices. Nevertheless, the prices were simultaneously elevated by all companies.
In the process of the analysis and the case consideration juridical features peculiarities of point 1 of the Article 6 of the RSFSR Law «On Competition…» were taken into account. It's necessary to note that amendments inserted in the Law «On Competition…» by the Federal Law of the Russian Federation № 122 of 09.10.2002 have introduced considerable clarifications in the definition of agreements and coordinated actions. It can be seen in comparison to the previous versions of the Article 6 of the Law «On Competition…» A juridical delineation between agreements and coordinated actions was introduced. The mentioned concepts, though having similar implications, are not identical and represent different forms of coordination.
According to point 1 of the Article 6 of the Law «On Competition…» an agreement is an accord between business entities which can be expressed in a formalised mode and be confirmed by documents. At the same time coordinated actions do not require such formalisation or documentary confirmation, as the claimant notes.
Therefore, by virtue of the legal composition of the Article 6 of the Law «On Competition…»a document (written act) is not required as direct evidence confirming the fact of coordinated pricing policy and coordinated actions.
To apply prohibitions provided by the Article 6 of the Law «On Competition…» it is sufficient to detect a fact of coordinated actions, their deliberateness and intent to restrict competition.
The behaviour (factual actions) of the mentioned business entities on the retail market of automotive fuel (AI-92 and AI-95 petrol) can be considered as evidence testifying to the fact of coordination geared to illegal elevation of automotive gasoline prices:
· the actions were conducted on a single product market;
· the actions were conducted simultaneously:
· the actions had similar purpose of simultaneous elevation of prices and their maintenance;
· the implication of the coordinated actions was the restriction of competition.
These very circumstances served as necessary arguments in the probation process.
The actions were committed on a single product market.
This circumstance directly stems from clause 1 of the Article 6 of the Law «On Competition…». It is proven that the companies conduct their activities on a single product market - the market of retail sales of petrochemicals.
No enterprise dominates the retail market of petrochemicals in Stavropol region. However, the indicated companies as a group having a considerable market potential can exert decisive influence on general conditions of the product turnover. It is necessary to note that the pool of companies is considered, not individual market shares of each company. Clause 1 of the Article 6 of the Law «On Competition…» as opposed to its previous version does not contain one qualifying feature - benchmark market share. Therefore it is not mandatory to prove the dominant position of companies including the market share calculation.
The actions were committed simultaneously.
The coordinated actions in establishing and maintaining uniform prices resulting in the restriction of competition suggest its simultaneity and synchrony. Otherwise there will be no restriction of competition.
The actions had similar purpose of simultaneous elevation and maintenance of prices.
This condition directly stems from clause 1 of the Article 6 of the Law «On Competition…».
The Article 6 of the Law «On Competition…» considers coordinated actions of business entities geared to price elevation (maintenance), not economic indicators of an individual business entity.
The parallel pricing policy pursued by independent oil companies on the retail market of automotive fuel can be justified by the following objective factors:
· Purchasing prices of automotive fuel;
· Cost of retail sales of the fuel.
The Directorate has studied objective reasons, which could serve as justification of petrochemicals' retail price elevation by the companies. To detect the parallel actions a comparative analysis of performance indicators in January - May 2004 of business entities suspected in conducting coordinated actions was made. The following indicators were studied: wholesale prices, volumes of sales, costs of sales, retail prices in the subjects of the South Federal District and so on.
The analysis has shown that at the moment (26.04.04 - 28.04.04) of simultaneous and synchronised retail price elevation, input prices and costs of sales changed in a different mode for each individual company and grounds for the simultaneous and single-step retail price elevation were absent. The growth of wholesale input prices was lower then the growth of retail sales prices. At the same time at the end of March - beginning of May big oil companies of the region possessed stocks of petrochemicals bought at old, lower prices.
It is possible to make a conclusion that objective circumstances are not the main reason of for a sharp parallel hike of retail prices and their maintenance at a certain level.
The after effects of coordinated actions are defined by the Article 6 of the Law as a restriction of competition.
It is necessary to note that the second paragraph of clause 1 of the Article 6 of the Law «On Competition…» meaning the mix of participants and the direction of implications indicates implicit grounds for the prohibition of coordinated actions of business entities acting on a single product market which can result in establishment (maintenance) of prices of products sold to legal entities or physical persons. Therefore it means a coordinated pricing policy regarding a product sold to consumers deprived of any choice of prices.
Increasing retail prices of automotive fuel the enterprises which have considerable market power had acquired a possibility to influence general conditions of automotive fuel turnover on the retail market of petrochemicals.
Having conducted the coordinated actions in automotive fuel retail price elevation, the business entities has limited competitiveness in setting retail prices and created a situation where each business entity was unable to unilaterally influence general conditions of automotive fuel turnover on the retail market of petrochemicals.
Therefore the competition between potentially competing business entities was terminated by the coordinated actions.
Such agreements have a capacity to negatively influence results of economic processes since market relations inevitably suggest the existence of competition between independent business entities which can serve as an economic regulator of price growth in the framework of effectively functioning product markets (clause 2, Article 6 of the Law «On Competition…»).
The acting legislation and legal and normative acts of the Russian federation do not provide for government regulation of retail prices of petrochemicals. The said prices deemed to be «free» and respective regulatory functions have to be assured by market tools, of which competition including price competition is the core. The Article 6 of the Law «On Competition…» explicitly claims for the preservation of the price competition as a necessary element of effective functioning of the economy.
Article 6 of the Law «On Competition…» does not contain a mandatory qualifying criterion: existence of profit. Therefore the Directorate did not take into account the companies' reference to its absence.
The submitted sources of evidence testify to the presence of symptoms of coordinated actions geared to the competition restriction.
The simultaneous elevation and maintenance of high price levels during a considerable time period was a result of a clandestine coordinated pricing policy of the market participants.
The evidence testifying to the fact of coordination geared to generate an illegal automotive fuel price hike is the behaviour (factual actions) of the said business entities on the market of retail sales of automotive fuel (AI-92 and AI-95).
Referring to the submitted facts, the Commission has come to the following conclusions:
· The available evidence testifies to the fact of the presence of features of coordinated actions aimed at the restriction of competition;
· one step price elevation;
· setting of uniform prices of the most popular brands of gasoline while input purchasing prices, sales costs, product stocks bought at low prices are different;
· maintenance of prices;
· lack of price competition.
5. Conclusions
The indicated business entities were made liable for the violation of Article 6 of the RSFSR Law «On Competition…». The violation took the form of coordinated actions aimed at the elevation and further maintenance of prices resulting in the restriction of competition.
As the result of the case investigation, warrants on the termination of violations of the antimonopoly Law were issued. The warrants prescribed:
1) to conduct actions aimed to restore the competition, notably by 10.06.2004 to terminate the coordinated actions geared to setting (maintenance) of automotive fuel (AI-92, AI-95) retail prices;
2) to transfer to the federal budget the income received as the result of antimonopoly Law violations in the period from 29.04.2004 to 25.05.2004;
3) to inform the Stavropol region FAS Directorate in written form on the termination of the coordinated actions by 15.06.2004, and on the transfer of the received income - by 05.07.2004.
OAO «Stavropolnefteproduct» (NK «Yukos» group); OOO «Lukolil-Yougnefteproduct»; OAO «NK Rosheft-Stavropolie»; OOO «Bashoil-KMV» has contested the FAS Directorate Decision №28 and the warrants in the Arbitration court.
OAO «NK Rosheft-Stavropolie», OOO «Bashoil-KMV» have withdrawn their claims at the stage of preliminary court proceedings.
The decisions of the Stavropol region Arbitrazh Court, decisions of the appeals branch of the Stavropol region Arbitrazh Court, decisions of cassational branch of the Federal Arbitrazh Court of the North Caucasian District have declined the claims of OAO «Stavropolnefteproduct» (NK «Yukos» group) and OOO «Lukolil-Yougnefteproduct» and the legitimacy of the Decision № 28 and warrants №20 and №19 of the Stavropol region FAS directorate was confirmed.
The independent business entities - operators of retail market of petrochemicals of the Stavropol region has terminated their coordinated actions aimed at setting (maintenance) of retail prices on the automotive fuel (Ai-92, AI-95) market.
Stavropol Directorate of FAS
Case № 41 Investigated in Connection with the Fact of Violation of Clause 1, Article 5 of the RSFSR Law «On Competition…»
1. Summary
Imposition of unfavourable conditions in a contract on power supply services by OOO «Stavropolenergo» on OOO «Piatigorskie elektricheskie seti» and the prevention of the competitor from participating in the wholesale electricity market (paragraph 2, point 1, article 5 of the RSFSR Law «On competition…». Indistinct legal basis in the transitional period of the electricity sector reform.
2. Factual and legal content
On 06.02.2004 OAO « Piatigorskie elektricheskie seti» (»PES») signed Contract # 600069 of 14.01.2004 on power supply services added with the discrepancy protocol. The sides have reached agreement on all clauses of the contract with the exception of clauses 2.2.1., 2.2.2., 6.4.
«PES» has to sign all required contracts including the contract with OAO «Stavropolenergo», otherwise it cannot participate in the wholesale electricity market, FOREM. «PES» depends on actions of «Stavropolenergo» which, by incorporating in the contract the indicated clauses, prevents its competitor from becoming a participant of the electricity wholesale market. The Contract period starts from February 2004, «Stavropolenergo» accepts payments in the framework of this contract but the contract is not signed in the final version. «Stavropolenergo» makes «PES» dependent on its actions preventing its competitor from becoming a participant of the electricity wholesale market thus violating point 1 of the article 5 of the RSFSR Law «On Competition…» prohibiting a business entity occupying dominant position to commit actions (inaction) which have or may have as its result prevention, restriction, elimination of competition and derogation of interests of other business entities, notably the deterioration of conditions of market access, exchange, consumption, acquisition, production, sales of a product that put one or several business entities in an unequal position vis a vis another or other business entities (discrimination conditions).
Having exhausted all possibilities to settle the dispute and in connection of non signing the discrepancy protocol by «Stavropolenergo», «PES» has addressed the antimonopoly body according to articles 11, 421, 450, 452 of the Civil Code of Russia and articles 5 and 12 of the RSFSR Law «On competition…».
3. Procedural aspects
The FAS Directorate has conducted the antimonopoly investigation and the collection of evidence in the course of which the following documents and information were considered and analysed: copies of letters «PES» addressed to «Stavropolenergo» of 06.022002 # 222-jur, of 18.03.2004 # 477/09; a copy of contract # 6000069 on provision of power supply services of 14.01.2004; a copy of discrepancy protocol of 06.02.2004 attached to contract # 6000069 on provision of power supply services of 14.01.2004; a copy of protocol of reconciliation of discrepancies of 21.06.2004 attached to the discrepancy protocol of 06.02.2004 attached to contract # 6000069 on provision of power supply services of 14.01.2004; a protocol of reconciling commission of 28.06.2004.
The submitted materials contained evidence of antimonopoly law violation. Summing up the investigation of the case, at the meeting of the Commission on 08.07.2004 the FAS Directorate decided to confirm the fact of violation of point 1, article 5 of the RSFSR Law «On competition…».
4. Analysis of competition
«Stavropolenergo,» being a branch of a natural monopoly according to articles 3,4 of Law of the Russian Federation «On Natural Monopolies» of 17.08.1995, occupies a dominant position on the market of power supply services on the territory of the Stavropol region and has access to the wholesale market of electricity. It enforces discriminatory terms and creates barriers for the market access to «PES». Since «PES» is also a participant of the wholesale electricity market «FOREM», it can on its own buy electricity from other wholesale sellers and sell to its customers without recourse to the services of one wholesaler - «Stavropolenergo».
According to clause 2.2.1 of the Contract, the provider (»Stavropolenergo») has a right to suspend the provision of services of power transfer if the services are not fully paid by the contractor (»PES») and the provider can provide the services only in the paid volume.
The above-mentioned clause was formulated without taking into account the specific feature of «PES's» (contractor's) activities including deliveries electricity to the population, vitally important facilities and other socially important entities of the city of Piatigorsk. Clause 2.2.1 is to be withdrawn from the Contract since in case of non-payment «PES's» responsibility is regulated by the norms of the Civil Code of the Russian Federation. The condition of the provider (»Stavropolenergo») to provide services in the volume paid by the customer does not comply with the norms of Civil Law, the Federal Law «On Electric Power Sector» of 26.03.2003 #35, Rules of the wholesale market of electric power of the transition period endorsed by the Act of the Government of the Russian Federation of 24.10.2003 #643. Article 38 of the Federal Law «On Electric Power Sector» prohibits the limitation of pattern of electric power consumption including its volume by customers which do not have payment arrears and bear other commitments provided by the Law of the Russian Federation and agreements of the parties.
In conditions of functional and technological interconnection of the processes of generation, transmission, sales and consumption of electricity and also the high degree of electricity market monopolization in the Russian Federation, article 328 of the Civil Code of the Russian Federation prohibits to cut or limit power supply to individual debtor consumers if this leads to the derogation of rights and interests of other entities belonging to the same network and can have dangerous social implications. The disputed provision of the Contract does not contain mechanisms assuring the limitation of power supply only to those debtor consumers of «PES» which are liable to that according to the legislation.
Taking into account the above-mentioned arguments, it was determined that «Stavropolenergo» does not have legal grounds for the full termination of power transmission to «PES» in case of payment delays.
Clause 2.2.2 defined that the «provider» had a right not to fulfil its commitments according to the contract if it became known to him that the «contractor» failed to fulfil its commitments according to the contract of electric power sales.
Clause 2.2.2 is subject to removal from the contract since in accordance with the Federal Law # 35- ФЗ of 26.03.2003 «On Electric Power Sector», «Stavropolenergo» is not a «network organization» and relations on the electric power market between consumers and network and selling companies will be considered only after the ban on the combination of power transmission activities with activities in the area of generation and sales and purchases of electric power. «Stavropolenergo's» reference to Article 26 of the Law «On Electric Power Sector» as an argument in favour of including the above-mentioned clause in the contract is not unlawful. Article 26 of the Law is not yet enacted and comes into force only in 2005.
As of the period of the case investigation, the Government of the Russian Federation had not yet worked out the mechanism to implement Article 26 of the Law «On Electric Power Sector». The norms of Article 26 has an optional, not a mandatory character and therefore can be applied only in case of mutual agreement of the parties. Therefore Article 26 of the Law «On Electric Power Sector» does not have an implementation mechanism, it gives a right but does not generate commitments. According to customs of business relations, it can be implemented by a «power selling organisation» on the instructions of a «network organisation».
Clause 6.4 of the contract provided that, if the electric power to a customer is cut according to clauses 2.2.1 or 2.2.2, then the customer must make a full payment for the contracted amount of electric power and there will be no further settlement. «Stavropolenergo» unjustifiably believed that this provision complies with clause 2 , article 781 of the Civil Code of the Russian Federation.
Clause 6.4 infringes Article 544 of the Civil Code of the Russian Federation, which says that a payment can be made only for actually provided services. For instance, according to clause 2 of Article 781 of the Civil Code of the Russian Federation, in case of an inability to fulfil contractual commitments because of the customer's fault, the payment is to be made in full if there is no other provision in the Law or service contract. «Stavropolenergo» and «PES» have not reached an agreement on the incorporation in the contract of clause 6.4 containing this condition. Article 544 of the Civil Code of the Russian Federation provides that the payment is to be made only for the electric power actually received by the customer, and does not contain a legal norm providing for otherwise. Therefore the inclusion of clause 6.4 in the contract is not mandatory and can be made only according to the mutual consent of the parties. The subject of the disputed contract is services of a product (electric power) delivery (transmission). At the same time, clause 2 of Article 781 of the Civil Code, the rules of Article 39 are applied only to contracts regarding services in the following areas: communications, medical services, veterinary services, auditing, consulting, information, training, tourist services and other with the exception of services provided according to contracts, indicated in chapters 37, 38, 40, 41, 44-47, 49, 51, 53. In case of suffering losses as the result non-fulfilment of the contractual obligations by «PES», «Stavropolenergo» has a right to vindicate them in a legal procedure.
The inclusion of clauses 2.2.1, 2.2.2, 6,4 in the contract has an unjustified character since they are discriminatory and violate and derogate the rights not only of «PES» being a power supplying organisation, but also rights of third parties, electric power consumers. Such consumers include entities and persons for whom a specific treatment in power supply is provided by decisions of the Government of the Russian Federation. In addition, according to part 1 of Article 10 of the Civil Code of the Russian Federation and clause 1 of Article 5 of the RSFSR Law «On Competition…» the use of civil rights for the restriction of competition and abuse of market dominant position is prohibited.
5. Conclusions
OAO «Stavropolenergo» was found to violate clause 1 of Article 5 of the RSFSR Law «On Competition…». «Stavropolenergo» was issued a warrant on the termination of the antimonopoly law violation. The content of the warrant was the following: to remove clauses 2.2.1, 2.2.2 and 6.4 not agreed upon by the parties from the contract # 6000069 on provision of electric power transmission services of 14.01.2004 with the discrepancy protocol of 06.02.2004 submitted by « Piatigorskie elektricheskie seti» and the protocol of reconciliation of discrepancies of 21.06.2004 submitted by «Stavropolenergo».
«Stavropolenergo asked the Arbitrazh Court of the Stavropol region to cancel the decision of 08.07.04 #41 and the warrant of 08.07.04 #35. By the ruling of 01.09.04 at the request of the FAS Directorate OAO «Piatigorskie elektricheskie seti» was involved in the case consideration as the third party not presenting independent claims regarding the dispute subject.
The decision of the Arbitrazh Court of the Stavropol region of 28.10.04, the ruling of the branch of appeals of the Arbitrazh Court of the Stavropol region of12.01.05, by the act of the Arbitrazh Court of cassational branch of the Federal Arbitrazh Court of North Caucasian district of 26.04.05 have rejected the claim and confirmed the legitimacy and feasibility of the decision and the warrant of the Stavropol Directorate of FAS of Russia.
Tambov Directorate of the FAS
Description of Case No. 10 of 20.05.2003 (Dominance Abuse)
The case was considered in 2003 by the Tambov Antimonopoly Department with respect of JSC Tambovenergo on Art. 5 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» (paragraph 3 and paragraph 5 of item 1), in particular - the imposition on a counterparty of unprofitable contractual terms or conditions irrelevant to the subject of the contract and erecting barriers to the withdrawal of an economic entity's from the market.
1. Resume
The main problem to competition in this case was finding the answer to the question:
Must an energy supplying organisation, OJSC Tambovenergo, accept for servicing disputable electric devices and supply energy to subscribers connected to them,
or an economic entity which is not an energy supplying organisation but supplies electric power to its sub-subscribers for a long period of time should obtain the necessary license and become an energy supplying organisation?
The second challenge in this case was the issue of ownership of electric network and transformer plants in the village, which turned out to be abandoned property.
2. Fact and Legal Content. Procedure
The applicant - state scientific institution Tambov Research Institute of Agriculture (SSI Tambov NIISH) complained that OJSC Tambovenergo is imposing the terms of energy supply contract, obliging the institute to pay for electric power consumed by sub-subscribers: the population, the kindergarten, commercial shops, and other facilities situated in the Zhemchuzhny village at the institute, and also to conduct the maintenance of the village electric communications.
SSI Tambov NIISH denied that the electric communication networks and plants in the Zhemchuzhny village of the Tambov region's Rzhaksinsk district are on its balance sheet and provided evidence thereof - the charter of the scientific institution and its books.
Investigation of the circumstances of the case. The Tambov Territorial Department applied to OJSC Tambovenergo for an explanation of this matter. The company replied that the electric energy supply scheme in the Zhemchuzhny village is part of the overall electric energy supply scheme of SSI Tambov NIISH and is not subject to isolation. The village was built at the institute for purposes of ensuring compact residence of its staff, and the electric network - a 0.4 kW line of the village and transformer plants - are on the institute balance sheet. The maintenance of electric networks and electric power supply to the population should be ensured by the institute, therefore the matters of electric energy supply to Zhemchuzhny village with all its consumers should be referred to SSI Tambov NIISH.
The Rzhaksinsk district administration provided a different explanation to the request filed by the Tambov Territorial Department concerning the balance sheet ownership of the disputable networks and transformer plants in the village of Zhemchuzhny. There is no act of balance sheet ownership of electric power transmission lines and transformer plants between OJSC Tambovenergo and SSI Tambov NIISH. The ownership of the electric power facilities is unclear. After the reconstruction of the said electric networks in 1974-1975 they were not accepted on the institute's balance sheet.
The Tambov state energy inspection department (Tambovgosenergonadzor) presented an expert opinion on this situation on request of the Tambov Territorial Department. To exercise the activity of operation of electric networks, an organisation should have a relevant license, but SSI Tambov NIISH is not an energy supplying organisation. SSI Tambov NIISH does not have a license to operate electric networks, it has not concluded agreements with the residents and other consumers in the village of Zhemchuzhny on electric power supply. Therefore it has no right to engage in electric power supply. Tambovgosenergonadzor came to the conclusion that the institute's wish to conduct settlements with OJSC Tambovenergo only for its own consumed electricity, regardless of consumers in the village of Zhemchuzhny, does not contradict effective law.
Reference. The differences on the issue of payment for electricity consumed by the population and other facilities in the village of Zhemchuzhny at the expense of SSI Tambov NIISH have emerged as early as 1994, which is confirmed by the memorandum of differences presented by OJSC Tambovenergo, annex No. 84 of 25.01.1996 to contract No. 453 of 07.02.1994 between SSI Tambov NIISH and OJSC Tambovenergo, and other documents. SSI Tambov NIISH has repeatedly stated that it has been fulfilling the functions of a power supplying organisation without any compensation for decades and requested to amend the terms of the energy supply contract, striking from it the institute's responsibility on the maintenance of networks, accounting electric energy supplied to the population for its household needs, and its payment. However, OJSC Tambovenergo forced the institute to conclude power supply contracts containing the terms obliging the applicant to service the electric networks of the village with other consumers and conduct settlements with OJSC Tambovenergo at its own expense.
After Tambovgosenergonadzor has repeatedly issued a warning that the institute does not have a right to resell power to the population and other consumers without a relevant license and a permit of the electric energy supplying organisation, the institute stopped charging the population and other consumers in the village of Zhemchuzhny electricity payment. During the conclusion of contract No. 453 of 27.11.2003 on electric energy supply with OJSC Tambovenergo, SSI Tambov NIISH presented a memorandum of differences, in which it requested to supplement the contract with a new provision: «In connection with the fact that starting 01.01.2003 the customer shall not charge payment for electric energy consumer by sub-subscribers such as the population, the kindergarten, commercial shops, and other facilities not owned by the customer, the customer shall not pay the energy supplying organisation for electric energy consumed by these sub-subscribers.» However, the power supplying organization - OJSC Tambovenergo - has not responded to the memorandum of differences.
Consideration of the case. It has been established that a contract on electric energy supply exists between the parties, which lacks obligatory supplements - an act of balance ownership and operational responsibility of the parties and a list of sub-subscribers and non-production consumers. The said supplements were also missing from the former electric energy supply agreements because of the differences on this issue between the parties.
OJSC Tambovenergo regards as the evidence of the institute's ownership of the disputable facilities in the village of Zhemchuzhny the fact that SSI Tambov NIISH has always been paying for electricity consumed by the population of Zhemchuzhny village. Therefore OJSC Tambovenergo insists on the former edition of the contract.
The Commission of the Tambov Territorial Department came to the following conclusions.
The RF Civil Code (Art. 545) stipulates that a subscriber may on agreement with an energy supplying organisation transmit energy received from the energy supplying organisation to another entity (a sub-subscriber) through a connected network. However, to exercise the activity on the operation of electric networks, an organisation should have a relevant license (Art. 17 of the Federal Law of 08.08.2001 No. 128-FZ «On the Licensing of Certain Forms of Activity»). SSI Tambov NIISH is not an energy supplying organisation and does not have a license to conduct the activity on the operation of electric networks, therefore it is not entitled to engage in the sale of electric energy in keeping with effective law.
Therefore, the actions of OJSC Tambovenergo consisting in inclusion of provisions in the energy supply contract with SSI Tambov NIISH, obliging SSI Tambov NIISH to exercise the functions of an energy supplying organisation, specifically, supply electric energy to the population and other facilities in the village of Zhemchuzhny of the Rzhaksinsk district, and to pay for it, violate the requirements of paragraphs 3 and 5 of item 1 Art. 5 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» prohibiting such actions of a dominant economic entity as imposing on a counterparty or unprofitable contractual terms or conditions irrelevant to the subject of the contract, and erecting barriers to an economic entity's withdrawal from the market.
Art. 5 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» prohibits the actions of a dominant economic entity which result or can result in restriction of competition and (or) infringement of the interests of other economic entities.
For these reasons the Tambov Territorial Department of the Russian MAP issued an instruction to OJSC Tambovenergo on results of the consideration of the case to terminate the violation of the antimonopoly legislation. The instruction obliges the company to introduce amendments to the contract of energy supply with SSI Tambov NIISH, excluding from it the provisions enabling SSI Tambov NIISH to fulfil the functions of an energy supplying organisation.
The conclusions of the Commission of the Tambov Territorial Department of the Russian MAP during the adoption of decision No. 10 of 25.06.2003 are based on an expert opinion of the state energy monitoring department for the Tambov region.
Appealing against the decision and instruction. OJSC Tambovenergo appealed against the decision and instruction with the arbitrazh court. The decision of the Tambov regional arbitrazh court of 30.10.2003 has dismissed the claim filed by OJSC Tambovenergo against the TambovTerritorial Decision of the Russian MAP on invalidating the decision and instruction No. 10 of 27.06.2003.
After the entry into legal force of this decision of the court, OJSC Tambovenergo fulfilled the instruction and concluded an energy supply contract with SSI Tambov NIISH No. 453 of 28 November 2003, with the calculations and responsibility of the institute for the electricity consumed by the school, the kindergarten, the hospital, the post office, the communications department, and the population of the village of Zhemchuzhny excluded from it.
At the same time, OJSC Tambovenergo filed a cassation. On 6 February 2004, the Federal Arbitrazh Court of the Central District issued a decision to leave the decision of the Tambov regional arbitrazh court of 30.10.2003 without a change, and dismiss the cassation.
4. Competition Analysis
OJSC Tambovenergo is entered in the Register of economic entities with an over 35% share on a certain product market in the product group «electric power supply services» with a share exceeding 65% within the geographic borders of the Tambov region.
No specific competition analysis has been conducted on this case, as this market and its characteristics were defined.
Ulyanovsk Directorate of the FAS
Description of the Case of Violation of Art. 18 of the Law «On Competition and Restriction of Monopolistic Activity on Product Markets» by Economic Entities Engaged in Retail Sale of Oil Products
I. Background Information
1. Classification of materials of the case by articles of the Law - the Law «On Competition and Restriction of Monopolistic Activity on Product Markets,» Art. 18 (1 and 9)
2. Territorial department - the Ulyanovsk FAS Department
3. Applicant - the case was instituted on the initiative of the Ulyanovsk Territorial Department of the Russian MAP
4. Respondents - 1) JSC Ulyanovsknefteprodukt, Ulyanovsk; 2) unitary municipal enterprise Technical Inventory Bureau, town of Lesnoi, Sverdlovsk region; 3) municipal institution Centre for Support of Entrepreneurship and Development of Competition, town of Trekhgorny, Chelyabinsk region.
5. Product market - retail product market of oil products.
II. Circumstances of the Case
A common partnership formed by JSC Ulyanovsknefteprodukt and the unitary municipal enterprise Technical Inventory Bureau (UME TIB), the town of Lesnoi, Sverdlovsk region, decided to acquire in ownership, usage or possession a property complex of five gasoline filling stations of JSC Maxima-X the book value of which exceeds 10% (exactly, 24.5%) of fixed production assets of JSC Maxima-X, and to acquire in ownership, usage or possession a property complex of a gasoline filling station of LLC Vitim the book value of which exceeds 10% (exactly, 76.8%) of fixed production assets of LLC Vitim.
A common partnership formed by JSC Ulyanovsknefteprodukt and the municipal institution Centre for Support of Entrepreneurship and Development of Competition (MI Centre for SE&DC), the town of Trekhgorny, Chelyabinsk region, decided to acquire in ownership, usage or possession a property complex of four gasoline filling stations of LLC Fond-RM the book value of which exceeds 10% (exactly, 58.8%) of fixed production assets of LLC Fond-RM.
Both common partnerships were created on the basis of an agreement on joint activity No. 9 of 18.12.1999. In accordance with Art. 1043 of the RF Civil Code, the fixed production assets acquired by the common partnerships constitutes joint property of participants of the partnerships, in which each of the participants has a title to property proportionate to the amount of contribution.
According to Art. 1041 of the RF CC, common partnerships are not legal entities, therefore from the point of view of the antimonopoly legislation the activity of common partnerships should be regarded as the activity of a group of entities defined according to Art. 4 of the Law «On Competition and Restriction of Monopolistic Activity on Product Markets.» In keeping with the agreement on the creation of common partnerships, the functions of property management, joint business administration, management of joint activity, accounting - i.e. the functions of executive bodies of common partnerships - have been handed over to JSC Ulyanovsknefteprodukt.
The group of persons in the first common partnership is formed by its participants: JSC Ulyanovsknefteprodukt and UME TIB, in the second - JSC Ulyanovsknefteprodukt and MI Centre for SE&DC. Proceeding from the fact that both partnerships conduct their activity on one and the same product market - the market of oil products sales in the city of Ulyanovsk, JSC Ulyanovsknefteprodukt, UME TIB, and MI Centre for SE&DC should be considered as one group of entities.
The total value of assets based on the balance sheets of all legal entities (JSC Ulyanovsknefteprodukt, UME TIB, and MI Centre for SE&DC) included in one group of entities with the recipient of fixed production assets, including the recipient of this property itself (JSC Ulyanovsknefteprodukt), and the book value of assets of the economic entity whose fixed production assets are being transferred into ownership or usage, jointly constitute a figure ten times in excess of 100 thousand minimal salaries. The value of assets of only one participant of the group - JSC Ulyanovsknefteprodukt - at the moment of adopting the decision on the purchase of property complexes of gasoline filling stations was more than RUR 235 million, which was scores of times higher than the margin of 100 thousand minimal salaries stipulated by Art. 18 (2) of the RF Law on Competition the exceeding of which requires preliminary consent of the antimonopoly authority to conclude such transactions.
For purposes of implementing the decisions on the purchase of property complexes the transaction participants have executed:
(1) Immovable property purchase and sale act No. 6 of 23.10.2002 on the transfer of the property complex of five gasoline filling stations of JSC Maxima-X to the first common partnership (purchase and sale contract No. 6 of 23.10.2002);
(2) Immovable property purchase and sale act No. 8 of 23.10.2002 on the transfer of the property complex of one gasoline filling station of LLC Vitim to the first common partnership (purchase and sale contract No. 8 of 23.10.2002);
(3) Immovable property purchase and sale act No. 7 of 23.10.2002 on the transfer of the property complex of four gasoline filling stations of LLC Fond-RM to the second common partnership (purchase and sale contract No. 7 of 23.10.2002).
Therefore, by 01.11.2002 the property complexes of all nine gasoline filling stations were handed in usage and possession to common partnerships JSC Ulyanovsknefteprodukt and UME TIB and JSC Ulyanovsknefteprodukt and MI Centre for SE&DC, and the title to the transferred immovable property objects were registered in the period from 29.11.2002 to 24.12.2002 in the manner prescribed by Russian Federation law.
The Ulyanovsk Territorial Department of the Russian MAP conducted an analysis and appraisal of the status of the competitive environment on the retail market of oil products in the city of Ulyanovsk, according to which the conclusion of transactions on the petitions filed resulted in a reduction of the number of economic entities on the market, the emergence of a dominant seller on the market - the group of entities consisting of JSC Ulyanovsknefteprodukt, UME TIB, and MI Centre for SE&DC.
In the opinion of common partnerships, their activity in 1999 - 2002 has a favourable socioeconomic effect. Considering that it would exceed all negative implications of the transactions for the oil products market, the partnerships paid the price of gasoline filling stations and actually received them in ownership and usage without consent of the antimonopoly authority. In their opinion, this step enabled them to avoid forced idling of the gasoline filling stations, provide the population with an opportunity of smooth and shortage-free purchase of oil products, and the state with taxes.
In the opinion of the Ulyanovsk Territorial Department of the Russian MAP, the evaluation of the position of YUKOS Oil Company on the market of oil products in the city of Ulyanovsk by the number of gasoline filling stations and their share in the overall consumption volume, calculated on the basis of consumption norms per motor transport unit, presented by the company, is not objective. The number of gasoline filling stations cannot act as a characteristic of the volume of product resources of the market, as the operating gasoline filling stations differ considerably both in their technological capacity and by the actual volumes of oil product sales. E.g. JSC Ulyanovsknefteproduktin November 2002 marketed through gasoline filling station No. 2 535 thousand litres of oil products, and through gasoline filling station No. 5 - 34.2 thousand litres. The overall number of gasoline filling station of JSC Ulyanovsknefteprodukt includes departmental gasoline filling station, situated generally on closed territories of enterprises and not engaged in the retail sale of oil products. The estimate of the sales volumes conducted by JSC Ulyanovsknefteprodukt on the basis of production volumes cannot characterise the volume of product resources of the market either. The overall consumption volume of JSC Ulyanovsknefteprodukt includes also the volume of consumption of oil products by industrial motor transport, usually filled at departmental gasoline filling stations.
The Ulyanovsk Territorial Department of the Russian MAO conducted the evaluation of the market volume and the market share of gasoline filling stations of the considered group of entities on the basis of the actual volumes of retail sale of oil products in 2001 and in January-September 2002, obtained on request from the sellers operating on the market. The estimated volume of the group of entities in question on the retail market of oil products in the city of Ulyanovsk by the sales volumes in 2001 and the first three quarters of 2002 were:
Product; Sales 2001; Sales January-September 2002
A-76 gasoline; 46.2%; 42.0%
AI-92/93 gasoline; 54.8%; 53.7%
A-95 gasoline; 70.8%; 68.9%
diesel fuel; 46.6%; 32.4%
Additional criteria presented in the analysis and appraisal of the status of the competitive environment on the retail market of oil products in the city of Ulyanovsk prove the fact of dominance of the group of entities consisting of JSC Ulyanovsknefteprodukt, UME TIB, and MI Centre for SE&DC, on the retail market of oil products in the city of Ulyanovsk.
Before the conclusion of transactions on the purchase by common partnerships of 10 gasoline filling station the retail market of oil products in the city of Ulyanovsk was characterised as moderately concentrated, and none of the sellers occupied a dominant position on the market. The conclusion of the transactions resulted in making the market highly concentrated, and a dominant seller appeared on the market. The transactions resulted in restriction of competition on the market.
The consideration of the case was launched on 03.02.2003, and completed on 11.05.2005.
The case was considered by all instances of the arbitrazh court. The arbitrazh court qualified the transactions on the purchase of gasoline filling station as illegal.
Volgograd Directorate of the FAS
Problems of Detecting Monopolistically High Prices on the Example of Analysis of the Volgograd Market of Socially Significant Bread Brands
1. Resume
The processes of economic denationalisation bring significant changes to economic entities' business incentives, which in its turn opens up the opportunities for creation and abuse of dominance, manifested in overpricing. Practice shows that the detection of monopolistically high prices is one of the most complicated spheres of activity of the antimonopoly authorities. This is connected with the specifics of market relations in the RF caused, above all, by the transitional nature of its economy: instability of the pricing factor indicators, disproportions in manifestation, distorting the level of prices. At present, the legal framework for regulating the issues of detecting monopolistically high prices is rather limited. A lack of a methodology for detecting monopolistically high prices generates difficulties in adequate interpretation of their definition provided in the Law on Competition and, therefore, complicates the proving of the fact of existence of an unreasonable level of prices.
2. Fact and Legal Content
In 2004, the Department conducted an analysis of the market of socially significant brands of bread for purposes of establishing the fact of monopolistically high pricing by the group of entities JSC UK Volgo-Don-Khleb (hereinafter - VDH).
In January 2004, there has been a radical increase of the prices of wheat and rye-wheat bread - i.e. the bread brands of mass consumption - initiated by VDH. At the moment of the price increase VDH was carrying out the functions of a sole executive company of four bread plants situated on the territory of the city holding control of parcels of shares of each of the said plants, which made it possible to consider these economic entities as a group.
According to the results of a preliminary investigation, the market share owned by VDH companies on the 1st quarter of 2003 varied between 35% and 65%. These circumstances provided grounds to suspect the presence in the VDH actions of the elements of a violation of Art. 5 of the Law «On Competition and Restriction of Monopolistic Activity on Product Markets» consisting in the establishment (maintenance) of monopolistically high prices. In this connection, specialists from the Territorial Department of the Russian MAP for the Volgograd Region and the Republic of Kalmykia have conducted the following survey.
3. Procedure
From the methodological point of view, this survey is based on the neoclassic model of market behaviour of a monopolist company and the theory of sector-specific markets. In addition, approaches of other theoretical concepts recognised by the international experience of antimonopoly policy and price regulation practice were used in the part consistent with the specifics of the Russian economy.
Due to the lack of an approved methodology of establishing monopolistic prices, the definition provided by the Law «On Competition and Restriction of Monopolistic Activity on Product Markets» was accepted as the benchmark within the context of the survey.
According to Art. 4 of the Law on Competition, a monopolistically high price is the price of a product set by an economic entity occupying a dominant position on the product market, with which this economic entity compensates or can compensate unjustified expenses and (or) gains or can gain a much higher profit than possible in comparable conditions or in a competitive environment.
In keeping with this definition, an investigation conducted for purposes of establishing the fact of monopolistically high pricing should include the following stages:
1. Establishing an economic entity's dominance on a relevant market.
2. Checking the parameters of business activity of the dominant company to match it with criteria of monopolistically high prices.
The main method of information gathering in the process of the survey consisted in formal written questioning conducted by means of letters requesting information.
4. Competitive Analysis
The survey covered only the market of mass consumption bread, namely, grade 1 wheat bread and rye-wheat bread, which is connected with its social significance. The conducted analysis suggested the conclusion that white bread and rye-wheat bread are situated within different product dimensions.
The geographic dimensions of the market are determined on the basis of the possibility of shifting the demand among territories supposedly comprising one geographic market. This is connected with the fact that transportation is generally carried out by the manufacturer, with inclusion of relevant expenses in the price of the supply. Transportation expenses are included in the group of non-production costs, distributed per produce unit in accordance with the accounting policy accepted by a company. It is important to pay attention to the absence of a geographic (area) principle in pricing. Transportation expenses are covered by their even distribution along the entire marketing geography. In other words, higher expenses on the transportation of produce to longer distances are compensated by inclusion part of them to the price of the produce supplied to shorter distances and, therefore, having a lesser actual share in the transport expenses. Regardless of the distance of the retail intermediary, the exit price is the same throughout the entire territory of the produce marketing.
A specific characteristic of the marketing activity on the market in question is the dependence of the geography of supply on the diversification of the selection range. This is connected with the fact that during the supply of more costly produce to the retail network, such as confectioneries, the manufacturers can transport it to longer distances than during the supply of only socially significant brands of bread. In other words, concluding contracts with retail sellers on supply of baked produce and confectioneries the bread manufacturers have an opportunity to market additional volumes of bread along with the other produce supplied to them, thus extending its marketing geography.
In connection with the above, the isolation of transportation costs on the marketing of bread as a factor determining the maximum possible length of economically profitable distance of its transportation is rather problematic. According to VDH testimony, the actual average distance of bread transportation is 20 km, which covers the approximate length of the radius of each manufacturer's marketing territory. The geography of mass demand bread marketing carries a predominantly local nature and is tied to the administrative borders of the territory of location of the bread plant and adjacent districts. Acting as a group of entities, companies included in the VDH jointly form a local market within the administrative borders of Volgograd.
The average volume of produce transported beyond the borders of the city by the VDH companies does not exceed 2%. The Volgograd manufacturers not included in the group in question (2 bread plants) also supply over 90% of their bread and baked produce to customers located on the territory of the city. In addition, a poll of the largest bread manufacturers located in the districts of the region has shown that their supply geography generally does not go beyond the administrative borders of a relevant district. All this has made it possible to identify the geographic dimensions of the market in question as the administrative borders of the city of Volgograd.
At the moment of the survey, there were 57 manufacturers of bread and baked produce within the city boundaries. Six of them have major production capacities. Four out of six major bread manufacturers on the territory of the city are members of the VDH, and the remaining two are among the founders of LLC Volga Agro-Industrial Company, but do not qualify as «a group of entities.» The largest supplier of bread and baked produce to the territory of Volgograd is OJSC Volzhsky Bread Plant situated on the territory of the town of Volzhsky of the Volgograd region (is one of the founders of LLC Volga Agro-Industrial Company). The production capacities of the remaining manufacturers do not exceed 3 tonnes per day, and their share in the aggregate production capacity of all Volgograd bread manufacturers is less than 16%.
The market in question is highly concentrated, of the oligopoly type, with three leading manufacturers. The calculation of the market share of the group of entities on the basis of the «sales volume» characteristic showed that there is no absolute dominance of the VDH companies, i.e. they own a share of the market within the 35% - 65% band, which alone cannot provide sufficient proof for establishing the fact of dominance. Additional parameters were considered for purposes of qualifying the position of the economic entity in question as dominant, characterising the product market and confirming the economic entity's opportunity to act mainly independent of the competition. The following facts provide the evidence of the market power of the companies included in VDH, whose share in 2003 was more than 56% of the market of 1st grace wheat bread and 46.8% of the market of rye-wheat bread:
· The production capacities of the VDH companies on the considered brands of bread on the whole exceed 180 tonnes a day; they are opposed by individual manufacturers whose overall production capacities do not exceed 3 tonnes a day (with the minimal effective daily output volume of a major bread manufacturer being 25 tonnes), which potentially cannot reach the level of the largest manufacturers and are incapable of forming an equal competition to the companies;
· The wide selection of produce of VDH-controlled companies as compared to small bakeries ensure greater flexibility of the organisations' pricing policy (allows cross-subsidising of the output of different types of produce) and, consequently, their sustainability on the market. A differentiated produce selection also has a favourable impact on the marketing opportunities by allowing to cut transportation expenses and extend the geography of bread marketing;
· New market entries and increase of production volumes of the existing manufacturers are restricted by a high level of demand satisfaction. One of the indirect evidence of high level of demand satisfaction is the level of capacity utilisation of the companies, which averages for the city companies at 50% - 54%.
· Production extension is prevented by the concentration growth on the related market of retail sale of bread and baked produce;
· VDK has an opportunity of purchasing raw material at cheaper prices because of the large purchase volumes;
· VDH companies have an advantage of favourable disposition in the city: the bread plants are located throughout the geographic market and vary with the LLC Volga Agro-Industrial Company enterprises. Considering the fact that the average economically feasible sales radius (according to VDH data) is 20 km, and the distance between VDH companies does not exceed this margin, it can be affirmed that the aggregate marketing territories of each bread plant fully cover the geographical area of the market in question, which restricts market entry for new manufacturers.
· The VDH market power and its capacity to act as the price leader is confirmed by the fact that the change of the level of bread prices initiated by it in October 2003 and in January 2004, restraining the growth of prices despite a constant increase of the prices of raw materials, were supported by all market participants.
Summing up the above, one can state that the share of companies comprising VDH, their high market potential, existence of considerable barriers to market entry, lack of adequate competitors as far as production capacities are concerned, which could make a considerable impact on its behaviour, restrict VDH influence on the market and its ability to act as the price leader, as well as the specifics of the marketing territory and advantageous location on the geographic market make it possible to qualify the position of this economic entity as dominant.
The examination aimed at establishing the fact of a monopolistically high price consisted of the following stages:
· Examining the dynamics of utilisation of production capacities and sales volumes;
· Analysis of the profit from the point of view of its possible monopolistic overcharge;
· Cost dynamics analysis for detecting unjustified expenses in the cost structure.
In the course of the analysis the bread plants were considered as a group of entities, and their share on the relevant market was calculated on the basis of the aggregate sales volume of the 1st grade wheat bread and rye-wheat bread manufactured by them marketed on the territory of the city. However, it is incorrect to consider the aggregate financial characteristics of the production and business activity for inspecting the business activity of those companies from the viewpoint of possible detection of monopolistically high prices, as VDH does not practice the redistribution of financial results of activity of its member companies: each bread plant is an independent legal entity and has a ring-fenced balance sheet.
The comparison of the results of production and business activity with the corresponding parameters of other manufacturers and the average characteristics in the industry was conducted with account taken of the enterprises comparable with the VDH companies in the scope of their activity.
The growth of prices of wheat bread and rye-wheat bread at the represented enterprises was on average 190% and 188%, respectively, and as compared to the previous year - 45% and 44.6%, respectively.
Considering the fact that bread prices in 2003 were being constantly restrained despite a constant increase of the price of flour, in connection with which the amount of the companies' profit was sliding and at certain periods reached a negative figure for the bread brands in consideration, it was necessary to exclude the distorting influence of this factor on the analysed characteristics during the determination of the basic level of the considered parameters. The basic period in the survey was accepted as the moment preceding the first most significant increase of the flour price, namely the first quarter of 2003. The determination of the period preceding the price increase during which the volumes were supposed to be declining, evidencing the creation of artificial shortages, was based on the assumption that bread is a product of everyday demand with the expiration period not exceeding 36 hours, in connection with which the effect of an intentional lowering of supply volumes for purposes of creating a shortage may transpire as early as within three days. To determine the amount of lowering the sales volumes, which could be qualified as intentional for purposes of creating a shortage on the relevant market, it is necessary to take into account that this amount should exceed the aggregate underutilised capacities of the other manufacturers. Otherwise the competitors would gain an opportunity to slot into the vacant niche on the market resulting in a loss of a share of the market.
In accordance with the MAP explanation (VB/1034 of 14.03.1996), the utilisation of production capacities less than 70-80 percent is regarded as an indication of underutilisation of production capacities. Higher characteristics mean that production capacity are fully utilised. The approximate amount of considerable decline of the sales volumes that could be possibly qualified as intentional decrease of the supply volumes can be calculated as the sum of production capacities equal to the percent of underutilisation of equipment to the indicated figure (80%). Therefore, this figure for wheat bread is approximately 30 tonnes a day, for rye-wheat bread - 20 tonnes a day. The factor analysis of the sales dynamics suggested the conclusion of objective reasons for lowering the characteristics (specifically, the reduction of bread sales in January is an objective consequence of the annual drop in demand during the holidays and days after the holidays, which is confirmed by a similar drop in the bread sales volumes from other bread plants as well).
The analysis of profit gained from the brands in question and its comparison with the basis level is not precise, as the absolute amount of profit for a certain period cannot accurately reflect the developing tendencies due to its determination by a number of factors, which can vary in different periods and for different enterprises. In this connection, it is expedient to accept as the benchmark the profit rate - profitability.
A reasonable profitability level to be used in this situation for purposes of the analysis is its monthly average for 2002. As the change in bread demand is cyclical, the setting of a fixed-moment profitability level (April 2003 formerly accepted as the benchmark period during the price analysis) as a benchmark is insufficient. Moreover, the considerable fluctuations were observed in the amount of profit during the period from April 2003 to January 2004, connected with the change of the market situation, which has not been registered in 2002. The acceptance of the monthly average profitability over the period from April 2002 to April 2003 as the benchmark would enable to mitigate the distorting impact of the aforementioned factors. As we can see, the target profitability rate included in the new price is slightly higher than the calculated benchmark, which was a result of efficient technical and product policy (in 2003 VDH redistributed of the manufactured brands of produce among its bread plants, installed modern equipment and carried out a number of other technical measures optimising the technological process and cutting energy costs). Thus, the above facts demonstrate that the profit level included in the January price was not monopolistically overcharged.
As the Provision on the composition of expenses on the manufacture and sale of produce, included in the cost of produce, and on the order of forming financial results considered for profit taxation purposes has lost validity, the cost of produce is calculated in accordance with provisions of chapter 25 of the RF Tax Code.
Horizontal and vertical cost analysis prompted the conclusion that a considerable increase of the price of raw material was the major factor influencing the growth of the produce costs. The increase of the price of flour was caused by the following reasons:
The 2003 grain harvest in Russia was on the whole much worse than the 2001 and 2002 harvests, due to which the grain supplies of agricultural organisations, grain storage and processing enterprises reduced by approximately 30%, which led to a noticeable decrease in proportions of the grain supplies and demand in it. This situation on the grain market entailed a growth of the grain prices along the entire grain consuming chain. As a result, starting 2004, bread prices in the region skyrocketed due to a significant increase of the grain price. A similar situation formed in the other regions of Russia. In the neighbouring regions (Astrakhan, Voronezh, Saratov) bread prices were gradually increasing, following the growth of flour prices. The growth of prices of raw material for flour production was practically similar, and so was the growth of bread production costs and, consequently, the prices of bread. The proportion between these parameters varies insignificantly in different regions, which is a consequence of the aforementioned regional specifics.
The average growth of prices of wheat bread at VDK companies over the analysed period was insignificantly ahead of the growth of its production cost. In January 2004, the average increase of the cost of wheat bread was 177% of the level of the 1st quarter of 2003, while the prices increased 188%. The increase of the rye-wheat bread prices were behind the growth of its cost and totalled 190% of the basis level with the cost growth being 203%. An accelerated growth of the pace of price increase over the pace of cost growth for wheat bread seems objectively reasonable, as the restraint of prices in 2003 was exercised at the expense of profit cuts, which in some reporting periods was reflected in the negative amount of production profit.
The new level of prices (January 2004) ensures the growth of production profitability, whose target amount is 10%. According to VDH data, the prices of bread: 13.3 roubles/kg (1st grade wheat bread) and 11.1 roubles/kg (rye-wheat bread), and flour prices: 1st grace - 10,500 roubles (TD), 10,800 roubles (GOST), top grace - 11,600 roubles (TD), 11,900 roubles (GOST), rye - 7,950 roubles (white), 7,700 roubles (medium) ensure 10% profitability of the bread productions.
This prompts the following question: do the enterprises receive additional profit by increasing its produce prices in accordance with the resources price growth, disposing of raw materials purchased at the old price? If the bread plant continues selling the produce manufactures from these resources at the former price, it will face a situation where the purchase of resources to replenish its supplies at new prices will cause a drop in its profitability level calculated on the basis of reproductive rather than historic costs, i.e. the expenses that will have to be made to replenish the spent supplies of resources. If the company raises the price, the profitability calculated on the basis of historical costs will actually grow. But the manufacturer would not gain anything from this as it needs to increase the operating capital by either raising capital from external sources (which would result in a growth of the cost of the capital used) or by gaining additional profit. Consequently, the actual amount of current expenses on ensuring the company sales would increase to the same amount as the new resources purchased by its have become more expensive. And if it fails to compensate this by an immediate relevant increase of prices of its own produce, it will very soon find itself in a tough financial situation.
The analysed situation was as follows. Until January 2004, there has been no growth of bread prices proportionate to the growth of prices of flour. Enterprises used their raw material supplies and restrained prices at the expense of a drop of their profitability level to a certain moment in time - January 2004. The increase of production costs during the analysed period was not accompanied with a relevant growth of prices, and at certain periods the cost was higher than the price. One of the factors determining the relatively high level of bread production costs of Volgograd manufacturers (as compared to the other regions) is the low level of utilisation of production capacities, which leads to the growth of conditionally constant outlays and, therefore, the price itself. As indicated above, the level of production capacity utilisation at the VDH companies in January 2004 was 37% for 1st grade wheat bread and 42% for rye-wheat bread. However, if the said underutilisation of the production capacities were aimed at compensating unjustified expenses, the share of conditionally constant outlays in the structure of cost would be steadily growing. However, their share during the periods under consideration was falling for wheat bread by 49% and for rye-wheat bread by 30%.
One of the criteria of unreasonableness of expenses in the structure of costs may be the accelerating growth of material expenses as compared to the industrial wholesale price index. In our case, it is expedient to consider the flour and cereal industry, as the price situation of this particular sector has the most significant direct impact on the cost of the produce in question. The growth of wholesale prices in the industry was 1.4 times larger than the average increase of the production costs at the VDH companies.
The analysis of the purchase prices of VDH Trading House (raw material for VDH companies was purchased in a centralised way - via the VDH Trading House) shows that the highest prices of wheat flour were set by OJSC Gorodishchnsky Bread Products Plant - the largest supplier of the Trading House.
At the same time, the purchase of raw material accounting for the biggest share in the structure of the bread cost by the bread manufacturer at a price exceeding the market average under the present circumstances acts as a factor of additional expenses, and the availability of a choice of more economically feasible supply sources provides grounds to qualify these expenses as unreasonable. The considerable market power of VDH and its opportunity to act as the price leader enable this manufacturer to compensate the growth of the said outlays by raising the price of its produce. Therefore, the VDH-initiated increase of prices of mass consumption brands of bread in January 2004 could be caused by a desire to compensate unreasonable expenses sustained by the economic entity as a result of purchase of flour at a price exceeding the market level.
According to Art. 4 of the Law «On Competition and Restriction of Monopolistic Activity on Product Markets,» the price of a product set by an economic entity occupying a dominant position on the product market during which this economic entity compensates or can compensate unreasonable expenses shall be recognised as a monopolistically high price.
At the same time, Art. 5 of the Law stipulates that a monopolistically high price shall be prohibited only if it is proven that these actions result or can result in prevention, restriction, elimination of competition and (or) infringement of the interests of other economic entities. Therefore, even if the price set by the dominant economic entity meets the characteristics qualifying for a monopolistically high price, according to the definition provided in Art. 4 of the Law, the very fact of setting such a price cannot be recognised as dominance abuse. Monopolistic overpricing can be considered as a violation of the antimonopoly legislation in the event of prevention, restriction, elimination of competition and (or) infringement of the interests of other economic entities. The economic essence of a monopolistically high price of a product (unlike a monopolistically low price) does not contain the elements of competition restriction on the market and infringement of the competitors' interests. In other words, the offer of a product at a monopolistically high price can only infringe the interests of potential and existing consumers. The specifics of the bread market as applied to the analysed situation consists in the following. Bread manufacturers market their produce on the wholesale market - to shops, and on the retail market through their own retail network. Considering a lack of specialisation and a tendency towards an increase of the selection of the marketed produce, the low share of bread in the overall volumes of turnover, one can state that the fluctuations of prices of mass consumption bread have practically no impact on results of business activity of the retail enterprises (which is also substantiated by returns of a poll conducted among the shop managers). In this connection, the infringement of the interests by an increase of prices of the considered produce takes place with respect of the end consumers - physical persons.
The setting of a monopolistically high price of socially significant brands of bread cannot be qualified as a violation of the antimonopoly legislation, as it infringes only the interests of physical persons, rather than economic entities, as required by the legal provision.
On the basis of the above, a conclusion was made that in keeping with provisions of effective law, the actions of JSC UK Volgo-Don-Khleb, consisting in the January increase of prices of socially significant brands of bread and containing the elements of a violation of Art. 5 of the Law on Competition, as well as the actions of JSC UK Volgo-Don-Khleb and OJSC Gorodishchnsky Bread Products Plant, containing possible elements of a violation of Art. 6 of the Law on Competition, cannot be qualified as a violation of the antimonopoly legislation.
5. Conclusions
Therefore, the practice of detecting monopolistically high prices encounters serious enforcement complications. The effective definition contains only the resulting elements of qualifying a monopolistically high price. A monopolistically high price contains make elements, many of which were excluded, and the remaining ones are scattered in the article on dominance abuse of the Law, and are in no way connected with the definition of a monopolistically high price. For example, the reduction or termination of the output of products for which there is a demand or customer orders despite the existence of a loss-free possibility of their production, and withdrawal of a product from circulation constitute independent forms of dominance abuse, which have no relation to a monopolistically high price. Art. 4 of the draft defines dominance abuse as action (omission) of a legal entity (group of entities) occupying a dominant position, which results or can result in prevention, restriction, elimination of competition and (or) infringement of the interests of other persons. Therefore, to qualify actions consisting in the reduction or termination of output of a product and withdrawal of products from circulation as dominance abuse it is necessary to prove the fact of prevention, restriction, elimination of competition and (or) infringement of the interests of other persons, which is practically impossible without proving the fact of overpricing, gaining excess profit or compensating unreasonable expenses. According to their economic essence, the actions presented in Art. 5 of the draft as independent forms of dominance abuse are factor elements of a monopolistically high price, and provisions containing them are difficult to apply in practice. In addition, such a qualification element of the analysed type of offences as infringement of the interests of economic entities excludes the possibility of applying the provision of this article to markets which have similar specifics as bread.
Vologda Directorate of the FAS
Description of the Case on Concerted Actions on the Product Market of Technical Maintenance of Cash Registers
The Department of the FAS for the Vologda region received an application on 06.03.2005 from OJSC Optimekh Production Association with a request to investigate the activity of organisations carrying out technical maintenance of cash registers from the point of view of detecting possible violations of the antimonopoly legislation, specifically, the elements of a price collusion between LLC Enery and LLC Artol, as well as the other technical maintenance centres which have simultaneously increased the price of technical maintenance of cash register Mercury - 115 F from one hundred to two hundred roubles a month.
According to the applicant, the market price of technical maintenance of this brand of cash register in 2003 and 2004 varied from 80 roubles a month to 180 roubles a month.
Reference:
Cash registered included in the State Register are obligatorily used on the RF territory by all organisations and individual entrepreneurs in conducting cash settlements and (or) settlements with the use of payment cards during the sale of products, fulfilment of jobs or rendering of services (Art. 2 (1) of the Federal Law «On the Use of Cash Registers for Conducting Cash Settlements and (or) Settlements with the Use of Payment Cards» No.54-FZ of 22.05.2003.
Persons using cash registers can use them only after they have been accepted for technical maintenance at a technical maintenance centre and registration with the tax authorities. These persons are not empowered to use the services of any enterprises of physical persons for technical maintenance and repair of the cash registers, except the maintenance centres which has accepted the cash register for maintenance (item 10 of the Provision on the Order of Sales, Technical Maintenance and Repair of Cash Registers in the RF» approved by Decision of the State Interdepartmental Expert Commission of 06.03.1995).
Technical maintenance and repair of cash registers should be conducted by organisations registered as centres of maintenance of concrete cash registers (item 9 of the Provision on the Use of Cash Registers for Conducting Monetary Settlements with the Population» approved by RF Governmental Decree No. 745 of 30.07.1993).
The analysis of the market of technical maintenance services of cash register Mercury - 115 F has revealed fifteen technical maintenance centres selling the said services, seven of which - LLC Ampersand, LLC Artol, LLC BusinessPartner, OJSC Vologdatorgtekhnika, LLC Temp, LLC Toir, and LLC Enei - in accordance with their price lists and contracts, have set a uniform price of technical maintenance of the aforementioned type of cash register in the amount of two hundred roubles a month starting 01.0102005.
The analysis of data on financial and business activity of these economic entities shows that the overhead expenses in the cost structure of the services of technical maintenance of cash registers, specifically Mercury - 115 F (salary of the personnel, transportation expenses, rent, repair jobs under rental agreement, public utilities fees, communications, stationery, taxes, spares, personnel training) are different for each of them. Considering that the overheads constitute one of the principal elements of the cost of technical maintenance centres' services, each of them should have established its own price of the said service, different from the other sellers.
Therefore, the increase of prices of technical maintenance of cash register Mercury - 115 F to a single level starting 01.01.2005 in spite of a lack of economic reason for this enables to qualify the behaviour of the above economic entities as concerted actions to establish and maintain prices enabling to receive illicit profit and leading to restriction of competition on the market of technical maintenance of cash registers, specifically Mercury - 115 F, IN the city of Vologda.
Art. 6 (1) of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» (hereinafter - the RSFSR Law on Competition) prohibits concerted actions of economic entities operating on the market of the same product, which result in the setting and maintenance of prices.
Art. 6 (2) of the RSFSR Law on Competition prohibits concerted actions of economic entities operating on the market of the same product, which result or can result in prevention, restriction, elimination of competition, and infringement of the interests of other economic entities.
On the basis of the obtained data, the Department issued determination No. 526 of 11.05.2005 initiating a case of violation of Art. 6 of the RSFSR Law on Competition against the seven aforementioned economic entities.
Representatives LLC BusinessPartner and LLC Temp told the Commission session about the change of the price of technical maintenance of cash register Mercury - 115 F. LLC BusinessPartner has increased the price to 220 roubles, and LLC Temp reduced it to 180 roubles. Thus, these two organisations have voluntarily terminated the violation of the antimonopoly legislation.
The oral explanations of a LLC Artol representative were that this organisation has established the tariff of 200 roubles for technical maintenance of this brand of cash registers on 05.10.2004, which is in fact three months earlier than the other technical maintenance centres.
Representatives of economic entities drew the Commission's attention to the fact that the main line of activity of these organisations is the sale of various brands of cash registers, while the condition of technical maintenance of these devices is in fact an advertising gimmick.
Today, the consideration of the case has been postponed to 19.07.2005 in connection with the need to obtain documents the existence of which was stated by the organisations' representatives at the Commission session.
The Commission came to the conclusion that five of the seven economic entities with respect of which a case was initiated have violated Art. 6 of the RSFSR Law on Competition. Information on two of them is being specified.
The Department has requested relevant documents for calculating profits gained as a result of violation of the antimonopoly legislation.
Therefore, we have an example of concerted actions between economic entities conducing activity on the product market of technical maintenance centres of cash registers in the city of Vologda (horizontal agreements) holding an aggregate share of services rendered on this market of over 65%.
The product market of cash registers sales has practically formed, and its situation determines the situation on the market of servicing of this product.
Considering the case of violation of Art. 6 of the RSFSR Law on Competition versus the Vologda city technical maintenance centres, the Department has encountered a number of problems:
1. since which moment should actions of economic entities be considered concerted: should these actions coincide strictly to the day, or is some interval possible between them (one, two, three days or more)?;
2. what prices (tariffs) can be considered concerted: only those that fully coincide or also those the difference between which is insignificant (what is the possible gap in prices, in percent)?;
3. what is the correct way of calculating the profit gained as a result of violations of the antimonopoly legislation, subject to collection in favour of the federal budget:
· from the entire activity of the violator;
· only from the form of activity which was conducted with a violation (e.g. technical maintenance of cash registers of various brands constitutes 5% of the overall volume of all forms of activity of technical maintenance centres);
· only with respect of the brand of the cash registers (Mercury - 115 F) the maintenance of which was conducted with a violation.
One of the conclusions made by the Commission considering this case is a proposal to introduce amendments to the Federal Law «On the Use of Cash Registers for Conducting Cash Settlements and (or) Settlements with the Use of Payment Cards» No.54-FZ of 22.05.2003 introducing the requirement of obligatory use of cash registers by representatives of small and medium business, everyone who pays a single tax on imputed income.
Obliging organisations and individual entrepreneurs to use cash registers for conducting settlements during the sale of goods, fulfilment of jobs or rendering of services, the state thus erects an administrative barrier on the pay of development of small and medium business. The condition of obligatory use of cash registers can bring practical use only to public officials exercising fiscal functions, supervising the registration of cash registers and their property utilisation, and also to organisations selling cash registers and conducting their technical maintenance.
Deputy Department Head V.T. Khlevchyuk
Voronezh Directorate of the FAS
Voronezh Department of the Russian FAS vs. JSC AC Polet (Art. 5 of the Law on Competition)
Resume: An economic entity - JSC AC Polet - dominates on the market of passenger air transportation services. In violation of Art. 5 of the RSFSR Law on Competition, AC Polet infringes the interests of limited liability company Central Air Communications Agency by erecting barriers to its access to the market of air ticket sales. The main difficulties in implementing antimonopoly measures are connected with ensuring the reflection of mutual connection and mutual dependence of the market of passenger air transportation services and the market of air tickets sales services.
Merits of the Case:
The Voronezh Department of the Russian FAS received an application from limited liability company Central Air Communications Agency (hereinafter LLC CAVS) concerning the violation of Art. 5 of RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» by JSC Aviation Company Polet (hereinafter - JSC AC Polet), which has shut off the access to the resource of seats on the air company's flights.
The consideration of the presented materials resulted in the initiation of a case on the elements of a violation of Art. 5(1) of the RSFSR Law on Competition. The Commission of the Federal Antimonopoly Service Department for the Voronezh region (hereinafter - the Department) established the following.
One of the main lines of activity of limited liability company Central Air Communications Agency, according to item 3.4 of its Articles of Association, is air transportation of passengers and cargoes. In keeping with Art. 4 of the Law on Competition, a product is the result of activity (including jobs, services) designated for sale, exchange or other input into circulation. Therefore, the product supplied to the market by JSC AC Polet consists in the service of passenger air transportation.
Proceeding from the consumer's economic possibility to purchase this product, the air transportation service, on the relevant territory and a lack of such a possibility outside its borders, the geographic dimensions of the product market in question (the territory where the consumers purchase or can purchase the product) should be considered as the city of Voronezh.
Passenger air transportations in the Voronezh region are currently exercised by the following economic entities: JSC Aviation Company Polet, OJSC Aviation Company LII named after M.M. Gromov, JSC Astair Aviation Company, OJSC Novolipetsk Metallurgical Works, etc.
The quantitative parameters of passenger transportation are presented in the table.
In accordance with Art.4 of the Law on Competition, a dominant position is the exclusive position of an economic entity on the market of a product that has no substitute, offering it the opportunity to render a decisive influence on the overall terms of the product circulation on the relevant product market or hinder other economic entities' market access. The position of an economic entity is recognised as dominant if its share on a certain product market is 65 percent and more.
Therefore, JSC AC Polet, whose share on the product market of passenger air transportation services is 75.2%, currently occupies a dominant position on this market.
Consumers of passenger air transportation services are natural persons who intend to use them.
Air transportations are possible only when the passengers have air tickets to a certain flight with a concrete destination, according to the air company timetable. The sale of air tickets is conducted by economic entities holding a relevant license.
The sale of passenger air transportation services is possible on condition of accreditation of an economic entity with JSC Transport Clearing Chamber (hereinafter - TCC) to the flights of any air companies which have concluded an agreement with the TCC on the organisation of sales on standard transportation document forms of air transportation settlements. The sale of air tickets to the flights of passenger air companies is possible only with an access granted to their resource of seats, which can be opened or closed by the aviation companies to their own resource of seats for accredited agencies and their sales points. Therefore, the markets of passenger air transportation services and sale of air tickets are very closely connected. The sale of air tickets cannot be exercised without the opening of access to the resource of seats by an air company.
It has been established that the following agencies accredited with TCC and having contractual relations with it operate on the product market of air ticket sales in the city of Voronezh: LLC CAVS, LLC LENG (legal address: Voronezh, 4, Perevertkina St., office 35), the Voronezh branch of JSC East-Line (Voronezh, 27, Nikitinskaya St.), as well as JSC AC Polet agency (Voronezh, 123, Truda Pr.) which is a sub-agent of LLC MAVINS (Moscow, 1, Volokolamskoe Shosse, office 610G), and some other economic entities.
LLC CAVS is an economic entity in Voronezh which has, according to its Articles of Association, the sale of air tickets as one of the lines of activity. In accordance with the license issued on 27.06.2002 by the State Civil Aviation Service of the RF Transport Ministry No. GSOP 002925, LLC CAVS is granted the right to conduct the activity of ensuring air transportations (type of the services rendered - sale and booking of passenger flights).
The materials of the case includes copies of the JSC AC Polet agreement with TCC, the LLC CAVS TCC accreditation certificate, as well as LLC CAVS agreement with TCC on the sale of air tickets to the air companies' flights. A direct agreement on the sale of air tickets between JSC AC Polet and LLC CAVS has not been concluded.
In April 2004, JSC AC Polet prohibited LLC CAVS to sell tickets to its flights closing its access to the resource of seats. As established in the course of the investigation conducted by the Department, the said closure of access by JSC AC Polet concerned only LLC CAVS sales points. According to the information provided by LLC LENG, the Voronezh branch of JSC East-Line, and confirmed by JSC AC Polet, other agencies' access to the resource of the air company's seats was not closed.
The Commission has not discovered any laws or regulations governing the order of granting, restriction and closure of access to the resource of an air company's seats to an agency conducting the sale of air tickets, and no such laws or regulations were presented by the case participants.
Actions of the parties which have contractual relations with TCC related to these issues are regulated only by the rules established by JSC Transport Clearing Chamber, specifically, the Procedures for Regulating Air Transportation Sales Rights on TCC Forms by Accredited Agencies within Automated Booking Systems (ABS), approved by TCC President on 18.02.2003. The Procedures envisage a number of conditions which may result in restrictions in the transportation sales rights by agencies. They are also regulated by the Standard Agreement on the Organisation of Sales on SPD forms and Settlements for Air Transportations, concluded with the transport organisation, item 2.4.6 of which grants the air company the right to close (open) to accredited agencies and their sales points the access to their own recourse of seats with subsequent TCC notification.
According to TCC response (outgoing No. 2/1-21-76-20) to the Department's request (outgoing No. 04-16/809 of 11.08.2004) for information on the closure of access to the resource of seats for LLC CAVS and other agencies conducting their activity on the territory of the Voronezh region, JSC Transport Clearing Chamber does not dispose of the information on the closure of access and has not taken any such actions itself with respect of LLC CAVS either.
JSC AC Polet occupies a dominant position on the market of providing passenger air transportation services and has an opportunity to influence the agencies' activity on the sale of air tickets.
By creating barriers to the market of air tickets sales for LLC CAVS, JSC AC Polet has placed this economic entity in unequal conditions as compared to the other economic entities operating on the same market. Such actions contradict the requirements of Art. 10 of the RF Civil Code, directly prohibiting the use of civil rights for purposes of restriction of competition, as well as dominance abuse on the market, which is also banned by Art. 5 of the Law on Competition.
Proceeding from the above and guided by Art. 27 (1 and 2) of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» and item 2.12 of the Ruled of Considering Cases of Violation of the Antimonopoly Legislation, the Commission decided to qualify the actions of JSC Aviation Company Polet, occupying a dominant position on the market of passenger air transportation services, consisting in erection of barriers to access on the passenger air transportation services market, placing LLC Central Air Communications Agency in unequal positions as compared to the other economic entities operating on the same market and resulting in infringement of the interests of LLC CAVS, as a violation of Art. 5 (1) of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» and to issue an instruction to JSC AC Polet to terminate the violation of the antimonopoly legislation.
JSC AC Polet filed a claim with the Voronezh regional arbitration court to invalidate the decisions and instructions of the Voronezh Department of the Russian FAS. The decision of the arbitration court and the ruling of the arbitration court of appeals have dismissed the claims of JSC AC Polet.
Head of the Voronezh Department of the Russian FAS V. Shamrai
Legal Department of the FAS
Description of a Case of Violation of the Antimonopoly Legislation by OJSC CentrTelecom
The Russian FAS has considered the application filed by OJSC CentrTelecom on 24.12.2004 No. 0200-09-736/5494 (hereinafter - the Application) to invalidate the decision and instruction of the Russian FAS of 26.10.2004 No. 1 05/72-04 on the violation of the antimonopoly legislation (hereinafter - the Decision and Instruction of the Russian FAS), and found the stated arguments void, and dismissed the requirements.
In accordance with Art. 13 (paragraph 1) of the Russian Federation Civil Code (hereinafter - the RF CC), a non-regulatory act inconsistent with the law or other legal acts and violating civil rights and legally protected interests of a citizen may be invalidated by the court.
The joint ruling of the Supreme Court of the Russian Federation Plenum and the Supreme Arbitration Court of the Russian Federation Plenum of 01.07.1996 No. 6/8 «On Some Aspects of Application of Part One of the Russian Federation Civil Code,» in particular, the second paragraph of item 1, stipulates the following: «If the court decides that the contested act is inconsistent with the law of other legal acts and restricts civil rights and legally protected interests of a citizen or a legal entity, it can recognise such act invalid in keeping with Art. 13 of the RF CC.»
Therefore, to invalidate the contested acts, the Russian FAS needed two obligatory conditions, namely, inconsistency with the law and violation of the applicant's rights.
The applicant's duty to prove the violation of its rights is stipulated by Art. $ (1), Art. 65 (1), Art. 198 (1), and Art. 201 (2) of the Russian Federation Code of Arbitration Procedure (hereinafter - APC).
In the opinion of the Russian FAS, the applicant's arguments do not prove that its rights and legal interests have been violated, and the allegations concerning the violation of legal norms during the adoption of the contested acts by the Russian FAS Commission for considering the case of violation of the antimonopoly legislation (hereinafter - the Russian FAS Commission) do not correspond to reality.
1. The Decision and Instruction of the Russian FAS have been adopted within the frames of competence of the Russian FAS in strict compliance with the procedural law.
In keeping with Art. 11 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» No. 948-1 of 22.03.1991 (hereinafter - the Law on Competition) and the Statute of the Federal Antimonopoly Service approved by Russian Federation Governmental Decree No. 331 of 30.06.2004, the Russian FAS is a federal executive authority responsible for conducting state policy of promoting the development of product markets and competition, state control over the observance of the antimonopoly legislation, as well as prevention and termination of monopolistic activity, unfair competition and other actions restricting competition.
According to Art. 12, 22, and 17 of the Law on Competition, in the presence of elements of a violation of the antimonopoly legislation the Russian FAS is entitled, including on the basis of applications filed by economic entities, to initiate cases on results of consideration of which to pas decisions and issue binding instructions.
The procedures for considering cases of violation of the antimonopoly legislation is prescribed by the Rules of Considering Cases of Violation of the Antimonopoly Legislation approved by Order of the Russian MAP No. 91 of 25.07.1996 (hereinafter - the Rules).
Case No. 1 05/72-04 was initiated by the Russian FAS on the basis of an application filed by JSC Elcatel pointing out the violations of the antimonopoly legislation by JSC CentrTelecom. The case was considered by the Russian FAS Commission in strict compliance with the Law on Competition and the Rules.
In the course of consideration of case the Russian FAS Commission has established that the actions of JSC CentrTelecom, which is a natural monopoly on the market public telecommunication services, consisting in unjustified refusal from concluding a contract on connection a telecommunication network to the local public telecommunication network (hereinafter - the Contract) with JSC Elcatel and hindering its access to the market of telephone communications in the town of Elektrostal, contradicts Art. 5 (1) of the Law on Competition.
On results of consideration of case No. 1 05/72-04, the Russian FAS issued the contested Decision and Instruction.
Therefore, the Decision and Instruction of the Russian FAS have been issued within the frames of competence of the Russian FAS in strict compliance with the procedural law.
2. The Decision and Instruction of the Russian FAS have been issued justifiably and in compliance of substantive law.
2.1. In the process of consideration of case No. 1 05/72-04, the Russian FAS Commission has established the following circumstances.
On 06.02.1998 the Russian Ministry of Communications issued license No. 9347 to JSC Elcatel to provide local and area telephone communication services on the territory of the Moscow region.
In keeping with its license terms, JSC Elcatel has order OJSC Giprosvyaz to draw up a project of JSC Elcatel telephone network construction. The technical specifications for designing the network have been coordinated with the State Committee for Telecommunications.
In August 1999, OJSC Giprosvyaz has completed the project design requested by JSC Elcatel, «Communication organisation scheme for creation of a digital superimposed telecommunication network of JSC Elcatel in the Eastern part of the Moscow region.» The project has undergone expert evaluation at the Federal State Municipal Enterprise Svyazekspertiza.
In March 2000, JSC Elcatel filed an application to OJSC Giprosvyaz for receiving a numbering resource of the Moscow regional telephone network necessary for development of the JSC Elcatel network.
In May 2000, license No. 9347 expired. The period allocated for the launching the provision of services turned out insufficient for receiving a numbering resource and technical specifications from OJSC Electrosvyaz Moscow Region
In July 2000, JSC Elcatel received a new license, No. 15583, the terms of which fully coincided with the former license.
OJSC Giprosvyaz conducted an analysis of the Moscow region local telephone network utilisation and offered to reserve with JSC Elcatel the unused indices «avh» in the ABC code = 096.
In accordance with the letter of the Russian Ministry for Communications of 27.12.2000, a relevant numbering resource has been allocated to JSC Elcatel in the Moscow region telephone network in the ABC code = 096. It was stated at the same time that the allocated numbering resource should be put into operation within two years from the moment of its allocation.
OJSC Electrosvyaz Moscow Region applied to the Russian Ministry for Communications with letter of 23.01.2001 for an explanation in connection with the received information on the allocation of the index «9» to JSC Elcatel.
In its letter of 24.04.2001, the Russian Ministry for Communications has altered its decision: the numbering resource formerly allocated to JSC Elcatel was transferred in the Russian Communication Ministry reserve, and a numbering resource half the size of the former one was allocated to JSC Elcatel.
JSC Elcatel has repeatedly (14.02.200, 17.04.2000) filed requests with OJSC Electrosvyaz Moscow Region for the issuance of technical specifications for connecting JSC Elcatel to the local public telephone network in the town of Elektrostal. The requested technical specifications were issued only in December 2000, by OJSC Electrosvyaz Moscow Region letter of 11.12.2000.
Along with solving the issues related to the allocation of numbering and receipt of technical specifications for connection, JSC Elcatel has concluded a contract of 26.12.2000 with OJSC Giprosvyaz on development of a working project «Connection of the JSC Elcatel telephone network to the telephone network of the town of Elektrostal of the Moscow region.» The communications organisation design developed within the frameworks of the said project was sent to OJSC Electrosvyaz on 17.01.2001 for approval.
After the approval, OJSC Giprosvyaz launched the development of the project, which was completed and presented to the customer.
In a letter of 01.04.2002, the ready package of documents on the connection project was sent for approval to JSC CentrTelecom (a successor of OJSC Electrosvyaz Moscow Region).
JSC CentrTelecom, in its letter of 16.12.2002, has approved the aforementioned working project, adjusted and completed on the basis of remarks, and at the same time informed that a connection contract will be concluded only after solving the issue of designing an outlet to optic distribution frames and interfaces of the JSC Elcatel-owned optic fibre with the multiplex equipment, as well as after the conclusion of a rental agreement of conduit runs where the said optic fibre is installed.
At the same time, in its letter of 03.12.2002, JSC CentrTelecom refused to introduce additions to the rental agreement of telephone conduits between JSC CentrTelecom and JSC Elcatel under the pretext that it did not have executive documentation specifying the location and length of the JSC Elcatel-owned fibre-optic line.
JSC Elcatel notified JSC CentrTelecom in its letters of 20.01.2003 and 22.01.2003 that the said fibre-optic line has been formerly used not only for the organisation of cable television broadcasting in the town, but also for organising inter-station connections of the town's first digital automated telephone station ATS-7 owned by JSC CentrTelecom with the other ATS in the town of Elektrostal (ATS-2, ATS-3, ATS-5, ATS-6) as recently as until 2002. JSC Elcatel has repeatedly offered to include in the said rental agreement of telephone conduits the term of rent of additional sections of conduit runs, and also filed a request to conclude a contract on connection of the JSC Elcatel telephone network to the telephone network of the town of Elertrostal of the Moscow region.
Hence, starting in 1998, JSC Elcatel has for five years been unable to exercise its statutory activity of providing local and area telephone communication services.
According to the 17.09.2004 report on inspection of JSC CentrTelecom activity conducted by the Moscow city and Moscow region Communications Control Department (Rossvyaznadzor), there is a technical possibility for both connecting the JSC Elcatel equipment to the JSC CentrTelecom network and for restoring the JSC Elcatel-owned fibre-optic line installed in the JSC CentrTelecom conduit run.
In addition, the Commission of the Russian FAS has established that in keeping with item 23 of the Russian Federation Governmental decree of 19.10.1996 No. 1254, designing the existing fibre-optic line by JSC Elcatel is not necessary.
In accordance with item 4.8 of the Decision of the State Committee for Telecommunications of 28.06.1996 No. 153, the project approval burden lies on the designer and is optional.
It should also be mentioned that a representative of Rossvyaznadzor for Moscow and the Moscow region present at the hearing of the case by the Russian FAS Commission explained that there are no obstacles to conclusion of a connection contract between JSC Elcatel and JSC CentrTelecom.
During the issuance of the contested acts, the Commission of the Russian FAS was also guided by the following considerations.
According to Art. 19 of the Federal Law of 07.07.2003 No. 126-FZ «On Communications» and item 27 of the Russian Federation Governmental Decree of 19.10.1996 No. 1254, telecommunication network operators participating in the connection process should conclude a contract on fulfilment of mutual obligations related to connection, taking into account the satisfaction of users' interests in providing high-quality telecommunication services and specifying:
· the volume of connection jobs and their distribution interacting operators of telecommunication networks;
· mutual obligations and liability of the parties, including on issues relevant to the quality of telecommunication services provided to the users.
Therefore, the conclusion of such a contract should precede the actual implementation of the connection jobs.
On 17.09.2004, JSC CentrTelecom sent a signed offer of a connection contract to JSC Elcatel. However, JSC Elcatel refused to accept this offer referring to contradictions between items 1.1 and 6.3 of the Connection Contract.
The Russian FAS Commission considered such refusal motivated, considering that item 6.3 deliberately restricts the possibility of JSC Elcatel, granted under item 1.1, to organise the implementation of the working project on connection of the JSC Elcatel communication network to the public network on the basis of technical specifications issued by JSC CentrTelecom.
Moreover, the aforementioned item 6.3, enabling JSC CentrTelecom to unilaterally cancel the contract, is missing from a similar connection contract concluded between JSC CentrTelecom and LLC Noginsk Telephone Company, exercising its activity on the territory of the Noginsk district of the Moscow region, presented by JSC CentrTelecom in compliance with the determination of the Russian FAS of 04.10.2440.
Art. 5 (1) of the Law on Competition prohibits actions of an economic entity occupying a dominant position on a relevant product market, aimed at the hindering, restriction or elimination of competition and/or infringement of the rights and lawful interests of other economic entities.
JSC CentrTelecom is a natural monopoly in the communication sphere, occupying a dominant position on the markets of provision of telephony services, and is included in the Register of Economic Entities holding over 35% share on a certain product market.
In view of the above circumstances, the Russian FAS Commission has lawfully detected the violation of Art. 5 (1) of the Law on Competition, manifested in hindering access to the market of telephone communication services in the town of Elektrostal and unjustified refusal from concluding a connection contract.
JSC CentrTelecom filed an appeal to the Moscow city arbitration court for invalidating the Decision and Instruction of the Russian FAS on this case.
The first instance court ruled that the Decision and Instruction of the Russian FAS have been issued within the frames of competence, justifiably, and in compliance with substantive law.
JSC CentrTelecom disagreed with this court ruling and filed an appeal with the arbitration court of appeals No. 9 against the ruling of the Moscow city arbitration court.
By the moment of preparing this case description the session of the court of appeals on this case has not been held yet.
Legal Department Adviser,Russian FAS A.A. Yeliseev
Department for Transport and Communications Monitoring and Control of FAS
Consideration of Case No. 1-05/1 05 of Violation of the Antimonopoly Legislation in the Form of Dominance Abuse by OJSC RZhD
The Department for Transport and Communications Monitoring and Control considered an application filed by OJSC Baltika Brewery (hereinafter - OJSC Baltika) concerning the violation of Art. 5 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» No. 948-1 of 22.03.1991 (hereinafter - the Law on Competition) by OJSC Russian Railways (hereinafter - OJSC RZhD), consisting in the actions of a dominant economic entity on the market of railway transportation of cargoes, aimed at prevention, restriction and elimination of competition and infringement of the interests of other economic entities, hindering economic activity of OJSC Baltika on the market of transportation services by issuing OJSC RZhD telegram No. HZ-10464 of 02.11.2004, reducing the former terms of beer delivery on special conditions to 10 days, which makes it impossible to use the boxcars specially re-equipped for beer transportation along the entire geographic area of ready produce consumption, compelling the cargo owners to use the services of the refrigerator rolling stock owned by OJSC RZhD subsidiary Refservis; and initiated case No. 1-05/1 05 of violation of the antimonopoly legislation by OJSC RZhD.
OJSC RZhD presented its explanations at the session of the Russian FAS Commission, stating that in accordance with Art. 8 of the Charter, in cases when transportation conditions are not specified by the rules of railway transportation of cargoes, the transportation organisation and the consignors may envisage special conditions of transportation of such cargoes, and the responsibility of the parties for their transportation and integrity by relevant contracts (contracts on cargo transportation on special conditions). The terms of cargos transportation contracts on special terms constitute an exception from the general rules of transportation.
According to Art. 426 of the Russian Federation Civil Code, the contract on cargo transportation on special conditions is not a public contract (unlike the cargo transportation contract on common conditions prescribed by the legislation). The Charter and the Rules of cargo transportation on special conditions do not contain provisions compelling a transport organisation to conclude contracts on cargo transportation on special conditions; the conclusion of such a contract is a right, rather than duty of a transport organisation.
In keeping with item 8.15 of the Rules, deciding the issue of establishing timeframes for cargo transportation in the winter season by thermally insulated boxcars is assigned to the transport organisation, the terms of cargo transportation on special conditions offered to all consignors of certain perishable goods are the same, which meets the principal competitive requirements.
The Russian Railway Ministry permitted the transportation of pasteurised beer on special conditions in the consignor's own thermally insulated boxcars during 15 days as an exception (letter of the Russian Railway Ministry No. D-14546 of 17.12.2001).
Therefore, in the period from 2001 to 2003 the transportation of pasteurised beer was carried out as an exception on decision of the federal executive authority for the railway transport.
All the above telegrams of the Russian Railway Ministry allowed the transportation of pasteurised beer only for a particular period, i.e. were restricted in time. After the expiration of the above period the telegrams and contract on cargo transportation on special conditions have expired.
The applicants were aware that as the terms of beer transportation contracts on special conditions were introduced as an exception, their actions involving the purchase, re-equipment of the rolling stock, concluding agreements with the produce consignees, and profit planning constituted a usual business risk.
Having heard the explanations offered by the parties and examined the presented evidence, the Commission established the following circumstances:
· The transportation of ready produce by re-equipped thermally insulated boxcars is an objective necessity for enterprises of the sector.
· The available refrigerator cars owned by OJSC RZhD subsidiary, Refservis, in the amount of 2,300 do not fully meet the demand of users of the railway transportation services in the transportation of perishable goods.
· The amount of ready produce transported by a refrigerator car is 33% less than by the company's own thermally insulated boxcar. The capacity of a boxcar is 68 tonnes, and the capacity of the OJSC RZhD refrigerator car is 46 tonnes.
· The tariff on transportation by a refrigerator car is on average 3.8 times higher compared to the company's own or rented boxcars thermally insulated according to special technologies.
· The loading in refrigerator cars can be performed only manually, as the height of the door opening is less than that of the boxcar, preventing automated produce loading. The total car loading time is higher, and, consequently, the car turnover increases.
The restriction by OJSC RZhD of the period of beer transportation by thermally insulated boxcars on special conditions from 15 to 10 days compels the consignors to reload the beer into motor transport after 10 days of travel for further delivery to the consignee or, also upon the expiry of 10 days of travel, to open up the car, heat it and only then serve the car for further transportation. All this increases transportation expenses and adds to the produce sales price, which in turn lowers the competitiveness of the produce in the regions and restricts consumer rights. A forced repeated service of one and the same car for transportation after the expiration of a 10-day period brings additional profit to OJSC RZhD, and enhances the characteristics of cargo and transportation work.
It is also necessary to mention that the refrigerator rolling stock is not manufactured at present (it used to be manufactured by the Bryansk machine-building plant, but the plant currently does not manufacture refrigerator rolling stock; and the Dessau plant situated on the territory of the former German Democratic Republic, which no longer exists), its maintenance is expensive, with all repair and servicing capacities owned by OJSC RZhD. Most of the refrigerator park (80%) is based in the subsidiary - Refservis, which, according to the reform plan, is to be reorganised into a subsidiary in the sphere of specialised transportation of cargoes by refrigerator cars.
Beer manufacturers experience severe competition, both between each other and with foreign breweries (many world-renown beer brands are manufactured in Russia for purposes of cutting transportation expenses). Competition is both regional and national (on the entire territory of the Russian Federation).
Cutting transportation expenses, optimising logistic chains of delivery, absolute control of the quality of the product (including the product quality during its transportation) constitute inseparable parts of existence and survival of breweries, regardless of their share on the beer market.
Considering the geographic characteristics of the Russian Federation and the general condition of highways, beer transportation by railway transport accounts on average for over 70% of the total transportation of the breweries' output.
Severe competition on the beer market compels large beer manufacturing companies to optimise their expenses: purchase/rent rolling stock, obtain the status of operators, order specialised scientific research organisations in the sphere of railways to develop technologies enabling to carry out the transportation of ready produce in the winter season across the entire territory of the Russian Federation.
Many years' practice of transportation across the entire territory of the Russian Federation confirmed complete preservation of the quality of the produce in climatic conditions of Siberia, the Extreme North, and the Far East. This is confirmed by a lack of instances of non-preservation of the cargoes (substantiated both by representatives of breweries and OJSC RZhD), the dynamics of purchase of boxcars by breweries and their re-equipment in accordance with the technology developed by the GU VNIIAS of the Russian Railway Ministry.
However, in the period of the 2004-2005 winter season OJSC RZhD permitted the transportation of pasteurised beer in re-equipped boxcars on special conditions with a maximum transportation period of 10 days, ignoring the requests of consignors - operators of their own rolling stock. In fact, the maximal transport period of pasteurised beer in boxcars thermally insulated according to the technology developed by the Research Institute (GU VNIIAS) of the Russian Railway Ministry, tested by many years' transportation experience, has been ignored.
Moreover, according to the explanation of the Health Ministry (letter No. 2131-03-01 of 06.05.2003), according to the Hygienic Requirements to the expiration terms and storage conditions of food products, introduced on 25.05.2004 (SanPiN 2.3.2.1324-03), beer is not a perishable product (its expiration period is from 3 months to 1 year).
Pasteurised beer requires a certain temperature regime during transportation which is in no way connected with the delivery period.
The referral of pasteurised beer to the category of perishable goods by the Russian Railway Ministry Order No. 37 of 18.06.2003, requiring special transportation conditions is inconsistent with supplement 1 to SanPiN 2.3.2.1324-03, Terms of Storage and Expiration Period of Perishable and Especially Perishable Products. Beer is not on this list.
OJSC Baltika in its letters of 17.12.2004 No. K-17/11230 addressed to the Russian Federation Transport Minister I.Ye. Levitin and of 06.12.2004 No. 4342 addressed to Deputy Transport Minister of the Russian Federation A.S. Misharin complained that in connection with the issuance of OJSC RZhD telegram No. HZ-10464 of 02.11.2004 the company has been sustaining totally unjustified losses.
The Russian Federation Transport Ministry addressed OJSC RZhD with letter No. 30/1863-is of 24.12.2004, requesting it to consider and take a decision on the issue of leaving a 15-day transport period for pasteurised beer.
The Commission learned that the purchase of rolling stock and its further modernisation in accordance with previously approved technologies, construction of loading racks at breweries comprises a long-term program directed at sustainable development of the industry. This is confirmed by the investments of the Baltika company in its own rolling park.
The 15 days transportation period is justified by research and a conclusion of a specialised railway research organisation (GU VNIIAS) and is not exclusive in its nature. Its preservation would stimulate the purchase of boxcars, attraction of cargoes to the railway transport, creation of cargo operator companies, which is determined by the Russian Federation Governmental Decree of 18.05.2001 No. 384 «On the Structural Reform Program in Railway Transport.»
Item 3 of the Annex to OJSC RZhD Instruction No. 1846r of 06.04.2004 «The Order of Considering by OJSC RZhD of Consignors' Applications for Cargo Transportation on Special Terms» introduces the procedure for OJSC RZhD considering consignors' applications for cargo transportation on special conditions, stipulates the data needed for agreeing the special conditions with OJSC RZhD, including the name of the cargo, type of transportation means, requested transportation period. If the applicant's request lacks those data, the Commercial Department for Cargo Transportation should request them from the applicant.
The Order prescribes the need to adopt a separate decision on each name of the cargo, and if a decision is made on the impossibility of granting cargo transportation on special conditions, the Commercial Department for Cargo Transportation should notify the applicant thereof within twenty days from the date of receipt of the request, supplemented with a motivated explanation of the reasons of the refusal.
In this connection the OJSC RZhD response should contain the arguments explaining the impossibility of transporting a concrete type of cargo (specifically, pasteurised beer). Referral to the fact that beer transportation in special thermoses is permitted by OJSC RZhD only for 10 days, therefore the period of beer transportation in own thermally insulated boxcars cannot be longer than the period of beer transportation by specialised rolling stock, including thermos cars, whose heat transfer coefficient is better than that of thermally insulated boxcars is inconsistent due to the List of perishable cargoes and maximal terms of their transportation by OJSC RZhD in thermos cars of various categories, approved by Instruction No. 3531r of 04.11.2004, according to which the maximum period of pasteurised beer transportation in the winter season: in glass packaging is 8 days, in tin or polymer packaging - 12 days. It has been established during the hearings that in establishing these maximal terms of pasteurised beer transportation in the winter season OJSC RZhD was guided by the conclusion of the aforementioned GU VNIIAS, which confirms the legitimacy of conclusions of this organization in these matters, objectiveness and professionalism of its recommendations.
This suggests the conclusion that in making its decision OJSC RZhD was not guided by a desire to attract cargoes (pasteurised beer) to the railway transport, but with the intention by reducing the period of beer transportation in thermally insulated boxcars owned by private companies, on the one hand, to increase the volumes of beer transportation by refrigerator cars of the OJSC RZhD park and thus oust private companies from the market of high-profit cargoes (low alcohol produce is referred to the category of high-profit cargoes), and on the other hand - gain additional profit from forced repeated serving of one and the same thermally insulated boxcar with beer by the brewers for its further transportation upon the expiration of 10 days of this car's travel.
According to item 8.15 of the Rules, thermally insulated boxcars preserve both heat and cold accumulated by the cargo for a certain period of time. This «certain period of time» is established by the technology of re-equipment of owned/rented boxcars, developed by GU VNIIAS of the Russian Railway Ministry, tested and confirmed by many years of experience and a total lack of cases of non-preservation or claims to the quality of the cargo. There are no grounds to assume that the «certain period of time» can change annually by 5 days depending on the business activity of the transport company, infringing the interests of owners of re-equipped rolling stock and cargo consignors.
The protocol of the session (on development of competition in the sphere of providing cars and containers for cargo transportation and interaction between transportation organisations and operators of the railway rolling stock) of the Russian FAS with the participation of representatives of transportation companies and rolling stock operators of 18.10.2004 chaired by A.Yu. Artemiev stated the need for developing the issue concerning the existing order of issuing permits to cargo transportation by railway transport on special conditions, the need to reassign the said functions from the transporting organisation to an independent service (within the system of the federal executive authority in the sphere of railway transport).
It is necessary to take into account that transportation of cargoes may be exercised by different transport organisations, each of which would have to be addressed by consignors for a permit to transport cargoes on special conditions. The said transport organisations may set different requirements, including discriminate ones.
It is also necessary to bear in mind that the Rules of cargo transportation by railway transport on special conditions should not contradict the antimonopoly legislation, including provisions of Art. 5 of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets,» prohibiting actions (omissions) of a dominant economic entity which result or can result in prevention, restriction, elimination of competition and (or) infringement of the interests of other economic entities, including such actions as creating conditions for access to the product market of exchange, consumption, purchase, manufacture, sale of a product, placing one or several economic entities in unequal conditions compared to another or other economic entities (discriminate conditions).
At the moment, OJSC RZhD is the only and monopolistic transport organisation in the sphere of public railway transport. Independent operators granted a transportation license cannot proceed to exercising their lawful right to conduct transportation activity doe to various reasons, including legal ones, and are compelled to work only on the capacity of a consignor, as they did before.
On the basis of the conclusions made, the Commission decided to recognise OJSC RZhD as a violator of Art. 5 (1) of the Law on Competition, which manifested in the form of taking actions aimed at prevention, restriction, and elimination of competition and infringement of the interests of other economic entities, hindering business activity of OJSC Baltika Brewery and OJSC Heineken Brewery on the market of transportation services by the issuance of OJSC RZhD telegram No. HZ-10464 of 02.11.2004, reducing the formerly accepted periods of delivery of beer on special conditions from 15 to 10 days in the winter season.
To issue an instruction to OJSC RZhD to terminate the violation of Art. 5(1) of the Law on Competition, for which purpose to cancel telegram No. HZ-10464 of 02.11.2004 in its part introducing a maximum period of 10 days for pasteurised beer transportation from November 2004 to March 2005 . During the conclusion of contracts of transportation on special conditions, to establish the maximum period of transportation of a in accordance with the time enabling to transport the cargo without disrupting the required temperature regime of storage, with the consignor being responsible for the quality and preservation of the transported produce, but not less than the formerly established 15 days period tested during many years of practice.
At present, the instruction has been partially fulfilled in the part of cancelling telegram No. HZ-10464 of 02.11.2004, and is being appealed at the Moscow city arbitration court.
Directorate of Control and Supervision in Fuel and Energy Complex
Abuse of Dominant Position on the Coal Processing Market
The antimonopoly body considered a case as a possible infringement of Article 5 of the Law of the Russian Federation «On Competition and Restriction of Competition on Product Markets» (further - Law «On Competition»).
The grounds for the initiation of the case was a request from a member of the Council of Federation of the Federal Assembly of the Russian Federation to consider, from an antimonopoly law perspective, the situation in the coal extraction and concentration market and to consider a statement of one of the market participants.
The antimonopoly body requested from a number of business entities, which were not parties of the case, information necessary to confirm a presence or an absence of property and other relations among them. In the Commission's opinion, the mentioned business entities belonged to the same group as the defendant.
The above-mentioned business entities were fined for the non-submission of the documents required to make a substantive decision according to the Article 14 of the Law «On Competition». The entities filed an appeal to the courts regarding the fine. The court confirmed the legitimacy of the fine imposed by the antimonopoly body. Subsequently, the complete data required for the consideration of the case were submitted.
According to rules of consideration of possible cases of violation of the antimonopoly law, the Commission has studied the submitted documents and materials, arranged hearings and studied sources of evidence and explanations by parties and persons participating in the case, conducted an analysis of circumstances of the case, and has come to the following conclusions.
Four concentrating plants, whose services were used by suppliers of ordinary coal, are located on the territory of Mezhdurechensk district of Kemerovo region.
The cost of transport and the technical capabilities determine the choice of concentrating plant. The particular location of railroads (one main track in a mountain terrain) substantially limits the volume of coal transport. Transport by truck/lorry is more expensive than by rail.
Technical characteristics permit to the applicant (a mine) to process the extracted ordinary coal at two concentrating plants.
80% of the ordinary coal is delivered for processing to the plant being a defendant. The draft of construction and start-up provided for the functioning of the applicant and defendant in a single technological chain: practically all ordinary coal from the mine had to be delivered through two conveyer lines to the concentrating plant specially designed for this purpose.
The applicant delivers 20% of coal for concentration by rail transport to a plant located 224 km away. The 100% load ratio of the defendant plant's production capacities did not permit the applicant to increase its coal deliveries. Moreover, the share of transport costs in the total cost of ordinary coal when using the services of the said plant was in the range of 30%.
The defendant occupies a dominant position on the market of ordinary coal processing and coal concentrate production within the boundaries of Mezhdurechensk town, Tom-Usinsk coal region. On one hand it is confirmed by the fact that this plant is included in the register of business entities occupying more than 35% on the market of a single product, on the other hand it is confirmed by the absence of possibilities to switch to processing of coal of other enterprises since it can lead to destabilisation of the work of other enterprises both bringing in and delivering coal of other types.
The comparative analysis of contracts on the processing of ordinary coal signed between the defendant and the applicant with the contracts signed by the defendant with other enterprises showed than the contracts signed with the applicant contain provisions contradicting requirements of the antimonopoly Law regarding groundless limitations of volumes of ordinary coal deliveries and the steady mode of ordinary coal deliveries for concentration.
The revealed violations by the defendant was of a systematic character including the dominant conditions in the contracts signed with the defendant during the several years preceding the consideration of the case.
In addition, the defendant planned to continue similar treatment of the applicant since the draft contract for the next year contained provisions obliging the applicant to sell not less than 20% of annual output of ordinary coal by signing the relevant contract and obliging the plant to receive and to pay for the delivered ordinary coal in the quantity agreed on a monthly basis.
The mentioned conditions cause a derogation of the applicant's rights, competition restriction and deteriorate production quality. Moreover, the applicant lacks technological alternative of coal concentration using services of other business entities.
According to results of the case consideration, the antimonopoly body has admitted that the actions of the defendant contain the fact of the dominant position abuse meaning the inconsistent restriction of access to the market of coal concentrate production and the embodiment in the contract signed with the applicant of discriminating conditions putting him in a position unequal with other business entities. The body has issued an order on the termination of the antimonopoly Law violation.
A. B. Nesterova
Leading specialist
Department of Gas and Coal Industry
Directorate of Control and Supervision in Fuel and Energy Complex
Unidentified
Possible Dominance Abuse on the Sales Market of Liquefied Hydrocarbon Gases
In 2005, the antimonopoly authority considered a case based on the elements of violation of Art. 5 of the Russian Federation Law «On Competition and Restriction of Monopolistic Activity on Product Markets» (hereinafter - the Law on Competition).
The case was initiated on the basis of an analysis and monitoring of the market of output and sale of liquefied hydrocarbon gases conducted by the Russian FAS in 2004. The Russian FAS requested information from all participants in the production sphere, as well as the sphere of wholesale and retail sale of liquefied hydrocarbon gases. The analysis of the presented documents and information has revealed the following.
Three types of enterprises on the Russian territory manufacture liquefied hydrocarbon gases: petrochemical, oil refineries and gas processing plants. A total of 17 enterprises participate in the sphere of liquefied hydrocarbon gases production, 8 of which have a market share exceeding 5%. A dominant position in the sphere of liquefied hydrocarbon gases production is occupied by a group of entities whose actions may contain the elements of a violation of the antimonopoly legislation (hereinafter - the group of entities). According to the information of the Russian Ministry of Industry and Energy, its share in the overall volume of liquefied hydrocarbon gases production in the Russian Federation in 2004 was 59%.
Liquefied gas in the Russian Federation is marketed along the following main lines: raw material for the petrochemical industry, public utility needs, the free market, and export.
A dominant position in the sphere of production and on the sales market of liquefied hydrocarbon gases (including the free sector of the liquefied hydrocarbon gases market) is occupied by the group of entities. According to the information of the Russian Ministry of Industry and Energy, the share of the group in the overall volume of liquefied hydrocarbon gases production in 2004 was 59%, sales - 58% (including on the free sector of the sales market of - some 54%, balance sheet assignments - 61%, the petrochemical industry - 58%, export - 59%).
In September 2004, the retail prices of liquefied hydrocarbon gases used as gas motor fuel (unregulated sector) have leaped. The growth of prices in August 2004 over July amounted to an average of 13-14%, in September over July - 46%, and over January 2004 - 50-55%. In October-November retail prices started declining (a 2.4% decrease in October, a 5% decline in November; a total reduction in November over September amounted to 7%).
The growth of retail prices of liquefied hydrocarbon gases used as gas motor fuel was caused by a considerable increase of ex-prices of the manufacturers and wholesale prices of intermediaries.
The wholesale and retail prices of liquefied hydrocarbon gases in September-October 2004 of various manufacturers and intermediaries have increased two-fold on average. The price increased on average from 3,500 - 4,000 RUR/t to 7,500 - 8,000 RUR/t.
The share of the group of entities in the overall sales volumes in the unregulated market sector is approximately 55%. In accordance with Art. 4 of the Law on Competition, the position of an economic entity is recognised as dominant if its share on a certain product market is less than 65 percent, if this is established by the antimonopoly authority proceeding from the stability of the economic entity's market share as compared to its competitors' market shares, possible access of new competitors to this market, or other criteria characterising the product market.
The deviations of the share of the said group of entities have not surpassed 10% of the product market capacity, and the total share did not fall beyond 35% of the product market capacity, amounting on average some 54%.
The gap between the share of the group of entities and its closest competitor on this market exceeded 20% (around 44%). The group of entities has an edge over its competitors within the wide system of sales, in entering vertically-integrated structures, etc.
The capacities of the competitors cannot be quickly extended or converted without considerable expenses and to a sufficient level, which would lead to a significant increase of their share on the product market and a noticeable reduction of the share of the group of entities.
As a result, a case of violation of the antimonopoly legislation has been initiated against the group of entities on 15.04.2005. The case was considered on 16.06.2005. In connection with the need to obtain additional evidence necessary for issuing a decision on the merits of the case, the consideration of the case of violation of the antimonopoly legislation has been postponed.
Unidentified
Report on the Case of Violation of the Antimonopoly Legislation by OJSC United Trade Company on the Product Market of Caustic Soda
The main manufacturers of caustic soda in the Russian Federation are JSC Caustic, OJSC Caustic, OJSC Khimprom, OJSC Sibur-Neftekhim, OJSC NAC Azot, OJSC KChHK, and OJSC Sayanskhimplast. The aggregate share of these enterprises on the caustic soda market exceeds 65%.
A characteristic feature of the caustic soda market consists in the fact that the buyers have an opportunity to purchase the product practically from any Russian manufacturer.
The creation of OJSC United Trade Company signified a transfer from the existing economic relations between caustic soda manufacturers and consumers to a new pattern of marketing of this product. Offering more profitable terms of caustic soda marketing to the manufacturers, OJSC United Trade Company actually ended up the owner of the entire volume of caustic soda manufactured in the Russian Federation. As a result, the price of caustic soda set by OJSC United Trade Company in 2004 amounted to 6,000 RUR/t, VAT and transportation expenses not included, which was 1.5 - 2 times more than the price of this product in 2002 - 2003. In addition, OJSC United Trade Company chose as consignors the manufacturing enterprises with an inconvenient (more remote) geographical location compared to the traditional suppliers, and introduced overstated and economically unjustified penalties for violation by consumers of a number of items of the contracts offered for conclusion (and concluded) with caustic soda consumers.
In 2004, the Russian Federation Ministry for Antimonopoly Policy and Support of Entrepreneurship received complaints from caustic soda consumers. They include major enterprises of the chemical, pulp-and-paper, aluminium, automobile industry and the energy sector. Specifically, the applicants included such companies as OJSC Krasnoyarskenergo, OJSC Siassky Pulp-and-Paper Works, OJSC Arkhangelsky Pulp-and-Paper Works, OJSC Kotlassky Pulp-and-Paper Works, OJSC AVTOVAZ, OJSC Russian Aluminium Management, OJSC Lukoil-Neftekhom, and OJSC Nizhnekamskneftekhim.
On the basis of the filed complaints the Russian MAP has conducted an analysis of the caustic soda product market in accordance with the Procedures for Holding and Analysis and Appraisal of the Status of Competitive Environment on the Product Markets approved by Order of the Russian MAP No. 169 of 20.12.1996 (in edition of the Russian MAP Order No. 71 of 11.03.1999), and examined the factual material presented by the manufacturer enterprises, OJSC United Trade Company, as well as caustic soda consumers.
In the beginning of 2004, a situation formed on the caustic soda market when the main manufacturers were refusing to conclude contracts on supply of caustic soda to consumers under the pretext that they have already concluded contracts with OJSC United Trade Company, and all supplies of this product will be carried out by OJSC United Trade Company.
For example, OJSC Sibur-Neftekhim in its letters refused from concluding direct contracts under the pretext of a change in the marketing policy and suggested applying to OJSC United Trade Company on this issue. JSC Caustic referred to the concluded purchase and sale agreement with OJSC United Trade Company, refused from concluding a contract and suggested turning to OJSC United Trade Company on this issue.
OJSC United Trade Company proposed to caustic soda consumers to conclude contracts on supply of this product in 2004 at the price of 6,000 RUR/t, VAT and transport expenses not included, although the Company had been purchasing this product at the price of 4,000 RUR/t, VAT and transport expenses not included.
A significant aspect of supply contracts concluded by OJSC United Trade Company with the caustic soda manufacturers was the following wording:
«The Seller shall not have the right to sell or otherwise transfer the Produce subject to transfer to the Buyer under this Contract into the property of other persons, except the Buyers.
If third parties apply to the Supplier with a request to manufacture for them and sell the said produce, the Seller shall refer them to the Buyer for deciding this issue.»
The caustic soda supply contracts envisaged the imposition of fines on the buyers in the form of 100% payment of the cost of the product in the event of the buyer's refusal to purchase the product less than 15 days before the start of the reporting month.
The actions of OJSC United Trade Company and caustic soda manufacturers have led to a situation where enterprises consuming the produce were deprived of a possibility to select the supplier, and the drastic growth of prices of caustic soda resulted in a deterioration of the economic position of consumer enterprises and growth of prices of their produce manufactured with the use of caustic soda.
Specifically, according to the application of OJSC Krasnoyarskenergo, this growth of caustic soda prices will inevitably result in a growth of tariffs on electric energy, which in turn will entail a price rise on practically all end products manufactured.
According to the information of enterprises consuming caustic soda, with the annual consumption of this product of 1,100 thousand tonnes, the total losses in the industry would amount to some 2.7 billion roubles. OJSC VISCOZA Trading House, in the event of purchase of liquefied caustic soda at the price of 6,000 RUR/t, would sustain losses in the amount of 13 million roubles a year. The losses of OJSC Volzhsky Orgsintez would reach an annual 73 million roubles. On the whole, the pulp-and-paper industry would lose 278 million roubles annually.
A number of companies (OJSC Siassky Pulp-and-Paper Works, OJSC Arkhangelsky Pulp-and-Paper Works, OJSC Kotlass branch of Ilim Pulp Exim) have categorically refused from concluding contracts with OJSC United Trade Company, as they disagreed with the supply scheme and the price.
It is necessary to note that the said companies are local economic mainstays, with all the entailing negative socioeconomic consequences.
From the economic point of view, the activity of OJSC United Trade Company has caused an important change in the situation on the caustic soda market. Economic ties connecting caustic soda manufacturers with its consumers have been disrupted.
Having come into possession of the entire volume of caustic soda manufactured in the Russian Federation, OJSC United Trade Company has actually occupied a monopolistic position on this product market. As a result, already in January 2004 the prices of caustic soda have increased 1.5 - 2 times.
The price of liquefied caustic soda was fluctuating in 2002 - 2003, but it always remained within the 3,000 - 4,000 RUR/t band (VAT and transport expenses not included), and in 2003 the price even dropped a little. At the end of 2003, the cost of caustic soda production was on the level of 4,000 - 4,100 RUR/t.
Although the energy prices went up in 2003 and a moderate inflation rate was registered, these factors could not have caused a two-fold increase of the caustic soda price, starting 1 January 2004.
Therefore, a conclusion can be made that the growth of prices was not caused by economic necessity, but was a consequence of dominance abuse on the market by OJSC United Trade Company.
Before OJSC United Trade Company appeared on the market, the manufacturers of caustic soda were competitors and their performance met with consumers' requirements. However, as a result of conclusion of contracts requiring the sale of 100% of the product volume of caustic soda, competitiveness between the manufacturers of this produce, aimed at better satisfying the customer's demand and ensuring the formation of market prices in conditions of free competition, disappeared. OJSC United Trade Company obtained an opportunity to unilaterally influence the general terms of the product circulation on a relevant market, resulting in elimination of competition on it.
In addition, using strict contractual terms with the caustic soda manufacturers and consumers, OJSC United Trade Company obtained an opportunity to coordinate the activity of the caustic soda market participants, which also had a negative effect on the state of the competitive environment on this product market.
The following decisions were adopted during the consideration of the case by the Russian MAP.
The actions of OJSC United Trade Company, consisting in the setting of a monopolistically high price of liquefied caustic soda and imposing geographically unprofitable suppliers on consumers of this produce, as well as including in the contract on caustic soda supply of economically unreasonable penal sanctions, were qualified as a violation of Art. 5 (1) of the RSFSR Law «On Competition and Restriction of Monopolistic Activity on Product Markets» No. 948-1 of 22.03.1992, manifested in the setting and maintenance of monopolistically high prices and imposing unprofitable contractual terms on a counterparty.
The actions of OJSC United Trade Company, OJSC Caustic (Volgograd), JSC Caustic Sterlitamak), OJSC Khimprom (Volgograd), OJSC Sibur-Neftekhim (Nizhny Novgorod), OJSC NAC Azot (Novomoskovsk, Tula region), OJSC Plastcard (Volgograd), and OJSC Sayanskhimplast Sayansk, Irkutsk region) were recognised as a violation of Art. 6 (3) of the above Law, consisting in concerted actions resulting in elimination of competition on the caustic soda market.
The Russian MAP issued instructions to OJSC United Trade Company and the aforementioned economic entities to terminate the violations of the antimonopoly legislation.
In addition, appeals were filed to the arbitrazh court to liquidate OJSC United Trade Company and to the Russian Federation Prosecutor General's Office for considering the possibility of imposing criminal liability on senior officials of the Company on the basis of Art. 178 of the Russian Federation Criminal Code.
II. Background Notes
III. Participants
Candidates for participation in OECD seminar on Competition Case Studies for Senior Russian Competition Officials (cartel investigation and abuse of dominance)
in Rostov-on-Don 27-30 September 2005
IV. Agenda