Retail petrol sector and exclusive supply agreements: new contractual limitations

Introduction
Lack of competition
New legislation
Interaction of new conditions and existing law
Comment

Introduction

The retail petrol sector has been in the sights of the National Competition Commission (NCC) for the past five years. The NCC has often voiced concerns over the sector's operation, regularly making public recommendations on the need to improve effective competition between market operators.

While other EU countries have experienced the arrival of new entrants and lower retail prices as a result of the economic downturn, the basic structure of the Spanish market has remained relatively unchanged in recent years. Prices and commercial margins have been comparatively higher in Spain than in other EU countries with similar characteristics, and competition from new entrants is negligible.

Following numerous public warnings from the NCC, the government recently decided to introduce new legislation aimed at tackling the alleged lack of effective competition in the sector. However, the new measures raise a number of doubts. Are they the most appropriate way to boost competition in the retail petrol sector? How will the new legislation interact with EU competition law on vertical agreements?

Lack of competition

The NCC first highlighted its concerns about the functioning of the retail petrol sector in its Report on Competition within the Automotive Petrol Sector, published in September 2009. The 2009 report analysed the competition structure of the Spanish retail market in detail (eg, entry barriers, number of operators, level of concentration) and looked for reasons for the increase in retail prices that had begun in 2003. Its overall conclusion was that there was not enough competition between operators, and it recommended that the government take further action to improve the regulatory framework.

The NCC published its Follow-up Report on the Automotive Petrol Report in July 2011 which, despite the call for urgent reforms to the administration, reached similar (pessimistic) conclusions about competition in the retail distribution market.

The follow-up report reiterated that the same regulatory framework which prevented the entry and expansion of new operators was still in place, and that just three companies (Repsol, Cepsa and BP) controlled most of the market (a significant concentration that was reinforced by the high level of vertical integration between these operators).

The Ministry of Industry (which has competence for energy matters) voiced its concern about the report's conclusions, and was particularly alarmed by the price levels and commercial margins applied. On September 30 2011 the government commissioned the NCC to assess these concerns further in a new report.

In June 2012 the NCC therefore published its Report Monitoring the Automotive Petrol Distribution Market in Spain. This report was the third evaluation of retail petrol distribution in Spain in three years. The NCC also used this opportunity to assess other economic and competition variables in the sector, in line with its previous reports.

The conclusions of the monitoring report may be summarised as follows:

• Retail prices for 95 research octane number (RON) and 98 RON petrol increased by 21% and 16%, respectively, from February 2011 to February 2012. This significant increase placed Spanish RON petrol prices above average EU prices.(1)
• The commercial margins of distributors were also above the EU average level during this period.
• The significant level of concentration on the supply side (in only three companies) was considered to influence average petrol prices at least partially. Petrol prices were higher in those territories where service stations were more concentrated.
• There was a significant asymmetry between the adjustment of retail prices to an increase in international petrol prices and the adjustment when the price decreased. In particular, prices adjusted quicker to increases in international prices than to reductions in these same prices. The NCC described this as the "rockets and feathers" effect.(2)
• This asymmetric adjustment implied a severe disadvantage for Spanish manufacturers that used petrol, since their products would be more expensive than those produced in countries where petrol prices were lower.
• The NCC concluded that these inefficiencies could be significantly reduced by introducing more effective competition in the sector.

The monitoring report appeared to convince the government that immediate action should be taken in this regard. To this end, the Ministry of Industry initiated further consultations involving not only the NCC, but also the National Energy Commission (NEC), the energy regulator.(3) Focusing on the government's request, the NCC published another report in in October 2012,(4) aimed at updating its previous recommendations and using them as a starting point to draft a new legislative package.

In addition to the problems already identified in previous reports, this new report paid special attention to how distribution agreements between operators and service stations could be influencing the detected problems. The authorities recommended taking the following actions:

• Reduced duration of exclusive supply agreements – a special maximum duration of exclusive supply agreements in the retail sale of automotive fuel through service stations should be set for suppliers with particular market power.
• Prohibition of recommended resale prices – suppliers with a high market share should be prohibited from even recommending retail prices to service stations.
• Measures to promote transparency – the Ministry of Industry should complete its petrol station price information service by preparing and publishing weekly, monthly and annual rankings of the cheapest service stations in Spain, as well as information about additional station services (eg, hypermarket, supermarket, carwash, repair shop or other 'non-oil' services).

New legislation

In February 2013 the government approved an extensive new legislative package through an unusual decree-law,(5) which included different measures to support entrepreneurship and promote growth and employment.

The decree-law included a number of measures on the petrol sector, some of which aimed to introduce competition at retail level. The measures concerning exclusive supply agreements between suppliers and service stations are set out below.

Introduction of limitation on exclusivity provisions
Exclusivity supply agreements between petrol companies and service stations will be limited to a maximum of one year. This one-year contract may be extended automatically on an annual basis for a maximum of three years, unless the retailer informs the petrol company or distributor of its intention to terminate the agreement at least one month before the termination date.

The General Directorate of Energy Policy and Mines of the Ministry of Industry will be kept informed of these exclusive agreements, including the date of signature and termination. The ministry's website will provide information about the contracts that are in place and their respective termination dates.

Prohibition of recommended retail prices
Petrol companies and distributors can no longer recommend the retail price, directly or indirectly, to service stations.

All existing agreements must be adapted to the new legislation (ie, amended if necessary) within one year – that is, before February 2014. Otherwise, they will be considered null and void.

Moreover, the decree-law will impose strict limitations on the market shares of existing operators wishing to establish exclusive supply contracts with service stations. Operators with a market share exceeding 30% are forbidden from entering into new exclusive supply agreements in the provinces where this limit is exceeded. For the purposes of calculating this threshold, the General Directorate of Energy Policy and Mines will publish an annual list with the names of the companies that exceed the allowed market share.

Elimination of regulatory barriers for opening new service stations
The existing authorisation processes for opening a service station, which vary significantly between the different regions, will be harmonised into a single procedure. The maximum duration of this authorisation procedure will be eight months.

Clarification of compatibility of petrol retail activities with use of land for commercial activities
This measure seeks to promote the construction of service stations in the areas surrounding large shopping centres.

Interaction of new conditions and existing law

Article 1(4) of the Competition Act (15/2007) provides that agreements that meet the requirements of the EU block exemption regulations are exempt from the application of Article 1 of the act – the national equivalent to Article 101 of the Treaty on the Functioning of the European Union. The act states that the conditions set out in the block exemption regulations are also applicable to agreements whose effects are limited to Spain (as opposed to those agreements which may have an effect on trade between member states, which are directly subject to the block exemption regulations).

This applies to the EU Regulation on Vertical Agreements and Concerted Practices (330/2010), which is applicable to pure Spanish agreements under Article 1(4) of the act.

Article 5 of EU Regulation 330/2010 establishes that "any direct or indirect non-compete obligation, the duration of which is indefinite or exceeds five years" is excluded from the block exemption. This limitation does not apply:

"where the contract goods or services are sold by the buyer from premises and land owned by the supplier or leased by the supplier from third parties not connected with the buyer, provided that the duration of the non-compete obligation does not exceed the period of occupancy of the premises and land by the buyer."

This is a common situation in retail distribution, where many service stations are operated by the dealer, but owned by the supplier (through company-owned, dealer-operated contracts).

Until now, the application of EU Regulation 330/2010 to exclusive supply agreements ensured the consistent application of the exemption from competition law of agreements subject either to Article 101 of the Treaty on the Functioning of the European Union (ie, those that could affect intra-Community trade) or to Article 1 of the act (ie, those with effects limited to the Spanish market). The same could be said about the possibility of recommending retail prices to service stations, which was allowed in both cases.

The situation has now changed with the introduction of the decree-law. The content of the decree-law must be applied in Spain even if it implies the indirect modification of Article 1(4) of the act and the partial non-application of EU Regulation 330/10. Therefore, exclusivity provisions in Spanish retail distribution contracts must be limited to stricter duration limits (one year, extendable for two one-year periods).

Implementation of the new legislation has just begun, and only time will tell how effectively it is implemented. However, the existing inconsistencies in the rules applicable to exclusive supply agreements will doubtless create uncertainty on the market. The evaluation of the same distribution contract by the European Commission could vary significantly, depending on whether it is deemed to affect intra-EU trade.

Comment

The impact of the changes introduced by the new legislation has yet to be felt on the market.

Spanish operators must not only adapt their existing contracts to the new provisions rather quickly, but also adjust their commercial policies and strategies to brand-new scenarios, in which their links to service stations will be shorter and thus more unstable.

Although the legislation clearly aims to create a new market in which service stations can change supplier more easily, the real impact of this measure may be different. There will be changes in supply to the most profitable service stations, but major variations to the existing market structure are unlikely. The reasons for this are twofold. On the one hand, the restriction of the 30% maximum provincial market share will limit the ability to bid for new contracts with the largest operators; on the other hand, the short duration of exclusive supply contracts (as short as one year) will be a clear deterrent to aggressive competing offers by potential new entrants.

Although the desire to improve competition in the sector is welcomed, the effective impact of the newly approved measures is yet to be seen.

For further information on this topic please contact Casto Gonzalez-Paramo or Sara Salvador at Hogan Lovells by telephone (+34 91 349 82 00), fax (+34 91 349 82 01) or email ([email protected] or [email protected]).

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

Endnotes