Case Study on abuse of dominance in Taiwan

Jishyan Hwu

Senior Investigator

Fair Trade Commission(TFTC)

OECD RCC seminar,Seoul ,23-25 April,2008

2

Outlines

Fuel gas market

Case study

Conclusion

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Fuel Gas Market in Taiwan

Classification of fuel gas market 1. Liquefied Petroleum Gas, LPG

LPG provides 65% usage of household heat energy

2. Liquefied Natural Gas, LNG

LNG provides 35% usage of household heat energy

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Classification of Fuel Gas Market

Liquefied Petroleum Gas, LPG

Liquefied Natural Gas, LNG

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LPG LNG

Market Share of household fuel gas usage in Taiwan (%)

65 35

Transportation to household

Motocycle or Truck Pipeline

Type of Market

Facing ConsumersCompetitive Regional Monopoly

Number of suppliers in Taiwan

About 3,600 retailers 25 city gas companies

Classification of Fuel Gas Market

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Case analysis(1)

The Great Taipei Gas Corp （ Taipei Gas ） Case

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Case analysis(2)

Taipei Gas Case

When and What Article been violated?Fair Trade Commission’s （ TFTC ） Decision (the 44

4 Commission Meeting) Violation of Article 10 of the Fair Trade Act(FTA) by a

busing its market power and asymmetric information of consumers to inappropriately install larger flow rate of No.5 natural gas meters in order to raise the basic monthly fees and gain extra illegal benefit.

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Taipei Gas Case

Case BackgroundOriginated from:A citizen’s

complaintTaipei Gas’s market position

-- a monopolist in its LNG business operation area

-- price regulation is undertaken in LNG industry

--

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Facts-1 (1/10)

Gas meter and basic usage degree

Gas meter No.3 No.5Max Gas Flow Rate per Hour 3.7 (cubic meters) 5.8 (cubic meters)

Basic usage degree 12 (cubic meters) 18 (cubic meters)

Expenditure of users under basic usage degree

12*p（ p is the charged rate）

18*p

Suitable for Household with one hot-water heater and a 2-burner gas stove

Household with more than one hot-water heater and a 2-burner gas stove

Expenditure of users above basic usage degree

Usage*p Usage*p

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Max Flow Rate of No.3 Gas Meter per hour is about 3.7 cubic meters

Facts-2 (2/10)

A typical household in Taipei usually had gas appliance of one hot water (shower)heater and one 2-burner gas stove

No.3 Gas Meter

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Facts-3(3/10)

The hot water (shower)heaters sold on the market had an average flow rate of gas about 2.25 or less cubic meters per hour.

What flow rate did a hot water heater need most per hour?

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Facts-4 (4/10)

The two burner Gas Stoves sold on the market had an average flow rate of gas about 1.2 or less cubic meters per hour.

What flow rate did a 2-burner gas stove need most per hour?

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Facts-5 (5/10)

A combined flow rate of all gas appliance in a typical household is about 3.45 （ 2.25+ 1.2 ） cubic meters per hour.

According to other city gas companies’ statement: Gas meters were typically designed for the combined flow rate per hour of all gas appliances in a household when they were operating simultaneously at 80%.

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Facts-6 (6/10)

That is: 3.45 ×80%=2.76 cubic meters per hour

No.3 gas meters could accommodate a max flow rate of 3.7 cubic meters per hour.

Taipei Gas's No.3 meters had an average flow rate of 3.53 cubic meters per hour.

Accordingly, No.3 gas meter would have been adequate for the needs of a household having one 2-burner gas stove and one hot water heater.

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Facts-7 (7/10)

After comparing with other suppliers in the LNG industry

It is found by TFTC that : The number and percentage of No. 5 meters

installed by Taipei Gas, and that of customers paying only the basic monthly fee ,compared with other LNG suppliers, were excessively high.

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Facts-8 (8/10)

Gas Meter NO.5 NO.5

GasCompany

Ratio of NO.5users of totalhouseholds

Ratio of No.5users only payingbasic monthly fee

Taipei Gas 69.51 8.65

A 7 0.2B 7.77 0.71C 2.45 0.17D 4.7 1.07E 1.77 2.92F 13.99 1.32G 6 0.4H 5.52 0.26I 0 0

J 0 0

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Facts-9 (9/10)

TaipeiGas

A B C D E F G H I J

N5 ratio

0

10

20

30

40

50

60

70

Ratio Ratio of NO.5 installment of total households

N5 ratio

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Facts-10 (10/10)

TaipeiGas

A B C D E F G H I J

N5 ratio

0

1

2

3

4

5

6

7

8

9

Ratio Ratio of NO.5 users only paying basic monthly fee

N5 ratio

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Economic Analysis

No.3 versus No.5

12 180

12p

18p

X, degree

Y

pxy

degree No.3 No.5 extra

range expense expense expense

0≦x≦12 12p 18p 6p

12 ＜ x≦18 xp 18p（ 18-x ）

p

x ＞ 18 xp xp 0

Consumer’s expense curve = Taipei Gas’s revenue curve

Consumers of Taipei Gas had been cheated and exploited.

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Economic Analysis of the Case

“Comparable Market Concept”

TaipeiGas

A B C D E F G H I J

N5 ratio

0

10

20

30

40

50

60

70

Ratio Ratio of NO.5 installment of total households

N5 ratio

TaipeiGas

A B C D E F G H I J

N5 ratio

0

1

2

3

4

5

6

7

8

9

Ratio Ratio of NO.5 users only paying basic monthly fee

N5 ratio

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Identify and Investigate Abuses

Types of AbusesExploitative abuses

To its customers or suppliers

Exclusionary abuses To its competitors

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Identify and Investigate Abuses

Exploitative Abuse of Dominance Taipei Gas’s market position: Regional Monopolist

Asymmetric information Without first ascertaining Without explaining the difference

Motive of gaining illegal benefits

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Enforcement of FTA

Violated Article 10(1)(ii) of the FTA Article 10(1)(ii)

Remedy orders-- Ordered Taipei Gas To cease the practice and change its basic monthly fee o

f original No.5 users from 18 to 12 degree (0r change meter)

To pay a fine of NTD 5 million (USD 153 thousand) To inform its customers of related information

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Conclusion

One of the fundamental purposes of FTA is to protect consumers’ interests

The enforcement of competition laws is to protect consumers’ interests against the abuse of dominance

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Case Study on Abuse of Dominance

The Taipei Gas Case

Taipei 101 tower

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謝謝 Thanks for your attention