REPSOL: Opening up the Fuel Distribution System in Spain (1) ANTITRUST Philippe CHAUVE, Directorate-General for Competition, Unit B-1

Competition Policy Newsletter

REPSOL: Opening up the fuel distribution system in Spain (1) ANTITRUST Philippe CHAUVE, Directorate-General for Competition, unit B-1

Introduction () logistic level and quantitative import restrictions were removed. Further, in 1995, restrictions on On 12 April 2006, the Commission adopted a deci- distance between service stations were removed, sion based on Article 9 of Regulation (EC) 1/2003 and in 1996, the legal obligation to have exclusive addressed to the largest petrol supplier in Spain, supplies for a given station was removed. Thus the REPSOL Commercial de Productos Petroliferos market was fully liberalised only ten years ago. (‘REPSOL’), making commitments entered into by REPSOL legally binding. This commitment deci- This gradual liberalisation occurred in a market sion concerns the supply of fuel to service stations which was still in its infancy. In 1990, there were in in Spain and results from the concern that the Spain around four times fewer stations per inhab- supply contracts of REPSOL foreclose the market. itants than in other large Member States of the EU. The decision remedies this concern by changing Thus liberalisation led to construction of many the market conduct of REPSOL and brings an end new service stations. By the end of the 1990s, to the investigation initiated under Article 81 of the number of stations per inhabitants had come the EC Treaty. The decision in particular gives an close to that of the other large Member States of opportunity for service stations in which REPSOL the EU. New stations were often financed by the had made investments to terminate the long term wholesale suppliers owning stations or by indi- agreements they signed with REPSOL and termi- vidual service stations owners through bank loans. nate the corresponding ‘right in rem’ that REPSOL However, in a significant number of cases (around held in those stations subject to compensation. 500 stations in the case of REPSOL, i.e. around Due to market specifics the decision adopts a solu- 15% of stations in REPSOL’s current portfolio), tion for compensation differing from that adopted individual station owners obtained financing for a in previous cases where there was an investment new station or refurbishing of an existing building from the supplier in the retailer’s premises (e.g. in directly from the suppliers. In exchange, the sup- the beer sector). pliers obtained a ‘right in rem’ in the station either in the form of ‘tenancy’ (where the land was bare), Background respectively ‘usufruct’ (when there was already a building in some shape or form). These rights In 2005, 40 million tons of motor fuel were sold basically allowed the supplier to build, respectively through service stations, mainly diesel (33 million refurbish, the building and own it for a specified tons, or more than 80% of total sales). This repre- number of years (which was usually between 25 to sented a value before tax of € 18 billion (up from 40 years, but could even be longer). The supplier € 14 billion in 2004). then leased back the station to the bare owner for Liberalisation of the Spanish service station mar- the operation of the station and became the exclu- ket occurred only rather recently and gradually sive supplier of the station for the duration of the after the accession of Spain to the EU in 1986. First ‘right in rem’. the exclusive supplier CAMPSA was split-up (). In parallel, from 1988 onwards, importers could cre- The various types of service stations on the Span- ate separate distribution networks with new serv- ish market today are thus, according to the jar- ice stations but remained subject to quantitative gon of the sector: the COCO stations (Company restrictions for total imports. This created a two- Owned and Company Operated), the CODO sta- tier system, which was ended in 1993 when remain- tions (Company Owned and Distributor Oper- ing exclusive and special rights at the refining and ated), the DODO stations (Distributor Owned and Distributor Operated), and the Usufruct/Tenancy (1) The content of this article does not necessarily reflect the (U/T) stations. In the case of REPSOL, which is official position of the European Communities. Respon- the largest operator representing around two fifth sibility for the information and views expressed lies enti- of the total number of stations in the market, there rely with the authors. are around 1000 COCO stations, 1400 CODO sta- (2) CAMPSA had to transfer the service stations it owned as tions, 750 DODO stations and 500 U/T stations. well as the contracts with service stations that it did not own to the refiners which were shareholders of CAMPSA, That being said, since the end of the 1990s, the in proportion of their shares, and CAMPSA under its new name CLH remained in charge of wholesale logistics. U/T stations have been trying in national courts to These transfers of assets were subject to a Commission obtain the cancellation of their contracts with the decision IV/M.138 dated 19.12.2001. various suppliers involved (REPSOL and others),

Number 2 — Summer 2006 25 Antitrust on the grounds that these contracts infringe Span- as well as some individual stations. The observa- ish competition rules, which mirror EC rules (). tions generally agreed with the analysis of market More precisely, the station operators often argued foreclosure but disagreed that the remedies were before national courts that the durations of the sufficient, in particular because they found that contract were contrary to competition rules and the possibility to exit long-term contracts might that REPSOL was fixing retail prices although the be ineffective (they argued that the price to be paid operators were not agents of REPSOL. In the face would render exit economically uninteresting). of widespread litigation and contradictory rul- Some submissions further argued that the Com- ings by the different National Courts involved, mission had not understood that REPSOL was de in December 2001 REPSOL notified pursuant to facto fixing the retail price in its network and that Regulation 17 () all its supply agreements to the the Commission had thus failed to address the Commission, with a view to obtaining a negative problem. clearance or, failing this, an individual exemption under Article 81(3) EC. In March 2005, REPSOL was informed of the observations received from interested third par- The procedure ties and subsequently submitted several amended proposals. The last amended proposals, submitted REPSOL’s notification covered the agreements in early March 2006, were considered satisfac- and/or model contracts laying down the conditions tory by the Commission, which, on 12 April 2006, under which it carried on or intended to carry on adopted a commitment decision. That decision its business of distributing fuel for motor vehicles had received on 27 March 2006 a unanimously through service stations in Spain. The Commis- favourable opinion of the Advisory Committee on sion subsequently carried out a market investiga- Restrictive Practices and Dominant Positions. tion, inter alia by publishing in the Official Journal a notice inviting interested third parties to submit The relevant market their comments on the notification (). With the entry into force of Regulation (EC) No 1/2003 ( ) Fuel sold in Spain includes two main catego- on 1 May 2004, the notification made by REPSOL ries: diesel and petrol, diesel outselling petrol as lapsed ( ). explained above. Fuel sold in Spain comes mainly However, in June 2004, given the concerns it had from Spanish refineries. The balance is imported/ with regard to the notified contracts, the Com- exported by tanker: Spain is a net importer of mission opened proceedings under Chapter III diesel and a net exporter of petrol. Fuel, whether of Regulation (EC) No 1/2003, and subsequently produced by a refinery or imported, is either fed addressed to REPSOL a preliminary assessment () into the retail sales network of the producer or outlining the competition concerns (about market importer (composed of company-owned or affili- foreclosure) and giving REPSOL the opportunity ated service stations) or sold wholesale (off-net- to remedy these concerns by submitting commit- work) to: (i) independent retailers who are not ments. REPSOL submitted commitment proposals integrated upstream (unbranded service stations to the Commission in response to the preliminary or supermarkets), (ii) traders (including large oil assessment and in October 2004, the Commission companies not vertically integrated in Spain), or market tested them, inviting interested third par- (iii) large final customers (industrial and commer- ties to submit observations (). cial users such as hospitals, car-rental companies, transport undertakings, factories, etc.). Products The Commission received 25 submissions from may, moreover, be exchanged between refiners or associations of service stations, groups of stations operators at all levels of the chain.

10 (3) The Spanish Competition law includes basically the same In earlier decisions ( ), the Commission consid- provisions as Articles 81 and 82 of the EC Treaty, and, ered that the off-network (or wholesale) selling of as regards vertical agreements, has incorporated the EC fuel and the retail selling of fuel through service block exemption Regulation 2790/1999. stations could constitute different product mar- (4) First Regulation implementing Articles 85 and 86 of the Treaty, OJ 13, 21.2.1962, p. 204/62, regulation as last kets. In the case of off-network selling, it con- amended by Regulation (EC) No 1216/1999 (OJ L 148, sidered that there was a separate product market 15.6.1999, p. 5). for each type of fuel. Given that the competition (5) OJ C 70, 19.3.2002, p. 29. In response to the invitation, concern identified in the preliminary assessment 69 comments were received from interested third parties, would also relate to a market comprising all fuel some on behalf of several service stations. (6) OJ L 1, 4.1.2003. types and both off-network and on-network sales, (7) Article 34(1) of Regulation (EC) No 1/2003. (8) Article 9(1) of Regulation (EC) No 1/2003. (10) Commission Decisions in Case No COMP/M.1383 — (9) OJ C 258, 20.10.2004, p. 7. Exxon/Mobil and Case No COMP/M.1628 TotalFina/Elf.

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the question of whether the market should be nar- into were of substantial duration, especially in ANTITRUST rowed down to the different channels and fuel types the case of agreements of the U/T type, which are was left open for the purpose of the decision. long-term agreements (between 25 and 40 years); and service station operators and final customers As regards the geographic market, in the same were deemed to be in a weak, fragmented position earlier decisions, the Commission considered that compared with suppliers, in particular REPSOL, markets could be local or national. Given that which has a total market share of around 40%. the competition concern identified in the preliminary assessment would also exist if the market The commitments offered (March 2006) were national, the question of whether the market should be narrowed down to local areas was left First, REPSOL proposed to offer to U/T service open. station operators the possibility of ‘buying back’ the right in rem before the scheduled expiry of Practices raising concerns the agreement. This option could in principle have been exercised at any time after the date when The distribution agreements (whether of CODO, the agreement had only 12 years left to run. The DODO, or U/T type) between REPSOL and serv- exercise of the option would have involved paying ice station operators contained non‑compete REPSOL compensation equal to the value of the clauses covering fuel intended for sale through right in rem in question. The value was to be cal- service stations (but not products other than fuel culated on the basis of REPSOL’s annual cash flow sold through service stations). The duration of and the contract period still to run and as a result these clauses varied. In agreements of the CODO would not correspond to the residual value of the or DODO type, it was as a rule 5 years. In agree- investment. However, in the event of disagreement ments of the U/T type, it ranged from 25 to 40 years about the compensation, the valuation criteria laid depending on the type of agreement. down in the Spanish law on expropriation would have applied. Such agreements may, depending on the circum- stances, give rise to a competition problem, nota- Second, REPSOL proposed not to conclude any bly where, by virtue of such clauses, other suppliers new supply contracts exceeding 5 years with serv- in the market cannot sell to the buyers concerned, ice stations that it does not own. Also, REPSOL which may foreclose the market and weaken inter- proposed not to purchase any independent station brand competition. In order to check whether such that is not supplied by REPSOL, until the end of foreclosure effects exist, two conditions need to be the second year following the Commission deci- fulfilled 11( ): access to the market should be diffi- sion. Finally, REPSOL proposed to ensure that cult and the contracts concerned should signifi- all service stations within its network are able to cantly contribute to the foreclosure of the market. provide discounts on the price recommended by Indeed, in its preliminary assessment, the Com- REPSOL: discounts should be possible also for sta- mission found that the market is accessible only tions which only act as agents of REPSOL (in such with difficulty by competitors wishing to enter or cases the station will be able to share its commis- expand. This is due notably to the significant verti- sion with the client in order to reduce the price for cal integration of operators, the cumulative effect the client). of the parallel networks of vertical restraints, dif- ficulties in setting up an alternative network and The issues of retail price maintenance other competitive conditions (principally the satu- and agency ration of the market and the nature of the prod- In its preliminary assessment, the Commission had uct). Further, in its preliminary assessment, the noted that the provisions of the contracts signed Commission took the view that the agreements by REPSOL did not prevent service stations from in question might contribute significantly to the granting discounts on the price recommended by foreclosure of the market . This was a result of the REPSOL. However, during the market test, some following factors: the extent of the non‑compete market participants claimed that service stations obligations imposed by REPSOL (the market share are not in practice able to make discounts on the tied by REPSOL’s sales under the CODO and U/T recommended price. It was also argued that the contracts was deemed considerable, at around [25- Commission should decide whether the stations 35%]); the non‑compete commitments entered are ‘real agents or not’. The submissions referred also to a national competition procedure, where (11) Ruling of the ECJ of 28.02.1991 in case C-234/89, Stergios the ‘Tribunal de Defensa de la Competencia’, con- Delimitis vs. Henninger Bräu AG, Rec. 1991, page I-935, paragraphs 13 et seq. See as well paragraphs 138 to 160 of cluded in 2001 that so-called ‘agency contracts’ the Communication of the Commission — Guidelines on entered into between some service stations and vertical restrictions, OJ C 291 of 13.10.2000, p. 1 et seq. REPSOL were in fact not real ‘agency contracts’

Number 2 — Summer 2006 27 Antitrust and that REPSOL was fixing resale price contrary margin (€/l) and the lower U/T margin (€/l) to to competition rules. REPSOL was ordered to stop REPSOL multiplied by its yearly volume of sales, fixing the price in all contracts with similar char- the station will roughly increase its revenues by acteristics and the implementation is being moni- 40% of the difference between the higher DODO tored by the ‘Servicio de Defensa de la Competen- margin and the lower U/T margin multiplied by cia’. its yearly volume of sales. Simulations on the portfolio of U/T stations of REPSOL showed that this Given that these issues are being addressed by the would be equivalent to an increase of [15-25]% of national competition authorities and that the issue the existing U/T margins (€/l), thus representing of whether the service stations are ‘agents’ or not a concrete financial incentive to exit, and that the is irrelevant for the market foreclosure concerns difference of margins between the two categories raised by the Commission, the Decision does not had remained rather stable in the past (13). Accord- take any position in this regard. The commitments ingly, these principles were retained for the calcu- proposed by REPSOL ensure, in any event, that lation of the compensation (14). all service stations within the network of REPSOL will be able to provide discounts on the basis of the These general principles had of course to be fine- price recommended by REPSOL. tuned in order to ensure that a real incentive exists for practically all types of stations. For instance, The compensation for investments the formula is based on six categories of stations As mentioned above, in the market test, some (depending on volumes of sales) and in each of market participants expressed the view that the them the payment is capped. It was further impor- possibility to exit long-term U/T contracts might tant to make up for any possible external fac- be ineffective, because the price to be paid would tor affecting the incentive after exit: in cases of a render exit economically uninteresting. In effect, severe drop (-10% or more) in volumes of fuel sold making the station pay for the cash-flow that REP- after exit, the volume used for the computation of SOL would have enjoyed if it had maintained the the compensation is adjusted to the lower level of 15 agreement till its end would have most likely pre- sales ( ). In addition, it was necessary to minimise vented a profitable operation of the station after any cost associated with the mechanism: for that termination of the U/T contract. The alternative purpose, payments by the stations can be done on offered to use arbitration under the terms of the a quarterly basis to limit financing costs for the sta- Spanish expropriation law would not have led to tion. effective results either as REPSOL and the service stations strongly disagree about the size of the In addition to these technical issues, it was crucial investments made by both parties in the station to make sure that the formula would not affect and about the duration in which they should be competition between REPSOL and the other fuel amortised and either party would have appealed in suppliers. With that aim, the DODO offer used for courts any result of a first arbitration, substantially calculating the 60/40 ratio is the first offer to be postponing any effect of the commitments. made by REPSOL at the time of exit. Accordingly, the compensation remains the same whatever the Accordingly, a new compensation mechanism was supplier chosen by the station when it exits its U/ designed, which does not take into account invest- T contract and REPSOL cannot increase its comments made by the parties, but rather attempts to pensation when trying to match offers by competi- give a concrete financial incentive for the U/T sta- tors. In addition, as indicated above, the formula tions to terminate their contracts while allowing depends on six categories of stations and in each REPSOL to receive a reasonable amount in com- of them the payment is capped: thus Repsol’s compensation. pensation is capped for the better performing stations in each category; accordingly, Repsol will The principles of the new mechanisms are the following: first of all, DODO contracts provide much (13) One must note in that respect that U/T stations receive larger margins (in €/l) than U/T contracts do and margins similar to those of the CODO stations and that stations which exit U/T contract will become the difference of margin between these stations and ‘independent operators’ and sign DODO contracts DODO stations is bound to stay given the different situa- with REPSOL or any other supplier (12). Assum- tion of the station operator in those categories. ing that the station pays every year to REPSOL (14) In order to avoid that transparency be maintained over time between competing suppliers for these stations and 60% of the difference between the higher DODO given the stability of the difference between the two categories, the formula uses the values of these margins and (12) Indeed, many observations made in the market test insis- volumes at the time of exit of a U/T contract. ted on the wish of service stations to obtain DODO like (15) This element of transparency is inevitable as stations can wholesale supply contracts with a price formula based on face sudden drops of activity due to external factors such a Platts’ index. as the creation of an alternative road.

28 Number 2 — Summer 2006 Competition Policy Newsletter not be able to use the compensation to anticipate Conclusion ANTITRUST competition and make a ‘better than normal’ first offer. The commitment decision adopted in this case will free hundreds of service stations linked to This mechanism was designed by taking into REPSOL from very long-term contracts bring- account the detailed comments and explanations ing competition to a significant segment of the of the market participants that participated in the Spanish service station market (16). This may market test launched in 2004, and that were fur- be followed by similar mechanisms for the few ther informally consulted on the revised formula other fuel suppliers who still maintain similar at the end of 2005. contracts (17). It signals the end of a special treat- In addition, given that some observations in the ment of a sector which until the end of the tran- market test argued that there are not enough sta- sition period for the implementation of the Block tions that would come on the market every year, exemption under Regulation 2790/1999 has been REPSOL proposed that all U/T stations be allowed characterised by the existence of exclusive sup- to terminate their contracts at the end of the dura- ply contracts of a duration longer than five years. tion of the commitments. In that context, given It also shows that commitment procedures under that some contracts will have much longer remain- Article 9 of Regulation (EC) 1/2003 can provide ing duration than 12 years at that point in time, concrete solutions to rather complex contractual it was decided that stations will not pay for more relationships and pave the way for competition on than 16 years (cap on duration). the merits.

(16) For more details, see: http://ec.europa.eu/comm/competition/antitrust/cases/ decisions/38348/decision_es.pdf and http://ec.europa.eu/comm/competition/antitrust/cases/ decisions/38348/commitments.pdf (17) The National Competion Authority has opened two cases against the number 2 (CEPSA-TOTAL) and number 3 (BP) in the market.

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