The Spanish Distribution System of Oil Products: an Economic Analysis

The Spanish distribution system of oil products: an economic analysis

Ignacio Contín*, Aad Correljé**, and Emilio Huerta***

This paper is concerned with the structure and regulation of the Spanish distribution system of oil products. Spanish-based refiners have a dominant position on the commercialisation of oil products. The Compañía Logística de Hidrocarburos (CLH), a joint venture between the three Spanish-based refiners and Shell, is the only firm that distributes oil products by pipelines in Spain. It also owns most of the storage capacity ex-refineries. CLH constitutes a “bottleneck” in the recently liberalised Spanish oil market, in particular, for transport inland. As a result, the government decided to regulate CLH in June 1996. However, more transparency should be achieved in this regulation.

1. Introduction

The Spanish oil industry was dominated by a state monopoly between 1927 and 1993. The oil sector was vertically disintegrated while the government strictly regulated the commercial relationships between companies involved. Ex-refinery and retail prices were imposed administratively. The government established the size of the deliveries from the refiners to the monopoly. The monopoly was operated by CAMPSA (Compañía Arrendataria del Monopolio de Petróleos Sociedad Anónima) which took care of distribution and marketing, either by its own service stations or by concessionaires. Following a rigorous reorganisation from the early 1980s onwards, Spain began to gradually liberalise its oil industry in order to adapt it to European competition rules and to address the instabilities inherent in the prevailing system of regulation. Access to various segments of the oil chain (distribution, transport, storage, and retail trade) was gradually opened up to new domestic and foreign operators. This produced a radical transformation of the industry structure and the relationships between companies involved1. Large investments were made in production, distribution and retail facilities in order to improve their efficiency and to adjust refinery output to the composition of demand. The number of refining companies was reduced from 8 in the early 1970s to only 3 by the early 1990s. The several public oil companies were reorganised into a “national champion”, Repsol, structured similarly to international oil companies. The foreign companies Elf and BP took part in the two private Spanish refiners Cepsa and Petromed, respectively. In this way, the private Spanish refineries were integrated into the production systems of large foreign oil companies In 1984, CAMPSA was transferred to the refiners on the basis of their respective refining capacity. At the same time, CAMPSA acquired the distribution and storage facilities as

*Nijmegen International Political Economy Centre (NIPEC) -University of Nijmegen- and Universidad Pública de Navarra. Dpto.: Gestión de Empresas. Campus de Arrosadía s/n. 31006 Pamplona. Navarra. Spain. E-mail: [email protected] **University of Nijmegen. School for Policy Studies. Thomas van Aquinostraat 1. P.O. Box 9108. 6500 HK Nijmegen. The Netherlands. E-mail: [email protected] ***Universidad Pública de Navarra. Dpto.: Gestión de Empresas. Campus de Arrosadía s/n. 31006 Pamplona. Navarra. Spain. E-mail: [email protected] 1For an analysis of this process see Correljé (1990, 1994). well as the service stations from the state2, achieving the refiners in this way a certain degree of downstream vertical integration. Over the 1980s, CAMPSA’s Plan estratégico de CAMPSA brought about a radical restructuring and modernisation of the Spanish distribution system. The plan envisaged large investment in the distribution network as well as a rationalisation of its labour force. Its objectives were to improve its efficiency3 as well as to adapt it to the change in the composition of demand (toward lighter products). Between 1986 and 1991, 20 depots were closed while the storage capacity for fuel oil was somewhat reduced. Large investments were made in order to modernise the remaining depots, through the construction of automatic loading facilities for the trucks and the introduction of a monitoring system in order to employ the capacity of the system more efficiently. The number of ships and barges was reduced and 1.025 kilometres of new pipelines were built. As a consequence all remaining depots (38) were either located in a seaport or connected to the pipeline grid. Hence, the transport of products from the refineries could take place largely by means of the cheapest types of transport, namely pipelines or ships. A satellite system controls automatically the pipeline grid [Correljé (1994) and CAMPSA annual report, 1991]. Forward integration of the refiners was achieved by separating the retail network from the distribution activities, and dividing it up among the refining companies by mid 1992. CAMPSA primarily became a transport company. In January 1993, when the monopoly was abolished, CAMPSA was renamed CLH (La Compañía Logística de Hidrocarburos). At the end of 1993, Shell took over a 5% stake from Repsol. CLH is currently a joint venture among the oil companies that have refineries in Spain plus Shell. Its current shareholding is structured as follows: Repsol, 61,46%; Cepsa, 25,1%; BP, 7.61%; Shell, 5% and others, 0,83% [Contín (1996)]. Together the refiners controlled, through different kinds of contracts, approximately 85,2% of the service stations by mid 19974. Repsol currently has 5 refineries with an approximate nominal capacity of 37 MT/year (which is 61,5% of the Spanish refining capacity). Cepsa has 3 refineries (28,7%) and BP España has one refinery (9,9%) [Contín (1996)]5. All Spanish refineries are connected with depots located in the main consumption areas through pipelines (see Figure 1). Most of the oil companies established in Spain transport their automotive fuels from their refineries or from depots located in seaports to the mainland country through CLH. This company transports

2Until that moment, CAMPSA only operated the Monopoly’s marketing system. The Monopoly’s assets were owned by the state 3In order to secure the distribution of products at minimal costs, it is necessary to locate the depots in such a way that a maximum volume of products can be transported over large distance at the lowest cost, while at the same time minimising the distances over which smaller quantities have to be transported to the retail outlets [Correljé (1994)]. 4The market shares of the “Spanish majors” in terms of service stations were: Repsol, 51,3%: Cepsa, 25,6%; and BP, 8,3%. Shell, Petrogal, Agip and Total together controlled around 7,5% of the outlets (only Total does not use CLH’s distribution system). The aggregate share of all others is 7,3% (Avanti, Continental Oil, Esso, Fina, Saroil, Meroil...-until a total of 12 companies). The hypermarkets managed directly 32 service stations (Oilgas, July-August, 1997). The three refiners sold 86% of the gasoline consumed (Repsol, 54%; Cepsa, 25%; and BP, 7%) and 77% of the gasoil [Contín et alt (1997) and Ministry of Industry (1995)]. In July 1990, when the market concentration was even higher, the government introduced maximum price regulation for automotive fuels to protect the consumers against monopoly pricing. Likewise, in June 1996 the government abolished maximum price regulation for gasoil because it considered that a sufficient competition had been reached. 5There is a ninth refinery, Asesa (capacity of 1 MT/year), a joint venture between Repsol and Cepsa, which only produces asphalt. One of the Cepsa’s refineries is located in the Canaries Islands. Our study refers to the mainland distribution system, to the exclusion of the Canary Islands. Seven of the Spanish refineries are located on the coast near main consumption areas. The other Refinery, Puertallono, is close to Madrid, connected with the coast by a crude pipeline.

2 about 90% of the transportation of automotive fuels (Oilgas, June, 1997)6. Post 1990, new distributors have constructed “independent” storage capacity near terminals in the seaports of high-consumption areas. These “independent terminals” are close to the Spanish refineries or to CLH’ depots. In June 1996, the government decided to regulate CLH because “the high concentration on the primary distribution market”. The final purpose of this regulation was to stimulate competition on gasoline and fueloil markets (Royal Decree 7 June 1996). The objective of this paper is to analyse the developed of the structure of the Spanish primary distribution system of oil products and its regulation7. The next section presents the main economic features of the distribution of oil products. Section 3 describes the Spanish distribution system and section 4 discusses why it should be regulate it. Finally, section 5 presents main findings.

Figure 1: CLH’s distribution system

Source: CLH Annual Report, 1996.

615 operators use CLH’s distribution system for moving their oil products (Repsol Annual Report, 1996). 7This paper does not deal with the Spanish LPG market. This market, monopolised by Repsol Butano, is regulated by a maximum price system. In contrast with other European countries, LPG is not an important automotive fuel in Spain.

3 2. Main characteristics of the distribution of oil products.

Pipelines are the cheapest means of transport for large quantities of light products (gasoil and gasoline) over large distances, such as in the primary distribution system8. Only transportation by water (barges in rivers and ships between seaports) is cost price-competitive with pipeline transportation9. Transport by train and trucks for this order are much more expensive10. For small quantities over short distances and when flexibility is required, like in the secondary distribution, railways and particularly trucks are the most appropriate means of transport. Average pipeline costs in Europe, by 1989, were about 30% of the costs of railroad transport, and between 50% and 90% of the costs of coastal shipping [Masseron (1990)]. In Spain there are not navigable waterways. So, pipelines are the only efficient alternative for inland transport gasoil and gasoline over long distances11. The main characteristics of the transport by pipelines are:

1) Economies of scale. Pipelines are large, highly capital-intensive facilities. Transport through pipelines is characterised by substantial economies of scale because the costs are a function of the diameter of the pipeline and its length. A larger diameter provides a more than proportional increase in capacity and, thus, less the proportional increases in per unit costs. The fact that unit costs decline over the entire range of technologically feasible pipelines sizes leads many economists to associate pipeline transport with natural monopoly characteristics. These natural monopoly characteristics underline the economic case for regulation of pipeline transport [Adams y Brock (1983) and Coburn (1988)]12. 2. Economies of expansion. Once built, the line’s capacity may be increased with only slight changes in average cost by adding pumping stations, which move the fuels more rapidly. The capacity of an overcrowded segment may be expanded, without constructing an entirely new pipeline, by adding up a parallel pipe to only those segments that are overcrowded. In the longer run throughput may be increased by the construction of new larger-diameter pipelines [Adams y Brock (1983) and Hansen (1983)]. Refineries that supply the same area can also share large depots, avoiding duplication. Moreover, shared depots can be linked through common pipelines. 3. Asset specificity. Pipelines are long-life specific investments (site and physical asset specificity). This means that pipelines can not be redeployed in alternative uses, without sacrifice of their productive value. As a consequence a “small numbers”13 problem can arise

8The primary distribution is that which takes place between refineries and large depots or between large depots. The transport from refineries or depots to service stations or final clients located in their nearness is called secondary distribution. 9See Teece (1976), Hansen (1983), Adams and Brock (1983), Coburn (1988). 10Pipelines are not appropriate for the transport of fuel oil over long distances. Because of its high viscosity it must be heated to about 90 degrees Celsius before it can be pumped through pipelines while these pipelines, and also storage tanks, must be insulated [Masseron (1990)]. 11Railways and trucks are the only viable solution for the inland transport of fuel oil, whereas ships could be used for transport between seaports [Correljé (1994)]. 12Hillman (1991) points out: “Where the capacity of a single pipeline is sufficient to handle all demand in its market, a “true” natural monopoly may exist. In many markets, however, intramodal and low cost water operations offer effective competition. Such competition may deprive affected pipelines of greater scale economies”. 13High asset-specificity because it prevents an easy redeployment of assets, locks partners into their mutual relationship. This raises the possibility of opportunistic behaviour, which may be checked by internalising the transaction within a hierarchical governance structure. However, the response to transactional

4 among an “independent” pipeline company that supplies one specific area and the user of its transport services, say, refining companies. Vertical integration of the refiners in the transport by pipelines, through a joint venture tries to overcome this problem [see Teece (1976)].

3. Spanish distribution system.

Table 1 shows how CLH has continued its modernisation during the 90s: new kilometres of pipelines have been built; storage capacity for light products, in particular for gasoil, has been increased whereas that for fuel oil has been reduced (CLH Annual Report, 1996); an important program has been implemented for the further modernisation of depots (El proyecto Dispatching de plantas, May 1995 -Oilgas, October 1997-). This all facilitated an important reduction of the labour force.

Table 1: CLH’s basic magnitudes. CONCEPTS UNITIES 1991 1992 1994 1996 · Means of transports and storage facilities -Depots Number 39 36 36 37 -Airports-depots Number 29 29 29 30 -Bunkers-depots Number 3 5 5 3 -Ships Number 17 16 11 9 -Ships Tonnes 288,892 279,236 215,061 169,091 -Barges Number 9 9 8 8 -Pipelines Kilometres 2,819 3,258 3,258 3,413 -Railway cars Number 945 930 930 797 -Trucks Number 250 250 250 207 -Storage capacity Miles of m3 6,051 6,210 5,909 6,114 · Human Resources -Workers Number 4,746 3,613 2,863 2,566 · Investments -Million pesetas 28,566 18,023 6,620 6,638 (1) Dates of 1991 are referred to CAMPSA. Source : Annual Reports CLH, 1996, 1994, 1992, and Annual Report CAMPSA, 1991

Pipelines thus became the most important means of transport used by CLH (see Table 2). Indeed, CAMPSA transported 38% of products by pipelines in 1988 against 88% of CLH in 1996 (CAMPSA, Annual Report, 1988 and CLH Annual Report, 1996). Note also that expansive transport with railways has been reduced importantly. Likewise, Table 3 shows that the supply of light of light products for the terrestrial market constitutes the most important activity of CLH (88% of total supplies). As stated in the introduction, 12 independent distributors have built terminals for oil products, mainly in the most important Spanish seaports, since 1990. The storage capacity of such distributors only means 6,2% of the total Spanish one (see Table 4). However, most of this storage capacity is only for gasoline and gasoil14. This means that in some coastal high problems in the market does not always have to be complete vertical integration. Long-run contracts are the other alternative available to face up to the called “small numbers” problems [see Williamson (1975)]. 14CLH’s storage capacity for gasoline and gasoil reached 4.760.000 m3 in 1996. Unfortunately, the independent distributors and the Spanish-based refiners do not publish their storage capacity by products.

5 consumption areas an storage capacity for light products have been developed out of the control of the refiners and CLH15.

Table 2. CLH’s movements of oil products. 1996 1990 Means of transport Miles Tonnes Million Txkm (%) Miles Tonnes (%) Million Txkm (%) (%) Ships 8,990 4,787 14,080 7,904 (31) (52.8) (50.6) (71.2) Pipelines 19,797 4,223 12,131 2,529 (68.4) (46.6) (43.6) (23.5) Railway cars 156 50 1,607 368 (0.5) (0.5) (5,7) (3,4) TOTAL 28,943 9,070 27,818 10,801 (100) (100) (100) (100) (1) Dates of 1990 are referred to CAMPSA Source : Annual Report CLH, 1996 and Annual Report CAMPSA, 1990.

Table 3: CLH’s supplies. · MARKETS AND PRODUCTS 1996 (%) 1991 (%) (Miles Tonnes and %) · TERRESTRIAL -Gasoline 7,778 8,174 -Gasoil 15,112 14,378 -Fueloil 3,943 5,072 -Others 143 170

Subtotal terrestrial market 26,976 (88.5) 27,794 (89.2) · AVIATION -Kerosene 2,193 1,721 -Gasoline 6 7

Subtotal Aviation market 2,199 (7.2) 1,728 (5.5) · COASTAL -Gasoil 452 819 -Fueloil 826 827

Subtotal coastal market 1,330 (4.3) 1,646 (5.3) TOTAL 30,453 (100) 31,168 (100) (1) Dates of 1991 are referred to CAMPSA. Source: Annual Report CLH, 1996 and Annual Report CAMPSA, 1991

However, most of the independent distributors are only competing on the gasoline and gasoil markets [see Enciclopedia Nacional del Petróleo, Petroquímica y Gas, 1997]. 15Certain degree of competition have been detected in Barcelona area. By mid 1992, an import terminal by charging a distribution fee of between 700 and 1000 pesetas per tonne, forced CLH to lower its prices in Barcelona area to the same level [Correljé (1994)]. OPAL (1996) states that in 1994 more than half of the “independent” storage capacity (500,000 cubic metres with a similar capacity under construction) was in Barcelona area. In 1995, CLH began to implement the called El proyecto Dispatching de plantas in order to improve the productivity of their depots and to faced up to competition, in particular, in some coastal areas.

6 Table 4. Spanish Storage capacity of oil products in Spain (1) . YEAR 1996 m3 % Repsol 6,102,100 38.12 Cepsa 2,027,300 12.66 BP 762,200 4.7 CLH 6,114,284 38,2 Independent distributors 1,000,000 6.2 TOTAL 16,005,884 100 (1) Not are included neither the storage capacity of Respol Butano (700.000 m3of LPG), nor the storage capacity of Cepsa’s refinery in the Canaries Islands (838.000 m3) Source: Annual Report CLH, 1996 and Enciclopedia Nacional del Petróleo, Petroquímica y Gas, 1997.

4. Market structure and regulation

So far, we can conclude that the restructuring of the Spanish oil industry that took place over the last years allowed the Spanish-based refiners to create one the most efficient primary distribution system in Europe [Correljé (1994) and Ballesteros (1995)]16. The process of modernisation of the former Monopoly’s distribution system enhanced the use of the cheapest means of transport for light products (pipelines) and allowed the refineries to share storage facilities, avoiding duplications. Moreover, technical modernisation allowed for a high degree of efficiency in the use of the system. As a result of such a process CLH was able to maintain and reinforce its dominant position in the distribution of oil products in Spain. Only in high consumption coastal areas new distributors have developed an “independent” storage capacity, but in most areas CLH is in a monopolistic situation. There is not available alternative to its pipeline grid, in equality of cost, for moving light products to inland17. Since transportation costs are an extremely important element in the final delivered cost of oil products, CLH plays a crucial role in the structure of competition in the Spanish oil industry. Laffont and Tirole (1996) state: “A major policy issue in a number of industries is the

16CLH states that its pipeline system has the biggest capacity of transport oil products in Western Europe (Oilgas, May, 1995). In fact, in 1990 in Western Europe over a total of approximately 9,000 km of pipelines, 2.400 (26%) were owned by CAMPSA [Masseron (1990) and CAMPSA Annual Report, 1990]. CLH also states that currently the ration “Km of pipelines/Tonne of gasoline and gasoil consumed” is in Spain double than elsewhere in Europe. OPAL (1991) points out: “...the unitary transport/storage infrastructure, furthermore, solely owned and operated by CAMPSA, is heavily reliant on long-distances product movement by pipeline and high-capacity depots, implying economies of scale that would only be matched with some difficulty by individual supplying companies in other EC countries”. In this sense, in 1991 the president of CAMPSA stated that only in the centre of the USA there were some distributors comparable, in term of efficiency, to CAMPSA. He also stated that in Europe only the French company Tapil was comparable, although in a smaller degree, to CAMPSA [Sala (1995)]. Tapil’s length’s pipeline system was of 1,300 kilometres in 1990 [Masseron (1990)]. 17The government does not restrain the construction of oil pipelines by independent operators. However, because of these small market shares, the small independent operators are not willing to invest in an alternative pipeline grid. Furthermore, the transport by train is rather limited. In 1993, it reached 500.000 tonnes (to the exclusion of LPG). CLH moved 68% of this quantity. In that year the pipeline system moved 16.853.000 tonnes (Oilgas, May, 1994). This means that the transport by rail is marginal and that also in this activity CLH has a dominant position. Trucks are only usually used in secondary distribution.

7 liberalisation of potentially competitive segments when one of the competitors also controls a complementary segment, called the “essential facility” or the “bottleneck”. The essential facility is monopolised because of large economies of scale, of first-mover advantages or of technological superiority”. In industries like telecommunications, electricity, gas, the challenge for public policy is to deregulate these largely competitive activities, while maintaining adequate antitrust and regulatory safeguards over the remaining “bottleneck” facilities, such as telephone switches, pipelines, and electric transmission lines [Lyon and Hackett (1993)]. In the Spanish oil industry CLH was made the bottleneck facility, in particular for inland transport. This suggests that it is necessary to regulate CLH in order to ensure that its services are provided on a non-discriminatory basis and that it is not used by its owners as a barrier to the entry of newcomers into marketing18. Until 1992, the government set oil transportation tariffs; since then, they have been set by CLH on a contractual basis. Prices take into account the origin and the destination of the products and the cost of storage19. CLH allows the operators to deliver their products at one of its facilities and to take them to whichever other CLH facilities they want (Oilgas, June, 1997). The independent operators argue that CLH discriminates, charging discriminatory prices to no-owners of CLH, and denying services to some oil companies, such as Dineff, Conoco, Tamoil (El País, 31/5/93). The Tribunal de Defensa de la Competencia20 (1995), however, states that CLH’s prices are the same for every contractor. Yet, it mentions other claims of independent operators against CLH: it refuses to transport fuels below certain volumes and sets prices depending on whether there are or not other distributors, and not depending on the available capacity. Finally, the TDC states that CLH plans to enter into the secondary distribution in some areas21. With respect to the prices charged by CLH, in 1994 Petrogal complained that such prices were too high, taking into account CLH’ excellent distribution system. CLH answered saying that its prices were comparable to those in other European countries. Yet, Agip argued that Spanish prices for transport and storage could not be directly compared with prices elsewhere in Europe because the Spanish distribution system is much more complete and effective(See Oilgas, May, 1994). It is important to note that the CLH’s “average logistic tariff” for light products has decreased from 2,4 pts/litre in 1992 to 1,3 pts/litre in 1996. This reduction has been possible for the process of modernisation already described. The TDC (1995) suggested to regulate CLH in order to ensure it provides its services in a non-discriminatory basis for all shippers, regardless of whether they are owners or non- owners, and that it sets prices that allow the entry of new operators in the oil industry. In June

18Pipelines can be employed as a barrier to the entry if the owners can exclude o limit flow of oil products to independent. The Federal Trade Commission (USA) states how pipelines can be employed as entry barriers: by (1) unnecessary minimum size requirements for shipment, (2) granting independents irregular shipping dates, (3) limiting available storage at the pipeline terminal, (4) imposing unreasonable product standards upon independent customers of pipeline, and (5) harassing or delaying tactics [see Adams y Brock (1983)]. Finally, a pipeline can exercise its monopoly power charging prices that are higher than competitively determined prices [Coburn (1982)]. 19The Ministry of Industry (1995) states that CLH’s “average logistic tariff”, which included transport and storage services, was 1,85 pts/litre in 1994 for gasoil and gasoline. However, the minimum tariff was 0,52 pts/litre in areas near refineries and the maximum was 4,7 pts/litre in remote areas. 20The Tribunal de Defensa de la Competencia (TDC) is the Spanish Antitrust Authority. 21However, more than 100 small companies with more than 6,000 trucks are competing in the secondary distribution system. So, this last allegation does not appear to have sense. Furthermore, CLH contracts with those companies for moving products by road (Enciclopedia Nacional del Petróleo, Petroquímica y Gas, 1997).

8 1996, following TDC’s suggestions, the government decided to regulate tariffs as well as access conditions to CLH’s facilities because “ ...the high concentration in the primary distribution system is an obstacle to competition, in particular on gasoline and fuel oil markets22”. The government requires CLH to provide transportation and storage services on a “non-discriminatory, transparent and clear” basis to all shippers; industries with consumption of fuel oil above 50.000 tonnes/year; and airlines with consumption of kerosene above 50.000 tonnes/year (Real Decreto Ley, 7 junio, 1996). The Real Decreto makes the contracts between CLH and others companies subject to Ministry of Industry’s approval. The Real Decreto also establishes the conditions under which CLH can deny its services. The most relevant conditions for our study are: Technical reasons that impede CLH to provide services; and lack of capacity. The denial of services must be approved by the Minister of Industry. As a consequence, CLH had to modify and reorganise its contracts (Repsol Annual Report, 1996).

5. Conclusions

So far, we have analysed the Spanish distribution system of oil products pointed out why it should be regulated. Lack of transparency is characteristic for this regulation. Yet, so far, in 1996 the government announced that it would establish such regulation: to stimulate competition in the oil industry through facilitating the access, in a non-discriminatory basis, to CLH’s distribution system for all oil operators and high-consumption companies. Recent British and North American regulation experiences may help to improve the regulation of the Spanish distribution system of oil products23. Independent regulatory offices with well defined rules and purposes, which have to inform periodically about theirs activities, seen more adequate to deal with the problems of regulatory capture and regulatory opportunism [Kühn and Regibeau (1998); Robison (1997)]. Recently, the Spanish government has announced a new Law that will create an independent regulatory agency for energy sub- sectors (electricity, gas and oil) (Expansion, 12/11/1997). In our opinion, this agency should regulate CLH’s pricing practices transparently24. Historically, regulatory agencies have tried to ensure that monopolist’s revenues equal their costs and have been less concerned with the pricing structured used (cost plus pricing regulation). Focus on rate structures has been motived and informed by considerations of equity rather than efficiency. Recently, however, regulatory agencies have become more interested in pricing schemes that promote economic efficiency. Amstrong et al (1994) specify the regulatory problem rather precisely: “.....Because of distribution concern, it is desirable to keep these rents (informational rents) low. It is desirable that the regulatory system maintains allocative and productive efficiency, and the regulatory problem (apart of avoiding regulatory

22The Ministry of Industry (1995) states that in spite of the complete liberalisation of the fuel oil market (December 1992), the price of this product has been systematically above the average European price. In the gasoline market, only recently some competition has emerged in respect of the supply of unleaded gasoline 95 RON [Contín et al (1997)]. 23For an analysis of the recent English and American regulatory experiences see Amstrong et al (1994) and Viscusi et al (1992). 24CLH points out (personal interview) that actual prices are set separately for storage and transport for each product. It also states that the price per unit transported is lower as bigger amounts of products are transported. This means that some kind of price discrimination is allowed and that the price per unit transported depends on the total moved. However, the Ministry of Industry’ regulation has forced CLH to modify its prices in order to reduce the discounts for big amounts. As a result, the differences in price per unit transported are currently lower than in the past. CLH also sets minimum size for shipments.

9 capture and regulatory opportunism) is to design the regime in order to trade off the three factors optimally”. The system of price cap regulation known as RPI-X (Retail price index-X%) has been applied to solve the “regulatory problem” in the United Kingdom. RPI-X, as compared to rate- of-return regulation, provides greater incentives for cost efficiency and is simpler to operate. Yet, it does not mean that regulated firms have complete freedom in pricing. Complete freedom in pricing may encourage anticompetitive behaviour by the regulated firm, and regulators have to monitor pricing carefully. Furthermore, regulators have generally duties to prevent undue discrimination in pricing and some forms of tariff rebalancing could be forbidden by this [Amstrong et alt (1994)]. Rate of return regime has been recently replaced by price cap regulation in interstate transportation by oil pipelines in the USA (January 1995, Order 561 promulgated by FERC)25. The new Spanish regulatory agency for energy should take into account these experiences in an evaluation of CLH’s pricing schemes. The fact that CLH is controlled by the Spanish-based refiners, which have a dominant position in the marketing of oil products, implies that the regulators should not only monitor general price caps carefully but also CLH’s pricing schemes. Notice that high tariffs could increase costs for the independent operators whereas this would only mean monetary transfer among divisions for CLH’s owners. In this sense, Adams y Brock (1983) states: ”Even when tariffs are nondiscriminatory, they can be set at levels which are burdensome to the independents while benefiting the integrated majors, who enjoy rebates via the dividends paid to pipeline owners”. Furthermore, the agency should also monitor segment-by-segment routes, avoiding too high tariffs where no competition is available, as in Spain for moving light products inland. The government studies a restructuring of CLH’ shares holding structure, in order to allow independent operators to enter into CLH’s capital. For example, it is proposed that no company should have more than 10% of shares (La Gaceta de los Negocios, 22/12/1997). The final objective of this restructuring would be to obtain a symmetry among CLH’ customers. The regulatory agency will have to analyse this plan too26. Finally, the agency should be set accounting rules for CLH, arbitrage procedures, and solve technical disputes.

References

Adams, W. and Brock, J. (1983). "Deregulation or divestiture: The case of petroleum pipelines", Wake Forest Law Review, vol. 19 (5): 705-791. Amstrong, M.; Cowan, S. and Vickers, J. (1994). Regulatory Reform: Economic Analysis and British Experience. The MIT press. Cambridge, Massachusetts.

25 The Producer Price Index for Finished Goods minus one percent (PPI-1) is the index used to determine annual ceiling levels of rated. The system will be revised every 5 years. The objective of this regulation is to establish just and reasonable rates for moving petroleum and products by pipelines in order to encourage maximum use of them. The regulatory agencies helps to assure shippers equal access to pipeline transport, equal service conditions on a pipeline (in 1906, oil pipelines were made common carriers). 26A radical solution would be the divestiture of refiners in CLH. However, divestiture approach is often criticised for ignoring economies of scope or for being cumbersome. In Spanish, continuous exchanges of oil products among refineries are common for efficiency reasons. Such exchanges are realised through CLH. Furthermore, most of gasoline and gasoil consumed is supplied by Spanish refineries, being moved by CLH’ pipelines. As stated, given that pipelines are specific investment, a “small numbers” problem could arise among refiners and an “independent CLH”.

10 Ballesteros, A. (1995). "La evolución de la industria petrolífera en España a lo largo de los últimos 50 años". Presented at: El petróleo y el problema energético a finales del siglo XX, Universidad Menéndez Pelayo, Santander, España, 31 July- 4 Auguts, 1995. CAMPA Annual Report. Several years. CLH Annual Report. Several years. Coburn, L. (1988). "Eighty years of US petroleum pipeline regulation". Journal of transport History, 9: 149-169. Coburn, L. (1982). "Petroleum pipeline regulation: A competitive analysis". U.S. Department of Energy. Contín, I; Correljé, A. and Huerta, E. (1997). “Competition and regulation in the Spanish gasoline market after the dismantlement of the monopoly”. Presented at: The International Energy Experience: Markets, Regulation and Environment. University of Warwick, England, 8-9 December, 1997. Contín, I. (1996). La desregulación en el sector del petróleo: Consecuencias empresariales y efectos sobre la competencia. Ph. Thesis, Universidad Pública de Navarra. Pamplona. España. Correljé, A. F. (1994). The Spanish oil industry: Structural change and modernization. Thesis Publishers, Tinbergen Institute Research Series, 84, Amsterdam. Correljé, A. F. (1990). “The Spanish oil sector: From state intervention to free market”, Energy Policy, 18(8): 747-755. Hansen, J. (1983). U.S. oil pipeline markets. The MIT press. Cambridge, Massachusetts. Hillman, J.J. (1991). "Oil pipeline rate: A case for yardstick regulation", in: Competition and the regulation of utilities: 72-95. M. A. Crew, ed., Kluwer Academic Publishers, London. Khün, K.U. and Regibeau, P (1998). “¿Ha llegado la competencia?. Un análisis económico de la reforma de la regulación en el sector eléctrico en España.”. Instituto de Análisis Económico (CSIC), February, 1998. Barcelona, España. Laffont, J.J. and Tirole, J.T. (1996). “Creating competition through interconnection: theory and practice”. Journal of Regulatory Economics, 10: 227-256. Lyont, T. and Hackett, S. (1993). "Bottlenecks and government structures: Open access and long-term contracting in natural gas", Journal of Law and Economics and Organization, vol. 9 (2): 380- 398. Manke, R.B. (1976). "Competition in the oil industry", in: Vertical integration in the oil industry: 35- 70. Edward J. Mitchell, eds., American Enterprise Institute for Public Policy Research, Washington, D.C. Masseron, J. (1990). Petroleum Economics (4th ed.). Editións Technip, París. Ministry of Industry (1995). “Informe sobre la formación de precios en el sector del petróleo”. Staff Report, Madrid. Oilgas. Several Issues. OPAL (Oil Price Assessments Limited, 1996). “Description of the oil product distribution sector in European countries”. Vol. 1. Walton on Thames. England. Study prepared for the Directorate general for Energy of the Commission of the European Communities. OPAL (Oil Price Assessments Limited, 1991). "Oil product price formation mechanisms in member countries of the European economic community". Vol. 1. Walton on Thames. England. Study prepared for the Directorate general for Energy of the Commission of the European Communities. Robinson, C. (1997). “Britain’s regulatory regime in perspective”. Presented at: The International Energy Experience: Markets, Regulation and Environment. University of Warwick, England, 8- 9 December, 1997. Sala, J. M. (1995). La liberalización del Monopolio de petróleos en España. Marcial Pons. Madrid. TDC (1995). "Distribución de productos petrolíferos", in: La competencia en España: Balance y nuevas propuestas: 179-215. Madrid. Teece, D.J. (1976). "Vertical integration in the U.S. oil industry", in: Vertical integration in the oil industry: 105-189. Edward J. Mitchell, eds., American Enterprise Institute for Public Policy Research, Washington, D.C.,

11 Viscusi, W.; Vernon, j.; and Harrington, J.R. (1992). Economics of regulation and antitrust. D. C. Health, Lexintong. Williamson, O.E. (1975). “Markets and hierarchies. Analysis and antitrust implications”. The Free Press. New York.