On 17 June 2015, the Competition Appeal Court (CAC)1 upheld an appeal brought by Sasol Chemical Industries (SCI), against the Competition Tribunal's finding that it had charged domestic customers excessive prices for purified propylene and polypropylene between 2004 and 2007 in contravention of section 8(a) of the Competition Act.2

Section 8(a) of the Act prohibits a dominant firm from charging an excessive price to the detriment of consumers. An "excessive price" is defined as "… a price for a good or service that bears no reasonable relation to the economic value of that good or service and is higher than that economic value." Economic value is not defined in the Act.

Prior to the SCI excessive pricing matter, excessive pricing has only previously been addressed in Mittal3 almost a decade ago. In Mittal, the CAC set out its approach (a four stage enquiry) to assessing excessive pricing in terms of section 8(a) of the Act4. The basics of the Mittal four step enquiry are:

• STEP 1: Determine the actual price of the good or service in question alleged to be excessive.
• STEP 2: Once the actual price is determined, determine the "economic value" of the good or service. This must be empirically determined - expressed as a monetary amount in order to be compared against the cost.

In determining "economic value", the CAC held that:

• it is the hypothesised / notional price of the good or service under assumed conditions of long-run competitive equilibrium. Otherwise stated, an amount of money which would notionally be the price or value of the good or service if market conditions other than those actually prevailing, were to prevail;
• the actual costs of the dominant firm are important evidence of "economic value" provided that they reflect normal costs in long run competitive conditions;
• where the actual price shown exceeds the 'normal price' for roughly similar goods / services to a degree which is on the face of it exorbitant, the need to quantify "economic value" more precisely before concluding that the actual price bears no reasonable relation may fall away. A prima facie case for the dominant firm to rebut may be established where the dominant firm raises its price without any corresponding rise in costs; or where the firm charges more than import parity; and
• particular cost savings (which result from a subsidised loan or a lower market rental or any other special advantage, current or historical) that reduce the firm's costs below the notional competitive norm ought to be disregarded.

• STEP 3: Only if the price charged is higher than the economic value of the good or service, a value judgment must be made as to whether the difference between the actual price and economic value is unreasonable.

In interpreting "reasonableness", the CAC held that:

• the test applies to the excess of price over "economic value", and thus only to the element of 'pure profit' (over and above 'normal profit') implicit in that price;
• a number of factors could be assessed including, the extent of dominance, the magnitude of the mark-up over the economic value and the nature of the market (cyclical, innovative, low risk); and
• it is at this stage that circumstances peculiar to the particular dominant firm or special advantages which may serve to reduce its own long-run average costs below the notional norm may be considered.

• STEP 4: If the difference is unreasonable, it must be determined whether the charging of the excessive price is to the detriment of consumers.

In interpreting "consumers" the CAC held that these may be users, but also any downstream consumers.

In summary, the CAC in Mittal positioned the first two steps of the excessive pricing enquiry as calling for a factual determination, with steps three and four requiring a subjective value judgment. Furthermore, the enquiry only proceeds to steps three and four if the actual price is higher than the economic value (which is determined without any consideration of any cost-advantages peculiar to any particular dominant firm). Particular cost-advantages are only considered at the reasonableness stage of the enquiry under step three. Notably, although Mittal set out the CAC's approach to excessive pricing, its approach was never applied to the facts as the matter was referred back to the Tribunal by the CAC for determination and settled without the four step enquiry being applied.

The first application of the Mittal approach was by the Tribunal in the SCI excessive pricing matter). Although the Tribunal ostensibly sought to apply the four step enquiry as set out by the CAC - it differed from the CAC in Mittal finding that particular cost-advantages obtained by a dominant firm not based on innovation, risk-taking and investment (but due to past exclusive or special rights, especially those acquired or inherited through significant State subsidies or support), must be included in the cost determination of "economic value" (i.e. at step two of the enquiry rather than step three as the CAC required). In determining "economic value", the Tribunal considered a number of methods of assessment including, price-costs analysis, export costs and the costs charged in other geographic regions. All these alternate determinants of "economic value" were, however, all applied in a way which factored in SCI's alleged special cost-advantages (SCI is a subsidiary of Sasol which was historically a recipient of significant State support), and as such was a key determinate in the Tribunal's ultimate finding that the price was higher than the "economic value".

The Tribunal's reasoning in the SCI excessive pricing matter was criticised for amongst other things: not following the CAC's approach in Mittal and thereby creating a bias in favour of finding that dominant firms with these particular cost-advantages have priced excessively (unless the difference can be shown to be reasonable); and offering no guidance on the issue of reasonableness, finding on the facts that a mark-up of as low as 20% may not be reasonable. The net outcome of the Tribunal's decision created a bleak outcome for both SCI and big business. SCI was liable to pay an administrative penalty of ZAR 543 million and any dominant firms with particular cost advantages not based on innovation, risk-taking and investment, (especially those that are present or previous recipients of State support) were left at risk of contravening section 8(a) of the Act (and facing a significant penalty for a first time contravention) even with very low mark-ups. No guidelines were offered with each determination being left in the hands of the Tribunal on a case by case assessment.

SCI was granted leave to appeal against the Tribunal's decision in the SCI excessive pricing matter with the appeal being heard by the CAC towards the end of 2014 and judgment delivered in June 2015.

In summary, the CAC held that on the evidence before it, the Tribunal's finding that the price bore no reasonable relation to the "economic value" of the good or service could not be justified. Following a price-cost test analysis to determine "economic value", the CAC that "economic value" must be predicated in this case on the price at which Synfuels sold feedstock to SCI i.e. the actual transfer price, not a hypothetical price. This price was then adjusted to accommodate the economic costs of production using variable costs, fixed costs, depreciation and return on capital. The CAC accepted SCI's evidence on the costs of production given that it very little expert evidence was led by the Commission's experts to rebut SCI's submissions. Based on the evidence before it and revised cost assumptions, and after seeking revised calculations from the parties on this basis, the CAC concluded that the price-cost mark-up was only approximately 12% - 14% and as such, no contravention of section 8(a) of the Act could be established.

While much of the CAC's reasons for upholding the appeal are fact specific, the following aspects of the CAC's judgment may have more general application to excessive pricing enquiries and serve to clarify some of the uncertainty created by the Tribunal's decision in the SCI excessive pricing matter:

• The CAC criticised the Tribunal for its selective application of its approach as set out in Mittal - seeming to endorse the approach set out therein. Related to this, the CAC held that special cost advantages (like historical State support) of a particular dominant firm are not to be considered in the determination of "economic value" (at step two) but rather at the reasonableness stage of the assessment (at step three); and
• The CAC held that returns above "economic value" are not per se unreasonable - competition authorities must show some level of deference to firms in excessive pricing enquiries in order to avoid becoming price regulators and to show regard for the importance of freedom of pricing. The CAC considered that intervention would only be justifiable where prices charged are significantly higher than "economic value", suggesting that a price less than 20% of the figure employed to determine "economic value" falls short of justifying judicial interference. This suggestion by the CAC may have created a safe harbour for excessive pricing and to the extent that dominant firms can show on any methodology used for determining "economic value" and subject to appropriate adjustments based on economic costs of production, that the mark-up is less than 20% of "economic value", no contravention of section 8(a) of the Act is possible.

The CAC's judgment also criticised the role of experts in competition law proceedings, cautioning the Tribunal to guard against "expert overreaching" by ensuring that experts provide expert evidence only on their sphere of expertise and in no other defined field. In particular, the CAC in particular cautioned against economists leading evidence on questions of legal interpretation; rather than only on economic questions.

Click here to read the CAC's judgment in Mittal.

Click here to read the Tribunal's decision in the SCI excessive pricing matter.

Click here to read the CAC's judgment in the SCI excessive pricing matter.

Notes:
¹Sasol Chemical Industries Ltd v Competition Commission (Case No. 131/CAC/Jun14).
²The Competition Commission and Sasol Chemical Industries Ltd (Case No. 48/CR/Aug10).
³Mittal Steel South Africa Ltd and two Others v Harmony Gold Mining Company Ltd and Another (Case No. 70/CAC/Apr07). (Referred to as Mittal).
⁴The CAC's approach in Mittal was largely influenced by the European Court of Justices decision in United Brands Company v Commission [Case 27/76].