The Competition Appeal Court (“CAC”) recently grappled once again with the question of excessive pricing. The Competition Commission initiated a complaint against Sasol Chemical Industries Limited (“SCI”) during 2010, alleging that the prices SCI charged between 2004 and 2007 for polypropylene and purified polypropylene were excessive. In the Mittal Steel South Africa and others v Harmony Gold Mining Company and Others case, the CAC firmly rapped the Competition Tribunal (“the Tribunal”) over the knuckles for ignoring the wording of the Competition Act in making a policy-based finding on the excessive pricing charges which Mittal faced. In the Mittal case, the CAC explained to the Tribunal how it was to deal with excessive pricing matters in future.
In the SCI matter, the CAC once again overturned the Tribunal's decision, finding SCI not guilty of excessive pricing. The SCI judgment shows that even with the Mittal case guidelines, excessive pricing complaints are extremely complicated and our jurisprudence on the issue is still a work in progress. CAC Judge President, Dennis Davis, described the Tribunal’s SCI judgment as “hard to understand” and based on a selective reading of the Mittal case.
Section 8(a) of the Competition Act (“the Act”) prohibits a dominant from charging “an excessive price to the detriment of consumers”. The Act defines an “excessive price” as:
“A price for a good or service which:
aa.) bears no reasonable relation to the economic value of that good or service; and
bb.) is higher than the value referred to in subparagraph (aa).
In finding SCI guilty of excessive pricing, the Tribunal applied a price cost test. Essentially, it compared the price of the products in question with SCI’s costs and found that the difference was such that the price was excessive. Much of the battle between SCI and the Commission revolved around how SCI’s costs should be calculated. A critical issue was whether SCI should have passed its feedstock saving (as a result of its relationship with its sister company and feedstock supplier, Sasol Synfuels) to its customers through its pricing. The cost calculation argument also extended to how SCI’s capital assets should be valued, how to calculate return on capital, group cost allocation and allocation of fixed costs between domestic and export sales.
The crux of the debate arose from the fact that SCI’s feedstock is cheap because Sasol was supported and funded by the State. SCI’s cost advantage does not result from risk taking or innovation. The Commission argued that SCI’s actual feedstock cost should be discounted so as to take account of the State support and funding from which SCI had benefitted. SCI argued that any special firm specific advantage or disadvantage should not be taken into account in determining the costs against which a firm's prices are assessed. SCI’s argument was that its prices had to be compared with the economic value of polypropylene and purified polypropylene as determined in a competitive market through objective (non firm specific) analysis.
The CAC analyzed expert evidence relating to SCI’s feedstock cost and ultimately concluded that the economic modeling proposed by the experts for both sides did not reflect reality. It concluded that the price that SCI actually paid Synfuels for feedstock was SCI’s feedstock cost. The CAC found that this cost was rationally justifiable because it met the arm’s length transfer pricing requirements of applicable tax law. The CAC emphasized the importance of "freedom of pricing" and the danger of courts becoming price regulators. It suggested that what is critical is whether a cost “can be justified on rational grounds” and warned that "the complexity of price assessment dictates that some deference is required".
Turning to the other cost issues, the CAC approved SCI’s insurance based replacement cost valuation methodology used to value its capital assets. In upholding SCI’s use of a weighted average cost of capital adjusted by a risk based hurdle rate in determining return on equity, the CAC criticized the Commission’s experts’ evidence as being "no more than a ‘thumb suck’". The CAC dismissed the Commission’s insistence on determining return on equity on a before tax basis as reflecting "a level of analysis whichcould not possibly be plausibly advanced by an expert in the field". Adopting a common sense approach to the before/after tax argument, the CAC found that "when examining returns, it is the after tax return upon which an investor relies in order to assess the possibility of a new investment".
With regard to expert evidence, the CAC cautioned that:
“Regrettably this court must now draw attention to the inability of the Tribunal to exercise discipline over proceedings in order to ensure that economic experts provide evidence on economic questions, leaving points of legal interpretation to the tribunal and to this court…figures cited without any clear and reasoned justification do not constitute expert evidence”.
The CAC suggested that it may have found for the Commission had proper expert evidence been presented to counter SCI's arguments.
The CAC warned the Tribunal against focussing so much on the pro-competitive benefits of innovation and risk-taking that it allows innovators who acquire patents a "licence" to price excessively.
Unfortunately for those of us who would like to see some certainty in relation to the law on excessive pricing, this is not the end of the saga. On 8 July 2015, the Competition Commission issued a press release confirming that it intends to challenge the CAC’s decision in the Constitutional Court.