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The Spanish distribution system for oil products: an obstacle to competition?
Jepo=753=Gracy=Venkatachala=BG
Energy Policy 29 (2001) 103}111
The Spanish distribution system for oil products: an obstacle to competition? Ignacio ContmH n *, Aad CorreljeH , Emilio Huerta Dpto. Gestio& n de Empresas, Universidad Pu& blica de Navarra, Campus de Arrosadia s/n, 31006 Pamplona, Navarra, Spain Nijmegen International Political Economy Centre (NIPEC), University of Nijmegen, Netherlands Department of General Economy, Erasmus Centre for Environmental Studies, Erasmus University Rotterdam, Netherlands Received 8 May 2000
Abstract This paper examines why the formal liberalization of the Spanish market for automotive fuels did not introduce competition in the sector. Against the background of the transformation of the country's oil industry, it is shown how the Spanish distribution system emerged as the essential facility within the formally liberalized oil products market. &Light-handed' regulation, in combination with the prevailing ownership structure turned the system into an impediment to newcomers' activities and to competition. This suggests that an evaluation of regulatory options for distribution systems in speci"c markets should take into due account crucial market characteristics like concentration and speci"c ownership/control relationships. 2000 Elsevier Science Ltd. All rights reserved. Keywords: Competition; Regulation; Distribution systems; Pipelines; Gasoline
1. Introduction The entry of Spain into the EU, by 1986, forced the country to adjust the organization of its oil industry to EU competition rules. Between 1983 and 1992, the re"ning, distribution and retail trade segments of the industry were gradually opened up to new entrants, by the abolishment of restrictive regulation and by the dismantlement of the state monopoly in the trade of oil products. Notwithstanding its formal liberalization, however, the market for automotive fuels in Spain does not provide a level-playing "eld to new entrants to date. The unchecked dominant position of the former monopoly's distribution system provides the incumbent Spanish "rms * as the new owners of this system * with a solid competitive advantage over newcomers. Consequently, only few new operators have entered the market, despite the low density of the service station network in large areas of Spain. Price competition has not taken o! so far and most of the new outlets are being established by the traditional Spanish "rms. * Correspondence address. Dpto. GestioH n de Empresas, Universidad PuH blica de Navarra, Campus de ArrosadmH a s/n. 31006 Pamplona, Navarra, Spain. Tel.: #349-48-169-379; fax: #349-48-169-404. E-mail address: [email protected] (I. ContmH n).
This paper explains these developments, by analysing the organization of the Spanish distribution system for automotive fuels and its regulation, following the formal liberalization of the market in 1992. To start with, Section 2 summarizes the transformation of the oil industry in Spain from the mid-1980s onwards. Against this background, Section 3 describes how the national distribution system was restructured and modernized and Section 4 shows how this system emerged as the essential facility within a formally liberalized market. Subsequently, Sections 5 and 6 discuss how &light-handed' regulation, in combination with the prevailing ownership structure turned the Spanish distribution system into an impediment to newcomers' activities and competition. To put the Spanish experience into perspective, Section 7 will recapitulate the main elements of organization and regulation of the distribution system in the e!ectively liberalized natural gas market in the UK. Another important determinant in the conduct of the "rms involved has been the ceiling regulation for automotive fuels prices, that enabled the incumbents to e!ectively co-ordinate their price-setting strategies. The impact of this phenomenon has been analysed in ContmH n et al., (1999). As a unique exception in Europe, Spain has a country-wide pipeline system for the distribution of oil products that, like electricity and gas distribution networks, incorporates natural monopoly characteristics.
0301-4215/01/$ - see front matter 2000 Elsevier Science Ltd. All rights reserved. PII: S 0 3 0 1 - 4 2 1 5 ( 0 0 ) 0 0 1 0 7 - 5
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Section 8 reviews both examples of the regulation of pipeline systems in formally liberalized markets. Fuelling the debate on the organization and regulation of national and/or regional distribution systems in the future liberalized European electricity and gas markets, we will conclude that light handed regulation and negotiated third party access will prove insu$cient to bring about competition in markets. In theory, such measures may yield the competitive market sought. Yet, in the presence of real-life market characteristics * such as xrst mover-advantages, concentration of ownership, speci"c control relationships and historical ties between speci"c public and private parties * competition will have to be &forced' upon the market through comprehensive regulation of the distribution system and regulated third party access.
2. The Spanish oil industry Between 1927 and 1992, consumers of oil products in Spain have been supplied by a state-monopoly. The day-to-day operation of this monopoly was entrusted to CompanJ n& a Arrendataria del Monopolio de Petro& leos Sociedad Ano& nima (CAMPSA); a private "rm that distributed and marketed the fuels. The distribution facilities used by CAMPSA, as well as the fuels sold were owned by the state. These fuels were supplied by several Spanish re"ners, in volumes and at prices negotiated between the state, the re"ners and CAMPSA. The re"ners' processing capacity and the supply of crude oil were also statecontrolled. By the mid-1970s, within the context of the changes in the world oil market, the economic recession and internal socio-political changes in Spain, this system of supply began to rapidly deteriorate. Driven primarily by political and administrative discretion, it failed to transmit the price signals that should have brought about the necessary adjustments in the behaviour of the consumers and the industry. By the end of the 1970s, Spain began to reorganize and liberalise its oil industry, to address the adverse consequences of the prevailing system of regulation, such as excess capacity, inadequate product yields and the failure to recover costs. A second reason became the foreseen entry of Spain into the EU, that required a timely adjustment of the organization of the industry to EU competition rules. In accordance with this latter objective, the re"ning, distribution and retail trade segments of the industry were step-by-step opened up to new domestic and foreign operators, culminating in the dismantlement of the monopoly by 1992 (CorreljeH , 1990, 1994). Parallel to this process of liberalization, the Spanish oil industry was radically transformed. Large investments were made in the re"ning, distribution and retail segments; in order to adjust re"nery output to the composition of demand, to improve e$ciency and to prepare for
a commercial mode of operation. By mergers, the number of re"ning companies was reduced from 8 in the early 1970s to only 3 by the early 1990s. Subsequently, the two private Spanish re"ners, Cepsa and Petromed, were integrated into the production systems of large foreign oil companies; Elf-Aquitaine and BP, respectively. The several public re"ning and crude-producing companies were merged into one &national champion', Repsol, which was privatized tranche by tranche (CorreljeH , 1990, 1994; ContmH n et al., 2000). Repsol currently has six re"neries with a nominal capacity of 38.4 Mt/year (which is 61% of the Spanish re"ning capacity). Cepsa/Elf has three re"neries (30%) and BP Espan a has one re"nery (9%) (Enciclopedia Nacional del PetroH leo, PetroqumH mica y Gas, 1999). In 1984, the hitherto-not-integrated Spanish re"ners acquired a kind of &joint' access to the consumers. First, the ownership of the monopoly's distribution and marketing assets was transferred from the state to CAMPSA. Thereupon, the CAMPSA-shares were sold to the re"ners, in proportion to their share in total Spanish re"ning capacity. Eventually, by 1992, the re"ners achieved forward integration on an individual basis, when the retail network was separated from CAMPSA's distribution facilities and its outlets were divided up among the share-holding re"ners. By the end of 1998, the three Spanish "rms controlled, through ownership and supply contracts, approximately 82% of the 6914 service stations. A new company was established to carry on CAMPSA's distribution activities: La CompanJ n& a Logn& stica de Hidrocarburos (CLH). By the end of 1993, Shell was allowed to join the Spanish re"ners in their ownership of CLH. Repsol held 61.46% of the shares; Cepsa, 25.1%; BP, 7.61%; Shell, 5% and others 0.83% (ContmH n, 1996). CLH distributes about 90% of all automotive fuels sold in Spain for 18 di!erent operators, including the traditional Spanish re"ners as well as some new entrants (Repsol Annual Report, 1997; Oilgas, Mayo 1998). From 1990 onwards, independent distributors were allowed to construct some terminals and storage facilities in ports near high consumption areas, such as Barcelona. Yet, compared with the 15 million m storage capacity of the Spanish re"ners and CLH, the `independenta capacity, of one million and a half m, is only modest (Enciclopedia Nacional del PetroH leo, PetroqumH mica y Gas, 1999).
In 1998, the market shares of the `Spanish majorsa in terms of service stations were: Repsol, 51%; Cepsa, 24%; and BP, 7%. Shell, Total, Continental Oil and Agip together controlled around 8.6% of the outlets (Enciclopedia Nacional del PetroH leo, PetroqumH mica y Gas, 1999). Hypermarkets operated 41 service stations (La Razo& n, 19/11/1999). The three Spanish re"ners sold 86% of the gasoline consumed (Repsol, 54%; Cepsa, 25%; and BP, 7%) and 77% of the gasoil in 1996 (ContmH n et al., 1999; Ministerio de Industria, 1995).
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Fig. 1. The distribution system for oil products.
3. The Spanish distribution system In the mid-1980s, CAMPSA * then owned by the re"ners * undertook a radical modernization of its distribution system, to improve the overall e$ciency and to adjust it to the shifting composition of demand, towards lighter fuels (from around 60% in the early 1980s to around 85% of total by the end of the 1990s). CAMPSA's Plan estrate& gico sought to secure the distribution of products at minimal cost, by (re)locating depots in such a way that a maximum volume of products could be transported over large distances through low-cost pipelines, while minimising the distances over which smaller volumes had to be transported by truck to the retail outlets (CorreljeH , 1994). Over the 1980s and 1990s, some 22 local depots were closed. All 37 remaining depots were either located in a seaport and/or connected to the pipeline grid. So, with exception of the Cepsa/Elf re"nery on the Canary Islands, all Spanish re"neries were connected through pipelines with distribution depots in the main consumption areas or near seaports from which they supply their inland outlets (see Fig. 1). Storage capacity for fuel oil was reduced, while that for light products, in particular for gas oil, was expanded. Large investments were made in modernising the remaining depots and in the construction of automatic loading facilities for trucks. Around 1600 km of new pipeline were constructed, while optimal use of the pipeline system was facilitated through a satellite-based control system. Hence, as illustrated in Table 1, to an increasing extent, the transport of products by CLH/CAMPSA takes place by means of pipelines and/or coastal shipping. The use of expensive railways and ships was reduced much. Pipelines are the lowest cost mode of transport for large volumes of light products, such as gas oil and gasoline,
LPG is not important as an automotive fuel in Spain.
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over large distances. Only transportation by river barges and ships between seaports may be cost-competitive with pipeline transport, but in Spain there are no navigable inland waterways (Teece, 1976; Hansen, 1983; Adams and Brock, 1983; Coburn, 1988). These measures allowed CAMPSA/CLH to reduce its labour force between 1991 and 1998 from 4746 to 2434 employees (CLH Annual Reports, 1992, 1998). It also reduced the distances over which products were moved; whereas the total volume moved fell by some 12%, measured in ton/km the decline was 46% (see Table 1). This implies that, parallel to the modernization and restructuring of their re"ning plants, the Spanish re"ners * as the new owners of the former monopoly's distribution system * managed to create a rather cost e$cient distribution system (see CorreljeH , 1994; Ballesteros, 1995). OPAL (1991, p. 8) stated that: ** 2the unitary transport/storage infrastructure,2, 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 dizculty by individual supplying companies in other EC countriesa.
4. CLH's dominant position as an essential facility From the above, it can be concluded that CAMPSA * later CLH * was allowed to maintain, or even to reinforce, its role in the distribution of oil products in Spain. The system, however, clearly displays the commonly acknowledged characteristics of a natural monopoly. First, pipeline systems are large, highly capital-intensive facilities, that incorporate strong economies of scale. The costs are a function of the diameter of the pipeline and its length. As a larger diameter yields a more than proportional increase in capacity, per unit costs tend to fall more than proportionately. Moreover, users of the system may share depots (Adams and Brock, 1983; Coburn, 1988). Secondly, once in place, the systems' capacity may be expanded with only slight changes in average cost, by adding pumping facilities. The capacity of bottleneck segments may be expanded by adding parallel pipes. Eventually, throughput may be increased by the construction of new larger diameter pipelines (Adams and Brock, 1983; Hansen, 1983). Because of its large economies of scale, the "rst-mover advantage involved and its technological superiority, the CLH pipeline system is to be considered as the essential According to Masseron (1990), 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. In 1991, CAMPSA's president stated that his company's e$ciency was matched only by a few pipeline operators in the centre of the USA and by Tapil in France (Sala, 1995).
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106 Table 1 Modal shift in transport by CAMPSA/CLH 1990
1998
Means of transport 1000 t
(%)
Ships Pipelines Railway
14,080 12,131 1607
(50.6) (43.6) (5.8)
TOTAL
27,818
(100)
Million t;km
(%)
1000 t
7904 2529 368
(73.2) (23.4) (3.4)
2554 21,806 Nil
10,801
(100)
24,362
(%) (10.4) (89.5) (100)
Million t;km 921 4882 Nil 5804
(%) (15.8) (84.1) (100)
Source: CLH Annual Report, 1998; CAMPSA Annual Report, 1990.
facility (La!ont and Tirole, 1996) of the Spanish inland market for oil products. Indeed, the rather unstable situation of the new entrants in the Spanish market, the small scale of their operations and the dispersion of their outlets renders the construction of alternative pipeline systems by independent operators unpro"table and unlikely. Whereas low-cost intra-modal distribution systems, using for example river barges, might o!er e!ective competition to a potentially natural monopoly (Hillman, 1991), these alternatives are not feasible for inland transport in Spain, as was argued above. The users/owners of the CLH-system have a clear cost advantage over alternative modes of distribution. Pipelines, however, are long-life, site and asset speci"c investments and, without sacri"cing much of their value, they cannot be employed in alternative uses. The operator of the system and the users on both ends are therefore `locked ina, into a situation of mutual interdependence. The risks involved with such a high degree of interdependence may be reduced by internalising the transactions within a vertically integrated governance structure (Teece, 1976; Harvay, 1979). This is precisely what happened with CLH, being operated as a jointventure of the re"ners. Yet, such a vertically integrated governance structure may * by purpose or not * also inhibit the entry of new entrants into a market. Adams and Brock (1983) and Coburn (1982) mention a number of strategies open to pipeline operators owned by (some of) their users: Unrealistically low-volume thresholds for shipments; The refusal of regular shipping arrangements and the use of storage facilities; The requirement of unreasonably high product standards, etc. Moreover, forms of vertical integration may facilitate cross subsidization between the monopolistic transport activities and the competitive trading activities (see also Lyon and Hackett, 1993). In addition, vertical integration may induce asymmetry in the way in which distribution costs a!ect the pro"tability of the several operators. Adams and Brock (1983: 719) state: `Even when [distribution] tariws are non-discriminatory, they can be set at levels which are burdensome to the
independents while benexting the integrated majors, who enjoy rebates via the dividends paid to pipeline ownersa. The position of CLH as the essential facility in the Spanish market for automotive fuels suggests that * beyond the formal liberalization of the re"ning, the wholesale and the retail trade in fuels * it is necessary to re#ect on the necessity to regulate CLH; so that it provides non-discriminatory access to all operators and that it can not be used by its owners, the Spanish re"ners and Shell, as a barrier to the entry of newcomers.
5. The need for regulation of CLH The Spanish government was well aware of the dominant position of the Spanish re"ners in the country's oil products market. In July 1990, it introduced price ceiling regulation for automotive fuels, to protect the consumers against monopolistic or oligopolistic pricing strategies by the highly concentrated Spanish "rms. But, in June 1996 and in October 1998, respectively, the price regulation for gas oil and gasoline, was abolished because the government felt that competition among the several suppliers had taken o! substantially (ContmH n et al., 1999). Regarding the distribution of oil products, following the dismantlement of the monopoly in 1992, neither access conditions nor CLH's transport tari!s were regulated or controlled. Potential users had to bilaterally negotiate contracts with CLH, or to organize their own distribution. Not unexpectedly, CLH was accused regularly for discriminating its non-shareholding (potential) customers, which complained that they were being charged discriminatory prices and that CLH denied its services (El PamH s, 31 Mayo 1993; Oilgas, Mayo 1994). CLH held that these tari! di!erentials could emerge because it
Until it was withdrawn in December 1982, in the US, the 1942 Elkins Act Consent Decree limited the annual dividend payable by a pipeline company to its oil company owners to 7% of the valuation of the carrier's property (Wood and Johnson, 1996; Coburn, 1988).
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charged storage and transport services separately and because it provided rebates on transport fees for large volumes of fuels. Given the fact that the Spanish re"ners had considerable amounts of storage capacity at their plants, while their market shares allowed them to transport large volumes, these practices implied that the much smaller third party users were charged higher per unit tari!s indeed. It also induced local variations in distribution costs. By mid-1992, in the Barcelona region, CLH lowered its distribution tari! to between 700 and 1000 ptas. per ton in response to independent's distribution activities (CorreljeH , 1994). In 1994, CLH's average transport tari! for gas oil and gasoline was 1.85 ptas. per litre, but in areas near re"neries it was only 0.52 ptas., while in remote areas it was 4.7 ptas. (Ministerio de Industria, 1995). In 1995, the Ministerio de Industria (1995) con"rmed that the distribution costs in Spain were higher than those elsewhere in Europe, while the Spanish antitrust authority, the Tribunal de Defensa de la Competencia (TDC, 1995) reported that CLH refused to transport smaller volumes of fuels and that it set tari!s according to the availability of alternative means of distribution in a speci"c area. In June 1996, following the TDC's suggestions, the government decided to light-handedly regulate CLH, because it recognized that `the high concentration in the primary distribution marketa might impede competition in the gasoline and gas oil markets. CLH was ordered to provide transportation and storage services on a `non-discriminatory, transparent and cleara basis to all shippers. The contracts between CLH and its customers, as well as the conditions under which CLH was allowed to deny its services were made subject to the Ministerio de Industria's approval (Real Decreto Ley, 7 junio 1996 (BOE 8 junio 1996, p. 1767)). As a consequence, CLH had to revise most of its contracts (Repsol Annual Report, 1996).The Ministry of Industry also forced CLH to reduce its discounts for large volumes. CLH's average revenues on the transport and storage of light products, declined from 2.4 ptas. per litre in 1992, 1.85 ptas. in 1994, to 1.3 ptas. in 1996, 1.25 ptas. in 1997, and 1.21 ptas. in 1998 (Oilgas, Mayo 1998, 1999). According to the OFT (1998), the costs of transport and the maintenance of compulsory security stocks incurred on gasoline sales by supermarkets in the UK are normally less than 0.5 pence per litre (1.2 ptas. per litre). This illustrates that, gradually, CLH has modi"ed its tari!s towards European levels. Nevertheless, after June 1996, lack of transparency in CLH's tari!-setting has persisted as no underlying formulae were made public. This suggests that CLH's charges are still determined in the traditional &Spanish style'; involving hidden agreements between the Ministerio de Industria and CLH, aiming to provide a &reasonable' pro"tability on the basis of &adequate' tari!s (see CorreljeH , 1994). The suggestion is not weakened by the
107
fact that the new Law for the Oil Sector of October 1998 requires, on the one hand, that CLH and third parties shall negotiate to arrive at mutually satisfactory conditions and that tari!s agreed upon are to be published. Yet, on the other hand, the law provides the government with the discretion to set storage and transport tari!s in areas without adequate alternatives to CLH's distribution system. Therewith, the law fosters the continuation of regulatory uncertainty, as it remains to be seen how the Spanish Government will apply this prerogative.
6. CLH's ownership structure as an impediment to competition So far, the Spanish government has remained fairly sensitive to the well-being of the Spanish oil industry. This is illustrated by the fact that, in 1997, Repsol succeeded in keeping the Ministerio de Industria from a restructuring of the ownership of CLH. The ministry's aim was to allow independent operators to acquire CLHshares, while restricting the maximum shareholding to 10% per individual company. The stated objective behind this proposal was to achieve symmetry among CLH's users and shareholders and to facilitate the establishment and enforcement of non-discriminatory tari! and access conditions. If none of the operators would have a controlling share, as was argued, CLH would be stimulated to optimalize the utilization of its facilities and to maximize its pro"ts to the well-being of all its users/owners, instead of favouring some customers over others (La Gaceta de los Negocios, 22 diciembre 1997). In raising the issue of CLH's ownership structure, the Ministerio de Industria touched upon a crucial issue. The current ownership structure not only provides CLH (and its owners) with the incentive and the (illegal) possibility to favour its shareholding customers over the independents; it also induces an asymmetry in the way in which distribution costs a!ect the pro"tability of the operators. If the Spanish distribution system is among the most cost e$cient systems in the world, while CLH tari!s are at an average European level, since recently (as was argued above), we may infer that CLH's pro"ts are relatively high. Yet, whereas the share-holding re"ners recoup these pro"ts in the form of dividends on their CLHshares, CLH's high pro"ts are an additional cost element to the independent operators. Table 2 shows that CLH's Return on Equity has been signi"cantly higher than that of its shareholding re"ners. Note that CLH is a &classic' essential facility; so the risk involved is only modest. Moreover, CLH generates relatively high dividends, relative to the total value of its assets. In 1995, for example, for CLH this ratio was 7.42%, whereas for Repsol it was 3%; for BP-Espan a 2.5%, and for Cepsa 2.25%. Table 3 illustrates that CLH has a rather generous pay-out ratio, as compared to that
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108
Table 2 Evolution of the returns on equity in the Spanish oil industry Company
1993
1994
1995
1996
1997
1998
Repsol Cepsa BP CLH
15.1% 7.8% 4.8% 23%
16.4% 10.1% 10.5% 20%
17.8% 11.6% 7% 20.6%
14% 9.6% 7.6% 16%
13.6% 11.8% n.a. 16.2%
14.4% 14.7% n.a. 16.6%
Note: n.a."not available. Source: Repsol, Cepsa, BP oil Espan a, and CLH Annual Reports, 1993}1998.
Table 3 Evolution of the pay-out ratio (dividends/net pro"ts) Company
1993
1994
1995
1996
1997
1998
Repsol Cepsa BP Oil Spain CLH
43% 67% 6.5% 75%
43% 54.7% 44% 88%
43.5% 49% 58% 99%
45% 51% n.a. 100%
47% 42% n.a. 100%
45% 36.4% n.a. 100%
Note: n.a."not available. Source: Repsol, Cepsa, BP oil Espan a, and CLH Annual Reports, 1993}1998.
of its shareholding re"ners. Another recently privatized essential facility, Red EleH ctrica de Espan a (REE), the network operator of the Spanish electric system, foresaw a pay-out ratio of 60% for 1999, which was considered rather high (El Pais, 9 Mayo 1999) This situation might seem reasonable, in the sense that the Spanish re"ners are now enabled to harvest the fruits of their earlier investments in the acquisition and the modernization of CLH's distribution network * formerly owned by the Ministry of Finance and managed by CAMPSA. Yet, CorreljeH (1994, pp. 93}118) describes how, just before the transfer in 1983/84, CAMPSA and the network were integrated into the conglomerate of state-owned companies INH (Instituto Nacional de Hidrocarburos), under the Ministerio de Industria. Subsequently, the private re"ners bought their CAMPSA shares from the state/INH, in proportion to their market shares, leaving the remainder in the hands of the INH. In 1987, the INH - including its share in CAMPSA - was transformed into Repsol, to be privatized later. Hence, Repsol never actually invested in the acquisition of the network. Meanwhile, through its control over retail and ex-re"nery prices, distribution fees and the later price ceiling regulation, the state enabled the (private) re"ners and CLH to generate the income necessary to, respectively, "nance the acquisition of CAMPSA and its subsequent modernization (CorreljeH , 1994, pp. 97, 98; ContmH n et al., 1999). This whole operation, at the time motivated by the objective to `preparea the Spanish oil industry for operations in a competitive marketa, thus, deliberately
rendered the re"ners the current "nancial and operative control over a modernized distribution system. As was rightly anticipated then, this would give them a crucial competitive advantage over potential new-comers to the market. Recently, the mutually advantageous relationship between the Spanish Government and Repsol was recon"rmed. Upon request by the conservative Aznar Government (facing elections in March 2000), Repsol delayed the up-ward adjustment of gasoline prices, following the 1999/2000 sti!ening of crude oil prices, in order to avoid a too steep rise in the politically delicate Consumer Price Index, shortly before the elections. The position of Repsol in the market - including its priceleadership, its balancing interests in crude production, re"ning and retail activities and its share-holding in CLH - implied that it would su!er less from a lagged increase in retail prices than its competitors, Cepsa, BP and the newcomers. Particularly the position of the new entrants was weakened, as they were struggling with low margins, high * uncompensated * distribution tari!s and rising international product prices (ContmH n and Huerta, 2000). This illustrates that both the Government and Repsol have a continuing interest in maintaining the latter's dominant position, including its dominant share holding in a light-handedly regulated CLH. Eventually, after Aznar's conservatives had won the elections in March 2000, Repsol announced that it had to increase its prices, under pressure of its international shareholders (see El Mundo, 16 Marzo 2000).
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7. The Transco experience as a contrasting example The post-1982 evolution of the regulatory framework for transport and distribution in the British gas industry provides a clear illustration of an approach, in which the introduction of competition within an e!ective regulatory framework was the unambiguous objective. Following the formal dismantlement of monopolistic structures and anti-competitive trade-arrangements, it was considered necessary to actively deal with issues involving both the structure of the liberalized industry, as well as the conduct of the "rms therein. (see Armstrong et al., 1994, pp. 245}278; Davis and Flanders, 1995; Waddams, 1997; IEA, 1998). In 1986, British Gas (BG) was privatized as a vertically integrated "rm, including its role as the operator of the UK natural gas transport and distribution system. Third party access to its distribution system was not regulated explicitly, neither was the system ring-fenced. The BG shares were sold with a restriction to a maximum of 15% on the holding of an individual, plus a &golden' share to the government (Armstrong et al., 1994, pp. 254}258). The failure of these measures to promote the emergence of a competitive gas market was acknowledged by the Monopolies and Mergers Commission. The MMC proposed that BG should publish its terms of access to third parties, while it should also place &Chinese walls' between its transport and trade divisions, in order to block the strategic use of information on shippers by the latter (MMC, 1988). The issue of the substance of those terms and an evaluation of whether BG should remain vertically integrated, or not, were left untouched, though (Armstrong et al., 1994: 264, 265). By September 1990, BG started publishing prices for its distribution services. Thereafter, the transport * and sales of gas by third parties took o!. After the conclusion of the "rst access agreements, however, it appeared that BG was evening out the transport charges to customers located at di!erent distances from the beach heads. Nearby BG customers thus cross-subsidised the users further away. In contrast therewith, the transport costs charged to users by &third party' suppliers showed a signi"cant geographical variation. This provided BG with a competitive advantage in the supply of its own gas to inland consumers, as was observed by the O$ce of Fair Trading
By focussing on the liberalization of the transport and distribution systems, as an indispensable means to facilitate free trade, we have not included an account of supply and demand related factors, such as the liberalization of the UK electricity industry and the developments in the up-stream gas industry. We restrict ourselves here in reporting the evolution of the regulation dealing with transport and storage issues, as being the most relevant in the context of the transport system for oil products in Spain.
109
(OFT). The OFT (1991) also observed that, though BG had fully complied with the MMC's requirements, it did not result in e!ective competition. Thereupon, the OFT (1991) recommended BG to divest its transport and storage activities, or at least the establishment of a separate distribution subsidiary, operating on a non-discriminatory basis at arm's length from the trading branch of BG, and regulation of the transport charges by Ofgas. In March 1992, BG agreed to set up separate business units for trade and transport and accepted that Ofgas should regulate its charges. Yet, BG and Ofgas got caught in a dead-lock in the negotiations on the determinants of BG's access charges. Both Ofgas and BG referred the entire case to the MMC (MMC, 1993a, b; Armstrong et al., 1994: 267}268; Waddams, 1997, p. 48). Regarding the issue of third party access, the MMC (1993a, b) recommended: E that BG should operate trading and transport as separate subsidiaries while, eventually, the trade activities would have to be divested before March 1997: `BG is both a seller of gas, and owner of the transportation system which its competitors have no alternative but to use. In our view, this dual role gives rise to an inherent conyict of interest which makes it impossible to provide the necessary conditions for self-sustaining competitiona (MMC, 1993b). E that access charges and conditions should be regulated by Ofgas, taking into account a number of factors: `the interests of consumers, the need to ensure that BG's UK gas supply activities can attract capital to "nance new investment, whether the cash #ows are adequate to sustain the business, and the requirement that any system of regulation should continue to provide the incentive to improve performance (MMC, 1993b). E that the transport activities should be subject to price regulation, based on a rate of return of 4}4.5% on existing assets, and of 6.5}7.5% on new investments in its system (MMC, 1993b). The government rejected the MMC's suggestion to divest the BG trade activities * most likely under in#uence of BG * and opted for an internal separation. This was included in the 1995 Gas Act, which also contained provisions regarding the development of a Network Code, that regulated the detailed conditions of
See Armstrong et al., 1994, pp. 268}277) for an evaluation of the motivation behind these recommendations. Note that CLH's Return on Assets has been between 7 and 8% throughout the 1993}1998 period (CLH Annual Reports, 1993}1998). In itself the MMC's suggestion to divest the trade activities seems illogical, as it would have caused serious problems in ring-fencing the natural monopoly in transport from BG's exploration, production and other activities.
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access to users of the transport system. By early 1997, BG split itself up into Centrica plc, as the trading "rm, and BG plc * including Transco as a transport and distribution subsidiary, BG Storage and the BG exploration activities. In 1999, for regulatory purposes, BG Group plc choose to formally separate Transco from the rest of its activities, as ring-fenced subsidiary (BG Group, Press Releases 1 October and 13 December 1999). Recently, BG announced that * as a matter of commercial strategy * it will would sell its Transco (BG Group, Press Release 22 March 2000). In the meantime, over lengthy discussions, Ofgas and BG agreed upon the structuring of transport and storage charges. These charges are required to re#ect the real costs incurred by Transco and should facilitate competition between shippers and between suppliers. To this end, Transco calculates several types of costs it incurs, which are augmented with an allowed return on investment in assets. Subsequently, Transco's allowed revenues are calculated through the formula (RPI-X) and translated on a cost basis into transportation charges, which include a "xed customer charge, plus separate (variable) commodity and ("xed) capacity related elements for the use of both the national transmission system (NTS), and the local low-pressure system (LTS). Both transport related elements are distance-related. The use of storage capacity is billed separately. All these elements are subject to a continuous review by Ofgas and the MMC (MMC, 1997; Transco, 1998, 1999 and several Ofgas reports).
8. Conclusion We have shown that the formal elements for a competitive market for oil products in Spain were in place, by and large. It was supplied by a number of oil companies. These "rms and potential newcomers were free to produce, to trade, to transport, to store and to sell their products, since 1992. Nevertheless, nearly a decade later, new suppliers have not succeeded in securing a signi"cant share of the market, while Repsol's price-leadership has remained una!ected. The BG case illustrates that, when an incumbent is vertically integrated and controls a natural monopoly distribution network, it is di$cult * if not impossible * to regulate the terms of access in such a way that it provides a level playing "eld to all users. In the UK, this
See IEA (1998) for a summary overview of the contents of the Network Code, which is continually under development to keep pace with newly emerging circumstances (see for a detailed explanation: Transco, 1998, 1999). Price cap regulation, known as RPI-X (Retail price index-X%), gives the "rm an incentive to enhance its productive e$ciency and to foster innovation, because cost reductions can be collected as pro"ts to the bene"t of the "rm, until the next revision of the price cap.
problem was solved by an internal separation of BG activities, initially. Subsequently, BG Group plc opted for a full divestment of Transco. (BG Group, Press Release 22 March 2000). In Spain, CLH is formally separated from the re"ners since 1993. Yet, it is practically run as a subsidiary of its majority shareholder, Repsol, with only three other, much smaller, shareholders involved. Such an ownership structure complicates the establishment of e!ective &Chinese walls' around CLH. It facilitates collusion and the collection of monopoly pro"ts and possibly constitutes a distortion of competition, as CLH's dividends may imply a &through-the-backdoor' discount on distribution charges to its shareholders. CLH's revenues, costs, pro"ts and dividends are not controlled at all. The situation of CLH in Spain shows that light handed or self-regulation, in a situation where a small number of actors/owners share an (in)direct interest in maintaining the status quo, may prove an e!ective impediment to competition. Third parties' non-discriminatory access to the distribution system would require a detailed and active regulation of CLH. Even more e!ective would be the #otation of CLH on the stock exchange, to neutralize the current in#uence of its owners. As illustrated in the BG case, essential elements in achieving a competitive market involved: "rstly; the establishment of a detailed Network Code (including procedures for access, disputes and arbitrage); secondly, the development of an integrated methodology for the computation of Transco's costs, revenues and the charges for storage and transport; and, thirdly, the active role of the MMC and Ofgas, independent from political and industry interests. Yet, either by purpose or not, the Spanish government has opted for an approach that has favoured the position of the incumbents, so far. This account of the regulation of the distribution systems for oil in Spain and for gas in BG raises questions regarding the adequacy of light handed and/or self-regulation of transport and distribution systems in the future liberalized gas and electicity sectors in Europe. Light handed regulation and negotiated acces may work under the assumption of an atomistic market, in which actors' interests are dispersed and where actors are unable to in#uence the management of distribution systems or to capture the regulator, to the detriment of new entrants and competition. Yet, in the actual practice of liberalizing markets, as was shown for Spain and the UK, the structure of a sector or industry is an inheritance from the past. Suppliers will have (in)direct ties with distributors and/or retailers
Still, if it were attempted to control CLH's rate of return and transport charges, it would prove very di$cult to determine a equitable basis for calculation, given the way in which CAMPSA has been transferred to the re"ners in the past.
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and public authorities. Actors may stick to traditional practices and &respect' each other's business. So, even though the market is formally liberalized, newcomers face the incumbent's common front. In particular, the UK case has illustrated that a policy-backed, comprehensive, detailed and dynamic approach is required to break such an inheritance and to create a competitive market. The evolution of the light handedly regulated Spanish market for automotive fuels, in contrast, shows that * in the absence of such an active approach * a remarkable degree of continuity will prevail in market behaviour, after the formal liberalization.
Acknowledgements Ignacio ContmH n gratefully acknowledges "nancial support from CICYT project SEC99-0843-C02-02.
References Adams, W., Brock, J., 1983. Deregulation or divestiture: The case of petroleum pipelines. Wake Forest Law Review 19(5), 705}791. Armstrong, M., Cowan, S., Vickers, J., 1994. Regulatory Reform: Economic Analysis and British Experience. MIT Press, Cambridge, MA. Ballesteros, A., 1995. La evolucioH n de la industria petrolmH fera en Espan a a lo largo de los uH ltimos 50 an os. Paper presented to El petroH leo y el problema energeH tico a "nales del siglo XX, Universidad MeneH ndez Pelayo, Santander, Spain, 31 July}4 August 1995. CAMPSA Annual Report, 1990. CLH Annual Reports, 1992, 1993}1998. Coburn, L., 1982. Petroleum pipeline regulation: a competitive analysis. US Department of Energy, Sta! Report. Coburn, L., 1988. Eighty years of US petroleum pipeline regulation. Journal of Transport History 9, 149}169. ContmH n, I., 1996. La desregulacioH n en el sector del petroH leo: Consecuencias empresariales y efectos sobre la competencia. Ph.D. Thesis, Universidad PuH blica de Navarra, Pamplona, Spain. ContmH n, I., CorreljeH , A., Huerta, E., 1999. The Spanish gasoline market: from ceiling regulation to open market pricing. The Energy Journal 20(4), 1}14. ContmH n, I., CorreljeH , A., Huerta, E., 2000. IntegracioH n vertical en el re"no de petroH leo: El caso espan ol. BoletmH n de Estudios EconoH micos, LV (169), 39}60. ContmH n, I., Huerta, E., 2000. El mercado espan ol de gasolinas: falta de competencia?. El PamH s, 22 Febreno 2000. CorreljeH , A.F., 1990. The Spanish oil sector: From state intervention to free market. Energy Policy 18 (8), 747}755. CorreljeH , A.F., 1994. The Spanish oil industry: structural change and modernization. Tinbergen Institute Research Series, Vol. 84. Thesis Publishers, Amsterdam. Davis, E., Flanders, S., 1995. Con#icting regulators objectives: the supply of gas to UK industry. In: Bishop, M., Kay, J., Mayer, .C.
These relations, obviously, are facilitated through common &cultural' elements of the (national) industries, such as communication channels, traditions, interpersonal relationships between state and private functionaries, and - often - a common objective to defend the status quo, against newcomers.
111
(Eds.), The Regulatory Challenge. Oxford University Press, Oxford, pp. 42}66. Enciclopedia Nacional del PetroH leo, PetroqumH mica y Gas, 1999. Ediciones Oilgas, Madrid. Hansen, J., 1983. U.S. Oil Pipeline Markets. MIT press, Cambridge, Massachusetts. Harvay, S.M., 1979. Interdependence and integration in the domestic oil re"ning industry. Ph. D Thesis, University of Berkeley, California. Hillman, J.J., 1991. Oil pipeline rate: A case for yardstick regulation. In: Crew, M.A. (Ed.), Competition and the Regulation of Utilities. Kluwer Academic Publishers, London, pp. 72}95. IEA, 1998. Natural Gas Pricing in Competitive Markets. IEA/OECD, Paris. La!ont, J.J., Tirole, J.T., 1996. Creating competition through interconnection: theory and practice. Journal of Regulatory Economics 10, 227}256. Lyon, T., Hackett, S., 1993. Bottlenecks and government structures: open access and long-term contracting in natural gas. Journal of Law and Economics and Organization 9(2), 380}398. Masseron, J., 1990. Petroleum Economics, 4th Edition. EditioH ns Technip, ParmH s. Ministerio de Industria, 1995. Informe sobre la formacioH n de precios en el sector del petroH leo. Sta! Report, Madrid. MMC, 1993a. Gas: Volume 1 of reports under the Fair Trading Act 1973, Cm 2134. HMSO, London. MMC, 1993b. British Gas plc, Volume 1 of reports under the Gas Act 1986, Cm 2135. HMSO, London. MMC, 1997. Summary of BG PLC: a report under the gas act 1986 on the restriction of prices for gas transportation and storage services. HMSO, London. MMC, 1988. Gas: a report on the matter of the existence or possible existence of a monopoly situation in relation to the supply in Great Britain of gas through pipes to persons other than tari! customers, Cm 500. HMSO, London. OFT, 1991. The gas review (summary version). London. OFT, 1998. Competition in the supply of petrol in the UK. OFT230, London. Oilgas, Mayo 1994, 1998, 1999. OPAL (Oil Price Assessments Limited), 1991. Oil product price formation mechanisms in member countries of the European economic community. Study prepared for the Directorate General for Energy of the Commission of the European Communities. Walton on Thames, England. Real Decreto Ley, 7 junio 1996 (BOE 8 junio 1996, p. 1767). Repsol Annual Reports, 1996, 1997. Sala, J.M., 1995. La liberalizacioH n del Monopolio de petroH leos en Espan a. Marcial Pons, Madrid. TDC, 1995. DistribucioH n de productos petrolmH feros. In: La competencia en Espan a: Balance y nuevas propuesta, Madrid, pp. 179}215. Teece, D.J., 1976. Vertical integration in the U.S. oil industry. In: Mitchell, E.J. (Ed.), Vertical integration in the oil industry. American Enterprise Institute for Public Policy Research, Washington DC, pp. 105}189. Transco, 1998. Ten Year Transportation Statement, 1998. Transco, 1999. Ten Year Transportation Statement, 1999. Waddams, P.C., 1997. Competition and regulation in the UK gas industry. Oxford Review of Economic Policy 13(1), 47}63. Wood, F., Johnson, J., 1996. Contemporary Transportation. PrenticeHall, Englewoods Cli!s, NJ.
Energy Policy 29 (2001) 103}111
The Spanish distribution system for oil products: an obstacle to competition? Ignacio ContmH n *, Aad CorreljeH , Emilio Huerta Dpto. Gestio& n de Empresas, Universidad Pu& blica de Navarra, Campus de Arrosadia s/n, 31006 Pamplona, Navarra, Spain Nijmegen International Political Economy Centre (NIPEC), University of Nijmegen, Netherlands Department of General Economy, Erasmus Centre for Environmental Studies, Erasmus University Rotterdam, Netherlands Received 8 May 2000
Abstract This paper examines why the formal liberalization of the Spanish market for automotive fuels did not introduce competition in the sector. Against the background of the transformation of the country's oil industry, it is shown how the Spanish distribution system emerged as the essential facility within the formally liberalized oil products market. &Light-handed' regulation, in combination with the prevailing ownership structure turned the system into an impediment to newcomers' activities and to competition. This suggests that an evaluation of regulatory options for distribution systems in speci"c markets should take into due account crucial market characteristics like concentration and speci"c ownership/control relationships. 2000 Elsevier Science Ltd. All rights reserved. Keywords: Competition; Regulation; Distribution systems; Pipelines; Gasoline
1. Introduction The entry of Spain into the EU, by 1986, forced the country to adjust the organization of its oil industry to EU competition rules. Between 1983 and 1992, the re"ning, distribution and retail trade segments of the industry were gradually opened up to new entrants, by the abolishment of restrictive regulation and by the dismantlement of the state monopoly in the trade of oil products. Notwithstanding its formal liberalization, however, the market for automotive fuels in Spain does not provide a level-playing "eld to new entrants to date. The unchecked dominant position of the former monopoly's distribution system provides the incumbent Spanish "rms * as the new owners of this system * with a solid competitive advantage over newcomers. Consequently, only few new operators have entered the market, despite the low density of the service station network in large areas of Spain. Price competition has not taken o! so far and most of the new outlets are being established by the traditional Spanish "rms. * Correspondence address. Dpto. GestioH n de Empresas, Universidad PuH blica de Navarra, Campus de ArrosadmH a s/n. 31006 Pamplona, Navarra, Spain. Tel.: #349-48-169-379; fax: #349-48-169-404. E-mail address: [email protected] (I. ContmH n).
This paper explains these developments, by analysing the organization of the Spanish distribution system for automotive fuels and its regulation, following the formal liberalization of the market in 1992. To start with, Section 2 summarizes the transformation of the oil industry in Spain from the mid-1980s onwards. Against this background, Section 3 describes how the national distribution system was restructured and modernized and Section 4 shows how this system emerged as the essential facility within a formally liberalized market. Subsequently, Sections 5 and 6 discuss how &light-handed' regulation, in combination with the prevailing ownership structure turned the Spanish distribution system into an impediment to newcomers' activities and competition. To put the Spanish experience into perspective, Section 7 will recapitulate the main elements of organization and regulation of the distribution system in the e!ectively liberalized natural gas market in the UK. Another important determinant in the conduct of the "rms involved has been the ceiling regulation for automotive fuels prices, that enabled the incumbents to e!ectively co-ordinate their price-setting strategies. The impact of this phenomenon has been analysed in ContmH n et al., (1999). As a unique exception in Europe, Spain has a country-wide pipeline system for the distribution of oil products that, like electricity and gas distribution networks, incorporates natural monopoly characteristics.
0301-4215/01/$ - see front matter 2000 Elsevier Science Ltd. All rights reserved. PII: S 0 3 0 1 - 4 2 1 5 ( 0 0 ) 0 0 1 0 7 - 5
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Section 8 reviews both examples of the regulation of pipeline systems in formally liberalized markets. Fuelling the debate on the organization and regulation of national and/or regional distribution systems in the future liberalized European electricity and gas markets, we will conclude that light handed regulation and negotiated third party access will prove insu$cient to bring about competition in markets. In theory, such measures may yield the competitive market sought. Yet, in the presence of real-life market characteristics * such as xrst mover-advantages, concentration of ownership, speci"c control relationships and historical ties between speci"c public and private parties * competition will have to be &forced' upon the market through comprehensive regulation of the distribution system and regulated third party access.
2. The Spanish oil industry Between 1927 and 1992, consumers of oil products in Spain have been supplied by a state-monopoly. The day-to-day operation of this monopoly was entrusted to CompanJ n& a Arrendataria del Monopolio de Petro& leos Sociedad Ano& nima (CAMPSA); a private "rm that distributed and marketed the fuels. The distribution facilities used by CAMPSA, as well as the fuels sold were owned by the state. These fuels were supplied by several Spanish re"ners, in volumes and at prices negotiated between the state, the re"ners and CAMPSA. The re"ners' processing capacity and the supply of crude oil were also statecontrolled. By the mid-1970s, within the context of the changes in the world oil market, the economic recession and internal socio-political changes in Spain, this system of supply began to rapidly deteriorate. Driven primarily by political and administrative discretion, it failed to transmit the price signals that should have brought about the necessary adjustments in the behaviour of the consumers and the industry. By the end of the 1970s, Spain began to reorganize and liberalise its oil industry, to address the adverse consequences of the prevailing system of regulation, such as excess capacity, inadequate product yields and the failure to recover costs. A second reason became the foreseen entry of Spain into the EU, that required a timely adjustment of the organization of the industry to EU competition rules. In accordance with this latter objective, the re"ning, distribution and retail trade segments of the industry were step-by-step opened up to new domestic and foreign operators, culminating in the dismantlement of the monopoly by 1992 (CorreljeH , 1990, 1994). Parallel to this process of liberalization, the Spanish oil industry was radically transformed. Large investments were made in the re"ning, distribution and retail segments; in order to adjust re"nery output to the composition of demand, to improve e$ciency and to prepare for
a commercial mode of operation. By mergers, the number of re"ning companies was reduced from 8 in the early 1970s to only 3 by the early 1990s. Subsequently, the two private Spanish re"ners, Cepsa and Petromed, were integrated into the production systems of large foreign oil companies; Elf-Aquitaine and BP, respectively. The several public re"ning and crude-producing companies were merged into one &national champion', Repsol, which was privatized tranche by tranche (CorreljeH , 1990, 1994; ContmH n et al., 2000). Repsol currently has six re"neries with a nominal capacity of 38.4 Mt/year (which is 61% of the Spanish re"ning capacity). Cepsa/Elf has three re"neries (30%) and BP Espan a has one re"nery (9%) (Enciclopedia Nacional del PetroH leo, PetroqumH mica y Gas, 1999). In 1984, the hitherto-not-integrated Spanish re"ners acquired a kind of &joint' access to the consumers. First, the ownership of the monopoly's distribution and marketing assets was transferred from the state to CAMPSA. Thereupon, the CAMPSA-shares were sold to the re"ners, in proportion to their share in total Spanish re"ning capacity. Eventually, by 1992, the re"ners achieved forward integration on an individual basis, when the retail network was separated from CAMPSA's distribution facilities and its outlets were divided up among the share-holding re"ners. By the end of 1998, the three Spanish "rms controlled, through ownership and supply contracts, approximately 82% of the 6914 service stations. A new company was established to carry on CAMPSA's distribution activities: La CompanJ n& a Logn& stica de Hidrocarburos (CLH). By the end of 1993, Shell was allowed to join the Spanish re"ners in their ownership of CLH. Repsol held 61.46% of the shares; Cepsa, 25.1%; BP, 7.61%; Shell, 5% and others 0.83% (ContmH n, 1996). CLH distributes about 90% of all automotive fuels sold in Spain for 18 di!erent operators, including the traditional Spanish re"ners as well as some new entrants (Repsol Annual Report, 1997; Oilgas, Mayo 1998). From 1990 onwards, independent distributors were allowed to construct some terminals and storage facilities in ports near high consumption areas, such as Barcelona. Yet, compared with the 15 million m storage capacity of the Spanish re"ners and CLH, the `independenta capacity, of one million and a half m, is only modest (Enciclopedia Nacional del PetroH leo, PetroqumH mica y Gas, 1999).
In 1998, the market shares of the `Spanish majorsa in terms of service stations were: Repsol, 51%; Cepsa, 24%; and BP, 7%. Shell, Total, Continental Oil and Agip together controlled around 8.6% of the outlets (Enciclopedia Nacional del PetroH leo, PetroqumH mica y Gas, 1999). Hypermarkets operated 41 service stations (La Razo& n, 19/11/1999). The three Spanish re"ners sold 86% of the gasoline consumed (Repsol, 54%; Cepsa, 25%; and BP, 7%) and 77% of the gasoil in 1996 (ContmH n et al., 1999; Ministerio de Industria, 1995).
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Fig. 1. The distribution system for oil products.
3. The Spanish distribution system In the mid-1980s, CAMPSA * then owned by the re"ners * undertook a radical modernization of its distribution system, to improve the overall e$ciency and to adjust it to the shifting composition of demand, towards lighter fuels (from around 60% in the early 1980s to around 85% of total by the end of the 1990s). CAMPSA's Plan estrate& gico sought to secure the distribution of products at minimal cost, by (re)locating depots in such a way that a maximum volume of products could be transported over large distances through low-cost pipelines, while minimising the distances over which smaller volumes had to be transported by truck to the retail outlets (CorreljeH , 1994). Over the 1980s and 1990s, some 22 local depots were closed. All 37 remaining depots were either located in a seaport and/or connected to the pipeline grid. So, with exception of the Cepsa/Elf re"nery on the Canary Islands, all Spanish re"neries were connected through pipelines with distribution depots in the main consumption areas or near seaports from which they supply their inland outlets (see Fig. 1). Storage capacity for fuel oil was reduced, while that for light products, in particular for gas oil, was expanded. Large investments were made in modernising the remaining depots and in the construction of automatic loading facilities for trucks. Around 1600 km of new pipeline were constructed, while optimal use of the pipeline system was facilitated through a satellite-based control system. Hence, as illustrated in Table 1, to an increasing extent, the transport of products by CLH/CAMPSA takes place by means of pipelines and/or coastal shipping. The use of expensive railways and ships was reduced much. Pipelines are the lowest cost mode of transport for large volumes of light products, such as gas oil and gasoline,
LPG is not important as an automotive fuel in Spain.
105
over large distances. Only transportation by river barges and ships between seaports may be cost-competitive with pipeline transport, but in Spain there are no navigable inland waterways (Teece, 1976; Hansen, 1983; Adams and Brock, 1983; Coburn, 1988). These measures allowed CAMPSA/CLH to reduce its labour force between 1991 and 1998 from 4746 to 2434 employees (CLH Annual Reports, 1992, 1998). It also reduced the distances over which products were moved; whereas the total volume moved fell by some 12%, measured in ton/km the decline was 46% (see Table 1). This implies that, parallel to the modernization and restructuring of their re"ning plants, the Spanish re"ners * as the new owners of the former monopoly's distribution system * managed to create a rather cost e$cient distribution system (see CorreljeH , 1994; Ballesteros, 1995). OPAL (1991, p. 8) stated that: ** 2the unitary transport/storage infrastructure,2, 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 dizculty by individual supplying companies in other EC countriesa.
4. CLH's dominant position as an essential facility From the above, it can be concluded that CAMPSA * later CLH * was allowed to maintain, or even to reinforce, its role in the distribution of oil products in Spain. The system, however, clearly displays the commonly acknowledged characteristics of a natural monopoly. First, pipeline systems are large, highly capital-intensive facilities, that incorporate strong economies of scale. The costs are a function of the diameter of the pipeline and its length. As a larger diameter yields a more than proportional increase in capacity, per unit costs tend to fall more than proportionately. Moreover, users of the system may share depots (Adams and Brock, 1983; Coburn, 1988). Secondly, once in place, the systems' capacity may be expanded with only slight changes in average cost, by adding pumping facilities. The capacity of bottleneck segments may be expanded by adding parallel pipes. Eventually, throughput may be increased by the construction of new larger diameter pipelines (Adams and Brock, 1983; Hansen, 1983). Because of its large economies of scale, the "rst-mover advantage involved and its technological superiority, the CLH pipeline system is to be considered as the essential According to Masseron (1990), 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. In 1991, CAMPSA's president stated that his company's e$ciency was matched only by a few pipeline operators in the centre of the USA and by Tapil in France (Sala, 1995).
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106 Table 1 Modal shift in transport by CAMPSA/CLH 1990
1998
Means of transport 1000 t
(%)
Ships Pipelines Railway
14,080 12,131 1607
(50.6) (43.6) (5.8)
TOTAL
27,818
(100)
Million t;km
(%)
1000 t
7904 2529 368
(73.2) (23.4) (3.4)
2554 21,806 Nil
10,801
(100)
24,362
(%) (10.4) (89.5) (100)
Million t;km 921 4882 Nil 5804
(%) (15.8) (84.1) (100)
Source: CLH Annual Report, 1998; CAMPSA Annual Report, 1990.
facility (La!ont and Tirole, 1996) of the Spanish inland market for oil products. Indeed, the rather unstable situation of the new entrants in the Spanish market, the small scale of their operations and the dispersion of their outlets renders the construction of alternative pipeline systems by independent operators unpro"table and unlikely. Whereas low-cost intra-modal distribution systems, using for example river barges, might o!er e!ective competition to a potentially natural monopoly (Hillman, 1991), these alternatives are not feasible for inland transport in Spain, as was argued above. The users/owners of the CLH-system have a clear cost advantage over alternative modes of distribution. Pipelines, however, are long-life, site and asset speci"c investments and, without sacri"cing much of their value, they cannot be employed in alternative uses. The operator of the system and the users on both ends are therefore `locked ina, into a situation of mutual interdependence. The risks involved with such a high degree of interdependence may be reduced by internalising the transactions within a vertically integrated governance structure (Teece, 1976; Harvay, 1979). This is precisely what happened with CLH, being operated as a jointventure of the re"ners. Yet, such a vertically integrated governance structure may * by purpose or not * also inhibit the entry of new entrants into a market. Adams and Brock (1983) and Coburn (1982) mention a number of strategies open to pipeline operators owned by (some of) their users: Unrealistically low-volume thresholds for shipments; The refusal of regular shipping arrangements and the use of storage facilities; The requirement of unreasonably high product standards, etc. Moreover, forms of vertical integration may facilitate cross subsidization between the monopolistic transport activities and the competitive trading activities (see also Lyon and Hackett, 1993). In addition, vertical integration may induce asymmetry in the way in which distribution costs a!ect the pro"tability of the several operators. Adams and Brock (1983: 719) state: `Even when [distribution] tariws are non-discriminatory, they can be set at levels which are burdensome to the
independents while benexting the integrated majors, who enjoy rebates via the dividends paid to pipeline ownersa. The position of CLH as the essential facility in the Spanish market for automotive fuels suggests that * beyond the formal liberalization of the re"ning, the wholesale and the retail trade in fuels * it is necessary to re#ect on the necessity to regulate CLH; so that it provides non-discriminatory access to all operators and that it can not be used by its owners, the Spanish re"ners and Shell, as a barrier to the entry of newcomers.
5. The need for regulation of CLH The Spanish government was well aware of the dominant position of the Spanish re"ners in the country's oil products market. In July 1990, it introduced price ceiling regulation for automotive fuels, to protect the consumers against monopolistic or oligopolistic pricing strategies by the highly concentrated Spanish "rms. But, in June 1996 and in October 1998, respectively, the price regulation for gas oil and gasoline, was abolished because the government felt that competition among the several suppliers had taken o! substantially (ContmH n et al., 1999). Regarding the distribution of oil products, following the dismantlement of the monopoly in 1992, neither access conditions nor CLH's transport tari!s were regulated or controlled. Potential users had to bilaterally negotiate contracts with CLH, or to organize their own distribution. Not unexpectedly, CLH was accused regularly for discriminating its non-shareholding (potential) customers, which complained that they were being charged discriminatory prices and that CLH denied its services (El PamH s, 31 Mayo 1993; Oilgas, Mayo 1994). CLH held that these tari! di!erentials could emerge because it
Until it was withdrawn in December 1982, in the US, the 1942 Elkins Act Consent Decree limited the annual dividend payable by a pipeline company to its oil company owners to 7% of the valuation of the carrier's property (Wood and Johnson, 1996; Coburn, 1988).
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charged storage and transport services separately and because it provided rebates on transport fees for large volumes of fuels. Given the fact that the Spanish re"ners had considerable amounts of storage capacity at their plants, while their market shares allowed them to transport large volumes, these practices implied that the much smaller third party users were charged higher per unit tari!s indeed. It also induced local variations in distribution costs. By mid-1992, in the Barcelona region, CLH lowered its distribution tari! to between 700 and 1000 ptas. per ton in response to independent's distribution activities (CorreljeH , 1994). In 1994, CLH's average transport tari! for gas oil and gasoline was 1.85 ptas. per litre, but in areas near re"neries it was only 0.52 ptas., while in remote areas it was 4.7 ptas. (Ministerio de Industria, 1995). In 1995, the Ministerio de Industria (1995) con"rmed that the distribution costs in Spain were higher than those elsewhere in Europe, while the Spanish antitrust authority, the Tribunal de Defensa de la Competencia (TDC, 1995) reported that CLH refused to transport smaller volumes of fuels and that it set tari!s according to the availability of alternative means of distribution in a speci"c area. In June 1996, following the TDC's suggestions, the government decided to light-handedly regulate CLH, because it recognized that `the high concentration in the primary distribution marketa might impede competition in the gasoline and gas oil markets. CLH was ordered to provide transportation and storage services on a `non-discriminatory, transparent and cleara basis to all shippers. The contracts between CLH and its customers, as well as the conditions under which CLH was allowed to deny its services were made subject to the Ministerio de Industria's approval (Real Decreto Ley, 7 junio 1996 (BOE 8 junio 1996, p. 1767)). As a consequence, CLH had to revise most of its contracts (Repsol Annual Report, 1996).The Ministry of Industry also forced CLH to reduce its discounts for large volumes. CLH's average revenues on the transport and storage of light products, declined from 2.4 ptas. per litre in 1992, 1.85 ptas. in 1994, to 1.3 ptas. in 1996, 1.25 ptas. in 1997, and 1.21 ptas. in 1998 (Oilgas, Mayo 1998, 1999). According to the OFT (1998), the costs of transport and the maintenance of compulsory security stocks incurred on gasoline sales by supermarkets in the UK are normally less than 0.5 pence per litre (1.2 ptas. per litre). This illustrates that, gradually, CLH has modi"ed its tari!s towards European levels. Nevertheless, after June 1996, lack of transparency in CLH's tari!-setting has persisted as no underlying formulae were made public. This suggests that CLH's charges are still determined in the traditional &Spanish style'; involving hidden agreements between the Ministerio de Industria and CLH, aiming to provide a &reasonable' pro"tability on the basis of &adequate' tari!s (see CorreljeH , 1994). The suggestion is not weakened by the
107
fact that the new Law for the Oil Sector of October 1998 requires, on the one hand, that CLH and third parties shall negotiate to arrive at mutually satisfactory conditions and that tari!s agreed upon are to be published. Yet, on the other hand, the law provides the government with the discretion to set storage and transport tari!s in areas without adequate alternatives to CLH's distribution system. Therewith, the law fosters the continuation of regulatory uncertainty, as it remains to be seen how the Spanish Government will apply this prerogative.
6. CLH's ownership structure as an impediment to competition So far, the Spanish government has remained fairly sensitive to the well-being of the Spanish oil industry. This is illustrated by the fact that, in 1997, Repsol succeeded in keeping the Ministerio de Industria from a restructuring of the ownership of CLH. The ministry's aim was to allow independent operators to acquire CLHshares, while restricting the maximum shareholding to 10% per individual company. The stated objective behind this proposal was to achieve symmetry among CLH's users and shareholders and to facilitate the establishment and enforcement of non-discriminatory tari! and access conditions. If none of the operators would have a controlling share, as was argued, CLH would be stimulated to optimalize the utilization of its facilities and to maximize its pro"ts to the well-being of all its users/owners, instead of favouring some customers over others (La Gaceta de los Negocios, 22 diciembre 1997). In raising the issue of CLH's ownership structure, the Ministerio de Industria touched upon a crucial issue. The current ownership structure not only provides CLH (and its owners) with the incentive and the (illegal) possibility to favour its shareholding customers over the independents; it also induces an asymmetry in the way in which distribution costs a!ect the pro"tability of the operators. If the Spanish distribution system is among the most cost e$cient systems in the world, while CLH tari!s are at an average European level, since recently (as was argued above), we may infer that CLH's pro"ts are relatively high. Yet, whereas the share-holding re"ners recoup these pro"ts in the form of dividends on their CLHshares, CLH's high pro"ts are an additional cost element to the independent operators. Table 2 shows that CLH's Return on Equity has been signi"cantly higher than that of its shareholding re"ners. Note that CLH is a &classic' essential facility; so the risk involved is only modest. Moreover, CLH generates relatively high dividends, relative to the total value of its assets. In 1995, for example, for CLH this ratio was 7.42%, whereas for Repsol it was 3%; for BP-Espan a 2.5%, and for Cepsa 2.25%. Table 3 illustrates that CLH has a rather generous pay-out ratio, as compared to that
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Table 2 Evolution of the returns on equity in the Spanish oil industry Company
1993
1994
1995
1996
1997
1998
Repsol Cepsa BP CLH
15.1% 7.8% 4.8% 23%
16.4% 10.1% 10.5% 20%
17.8% 11.6% 7% 20.6%
14% 9.6% 7.6% 16%
13.6% 11.8% n.a. 16.2%
14.4% 14.7% n.a. 16.6%
Note: n.a."not available. Source: Repsol, Cepsa, BP oil Espan a, and CLH Annual Reports, 1993}1998.
Table 3 Evolution of the pay-out ratio (dividends/net pro"ts) Company
1993
1994
1995
1996
1997
1998
Repsol Cepsa BP Oil Spain CLH
43% 67% 6.5% 75%
43% 54.7% 44% 88%
43.5% 49% 58% 99%
45% 51% n.a. 100%
47% 42% n.a. 100%
45% 36.4% n.a. 100%
Note: n.a."not available. Source: Repsol, Cepsa, BP oil Espan a, and CLH Annual Reports, 1993}1998.
of its shareholding re"ners. Another recently privatized essential facility, Red EleH ctrica de Espan a (REE), the network operator of the Spanish electric system, foresaw a pay-out ratio of 60% for 1999, which was considered rather high (El Pais, 9 Mayo 1999) This situation might seem reasonable, in the sense that the Spanish re"ners are now enabled to harvest the fruits of their earlier investments in the acquisition and the modernization of CLH's distribution network * formerly owned by the Ministry of Finance and managed by CAMPSA. Yet, CorreljeH (1994, pp. 93}118) describes how, just before the transfer in 1983/84, CAMPSA and the network were integrated into the conglomerate of state-owned companies INH (Instituto Nacional de Hidrocarburos), under the Ministerio de Industria. Subsequently, the private re"ners bought their CAMPSA shares from the state/INH, in proportion to their market shares, leaving the remainder in the hands of the INH. In 1987, the INH - including its share in CAMPSA - was transformed into Repsol, to be privatized later. Hence, Repsol never actually invested in the acquisition of the network. Meanwhile, through its control over retail and ex-re"nery prices, distribution fees and the later price ceiling regulation, the state enabled the (private) re"ners and CLH to generate the income necessary to, respectively, "nance the acquisition of CAMPSA and its subsequent modernization (CorreljeH , 1994, pp. 97, 98; ContmH n et al., 1999). This whole operation, at the time motivated by the objective to `preparea the Spanish oil industry for operations in a competitive marketa, thus, deliberately
rendered the re"ners the current "nancial and operative control over a modernized distribution system. As was rightly anticipated then, this would give them a crucial competitive advantage over potential new-comers to the market. Recently, the mutually advantageous relationship between the Spanish Government and Repsol was recon"rmed. Upon request by the conservative Aznar Government (facing elections in March 2000), Repsol delayed the up-ward adjustment of gasoline prices, following the 1999/2000 sti!ening of crude oil prices, in order to avoid a too steep rise in the politically delicate Consumer Price Index, shortly before the elections. The position of Repsol in the market - including its priceleadership, its balancing interests in crude production, re"ning and retail activities and its share-holding in CLH - implied that it would su!er less from a lagged increase in retail prices than its competitors, Cepsa, BP and the newcomers. Particularly the position of the new entrants was weakened, as they were struggling with low margins, high * uncompensated * distribution tari!s and rising international product prices (ContmH n and Huerta, 2000). This illustrates that both the Government and Repsol have a continuing interest in maintaining the latter's dominant position, including its dominant share holding in a light-handedly regulated CLH. Eventually, after Aznar's conservatives had won the elections in March 2000, Repsol announced that it had to increase its prices, under pressure of its international shareholders (see El Mundo, 16 Marzo 2000).
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7. The Transco experience as a contrasting example The post-1982 evolution of the regulatory framework for transport and distribution in the British gas industry provides a clear illustration of an approach, in which the introduction of competition within an e!ective regulatory framework was the unambiguous objective. Following the formal dismantlement of monopolistic structures and anti-competitive trade-arrangements, it was considered necessary to actively deal with issues involving both the structure of the liberalized industry, as well as the conduct of the "rms therein. (see Armstrong et al., 1994, pp. 245}278; Davis and Flanders, 1995; Waddams, 1997; IEA, 1998). In 1986, British Gas (BG) was privatized as a vertically integrated "rm, including its role as the operator of the UK natural gas transport and distribution system. Third party access to its distribution system was not regulated explicitly, neither was the system ring-fenced. The BG shares were sold with a restriction to a maximum of 15% on the holding of an individual, plus a &golden' share to the government (Armstrong et al., 1994, pp. 254}258). The failure of these measures to promote the emergence of a competitive gas market was acknowledged by the Monopolies and Mergers Commission. The MMC proposed that BG should publish its terms of access to third parties, while it should also place &Chinese walls' between its transport and trade divisions, in order to block the strategic use of information on shippers by the latter (MMC, 1988). The issue of the substance of those terms and an evaluation of whether BG should remain vertically integrated, or not, were left untouched, though (Armstrong et al., 1994: 264, 265). By September 1990, BG started publishing prices for its distribution services. Thereafter, the transport * and sales of gas by third parties took o!. After the conclusion of the "rst access agreements, however, it appeared that BG was evening out the transport charges to customers located at di!erent distances from the beach heads. Nearby BG customers thus cross-subsidised the users further away. In contrast therewith, the transport costs charged to users by &third party' suppliers showed a signi"cant geographical variation. This provided BG with a competitive advantage in the supply of its own gas to inland consumers, as was observed by the O$ce of Fair Trading
By focussing on the liberalization of the transport and distribution systems, as an indispensable means to facilitate free trade, we have not included an account of supply and demand related factors, such as the liberalization of the UK electricity industry and the developments in the up-stream gas industry. We restrict ourselves here in reporting the evolution of the regulation dealing with transport and storage issues, as being the most relevant in the context of the transport system for oil products in Spain.
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(OFT). The OFT (1991) also observed that, though BG had fully complied with the MMC's requirements, it did not result in e!ective competition. Thereupon, the OFT (1991) recommended BG to divest its transport and storage activities, or at least the establishment of a separate distribution subsidiary, operating on a non-discriminatory basis at arm's length from the trading branch of BG, and regulation of the transport charges by Ofgas. In March 1992, BG agreed to set up separate business units for trade and transport and accepted that Ofgas should regulate its charges. Yet, BG and Ofgas got caught in a dead-lock in the negotiations on the determinants of BG's access charges. Both Ofgas and BG referred the entire case to the MMC (MMC, 1993a, b; Armstrong et al., 1994: 267}268; Waddams, 1997, p. 48). Regarding the issue of third party access, the MMC (1993a, b) recommended: E that BG should operate trading and transport as separate subsidiaries while, eventually, the trade activities would have to be divested before March 1997: `BG is both a seller of gas, and owner of the transportation system which its competitors have no alternative but to use. In our view, this dual role gives rise to an inherent conyict of interest which makes it impossible to provide the necessary conditions for self-sustaining competitiona (MMC, 1993b). E that access charges and conditions should be regulated by Ofgas, taking into account a number of factors: `the interests of consumers, the need to ensure that BG's UK gas supply activities can attract capital to "nance new investment, whether the cash #ows are adequate to sustain the business, and the requirement that any system of regulation should continue to provide the incentive to improve performance (MMC, 1993b). E that the transport activities should be subject to price regulation, based on a rate of return of 4}4.5% on existing assets, and of 6.5}7.5% on new investments in its system (MMC, 1993b). The government rejected the MMC's suggestion to divest the BG trade activities * most likely under in#uence of BG * and opted for an internal separation. This was included in the 1995 Gas Act, which also contained provisions regarding the development of a Network Code, that regulated the detailed conditions of
See Armstrong et al., 1994, pp. 268}277) for an evaluation of the motivation behind these recommendations. Note that CLH's Return on Assets has been between 7 and 8% throughout the 1993}1998 period (CLH Annual Reports, 1993}1998). In itself the MMC's suggestion to divest the trade activities seems illogical, as it would have caused serious problems in ring-fencing the natural monopoly in transport from BG's exploration, production and other activities.
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access to users of the transport system. By early 1997, BG split itself up into Centrica plc, as the trading "rm, and BG plc * including Transco as a transport and distribution subsidiary, BG Storage and the BG exploration activities. In 1999, for regulatory purposes, BG Group plc choose to formally separate Transco from the rest of its activities, as ring-fenced subsidiary (BG Group, Press Releases 1 October and 13 December 1999). Recently, BG announced that * as a matter of commercial strategy * it will would sell its Transco (BG Group, Press Release 22 March 2000). In the meantime, over lengthy discussions, Ofgas and BG agreed upon the structuring of transport and storage charges. These charges are required to re#ect the real costs incurred by Transco and should facilitate competition between shippers and between suppliers. To this end, Transco calculates several types of costs it incurs, which are augmented with an allowed return on investment in assets. Subsequently, Transco's allowed revenues are calculated through the formula (RPI-X) and translated on a cost basis into transportation charges, which include a "xed customer charge, plus separate (variable) commodity and ("xed) capacity related elements for the use of both the national transmission system (NTS), and the local low-pressure system (LTS). Both transport related elements are distance-related. The use of storage capacity is billed separately. All these elements are subject to a continuous review by Ofgas and the MMC (MMC, 1997; Transco, 1998, 1999 and several Ofgas reports).
8. Conclusion We have shown that the formal elements for a competitive market for oil products in Spain were in place, by and large. It was supplied by a number of oil companies. These "rms and potential newcomers were free to produce, to trade, to transport, to store and to sell their products, since 1992. Nevertheless, nearly a decade later, new suppliers have not succeeded in securing a signi"cant share of the market, while Repsol's price-leadership has remained una!ected. The BG case illustrates that, when an incumbent is vertically integrated and controls a natural monopoly distribution network, it is di$cult * if not impossible * to regulate the terms of access in such a way that it provides a level playing "eld to all users. In the UK, this
See IEA (1998) for a summary overview of the contents of the Network Code, which is continually under development to keep pace with newly emerging circumstances (see for a detailed explanation: Transco, 1998, 1999). Price cap regulation, known as RPI-X (Retail price index-X%), gives the "rm an incentive to enhance its productive e$ciency and to foster innovation, because cost reductions can be collected as pro"ts to the bene"t of the "rm, until the next revision of the price cap.
problem was solved by an internal separation of BG activities, initially. Subsequently, BG Group plc opted for a full divestment of Transco. (BG Group, Press Release 22 March 2000). In Spain, CLH is formally separated from the re"ners since 1993. Yet, it is practically run as a subsidiary of its majority shareholder, Repsol, with only three other, much smaller, shareholders involved. Such an ownership structure complicates the establishment of e!ective &Chinese walls' around CLH. It facilitates collusion and the collection of monopoly pro"ts and possibly constitutes a distortion of competition, as CLH's dividends may imply a &through-the-backdoor' discount on distribution charges to its shareholders. CLH's revenues, costs, pro"ts and dividends are not controlled at all. The situation of CLH in Spain shows that light handed or self-regulation, in a situation where a small number of actors/owners share an (in)direct interest in maintaining the status quo, may prove an e!ective impediment to competition. Third parties' non-discriminatory access to the distribution system would require a detailed and active regulation of CLH. Even more e!ective would be the #otation of CLH on the stock exchange, to neutralize the current in#uence of its owners. As illustrated in the BG case, essential elements in achieving a competitive market involved: "rstly; the establishment of a detailed Network Code (including procedures for access, disputes and arbitrage); secondly, the development of an integrated methodology for the computation of Transco's costs, revenues and the charges for storage and transport; and, thirdly, the active role of the MMC and Ofgas, independent from political and industry interests. Yet, either by purpose or not, the Spanish government has opted for an approach that has favoured the position of the incumbents, so far. This account of the regulation of the distribution systems for oil in Spain and for gas in BG raises questions regarding the adequacy of light handed and/or self-regulation of transport and distribution systems in the future liberalized gas and electicity sectors in Europe. Light handed regulation and negotiated acces may work under the assumption of an atomistic market, in which actors' interests are dispersed and where actors are unable to in#uence the management of distribution systems or to capture the regulator, to the detriment of new entrants and competition. Yet, in the actual practice of liberalizing markets, as was shown for Spain and the UK, the structure of a sector or industry is an inheritance from the past. Suppliers will have (in)direct ties with distributors and/or retailers
Still, if it were attempted to control CLH's rate of return and transport charges, it would prove very di$cult to determine a equitable basis for calculation, given the way in which CAMPSA has been transferred to the re"ners in the past.
Jepo=753=GV=VVC I. Contn& n et al. / Energy Policy 29 (2001) 103}111
and public authorities. Actors may stick to traditional practices and &respect' each other's business. So, even though the market is formally liberalized, newcomers face the incumbent's common front. In particular, the UK case has illustrated that a policy-backed, comprehensive, detailed and dynamic approach is required to break such an inheritance and to create a competitive market. The evolution of the light handedly regulated Spanish market for automotive fuels, in contrast, shows that * in the absence of such an active approach * a remarkable degree of continuity will prevail in market behaviour, after the formal liberalization.
Acknowledgements Ignacio ContmH n gratefully acknowledges "nancial support from CICYT project SEC99-0843-C02-02.
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