Elgas Ltd - proposed acquisition of Sun Retail's LPG business

Summary

Elgas proposed to acquire the LPG business of Sun Retail, which was being sold as part of a tender process run by the Queensland Government.

Elgas was owned in 50% shares by AGL Energy and BOC. It was the largest LPG marketer and distributor in Australia with industrial, commercial and residential customers Australia-wide. Sun Retail's LPG business retailed LPG to customers in south east Queensland and northern NSW.

Market definition

The ACCC considered the relevant market in this instance was likely to be the market for retailing 'traditional' LPG in south east Queensland and northern NSW.

Functional dimension

Although Elgas had operations at both the retail and wholesale levels, Sun Retail only had retail LPG operations. Therefore, the ACCC considered that the relevant functional dimension for analysis was the retail level. This is in contrast to the ACCC's previous assessment of Origin's proposed acquisition of the Tasmanian LPG assets of Mobil. In that matter, the focus of the analysis was the wholesale functional level of the market, whereas in this instance it was the retail functional level. As such, the conclusions reached regarding the substitutability of 'traditional' LPG and autogas were different.

Product dimension

Market inquiries revealed that there were two major types of LPG: 'traditional' LPG and 'autogas'. Traditional LPG is made up almost entirely of propane, whereas autogas is typically comprised of a mix of propane and butane.

The ACCC found that, for the purposes of its assessment of the matter, traditional LPG and autogas were unlikely to be in the same product market for a number of reasons.

First, while pure propane (traditional LPG) can be used as a substitute for autogas, autogas cannot be used as a substitute for traditional LPG, limiting substitute possibilities for traditional LPG customers.

Second, different levels of infrastructure are required to retail traditional LPG compared to retailing autogas. Retailers of traditional LPG require large tanks to store LPG, cylinders of various sizes to service customers with, and tray trucks and tankers to deliver the product. In contrast, retailers of autogas typically do not require storage tanks and cylinders because they pick up the LPG from a wholesale supplier and deliver it directly to end customers (typically service stations with large underground tanks). Therefore, a retailer of autogas would have only a small part of the infrastructure needed to retail traditional LPG and would therefore face only slightly lower barriers to entry when compared to other new entrants. As such, traditional LPG and autogas were not considered to be in the same market in this instance.

While the ACCC considered that it may have been possible for other energy sources (such as diesel, electricity and wood) to compete with traditional LPG in some very discreet segments of the market, it considered it unlikely that these energy sources were in the same market.

Geographic dimension

To retail traditional LPG in an area, it is necessary to have storage facilities in a location proximate to end customers. This is because traditional LPG is typically delivered via truck and having facilities located nearby minimises transport costs.

At the wholesale level, the ACCC recognised that LPG is sourced from a number of different sources along the east coast of Australia, as well as being imported from overseas. However, it was not necessary to define the exact geographic extent of the wholesale market.

Competition analysis

The ACCC considered that the proposed acquisition would not have resulted in an SLC because barriers to entry did not appear to be insurmountable and the merged entity was likely to face sufficient competition from other existing players in the market.

Barriers to Entry

In relation to barriers to entry, it was recognised that new entrants would need to acquire land, storage tanks and a fleet of vehicles to enter on a reasonable scale, however these were not considered to be very significant barriers. Further, market inquiries indicated that in the south east Queensland and Northern NSW area, there are independent sources of gas available from the refineries as well as other potential sources. Evidence of recent new entry was considered an indication that barriers to entry were not very significant.

Existence of competitors

Although the proposed acquisition would have resulted in an increase in market concentration, the ACCC considered that the presence of national LPG retailers, Origin and Kleenheat, in the market, as well as the threat of new entry, would have provided a sufficient competitive constraint on the merged entity's ability to raise prices or decrease service levels post-acquisition.