REGULATORY: Global Competition Law: Competition Commission of India goes full power with investigation against Coal India— A Study in Contrast to a Recent European Commission Decision

by King & Spalding

[author: Suzanne Rab]

The Competition Commission of India (CCI) has started an investigation against Coal India Limited (CIL) alleging unfair trade practices and abuse of a dominant position in the supply of coal to power producers. If the allegations are substantiated, the CCI may impose fines of up to 10 per cent of the average turnover of CIL for the last three years and may order CIL to modify its commercial practices. The investigation was prompted by a complaint from the Maharashtra State Electricity Board earlier in 2012. The case further illustrates the increasingly complaints-led nature of competition probes in India, where active and increasingly aggressive enforcement of the Competition Act 2002 (Competition Act) enters into its third year.

Background to the Investigation

The allegations levied against CIL are twofold. First, the CCI is investigating whether CIL supplied an acceptable quality of coal to customers. In particular, it is alleged that CIL abused a dominant position by supplying a large quantity of stones and boulders along with coal. It is alleged that the supply was in violation of the terms of a letter of assurance and a new coal distribution policy launched in 2007.

As in the vast majority of cases before the CCI to date, complainants have played an active role in raising lines of inquiry before the CCI and in purporting to provide substantiating evidence. Apparently, two of India’s largest coal consumers – the central power utilities NTPC and DVC – supported the original complaint. This was in response to information requests from the CCI asking them whether CIL was imposing unfair and discriminatory terms and conditions and, if so, requesting evidence of the offending practices.

Also, it appears that a power utility raised before the CCI an allegation that CIL asked customers to enter into an MoU pending execution of a fuel supply agreement (FSA). The utility maintains that CIL is using delaying tactics and that the quantity specified in the MoU is below that stated in the letter of assurance. CIL is accused of manipulating the supply to power utilities by diverting coal supply via the MoU route rather than the FSA in order to earn greater profit. NTPC and DVC have not apparently signed an FSA with CIL for plants commissioned after April 2009, owing to the alleged one-sided nature of the arrangements.

Discriminatory Practices in Coal Purchasing – Comparison from Europe

The legal provision at issue is section 4 of the Competition Act, which is the substantive provision in Indian competition law dealing with abuse of a dominant position. This provision is similar to the EU competition law prohibition of abuse of dominance contained in Article 102 of the Treaty on the Functioning of the EU (TFEU).

The categories of abuse of dominance in Indian competition law resemble the illustrative categories of abuse in EU competition law. The Competition Act specifically refers to “directly or indirectly imposing unfair or discriminatory conditions or prices in purchase or sale (including predatory price) of goods or service” as an example of abusive behaviour. Similarly, under Article 102 TFEU, an abuse may consist in “directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions” or “applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage.”

Given the similarity in the underlying legal provisions and the types of case that come before the authorities, it can be useful to contrast the approach that other competition authorities have taken when addressing similar situations. Indeed, in addition to the EU and U.S. the CCI has cited cases as far afield as Canada, Latvia, and Brazil as support for its decisions and reasoning.

In the coal sector, a recent judgment of the EU’s second highest court illustrates some of the issues and complexities of applying competition and related laws to that sector (Case T—320/07 – Daphne Jones, Glen Jones and Fforch-Y-Garon Coal Co. Ltd v Commission). Although the case must be viewed against the specific market context and the organisation of the coal sector in Great Britain over an extended period of time, it highlights the importance of an evaluation of the different positions of buyers and sellers when determining whether the conditions of trade may be seen as discriminatory, unfair or otherwise distortive of competition.

The EU General Court in its 23 November 2011 judgment dismissed an appeal brought by certain private coal producers in Wales against a decision of the European Commission rejecting their complaint. The applicant coal producers alleged that the Central Electricity Generating Board (CEGB) discriminated against private coal producers through the prices that it paid for the purchase of coal where it paid higher prices to British Coal. The case has a long and tortuous history and dates back to arrangements in place before 1990. The General Court concluded that the European Commission had not manifestly erred in concluding that there was no European Community interest in pursuing the complaint at issue. Moreover, the applicants had not demonstrated that the European Commission had made a manifest error of assessment in concluding that the price differences were justified and were a proportionate response to the then-prevailing market conditions.

It should be noted that this case concerns a challenge to a decision to reject a complaint and so does not definitively rule on the question of whether or not there was an infringement of EU competition law. In the case of a decision to reject a complaint, the European Commission is not required to conduct an investigation as to the existence or non-existence of an infringement of EU competition law. Nevertheless, the General Court’s judgment does contain interesting insights on some of the legal and economic considerations that come into play when ruling on the issue of possible unfair or discriminatory practices in the coal sector (in this case, conditions of coal purchasing by a large purchaser).

To simplify a detailed factual background, the applicants maintained that the differences in the prices paid to British Coal and private producers were disproportionate and discriminatory. At the time, CEGB was the largest buyer of coal. Under a tranche (or tiered) system where the terms and conditions were different for each tranche, both private producers or British Coal could supply “marginal coal” in the “third tranche.” Under the tranche system, the prices paid by the CEGB to private producers were on average considerably (up to one third) less than those paid to British Coal.

The European Commission concluded that British Coal and the private producers represented different categories of suppliers and there were justifiable reasons why the terms offered to each were not comparable. It is of note that British Coal undertook to provide 95 per cent of CEGB’s coal requirements with the remaining 5 per cent being met by licensed private parties. Furthermore, according to the General Court the applicants had not shown why the private producers would have been able to guarantee security of supply despite sudden changes in production and competition in the spot market.

In relation to the relevant geographic market, the applicants argued that the European Commission had erred in comparing the conditions of coal supply at national level. They maintained that the European Commission should have examined whether CEGB operated in a number of separate geographical markets for the supply of electricity in each. The General Court agreed with the approach of the European Commission that the way in which the downstream electricity network was managed by CEGB was not relevant to a determination of the relevant market against which the allegedly infringing practices were to be appraised. Thus, the General Court agreed with the European Commission that the relevant frame of reference was CEGB’s conduct on the market for the purchase of coal.

India Competition Law as a Sword and a Shield

The ongoing investigation into the terms and conditions of CIL’s coal supply is symptomatic of a growing trend in India and elsewhere where the competition authority has initiated an investigation prompted by complaints from customers and where those third parties have played an active role in the investigatory procedure. As in many other countries, the CCI may launch a probe suo moto (of its own initiation), or once concerns have been drawn to its attention by a sector regulator or any interested third party. This is certainly not to say that the CCI will necessarily pursue all complaints or agree with the complainant. However, the fact that there are consistent complaints from a number of sources provides an added factor for the competition authority to weigh in the balance when testing the arguments and evidence on both sides.

For companies who violate the law, there will always be a risk of an investigation whether or not there are complaints. India is no different in that respect. However, complaints have been shown to be a tool for companies who believe that they have been harmed by the anticompetitive practices of their competitors, suppliers, and even customers to draw those concerns to the attention of an appropriate authority. This may be designed to seek redress in the form of a financial award against the other party, or to secure a finding of infringement which can be used as the basis for a private action for damages. For example, in India any person who can prove a loss or damage caused due to any anticompetitive activity of an enterprise or failure of the enterprise to comply with the orders and directions of the CCI or Competition Appellate Tribunal (Compat) can approach Compat for compensation. Finally, competition cases may be strategically motivated to seek to apply pressure on the other party to modify or cease the offensive practices where normal commercial pressure fails.

Suzanne Rab

 Suzanne Rab
 + 44 20 7551 7581

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