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Vj-33/2004/24

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Vj-33/2004/24

The Hungarian Competition Office (GVH) has terminated the repeated proceeding against MOL Ltd. finding that MOL`s pricing method was fairly used

At a hearing in October 2004, the Competition Council terminated the proceeding against MOL finding that the fuel prices MOL applied in the period between 1997 and the first half of 2000 did not constitute an abuse of the undertaking`s dominant market position.

In 2000, the Hungarian Motoring Club brought an action before GVH in order to clarify whether MOL abused its dominant position by charging excessively high wholesale and retail prices for fuels (petrol and diesel) between 1997 and 2000. In January 2001, the GVH dropped the case as to the applied retail prices concerned declaring that MOL was not in a dominant position in this market. The GVH also established that the wholesale prices MOL charged were competitive prices and therefore an abuse of the undertaking`s dominant position could not be detected.

As a result of a judicial review initiated by the Hungarian Motoring Club in 2001, the Metropolitan Court judged the GVH`s decision mentioned above in respect of the wholesale prices quashed and ordered GVH to launch a new proceeding in this regard.
In November 2003, the Supreme Court approved the decision of the Metropolitan Court and requested GVH to repeat its examination, with the involvement of an expert, relating to MOL`s wholesale pricing method. The examination extended to the relation between the wholesale prices and the unit production cost as well.
In that new proceeding GVH found that MOL`s wholesale prices exceeded the wholesale costs (where these costs included the reasonable proceeds of the invested capital) in the period between 1997 and the first half of 2000.
Having regard the fact that MOL set competitive wholesale prices, which could not be judged unfair according to the
Hungarian competition law, and the departure from this rule was not substantiated by the GVH`s investigation the GVH put an end to the proceeding.

Budapest, 12 October 2004.

Vj-33/2004/24 (12 October 2004) Magyar Olaj- és Gázipari Rt. (MOL Rt.)

(dominant position)

(summary)

The Hungarian Competition Authority (GVH) has terminated the repeated proceedings against MOL Rt., concluding that MOL Rt.`s pricing method from 1997 until the first half of 2000 did not constitute an abuse of dominant position

I. Background of the proceedings

In Sept. 2000 the Magyar Autóklub (Hungarian Automobile Club) brought an action before the Hungarian Competition Authority (Gazdasági Versenyhivatal - GVH) in order to examine whether MOL Rt.`s conduct violated Art. 21 a) of the Hungarian Competition Act by charging excessively high wholesale and retail prices for fuels (petrol and diesel). In its decision the Competition Council of the GVH concluded that, as to the retail market of fuels MOL Rt. did not have a dominant position and as to the wholesale market of fuels MOL Rt. did not abuse its dominant position. The decision of the GVH was reviewed firstly by the Metropolitan Court, then by the Hungarian Supreme Court, and the latter ordered the GVH to carry out new proceedings in the case. The Supreme Court prescribed that the GVH must examine,

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    on the one hand, whether there is a disproportionality between the petrol`s wholesale price applied by MOL Rt. and the wholesale price based on production costs, and

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    on the other hand, whether, as a result of that MOL Rt. had an unjustified advantage on the market.

II. MOL Rt.`s position on the market

MOL Rt. is a very large undertaking, which, during the period of investigation, controlled 61 companies in Hungary as well as 23 companies abroad (altogether: MOL-group).
As far as the usage of the petrol and diesel is concerned, there are no reasonable substitutes for them.
During the period of investigation there was no real possibility of entry onto the market of petrol production where MOL Rt. was active.
The importation of fuel to the Hungarian market is impeded by the fact that petrol can be transported by tank-trucks from the petrol refinery economically efficiently only within a circle of 200-250 km.
MOL Rt.`s market shares on both the petrol and diesel markets were ca. 80-90%.

III. Petrol`s wholesale prices of MOL Rt.

MOL Rt. was continuously adjusting its wholesale list-prices of petrol to the international list-prices (the calculation of its wholesale list prices included cost of transportation to Hungary as well as other costs of the importer).
Both the petrol`s as well as the diesel`s actual wholesale prices of MOL Rt. were, regarding the annual level during the period of investigation, under the level of import prices.
The expert, mandated by the GVH, concluded in its report that the wholesale prices of petrol of MOL Rt. were higher than the wholesale costs, which included the reasonable proceeds of the invested capital, during the period from 1997 until the first half of 2000.

IV. Dominant position

According to Art. 22(1) of the Hungarian Competition Act an undertaking is in a dominant position if it is able to pursue its business activities to a large extent independently of other market participants substantially without the need to take into account the market reactions of its suppliers, competitors, customers and other trading parties when deciding its market conduct. Pursuant to Art. 22(2) of the same Act in assessing whether a dominant position exists, the following factors have to be considered in particular: the costs and risks of entry to and exit from the relevant market; the financial strength and profitability of the undertaking; the structure of the relevant market, the comparative market shares.
As there are no reasonable substitutes, the relevant product market consists of petrol and diesel. The relevant geographic market is the whole territory of Hungary.
The Competition Council had found the market shares of MOL Rt. on the wholesale market of petrol (85-90%) and the fact that there were no real possibilities of entry onto that market implied that MOL Rt. was dominant on the relevant market.

V. Examination of the infringement

Pursuant to Art. 21 of the Hungarian Competition Act it is prohibited for undertakings in a dominant position to set unfair selling prices. Practically, this means the prohibition of excessively high prices.
According to the enforcement practice of the Competition Council of the GVH a price is excessively high, and thus violates Art. 21(a) of the Hungarian Competition Act, if it exceeds the economically justified costs and (fair) profits, the latter arising from an income proportionate to the investment based on the risks of the relevant sector.
The Competition Council of the GVH pointed out a few problematic issues when judging the cost based price in the present case. In this sector it is difficult to determine the investments per unit in order to define a fair amount of profit.
Also, the examination of a cost based price may put in danger the willingness of the undertaking to produce more efficiently.
During the period under investigation, according to the calculation of the expert mandated by the GVH, the actual wholesale prices for the petrol was 8% higher than the cost based wholesale price; for diesel this was 12%.
The calculation of costs by MOL Rt., which included the cost of transportation to Hungary and costs of importation, was held to be correct by the Competition Council of the GVH because this was equal to the price for which importation could have arrived from neighbouring countries. The difference between the actual wholesale price and the cost based price constituted the profit of MOL Rt. According to the Competition Council of the GVH, this difference between the two types of prices cannot be judged as an unjustified advantage. The amount of profit (ca. 10%) leads to the same conclusion. Therefore, the Competition Council of the GVH concluded that the pricing method of MOL Rt. did not lead to excessively high prices, and therefore Art. 21(a) of the Hungarian Competition Act was not violated.

October 12, 2004. Budapest