On June 8, 2020, the National Economic Prosecutor’s Office (“FNE” as per its Spanish acronym) approved, without conditions, the decision (“Decision”) under which the Compañía de Petróleos de Chile Copec S.A. (“Copec”) –the largest distribution company of liquid fuels in Chile, both wholesale and retail– seeking to gain control over certain assets belonging to Inmobiliaria y Administradora CGL Limitada (“CGL”) and Servicios J. Chajtur SpA (“Chajtur”), in addition to entering into a long-term lease with Sociedad Silvia Moreno Rojas y Compañía Limitada (“SMR” and, together with Copec, CGL and Chajtur, the “Parties”). These agreements would allow Copec to operate an independent filling station (“Object Station”) located in the district of Hualpén, in the southern part of the country.
The Operation had been notified by the Parties on October 10, 2019. However, in view of the anti-competitive risks that were previously identified by the FNE (unilateral and coordinated risks), mainly based upon Copec market share and the role that the Object Station had in the relevant market, the competition authority chose to extend the investigation of this Operation to Phase II, in order to analyze the matter in more detail.
The Decision indicated that the relevant market of the affected product by the Operation was that of retail distribution of liquid petroleum-derived fuels. As for the relevant geographic market, it considered areas of influence determined by three- and five- kilometer linear radius circumferences with a center being at the Object Station, without the results varying substantially in one case or another. Thus, in both geographical relevant market definitions, Copec would have had a share of more than 50% measured in volume of fuel marketed and the Herfindahl Hirschman Index (HHI) after the Operation, would have been greater than 4,600 points, exceeding the thresholds provided for in the FNE Guide to Analyze Horizontal Concentration Operations.
In particular, the FNE indicated that the materialization of the Operation would produce unilateral risks that would be able to substantially reduce competition, in particular related to the price increase, since: (i) the Object Station would have a low price strategy; (ii) it would have been demonstrated from the analysis of the Upward Pricing Pressure Index test (UPP) and Gross Upward Pricing Pressure Index (GUPPI); (iii) in general, independent service stations, not associated with the three main retailers (brands) in Chile, would favor more price-competitive liquid fuel distribution markets; and, (iv) Copec filling stations and the Object Station would have a particular proximity in terms of location and price (not in quality, however, since in that variable Copec would be superior).
Then, regarding coordinated risks, the Decision noted that the fuel distribution market would present structural conditions that, in theory, could facilitate coordination between its agents – specially due to homogeneity of the fuels marketed in Chile– and, that the Operation would increase risks of price coordination, given the price profile of the Object Station. However, the FNE also acknowledged that this risk could be mitigated given the presence of other independent stations in a geographical market greater than three kilometers.
The Decision added that while the area where the Object Station is located would not provide regulatory conditions forbidding the entry of new actors, however, there would be difficulties that would affect the likelihood of entry of independent competitors (real estate market, investment amounts, higher supply costs, positioning and additional services) and that, although there was a likelihood of entry of traditional filling stations, it would not be clear that such entry could be timely or sufficient.
With regard to the productive and dynamic efficiencies presented by the Parties –more competitive prices for lower fuel acquisition costs and the addition of the Object Station to a better service network, as well as new products and benefits for consumers–, the FNE indicated that they could not be regarded as a counterpart to the risks identified, as they would not be duly accredited.
However, during phase II, the Parties presented evidence to prove to the FNE the failing firm defense, since the insolvency status of CGL and its business group was such that the deterioration in the competitive structure of the market in question would not be attributable to the Operation.
With regard to that defense, the FNE indicated that the crisis situation in which the economic operator at issue is located, amended the counterfactual, so that the reduction in competition that would affect the market after the operation would not be inherent in the same. In this regard, the competition authority emphasized that this is an exceptional situation –so much that it is the first time it had been applied in Chile in 60 years of its competition law regime– that it is only configured for the extent that the Parties can prove certain requirements.
The FNE rightly requires the Parties to prove that: (i) the company allegedly in crisis, because of its economic problems, will leave the market in the near future if it is not absorbed by another company; (ii) such exit will make the market disappearance from the tangible and intangible assets of that company inevitable; and, (iii) there is no other option to preserve the company’s assets in the market that is less burdensome to competition, with efforts being made to find alternative options.
Specifically, in this case, the FNE considered that:
(i) the operation of the Object Station was unworkable without the constant and permanent support of its business group and it would be ad portas of widespread insolvency; that the negative results of the Object Station were long-standing, so a possible debt judicial reorganization strategy would have little expectation of success; and, that the situation had been aggravated by the constitutional exceptional state of emergency decreed in the area in October 2019 and the constitutional state of emergency of public calamity catastrophe produced by COVID-19 (importantly, the FNE stated that even without both exceptional state emergencies the failing firm defense would have been proved anyway).
(ii) given the high cost and its virtually zero residual value, it would not be feasible to withdraw the assets from the land of the Object Station or its transfer to another location, nor would it be an option for SMR to operate the Object Station directly and there would be no other economic agent willing to acquire and operate the assets; and,
(iii) reasonable efforts would have been made to find options to preserve the Object Station’s assets in the market in a less burdensome manner to competition than the Operation.
Thus, the FNE estimated that the exit of the Object Station from the market would result in a deterioration of the competitive structure of the market at least equivalent to that generated by the Operation, because given the competitive proximity between the Object Station and Copec, much of the sales volume of the first would be also captured by the second –whether the operation materializes or not–. In that regard, the Decision states that, by establishing the failing firm defense, the Operation itself would not be able to substantially reduce competition.
Moreover, the Operation would be less harmful to consumers than the counterfactual scenario of the imminent exit of the assets because it will maintain the location of a filling station. This would be particularly important for consumers in the district of Hualpén, since there would be a low number of filling stations in proportion to the number of inhabitants and would have unfavorable entry conditions.
In summary, despite the anti-competitive risks of the Operation, the FNE decided to simply approve it, since it considered that those risks would not be inherent in the Operations, since the failing firm defense, for the first time in Chile, had been established.