Bulgarian problems with the fuel market awaiting their European solution

Abuse of a dominant market position is an economic condition defined by law in Article 20 of the Protection of Competition Act (PCA) as the position of an enterprise that, based on its market share, financial resources, market access opportunities, technological level, and business relations with other enterprises, can hinder competition in the relevant market, as it is independent of its competitors, suppliers, or buyers. According to Article 21 of the PCA, behavior by an enterprise that may lead to abuse of a dominant position, thereby limiting or distorting competition, is prohibited, as it harms consumer interests. From this, it follows that the natural economic state of the market is one where working competition exists, and any deviation from this requires legal measures to restore it. This is also required by Article 119 of the TFEU in connection with Article 3 of the EU Treaty, emphasizing the idea of a strongly competitive social market economy, operating in accordance with the principle of an open market economy and free competition.

Two key cases related to fuel and electricity are of public importance.

The complexity of proving abuse of a dominant market position in practice is significant, especially in cases with a clear public interest. As we know, this is the exclusive responsibility of the Commission for Protection of Competition (CPC), and the procedure follows Articles 70-77 of the PCA. For example, with Decision No. 698/2022 and under Article 74, paragraph 1, item 3 of the PCA, the CPC presents accusations to Lukoil-Bulgaria for a violation of Article 21 of the PCA and Article 102 of the TFEU, involving abuse of dominant position through price pressure on competitors in the wholesale fuel trade. The investigation and establishment of the violation did not result from the CPC’s own initiative, but rather from a complaint by competitors in the sector, initially from Insa Oil regarding diesel fuel pricing and later from OMV concerning a monopoly.

How does this situation with diesel fuel work in practice?

The CPC (Commission for Protection of Competition) is bound to check a specific time period and the claims within that time frame. Thus, the time period for this market situation is from March 2021 to the decision of the CPC in February 2023. OMV claims that Lukoil removed the price discount when purchasing large quantities of fuel. This means that regardless of whether large quantities are bought for wholesale resale or retail, the price is the same. This leads to two issues: first, reselling the product and the potential profit from the price difference allows covering transportation costs and maintaining business premises. With the same starting price, fuel distributors can’t even cover their costs, let alone sustain their businesses. Secondly, since Lukoil is also a fuel seller through other subsidiaries with gas stations, it directly deprives distributors and retail traders of a competitive environment. Third, a uniform payment system is imposed – both wholesale and retail traders pay immediately, including the excise duty on fuel, even though wholesalers store fuel in tax warehouses and could pay excise duty in deferred payment mode. As a result, while some retail traders benefit, the ability for wholesale and retail traders to compete with Lukoil is reduced.

OMV claims, based on publicly available data, that Lukoil’s market share in fuel production and sales through its Burgas refinery during 2020-2022 ranged between 62 and 79%. This makes it a decisive factor in this market. The ultimate effect would be that Lukoil eliminates competition from the wholesale fuel market, particularly for diesel, which would have a long-term negative effect on the market. The disappearance of buyers who have balancing market power against Lukoil would allow the dominant company to exploit customers by increasing fuel prices. In the long run, this would cause fuel distributors to leave the market, eliminating the possibility of importing fuel from other countries.

Insa Oil’s claim is based on the same facts as OMV’s, with the addition that Lukoil sells diesel fuels below market cost (production and resale), which constitutes “predatory pricing,” with the ultimate goal of driving other traders out of the market.

Fuel traders from Saksa are also involved in this case, adding that the removal of commercial discounts without warning deprived them of the opportunity to quickly reorient towards other fuel producers. This situation also leads to the inability to fulfill contracts under other commercial arrangements, forcing renegotiations and potential termination of business relationships.

The factual situation is as follows – a liter of diesel at a Lukoil gas station costs 2.70 BGN, with no discount for customers, while a liter of diesel purchased from Lukoil by a wholesaler costs 2.72 BGN. The moment the wholesaler buys from Lukoil, they incur a loss compared to retail trading.

Thus, initially, the consumer enjoys low prices, but with the elimination of competition, prices will permanently be set according to the will of the only market player, with a trend toward increases.

However, the key market aspect in this case is that if Lukoil changes commercial terms in such a way that purchasing fuel from them for resale becomes practically unprofitable or if they halt supply of automotive fuels, traders will be deprived of alternative supplies. Imports will become uncompetitive, thus eliminating foreign alternatives. Given the massive investment required to enter the market, this situation makes it extremely disadvantageous for new players. This now calls for special intervention by the regulatory authority.

Is there a resolution to the case?

At the first stage of the investigation, the CPC (Commission for Protection of Competition) found a violation and imposed a sanction through its Decision 184/2023. A large part of the facts are protected by commercial confidentiality, particularly concerning sales volumes, prices, market position, market behavior, market strategies, and intentions.

What the Commission established from an economic perspective is as follows:

The most significant aspect in this matter is how the fuel market has been defined for the purposes of this specific dispute. The CPC defines the market as the wholesale motor fuel market (automobile gasoline and diesel) within the country, comprising two vertically linked sub-markets, namely:

– a sub-market for wholesale motor fuel trade under a deferred excise payment regime (ROP);

– a sub-market for wholesale motor fuel trade that is released for consumption (with paid excise).

Naturally, Lukoil holds a different view, asserting that two separate markets cannot be spoken of, which contradicts the CPC’s long-standing practice. This would avoid the dispute regarding the same prices imposed by Lukoil on different markets, commonly referred to as wholesale and retail at the gas stations. A contentious issue is whether the market should be considered as one for motor fuels in general or separate markets for gasoline and diesel.

The Commission justifies why the market should be redefined, namely because fuel market conditions evolve dynamically, and the behavior of market participants changes according to multiple external factors, meaning the specific market characteristics should be considered in each case. In the Commission’s practice, the wholesale fuel market has often been segmented into two levels: wholesalers – first level and wholesalers – second level. In the specific cases, the CPC did not examine wholesale trading in terms of the tax regime, as the focus was not on such segmentation, and no anti-competitive issues were found. However, the presence of such issues in this case prompted the Commission to analyze the market in detail and separate the two sub-markets – with and without paid excise. This approach also aligns with the European Commission’s practice, which treats the wholesale market as a single product market for diesel and gasoline, considering their interchangeability from the supplier’s perspective, rather than from the consumer’s. The CPC also justifies the claim that high entry barriers exist for current and potential competitors in the wholesale motor fuel market. Due to the confidential information regarding prices and discounts, explaining these economic mechanisms and their impact on the outcome of the case is challenging. However, the CPC concludes that Lukoil has a substantial presence in the fuel storage market, specifically in tax warehouses, where diesel fuel without biodiesel and exempt from excise duty is stored.

From a legal perspective, the Commission found:

European practice defines dominance as a position of economic power that allows a company to prevent effective competition from being maintained in the relevant market, thus enabling it to act independently of its competitors, clients, and ultimately consumers. The concept of independence, which is a distinctive feature of dominance, is related to the level of competitive pressure exerted on the company. To establish dominance, it is not necessary for the company to eliminate all competitive options in the market. However, it must have substantial market power to significantly influence the conditions under which competition could develop. A stable market share of about 50% or more creates a rebuttable presumption of dominance. The CPC found that “Lukoil-Bulgaria” has a relatively high market share and is a market leader in the wholesale motor fuel market, with a share fluctuating between 40-50% and 50-60% during the study period. It is also undisputed that entering the market is difficult, partly due to the lack of available tax warehouses, considering Lukoil’s vast network in this area.

In summary, based on the conducted economic and legal analysis, the Commission concludes that “Lukoil-Bulgaria” has violated Article 21 of the Competition Protection Act by abusing its dominant position through price pressure on its competitors in wholesale motor fuel trade within the country, which could prevent, limit, or disrupt competition in the fuel markets and harm consumer interests. Therefore, the Commission imposes a final fine of over 67.7 million BGN.

The CPC’s decision has been contested before the Administrative Court – Sofia region. The court has not yet ruled, instead referring the case to the Court of Justice of the European Union to clarify how the market should be defined. Specifically, whether it is acceptable to include goods that are not interchangeable from both the supply and demand perspectives, such as gasoline and diesel, within the same national product market. It also asks whether it is permissible to exclude another key motor fuel, LPG, from the product market for motor fuels, considering that its market share is equal to that of gasoline.

Until the ruling of the CJEU, this economically significant case will not receive its answer.

[1] The following acts are also cited by the CPC: Decisions No. 887 and No. 888 of 2012; Decision 479 of 2017; Decision No. 727 of 2017; Decision No. 313 of 2019.

[2] CJEU ruling in the case United Brands v Commission, C-27/76, EU:C:1978:22, § 65.

“This article was created within the framework of the initiative ‘Monitoring the activities of the CPC in protecting free competition,’ funded by the European Union and the ‘Open Society Institute – Sofia’ (OSIS). The views and opinions expressed are solely those of the author(s) and do not necessarily reflect those of the European Union or the European Education and Culture Executive Agency (EACEA) or OSIS. Neither the European Union, nor EACEA, nor OSIS can be held responsible for them.”