The Taiwan Fair Trade Commission’s NT$6.3 Billion (US$200 Million) Cartel Fine on Power Providers Overruled by the Taipei High Administrative Court

Author: Jamie C. Yang

Case Background

The Taiwan Fair Trade Commission’s (“TFTC”) NT$63 billion fine on the nine independent power providers (“IPPs”) for alleged cartel activities and subsequent annulment of TFTC’s decision by the Taipei High Administrative Court’s makes it one of the most significant and controversial case in Taiwan’s antitrust practice history. The case was significant in many aspects. This was the first case in which the Regulations for Calculation of Administrative Fines for Serious Violations of Articles 10 and 14 of the Fair Trade Act (“Fine Calculation Regulation”) was applied, and a record breaking amount of fines was assessed. The alleged “victim” of concerted action is a monopsonist electricity buyer, which makes the case unique even on the level of international antitrust practice.

The Taiwan Power Company (“TPC”), whose great majority of shares are state-owned, is a utility company which had enjoyed complete monopoly in electricity supply in Taiwan up until 1998. Due to rising electricity demand from the public since 1999, the Taiwan Bureau of Energy (“BOE”) has in three stages, authorized the setup of nine IPPs.

Electricity supply can be broken down into three steps: generation, transmission and distribution. The IPPs are only authorized to generate electricity, but are banned from transmitting or distributing their electricity directly to consumers. They must do so through TPC. To sell off their power output, the IPPs entered into power purchase agreements (“PPAs”) with TPC. From the consumers’ standpoint, TPC is the monopolist seller of electricity; and from the IPPs’ point of view, the TPC is the monopsonist buyer of electricity.

Generally speaking, the cost of generating electricity can be broken down into two broad categories: fixed and variable costs. The cost of fuel is an important determinant of variable cost, while interest expense is a major component of fixed cost. Each PPA reflects the fixed and variable costs of the IPP at the time it was entered into. In 2006, due to a sharp rise in the price of fuel, all the IPPs initiated a negotiation with the TPC and successfully modified their PPAs respectively to reflect the rising price of fuel. On the other hand, interest rate consistently declined in the aftermath of the U.S. sub-prime crisis. In September 2008, TPC initiated a negotiation with the IPPs to lower the purchase price to reflect the reduced interest rate. This time, the parties were unable to reach an agreement.

The TFTC Found Cartel Activity

Starting in April 2012, the rising utility cost aroused public anger and became the focus of the Taiwan media. The popular belief was that TPC was buying electricity from the IPPs at an inflated price. TPC and the IPPs conducted further negotiation in a mediation session chaired by the BOE, but no consensus was reached. In October 2012, the TFTC started a cartel investigation on its own initiative. By March 2013, the TFTC swiftly concluded investigation and penalized the nine IPPs for concerted refusal to modify their contracts with TPC.

TFTC found that the IPPs reached an agreement to “passively delay” negotiations with the TPC, mainly based on the following findings: (1) the IPPs formed an association, and made certain conclusions among themselves, including “it is unfair to apply TPC’s singular formula on all IPPs” and “each IPP should provide the other IPPs with materials it provide to TPC,” (2) the IPPs selected two research providers, the Taiwan Research Institute and McKinsey & Co. to provide reports as the basis of arguing that the reduced rates requested by TPC were unreasonable, and (3) a public relations company made a press release on behalf of the IPPs to reject the solution provided by the BOE.

The TFTC investigation lasted less than six months, and following the promulgation of the Fine Calculation Regulation in April 2012, fines assessed on each of the 9 IPPs ranged from a staggering NT$130 million to NT$1.85 billion (approximately US$4.2 to US$59.8million) and the total fine was NT$6.3 billion (US$200 million). Notably, some IPPs have in fact renegotiated their PPAs and reached new agreements with TPC before the TFTC’s decision, but all of them have been heavily punished.

The IPPs each appealed the TFTC’s decision to the Executive Yuan, which upheld the TFTC’s decision. Subsequently, all the IPPs appealed the Executive Yuan’s decision to the Taipei High Administrative Court.

The IPPs’ Appeal

Under the Taiwan Fair Trade Act, “concerted action (cartel)” is defined as “the conduct of any enterprise, by means of contract, agreement or any other form of mutual understanding, with any other competing enterprise, to jointly determine the price of goods or services, or to limit the terms of quantity, technology, products, facilities, trading counterparts, or trading territory with respect to such goods and services, etc., and thereby restricting each other’s business activities.” The term “competition” as used in this Act means “any conduct of one enterprise to compete for more trading opportunities in the same market with one or more enterprises by offering more favorable price, quantity, quality, service or any other terms.”

The IPPs each forwarded numerous arguments in their appeal to the Taipei High Administrative Court. The most significant arguments are (a) they are protected by existing contracts and (b) it is impossible for them to earn new trading opportunities and therefore there is not a competitive relationship among them.

As explained earlier, the two major components which determines the rates in PPAs are fixed and variable costs. Each IPP has a different set of fixed and variable costs defined in their respective PPAs. But the following general rule applies to all of them: for the same amount of electricity generated, the IPPs may charge two different types of rates depending on the time of the day. Certain hours belong to the “guaranteed period,” and others belong to the “non-guaranteed period.” For electricity generated during guaranteed periods, the IPPs have fixed quotas to meet, but they are compensated at a guaranteed rate reflecting both fixed and variable costs; on the other hand, although there is no quota requirement during non-guaranteed periods, the non-guaranteed rate does not reflect fixed costs. Thus, the guaranteed rate is a higher rate than the non-guaranteed rate.

A number of the IPPs argued that the TFTC erred in finding them to be competitors. During guaranteed periods, the IPPs’ quotas are fixed in their PPAs. It is not possible for any IPP to compete for more quota than it was allotted by selling electricity at a discounted rate. On the other hand, as “Interest rates” were not taken into account in the non-guaranteed rate, the decline in interest rates did not have an impact in the non-guaranteed period. In sum, in both guaranteed and non-guaranteed periods, it is impossible for the IPPs to compete with each other by offering a more favorable price.

The Taipei High Administrative Court Overruled the TFTC’s Decision

The Court was persuaded by the existing contract argument. The Court reasoned that demand substitutability and supply substitutability must be examined to determine whether two companies compete in the same market. The premise of having demand substitutability or supply substitutability, is that the suppliers having the power to decide on price. The Court then found that the prices have been fixed in the PPAs, and the IPPs cannot make changes unilaterally. Finding the IPPs’ lack of demand substitutability and supply substitutability, the Court concluded that they are not competitors in the same market, thus cannot form a cartel. According to the Court, the IPPs are only subcontractors of the TPC. On October 29, 2014, the Court annulled both the TFTC’s and the Executive Yuan’s decision.

Comments on the Case

The Court seem to have reached its conclusion at an early stage, leaving much room for debate on the appellate level. Under the court system in Taiwan, the TFTC may appeal the case to the Supreme Administrative Court on grounds that the Taipei Administrative Court misconstrued the law, but not on fact finding errors. The Taipei Administrative Court’s market definition would be a legal construction subject to arguments on both sides in the appellate level.

Many aspects of the case may deserve further discussion. The case was unique in that the alleged victim of the cartel act was a monopsonist buyer much bigger than all the IPPs combined. Furthermore, the IPPs are justified under their contractual rights in existing PPAs to not lower their price. Finally, both the TPC and the BOE have either instructed the IPPs to form a consensus before renegotiation or consistently failed to contest after knowing that a consensus was formed. These factors, along with many others may be debated by the parties and ruled on by the Court in the following months to come.

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If you have any questions about any of the topics discussed above, please contact:

Jamie C. Yang
+886.2.7733.7057
jamie.yang@innovatus.com.tw

This note is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.