Competition law block exemptions published for the South African energy sector

The Minister of Trade, Industry and Competition (MTIC) on Wednesday 24 May 2023 published the Energy Users Block Exemption and Energy Supplier Block Exemption.

The Department of Trade, Industry and Competition (DTIC) is entitled to make regulations that are required to give effect to the purposes of the Competition Act and specifically to exempt a category of agreements or practices from Chapter 2 of the Competition Act which deals with prohibited practices, including prohibited horizontal conduct, prohibited vertical conduct and abuses of dominance. These block exemptions were first published for input during the subsequently withdrawn National State of Disaster related to energy supply.

The Energy Users Block Exemption allows for collaboration between energy users to respond to the current electricity supply constraints subject to a process of notification to the Competition Commission (Commission) and the DTIC. Energy Suppliers, on the other hand, are required under the Energy Suppliers Block Exemption to effectively apply to the Commission for permission to collaborate and if that application is granted (potentially subject to certain safeguards, or conditions) the firms implementation of the collaboration agreements or practices will be monitored by the Commission (albeit not through an overly prescriptive process) and the permission to collaborate may be withdrawn by the Commission in certain instances.

It is important for energy users and energy suppliers to understand the scope of these block exemptions not only if they wish to make use of these exemptions, but also to assess any engagement with parties in the value chain that may be acting under an exemption.

Energy Users Block Exemption:

The Energy Users Block Exemption allows for collaboration between energy users in specifically delineated instances. The block exemption envisages that energy users may collaborate, likely through industry or trade associations, to share information and lobby government to implement appropriate regulatory measures to address the electricity crisis. On the other hand, energy users, may in certain prescribed circumstances collaborate proactively to address the electricity crisis to pool their resources or to jointly negotiate to secure consistent electricity supply, preferably at reduced costs to those energy users. Importantly, however, the block exemption does not allow energy users to fix selling prices, collaborate unlawfully when tendering, or engage in resale price maintenance.

There is a positive obligation on energy users that use the block exemption to offer small, medium and micro enterprises (SMMEs) and firms owned or controlled by historically disadvantaged persons (HDPs), that operate at all levels of the energy users value chain, to participate in the collaboration agreements.

1. Agreements or practices between users of any form of energy supply (either competitors or firms in a customer-supplier relationship) may be exempt if those practices either (i) contribute to regulatory measures to prevent the escalation of the electricity supply crisis; or (ii) are aimed at achieving certain specified purposes. Specifically collaboration between energy users fall within the Energy Users Block Exemption if the conduct is aimed at:
   1. securing backup or alternative energy supply;
   2. reducing energy costs;
   3. promoting the optimisation and efficient use of energy supply; or
   4. securing shared or adjacent sites, infrastructure, equipment and facilities.
2. The block exemption covers specific conduct (aimed at achieving the purposes listed above) that may constitute (i) a general horizontal restrictive practice; (ii) the fixing of a purchase price or other trading condition; or (iii) a general vertical restrictive practice through collaboration between parties.   The conduct includes agreements and practices as well as the exchange of information (limited to information strictly necessary to conclude and implement the relevant agreements or practices). The block exemption does not cover conduct that amounts to (i) the fixing of a price of goods or services to customers or consumers; (ii) collusive tendering; or (iii) resale price maintenance.
3. The following agreements or practices are covered by the block exemption:
   1. To secure backup or alternative energy supply: (i) joint procurement; or (ii) sharing of backup and energy generation capacity;
   2. To reduce the cost or to promote the efficient use of energy supply through (i) joint negotiation and purchase of energy and related products and services; (ii) joint financing of backup and alternative energy supply; or (iii) joint purchasing of shared backup and alternative energy generation capacity;
   3. To alleviate, contain and minimise the effect of the electricity crisis on operations through (i) energy use, saving and optimisation initiatives to limit operational downtime and reduce energy demand; (ii) joint procurement and sharing of security services to secure a site; or (iii) planning, coordination, maintenance and monitoring the performance of energy-related installations.
   4. It is further important to note that energy users that wish to make use of the block exemption must afford HDP firms and SMMEs at all levels of the value chain to opt-in to the agreements or practices the energy users will engage in under the block exemption.

The Energy Users Block Exemption prescribe a less stringent process for energy users to make use of the block exemption. This, of course, does not mean that energy users have free reign to collaborate and the collaboration is still limited to the prescribed purposes and scope of the block exemption, but there is greater freedom granted to energy users in terms of implementing suitable collaboration agreements when compared to the processes prescribed for energy suppliers to benefit from the Energy Suppliers Block Exemption.

Energy users that aim to collaborate should keep thorough records of their engagement and may, prior to implementing a collaboration agreement, approach the Commission for clarification whether the proposed collaboration would be exempted under the block exemption or not. If the clarification process is used, energy users should have certainty that they are engaging in conduct that is permitted under the Energy Users Block Exemption and they are not falling foul of the Competition Act. Only once the energy users implement the collaboration agreement do they have an obligation to inform the Commission and the DTIC, within 7 business days, of the implementation of that agreement.

• In order to benefit from the block exemption, the energy users must inform the Commission and the DTIC of the scope agreement or practices within 7 business days of the implementation of those agreements or practices.
• This means that energy users need not seek the Commission and DTIC’s permission to enter into discussions to engage in conduct envisaged under the block exemption. Energy users may, however, request clarification from the Commission and the DTIC whether their conduct would fall within the block exemption and this should be done prior to implementation of those arrangements.
• Firms seeking to engage in conduct that would be exempted under the block exemption must keep accurate records of all engagements, including written records of meetings, correspondence, information exchange protocols etc. and documents relevant to the negotiation, conclusion and implementation of the agreements or practices. The Commission may request these records at any time and will likely require the production of these records at the time of being notified of the implementation of the arrangements.
• The block exemption will be in place until withdrawn by the MTIC and, once withdrawn, the MTIC may prescribe a reasonable period for arrangements put in place under the block exemptions to be unwound and withdrawn.

Energy Suppliers Block Exemption:

The Energy Suppliers Block Exemption allows for collaboration between all forms of energy suppliers as well as suppliers of energy supply inputs, services and products related to energy supply. Energy supplies may collaborate for purposes of joint lobbying exercises to inform appropriate regulation and may also engage in specific joint commercial arrangements in order to increase the consistent supply of cheaper energy. The Energy Suppliers Block Exemption delineate specific conduct that energy suppliers may engage in under the block exemption and which may only be engaged in with the approval of the Commission. Importantly, however, the block exemption does not allow energy suppliers to apply to fix selling prices, collaborate unlawfully when tendering or engage in resale price maintenance.

There is a positive obligation on energy suppliers that use the block exemption to offer SMMEs and HDPs that operate at all levels of the energy value chain to participate the collaboration agreements.

1. The block exemption applies to suppliers of:
   1. all forms of energy including electricity, natural gas, liquified petroleum gas, diesel, liquified natural gas or paraffin;
   2. related products including inverters, batteries, solar panels, wind turbined and generators;
   3. energy supply inputs such as coal; and
   4. energy supply services such as storage and installation.
2. Energy suppliers may engage exempt conduct contribute to regulatory measures to prevent the escalation of the electricity supply crisis; or (ii) are aimed at achieving certain specified purposes. Specifically collaboration between suppliers fall within the block exemption if the conduct is aimed at:
   1. increasing and optimising the supply of energy in the market
   2. reducing costs of energy supply; or
   3. securing shared or adjacent sites, infrastructure, equipment and facilities.
3. The block exemption covers specific conduct (aimed at achieving the purposes listed above) that may constitute (i) a general horizontal restrictive practice; (ii) the fixing of a purchase price or other trading condition; or (iii) a general vertical restrictive practice through collaboration between parties. The conduct includes agreements and practices as well as the exchange of information (limited to information strictly necessary to conclude and implement the relevant agreements or practices). Importantly, the block exemption does not cover conduct that amounts to (i) the fixing of a price of goods or services to customers or consumers; (ii) collusive tendering; or (iii) resale price maintenance.
4. The following agreements or practices are covered by the block exemption:
   1. To increase supply capacity and optimise energy supply through (i) joint investment in shared energy infrastructure; (ii) joint financing and risk-sharing in energy projects; (iii) joint training and skills development; or (iv) collaboration and optimising the level and timing of energy supply.
   2. To reduce the cost or improve the efficiency of energy supply through (i) joint negotiation and purchasing of energy supply inputs and related products or services; or (ii) joint procurement and the sharing of security services for the purposes of securing infrastructure.
5. It is further important to note that energy users that wish to make use of the block exemption must afford HDP firms and SMMEs at all levels of the value chain to opt-in to the agreements or practices the energy users will engage in under the block exemption.

In order to make use of the Energy Supply Block Exemptions energy suppliers will have to be able to clearly articulate the actions they wish to take, the manner and form of collaboration and how the collaboration will achieve the purpose of addressing the electricity supply crisis or ensure energy supply in other forms to energy users. Energy suppliers may not implement any joint action prior to approval from the Commission (which may be given subject to certain prescribed safeguards) and should limit their engagements, including the sharing of competitively sensitive information during the planning process and prior to finalising their engagement with the Commission to obtain certainty that the proposed collaboration would be exempt and implementing the planned action would not fall foul of the Competition Act.

Methodical records should be kept of these planning processes as well as all engagements following the implementation of the collaboration arrangements.

Once energy users have the approval from the Commission to engage in the joint conduct, they will have to report the implementation of that arrangement to the Commission and DTIC within 7 business days. Thereafter the Commission may request information from the energy users to monitor that the joint conduct is engaged in within the confines of the exemption as approved by the Commission. The Energy Suppliers Block Exemption does not prescribe a formalised reporting process, but it is likely that the Commission will monitor the implementation of these arrangements through the use of its general power to request information in order to ensure that the arrangement is implemented within the scope of the exemption granted by the Commission (failing which the Commission may withdraw the exemption granted to the energy users).

• ­Energy suppliers who wish to benefit from the block exemption must first apply to the Commission for written confirmation that the conduct they wish to engage in would fall within the scope of the block exemption. The envisaged conduct may not be implemented until such written confirmation is obtained from the Commission. This stands in contrast to the process prescribed for collaboration between energy users as prescribed in the Energy Users Block Exemption, where the firms need only inform the Commission and DTIC of the implementation of agreements under the block exemption and may seek clarification from the Commission prior to implementation of those agreements.
• The block exemptions prescribes an application process where energy suppliers must request confirmation from the Commission that the conduct may be engaged in under the block exemption. The Commission will assess the proposed conduct and may then either (i) proclaim that the proposed conduct does not fall within the block exemption and may not be engaged in by the parties; or (ii) confirm that the conduct would fall within the block exemption and may prescribe safeguards that the energy users must comply with to benefit from the block exemption.
• The Commission will have 30 business days to assess such an application by energy suppliers and if no decision is communicated in writing by that time, the conduct shall be regarded as having been confirmed as falling within the scope of the block exemption.
• Once approval (or conditional approval) is received from the Commission, the energy suppliers must notify the Commission and the DTIC of the implementation of the relevant agreements or practices within 7 business days.
• The Commission has the power to revoke its approval of certain conduct if (i) the energy suppliers breach any of the safeguards imposed by the Commission; (ii) the energy users exceed the scope of the exemption granted by the Commission; (iii) the exemption was granted on the basis of false information; or (iv) the reason for granting the confirmation no longer exists.
• Firms seeking to engage in conduct that would be exempted under the block exemption must keep accurate records of all engagements, including written records of meetings, correspondence, information exchange protocols etc. and documents relevant to the negotiation, conclusion and implementation of the agreements or practices. The Commission may request these records at any time and will likely require the production of these records at the time of being notified of the implementation of the arrangements.
• The block exemption will be in place until withdrawn by the MTIC and, once withdrawn, the MTIC may prescribe a reasonable period for arrangements put in place under the block exemptions to be unwound and withdrawn.

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Read the original publication at Herbert Smith Freehills.