Competition Practice Newsletter (ISSUE 2, 2017)
NEWS AND EVENTS
FEDERAL ANTIMONOPOLY SERVICE PRESENTS THE PUBLIC DECLARATION OF ITS GOALS AND OBJECTIVES FOR 2017
The Public Declaration sets the major strategic directions of the Federal Antimonopoly Service of Russia (FAS Russia) for 2017. The main goals are: the adoption of the National Plan for the Development of Competition in the Russian Federation for 2017-2019; and a basic reform of the tariff regulation strategy, including the adoption of the proposed federal law On the Basics of State Regulation of Prices (Tariffs) for Goods (Services) and a new strategy for stimulating tariff regulation.
FAS Russia also plans to create effective mechanisms to combat restrictive business practices by transnational corporations and cross-border violations of antimonopoly law.
According to the Declaration, FAS Russia plans to accept and approve two regulatory road maps in 2017: "Development of Competition in Healthcare"; and "Development of Competition in the Financial Services Market." The latter road map has already been agreed with the Bank of Russia and was approved by FAS Russia on May 10, 2017.
FAS RUSSIA INTRODUCES A DRAFT OF THE 2017 STATE OF COMPETITION REPORT
FAS Russia has submitted a draft of its State of Competition Report for 2017 to Government of the Russian Federation. The Report includes: an analysis of the main changes in the antimonopoly legislation in 2016 and their effects; conclusions about the research on the state of competition in certain sectors of the economy; and the goals and objectives of FAS Russia for the further development of competition in the Russian Federation.
The Report’s main theme is a pro-competition tariff policy aimed at improving the efficiency and transparency of tariff regulation. Instead of tariff regulation at the agency level, FAS Russia recommends a single law that would define the basic principles of tariff policy. This would include a rejection of the "cost-plus" principle and a transition to the use of market indicators based on the "inflation-minus" principle.
The antimonopoly body also plans to switch to long-term tariff regulation with a planning horizon of more than 5 years. In addition, in the Report, FAS Russia rejects the previous policy of the expanding nationalization of the economy and focuses instead on a sharp reduction in tariff regulation through the exemption of the certain sectors of economic activity.
FAS RUSSIA DEVELOPS ANTIMONOPOLY COMPLIANCE RECOMMENDATIONS FOR ENTERPRISES IN THE DEFENSE-INDUSTRIAL COMPLEX
FAS Russia, together with Rostec, Rosatom State Corporation, Roscosmos State Corporation, United Aircraft Corporation, United Shipbuilding Corporation, and the Ministry of Industry and Trade of the Russian Federation, have prepared Methodological Recommendations on the introduction of internal control over compliance with antimonopoly legislation, legislation on the state defense order, and legislation regulating the purchasing activity for the organizations in the defense-industrial complex and contractors of the state defense order.
The draft law on antimonopoly compliance has already passed all stages of discussion in the Government of the Russian Federation, where all disputable issues were settled. The State Duma is expected to adopt the law in its fall session.
Of special importance, the Methodological Recommendations promote the development of a unified approach to the organization of internal controls for compliance with the requirements of not only Federal Law No. 135-FZ of July 26, 2006, On Protection of Competition, (the “Federal Competition Protection Law”) as provided by the bill now pending in the State Duma, but also with: Federal Law No. 275-FZ of December 29, 2012, On State Defense Order; Federal Law No. 44-FZ of April 5, 2013, On the Contract System in the Sphere of Procurement of Goods, Work, Services for Ensuring State and Municipal Needs (the “Federal Contract System Law”); and Federal Law No. 223-FZ of July 18, 2011, On the Procurement of Goods, Work, Services by Certain Types of Legal Entities.
The Methodological Recommendations primarily concern economic entities that operate in the defense-industrial complex or are the main contractors of the state defense order, or both. However – very importantly – the provisions of the Methodological Recommendations can also be used in the construction of antimonopoly compliance systems in organizations operating in other sectors. This adds meaning and value to the document, as it describes universal approaches to building compliance systems that can be effective in all sectors, and not only among companies in the field of defense procurement.
At this stage in the development of an institutional approach to antimonopoly compliance, the Methodological Recommendations offer significant value for the entire market. Considering that the draft law on antimonopoly compliance contains only the most general provisions, the Methodological Recommendations can be useful for understanding what FAS Russia envisions as the basic components of an adequate system of internal control of compliance with antimonopoly legislation.
PRESIDENT PUTIN SIGNS ENABLING LEGISLATION FOR THE FREE TRADE AREA TREATY
On May 28, 2017, President Vladimir Putin signed the Federal Law On Ratification of the Protocol of the Free Trade Area Treaty between the Participating States. This legislation formally ratified the Protocol, signed in Bishkek on June 7, 2016, concerning the rules and procedures for regulating public procurement in the CIS Free Trade Area, which was created by the treaty of October 18, 2011.
The protocol defines the objectives, principles of regulation, and basic requirements for the organization and conduct of procurement in the contracting countries. The Protocol will be implemented in several stages.
The first stage involves the transition to the electronic format of competitive procurement by January 1, 2018. The second stage, to be completed before January 1, 2019, will introduce technologies that provide information and procurement transparency. This will include the compatibility of all online portals in the field of public procurement.
The implementation of the Protocol should promote the expansion of economic cooperation among the CIS member states.
JUDICIAL AND ADMINISTRATIVE PRACTICE
PRIMORSK COMMERCIAL PORT SUCCESSFULLY CHALLENGES FAS RUSSIA DECISION
In June 2016, FAS Russia initiated a case alleging an antimonopoly violation by LLC Primorsk Commercial Port (“LLC PСP”).
On November 10, 2016, FAS Russia found that LLC PCP, a member of the NCSP Group, had violated Clause 1, Part 1, Article 10 of the Federal Competition Protection Law by establishing and maintaining a monopolistically high price for oil transshipment services in the port of Primorsk. The antimonopoly body ordered LLC PCP to reduce its oil transshipment tariffs, and to set prices in the currency of the Russian Federation, rather than U.S. dollars. It also instituted proceedings against the LLC PCP for an administrative offense.
LLC PCP appealed to the Arbitration Court of Moscow, which, on June 8, 2017, decided in the company’s favor. The court highlighted significant violations and mistakes in FAS Russia’s consideration of the case against LLC PCP. In analyzing the competition in the market within which LLC PCP operates, FAS Russia artificially narrowed the boundaries of the commodity market under investigation, which the Arbitration Court found to be an unreasonable refusal to apply a correct method of comparable markets price analysis, which LLC PCP had used. All of this resulted in an incorrect assessment by FAS Russia of the circumstances of the case.
The claim of LLC PCP was the first in a series of cases brought to the court by stevedoring companies. On July 21, 2017, the court held in favor of PJSC Novorossiysk Commercial Sea Port (PJSC NCSP) in its challenge to a similar analysis by FAS Russia. The decisions by the Moscow Arbitration Court in the cases of PCP LLC and PJSC NCSP may indicate that FAS Russia is making similar mistakes in its evaluation of potential cases against other companies.
SUPREME COURT APPROVES THE REVIEW OF JUDICIAL PRACTICE IN PROCUREMENT CONTRACT CASES
On June 28, 2017, the Presidium of the Supreme Court of the Russian Federation approved the Review of Judicial Practice of Applying the Legislation of the Russian Federation on the Contractual System in the Sphere of Procurement of Goods, Work and Services for Ensuring State and Municipal Needs, including its most important positions related to the application of the Federal Contract System Law.
For example, according to the Review, if the customer specifies, in the auction documentation, the special characteristics of the goods, which meet the needs and include the specifics of the use of the procurement subject, this description cannot be interpreted to limit the range of potential participants. At the same time, the inclusion in the documentation of requirements that point to a particular manufacturer of the goods, in the absence of specific use, violates the provisions of Article 33 of the Federal Contract System Law.
The Presidium of the Armed Forces of the Russian Federation indicated that the parties to a state or municipal contract are not usually entitled to enter into an additional agreement providing for an increase in the contract price by more than 10%. Such an additional condition is void, unless the law states otherwise. The parties also have no right to change the terms of performance of work under a state contract, unless otherwise provided by law or by the contract itself.
The Armed Forces also drew attention to the fact that the concession or assignment by the supplier (e.g., contractor, executor) to a third party of the supplier’s claim to the obligated payment from the customer does not contradict the legislation of the Russian Federation.
NOTEWORTHY FOREIGN CASES
GOOGLE GUILTY OF ABUSE OF ITS DOMINANT POSITION IN THE SEARCH SYSTEMS MARKET
On July 14, 2016, the European Commission brought antimonopoly charges against Google. The Commission suspected the company of distorting the search results in its search engine to favor Google Shopping's own service offerings, as well as Google’s commercial partners and customers, by giving them priority placement in the search results.
The European Commission found that, because of the company's behavior, products and services that competed against the Google Shopping service were significantly understated and their offers were not reflected on the first page of the search results. This was based on findings by Commission experts that that the first ten results on the first page of search results receive a total of about 95% of all clicks by consumers, and the first result on the second page accounts for an average of no more than 1% of clicks.
In accordance with these findings, on June 27, 2017, the European Commission found Google guilty of abuse of its dominant position in the search market of the European Union and fined the company a record amount of 2.42 billion euros.
The Commission also ordered the company to stop the violation within 90 days; or face liability for a fine of up to 5% of the global daily profit of its parent company Alphabet.
At the same time, the European Commission did not indicate a specific mechanism for eliminating the violation, giving Google the opportunity independently to decide on the necessary changes.
LEGISLATIVE AND REGULATORY PROJECTS
DRAFT FEDERAL LAW TO IMPROVE STATE REGULATION OF PRICES
The legal regulation of prices, or tariffs, by the state has for many years been characterized by an exceptional lack of a consistent, systematic approach, as well as by an absence of realistic calculations in the relevant markets. Permissible tariff levels have been established by agency actions that have been isolated from uniform and universal pricing principles. This has led to a lack of consistency in regulation.
In order to unify tariff formation and to provide a single regulatory platform for it, the Federal Antimonopoly Service of Russia developed a draft Federal Law, On the Basics of State Regulation of Prices (Tariffs). This law, if adopted, will allow a unification of the procedures for setting prices, will establish consistent regulatory principles and approaches, and will standardize the order of their application.
FAS Russia has initiated this reform of the entire tariff system in Russia, as part of its goal to modernize the system of normative acts that was set previously by the Federal Tariff Service of Russia.
DRAFT GOVERNMENT RESOLUTION APPROVING STATE REGULATION OF PRICES FOR PRODUCTS SUPPLIED UNDER THE STATE DEFENSE ORDER
A draft resolution of the Government of the Russian Federation, which is expected to come into force on January 1, 2018, would consolidate, into a single normative legal act, current policies and practices in the state regulation of the prices of products supplied under the state defense order. The resolution, which contains more than 100 articles, will cover a wide range of subjects, such as:
• the stages of formation, deployment, and execution of public procurement under the state defense order;
• forecasting and registration of the prices of products;
• prices under government contracts; and
• conversions to fixed prices.
DRAFT GOVERNMENT RESOLUTION TO ADOPT A RISK-ORIENTED APPROACH FOR ANTIMONOPOLY COMPLIANCE OVERSIGHT
This draft resolution would require a risk-oriented approach to the procedure for assigning legal entities and individual entrepreneurs to a risk category for purposes of exercising state control over their compliance with antimonopoly legislation and legislation on natural monopolies.
It would categorize the subjects of natural monopolies as medium, moderate, and low risk, based on the size of their revenues. The frequency of planned inspections of entities subject to state control would be determined by their assigned risk category.
DRAFT AMENDMENTS TO THE BUDGET CODE OF THE RUSSIAN FEDERATION TO REGULATE PRICES BY NATURAL MONOPOLIES
The draft law proposes to make significant changes in the method to approve the levels of prices for the goods, work, and services of natural monopolies. These levels would be established when approving the main parts of the federal budget; because tariffs play a key role in business and for the state as a whole.
The changes include provisions on setting the maximum level, under federal law, of the prices or tariffs for the goods, work, and, services of natural monopolies. Under the proposed changes, increases could not exceed the projected level of inflation, which is a basis for federal budget development for the next financial year and planning period.