Regulation and market power in the Spanish liquefied petroleum gas industry: Progress or failure?

This paper presents a detailed study of the structure, market power and competition in the distribution sector for liquefied petroleum gas (LPG), within Spain. It is a segment of energy consumption and supply that is not often given serious attention, despite the fact that LPG is a crucial source of energy to many households, in many countries in Europe and in the rest of the world. Despite formally being an open and liberalized sector, the Spanish LPG market is characterized by high concentration within the industry; Repsol Butano, the dominant operator, practically controls the entire value chain. These structural characteristics probably justify state intervention in the form of price fixing, in order to guarantee accessible prices for final consumers. Nevertheless, applying this tool has had negative effects on the opening and liberalization process. On the one hand, it fails to encourage entry or an increase in the participation of new operators; on the other, it has considerably deteriorated the economic and financial performance of the distribution agents that are subjected to two strong forces. First, the dominant operator looks after its own interests and its income; and second, the Government tries to defend the interests of final consumers by fixing prices that inadequately remunerate the activity. This shows the contradictory regulatory actions that try to promote competition, and then establish mechanisms to regulate activity by fixing prices that act as price limits. These government set prices discourage new competitors from entering.