VZCZCXYZ0009
PP RUEHWEB

DE RUEHSN #2300/01 3242047
ZNR UUUUU ZZH
P 202047Z NOV 07
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC PRIORITY 8608
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEAWJA/DEPT OF JUSTICE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SAN SALVADOR 002300 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA/CEN, WHA/EPSC, 
STATE PASS TO FEDERAL TRADE COMMISSION 
DEPT OF JUSTICE FOR ANTITRUST DIVISION 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EPET ENRG EINV ES
SUBJECT: Superintendent of Competition's Active Agenda 
 
¶1. (SBU) Summary.  The Superintendent of Competition (SC), 
established less than two years ago has been aggressively pursuing 
cases of alleged non-competitive practices in El Salvador.  It 
recently imposed fines against gasoline and electricity distribution 
companies and commodity brokers.  Local affiliates of AES and Esso 
appealed these decisions and raised concerns over due process issues 
and the merits of each case.  The SC is studying the poultry sector 
and wants to look at the cement, fertilizer and regional airline 
industries, all areas suspected to be controlled by powerful, local 
oligopolies.  While the SC is a reputable agency, there appears to 
be legitimate questions about the independent agency's lack of 
experience.  The SC's limited expertise in economic analysis could 
seriously affect the credibility of the institution and, ironically, 
lead to higher prices for the consumer.  End Summary. 
 
Taking on the Internationals 
---------------------------- 
 
¶2. (U) In September, the Superintendent leveled fines of $247,080 
against two electricity distributors, including a Salvadoran 
affiliate of the U.S.-based AES Corporation, for allegedly 
restricting competition by blocking two companies from entering the 
power distribution business.  After the SC reaffirmed its ruling on 
October 4, AES filed an appeal to the Salvadoran Supreme Court.  AES 
argues that it was following Salvadoran law, which requires 
companies to have an approved electricity rate schedule before 
engaging in power distribution.  After the company filed a complaint 
with the SC, the electricity regulator (SIGET) approved the 
company's rate schedule and AES granted them access to the 
electricity network before the SC ruling.  AES representatives have 
emphasized to Econoffs their broader concern over the lack of clear 
rules on how new distributors will share service requirements and 
network maintenance costs. 
 
Questions of Due Process 
------------------------ 
 
¶3. (U) In its second high-profile case against international 
companies, the SC imposed maximum fines of $852,000 against the 
local affiliates of Esso (Exxon) and Shell.  SC determined that Esso 
and Shell had a dominant position in the Salvadoran market because 
both purchased their fuel from RASA, a refinery jointly-owned by the 
two companies' parent companies.  According to the SC, the companies 
abused that dominant position because they suggested prices for 
different zones of the country.  The SC dismissed a separate 
complaint against Texaco for the same zone pricing practices, 
concluding that Texaco does not have a dominant market position, 
although their market share is larger than Shell's.  Esso and Shell 
argue that Salvadoran law has no provision for both firms to be 
grouped together as a single entity and they should not be 
considered as acting in concert, since the SC specifically found no 
evidence of collusion between them to set prices. 
 
¶4. (U) Esso also argues that its due process rights were violated 
because the SC changed the definition of the relevant market at the 
last minute (in the final order imposing the fines) and did not give 
the company an opportunity to properly defend itself.  It claims 
that the SC failed to consider expert evidence in Esso's favor and 
did not provide Esso with the full report from the expert employed 
by the SC to study the hydrocarbons sector. 
 
¶5. (U) On November 6, the SC reaffirmed its October 1 ruling and 
ordered Esso and Shell to eliminate the allegad non-competitive 
practices (zone pricing) within 45 days. Esso plans to file an 
appeal to the Administrative Division of Salvadoran Supreme Court to 
reverse the SC's decision based on due process concerns.  If this 
appeal does not succeed, Esso can appeal to other Supreme Court 
divisions to contest the legal merits of the SC decision.  Esso will 
also ask the Supreme Court to delay enforcement of the SC ruling 
until the Supreme Court issues its ruling.  Though confident in its 
legal case, Esso is concerned about the competitive disadvantage it 
will face if it is unable to price by zone while Texaco is allowed 
to continue the practice during a potentially lengthy legal 
process. 
 
¶6. (SBU) In addition to frequent discussions with Embassy officials, 
Exxon has discussed this case with several USG agencies in 
Washington.  Post has consulted competition law specialists from the 
Federal Trade Commission (FTC) and the Department of Justice (DOJ), 
both of which have developed positive relations with the SC. 
USAID's Economic Growth Office has offered to provide technical 
assistance to the SC, but the Superintendent has resisted some 
proposed activities, supposedly to maintain its independence.  The 
SC has expressed interest in technical assistance from counterpart 
U.S. competition agencies (FTC and DOJ) which could also lead to 
greater USAID support. 
 
SC: Good Reputation but Lacks Experience 
---------------------------------------- 
 
¶7. (SBU) We have spoken with several USG lawyers who have worked 
with the Superintendent and speak highly of her. She enjoys a 
reputation as an honest, capable attorney with long experience as a 
technical advisor in the Ministry of Economy.  However, the SC is a 
young institution only beginning to apply competition law with few 
domestic legal precedents to follow.  With a small staff and limited 
budget, the SC has undertaken an ambitious agenda, contracting 
numerous studies through independent consultants, and investigating 
an array of cases involving influential companies. In addition to 
ongoing studies of the transportation, pharmaceutical, 
telecommunications and poultry sectors, the Superintendent told 
Econoff she wants to study the cement, fertilizer and regional 
airline industries.  In analyzing the recent rulings against Esso 
and AES, another legal analyst underscored the SC's limited capacity 
for economic analysis.  Ironically, according to the legal analyst, 
the SC's lack of economic analysis could lead to even higher 
gasoline prices for the consumer.  With limited ability to determine 
whether alleged uncompetitive practices are economically harmful to 
consumers, the SC tends to focus on legal issues and market 
structure. 
 
Competition Law Reforms 
----------------------- 
 
¶8. (U) In October, the National Assembly approved reforms to 
competition law that will increase the investigative power of the 
Superintendent, allow the SC to issue preventive orders to stop 
alleged anticompetitive practices and increase maximum fines to 6% 
of gross annual revenues.  In approving these reforms, one 
legislator noted that under the reformed law, the Superintendent 
could have fined Esso and Shell up to $24 million. 
 
Comment 
------- 
 
¶9. (SBU) The SC is doing important work in a country where 
traditionally a small group of people control much of the economy. 
However, it is critical that the job be done right or the SC might, 
at the very least,  unnecessarily restrict legitimate business 
activities that do not harm consumers, and damage its own 
credibility in the process.  Record oil and energy prices fuel 
criticism of the sector.  However, Esso and AES appear to have 
raised legitimate concerns about how the SC is applying competition 
law.  Post has emphasized our interest in protecting U.S. companies' 
due process rights and will continue to explore opportunities for 
U.S. competition agencies and USAID to provide technical assistance 
to the SC. 
 
GLAZER