Wholesale fuel to be regulated

The Government has accepted a majority of the recommendations of the Commerce Commission's retail fuel market study, Marc Daalder reports

Energy Minister Megan Woods announced today that the Government will regulate the wholesale fuel market, in line with recommendations from the Commerce Commission.

In legislation due to be passed by the middle of the year, Woods will implement terminal gate pricing, regulate the complexity and competitiveness of wholesale supply contracts and impose a legally enforceable code of conduct for the industry.

The Commerce Commission's final report into the retail fuel market, released in December, said consumers were "currently paying higher pump prices for petrol and diesel than could be expected in a competitive market" and validated Jacinda Ardern’s assertion in October of 2018 that consumers were being “fleeced” at the pump.

"The action the Government is taking in response to the Commission’s report forms a package of solutions to deal with entrenched problems that have been around since the 1980s," Woods said.

Wholesale reforms

The headline item in the Government's reform package is terminal gate pricing (TGP), which has been implemented to considerable effect in Australia. Currently, different retailers purchase fuel wholesale from the same terminal at different prices, depending on an arcane arrangement of contracts and interlocking agreements.

With TGP, a single price will be posted at each terminal and fuel will be sold. In essence, this applies the sales method used at retail gas stations - one price per type of fuel for all customers - to the wholesale market.

Woods is also preparing for the event that the terminal gate pricing fails to lead to a more competitive market by giving the Government price control powers as a backstop. This option is still being investigated but will be added to the books as an amendment in the future.

The Government is also taking aim at the arcane contracts that govern the wholesale market. According to a Cabinet paper released alongside the announcement, distributors are sometimes only told the price of wholesale fuel after the purchased has concluded.

Under the new regulatory regime, new contracts will have to be "written in clear and concise language", apply for a maximum of five years, require both parties’ permission to alter prices and limit exclusivity requirements. Even companies already locked into long-term contracts will experience some relief as, after a transition period, the new rules will apply to existing contracts as well.

Lastly, the legislation will also put into place an enforceable industry code of conduct. Much of this code of conduct will have to do with transparency, Woods said.

“The main component we’re looking for here is around the transparency. We’re actually having information that will allow there to be a monitoring and compliance regime to be put into place.”

Retail changes also on the way

In addition to recommending significant changes to the wholesale market, ComCom's report examined a handful of potentially anti-consumer practices. The Government has adopted most of its recommendations in this area.

The Commerce Commission was particularly worried by widespread misuse of premium fuels. Customers who didn't need it bought it and, in some cases, customers who needed it didn't buy it.

"The premium petrol margin has increased faster than regular petrol. The extra margin fuel companies are earning on this product does not appear to reflect actual cost differences between premium and regular petrol," the Commission wrote. "We believe one explanation is that premium petrol prices are seldom displayed on price boards, making it difficult for consumers to compare prices."

In order to resolve this, the Government will require retail fuel sites to post premium prices on price boards, alongside regular petrol and diesel. At the moment, that requirement will kick in 18 months after the legislation passes, but in response to Z Energy’s call for it to be immediate, Woods said she was open to moving forward the deadline.

“We find it surprising that it would take 18 months to bring about price transparency. This market study has ultimately been about ensuring positive consumer outcomes, so we believe it is essential that all consumers are able to compare all prices across all sites as quickly as possible,” Z CEO Mike Bennetts said.

“We’ll be talking further with industry as we progress this through. I want to do this as quickly as we can. The feedback we’ve had from industry at this stage is around the time-lead that they need, but if we can do it quicker, that’s certainly something I want to look at,” Woods said.

The Government will also look into regulations requiring stickers on fuel caps that specify the recommended type of fuel, Woods said. The Commerce Commission recommended this be a part of the Government’s legislative response, but Woods said officials were still trying to figure out whether there was enough reliable information about each vehicle to mandate such stickers.

“One of the big issues is what information is available to make sure that we’re putting the right sticker on the right car,” she said.

In response to criticism of the way in which discounts and loyalty schemes are used to offer better prices to some customers than others, the Government will monitor this practice and give itself the power to mandate discount prices are not advertised on price boards. If the situation worsens, Woods said, the Government will act on that power.

“What we want to be monitoring is that loyalty schemes and discounts aren’t actually getting in the way of fair, everyday pricing for consumers. The lure of so many cents off a litre of petrol is obviously something consumers are attracted by, but what we want to check on is that that’s not instead of having fair, competitive, everyday pricing for petrol.”

Stakeholders respond

The National Party was quick to respond to the Government’s announcement, launching into a familiar refrain on fuel excises. “Unlike petrol, talk is cheap and the Government’s fuel tax is the main reason why petrol prices are so high,” Paul Goldsmith, National’s finance spokesperson, said in a statement.

“After all of the chest beating from the Prime Minister on reducing costs, all we’ve got is some modest changes that won’t alter the reality that the Fleecer-in-Chief has always been Jacinda Ardern and the Labour, NZ First, Greens Government with its big fuel tax increases.”

National has said it will repeal the Auckland Regional Fuel Tax and commit to not raising fuel excises during its first term in office if it wins in September. However, despite criticising the present Government for raising fuel excises, National has refused to commit to repealing these excise hikes.

Woods hit back, saying that “the evidence just does not back up that statement. Fuel levies are actually there to pay for roads, they’re there to pay for our transport systems. This is something that is business as usual for any Government to be charging excise on fuel. National had nine years to look at what was driving what was often seen as too-high petrol prices for New Zealanders. They didn’t do it. To simply come back and say that it’s tax and excise that’s driving it ignores the evidence.”

“National raised petrol excise duty by 17 cents a litre, or 40 percent, over six increases during the time they were in Government.”

At around 50 percent of the price of petrol, New Zealand’s taxes on fuel are the sixth-lowest in the world, according to the AA.

Fuel companies were more positive about the changes. Z Energy’s Bennetts said the company “welcomes today’s announcement that the Government is acting quickly on the Commerce Commission’s recommendations”.

“As we have stated for some time, we believe that there are competition and consumer benefits to measures such as a terminal gate pricing regime and the display of premium fuel prices on all price boards. We look forward to working with stakeholders as required in the coming months to ensure a robust set of regulations and piece of legislation.”

After Thursday's announcement, Z shares on the NZX fell 3.6 percent to their second-lowest in five years, just 5 cents above where they fell after ComCom released its report in December.

BP New Zealand, which has consistently opposed the Commerce Commission’s regulatory moves, was more cautious.

“We will continue to provide information and context to Government and officials and participate in upcoming consultation. This will ensure what’s delivered leads to the right outcomes for consumers and the market,” the company’s managing director, Debi Boffa, said in a statement.

Dave Bodger, general manager of the independent importer Gull NZ, said he largely welcomed the announcement. “We’re very supportive of terminal gate pricing. It will open up wholesale competition which will open up retail competition,” he said.

However, Gull is opposed to the requirement to post premium prices on price boards. “We’ve been opposed to compulsory display of any price – it’s up to the individual site. You might want to write ‘meat pies’ up on your LED sign instead of writing ‘premium fuel'."

Nonetheless, Gull has begun putting premium pricing up on the boards of new sites and whenever there are major works. “It’s really expensive to retrofit and we want time to do that retrofit,” Bodger said.

Report found anti-competitive market

The Commerce Commission's December report found that many fuel companies were achieving a level of profitability that is "persistently higher than what we estimate a reasonable return would be in a workably competitive market”. In the Commission’s view, “the core problem is that an active wholesale market does not exist in New Zealand. This is weakening price competition in the retail market”.

An independent analysis submitted to the Commission by financial consultants Ireland, Wallace and Associates found the majors earned $469 million in excess profits in 2017.

The Commission identified several factors relating to profitability that it said pointed to a non-competitive market. The first, that the profit margin for importers has doubled since 2008, has been disputed by the majors in the past. They say the statistic is misleading, since 2008 saw historical lows in returns after a decade of price wars, but Commission chair Anna Rawlings told reporters in August that it's still a useful metric.

The 20 percent return on investment that fuel companies see is more than double the 6.9 to 8.6 percent that the Commission would expect in a competitive market. New retail sites are increasingly exceeding even the fuel companies’ expectations when it comes to profitability.

Margins are high as well, the Commission says. The Ministry of Business, Innovation and Employment estimates that importer margins are around 30 cents per litre and haven’t dropped below 25 cents since 2015. For diesel, MBIE estimates margins of just under 49 cents per litre.

Anti-consumer practices

In addition to a non-competitive wholesale market and overly-high profitability, the Commission highlighted several anti-consumer practices - including discounts or loyalty schemes, which the Commission said was “not a substitute for more generalised price competition”.

The Commission observed a correlation between high discounts and high board prices, possibly indicating that retail outlets increase the price of fuel when they offer particularly good discounts.

Code of conduct for supply contracts

The regulator found resellers like Waitomo and NPD find themselves locked into long-term and opaque contracts, which means they can’t see the prices that their competitors are paying and negotiate better deals for themselves. The length of these contracts, which can stretch beyond a decade, also poses problems, particularly when the contract forces the reseller to buy exclusively from a single supplier.

The Commission also observed “other disincentives to switch suppliers, including restrictive covenants and restraints of trade, requirements to pay liquidated damages upon switching suppliers, rights of first refusal and renewal clauses at the supplier’s option”.

In order to address this, the Commission asked the Government to regulate new contracts, making them transparent and removing onerous and exclusive provisions from them. Woods has pledged to do so.

Consumers to also see relief

The Commission's third tranche of recommendations dealt with the anti-consumer practices that retailers of all stripes engage in. The headline proposal, which the Government has promised to implement, is requiring retailers to post the price of premium fuels on price boards, a move that Z Energy has said it is already acting on.

The Commission found some consumers purchased premium fuel when their vehicles did not need it. Understanding the difference in price between premium and regular fuel and promoting competition between retailers on the price of premium fuel would be beneficial for consumers, the Commission said.

Another way to reduce unnecessary use of premium fuels would be to mandate the inclusion of stickers on car fuel caps stating what fuel the car needed. The Commission recommended that the Government introduce this regulation but Faafoi only said he would examine it.

When the Commission released its draft report in August, it took particular aim at discounts and loyalty schemes. After the report, Consumer NZ Head of Testing Paul Smith told TVNZ that “it would be better for every consumer to be offered the same price, a fair price, rather than expect consumers to jump through hoops and for some consumers to access quite large discounts while there are consumers who aren’t accessing such large discounts who are effectively cross-subsidising them”.

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