New Zealand Law Society - Commission recommends changes to fuel market

Commission recommends changes to fuel market

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The Commerce Commission has released its final report into the retail fuel market and has recommended changes to stimulate competition and benefit consumers.

“As a result of our study, we consider many fuel companies have been making persistently higher profits over the past decade than we would expect in a workably competitive market. For consumers, this means they are paying higher pump prices than could be expected,” says Commission Chair Anna Rawlings.

The Commission says it used a range of indicators to assess the profitability of fuel companies. This includes import margins more than doubling over the past decade, fuel company returns double the Commission’s estimate of a reasonable return, some new retail sites being paid off unusually fast, and fuel companies market values being significantly higher than their physical costs to build.

“There are indications that returns have peaked and are stable. However, profitability is expected to remain high for some time and we are not convinced that the industry’s experience of excess returns has come to an end under current policy settings,” Ms Rawlings says.

The Government responded quickly to the market study, saying it has accepted the Commission's findings and will make changes to the fuel market in response by introducing legislation.

The Commission also made other observations during its study which indicate the market is not working as well as it could for consumers. These include:

*    Regional differences in retail fuel prices reflecting the level of local competition 

*    Discounting and loyalty schemes being used to avoid direct competition on board prices, and

*    An increasing difference between regular and premium petrol margins which are not all explained by cost differences.

The core problem

The Commission believes the core problem is that an active wholesale market for fuel does not exist in New Zealand. 

“The major fuel companies, Z Energy, BP and Mobil, share a joint infrastructure network which includes the Marsden Point refinery, coastal shipping operations and storage terminals at regional ports. They use this network to supply 90% of the nation’s fuel through their own branded retail sites or via other distributors or resellers via exclusive long-term wholesale supply contracts. The only other fuel importer is Gull, with a terminal in Mt Maunganui,” Ms Rawlings says. 

“The combination of infrastructure sharing and restrictive supply relationships gives the major fuel companies an advantage. There is a reduced ability for importers to compete for customers of the majors and for distributors and dealers to obtain competitive wholesale supply terms.” 

The Commission acknowledges there are some positive industry developments underway. These include fuel company innovations like pay at the pump technology benefiting consumers, the establishment of Timaru Oil Services new import terminal in Timaru, expansion by Gull and resellers including Waitomo and NPD, and the electrification of vehicles. 

“While these developments could improve outcomes for consumers over the long-term, they do not address the core problem we have identified with the wholesale market.” 

The Commission has made a series of interdependent recommendations to improve competition, mainly targeted at creating an effective wholesale market.

The Commission recommends introducing a Terminal Gate Pricing Regime, based on the Australian equivalent. This requires all importers to offer a spot price at which they will sell fuel to wholesale customers at storage terminals. 

“We consider this regime will improve competition by creating the potential for a liquid spot wholesale market to develop, lower barriers to entry and expansion for rivals, provide greater price transparency for wholesale customers, and provide competitive benchmark information for industry and government.”