Claims of excess returns challenged

WELLINGTON: Z Energy, BP and Waitomo Group have challenged the Commerce Commission’s claims that a lack of competition in the fuel sector is delivering participants excess returns.

Z Energy, the country’s biggest fuel retailer, said it had discovered a number of inaccuracies in the commission’s draft findings on profitability, including a misrepresentation of Z’s 201618 rate of return as about 22%, about double Z’s independently reviewed calculations of about 11%, chief executive Mike Bennetts said.

The study had also used the wrong number of shares the company had on issue, inflating its market value by $181.5 million, had ignored $158 million of goodwill recorded at the time Z bought the Caltex fuel distribution business from Chevron NZ, used the wrong concept for assessing depreciation, and a deferred tax liability had been accounted for in a way unsupported by the relevant literature, according to a report Z commissioned from Victoriabased consultancy Incenta.

The company said in its 39page submission it had concerns about the ‘‘light touch’’ approach the commission had taken and the messages that might send to interested parties and the public.

‘‘Multiple shorthand approaches do not verify a concrete overall view — i.e. that firms are earning persistently high profits, justifying action,’’ the submission said.

The commission’s draft report last month said fuel retailers’ average returns had consistently exceeded the regulator’s estimate of their weighted average cost of capital since Shell sold its local business in 2010.

At that rate they could be earning close to $400 million a year in excess returns.

It found all the players were earning at least twice the 8.6% return it estimated as the upper bound for the industry’s weighted average cost of capital.

Gull was the highest, about 28%, followed by a grouping of Waitomo, NPD and GAS at almost 25%, and Z Energy at almost 23%. Mobil and BP came in at close to 20% and 18% respectively.

Discount provider Waitomo, one of the fastestgrowing independent chains, requested greater clarity as to how the commission derived its figures which it said ‘‘do not reflect’’ the company’s earnings.

BP, the country’s secondlargest fuel retailer, was blunt.

Fuel retailers had not made ‘‘excess profits’’ over time.

The sector had experienced both high margins and unsustainably low margins, and the recent high margins were attracting new entrants just as they had in the late 1990s.

‘‘The substantial — and ongoing — growth of independent retail chains, and therefore the growth of overall retail capacity in a flat to declining market, is the strongest possible indicator of strong competition at both the wholesale and retail levels,’’ BP said in its 43page submission.

The commission’s market study is the first under new powers the regulator was granted last year.

The Government wanted the $10 billionayear retail fuel industry investigated further after a 2017 study led by the Ministry of Business, Innovation and Employment found fuel pricing in some parts of the country may not be reasonable. — BusinessDesk

❛ Multiple shorthand

approaches do not verify a concrete overall view — i.e. that firms are earning persistently

high profits