Geography, sources of profit among issues for fuel inquiry
WELLINGTON: The Commerce Commission says its assessment of competition in the retail fuel industry will include whether some geographies or parts of the business are more profitable than others.
The regulator says persistently high prices and excess returns at an industry level may be a sign that competition is not effective. But even where it is, some firms may achieve abovenormal profits if they offer superior products or are better at controlling costs.
It says it will need to consider the source of any high profits being made and their impact on the prices paid by retail consumers. It noted that fuel is a ‘‘significant’’ purchase for households, with an average spend of about $1500 per car a year.
‘‘High levels of profitability at one level of the supply chain — e.g., the wholesale level, or one area — e.g., the South Island, may suggest the factors affecting competition are more significant in that level or area,’’ the commission said in a paper setting out its approach.
The market study is the first the commission is undertaking under new powers granted by the Government last year.
The Government’s move was a direct response to a 2017 study led by the Ministry of Business, Innovation and Employment that found pricing in some parts of the country might not be reasonable.
Among issues highlighted was the major firms’ control of most of the fuel storage around the country and independent retailer Gull’s complaints that its efforts to gain access to some of that on commercial terms had been rebuffed out of hand.
Fuel prices then became a political football last year as rising crude oil prices and a weak New Zealand dollar contributed to record pump prices. That also highlighted the growing price disparity between areas where Gull operates and where it does not — Wellington and the South Island.
Earlier this month, Gull announced plans to open six outlets in the South Island over the next two years, after securing access to a fuel terminal being built at Timaru. Fellow discount fuel retailer Waitomo plans to open its first South Island outlet in Christchurch this year.
The commission says profitability and prices will be an important part of its work. It wants to understand how suppliers’ returns compare with those of other local companies, international suppliers and firms’ own cost of capital.
It also wants to understand how and why prices and margins vary around the country, how input costs are passed through to consumers, and whether that has changed over time.
Other factors affecting competition — such as industry structure, existing infrastructuresharing agreements among the major players, and wholesale fuel supply terms will also be considered.
The commission says it also needs to understand consumer behaviour and firms’ pricing strategies.
‘‘Why do retailers use selective price discounting, loyalty and bundling strategies, and how do consumers respond to these?
‘‘Why has discounting increased, and why have importer margins risen at the same time?‘‘
The commission acknowledged the need to consider industry returns over time.
It noted that retail fuel prices had been relatively high before Gull and Challenge entered the market in 1998. Low margins in the 2000s led to a decline in infrastructure investment and the departure of Shell. By 2017 pretax fuel prices were among the highest in the OECD and higher than in many Pacific Island states, it noted.
‘‘In recent years there has been a growing number of new retail sites, retailers, and increased investment in the industry — this entry and expansion may reduce future profitability.’’
The commission plans to consider gross margins and returns on capital employed, but will also review expected returns and cashflows from more recent investments to better understand actual returns and replacement costs in the industry.
It noted that many fuel firms’ activities extended beyond retail petrol and diesel sales the market study focused on. Accordingly, their systems might not provide the level of accounting detail preferred.
It plans to rely on existing information where it can. It believes the differing size and scope of the different firms can be catered for, given it aims to assess the profitability of the widest range of players as possible and is not relying on a single approach to do that.
It will also seek to estimate returns over the long term, ‘‘having regard to the availability of data and being mindful of the costs to firms from sourcing data over long periods of time.
‘‘Engagement with NZ fuel firms indicates that there are practical and cost limitations on their ability to supply data over extended historic time periods.’’ — BusinessDesk