Is NZ’s watchdog really going to set price of fuel?
Energy Minister Megan Woods appeared to rev up the engines on another major intervention in the fuel market yesterday when she announced the Government had agreed to give the Commerce Commission the right ‘‘to step in and set fair prices if needed’’.
But the country’s largest petrol company is not up in arms. Z Energy chief executive Mike Bennetts said the ‘‘backstop’’ power to set wholesale prices for fuel had been on the cards since the commission concluded its fuel market study in 2019 and was the last of its recommendations to be put in place.
It may be worth recapping the events that led up to yesterday’s announcement. In its final report into the fuel industry, the Commerce Commission recommended that petrol importers – currently Z, BP, Mobil, Gull and Tasman Fuels – be required to advertise a daily price at which they would sell petrol to rival retailers who turned up at their terminals with a tanker to collect it. That ‘‘terminal gate pricing’’ (TGP) regime was put in place by the Government in August last year to try to ensure a more competitive wholesale market it believed would flow through to prices at the pump. But petrol importers have been able to set those terminal gate prices for petrol however they see fit.
The commission cautioned in its 2019 report that as petrol importers would be able to see the prices other importers were charging, there was a risk they might all end up settling on a high price that did not really help competition in the market.
So it also recommended that the Government develop a ‘‘backstop regime’’ that would come into force if terminal gate pricing did not result in competitive wholesale prices.
In early 2020, Cabinet instructed the Ministry of Business, Innovation and
Employment (MBIE) to develop a backstop regime ‘‘to be implemented at a future point’’, also saying it had decided the implementation of that regime would be ‘‘deferred’’.
And it is this piece of work that seems to have finally made it to the top of the ministry’s ‘‘to do’’ list. A law change will give the commission the power to dictate the TGP for any of the importers from the middle of next year ‘‘if excessive terminal gate prices are found to be offered’’.
Gull chief executive David Bodger appeared to sum up the phlegmatic mood of petrol firms when he admitted he had ‘‘forgotten about this part of the regulation’’. As both a buyer and seller of fuel on the wholesale market, Gull sees the market from both sides. Bodger said the existing TGP regime had made a big difference to competition in the industry by forcing the majors to supply fuel. ‘‘We are now operating six sites in the South Island and we could not have done that without that law.’’ But Gull
had never bought or sold fuel at a terminal gate price, he said, as it had contracts that used the price in Singapore as their reference point.
Energy Resources Aotearoa, which lobbies in the energy sector, sees a danger in wholesale price controls, warning they could prove ‘‘a red flag for any international firm weighing up whether to enter New Zealand’’. ‘‘Today it is fuel companies, who is next?’’ it said.
But Z’s Bennetts sees no real prospect of the commission using the power.
‘‘I think it is very unlikely it would come into effect because the market is functioning very well,’’ he said. ‘‘We are required to provide our margins and our profitability to the Commerce Commission on a regular basis. There is no other industry in New Zealand that reports its margins and profitability with the regularity that the fuel industry does,’’ he said.
As noted by Woods, price monitoring by MBIE does suggest there has been a slight decrease in fuel companies’ profit margins since 2020, despite a seemingly bizarre, short-lived spike in July that prompted her to write to fuel companies demanding action.
Importer margins, out of which petrol companies need to pay their retail and distribution costs and fund their profits, currently sit at about 28 cents a litre for 91 octane, 37c/litre for diesel and 40c/litre for 95 octane. Bennetts said that was despite the fact it sold about
10% less fuel in the year to June than it did in 2019.
In other words, based on MBIE’s figures, margins are below the level that applied when the Government decided to ‘‘defer’’ implementing a backstop for the terminal gate pricing regime in 2020, which suggests any intervention on wholesale pricing is unlikely to be imminent. Another clue may be that Woods announced the work on the backstop only after outlining two other measures about which petrol companies appear more animated. One means fuel companies will be given an extra year before needing to blend biofuels into their fuels, to reduce overall carbon emissions.
Bodger said the Government’s original deadline of April next year was not practical given the regulations had yet to be finalised.
But what may have been high in the Government’s mind is an estimate by Energy Resources Aotearoa that the biofuels mandate would add 6-10 cents a litre to the price of diesel.
There was a mixed response to Woods’ announcement that the five fuel importers would need to foot the bill to store 28, 24 and 21 days’ worth of petrol, jet fuel and diesel, respectively, in New Zealand, but that the Government would pick up the tab for storing another seven days’ worth of diesel. Bennetts said Z could already meet that requirement.
But Bodger queried whether the extra reserves were needed to ensure security of supply.
All up, Woods’ decisions look like fairly unremarkable compromises.