The Commerce Commission has released its final report into the retail fuel market and has recommended changes to stimulate competition and benefit consumers.
It found that fuel companies had been making higher profits over the last decade than it would expect in a workably competitive market, meaning that consumers were paying higher pump prices than could be expected according to commission chair Anna Rawlings.
Profitability indicators showed that import margins more than doubled over the past decade, fuel company returns were double the commission’s estimate of a reasonable return, and some new retail sites were paid off unusually fast.
The study indicates the market is not working as well as it could for consumers. The regional differences in retail fuel prices reflect 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 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,” says Rawlings.
“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.”
Positive industry developments include fuel company innovations such as pay at the pump technology, 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.
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,” says Rawlings.
It also recommends regulating wholesale supply contracts to allow greater contractual freedom for resellers to compare offers and switch suppliers by:
- Requiring clear and concise language and transparent pricing
- Limiting the use of long term and exclusive supply contracts
- Assessing the use of other potentially restrictive contract terms.
These two recommendations would be implemented via an enforceable Industry Code of Conduct.
To improve competition in retail markets, the commission has made several recommendations to help consumers make more informed purchasing decisions. These include regulations to require retailers to display premium fuel prices on price boards and fuel cap stickers to help consumers understand what grade of fuel their vehicle requires.
It also recommends improving information and record keeping about the fuel market for future analysis, as well as encouraging major fuel companies with shared infrastructure arrangements to:
- Publish the criteria and the process for participation in the arrangements
- Review aspects of the arrangements that may dis-incentivise investment in shared storage
- Review information sharing about the arrangements to reduce the potential for coordination.
