Petrol could fall 18c a litre if fuel retailers forced to show price

Thursday, 5 December 2019

Petrol prices could be slashed by 18 cents a litre when new laws are passed to increase competition and force retailers to display prices at the pump, Commerce and Consumer Affairs Minister Kris Faafoi says. 

The Government has said it is ready to act swiftly on a Commerce Commission study on the fuel market and its competitiveness. 

The Government wanted prices to come down as 'fast as possible', but was looking at introducing a law early next year and passing it by the middle of 2020, Faafoi said.

As expected, the commission recommended 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'.

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It also recommended requiring fuel importers to make their wholesale petrol prices more transparent by advertising a spot price at which they would sell fuel to other retailers from their terminals. 

Commerce Commission chairman Anna Rawlings would not be drawn on how much she thought the price of petrol might fall.

'We are not required to determine exactly how much consumers ought to be paying for fuel at different locations across the country or how much how profit fuel companies ought to be earning precisely at any particular point in time,' she said.

'We would expect there to be some variation in price and profitability even in a workably competitive market.'

But ​Faafoi said the best price gauge for consumers was what was already happening where there was increased competition – prices dropped by 18 cent a litre and in some places 32 cent a litre.

'I think we have got a lot of other players that are keen. The way the market has been set up was probably a barrier for them to expand and this is what we are looking to change.'

He had written to fuel companies to suggest they move now on displaying premium brand petrol prices on forecourt display boards, before regulation comes in.

AA spokesman Mark Stockdale said about 20 per cent of petrol sold was premium. Because stations did not always advertise 95 or 98 octane prices in the same way they did 91 octane or diesel, people were often paying much higher prices for premium than they should be.

In some cases, premium was selling 40c to 50c a litre higher than 91 octane, which Stockdale said was 'outrageous'.

If the Government acted on the recommendations, 'this change will absolutely improve competition', he said.

'And in the meantime, AA calls on the companies to voluntarily start doing this where they can … They don't need to wait for regulation.'

The study's other major recommendation is requiring the petrol majors – Z, BP and Mobil – to reveal a price at which they will sell fuel on a spot market to independent retailers, the so-called 'terminal gate pricing'.

Stockdale said this was already in place in other countries including Australia, and was bound to increase competition.

Dave Bodger, of independent retailer Gull, said his company had been calling for terminal gate pricing for years.

'We've got to see how it goes through regulation and it's with a lot of caution [that I welcome regulation] … but it will open up competition.' 

Greater competition at wholesale level would help Gull, which imports its own fuel but has been restricted to areas close to its only terminal. 

But Bodger said it could also lower petrol prices for consumers. Wherever Gull had lowered prices against the big players, they had lowered prices to match.

BP responded to the report by saying it needed to read it more fully, but managing director Debi Boffa said the company would work with the Government 'to progress next steps in the interests of consumers and the market'.

CONSUMERS PAYING HIGHER PRICES

Rawlings said the study showed 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,' she said.

Import margins had more than doubled over the past decade, fuel company returns were double the commission's estimate of a reasonable return, some new retail sites were being paid off unusually fast, and fuel companies market values were significantly higher than their physical costs to build, the commission said.

'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.'

The commission said there were other signs the market was not working as well as it could for consumers.

'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 per cent 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,' Rawlings said. 

'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.' 

Terminal-gate pricing would improve competition by creating the potential for a liquid spot wholesale market to develop, Rawlings said.

Retailers would be able to buy fuel from any terminal, she said.

It would 'lower barriers to entry and expansion for rivals, provide greater price transparency for wholesale customers, and provide competitive benchmark information for industry and government,' she said.

Rawlings agreed there was a risk terminal gate pricing could help oil majors coordinate their prices, but said the benefits outweighed that risk.

The commission also recommended regulating wholesale supply contracts to allow greater contractual freedom for resellers to compare offers and switch suppliers, including limiting the use of long term and exclusive supply contracts and 'assessing the use of other potentially restrictive contract terms'.

It will be up to the Government to decide whether to implement the commission's recommendations, but Rawlings believed some could be implemented voluntarily by the petrol companies.

Prime Minister Jacinda Ardern said in August that the competition watchdog's draft market study showed that motorists were being fleeced at the pump.

But BP and Z Energy strongly disputed the commission's preliminary findings that they had made 'excess returns' for most of the past 10 years.

Z Energy said last month that an 80 per cent drop in its interim profit for the six months to September, to $28 million, showed competition was 'unprecedented'.

BP reported a 26 per cent fall in its annual profit to $179m last year.

The commission has been pressed by the AA not just to improve competition in the fuel market, but also to tell motorists how much it thought the price of fuel should fall as a result of its proposals. 

National's transport spokesman Chris Bishop welcomed suggestions to improve competition in the fuel market.

'But unlike petrol, talk is cheap and the Government is a big part of the reason why petrol prices are so high.

'If elected in 2020, National will repeal the Auckland Regional Fuel Tax and we won't increase fuel taxes in our first term.'

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