Is the country's competition watchdog really going to set the price of petrol?

Wednesday, 9 November 2022

Energy and Resources Minister Megan Woods announces new rules for petrol prices, storage and biofuels. Video first published November 9, 2022.

ANALYSIS: Energy Minister Megan Woods appeared to rev up the engines on another major intervention in the fuel market on Wednesday 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 isn’t 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 market study into the industry in 2019 and was simply the last of its recommendations to be put in place.

“We fully expected this. It is the last piece of the puzzle so to speak, so no surprises here from our perspective.”

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The backstop power could be applied to five petrol importers.

It may be worth recapping the events that led up to Wednesday’s announcement.

In its final report into the fuel industry, the Commerce Commission recommended that the country’s petrol importers, currently Z, BP, Mobil, Gull and TasmanFuels, should 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” regime was put into place by the Government in August last year to try to ensure a more competitive wholesale market, that it believed would flow through to prices at the pump.

But the petrol importers have been able to set those terminal gate prices for petrol however they see fit.

The Commerce Commission cautioned in its 2019 report that as petrol importers would be able to see the prices other importers were charging by looking at the terminal gate prices on their websites, there was a risk that they might all end up settling on a high price that didn’t really help competition in the market.

So it also recommended the Government should develop a “backstop regime” that would come into force if terminal gate pricing didn’t result in competitive wholesale prices in a reasonable period of time.

Responding to the commission's market study 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 on Wednesday.

A law change will give the Commerce Commission the power to dictate the terminal gate price 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”.

The Commerce Commission is about to get new powers, but there seems to be little expectation it will use them.

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 couldn't have done that without that law.”

But ironically Gull had never bought or sold fuel at an actual terminal gate price, he said, as it purchased fuel under contracts that used the price in Singapore as their reference point.

“Whether there's a need for this extra legislation, I don't know.”

Energy Resources Aotearoa, which lobbies on behalf of some firms in the energy sector, sees a danger in the precedent for wholesale price controls, warning they could prove “a red flag for any international firm weighing up whether to enter New Zealand”.

“Today it’s fuel companies, who’s next?,” it said.

But Z’s Bennetts appeared to see no real prospect of the Commerce Commission actually using its soon-to-be-granted power.

Energy Minister Megan Woods said fuel margins had fallen, at the same time as finishing the job on ComCom’s 2019 fuel market study.

“I think it's 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 all their retail and distribution costs and fund all their profits, currently sit at about 28 cents a litre for ‘91’, 37c/litre for diesel and 40c/litre for ‘95’.

Bennetts said that was despite the fact it sold about 10% less fuel in the year to June than it did in 2019, before the Covid pandemic.

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 on Wednesday about which petrol companies appear more animated.

One means fuel companies will be given an extra year before needing to comply with a regulation that will require them 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.

BP also welcomed the delay, saying it couldn’t finalise the investments it would need to make to meet the biofuel mandate in advance of legislation being agreed.

But what may have been high in the Government’s mind is an estimate by Energy Resources Aotearoa that the biofuels mandate would add between 6 and 10 cents a litre to the already spiking 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 itself pick up the tab for storing another seven days’ worth of diesel.

Bennetts said Z, which has the country’s largest storage facilities, could already meet that requirement.

But Bodger said it could require further investment by Gull and queried whether the extra reserves were needed to ensure security of supply.

“I’ve got 40 to 45 million litres of refined fuel on a boat somewhere near Noumea coming to Tauranga as I speak,” he said.

“I must receive it as I’m contracted to do that and so must the other party, so it's as good as here. Why do we actually have to have it here as well as that?”

But Buddle Findlay special counsel Bassam Maghzal has previously voiced concern the mandated reserves might not be sufficient to see the country through a supply chain crisis given “where we sit in the global supply pecking order”.

All up, Woods’ decisions – particularly to pick up the bill for storing those extra 70 million litres of diesel – look like fairly unremarkable compromises between calls for the Government to do more, and less.