On Tuesday, the New Zealand Commerce Commission (Commission) released its much anticipated draft market studies report into the retail fuel sector. The report outlined the Commission's preliminary view that the retail fuel market is "not as competitive as it could be", with its preliminary view being that:
(a) there is an absence of an "active" wholesale market for fuel in New Zealand, with wholesale pricing (and consequent retail prices) higher than the Commission would expect in a competitive market; and
(b) there are difficulties faced by new fuel importers entering the New Zealand market, especially in accessing infrastructure owned and operated by the three 'majors'.
Although many of the preliminary findings will no doubt be contested by industry participants, the draft report is of broader interest for other industries. Just as the Commission's "input methodologies"1 process became the Commission's blueprint for assessment of the appropriate profitability in regulated industries, it is likely the methods and approach adopted in the retail fuel report will be a blueprint for the assessment of whether other industries, that are the subject of market studies in the future, meet the "workable competition" standard.
The Commission's draft report pointed to the following characteristics as indicative of sub-optimal competition in the retail fuel markets:
- the returns of industry participants being higher than the Commission's estimates of their weighted average cost of capital (WACC). In reaching this conclusion, the Commission has effectively imported its "input methodology" approach (which deals with regulated, typically "monopoly", markets such as airports, electricity distribution, etc) into its market studies framework;
- the joint ownership and operation of infrastructure by major competitors in the industry;
- a prevalence of loyalty programs and discount schemes (which the Commission said are used in preference for competition to lower everyday prices);
- the absence of a spot market or active wholesale market for wholesale fuel supply; and
- the vertical integration of major industry participants.
These characteristics are hardly unique to the retail fuel industry - many are replicated in numerous sectors throughout the New Zealand economy. It may be that, given the small size of New Zealand's economy and the significant geographic distance between us and many of our largest trading partners, higher levels of concentration and cooperation are necessary in order for New Zealand businesses to realise the efficiencies required to operate profitably. This may be important to attract and retain investment in this far-flung corner of the world. Whether this is the case, and the extent to which that dynamic gives rise to wider benefits to the public, are of course policy questions appropriately considered by the government of the day in light of the Commission's final report.
The Commission's (over 400 page) full draft report is available here. Alongside that full report, an Executive Summary and accompanying infographic were also published by the Commission on Tuesday. After a period of consultation, the final report will be published and presented to Government on 5 December 2019.
If you have any questions about this report, or how a future Commission market study in your industry could affect your business, please contact Sarah Keene, Troy Pilkington or Craig Shrive.