UPDATE: Z, BP, Waitomo challenge ComCom claims on excess returns
(Adds comment from BP, Mobil, Waitomo throughout.)
By Gavin Evans
Sept. 16 – Z Energy, BP and Waitomo Group have challenged the Commerce Commission’s claims that a lack of competition in
the fuel sector is delivering participants excess returns.
Z Energy, the country’s biggest fuel retailer, says it has discovered a number of inaccuracies in the commission’s draft
findings on profitability, including a misrepresentation of Z’s 2016-2018 rate of return as about 22 percent, about
double Z’s independently reviewed calculations of about 11 percent, chief executive Mike Bennetts said.
The study had also used the wrong number of shares the company had on issue, inflating its market value by $181.5
million, had ignored $158 million of goodwill booked at the time Z bought the Caltex fuel distribution business from
Chevron NZ, used the wrong concept for assessing depreciation, and a deferred tax liability had been accounted for in a
way unsupported by the relevant literature, according to a report Z commissioned from Victoria-based consultancy
Setting aside the “material errors” in various parts of the analysis, Z said it has concerns about the “light touch”
approach the commission had taken and the messages that might send to interested parties and the public.
“Multiple short-hand approaches do not verify a concrete overall view - i.e. that firms are earning persistently high
profits, justifying action,” the company said in its 39-page submission.
“Nor is it sufficient for the draft report to acknowledge the uncertainty inherent in its analysis of profitability.
Regardless of any disclaimers, the analysis colours the findings in the draft and is used to justify recommendations.”
The commission’s draft report last month said fuel retailers’ average returns had consistently exceeded the regulator’s
estimate of their weighted average cost of capital since Shell sold its local business in 2010. At that rate they could
be earning close to $400 million a year in excess returns.
It found all the players were earning at least twice the 8.6 percent return it estimated as the upper bound for the
industry’s weighted average cost of capital. Gull was the highest at about 28 percent, followed by a grouping of
Waitomo, NPD and GAS at almost 25 percent, and Z Energy at almost 23 percent. Mobil and BP came in at close to 20
percent and 18 percent respectively.
Discount provider Waitomo, one of the fastest-growing independent chains, requested greater clarity as to how the
commission derived its figures which it said “do not reflect” the company’s earnings.
It said any analysis of the group’s returns needs to consider both its retail and commercial fuel activities and it is
“both unfair and misleading” not to consider the group as a whole.
BP, the country’s second-largest fuel retailer was blunt.
Fuel retailers had not made “excess profits” over time. The sector had experienced both high margins and unsustainably
low margins, and the recent high margins were attracting new entrants just as they had in the late 1990s.
“The substantial - and ongoing - growth of independent retail chains, and therefore the growth of overall retail
capacity in a flat to declining market, is the strongest possible indicator of strong competition at both the wholesale
and retail levels,” BP said in its 43-page submission.
“No amount of theory can undermine the fact that commercial firms are making these investments and expanding, which is
precisely what you would expect in a workably competitive market.
“The contrary findings in the draft report are based on material factual inaccuracies and conclusions that cannot be
supported by the facts as presented. In particular, the factual matrix and reasoning relating to the operation of the
supply chain, the impact of entry and expansion in retail markets and profitability have fundamental flaws.”
The commission’s market study is the first under new powers the regulator was granted last year. The government wanted
the $10 billion a year retail fuel industry investigated further after a 2017 study led by the Ministry of Business,
Innovation and Employment found fuel pricing in some parts of the country may not be reasonable.
The commission proposed a number of measures intended to increase competition in the wholesale fuels market by removing
restrictive provisions from term fuel contracts and encouraging more switching of supply.
It also wants to provide access to infrastructure controlled by the three major firms – Z, BP and Mobil - and was keen
to see owners of new storage facilities – like Gull and Timaru Oil Services – be able to join the national
borrow-and-loan scheme that provides the majors access to fuel across the country while avoiding duplication.
Several firms, including Z, Mobil and Gull, endorsed the suggestion of adopting terminal gate pricing – as is required
of suppliers in Australia – in order to provide transparent wholesale fuel prices around the country. Z Energy suggested
transforming the Marsden Point oil refinery into a merchant operation would allay some of the commission's concerns and
could also deliver further efficiencies for the industry.
Shares in Refining NZ were unchanged at $2.10. Z shares fell 0.9 percent to $5.48.
Mobil – which also supplies independent retailers Waitomo, NPD and Allied – pushed back on the commission’s call for
shorter-term wholesale contracts. It said firms should be able to negotiate terms to reflect their needs, noting that
shorter terms could make it harder for those retailers to compete in the commercial fuel market.
Waitomo said it believed some of the majors are making bigger margins on sales to resellers like itself than they do on
contracts with similar-sized commercial clients. It would like greater choice.
BP and Mobil both questioned how independent operators could practically participate in the borrow-and-loan regime if
they were not equity partners or had assets throughout the supply chain.
And BP also challenged the commission’s belief that “coordination events” – rationing of supplies among users when
supplies at regional terminals are tight – shows that the majors are choosing to under-invest in storage capacity.
It noted that trucking fuel is highly efficient and that Gull and newcomer Timaru Oil Services could not operate from
their respective single terminals were it not.
BP says that – prior to deregulation of the industry in 1988 – there was an oversupply of fuel storage, which rising
demand has only recently caught up with.
While firms have invested in new capacity in recent years, expanding storage at a port like Nelson would cost roughly
four-times as much a year as the current trucking arrangements by all firms, it said.
Nor is BP’s overall level of storage an obstacle to its ongoing competitiveness.
“BPNZ could readily take on supply of a new distributor using its current capacity,” it said.
“Indeed, if BPNZ were to ‘start from scratch’ in building its network, it would operate from a much smaller number of
terminals and make more use of trucking.”
The commission is expected to undertake one market study annually. Housing Minister Megan Woods has indicated she would
like competitiveness of the building supplies sector to be the next subject of the next study.
Business New Zealand told the commission it agreed on the importance that fuel prices and profitability in the sector
reflect normal rates of return over time.
But, noting the potential precedent-setting nature of the study, it warned of the potential risk in the commission
assessing an “appropriate” rate of return for businesses operating in contestable markets.
It was also concerned that the regulator hadn’t conducted any form of cost-benefit analysis of the options being
“We wonder how the Commerce Commission can assess or even rank the efficacy of its recommended options without
completing at the least a high-level initial cost-benefit analysis. Without this, we believe that the entire process,
including the public policy-making element will become highly problematic.”