fuel industry competition in australia

Fuel industry competition in Australia

Dr Martyn Taylor

Partner

September 2016

Overview

Fuel Industry Competition in Australia ‒ Dr Martyn Taylor2

Regulation of fuel markets in Australia Historic context

Current regulatory framework

Generic competition law Unilateral conduct - case study

Concerted conduct - case study

Merger review - case study

Sectoral industry regulation Price monitoring regime

The Oilcode

Lessons from Australia Insights from the Australian experience

Regulation of fuel markets in Australia

Historic context to Australian fuel market regulation


Price control

(1939-1973)

Price surveillance

(1973-1998)

Price monitoring

(1998-present)

• The Commonwealth Government intervened from the start of WWII, initially via

price controls, but later by taking control of Australian fuel distribution.

• From 1948, fuel industry regulation passed to the States, who enacted price control

regimes. State-based price controls started to reduce from around 1973.

• In reforms commencing in 1973, regulation was progressively

consolidated at the federal level under a price surveillance regime.

• Price surveillance generally involved taking proactive steps to

avoid excessive pricing, normally via a wholesale price cap.

.• From 1998, Australia deregulated fuel prices and

implemented a price monitoring regime.

• Price monitoring seeks to identify if prices are

excessive; then, if so, the key causes and

whether such causes can be addressed.

Generic competition law Sectoral industry regulation

• Viewed as the minimal level of regulation to

ensure competition occurs so that markets

operate effectively.

• Applies on a uniform basis to regulate the

creation and use of market power in all

markets in the economy.

• Tripartite structure – directed at the

unilateral conduct of firms, the concerted

actions of multiple firms, and the creation of

market power by acquisition.

• Enforced by the Australian Competition and

Consumer Commission (ACCC).

• Viewed as additional ‘bespoke’ regulation

where required to address particular market

failures or societal concerns.

• Australia now implements sectoral regulation

by a price monitoring regime.

• If concerns are identified in price monitoring

and a regulatory solution is practicable,

steps can be taken to implement this.

• The ‘Oilcode’ was promulgated in Australia in

2006 to address particular concerns arising

in relation to price transparency and

reasonableness of fuel franchise terms.

Current regulatory framework in Australia


Generic competition law

All competition laws have a common tripartite structure…

7 Fuel Industry Competition in Australia ‒ Dr Martyn Taylor

Competition

regulation

Merger control

• Misuse of substantial market power

• Unconscionable conduct

• Price fixing and bid-rigging

• Territorial allocation

• Price signalling

• Restrictive provisions in contracts

• Mergers and acquisitions that

substantially lessening competition

Multi-firm

(concerted)

conduct

Vertical

conduct

Horizontal

conduct

• Exclusive dealing

• Exclusionary provisions

• Boycotts of customers or suppliers

• Resale price maintenance

Single firm (unilateral)

conduct

Objective of competition laws What are the fuel markets ?

Competition laws apply through the prism of a market…


• To “enhance the welfare of [Australians]

through the promotion of competition”.

• Economics 101 – in the absence of

competition, firms will have market power

and can raise prices and restrict output to

maximise profits to the detriment of society,

• Firms with market power should not use that

market power to harm the competitive

process and thereby increase market power.

• Firms should not co-ordinate their behaviour

to increase their market power (whether by

understanding, contract, or acquisition)

• Competition law defines the relevant

markets to identify the existence or potential

existence of market power.

• Markets have product, geographic,

functional and temporal dimensions.

• In the fuel industry, the fuel markets are

defined with regard to particular fuel

products, geographic transport costs, and

whether supply is wholesale or retail.

• Competition law then identifies the features

of the market that determine the level of

competition, including barriers to entry.

The theory… … and the practice

Competition law – unilateral conduct


• Firms with substantial market power must

not take advantage of that power with the

purpose of harming competitors (s46).

• Generally, section 46 targets firms with a

high market share or that control a critical

facility that is essential to competition.

• Firms in this position must seek to act in a

way that is consistent with a competitive

market (i.e., not ‘take advantage’ of the lack

of competition to harm their competitors).

• Competition by its nature harms

competitors, so dividing line is often unclear.

• ACCC has often been unsuccessful in its

attempts to enforce s46 in Australia.

• ACCC’s lack of success has, ultimately, lead

to reforms currently proposed to make s46

more severe in its application.

• The risk of a costly ACCC investigation can

itself provide an effective deterrent. Costs

of complying with statutory information

gathering notices can be very high indeed.

• ACCC has made increasing use of

‘unconscionable conduct’ claims to target

unilateral conduct (eg supermarkets).

Case study – denial of access to critical infrastructure

• While the fuel sector has largely escaped ACCC

prosecutions for misuse of market power, it has not

avoided ACCC investigations.

• A key risk factor for larger participants is the extent

of vertical integration in the fuel supply chain.

• A vertically integrated fuel supplier may compete in

downstream markets with its customers. Concerns

arise if that supplier takes actions in upstream

markets that disadvantage its customers where

they compete downstream with its retail business.

• For example, a firm may control a critical oil tank or

pipeline that is necessary for the distribution of fuel

and may provide more favourable access to that

tank or pipeline to its own business.

10 Fuel Industry Competition in Australia ‒ Dr Martyn Taylor


Competition law – concerted conduct


• Price fixing, bid-rigging, market sharing and

collective boycotts are so reprehensible that

they should be illegal regardless of effect.

• For such ‘cartel conduct’, Australia can also

imprison individuals, but has not yet done so

(although the first such case is underway).

• Other co-ordinated behaviour should be

prohibited if is has the effect of substantially

lessening competition in market as a whole.

• Exceptions should be provided for conduct

that is net beneficial to society, including

certain JVs and where a net public benefit.

• ACCC has used its fuel price monitoring role

to identify particular concerns. These

concerns have often fallen into the

‘concerted conduct’ basket.

• Oligopolistic nature of many fuel markets

means that allegations of co-ordinated

behaviour will attract ACCC attention.

• ACCC has been active in relation to

investigations and enforcement action.

• However, dividing line between legitimate

behaviour and anti-competitive behaviour is

not always clear.

Bundling fuel with groceries?

Case study – concerns regarding forcing and bundling


• In July 2013, ACCC indicted that the

bundling of groceries with petrol via ‘shopper

docket’ petrol discounts was impeding

competition in the petrol industry.

• The two largest supermarket chains in

Australia subsequently provided binding

undertakings to the ACCC in relation to their

shopper docket discounts.

• Example of the ACCC using its powers of

investigation to extract a concession.

• The ACCC subsequently took enforcement

action against the supermarket chains

alleging a breach of the undertakings.

Data feed of competitor pricing?

Case study – concerns regarding price co-ordination


• An information exchange in Australia

enabled petrol retailers to have greater

transparency of the prices of their

competitors on a near real-time basis.

• ACCC concerned that this arrangement did

not necessarily lead to more informed

consumer choice, but rather created a

greater risk of price co-ordination between

petrol retailers, hence reducing competition.

• The matter was settled by undertakings to

the ACCC to the effect that a data feed

would be provided to customers as well as

competitors, facilitating customer choice.


Competition law - merger control regime


• Acquisitions of assets and shares should be

prohibited if they have the likely effect of

substantially lessening competition (i.e.,

confer materially greater market power).

• Less competition can arise by elimination of

competition between merging firms, so the

merged firm is less constrained.

• Less competition can arise if the market is

susceptible to price co-ordination and the

risk of such co-ordination is enhanced.

• Exceptions should be provided for

acquisitions that have a net public benefit.

• While most countries require all acquisitions

that exceed certain thresholds to be notified,

Australia has a voluntary notification regime.

• Some fuel markets in Australia have a high

level of market concentration, so will require

acquisitions to be notified to the ACCC.

• If concerns arise, Australia’s regime is

relatively flexible and fast by global

standards, allowing some scope for

solutions to be negotiated with the ACCC.

• Improvements are constantly being made to

the merger regime to improve its operation.

Case study –proposed acquisition of retail sites

Caltex Australia Ltd ‒ proposed acquisition of retail assets of Mobil Oil Australia Pty Ltd ‒ 2009

Market definition:

• Separate state-based markets for the production and sale of: petrol; diesel; and LPG.

• Separate state-based markets for the wholesale supply and distribution of: petrol; diesel; and automotive LPG.

• Separate metropolitan and local markets for the retail supply of: petrol & diesel; automotive LPG.

Review timeline: ~85 days.

Outcome: ACCC opposed acquisition.


“The proposed acquisition would give Caltex a

significant share of retail sites in Brisbane,

Sydney, Melbourne and Adelaide.

As one of the leaders of the weekly price cycle

in these cities, this increase in Caltex's

presence would increase the likelihood of

stable price increases particularly compared to

a situation where some or all of the sites are

acquired by more maverick or aggressive

retailers.”

‒ ACCC Media Release, 2 December 2009

ACCC concerned with reduction in competition at

retail level and its impact on pricing to consumers.

Sectoral industry regulation

Sectoral regulation – fuel price monitoring

17

“Retail margins in

2015–16 were the

highest since the

ACCC began

monitoring them”

“International crude

oil and refined petrol

prices in 2015–16

were at their lowest

levels for over a

decade”

“The city-country

price differential

narrowed in the June

quarter”

Fuel Industry Competition in Australia ‒ Dr Martyn Taylor

• Objective of monitoring is to enable the

ACCC to identify instances of excessive

pricing and the causes underpinning them.

• If the causes can be addressed by

regulatory intervention, then this will be

considered by the ACCC as a next step.

• Under current Ministerial directives, the

ACCC produces two types of reports:

• quarterly ‘macro’ reports on petrol price

movements and the overall drivers; and

• market studies that look at ‘micro’ issues

in considerable depth, including specific

regional markets.

Why Launceston ?

Case study – review of Launceston petrol market (2016)

18

• ACCC collects pricing data for 190 regional

locations around Australia.

• ACCC runs a regression analysis to

compare estimated prices against actuals.

• ACCC also ranks locations based on the

gross indicative retail difference in each

regional location compared to capital cities,

• The region with the results that are most at

odds with expectations is then the subject

of a detailed regional study.

• Darwin (NT) was selected for the first study.

Launceston (TAS) for the second study.

“High net retail margins

reflect a lack of strong

price competition in

Launceston”

“Net profit per site in

Launceston is

substantially higher

than in Adelaide”

“Firms may have less

incentive to increase

and maintain high

prices if there is close

scrutiny of their

their pricing behaviour.”


ACCC has specific powersThe Oilcode…

Sectoral regulation – the Oilcode

19

• Public warning notice: ACCC

may issue a public warning notice if it has

reasonable grounds to believe there has been a

contravention of the code, there is likely to be

damage, and it is in the public interest.

• Redress: ACCC may apply to the Court to

redress loss or damage resulting from

contravening conduct


• comprises regulations made on recommendation

of the ACCC and mandated as compulsory;

• was prepared in 2006 to replace previous

legislation that set out minimum terms and

conditions for oil company franchises.

• regulates the conduct of wholesalers and fuel

resellers who are involved in the sale, supply or

purchase of declared petroleum products, such

as unleaded petrol and diesel; and

• requires daily publication of terminal gate prices,

sets out minimum requirements for fuel re-selling

agreements, contemplates ACCC investigations

if complaints are received, and includes a

dispute resolution scheme.

• Audit: ACCC can request

information or documents

required be kept, generated

or published by the Oilcode.

Lessons from Australia

Generic competition laws Sectoral regulation

Insights from the Australian experience


• Industry deregulation and reliance on

generic competition law can work effectively,

consistent with competition policy principles.

• The easier competition problems have

generally been resolved in Australia (or are

quickly resolved if they arise).

• Australia is still grappling with conduct that

ostensibly is beneficial or competitive, but

allegedly raises competition concerns.

• The ACCC uses various means to coerce

compliance, but is also not afraid to run

litigation to test its views.

• Sectoral regulation has been used

effectively in Australia to complement

generic competition law.

• The Oilcode is an example of a specific

regime created to address specific industry

concerns in a petrol franchising context.

• The ACCC has been given powers to

monitor prices so as to identify any concerns

with fuel pricing in Australia.

• The ACCC collects extensive pricing data,

then focuses its monitoring on the data that

is most at odds with price expectations.

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* associate office


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Contact us

Dr Martyn Taylor

Partner

Norton Rose Fulbright Australia

+61 2 9330 8056

+61 45 777 4711 (Mobile)

[email protected]

nortonrosefulbright.com

2185357223

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fuel industry competition in australia

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