Meanwhile up at the Forum

Are we on the road to a universal terminal gate price, removal of the Sites Act, and some toughening to the Trade Practices Act in favour of the retailer?

It may have been a long time coming but the recent (April 16) Government forum to discuss the downstream petroleum industry was welcomed by all who attended. Industry participants were represented by their associations - Australian Institute of Petroleum (AIP), the Australian Petroleum Agents and Distributors Association (APADA), the Motor Trades Association of Australia (MTAA), the Petroleum Marketers Association of Australia (PMAA), and the Service Stations Association (SSA). The Australian Competition and Consumer Association (ACCC) attended as an observer.

The forum hosted by Ian Macfarlane, Minister for Industry, Tourism and Resources, was an opportunity for industry participants to let the Government know where they stand on key issues - to clarify the extent of the differences and to find common ground. It was made clear that reform of regulation would only be possible with consensus and support from the main players, and that all would need to make concessions.

The participants had earlier received a copy of a draft policy framework prepared by the Department of Industry, Tourism and Resources (DITR) which, in addition to describing the status of the industry in some detail, highlighted the seriousness of the industry's problems - "An Industry in Crisis". The draft articulates a 'vision' for the industry, part of which states:

"Fuel retailers entering the sector will be able to achieve long-term profitability, thereby attracting the continuing investment necessary to provide jobs, meet safety and environmental responsibilities and ensure security and amenity of fuel supply. The benefits of improved efficiency in the retail petroleum sector will be shared with Australians and will reduce disadvantage for those consumers in regions where market competition is inhibited."

Sounds great, doesn't it? Sounds familiar too! But, this time there does seem to be an acknowledgement by all participants and the Government of the seriousness of the problems and the need to work together to solve them.

"The Minister seems to understand that something needs to be done. The Government acknowledges the need to make refining more efficient, and realises industry issues must be addressed. This time, it did not turn into a slanging match between the various representative groups. There is a genuine recognition of the need to work together." Garth Symington, General Manager, APADA.

"The forum was a positive step. There is increasing convergence of views of what is needed, and a sense of working together towards a sensible system of wholesale pricing. We want to give the industry and the consumer greater stability and confidence in the industry." Jim Lamb, President, PMAA

"DITR policy framework is a positive step, encouraging the debate about the issues, a good mechanism to move forward." Bruce Harrison, Assistant Director, AIP

This forum tackled three key issues:

Pricing system - terminal gate pricing

Retail regulation - Sites Act

Competition policy - review of the Trade Practices Act

Pay at the gate?

There is now consensus that a national system of terminal gate pricing is worthy of serious consideration. A number of refiners supported the format introduced in Victoria, and Shell introduced a system of national terminal gate prices in February this year (see box). It is also strongly rumoured that another refiner will introduce a similar system soon. All attendees supported the concept, favouring its simplicity and transparency.

The main difference that remains relates to the extent to which the terminal gate price (TGP) should apply to different classes of buyers. Shell's current system applies to all buyers except franchisees. Franchisees continue to pay the higher list price and to receive price support during periods of market discounting. The MTAA is a strong critic of this process believing it to be unfair to franchisees, reducing their capacity to compete in the retail market.

"We (franchisees) sell it for less than we buy it and then a month later they give us some money back. If we don't put our price up when support is withdrawn, we sell it at a loss. There should be open access to the terminals so the refiners can't control the pricing cycle." Michael Delaney, Executive Director, MTAA

The PMAA also advocated a single wholesale terminal gate price for each terminal, one that reflects the cost and a return to the refiner. Buyers should pay extra for additional services including credit, cartage, brand and provision of assets.

"Refiners and importers can compete to the terminal gate, and retailers (including the retail division of major oil companies) can compete in the retail market. Then, retailers could focus on the customer and compete to meet their needs. The cheapest operator would sell at the cheapest price." Jim Lamb.

The PMAA supports the move by Shell towards national terminal gate pricing. Their members have found that Shell has been disciplined in its application of the terminal gate price and is not discounting from the price for particular classes of buyers. However, while franchisees pay a different price and receive price support, concerns over the potential for predatory pricing remain.

According to the AIP, sales are being made at TGP in Victoria, and most of these are at the Shell terminal under its new system. However, in Western Australia, where a maximum wholesale price is set for spot sales, there have been no spot transactions.

"If regulation gets it wrong, there will be adverse outcomes for companies or consumers or both." Bruce Harrison

APADA as a representative of regional Australia advised the forum of the trend for distributors to increasingly shift to direct delivery of full loads from seaboard terminals. This may result in some small businesses and primary producers paying higher prices that reflect the true cost of supply, or not being supplied at all. Garth Symington also pointed to the proposed retail price cap in Western Australia and his concern for the future of country retailing, and the possibility that supplies to customers will be adversely affected.

Are we so special that we need our own regulations?

All attendees agree that the Sites Act is simply not working. Yet, it is a major stumbling block to consensus, with strong views expressed about its removal.

"The AIP is not keen to proceed much further without repeal of the Sites Act. We are happy to contribute more resources to the reform process, but only if the Sites Act is going to be repealed." Bruce Harrison.

The MTAA is concerned over the potential misuse of market power.

"We essentially say that if it's taken away, the companies' refiners will own and operate every site and have complete control over the prices in every location at every time." Michael Delaney

The PMAA looked for the trade-off.

"If there was a "pristine" terminal gate price applying to all buyers, then the need for Sites Act and other industry specific regulation would disappear." Jim Lamb

Will more power to the ACCC break the deadlock?

"We think that the resolution to this situation is to be found in the review of the Trade Practices Act." Michael Delaney

The relevant sections of the Trade Practices Act (TPA) are those that deal with mergers and the abuse of market power (in particular, predatory pricing). It is a timely discussion, with the TPA to be reviewed this year.

Oil refiners are likely to argue for changes to the merger provisions that prevent refinery rationalization. This will be supported by the work of the DITR.

At the retail level, the PMAA called for an "effects test" under Section 46 which covers the abuse of market power. Under the current section, intent to lessen competition has to be proven. Using the analogy of the ants getting squashed when the elephants dance, representatives of smaller companies in the industry argue that it is the impact that matters.

"During the dramatic cycles of price, independent retailers sell at a loss, but franchisees get price support. Oil companies can withstand losses for longer as they are larger businesses. Small independents can't cope. That is why we have called for an amendment to Section 46 to change the burden of proof from intent to effect. With a change to the Act, if oil companies hold retail prices below the TGP for a sustained period of time and cause significant losses to independents, then they would be in breach. We need a means to drive the outcome of a fair wholesale price." Jim Lamb

At various times, calls have been made for reform of the TPA to go further and also reverse the onus of proof from the accuser to the accused. With both changes, refiners could be required to prove that their actions did not cause an independent to exit the market.

Labor Party policy now includes specific penalties and sanctions for price exploitation during holiday periods, increased powers for the ACCC, establishing an 'effects test' for anti-competitive behaviour under the Trade Practices Act, and reversing the onus of proof under section 46 of the Act. The TGP system proposed by Labor would apply to all retailers.

The AIP argues that it will be very difficult to separate strong competition from predation.

"The difficulty in regulating predatory pricing supposedly aimed at driving a competitor from the market is that strong competition can sometimes be mistaken for predatory pricing. Market participants compete through a number of mechanisms but mostly through pricing. If a market participant complains that the price is too low, is that because it is predatory pricing or just that he is less efficient? Moreover, when does a low price become too low for the regulator?" Bruce Harrison

The ACCC attended as an observer, and is understood to agree with the general direction of the forum and the issues raised. Its views on these issues have been expressed in the past when it has called for a strengthening of the Act, including changing the test for abuse of market power from intent to effect. However, reversal of onus of proof does not seem to be on the ACCC agenda. It is likely to argue against changes to the mergers test.

The recent raid on a number of oil companies by the ACCC highlighted other factors such as the call for tougher penalties including jail terms for serious breaches of the Act. The ACCC's actions triggered a number of public statements across the spectrum with regard to the strength of the Act and the powers of the regulator. The terms of the TPA review should be in the public domain in early May, and it is likely to take at least till the end of the year to report with recommendations. There are sure to be some lively discussions in the process.

Famous last words

"At the end of the day, the Government would like to see a petroleum retail sector with room and opportunities for both large and small players, where the consumer is served by genuine competition. However, for reform to proceed there needs to be broad industry support. There's no value in trying to move this industry forward if it continues to scrap with each other." Ian Macfarlane.

Shell's National TGP* Shell's terminal gate price is set by taking the base product cost (import parity) of petrol and adding a terminal operation and administration charge of between one and two cents per litre. Wholesale customers can purchase tanker loads (35,000 litres or more) of petrol and diesel direct from Shell's main terminals at the TGP. Terms are payment in full prior to pick-up, and vehicles and drivers entering Shell terminals must have achieved company accreditation.

Shell's TPG August 2001

As contracts are renewed the TGP applies, and eventually there will be only two wholesale prices at Shell terminals - the TGP and the list price that applies to franchisees. The list price includes other costs beyond the terminal gate. Shell argues that the difference in the two prices reflects the difference in risk. "For agency and franchised sites Shell takes the retail market price volatility risk, all other buyers take that risk. Shell earns income from royalties in franchised sites and requires volume throughput to achieve non-fuel sales. Therefore it supports petrol sales to achieve volume targets. Franchisees deliver the customer offer developed by Shell, the franchisor."

Source: www.shell.com and Ian McKenzie, GM External Affairs, Shell.