Published on October 17, 2016
1. Fuel industry competition in Australia Dr Martyn Taylor Partner September 2016
2. 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
3. Regulation of fuel markets in Australia
4. Historic context to Australian fuel market regulation Fuel Industry Competition in Australia ‒ Dr Martyn Taylor4 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.
5. 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 Fuel Industry Competition in Australia ‒ Dr Martyn Taylor5
6. Generic competition law
7. 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
8. Objective of competition laws What are the fuel markets ? Competition laws apply through the prism of a market… Fuel Industry Competition in Australia ‒ Dr Martyn Taylor8 • 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.
9. The theory… … and the practice Competition law – unilateral conduct Fuel Industry Competition in Australia ‒ Dr Martyn Taylor9 • 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).
10. 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
11. The theory… … and the practice Competition law – concerted conduct Fuel Industry Competition in Australia ‒ Dr Martyn Taylor11 • 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.
12. Bundling fuel with groceries? Case study – concerns regarding forcing and bundling Fuel Industry Competition in Australia ‒ Dr Martyn Taylor12 • 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.
13. Data feed of competitor pricing? Case study – concerns regarding price co-ordination Fuel Industry Competition in Australia ‒ Dr Martyn Taylor13 • 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.
14. The theory… … and the practice Competition law - merger control regime Fuel Industry Competition in Australia ‒ Dr Martyn Taylor14 • 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.
15. 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. Fuel Industry Competition in Australia ‒ Dr Martyn Taylor15 “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.
16. Sectoral industry regulation
17. 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.
18. 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.” Fuel Industry Competition in Australia ‒ Dr Martyn Taylor
19. 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 Fuel Industry Competition in Australia ‒ Dr Martyn Taylor • 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.
20. Lessons from Australia
21. Generic competition laws Sectoral regulation Insights from the Australian experience Fuel Industry Competition in Australia ‒ Dr Martyn Taylor21 • 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.
22. 22 * associate office Fuel Industry Competition in Australia ‒ Dr Martyn Taylor
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