22 September 2017 - Parliament of Victoria · Guiding strategic insights ... Much of this information can be gleaned by an examination of the Australian Competition and Consumer Commission’s

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22 September 2017

The Executive Officer Economic, Education, Jobs & Skills Committee Parliament of Victoria Parliament House Spring Street EAST MELBOURNE, VIC 3002

[email protected]

Dear Sir/Madam,

Inquiry into fuel prices in Regional Victoria.

I refer to your letter of 8 August 2017 inviting ACAPMA to make a submission to the Victorian Parliament’s Economic, Education, Jobs & Skills Committee’s Inquiry into fuel prices in Regional Victoria.

Attached please find a copy of ACAPMA’s submission.

Given that ACAPMA’s Charter seeks to represent the interests of fuel wholesalers and fuel retailers, we have confined our comments to those areas of the Committee’s investigation that can credibly be answered by the fuel retail industry, namely:

▪ Fuel pricing discrepancies between service stations in regional locations and those inMelbourne or other regional areas

▪ The influence of regulations and legislation on fuel pricing

▪ Interstate best practice initiatives to reduce fuel prices

The above points are discussed in Sections 4 through 6 of the attached submission.

Our submission is prefaced by a discussion (Section 3) of several strategic considerations that seek to address some of the long-held misunderstandings about fuel pricing, the nature of the fuel retail market in Australia and the variability in operating models utilised by the large number of businesses that comprise the fuel market in Victoria (and Australia).

The key points of our submission can be summarised as follows:

a) The retail fuel market in Victoria is diverse and operated by many businesses of varyingsize. Of the estimated 1480 fuel retail sites operating in the State of Victoria, ACAPMA

estimates that 32% are owned and operated by large fuel companies (i.e. Caltex, BP,Viva Energy) or supermarkets (i.e. Coles and Woolworths). A further 19% are estimated

EEJSC Submission No. 32Received 22 September 2017

mailto:[email protected]

mailto:dtf.myfuelnt@nt,.gov.au

ACAPMA Submission Victorian Parliamentary Inquiry into Regional Fuel Prices (September 2017)

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to be owned by large companies (e.g. 7 Eleven or United Petroleum) via contractual arrangements with smaller businesses known as ‘Commission Agents’. The remaining 49% are independently owned and operated small to medium businesses, with approximately half of these businesses operating under a branding and supply agreement with a major oil company (the balance display independent brands)

b) While ACAPMA is not aware of any definitive data on the number of businesses that comprise the State’s retail fuel industry, ACAPMA estimates that the Victorian retail fuel market comprises around 362 businesses. Of these, 7 are large businesses (either directly owned and operated via the utilisation of the Commission Agent model) and approximately 355 are small to medium businesses (operating either under a branding

agreement with a major oil company or independently branded)

c) The variable size and operating models of these businesses means that the financial structures of these 360 businesses varies markedly in terms of both the structure of operating costs and the nature of revenue streams (i.e. fuel vs convenience items), making it difficult to draw meaningful whole-of-industry conclusions about typical site profitability across geographical boundaries region.

d) It can generally be concluded, however, that fuel retail sites operating in low volume markets (e.g. regional and rural areas) often need to maintain a higher unit price per litre of fuel sold to remain viable. An analysis of two operating models in a rural/regional vs metropolitan context reveals that a service station operating in a small rural town

typically needs to earn an average of 23cpl in a financial year to reach cost break-even. This compares a large metropolitan freeway site that would typically need to charge just 10cpl to break-even (In reality, the quantum of this differential is partly negated by profit earned from convenience store sales but the relativities in price remain valid)

e) Differences in regional fuel prices at a given point of time are largely invalid as they can be distorted as a result of the regional fuel price cycle lagging behind the metropolitan fuel price cycle. Consequently, a valid comparison can only be made by assessing average fuel prices over a 12-month period or longer

f) The varying business models and financial structure means that prices will vary between

fuel retail sites but there are suggestions that lower priced fuel retailers are not being rewarded by increased custom. Rather, motorists appear to be trending away from traditional price-centric behaviour and rewarding fuel sites with their custom based on their perceptions of the quality of the total site offering (i.e. petrol and convenience proposition)

g) Every $50,000 increase in annual compliance costs for fuel retailers will typically add between 1.4 and 2.5cpl for rural/regional fuel retail sites, compared with between 0.3cpl and 1.3cpl in metropolitan areas

h) There is no evidence to support the proposition that fuel price transparency schemes

lower fuel prices. They can, however, be useful in helping motorists to readily identify lower priced fuel retailers in their local areas or towns and there are several industry-


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1. About this paper

This paper constitutes a submission by the Australasian Convenience and Petroleum

Marketers Association (ACAPMA) to the recent call by the Parliament of Victoria’s Economic, Education, Jobs and Skills Committee for stakeholder submissions to its’ Inquiry into fuel prices in Regional Victoria.

As a national body representing the interests of fuel retailers and fuel wholesalers in Australia, this submission has been specifically developed to address the elements of the Committee’s investigations that are most relevant to fuel retailers, namely:

▪ Fuel pricing discrepancies between service stations in regional locations and those in Melbourne or other regional areas

▪ The influence of regulations and legislation on fuel pricing

▪ Interstate best practice initiatives to reduce fuel prices In preparing this submission, ACAPMA notes that despite more than 10 years of ACCC oversight of the Australian retail fuels market (including Victoria) that our industry is yet again seeking to explain the vagaries of fuel pricing. ACAPMA is concerned that in the face of overwhelming evidence that our industry is

operating wholly in accordance with Australian competition law, the national (and State/Territory) fuel pricing debate has evolved into one that is now centred around subjective assessment of what non-industry stakeholders deem to be a ‘fair price’ – much of it derived from simplistic assessments of a complex retail market. For this reason, the first part of this submission seeks to outline some of the key characteristics of what is a complex and openly competitive market that is populated by around 360 businesses of varying size.


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2. About ACAPMA

The Australasian Convenience and Petroleum Marketers Association (ACAPMA) is the

national peak body representing the interests of the petroleum distribution and the petrol-convenience retail industry. The Association is first and foremost an employer organisation that is formally recognised under Australian law as the industrial advocate for fuel marketing and fuel distribution businesses.

First established in 1976, the Association started operations as the Australian Petroleum Agents and Distributors Association (APADA) and subsequently changed its name to ACAPMA in 2007. The name change was accompanied by a change in the Association’s Constitution to incorporate national representation of fuel retailers. Today, the Association directly represents 95% of fuel distributors in the country and directly and indirectly (via franchisees and distributor-owned retailers) around 4800 of the 6400 service stations operating in Australia. The scope of ACAPMA’s membership extends from ‘refinery gate’ through to the forecourt of Australia’s national network of service stations and petrol convenience outlets – including

fuel wholesale, fuel distributors, fuel retailers, petroleum equipment suppliers and petroleum service providers. ACAPMA’s member businesses range from Australian-owned subsidiaries of international companies, to Australian-owned businesses, to independently owned mid-cap Australian companies, and small single retail site family-owned businesses. Given the diversity of its membership base, ACAPMA strives to assemble a position that reflects the views of most of its’ members in accordance with Board-approved public policies.

There are, of course, times when one or more of ACAPMA’s members will have a dissenting view – either in part or in whole. Consequently, it is possible that one or more of ACAPMA’s members may have elected to provide an individual submission that differs – either in part or as a whole – from the views presented in this paper.


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3. Guiding strategic insights

For reasons outlined at the outset of this paper, ACAPMA urges the Committee to take the

time to understand the structure and nature of the fuel retail industry in Victoria. Much of this information can be gleaned by an examination of the Australian Competition and Consumer Commission’s (ACCC’s) annual reports of the Australian Petroleum Industry. These reports (entitled: Monitoring of the Australian Petroleum Industry) were produced on an annual basis and provided detailed insights on the structure, prices, costs and profit of the fuel retail industry.

Unfortunately, the last of these detailed reports was prepared for the 2013/14 financial year and released in December 2014 (refer to https://www.accc.gov.au/system/files/897 ACCC Petrol%20Monitoring%20Report FA web.pdf). Since December 2014, the ACCC has only been producing quarterly reports that track movements in average unleaded fuel prices without tracking changes in retailer costs. Accordingly, ACAPMA has been openly critical of some of the conclusions derived from the ACCC’s Quarterly Reports that have been produced over the past 3 years - and has

supported the ACCC being given greater resources to prepare the more definitive annual reports of the past. For its part, ACAPMA produced its own snapshot of the industry by amalgamation information from three key sources, namely:

▪ The Australian Competition and Consumer Commission’s December 2014 Annual Report ▪ IBIS World’s Fuel Retailing in Australia Report -2016 (refer to

https://www.ibisworld.com.au/industry-trends/market-research-reports/retail-trade/fuel-retailing/fuel-retailing.html

▪ Australian petroleum statistics data prepared by the Australian Department of Industry’s

Office of the Chief Economist (refer to https://industry.gov.au/Office-of-the-Chief-Economist/Publications/Pages/Australian-petroleum-statistics.aspx

The above information was used to assemble ACAPMA’s inaugural iScan Report – An overview of the Australian Retail Fuels Market – 2016 (refer to http://www.acapma.com.au/wp-content/uploads/2016/06/ACA097 ACAPMA industry scan report.pdf) The analysis of this data gave rise to some very interesting observations about the true nature of the Australia’s fuel retailing sector.

3.1. A national industry comprising many fuel retail businesses or varying size

https://www.accc.gov.au/system/files/897_ACCC_Petrol%20Monitoring%20Report_FA_web.pdf

https://www.accc.gov.au/system/files/897_ACCC_Petrol%20Monitoring%20Report_FA_web.pdf



https://industry.gov.au/Office-of-the-Chief-Economist/Publications/Pages/Australian-petroleum-statistics.aspx

https://industry.gov.au/Office-of-the-Chief-Economist/Publications/Pages/Australian-petroleum-statistics.aspx

http://www.acapma.com.au/wp-content/uploads/2016/06/ACA097_ACAPMA_industry_scan_report.pdf

http://www.acapma.com.au/wp-content/uploads/2016/06/ACA097_ACAPMA_industry_scan_report.pdf


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First and foremost, the true face of the fuel retailing sector is one that comprised 3,790 retail fuel businesses in 2015 (albeit that a significant proportion of this number are automotive retail businesses selling lubricants). This large number of businesses is a far cry from suggestions that the Australian retail fuel market simply comprises four or five large Australian businesses – albeit that these businesses do operate a significant number of high volume sites. Given that around 33% of the nation’s 6400 service stations are owned and operated by one of the major fuel retailers in Australia (i.e. BP, Caltex, Coles and Woolworths), the remaining two-thirds of Australia’s service stations are operated by more than 3690 businesses – most of them small Australian businesses.

3.2. Highly varied ownership structures and business models The business models used by fuel retail businesses are as diverse as the nature of their relationship with their fuel suppliers and the ownership structures that exist throughout the industry. Some retailers operate using retail sites that are owned by a larger business, others are leasing sites from non-fuel related businesses and still others own and operated their own sites.

Further diversity in business models is created by the fact that the vast majority of Australian fuel retailers are ‘mixed’ businesses – with each business relying on varying levels of profitability from the sales of fuel products, sales of convenience products and/or revenues derived from automotive servicing. Suffice to say, there is no such thing as a ‘typical’ fuel retail business in Australia. This begs the question “Why does the Australian community believe all fuel prices should be the same simply because fuel is wholesaled into the Australian market at similar prices”. For ease of industry analysis, the ACCC classifies Australian retail fuel businesses into five

broad groups (see Figure A), namely:

▪ Company owned and company operated (COCO’s) – businesses that are wholly owned and operated by a large fuel company

▪ Commission agents (CA’s) – businesses operating under a modified franchise arrangement where the franchisee is not required to purchase the petrol but rather, is paid a fixed commission per litre of fuel sold. The fuel supplier is the one that sets the retail price.

▪ Franchisees –these businesses operate under a pure franchise arrangement with a fuel major where the fuel major is involved in the retail price discussion.


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▪ Dealer owned and dealer operated (DODO’s) – businesses that are independently owned but operate under a brand agreement with a fuel major. The business purchases its own fuel stock and has the freedom to respond to market movements in fuel prices

▪ Independent fuel retailers – businesses that are independently owned and operate under a brand other than a fuel or grocery major. Once again, these businesses purchase fuel from their supplier and set their own retail prices according to local market pressures.

Figure A: The business operation of Australia’s 6400 retail fuel outlets can be broadly

classified five key groups according to the nature of their business operating model (ACCC

2014)

3.3 Industry Sector profitability is historically lower than Australian ‘all industry’ average Contrary to popular belief average profit margins in the fuel industry have been historically low over the past decade, largely due to the combined forces of new industry competition from Australia’s grocery majors and continued business consolidation.

In fact, the ACCC estimates the profit earned by fuel retail businesses between 1 Jul 2005 and 30 June 2013 average just 2cpl (for petrol and convenience sales) as shown in Figure B. Given average annual fuel sales of 2.86ML per year, this translates into an annual average profit of $57,200 (or 3.6% of gross revenue). Interestingly, the 3.6% gross profit earned by fuel retailers between 1 Jul 2005 and 30 June 2013 is actually below the all-industry average of 4.9% over the same period.


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Figure B: Retail industry averaged just 2cpl in the 8-year period ending 30 June 2015 (ACCC

2014)

Unfortunately, a change of focus in ACCC research in 2015 means that the data for the period since 30 June 2013 is not readily available. It would be fair to conclude, however, that profit margins for fuel retailers have returned to more healthy levels over the last 2 years – largely on the back of lower global oil prices.

Most businesses appear to be taking the opportunity to use these higher earnings to invest in upgrading fuel infrastructure, restocking capital reserves depleted by a decade of cut-throat competition, and funding ever-increasing compliance costs. 3.4. Australia had fifth lowest national average fuel price of all OECD countries in 2015. Interestingly, there was considerable debate about petrol prices in December 2015 about the high average price of petrol in Australia – a concern that does not appear to be supported by objective analysis of Australia’s petrol prices relative to those levied in other developed economies.

In its most recent assessment of Australia’s national average fuel price, the Australian Government (Office of the Chief Economist 2016) found that Australia’s petrol and diesel prices were the fifth lowest of all OECD economies in the December 2015 Quarter (see Figure C). An inspection of the more recent assessments prepared by the Chief Economist since December 2015 shows that the relative fuel price advantage enjoyed by the Australian economy has continued to be maintained. ( see https://industry.gov.au/Office-of-the-Chief-Economist/Publications/Documents/aps/2016/Australian Petroleum Statistics 242 September2016.pdf).

https://industry.gov.au/Office-of-the-Chief-Economist/Publications/Documents/aps/2016/Australian_Petroleum_Statistics_242_September2016.pdf




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It therefore follows that the Australian retail fuel sector is one of the most efficient in the world in delivering relatively low fuel prices for all Australians - and is doing its part to enhance the international competitiveness of our country in the global market.

Figure C: The Australian average price of petrol and diesel was fourth and fifth lowest

(respectively) of all OECD economies in the December 2015 Quarter.

3.5. The fundamentals of national industry competition remain strong The variety of business structures that exist in the market provides varying degrees of price control (i.e. direct and indirect) by the major fuel marketers in Australia. At its most basic level, examination of the ACCC data on retail site about business structures (see Figure A) demonstrates that 40% of Australia’s retail sites operate completely

independently of Australia’s largest fuel and supermarket companies. To suggest that the businesses that operate these sites are somehow conspiring with large oil companies and supermarket majors to set uniformly high national prices is patently absurd. Nonetheless, the industry regularly welcomes competition interrogation by the Nation’s competition watchdog – the ACCC- who despite more than 10 years of intense market interrogation have failed to find any substantial evidence of competition failure.


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3.6. The industry is a valuable contributor to the Australian economy Much of the attention of politicians and economists on the retail fuels sector is motivated by a desire to minimise input costs to Australian businesses and households. That is, by keeping unit fuel prices low, Australian businesses pay less to transport their goods and services to national and international markets – thereby improving the competitiveness of Australian business and industry. Low petrol prices also mean that households spend less on moving around in their cars and have more money to spend on buying domestically produced goods and services to help grow our national economy.

What often gets lost in these discussions, however, is the actual contribution that the retail fuel industry makes to the Australian economy of itself. In the last financial year (2014/15), Industry research (IBIS World 2016) tells us that the 3790 businesses that comprised the Australian retail fuel industry:

▪ Employed more than 43,000 Australians

▪ Generated more than $37B in revenue (much of it being government taxes)

▪ Made a profit of $924.5M

▪ Added $2.6B in value to the Australian economy.

By any measure, the Australian retail fuel sector is a big employer of Australians and makes a substantial economic contribution to the national economy. 3.7. Snapshot of the Victorian industry The information cited above was used to interpolate a profile of the fuel retail industry in Victoria. This profile can be summarised by the following principal observations:

▪ The retail fuel market in Victoria is diverse and operated by many businesses of varying size

▪ Of the estimated 1480 fuel retail sites operating in the State of Victoria, ACAPMA estimates that 32% are owned and operated by large fuel companies (i.e. Caltex, BP, Viva Energy) or supermarkets (i.e. Coles and Woolworths).

▪ A further 19% of fuel retail sites are estimated to be owned by large companies (e.g. 7 Eleven or United Petroleum) via contractual arrangements with smaller businesses known as ‘Commission Agents’.

▪ The remaining 49% are independently owned and operated small to medium businesses, with approximately half of these businesses operating under a branding and supply agreement with a major oil company (the balance display independent brands)

▪ It is estimates that the Victorian retail fuel market comprises around 362 businesses. Of these, 7 are large businesses (either directly operated or utilising the Commission Agent


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model) and approximately 355 are small to medium businesses (operating either under a branding agreement with a major oil company or are independently branded)

▪ The estimated 360 businesses that comprise the fuel market make fuel pricing decisions that are independent of each other and of individual geographies

▪ The variable size and operating models of these businesses means that the financial structures of these 360 businesses varies markedly in terms of both the structure of operating costs and the revenue streams (i.e. fuel vs convenience items), making it difficult to draw meaningful conclusions about typical site profitability - either within or between geographic regions (i.e. The types of retail businesses that comprise the market and the intensity of competition in a given area, are generally more relevant to average

fuel prices than simple geographic considerations) Given that the Victorian fuel retail industry represented around 23% of the national market in 2014/15, it can be estimated that the Victorian fuel retail industry:

▪ Employed more than 9,900 Victorian

▪ Generated more than $8.5B in revenue (much of it being government taxes)

▪ Made a profit of $212.5M

▪ Added $0.6B in value to the Victorian economy.


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4. Sources of fuel price variance (metro vs regional)

There is no single answer to the question of why regional prices vary between and within

discrete geographic regions.

Prices vary between geographic regions due to the interplay of several factors, namely:

▪ Variance in the mix of business models used by the specific fuel retailers that are

operating in a given regional area

▪ The proximity of a regional town to a busy State Highway

▪ The intensity of retail site competition in a given regional area (as measured by the

number of sites for a given unit population) relative to other regional areas or capital

cities

▪ Additional premiums for transport of fuels from metropolitan ports to regional areas

▪ Time lags in the flow through of wholesale fuel price increases owing to lower rates of

stock turnover in regional centres.

Many of the above factors have a direct bearing on the annual average demand at individual

fuel retail sites.

A point often missed in analyses of fuel price discrepancies – and further exacerbated by

price assessments derived from whole of industry averaging techniques such as those

employed by the ACCC - is that retail business costs do not vary in proportion with variations

in the volume of fuel sold (and hence gross annual income).

As a result, fuel businesses with lower fuel volumes generally need to charge a higher unit

price for fuels sold than those levied by higher volume sites in order to merely recover their

business costs (i.e. excludes any profit consideration).

In an effort to demonstrate this phenomenon in practice, ACAPMA has prepared an

illustrative analysis of the influence of annual fuel volume variations on the break-even point

(i.e. no profit) for fuel retailers.

The analysis is based on data derived from businesses using the DODO and Independent

Dealer business models (refer to sub-section 3.2) which account for around 40% of the sites

in Victoria. The analysis:

▪ Was derived from real-world data supplied by a sample of these retailers and averaged

within the business model and volume segments - as opposed to a whole-of-industry

basis.

▪ Comprises seven sub-segments that are classified on the basis of geography and

indicative annual sales volumes, namely:


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o Rural (average): This is a site in a small regional town or rural area, averaging

annual fuels sales of 2ML per year

o Regional (Town): This is a site located in a medium sized regional town,

averaging annual fuel sales of 3ML per year

o Regional (Highway): This is a site located in a large regional town or regional

highway, averaging annual fuel sales of 3.6ML per year

o Metropolitan (Outer Ring): This is a fuel site located on the outer ring of

Melbourne, averaging annual fuel sales of around 4ML per year

o Metropolitan (Inner Ring): This is a fuel site located in the inner ring of

Melbourne, averaging annual fuel sales of around 5.4ML per year

o Metropolitan (City): This is a fuel site located near the centre of Melbourne,

averaging annual fuels sales of around 8ML per year

o Metropolitan (Freeway): This is a fuel site located on a metropolitan freeway,

averaging annual fuels sales of around 15ML per year

▪ Provides a summary of average costs for each classification of fuel site, taking account of

variance in wage costs, lease costs, equipment costs, electricity costs and other business

costs.

▪ Takes account of variances in typical operating hours with smaller sites operating less

daily hours than large metro sites

▪ Considers wage costs based on typical rosters and payment of award rates.

▪ Excludes any consideration of profit (i.e. developed around break-even scenario only)

▪ Excludes consideration of convenience store sales (due to high levels of sample

variability)

An examination of the resulting analysis (see Table A) gives rise to the following principal

observations:

▪ The unit costs of fuel retailing vary by 13cpl - from a high of 23cpl (Rural average site) to

a low of 10cpl (Metropolitan Freeway site).

▪ The unit costs between a typical metropolitan site (excluding freeway and city sites) and

a typical regional site (excluding rural average) vary by around 4cpl – from a high of

21cpl to a low of 17cpl

▪ While the additional costs of delivering fuel to regional sites is significant, it is a relatively

small part of the cost premium for regional sites (i.e. 0.8cpl)

It should be noted that the quantum of the underlying cost differences cited in the above

analysis do not reflect actual market premiums, owing to the fact that fuel retail businesses

typically utilise profit from convenience store sales to offset fuel costs (e.g. At a Regional

Highway site, the subsidy averages around 8cpl meaning that the unit retail cost that needs

to be recovered via fuel sales is around 10cpl).


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Table A: Example analysis of typical unit fuel price differences for a regional site relevant to an outer metropolitan site with similar site scale and business

models (* Illustrative only)

Rural

(Average)

Regional

(Town)

Regional

(Highway)

Metropolitan

(Outer ring)

Metropolitan

(inner ring)

Metropolitan

(City)

Metropolitan

(Freeway)

Site characteristics

Average annual fuel volume (ML) 2.0 3.0 3.6 4 5.4 8 15

Hours of operation (per day) 15 18 18 18 24 24 24

No. of dispensers on forecourt 4 4 4 4 6 6 8

Annual Retail site costs (Expenditure)

Bank and merchant fees $12,222 $18,333 $22,000 $25,000 $33,000 $48,889 $91,667

Insurances $11,200 $11,200 $11,200 $12,444 $16,800 $24,889 $46,667

Site maintenance $3,500 $5,300 $5,300 $5,300 $7,155 $10,600 $19,875

Employment expenses $300,000 $435,000 $435,000 $435,000 $580,000 $580,000 $725,000

Site rental $60,000 $110,000 $130,000 $150,000 $200,000 $350,000 $500,000

Communications $3,000 $3,000 $3,000 $3,000 $4,500 $4,500 $6,000

Vehicle expenses $8,400 $8,400 $8,400 $8,400 $8,400 $8,400 $8,400

Services (electricity, waste removal, water, rates etc) $20,000 $40,000 $40,000 $40,000 $40,000 $50,000 $65,000

Miscellaneous $3,700 $3,700 $3,700 $3,700 $3,700 $3,700 $3,700

Total expenses $422,022 $634,933 $658,600 $682,844 $893,555 $1,080,978 $1,466,308

Distribution premium (relative to metro delivered price) $0.014 $0.008 $0.008 $0.004 $0.000 $0.000 $0.000

Cost recovery (break-even) required per litre of fuel sold (see n $0.23 $0.21 $0.18 $0.17 $0.17 $0.14 $0.10

Notes:

1. Actual quantum of cost recovery will be reduced by profit earned from convenience store sales

2 Overall analysis excludes additional premium required to deliver profit (i.e. break-even analysis only)


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Importantly, at regional sites the gross income and profit earned from convenience stores is

generally lower than for metropolitan sites which suggests that the true differential is likely

to be in excess of the 4cpl average cited in Table A.

Finally, the analysis has been developed on the basis of the average price over an annual

period and does not take account of the variance that occurs in price discounting cycles.

Typically, a regional fuel price discounting cycle is shallower and lags behind a metropolitan

price cycle which means that the price difference can be substantially higher at a single

point in time.


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5. Influence of regulations and legislation on fuel prices

The introduction of legislation and regulations imposes compliance costs that must be

recovered by the fuel retail business. This recovery occurs via the pass through of

compliance costs to the consumer.

For the reasons discussed in Section 4 of this paper, the impact of this increased costs will

be more pronounced on sites that are required to amortise the compliance costs on lower

fuel sales than those sites with higher annual fuel sales.

Accordingly, an additional $50,000 in compliance costs in a given year (whether due to a

single piece of new legislation or an aggregate of several pieces) will typically result in the

following average increases in underlying fuel price:

▪ Rural (Average): 2.5cpl increase

▪ Regional (Town): 1.7cpl increase

▪ Regional (Highway): 1.4cpl increase

▪ Metropolitan (Outer ring): 1.3cpl increase

▪ Metropolitan (Inner ring): 0.9cpl increase

▪ Metropolitan (City): 0.6cpl increase

▪ Metropolitan (Freeway): -0.3cpl increase

It should also be noted that new compliance costs are generally imposed on a site basis

irrespective of the volumes of fuel sold.

As a result, new legislation that imposes a $50,000 compliance cost would generally

increase the price differential between regional and metropolitan sites by around 0.6cpl

(excludes ‘rural average’, ‘metropolitan city’ and ‘metropolitan freeway’ sites.)

While this increase can be lessened by amortisation over a longer period, such an approach

is generally not favoured owing to the likely cumulative impact of any future unforeseen

legislation.

In the current environment, where State/Territory governments have demonstrated an

unprecedented willingness to impose new legislation, fuel retailers are generally seeking to

recover additional compliance costs within the year in which they are incurred.


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6. Interstate best practices to reduce fuel prices

ACAPMA is not aware of any interstate best practices to reduce fuel prices in Australia – or

in any other jurisdiction in the world.

This statement may at first seem to be inconsistent with the recent legislative actions of

some other Australian States (i.e. Western Australia and New South Wales) give recent

moves by both of these states to introduce different regulatory mechanisms targeting

average petrol prices.

6.1. FuelWatch (WA) In the case of Western Australia, the state government introduced Fuel Watch in 2001

This initiative requires fuel retailers to formally post fuel prices the day before they are

posted on the forecourt.

While the net effect of this action has been to create a more regular fuel discounting cycle

(i.e. weekly) there is no evidence that it has reduced fuel prices.

In fact, a recent study completed by the OECD (See sub-section 6.3 below) suggested that

this scheme may have inadvertently resulted in an increase in fuel prices as a result of a

reduction in the competition dynamic.

The benefit of this scheme, however, has been to provide consumers with advance access to

fuel pricing information to allow price-sensitive consumers to make more informed fuel

purchase decisions.

6.2. FuelCheck (NSW) The NSW Government formally introduced the Fuel Check initiative in NSW in August 2016.

This initiative requires all fuel retailers to report real-time prices to the government for

display on the government’s web-site which overtly promotes E10 as a purchase choice for

consumers.

This scheme has been the source of constant discussion between ACAPMA and NSW Fair

Trading with respect to the validity of the claims that (a) the initiative captures fuel prices

from all fuel retailers, and (b) that the initiative provides real-time fuel pricing.

ACAPMA maintains that the NSW Fuel Check Scheme is grossly under-resourced and is being

ignored by a significant part of the NSW fuel retail industry. This problem of ineffective

compliance is a factor that was identified as a shortfall of government initiatives in a recent

OECD report (See sub-section 6.3 below).


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Claims by the NSW Government that the scheme has lowered average fuel prices are

refuted by ACAPMA and are not supported by any objective analysis of ACCC average petrol

price data for the 12-month period ending 31 August 2017.

6.3. Fuel Price transparency ACAPMA accepts that fuel price transparency initiatives are a necessary part of any openly

competitive fuel retails market as they provide a mechanism for price sensitive motorists to

shop around for the best price in their local area.

ACAPMA believes, however, that these initiatives are best advanced via industry-based or

consumer-based mechanisms (e.g. Motormouth and Gas buddy) that provide fuel pricing

data on a peer-to-peer basis via mobile phone applications at no cost to taxpayers.

Government operated schemes, on the other hand, have been problematic for government

and industry alike.

A recent report released by the OECD in June 2017 (see

https://one.oecd.org/document/DAF/COMP/WD(2017)25/en/pdf) observed that

Government initiatives targeting fuel price transparency have been largely unsuccessful and

have:

▪ Resulted in a compliance burden that is unsustainable, resulting in a loss of credibility of the scheme in the eyes of consumers and the fuel industry alike.

▪ Inadvertently resulted in an average 2% increase in retail fuel costs as a result of market participants being able to take advantage of real price information by only discounting at the minimum level needed to undercut the (now visible) prices of their competitors

6.4. Changes in price-centric consumer behaviour A related consideration to the matter of fuel price transparency initiatives relates to the

actual demand for these schemes amongst consumers.

Analysis of data submitted to the recent NSW Parliamentary Budget Committee

deliberations reveals that the current Fuel Check fuel price information system was used for

just 1.6% of all motor vehicle refuelling events over the past 12 months.

Further, the preliminary analysis of national consumer research completed by ACAPMA

suggests that there is an increasing trend away from price-centric consumer behaviour

amongst many consumer segments with consumers instead making site patronage decisions

based on the total petrol-convenience offering (The Final Report for this research will be

available in late October 2017).

https://one.oecd.org/document/DAF/COMP/WD(2017)25/en/pdf


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7. Summary

Analysis of the discussion presented in this report gives rise to the following principal

observations:

j) The retail fuel market in Victoria is diverse and operated by many businesses of varying size. Of the estimated 1480 fuel retail sites operating in the State of Victoria, ACAPMA estimates that 32% are owned and operated by large fuel companies (i.e. Caltex, BP, Viva Energy) or supermarkets (i.e. Coles and Woolworths). A further 19% are estimated to be owned by large companies (e.g. 7 Eleven or United Petroleum) via contractual

arrangements with smaller businesses known as ‘Commission Agents’. The remaining 49% are independently owned and operated small to medium businesses, with approximately half of these businesses operating under a branding and supply agreement with a major oil company (the balance display independent brands)

k) While ACAPMA is not aware of any definitive data on the number of businesses that comprise the State’s retail fuel industry, ACAPMA estimates that the Victorian retail fuel market comprises around 362 businesses. Of these, 7 are large businesses (either directly owned and operated via the utilisation of the Commission Agent model) and approximately 355 are small to medium businesses (operating either under a branding agreement with a major oil company or independently branded)

l) The variable size and operating models of these businesses means that the financial structures of these 360 businesses varies markedly in terms of both the structure of operating costs and the nature of revenue streams (i.e. fuel vs convenience items), making it difficult to draw meaningful whole-of-industry conclusions about typical site profitability across geographical boundaries region.

m) It can generally be concluded, however, that fuel retail sites operating in low volume

markets (e.g. regional and rural areas) often need to maintain a higher unit price per litre of fuel sold to remain viable. An analysis of two operating models in a rural/regional vs metropolitan context reveals that a service station operating in a small rural town typically needs to earn an average of 23cpl in a financial year to reach cost break-even.

This compares a large metropolitan freeway site that would typically need to charge just 10cpl to break-even (In reality, the quantum of this differential is partly negated by profit earned from convenience store sales but the relativities in price remain valid)

n) Differences in regional fuel prices at a given point of time are largely invalid as they can be distorted as a result of the regional fuel price cycle lagging behind the metropolitan fuel price cycle. Consequently, a valid comparison can only be made by assessing average fuel prices over a 12-month period or longer

o) The varying business models and financial structure means that prices will vary between fuel retail sites but there are suggestions that lower priced fuel retailers are not being

rewarded by increased custom. Rather, motorists appear to be trending away from traditional price-centric behaviour and rewarding fuel sites with their custom based on


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their perceptions of the quality of the total site offering (i.e. petrol and convenience proposition)

p) Every $50,000 increase in annual compliance costs for fuel retailers will typically add between 1.4 and 2.5cpl for rural/regional fuel retail sites, compared with between 0.3cpl and 1.3cpl in metropolitan areas

q) There is no evidence to support the proposition that fuel price transparency schemes lower fuel prices. They can, however, be useful in helping motorists to readily identify lower priced fuel retailers in their local areas or towns and there are several industry-based and consumer-based schemes that already provide this service in Victoria (and nationally)

r) Compulsory fuel price reporting schemes (e.g. Fuel Watch in WA and Fuel Check in NSW) have not been shown to reduce fuel prices. A recent OECD report concluded that these types of initiatives can potentially result in increased fuel prices for motorists and/or the creation of an unwieldy enforcement burden for governments


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8. Further information

Further information about this submission can be obtained by contacting the Chief Executive Officer, Mark McKenzie using any of the below details: Suite 6, Level 8, 3 Spring Street Sydney, NSW, 2000 P | 1300 160 270 M | E |