Presentation to the Asia Pacific Fuel Industry Forum on the development of fuel industry competition in Australia and the role of generic competition law

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.

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* associate office
Fuel Industry Competition in Australia ‒ Dr Martyn Taylor

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Contact us
Dr Martyn Taylor
Partner
Norton Rose Fulbright Australia
+61 2 9330 8056
+61 45 777 4711 (Mobile)
martyn.taylor@nortonrosefulbright.com
nortonrosefulbright.com
2185357223
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