Wednesday, 21 August 2019

How'd it go?

You'll have seen the key takeaways from the Commerce Commission's petrol market study:
many fuel companies appear to be achieving a level of profitability in New Zealand that is persistently higher than what we estimate a reasonable return would be in a workably competitive market ... The core problem, in our view, is that an active wholesale market does not exist in New Zealand. This is weakening price competition in the retail market (Executive Summary, X10-11)
and you can follow up on the details in the full report.

Most people, rightly, will be concerned with the substance of the report, but us competition geeks also have an interest in the market study process itself, especially as this was the first use of the Commission's new market study powers. So, how'd they go?

Overall, I'm impressed. They've self-evidently done a ton of work on this in effectively just six months. Occasionally I've been critical of how some of the Commission's work would stack up, from a productivity point of view, against a top rank commercial economic consultancy. Not this time. I was especially impressed by the work done in Attachments B though E on estimating profitability. And amongst all the other stuff they tackled it was good to see regression analysis applied, too: in a world of ever bigger torrents of data, the opportunity to deploy econometrics to useful effect is growing all the time. If this productivity partly reflected the tight deadlines, on Parkinson's Law lines, then let's keep whipping the Commission along. But I'm also pretty sure it reflects the team (Commissioners and staff) raising their game.

And the heap of data the Commission had available makes another point: you're not going to get meaningful answers to any potential competition questions unless the folks involved have a clear mandate to fossick where they need to, have the powers to collect the data and other information they need, and have the resources to process what they find (contrary to some asinine political reaction about spending a million dollars of the taxpayers' money). MBIE's petrol inquiry in 2017, despite the fine people they recruited to do it, had ticked none of those boxes adequately: the Commission's did. The case for market studies, as set up under Part 3A of the Commerce Act, is now closed.

Another thing I noted was the willingness to put out work-in-progress analysis with a "this is where we've got to, whatcha reckon?" tag. That's progress too: you don't want to put out shoddy stuff, but you don't want to be unnecessarily perfectionist, either. On this showing, the 80:20 rule is getting more of a look-in at 44 The Terrace. It's not without its own challenges, and no doubt the Commission's lawyers are several steps ahead of me in dealing with how you allow adequate consultation if some of these provisional findings get changed between the draft report and the final one, but the "it's looking as if this is how it's going down, are we right or wrong?" approach has a lot going for it, including the clear signal of open-mindedness.

That's another thing: this study looked a balanced exercise. It's easy (trust me) to see 'problems' everywhere when you're a regulator: to the man with a hammer, everything looks like a nail. But I thought the report, correctly, said the right things about the efficiency of the petrol companies' infrastructure, their retail innovations on the forecourt, and the inadvisability of jumping to inadequate-competition conclusions just because companies are profitable.

The other thing I'd wanted to see was a firmly remedy-oriented approach (assuming there were problems identified). No complaints there, either: head straight to Chapter 8 if that's your thing. I may be reading too much into 8.6 - "A number of the options are directed at industry participants who may be best placed to implement them. Others are of a regulatory nature that the Government
may consider instead of, or alongside, those market options" - but if the sense, or hint, is that the industry can get to a better place through enlightened self-interest improvements rather than anything more heavily-handed regulatory, jolly good.

On the substance of the report? So far I've only given its 424 pages the once over lightly, but it looks a generally plausible set of findings, even if not what people on the street were likely expecting as the big issue (some kind of tacit leader-follower price coordination). One thing that is nagging me, though, is the extent to which our local business cycle may be partly responsible for the reported petrol company profitability. Here, for example, is a chart (from page 326) showing a measure of profitability (return on average capital employed) for both the New Zealand petrol companies and a group of overseas comparators.

It looks, doesn't it, like profitability everywhere took a knock through the GFC, but recovered afterwards - fairly early on here at home, only in the last few years overseas. You see the same cyclical pattern in local importer margins, too, if you look at Figure 2.4 on page 28. I'm not saying that a relatively good post-GFC cyclical expansion here in New Zealand explains everything away, but at the moment I'm left wondering whether at least some of the profits reflect generally benign economic conditions as much as anything, and, if so, how that should be incorporated into the analysis.

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