The ComCom session at the NZAE conference

Last week the New Zealand Association of Economists hosted a Commerce Commission themed session at its annual conference. It's become a fixture in the past few years, I'm pleased to say, after a drought period where industrial organisation, competition and regulation didn't quite get the focus they deserved.

The Commerce Commission team - Diego Villalobos, who chaired the session, Geoff Brooke and Rae Rho - talk about productivity trends in the regulated electricity lines business, the regulatory cost of capital, and the competitive effect of new unmanned petrol stations

Geoff Brooke's presentation showed the large increases in allowable revenue for the electricity lines businesses (ELBs) which the Commission has proposed for the forthcoming 5-year regulatory period (from the Commission's draft decision). They're stonking great rises - more than a billion dollars extra in what makes up about a quarter of a household's electricity bill - and they add to all that upward pressure on domestic non-tradables prices that is already giving the Reserve Bank conniptions.

But they're justified, as you can see in the graph below which shows the underlying drivers: input cost inflation, a substantially higher weighted average cost of capital ('WACC') reflecting the rise in interest rate costs as ultra-easy monetary policy has changed to the current post-Covid tightening, and provision for increased opex and capex spending.

Diego Villalobos talked about a productivity study that ComCom commissioned from Cambridge Economic Policy Associates (CEPA), and which looked at the productivity trends in the electricity distribution business (i.e. the ELBs again). As ComCom's cover note about the research said, "The productivity of Electricity Distribution Businesses (EDBs), measured as their outputs relative to inputs, is an important performance indicator. Over time, we and other stakeholders expect EDB productivity to increase as they become more efficient and able to deliver the same services using fewer inputs".

Unfortunately the exact opposite has been happening: productivity has fallen, and sharply, as this extract from the CEPA work shows. 'Non-exempt' EDBs in the table are those directly revenue-regulated by ComCom, 'Exempt' are ones owned by local consumer trusts and which are only subject to an information disclosure regime. But either way both groups have shown steadily lower productivity.

And it doesn't seem to be an oddball result of anything weird CEPA has done: Stats NZ data for a broadly comparable sector (electricity, gas, water, waste services, the yellow line in the graph below) show a similar pattern. It's still possible that both CEPA and Stats are missing a trick somewhere along the line - I'd argue that in some sectors of the economy, particularly those closest to the internet and other IT, productivity is being systematically underestimated - but the first best guess looks to be that there is something sector-specific happening.

It would be nice to say we know what's going on here, but we don't. CEPA canvas some explanations in their Section 6, so have a read for yourself and see what you think, but thus far there don't seem to be any smoking guns.

And finally Rae talked about her research on the competitive impact on incumbents of new unmanned petrol stations opening up (full thing here, summary here). Here's her key result. Look at the red dots, which are the price responses from incumbent petrol stations within five minutes' drive when a new unmanned station opens: you'll see a 2-3 cents per litre reduction in the weeks after the new competitor opens. The black* dots are the response by incumbents who are five to ten minutes' drive away: zilch,  nicely demonstrating the geographical market definition for petrol.

As well as this event study examining response to new entry, there was also a cross-section analysis comparing petrol prices where incumbents face at least one unmanned competitor within a five minute catchment: "On average, Regular 91 prices are 6.1 cpl [cents per litre] lower in local markets where at least one non-supermarket unstaffed site is present, compared to those with staffed sites only". 

There was a bit of discussion in the Q&A about whether ComCom ought to go around the country telling local authority land use planners about these results, and encouraging them to free up areas that new unmanned petrol stations could use. Quite right, too: if the councillor for a particular ward would like the credit for petrol becoming 6 cents a litre cheaper for his or her constituents, there's an easy way to help bring it about.

*A correction, I'd earlier mistakenly repeated 'red' again

What got snuck in

We only got through Day 1 of last week's NZ Association of Economists' annual workshop before the Plague shut us down, but it was interesting while it lasted (full programme here - there's a fair smattering of the papers available to download), and on the positive side at least we snuck one day in, unlike the total lockdown wipeout of 2020.

The first keynote was ecological economist Marjan van den Belt on 'Aoteanomics; A Vision for a Thriving, Just and Sustainable Aotearoa NZ' (brief abstract here). If you're a fan of, say, Kate Raworth's Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist, then this was for you. I liked her emphasis on systems thinking/modelling that captures all the positive and negative aspects of any policy, and accounts for the inter-relationships between the various moving parts. 

But I didn't agree that economics as we all know and love it today isn't up to, or interested in, handling issues like climate change or other environmental degradation: you don't get far into an economics course these days without bumping into 'externalities' and how to deal with them. And she's what I might call a technology pessimist about the ability of technological change to get us out of the climate and pollution hole - "we can't efficiency our way out" as she put it - whereas I'd point to the likes of the plummeting cost of solar energy or indeed the speed with which Covid vaccines were developed. The last 20th / early 21st century is an odd time to be downbeat about inventiveness.

From the concurrent session options, I picked 'Auckland Council - Urban Economics'. The big takeaway for me was the work done by David Norman (the former chief economist for the Council) and his colleague, now acting chief economist, Shane Martin, on whether the planning constraints which apply inside the Rural Urban Boundary (RUB) are responsible for the very high prices of Auckland housing land when compared to land outside it. As an Auckland resident regularly gobsmacked by the price of land, I'd have been prepared to bet a reasonable amount of money that they did, but at least for now I've been disabused. After comparing like-for-like land (eg correcting for the value of closeness to amenities and a zillion other hedonic features) there's virtually no RUB factor, as shown below (from the version of the paper available on the Council's Economic Advice page).

After coffee it was time for Motu's Arthur Grimes on 'Reinterpreting Productivity: New Zealand’s Surprising Performance'. Well worth reading: while the stylised narrative is that New Zealand has gone to hell in a handbasket in terms of relative international performance over time, Arthur argued (pp22-3) that "The country enacted reforms in the 1980s and early 1990s that improved allocative efficiency as well as technical efficiency. The result has been one of the strongest performances of any developed country in the growth of sustainable consumption possibilities over the second 24 year period covered by our data" (i.e. the second half of 1970-2018).

In the afternoon the 'Household Economics' session had two papers looking at how extra tax credits and extended parental paid leave since 2018 had worked out (one paper is up, here): my overall impression was they made a difference (in a good way) but more could be done. Victoria's Norman Gemmell presented on behalf of his co-authors Nazila Alinaghi and John Creedy on 'Do Couples Bunch More? Evidence from Partnered and Single Taxpayers', which looked at the bunching of people's tax returns around marginal tax rate thresholds. 

There were questions from the audience suggesting that it looked like tax evasion: it isn't (or not necessarily), because (a) that's the way the tax system is, or as the paper says (p25) the system "imposes relatively weak constraints on intra-family income sharing" and (b) the income split is inherently arbitrary for self-employed couples. If one partner stays home to let the plumber in while the other goes out to meet a client, who's contributed what? It was also a reminder that while the all-knowing always-calculating homo economicus may be a caricature of how people behave, people aren't stupid, either, and are perfectly capable of making fine adjustments to their affairs to their own best advantage.

Finally I went to the 'Commerce Commission: Market outcomes in the retail fuel and electricity markets' session (natch). Quick hat-tip to the Commission and the NZAE - there were years when the conference carried little or nothing in the competition / industrial organisation / regulation space, but in the last few years it's had its own regular slot.

The Commission's Ben Harris and Imogen Turner spoke on 'Valuing the harm to consumers in electricity markets'. I'd imagined beforehand that this might have been a go at estimating how much people were missing out by being on inappropriate pricing plans, but it actually looked at the value consumers ascribe to not suffering power outages. Human nature being what it is, people say they'd be hugely put out by an outage inflicted on them. But when offered cold cash to accept an outage, they turn out to take a much lower amount. Funny that. Why does the Commission care? Because the valuation goes into the regulatory regime to prevent the risk of electricity lines companies overbuilding ('gold plating') their asset base and providing levels of reliability that consumers do not actually want. More positively, it feeds into an incentive system rewarding lines companies for better-than-expected outage performance.

Finally Commerce Commissioner John Small took us over 'Empirical analysis on the retail fuel market study' (the study itself is here) and as part of it reminded us of this graph.

The dotted lines are when Z Energy was publishing the 'MPP', "the price that is used at most of Z Energy’s retail sites in the South Island and lower North Island" (market study, p296). The Commission said that, while there could be other explanations, from the graph "it appears that average margins increased during the period when the daily MPP was published, and have levelled off or decreased since publication ceased ... The evidence therefore appears to support our conclusion that the retail market is

conducive to tacit coordination through price transparency and leader-follower pricing" (p298).

The petrol industry is getting close to the pointy end of implementing the recommendations of the market study (a wholesale market, liberalised wholesale supply contracts, publicising the price of 95 octane, and enhanced information provision). My guess would be that the Commission will wait and see how effective they've been, but at some point I'd bet that they will be combing the evidence to see if they've dealt to that "tacit coordination".

Oops

Every year the American Economic Association picks the year's best paper from each of its four journals (Applied Economics, Economic Policy, Macroeconomics, Microeconomics): there's a list of the winners for the past decade here if you'd like to catch up with the good stuff. In a nice touch, you can download the full text of each one without being an AEA member. 

So us pro-competition types can feast, for example, on the finding by the 2016 Economic Policy winner ('Death by Market Power: Reform, Competition, and Patient Outcomes in the National Health Service') that increased competition in the UK's National Health Service worked:

Within two years of implementation, the NHS reforms resulted in significant improvements in mortality and reductions in length of stay without changes in total expenditure or increases in expenditure per patient. Our back of the envelope estimates suggest that the immediate net benefit of this policy is around $479 million per year

Fernando Luco, who hails from Texas A&M University, is this year's winner in the Microeconomics category with 'Who Benefits from Information Disclosure? The Case of Retail Gasoline'. This one, though, doesn't have such an unambiguously happy moral.

Our story starts in Chile in 2012, when the government required petrol stations to post their prices on a government website and update them promptly (within 15 minutes) whenever they changed. An everyday tale of empowering customers to find the best deal, you might think.

Except that petrol stations' margins increased by some 9% after the new disclosure policy, and various statistical checks confirmed that it was indeed the disclosure policy, and not some non-policy event happening at the same time, that was behind the petrol stations coining it.

What went on? As the author says (p278)

information disclosure may have both pro- and anti-competitive effects. On the one hand, disclosure may intensify competition if consumers benefit from lower search costs and firms use the website to compete more intensively. On the other hand, if stations can easily monitor their rivals’ actions and consumers do not actively use the disclosed information, disclosure may facilitate coordination

so it could go either way, and the net effect depends on who uses the info smartest.  As it happens, the author had a dataset of smartphone price look-ups, geocoded, so he could see in each local petrol market how actively people were checking out the prices on offer. In aggregate, the petrol stations won - but not everywhere (p302):

price disclosure allowed firms to monitor their rivals’ actions and to increase their payoffs on average. However, when consumers actively engaged in search [which he could tell, from his dataset], the demand-side response to disclosure dominated and competition intensified

The more smartphone-savvy higher income areas came out okay, lower-income areas not so much: "while in the lowest income areas margins increased by around 12 percent, margins decreased by 4 percent in the highest income areas, suggesting that disclosure affected low income areas the most" (p296). 

Bottom line from a competition policy point of view (p303)? 

mechanisms that increase market transparency may increase competition and benefit consumers only if consumers can easily access and use the disclosed information. Otherwise, the supply-side response to disclosure is likely to dominate, and the intensity of competition will decrease. Hence, this paper provides evidence showing that policy makers should consider ease of access to the newly disclosed information to be of major importance

In a New Zealand context, I suspect smartphone use probably doesn't vary as much with income as (I'm guessing) it does in Chile. Even so, the general proposition still applies: a price disclosure Cunning Plan has the potential to be a good pro-competition pro-consumer idea, but only if there's a good deal of effort put into making sure people from every walk of life end up using the thing.

Our first market study

The petrol market study came out a short while ago, and if you haven't caught up with where it landed, the Commerce Commission has an infographic on its main findings, another one on its recommendations, the media presentation this morning, an executive summary, plus the whole report.

From a regulatory policy point of view I like where it has gone. There's been an almost unthinking reach for heavier-handed forms of sectoral regulation in recent years, and it's good to see a lighter-touch approach favoured for petrol. The two main recommendations are a terminal gate pricing wholesale market, and less restrictive contractual arrangements between petrol wholesalers and petrol retailers, both overseen by an industry code of conduct.

There is the threat of tougher regulation in the background if these arrangements don't do what they're meant to, which is fair enough, but the key element is a "more market" one, with a currently ineffective wholesale petrol market getting a kick start towards greater liquidity and relevance. And that's as it should be: the intervention required should be the minimum required to get a result, and if we can get an effective market-based solution satisfactorily supervised by the industry itself, we're done.

These are of course only recommendations to the government, and who knows how a three-headed cat will jump, but hopefully the proposals will get the tick. At least we know we will get a response, as the very excellent s51(e) of the Commerce Act requires that "The Minister must respond to the final competition report within a reasonable time after the report is made publicly available".

The thing I was most mulling about, in the interval between the draft report back in August (which I wrote about here) and this morning, was what had happened to all those arguments about the real problem being tacit retail price collusion, which had cropped up in (for example) the MBIE petrol market study and in the Commission's own Z / Chevron decision. The answer to that is in para 7.97 of today's report, where the Commission says coordination is still a risk, but one that will be made harder (and any effects would be less) if the proposed wholesale market gets up and running:

most of the market features that made retail markets vulnerable to tacit  coordination when we considered the Z/Chevron merger in 2015/16 remain today although some market features have changed to make the markets more vulnerable to tacit coordination and others less so. We consider that retail fuel markets are vulnerable to some level of tacit coordination. We welcome Z Energy removing the MPP from its website. However, we consider that tacit coordination has been and may remain at least a contributing factor to the margins that we observe. We consider that measures to improve competition at wholesale and retail levels of the fuel supply chain, opening up those markets to new suppliers, will reduce their vulnerability to accommodating behaviour as well the potential effect of any such behaviour that does occur.

Out of vanity I looked up what had happened to my own little submission on the draft: I'd said that a chart showing New Zealand with amongst the world's highest post-tax petrol prices should have been on a purchasing power parity basis, rather than at market exchange rates, since market rates at one point in time can wobble all over the place, and what looks expensive in New Zealand today might look cheap tomorrow. I'll call it a draw: at 3.88-89 the Commission agrees that a point-in-time comparison isn't the best, and they've included longer-term paths which show our petrol prices are indeed among the developed world's most expensive (possibly for good reason, eg transport costs to a small isolated country), but the Commission remains wedded to spot rates. Over longer periods the Commission says spot rates will average out the volatility.

The other thing to take away is that we've now seen the first final output from the new market studies powers. Self-evidently, despite the critics and sceptics, the sky has not fallen. It's been done at reasonable cost, in reasonable time, with a good degree of balance - in the media presentation, the chair Anna Rawlings pointed out a range of consumer-benefiting innovations in the petrol business, for example - and with sensible-looking recommendations tailored to the diagnosis. Good day's work all round.

Who'll be next, I wonder? The goss has been that the government in principle recognises that the Commission can initiate its own studies (s50 of the Act) but in practice will fund only one a year, and will be picking another one toot sweet to pre-empt which one it'll be. I've heard rumours, but let's not spoil anyone's Christmas.

Those high petrol prices - another view

There's a graph, Figure 3.8 on page 82, in the Commerce Commission's petrol market study that's puzzled me. And not for the first time: it also puzzled me when I first saw an earlier version of it, in MBIE's 2017 go at an inquiry into the petrol industry (where it was Figure 4 on p3). Here is ComCom's one.

It shows the price at the pump of a litre of premium petrol in a wide range of higher income countries, standardised by being converted into US dollars. Eyeballing the graph, you see New Zealand is there at roughly US$1.47. At the exchange rate of the time (March quarter '19) of 68 US cents, the price converts into NZ$2.16, which looks right. All good.

Because the price at the pump is heavily affected by local taxes, for competition policy purposes you need to focus on the price ex taxes, which is shown in blue in the graph. New Zealand does not show to advantage, with the third highest petrol price. Cue song and dance about how bad we are.

But what's been puzzling me is the weirdness of the country rankings. Your first inclination is to go looking for some underlying explanatory patterns - transport costs from major oil fields or refineries? - but it's hard to spot any. The three countries at the top - Mexico, Korea, us - are as odd an assortment as you'll ever see. The three at the bottom - Slovenia, Chile, Finland - don't obviously have much in common, either.

The ordering could of course reflect differences in local competitive intensity. You look at Mexico's top billing, for example, and you wonder about Pemex, a state owned monopoly up to 2013 which still has nearly three quarters of the petrol stations. You wouldn't know about the rest of them without some intensive investigation along our own Commerce Commission's lines.

But I'm also wondering whether the somewhat jumbled pattern mightn't partly reflect the fact that the petrol prices have been converted into US dollars at market exchange rates, rather than at purchasing power parity (PPP) exchange rates.

If this whole 'which exchange rate to use' thing isn't your bag, let's backtrack for a moment. If you're comparing, say, the price of an Apple i-Pad Pro 11" Wi-Fi 256GB, you'll find it's on Amazon at US$799.99 and you'll find it's NZ$1648 at JB Hi-Fi. At today's exchange rate (63.7 cents) the Amazon one costs NZ$1256. Good deal cheaper in the US.

But market exchange rates are fickle beasts and move around a lot. Because an iPad is expensive locally today doesn't mean it mightn't be locally cheap next Tuesday if the Kiwi dollar were to fall sharply against the US dollar over the weekend. You shouldn't be drawing any long-term policy conclusions about iPads - or petrol - on the basis of an exchange rate that might make a fool of you in no time.

Which is why these international comparisons are more normally done on a different basis. Supposing you went out and bought a wide bundle of stuff in the States, and it cost you US$100,000. You do the same in New Zealand, and it costs you NZ$150,000. It would then be fair to say that US$1.00 has the same buying power as NZ$1.50. In that case you wouldn't be in the least bit surprised if a litre of petrol cost US$1 in the States and NZ$1.50 here: that's just what you'd expect, because anything that costs a US dollar in the States is on average likely to cost NZ$1.50 here, as we discovered on our shopping expedition.

Long story short, people making international comparisons tend to use that US$1-equals-NZ$1.50 exchange rate, called the purchasing power parity rate (obvs). And here's what happens when you do that same chart of ex tax prices in blue above, but at that PPP rate instead. I've used the latest (2018) PPP rates as calculated by the OECD (you can find them if you fossick here).

In New Zealand's case, the pre-tax petrol price doesn't change much. It was around 77.5 US cents before (again eyeballing the number from the ComCom graph, as I'm not going to pay the €900 the International Energy Agency wants for the exact data). At the March quarter market exchange rate of the time, 68 cents, that was NZ$1.14. The PPP exchange rate wasn't very different: it was 67.6 cents. So our local price translated into US$ at PPP was 77.1 US cents, rather than the 77.5 US cents price you get at market exchange rates. Same diff.

But other countries' prices move around quite a lot when their PPP rates are used instead of their market exchange rates. And the end result is that our relative position drops quite a bit. We were third highest out of 33 on a market rate basis: on a PPP basis we're 14th out of 33. There's a bit of imprecision here, as I've used eyeball data rather than precise ones, so I wouldn't obsess over whether it's 14th or 13th or 15th*. This PPP ordering also makes a bit more intuitive sense than the market rate one: the bottom three, for example (now Norway, Finland, Iceland) look like a more coherent bunch.

There are still good reasons for having a market study look at the petrol market: those rates of profitability that ComCom found, in particular, need some explaining.  But one conclusion from this exercise is that I wouldn't get carried away by the "we're one of the dearest in the OECD" line of argument.On this, entirely conventional, alternative way of making the comparison, we're a little bit on the expensive side of middle of the pack.

*If you want to see the data I've used, and maybe check I haven't got the wrong end of any sticks, it's here (assuming I've got Dropbox working right).

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.

Petrol profits

The Commerce Commission's paper on measuring profitability in the petrol business didn't formally call for submissions but if people had any views they could send them in by close of play today. Here are a few of mine.

The first thing is that, somewhat surprisingly, firms - perhaps many of them - can be earning persistent 'excess' profits even in workably competitive markets. The graph below, which is the absolutely standard 'demand curve crosses the supply curve' picture, shows how it happens.

We know that producer A would be earning its weighted average cost of capital at price PA because it is willing to offer to supply at that price, and it wouldn't if it wasn't. At the higher market price of Pe it is making above-normal-WACC returns.

Or as a very good text book* says, when you have upward sloping supply curves, as in my view you often will, "the market price in equilibrium will normally be determined by the level of cost of the higher-cost producers - the 'marginal producers' - who will make only a 'normal' profit (the market price only just covers their costs) ... At the market price, the lower-cost suppliers will make a healthy margin above cost".

So the ComCom paper is bang on when it says that "Even where competition is effective, the profitability of some suppliers may be above normal or competitive levels" (para 37) and that "Analysis of profitability by itself may not distinguish whether higher than competitive levels of profits are due to cost advantages [as with producer A in the graph], the exercise of market power, or a mix of both".

It follows that the focus of the profitability analysis should be firmly on the returns being earned by the marginal producer at Pe and not on intra-marginal producers like A. This was the approach correctly adopted in last year's first report from our Electricity Price Review (write-up here, with links to the review). It looked at whether prices were in line with the costs of the next (the 'marginal') generator commissioned.

The logic was

Contract prices that were above costs on a sustained basis would suggest weak competition among generators, and that the entry, or threatened entry, of new generators was not restraining prices. On the other hand, prices that were well below costs on a sustained basis would suggest looming problems with reliability of supply because new investment would not be able to keep pace with demand. The comparison suggests competition has been effective in restraining prices. Figure 14 shows how wholesale prices have moved broadly in line with the cost of adding more capacity. Importantly, there is no evidence contract prices have been above costs on a sustained basis in recent years (p32)

The other main point I'd like to make is that the ComCom paper currently places some reliance on where analysis of 'gross margins' might take you in any assessment of profitability. I'd say that the answer is, almost nowhere. They may have accounting or commercial relevance, but for all the reasons mentioned in para 68 of the paper they are indeed "an incomplete measure of performance". From an economic perspective gross margins tell you very little, although they might (in a very homogeneous industry) give some limited insight into productive efficiency. In particular there is no way of telling whether any particular level of gross margins is "too high"

I appreciate that in a world of limited and non-standardised industry data, ComCom is going to have to scrabble for whatever indicators, however indirect, are available to hand. But I'd downplay the gross margins route, and put more reliance on estimates of return on capital employed or return on equity (ROE), which in a market economy are the numbers that matter from an allocative efficiency point of view.

Two final small points.

In para 93 ComCom says that it will consider as an indicator of profitability "The returns being achieved on recent and proposed investment both by new entrants, and by existing participants expanding their operations, in the retail fuel markets ... we would expect returns on more recent investment to approximate the cost of capital if competition is workable and effective", which is very much along the lines of the point I made above about the profit conditions of the marginal producer. The only gloss I'd add is that, as ComCom looks at recent or proposed investments, it should be wary of the 'hurdle' rates companies tend to use to assess the profitability of investments (the projects have to have an internal rate of return that beats some minimum 'hurdle' level).

While generally it's very useful to examine internal company thinking at the time, the evidence is that hurdle rates are not good sightings of what the investing company thinks is its true WACC or ROE. The hurdle rate is typically well north of that, as companies tend to use hurdle rates to filter out overoptimistic managerial gaming of the investment budget.

And if the focus is going to be on ROE (as it ought), Stats already has some estimates of petrol company ROE in its Business Performance Benchmarker tool. Here for example are ROEs by size of petrol station. No idea of the basis of the calculations, but on the adage that if all else fails, read the instructions ...

* Gunnar Niels, Helen Jenkins, James Kavanagh, Economics for Competition Lawyers, 2nd edition, Oxford University Press 2016, p10

I've tried to stop...

...writing any more posts about market studies, but events have intervened. The government announced that it's going to fast track the Commerce Amendment Bill, which will give the Commerce Commission the powers to do studies, and also that the first one will be an inquiry into the petrol industry (which was always on the cards anyway).

So I headed smartly to the Transport and Infrastructure Select Committee's website to see where the Bill had got to, and found its final report (published on September 12). Market studies - or "competition studies" as we've elected to call them - have got the tick, though the Committee members divided on party lines on who should be allowed to initiate them. The majority backed either a Minister or the Commission (I'm with them), in line with MBIE's advice in its advisory report on the bill. The National members would have let the Commission initiate only with ministerial approval.

The Committee also went with another good MBIE recommendation. The Committee said (p3):

We consider that it would be appropriate for the legislation to require a government response to the final report. We do not consider it necessary to specify a time frame or process for the response. We recommend inserting new section 51E to require the Minister to respond to the commission’s final report on a competition study within a reasonable time frame.

I was really pleased about this. Of the 15 market studies submitters on the Bill (6 for, 6 broadly neutral, 3 against), only two folks had pushed for it - ASB Bank (submission here, the Ministerial response bit is on p7) and me (ditto, pp18-19). But MBIE thankfully saw enough merit in the idea to run with it. To my mind, it made no sense to set up a studies regime but not address the risk that they would be ignored.

There is also a useful focus (again following MBIE's sound advice) on following up what actually happens after the studies come out. As the Committee put it (p3)

We would like to see evaluations carried out to assess the effectiveness of each study and of the regime as a whole. We do not propose any legislative amendment in this regard. However, we suggest that, as part of the commission’s accountability arrangements with the responsible Minister, one of its performance measures should be to evaluate each competition study and report the results in its annual report.

I also learned from para 20 of MBIE's report to the Committee that "Cabinet has directed MBIE to carry out an evaluation of the competition studies regime after it has been in operation for five years". That's good practice. As I mentioned in a telco context ('Regulation done right'), it's easy to set up regulatory regimes and processes, and then forget to go back and check whether they've done any good or are still needed.

It's a pity in a way that it needed soaring petrol prices to be the catalyst that propelled competition studies up the legislative queue: they deserved a faster track than they'd got up to now. But that's realpolitik, and there's no point being naïve about it. If it took politicians' squirming to get a faster result, let's bank it and get the Commission underway that much quicker.

At the petrol pump

You don't - for good reason - get much of a chance to quote reams of facts on the radio. So for those of you who were listening to my stint on the National programme's 'The Panel with Jim Mora' on Tuesday, here are the numbers on what's driven the rise in petrol prices this year.

Conclusion - roughly two-thirds of the rise is down to the increased cost of the imported fuel, which has been hit by both a markedly higher world price in US dollars, and a markedly lower New Zealand dollar against the US dollar. It's not down to a big rise in petrol companies' margins, which is the story being used to frighten the children.

Most of the rest is down to taxes, by the way, and even more so in Auckland. The numbers above come from MBIE's weekly petrol price monitoring which as MBIE says "assumes retail petrol price are uniform nationally. Auckland City has recently introduced a regional fuel tax that will increase fuel prices in the Auckland region. Our currently methodology does not accommodate regional prices or regional fuel taxes. We are developing a new methodology ... that will include regional retail price differences". Aucklanders can add 11.5 cents to the increase in taxes, meaning that, for them, tax increases have been of the same order of importance as higher import costs.

The MBIE data are a great resource if you'd like to keep tracking developments for yourself. There was also an excellent explainer on the Newsroom website from Bernard Hickey, 'Q+A: Are petrol retailers profiteering?' which provides a lot of useful background.

Patrolling the petrol market

BP's been getting it in the neck about that leaked pricing memo from 2017, which proposed to fix its little local difficulty on the Kapiti Coast. BP Otaki had been bleeding volume because of its regionally high pricing, and the idea was to raise prices at BP Levin and BP Paraparaumu up to the BP Otaki level, and hope that the other petrol companies followed suit rather than leave all three BP outlets high and dry with out-of-the-market prices. BP had grounds to believe the others might well follow: the memo said that Z Paraparaumu had already followed the first 5 cents hike.

Cue for hysteria all over the place, carpetings by The Minister, and calls for boycotts and bonkers policies (eg national uniform petrol pricing).

While BP is perfectly capable of fighting its own corner - 'BP defends petrol pricing strategy' - it might be helpful to step back and look at the wider picture.

Yes, it's not good for consumers if the petrol industry starts running a leader-follower model and the leader is taking prices higher (we'd have much less of a problem if the leader was driving prices down). And the petrol companies are getting away with higher margins in parts of the country than they would if they faced more competition.

But to be fair to BP, it's not systematically a higher-price leader, though it used to be. Have a look at this graph, from MBIE's petrol study last year (I originally covered it here).

The bottom panel shows that over the period 2008-10 BP had virtually always led prices up, and had almost never led them down: if there was a time to rip into it, it was back then. Shell was the mirror opposite, always the leader down and never the leader up. 

But after Shell was bought in 2010 by the NZ Super Fund and Infratil and later renamed Z, the pattern changed markedly. Over 2010-15 Z was now the most likely to be first to raise, ahead of Caltex, though BP still did a bit of it. And the pattern changed on the down side, too: Z was still most likely to cut prices first, but BP was also a pretty active first mover. Strategies may have changed again since 2015, but BP isn't obviously the "let's take prices higher" coordinator it's been painted.

It's also not odd, by the way, for companies to be experimenting with all sorts of price changes, up and down. Here for example is a graph of what Air New Zealand was charging for a one-way flight from Auckland to Wellington, no bag, for travel on Wednesday May 3 or Thursday May 4.

The airlines, as memorably satirised in 'If airlines sold paint', are at one extreme of price differentiation: they've got more scope for it than the petrol companies because one flight is often not a perfect substitute for another, whereas a litre of 91 is a litre of 91. But it's also not unusual, even in workably competitive markets, to find companies selling much the same product at different prices in different circumstances. It's certainly not a strong basis for blowing a gasket and reaching for regulation.

And let's also recall that price discrimination isn't necessarily bad for consumers, either. The high price that an airline charges for the inelastic business passenger demand at the start and end of the business day helps fund those cheapo offerings for the budget end of the market. If there was uniform pricing, the budget traveller wouldn't get a look in at all.

It's also not at all clear that the petrol companies are collectively gouging everyone. It's true that their margins have been going up a bit recently as this chart shows (it comes from MBIE here). 

But short-term trends aren't a great guide to the longer-run state of profitability. As MBIE's longer-run and inflation-adjusted series shows below, margins aren't unusually high at the moment. They were higher in the mid 1990s, for example, and a good deal less than they were in the cushy days of the over-regulated industry of the 1980s.

All of this isn't to say that the petrol industry is problem-free from a competition point of view, as hapless buyers of petrol in the bottom of the North Island and the whole of the South Island know. Here are the petrol companies' margins, split out by North and Sound Island (again from last year's petrol market study).

The difference, of course, is the absence of Gull from the South Island: where it operates, Gull acts as an effective competitive discipline on the other companies' pricing. It's no coincidence where this latest brouhaha blew up: Gull is in Levin (its second most southerly outlet). The first best solution to keeping the petrol companies honest would be for Gull, or some other discount operator, to expand nationwide. 

Competitors rolling out their own infrastructure will always be the consumer's best friend. How hard would it be, for example, to get Whenuapai up and running as an effective competitor to Auckland Airport? And how much better would it be to have genuine traveller choice, and the lower prices that would come with it, than any regulate-the-one-supplier approach?

Whether a new or expanded competitor in the petrol game is realistic or not, I don't know. What I do know is that the ACCC's studies of the markets for petrol in the big Australian cities have shown that you need a reasonably large number of operators to get prices to sharp competitive levels. As I wrote in 'How many is 'enough'?', even though Brisbane has quite a decent range of operators (more than we have here in New Zealand), prices are 3.0-3.5 Aussie cents a litre higher than they are in the even more competitive Sydney market.

And I'm still not convinced that the Commerce Commission got it right when it let Z buy Chevron: Chevron and its Caltex stations had not been a strongly independent price-setter, but under different management it might have become one. Loss of that option may well prove costly, if nobody else is going to step up to the plate and expand a Gull-like pricing challenge.

How many is 'enough'?

The ACCC has been doing a fine bit of reporting on the state of competition in various petrol markets around Australia. Its latest one, out last week, is on Brisbane, where it found that motorists were paying roughly 3.3 Aussie cents a litre over the odds compared to the other large cities in Australia, which adds up to A$50 million extracted from drivers' pockets over a full year.

The reason? Less intense competition in Brisbane. Which looks a bit odd at first, when you compare the industry structure in Brisbane with that in Sydney. They don't look that different - in terms of numbers of petrol stations, both cities have the oil companies (BP and Caltex in Brisbane), supermarket outlets, independent chains, and small independents. We can only salivate in contemplation of the degree of choice both cities have compared to us (and in particular compared to our South Island).

But it's a bit more apparent than real. In Brisbane the ACCC found that the supermarkets and the independents don't always price that sharply ('RULP' in the graph is regular unleaded petrol). Coles by the way looks a bit worse than it really is, as the prices measured are pump prices, before using "shopper dockets" (those discounts you get with your supermarket receipt). I'd guess a big proportion of the drivers who belly up to Coles will be armed with the discount.

In Sydney, though, the independents go for it.

Part of the difference may be down to the pricing strategies the Brisbane companies have happened to follow. But part of it is down to the greater leeway the Brisbane players have to follow less aggressive pricing plans: there's been a degree of consolidation over the past ten years, with two independents merged into one, and 7-Eleven buying Mobil's stations.

This is sobering stuff for us on this side of the Tasman. If two supermarkets, two oil companies, five independent chains and a tail of small outlets aren't enough to constrain petrol prices in Brisbane to what's on offer in the other Aussie cities, what hope have motorists in New Zealand got of getting a really sharp price from the three big players (BP, Mobil, Z) and the regionally limited price discipline that Gull imposes?

The more time has gone by - and in the light of MBIE's petrol study (links to study here, my comments here and here) - the more I'm leaning towards the view that Dr Jill Walker, the dissenter in the Commerce Commission's approval of the Z/Chevron merger - had the right end of the stick. She said (para 40 of her dissent):

An independent Chevron also provides an ‘option value’ for increased competition in the future without the merger. Without the merger, Chevron’s assets would remain independent of Z. Importantly, this involves not simply retail assets, but an entire supply chain. Effective competition in retail fuel markets tends to be driven by retailers who are backed by their own independent supply chain, such as Gull in parts of the North Island...I am not satisfied that in the future without the merger, there is not a real chance that Chevron’s assets could be used to disrupt retail coordination and increase competition. With the merger, any real chance is permanently removed.

What the Brisbane report shows, in my view, is that you need to facilitate every bit of competition you possibly can: you need a lot of parties to get the sort of outcomes Sydney and Melbourne motorists enjoy. And the option value of one extra aggressive competitor is very high indeed when you're starting (as we are) from a highly concentrated starting point.

The other thing the Brisbane report shows - and I'm not apologising for banging on about it yet again - is what a useful thing these "market studies" are. Our Commerce Commission still hasn't got the ability to do what the ACCC has just done, and does anyone really think the ACCC report was a bad idea, or that the Commerce Commission wouldn't have done just as good a job?

Little birdies tell me that the legislation to give the Commission some limited market studies powers is getting closer and that a petrol study could well be first out of the blocks. There's even a chance that the Commission will, in time, be let do studies off its own bat instead of waiting for Ministerial direction.

Good.

The good bits from the half-baked cake

It's a shame that MBIE's inquiry into the petrol industry was semi-botched. The commissioned report did some good stuff, but was unable - and was always going to be unable, given the time and resource constraints it was lumbered with - to get to the only answer that would have really mattered: are the returns ('WACC') earned by the petrol companies excessive compared to what is reasonable for an industry like petrol retailing?

That, self-evidently, requires a set of standardised financial information so the companies can be assessed in a sensible way. But as the report team found the data wasn't always there at all, let alone reported on an industry-wide consistent basis, and it would have involved a good deal of heavy-duty financial analysis to make it consistent, as anyone involved with price regulation under Part 4 of the Commerce Act knows. The back end of Chapter 4 of the report lists all the knotty issues: they weren't going to be put to bed in the few months the report team were given.

I'm no great fan of finger-pointing with the benefit of hindsight, but on this occasion I think that the government and MBIE should have known there was a high risk that the profitability numbers, key to any definitive answers, weren't going to be forthcoming given the time and resources allotted.

And I'm also uncomfortable with this kind of judicial limbo. The petrol companies are neither clearly off the hook, nor clearly convicted. I'm not sure governments should be publishing reports, about anyone, effectively saying "you could well be up to something". That can't be right: prove something, or clear off.

That's another benefit, by the way, of properly resourced market studies rather than hurried half-measures. People tend to think that market studies are mostly used to find rorts and abuses, and of course they can and have, but equally they can clear companies of popular misconceptions. In New Zealand (and even more so in Australia) there is always going to be somebody having a go at some industry or other. Sometimes the go is well-founded, sometimes it's basely political: properly run market inquiries can put the facts to bed and see off the uninformed muckrakers. This half-baked time round, we ended up with just about the worst outcome, for everyone, of suspicions left unresolved. And we're now going to have to do the full, proper inquiry that should have been done in the first place.

More positively, the report did find some interesting non-WACC results. This pattern of regional petrol margins, for example, confirmed a lot of what the Commerce Commission's Z / Chevron decision had also found.

This is consistent with Gull constraining profitability where it operates (only north of Wellington). As the Commission put it (para 205), "The evidence suggests Gull is acting as a significant competitive force driving prices downwards".

What's happening in the rest of the country? Three of the Commissioners in Z / Chevron kicked for touch: they said (para 231.2) that in non-Gull areas, "it is unclear whether, viewed in the round, individual local market conditions can be said to be conducive to a coordinated outcome. There are a range of market features, that do not all point in the same direction", and anyway Z acquiring Chevron wouldn't make any difference to whatever was happening. The dissenting Commissioner, Dr Jill Walker, felt (para 10 of her dissent) that "there is currently evidence of such tacit coordination among petrol retailers which follows a leader-follower pattern".

She'd also argued (para 13, footnotes omitted) that "The increase in margins...appears to have come about from Z’s different strategy from Shell. Z has told us that Shell focused on generating volumes of sales and led prices down. Z has shifted to a strategy focused on increased margins at the expense of volume ".

This latest report found the same, as this graph (on p63) shows.

In the bottom half of the chart, Shell often used to take the lead in cutting prices: it never led prices up (BP tended to be first). In the top half, these days Shell, now Z, still does a fair amount of being first to cut prices, but it is now also prepared to lead prices up (it's slightly more active at it than Caltex and BP).

I'd stress there is nothing wrong from a Commerce Act point of view with any of this: any of these companies can pursue any independent pricing policy they like, even if it is follow-my-leader. And as the report notes (page 63) about the change in pricing strategy, "Z Energy – and some other interviewees – maintain that this was necessary, due to margins being too low because of Shell’s approach". But as I argued yesterday the excessively short-term focus of the MBIE enquiry - what's happened to margins since 2011? - meant that the question of whether margins had merely returned to more normal longer-term averages could not be explored properly either.

Finally, there's the finding that the pre-tax price of petrol is high by international standards, as this graph (on page 3) showed: the report said that "New Zealand is now an outlier when it comes to the pre-tax price of fuel".

Well, strictly true I suppose, depending on how "out" you need an "outlier" to be. Here's the same data graphed a bit differently (it's here on MBIE's website). Some countries are a bit higher than the average, some a bit below, nobody is a zillion miles out of line, so I wouldn't necessarily make a song and dance about "outliers".

That said, we are where we are. And while the pre-tax price isn't the be-all and end-all of anything - as the charts show (and the report also notes), taxes tend to make up most of the retail price - it's still an interesting fact that our pre-tax price is on the high side. If indeed it is a permanent fact at all, and not some unlucky draw of prices in particular one quarter at one particular set of exchange rates.

If it is a genuinely ongoing thing, 15 US cents a litre above the OECD average is worth a squizz. Is it transport costs? Some sort of inefficiency? And what on earth explains the grouping of New Zealand, Korea, Mexico, Australia and Switzerland down the dearer end, and the grouping of the Czech Republic, the UK, Slovenia, Ireland and Finland down the cheaper end? Damned if I can see any obvious common explanatory feature among that lot.

Yet another thing that an under-resourced inquiry wasn't able to look at properly.

The dog that sort of barked

MBIE's commissioned report on petrol prices has left everyone up in the air. The petrol companies have been sort-of fingered for profiteering - the report (page i) says "we cannot definitely say that fuel prices in New Zealand are reasonable, but we have reason to believe that they might not be" - but there's no smoking gun. "They could be ripping you off, maybe are, but who really knows" is an unsatisfactory outcome for the petrol companies, consumers and policymakers, and probably the report authors themselves.

I'll be coming back to this report over the next few days because I'm not especially happy with the outcome, but I'll just start with three observations to be going on with.

The first is that the report indirectly makes the case for 'proper' market studies, which the government has finally agreed to. That's no criticism of the people who carried out this report - Cognitus, Grant Thornton, and the NZIER, all capable and experienced folks. But it's frankly impossible to get to the bottom of anything without information-gathering powers that the report authors didn't have (but the Commerce Commission likely will when it gets going with its own reports). They got a lot of cooperation from the petrol companies, but that only takes you so far. Nor were they given the time the Commission would likely have been allowed (inquiry announced February 9, report delivered May 29).

The second is that the terms of reference hobbled the report from the git-go, with their heavy emphasis on short-term trends: "what is the return on average capital employed...in each year since 2011?", "What are the annual gross and net margins of each of the major businesses...What trends are apparent since 2011?" (my emphasis).

The report team politely pointed out (p92) that this didn't help:

The study period was also reasonably short – 2011 to 2015 – in an industry that is characterised by long-term pricing cycles. This carried a risk that those long-term trends would not be captured in the data we were using. We have had to bear this in mind when reaching our conclusions.

They did however have the wit to smuggle in one longer-term chart on the performance of the petrol industry (there are two other long series graphs in the report, on the world real oil price, and the link between the world price and the domestic price, but other than this one I'm about to show you, nothing on the local industry itself). Here it is, from page 1 of the report. It splits the petrol price into the petrol companies' costs (lighter blue) and their margins (dark blue) since 2004, expressed in real terms (2016 prices).

You'll notice that margins virtually vanished in the very difficult GFC period, and it gets you wondering about a cyclical explanation of petrol margins. Perhaps the petrol companies do well (like many other companies) when times are good (like now), but have to sharpen their pricing pencils when household and business budgets are stretched? Wouldn't it be nice to see a longer picture, over more cycles than just the GFC and the current expansion?

And there is one. On MBIE's own site. Here it is.

There's quite a plausible case that the strength of the business cycle is part of the explanation for variations in petrol margins. You can see the fall in margins after the '87 sharemarket crash (possibly conflated with anticipation of imminent deregulation), low margins again in the '90-'91 recession, better margins in the good years in the early to mid 1990s, and the sustained rise in the current expansion.

It's not a complete explanation. There was a sustained fall in margins in the good years of the early 2000s, so cycles can't be the full answer: there must be other longer-term trends going on, too. I'd be minded to dig out the HHI index for the industry, for example, as one of my first candidates to get added to the regression.

But either way the longer sweep of history clearly has something powerful to say about the state of margins at any single point in time: would there even have been an inquiry, if someone had pointed out that current margins are pretty much the same as they were twenty years ago? Quarantining the scope of the report to the last few years was a poor decision which prevented the report from developing the full value it might have had.

Finally, the report sensibly says that even if you harbour dark thoughts about what's going on, you'd want to be mighty careful about whatever regulatory sticks and carrots you reach for. Requiring some greater price transparency, for example, sounds good, but can backfire (page 87, emphasis in original):

While at first glance this type of regulation seems attractive and pro-consumer, it is a double edged-sword, although the second edge is not obvious. While these schemes give greater information to consumers, they give the same information to suppliers. That is, they increase the ability of suppliers to coordinate their prices.

One study of the German scheme found that prices for petrol increased by between 1.2 and 3.3 euro cents per litre as a result of the scheme, while the price of diesel increased by about 2 cents per litre.

And in general, the report says (p90)

Overseas experience suggests that even the most well-intended regulations can lead to perverse outcomes and unintended consequences.

Which is something else that the long-run MBIE graph shows: deregulation put a permanent dent in petrol margins. They've never returned to the regulation era levels. And it's a reminder, for those still minded to revisit the reforms of the 1984-90 Labour government, that these days regulation is at least intended to benefit the consumer. Before 1984, it was designed to enrich the producer.

Quick reactions to the Z/Chevron decision

The decision is out and it's pretty much as outsiders would have picked (and I should add I'm an outsider, not having advised any of the parties involved) - the likelihood always was (at least for petrol stations) that it would be either a clearance with divestments, or a decline, and we've ended up with a split decision, a 3:1 majority for clearance with divestments (19 petrol stations and 1 truck-stop), with one vote for a decline.

We don't have the full written decision yet, but the press release says the sticking point for the split decision was the possible increased risks of price coordination. The majority thought that "the loss of Chevron would make no material difference to this behaviour given its passive role in the market as a wholesale supplier. The likelihood of Chevron being an effective constraint on coordination in the future is low, even if sold in the future to another party". Dr Jill Walker in dissenting felt that "there is evidence of tacit coordination between petrol retailers in some regions, primarily where Gull is not present, and that this has contributed to increasing margins in the petrol industry" and that "the permanent removal of Chevron’s assets as an independent supply chain means its potential to disrupt coordination is gone and this behaviour would become more firmly entrenched post-merger".

I had three immediate reactions.

My first was that I was pleased to see a split merger decision: there haven't been many of them (the last one, from memory, was Ezi-Pay in 2012, which was a split decline). Yet the merger applications that come into the Commission these days tend to be complicated and borderline beasts, and frankly it would be very surprising if everyone invariably saw them the same way. For me split decisions suggest there there is indeed that "robust mix of viewpoints represented around the decision table" that I mentioned earlier this week.

My second was a quiet wonder to myself whether Australian and New Zealand attitudes to mergers (and arguably to competition issues as a whole) might be diverging: the majority were Kiwis, the dissenter the Aussie cross-appointee to the Commission. Could be entirely happenstance on the facts of this case, or it could be that the Aussies (rightly or wrongly) are taking a more hardball (or conservative, pick your own word) to competition risks. Sometimes the Aussies in my view go too far: I'm not yet persuaded, for example, that their actions to stop the supermarkets giving out very large petrol discount vouchers ('shopper dockets') were necessary. And some might argue that it's fine for the two jurisdictions to take different lenses to issues. All the same, it's probably best, if only to make trans-Tasman mergers more predictable, if there's a consistent perspective on both sides of the ditch. Perhaps there is, and the split-by-nationality is of no significance. Or perhaps there isn't, in which case it might be useful to explore how the two countries' regulators think about issues such as price coordination and the loss of potential disruptors, and how you assess economic evidence on the issues.

My third reaction is one that won't surprise readers of this blog, and that is the absurdity of the Commission's limited powers to look at the state of competition in markets. In this case, the Commission examined "whether coordination was already occurring in the retail [petrol station] market": it pointed out that even if it were, it may not be anything illegal, and that "The behaviours occurring in the retail fuel markets in New Zealand, such as price following, regional pricing differences and rising margins, can occur in both coordinated and competitive markets".

But it also said that "The majority of Commissioners consider it is possible, though not definitive, that coordination is occurring in some local markets. However, where they may have had the most concerns about coordination occurring post-merger, they consider the divestments remedy those concerns". Dr Walker, however, was not convinced: as noted above, she felt it was happening already.

The stupid thing is that this behaviour - potential, suspected, actual, benign, malign, whatever - only got examined because, fortuitously, a merger came in the Commission's window and triggered a look. The Commission has got no formal power to have a look off its own bat, even though it has a very good feel for where these coordination issues are likely to arise, and would know where to beat the bushes. I've gone on and on about the need for the Commission to be able to conduct 'market studies': it was already screamingly obvious that they should (assorted process issues can be dealt with), and this latest decision is yet more evidence why there's a problem. The government needs to get off its chuff and fix it.