By Pattrick Smellie
Sept. 16 (BusinessDesk) - Z Energy has released analysis that questions the Commerce Commission's basic arithmetic, use of economic concepts and choice of the formula it used to conclude the New Zealand transport fuel sector is uncompetitive.
"Z has discovered a number of inaccuracies in the draft findings on profitability, including a misrepresentation of Z’s 2016-2018 rate of return as about 22 percent, around double Z’s independently reviewed calculations of about 11 percent," said Z chief executive Mike Bennetts in a statement accompanying the company's submission on the first 'market study' of its kind undertaken by the government's competition watchdog under new law beefing up its investigation powers.
"The Commerce Commission's fuel study draft has material inaccuracies that need to be rectified," the statement is headlined.
The study had also used the wrong number of shares that Z had on issue, inflating the company's market value by $181.5 million, had ignored $158 million of goodwill booked at the time Z bought the Caltex fuel distribution business from Chevron NZ, used the wrong concept for assessing depreciation, and a deferred tax liability had been accounted for in a way unsupported by the relevant literature, a report from Victoria-based consultancy Incenta said.
A policy advisory firm, Incenta claims expertise in valuation and policy relating to regulated monopolies and the resources and energy, transport and government sectors.
Incenta also argued the commission's use of a formula known as 'Tobin's q' to calculate the level of competition in the New Zealand fuel distribution sector was "volatile and not appropriate to use as a benchmark".
Z scored a Tobin's q of 2.08, where anything higher than 1 is regarded as indicating some absence of competition. Backing out the claimed errors would reduce that to 1.28, Incenta said.
“This market study is the first of its kind and needs to be bullet-proof so that decision-makers, other industries and all Kiwis can be confident in the outcome of this and future market studies. We look forward to working with the commission to resolve some of the concerns we have," Bennetts said. "We agree with a lot of the draft report. We can’t agree with the draft findings on profitability."
Z's submission recommends that petrol stations all move to "fully display" all prices, including Premium and post-discount, on price boards. It also favours opening up wholesale market arrangements - a key commission recommendation - through the use of so-called 'terminal gate pricing', limiting wholesale contracts with distributors to seven years, and establishing an industry code for the retail fuels market that "sets clear rules".