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Petroleum Products Pricing Act - Petroleum Products Pricing Authority - Report - Year - 1981-82 (2nd)


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The Parliament of the Commonwealth of Australia

PETROLEUM PRODUCTS PRICING AUTHORITY

Annual Report

1981-82

Presented pursuant to Statute 21 October 1982 Ordered to be printed 27 October 1982

Parliamentary Paper No. 261/1982

Petroleum Products Pricing Authority

A n n u a l R e p o rt 1981— 82

ANNUAL REPORT OF THE

PETROLEUM PRODUCTS PRICING AUTHORITY

1981-82

Australian Government Publishing Service

Canberra 1982

© Commonweajth of Australia 1982

Commonwealth Government Printing Unit, Melbourne

Petroleum Products Pricing Authority

10 QUEENS ROAD, MELBOURNE, 3004,

Tel. 267 3700 Telex: AA32504

5 October 1982

The Hon. Kevin Newman, M.P. Minister for Administrative Services Parliament House CANBERRA A.C.T. 2600

Dear Minister

In accordance with Section 37 (1) of the Petroleum Products Pricing Act 1981, I have the honour to submit to you, for presentation to the Parliament, the Second Annual Report of the Petroleum Products Pricing Authority.

This Report reviews the operations of the Authority from 1 July 1981 to 30 June 1982.

Yours sincerely

C . W . CONRON Commissioner

iii

CONTENTS

Page

1 . INTRODUCTION 1

2. OBJECTIVES AND FUNCTIONS 2

3. EXEMPTION POWERS 6

4. PRICE MOVEMENTS IN J.981-82 7

5. DIFFERENCES IN MOTOR SPIRIT PRICES 16

6. COMMONWEALTH/STATE WORKING PARTY ON PETROL MARKETING MATTERS 19

7. INVESTMENT IN RETAIL SITES 20

3. PRICING PROCEDURES 23

9. PETROLEUM PRODUCTS FREIGHT DIFFERENTIALS 25

10. LIQUEFIED PETROLEUM GAS 27

11. STAFF 30

APPENDIXES:

A Annual Report of the Petroleum Products Pricing Authority 1980-81 31

Letter to the Minister for Business and Consumer Affairs

B Petroleum Products Pricing Act 1981 -Notice under Section 18 33

Direction from the Minister for Business and Consumer Affairs

C Petroleum Products Pricing Act 1981 -Notice under Section 18 34

Direction from the Minister for Business and Consumer Affairs

D. Classification of Staff Positions on Establishment. 35

iv

1 . INTRODUCTION

Section 37(1) of the Petroleum Products Pricing Act

1981 requires the Authority to report to the Minister on its

operations during the year ended on each 30 June.

This is the Authority's first report covering a

full 12 months period of operation since it was established

on 26 June 1981. A brief report of activities for the

period 26 June 1981 to 30 June 1981 was contained in the

form of a letter dated 24 August 1981 to the then Minister

for Business and Consumer Affairs, the Hon. John Moore. A

copy of that report is provided at Appendix A.

The Petroleum Products Pricing Act (No. 117 of

1981) which was proclaimed and became effective on and from

26 June 1981 gave effect to the Government's decision announced

by the Prime Minister on 30 April 1981 that, concurrently

with the abolition of the Prices Justification Tribunal (PJT),

a Petroleum Products Pricing Authority would be established

for the maintenance of the Government's petroleum products

pricing policy.

On 26 June 1981 Mr. C.W. Conron was apppointed to

the position of Commissioner of the Authority for a period of

5 years. Initially the office of the Authority carried out

its functions with the assistance of former P.J.T. staff

awaiting placement elsewhere in the Commonwealth Public Service.

Permanent staff appointments to the Authority were finalised

on 21 October 1981 and details of the establishment are

provided later in this Report.

Following a review of administrative arrangements the

Department of Business and Consumer Affairs was abolished on

7 May 1982. As from that date, responsibility for the Authority

was assumed by the Minister for Administrative Services.

1

■

2. OBJECTIVES AND FUNCTIONS

Subject to the legislative requirement that the

Authority shall have due regard to the need for declared

companies to achieve a level of profitability that is

sufficient to enable them to maintain an adequate level of

investment and employment,* the objective of the Authority is

to establish maximum wholesale prices for specified petroleum

products which are fair to both producers and consumers. The

Authority determines its maximum wholesale prices on the basis

of justified costs of production and wholesale distribution

and of a return on investment consistent with the abovementioned

requirement of the Petroleum Products Pricing Act.

The functions of the Authority as specified in

Section 16(1) of the Petroleum Products Pricing Act 1981 are

as follows:

"The functions of the Authority are to conduct inquiries in accordance with this Part in relation to -(a) the prices for the supply of petroleum products;

and

(b) the prices for the supply of services

and to report to the Minister the results of every such inquiry."

In accordance with Section 17, the Minister has

power to require the Authority to conduct a prices justification

inquiry or an inquiry into a specified matter related to the

prices at which petroleum products or services are supplied.

Subject to the approval of the Minister, the Authority may

conduct such other prices justification inquiries as it

believes appropriate.

2

Section 18 provides that the Minister may

direct the Authority to give special consideration, in

exercising its functions and powers under the Act, to the

matter or matters specified in a notice. Two such notices

were issued by the Minister on 16 November 1981, one relating

to spot purchases overseas of crude oil and petroleum products

and the other to wholesale prices of L.P.G. sold ex-refinery

gate. These notices appear as Appendixes B and C.

Sections 19(1) and 19(2)refer to the notification

to the Authority by a declared company of proposed increases

in prices of petroleum products or services. These sub­

sections require a declared company not to supply petroleum

products or services in a locality at a price higher than

the highest price at which those products or services were

supplied within the immediately preceding period of 90 days

or earlier unless a notice to that effect has been given by

that company to the Authority and at least one of the following

events has occurred:

(a) the prescribed period of 21 days from

the date of lodgement of the notice has

expired. (Provision, however, is made for

the extension of this period);

(b) the Authority has served notice in writing

on the company stating that the Authority

does not intend to hold an inquiry as to

whether the proposed price is justified, or

(c) the Authority has served a notice on the

company specifying a price which is lower

than the price notified by the company and

the company has given a further notice

stating that the price will not be higher

than that specified by the Authority.

3

Section 19(3) imposes a similar requirement where

a declared company has not previously supplied the petroleum

product or service to a locality. There is a penalty of

$10,000 for failure to comply with the provisions of Sections

19 (1) , 19 (2) and 19 (3) .

The procedure followed under these legislative

provisions is for companj.es to notify the Authority of proposed

price increases. The Authority examines the case presented

and, if it has no objection, it informs the company that it

does not intend to recommend a public inquiry. If there are

aspects of a notification not agreed to by the Authority, it

indicates its objections to the company which may submit an

amended notification or pursue its orginal claim. In the

latter case, if no agreement can be reached, the Authority

would be likely to recommend a public inquiry to the Minister.

In 1981-82, the Authority made no recommendations to the

Minister that a public inquiry be held.

For purposes of the legislation, the following

companies were declared by the Minister on 26 June 1981:

Amoco Australia Limited

Ampol Petroleum Limited

Ampol Petroleum (Victoria) Pty Limited

Ampol Petroleum (Queensland) Pty Limited

Ampol Refineries Limited

BP Australia Limited

BP Refinery (Westernport) Pty Limited

BP Refinery (Kwinana) Pty Limited

BP (Fremantle) Limited

Caltex Oil (Australia) Pty Limited

Golden Fleece Petroleum Limited

Australian Oil Refining Pty Limited

Australian Lubricating Oil Refinery Limited

Castrol Australia Pty Limited

Burmah Oil Australia Limited

4

Esso Australia Limited

Mobil Oil Australia Limited

Petroleum Refineries (Australia) Pty Limited

The Shell Company of Australia Limited

Neptune Oil Company Pty Limited

Shell Refining (Australia) Pty Limited

Total Australia Limited

5

3. EXEMPTION POWERS

Section 3 of the Petroleum Products Pricing Act

defines a petroleum product as any product derived from

petroleum but excludes:

(a) petroleum;

(b) any product specified in the Schedule to the

Act; or

(c) any product that the Minister has, by notice

in writing published in the Gazette, declared

not to be a petroleum product for the purposes

of the Act.

During the year it became apparent to the Authority

that it would be desirable to exclude from the coverage of

the legislation certain categories of products additional to

those specified in the Schedule to the Act. Accordingly it will

be recommending to the Minister that a Gazette notice be

issued giving effect to the required exclusions.

The Authority also intends to seek the enactment of

a Regulation which would prescribe those supplies of petroleum

products and services which it considers could be excluded from

its jurisdiction in accordance with Section 4 of the Petroleum

Products Pricing Act.

As the Authority expects there will be a continuing

need to adjust the list of prescribed products and services from

time to time, there would be advantages from an administrative

point of view if the Act were to be amended to give the

Commissioner power to approve or withdraw exemptions, by

Gazette notice, as circumstances dictate.

6

4. PRICE MOVEMENTS IN 1981-82

During the year the Authority received 228 notices

of proposed increases in prices of petroleum products or

services under Section 19 of the Petroleum Products Pricing

Act 1981. The notifications were concerned with the following

matters:

No.

Supply Costs (crude, feedstock and purchased product) 72

General Operating Costs (refining, marketing, wholesale distribution etc.) 13

New Products 16

Country Freight Differentials 77

State Franchise Fees - Vic. 24 - S . A . 8

- W.A. 6

- Tas. 5 43

228

Of the notices received, 12 were withdrawn by the

companies after consulation with the Authority. In 60 per

cent of the remaining cases a decision as to the maximum

justified price was taken within the 21 day period prescribed

by the legislation. Extensions of time were generally required

in the cases of State reviews of country freight differentials

and submissions on general operating costs.

Movements in Maximum Wholesale Prices

During 1981-82 maximum wholesale prices of super motor

spirit and distillate for individual companies increased

between 3 per cent and 9 per cent before account is taken of

State taxes. Maximum wholesale price increases in this range

occurred in New South Wales and Queensland, where no State taxes

were levied in 1981-82 and in South Australia and Western

Australia where State taxes had little effect on the rate of

7

increase. However in Tasmania maximum wholesale prices of

super motor spirit and distillate increased between 8 per

cent and 14 per cent and in Victoria between 5 per cent

and 10 per cent, the higher rate of increase in these States

resulting from the impact of State taxes.

The following table gives details of movements of

maximum wholesale reseller prices for super motor spirit and

distillate, including State taxes, during 1981-82.

8

MOVEMENTS IN MAXIMUM JUSTIFIED WHOLESALE PRICES OF MAJOR PRODUCTS

(A) MOTOR SPIRIT PREMIUM (BULK)

(B) AUTOMOTIVE DISTILLATE (BULK)

Company Sydney

c .p. 1

Melbourne Brisbane c.p.l. c.p.l.

Adelaide c.p.l.

Perth c.p.l.

Hobart c.p.l. ■

Amoco 1/7/81

30/6/82

A B A B A B A B A B A B

34.67

36.83

34.31

36.35

36.14

38.75

36.88

39.68

34.47

36.63

34.23

36.27

35.80

38.13

36.27

38.59

Ampol 1/7/81

30/6/82

34.68

37.33

33.99

36.64

36.15

39.25

36.56

39.97

34.48

37.13

33.91

36.56

35.81

38.63

35.95

38.88

36.08

37.73

36.99

39.64

34.66

38.88

34.08

38.28

B.P. 1/7/81

30/6/82

34.37

36.38

34.36

35.70

35.86

38.32

36.93

39.03

34.20

36.21

34.30

35.64

35.51

37.69

36.29

37.91

35.80

37.81

37.36

38.70

34.37

37.95

34.44

37.33

Caltex 1/7/81

30/6/82

34.28

37.11

33.94

36.84

35.75

39.03

36.51

40.17

34.08

36.91

33.86

36.76

35.41

38.41

35.91

39.09

35.68

38.51

36.94

39.84

34.26

38.66

34.03

38.48

Esso 1/7/81

30/6/82

34.26

36.41

33.72

35.70

35.73

38.33

36.29

39.03

34.06

36.21

33.63

35.61

35.39

37.71

35.68

37.94

35.66

37.81

36.72

38.70

Mobil 1/7/81

30/6/82

33.91

36.95

33.75

36.76

35. 38

38.87

36.32

40.09

33.71

36.75

33.66

36.67

35.04

38.25

35.71

39.00

35.31

38.35

36.75

38.76

33.89

38.50

33.84

38.40

Shell 1/7/81

30/6/82

34.46

35.68

34.27

35. 38

35.93

37.60

36.84

38.71

34.26

35.48

34.18

35.29

35.59

36.98

36.23

37.62

35.86

37.08

37.27

38.38

34.44

37.23

34.36

37.02

Total 1/7/81

30/6/82

35.02

36.97

34.67

36.87

36.42

38.82

37.24

40.20

34.82

36.77

34.58

36.78

36.15

38.27

36.92

39.40

9

Major Reasons for Variations in Maximum Wholesale Prices

The major influence on the maximum wholesale price

movements over the twelve month period was the higher cost of

both indigenous and imported crude oils.

At 1 January and 1 July each year the Minister for

National Development and. Energy determines prices to be paid

by refiners for indigenous crude oil from the Bass Strait,

Barrow Island, Dongara and Moonie fields.

The Bass Strait crude price increased by 6.7 per

cent over the period as follows:

1 July 1981 from $30.23 to $30.79 per barrel

1 January 1982 from $30.79 to $32.25 per barrel.

The Bass Strait field accounts for about 93 per

cent of indigenous crude production.

Depreciation in the value of the Australian dollar

against the American dollar in 1981-82 from $US1.1779 to

$US1.0532 resulted in an increase of 10.6 per cent in the

cost of imported crude, feedstock and product.

Arabian light crude is the marker crude on which the

Commonwealth Government's import parity pricing policy is based,

being the highest volume crude imported by Australian refiners.

The official Saudi Arabian price was increased from $US32

to $US34 per barrel, effective from 1 October 1981.

Price movements resulting from these higher supply

costs were tempered somewhat by lower freight rates on imports,

falling free on board (F.O.B.) postings for some imported

products and lower F.O.B. prices for certain imported crude

types.

10

A summary of the maximum wholesale price increases

for super motor spirit and distillate approved for each company in the period 1 July 1981 t:o 30 June 1982, resulting from supply

cost movements, is set out in the following table:

Company Cents per Litre

Super Motor Spirit Distillate

Amoco 1.72 1.59

Ampol 1.69 1.81

B.P. 1.57 1.34

Caltex 1.80 2.20

Golden Fleece 1.70 2.30

Esso 1.32 1.58

Mobil 1.96 2.27

Shell 0.59 0.61

Total 1.40 1.66

Note: In general, supply costs can be defined as those costs

relating to the cost of purchasing and transporting

crude oil, feedstock and refined product.

Each oil company lodged at least one notification

for proposed increased prices to recover increases in general

operating costs. The trend has been towards six-monthly notices

for these costs.

General operating costs may be classified under

the following major headings with examples of major components:

(a) Labour Costs

- Administration

- Manufacturing

- Marine

- Marketing handling and distribution

11

(b) Administration Costs (Excluding Labour)

- Data processing

- Insurance

- Maintenance and operating costs of buildings

- Maintenance and operating costs of vehicles.

(c) Manufacturing Costs (Excluding Labour)

- Processing materials (catalysts, lead etc.)

- Utilities (gas, water and electricity)

- Contract maintenance and repairs

- Maintenance and repair materials.

(d) Marine Costs (Excluding Labour)

- Coastal shipping

. product

. crude and feedstock.

(e) Pipeline Costs (Excluding Labour)

(f) Marketing, Handling and Distribution Costs (Excluding Labour)

- Agents 1 commission

- Repairs and maintenance on dispensing equipment and inland terminals

- Advertising

- Sales representatives expenses

- Sales administration and accounting

- Transporation and handling. .

The following table sets out the maximum wholesale

price increases approved for super motor spirit and distillate

for each company in the period 1 July 1981 to 30 June 1982

in respect of general operating costs. It should be noted

that companies lodge notices at different times covering

different periods and that meaningful comparisons therefore

cannot be made between the increases awarded to individual

companies during the year under review.

12

Cents Per Litre

Company

Amoco

Ampol

BP

Caltex (and Golden Fleece)

Esso

Mobil

Shell

Total

Super Motor Spirit

0.44

0.96

0.44

1.03

0.83

1.08

0.63

0.55

Distillate

0.45

0.83

0.70

0.41

0.74

0.50

0.54

Maximum justified wholesale prices which were

applicable to petroleum products at 30 June 1982 included

franchise fees imposed by the State Governments of Victoria,

Tasmania, South Australia and Western Australia under State

business franchise legislation.

The amounts of those fees, together with the increases'

passed into prices during 1981-82, are shown in the following

table:

Super Motor Spirit Distillate

Franchise

State Fee

c.p.1.

Victoria 2.05

Tasmania 1.57

South Australia 1.50

Western Australia 1.60

Included in price for

* Effective 1

that date. July 1981

Increase Franchise Fee Increase

c.p.l. c.p.l. c.p.l.

0.45 3.33 0.76

1.57s 2 * 1.55 1.55s 2 *

0.17 2.53 0.28

0.30* 3.00

first time on 1 December 1981

and included in price at

13

Retail Prices

The following table shows movements in average retail

prices of super motor spirit in the major capital cities since

1976. During 1981-82 average retail prices fell by 4 per cent

to 5 per cent in Melbourne, Brisbane and Adelaide but increased

by 2 per cent in Perth, 4 per cent in Sydney and Hobart and

by 7 per cent in Canberra. These varying price movements reflect

primarily differing competitive pressures in the capital cities.

It should be noted that the Authority determines

maximum wholesale prices but does not regulate retail prices.

14

AVERAGE RETAIL PRICES

MOTOR SPIRIT - PREMIUM GRADE

(CENTS PER LITRE)

QUARTER SYDNEY MELBOURNE BRISBANE ADELAIDE PERTH HOBART CANBERRA

1976

MAR 17.8 13.7 16.5 14.7 15.8 16.7 16.7

JUNE 16.1 13.8 16.8 14.7 16.2 17.0 16.9

SEPT 16.4 14.0 17.2 14.7 16.5 17.6 17.3

DEC 16.5 14.0 16.8 15.2 16.2 17.6 17.4

1977

MAR 17.1 14.7 17.1 15.9 16.3 18.5 18.4

JUNE 16.6 14.7 17.0 15.5 15.8 18.6 17.8

SEPT 16.4 15.3 17.3 16.2 16.2 19.4 18.4

DEC 18.2 16.7 18.0 17.5 17.8 21.2 19.7

1978

MAR 17.8 16.7 17.9 17.2 17.7 21.2 19.1

JUNE 17.8 16.9 18.0 16.9 17.7 21.6 19.0

SEPT 18.3 16.6 17.9 17.3 17.6 18.8 18.8

DEC 21.8 20.4 21.9 20.9 21.4 20.7 21.2

1979

MAR 23.0 20.7 22.3 21.1 21.4 22.2 22.3

JUNE 24.2 23.4 25.0 23.9 23.8 25.1 25.3

SEPT 25.6 26.4 26.1 25.0 26.0 28.5 27.1

DEC 28.9 28.1 28.5 29.4 28.9 29.5 29.8

1980

MAR 27.6 27.7 27.9 29.0 28.6 29.5 30.0

JUNE 32.6 31.4 31.5 32.0 32.6 32.9 34.9

SEPT 31.2 30.1 30.1 30.2 31.0 34.0 34.3

DEC 32.0 30.9 30.6 30.5 31.8 33.7 35.1

1981

MAR 33.2 34.8 31.3 35.3 34.2 34.8 35.8

JUNE 35.1 38.0 37.3 39.4 38.0 38.1 37.6

SEPT 33.2 34.7 35.5 35.9 37.8 38.1 37.6

DEC 36.0 36.1 36.3 36.2 38.5 38.1 37.9

1982

MAR 35.5 33.4 39. 0 36.5 37.9 40.0 37.3

JUNE 36.6 36.5 35.8 37.5 38.6 39.7 40.2

% CHANGE IN 1981-8 2 4 -4 -4 -5 2 4 7

Source - Australian Bureau of Statistics

15

5. DIFFERENCES IN MOTOR SPIRIT PRICES

Differences in prices charged for motor spirit between

the States and within the States attracted much public

comment during the year. Such differences were particularly

evident at the retail level and it is perhaps necessary to

again emphasise that the Authority's role in pricing is

restricted to wholesale prices. In performing its function,

the Authority determines maximum justified wholesale prices

for motor spirit sold by declared companies (currently the

major refining and marketing companies operating in Australia)

in each State capital city. Variations in maximum wholesale

prices of the companies in any one capital city reflect

differences in their costs and differences in their individual

pricing strategies for recovering those costs against the

range of petroleum products each produces.

The maximum justified wholesale price for motor spirit

for any one company differs between the State capital cities

at which refineries exist for the following reasons:

. Taxes imposed by some States. In 1981-82

States taxes applied in Victoria, South

Australia, Western Australia and Tasmania;

. Low lead content regulations. Prices in

Victoria and Tasmania and in Sydney, Wollongong

and Newcastle include amounts to compensate

for costs incurred as a direct result of low

lead content regulations.

Subject to the foregoing exceptions, the maximum wholesale

prices determined by the Authority for each company are the

same in each State capital at which a refinery exists.

16

Whilst the Authority establishes maximum justified wholesale

prices, the wholesale prices actually charged reflect the

competitive forces in the various State markets and, in part,

the price regulation activity of some State Governments.

As at 30 June 1982 the maximum wholesale price for

motor spirit in South Australia was limited by State legislation

to 3 cents per litre below the maximum justified prices estab­

lished by the Authority. In New South Wales, maximum wholesale

prices set by the N.S.W. Prices Commission ranged from .38 to

1.00 cents per litre below the prices set by the Authority.

Wholesale purchasers of motor spirit, namely lessee

dealers, owner dealers, independents and direct purchase

distributors, are not a uniform group and represent a range

of potential transactions to oil companies with varying

degrees of attractiveness depending upon factors such as the

volume involved, location, degree of competition, and security

of continued supply. Such differences are reflected in the

range of discounting off the essentially uniform maximum

justified wholesale prices established by the Authority.

The extent of this discounting is influenced by

conditions of supply and demand prevailing in the petroleum

products industry. An important factor in the market for

petroleum products in 1981-82 was that there was practically

no growth. The volume of sales increased by only 0.3 per

cent and over the three years ending in 1981-82 the volume

of sales of petroleum products fell by almost 4 per cent.

In periods when demand for petroleum products shows little

growth and spare refinery capacity exists, discounting will

tend to intensify as companies seek to maintain or even

increase their market share. Under such circumstances,

competing companies may be prepared to make some sales at a

wholesale price which only just covers, or is even below,

their marginal operating costs, so that a widening of the

range of actual wholesale prices may take place.

17

Prices determined by the Authority are maximum

wholesale prices - there is no restriction on companies

charging lower prices to meet the marketing situation in

particular areas and it is clear from the retail prices

charged during 1981-82 that they frequently do so. When

this happens, the companies are reducing their profit margins

in an effort to maintain or increase their sales. Published

profits of oil companies in their most recent financial

years have been relatively low and most companies have

acknowledged in their Annual Reports that market competition

has been a major cause of this low return.

The maximum justified wholesale price of motor spirit

for any location in Australia outside the capital cities is

obtained by adding a differential representing the freight

cost (an average cost in practice) for that location determined

by the Authority, to the appropriate capital city maximum

justified wholesale price and then deducting the subsidy

payable by the Commonwealth Government under the States Grants

(Petroleum Products) Act 1965. The effect of the freight subsidy

scheme in 1981-82 was that sales of motor spirit to resellers

located outside capital cities were subject to a maximum

wholesale price which was no more than 0.44 c.p.l. higher

than the maximum justified wholesale price applying to

sales to resellers in capital cities.

As the Authority does not exercise jurisdiction

over retail prices of petroleum products, it can only make

general observations on the pattern of such prices. Prices

charged for motor spirit by individual resellers (irrespective

of location) reflect the general conditions of supply and

demand prevailing in the particular market in which the

resellers operate. These factors are reflected in differing

retail margins levied by individual resellers which, when

added to the varying wholesale prices charged by companies,

account for the varying retail prices observed in particular

cities and the various States.

18

6. COMMONWEALTH/STATE WORKING PARTY ON PETROL MARKETING MATTERS

At a meeting in Adelaide on 6 November 1981,

Commonwealth, State and Territory Ministers for Consumer

Affairs agreed to establish a working party of Commonwealth

and State officials to examine matters relating to petrol

marketing under the following terms of reference:

. To identify common problems Governments face in relation to the marketing of petrol;

To analyse the argument that partial divorcement* is a sufficient degree of divorcement;

To examine the case for greater separation of wholesale and retail activities;

To investigate the feasibility of taking steps which may produce a relatively uniform price of petrol throughout Australia.

* "Divorcement" is the term used to describe the removal of oil companies from the operation of retail sites.

A representative of the Authority attended a

meeting of the working party, relating to petrol pricing.

The report of the working party was discussed at a

meeting of Commonwealth, State and Territory Ministers for

Consumer Affairs held in Brisbane on 16 April 1982. At that

meeting, questions were raised about the procedures followed

by the Petroleum Products Pricing Authority in determining

maximum wholesale prices and it was agreed that the Commissioner

should visit all States to discuss the matter with Consumer

Affairs Ministers.

By 30 June 1982, in accordance with this arrangement,

the Commissioner had visited New South Wales, Victoria, Western

Australia, South Australia, and Queensland.

19

7. INVESTMENT IN RETAIL SITES

On 21 August 1980 the Prices Justification Tribunal

was requested by the Minister for Business and Consumer

Affairs, the Hon. Mr. R.V. Garland, M.P., to examine the

basis of petroleum product prices. As part of the reference

the Minister asked the Tribunal to investigate whether

maximum wholesale prices

component which represented a return on investment in retail

sites (service stations), or the recovery of the costs of

operating such sites and, given the existence of any such

component, whether it should be allowed to continue to be

included in wholesale prices.

In a report on these matters dated 31 March 1981,

the Tribunal stated on the basis of the information before

it, that it seemed likely that the existing maximum justified

wholesale price of petrol included an amount related to a

return on oil companies' investment in service station sites,

i.e. the so called "buried rent" component. It reached this

view on the basis of evidence that oil companies were continuing

to invest in service station sites for leasing to dealers

even though the rental expected to be received from the

dealer would be insufficient (after covering the companies'

landlord expenses such as rates, taxes etc.) to earn an

appropriate rate of return on the investment in the site.

This behaviour on the part of oil companies suggested to the

Tribunal that an amount within the wholesale price of petrol

was expected to supplement the return on such investments.

The Tribunal considered that the return on investment by oil

companies in service station sites should be recovered only

by way of adequate rentals levied on the lessee dealers and

that the wholesale price of petrol charged to lessee dealers

should be reduced accordingly. The Tribunal noted that

this would not necessarily result in a change in the retail

price of petrol paid by consumers.

20

At the time of preparing its report, the Tribunal

had insufficient information on oil companies' retail site

investment decisions to quantify the appropriate adjustment

component. It considered the possibility of determining the

size of the component on the basis of data available on the

differential between the average wholesale price charged by

oil companies to their lessee dealers and that charged to

dealers who owned their own service stations (1.26 c.p.l. as at

1 September 1980). However, the Tribunal concluded that

factors other than the existence of a "buried rent" component

in the wholesale price to the lessee dealer determined the

magnitude of this average differential and that this was not

a satisfactory approach to the problem. Likewise the various

estimates of the "buried rent" component postulated by the

Royal Commission on Petroleum in 1976 (1.32 c.p.l. to 1.76

c.p.l.) were not utilised by the Tribunal. Rather, the

Tribunal proposed to obtain further information on oil

companies' retail site investment behaviour to determine the

magnitude of the "buried rent" component and then remove

that amount from the maximum justified wholesale price of

motor spirit in January 1982.

In the event, the Authority assumed responsibility

for gathering this information and determining the matter.

Following some investigation, it was confirmed that oil

companies do in fact assess proposed service station investments,

not solely on the basis of whether the rental income from

the lessee dealer would earn an adequate return on the

investment, but also by taking account of the additional net

sales income expected to be generated through the wholesale

sales of petroleum products to the lessee dealer at the

service station. This net sales income anticipated by oil

companies is calculated by them as being generated by the

excess of the expected wholesale price over the estimated

marginal operating costs of refining and distributing the

petroleum products expected to be sold to that retail site.

21

Thus this new information provided the explanation

for such investments proceeding despite seemingly inadequate

rentals being charged to lessee dealers and, in so doing,

challenged the basis for concluding that "buried rent"

existed. Accordingly, the Authority took the view that it

would not be appropriate to regard the excess of the

expected wholesale price over the estimated marginal operating

costs as the "buried rent" component to be removed from the

maximum wholesale price, as this would effectively involve

setting new maximum wholesale prices based only on the

estimated marginal operating costs of refining and distributing

products to new retail sites. Such a pricing policy, if

adopted by the Authority, could put investment and employment

in the industry at risk and would therefore be inconsistent

with Section 16(5) of the Petroleum Products Pricing Act.

The Authority's proposed new pricing procedures

(see Chapter 8) will ensure that costs entering into the

calculation of maximum wholesale prices of petroleum products

are clearly identifiable and reflect only the costs of

manufacture and wholesale distribution together with an

appropriate return on capital.

A paper outlining in detail the considerations

which led to the Authority's decision concerning the retail

site investment component was published on 14 December 1981.

22

8 . PRICING PROCEDURES

In its report on the inquiry into prices of petroleum

products dated 31 March 1981 the Prices Justification Tribunal

undertook to review its procedures for assessing the justifi­

cation of wholesale prices of petroleum products proposed to

be charged by oil companies. Specifically, the Tribunal

undertook to prepare a draft statement of the criteria

procedures and information it would utilise when assessing

future pricing proposals of companies and to make that draft

statement available to the industry and interested parties

for comment prior to implementation.

Following the abolition of the Tribunal as from

26 June 1981 the Petroleum Products Pricing Authority assumed

responsibility for this review. To facilitate both the

receipt and subsequent assessment of comment from the industry

and interested parties regarding the proposed procedures,

it was decided to issue the draft papers sequentially. Three

such papers were issued during 1981-82.

The first paper in this series discussed the basic

pricing model underlying the proposed procedures by adopting

as a starting point the principle of setting a maximum price

equal to unit (or average) cost plus unit profit. However,

because the joint production of a number of petroleum products

from the same inputs (crude oil and feedstock) does not permit

the unique identification of the unit costs of individual

products, Draft Paper No. 1 outlined a procedure whereby

maximum wholesale prices of individual products could be

related to the unit cost per barrel of total output plus unit

profit per barrel of total output (via a notional maximum

price for a barrel of total output). That paper also noted

that if maximum wholesale prices were established on this

basis, it would be possible to relate changes in maximum

wholesale prices to changes in the unit cost and unit profit

per barrel of total output.

23

The following two draft papers outlined proposed

procedures for relating changes in maximum wholesale prices of

petroleum products to changes in the unit cost of production

and wholesale distribution per barrel of total output. Su h

unit cost changes were partitioned into unit "supply" cost

changes relating to crude oil and refined inputs (discussed

in Draft Paper No. 2) and unit "domestic" cost changes relating

to costs of refining and4wholesale distribution (discussed in

Draft Paper No. 3). As specified in those two papers, it is

envisaged that companies will notify the Authority on a regular

and standardised basis of changes in their unit costs of

production and wholesale distribution through "supply cost"

notifications and "domestic cost" notifications.

A fourth draft paper to be issued will outline

proposals to assess maximum wholesale prices periodically on an

industry-wide basis by examining the level of unit profit per

barrel of total output in conjunction with the level of unit

costs per barrel of total output.

Examination of comments on the first three draft

papers received from the industry and interested parties is

proceeding.

24

9. PETROLEUM PRODUCTS FREIGHT DIFFERENTIALS

During the course of the year the Authority commenced

a detailed examination of its procedures for establishing

inland freight differentials. At the invitation of the Authority,

submissions were received from the major oil companies and

discussions were held with them.

A freight differential is the means by which oil

companies recover freight costs incurred in transporting

products to country areas. Differentials are calculated by

the Authority and applied to motor spirit, power and lighting

kerosene, automotive distillate, aviation fuels, heating oil,

industrial diesel oil and lubricants. For each of these

products the country location maximum wholesale price is

arrived at by adding a differential, representing the freight

cost, to the relevant capital city maximum wholesale price.

The freight costs for motor spirit, power kerosene,

automotive distillate and aviation fuels are subsidised by

the Commonwealth Government which, in 1981-82 reimbursed

oil companies and other registered distributors for freight

costs higher than 0.44 c.p.l. The levels of subsidy payable

for deliveries to country locations are based on the differen­

tials established by the Authority. In 1981-82 , the effect

of the subsidy was to restrict the difference between the

Authority's maximum justified capital city and country

wholesale prices for subsidised products to 0.44 c.p.l.

The Authority calculates differentials for approx­

imately 10,000 inland locations throughout Australia.

Differentials are established and reviewed on a State by

State basis. The differentials applying in each State are

reviewed at intervals of approximately 9 to 12 months.

25

During each review the major oil companies submit

to the Authority their costs of making deliveries to individual

locations in the relevant State. These costs may involve

separately , or in combination, deliveries of petroleum

products made by road, rail or sea. Differentials in Victoria,

Tasmania and areas of west New South Wales are calculated on

a zonal basis. Elsewhere in Australia, differentials are

calculated for individual inland locations.

The present policies and procedures for the establish­

ment of differentials were introduced by the Prices Justification

Tribunal when it assumed responsibility for the calculation

of differentials in late 1974. Prior to that time the

calculation of differentials, was undertaken by an oil industry

secretariat. Although some changes were made by the Prices

Justification Tribunal, the present system is substantially

in accordance with the earlier oil industry practices.

In recent years, an increasing volume of petroleum

products has been carried to country locations by independent

operators such as direct purchase distributors, consignment

agents and jobbers. Formerly country deliveries were mainly

undertaken by oil companies or by agents of the companies

who did not own the product. This change in delivery

arrangements has caused a deterioration in the quality of

the freight cost data submitted by companies as their access

to actual costs has declined. Accordingly the Authority

decided that it was necessary to review the procedures for

establishing freight differentials.

At the close of the year the Authority had completed

its consideration of the principal issues and was in the

process of preparing revised procedures to be followed by

oil companies in submissions seeking changes in freight

differentials.

26

10. LIQUEFIED PETROLEUM GAS

One of the Authority's first functions was to

establish the maximum justified wholesale price (ex-refinery)

of liquefied petroleum gas (LPG) to apply on and from 1 July

1981. The price had been calculated by the Prices Justification

Tribunal in accordance with a direction to the Tribunal by

the Minister for Business and Consumer Affairs on 11 April

1980. This direction, together with the LPG policy statement

on which it is based, is reproduced in full in the Annual

Report of the Prices Justification Tribunal 1979-80. An

implication of the direction was that there should be a review

of the maximum wholesale price of LPG to apply on and from

1 January and 1 July each year. On 1 July 1981 the maximum

justified wholesale price of ex-refinery LPG (propane and

butane) was set at $228.88 per tonne.

On 16 November 1981, the Authority received a direction

on LPG pricing from the Minister for Business and Consumer

Affairs. The text of this direction, which was similar to

that given to the Tribunal, is set out below:

"In pursuance of section 18 of the Petroleum Products Pricing Act 1981, I, JOHN COLINTON MOORE, the Minister of State for Business and Consumer Affairs, hereby direct the Petroleum Products Pricing Authority to give special consideration in exercising its functions and powers under that Act, to the following matters:

the need to ensure that wholesale prices of LPG sold ex-refinery gate, other than for use as a petrochemical feedstock or for non-traditional industrial uses, are established on 1 January and

1 July each year at a level not exceeding the lower of:

(i) export parity as determined by the Authority having regard to export prices of LPG achieved in the international bulk export market as well as those achieved by Australian exporters of LPG; or

27

(ii) the price of $205 per tonne indexed to the increase in the import parity price of Bass Strait crude oil, as determined by the Minister for National Development and Energy, over the price of $155.87 per kilolitre."

Export parity was the basis for the calculation of

the maximum wholesale price to apply on 1 July 1981. It was

also the basis for the price of $200.15 per tonne which applied

on 1 January 1982, and for the price of $220.09 per tonne to

apply on 1 July 1982.

After the Authority determines a maximum wholesale

price for ex-refinery LPG, the Minister for National Development

and Energy announces the same price for naturally occurring

LPG, which is exempt from the provisons of the Petroleum

Products Pricing Act, to apply on and from 1 January and

1 July each year. This ensures that there is a single base

price for LPG regardless of its source.

During 1981-82 the Authority also examined notifi­

cations from declared companies of changes to maximum wholesale

prices of LPG in localities beyond the refinery gate. These

prices are made up of the ex-refinery price plus the cost of

transporting the product to a particular location.

From its inception the Authority has been concerned

that it does not have adequate jurisdiction over the pricing

of refinery produced LPG in localities beyond the refinery

gate as part of the wholesale distribution of the product

is in the hands of distributors who, unlike the oil companies

which are declared under the Act, are not required to notify

the Authority of any intention to vary prices. In order that

all major distributors might be treated in a uniform manner,

it would be necessary to declare these additional supplying

companies under the Act. However, this solution could not

apply to the Victorian Gas and Fuel Corporation which is a

statutory authority and hence not subject to the jurisdiction

of the Petroleum Products Pricing Act.

28

A further problem arises as a consequence of the

Authority not having jurisdiction over the price of naturally

occurring LPG. Where this product is sold wholesale in

localities, either separately or mixed with the refinery

produced product, the Authority has no control over prices

charged, even where the product is sold by companies declared

under the Act.

The Authority notified the Minister of these

matters and suggested the appropriate course would be to exempt

sales of ex-refinery LPG beyond the refinery gate from its

jurisdiction. On 15 June 1982 the Minister informed the

Authority that sales of ex-refinery LPG beyond the refinery

gate were to be removed from the provisions of the Petroleum

Products Pricing Act. The issue of a Regulation under Section

4 (2j (a) (iii) of the Act is expected to give formal effect to

this decision.

29

11. STAFF

Section 34(1) of the Petroleum Products Pricing

Act 1981 requires that the staff assisting the Authority in

the performance of its functions shall be persons appointed

or employed under the Public Service Act 1922.

The Office of the Authority which is under the

control of a Director, Mr. C.V. Kennedy, has a staff ceiling

of 16 officers. Details of the classification of positions

in the Authority are shown in Appendix D.

The setting up and organisation of the Petroleum

Products Pricing Authority and the dismantling of the Prices

Justification Tribunal occurred concurrently. It involved

the selection of staff to service the Authority and the

placement of 64 officers employed by the Tribunal as at

26 June 1981.

In the event, 15 of the surplus Tribunal staff

were placed in a permanent capacity in the office of the

Authority and transfers to other Commonwealth Departments or

Agencies, at existing classifications, were arranged, with

the assistance of the Victorian Office of the Public Service

Board, for a further 33 officers. As at 30 June 1982,

16 ex Prices Justification Tribunal officers were still

working with other Commonwealth bodies on a gainful employment

basis, awaiting permanent placement.

30

APPENDIX A

ANNUAL REPORT OF THE PETROLEUM PRODUCTS

PRICING AUTHORITY 1980-81

LETTER TO THE MINISTER FOR BUSINESS AND CONSUMER AFFAIRS

The Hon. John Moore, M.P. Minister for Business and Consumer Affairs Parliament House

CANBERRA A .C .T . 2600

Dear Minister,

Section 37(1) of the Petroleum Products Pricing

Act 1981 requires the Petroleum Products Pricing Authority

to report to you with respect to the operations of the Authority

during the year ended on 30 June.

The Petroleum Products Pricing Authority was estab­

lished on 26 June 1981 to take over from the Prices Justification

Tribunal the responsibility for price surveillance of the

petroleum products industry.

The functions of the Authority are to conduct inquiries

in relation to:

(a) the prices for the supply of petroleum products,

and

(b) the prices for the supply of services

and to report to you the results of every such inquiry. Declared

companies are required by Section 19 of the Petroleum Products

Pricing Act to notify the Authority of proposed increases in the

prices of defined petroleum products and associated services.

Where a proposed increase is to be the subject of any inquiry,

an interim price increase may be allowed by the Authority

pending the outcome of the inquiry as provided in Section 21.

31

I was appointed to the position of Commissioner of

the Authority on 26 June 1981 but details of its staff estab­

lishment had not been finally settled by 30 June 1981.

Having regard to the short period of the Authority's

existence prior to 30 June 1981, there is nothing to report

in respect of its operations during the year ended on that

date. The main developments in the pricing of petroleum products

in 1980-81 were covered in my report to you on the activities

of the Prices Justification Tribunal forwarded under cover

of my letter of 16 June 1981.

In these circumstances and as this letter is a full

report of the Authority during the period since its inception

to 30 June 1981, it is my intention also to incorporate the

letter in the annual report of the Authority for the year

1981-82 which will cover the first full year of the Authority's

operations.

Yours sincerely,

C. W. CONRON Commissioner

32

APPENDIX B

PETROLEUM PRODUCTS PRICING ACT 1981

NOTICE UNDER SECTION 18

Direction From the Minister for Business and Consumer Affairs

"In pursuance of section 18 of the Petroleum Products

Pricing Act 1981, I, JOHN COLINTON MOORE, the Minister of

State for Business and Consumer Affairs, hereby direct the

Petroleum Products Pricing Authority to give special consider­

ation, in exercising its functions and powers under that Act, to

the following matters:

(a) the occasional need for oil companies to make spot

purchases overseas of crude oil and petroleum

products to enable them to satisfy Australian

requirements for petroleum products;

(b) the need to ensure that oil companies are encouraged

to make such purchases by permitting them to pass

on to users the higher costs associated with such

purchases made at prices that are not increased by

reason of any relationship or affiliation between

the buyer and seller;

(c) the need to ensure that price relativities in

relation to petroleum products marketed in Australia

are not such as to inhibit the production in Australia

of petroleum products that are in short supply in

Australia.

Dated this Sixteenth day of November 1981.

Minister of State for Business and Consumer Affairs"

33

APPENDIX C

PETROLEUM PRODUCTS PRICING ACT 1981

NOTICE UNDER SECTION 18

Direction From the Minister for Business and Consumer Affairs

"In pursuance of section 18 of the Petroleum Products

Pricing Act 1981, I, JOHN COLINTON MOORE, the Minister of

State for Business and Consumer Affairs, hereby direct the

Petroleum Products Pricing Authority to give special consider­

ation, in exercising its functions and powers under that Act, to

the following matters:

the need to ensure that wholesale prices of LPG sold

ex-refinery gate, other than for use as a petrochemical

feedstock or for non-traditional industrial uses, are

established on 1 January and 1 July each year at a level

not exceeding the lower of

(i) export parity as determined by the Authority

having regard to export prices for LPG achieved

in the international bulk export market as

well as those achieved by Australian exporters

of LPG; or

(ii) the price of $205 per tonne indexed to the

increase in the import parity price of Bass

Strait crude oil, as determined by the Minister

for National Development and Energy over the

price of $155.87 per kilolitre.

Dated this Sixteenth day of November 1981.

Minister of State for Business and Consumer Affairs"

34

APPENDIX D

CLASSIFICATION OF STAFF POSITIONS ON

DIVISION CLASS/LEVEL

NO. OF POSITIONS

SECOND DIVISION

LEVEL 1 1

THIRD DIVISION

CLASS 11 1

CLASS 9 4

CLASS 8 4

CLASS 7 1

CLASS 2/3 1

FOURTH DIVISION

CLERICAL ASSISTANT 1

GRADE 6

PERSONAL SECRETARY 1

GRADE 1

STENO-SECRETARY 1

GRADE 1

TYPIST GRADE 2 1

ESTABLISHMENT

DESIGNATION

DIRECTOR

SUPERVISING PROJECT OFFICER

SENIOR PROJECT OFFICER

PROJECT OFFICER

PROJECT OFFICER

CLERK

CLERICAL ASSISTANT

PERSONAL SECRETARY

STENO-SECRETARY

TYPIST

35