Refineries, gas stations and gas stations under the microscope of the Competition Commission for three months

The oil sector is under the microscope of the Competition Commission for three months, as its mapping shows asymmetries in price pass-through and in the three stages of the production and distribution chain (refining, marketing, retail distribution) in the Greek market.

The Competition Commission announced today the launch of regulatory intervention in the petroleum industry.

Initiation of procedure no. 11 of Law 3959/2011 – Regulatory intervention in the petroleum sector

In detail, the commission’s announcement states:

On November 28, 2022, the Competition Commission (“EA”) took a majority decision to initiate the procedure no. 11 of Law 3959/2011 (regulatory intervention in a sector of the economy) in order to examine the petroleum sector, and in particular to assess whether conditions of effective competition prevail in the three stages of production and distribution (refining, marketing and retail availability) of the products (unleaded petrol, diesel movementoil heating) in the Greek market. These are basic necessities with low price inelastic demand.

Quotation marks

The importance of the petroleum sector for the Greek economy and its interconnection with all sectors of economic activity and directly with the final consumers are key factors in activating the regulatory competence of the Competition Commission under No. 11.

It is noted that the Competition Commission, applying the national and EU competition rules, has systematically dealt with the sector, issuing over the last fifteen years a series of Opinions and Regulatory Decisions:

1. The EA, in the framework of its regulatory intervention based on Article 5 of Law 703/77, as it was in force (now Article 11 of Law 3959/2011), fully investigated the petroleum industry in all its stages (refining, wholesale , retail distribution) and proposed with decisions 334/V/2007 and 418/V/2008 the adoption of specific measures by the State to address the structural weaknesses and chronic problems that hinder the level of competition and increase the price level fuel. Some of these proposals were gradually adopted by the relevant political leadership (e.g. mandatory provision of retail sales receipts, access of Independent Dispensaries to the refineries, detailed listing of discounts on invoices, markings on the closed roads of Attica Road, etc.).

2. The EA has, furthermore, issued the no. 26/VII/2012 Opinion regarding the maintenance of the previous administrative license in a number of professions in the petroleum industry, based on par. 2 of article 3 of Law 3919/2011 “Principle of Professional Freedom, Abolition of Unjustified Restrictions on access and exercise professions”.

3. In addition, issued the no. 29/VII/2012 “Opinion of the Competition Commission in the context of the provisions of article 23 of Law 3959/2011 on the removal of restrictions and regulations that create obstacles to the operation of free competition in the petroleum sector”. With this Opinion, the EA’s two previous regulatory interventions in the oil industry were updated, both by identifying regulatory obstacles to the efficient operation of the oil industry and by identifying restrictions on access and practice of the relevant professions in the more specific light of the article 2 of Law 3919/2011, to the extent that these have not been addressed by state interventions in the meantime. This Opinion includes a total of 31 proposals, which were forwarded to the competent Ministries of Development, Competitiveness, Infrastructure, Transport and Networks, Ministry of Finance, Ministry of Environment, Energy and Climate Change. Some of these 31 proposals of the Opinion were not adopted or partially adopted by the competent Ministries.

Petroleum Mapping

The initiation of regulatory intervention is based on the findings of the Petroleum Market Mapping, which was launched by EA decision on 22 March 2022. The EA Mapping selectively covered 95 octane unleaded petrol, diesel and heating oil and examined price pass-through (pass through) in the chain of production and distribution of petroleum products in the Greek market. Specifically, the phenomenon of the asymmetric adjustment of fuel prices to changes in product acquisition costs between the three stages of production and distribution (also referred to as the “rocket and feather” or Rockets & Feathers) phenomenon was examined.

The econometric analysis focused on the direct effect of the change in product acquisition costs on prices. The final conclusion of the analysis, which was limited to the prefecture of Attica, a market where there is more competitive intensity, shows the existence of asymmetry for all three products in all three stages of the production and distribution chain (refining, marketing, retail distribution). From a further econometric analysis, it appears that for the products gasoline 95 and heating oil there is an asymmetric transfer to the retail (gas station) prices after a change in the price of the wholesale companies. For these products, the asymmetry appears simultaneously with the wholesale price change (immediate effect) and still exists cumulatively after five days (aggregate pass-through), although it is decreasing. Furthermore, the GDA examined the pricing of the three products and other factors that may be linked to the observed asymmetry.

Regarding the conditions of competition, the following are preliminary observed, among others:

(a) High degree of concentration in the refining market. Moderate to low degree of concentration in the wholesale market. It is noted that there are approximately 5,000 gas stations operating in the retail market in Greece, however the competition is local, so the level of concentration may vary by region and should be thoroughly examined.

(b) Significant increase in the turnover and profitability indicators of refining and wholesale businesses during the period under review.

(c) On the face of it, particularly increased profit margin of refiners in 2022 (almost double compared to 2021), however the figures need to be confirmed by further research by product.

(d) Increase in the refining margin as calculated by the companies despite the individual variations that took place in some cases, however it needs further investigation for reasons of comparability with other countries.

(e) Sharp downward trend of average wholesale prices in all three products under analysis during the 2020 restrictive measures intervals with a change to an upward trajectory from June 2020 onwards, recording a strong upward trend from early 2022 onwards, possibly due to and the war in Ukraine.

(f) The average retail prices of all three products recorded a similar trend. Likewise, sales prices to the wholesale market (minus discounts and credits) follow a similar path, recording an upward trend from mid-2020 onwards, while a very large price match is observed between the two refining companies both in terms of 95 octane unleaded petrol and to diesel fuel.

It is noted that the main factors affecting retail prices are refinery prices, taxes and the exchange rate. In turn, the price of refined products is highly dependent on international Platts prices and other factors. The pricing elements mainly determined by the refiners are the fixed consideration for holding safety stocks, mark-up and their discount policy. Inventories and their costs are an important factor in pricing, setting prices and determining the profit margin at an accounting and actual level.

Normative

With the decision to initiate regulatory intervention, the mapping is completed. In the context of the initiated process, the conditions of competition in the relevant markets will be examined in depth, in order to clarify both whether the observed asymmetry, and in general the increase in the price of these products in the last two years, are due to the absence of conditions of effective competition, as well as issues regarding with the tariff policy mechanism, maintenance of safety stocks and other potential barriers to market entry and development and maintaining a high profit margin by the industry enterprises.

In this regard, it is noted that Greece is among the most expensive European countries in terms of liquid fuel prices before taxes (simple unleaded gasoline and diesel), combined with the existence of an asymmetric adjustment in the formation of final fuel prices (pump prices), especially for gasoline 95 and heating oil, and increasing the profit margin at the various stages of the value chain.

Procedure

If, during this first stage, it is first established that there are no conditions of effective competition in the sector under investigation, the EA will make public its views, through a public consultation, within 90 days from the initiation of said procedure. The public consultation will last at least 30 days.

After the end of the public consultation and if the EA finds again that in the specific sector of the economy there are no conditions for effective competition, it announces specific measures that it considers to be absolutely necessary, expedient and in accordance with the principle of proportionality, to create conditions for effective competition competition. The EA publicizes sufficiently and in an appropriate way its views on the measures it announces and puts them up for public consultation. The public consultation lasts at least 30 days.

The EA, after the end of said consultation and after taking into account its results, may impose, by its decision, which is enforceable, the specific measures which it considers to be absolutely necessary, expedient and in accordance with the principle of proportionality to create conditions of effective competition. If the EA finds that the lack of conditions for effective competition is due, among other things, to legislative and regulatory regulations, it issues an opinion, under no. 23 of Law 3959/2011 for their repeal or amendment. The EA’s opinion is submitted to the relevant Minister and notified to the Minister of Development and Investments.

Finally, it is noted that the Rockets & Feathers phenomenon may be due to various causes and possible distortions of competition, both on the demand side and on the supply side, including the existence of explicit or implicit collusion, storage constraints, search costs (search costs) for consumers due to internalities etc.

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