Australian Convenience Store News & C-Store Exhibitions | The new temperature correction regulation

Petroleum Forecourt
November/December 2001

The new temperature correction regulation

Hot fuel has been an issue in the industry for many years. In the early 1990s, temperature correction was considered for petrol sold at the pump, but rejected as being too costly. Oil refiners have in the past resisted the change. The issue was raised again last year in the Victorian parliament along with terminal gate pricing. The result is the new temperature correction regulation whereby,

The new regulations should apply from early next year. The Victorian government, convinced their counterparts in other states - not all from the same side of politics, and the result is a change that "everybody can live with". For an industry often fraught with tension and antagonism, this is a refreshing outcome.

Hot stuff
The refining process is "hot", up to 500°C. Even with the use of heat exchangers to reduce costs, fuel regularly goes into the terminal tanks at temperatures well in excess of the 15°C used to calculate excise. Depending on the season and location, temperatures are also often much higher than the ambient temperature. According to APADA, with 'just-in-time' inventory management, and the rationalisation of seaboard terminals, there is virtually no settling or cooling off time for both petrol and diesel before it is trucked directly to either service stations or the distributors' bulk facilities.

For example, on average, Melbourne fuel is around 25°C when it leaves the terminal tanks and around 19.5°C when it leaves the service station tanks. This difference of 5.5°C on a 30,000 litre load implies a volume loss of around 200 litres - volume invoiced and paid for but not available for resale. This is a fairly modest example, with buyers citing cases of fuel bought at 30-40°C at the terminal and losing over 1.5% in volume between purchase and resale. For a $35,000 load, a 1.5% loss of product equates to $525. The VACC cites one extreme case of a service station operator being "short-delivered" to the tune of $74,000 over a year.

Using rounded numbers for simplicity, we can "guesstimate" the extent of loss through cooling of petrol within Australia. If the average temperature at the terminal is 25°C and the average sale temperature is 20°C, then of the 20,000 Megalitres (Ml) of petrol refined, only 19,877Ml is consumed, and 123Ml is the extent of shrinkage through cooling. Note that in energy terms there is no loss - Australian motorists drive as far as, and no farther than, the 20,000 Ml will take them.

When the wholesale price is 80 cpl, buyers pay $16,000 million (m) for the fuel, and the refiners pay $7,901m (19,753Ml at 40cpl) to the government. At face value, refiners receive $99m in excise that does not get passed on to the government. Whoever buys the fuel hot and sells it after it is cooled, pays for more litres than they sell. Generously allowing 10cpl to cover all costs and profit after the terminal gate, the consumer pays $17,889m rather than $18,000m, valuing the cost of shrinkage at $111m (equivalent to $13,260 for every service station in Australia).

When they fill up at the pump, motorists really buy the energy content of fuel - the extent to which it powers the engine. The petrol supply chain puts the fuel in their tanks. All other things being equal, the temperature at which fuel is measured for sale should have no impact on the overall consumption of fuel. However, transactions are not in dollars per unit of energy, but in cents per litre, and fuel changes ownership at different points on the supply chain. This creates the potential for inequities. The businesses that buy hot fuel and sell cool fuel - usually distributors and retailers are the ones that seem to wear the loss. In particular, for independent retailers, the main (and sometimes only) transaction with refiners is buying fuel at the seaboard terminal. According to Consumer and Business Affairs Victoria (CBAV), the change to the regulation is specifically intended to level the playing field for independents.

On the basis of the loading manifests (which showed temperatures in the range 20-50°C) and records of tank delivery temperatures, the Victorian government believed there was a case to act upon and that it was a matter of uniform trade measurement. Although even the largest customers could not until then negotiate a resolution of the issue, all the stakeholders, in particular the PMAA, VACC, APADA, and AIP, contributed to government's understanding of the problem and the solution.

Cool new regulation
The Ministerial Council for Consumer Affairs agreed to introduce temperature correction for fuel sold by refiners and importers to distributors and retailers in July 2001. Temperature correction will apply to the first transaction after the terminal. Therefore, retailers whose fuel is delivered directly, whether they buy from an importer, a refiner, or a distributor/wholesaler, will pay for volumes corrected to 15°C. For most purchases this means paying for less litres, but not selling less. For some, their sales volumes will be higher than their purchases! Retailers whose fuel is delivered from a depot, whether they buy from an importer, a refiner, or a distributor/wholesale, will pay for volumes measured at ambient temperature.

The next step is for the Queensland consumer affairs department to produce a Regulatory Impact Statement that will be distributed to all States and the Commonwealth for approval. Once the wording is agreed, it should be enacted in all jurisdictions by the first quarter of next year.

The regulation does not apply to depots. CBAV found that over 90% of the hot fuel problems are at the refinery/terminal stage of the supply chain, and evidence (verified by Trade Measurement Victoria) that the cost at the depot level would be substantial.

All warm to the cool change
Everyone we spoke to for this article is pleased with the new regulation.

"The Victorian proposal, which was supported by industry, was acknowledged as dealing with the majority of the problem at little cost and with potentially significant benefits for resellers. To some extent other problems of stock loss - leaking tanks and theft - are blamed on cooling. Changing the regulation will make things clearer." APADA

Even though the oil refiners argue that the new regulation was not necessary - changes in temperature affect volume not energy content, and the market price variations in the industry overwhelm the impact of temperature variation - they accept that it is an issue for other players in the industry, and the regulation will have a positive impact in terms of a perception of greater fairness.

Retailer representatives agree the new legislation improves the relationships within the industry by creating fairer dealing. However, some are seeking to take the correction further down the supply chain. The VACC argue that the new Harris device (designed and constructed by former service station owner, Ken Harris) is a cost-effective solution. The device is a connector between the fuel tanker and the service station tank that takes the temperature as fuel is delivered. However, there are still some unresolved issues around temperature correction devices at service stations. Further, the AIP and APADA argue that it would be costly compared to the relatively small gains from taking the correction process the next step down the supply chain.

MTAQ also prefer measurement, and correction and invoicing at the delivery point. Then, service station owners and operators have a better handle on leakage and other losses.

No one is calling for temperature correction at the pump where it is agreed the gains for the customer, if any, are minimal.

Will we keep our cool
There is less agreement or certainty about the impact of temperature correction on buy prices. Conceptually, prices must be adjusting somewhere because the energy produced is the energy consumed and there is no real loss in the system from temperature change. Will they readjust with temperature correction? According to the AIP, the price is not determined through a cost-plus framework.

"The industry prices are set by an unregulated competitive market that delivers the best price, and in the current market this price does not cover the cost." AIP

CBAV thinks there may be a geographic redistribution of revenue or a redistribution among participants. Keeping in mind the intention of the regulation was to improve the competitiveness of the market for the independents, it is important that any price adjustment doesn't make any player worse off.

Then, there is the issue of compensation. The new regulation is not retrospective. However, some service station operators believe they have a right to recoup the value of the "lost" fuel. Although some have kept excellent records, the number of claims is likely to be small due to the difficulty in separating out the different causes of volume loss. If someone was successful, it would raise the issue of the implicit excise. The refiners have legally paid all their excise obligations and the tax office has no further claim. Given the inherent complexities and difficulties with compensation, many are focusing on future and further improvements.