Back to the grindstone

It’s back to the grindstone for RMI chairman Brian Madderson as the Office of Fair Trading provisionally rejected the call for a market study into road fuel retailing. The only encouraging part of the response was that it was ’provisional’. This gives Brian and others another six weeks to find some more convincing evidence that the current situation particularly low and below-cost pricing of road fuels by the hypermarkets and certain oil companies is actually working against the interest of consumers.

"Everyone pushed me off to the OFT, including Chancellor George Osborne," said Madderson. "But it has such a narrow remit revolving around if the market is working to the benefit of consumers that we need to work very hard to persuade the powers that be of our case.

"We will of course make the most of the opportunity to find more evidence. We will be looking for locations where cut-price operators have seen off the local competition, and subsequently, with the market to themselves, have put prices up. We will also be pointing out that consumers are not just private motorists, but also the ’white van’ community of small business operators such as plumbers, carpenters and so on, which are all vital to the economy."

Even the fact that the German OFT counterpart has launched an investigation into "cases of unfair hindrance of independent petrol stations" failed to impress.

"The OFT understands that the German road fuels sector, which would operate in a separate geographic market to the UK, to have structural conditions that are different from those in the UK, such as the market shares of the oil companies and the presence of hypermarkets, and does not consider that the fact an investigation has been launched by the Bundeskartellamt to affect its assessment of the matters raised by the RMI..." it concluded.

In relation to RMI’s concerns relating to Platts-plus pricing and the way this is currently calculated, the OFT said it had focused its prioritisation assessment on the wider determinants of retail road fuel pricing, such as the market structure and business behaviour, rather than the precise mechanics of how a particular wholesale price is determined.

"In relation to purchases on a daily spot basis without the volumes to buy on two-weekly lag, it is unclear to the OFT the nature of the impact this has on competition, and, in particular, the OFT has no evidence that consumers are adversely affected by this practice."

On the role played by the supply of the road fuels industry, the OFT recognised it is an important part of the infrastructure of the UK economy and underpins significant amounts of business and consumer activity. But again, the absence of significant consumer detriment in road fuel retailing meant "it would be inappropriate to prioritise the commitment of further resources to progress a market study in this sector at the current time".

Resource was also a concern any study would be likely to last for between six and 12 months and would involve significant front-line resources.

So where does this leave Brian? "I will also be paying another visit to Chancellor George Osborne to see where else he recommends we go. The OFT has only a limited interest and legislative responsibility for many of the issues we’ve raised."

The RMI raised a number of concerns with the OFT which it said were more appropriate for other government departments to consider.

The RMI has therefore got its work cut out, with the need to make approaches to Her Majesty’s Revenue and Customs to talk about duty on recovered vapour, and fuel duty increases (including those introduced in the Budget); the Department for Transport for anything to do with the RTFO and biofuels; the Department for Communities and Local Government for anything to do with the relaxation of planning guidelines.

RMI’s submission and OFT response

The Retail Motor Industry Federation (RMI) provided a submission on February 17, 2012, to the Office of Fair Trading requesting a market study into the UK road transport fuel retailing sector.

CONCERNS RAISED BY THE RMI IN THE SUBMISSION:l Low and below-cost pricing of road fuels by hypermarkets through a cross-subsidy from grocery retailing activities.

l The oil companies retailing road fuels at their own sites at prices close to the wholesale prices they charge dealers; not allowing their dealers to obtain an adequate margin; and withdrawing financial support from them.

l The oil companies using fuel card schemes that only operate at company owned and operated sites.

l Examples of individual oil companies withdrawing from some UK regions and the withdrawal of a number of road fuel brands from the UK as a whole, with the consequent reduction in competition at the wholesale level.

l Exclusive supply contracts of up to five years’ duration between oil companies and dealers, and a more general inequality in bargaining power between oil companies and dealers.

l The ’Platts plus’ pricing, used by oil companies in supplying dealers, exposes dealers to daily fluctuations in traded Platts prices.

l Dealers now buy road fuels on a daily spot price rather than based on a weekly lag basis, which impacts more on dealers in a market where prices are rising.

HIGHLIGHTS FROM THE OFT’s PROVISIONAL ASSESSMENT:l The OFT’s mission is to make markets work well for consumers. As part of this role, the OFT can carry out market studies where it suspects a market is not working in the best interests of consumers.

l In this case, the OFT has considered the above issues against its published prioritisation principles and reached the provisional view that it does not consider it appropriate to agree to the request to launch a market study in relation to road fuels at the current time.

l This view is provisional and based on an assessment of the information provided by RMI against the OFT’s prioritisation principles. For the purposes of this provisional prioritisation assessment the OFT said it has focused on the retailing of road fuels across the UK. At this stage of its assessment the OFT has said there is no requirement that it consider whether this is the appropriate relevant economic market.

l As this is a provisional assessment, the RMI may wish to consider whether to submit further materials, relevant to its request, which it would wish the OFT to take into account in reaching its final view.

l Low prices charged by hypermarkets: In relation to the prices charged by hypermarkets, the OFT said the materials submitted did not suggest that the competition from hypermarkets is harming consumers but rather, in line with the findings of the Competition Commission (CC) in 2006, consumers appear to be benefitting from competitive prices.

l The OFT noted that since its last report in 1998, the two largest types of supplier of road fuels hypermarkets and oil companies have not changed, even where the respective shares of the market for which they account have been altered. Given the continuation of the competitive dynamic within, and between, the hypermarkets and oil companies, and despite the reduction in the number of retail sites, particularly among dealers, the OFT remains of the view that, across the sector as a whole, competition is acting to the benefit of consumers by constraining prices in road fuels in the UK.

l For a full version of the OFT’s provisional response, go to www.oft.gov.uk/ and type ’road fuel retailing in the UK’ in the search box.