NO.028

ACCC REPORT ON REDUCING FUEL PRICE VARIABILITY

The Treasurer, Peter Costello, and the Minister for Industry,

Tourism and Resources, Ian Macfarlane, today announced the Government’s response

to the Australian Competition and Consumer Commission (ACCC) report on Reducing

Fuel Price Variability.

The Ministers welcomed the report and noted the ACCC’s recommendation

that regulation to limit price cycles should not be implemented, due to the

significant costs and likely higher average prices to consumers that would result

from such measures.

The Government has agreed to all five of the report’s recommendations, as outlined

in the attached response.

Mr Macfarlane noted that the report provided useful input for

current consideration of policy options to achieve a competitive and sustainable

industry. This consideration includes individual discussions with stakeholders,

the convening of a Petroleum Industry Forum and the development of a Downstream

Petroleum Policy Framework. Mr Macfarlane also reaffirmed the Government’s commitment

to pursue specific petroleum industry reform initiatives which have broad industry

support.

Mr Costello said that he had written to the ACCC and requested

that the ACCC collect and make available the information it considers would

enhance consumers awareness of fuel price volatility and also provide the information

to industry, motoring and consumer groups to encourage its wide dissemination,

including on the Internet. The Government has also asked the ACCC to continue

to monitor the pricing arrangements in Victoria and Western Australia and provide

a further report on the outcomes of these arrangements before the end of 2002.

The ACCC’s report is available at http://www.accc.gov.au

CANBERRA

14 May 2002

Contact:	Niki Savva	Kirsty Boazman
	Treasurer’s Office	Minister Macfarlane’s Office
	02 6277 7340	02 6277 7580

 

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RESPONSE TO THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION REPORT ON

REDUCING FUEL PRICE VARIABILITY

In March 2001, the Government requested the ACCC to examine the feasibility

of placing limitations on petrol and diesel price fluctuations throughout Australia.

This was due to consumer concerns about petrol price cycles and that prices

can suddenly increase by as much as 10 cents per litre in a day.

However, price cycles also provide people, particularly those that are price

conscious, with the opportunity to purchase fuel at low prices. Indeed the report

finds that 60 per cent of fuel is sold at below average prices. In this context,

the Government notes that reducing petrol price variability will reduce the

benefits that most consumers gain from timing their petrol purchases and that

furthermore, all consumers will lose if average petrol prices increase as a

result of regulatory intervention.

The report finds that volatility of retail petrol prices is generally confined

to major cities and some rural towns on major highways. Retail diesel prices

do not display price volatility.

The report finds the causes of local price cycles to be complex and that there

is no agreement among industry participants as to the significance of suggested

factors. However there is a strong suggestion that larger petrol price cycles

occur when average petrol prices are relatively low and where local competition

is strongest.

The following are the Commonwealth’s responses to the Commission’s recommendations.

Recommendation 1: There should be a consumer awareness initiative to increase consumers’ understanding of price cycles, and to enable consumers to time their purchases so that they can buy petrol at times when petrol prices are relatively low.

The Government agrees with this recommendation.

Publication of information about the price cycle should increase consumer understanding

of the nature of price cycles and how they work. It will also help them to plan

the timing of their petrol purchases.

The Government will be asking the ACCC to collect and make available the information

it considers helpful for consumers and also provide the information to industry,

motoring and consumer groups to encourage wide dissemination of this information,

including on the Internet. The Government also encourages interested consumers

to use the range of services providing petrol price information.

Recommendation 2: The Government should consider holding discussions with all industry participants to further reform in the petrol industry.

The Government agrees with this recommendation.

In 1998, the Government sought wide ranging reform of the petroleum industry

including repeal of the Petroleum Marketing Retail Sites Act 1980 and the Petroleum

Marketing Retail Franchise Act 1980 to be replaced by an enhanced industry Oilcode

and open access arrangements. These reforms have been stalled due, in part,

to industry disagreement.

The Government still considers that implementation of the elements of the package

will enhance industry efficiency and contribute to lower petrol prices. Accordingly,

discussions continue to be held between the Government and industry regarding

the package. The issue has been discussed at an industry forum convened by the

Minister for Industry, Tourism and Resources on 16 April 2002 and further consultation

is planned. The Government notes that it only intends to pursue petroleum industry

reform if there is broad industry support for reform.

Recommendation 3: The current terminal gate pricing arrangements in Western Australia and Victoria should be monitored closely before a final conclusion is made about terminal gate pricing.

The Government agrees with this recommendation. Generally, the Government does

not prefer regulation, unless it will generate net benefits to the community

as a whole. The report does not find a compelling reason for regulating terminal

gate prices (TGP), and there are concerns that such regulation would be difficult

to make effective and may result in increasing average retail prices.

While submissions from industry groups, consumer groups and State Governments

generally supported TGP, there are significant differences in the definitions

of TGP supported. The two States that have implemented TGP so far use different

approaches.

However the Government is aware of industry concerns at the apparent lack of

transparency of wholesale petrol prices. The Government is keen to encourage

greater price transparency as this is likely to enhance competition.

The Government considers that terminal gate pricing can improve the ability

of consumers to evaluate changes in fuel prices over time as well as differences

in fuel prices between regions. It has urged that regional industry and community

groups, including regional councils, use available terminal gate pricing information

to ensure access to competitively priced fuel in rural and remote areas.

The Government has set up a consultation forum with State and Territory agencies

that is considering terminal gate pricing mechanisms. This forum will continue

to facilitate consistency in regulatory mechanisms across Australia where these

mechanisms are found to be warranted. The Government has also received advice

on TGP mechanisms from industry representatives at the Petroleum Industry Forum.

This advice confirms support for a national approach to TGP but views remain

divided on the nature and extent of possible Government intervention.

The Government will ask the ACCC to continue monitoring the Western Australian

and Victorian arrangements.

Recommendation 4: Other options to limit price cycles (such as limiting price changes to only once every 24 hours, limiting price increases to a certain amount each day, and price regulation at the wholesale or retail levels) should not be implemented.

The Government agrees with this recommendation. It is unclear that there will

be benefits from implementing any of these options and it is likely that there

will be significant costs.

The Government removed wholesale prices surveillance in August 1998 due to

evidence that the setting of a maximum endorsed price facilitated price coordination,

not competition, encouraging companies to charge the maximum price rather than

a lower one. The system also had harmful side effects on the efficiency of the

industry. Prices surveillance imposes considerable compliance costs on industry

and administrative costs on governments, which in turn would be passed on to

consumers and taxpayers. It would be expected that the 24 hour rule, retail

price regulation, and limitations on price increases would have administration

costs a number of times higher than wholesale price surveillance because they

involve surveillance of retail outlets.

Limiting price cycles is likely to reduce consumer’s ability to purchase petrol

at below average prices (at which 60 per cent of fuel is sold according to ACCC

estimates). Further it is also possible that these options may result in increasing

average prices due to a reduction in the flexibility of firms to compete in

the market place and higher compliance costs. The report also demonstrates that

significant retail price cycles existed while wholesale prices were under prices

surveillance and continue to exist under the Western Australian arrangements.

It is also notable that most submissions to the inquiry did not support any

of these options, on the basis that they would be administratively costly and

that higher average fuel prices would result.

Recommendation 5: The fuel pricing arrangements in Western Australia should continue to be monitored closely.

The Government agrees with this recommendation.

The Government notes that, up to November 2001, the ACCC identifies no significant

change in the retail price cycle in Western Australia. Although legislative

change to close a loophole took effect from 24 August 2001, ACCC data from September

and October also suggests there has been no significant change to the price

cycle.

A number of submissions to the inquiry expressed concerns at the effect of the

arrangements, particularly on the competitiveness of independent operators.

The Government considers that competition is a key factor in keeping petrol

prices low and that competition is enhanced by the presence of independents.

The Government will ask the ACCC to continue monitoring these arrangements

and report back before 31 December 2002.