Official Report (Hansard)

Session: 2012/2013

Date: Tuesday, 09 October 2012

Committee for Enterprise, Trade and Investment

UK Petrol and Diesel Briefing: OFT Briefing

The Chairperson: I welcome Kyla Brand, the Office of Fair Trading (OFT) representative for Scotland, Wales and Northern Ireland; John Riley, project director of OFT's call for information on the UK petrol and diesel fuel sector; and Mahin Choudry, a team leader in OFT's call for information project.  You are very welcome.  Needless to say, I hope that you have a good product at the end of it all in the interests of local consumers and people who, as you have heard, pay excessively for their fuel.  If you wish to make a presentation, members can then raise points with you.

Ms Kyla Brand (Office of Fair Trading): Thank you very much indeed, Chairman and members.  We appreciate the opportunity to talk to you at this early stage in our call for information.  Engaging with your Committee has become a valuable habit for us in some of the studies that we do.  Clearly, there are aspects in which the experience and working of markets in Northern Ireland can be different from elsewhere in the UK.  We want to be clear that we can receive all such evidence.  We appreciate the opportunity to examine the evidence that has been introduced to you by the parliamentary researchers.  You will appreciate that we have not seen that evidence, so we will not be able to comment on any of those aspects.

Importantly, the call for information on which we have embarked looks across all the markets of the UK.  We have flagged up in the initial call for information some of the aspects that we expect to need to look into in some detail, but there will be others that come to us afresh.  That is part of the point; we will start with an open mind.  We are trying to establish the scope and nature of particular difficulties that could merit further enquiry.  My colleague John, who is directing the project, will introduce it, and we will be happy to answer your questions.  You will appreciate that we are still in the information-gathering phase; we have not yet been able to do deep and full analysis.

Mr John Riley (Office of Fair Trading): I do not intend to talk for very long.  It might be useful if I outline why we decided to do this work and the areas that we will focus on.  I will then talk a little bit about the options that might be available to take forward further work.

We have decided to do the work because there was growing discontent with the price of petrol and diesel in the United Kingdom.  Having said that, we did not receive a great deal of evidence that there were particular competition concerns for OFT to take forward.  Given the importance of the sector to drivers and to the economy, we thought that it was important that we were proactive in asking people to come forward with evidence of competition concerns so that we could make a judgement on whether there was further work for OFT or other bodies to do.

We are not limiting ourselves purely to the retail part of the sector; we want to look at every part of the supply chain that is relevant to the final price that drivers pay at the pump.  We are looking throughout the UK for evidence.  We have identified four issues for particular focus.  One is the question of what we call rocket-and-feather pricing, which is how the retail price might move relative to the price of crude oil.  What we have been hearing is that, when the price of crude oil rises, retail prices tend to rocket, but that when the price of crude oil falls, retail prices might feather down rather than fall in line with the crude oil price.  We want to get to grips with whether that is happening — it is certainly disputed by some in the industry — and why it is happening, if, indeed, it is.

We are also interested in whether independent retailers can compete fairly with hypermarkets and oil company-owned sites and the impact that that might have on consumers and the prices that they pay.  Competition in the market has a real local aspect.  It is important that, while you look at the holistic picture of what is going on in the UK and in UK prices, you look at local competition in particular areas.  People are very interested in why, in one town for instance, you might pay 3p or 4p a litre more than in a nearby town.  People who live in rural communities are particularly interested in why they might pay more than those who live in some towns or cities in the UK. 

The last area that we will focus on is the work of competition bodies in other jurisdictions.  They have found issues with the structure of the market and the number of players in aspects of it.  They also found that competitors follow one another too closely with their prices.  It would be interesting to see whether anyone has any evidence on those issues.

The last thing that I want to say is that this will be a short, sharp piece of work.  We aim to come to initial conclusions and publish our initial findings in January 2013.  At that point, we will decide whether there is further work for OFT to do.  We may find evidence of a breach of competition law, in which case we might decide to take forward an enforcement action against the relevant market participants; or we might decide that although the law has not been broken, the market may not be functioning as efficiently as it could be or that there are particular aspects of the market that are not functioning well.  In that case, we may launch a market study to look at those aspects in further depth, with a view to making recommendations to government on how those things could be tackled.  We could also refer the market to the Competition Commission for an in-depth look at the market and, perhaps, ask it to consider possible remedies.  Finally, as Kyla said, we are quite early in our evidence-gathering process.  We came to Northern Ireland today largely in listening mode and to learn more about how the market works here.  We would be very happy to answer any questions you have about the work.

Mr A Maginness: Thank you very much for coming.  Your investigation into the retail price of petrol and diesel is very timely.  The issue is of continuing concern to my constituents, and I want to point out to you that it is causing real hardship.  It affects not just ordinary motorists but small businesses, which find it very difficult.  The price of fuel is eating into their margins, and they just cannot cope.  I am not sure what you can do about it, but, at least, we might get an idea of what is going on.

Your point about prices rocketing whenever there is an increase in the crude oil price and prices feathering when there is a decline is very interesting.  I do not understand that, and I would be very interested if you can give us an explanation.

Another point that I want to make is about the devastating effect of big retail outlets, particularly supermarkets, on independent retailers.  We all want cheaper petrol and diesel, but at what price?  Is the price the closure of independent retailers?  That is true.  There is firm evidence, and, anecdotally, I can tell you of at least a dozen independent outlets that have closed in the Belfast region in the past number of years.  In rural areas, in particular, there are some towns in which there is no access to petrol or diesel at all, in the formal sense of there being a garage or an outlet.  I raise that issue with you because it is having a very adverse impact on rural communities, and, in parts of urban areas, the closure of independent retailers leaves less opportunity to buy petrol from other than the big supermarket forecourts or bigger garages.

Mr Flanagan: Thank you, Chair, for inviting the Office of Fair Trading to the Committee to give us an opportunity to feed into this very important inquiry.  There is a great deal of statistical information here from the AA and the Consumer Council, which will be central to what you are looking at.  The widely held perception is that prices do not come down as quickly as they go up when there is a change in either currency or in the price of crude oil.  I feel that that is happening, and I do not think that too many would argue with it.  However, that is the case in most commodity industries, so you have a difficult job proving that something wrong is happening.

The last time that we had the OFT here, it was inquiring into home heating oil.  I was fairly disappointed in that because it focused mainly on what happened in Britain and did not reflect the uniqueness of the market here, where nearly two thirds of houses rely on oil for their heating.  I am concerned that the predominantly rural nature of our community, where many people live far from a town or city, be reflected in your finished report, along with the negative impact that fuel pricing has on rural dwellers, as Alban said.  That touches on everything, so I am keen to ensure that our unique rurality is factored into your report.

Mr Dunne: Thanks for your presentation.  We have a great deal of information.  It is alarming to say that there has been a 60% increase over five years in petrol prices.  That is a stark figure.  As my colleagues said, it has had a knock-on effect on private individuals and businesses.  Fuel and transportation costs have increased immensely.  It has a major knock-on effect on all sectors, whether industry, farming or the service sector.  That has had a major impact on the cost of living and on people's purchasing power.  We here have always thought that duty was an issue, but is it fair to say that that has remained fairly constant over the years?  Has it followed the increase but not significantly distorted the figures?

I also understand that home heating oil, which, as has been said, is extensively used in Northern Ireland, is cheaper here than on the mainland.  Is that true?  May we have some information on those issues?

Mrs Overend: I appreciate OFT coming to the Committee.  Coming from a rural constituency in the west, I know that fuel prices are a major worry.  I do not know whether I can add any more to what my colleagues have said.  The price of fuel is a major factor for rural constituents and businesses, including haulage companies, not just in rural areas but across Northern Ireland.  It is something that we are continually lobbied about.  It is interesting that 82% of respondents to a survey by the Consumer Council — with which we will talk later today — said that they have changed how they think about travelling due to the price of fuel.  Please take those factors into consideration.  Thank you.

The Chairperson: Mrs Overend and I represent the one constituency, and I am sure that Mr Flanagan can link thumbs with this as well.  Many people are employed in the public service in Northern Ireland, as you know.  Many of us have seen an increase in closures of public service offices in our constituencies.  That has led to a form of centralisation, which usually happens around Belfast, although there has been some recent investment in public service offices in Derry.

Often, you find that the female in the household works in the Civil Service.  We see increasing numbers of people travelling to their work in Belfast every day as we are travelling up here.  The figures show that significant increases in fuel costs are leading to a new concept of fuel poverty, which is placing increasing strain on families, in many cases, in rural areas where the husband or partner has been working in the building industry and the role of principal breadwinner has almost been reversed.  Then you have the knock-on effect of the fuel costs, which leads to additional hardship in families, to say nothing of the knock-on effect of the cost of fuel and other consumer goods as a consequence, as Mr Dunne rightly said, of the rise in transportation costs.

It will be important to relay this research paper to you, because you do not have access to it at the moment.  Table 4 on page 12 of the paper highlights a significant anomaly, difference or disparity, whatever you want to call it, in petrol costs between Yorkshire, Humberside and Northern Ireland.

The petrol cost of travelling 875 miles a month for 12 months in 2011 was cheaper in Yorkshire and Humberside, but it was £200 dearer in Northern Ireland.  For nine months in 2012 in Northern Ireland it was £150 dearer.  There was a difference in the cost of diesel, the respective figures in that case being £140 dearer in Northern Ireland in the 12-month period in 2011 and £111 dearer in the nine months in 2012.  It came across as a wee tad unusual that there should be such a significant difference even when all sorts of other elements are factored in.  It is one of the anomalies that has been thrown up by the research that was carried out on behalf of the Committee.

The document throws up more questions than answers, although I hope that it will be useful to you in your deliberations.  I know that you will want to come back to those points when concluding your answer.  You said that the process itself might throw up a range of options for further research, but once that is concluded, where does it go from there?  What potential impact might it have?

Ms Brand: I will start with your concluding comment.  We know, as does everyone else, that the price of fuel underpins so many other aspects of the cost of living and the cost of doing business, and that is why it is so significant.  That is why we are bringing our powers and our analysis to understand the market and its structure.

You asked where the process goes from here.  In order to do our work, we always have to have some view that we can make a difference and that we can imagine a way in which the sorts of things over which we have control will have an impact on consumers' experiences.  Our mission is to make markets work well for consumers, and, in that, we include small businesses, and, in this case, other business users.  So we are absolutely committed to the idea that it will have an impact.  However, at this stage, and in this kind of study, we cannot necessarily predict exactly how.  John sought to outline how there could be a particular legal action if there were evidence of collusion or of the abuse of a dominant position in a local market or a wider market.  In a sense, we have to ask for your patience before we can say that it will go this way rather than that way.  We are committed to trying to ensure that our efforts, and those of everyone else who contributes, lead to something.  At the moment, we cannot say exactly what that will be.

I will leave John to deal with the technical issues, because that is his business, and I will pick up on the various points on rurality.  Since we previously talked to the Committee, we have conducted another piece of work on markets in remote communities.  That was even more open than the current piece of work, because we asked people what mattered to them.  It was very much a case of "Oh come all ye", and over 500 people told us what they thought really mattered from their perception of living in a remote community.  It will be no surprise that fuel pricing was up there along with delivery services, broadband availability, public transport and costs in shops.  Through that engagement, we realised that although a lot of those issues were dealt with in silos and tackled separately, some were completely interactive:  poor broadband means still having to travel to your bank and incurring public transport or fuel costs; and access to broadband without decent delivery services means that you may not get the full benefit of access to online shopping. 

Although we are looking at one particular sector today, we then, as your comments suggested, need to think about how that ties in with other aspects of the remote or rural experience.  I am not seeking to take us off into an even wider spectrum.  We know that we have our work cut out to identify what the structural problem is and what the different manifestations are of disadvantage or difficulty in this market.  As John said, one area that we will look at is the disparities between local markets.  We highlighted the issue of lack of competition in remote communities that may support only one supplier, maybe not even a full one, which leads to the kind of issues that have been mentioned.  There are also questions to do with the supermarket effect, which John will pick up.

One other aside is on the question of fuel duty.  Duty is a huge proportion of the cost, and, obviously, the level of duty is in the hands of government.  It is not a market issue in that sense, so it is not our role to consider whether, if only you could reduce the duty, you would be able to deal with these cost-of-living problems.

Mr Riley: I will talk about the extent to which our work will focus on Northern Ireland.  To an extent, it will be led by the evidence that we gather on Northern Ireland and the rest of the UK before we decide on where the final report will focus.  That said, it appears from some of the numbers that we heard today that prices in Northern Ireland may well be consistently higher than those in other parts of the UK, in which case that is a good prompt for us to look more closely at why that might be.

On the issue of supermarkets and their effect on the rest of the competition, we hear a good deal from independent retailers about how they struggle to compete with hypermarkets and some of the sites owned by major oil companies.  It is important for us to look at competition and not just in the short term at the prices being paid now.  We must also look at competition in the long term:  how will the market evolve; how it might look in the future; and whether some of the short-term gains that consumers might make from the intense competition that is driving out competitors might impact further down the track.  It is also important to say that, as OFT, our focus is on consumers and the prices that they pay.  We are here to protect competition, not necessarily all competitors.  It is important to balance those things.   

It is a big challenge for us to try to get to the bottom of whether the phenomenon of rocket-and-feather pricing exists and getting the data to prove that.  The bare minimum will be to establish whether rocket-and-feather prices exist.  The second point will be to examine whether competition factors are driving their existence or whether there are more benign explanations.

The Chairperson: Are there any outstanding issues on which members want further clarification?

Mr A Maginness: I want to go back to the issue of the Republic of Ireland, although it may be outside your remit.  I understand if that is the case given that you look at the UK as a whole and Northern Ireland in particular.  However, what is happening in the South is relevant.  Until now, prices were usually a bit lower in the South, and, at some stages, there was quite a significant margin.  I am not certain, but prices in the South now may be equivalent to, or slightly higher than, those here.  During the summer, prices in the South were coming up to UK levels or Northern Ireland levels.

There has been a consistent problem here with fuel laundering.  I know that that is not your remit, but I have always felt that an element of the problem was the fact that excise duty on petrol and diesel was never the same, North and South.  In order to harmonise the market in some way, which would be beneficial to the North and South, perhaps that duty element should be examined to determine whether there is a differential now and whether there has been a differential over the past number of years.  A differential distorts the market, because you are dealing with one land mass and easy access to petrol stations, North and South.  I am not sure whether that comes under your remit, but it might be worthy of some consideration.  I throw that out as a suggestion.

Ms Brand: We have to be conscious of the authority that we have and our role in the economy.  That said, this is a call for information.  We gather a vast amount of information, and part of our role is to work out what issues are for us, what we need to take action on and, as John said at the outset, what needs to be tackled by other authorities.  If it became apparent that differentials in excise duty, in whatever manner, were having a particular structural effect that we could identify, that information would be available to those with control over those areas of policy.  That may also be true of some other areas:  they might not fall under our responsibility, but we can demonstrate the effect and provide a picture so that other bodies can then take up those issues and make their contribution to improving how the market works.  As we said earlier, we will have to see.  On the question of duty, we can observe and we will receive information, but it may be one of those areas over which we do not have that level of constructive control.

Mr A Maginness: I do not want to labour the point, but we know that a significant number of transportation companies have moved their operations to the South to take advantage of a lower pricing regime.  That is a distortion in the market.  It is not the sort of distortion that you would get between, say, southern Scotland and the north of England, because of the two jurisdictions, but it does have an impact and it does distort the market.  My point is that, if it causes a significant distortion in the market, it is worthy of investigation.

The Chairperson: Do you wish to add anything on that?

Ms Brand: We received an invitation to discuss energy.

Mr Dunne: You mentioned the heating oil differential.  I understand that heating oil is cheaper in Northern Ireland than on the mainland, although we feel that it is still expensive here.  Is there a reason behind that?

Ms Brand: We did some fairly extensive work on heating oil, although I know that there were those who wished that we had gone further in terms of Northern Ireland.  We found that, partly because of the large size of the market here, there were various economies of scale, and so forth, which kept the price lower.  However, when so many people use heating oil, it is still, obviously, a significant household expense   I am afraid that we do not have the figures to enable us to give a comparison of prices in Northern Ireland and England, because that is not the sector that we are looking at now.  There are some differences and quite a lot of similarities.

Mr Dunne: I think that we would all endorse the point made about the supermarkets.  In the greater Belfast area, we feel that the supermarkets dominate the market and set the agenda.  Time flies on, but, 10 or 12 years ago, we had only a few, or maybe none, of those multinational supermarkets.  They seem to have come over and conquered.  They have taken so much of the retail market, not just fuel but food and all other supplies.  As my colleague said, if you drive around the greater Belfast area, you see that most of the independents are gone.  They became sites for apartments, but, as there is now no market for apartments, they lie vacant or have become sites for car washes.  I think that supermarkets put the whole thing at risk.  They must be major players in the whole market.  You must look at that issue very closely to see what influence you can bring to bear on them.  Bringing to bear any influence on the supermarkets is difficult, but we would appreciate your trying to get to the bottom of it, because the situation seems out of control, not only in the greater Belfast area but throughout the Province.  Virtually every town now has a multinational supermarket, and the knock-on effect on retailing in the town centres is huge.  They have the fuel market under control as well.  We need to look at that very closely.

Mr Flanagan: Before we know it, Tesco will be running the car washes around Belfast.

The Chairperson: Some of the stores already do.

Mr Flanagan: Do they?  Are they drive-through or staffed?

The Chairperson: Drive-through.

Mr Flanagan: I do not go near them.  One of the strange things that I have seen with one of the multinational chains is this:  it has an outfit in Belfast beside IKEA and the airport, which means that it is very close to the docks, so you would think that its transportation costs would be cheapest.  However, if you compare the price of petrol and diesel at that site with the price of the same organisation's petrol and diesel in Craigavon, you see that it is 5p cheaper in Craigavon.  That is  because the Craigavon supermarket is located beside a competitor, whereas the Belfast one is near no competitors and is right beside access to the market here.  I see no reason why it should be more expensive.  That is an evidence-based example of what happens here.

Ms Brand: I think that it is partly about explaining what is going on, as we were invited to do earlier.  It is about being able to explain some of those effects.  There may be terribly good reasons why petrol retailers' different overheads mean that there is that kind of effect, or it may be precisely because they are next door to a competitor and that is the way in which their business model works.  Whether that is or is not either illegal or an economic problem involves another whole set of questions.  We will try to understand and then explain some of those effects.  We all have examples of the kind of differentials that cause dismay, at the least, and, often, worse.  Therefore, we will certainly look at the effects of supermarkets, both the positive and the potentially negative, locally and nationally.  We hope that, when we have a report in the new year, there will be explanations for each of your various perspectives.  We hope to provide some grounds for evidence and an understanding that we do not have today.

Mr Flanagan: Will your report include any recommendations, or will it just be a summary of evidence gathered?

Mr Riley: It is possible, but not necessarily likely, that we will seek to make recommendations at that stage.  It may be that if, after a preliminary look, we think that there is a problem, we will need to do further evidence-gathering before we can get to the bottom of that problem and say exactly how to fix it.

The Chairperson: The theme that Mr Maginness was developing was that of the fuel duty differentials on the island of Ireland, where we have two jurisdictions and two sets of duties, and the consequential impact that those differentials have on the displacement of businesses and petrol retailers.  If you travel along the border, you will find that out very quickly.  Can you look at that as well?

Ms Brand: We are very open to any evidence that anyone would like to bring to us.  That is what our call for information is about.  Therefore, if that is covered in the work that your researchers have undertaken and in any other evidence that comes to us, of course we will consider it.  Now that you have flagged the issue to us, we can work to understand how that affects the market.

The Chairperson: If it is OK with you, we will commission some further Assembly research on that and forward it to you when the Committee has had a look at it.

Unless any member has anything further to add, we will conclude the meeting.  Thank you very much for being with us.  I hope that your inquiry and research are extremely productive.  Thank you for your time.  We will probably see you again.

Ms Brand: Thank you.

The Chairperson: We will provide you with a copy of the research, which can be e-mailed.  I presume that there are e-mail addresses and contacts to whom it can be sent.  Thanks very much indeed.

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