Road Fuel Pricing (Equalisation)

Mark Garnier Excerpts

Tuesday 20th January 2015 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

I beg to move,

That leave be given to bring in a Bill to require that companies selling road fuels be required to charge prices equalised between rural and urban areas; and for connected purposes.

The retail market in road fuels is complex. According to the Petrol Retailers Association, the UK has 8,605 road fuel retailing sites—what the normal consumer would refer to as petrol stations. Petrol stations are administered by a variety of operators, including small, independent dealers, companies that own a significant number of petrol stations, or what the PRA refers to as hypermarkets but are more familiar to us as supermarkets—Sainsbury’s, Tesco, Asda, and Morrisons. In addition, motorway based service stations are owned and operated by a different set of retailers.

Consumers are familiar with the provision of petrol stations. In the majority of cases, the petrol station will have a familiar brand name—BP, Shell, Esso—yet it is less well understood by the consumer that the large petrol corporation does not necessarily own and operate the petrol station displaying the brand name. In the majority of cases, brand-name petrol stations are operated by either independent companies or smaller retailers. These so-called dealers operate 5,385 of the 8,605 petrol stations across the UK—some 62.5% of the outlet share. Similarly, petrol companies, many of which are in the process of divesting their portfolio of outlets, comprise just 1,846 of the open outlets, or a 21.5% outlet share. The remainder of the outlet share is taken by just 1,374 supermarket outlets—a small 16% of the outlet share.

To look simply at the number of petrol retail sites is to fail to appreciate how the market works and what factors affect the pricing of petrol and diesel, and a number of factors drive the price of petrol in various areas. In the far outlying regions of the country, scarcity of population means that the number of cars per outlet becomes small, and accordingly petrol stations are small as well. The economy of scale vanishes, and petrol stations can be as simple as a single pump. Although that makes for high price road fuel, in reality the choice in many cases is high price or no fuel at all, and the Government have already helped with a fuel duty subsidy in outlying and hard-to-reach regions. In other areas there is a high degree of competition, with many outlets and a high number of cars per fuel pump. Again, that drives healthy competition, and cheap road fuel prices are available to the lucky people who live within the petrol station catchment area.

I am an enthusiast for markets being allowed to drive positive outcomes for the consumer; I am an advocate of free market economics and support healthy competition. However, in our complex world, from time to time markets fail to deliver exclusively fair outcomes, and when markets go wrong I believe intervention should happen, as is the case with road fuel pricing.

I have already stated that petrol companies own 21.5% of the outlet share in the UK, with dealers owning 62.6% and supermarkets just 16%, but those figures fail to highlight the inequality within the market. Although companies own 21% of outlets, they hold 24% of the volume sales share—the amount of petrol and diesel sold—and dealers with 63% of the outlets transact just 32% of the volume sales. Supermarkets, however, with just 16% of outlets, dominate the market with 44% of the volume market share—just four big supermarket chains in the UK hold 44% of the market.

Trying to understand the supermarkets’ pricing model is like trying to read and understand a dark art. Many hon. Members will be aware that there are peculiar price anomalies between their constituencies and neighbouring ones. In Kidderminster, Stourport and Bewdley, we frequently find that petrol and diesel prices are up to 7p more expensive than in neighbouring Bromsgrove just 10 miles down the road. Having written to supermarkets in my constituency, only Tesco agreed to meet me and discuss how it constructs prices in Kidderminster. It seems that the supermarkets look to the competition within three miles of their local petrol station and decide, on an undisclosed and opaque basis, the best price to charge at any given petrol station.

That process throws up anomalies. In a city such as Birmingham there is healthy competition between retailers and across the city, and it is unlikely that there will be a three mile gap between retailers. Therefore, a supermarket such as Asda can cut its price on one side of the city, and that will transmit quickly through the entire city to reduce prices for everybody. In addition, petrol retailers are not just competing against each other, but against an efficient public transport system. Prices locally in a city such as Birmingham can be significantly cheaper, but in a town such as Kidderminster the area is surrounded by a void of petrol stations far wider than three miles. Kidderminster, and any similar small town, will find itself in a closed and inefficient market for road fuel. Add to that the fact that local residents rely on their cars much more, not least because of a less than optimal public transport system, and the supermarkets can charge more for their fuel locally.

The question inevitably follows: is the significant price anomaly between same-brand supermarkets and road fuel prices a healthy outcome of market forces, or a cynical attempt by supermarkets to charge premium prices for fuel in areas where competition is weak, to subsidise their activities where competition is strong? A similar question needs to be answered with regard to motorway service stations, which charge even higher premiums for urban fuel prices. Again, is that driven by genuine market forces, or by opportunism to overcharge motorists who would otherwise have to detour off their motorway route to search for properly priced fuel?

There are certainly significant anomalies within regions, but when looking at regional pricing there seems to be a more efficient market operating. The AA, in its November fuel price report, notes that the difference between the highest priced region for petrol, London, and the lowest, Yorkshire and Humberside, is just 0.4p. However, the price differences within those regions mean that many people are paying a significant rural premium for their essential road fuel. My Bill will seek to address the problem by giving reserve powers to the Competition and Markets Authority to intervene when price anomalies cannot easily be explained by significant pricing factors.

It is clear that the factors affecting a single pump retailer in a sparsely populated region with hundreds of miles to the nearest wholesaler will result in a higher than average fuel retail price. However, the factors that decide Kidderminster is charged a 7p premium over neighbouring Bromsgrove are not so easy to determine. In this event, the CMA will expect an immediate explanation of the anomaly, which, if not satisfactory, will mean an intervention to iron out the price discrepancy. The reserve power can also be used to determine anomalies with motorway service stations, and the discrepancy between petrol and diesel prices.

We have already seen a drop in the wholesale prices of road fuel and crude oil, one that lessens the impact of fuel prices on households. However, while that is in part welcome—the phenomenon of fuel prices rising like a rocket but falling like a feather has not yet been resolved satisfactorily—there is no reason not to address the price anomaly that sees rural communities being required, in the main by supermarkets, to pay a significant premium for their fuel over communities in better served areas such as conurbations. My proposals seek to bring that inequality to an end by providing a mechanism that, I hope, those people guilty of infringement will respond to before intervention by the CMA is necessary. That will begin to bring to an end the premiums paid by rural communities for their road fuel.

Question put and agreed to.

Ordered,

That Mark Garnier, Jason McCartney, Jim Shannon, Oliver Colvile, John Thurso, Mr James Gray, Mr Philip Hollobone, Peter Aldous, Jeremy Lefroy, Guto Bebb, Simon Hart and Pauline Latham present the Bill.

Mark Garnier accordingly presented the Bill.

Bill read the First time; to be read a Second time on Friday 6 March, and to be printed (Bill 157).