06 February 2008
Key Points:
The report found no collusion between major players. The ACCC recommended some changes to the Trade Practices Act.
On 18 December 2007 the ACCC published its long-awaited report on its Inquiry into the price of unleaded petroleum in Australia. Its finding? That Australia' s petrol prices are the fourth lowest in the OECD.
The finding will undoubtedly come as a surprise to those who have been following media reports alleging collusion in the industry around the setting of petrol prices. The ACCC did find that the industry displays characteristics of an oligopoly – dominated by a small number of players – as well as having high barriers to entry. It also raised concerns around retailers' ability to access information about competitors' petrol prices via a service known as Informed Sources. Despite these concerns however, the report goes some way to dispelling many of the myths surrounding the industry and its practices.
Despite media claims to the contrary, the ACCC found there was no evidence that petrol prices always rise before public holidays or that they rise by a higher amount than during normal price cycles. Consumers travelling on the roads over the Christmas/New Year period are unlikely to agree, with petrol prices having climbed to $1.50 per litre in some capital cities.
What about the supermarkets?
The ACCC also rejected suggestions of misuse of market power by supermarket alliances in raising petrol prices. Rather, it found that supermarkets were the first retailers to drop their prices and, with the exception of Coles Express in recent times, were the last to increase. Mobil was found to have led prices upwards in Sydney and Melbourne, while Caltex did so in Brisbane and BP in Perth.
Coles and Woolworths on the other hand were found to have pricing policies whereby they matched the lowest price in the local area.
Similarly, the ACCC dismissed claims that the supermarkets' shopper docket schemes provided consumers with a false discount due to higher prices to begin with.
Industry rationalisation and price cycles
The ACCC also found that rationalisation in the industry was already occurring at the time the supermarkets entered the market, and was not the result of the supermarkets' introducing their shopper docket schemes. With the supermarkets leading the market in discounting, the independents have now taken on the role as "price takers" – that is, following the direction of the market.
The ACCC was unable to identify a cause for Australia's petrol price cycles, labelling their cause "an enigma".
While price cycles exist overseas, Australian petrol price cycles are distinct for two reasons:
The ACCC found that there was significant price competition at the retail level of the petrol market but noted this was less so in rural areas. This however could be explained by the lower populations in and the freight costs involved in transporting fuel to those areas, and the lesser number of retailers servicing the areas.
Of some concern to the ACCC was Informed Sources, the service to which a number of the larger participants in the retail petrol market subscribe. The service gives retailers access to real time knowledge of other retailers' petrol prices. The ACCC was particularly concerned that this information is available to the sellers of petrol but not so easily available to consumers, who can only know the price of petrol at any given time by passing by a petrol station (with the exception of Western Australia which has its FuelWatch system).
The ACCC also flagged its concerns that the buy-sell agreements between the refiners and the retailers may lessen competition, but did not draw any formal conclusions. Instead, it suggested that parties to those agreements should apply for authorisation under section 90 of the Trade Practices Act on the basis of a public benefit.
It is unclear whether any of the majors will take up that suggestion, involving as it will a high degree of further investigation and publicity around the arrangements between them.
In response to the report, Federal Assistant Treasurer Chris Bowen has directed the ACCC to commence formal price monitoring of unleaded fuel prices. This means fuel retailers will be required to submit extensive information to the ACCC to explain their pricing decisions - imposing a further layer of costs on the industry for questionable consumer benefit.
Further changes to the concept of an "understanding"??
The ACCC also considered the relevant sections of the Act and their operation in ensuring competition in the various petrol markets (wholesale and retail).
The Commission recommends a return to what it describes as the original meaning of "understanding " in section 45, so that corporations which communicate and follow each other's prices – regardless of their sense of commitment to each other– will be caught by the Act. This would tackle the problem of proof, on which the ACCC's case against Geelong fuel sellers foundered.
We question whether there was in the Geelong case a departure from the original meaning of the term "understanding" in the 1974 Act.
When one reviews the Email case of 1980, (another case of competitors communicating their prices to each other), the Court in that decision found there was no "understanding", based on there being no proof of any "consensus" being reached between the parties as to their respective pricing, despite exchanging each other's price lists.
In the Email case, the Court relied for the concept of an "understanding" on a number of 1960s decisions from the United Kingdom, all of which were no doubt available to the draftsmen of the 1974 Trade Practices Act. The Court was prepared to find an understanding in Email even if only one party assumed some moral obligation to act in accordance with the communications, but there needed to be at least that element of commitment shown by one party rather than mere communications.
Predatory pricing - recent reform
The ACCC petrol report also examines the 2007 amendments to section 46 which came into effect during the Inquiry. In particular, the ACCC discusses at length the uncertainties around the elements of the new predatory pricing offence, suggesting the provision is likely to be the subject of further debate..
Among the ACCC's concerns about new section 46(1AA) is the lack of definition of "substantial share" of the market. Similarly, the regulator considers that factors such as the range of products being sold below cost and the size of the consumer group affected by below cost selling may also be relevant. Relevant cost is a matter that will depend on the circumstances of each case.
