Thursday, May 29, 2008

Did Western Australia's relative fuel price margin fall after January 2001?

It certainly looks as if it did:

This is the graph included in Appendix S of the ACCC's fuel price report, which concludes that FuelWatch in Western Australia has cut the margins charged by service stations there.

The Government wants to take FuelWatch national. We now know that four government departments opposed the idea in their co-ordination comments on the submission presented to Cabinet.

As I explained in the
Canberra Times this morning, dissenting co-ordination comments are not unusual. Very common in my memory. (I once had a small role in drafting them.)

The Cabinet probably made the right decision in deciding to adopt FuelWatch in the face of what we now know was concern expressed by four government departments that reported to it.

The concerns were expressed robustly. That’s how Australia’s Cabinet co-ordination process works. Each of the relevant departments gets to comment on each submission put forward by the most relevant one.

Sometimes they argue their case in strong terms, just to make sure the Cabinet has a full debate.

There is absolutely nothing unusual about the process, as every public servant who has ever worked in a policy department and every person who has ever looked at the Cabinet documents released under the 30-rule knows...

In this case the Australian Competition and Consumer Commission was putting forward a proposal through the Treasurer and Assistant Treasurer.

It recommended that the FuelWatch scheme, in operation for eight years in Western Australia, be taken nationwide.

There each petrol station is required to freeze the price it will charge for petrol for 24 hours from 6.00am each day

It notifies FuelWatch of its planned price at 2.00pm on the day before. FuelWatch puts the information up onto its website and SMS service and gets it to the media by 4.00pm.

People planning to buy petrol the next day can know with absolute certainty where they will get the cheapest deal. If a service station indicates that it is planning to increase its price they can even get in early and get their supplies before the price goes up.

The oil companies hate it. Here is a list of the organisations that made submissions to the ACCC opposing the scheme, in the order that they are named in the ACCC’s petrol price report: Caltex, Coles, Woolworths, Mobil, BP and Gull Petroleum.

Each suggests that it opposes FuelWatch because it doesn’t bring about lower petrol prices.

Given that each is a petrol retailer it is more likely that each opposes FuelWatch precisely because that is what it does do.

The econometric analysis prepared for the ACCC finds that the average price of petrol in Western Australia is 1.9 cents per litre cheaper than it would have been without FuelWatch.

The lowest price is lower also, although by a smaller 0.9 cents per litre.

In the graph presented in Appendix S of the Commission’s report, the difference is apparent to the naked eye.

Before Western Australia introduced FuelWatch at the start of 2001 the margins charged by Perth retailers were typically somewhat higher than those charged in the eastern states. After FuelWatch they were somewhat lower.

In the language of statisticians the difference is “statistically significant”.

The study concedes, generously, that there might be something else missing from its analysis that explains the narrowing of petrol station margins from the start of 2001.

However it says that “the use of the eastern capitals for relatively means that any missing items would need to have a significantly different effect for Perth relative to the other capitals”.

In other words, it’s not likely.

Subsequent advice to the Treasurer from the ACCC was that it wasn’t likely at all.

There are many potential objections to the scheme, none of them strong.

One is that it’ll impose a heavy administrative burden on petrol retailers, costing them $20 million a year.

It is hard to see where the expense could come from. Is it the price of the phone calls or emails to FuelWatch? Or is it something else? In any event the government has promised to reimburse the service stations for any extra expenses they face.

As it happens almost every service station in the land already supplies its price information minute by minute to a company called Informed Sources, which sells the aggregate information back to it.

Under FuelWatch each station would only need to provide that information once a day and it wouldn’t be charged for getting it back.

As one witness told the ACCC inquiry: “FuelWatch had made it easier to read the market at almost no cost to the business as the cost was being borne by the taxpayer”.

The Opposition and apparently the Prime Ministers Department have argued that there is no need to freeze each petrol station’s prices for 24 hours to get the benefit of FuelWatch, it is enough just to put pricing information on the internet.

But information without a short-term price freeze is no information at all. Not if a price can change the minute after someone looks it up and gets into their car.