Myths about FuelWatch

Watching the discussion on my previous posts on FuelWatch, I can see that there are many myths being perpetuated. I thought I’d list them here.

Myth No.1: The ACCC recommended a WA-style FuelWatch scheme. Not quite. The ACCC only investigated fully a WA-style FuelWatch scheme and explicitly did not analyse whether it was the best possible arrangement. Quoting from their conclusion:

Assessing any system in the style of FuelWatch that incorporates increased price information and price commitment requires great care due to the potential for anti-competitive as well as pro-competitive benefits. Although the inquiry gained a preliminary assessment of the impacts in Perth from the scheme, it is clear that a case–by-case approach is required to assess the potential impacts on competition of any similar scheme. In particular the ACCC has not analysed the application of such a scheme to rural and regional areas. Apparent extra considerations here include the increased potential for anti-competitive effects due to the more concentrated nature of the market, the extra cost in initialisation, administration and compliance and how to decide which areas to cover. In summary, there are potential benefits and potential costs of adopting a national price commitment arrangement that need to be carefully considered.

The other options to increase price transparency have only briefly been considered in the time available for the inquiry.

Hence, my concern that in just adopting the current WA model, not enough due diligence has been done on find the best policy. Now the response might be: “well, we can adjust the scheme later.” However, I worry that once a scheme is in place it will stick.

What the ACCC did explicitly want was an expansion of the powers of our price fixing laws to take into account the exclusive sharing of price and other information amongst competitors. On that score, the government does not appear to have considered the ACCC concerns at all. Hence, strictly speaking, we should consider the ACCC’s recommendations as currently ignored.

Myth No.2: The ACCC found conclusively that FuelWatch in WA lowered petrol prices. Not quite. The ACCC did make a far more rigorous investigation of the WA scheme than anyone had ever done and had concluded that the introduction of the scheme was associated with a 1.92 cent per litre average price fall. But there were caveats such as the difference between eastern capitals and Perth, the lack of data going back prior to 1998, difference in fuel standards, transport and port charges were not explicitly modelled and other factors driving price margins in Perth contemporaneous to the changes in their petrol regime. All these were explicitly laid out in the ACCC report.

Now here is where industry has to step up. All of these factors, including my desire for a site-by-site econometric investigation can be done. If the industry is concerned about the FuelWatch scheme where was their analysis. They could have done it in submissions to the ACCC. They could commission academics to do so. And they could provide analyses that could be published subject to peer review. At the moment, the ACCC did a good but not fully conclusive job. Absent other information, it suggests that a WA-style scheme would do little harm to consumers.

3. Myth No.3: A FuelWatch scheme is unprecedented in Australia. This is definitely not true. Our entire wholesale electricity market operates in a very similar manner. In that market, there is a single customer — a system operator — who solicits bids from generators 48 hours in advance and with only limited room for adjustment after that. Generator bids are fixed for 30 minutes at a time. Moreover, prices are provided every 5 minutes and bid information is provided to everyone the next day. (It used to be only to generators but thankfully that rule has been removed). It is a regulated, financial market with constraints operating very similar to those that will be in place for FuelWatch. Indeed, my suggestion as to a better petrol scheme was based on the electricity market model.

11 thoughts on “Myths about FuelWatch”

  1. I certainly didn’t perpetrate any myths. All I am saying is that Fuel watch is an unnecessary, arbitrary and capricious action that is being sponsored by a government that doesn’t understand markets and supported by left wing economists that either ought to know better or are simply enabling a mugging.

    If you or anyone else thinks petrol stations are making loads of money, we ought to see it in their annual returns. Are they? Let’s see the evidence.

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  2. Joshua you seem somewhat less enthusiastic about FuelWatch than before.

    ARC – don’t hold back.

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  3. Sinclair, it is the same thing I have been saying all along. FuelWatch — for a politically motivated intervention — will likely do little harm.

    With a little more time I am now wondering whether the intervention could be even better and am concerned that we are locking ourselves out of future improvements.

    In any case, the petrol prices need to be much higher.

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  4. Yes, I saw your previous post. In time I imagine the market will provide such a service. The RACV (and other motoring organisations) already offer the Fuelwatch service.

    But your position has changed. How is ‘likely to do little harm’ consistent with

    In any case, Fuel Watch is going to change all of this. First of all, price changes will occur less often and so any super-competitive prices will be harder to sustain.

    A reduction in competition would be harmful to consumers, I would have thought.

    And then this (emphasis added):

    This is one area where the ACCC did its homework. Its econometric analysis of the scheme in WA revealed a fall in petrol prices and an elimination of the weekly petrol price cycle — something that was likely to be inefficient for consumers and the industry. Also, petrol stations are already collecting and providing this data to private sources and so the compliance costs are surely minimal. What is terrific here is that a policy was enacted in a part of Australia, evaluated and then rolled out as it was determined it did its job.

    The Fuelwatch scheme was oversold. It is now part of the ACCC – and reflects poorly on the ACCC. The state-sponsored bully of Informed Sources in The Sunday Age was disgraceful* and the monstering of Coles too was disgraceful.

    * That kind of trial by media smear and innuendo had disappeared under Graeme Samuel.

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  5. In any case, the petrol prices need to be much higher.

    That is another argument – one that I’m going to enjoy watching.

    state-sponsored bully = state-sponsored bullying.

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  6. joshua:

    let me get this straight.

    on the one hand you want fuel prices to come down for consumers. on the other hand you wanr fuel prices to go higher for consumers. am i understnding this mental gymnastics?

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  7. Has anyone considered that the reason why the industry is silent on the Fuelwatch debate is because its introduction will increase their profitability through higher margins?

    The ACCC analysis was seriously flawed and a feeble and amateur attempt to calculate its impact. Rudd labor has been sold a pup.

    Additionally through elimination of the price cycle it will improve their supply chain asset efficiency and decrease stockouts. Selling 70% of fuel in 2 days of the week at discount prices is really not good for business.

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  8. Sinclair, nuance depends on my mood of the day. It is a blog after all. But (i) in contrast to most policies motivated by politics, this one had some of the best econometric evidence put forward ever; (ii) that said, as I have come to worry about, no one looked at any options other than FuelWatch; (iii) I have consistently called for more research throughout the Inquiry and afterwards).

    So relative to standard practice this was good. Relative to best practice we have a distance to travel. But I agree, words read at any one period of my writing — usually reflecting reaction to some other opinion expressed by someone that particular day — do not capture that.

    ARC, on the one hand, we have to treat petrol like any other market. If there is a government intervention that gets it working better (i.e., lower prices) then good. But, on the other, I can’t believe the attention the notion of having lower prices is getting politicially. Let’s face it, environmentally, we are going to need higher prices and much higher prices at that. How are our political leaders going to sell that when they are spending all of the time saying how great it is to shave a few cents off the price of petrol?

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  9. ARC, on the one hand, we have to treat petrol like any other market. If there is a government intervention that gets it working better (i.e., lower prices) then good.

    Where’s the evidence that it isn’t working well, Joshua?

    But, on the other, I can’t believe the attention the notion of having lower prices is getting politicially.

    Why? You think people actually want to pay more for fuel?

    Let’s face it, environmentally, we are going to need higher prices and much higher prices at that. How are our political leaders going to sell that when they are spending all of the time saying how great it is to shave a few cents off the price of petrol?

    No we don’t. We don’t need to raise the cost of fuel do achieve the desired goal of introducing substitutes that are less carbon intensive. Lowering the excise to zero and introducing a carbon tax with a equal cut in income tax would do the trick. We don’t have to lower living standards to get us to lower emissions.

    Have you any evidence that the petrol stations are making super profits that warrants intervention yet?

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  10. Joshua :

    Think of me like castor oil before modern laxatives. You just hate it but got to take it to make you better.

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