Domestic Bulk Supply Referred
to Competition Commission
The Office of Fair Trading (OFT) has referred
the domestic bulk lpg market to the Competition Commission (CC).
This follows a preliminary review of the market by the OFT, which
found there are features of the sector that appear to prevent,
restrict or distort competition and which may lead to customers
paying higher prices for their household lpg supply.
The OFT said that customers wishing to change
supplier typically face sizeable switching costs, with the current
and new suppliers often charging for the removal and installation
of their respective tanks. Other obstacles to customers switching
supplier identified by the OFT include lengthy contracts, with
customers often incurring charges for early termination, long
notice periods, the possibility of a break in supply, and difficulty
in finding information about possible deals with alternative
suppliers.
Rates of switching by customers between suppliers are low and the OFT believes
that the obstacles to switching restrict competition by making it difficult
for new suppliers to enter the market.
"There are several features of this market
which appear to restrict competition and customer choice. The
Competition Commission will now investigate further and determine
whether any remedies are required," said John Vickers,
OFT chairman, in a recent statement.
In May, the OFT wrote to 15 lpg supply companies
asking for comments on its decision to make a reference to the
CC. The companies argued that, in order to ensure safety, the
supplier of the tank should own and have control of the tank,
and that the use of adaptors to supply other companies’ tanks
was unsafe.
The companies said that switchers from other
companies were frequently not charged for tank installation,
and that the companies paid some of the tank removal charges
themselves, and gave some of these customers a gas credit.
They argued that contracts of three years
or more meant that the companies could recoup the costs of tank
installation through variable charges over the period of the
contract, rather than lump sum charges, and that many customers
were outside their initial contract period and were free to switch
supplier.
They said that three months’ notice
of switching was required because of the number of different
parties involved in removing and installing tanks and the need
to fit this into existing timetables. It also allowed the tank
to be run down, making the process safer. In addition, it gave
the customer time to consider any lower offer put forward by
the existing supplier and to use this as a negotiation tool with
the potential new supplier.
It was argued that procedures for tank removal
and installation were in place that meant that it was extremely
rare for breaks in supply to occur. Offering customers attractive
deals simply reflected competition and companies’ response
to customers that expressed dissatisfaction, that it was not
hard for customers to compare prices, and prices of some companies
did not vary by location. The OFT responded that many lpg suppliers
have customers that own their own tanks, and that some companies
would supply lpg to a customer with their own tank if proof of
ownership and a valid certificate were provided. The Heath & Safety
Executive says that safety regulations do not require the supplier
of the tank to be the tank owner.
The OFT said that it is not self evident that
tanks need to be changed whenever customers change supplier and
was of the view that it should make a reference to the CC for
an investigation, which was made on 5 July.
Return to August/September
2004 News
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