LPG - a load of hot air

The Competition Commission has found evidence that huge monopolies dominating a major utility sector are taking advantage of the position - but apparently not enough to warrant action.

Submitted by Freedom on September 2, 2006

A report has found that the Liquid Petroleum Gas (LPG) market is uncompetitive and could be ripping off vulnerable rural people, but has refused to suggest the breakup of controlling monopolies.

LPG is used to supply heating for housing not covered by the national gas grid, with people living in rural areas having gas periodically delivered and stored at their homes.

The Competition Commission has completed its findings on the LPG market and voiced concerns that people living in rural areas are being systematically misled by four major players – who control 90% of the market between them.

The Commission’s conclusion for reform to the market suggests the banning of certain anticompetitive practices, such as the common technique of charging high prices to switch suppliers with a 3-5 year block on switching again.

Switching supplier can cost up to £700, compared to an average annual bill for domestic bulk LPG of about £800, making even extremely good deals potentially unattainable in competitive situations.

Switchover prices are kept high by the system of tank transfers currently operated by the companies. When an LPG user signs up for a supply, a tank is installed at the home, but remains in the hands of the company.

In order for the supply to be switched, companies remove their tanks, while the new supplier has to install their own. This would be stopped with companies simply taking over responsibility for existing tanks, the Commission said.
Other suggested measures include the stopping of three-month waiting periods for switchovers, and the distribution of increased information on alternative suppliers.

However the 87-page report has concluded that while smaller groups have been systematically pushed out in favour of a tiny number of ‘major suppliers’, and prices are far above production costs, it does not qualify as a cartel industry.
The four suppliers (referred to as the ‘major suppliers’) are familiar household names BP, Calor Gas Limited, Shell, and specialist firm Flogas.

The conclusion by the Competition Commission, that while some practice is breaching monopoly guidelines there is no reasonable risk of major monopolistic price gouging seems to conflict with their own research.

The report notes for example: “We consider that, if a hypothetical monopolist of domestic bulk LPG raised prices to 5% above the competitive level, customers would not switch to heating oil at a sufficient rate to make such a price rise unprofitable.”

Around 150,000 households are covered by LPG but barely 750 (0.5%) switch in any given year. This compares to 15% of mains gas customers – a market which in itself has come under sustained criticism for its monopoly habits of cutting maintenance while hiking prices for their captive audience.