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Petrol Prices (Rural Areas)

4 pm

John Thurso (Caithness, Sutherland and Easter Ross): I am grateful for this opportunity to highlight the ongoing and increasingly heavy burden borne by those living in remote rural areas in respect of the differential cost of petrol and diesel, and to suggest to the Minister some solutions that the Government might profitably explore. My remarks will of necessity draw on my experience in my constituency in the far north of the highlands, but I believe that much of what I have to say is equally relevant to remote rural areas in parts of England and Wales.

My hon. Friend the Member for Orkney and Shetland (Mr. Carmichael) has intimated to me that he might like to intervene at some point, and I understand that he has also let the Minister know that that is a possibility. I welcome his support—his constituents share the problems that my constituents face, and he has had similar experiences.

Although I wish to draw attention to the differential in price between urban and suburban areas and remote rural areas, I do not make any point at all in respect of the overall cost of fuel in this country, which is a quite separate debate that I do not want to get into. In broad terms, the differential over the past few years has ranged between 8p per litre and 15p per litre, but seems to average out at around 10p per litre. I had my office ring round a selection of garages in my constituency today, which has shown that, for example, there is a 9p differential between all the garages in Wick and Thurso and those in Inverness. There is a further 2p or 3p differential between Inverness and central belt garages. When one moves to even more rural sites in Caithness and, in particular, Sutherland and the north coast, the differential today rises to between 12p and 13p.

Very similar figures were shown by a study that my predecessor carried out in October 2000, and a further study by EKOS Ltd. in January 2000, which Highlands and Islands Enterprise and the Highland council commissioned, also showed similar results. There is not really any argument about what the differential is roughly, and it has been there for some time.

To put across the effect of the differential, I quote the EKOS report, which says:

full-time equivalent jobs—

The same report estimates both that the average income in the highland area is much lower than in the rest of Scotland and that prices are higher. In consequence, highland residents have 76p to spend on goods and services for every £1 that the average Scottish resident has. In other words, highland residents are 24 per cent. worse off. However, those very people must now pay some 10 to 15 per cent. more for their fuel.

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It is of course a perfectly acceptable policy to pursue higher prices in order to persuade people to use their cars less and to move to public transport. In urban and suburban areas there are regular trains, buses and tubes. However, there are many areas in the far north where there is no public transport and where it is unlikely that the introduction of meaningful public transport will either be economic or make environmental sense. A car is therefore a necessity for residents in remote areas. They have no alternative, yet those people on the lowest incomes, who have no choice, have to bear the heaviest burden. The Minister is sympathetic to my point of view, as he said in a Finance Bill Committee:

I hope that I might elicit some similar sympathy from him today.

The problem is not with the forecourt operators. As the two Office of Fair Trading reports into the highland area show, a higher margin is required in remote areas to give sufficient cash profit to cover fixed costs due to lower volumes in those areas. There is a double whammy, as the densely populated areas benefit from cut-throat competition between oil companies and superstores. It is a case of market failure, which necessitates a Government solution.

The Government have put in a place a scheme for lower vehicle excise duty. However, it is not specifically targeted at rural areas and is based on smaller, more fuel-efficient cars, irrespective of where people live. Yet as I have shown, people in remote areas have the least buying power and are the least likely to be able to afford to buy the new, fuel-efficient cars to which the lower VED applies. Furthermore, crofters and farmers are more likely to require larger vehicles to tow their produce to market. Even if the VED for rural areas were to be zero, the cost differential would still leave people worst off, as the average differential paid annually is estimated to be at least more than double current vehicle excise duty. Offering a rebate on VED will not solve the problem. Pump prices have to come down.

I suggest three possibilities to the Minister: first, a simple reduction in value added tax. Because of higher pump prices, residents of remote rural areas pay on average about 2p to 3p a litre more of the VAT element. If VAT on fuel in remote areas were reduced to about 5 per cent., it would put pump prices at the same level as in urban and suburban areas. I am certain that the Treasury response will, as always, be a resounding no, and probably Ministers will cite European Union rules. However, my brief research into the matter revealed some sound precedents in the EU to allow such a reduction, although I shall not cite them, as time is short.

My second solution is of a similar nature: a reduction in excise duty, which is clearly possible under EU rules. The preamble and article 8, paragraphs 4 and 5, of directive 92/81/EEC, and directive 92/82/EEC, specifically permit derogations for remote and rural areas. I put that to the Treasury in a letter, which was answered by the then Chief Secretary on 1 October 2001. His response, not surprisingly, was that the EU would not allow it. My subsequent research shows that although it may be difficult, it is perfectly possible, and I ask the Government at least to explore the matter and not rest with a "non" from the Treasury.

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An argument against both schemes might be the difficulty in defining areas, but in my constituency an examination of postcodes shows that they could be used to devise a reasonably coherent scheme. Of course, there will always be anomalies on the margin but they should not spoil the scheme's potential for greater good.

The third alternative does not apply specifically to the remote rural areas as it covers the retailing of petrol in the whole country: it is to review upstream competition. In Australia, oil companies are not allowed to own forecourts and in America the number that they may own is severely limited. A previous Government recognised that the vertical integration of producer and retailer leads to poor competition practices. The obvious example is that of the pubs and brewers, the latter of which from 1989 onwards were forced to divest themselves of their tied houses. The Government should consider a similar divorce between the oil companies and forecourts, thereby producing price transparency between the refining point and wholesale point—an area that is currently decidedly obscure.

My requests to the Minister are straightforward. First, will he accept the severity of the problem on remote rural areas, where public transport is not an option, people need a car to go about their daily business and they suffer social exclusion by being unable to use their car as often as they would like? Will he understand that vehicle excise duty rebates do not, and will not, offer a solution, and that that is not a fault of the retailers but an exceptional market failure?

Secondly, will the Minister agree to examine the solutions that I have proposed? Will the Government at least explore with the EU the possibility of either VAT or excise duty cuts and not simply rest, as we often do, on a no from the Treasury? Thirdly, will the Government look at what could be done on the upstream market?

Since a noteworthy Labour Government in the 1960s adopted Jo Grimond's idea and created the Highlands and Islands development board, which has been succeeded by Highlands and Islands Enterprise, billions have been spent, rightly, in trying to ensure sustainable populations and viable economies in our remote areas. I can think of no measure that would aid that objective as effectively and cost-efficiently as eliminating the cruel and unnecessary burden of fuel cost differentials in remote areas. I ask the Minister to consider those points seriously.

4.12 pm

Mr. Alistair Carmichael (Orkney and Shetland): I congratulate my hon. Friend the Member for Caithness, Sutherland and Easter Ross (John Thurso) not only on securing this debate, but on the thoroughgoing and exceptionally well-researched way in which he presented his case to the Chamber. It was a tour de force of the subject.

I want to bring a more northerly perspective to bear on the debate, because the fuel prices are viewed with great frustration by my constituents. In September 2000, when the country was almost brought to its knees by fuel protesters, my constituents were delighted to see the price of fuel on the national agenda and at the top of

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the 6 o'clock news every night. However, they would still have loved to pay the prices that those people were complaining about. That remains the feeling today, when the spotlight is off and the glare of publicity is away from the issue. It remains a pressing problem in my constituency, as it is for people in all the remotest communities in this country.

The price of fuel is an issue of social inclusion. Sadly, the people who live in the remotest parts of my constituency often have only one part-time job or a series of part-time jobs, survive on a crofting income, which is low by definition, or are on a fixed income such as a state pension. Those people are hit hardest by the absence of public transport, and their reliance in turn on the private car as their only means of getting to and from their home means that they are excluded from the benefits of supermarkets that might be in the nearest town some 15 or 20 miles away.

My hon. Friend referred to the Minister having sympathy; I hope that he still feels the sympathy that he exhibited in the past, and that he will now add to it the vital ingredient, which is the political will to see this issue, and solutions along the lines suggested by my hon. Friend, taken seriously once and for all.

4.14 pm

The Minister for E-Commerce and Competitiveness (Mr. Stephen Timms) : I listened with great interest to the case that was ably made by the hon. Member for Caithness, Sutherland and Easter Ross (John Thurso). I can reaffirm the sympathy that I have expressed on these issues on previous occasions, and the Government's view that a car is essential for many people in rural areas and certainly not a luxury. As a Department of Trade and Industry Minister, I cannot answer questions on the taxation issues that he raised. When I made my previous comments, I was a Treasury Minister. However, I can say that the hon. Gentleman should not underestimate the significant barriers that there would be to introducing a differential scheme of the type that he proposes. I shall leave it to my colleagues who are responsible for those matters to deal with the points that he raised.

It is worth considering how the price of fuel is made up. The largest element in the cost of a litre of fuel is excise duty. Then there is value added tax and the wholesale price—the Rotterdam or Platts price—which accounts for 12p to 15p. The cost of transportation is between 1p and 1.5p per litre, depending on location.

Sometimes people think that the problem that we are debating results from transport costs, but that is not the case. The real source was identified by the hon. Gentleman: the typically very different volumes of sales in urban and rural locations. The largest urban sites sell up to 20 million litres a year, whereas a rural site may well sell less than 1 million litres a year. Often, it will be significantly less than that. As the hon. Gentleman said, a comparable level of overheads has to be recovered from a lower volume of sales. That is essentially where the differential arises.

The UK retail petrol and diesel prices were relatively flat for most of 2002, with fluctuations in retail margins typically absorbing changes in wholesale prices. However, as wholesale prices increased during the latter part of 2002 and early this year, margins were squeezed

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and retail prices rose by more than 5p a litre as a result. The end of winter, lower world crude oil prices and greater stability in the middle east have helped to reduce pressure on wholesale petrol and diesel prices since late March. That has allowed UK retail margins to recover and retail prices to fall back to levels slightly above those of this time last year.

The hon. Gentleman asked an interesting question about competition issues and whether a competition problem was part of the background to the phenomenon of higher fuel prices in rural areas. The main legislation governing competition issues is the Competition Act 1998. Under that, the Office of Fair Trading has responsibilities for those issues. In the past decade or so, the OFT has investigated the retail oil industry on a number of occasions and specifically considered the questions that have featured in this debate. However, its investigations did not find malpractice on any of those occasions.

Under the Act, the OFT does not have powers to rule on price as such, because that is for the market to determine, but it has powers to act against dominant businesses that abuse their position, which can include using unfairly low pricing to force competition out of the market. If there is a competition problem, there is a mechanism in legislation to address that. The OFT has the necessary tools and has used them in the instances to which the hon. Gentleman referred in which there has been action in other industries. The OFT concluded, however, that it was not necessary to use those tools in this case. On the third of the remedies that the hon. Gentleman suggested, the OFT conclusion was that there is no problem of competition.

John Thurso : I specifically referred to those reports because it is not the retail end that concerns me. I obviously did not make it clear that I am concerned about the pre-retail price—the wholesale price—from the refiner to the wholesaler. Why can the oil companies always compete with a superstore at a vastly lower price when they have to, but cannot compete when they have to go to a remote area? I contend that the opaqueness in price, if it exists, exists at an earlier level in the chain.

Mr. Timms : The hon. Gentleman identified the answer: the typically lower volume of sales in outlets in rural areas. I believe that that is the reason for the differential. There is no competition problem.

My Department has been doing several things to deal with the problem. We recognise that this is an issue for rural areas. My hon. Friend the Minister for Energy and Construction instigated the Downstream Oil Industry Forum, which met in July and November last year and is due to meet again in September. The forum was set up to examine several important industry issues, one of which was the service to the rural motorist. It is made up of all parts of the downstream industry from the oil refinery to the fuel pump. It includes the Petrol Retailers Association, the UK Petroleum Industry Association, the Association of UK Oil Independents, the Tank Storage Association, and GarageWatch—the trade association for smaller operators. All the major oil refiners and companies active in the UK also attend, as do representatives from the Scottish Executive, the Welsh Assembly, the Department for Environment, Food and Rural Affairs and the Countryside Agency.

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At the second forum meeting, it was decided that there should be a rural taskforce to consider how best to support the rural motorist and petrol retailer by investigating methods and approaches that would help to reduce the overhead costs to this part of the sector. That follows work pioneered by the Scottish Executive, with which I am sure hon. Members who have spoken are familiar.

The taskforce comprises a sub-group from the main forum. It has now met twice and another meeting is due at the end of September. It has been investigating several issues that all parts of the industry believe to be important. Its work is aimed especially at reducing the capital expenditure required to operate a rural petrol station, to reduce the risk of the site closing and possibly to reduce the price of petrol to the rural motorist, given that I believe that we have agreed today that overheads are the root of the difficulty.

Lembit Öpik (Montgomeryshire): If the taskforce can identify less expensive ways of running rural petrol stations, surely that same benefit could be applied in some way to the city? It does not absolve the Government from answering whether they are willing in principle to consider using their tax-varying powers to create a level playing field if the taskforce can find no other way to achieve that.

Mr. Timms : Let me explain how the measures that we are considering address the challenges of rural petrol stations. First, there is the issue of vapour recovery at petrol stations during the delivery of petrol to the underground tanks. A European Union directive covers the collection of vapour from distribution terminals and petrol stations. That has been phased in over several years. The last implementation date covers the very low throughput sites typically found in rural areas.

This Monday, my officials met to discuss the issue in detail to obtain an exemption for these very low volume throughput sites: that is, sites with sales of fewer than 500,000 litres a year. The technical justification for that would be the negligible impact on air quality, due to the low quantity of vapour and the rural location. The directive recognised that possibility and gave member states the option of a derogation. An environmental impact assessment is being conducted on the possibility of such a derogation, and a final decision on that will be taken in the autumn, which will give sufficient time, if the decision is taken to proceed, to save the rural sites from the necessity of investing in the collection technology that would need to be put in place.

The second issue is the maintenance and repair of underground tanks. Replacing corroded underground tanks is expensive and is a serious issue for many rural sites. Most such sites were opened 40 or more years ago and there have been problems with corrosion, which is beginning to cause contamination of the soil and groundwater. There is a cheaper alternative to replacement, which involves lining the tank with a plastic coating. That is a tried and tested technology, but many local authorities are hesitant about accepting lining and feel more confident about requiring owners to replace the underground tanks, which incurs a substantial capital cost. That requirement frequently means that the petrol station has to close down, or has to increase its petrol prices to cover the tank replacement cost.

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My officials are discussing the issue with the Health and Safety Executive. It is a complex subject requiring detailed technical knowledge of soil types and groundwater flows. There is also the issue of identifying suitable competent contractors capable of carrying out the tank lining in a safe way that provides reassurance on environmental concerns. The Health and Safety Executive is working to support local authorities in making assessments in line with the guidance, which is its responsibility, and the Scottish Environment Protection Agency is fulfilling that role in Scotland.

Mr. Elfyn Llwyd (Meirionnydd Nant Conwy): I did not anticipate that I would intervene, but this is a subject on which I have campaigned for a long while and I am pleased to hear what the Minister is saying about it. Is he saying that there will be financial assistance for those hard-pressed rural garages, similar to the package made available by the Scottish Parliament?

Mr. Timms : No, I am not saying that. I am describing a range of matters that are being examined by the rural forum that has been set up. The forum is examining issues that are particularly difficult for rural petrol stations, and the two issues that I have cited fall into that category. We are also looking at how to address those issues and tackle what is undoubtedly a serious problem in rural areas. The problem is not just the high price of petrol, but the fact that petrol stations are closing down when action could be taken to enable them to continue to operate.

Those technical issues are good examples of my Department working with other Departments and with the Scottish Executive to reduce the legislative burden on small, rural petrol stations. Without those two initiatives, the price of petrol on rural sites could increase further. We are not talking about a huge

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increase—perhaps 0.5p a litre—but that might have a significant effect, which we would be keen to avoid, if possible.

We have also been working with the Countryside Agency to establish a definition of a "rural petrol station". Such a definition exists in Scotland and is applied by the Scottish Executive for the purposes to which the hon. Gentleman referred. However, the difficulty is that few petrol stations in England would fit the definition as applied in Scotland. We want to carry out benchmarking in England and need to collect data on the number of petrol stations concerned, so we are working on what the appropriate definition would be.

Mr. Llwyd : Does the Minister mean Wales as well, because surely the issues are the same?

Mr. Timms : Yes. My understanding is that that work will cover Wales—undoubtedly there are pressing issues of that sort in Wales.

Another issue that has been raised in the rural taskforce concerns how to develop the skills of people working in rural petrol stations. The Petrol Retailers Association and GarageWatch have worked with Cogent, the new sector skills council, to determine the skill sets required by rural petrol retailers. If we can encourage the development of skills, retailers may be able to diversify their businesses, increase profits and maintain lower petrol prices. That work is continuing.

The rural taskforce also recognises that small businesses often require guidance on how to approach appropriate organisations for financial support and, based on what has been happening in Scotland, DEFRA and the Countryside Agency have worked together to provide clear guidance on the types of projects that could be supported under the vital villages initiative.

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