Trajtenberg's Recommendations for the Gasoline Sector: Restore Diesel Price Control, Build More Private Gas Stations

Four retail fuel companies hold an aggregate share of about 90% in Israel's fuel market, which is indicative of a concentrated oligopoly.

Restoration of government price controls over diesel fuel at gas stations, releasing private gas stations from exclusivity contracts with retail fuel companies, and accelerated construction of 40 new independent gas stations within city centers - these are three of the main recommendations brewing in the Trajtenberg committee for increasing competition in Israel's concentrated fuel market.

Four retail fuel companies - Paz Oil, Delek Israel, Sonol and Dor Alon Energy - hold an aggregate share of about 90% in Israel's fuel market. This in itself is indicative of a concentrated oligopoly, but since fuel consumption is regional and some areas have no competition whatsoever - with several stations operated by one single company - the level of concentration is actually much higher.

Trajtenberg - Tomer Appelbaum - 26092011
Tomer Appelbaum

An inter-ministerial committee on competition in the fuel market published a draft report two years ago pointing out that the dominant reasons for lack of competition in this sector are the shortage in the number of filling stations operating in Israel - just 1,100 - and the difficulties involved in establishing new ones, requiring an average of seven years.

The inter-ministerial committee recommended that within six months of the government adopting its conclusions, each local council establish a policy for building public gas stations or mini-stations within its territory and define areas where nothing prevents them from being built. It also recommended that the Interior Ministry's Planning Administration allocate land alongside each 20 kilometers of planned road construction for building a new filling station, and prepare a national master plan by June 2011 for building stations on stretches of existing roads where none exist for distances of 20 kilometers or more.

These recommendations were never implemented. Now, the committee headed by Prof. Manuel Trajtenberg recommends setting aside land over the next two years for 40 new independently run filling stations, with a preference for building new stations in the heart of cities. The committee also recommends releasing private station operators from being bound by exclusive supply contracts with fuel companies, thereby opening supply to competition. This conforms to a ruling made by the antitrust commissioner several years ago that exclusive contracts between fuel companies and station owners are too restrictive.

The Trajtenberg Committee also addresses the rampantly growing trend of price-gouging against occasional customers to subsidize huge discounts given for vehicle fleets run by companies and other institutions. The committee estimates that the excess cost of diesel fuel due to lack of competition is NIS 400 million a year, and calls for restoring price controls on diesel fuel at the pumps. This step is now also under consideration by the Finance Ministry and the National Infrastructure Ministry after being foiled two years ago by objections from the treasury's budget department.

In 1993, price controls over diesel fuel at retail filling stations were removed, but they were kept in place for wholesale prices charged by refineries. This was done under the assumption that the market was competitive, consisting largely of government or private vehicle fleets with substantial bargaining power, and enjoying reduced excise taxes. Over the years, however, diesel fuel has been increasingly used for private transportation, with a growing number of diesel engine vehicles in the market, such as jeeps. The Israel Tax Authority has responded to this trend with a five-year plan for gradually aligning excise taxes on diesel fuel with taxes on gasoline.

On January 1, 2007, in the framework of privatizing and splitting up the refineries, a decision was made to remove controls on their wholesale prices for petroleum products. Retail gasoline companies complained that gasoline prices at their filling stations remained subject to price controls, and they warned that the move would cause their margins to shrink. At the same time, they set their base prices for diesel fuel at exorbitantly high rates, offering discounts through long-term contracts to taxis and fleet operators. Private individual customers, accounting for 30% of diesel consumers at the pumps, were forced to accept the uncontrolled prices, ostensibly "subsidizing" the discounts for fleets.

The Trajtenberg Committee also addressed competition in the institutional market, recommending the implementation of a universal "Dalkan" automatic billing system, allowing automatic billing regardless of which company operates the filling station. The necessary regulations for this were already passed by the Knesset last year.