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Wednesday, 27 June 2012

Has fuel pricing regulation helped Kenyans?



In Kenya, petroleum fuel pump prices are regulated through price capping. ‘Super’ and ‘Regular’ petrol as well as ‘automotive diesel’ and ‘kerosene’ are the better known fuel brands whose prices are capped this way. In this regulation, the prices are reviewed on a monthly basis by the Energy Regulatory Commission (ERC). This price control continues to be the subject of debate, with different stakeholders arguing for or against it.

All petroleum products in Kenya are imported from the Middle East. Their cost is dependent on actual cost of a barrel of crude oil or an expected future one at the time of purchase. Crude oil and other petroleum products are purchased through the open tender system of the Ministry of Energy. Here, the oil company that quotes the lowest price gets to import for the whole industry consignment for the month. However, this is going to change from, July 2012, with the lone refinery, Kenya Petroleum Refinery Limited, having been granted a license to import crude on its own behalf and sell its refined products to oil marketers as a merchant. Previously, it charged a refining fee for its service.

Going back to our discussion, the importing cost forms the basis of the price capping formula.

Background
The Energy Regulatory Commission was established as the energy sector regulator by the Energy Act (2006) in July 2007. In addition to the economic and technical regulation of the petroleum sub sectors, the Commission’s mandate includes electric power and renewable energy forms.  Its work includes setting, enforcing and reviewing tariffs, licensing, dispute settlement and approval of power purchase.
The ERC has had the power to regulate fuel prices from inception but the government, through the Ministry of Energy, declined to effect the regulation due to lobbying from oil marketers. The price capping began only in December 2010 after views from stakeholders were collected over a period of one year. Public, consumer rights groups and Members of Parliament pressure was the straw that broke the camels back. With rising food and energy costs causing protests around the world in the aftermath of global financial meltdown of late 2008.  The signs were clear that the Kenyan public was getting restive.
Rationale
It is not surprising that the Kenya government buckled under the weight of this enormous pressure. The basic rationale was an easy one – the increased cost of living was unbearable to the majority of Kenyans who are poor folk.  For once, the government appeared to be doing its prime duty of protecting citizens from exploitation by ‘bourgeoisie’ oil marketers. The price would now be set based on the cost of imported product, logistical costs, taxes, a set wholesale and retail margin. This price would be effective from 15thof a month until the 14th of the following one.

How was the cost of imported product to be determined? This would be the average cost of the previous two months. Therein, begun the issues of execution. What happens when prices are rising or dipping fast? Would all logistical costs be taken care of? It turns out that some hidden costs, such as demurrage costs, were not taken into account in the initial formula. Demurrage costs tend to be significant due to clearance delays arising due to the congestion at the Port of Mombasa.
Impact
Price capping initially had an impact, especially on petrol prices, as it curtailed the sharp trajectory of prices, as prices shot upwards on the international market. Some of the hidden costs were later included in the capping formula after intense lobbying by the oil marketers. This improved their marketing margin.
Poorer markets
An unwanted result of the capping is that petroleum product prices in rural areas now cost more. The reverse was the case before price capping. The formulae cumulatively adds transport costs from the urban depots of the oil marketers with the further away from key depots, the higher the prices. Previously, the marketers would simply total their costs and take care of such market realities by segmenting the market and cross subsiding with urban areas. Making prices in rural Kenya lower.

In addition, even in urban areas like Nairobi and Mombasa, fuel prices are the same at all stations. Previously, fuel was more expensive in more affluent areas. This way, oil marketers were able to recover their margin lost in lower pricing in lower income market segments. It also allowed the volume factor to come into play as lower income areas have much higher customer densities. Since the ERC is now accountable for setting prices, the oil marketers go for profit maximization, which sometimes result in windfall profits.
Kerosene
Kerosene, the poor man’s energy, has also become more expensive due to ERC recommendations that don’t take cognizance of  market realities. Previously, oil marketers priced it at very thin margins. They leveraged it on their overall strategy of benefit from diesel’s high sale volumes and petrol’s flexible pricing margins. In fact, the main focus on kerosene was increasing market share around high sales.
Conclusion
So, whereas the sharp price increases are no longer witnessed allowing for some stability, the price caps have ended up hurting the economically vulnerable i.e. rural folk and urban poor, who they were meant to protect, in the first place.