Fuel prices: Whose interests does energy regulator serve?

A petrol station attendant in Nakuru fuels a car on January 15, 2015. [PHOTO:KIPSANG JOSEPH/STANDARD]

Kenya’s energy regulator is in a spot once again for raising fuel pump prices, with Kenyans saying they are yet to fully benefit from the drop in global crude oil prices.

In its latest price review last Saturday, the Energy Regulatory Commission (ERC) raised the pump price for super petrol by Sh4.47 to Sh89.46 per litre, while diesel increased by Sh0.68 to retail at Sh76.20 per litre.

Also hard hit were rural households that use kerosene, which saw a price increase of Sh3.35 per litre from the February price of Sh52.40 per litre.

The biggest increases were in Mandera, where super petrol will for the next month retail at Sh103.27 per litre, diesel at Sh90.01 per litre and kerosene at Sh69.56 per litre.

ERC Director General Joseph Ng’ang’a cited the rebound in global prices of crude oil as the reason for the increase in pump prices.

Among the first to react was business mogul Vimal Shah, who termed the rise as unjustifiable on his Twitter account. “No justification for this increase of fuel prices in Kenya!” Mr Shah, also the managing director of Bidco Oil Refineries, said soon after the new prices were announced. “Why is ERC doing this?”

Energy costs are a big concern for manufacturers like Mr Shah, often taking up a significant portion of production costs. The Consumer Federation of Kenya (Cofek) lobby group says ERC’s reviews could be handing hefty profits to oil marketers at the expense of consumers. The near-Sh5 rise in petrol prices saw Cofek warn it would seek High Court’s interpretation of the constitutionality of price controls, which it says could be denying Kenyans full benefits of the recent drop of crude price.

Rocket and feather

Cofek Secretary General Stephen Mutoro believes Kenyans should be paying Sh72 per litre for super petrol in Nairobi. “We do not agree with them. ERC is supposed to regulate the sector on competitiveness, not be a champion of price controls. In any case, price controls are anti-consumer,” said Mr Mutoro, adding the formula and entire concept of fuel price caps should be scrapped, and a free market economy allowed to thrive, with the regulator only determining and overseeing standards.

Already, Cofek has petitioned the National Assembly to withdraw ERC’s powers over petroleum prices. The lobby says the setting of prices should be left to the market forces of demand and supply.

Analysts also believe something could be amiss with the pricing.
Mohamed Wehliye, the senior vice president for financial risk management at Riyadh Bank, Saudi Arabia, said it looks like ERC has applied the ‘rocket and feather’ effect here. This is when wholesale price rises are passed on to consumers in their entirety whereas falls are passed on very slowly; so prices rise like a rocket and fall like a feather.

In its previous press briefings, the ERC justified its sluggish response to cut local retail prices by saying that it takes Kenya 30 to 45 days to reflect global oil price changes in domestic prices.

More recently, it said a sharp jump in the international pricing of petroleum products that happened on February 1 this year, without a corresponding downward adjustment, is to blame for recent hefty hike. “There was a sharp rise at the beginning of the period that informed the pricing,” Linus Gitonga, the director of petroleum at ERC, said. The energy regulator relies on data from Platts to peg prices, but independent oil marketers carry out the actual importation before the commodities are distributed to retail outlet. Platts is an independent provider of energy and metals information, and a source of benchmark price assessments in the physical energy markets.

“It was taking them almost two months or at least their 45 days upper limit to do the downward adjustments, but it has now taken them less than a month to reflect the slight rise in prices in February,” Mr Wehliye said. “In fact, prices have again fallen to a six-year low already in this month, but I doubt ERC will be quick to pass that through in its April review.”

However, he added that the latest upward revision is not the issue, but rather whether the base prices from which ERC increased fuel costs mirror what is happening in the global oil markets. “So their starting point – the point from which they raised the prices – was, in my opinion, already not reflective of global oil prices. ERC should stop this malarkey of telling Kenyans that because we import refined/white products, we should not be looking at global crude prices,” Mr Wehliye said.

The two, he said, are highly and positively correlated, and whether you use the Platt Index or Murban Crude Oil prices, it is easy to tell that Kenyans are paying Sh8 to Sh15 more than they should. “The sad thing is, this is neither going to the Government as tax or the pocket of the consumers. So who does ERC work for?” Mr Wehliye asked.

Jumped 20 per cent

His suggestion is to floor the price at, say, Sh85 a litre, even if crude prices hit $40 (Sh3,682) a barrel, by increasing the tax component of domestic pump prices. “If the money is not going to the pocket of wananchi, let it go to the public coffers so that it can be put to work rather than frittered away. The excess taxation during the low-price regime may as well save the day for the Government if and when oil prices start to rise. It could impose trigger points to remove the tax if oil prices rise to a certain level.”

This way, Mr Wehliye said, the Government would insulate ordinary wananchi from the volatility of the oil market. “The ideal way forward is to pass on the benefits of cheaper oil to consumers by half now, and pass on the other half when prices spike.”

However, on the pricing and ERC’s model, Mwendia Nyaga, a petroleum analyst, said it would be unfair speculation to assume the energy regulator has manipulated the formula to favour oil companies, unless someone has evidence.

“It seems to have escaped the minds of analysts that crude oil prices jumped 20 per cent in February. This could have led to an increase of landed cost of some imports, depending on the dates they came in, and would certainly lead to a price increase.”

In your copy of The Standard on Sunday tomorrow, find out why Cofek wants ERC stripped of its power to set prices.