New charge sets up consumers for higher petroleum prices charge

The energy sector regulator has allowed oil marketers to pass on the rising cost of financing their business to consumers, setting up motorists for higher pump prices.

The decision came in the form of a “cost of credit” surcharge that the Energy Regulatory Commission (ERC) introduced in this month’s price adjustments jerking up pump prices by Sh0.62 per litre.

Commercial bank lending rates rose by an average of 10 percentage points since the November 14 review and will henceforth reflect in the ERC’s monthly price reviews.

ERC director general Kaburu Mwirichia said the borrowing cost surcharge will be adjusted on a quarterly basis, indicating that consumers are likely to shoulder the steep rise in lending rates in the next three months.

“Borrowing costs are a direct operating expense for oil marketers. We felt it is important to factor it in on a quarterly basis,” said Mr Mwirichia in an interview.

The energy sector regulator, however, declined to give an indication of the margin by which the next adjustment will increase fuel costs, saying the oil marketers “will not be allowed to pass on the lending cost increases in full.”

An industry analyst who sought anonymity to protect his consultancy contracts with oil marketers estimated that if passed on in full, the price of super petrol could move closer to Sh130 per litre from the current cost of Sh124.13 in Nairobi.

Kenyan energy sector operators are cushioned from international crude oil price changes, foreign exchange and inflation rate fluctuations, which are charged on consumers as “pass through costs.”

This makes Kenya one of the most attractive investment destinations for energy sector investors in Africa, but critics have pointed out its inflationary effect on fuel and power bills that in turn increase the cost of production for goods and services.

Samuel Nyandemo, a lecturer at the University of Nairobi, said there should be a limit to the cost elements that oil marketers can pass on to consumers.

He argued that since international crude prices are already stabilising, the energy sector regulator should have let the oil marketers absorb the financing costs to minimise the burden on consumers and protect economic growth.

Mr Mwirichia, however, said the ERC had decided to introduce the finance cost element in the price adjustment formula after lending rates increased substantially in the past eight months.

The financing cost adjustment will be based on the cost that oil marketers incur in buying crude oil and shipping it to Kenya. Most oil marketers use money borrowed from local banks to buy and ship in the oil.

“We’ll be looking at the working capital costs,” said Mr Mwirichia.

The Central Bank of Kenya (CBK) last month raised its policy lending rate to 16.5 per cent, aiming to stabilise the depreciating shilling and tame runaway inflation.