New charge sets up consumers for higher petroleum prices charge
A pump station attendant fuelling a car. 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.”. Photo/FILE
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.
The shilling touched an unprecedented low of 107 units to the dollar on October 11 while inflation surged to 18.91 per cent in the same month.
Majority of commercial banks have taken CBK’s cue and raised their lending rates to about 24 per cent, pushing up the effective cost of loans to nearly 27 per cent after factoring in risk premiums that the lenders add to their base lending rates.
Factoring in the rising costs of lending could keep energy prices high at a time when consumers were expecting a reprieve from the cooling international crude prices and the strengthening shilling, which has climbed to 89 units to the dollar.
The pump prices of super petrol increased to Sh124.13 a litre this month, up from Sh120.50 a litre in October.
Manufacturers have warned that high energy costs and rising lending rates would hold commodity prices high, off-setting potential gains from the strengthening shilling.
Mr Mwirichia, in defence of ERC’s price adjustment formula, said consumers would be “suffering more” in the absence of controls in the oil market. Oil marketers are allowed a profit margin of Sh6 per litre of fuel, but the surging borrowing costs have inflated their cost structure shrinking their earnings.
Mr George Wachira, an independent oil sector analyst and director of Petroleum Focus Consultants, however termed the new financing cost adjustment a “genuine” cost claim by the oil marketers. “The country would rather have oil at a higher price than have no oil at all,” said Mr Wachira.
He, however, added that the cost burden to consumers could increase if retailers also go to ERC to be cushioned for the high borrowing costs since they also seek overdraft facilities from lenders.
The current adjustment is limited to costs incurred by importers.
Jimmy Mugerwa, the country manager for Kenya Shell, said oil marketers’ overhead costs have increased to an extent that “they can no longer operate without making losses.”
Foreign exchange losses
Electricity distributor, Kenya Power, increased power tariffs last month citing high fuel prices, an indicator that higher petroleum prices are also likely to feed into increased energy costs.
Kenya Power’s fuel surcharge increased from Sh8.4 a kilowatt hour (kwh) last month to Sh9.02.
Some oil importers have opted for dollar-denominated loans to escape the high lending rates—which have however exposed them to the risk of foreign exchange losses.
“Some of them are opting to borrow dollars at between five per cent and 10 per cent as opposed to taking shilling denominated loans, but scarcity of the dollar is limiting their efforts,” said Jeremiah Kendagor a currency trader at KCB.
Pressure on borrowing costs is also emerging due to reluctance by commercial banks to borrow directly from the CBK.
The regulator announced that banks borrowing through the overnight window for more than two times in a weak would be investigated, which has seen the lenders shy away from taking overnight loans.
