ERC told to review formula it uses to set fuel pump prices

What you need to know:

Kippra says that the ERC’s failure to remove cost components such as those associated with the Mombasa-based refinery that was closed in September 2013 is unsustainable.
The think-tank reckons that leaving the refinery cost component unchanged in ERC’s price-setting formula puts unnecessary burden on motorists.
ERC, however, says it reduced the refinery cost component to zero on September 1, 2013 after the refinery closed, but left the general formula unchanged.

The Energy Regulatory Commission (ERC) has been asked to review the formula it uses to set petroleum pump prices to remove some cost components that have been rendered obsolete, but continue to burden consumers.

The Kenya Institute for Public Policy Research and Analysis (Kippra) says in a report to be launched Wednesday morning that the ERC’s failure to remove cost components such as those associated with the Mombasa-based refinery that was closed in September 2013 is unsustainable.

The think-tank reckons that leaving the refinery cost component unchanged in ERC’s price-setting formula puts unnecessary burden on motorists since Kenya currently imports all of its petroleum.

“In terms of petroleum consumption, the formula used to calculate prices has not been reviewed since it was enacted (2006),” Kippra says in the report, adding that “it is important to review this because aspects such as charges for refining remain even after the only refinery was closed.”

ERC, however, said it reduced the refinery cost component to zero on September 1, 2013 after the refinery closed, but left the general formula unchanged.

“We zeroed the charge but left the formula unchanged since there is a window for Kenya to build a new refinery in Lamu that will make the formula applicable in future,” said Edward Kinyua, the acting director of petroleum at the ERC.

Kippra’s policy analyst Hellen Osiro, however, insisted that consumers are still paying the refinery charges as the energy regulator had not presented any formal documents such as a gazette notice or policy brief indicating it had ceased to apply three years ago.

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If this is the case, it means Kenyan consumers have forked out at least Sh12 billion in refinery charges based on the 7.1 billion litres of petrol and diesel consumed since 2014.
The refinery levy stood at Sh286.8 ($2.84) per barrel of petroleum in 2013.

A barrel is equivalent to 159 litres, meaning the refinery levy translates to about Sh1.80 per litre of petroleum.

The levy was charged on oil marketers who then passed it on to consumers through pump prices.

Oil dealers were forced to source a portion of their stocks from the defunct Kenya Petroleum Refineries Ltd (KPRL) to ensure all consumers paid the levy.

At Sh1.80 a litre, the refinery levy translates to billions of shillings based on the billions of litres of petroleum Kenya consumes every year.

Consumption of petrol jumped 25 per cent to 1.5 billion litres last year compared to 1.2 billion litres in 2014, according to the Kenya National Bureau of Statistics (KNBS).
Diesel consumption hit 2.4 billion litres from two billion in 2014.

Kenya imports all its refined petroleum following the closure of the refinery, which the government plans to convert to a storage facility.

The ERC sets the prices of petroleum products every month in line with global crude oil prices and fiscal policy changes. Kenyan motorists pay multiple taxes and levies at the pump.

Taxes account for more than 40 per cent the cost of each litre of petroleum at the pump, including excise duty (Sh19.89 for a litre of petrol and Sh10.30 for diesel) and road levy (Sh18).

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Petroleum traders then add their profit margins onto these costs – at the rate of Sh7 a litre for wholesale and Sh3.89 for retail to make the pump price.

The ERC has commissioned a study it says will inform the frequency of updating marketers’ loan burdens and inflation in the pricing of fuel.

Inflation and bank interest rates are part of the formula for review of monthly pump prices but they are not reviewed regularly.

The ERC has recently come under scathing attack over what has been viewed as failure to pass on to consumers the full benefits of lower fuel prices in line with tanking global oil prices.

“The formula allows losses in the pipeline and depot instead of encouraging the companies to be efficient so as to minimise on losses,” the report says.

“The oil marketers are also allowed to set their gross margin; however, it is not clear how they arrive at the set gross margin, and this provides a window for companies to form cartels and collude on the margins set.”