Why Kenyans still pay more for fuel amid low oil prices

The Energy Regulatory Commission (ERC) has recently come under heavy criticism from fuel consumers who feel they have been denied the full benefits of the tanking global oil prices.

The ERC, which controls petroleum prices through monthly reviews, has traditionally responded to the criticism by stating that a large segment of what makes unit pricing of petroleum is made of taxes and fixed charges that do not vary with the change in global pricing.

The Business Daily sought the regulator to shed light on petroleum pricing and other energy sector issues in an interview with ERC director-general Joseph Nga’ng’a. Here are the excerpts.

Consumers have raised concerns that the recent drops in fuel pump prices, factoring in recent tax increments, do not reflect the plummeting global oil prices. How do you respond to this in your role as the protector of the public interest?

A major omission by many commentators on this subject is the fact that there is a fixed component in the pricing formula that does not change, irrespective of the changes in global prices.

This is on account of duties and taxes, supplier margins and distribution costs. For instance, at the current price of Sh88.64 per litre of petrol, the fixed elements comprise more than half or Sh48. Duties and taxes take up Sh33, supplier margins (Sh11) while distribution cost is Sh4, bringing the total fixed costs in a litre of petroleum to Sh48.

The remaining Sh40.64 of the Sh88.64 a litre is the only part that gets affected by global cost variations. Additionally, the shilling has depreciated against the dollar from Sh90.59 in December 2014 to Sh102.19 in December 2015.

This eroded the gains that would otherwise have been realised from the declining crude prices. When this is taken into consideration, our retail prices are a reflection of the changes in international prices. The International Monetary Fund has previously confirmed this position.

In addition, a road maintenance levy adjustment of Sh3 a litre was introduced for super petrol and diesel last July and an additional excise duty of Sh2.061 on diesel last December preventing any further drop in pump prices. I can, therefore, affirm that the ERC has transferred the full benefits due to consumers as they happen.

Why is it that despite the heavy El Niño rains the fuel cost levy in power bills has little changed?

There were expectations that the rains would boost hydropower generation and, therefore, reduce use of expensive thermal power.

The country’s electricity generation data for the period between last July and December shows that geothermal generation contributed the largest share, having averaged 47 per cent followed by hydropower at 37.9 per cent.

Thermal contribution averaged 13.4 per cent.  At the onset of El Niño rains last November, the fuel cost charge was Sh2.51 per unit (kilowatt hour), but this has dropped to a low of Sh2.31 this month.

However, there was an adverse impact on consumer tariffs arising from foreign exchange rate fluctuation adjustment as the shilling weakened against the US dollar.

Kenya’s switch to geothermal power has left diesel power generators holding on to stockpiles of fuel for longer. What options does the energy regulator have in compensating independent power producers (IPPs) in the event of losses?

All thermal electricity plants have power purchase agreements and fuel supply agreements that define the terms and conditions of power off-take by Kenya Power.

The ERC is not party to these agreements but approves critical considerations that have an impact on the final retail electricity tariffs.

This includes stockpiling of fuel to ensure security of supply, the applicable fuel prices at the time of delivery and specific consumption of the power plants.

(The regulator requires all diesel power generators to store at least three months equivalent of fuel supplies to avoid stock-outs).

The ERC’s mandate is to ensure that power supplied to consumers is least expensive, all factors considered.

What is the ERC’s stand on the proposed plan to introduce maximum price controls on cooking gas just like on the petroleum market?

Sessional Paper No. 4 of 2004 on energy provides that regulation would only be necessary in cases where the market structure cannot allow competition.

This is the reason the commission does not regulate the price of LPG (liquefied petroleum gas). But imperfect market environment often demands that regulators put in place some form of price caps. This was the basis for introducing controls on petroleum products in 2010.

In the LPG segment of the market, the introduction of gas cylinder exchange pool in 2009 enabled consumers to migrate from one LPG brand to another without losing their initial investment in the cylinder.

This was only possible when the commission, through Legal Notice No. 12 of 2009, ensured that cylinder sizes for use in the retail market were standardised at 1kg, 3kg, 6kg and 13kg. Further, the cylinder nozzles were also standardised to ensure use of a single gas regulator.

What about plans to scrap taxes on cooking gas to make it affordable for poor homes to switch from use of kerosene and biomass fuel?

The commission has made proposals previously to the relevant authorities and the matter is receiving due attention.

The ERC will continue to advise the government on measures that are needed to encourage use of LPG as opposed to domestic kerosene, which is known to have adverse effects on users.

The ERC and Ministry of Energy last year proposed the creation of a petroleum stabilisation fund meant to cushion the country from wild swings in global oil prices. How will it operate and from when?

A petroleum stabilisation fund is necessary where volatility in prices is a major risk for economic planning and where it is difficult to raise requisite funds from the consolidated fund.

Price stabilisation is a form of hedging and does not always work in the interest of all parties. This will call for extensive consultation with various stakeholders.

While the current price determining formula is working well, the commission is undertaking a comprehensive study on the cost service for the petroleum supply chain that will determine the need and modality of the stabilisation fund.

This will then inform revision of the current legal notice on petroleum pricing.

What progress has been made in the plan to introduce cheaper off-peak tariffs for manufacturers to shift to overnight production?

The ERC is in the process of commissioning a cost-of-service study in electricity that will determine the level of industrial/large commercial tariff that would reduce peak load and utilise idle capacity in off-peak times (time-of-use), usually between 10pm and 5am.

This is an issue that will be considered during the next tariff control period, which starts in July 2016.

The time of use tariff had been introduced in 1999/2000 with disastrous consequences on Kenya Power. All large consumers shifted to the off-peak times incurring the electricity distributor heavy losses and had to be abandoned.

The ERC is approaching the issue with caution to ensure that Kenya Power is left in a revenue neutral position when off-peak tariff is introduced. Besides, only large commercial/industrial enterprises with the capacity to shift their load will enjoy the incentive.