ERB CLARIFIES ISSUES RAISED ON THE FUEL PRICE ADJUSTMENT

Sun, 20 Aug 2017 09:04:38 +0000

FOLLOWING the recent fuel price adjustment by the Energy Regulation Board (ERB), a number of issues have been raised by the public and other stakeholders. This week’s article is therefore dedicated to clarifying these issues of concern raised by the public on different platforms, including the media.

The key issues captured and the ERB responses are as highlighted below:

Question 1:Why was the fuel adjustment so low? Shouldn’t it have been higher considering reductions in international oil prices as well as gains in the Kwacha exchange rate?

From the outset the ERB would like to emphasise that the pump prices are not determined on the basis of pure crude oil as appears to be the general perception. Rather, it is based on a two-tier product importation system that provides for security of supply in the country as follows:

.Commingled feedstock that is transported via pipeline; and

.Refined petroleum products that are transported by road

Therefore, the pump prices determined by the ERB provide for cost recovery for both petroleum feedstock and the refined petroleum products.

It should be noted that it is not pure crude oil that is imported for the Zambian market but rather a commingled petroleum feedstock which contains refined diesel.

The commingled feedstock is necessary to suit the configuration of our refinery. Due to its composition, the cost for commingled feedstock is higher than pure crude oil because it contains refined diesel.

Therefore, the price build-up for fuel though influenced by international crude oil prices is based on the cost commingled feedstock which is generally more expensive.

Further, a “one to one” (international oil prices vis a vis pump prices) price change would not be feasible for the reasons stated below:

.Essentially, only about 50 percent of the costs which include feedstock, shipping and port charges are directly affected by the exchange rate. However, other costs in the fuel price build-up such as pumping fees, terminal fees, marking fee, excise duty, transportation margins, OMC and dealer margins and the Strategic Reserve Fund, are fixed charges calculated in Kwacha terms;

.The time lag is also a factor to bear in mind with regard to the pricing of petroleum products in Zambia. It should be noted that there is a lag from the time a cargo is bought to the time when it arrives in the country and is priced. Inevitably, this entails that there may be differences between the prevailing exchange rate and the one used at the time of pricing the product. Sometimes, this is to the benefit of consumers while at other times it may not, depending on the circumstances; and

.Furthermore, the current price reduction may appear small when looked at in isolation but is actually quite significant when considered cumulatively with the other reductions effected in January this year.

You will recall that a reduction was made in January 2017 and has been followed up by this August one. Meanwhile, in between January and August there has been no increase in fuel prices. To illustrate the point, the cumulative reduction in fuel prices this year alone is as follows:

.Petrol by K2.3 – (K1.25 in January and a further K0.83 in August)

.Diesel by K1.53 – (K0.7 in January and a further K0.85 in August)

.Kerosene by K1.53 – (K1.22 in January and a further K0.31 in August)

This essentially means that since the beginning of this year there has been a saving by the above indicated amounts for every litre of fuel an ordinary consumer buys, and that saving has further increased in August 2017.

It should be noted that while price reviews were undertaken for other cargoes in March and June, there was no price adjustment as the supposed changes would have been below the 2.5 percent threshold which triggers a price adjustment.  Therefore, any variation in prices exceeding 2.5% is considered significant enough to trigger an adjustment because the overriding consideration is full cost recovery vis a vis the need for stability in prices. The 2.5 percent threshold is intended to guard against frequent price changes which are not only disruptive to the economy but make planning for energy use difficult.

We wish to emphasise that the 2.5 percent threshold is not a subsidy but merely ensures that prices remain stable where the determined variation would be within tolerable levels so as to avoid frequent but marginal changes.

In conclusion, the assessments conducted by the ERB using the Cost-Plus Model showed that fuel prices needed to be revised downwards by the indicated margins. Subsequently, the ERB duly effected the change in line with its mandate.

Question 2:Why did the ERB have to reduce fuel prices now?

.The ERB assessed the consignment upon arrival, in line with its mandate to determine the price of energy products and services. The ERB computation using the Cost-Plus Mechanism showed that the costs had reduced by more than the 2.5 percent trigger band. Therefore, a price reduction had to be effected. This gain was subsequently passed on to consumers as dictated by the assessment results.

.This gain was due to changes in the two key fundamentals (factors) that affect fuel pricing in Zambia. As you may be aware, the Cost-Plus Mechanism is primarily based on Cost Recovery. Therefore, in the event that the price determined for a particular cargo exceeds the costs associated with it, there should be a price reduction which is passed on to consumers. Conversely, when the price is determined for a cargo taking into account all associated costs and the current price falls short, there is need for a price increase.

 The principle is basically that all costs are recovered to ensure sustainability of fuel supply as feedstock or finished petroleum products are bought from the proceeds of previous cargos.

.Therefore, the last decision was informed by movement in the prices of oil on the international market and the Kwacha to US dollar exchange rate. For example, International oil prices dropped to about US$48 per barrel in June from US$56.6 in March 2017, while the Kwacha appreciated to about K9 to the US dollar by mid-year from about K9.6 in January 2017.

Question 3:Are there any other factors or influences that motivated ERB to adjust prices?

.The ERB tries to be professional in executing its mandate which includes energy pricing. The regulatory function is challenging and calls for balancing the needs of all the stakeholders in the sector while allowing for generation of funds for continued service provision.

.With regard to fuel pricing the ERB uses the Cost-Plus Mechanism as earlier stated to determine fuel prices. Thereafter, an adjustment is made in the event where changes are more than the 2.5 percent threshold (upwards or downwards).

The ERB maintains professionalism by basing its decisions on numbers that can be verified if need be rather than act on emotions. In the event of the need for further clarity and transparency, interested parties can engage the ERB for a demonstration of the Cost-Plus Mechanism.

.Further, it should be noted that a price assessment is done on the basis of each cargo imported. It is therefore not feasible to review or adjust fuel prices when the fundamentals remain constant.

Question 4:Why adjust fuel prices at midnight?

.Prices are usually adjusted at midnight in order to give Oil Marketing Companies (OMCs) enough time between midnight and 06:00 hours to make the necessary adjustments at the pump. It is expected that with wide access to internet and mobile services this period would allow OMCs make changes even in filling stations in remote areas. It is also intended to control panic buying as well as fuel hoarding, whichever the case maybe.

For clarifications or comments kindly contact the ERB on the Toll Free Line 8484 or email erb@erb.org.zm