Sri Lanka’s fuel pricing formula
Apparently, there is a fuel pricing formula in operation in Sri Lanka. Professionals support a pricing formula, because that is the only way to move away from politically-determined pricing of petrol, diesel, kerosene and fuel oil. Ever since the government poked its finger into the petroleum industry in the 1950s, politics, not commercial sense, determined fuel prices in Sri Lanka, except for a narrow window between 2002-2004. More on that later.
File picture of a fuel station recently when prices were revised.
Sadly enough, it is not the Ceylon Petroleum Corporation (CPC) or the Minister in charge or his Ministry that determines the fuel prices. It is the Finance Ministry. Despite highly respected civil servants and even PhD economists holding the position of Secretary Finance, all were happy to determine prices of petroleum products themselves, with little or no knowledge about the petroleum industry and its market. When CPC runs into losses, the same Secretary Finance would be quick to blame CPC, soon followed by the politicians.
2001 formula
A fuel pricing formula was introduced by the government of 2001. The formula was operational over February 2002 to about January 2004. At its inception, the formula and the sources of data were published in the newspapers. Fuel prices were adjusted upwards or downwards by not more than Rs. 2 per litre, on the last Sunday of every month. If the calculated adjustment was more than Rs. 2 per litre, the balance amount would be passed on to the next price adjustment. If the formula was correctly applied, customers would be further compensated for the accumulated funds if the drop was to be over Rs. 2, but curtailed at Rs. 2 per litre.
Such compensation at the subsequent revision would be owing to excessive income to CPC that would carry an interest income; the reverse was also applicable.
In summary, the formula published in 2002-2004 looked like the following (FOB means free on board, CIF means cost, insurance and freight, bbl means barrel and LC means letter of credit):
Data sources were transparent
Data sources for the Singapore quoted price, the starting point of the calculation, were published, which could be checked independently by anyone interested. If the government moved further and wanted to be honest back in 2002-4, they could have published the actual calculation for every month, and even compared each component of cost against regional (eg: India) and international prices and norms. No such thing happened, but price adjustments were operational for nearly two years. Customers got used to the adjustments, made on a specific date. Accountants liked it because prices were stable for a month. The CPC and the newcomer LIOC loved it because the sins of politician’s decisions were not brushed aside as their inefficiency.
Elections 2004
Alas! An election was announced for April 2, 2004. The same government that brought in the fuel pricing formula abandoned it, presumably because in the run-up to the elections, each monthly adjustment was to be positive. The government thought they could deceive the petroleum customers by not implementing the formula, but the customers were wiser. The government of 2001 that introduced the formula, operated it fairly accurately for nearly two years, and then abandoned it for political reasons, was thrown out of power. Not that the new government of 2004 embraced the formula, either; the words of the new Energy Minister were the following: “to increase the prices when world market prices increase, why should there be a government?” So that was the end of the pricing formula for petroleum products in 2004, until it resurfaced in 2018.
Unlike the last attempt the formula now operational is invisible. No journalist is asking for it; the government has not published it. The opposition is not looking for it.
Calculations are not published anyway. Therefore, the public have no idea of how the prices are calculated. There seems to be no fixed date for its implementation.
Different arms of the government have different views on the formula and its date of implementation. Minister of Petroleum says “do not increase.” Finance Ministry says “must increase”. The President says “why so much of an increase?” This means that the government is unable to perform its tasks on petroleum pricing at least as well as the same government did in 2002, a good 16 years later, when the people are more educated and aware, and the media stronger.
Electricity pricing: PUC and CEB
Although the government also spoke of an electricity pricing formula, there is no such formula. However, there is comprehensive electricity costing and pricing policy and a methodology. The Public Utilities Commission (PUC) calculates the costs of electricity for each month. According to the law, if prices are not increased to match costs of CEB and LECO, the PUC should get the subsidy from the government and pay CEB and LECO.
Instead of adjusting electricity prices (upwards of course), the PUC is busy debating with CEB on future power generation projects. CEB is having a field day, since any cost of today or the future can now be attributed to the PUC. For eight years, CEB has been resisting the establishment of the bulk supply transaction (BST) account. This BST account is where all its income, government subsidies (paid or unpaid), extra payments to renewable energy, losses owing to rooftop solar (buying at Rs. 22 and displacing energy worth about Rs. 12 per unit) and benefits (or losses) from good (or bad) rainfall are accumulated. This account was to be transparently published for all to see, but the CEB never did that for eight long years, ever since the Electricity Act of 2009 became operational. So, the PUC has an excuse not to fulfil their duty, be as independent as when the PUC reviews the generation plan, to raise electricity prices to account for “government policies.” The CEB has an excuse not to cooperate on anything that causes losses to increase, ranging from purchasing wind power at the world’s highest price to purchasing from rooftop solar and increasing staff from 15,000 to 19,000 after elections whereas customer numbers are stagnant.
Meanwhile, the World Bank and IMF are reported to be busy “preparing” an electricity pricing formula, when all ingredients and the pricing formula itself are already available and operational since year 2010. But not implemented.
There is no point in blaming the CEB, CPC, PUC or anyone, without clearly separating out the costs, prices and income. I know it is enjoyable for politicians and armchair critics to blame state agencies when losses are reported. None of them, including the most “learned” economists sitting in the Cabinet, care to examine in detail, the costs, prices and disaggregate the losses, and have a road map to achieve cost reflective pricing.
For example, many electricity regulatory commissions in India have resolved that cross subsidies (or surcharges) will be limited to -30 per cent (+30 per cent) of the cost, by year 2020. In most states, when the state government says for example “subsidize electricity used in small scale power looms”, the state treasury actually sends a cheque every month to the electricity board to pay for their policy. Over here in similar situations, the politician would say, “CEB is a state organisation and they should do public service”, and weeks later, thunder when annual accounts are presented to Parliament.
Publish the formula!
So if the government is honest, publish the fuel pricing formula, sources of data, and its actual calculations. Make price revisions on a fixed date of the month (eg: last Sunday). Remove the requirement to ask for Cabinet approval for each revision, up or down. For the obvious subsidy on kerosene, actually send a cheque to the CPC every month, to show that you care for transparency.
(The writer is a renowned energy specialist and can be reached at tilak@rmaenergy.lk)
| Singapore quoted FOB Price (USD/bbl) +freight (USD/bbl) +ocean losses (%)+ insurance = CIF price in USD/bbl x exchange rate (LKR/USD) x litres/bbl (158.9) = CIF price in rupees per litre + Jetty pipeline charge+ Port development charge+ LC charge = Landed cost + Taxes (excise duty, customs duty, and other levies) + Finance cost of working capital + Storage terminal cost+ storage Terminal margin = Wholesale cost + Marketing company margin = Dealer delivery price +Provincial council tax +VAT +Dealer margin = Max retail price | |