Gas prices not set at international rates

The international price of liquid petroleum gas, a mix of propane and butane, goes up and down in the world. And yet, Malta's regulator sets the domestic price for gas cylinders at according to the cost of purchases by the dominant supplier in the market.

It may come as an amazing declaration, but Anthony Rizzo, the Chief Executive Officer of the Malta Resources Authority, has confirmed that domestic gas cylinder prices are based on the actual cost of LPG as purchased by Liquigas, the dominant supplier.

And that means that even when gas is purchased at a cheaper price by the other supplier, Easygas, the MRA's price ceiling is set at the ceiling determined by Liquigas's cost of purchases.

Rizzo told MaltaToday: "The price of LPG cylinders is based on the actual cost of LPG that are stated on the invoices and not on the spot price or international price."

According to the international prices of propane and butane as stated by Platts, seen by this newspaper, both prices decreased significantly every month since April. But domestic prices remained high despite the significant drop.

Rizzo insisted that it was not in Liquigas's interests to keep LPG prices high. "The prices established by Liquigas are not above the maximum allowable price established in the price mechanism," the MRA chief said.

But as the international price for liquid petroleum gas (LPG) has continued to fall over the last three months, the Maltese consumers continued to bear the brunt of a price hike on gas cylinders that took place in April.

At the time, Liquigas cited the increasing international price of butane as the driver behind the increase in the price of gas at the start of April.  Yet, two months on, the domestic prices of gas cylinders remained untouched while the international prices continued to fall according to Platts prices provided to this newspaper.

While Rizzo has confirmed that the prices of gas "in US dollars has eased off slightly", this was not reflected due to the strengthening of the American dollar. "The easing of the cost of LPG has been offset with the strengthening of the US dollar. Purchases of LPG are made in US dollars and the strengthening of the dollar has wiped out the decrease in the price of LPG," Rizzo told MaltaToday when asked whether the decrease would result in a reduction in gas cylinder prices.

"Notwithstanding this, the price of LPG cylinders is based on the actual cost of LPG that are stated on the invoices and not on the spot price or international price," he said, referring to the invoices provided by Liquigas to the regulator.

In other words, MRA would not increase or decrease the maximum retail price of LPG or propane just because international prices change, but it would base its revision according to figures provided by operator Liquigas. "This is because Liquigas, covering well over 40% of the distribution, is the dominant player," Rizzo said.

He also insisted that the prices established by Liquigas are "not above th emaximum allowable price established in the price mechanism and the costs reflect purchases of LPG affected in the previous month".

Asked how MRA's price mechanism reflected a true competitive and liberalised market, Rizzo insisted that the market itself was regulated the operators. "It is not in Liquigas's interests to increase the prices of gas cylinders when it has to compete with another operator who is providing cheaper gas cylinders," he said.

"Liquigas is now also looking into a pricing strategy and methods to make sure it doesn't lose the market share while reducing the costs to remain competitive."

Liquigas, which is the dominant gas provider in Malta, today has 75% of the market. The other player in the market is Easygas.

Minister: Easygas can go to MRA with complaint

Resources Minister George Pullicino has defended the current price mechanism, insisting that there is a "clear policy" and laws that had been issued for public consultation.

"The MRA abides to a price mechanism which is public and which was established following consultation with the public," Pullicino told MaltaToday.

He insisted that the invoices provided by Liquigas are compared with the international prices and the operator has to explain how the gas was bought. "Moreover, Liquigas buys its gas by auction and their purchasing system must be fully transparent," Pullicino said.

Asked to state how fair it was for Liquigas's competitor Easygas to see the maximum retail price being set according to the prices by which Liquigas purchased its product, Pullicino said that Easygas could always complain to the authority.

"The competitor also buys from the international market. At the end of the day, one must understand that the price mechanism is transparent and that there is nothing which prohibits the competitor to take its case before the MRA," the resources minister said.

He added that the issue was the competence of the authority and not of the resources ministry.

12kg gas cylinder price trebles in four years

Liquefied Petroleum Gas (LPG) consists mainly of propane (60%) and butane (40%), and the price of gas cylinders mainly depends on the price of these two gases.

In the space of four years the price of a 12kg gas cylinder has trebled. The price of a 12kg cylinder in April 2008 was €5.40. After the price revision last April, a 12kg cylinder now costs €19.70 from Liquigas and €19.20 from Easygas.

The 10kg and 15 kg cylinders have taken on an increase of 269.3% and 280.5% respectively compared to April 2008. The price of an industrial-sized 25kg cylinder increased by €20.50 or 170.8% when compared to April 2008.

According to the maximum price mechanism set by the MRA, the retail price of LPG and propane per kg "will be equal to the sum of the cost of LPG and propane, bottling charge and storage charges, distributors' commission, depreciation and cylinder retesting costs, operating expenses, allowable mark up [on the selling price] and the VAT rate divided by the projected annual demand for LPG and propane (kgs).

The price review published by the MRA in 2010 stated that one of the principles behind the mechanism was to see that "the proposed prices should enable Liquigas to achieve a rate of return on capital employed that allow for a sustained and acceptable fixed asset replacement and upgrade policy".