Reducing fuel prices: increase storage and increase competition

The Chief Executive Officer of the Malta Resources Authority has suggested that by increasing its fuel storage capacity, Enemalta would better control its prices as it would not be forced to buy fuel every 30 or 90 days.

Anthony Rizzo also said that the introduction of a new competitor would help.

Each final day of the month has become a headache for consumers when Enemalta announces its price revision for diesel and unleaded. Consumers are faced by an ever-increasing fuel price, sparked not only by the international oil demand but also set off by the weak euro against the strong dollar.

After Enemalta announced a 5c increase in the price of unleaded and a 2c reduction for diesel, the Labour Party accused the national corporation of not reflecting international price reductions in the domestic price.

Rizzo however is categorical that, as such, it is not Enemalta's fault that prices cannot go down as far as we'd want to.

"Firstly, because Enemalta has to buy fuel every 30 days or so. Being the dominant supplier, Enemalta cannot afford to wait until the international price of oil goes down to buy. It has to buy and supply for at least 90 days in advance, irrespective of the price," Rizzo said.

Then there is also the issue of price hedging. Having bought the fuel at a set price, Enemalta would have to stick to that price when making its purchases, irrespective of whether the international price of crude oil increases or decreases.

Enemalta would also have to include in its formula any closing stock it would have.

Philip Caruana, an economist at MRA, explained that it was the closing stock element that led for Malta's fuel prices not going down at the same rate as prices in EU Member States did in July.

"Another factor is the exchange rate from the dollar to the euro. Because the dollar is so strong and the euro is so weak, it almost cancels out the decrease in the price of oil," Caruana said.

This theory is echoed by Enemalta when it justifies a price increase. Rizzo however concedes that there are measures which could help lower the price of fuel.

"There is always room for improvement," Rizzo said when asked whether MRA was satisfied with the methods and calculations used by Enemalta when buying fuel and setting the maximum retail price.

"We look at the possibility for Enemalta to develop a terminal with a bigger storage. This will definitely help us. Moreover, if a new competitor enters the market, it would further help to influence the prices."

Rizzo said that MRA has already held discussions with authorities and entities, including the Malta Environment and Planning Authority as to how the process of licensing and issuing permits could be facilitated.

"On our part, we always try to seek new ways of simplifying the licensing process. We also look into how we could help anyone who'd be interested in setting up a storage facility," Caruana added.

Rizzo confirmed that there already existed areas that have been earmarked for the development of such storage terminals. However, he said, these were limited as well.

"There are areas which we believe would be suitable for such a terminal. MEPA itself has been carrying out feasibility studies and particular areas have been identified," he said.

The areas located are to the south of the island, near Benghajsa. An area in Hal Far has been earmarked for manufacturing purposes.

Rizzo said that offshore terminals were also a possibility: "But in all projects, one has to keep in mind that these must pass the environment impact studies."

According to Rizzo, a number of landowners have already approached MRA expressing their interest to develop their land for such a purpose.

Enemalta so far faces competition by Cassar Fuel Ltd and Falzon Waste Oils on the importation and selling of diesel - a sector which Rizzo believe should be completely liberalised: "These companies decide their prices on a day-to-day basis, and Enemalta ideally should do the same. At the end of the day, this is how companies make their prices more competitive."

Rizzo also acknowledged that the operation of the two suppliers has considerably affected the sales of diesel by Enemalta to petrol stations.

He reiterated that being the dominant player, Enemalta couldn't afford to allow its provision to dry out while waiting for a better price.

"It's not the first time that Enemalta had to intervene and supply petrol stations who usually buy their fuel from the other two operators. Not having any obligations, they can wait until the international price is more convenient to them," he said.

Government is currently wrestling with an approximate €600 million Enemalta debt. In fact, government and opposition have agreed with the creation of a special purpose vehicle to absorb Enemalta's massive debt and map out a clear repayment system.

So how would Enemalta fend off if another competitor were introduced?

"Enemalta's petroleum accounts are viable. Enemalta's issue stands with its electricity accounts," Rizzo said.

However, he also points out that Enemalta was not generating any profits: "This is why it's so important that the corporation controls its expenses, cuts down on what is not rendering and invest to improve its service."

Yet, as economists and politicians continue to ask how Enemalta will manage to repay its debts, many have raised questions on the transparency of Enemalta's fuel price calculations.

Labour MP Leo Brincat had even called on the Auditor General to investigate Enemalta's oil and oil product purchases, claiming a lack of transparency in the way the fuel was purchased.

Among others, economist Karm Farrugia is of the belief that Enemalta should make its formula public for economic and social partners to scrutinise.

But according to Caruana, MRA can publish the framework of the formula, but it cannot publish each and every cost that goes in the calculations of the final price.

"The figures themselves cannot be published due to commercial reasons. The formula goes into the detail of every cost made by Enemalta," he said.

Karm Farrugia had argued that variables within the formula would constitute a range - not a fixed amount - and this, he said, merited transparency as Enemalta could round up figures to their necessity.

But both Rizzo and Caruana seem to be rubbish this argument. According to the economist, since almost half of the price is made up of taxes, there isn't much where Enemalta could 'play around'.

"Maybe 3c here and there so it could cover its non-product cost," Caruana said, adding quickly that every month MRA closely monitored how the product cost is calculated.

The product cost, he said, included the consignment cost, the closing stock of what Enemalta didn't consume from the previous consignment and other elements such as the exchange rate.

"We then take the consignment cost and compare it with the average prices published by Platts - and so far they always concurred," he said.

Asked whether it was justified that taxes made up almost half of the fuel prices, Rizzo said it was not MRA's prerogative to decide whether it was or not.

"This is fiscal policy so it's the Finance Minister's prerogative to decide. We do make our own suggewstions but it's not for us to decide," he said.

Rizzo added that it would be irresponsible of MRA if it were to tell government to cut down the prices: "Government must balance between income and expenditure. Rather than simply cutting down, it would be better to seek more sustainable methods to how Enemalta could reduce its price."