Heading towards price stability on LPG gas cylinders

An agreement signed in 2008 between Enemalta and Gasco Energy Ltd led to the privatisation of Enemalta's gas division, with the Italian company binding itself to invest over €20 million in a new gas bottling plant in Benghajsa.

Inaugurated last year, the LPG sea importation terminal, storage and bottling facility at Benghajsa provides a storage capacity of 4,800 metric tonnes and six new LPG storage tanks.

It was also meant to ensure the closure of the Qajjenza plant.

Over the past years, Gasco Energy - who through Liquigas distributes the gas cylinders - had underlined how a larger storage area would allow the purchase of gas at far more competitive prices.

Covering well over 40% of the distribution, Liquigas is the dominant gas provider having secured 75% of the market.

As the dominant player on the market, Liquigas prices often determine the minimum retail price as sanctioned by the regulator, the Malta Resources Authority.

During a tour of the Benghajsa plant last year, Gasco chairman Louis Farrugia had said Liquigas had not made a profit, despite having already been in operation for two years.

Thanks to the new facility, Gasco is also able to buy butane and propane - the two components that make up liquid petroleum gas - separately, rather than buy it ready-mixed.

Over the years, irate consumers have noticed that while the international price of LPG might go down, domestic prices would remain high. This is because the MRA's price ceiling is set at the ceiling determined by Liquigas's cost of purchases. Put simply, the price of LPG cylinders is based on the actual cost of LPG that is stated on the invoices and not on the spot price or international price.

In the past, leading entrepreneurs had argued that despite a drop in the international prices, the dominant gas supplier in Malta might not be in a position to lower its prices due to the stringent pressure of competition. Local demand for gas is reportedly at only 18,000 tonnes per year.

Yet, the market liberalisation has not benefitted consumers in terms of price stability.

The high fluctuation in domestic prices has forced the current administration to turn to the regulator and ask for a revision of the LPG pricing mechanism.

Two meetings between Liquigas Malta and MRA already took place to discuss a new pricing model that would allow the company to hedge or forward buy and utilise more of its gas cylinder storage space.

According to energy minister Konrad Mizzi, there is nothing in the current formula that encourages the operator to carry out forward buying.

"A team has now been set up to review the model which determines the price. The regulator will look at all the costs: the price of gas, how much it costs to fill a cylinder, to store it, how much workers are paid and so on," the minister said.

The team will also look at how the operator should carry out its purchase.

Seeking price stability

According to a ministry's spokesperson, a fair deal for both the operator and the consumers could be achieved by a purchasing policy that looks towards the stability of price.

"The government's intention is to have a win-win situation for both the consumers and the operator," the spokesperson said.

"The mechanism that is currently utilised does not incentivise the operator to adopt purchasing practices that would stabilise prices. At times this can lead to higher prices for consumers and lack of price stability."

The current LPG pricing is based on the full cost recovery method, which involves the recovery of eligible costs and a reasonable rate of return on capital employed.

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)".

Costing gas cylinders

The final price of bottled gas depends on a number of factors: the cost of raw material, taxes, overhead expenses, labour expenses and more. Some of these price components are reviewed every year by the MRA to ensure the final price truly reflects the expenses declared.

However, there are two main components that play an important part in the price fluctuation: the cost of raw material and the purchasing of gas made in US dollars.

A review of these two components together with forward buying - or hedging - when the price of LPG is on the decrease is one of the options being suggested.