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Unbundling of prices of petroleum products

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DOE?s push for unbundling fuel product pricing meets resistance from oil players
By Lenie Lectura ? June 15, 2018
A PROPOSED policy that would mandate oil firms to unbundle, or itemize, the costs of petro fuel?from the pump to the consumers ?just doesn?t sit well for oil firms, who argue that such proposal is no longer necessary in a deregulated market.
The draft policy enables the unbundling of the base prices of petroleum products, namely, gasoline, automotive and industrial diesel, kerosene, jet fuel, bunker fuel oil and household and automotive liquefied petroleum gas. This is the first time that the government, through Department of Energy (DOE), will require oil companies to make public the breakdown of the costs that go into the pricing of fuel.
Energy Secretary Alfonso G. Cusi ordered the unbundling of prices of petroleum products recently, and the DOE said the corresponding department circular is now the subject of focus group discussions with the stakeholders.
The DOE?s move to finalize the rules implementing, for the first time, a mandate of the oil deregulation law enacted 20 years ago, came just as concern was rising that there might be an element of profiteering in the spike in local oil prices. The spike was blamed initially on the Tax Reform for Acceleration and Inclusion (TRAIN) law that imposed higher fuel excise taxes, but was later explained as a result as well of rising global prices. Thus, the transparency promised by unbundling was seen in some quarters as a timely move by the DOE to precisely eliminate the profiteering angle.
Energy Undersecretary Felix William Fuentebella, in an interview with the BusinessMirror, said the objective of the proposed circular is to mandate industry players to explain to consumers the cost components of petroleum products.
?We already know that the components include peso per barrel of landed cost, taxes, biofuels and industry take. But what are the percentages of these components? We just want a breakdown of these components from them so that the public may better understand what they are paying for,? he said.
The DOE, in the draft circular, also wants oil companies to provide a weekly notice of the price adjustments?whether decrease, increase or no adjustment?alongside the computation of their products? components based on the elements involved in the international price movement, the biofuels cost and the operational cost recovery.
Cusi had said the weekly oil pricing updates by oil firms would guide the consumers in making informed decisions in the management of their fuel oil requirements.
?Identification of the costing for the major components of these petroleum products that may affect the pump prices would provide a higher level of transparency for our consumers, particularly the motorists,? he said.
The same policy will require oil companies and retail outlets to submit baseline data every end of the year for the unbundling of their base price and to comply as well with the mandatory price display board.
Unnecessary, confidential
The Philippine Institute of Petroleum (PIP), composed of Petron Corp., Pilipinas Shell, Chevron, PTT Philippines and Isla LPG, said the extent of information that the government requires from them, and the manner by which it requires to do so, are ?inconsistent with the policy of deregulation.?
?The position is that there is no need to unbundle,? said PIP Executive Director Teddy Reyes over the phone. ?We felt that since all factors on how prices are arrived at are transparent, since these are published and known to everyone, then it would be ?nnecessary? for the unbundling.?
The weekly price adjustment, he said, basically covers increments from previous price, and the reason for that includes changes in Mean of Platts Singapore (MOPS), foreign-exchange (forex) rate, cost of value component and taxes.
Philippine retail prices are based on the average prices based on the MOPS. This refers to the prices of finished product, not crude. Gasoline and diesel sold at gasoline stations are finished products.
?The movement of Platts is transparent. Forex, also a major component of pricing, is also transparent. The impact of taxes can also be computed. The cost of value component, such as ethanol, is beyond the control of the players,? Reyes said.
Oil firms are required by law to blend 10-percent ethanol for gasoline and 2-percent coco methyl esther to create biodiesel. The biofuels component is priced differently and separately from the fuel products. Ethanol in the Philippines comes from sugar, and sugar prices have increased.
?Secret fried chicken recipe?
Independent Philippine Petroleum Companies Association (Ippca) President Bong Suntay said each oil firm has its own proprietary elements of cost, which should be kept confidential because this allows an oil firm to have a competitive edge over the other.
?It is like asking KFC [Kentucky Fried Chicken] to give out their recipe and divulge the seven secret herbs and spices used in their chicken. Definitely, each one has their own computation, which may differ from each other. Various factors would also have an impact, where the product is sourced, when it was sourced, the amount purchased, the size of the vessel, among others,? Suntay said.
The Ippca official said if the DOE wants to extrapolate, then it can start from the published MOPS. Suntay also said that feeding the DOE with so much information could be tedious.
?The premium?ocean freight and trader margin?also differs from each company, depending on various factors, such as term of payments, size of vessel and loading origin. Forex also differs depending on cost of purchaser. Prices now change weekly.
?To require the industry players in a deregulated industry to break down their pricing would put another layer of tedious reportorial requirement, which would really be of no use in a deregulated industry,? Suntay said.
Free choice
Eastern Petroleum Corp., a member of Ippca, noted that consumers are free to make their own choices in a deregulated environment. ?In a deregulated regime, market forces and competition, which is very much alive, is the ultimate price determinator,? according to Eastern Petroleum Chairman and Chief Executive Officer Fernando Martinez in a text message.
Ippca has at least 16 members, mostly the country?s leading independent oil players, such as Eastern Petroleum, Unioil Petroleum Philippines Inc., Seaoil Philippines, Flying V, City Oil, Pryce Gases and LPGMA, among others.
?Based on my observation on the sentiments of industry players, I am inclined to say that they are not amenable to disclosing components of pricing,? Suntay said. ?Besides, let us define deregulation again if we wish to give a different interpretation,? he added.
?Would it make sense to ask Levi?s jeans to break down their costing so consumers would know how they are pricing their jeans? What for? Unless the government wants to put in place price controls, then it would no longer be a deregulated industry,? Suntay said.
Must comply
A senator, in a separate interview, stressed that oil firms are mandated by the Downstream Oil Deregulation Act under Section 15b to comply with the DOE.
?The power to direct oil firms to submit unbundled prices to the DOE appears to be allowed under the law, in which the secretary has the power to require, by general or special orders, persons and entities engaged in a particular activity of the industry to file an annual or special report, or both in such form as the secretary may prescribe,? said Senate Energy Committee head Sherwin Gatchalian, who added that ?this appears to be the first time that the DOE will require an unbundling of oil prices.?
The senator said the move by the DOE is consistent with the declared policy of the oil deregulation law to ensure a competitive market under a regime of fair prices. ?In some of our talks with people from the DOE, even before the passage of the TRAIN law, and the rising oil prices, they have mentioned that they?re not in a position to determine whether there is cartelization or unfair trade practices since they don?t know the breakdown of the oil prices, and where/how much the margins are. With the required unbundling of oil prices, this would provide transparency to the pricing of the oil sector,? Gatchalian said.
Nevertheless, the lawmaker said, the DOE should still take into account that it does not have the authority to make public any trade secret or any commercial or financial information or privileged/confidential information obtained from the oil companies.
When sought for comment, Cusi said that as DOE chief, he is authorized to ask for any information from the oil companies.
?On my part, I have ordered the unbundling of prices of petroleum products and the corresponding department circular is now subject of focus group discussions with the stakeholders. In a way, the directive for Philippine National Oil Co. Exploration Corp. to import and trade oil will help the DOE in the unbundling of the prices and help us validate the costing submitted to us by the oil companies,? Cusi said.
Power bill
A similar move for the power sector is, likewise, being pushed. A draft circular adopting the framework for a uniform monthly electricity bill format was recently released. The DOE said the electricity bill should be prepared in a simple and easy-to-understand format.
Section 25 of the Electric Power Industry Reform Act (Epira) requires that every distribution utility identify and segregate in its bills to end users the components of the retail rate.
?Just like in [the] power industry, unbundling is part of our mandate to monitor both international and domestic price movements to provide a higher level of transparency for our consumers. Further, unbundling the price will aid us in developing further policies to help relieve price shocks from the international market, as well as aid us in developing legislative recommendations to Congress,? Cusi said.
The DOE is bent on implementing the proposed unbundling policy, amid concerns raised by oil firms. However, it is not closing its doors, and said it would conduct another round of discussions to consider some of the oil firms? concerns.
?The circular must be in accordance with the existing laws. As a way forward, we are holding another round of discussions with them before the full-blown public consultation,? Fuentebella said.
Earlier, consumer advocacy group Laban Konsyumer Inc. (LKI) called on the energy department to compel oil firms to unbundle retail prices of petroleum products.
This is meant to enable consumers to truly enjoy their right to information, and thereby provide them access to fair and reasonable pricing of petroleum products and electricity, said LKI President and former Department of Trade and Industry (DTI) Undersecretary Atty. Vic Dimagiba.
In a letter to Cusi, LKI said that even under full deregulation, the energy secretary is authorized to ensure fair pricing of the petroleum products for the benefit and information of the consumers.
?The DOE will note that oil companies and the new players have practically uniform prices for diesel. This situation does not appear [to be] tenable since oil companies and new players procure their products differently,? Dimagiba said.
The DOE acknowledged the concerns raised by LKI. It is now finalizing the circular. The DOE is eyeing to sign the draft circular within the month, with implementation being eyed 15 days after publication.
Given the seeming determined stance of most oil players to oppose unbundling, however, the DOE may need more time than that.
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