Cyprus Mail

Ministry looking at ways to boost fuel competition

From July 12 to date, the price of gasoline has fallen by an average of 17 cents and diesel by 11 cents.

By Elias Hazou

The commerce ministry is looking into ways of boosting competition in the fuel market, including enabling some petrol stations to operate freely of importers.

High fuel prices at the pump, and the ‘rockets and feathers effect’ – prices rapidly jacked up once import costs increase but dropped slowly during reductions – were again discussed at parliament on Tuesday.

Stelios Himonas, the commerce ministry’s permanent secretary, told MPs that presently four fuel importers dominate the market, controlling about 85 per cent of petrol stations.

On the retail end, petrol stations are bound by contract to buy from a specific importer, meaning they cannot shop around for the cheapest price.

What’s more, Himonas said, four importers purchase their fuel from the same supplier in Greece.

The ministry has prepared a draft study proposing that a number of petrol stations are rendered independent of importers.

The study found that, in order to sever the tight bond between the retailers and importers, it would take at least two dozen petrol stations to import their own fuel.

As such, the ministry is considering specific stations whose contracts with importers are due to expire over the next few years.

On his part, auditor-general Odysseas Michaelides openly spoke of an oligopoly, urging authorities to tackle the problem “at its root”.

He cited a probe by the Committee for the Protection of Competition (CPC), which in 2009 determined that fuel companies had engaged in “concerted practice,” a term denoting the informal and tacit understanding between firms to influence the conduct of the market.

The CPC had slapped a €42.9m fine on the companies, but the decision was overturned by the Supreme Court in May 2011 on a technicality. The companies convinced the court that the probe was null and void because the then-leadership of the CPC lacked the necessary qualifications.

In his 2013 report, the auditor-general had red-flagged how importers’ fuel margins are calculated.

Currently, it’s understood, the ‘reasonable profit margin’ is declared every year by each of the companies, and the government goes along with whatever figures the companies cite.

The auditor-general recommends instead that the profit margin be determined by a government-appointed panel, which will study in detail the companies’ expenses (fuel plus operating costs) and derive an appropriate profit margin.

“In checking the reasonableness of wholesale prices, up until now the approach has been to take the fuel price on the day of import and add the company’s acceptable profit margin. This is a distortion,” Michaelides said in parliament.

The commerce ministry’s Himonas said authorities are taking on board the suggestion. The ministry will be issuing a call for tender to hire consultants who will investigate whether the rates quoted by fuel importers are reasonable.

The external consultants will be given the task because, explained Himonas, by law the government is prohibited from conducting thorough checks of the companies’ cost analysis.

But, he added, from a cursory examination it has emerged that the price per litre for operational costs, quoted by importers, is lower than the price per litre for their other expenses.

“So the problem doesn’t lie there, and this is why we need to investigate and to hire experts,” Himonas said.

Meanwhile, the ministry plans to launch within July an app reporting fuel prices to consumers in real time.

In April 2013 the CPC decided to re-open the old 2009 investigation into possible fuel price collusion.

CPC head Loukia Christodoulou told deputies that the revived probe is now nearing completion.

The CPC has drawn up 80 files in total. As required by law, it has given each of the respondent companies access to the material concerning them.

“We have set the dates for the hearings, the hearings process is now pending,” she said.

In addition, the CPC is conducting a sector-wide investigation into petroleum products. It is looking into the prices of unleaded 95 petrol, unleaded 98 petrol, diesel, heating oil, and gas.

Launched in January of this year, the probe covers the entire supply chain – importation, transportation and storage. Its purpose is to establish any distortion or impediment to market competition.

Excise duties on fuel now are 49 cents per litre, on top of which 19 per cent VAT is added. The excise duty levied by the government is not tied to sales or consumption, but is rather pre-paid at customs at the point of delivery – the bonded warehouses or tank farms in Larnaca where shipments arrive.

Oil importers bring in a new shipment roughly once every 10 days.

The energy minister has the power to issue a decree – in force for a maximum of 45 days – imposing a cap on fuel prices. Despite calls from politicians for the imposition of a price ceiling to shield consumers, the government is wary of enforcing the measure, as it distorts free market conditions.

However, the energy ministry is currently devising a new formula determining the criteria by which such a decree may be issued.

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