Absence of MERA Board might affect fuel pricing mechanism

By Duncan Mlanjira

The absence of the Board of Directors for Malawi Energy Regulatory Authority (MERA) can trigger serious fuel pricing upwards as the COVID-19 curve is flattening.

This was observed on Monday when Consumer Association of Malawi (CAMA) and the MERA secretariat engaged the media on the trends that are involved in the fuel pricing mechanism and the role that MERA plays.

Using Automatic Pricing Mechanism that involves global fuel pricing trends, MERA’s Liquid Fuels & Gas Pricing Advisory Committee meets on the first Tuesday of every month to review prices of liquid fuels and gas.

The Committee next submits its recommendations to the MERA Board and within 48 hours, the Board is supposed to make a resolution on the Committee’s recommendations, as provided in the Liquid Fuels and Gas (production and supply) Regulations, 2009.

According to the presentation by both CAMA Executive Director, John Kapito and MERA secretariat’s director Chimwemwe Dunkalo, the Authority applies the Automatic Pricing Mechanism in setting the maximum retail prices for liquid fuels and gas prices, as according to the law.

The Law provides for a Price Stabilisation Fund (PSF) at 5% of in-bond landed cost (IBLC) in which prices are reviewed upwards if the change in IBLC is above 5% and downwards if it is below 5%.

Then when the change is below 5%, the difference is channeled into the Price Stabilisation Fund to cushion fuel prices should there be an increase within the -5% benchmark.

Due to the COVID-19 global lockdowns that involved travel restrictions, fuel prices went down and MERA considered the downward trend of oil prices on the international market and stability of the Malawi kwacha against the United States dollar.

In March 2020, the average freight on board (FOB) prices of petrol, diesel and paraffin fell by 7.10%, 13.63% and 10.60% respectively while in April 2020 it fell by 45.81%, 34.11% and 40.85% respectively.

In May 2020 the average FOB prices declined by 40.51%, 39.65% and 56.57% respectively.

In the month of March 2020, the combined effect of the interaction of the Exchange Rate and the low oil prices of the international market resulted in a downward change of landed costs.

In-bond landed cost (IBLC) in November was at K451.50 for petrol; K486.67 for diesel and K462.65 for paraffin.

In March, IBLC for petrol was at K437.10 representing a downward trend of -3.19%; diesel at K450.89 (-7.35%) and paraffin at K437.14 (-5.51%).

The landed cost change on petrol was within the plus or minus 5% threshold while the changes on diesel and paraffin were beyond the APM threshold and therefore only diesel and paraffin qualified for a downward price adjustment and pump prices were effectively adjusted.

Recommended pump prices for petrol remained at K930.00; diesel down at K887 at K924 (-4.00%) and paraffin at K693.60 (-2.38%).

In April, IBLC for petrol was at K302.34 representing a downward trend of -33.04%; diesel at K357.98 (-20.61%) and paraffin at K437.14 (-27.18%).

In May, actual IBLC for petrol was at K235.57 representing a downward trend of -37.50%; diesel at K286.78 (-19.89%) and paraffin at K221.00 (-41.49%).

This prompted prices to go down from K930.00 to K780.00 for petrol representing downward trend of 16.13%; diesel from K887.00 to K765.00 (13.75%) and paraffin from K693.60 to K625.00 (-9.71%).

The prices were again adjusted downwards to K690.50 (-12.31%) for petrol; diesel to K664.80 (-13.10%) and K441.70 (-29.30%) for kerosene.

Landed cost for fuel went up in June and July from 21.00% to 44.89% for petrol, 7.42% to 28.69 for diesel and 16.56% to 51.04 for kerosene In both months.

The changes of the landed cost against the benchmark applied in ruling price were beyond the plus or minus 5% threshold and ordinarily pump prices needed to be adjusted upwards in line with the automatic pricing mechanism.

However, the pump prices were maintained on account of the liquidity of the Price Stabilisation Fund which had adequate funds to cover resultant importation losses in the months of June and July 2020.

Dunkalo and Kapito said if the Price Stabilisation Fund is depleted through the cushions it is meeting, pump prices cannot be adjusted upwards in the absence of the MERA Board which reviews recommendations from its Liquid Fuels and Gas Pricing Advisory Committee that meets on the first Tuesday of every month to review global market trends.

The pricing of petroleum products is underpinned by the following:

* The Energy Regulation Act, 2004

* The Liquid Fuels and Gas (Production and Supply) Act, 2004

* The Rural Electrification Act, 2004

* The Liquid Fuels and Gas (Production and Supply) Regulations, 2009

* Malawi Bureau of Standards Act, 1972

Since MERA is an independent regulator for the liquid fuels and gas industry established by an Act of Parliament, petroleum price review continues to be a transparent, accountable, efficient and verifiable process.

The underlying principles for the determination of the price of petroleum products  are to represent the realistic, market-related costs supply and that principles of price review are underpinned by Law.

However, the Laws and Regulations governing the process are not exhaustive and may be subjected to review from time to time.