Mon | Aug 19, 2019

Editorial | Fortuitous timing of Petrojam price debate

Published:Sunday | December 9, 2018 | 12:00 AM

Jamaicans are appropriately outraged at the auditor general's revelation that Petrojam's pricing committee either made no minutes of meetings or didn't keep its records, or worse, wilfully hid them from her investigators.

The cause of this newspaper's deeper shock, though, is the seeming surprise of many people, including influential figures in the petroleum sector and the wider economy, at this absence of transparency and whether the existing pricing mechanism is best for Jamaica.

Not only is this a debate that's more than a decade old, but nine years ago, a report on the refinery, commissioned by the then Golding administration, and conducted by the Washington-based consultants, Centennial Group, concluded that it wasn't. Not only did Petrojam establish prices for the industry "virtually without oversight", the consultants said, but they suggested that the company cheated on the system, to the benefit of itself and others in market, to the detriment of consumers.

Unfortunately, that report, in part because of its limited circulation, didn't generate the depth of debate it deserves. However, many of the issues it raised, and the recommendations it made, remain relevant, especially in the context of the findings of Pamela Monroe Ellis' audit. Both documents should now be considered together in the new debate on Petrojam.

The auditor general's investigation was triggered by fears that Petrojam, owned by the Jamaican Government with Venezuela as its minority partner, was being sacked on the watch of either incompetent or indulgent managers, who were seemingly enabled by a permissive board and acquiescent minister. Mrs Monroe Ellis found plenty that was wrong, but addressed its scheme for pricing its products only briefly.

 

BIGGEST PLAYER IN THE MARKET

 

Petrojam uses the US Gulf Coast references for finished petroleum products as an index for those it either refines itself or imports, after adding its various costs, including foreign exchange movements. Because Petrojam is the biggest player in the market, the ex-refinery price it establishes each week provides the benchmark price for even independent marketing companies.

But the auditor general, in her report, said: "We note that the market adjustment is a discretionary value that Petrojam's pricing committee determines. However, owing to absence of minutes for meetings, we could not determine whether the market adjustment was always determined in a transparent manner."

Nearly a decade ago, Centennial Group raised similar concerns, saying that "in a liberalised market, it is not considered for a market player to be involved in price setting as presently done by Petrojam". We agree.

Centennial's recommendation at the time, that the pricing formula and its administration be handled by an independent agency, such as the Office of Utilities Regulations - perhaps in consultation with the Fair Trading Commission - still makes sense. At least in the short term, while a new oversight regime is formulated.

This, in the circumstances, should happen as a matter of urgency, partly to ensure that a least-cost option for the delivery of petroleum products, to which Petrojam is supposedly obligated, is adhered to, and to prevent the kind of skimming of consumers, with steroids-induced cost components, of which Centennial accused Petrojam.

The consultants said at the time: "The current pricing formula has a market price adjustment factor which is used by Petrojam to its advantage. While passing down a minimum price adjustment to consumers when prices increase fast, the benefits of sharp price declines are passed on to consumers by a large positive adjustment ... ."

Timing may also be fortuitous for a discussion on the administration of Petrojam's pricing formula, but on changing it altogether. Centennial, in its report, had proposed the discontinuance of the Gulf Coast references, in favour of Caribbean cargo benchmarks, as the index for Jamaica's petroleum prices, as well as the removal of CARICOM's 10 per cent common external tariff (CET) from oil products. The CET protected the oil from Trinidad and Tobago.

However, CARICOM's Council on Trade and Development recently suspended the CET in the face of the decision of Petrotrin, the Trinidad and Tobago oil company, to mothball its refinery.