OMCs to make automatic adjustments in oil prices?

The government is reportedly considering a proposal to exclude its role in fixing oil prices in the wake of withdrawal of oil subsidy, and instead authorise the oil marketing companies (OMCs) to make automatic adjustment in oil prices, in line with the global oil prices, with effect from the next financial year. However, the OMCs will follow the formula of oil pricing set by federal government.
Withdrawal of oil subsidy is said to have been one of the conditionalities set by the IMF for $7.6 billion standby facility extended to Pakistan. A noteworthy aspect of the move is that oil prices in international market are on the rise once again, which means that more trouble lies ahead for our oil-dependent power sector.
At present, the price of high-speed diesel (HSD) is deregulated, based on a federal government formula, while the prices of other POL products, including light diesel oil, motor spirit, JP-I, JP-4 and JP-8 are regulated, and fortnightly notified by the government. A major cause of power sector's circular debt is the pending price differential claims to OMCs.
Pakistan State Oil's outstanding dues against different IPPs have meanwhile steadily mounted: it has to recover, among others, Rs 31 billion from Hubco, Rs 19 billion from Kapco, Rs 3 billion from Wapda, and Rs 3.2 billion from PIA. But it has also to pay Rs 28 billion to Parco, Rs 9.1 billion to PRL, Rs 7.6 billion to NRL, and Rs 3.7 billion to Bosicor oil refinery.
Despite a recent cut in POL prices, the government is still charging PDL of Rs 12.28 on each litre of petrol sold, Rs 16.44 per litre on HOBC, Rs 6.88 per litre on kerosene, Rs 3.95 per litre on light diesel oil and Rs 3 per litre on JP-4 and JP-8.
In a related development, the Private Power Infrastructure Board (PPIB) has warned the government to clear the outstanding receivables of IPPs, two of which have even threatened to call the GoP guarantees, sources in the PPIB have told the Business Recorder.
The outstanding receivables of Hubco, a major IPP, reportedly rose to Rs 36.2 billion on May 12, 2009, while Rousch Pakistan has voiced more reservations than Hubco, maintaining that nothing was paid to it despite issuance of Rs 80 billion. Deducting Rs 80 billion from the reported total power sector debt of Rs 180 billion will leave Rs 100 billion - not a small amount by any reckoning.
A decision by the government to authorise the OMCs to make automatic adjustments in line with the global oil prices would be unfair to the consumers despite the fact that they will follow a formula set by the government. The government should reconsider its position on the issue.
Meanwhile, there is no word on how the issue of freight equalisation will be resolved, and how will the issue of cross-subsidy be addressed. The government should announce a clear policy on these critical issues. It will be recalled that in 2006 the OCAC, a private group comprising heads of the oil marketing companies with no public representation, was assigned the role of fixing petroleum prices, though these were "vetted" by Ogra.
Earlier, in 2005 the World Bank had asked the government to rationalise the whole mechanism, which gave the "appearance of a collusion" between the government and the oil industry. Authorising the OMCs to make automatic price adjustments would more or less amount to the same thing. Fuel prices in Pakistan are said to have registered an increase of over 500 percent since the early 1990s, and a major part of the profit made by the oil marketing companies could have been due to the inventory gain.
Further, a sharp rise in oil prices in 2008 to $147 a barrel has contributed towards accumulation of power sector circular debt, which has since continued to destabilise the energy chain. Analysts maintain that the sharp rise in oil prices and the government's failure to increase either the power tariff or POL prices had caused Discos and OMCs to incur losses.
As one analyst has put it, this had created a situation where receivables from the government to the OMCs came under control, but the losses sustained by power distributors made them incapable of paying their dues. As the dues of power distributors increased the receivables of IPPs also increased.
In order to ease pressure on themselves, the IPPs had to let their payables slide as well, which landed the OMC into the debt trap. The present power sector circular debt is thus a result of the "chain reaction." Unless power sector defaulters are forced to pay the outstanding dues, Pepco cannot effectively manage this sector.
But for its own part Pepco is said to be incurring a monthly deficit of Rs 13 billion because its monthly earning is said to be Rs 25 billion against an expenditure of around Rs 38 billion. Allowing the market forces to come into play in the power sector has not only increased the cost of doing business in Pakistan, it has also eroded competitiveness of our exports.
It is said the government is charging 14 types of taxes on power supply alone, a number that should be reduced, and the resulting revenue loss should be met by taxing the sectors that have hitherto remained outside the tax net. We suggest that the government should get proper feedback from all the stakeholders before making or enforcing a final decision. At the same time it should explore other options to keep the system absolutely transparent and humane.