Kenyan consumers opposed to KPC tariff review over pricing formula

Monday August 5 2019

Kenya Pipeline Company is seeking a review of tariffs to raise funds to service debt procured to finance the Mombasa-Nairobi pipeline, new oil storage tanks in Nairobi and the Kisumu oil jetty.

Kenya Pipeline Company is seeking a review of tariffs to raise funds to service debt procured to finance the Mombasa-Nairobi pipeline, new oil storage tanks in Nairobi and the Kisumu oil jetty. PHOTO | FILE | NATION MEDIA GROUP 

NJIRAINI MUCHIRA
By NJIRAINI MUCHIRA
More by this Author

A year after the Kenya government introduced an eight per cent value added tax on fuel, prompting a rise in pump prices, it is considering yet another rise with a planned increase on tariffs on storage and transportation of petroleum products.

Kenya Pipeline Company — whose mandate includes providing efficient, reliable, safe and cost effective means of transporting petroleum products from Mombasa to the hinterland — has applied to the Energy and Petroleum Regulatory Authority (Epra) seeking a review of the said tariffs even though pump prices have been on an upward trajectory in recent months.

Fuel prices have increased from $0.986 (Ksh104.21) per litre for super petrol; $0.968 (Ksh102.24) for diesel and $0.962 (Ksh101.70) for kerosene in January to $1.092 (Ksh115.39) for super petrol, $0.983 (Ksh103.88) for diesel and $0.965 (Ksh101.97) for kerosene in July.

REVIEW

KPC chairman John Ngumi told The EastAfrican the application is a regular review, which is done every three years. The last review was done in 2016.

“We are conscious of the need to have a tariff that supports consumers and the industry,” he said.

Advertisement

While the tariff is a component of pump prices, Mr Ngumi said the company recognises the need to ensure that it makes the country competitive as it seeks to recover the regional export markets, Uganda, South Sudan and Rwanda.

The new tariff should be in place by the end of the year and Mr Ngumi said it is intended to “bring efficiency.”

In seeking a review, KPC hopes to raise funds to service massive debt procured to finance infrastructure investments, including the new Mombasa-Nairobi pipeline constructed at a cost of $473.4 million, and the four new oil storage tanks in Nairobi that cost $50 million.

The company has also invested $16 million in the Kisumu Oil Jetty, which currently lies idle due to delays by Uganda in completing its own jetty to receive, provide storage and ease the transportation of oil between the two countries.

But the Consumer Federation of Kenya wants Epra to shelve the review and initiate a broader public consultation saying the complex nature of the retail fuel pricing formula has not benefited consumers.

The federation’s secretary-general Stephen Mutoro has threatened to go to court to stop the review should Epra also fail to publish the cost of alleged inefficiencies and corruption at KPC and how losses from these malpractices affect the tariffs.

“Epra should freeze the process and share details of the KPC application together with summary highlights with explanation and justification for any variance,” said Mr Mutoro in a letter addressed to Epra director-general Parvel Oimeke dated July 29.

SETTING TARIFF

Cofek has disputed the selection of four counties where Epra has opted to hold stakeholder consultations on both the KPC fuel tariff and the implementation of the Study on the Cost of Services in Supply of Petroleum products in Kenya. The counties are Nyeri, Eldoret, Kisumu and Mombasa.

“To subject such complex matters to ordinary members of the public without first involving informed consumer organisations was an ambush,” said Mr Mutoro.

The formula KPC uses to set the tariffs for oil marketers to use its transportation and storage facilities has been said to be complex and opaque and some lobbies say it is designed to serve the interests of the company and oil marketers and not consumers.

According to the study dated June 2018 and carried out by consultancy firm Kurrent Technologies, the KPC tariff is divided into two components: Pipeline tariff and storage levy.

In setting the pipeline tariff, KPC uses the revenue requirement methodology to compute the pipeline transmission tariff.

This takes into consideration the regulatory asset base, rate of return, expenses — both operating and maintenance — tax in the form of actual liabilities arising in the tariff period, depreciation in the form of the charge for the tariff period and approved revenue addition to meet debt obligations.

Based on this methodology, KPC has imposed a tariff of $0.049 (Ksh5.22) per metric cube per kilometre to use its pipeline infrastructure.

Notably, 80 per cent of fuel in Kenya is transported via pipelines from import storage facilities in Mombasa to inland storage and loading depots in Nairobi, Nakuru, Eldoret and Kisumu. Trucks transport only 20 per cent.

SUPPLY CHAIN

KPC owns the Kipevu oil storage facility that is mainly used for imports, and levies a $3 per M3 tariff or Ksh0.31 per litre on imports discharged and transferred to the main pipeline or any other designated location in Mombasa.

The company has also leased the Kenya Pipeline Refinery storage which have been merged with Kipevu to increase capacity and reduce demurrage costs.

In 2016, for example, Kenya paid out $23.4 million in demurrage, which was passed on to the consumer through the pricing formula, equating to $0.004 (Ksh0.51) per litre of fuel.

While oil marketers pay the $3 for imports discharge and transfer to the pipeline, the company has also imposed tariffs for storage in various depots across the country.

“KPC is a significant ‘cost-centre’ in the petroleum supply chain with a large impact on consumer prices,” stated the report.

At the Nairobi terminal, the tariff is set at $22.2 per M3; Nakuru $30.5; Eldoret $39.3; and Kisumu $39.2.

Advertisement