Review panel upholds oil industry deregulation

There is no evidence of the existence of an oil cartel and the deregulated oil industry should continue.

This was the main recommendation of the Independent Review Committee (IRC) on oil deregulation tasked by the Department of Energy (DOE) to assess the Oil Deregulation Law earlier this year amid rising world crude prices that saw local oil companies frequently raising pump prices.

The study was prompted by calls from various sectors to go back to a regulated regime when local oil prices were controlled and dictated by the Energy Regulatory Commission (ERC) or formerly, the Energy Regulatory Board.

The IRC concluded in its report that even as consumers complain about high oil prices, its study show that prices will even be higher under a regulated oil regime.

Carlos Alindada, chairman of the five-man IRC, said there should be no changes to the government’s existing policy on the oil industry.

"Oil product increases were due primarily to the effects of major peso devaluations and increase in international prices of oil since the Philippines practically imports all of its oil product requirements," said Alindada. Moreover, the IRC found no concrete evidence of the existence of an oil cartel.

"We cannot point to the existence of an oil cartel because there is clearly competition, the players are competing for market share. Cartelization is to conspire, now conspirary happens behind closed doors, so there’s no way we can say it happens because if ever it happens we’re not privy to that, so we’re basing our findings on the nature of the oil industry," Alindada said.

"The fact that they produce and sell interchangeably, and the fact that most of the oil companies want market share, that will tell you that when one moves, every one move will tend to move, you have to expect that. Rather than be suspect, you know that’s the nature of the beast, so when they do move together you cannot say that cartelization exists," he added.

Alindada said that competition in fact, especially with the entry of new players, now numbering about 35 from only three in 1998, significantly reduced the return on equity (ROE) of the major players like Petron and Pilipinas Shell which in the last seven years, managed only a three-percent ROE. This is in sharp contrast to their guaranteed eight-percent return on rate base or RORB under a regulated regime.

The IRC also discouraged government from restoring oil subsidies through the restoration of the Oil Price Stabilization Fund (OPSF) which the committee said was not a sound fiscal practice.

The OPSF served as a buffer fund to absorb price increases and minimize the impact of frequent price changes. Oil companies contributed to the fund when crude prices were low and was also used to keep pump prices low when crude prices were increasing.

"The OPSF only works where there are few players who are here for the long-haul and are willing to stay in the business and contributed to the fund when they have to. Moreover, it distorts pricing because the fund is used to keep oil prices artificially low," said Alindada, adding that at this point, "the government cannot afford subsidies."

The oil companies present during yesterday’s presentation of the report at the DOE however, opposed the IRC’s recommendation that Petron, which is partially owned by the government, be used as a "price moderator" for both price increases and rollbacks.

"My only concern is this Petron issue, we cannot have government exercising influence on the market using the position of the Petron board, that’s quasi-regulation and it’s illegal under a deregulated environment," said Total Philippines president Jeff Attwood.

Attwood said that if government adopts the policy recommendation for Petron to be playing the role of price moderator, investors will definitely think twice about putting in more investments in the oil industry.

"If we cannot make a fair return on our investment because of that disadvantage put on us, we will have to review our plans of expanding, especially future programs," said Attwood.

The IRC’s other recommendations include expanding the role of the DOE and to give it more teeth to enforce rules and regulations.

"With the limited powers of the DOE over both the liquefied petroleum gas and service stations sectors, illegal, unsafe and unfair practices continue to go uncorrected," said the IRC.

Energy Secretary Raphael Lotilla said the department will take into consideration the recommendations of the IRC, especially calls for the DOE to be given greater flexibility in enforcing rules and regulations.

The IRC committee members aside from Alindada are Prof. Peter Lee Yu, dean of the College of Economics of the University of Asia and the Pacific; Alberto Suansing, secretary general of the Confederation of Land Transportation Organizations of the Philippines; Merceditas Garcia, president of the Petroleum Dealers Association of the Philippines; Joey Leviste, former executive director of the Petroleum Board, and Cedric Bagtas, deputy secretary general of the Trade Union Congress of the Philippines.

Alindada is the chairman of accounting and auditing firm Sycip, Gorres and Velayo, and a former commissioner of the ERC.