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Kenya Energy Regulatory Commission – ERC



Kenya Energy Regulatory Commission was established as an energy sector regulator under the Energy Act 2006 in July 2007. The Energy Regulatory Commission (ERC) is a single sector regulatory agency, with responsibility for economic and technical regulation of electric power, renewable energy, and downstream petroleum sub-sectors, including tariff setting and review, licensing, enforcement, dispute settlement and approval of power purchase and network service contracts.

ERC is organised into departments to achieve its mandate. The Electricity Department is responsible for reviewing and advising the Government policy on the electricity sub-sector, preparing of strategic and operational plans, licensing of utilities, regulation of electrical installation work, including licensing of electricians and registration of electrical contractors. It also reviews power purchasing agreements. The department is split into power systems and consumer affairs.

The Petroleum Department is responsible for implementing government policy on the petroleum sector, focusing on licensing, issuing of construction permits and developing standards for the petroleum sector. It comprises five sections: Petroleum, Environmental Health and Safety, Renewable Energy Department, Licensing and Compliance and the Energy Efficiency Section.

ERC’s Economic Regulation Department is responsible for the monitoring and ensuring the implementation of and compliance with the principles of fair play in the energy sector. It sets fair tariffs that ensure investors are adequately compensated and consumers pay a fair price for the regulated services. It is also involved in developing indicative energy plans, research and development and consists of three sections: Indicative Planning, Policy Analysis and Research and Tariffs / Monitoring.

The year 2011 was an eventful one for the ERC. In December, 2010, the regulator finally introduced price caps on the price of fuel at the pump.

That month, the prices went down for the first time before rebounding to increase every month for 12 consecutive months.

In December, 2011, the ERC announced a price drop for the first time in a year. The ERC bases its price caps on the calculated cost of procuring and delivering fuel to the customer 0utlets/ fuel stations.

Crude oils are traded openly in the international market. Kenya’s crude imports are made up of about 90 percent Murban crude oil from Abu Dhabi, marketed by the Abu Dhabi National Oil Company (ADNOC).

Early each month, ADNOC sets the Official Selling Price (OSP) of Murban crude oil lifted during the previous month. This becomes the Free On Board (FOB) loading port price applicable to the tenders called in Kenya.

The balance 10 per cent of crude imports is Arab medium crude from Saudi Arabia.

The following are all the components in the landed cost of crude delivered to the refinery

Free On Board ( FOB) cost

Freight and Premium.

0.105 per cent for both marine and War insurances.

2.75 per cent Import Declaration Form (IDF) fee.

0.85 per cent Letter of credit charges.

0.5 per cent Ocean Loss allowance (for loss not covered by insurance)

US$ 3.82 /MT port handling charges.

0.5 CIF importer administration fees.

Sh1.5O / MT +VAT Discharge Inspection fee.

Exiting Articles

Potential demurrage.

Cargo clearing charges.

International prices for refined petroleum products are available on daily basis in such publications as Platt’s and Reuters for the major trading markets. For imports into Kenya, the relevant prices are those in the Arabian Gulf (AG) and the Mediterranean Sea  Quotations for trading are based on the mean prices for 3-5 days around the bill of lading day as FOB price plus a freight and premium component.

For the purpose of the OTS, tenderers quote a fixed freight and premium figure to bring the specific product from the loading port to Mombasa. The tender document specifies the vessel’s arrival date and therefore indirectly fixes the loading date range. The following elements are the components necessary to obtain a final landed cost of refined petroleum products.

  1. Free on Board (FOB).
  2. Freight and premium.
  3. 0.0998 percent for marine and war insurances.
  4. 2.25 per cent Import Declaration Form (IDF) fee.
  5. 1.2 per cent Letter of Credit charges.
  6. 0.5 per cent Ocean Loss allowance.
  7. $ 3.82/ MT Port handling charges.
  8. 0.5 per cent CIF Importer Admin. fees
  9. Kshs9.50/ MT +VAT discharge inspection fee.
  10. Potential demurrage.
  11. Cargo clearing charges.

For both crude and refined products, the dollar exchange rate used has an impact on the final landed costs.

The OTS agreements specify the rate to be used as importer’s commercial bank’ selling rate on the bill of lading date.

After the crude is landed, the importer has to pay a refining fee to KPRL for processing the crude to final products. The current average processing fee is $2.4/bbl (Kshs1.20 per litre).

The refinery also uses five per cent of the crude as fuel loss in its operations. This is a loss which has to be recovered in the pricing mechanism.

Because of its old technology, KPRL’ s ability to add value on crude is very limited.

For a light crude like Murban, 33 per cent of the crude is produced as residue (fuel oil) whose value is almost half that of crude. This loss of value is recovered in the prices of the higher value products.

To assign costs to the products from the refinery, a cost allocation method is applied. The proposed method prorates the crude cost plus refining fees to the cost of importing similar products. A sample cost allocation calculation.

Kipevu oil storage facility

This is the Government-owned import tank farm for refined products. It is managed/ operated by Kenya Pipeline Company.

The charge for using the facility is $3.0/ cubic metres plus VAT (28 cents per litre.)

Delivery

From the distribution/wholesale depots, products are delivered by independently owned small  / medium tankers to both customer sites and retail outlets.

Retail dispensing sites

There are three types of retail sites:

  1. Company owned/ company operated sites. These are few but the oil companies sometimes run their stations when and where they cannot find independent dealers.
  2. Company owned/ dealer operated. In this case, the oil company owns the station and signs a dealership agreement with an independent business person
  3. Dealer owned/ dealer operated. These are the independent stations, which developed after de-regulation in 1994. They are of varying standards and sizes.
  4. Dealer owned/ company leased. Sometimes oil companies lease stations, which have been constructed by either dealers or individual businessmen.

Stations incur normal operational losses of product with a maximum allowed level of 0.5 percent.


 



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