Oil companies ‘unbundling’ anxieties

For any business entity operating in a fiercely competitive environment, the mere mention of the word “unbundling” of retail pricing by its supervising government regulatory agency can evoke lots of anxiety, which is pretty much what’s happening in the local oil industry now.

This is a bit puzzling, considering that local oil companies had already been through a more regulated operating habitat about five decades ago when the global oil supply and demand ecosystem was changing hands from the multinational oil companies that mined oil, to national governments whose oil was being mined.

Even in succeeding years, whenever there was turmoil that would affect oil prices, like a war or embargoes, or the unilateral action of the Organization of Petroleum Exporting Countries to raise prices, petroleum product consumers would demand why a price increase in the pumps was necessary.

Ironically, the then regulation of the oil industry somehow became a refuge by oil firms during those turbulent times that saw pump prices increase from a few centavos to plenty of pesos — and especially when there was not enough supply that caused queuing at petrol stations.

But this is ancient history for most of us, and those young oil company executives today that sit at management meetings may have forgotten just how regulated the industry was, when every price increase at the pumps had to be justified with the Energy Regulation Board, now known as the Energy Regulatory Commission.

Deregulation only came when the increasing reimbursement bill of oil companies under the Oil Price Stabilization Fund mechanism became a threat to the government’s fiscal sustainability after it found itself repeatedly subsidizing tempered oil price hikes, and even reductions.

Going to court

The oil companies’ current anxiety stems from a circular that the Department of Energy recently released for implementation come July 12. In reaction, the Philippine Institute of Petroleum Inc. (PIP) composed of Petron, Shell, Chevron, PTT, Total, and Isla LPG filed for a temporary restraining order on the DOE against implementing the circular. Shell, Petron, and the Independent Philippine Petroleum Companies Association also filed their own petitions.

PIP was recently granted its plea for a TRO, which effectively put on hold the DOE circular. Going to court, though, is not the best way to deal with a regulator, especially if the public interest and greater good are being upheld as basic reasons.

Questions of collusion

The issue of collusion, apparently, is still very much alive two decades after the passage of the oil industry deregulation law. The DOE and Department of Justice supposedly have received a number of complaints of price manipulation, and this was enough reason for the circular’s issuance.

The request for court intervention by the industry has prompted the DOE to dig in its heels and vow to implement the proposed measure, not just to better understand how oil companies determine pump prices, but also in preparation to improving the 19-year-old law, if needed.

For now, the debate between the industry and DOE centers on an interpretation of the Downstream Oil Industry Deregulation Law. The DOE cites provisions in the law that encourages effective data-driven policymaking and greater market transparency in amending its reporting guidelines on price adjustments.

Oil companies, on the other hand, are saying that the circular runs directly against the deregulation law because it will impinge on their operations in a competitive market, as well as their right not to disclose trade secrets and confidential information.

The TRO issued by the Makati Trial Court echoes these concerns, declaring “Petitioners have unmistakable rights for a competitive market pursuant to RA 8479. Also, petitioners have rights against disclosure of their trade secrets. They will suffer irreparable damage if no TRO is issued.”

Other concerns

The DOE also argued that the data being asked of the oil companies was information they submit to other government agencies like the Bureau of Customs and the Bureau of Internal Revenue, like cost of import and freight, taxes and duties, additive costs, and profit margins.

An oil company executive countered that some of the information required are critical and unaudited, and thus could be prejudicial to year-end reports filed with the Securities and Exchange Commission. Furthermore, he said the circular is unclear and administratively impossible to comply with.

The DOE circular requires oil companies to submit a detailed computation, with explanation and supporting documents, on a per-liter and per-product basis of each petroleum product every time prices are adjusted.

The energy department asserts that the unbundling initiative would help determine whether oil firms’ price adjustments are fair and reasonable, something that the DOE has been resigned to accept hook, line and sinker, even if detrimental to the public’s interest.

According to the DOE and DOJ, the data collected can be used to determine if an oil company is colluding with other oil companies, which has also been difficult to ascertain because of the lack of numbers to crunch.

Guarding against anti-competition

The word “unbundling” is something that oil companies need not fear if they are not involved in anti-competitive activities. In this era, especially in the Philippines, when transparency is a byword for utility companies with strong regulatory supervision, cooperation must not be seen as total surrender.

The power industry’s operating expenses, for instance, have been subjected to far more intense scrutiny, more so now that it operates in a deregulated environment. Why not with fuel prices at the pumps? This will surely help oil companies, especially when fuel prices become more volatile and on an upward trend.

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