How will the latest BERC amendment affect energy prices?
The worldwide norm is that the energy sector consists of either state or natural monopolies. However, monopolistic control can have adverse effects on consumers, to control which, regulators are appointed to ensure efficiency, transparency and accountability. In 1966, there were reforms in Bangladesh, where the vertically integrated power and gas sectors were unbounded into three categories of generation, transmission and distribution, out of which multiple companies were set up.
At the time, there was quite a bit of resistance towards creating a regulator, but finally, in 2003, the Bangladesh Energy Regulatory Commission (BERC) was established, and the BERC act was passed. It became effective in 2007-2008 when they started fixing prices. Although the regulatory act says that oil and liquid fuel prices will be fixed by the regulators, from the beginning the government kept this authority to itself. The reason behind that was shown to be the fact that the Bangladesh Petroleum Corporation (BPC), a government organisation, was the single importer of oil and petroleum in the country. Government subsidies in the sector were also presented as a factor.
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Since 2008, BERC started holding hearings on fixing electricity prices and natural gas rates. This ensured some sort of transparency and accountability of utility companies, and allowed the general public and consumers to look into their accounts and books, and judge their efficiency. A process was put into place where they had to apply and show the reason for any increase in the rate, after which the hearing took place, and the price was fixed. If any inefficiencies or excessive spending were discovered, BERC set rules or conditions to improve in those areas.
However, the role of BERC is often questioned. They are supposed to be an independent state-run organisation that is not under the control of the party in power or the government. Unfortunately, BERC has never been able to exercise that independence when setting rates. Typically, the hearings and price discovery have taken place but BERC has had to consult the government before setting prices due to government subsidies.
When utility companies have asked for a 60-100 percent increase, BERC eventually allowed a 10-20 percent increase – after cost analysis, they can find out the level of subsidies the government will provide. In this monopolistic situation with little accountability, there is no question of efficiency or cost-cutting; all expenses are borne by consumers. However, the process of holding hearings keeps the utility companies on their toes.
The recent amendment to the BERC act can change this. The reason for this amendment given by the government – pointing to subsidies and time-consumption – does not stand scrutiny.
First of all, the government has not sidelined BERC entirely, but has said that in special circumstances, it will have the authority to fix prices. They have said so without specifying what these special circumstances are, but we can assume that they can increase prices numerous times in quick succession if the need presents itself. The government may take into consideration the political and economic situation to make these decisions.
The BERC act allows for a maximum of 90 days to declare prices after a hearing. In the new amendment, the government has reduced the time to 60 days. If BERC wants and the government gives them directives – even though they are not supposed to take any directive from the government – they can even declare a new price within 30 days.
Another amendment was made previously, where utility companies could only apply once a year for price hikes. Now, that limit has been lifted. And if applications are made on a regular basis, like in some countries where gas and electricity prices are routinely adjusted every three months, this means there can be price hikes four times a year. This is all within rules and regulations. So the whole process has been set by BERC through rules and regulations, but they can be adjusted and aligned with government policy. The government can decide how regularly they want BERC to adjust prices, or if BERC should implement an automated price adjustment process.
Currently, BERC is already fixing the price of LPG every month. Changes of LPG, oil and gas prices mean changes in the prices of diesel and petrol. The government is now saying they will allow petrol and diesel to be sold by the private sector. The price-fixing for petrol and diesel need not be different from the way LPG prices are fixed. BERC can fix these prices on the basis of some formula, which will have to be approved through a hearing process. Everybody must see what its components are, and how prices are going to be adjusted.
Of course, for liquid fuels such as diesel, there might be an upward or downward adjustment. Upward adjustments affect people directly through the transport sector, where costs of both goods or passengers go up if fuel price goes up. But if it goes down, bus and truck fares usually do not go down. The question is, if BERC goes for automated price adjustment, how will the transport sector fix fares? Can the government control that? If the price of oil goes down to USD 50 tomorrow, the prices of octane, diesel and petrol should go down to only Tk 40-50 per litre. Will the buses reduce their fare then? If the government cannot ensure that, then the benefit of automated price adjustment will not be enjoyed by consumers.
These are issues that will have to be faced later on. But by making this adjustment, people are subject to arbitrary price fixation by the government without any accountability or transparency. The government should give us an explanation on why they are increasing the price, and what their losses are. For example, BPC recently adjusted prices saying that they are losing money. But because there was no hearings or transparency, it was later found that they actually made Tk 40,000 crore in a seven-year period.
If there was a hearing for oil price-fixing, BERC and the general people would have known that they made that much money when they did not reduce prices manually after global oil prices went down. It all comes down to basic fairness, and a transparent and accountable process of fixing energy prices.
Dr M Tamim is professor at the Department of Petroleum and Mineral Resources Engineering in Bangladesh University of Engineering and Technology (Buet).
Transcribed and translated by Azmin Azran and Monorom Polok.
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