MercoPress. South Atlantic News Agency

FIG Completes Audit of Fuel Supply Agreement

The Falkland Islands government (FIG) and Stanley Services Ltd (SSL) have revealed the formula used for fixing fuel prices.

In a statement released last Friday, the government announced that the latest periodic audit of the operation of the exclusive agreement with SSL for the supply of fuel to civilian consumers has been satisfactorily completed, and that SSL has agreed to the publication of the domestic fuel formula.

The current Fuel Supply Agreement was completed in March 2005 and provides a licence to SSL to be the only supplier of fuel to the civilian community in the Falkland Islands for a minimum period of ten years.

In the press statement released last Friday, FIG Chief Executive Chris Simpkins said SSL is required to maintain minimum stock levels and to fix prices in accordance with a detailed formula which ensures that excess profits are not made and that, "...only SSL's reasonable costs in operating the fuel supply business are charged to consumers through the operation of the fuel price formula."

FIG is the regulator of the fuel supply business and is able to audit SSL's activities under the Fuel Supply Agreement and, in particular, the operation of the domestic fuel formula. The most recent audit has now been completed and, Mr Simpkins reported, FIG is satisfied that the company is applying the domestic fuel formula fairly in overall terms. "Judgements inevitably have to be made about how some costs should be charged to the domestic fuel formula and the amount of such costs in some cases. Whilst such judgements will be the subject of regular review, FIG is satisfied as to the reasonableness of SSL's approach to such items. "The audit revealed some minor errors and areas for change and all have been readily corrected by SSL. In overall terms, SSL has operated the fuel price formula to the benefit of customers."

He said SSL has also agreed to the publication of the domestic fuel formula. "There are, in fact, two formulae: one for fuels that are sourced outside the Falkland Islands and another very similar formula for fuels that are sourced within the Falkland Islands. "Both formulae aggregate the various components of the cost of supplying fuel to the civilian market." Mr Simpkins explained, "SSL uses the formula to project its costs on a rolling basis until the end of a financial year. At that point the actual costs and volume of fuel supplied in the year can be quantified and those data are substituted into the formula.

"Fuel prices are reviewed on a monthly basis so as to match projected income with the projected costs. Differences between SSL's fuel income and the related costs, as projected by the formula, are carried forward as a balance to offset prices in the next period."

In practice, he said, SSL can project the costs accurately in the short term because fuel demand is stable and the cost components are known: they either follow an operating cost budget or they are driven by the cost of fuel as it is drawn from stock on a relatively stable average cost basis."

"In principle," he said, "the formula fairly determines the cost of supplying domestic fuel and provides a justifiable methodology for SSL to recover those costs," and enables SSL to make "a reasonable return", including :

? Guaranteed cash-flow from monopoly sales of a commodity product. ? Guaranteed recovery of all costs, including hidden costs such as stockholding finance, which a normal retailer would need to absorb against his profit. ? Guaranteed access to "shared use" assets, such as the filling station shop, which enable SSL to generate general retail sales as well as fuel sales ("although notional rents are credited to the formula on the basis that the fuel consumer should not subsidise SSL's wider business activities"). ? A 2.5% mark-up on the input price of the fuel and the company's operating costs, "which is in effect a modest but risk-free return".

Mr Simpkins concluded, "As can be seen, the method of fixing fuel prices is complicated. SSL is required to provide, and justify, details and evidence of all costs that contribute to the cost of fuel to consumers. "Regular audits have been, and will continue to be, carried out to ensure that the interests of consumers, which include the Government itself, are protected."

The domestic fuel formula (for fuel sourced outside Falkland Islands)

[P + T + F + OV/E + R] /V

P = the price of the fuel itself at the port of loading and net table discounts T = cost of transportation and insurance F = cost of financing stock, eg any loan charges O = the operating costs of fuel activities of SSL including depreciation of all assets provided such a period as is reasonably estimated by the company as being likely to equate to their useful first being used for the fuel activities of the company and the cost of financing those assets if E = estimated annual consumption in the Falkland Islands by civilian R = profit of 2.5% on P + O V = volume of product landed in the Falkland Islands

Source: FIG The Secretariat/Penguin News