The fuel surcharge adopted by Cyprus

Cypriot consumers have had a fuel surcharge on their electricity bills for some years. Malta and Cyprus have much in common. Electrically, both are classified as small isolated systems, both use mainly steam plant fired by fuel-oil plus some gas turbines burning gas-oil to generate their electricity. In both countries there is only one electricity company and it is state-owned. In Cyprus, this is the Electricity Authority of Cyprus (EAC), which is the equivalent of our Enemalta Corporation.

Details of the electricity tariffs and the surcharge in use in Cyprus are readily available on the website of the EAC at www.eac.com.cy. As in Malta, they have different charges for different categories of consumers but the fuel surcharge is the same for all. Quoting from the website:

"Fuel Adjustment

"The kWhr prices are based on a nominal fuel cost of CY50 per metric ton. In each bi-monthly (or monthly) period the kWhr prices shall be increased or reduced by 0.0015cent per kWhr for each 5 cents by which the cost of fuel per metric ton, as prescribed by EAC in the bi-monthly (or monthly) period, shall be above or below CY50 per metric ton."

The fuel cost is published on a monthly basis and the website lists the fuel costs month by month starting from January 1999. The figures are posted with about a month's delay. The last figure (for October 2004) was posted early this month.

I inserted these fuel costs and the price formula in a spreadsheet on my computer and worked out the fuel surcharge month by month. Two interesting facts emerge. One is that, in 1990, the average fuel cost for the year was below CY50. In January 1999, it was as low as CY32.3. This is not surprising since 1999 saw some of the lowest fuel prices in years. This meant that, in 1999, Cypriot consumers actually received a rebate on their electricity bills.

The other interesting fact is that at no time was the fuel surcharge in 2004 (up to October) higher than the average for 2003. I would urge caution in drawing any conclusion from this with regard to our situation since the fuel mix between fuel oil and gas oil may be different for the two countries and the date of the change-over to low sulphur fuel oil might also be different.

However, this should not deter us from comparing the system used in Cyprus with the one introduced recently in Malta. For a start, both are based on the concept of a reference cost of fuel. Logically there is no other way; a benchmark must be set. But the similarity ends there.

In Cyprus the reference cost is that of one unit of fuel, a metric ton, and the tariff is based on this cost. In a way it is an exercise in the cost of producing a unit of electricity and the tariff is adjusted monthly or bi-monthly.

In contrast, ours is based on the total fuel cost for the year, with the total fuel cost for 1999 (when fuel cost was very low) as the reference. In contrast to Cyprus, ours, rather than being a costing exercise, seems more like an exercise in trying to balance the books of Enemalta. In the last few days, the Public Investments Ministry has published a table which shows how the excess fuel bill for the year will be shared between consumers and the corporation for various fuel bills. There is no indication of the relationship between any changes in consumption and the fuel surcharge. In other words, if the increase in fuel costs are due to an increase in consumption rather than an increase in unit price of fuel, what happens?

Both the Maltese and Cypriot consumers pay for their electricity in arrears. However, while the Cypriots' bills are based on the actual cost of fuel consumed on a monthly basis our bills are based on a predicted cost of fuel for a whole year. I understand, however, that we shall not have to wait for a whole year to know whether we have paid too much or too little for our electricity as I believe the situation will be reviewed in six months' time.

It is, of course, impossible to predict the future price of oil. For example, it was clear, until only recently, that Opec were trying to keep the price of crude oil at $25 and one was under the illusion that the market could stabilise at that price. And yet, at their last meeting a few days ago, Opec members expressed concern that the price was dropping when it was still well over 150 per cent of the $25 mark.

Another uncertainty is the exchange rate; who would have imagined that the dollar would have dropped so much, especially against the euro? The impossibility of predicting the future was the reason why the fuel price mechanism for petrol, diesel and kerosene is based on the fuel costs of the last three months, notwithstanding that the consumer in this case does not pay for his purchases in arrears but at the time of purchase.

Cypriot consumers also have another "surcharge" to pay on their electricity bills, although it is automatically included in the tariff. This is of approximately one Maltese mil per kWhr. The money generated by this "surcharge" goes towards financing schemes run by the department responsible for energy to subsidise projects on renewables and energy efficiency.

I have recently attended EU workshops where I had the opportunity to see what Cyprus is doing in the field of energy. There is a lot we can learn from them, besides how to apply a fuel surcharge.

Prof. Ghirlando is a former chairman of Enemalta.