Committee advises Enemalta against long-term hedging

The Fuel Procurement Advisory Committee has told Enemalta that is it against long-term hedging of oil purchases, given current prices and market volatility, but instead favoured short-term forward buying in order to maintain price stability, Public Investments Minister Austin Gatt told Parliament yesterday.

He said he agreed with this view, which has been adopted by Enemalta.

The minister was speaking during a debate on an opposition motion criticising the government over the way it established the surcharge on power and water consumption.

The minister repeatedly insisted that contrary to opposition claims, the surcharge was calculated solely on the basis of the oil purchases bill, which in two years had doubled to Lm80 million.

The minister also repeatedly accused the opposition of shedding crocodile tears, saying the bills consumers were paying now were equal to - indeed marginally lower than - the tariffs which the Labour government had proposed, but Enemalta's spending on fuel oil for the power stations was now more than four times as high on the same volume.

When he spoke on calls made by the opposition and other bodies for oil hedging, Dr Gatt said he agreed with what Prof. Joseph Falzon, a member of the fuel procurement advisory committee, had told The Times Business, that this argument should be taken out of politics. As minister he had never been officially advised to hedge, nor did he expect to receive such advice, because it was not within his remit to take such decisions. That was up to Enemalta.

Prof. Falzon had made retrospective calculations which showed that Enemalta would have saved money had it hedged for the period April 1999-September 2000. But the key word here was "retrospective".

Prof. Falzon was right to compare hedging to taking out an insurance policy - one spent money on insurance hoping never to have to lodge a claim. In going for forward buying rather than long-term hedging one would be risking a cost in the interests of stability.

Dr Gatt stressed, however, that he was not against hedging and Enemalta did some hedging in 2005 and again this year for small volumes. But hedging was not a magic wand.

The Labour government in 1996 had opted for hedging, and the oil price then fell in the following two years. Dr Sant and others had recently said that hedging last November would have meant a lower surcharge in March. He would challenge anyone to show, in any one day between October and March, when it was possible to hedge at prices which were more favourable than Enemalta's oil purchases in January and February or average Mediterranean spot prices during that time. Even Ryanair had now said it had opted against further hedging.

Dr Gatt said the crux of the argument was how Malta would find the additional Lm40 million needed to pay for its oil needs. There were several options, but the one the government had taken was to spread the burden while considering the need to observe solidarity and keep the economy going.

Lm13 million were being borne directly by the government through borrowing, while the rest was divided among the various sectors of society.

The surcharge was calculated on the basis of oil purchase costs in the previous two months and spread to include water and petrol, but there was capping on the surcharge to major industries and hotels and no charge was made on those receiving social assistance.

Some had said that water should not be included in the equation, but that would only mean the surcharge on power rising by 11.7 per cent.

Were leaded and unleaded petrol to be removed from the surcharge calculation, the surcharge would climb to 102.5 per cent.

Removing the capping from large industries would have meant a saving of Lm3 million for the other sectors, but what about the unemployment which would have followed? Likewise, removing the capping on hotels meant a saving of Lm2 million. But what then?

At the other end of the argument, some were saying the capping should be extended to restaurants and small businesses, but where would the money come from instead?

Had the government absorbed all the increase in the fuel bill, Malta would have had an economic disaster, with higher inflation and taxation and a wider deficit.

Dr Gatt said it was absolutely not true that the government had not given detailed explanations of how the surcharge was calculated. He had done so repeatedly in public statements and in two meetings at the MCESD. What surprised him was how members of the MCESD had said nothing or nearly nothing at the meetings, and then came out with statements which were contrary to what they would have heard. He had invited them to study official documents in confidence, but no one turned up.

Some, such as the MHRA, demanded an independent audit and now that this audit was being made, it was being said that this was not enough. What sort of country was this?

The fact was that with the power costs now about equal to what Labour had proposed, the people had made considerable savings over seven years. For example, a single person had saved Lm800 on his bill during these years.

Labour had continued to defend its proposals, even when oil prices were a fraction of what they are now. Yet the present government continued to be attacked and its arguments and documentation were ignored. This was arrogance, Dr Gatt said.

The present government was even accused of not carrying out a social impact assessment. Yet, while Labour had only come out with a simple article three months after it announced its tariffs, the present government had produced detailed tables of the average power bill of every sector of society.

He hoped apologies would be forthcoming from all those who had criticised the government over the way the surcharge had been calculated, once the independent audit was completed.

Dr Gatt also referred to oil purchases from Libya. He explained that the previous oil purchases agreement ended when Malta started buying low-sulphur oil. Today Enemalta was making its purchases from the spot market at more favourable terms, including 60 days' credit.

Still, talks on a new oil purchase agreement with Libya were continuing. Purchases in 2006 were not possible because Libya had assigned all its production, but 2007 was a possibility. The prices offered so far, however, were not as competitive as the international market, Dr Gatt said.