Surcharge workings 'correct'

The water and electricity surcharge has been correctly worked out to reflect the spike in oil prices and does not incorporate Enemalta's losses or inefficiencies, a report presented to the Malta Council for Economic and Social Development on Monday concludes. The 20-page report, compiled by Deloitte & Touche for the Malta Resources Authority, states that increased fuel costs are being absorbed by all consumers except those who classify as social cases, and by restaurants and hotels that pay a capped surcharge of Lm5,000.

The report comes in the wake of opposition calls for an independent audit of the surcharge, which it holds is unjustifiably high and is financing inefficiencies at Enemalta.

Deloitte & Touche analysed the computations used by Enemalta since the surcharge was set at 17 per cent in January 2005.

When the surcharge was first introduced, it had been estimated that buying fuel for the financial year 2004-2005 would have cost Enemalta Lm47.8 million - Lm16.2 million more than the baseline figure of Lm31.6 million.

The cost of oil procurement in 1999 had been Lm18.7 million. This increased by Lm4.9 million over six years as the power stations increased electricity generation due to greater demand.

The figures, along with Lm2.7 million accounting for unbilled "throughput" losses and a Lm5.3 million cost incurred by Enemalta when it shifted to the less harmful low-sulphur fuel in 2003, were added to make up the baseline figure, meaning that none of these costs have been passed on to the consumer.

Since the government and the corporation had decided to absorb 52 per cent of the increase, Lm7.764 million were to be recovered by the surcharge. A 17 per cent rate was set in January 2005.

Despite the surcharge, Enemalta failed to recover Lm7.9 million in 2004/5.

"On the basis of the corporation's management accounts, the actual cost of fuel consumption for 2004/5 was Lm53.6 million. The actual cost was Lm5.8 million higher than the Lm47.8 million projected.

The corporation absorbed this adverse variance. Furthermore, in view of the fact that the surcharge was only introduced in January 2005, the corporation had to absorb a further Lm2.1 million of the cost increase," the report noted.

For the 2005/6 financial year, Enemalta calculated that the fuel surcharge should be set at 84 per cent since fuel procurement costs were budgeted at Lm80.7 million.

"However, the government decided that the surcharge was to be initially introduced at 55 per cent in November 2005 and be revised every two months in line with fluctuations in fuel prices.

"The difference between the introduced surcharge of 55 per cent and the required surcharge of 84 per cent was to be gradually factored into the mechanism by means of bi-monthly increase of 2.42 per cent over a period of 24 months. The effect of this delay was to be absorbed by the corporation."

International fuel price movements presented in the report showed that between October 2004 and March 2006, the market prices of gas oil and fuel oil increased by 19 per cent and 56 per cent respectively.

Taking into account the exchange rate of the lira against the US dollar and the effect this has on the costs incurred by Enemalta, Deloitte & Touche concluded that "the strengthening dollar has contributed to further increases in fuel costs, over and above the actual price increases".

The report says that while Enemalta is projecting to reduce throughput losses (incurred when electricity is produced and transferred to households) from 17.52 per cent to 14.77 per cent this year, it assumed that five per cent of the losses were unavoidable due to the complex factors leading to these losses.

It concluded that "by adopting the baseline mechanism the corporation is absorbing the cost of fuel relating to through losses as at 2004 of Lm5.3 million. Thereafter, no additional cost is being attributed to the said losses. This issue is being mitigated by the fact that the surcharge is being calculated on an assumed sales figure which is higher than actual sales levels".

The report concluded that with its decision to phase in the 84 per cent surcharge required in 2005/6, "the corporation has and is still effectively absorbing a substantial part of the fuel price increase burden, which should technically have been passed on to consumers".