DOE welcomes review committee report that oil firms’ profits are “reasonable”

MANILA, Sept.7 (PNA) — The Department of Energy(DOE) on Wednesday welcomed the long-awaited report of the independent oil review committee (IORC) who found that the profits of the oil firms are “reasonable.”

The IORC led by economist Dr. Benjamin Diokno, started its review in March this year. The results of the review were presented to the media and to DOE Secretary Jose Rene Almendras on Wednesday.

“The IOPRC finds that the oil companies’ profits are reasonable. This conclusion is based on the results of its analysis of the ROE (return on equity) and IRR (internal rate of return) of oil companies relating the same to the comparative ratio in other industries and risk-free government securities,” Diokno said.

Almendras said the DOE “will find ways” to implement the IORC’s suggestions and recommendations.

“I need to emphasize that they are not a government body but a truly independent group and DOE stayed away and only got involved in providing data,” the energy chief said.

For her part, Energy director Zenaida Monsada said she is very happy with the results of the IORC review as this validates the position of the department that domestic pump prices follow the movement of world oil prices.

Monsada said she is hoping that the report will somehow put a stop or mitigate the protests against oil price increases.

“We hope that (protests will stop) but we cannot expect that,” Monsada, said adding that hopefully, people will realize that the department has basis in computing the impact of world oil prices on the domestic market.

The IORC’s task was to determine if oil companies accumulated “excessive profits” and if they were guilty of unfair pricing.

Aside from Diokno, the other IORC members are Dr. Rene Azurin (academe), Dr. Jesus Estanislao (business community); Raul Concepcion (consumer group); Dr. Victor Abola (economist); Dexter Ortega (accountant) and Atty. Vigor Mendoza (public transport).

Diokno is a Professor Emeritus in the School of Economics of the University of the Philippines, a columnist, and former Secretary of the Department of Budget and Management. Azurin is a columnist and former professor at the MBA Program of the UP School of Business Administration. Estanislao is a former Finance Secretary and Chairman of the Institute of Corporate Directors.

Concepcion is a consumer rights advocate and is the head of the “Government Watch” (formerly Consumer Oil Price Watch) while Abola is an Associate Professor and Program Director of the Strategic Business Economics Program of the University of Asia and the Pacific School of Economics.

Ortega is a lecturer and member of the Philippine Institute of Certified Public Accountants (PICPA) and a partner at Tagnia Ortega & Partners CPAs and Atty. Mendoza is the National Chairman of 1-United Transport Alliance Koalisyon (1-UTAK) and a partner at the Malcolm Law Offices.

Diokno said that because there is no clear and legal definition “excessive profits” the IORC determined whether the profits of the oil firms are “unreasonable.”

The IORC conducted a three-way approach to determine the reasonableness of domestic oil prices.

First,the IORC used the regression analysis to check the extent to which local pump prices track world prices. The IORC compared the movement of local prices to Thailand, whose is closely situated to the Philippines.

The IORC found “nothing extraordinary about the movement of local pump prices in the country.”

“For periods with no prices subsidies in effect,” the relationship between local pump prices and world oil prices is generally the same for the Philippines and Thailand,” Diokno said.

Diokno urged the government to review the possible deregulation of the land transport sector since regulated regime of the transport sector prevents it from adjusting fares to immediately compensate for rising fuel prices.

He said the “creation of an automatic, monthly, fare-setting mechanism that can respond to fuel price increases (or decreases) and current adjustments so as to provide assistance to the affected sectors without engaging in direct fuel subsidy.”

The IORC also collected and analyzed the oil firm’s financial information and determine their rates of returns (ROR)and compared it to other industries.

The IORC found that the return on investment (ROI)of the oil industry of 15 percent and below is comparable to the other industries such as telecom, mining, gambling and power.

The IORC said oil deregulation resulted in a lower average return on equity on the three major oil firms which went down to 13 percent from 1998 to 2011 from 23 percent during the regulated period.

The IORC also used an Excel-based predictive model of unleaded gas and diesel and compared this with calculation of prices in the Mean of Platts Singapore,(MOPS) and various fees and taxes.

Diokno said domestic pump price response to changes in the world prices have been symmetrical or it goes down when world prices go down and vice versa.

Diokno, however said that the IORC found that in some periods “there is statistical evidence of asymmetric responses to world oil price change” which the DOE should examine further.

The IORC also found that the Oil Deregulation Law of 1998′s goal of increased competition and fair prices is being achieved.

The market share of the independent oil firms increase to 25.7 percent in 2011 from zero in 1998. The number of stations also grew to 4,500 stations as of end 2011 (around 800 or 20 percent are operated by independent oil firms).

“Competition results in lower prices. Pump prices are lower where there are more retail stations…Local pump prices now are more responsive to world oil prices now than at any period since regulation,” Diokno said.

The IORC urged the respective agencies to address smuggling, DOE to set quality standards and for the municipal and city governments should ensure that correct quantity of products are dispensed.

“DOE should step up its task of monitoring the quality of petroleum products. The quality of petroleum products is sometimes sacrificed by some irresponsible oil industry players in order to meet their target return/profit,” Diokno said.

The IORC said the government should also require oil companies to submit their audited financial statements annually in accordance with the applicable financial monitoring framework and accreditation of external auditors be made to ensure that their financial statements reflect the true financial condition and results of operations of the oil companies.

The IORC urged DOE to conduct a deeper study on the different means to foster competition (e.g. funding common terminal depots etc) while exercising regulatory oversight on quantity and quality standards. (PNA)
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