Consumer Affairs

Chairman's message

Being the regulator for the regulation of trade under Part II of the Consumer Affairs Authority Act No. 9 of 2003, the mandate of the CAA is extremely difficult to perform due to the restrictions and high expectations.

One of the main duties of the CAA as the regulator is to act under Section 18 to approve or increase the prices of certain products which are published in the Govt. Gazette as prescribed goods or services by the Minister. In this instance the Board acts as an independent regulator and arbitrator and is expected to listen to all the parties and to act based on natural justice considering all the circumstances.

At the same time it is our duty to make public and consumers aware of their rights, duties and current situation as prescribed by the Act. In the Consumer Page we afford the opportunity for all the parties to air their views and we use our "Good Office" while maintaining our independence in the capacity of a regulator. The Board may delegate powers of regulation for some Members of the Board.

We wish to identify certain items and areas every week in this exercise in order to achieve the objectives of the Consumer Affairs Authority.

We invite criticism suggestions and proposals to improve the project of awareness. Considering today's topic, there should be a short term and long term strategy in the use of LP gas. Short term strategy maybe to look for some other source of energy and the minimization of the use of LP gas because every drop of gas consumed is our money.

Invite OPA and scientists in Sri Lanka and the world over and invited to find alternative energy such as bio-gas, energy from waste, solar energy, etc. At the same time use of pressure cookers is a good idea as it consume less gas. Advising the people in rural areas not to use LP gas is good but there should be the maintainance of ecological balance. Eg. One can use treated firewood or cow dung in such areas.

Long term strategy is to encourage competition and introduce new players with the intention of using 'Good Office' to find cheaper areas and to draw up a national plan for energy. These are only propositions as our mandate as a regulatory body is restricted. Also we are bound to maintain confidentiality, upto 5/57 of CAA.

We also invite the public to associate with us in the following programmes organised by the Consumer Affairs Authority:

International Women's day - Maharagama - 8.3.2006 at the President's College.

World Consumer Day - 15.3.2006 at John De Silva Theatre

Consumer Flag Day Consumer Walk - From CAA office situated at CWE Secretariat, 27, Vauxhall Street to Town Hall.

Inauguration of the Web site and other programmes including drama and essay competitions for the children. Public is most welcome to take part in these projects. Please help u to help you.

Sarath Wijesinghe, Chairman, CAA.

Liquified Petroleum Gas - LPG

Q: What is LPG or LP Gas?

A: LPG or LP gas is Liquified Petroleum Gas. This is a general description of Propane (chemical formula C3H8) and Butane (chemical formula C4H10) either stored separately or together as a mix.

Q: Why is it called Liquified Petroleum Gas?

A: This is because these gases can be liquified at normal temperature by application of a moderate pressure increase, or at normal pressure by application of cooling using refrigeration.

Q: Where does LPG come from?

A: LPG comes from two sources. It occurs naturally in oil and gas fields and is separated from the other components during the extraction process from the oil or gas field. LPG is also one of the by-products of the oil refining process.

Q: What is LPG used for?

A: LPG is used as a fuel for domestic, industrial, cooking, heating and drying processes. LPG can be used as an automotive fuel or as a propellant for aerosols, in addition to other specialist applications. LPG can also be used to provide lighting through the use of pressure lanterns.

Q: What are the main uses of LPG in Sri Lanka?

A: LPG is used as a heating for domestic cooking, as a fuel source for commerce/industry and automobile fuel.

Q:Which usage is popular in Sri Lanka?

A: Domestic cooking LPG.

Q:What is the current LPG market segment in Sri Lanka?

A: This can be divided into 4 main segments. User market

a) Domestic cooking Upto 12.5 kgs cylinders of various sizes.

b) Industrial sector - Bulk supply to tank and containers installed in plants.

c) Hotels/Catering Cylinders of 37.5 kgs.

d) Auto gas Bulk supply to tanks installed in gas stations.

About 75 per cent of the total market is for domestic cooking and the balance is being shared among industrial users and auto gas.

Q: Is there a monopoly in LPG trade?

A: Yes, LPG trade can be considered in three fold. LPG imports, LPG storage and LPG distribution. In all three segments the privatised Government entity (former Colombo Gas Company) viz. Shell is the monopoly.

Q: How many players are in the market in respect of the importation of LPG?

A: There are two players for the time being actively involved and the third player has just started its test marketing.

Q: Who are they?

A: Shell Gas Lanka Ltd (SGLL), Laugfs Gas Ltd and E-Gas Ltd.

Q: How many players are in the storage of LPG?

A: Two players. Shell Terminal Lanka Ltd and Laugfs Gas Ltd.

Q: How many players are in the distribution of LPG?

A: Three players. Shell Gas Lanka Ltd (SGLL), Laugfs Gas Ltd, E-Gas Ltd. has just started test marketing in Gampaha district.

Q: Are there any restrictions in entering this market?

A: No. The privatisation initiated by Government of Sri Lanka in 1995 protected the SGLL as the single source of supply in the local LPG market for a period of 5 years ending year 2000. Thereafter a number of firms took initiative under the BOI to compete in the liberalised market. Companies registered were Laugfs, Mundo, and E-Gas. Now free market is in operation.

Q: What is the objective of the liberalised market?

A: The objective is to promote competition in all three segments of the trade; importation, storage and distribution and thus bring in efficient service to the consumers with lower price. Efficient service means adequate supply to meet the rising demand, distribution in rural areas, make LPG available at reasonable prices to all segments of the public and ensure adequate safety measures as this is a highly flammable product and handled at domestic level.

Mahinda Chinthana stands to encourage local industrialists and traders, whilst maintaining free market economy, not to send wrong signals to world community.

Q: What are the main supply sources of LPG?

A: 90 per cent of the country's requirements are imported and 10 per cent is being supplied by CPC locally from the refinery. We have to depend on imports and spending on foreign exchange. Therefore, it becomes necessary to use LPG sparingly and it is time to look into alternate energy sources. Even firewood can be used. Energy from waste another solution. We invite scientist to assist us. We are conscious about the environment.

Q: How demographic LPG consumption is distributed?

A: Western province about 60 per cent and the balance is being distributed among other provinces.

Q: Why are there not enough competitors?

A: Potential investors are of the view that importation, storage and distribution - all three segments of the trade should have competition for efficient product to be supplied. They envisage storage terminal is the bottle neck facility owned by the privatised monopoly to be a significant barrier to entry. Already imports and distribution, there are new players shown interest in addition to the existing competition.

Q: How do you hope to promote competition?

A: One should look into the possibilities of bringing in greater participation, industry restructuring, access regime within existing framework etc.

Q: What can we do to improve competition?

A: Government can promote competition by bringing new players in to the importation, storage and distribution of LPG and in use of existing storage facility with other players. This in turn encourages innovation and alternatives, greater consumer choice and maximisation of welfare of society.

Q: As a Regulator what is the role of CAA?

A: LPG has been identified as an essential item and 'specified' by the Minister of Trade, Commerce and Consumer Affairs under Section 18 of the Consumer Affairs Authority Act No. 09 of 2003.

The Authority is empowered to enter into agreements with manufacturers or traders with regard to price and require the manufacturers etc. to ensure into undertakings. Exploring the possibilities with the manufacture to endure that the terms of their distributions and supplies contracts are on the table.

The Authority can specify the safety standards in respect of product quality cylinders, cylinder filling, storage etc. and if necessary the environmental safety measures. This is a particularly vehicle powered with LPG.

Q: Do Companies come to the CAA for price fixing?

A: LPG has been identified as an essential item and "Specified" by the Minister of Trade Commerce and Consumer Affairs under the Section 18 of the Consumer Affairs Authority Act No. 09 of 2003. When a manufacturer or trader wants to increase the price of specified item it is mandatory to obtain a prior approval of the Authority.

When they seek to obtain the approval of the Authority for an increase in the selling price of specified goods or services as per Section 18(3) the burden is upon the said manufacturer or trader to show that the increase in price is reasonable. The Authority shall after holding an inquiry and if satisfied that the proposed increase is reasonable approves such increase or any other increase, as the Authority considers reasonable.

Q: Why can't we control the prices of LPG?

A: Since the LPG market is with two players at the moment, imperfect market conditions exist. Considering under Section 19 as its prices are excessive, the Authority may refer the matter to the Consumer Affairs Council. Where the Council after an investigation is empowered to fix the maximum price or price structure and accordingly, maximum price shall be fixed.

Here this will amount to a price control instead of the price supervision under Section 18. Similarly members of the public, associations or organizations to refer the matter to the Council under Section 22 and Council could consider a maximum price for the product.

Q: On what basis the CAA monitor the prices of LPG?

A: The CAA considers the actual current cost of importation, transportation and distribution. The cost varies from company to company. The main element of cost is the world market prices commonly used in LGP trade the Saudi Aramco Prices.

Q: How Saudi Aramco prices are determined?

A: These are based on demand and supply.

Q: Why did LPG prices rise so dramatically?

A: It has been noted in the recent past that there is an increase in demand in the Saudi Aramco prices. The reason for this increases are high demand from fast growing economies such as China and India. Supply constraints in oil producing countries and adverse weather conditions. Increased global demand and limitations in supply.

Q: What can you do about the increase in world market prices?

A: The Government has done its best by waiving the duty and VAT in view of reducing the burden of the consumer.

We are heavily depending on imports and therefore, now we are looking into the possibilities of alternatives or substitutes.

Q: What are the alternatives or substitutes?

A: Immediate concern should be to help the domestic LPG users of cooking gas. For them we are trying to give cheaper substitutes for cooking in the short run. For eg. if pressure cookers are used in cooking, gas consumption could be reduced to a greater extent.

Then we are looking forward how to manage the urban area and rural area. The alternative sources such as bio-gas, treated fire wood, solar energy etc.

We are mindful of the immediate alternative, electricity but that too is a problem as of now. We are in consultation with the Ministry of Power & Energy and the Ministry of Scientific Affairs in addressing this problem.

Q: Is it true that already steps are under way to import in cheaper LPG?

A: Yes, we understand that measures are being taken and possibilities are being explored to look after the consumer interest.

Q: What is the monthly demand for LPG domestic cooking?

A: About 2000 MT per month.

Q: What is the Government ownership in the privatized State Monopoly?

A: Government 49% and the balance 51% belongs to Shell.

Q: What percentage of market is being controlled by the shell company? A: About 85%.

Q: Is there any relationship between Gas prices and the increase in Crude Oil and other oil prices?

A: Yes. The cost of fuel is indexed to spot prices of crude oil. Thus in times of oil price hikes, the price of LGP also increases.

Q: What plans are ahead for the long term price stabilization of LPG?

A: We are aware that in addition to cooking gas there are other uses such as industrial and catering. Therefore, it becomes necessary the LPG industry problem as a whole has to be addressed. We have identified that there is a need for the re ordering of market segment and development of new products in the interest of all stakeholders.

Q: Why can't we initiate biogas?

A: Our mandate is limited but we tried to do it with other professional associations. The OPA promised to help us in our hour of need and to assist the consumer with advice and suggestions are required.

Q: Can consumers expect any Government assistance?

No. LPG is being used for various reasons. Therefore the government has to be careful in giving assistance. If importers use the facility given for commercial purpose then it is not proper.

LAUGFS Gas (Pvt) Limited

The Colombo Gas Company, the Government owned exclusive player in the LPG business Sri Lanka was privatized in 1995, with the idea of creating a better market environment for consumers. Not only the management rights but also a five year trade monopoly was given to the foreign multinational company who took over Colombo Gas Company to achieve this objective.

However, no need to mention the hardship that the Sri Lankan LPG consumers went through during 1995 to 2000, as a result of this exclusive and protected market environment.

In the year 2001, LAUGFS Gas found the entry in to the LPG business in Sri Lanka with the encouragements received from all stakeholders, especially with the blessings of Chandrika Bandaranaike Kumaratunga the then President of Sri Lanka, who directly supported in breaking all barriers thus paving the path to our entry.

The objective of promoting a Sri Lankan company to create a competition in the LPG business was to bring long-term benefits to the local LPG consumers. Hence, LAUGFS was given a chance to secure access to the indigenous supply source; LPG produced by the refinery own by the Ceylon Petroleum Corporation at a concessionary price of Rs. 15,000 per M/ton, much higher price than what Shell Gas Lanka has been paying for six years from 1995 to 2001. Shell Gas Lanka has been buying the entire LPG produced at the refinery at Rs. 12,000 per m/ton for almost six years starting from 1995.

LAUGFS was supposed to pass this benefit to the LPG consumers in Sri Lanka by fixing the retail price Rs. 100 per domestic cylinder less than the retail price of Shell. Accordingly, LAUGFS entered in to the LPG market on the 22nd October 2001 and sold domestic cylinder at Rs. 409.00 whereas the Shell Gas was at Rs. 509.

The long-term objective of the joint effort of LAUGFS and the Government expected to create a healthy competition much advantages to the local LPG consumers was disturbed within less than two months of operation, when the Government was changed in December 2001.

The then appointed Minister of Commerce and Consumer Affairs of the government, unilaterally and forcibly changed the terms and conditions of the agreement that LAUGFS has entered with the Government and CPC, thus forcing LAUGFS to buy LPG at a higher price of Rs. 20,000 per m/ton from the local refinery.

Hence LAUGFS was forced to raise their retail price in par with the retail price of Shell whereby LPG consumers in Sri Lanka lost the opportunity to buy LPG at a cheaper price. Even today we are been blamed not keeping this promise of Rs, 100 cheaper LPG; despite we a local company. We urged again and again to all concern it was not our fault; it was a result of a group of people who had vested interests and malicious intentions.

Now we blame the global scenario. As you all know the hostile political situation irrupted in the Middle-East region in year 2002, promptly resulted to an energy crisis thus escalating prices of all energy products in the world market. Middle-Eastern countries produce almost 80% of the LPG supply to the world market. They setup the bench mark price of LPG that is used globally in LPG trading businesses.

The crisis in the Gulf countries, bad weather, and increasing demand in Asian countries further deepened the crisis resulting high cost of LPG, thus forcing us to increase our retail prices. The local refinery owned by the CPC is supplying only about 1,200 m/tons of LPG per month which equals to 40% of our requirements and the balance 60% is sourced from the world market by way of imports. Many think that we are enjoying special price from CPC for LPG buying from their refinery.

The truth is that we pay CPC for LPG purchase from them is a the world market price decided monthly basis, calculated in US Dollar terms and converted into rupees based on the current exchange rate. When world market price go up; CPC also increase their selling price accordingly.

Starting from June 2005 the world market price of LPG has been escalating in an abnormal phase ending at USD. 627.00 per m/tons in February 2006, which is noted as the highest ever world market price registered in the history. This is a crisis that almost all the Asian countries are equally facing. However, in many Asian countries the respective governments have intervened by absorbing this shock without passing it to the customers.

We as the only Sri Lankan company engaged in the LPG downstream business in Sri Lanka thank the government,officials of the different authorities and finally our valued customers for understanding the situation and being with us during this crisis.

W.K.H. Wegapitiya - Chairman

LPG Market in Sri Lanka

The LPG market in Sri Lanka has grown from around 70,000 mt in 1995 to over 170,000 mt at present. Out of this, the Ceylon Petroleum Corporation produces around 15,000 mt of LPG and the

balance quantity is imported.

It is estimated that more than 75% of the LPG consumption is by the households for cooking purposes. It is also estimated that there are about 25% to 30% households using LPG as a cooking fuel and these households represent the relatively affluent segments of the society. Other applications of LPG include commercial uses such as hotels and restaurants as well as industrial uses such as ceramics, plastics and metal.

Cost of imported LPG

The international market price of LPG is called "Saudi Aramco Contract Price" or "CP". The CP varies every month and it closely follows crude oil prices. CP is also strongly influenced by the pent up demand during winter season. With the oil prices consistently escalating during the past two years, the CP too has moved upward into unprecedented levels.

The average CP, which was $291/mt in 2003, had moved up to $352/mt in 2004 and to $434/mt in 2005. The CP escalated to $582/mt in January 2006 and has shot up to $625/mt this month.

Cylinder pricing

The price of a LP Gas cylinder is built on the cost elements in the supply chain. Of these elements, the cost of products (CP) is the major driver of price. The landed cost of product consists of CP, shipping and insurance and other costs to bring the product to Sri Lankan shores.

At today's price level of Rs. 960/= per 12.5 kg cylinder the landed cost alone accounts for over 91% leaving only 9% for distribution margin and company overheads thus leaving no profit margin for the company. The price of a 12.5 kg LP Gas cylinder on the basis of current landed cost of product should be over Rs. 1,130.

Affordability

The average usage of a 12.5 kg of LPG is approximately 2 months. This means that at Rs. 960 per cylinder, the daily cost of LPG to an average household is Rs. 16. Considering that there are four persons per household, the daily cost of domestic LPG per person is only Rs. 4. Compared to daily cost of many other consumer items that one purchases from the market today, this cost cannot be considered high. In terms of a price increase, for example of Rs. 120 per 12.5 kg LPG cylinder, the same logic would say that the daily increase in cost per person per household is only 05.0 cents.

Shell's investments

Since its market entry in 1995, Shell Gas has invested over US$ 150 million in the LPG industry in Sri Lanka.

These investments consists of US$ 33 million for 51% stake in the Colombo Gas Company and US$ 82 million investment on the LPG import and storage Terminal.

Shell has also invested heavily in modernizing its filling plant, upgrading LPG road tanker fleet and conforming to international safety standards.

Shell is working with the Government for instituting a sound regulatory framework for the betterment of the LPG industry and its growth in Sri Lanka and including legalizing safety standards. Unfortunately, even after 10 years of business in Sri Lanka, Shell Gas companies carry the burden of accumulated losses.

Dr. Mahesha Ranasoma, Director Marketing and Corporate Affairs, Project Director - Shell Live Wire