EAP - The Pacific Infrastructure Challenge - World Bank (2006).pdf

The predominance of oil fired electricity generation – mostly diesel – exposes the Pacific
countries to the vagaries of the international oil market. Large variations exist between
wholesale and retail prices of fuel in various Pacific countries. These go beyond the simple
explanation of ‘small and remote markets’. For example: large volume markets in Papua New
Guinea and New Caledonia have consistently reported up to 50% higher pre-tax wholesale
prices than much smaller markets.
Analysis of the pre-tax wholesale price of fuel (mogas, diesel and kerosene) for three periods
in 2003 showed that there is a substantial and systematic fuel price premium, above that
charged by efficient fuel suppliers to a reasonably efficient small, remote market, being
extracted from the Pacific region. The aggregate value of this premium is calculated as being
in excess of US$120 million annually.
In the Pacific:
Up to 80% of the costs of island utilities can be attributed to fuel costs and outer
island fuel costs can be 200 – 400% higher than that of main islands
Exclusive ownership of fuel import terminals by multi-national oil companies
(MNOCs) results in higher fuel prices, whether they operate as monopolies or not
MNOCs use fuel terminal ownership and the resulting barrier to entry for new
suppliers to extract high returns from Pacific countries. They therefore have no
incentive to enter price competition with small islands
Periodic international tendering of fuel supply (made possible by independent or
government ownership of at least one import fuel terminal) is an effective form of
competition between MNOCs
Fuel prices can be influenced by institutional arrangements. Data collected and reported bimonthly
over a period of 2 years demonstrated that the pre-tax wholesale price of fuel in
countries such as Vanuatu and Kiribati (which have no price regulation and ‘closed market’
monopoly suppliers respectively) are consistently as much as 100% higher than those found
in Samoa or the Solomon Islands, which have an open market international tendering
process and price regulation.
Of the 11 Pacific countries reviewed, only Samoa has a national supply contract with a
MNOC. It also has its own fuel terminal and can therefore change suppliers if it chooses. As
such, Samoa has negotiated a favorable supply contract by sourcing the country’s total
supply from one oil company. This benefit is reflected in diesel and petrol prices which are
amongst the lowest in the Pacific region, before government taxes and levies are imposed.
The Marshalls Energy Company owns its own fuel terminal and can therefore purchase fuel
directly from MNOC suppliers. This contributes towards lower overall fuel prices. However,
the Marshalls Energy Company does not supply fuel nationally.
Economies of Scale
The generation cost of electricity should benefit from economies of scale. Figure A11 sets
out the relationship between average end user tariffs 42 and electricity production for most
Pacific and comparator countries. It seems that size does have an impact on cost, but it is far
from the most important factor.
42 It would be better to use cost rather than tariff in this analysis, but that data was not available
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