The Utility Regulation and Competition Office, known as OfReg, is seeking an economic consultant to analyze the territory’s fuels sector and draft an assessment, which the regulator will use to determine what rules to make for the market.
The assessment is being launched against the backdrop of some in the territory saying that gasoline prices are higher than they should be. While gas prices have fallen in Cayman by about 9 cents per gallon since July, they have fallen by nearly 50 cents in the U.S. over that same period.
But before OfReg can think about potentially regulating gas prices – or whether it will encourage market competition to determine prices – it must analyze the fuels sector to consider multiple factors that affect the local sector. Those factors include consumer and price behaviors, including the impact of the various stages of the supply chain on end prices of fuel, as well as how much market power the fuel companies have in Cayman.
This will help regulators identify any potential anti-competitive behavior that may be impeding competition in the various fuel markets here, according to OfReg.
“Without completing market assessment [first], we run the risk of employing measures that aren’t sustainable for the sector, and can in effect cause an exit or threaten the very operation of the current operators,” OfReg Acting CEO Duke Munroe explained at a Legislative Assembly Finance Committee meeting last month.
In its advertisement for bidders, OfReg explained that the consultant will review and define the market structures that exist within the fuels sector, and thereafter identify, evaluate and recommend potential regulatory models that may be applicable to the Cayman Islands.
The review will be conducted in several stages.
First, the economic consultant will clearly define the various fuel markets within Cayman. For example, one market is the fuel used by the aviation sector, another market is for vehicles, and some fuel is imported solely for the use of the Caribbean Utilities Company.
After defining the elements of the fuels sector, the economic consultant will conduct its market assessment. While regulators have already deemed the territory’s major propane and motor fuel suppliers as being dominant and having significant market power, OfReg stated that it is necessary to reassess their dominance due to the recent entry of new companies into those areas.
Once those two stages of the review are conducted, the economic consultant will help draft a consultation report for OfReg to take to all the players in the fuels sector. Once those players provide their feedback, OfReg will make determinations on how it will regulate the sector.
OfReg’s advertisement for bidders states that the regulator is aiming to sign an agreement with a consultant by Feb. 21, and have the preliminary market review completed by around June.
At last month’s Finance Committee meeting, Mr. Munroe explained that the process described above has been delayed because OfReg’s fuels regulation office has been underfunded.
Government injected $1.15 million this year to help fund OfReg’s fuels office, and some of that funding will go toward paying for the market review.
OfReg explained in its advertisement for bidders that it needs an economic consultant to conduct the market review because its staff lacks the required expertise to conduct the assessment itself.
“While some level of expertise exists within the Office, a greater depth of experience in the application of appropriate regulatory tools and techniques to undertake this assessment is required,” OfReg’s request for proposals document states. “As such, in order for the Office to competently and successfully carry out the various studies and evaluation necessary, it seeks to hire a consultant.”
OfReg has spent more than $2 million on consultancy and professional fees, due in large part to the lack of necessary skills within its office.
The regulator’s 2017 annual report notes that the office is “endowed with a small group of enthusiastic, willing and dedicated staff” but that “the organization currently lacks, in house, the range of requisite skills to perform its regulatory work.”
Therefore, OfReg “must rely on consultant help,” states the report, which also shows that OfReg spent $2,228,992 on salaries and benefits for a “total full-time equivalent staff” of 22 people in 2017 – about $100,000 per employee.
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