An investigation by La Nación found a hidden subsidy in price formula

Public services regulatory body raises the price of gasoline and diesel to cheapen asphalt and gas

Published on December 8, 2014


mathematical maneuver made at the end of 2008 by the Public Services Regulatory Body (ARESEP in Spanish) harms, ever since, the consumers of diesel and gasoline, who pay more per liter than do asphalt firms and the consumers of gas who, in turn, save millions because of the lower prices they pay.

From 2009 through September this year, diesel users paid up to ¢73.5 billion more, while gas users save some ¢33.27 billion. Others who benefitted are the firms that buy asphalt and emulsion, which saved at least ¢11.6 billion, at the expense of buyers of regular and super gasoline, who paid an extra ¢29.5 billion.

$45 billion

in subsidy to gas and asphalt equal almost the cost of widening the road from Cañas to Liberia.
An investigation by La Nación found that the subsidy to cheapen gas and asphalt (and to increase the price of diesel and gasoline) is hidden in the price formula created by ARESEP in November 2008. That month, with Fernando Herrero as chief regulator, the institution modified the way in which the final price includes the costs of the Costa Rican Petroleum Refinery (RECOPE in Spanish), known as K factor and which are necessary to take to its plants the 15 products it sells.

A cross subsidy is present when a product is assigned a Price higher than the real one in order to lower the price of another product. This happened with the formula to calculate, because even though RECOPE has definite costs to distribute each product (including insurance, shipping, port charges, and inventory, among others), ARESEP calculates them anew based on the import price.

In the last six years, it cost RECOPE an average ¢45 to take every liter of diesel to its plants, but as a result of the financial operation by ARESEP that amount went up to ¢57. As an average, consumers paid ¢12 more per liter. The average final price for diesel (between 2009 and last September) should have been ¢568, not ¢580.

To the contrary, in that period, gas users (most of them industries, businesses, hotels, and restaurants) paid, as an average, ¢27 a liter, ¢24 less than RECOPE’s real cost: ¢51. With no subsidy, the liter would have cost ¢258, but the final price was actually ¢234.

In the case of gasoline, the distribution of one liter of regular meant ¢50 and that of super ¢51; however, ARESEP raised the K for regular to ¢54 and that for super to ¢56. A ¢4 and ¢5 difference, respectively, against the consumer. Buyers paid ¢641 per liter of regular and ¢666 per liter of super.

In turn, the formula favored the price of asphalt. The K factor for that product, in the period discussed, was ¢40 and not the ¢70 required by RECOPE. This enabled industrialists to buy a liter for ¢333 and not for ¢363, as they were supposed to. ARESEP claimed that the change would lower the cost of construction and road maintenance. Also, that it would favor gas for cooking, which is used as a substitute for electricity and firewood.

In order to reach these conclusions, La Nación created a database with information from 59 price resolutions, both ordinary and extraordinary. They were issued by ARESEP in Word and PDF documents, from June 2009 through September this year.

Luis Carlos Solera,
RECOPE’s head of economic and financial analyses
The parts of the formula were broken down to find out how RECOPE’s operation costs are included in the price of fuels. The economic impact on consumers was estimated by multiplying the sales of each fuel by multiplying the sales of each fuel by the costs ARESEP assigned to them by ARESEP and also by RECOPE’s real costs. The result of the second multiplication was detracted from that of the first one. (Investigation methodology)

This is the first of six installments in which this daily demonstrates why Costa Ricans buy the most expensive fuel in the Isthmus.

Disclaim. When asked about the issue, former regulator Herrera argued, in an e-mail, that the change in the formula was aimed at making explicit that the prices of fuels came from two sources: their import costs and RECOPE’s costs.

“I think it is not possible to speak about a cross subsidy, because by using a factor (K) in a percentage equal for all of the products, the operation costs are proportionally distributed to the import costs,” Herrero argued.

However, the rate analyst at the regulatory body, Xiomara Garita, asserted that it had always been known that changing the methodology meant creating a subsidy against diesel and gasoline consumers.

“They were decisions from above. The regulator was fully aware of this fact,” added Garita, who had been a member of the team that drafted the report upon which the new formula was based. The public servant claimed that they had acted upon a request by Fernando Herrero and his advisors. “The order is given to the technical team and it just acts,” she remarked.

The subsidy came to be even though, according to the law, ARESEP has to guarantee that no public service company discriminates against a sector or a consumer.

Regarding RECOPE, the change in the estimate of costs does not affect it; it always receives the necessary funds to operate. “The formula does hurt consumers,” admitted Luis Carlos Solera, the refinery’s chief of Economic Analysis, for whom the method “is not crystal clear”. The firm appealed ARESEP’s resolution in all instances, but was not successful.

Until today, the Regulatory Body keeps on applying the same method to establish the prices of fuels. Ingrid Araya, fuel rate coordinator, said last Wednesday that they are analyzing a new method.

Thus was the subsidy born

Before November 2008, ARESEP added a fixed amount (¢58 that year) to the price per liter of fuels in order to cover RECOPE’s costs (K factor). Said method also incorporated a subsidy, since each fuel has a different cost

At the end of that month, the Regulatory Body turned that fixed amount into a percentage. To estimate the percentage, it multiplies the import price of each liter of every fuel by the projection of its yearly sales. The sum resulting from those operations is divided into the income authorized to RECOPE (¢188 billion for this year).

is charged to the final price per liter. That amount differs from the real distribution costs, generating the subsidy. Herrero allowed that distortion when he endorsed, in August 2008, the technical report in which the new formula was proposed. The preceding even though, since his arrival at ARESEP in 2006, he had declared war to subsidies and warned. “We do not create nor reduce them, we just follow the law.”

60% of
the gas

sold by bottlers is used fundamentally by industry, which is followed by hotels, businesses, and restaurants.
In the technical report, ARESEP admitted that the formula cheapens the fuels with lower demand and lower international price “now, at the expense of adjusting, to a greater extent, the prices of the more expensive ones in the international market (gasoline and diesel).”

“The change in the method is justified because it would favor road building as a result of the lower impact on the future prices of asphalt and gas,” the document points out.

In April 2008, seven months before the formula became effective, the Chamber of Industry complained because of the high prices of bunker and gas, which are used by its members in production ovens and boilers.

“It would be a pity that now that the free trade agreement with the US was approved and that a negotiation with Europe is under way, we start sending signals of a loss of competitiveness because of the cost of fuels,” stated Martha Castillo, at the time Chamber vice-chairperson, in a letter in which she opposed the adjustment in prices. Castillo chose not to make comments on the issue.

Currently, RECOPE sells 90% of the gas to bottlers and the remaining 10% goes straight from its plants to the industrial sector. Felipe Mejia, Communications manager at Gas Zeta, explained that the larger customers are industries (particularly that of ceramics). Then come businesses, hotels, and restaurants. Jointly, they use close to 60% of the fuel. Another 32% goes to homes and small cafeterias. The remaining 8% is used in cars with adapted engines.

Meanwhile, bunker received subsidies worth ¢4.1 billion in 2013 and so far this year. Before, that product had paid a ¢3.6 billion overcharge.

“When the method changed, nobody complained. The industrial sector received a benefit and the consumer did not perceive the raise because of the volatility of the international price, which goes up and down, and which the consumer does not differentiate”

Luis Carlos Solera, RECOPE’s head of Economic and Financial Studies.

Regarding asphalt, it had already enjoyed another decrease in early 2007: ¢128 less per liter. The preceding happened when Herrero eliminated the subsidies which had favored diesel and jet fuel since 1980.

At that time, the decision pleased Meco Building Company, one of the leading contractors who worked for the State in road maintenance, which forecast a price reduction of almost 18% in the cost of road repairs.

“If repairing a road costs ¢100 million and the share of asphalt in the overall cost is 40%, those ¢40 million are lowered to ¢22.4 million, which means saving ¢17.6 million (in the work),” wrote Meco representative Magda Verdesia in a 2006 letter.

Victor Padilla, general manager of Concreto Asfaltico Nacional S.A., took saving expectations to 26%. However, eight years later, the National Road Council does not know whether the promises became true or not.

CONAVI does not know is the decrease in asphalt produced savings in road repairs

The National Road Council (CONAVI in Spanish) does not know whether the decreases applied by ARESEP to asphalt and emulsion generated any savings in road repairs. Those products, which are used in repaving, fixing holes, and building roads, had two price reductions, one in late 2006 and another since November 2008.

The first one took place when the Public Service Regulatory Body (ARESEP in Spanish) eliminated the subsidy to diesel and jet fuel. At that time, some construction companies forecast savings from 17% to 26% in road repairs. The other decrease resulted from the creation of a subsidy after ARESEP modified the formula that includes the costs of RECOPE in the price of fuels.


Fernando Herrero, chief regulator at the time, spoke of benefits for that amount in road repairs.
According to an investigation by this daily, just because of that subsidy, asphalt companies saved some ¢11.6 billion between 2009 and this year.

However, CONAVI has not investigated whether or not that benefit generated the pledged savings. In that regard, Mauricio Salom, Council’s director, stated: “I cannot be held accountable for a period when I was not here,” and added that as a result of the high rotation of the staff in recent years it is hard to find one official who can shed light on the matter.

Meanwhile, the University of Costa Rica Materials and Structural Models National Laboratory (LANAMME in Spanish), which is in charge of overseeing CONAVI, lacks a study to establish if the decreases were applied. Guillermo Loria, coordinator of the Road Program at the laboratory, explained that it is something outside his field of action.

Disorder. In order to verify if the reduction in price of asphalt and emulsion had any impact, La Nacion tried to gather all of the data of the two largest national bids for road maintenance, granted by CONAVI in 2005 and 2009. However, the scattered information and the sheer volume of the records (most of them in paper) allowed for analyzing only a sample of the readjustments paid.

Reparación AsfaltoThe cost of asphalt represents from 40% to 60% of the cost of repairing a road, according to estimates of the construction companies themselves.Of the 2005-2009 contract, CONAVI sent data for 15 adjustments for road maintenance in San Jose and Puriscal. Four listings were examined and all of the bills carried increases ranging from 12% to 71%. The sample does not show any decreases. In the case of hole fixing in hot, intensively used to repair streets, the price offered in the first contract was ¢40,014 per metric ton, but it was increased to ¢68,262 (71% more).

Asphalt represents from 40% to 60% of the cost of repairing a road. The updates of costs are included in the contracts and are applied to acknowledge changes in inflation and the rate of exchange, among others.

For the 2009-2014 requests for bids, data from 93 readjustment bills paid from September 2011 through December 2013 were analyzed. The increases range from 6% to 19%; there were no decreases. This time, the contractor offered the ton for fixing holes in hot in ¢58,964. With the adjustments, it increased to ¢70,028.

Subsidy hits bus passengers and companies

A student at the Institute of Technology in Cartago needs ¢595 for the bus fare from San Jose to the campus (¢1,150 for the round trip). Unknowingly, he pays an additional ¢1.47 for the subsidy ARESEP charges to diesel, the fuel used by most of the buses in this country. At the end of the year, the young person would pay an additional ¢646, an amount enough to cover a fare.

Per trip, one of the 118 buses of Lumaca (the line serving Cartago) spends ¢13,675 worth of diesel, ¢86 of which correspond to the subsidy. The amount is divided into the 59 passengers that as an average travel in each bus. Lumaca carries some 12.5 million commuters a year, at the end of this year passengers would have paid over ¢17 million because of the distortion in the prices of diesel.

DieselLuis Fernando Gonzalez has carried freight in the Northern Zone for 35 years. “What I earn is barely enough to survive. In addition to paying more for diesel, parts and tires are also very, very expensive,” he says.The cost of fuel represents some 27% of the fare and any change in its Price is transfer to passengers, admitted Maritza Hernandez, chairperson of the National Transportation Chamber.

“The adjustments for the changes in the price of diesel are acknowledged by ARESEP up to six months later, when fares are updated. This affects the basic basket and, therefore, minimum wages,” Hernandez added.

Unaware of the subsidy, freight carriers also face its consequences. Luis Fernando Gonzalez, 62, carries furniture in San Carlos, Alajuela, and claimed that for over five years the price of diesel has run against his earnings. Even though he does not know it, the period mentioned coincides with the validity of the price formula which made diesel and gasoline more expensive in order to cheapen asphalt and gas. “They are hitting us very hard. Tires and parts are also highly expensive. My earnings barely allow me to survive,” Gonzalez complained.

Heavy loads. PFor the carriers of the highest volume of freight, the story is not different. A trailer uses 200 liters of diesel to carry a load from San Jose to Port Limon. For that trip, the company has paid an average ¢133,000 through September (¢663 a liter).

Because of ARESEP’s cross subsidy, every liter has been an average ¢4 more expensive this year. The bill for that trip should have been ¢840 cheaper. To make the business profitable, that trailer has to make three trips a week to Port Moin. At the end of the year, the company would have paid an extra ¢126,000 because of the subsidy. That amount is almost equal to the cost of one trip.

The estimates were made by La Nación on an own database and estimates by the National Chamber of Freight Carriers (CANATRAC in Spanish), which gathers 73 sector companies (85% of the total).

“If the variations in price are under ¢20, the company absorbs them, there is no option. If the adjustment is larger, it allows for a renegotiation of the fare, but this year we have not done it because the demand of services decreased,” asserted Javier Reyna, CANATRAC’s vice-chairman.



Chief Editor: armando gonzález, Editor: Hassel Fallas, Investigation and data analysis: mercedes agüero y hassel fallas, Digital design and infographics: Pablo Robles y Marco Hernández, EDITOR of design and infographics: MANUEL CANALES, QA: Emilio Venegas, audiovisual producer: rené valenzuela, Scripts: adrian soto, mercedes agüero y hassel fallas, locution: Maria Luisa Madrigal, IT manager: polette brenes, programming: pablo robles, josué muñoz, Bryan Gutiérrez y Leonel López, Computer engineer: Daryl Zuñiga, text correction: ismael venegas, Photography: Alonso Tenorio, Luis Navarro, Carlos Hernández, Jorge Navarro

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