ISLAMABAD The Oil and Gas Regulatory Authority (Ogra) wants powers under the law to change the basic structure of Inland Freight Equalisation Margin (IFEM) to allow actual transportation cost on supply of oil products to 13 depots across the country, in place of the existing non-transparent system.

The IFEM is charged by oil companies and refineries on oil products in the name of transportation cost to maintain uniform prices across the 29 depots - now reduced to 13.

The Economic Coordination Committee (ECC) of the cabinet decided on Wednesday to withdraw the role of IFEM calculation from oil marketing companies and transfer it to Ogra and reduced the number of depots from existing 29 to 13. The reduction in the number of depots, some sources say, is likely to create variations in retail prices depending on the location of depots.

A senior Ogra official told Dawn on Thursday that it had not yet received an official notification for taking over the responsibility of IFEM calculation from the OMCs.

He said Ogra was clear about the IFEM calculation and it had told the government how it could be improved. He said the basic thing the regulator would like to do was to change the variable mode of IFEM on oil products to a fixed charge to make it more transparent and meet only the oil transportation cost instead of being a source of profit. He said there were a lot of problems with the existing system of price equalisation.

Until now, the IFEM calculated by oil companies was final for the purpose of oil price calculation.

The existing system not only lacks transparency but involves conflicts of interest for the fact that private firms set a rate that benefit them — a job which should be done by an independent regulator or government authority.

Secondly, the physical movement of petroleum products is difficult to verify because many companies are running virtual depots and agencies without real storage of products which raises suspicion of price manipulation, and hence they lack any incentive to improve efficiency in transportation.

Since the entire formula was somewhat erroneous, Ogra saved its own skin by asking the heads of refineries and oil companies to submit monthly undertakings that the IFEM estimates were actual transportation cost. Initially, the heads of these oil companies and refineries expressed their inability to sign such undertakings fearing some investigations, but they finally had to give in when Ogra refused to calculate POL prices on the basis of these IFEM estimates.

Now, Ogra will restructure the IFEM mechanism if authorised by the government.

The IFEM charge on oil products currently fluctuates substantially between Rs1 per litre to Rs4 per litre without similar change in transportation costs, indicating that it is being calculated arbitrarily and without any proper mechanism.

Ogra is considering three options. First, the IFEM be divided into two parts and announced in advance for one year. A fixed annualised freight cost of oil marketing companies to be determined on historical basis and a variable refining component recovered from all the petroleum products.

This would mean that the transport cost of OMCs for the previous year would be taken as benchmark for the next year and any change in cost would go to the respective company for loss or profit.