SUNBIZ

Price Regulation

Bobby Maharaj is the chief executive of the Fiji Commerce Commission. This is a regular column from the Commission in the Fiji Sun.   Let’s begin this week looking at
08 Feb 2016 10:30
Price Regulation

Bobby Maharaj is the chief executive of the Fiji Commerce Commission. This is a regular column from the Commission in the Fiji Sun.

 

Let’s begin this week looking at the meaning of price regulation.

What is Price Regulation?

Price Regulation is also commonly known as Price Control in Fiji and other jurisdictions.  Price Regulation refers to the policy of price setting by a government agency, legal statute or a regulatory authority. This means that instead of allowing the trader’s to set their own price, the price regulator obtains all the necessary cost evidences and computes the cost of particular goods and services.

After establishing the appropriate costs, a reasonable and fair amount of mark-up is added to determine the maximum or minimum prices.  This is commonly known as the Cost-plus Mark Up pricing methodology.

Under the price regulation policy, the price regulator has two options in setting the prices:

 Maximum Prices. This is the highest prices at which goods and services can be sold. In this case, selling above the maximum prices will be deemed illegal.

 Minimum Prices. This is the lowest prices at which goods and services can be sold.  In this case, selling below the minimum prices will be deemed illegal.

Price Regulation may be imposed at different levels of the production and distribution channel.  This includes at the retail marketplace, wholesale level, factory level and even at the farm gate level. Price control is a widely accepted instrument of competition policy in cases of natural monopoly, such as the case with utilities.

 

Who has the Mandate to regulate prices in Fiji?

The Fiji Commerce Commission has the mandate to regulate prices after obtaining a Price Control Order from the Minister. The Commission can make a recommendation to the Minister under Section 39 and Section 44 of the Commerce Commission Decree 2010 to bring certain goods and services under price control.

The Commission makes a recommendation to the Minister only after it is satisfied (after an in-depth study and research based on scientific methodologies) that:

 

(a) Goods or services to which the recommendation relates are or will be supplied or acquired in a market in which competition is limited or is likely to be lessened; or

(b) It is necessary or desirable for the prices of those goods or services to be controlled in accordance to Commerce Commission Decree 2010 in the interests of users, consumers or suppliers.

Once the Cabinet approves for the prices of goods and services to be controlled, the Commission obtains the Price Control Order and then determines and authorises price of goods and services in various qualities, quantities, grades and classes.

The role of regulating price of various essential items such as basic food items, medicines, hardware, bread, wheat product, fuel, etc was previously carried out by the Prices and Incomes Board (“PIB”).

However with the merger of PIB with the Commission, the Commission is now the principle price regulator of Fiji.

 

Why is it important to regulate prices in Fiji?

 To correct market failures or anomalies in the market. This occurs when the market prices are not competitive due to the existence of player with a dominant position and the same is abused,   a monopoly, or markets not being competitive.  In these cases the prices are not set at what the competitive market prices should be, but higher prices are charged putting the consumers at a disadvantage.  Price regulation then ensures a fair and reasonable pricing.

Prevent the exercise of market power: An important goal of regulation is to ensure that prices are fair and reasonable, where competitive forces are insufficient.  Regulatory price control mechanism encourages prices that reflect what one would observe in a competitive environment.

Promote competition: To promote competition in Fijian markets by creating a level playing field  for players with different sizes of operations by ensuring the purchase costs are similar (slight differences may be noted due to the differences in  volume, buyer loyalty, etc).

Affordability. To make basic items affordable to the public and also to ensure that prices are attractive for investment decisions.

Geographical Dispersions. The geographical dispersion of islands in Fiji means that a lot of rural and maritime areas are serviced by a small number of traders or monopoly traders. For example, in towns and cities there may be a number of traders selling kerosene, but in most rural and maritime areas there may be a few smaller players and most commonly a single seller is accessible to the public.

As such price controls are introduced to ensure that the rural and maritime Fijians benefit from similar prices as are enjoyed by the urban population.

Price control ensures equitable returns for businesses with fair and reasonable prices charged to consumers.

Price regulation also acts as a counter inflationary measure.

 

Process of Price Regulation

(1) The Commission identifies (based on complaints, submissions, own research etc) on areas lacking competition or industries in which a particular player has Substantial Market Power.

(2) The Commission carries out an investigative research and compiles the Commission paper, making recommendations for price control (amongst other recommendations).

(3) The Report comprising of Commission paper along with the recommendation is then given to the Minister for cabinet decision.

(4) If cabinet approves the Commission’s recommendations, a Price Control Order is issued.

(5) The Commission gives a 14 days intention notice to the stakeholders and informs them about the Order and requests them to make submissions.

(6) After 14 days the Commission analyses the submissions received and then writes back to the stakeholders to advise them if the Order is now effective. In case the order has come into effect, the Commission requests the traders to send their submissions including costing documents, financial reports, etc.

(7) Upon receipt of the costing documents and other requested data/information, the Commission commences the costing and pricing process.

(8) Once the costing and pricing is completed, the Commission releases a draft determination to the stakeholders for comments and suggestions giving them reasonable time to respond. However, in some cases due to the sensitivity of the price information for products such as fuel, LPG and wheat products, draft authorizations are not released to the stakeholders.

(9) After receiving feedbacks from the stakeholders, the Commission relooks into the determination and then finalises the authorization.

(10) The authorisation is signed by the Commissioners and made public if made under Section 44 of the Decree or submitted for ministerial approval and publication in the gazette if made under section 39 of the Decree.

(11) Public announcement is made on the authorization, including the prices and the effective dates(s).

 

Fixed Price Control

Fixed Price Control means that the prices of the items are determined and authorized by the Commission. The prices does not remain fixed but is continuously reviewed to account for changes in the factor and product market costs. For example, fuel prices in Fiji are reviewed quarterly. The “quarterly restatements” of prices are based on three (3) months average of international benchmark, Means of Platts Singapore, the average exchange rate and international freight charges. Noting that the international fuel prices are volatile, major movements in international prices can also occur during a quarter. Such movements may result in huge changes in the international prices with the trickledown effect on the Fijian importers, distributors, retailers and the consumers. To cushion the effects of major changes in international prices within a quarter, the Commission established a trigger point for the price reviews within a quarter.  Under this method, review of the prices will be undertaken provided the change is   (i.e. + fifteen Fijian cents per litre).  The band is set to be at a plus or minus $0.15 per litre i.e. if the prices change by more than $0.15 either way then the Commission may review the prices within the quarter.

Under this method, the Commission obtains all the cost documents from the traders and then calculates and authorises the prices. It is illegal for traders to sell above the prices authorised by the Commission.  However traders are free to charges prices below the authorised prices, in case of the maximum price regulation. In case of minimum price regulation, selling below the authorised prices will be deemed illegal.

 

Fixed Price Control

Under this method of price regulation, instead of setting the maximum or minimum prices, the Commission imposes a maximum or minimum cap on the mark-up that can be imposed by the traders. That is there is a restriction in terms of the mark –up that can be added by traders on the costs. The list of items and the allowable mark-ups are published in a gazette together with the price computation methodology. The traders are required to calculate the maximum or minimum prices using the template, ensuring that the mark-ups do not exceed those published in a gazette.

Feedback:  sunbiz@fijisun.com.fj

 

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