Electricity Economics: Pointless Populism
Prof Kumar David
On April 28, in this column, I discussed the design of the proposed electricity tariffs and made three points; the domestic tariff structure is moronic (no exaggeration), Fuel Adjustment is a fraud that has nothing to do with fuel and less with adjustment, it is a swindle to increase tariffs by a further 40%, and thirdly the Public Utilities Commission’s (PUC) consultative document is slip-shod, with incoherent accounting, replete with undefined terms and incomplete presentations. The PUC and President Rajapakse capitulated, and on May 9 the former issued a statement partially abandoning the Moronic Tariff Structure (MTS) and also lowering the charges for consumption less than 60 units to the previous level. Sustained pressure works; I am glad to have been instrumental. PUC, CEB, Power Ministry, Cabinet and President, were well aware of the folly of MTS when they endorsed and implemented it with effect from 20 April before partially abandoning it 20 days later. This tells a story about their intelligence, jointly and severally. Public and trade union outcry against raising electricity prices at all, however, will continue, but this is a different matter from MTS per se.
My April 28 column was a little weighted to the technical side, but as the results have proved, it was necessary to debunk the theoretical basis of MTS before taking on the political side. This piece has three objectives; to analyse other aspects of the tariffs, to comment on the climb down as it remains to be seen by what means the CEB is will make good the revenue shortfall to reach a balanced budget as promised to the IMF, and third to show that the government has no economic plan or perspective; hence fiddling with electricity and fuel prices is a UPFA survival tactic. If that piece was technical, this one is more straightforward.
Comparative tariffs
The tariff paid by domestic consumers consist of a unit charge depending on consumption, a Fixed Charge which is not fixed but rises with tariff slab, and a fraudulent quantity called the Fuel Adjustment Charge which is no adjustment at all but simply raises the unit charge by another 40% (25% if consumption is up to 30 units; 35% if up to 60 units) without rationale. The de facto average charge, per unit of consumption, is the sum of these three components divided by the units consumed. Defined thus, the average, de facto, cost per unit, for different domestic consumer categories, after PUC and Rajapakse’s 9 May capitulation, is as follows.
I am unable to make precise estimates of the loss of revenue caused by May 9 backtracking because it depends on the exact consumption at every de facto average price, and also because of price elasticity of demand. That is, due to price increases some consumers may try and slip down from just above 61 to just below 60, just above 91 to just below 90 and from just above 181 to just below 180. Also, in general, high-end consumer demand is likely to decline while low-end consumption will remain unchanged, or even rise for psychological reasons. This spells trouble for the CEB because the subsidisers will decline, and the subsidised remain static or increase. As an educated guess, I would say, CEB revenue shortfall due to the 9 May concessions will be about Rs 12 billion (PUC says Rs 5 billion; I disagree), or the expected 2013 revenue will decline from Rs 220 billion to Rs 208 billion.
According to the PUC, the cost of supply, including fuel, capital servicing, transmission and distribution, for each unit of electricity sold, is estimated for 2013 at Rs 20.80 per kWh. Consumers using below 105 units pay a lower price than this. I am providing a table of tariffs charged in several countries. The statistics are recent, but not all for the same year, and are based on a conversion rate of Rs 130 to one US$. These apply to the domestic sector and are per unit (kWh).
Denmark; Rs 52 – High surcharges to encourage expensive, fluctuating, wind power.
Philippines; Rs 39 – I don’t know why so high in this developing country.
Italy; Rs 36
Hong Kong andSingapore; Rs 20 to Rs 28 – Cost plus regulated, “reasonable”, profit.
UK; Rs 26 – Competitive commercial pricing.
New Zealand; Rs 25 – ditto
Malaysia; Rs 9.10 to Rs 19.50 – There are many subsidies.
India; Rs 10.40 to 15.60 – There is a complex regimen of subsidies and cross-subsidies.
Vietnam; Rs 8 to Rs 13 – ditto
Thailand; Rs 5.80 to Rs 12.70 – ditto.
It is difficult to make cross country comparisons because Denmark and Northern Europe levy a massive surcharge to support wind and carbon-free renewable technologies. At the other end, developing countries employ a variety of subsidies, cross-subsidies between rich and poor, and whole-sector subsidies where the exchequer bears part of the cost. The best examples of natural undistorted prices are Hong Kong,Singapore,UK and New Zealand, and as a rule of thumb Rs 25 per kWh (fuel + capital + T&D + maintenance + management) is a guide.
It is a little less in Lanka for two reasons. About 32% of our supply is from hydro sources which incur no expenditure on fuel (but capital charges, and T&D i.e. transmission and distribution costs, are unavoidable) and secondly, unlike say Hong Kong’s 99.999% reliability, we get away with less onerous and therefore less costly equipment and maintenance outlays. It is sometimes said that Putlam coal power costs only Rs 8.30 per kWh, but this is misleading; we must add Rs 3.50 for T&D before electricity can reach the consumer, and another, say Rs 2 (depending on the terms of financing) for interest charges and to repay capital.
The bottom line is that the Rs 20.80 per kWh claimed by the CEB and the PUC as the total cost of supply in our mixed hydro-thermal (coal and oil) system is reasonable and in line with international figures. We can have subsidies, we can charge less, we can charge more, these are policy matters and we can do as we like, but we cannot get away from this twenty rupee and eighty cent ogre. Somebody must pay it until the next 600MW of plant comes reliably on stream at Norochcholi, after which the average cost of supply will decline to about Rs 17 per kWh.
Distribution of charges
The psychological impact of these biting tariff increases is noticeable; households are cutting back on consumption, switching off lights, not using fans and commercial establishments switching off air conditioners. These conservation measures will be economically helpful if low-end consumers (paying less than supply cost) curtail consumption, but on the other hand, if high-end consumers, paying in excess of Rs 20.80 per unit reduce consumption, the effect will be that the CEB will run short on the revenue stream it relies on to cross-subsidise low-end consumers. Cross-subsidies, such as affirmative action in employment and education, are unworkable as permanent measures; they have to be phased-out over time. Electricity, like onions and arrack, eventually, has to be offered to everyone at the same price.
Non-domestic tariffs
Leaving aside the peak period (6.30pm to 10.30pm) the General Purpose tariff for shops and commercial establishments varies between Rs 13.50 and Rs 20.50, depending on category, Hotels pay between Rs 9.00 and Rs 22.00, and Industry between Rs 6.00 and Rs 12.50. The peak time tariff is only a little higher than the top end of these bands. Government offices pay between Rs 14.35 and Rs 14.65 at all times. The so-called Fuel Adjustment Charge for all these sectors is only 25% compared to 40% in the domestic sector. (Roughly 40% of our consumption is Domestic, 35% Industrial and 25% General Purpose; other sectors are small).
Compare these numbers with the CEB’s stated supply cost of Rs 20.80 per kWh. Domestic consumers using over 105 units are cross-subsidising business and commercial premises, hotels and tourists, government offices and industry, in addition to subsidising low-end domestic consumers! If the public is agreeable as a matter of principle, I have nothing to add, but how can the public agree or disagree when none of this has been brought into the open transparently? The disparity is not as bad as it looks because these sectors pay a fixed charge of Rs 240 to 3000, depending on category, and a kVA charge of Rs 1000 (or Rs 1100) per kVA of maximum demand, but a disparity there is.
It is not only the PUC that is to blame for not spelling all this out explicitly; the media and “learned” commentators who have confined themselves to superficial off-the-cuff wisdom are also to blame. The political opposition, and the odd quantum physicist who weighs in from afar, are as trivial as they are ignorant of public policy issues, and their social and economic impact.
Governing without policy
This government has no industrial policy; it lives by day to day decision making. It has undertaken a great deal of infrastructure development, some of it very creditable, some useless white elephants, but on industrial policy it is cluless. I was in Taiwan for a few days overlapping May Day and saw at first hand what a dirigisme economic policy with long term planning, not only of the state sector but also in partnership with private investors, has achieved.
Lanka’s electricity price increase will render exports less competitive, discourage investment and further slow down growth that has been stalling since August 2012. There is no long-term thinking, planning or strategy. The mish-mash in the electricity sector, the President jumping this way and that, the inability to reform the CEB for enhanced productivity (I am not a CEB basher and I do not support wholesale privatisation) and a similar state of affairs in the petroleum sector, all have the same root; absence of, policy, managerial discipline, and political will or understanding. You can’t teach old dogs new tricks; this government will not learn or reform; we have to wait for the next – but then, oh hell, I wonder!
[The Socialist Study Circle will conduct a seminar on Electricity Tariffs at the NM Centre, 106 Cotta Road, Borella, on Thursday 30 May, 4.45pm to 6.45pm. All welcome, admission free, language Singlish. Speaker Dr Tilak Siyambalapitiya; Discussion and Q&A, Dr Siyambalapitiya and Prof Kumar David]
