Electricity Tariff Revision Is UNJUST, It Is kW Wise But MW Foolish

By Harsha de Silva and the United National Party -April 19, 2013 |

Dr Harsha de Silva MP

Summary

The CEB Tariff Proposal (CEBTP) is an unjust attempt to extract LKR 34.2 billion mainly from the poorest 3.6 million of the total 5.0 million domestic consumers of the CEB and LECO.[1] The proposed tariff increases on low income households will be detrimental to their economic welfare given that over 40 percent of the existing consumers are not able to afford even the minimum household electricity requirement.[2]    Even though the expected revenue would cut the losses of CEB in the short term the long term adverse socio-economic impact on the segment of people of Sri Lanka that need to increase their use of electricity, not reduce its use, will be significant.  It will also create negative externalities in the entire economy.  Therefore, PUCSL should come up with a more equitable tariff mix that shifts more of the burden from the low income households to the richer households. The adjustment can theoretically be effected without reducing the expected revenue from domestic customers for 2013.

1. Demand for electricity and benefits accrued to the household

1. Demand for electricity is derived

a. That means, electricity does not yield any utility but rather is an input into appliances that do yield utility; lighting, television, radio, fan etc.

2. In the short-term, electricity demand generally arises from utilization of such appliances while in the long-term demand is influenced by the stock of these appliances

3. The economic benefits of electricity at the household have been documented extensively based on improved consumer surplus

a. These include short term benefits such as increased efficiency in the daily routine to long term benefits such as improved adult earning capacity due to longer study hours during childhood

b.These benefits are larger for lower income households; for instance having electricity and low cost lighting for the first time (electrification) will certainly have a much larger impact than having an additional light bulb in a fairly well lit household and a larger impact than an additional air conditioner in an already fully lit and air conditioned household

4. Therefore, any tariff adjustment must consider the economic impact beyond the simple short term revenue increase to the utility, here CEB and LECO

2. Our focus is on the LOW INCOME CONSUMER

1. The proposed tariff structure is understandably based on multiple considerations both on the supply side and the demand side

a. But for this submission we assume the supply side as given; that is, the cost of generation, transmission and distribution[3] albeit to note the following:

i.      The cost of mismanagement in the process of electricity supply must not be recovered and sustained by increasing tariffs

ii.      There are numerous allegations of rampant corruption, waste and misuse of resources and any attempt to recover such costs from consumers is unacceptable

2. Our comments and suggestions are therefore strictly focused on the domestic demand (and consumption)

3. Assessment of the demand side

1. In justifying the proposed tariff revision to domestic consumers CEB uses its internal billing data along with a 2,500 sample nationwide study by the University of Colombo[4]

a. It is therefore reasonable to assume that the proposed tariff adjustments have taken in to consideration the salient findings of that study on demand, affordability and consumption data

2. The study finds that a household of 4 persons needs a bare minimum of 48kWh of electricity per month for a ‘decent life standard’

a. The sample study further finds that 42 percent of the CEB and LECO customers are unable to afford even the minimum 48 units per month; they are referred to as ‘electricity-poor’.  If the un-electrified households are also included, this figure gets close to 50 percent

3. Separately, CEB data suggests that around 1.1m domestic consumers (of 5m total) use less than 30 units per month while a further 1.3 million use less than 60 units.  The sum total of these two poorest groups is 2.4 million customers or 48 percent of all domestic customers.

4. The significant tariff increases prosed for these low income consumers who are even under the present tariffs are unable to afford even the bare minimum essentially electricity-poor consumersusing up to 60 units are as follows:

a. 0-30 units per month; increase is 53 percent

b. 0-60 units per month; increase is 47 percent.  The graph below indicates the increases up to 510 units per month

5. Proposed tariff revision is kW-wise but MW-foolish

1. Given the price inelastic nature of electricity use it is not likely that these low income households would reduce use by any significant amount than what they are currently using; albeit less than the even the bare minimum level

2. This But PUCSL must consider if it is possible to

a. Shift more of the burden to higher income groups that use more units per month.

b. Then if possible to reduce peak load demand due to greater elasticity (either lower demand or shifting of demand to non-peak time), can reduce the total cost of production.

3. The proposed tariff increase mix will certainly push low income uses in to further electricity-poverty

a. Given that electricity is derived demand electricity poverty means that these consumers will not be able to use appliances that would help improve their household economy and contribute to national development

4. This strategy is not in the best long-term interest of the nation as a whole and certainly not in the short-term or long-term interest of the respective low income households

5. Can more of the burden be shifted to higher-income groups

1. It is understood that CEB wishes to increase the tariffs for the low users so that it is guaranteed of the revenue increase as they are ‘captive’ as explained earlier

2. But PUCSL must consider if it is possible to

a. Shift some of the burden to higher income groups that use more units per month.  But given the higher elasticity the revenue increase may not be as guaranteed as proposed

3. Create an additional user group; 0-45 and thereafter keep to a minimum the increase in the 0-30 category and the 0-45 category

a. Any loss of revenue could either be cross-subsidized by high income consumers by revising the tariff adjustment mix or directly subsidized by the Treasury

6. Could PUCSL propose a targeted subsidy for the electricity poor to the Treasury?

1. If it is not possible to adjust the tariffs and the PUCSL is to propose a direct subsidy from the Treasury it should

a. Be transparent; in that the subsidy must be targeted only to the electricity poor CEB

i. The proposed LKR 1.7 billion by CEB is non-transparent and could very well be subsidizing high-income consumers[5]

b. Be funded via specific electricity vouchers.  If so, the electricity-poor can use these vouchers to offset the invoice prepared using the proposed tariff revision

2. The CEB net-metering program could in fact turnout to be a mechanism for the higher income groups to pay less per unit given the expected time-of-day generation and sale to CEB

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[1] CEB estimated revenue from domestic customers for 2013 under the proposed new tariff structure is LKR 84.9 billion while it is LKR 50.7 billion under the current tariff. This is in page 9 of the Consultation Document on Proposed Electricity Tariff Revision 2013  http://www.pucsl.gov.lk/english/wp-content/uploads/2013/03/consultation-document-12-03-2013.pdf

[2] Study on Requirements of Prospective Electricity Consumers and Fuel (electricity) Poverty and Affordability, SPARC, University of Colombo, 2011

[3] This assumption does not mean that we agree that the generation, transmission and distribution costs are the most efficient but only that others have already proposed technical arguments for lowering such costs.

[4] Section 3.1: Study on Requirements of Prospective Electricity Consumers and Fuel (Electricity) Poverty and Affordability; April 2011

[5] PUCSL Consultation Document on Proposed Electricity Tariff Revision 2013