Economists blast timing of introduction of new utilities tariffs
Charlot Zahra
Senior economists who spoke to Business Today this week were critical of the timing and the extent of the increases in the new utilities’ tariffs, which were rushed through in the span of six weeks in Malta when other European Union countries took much longer to introduce them.
Edward Scicluna said that the whole new utilities’ tariffs issue was “confusing, because outsiders – including the social partners – do not have all the information at hand.”
He said that the KPMG report was “simply an exercise carried out to recover all the costs… …past, present and future incurred by Enemalta and the WSC to make sure that our two main public monopolists would not ever feel the need to seek government assistance.
“Furthermore it also ensures to keep these two monopolists cosy enough for any rainy day,” he insisted.
Scicluna said that the KPMG report “does not come near to what a utility regulator would normally produce in an EU member country.
“The usually used rules of marginal cost pricing, or RPI minus X and other such like rules are not even mentioned in the report. It was obviously meant to project the utility providers’ position only, quite important, but should have served as just the beginning of a long regulatory process,” Scicluna told Business Today.
Scicluna said that “very understandably” the business sectors and the unions went for the bottom line and argued ‘what is in it for us’. They cried out loud when they sensed that the increase would be painful.
However, “they were not interested in solving certain basic regulatory principles which EU countries normally have to respect,” he added.
There was no discussion or agreement on what should be the run of a price control regime – normally four years – and about the minimum period when prices could be changed – normally one year.
Nor was there any discussion or agreement on the notice period to be given by the Regulator – in our case read Minister – of the notice to be given for the change of this latest regime.
“In the KPMG report a one month notice would suffice for a change of this regime,” Scicluna said. “In the UK, its regulator is currently negotiating the price controls with the utility operators for 2010, two years in advance”.
“The justified changes agreed in the regime normally lasting one year would, it seems in our case, last only six months, and be announced merely two weeks in advance,” the senior economist noted.
Incidentally, the regulatory package normally puts various customer service obligations including environmental ones on the operator or distributor of the utility. To my knowledge none were mentioned during the current debate,” Scicluna told Business Today.
“If these basic principles had been applied, as they should have, the MCESD then would have only come into the picture to evaluate the ‘Regulatory Impact Assessment’ drawn by the Regulator at its own expense, to examine the economic and social impacts on all sectors but especially on small businesses and on the energy-poor sectors of society,” Scicluna told Business Today.
On the question of subsidisation, Scicluna explained that most economists, like the EU, were in principle against subsidisation of a scarce resource. “Cross-subsidisation also tends to have the same negative effects of subsidisation.
“However, the EU and any EU country’s regulator for that matter, would not only allow, but encourage different cost recovery tariffs on market segments which have either different price elasticities, or different marginal cost pricing structures,” he said.
These different tariffs would have to be economically justified and would thus not be considered as cross-subsidisation. “Take hotels - which have different marginal costs per hotel bed in summer and in winter, and thus have different rates.
“Economic efficiency demands that different users at different periods of the day or night pay different tariffs. Treating every unequal users equally is not only an injustice but goes against the principle of economic efficiency,” the senior economist insisted.
Another issue is the previously paid subsidy to Enemalta and the WSC. “In view that this subsidy to date was paid by the taxpayer, and now it is being abolished, the said amount should be paid back to the taxpayer. If this is not done, then it can be said that the new tariff is another new tax,” Scicluna said.
Compared to other taxes such as income tax and VAT, the utility tariff seen as a tax, “is very regressive indeed. It penalises the low income bracket more than the higher income one.
“This is the case because low income households spend a higher percentage of their income on fuel than higher income ones. Ideally a flat credit equivalent to the one paid to those low income households should be given to every household irrespective of the number of electricity units used.”
This would be paid by government from the previous taxpayers’ financed subsidy. This would ensure that the real marginal cost of the resource – oil –remains reflected in the price.
“At the same time the tariff or tax would not increase further the tax burden on Maltese society at a time when most governments are reducing it. The reasons should now be obvious to all,” he told this newspaper.
On his part, economist Karm Farrugia said that the recession was not just European, but global. “It is not even a ‘normal’ recession which one expects to face every decade or so and restricted usually to countries which had been growing far too fast, such as Japan, and recently Ireland.
“For almost a year everyone has been forecasting its inevitable onset; even our Prime Minister during the last election campaign. Now it is not just round the corner, but already knocking at the door,” Farrugia told Business Today.
Its effects on Malta’s economy have already started being felt: the worst is yet to come and nobody has any idea how bad it is likely to be. “Certainly not the government, if it still persists in imposing the proposed electricity and water tariffs and in achieving a balanced national budget inside two years. The timing is palpably wrong,” Farrugia insisted.
“We need a pause to enable us to concentrate on preventive measures rather than on fiscal reforms that have the opposite effect on the economy to that it needs during recessionary times,” he added.
Farrugia said the sectors of the Maltese economy which will be hardest hit by the new tariffs were “those in which the cost input of power consumption is highest, like manufacturing, transportation, and hospitality, together probably constituting a large majority of our economic operators”.
Asked as to how the Government should alleviate the impact of the proposed tariffs, especially on low-income families and SMEs, Farrugia explained that for low-income families, the alleviation should take the form of a calculated fixed allowance to be reduced by the actual consumption per quarter.
“For SMEs, like for all industrial units, the full costs should be gradually spread over a period of five years starting from the end of the recession when this happens,” the veteran economist told Business Today.
Asked for his assessment of the handling of the hedging arrangements operated by Enemalta Corporation with respect of the purchase of fuel oils in the past few months, the veteran economist explained that hedging has its pitfalls as well.
“Hedging can also go against you if prices fall unexpectedly. It does not ensure bargain prices in the future, but stable ones. I am not in possession of details on how Enemalta hedges its purchases, so I cannot comment,” he added.
Farrugia said he agreed in principle with the Government’s decision to remove capping on large industries “but piecemeal over a period of 5 years from the end of the recession. That’s the only way to save them from shocks that could kill some of them off at one go,” he insisted.
With regard to the expected effect on domestic consumption as a result of the introduction of the new tariffs, Farrugia explained that he foresaw a minimal impact in this respect.
“Unless people are convinced of the need to reduce their overall living standards, I foresee only a marginal impact on total national consumption. People are likely to sacrifice other spendings than economising on utilities,” he told Business Today.
Farrugia said that “in principle the government is justified in imposing the proposed tariffs” despite the constant reduction in crude oil prices over the last few months, “but only after ensuring that Enemalta improves its efficiency performance in line with other producers elsewhere and introducing them in small annual increments over at least five years.”
Finally asked as to which alternative financing solutions that are not drastic the Government should explore before introducing the new utilities’ tariffs, the veteran economist did not mince his words: “Alternative financing solutions are certainly not the answer. It is, I believe, only the timing factor that really counts.”
