Edward Scicluna

Competitiveness – Business Today

The KPMG report is 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 feel ever the need to seek Government assistance. is, if other countries, especially the EU would be affected

The whole new utilities’ tariffs issue is a confusing issue, because outsiders (including the social partners) do not have all the information at hand, The KPMG report is 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 feel ever the need to seek Government assistance. Furthermore it also ensures to keep these two monopolists cosy enough for any rainy day.

The 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.

Very understandably the business sectors and the unions have gone 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. They were not interested in solving certain basic regulatory principles which EU countries normally have to respect. There has been 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 has there been 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 a one month notice would suffice for a change of this regime. 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 6 months, and be announced merely two weeks in advance. Incidentally the regulatory package normally puts various customer service obligations including environmenatal ones on the operator/distributor of the utility. To my knowledge none were mentioned during the current debate.

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.

One particular issue is the question of subsidisation. Economists, like the EU, are 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. 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.

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 a another new tax. 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 the government from the previous taxpayers financed subsidy. This would ensure that the real marginal cost of the resource (oil) remain 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.

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