Who pays for CEB losses and revised electricity prices? Government! Really!!

by Usvatte-aratchi

New proposals for the consumer price of electricity, announced by the Ceylon Electricity Board in mid-April, have given rise to a confused debate in which many people blame the government for transferring the losses of the Board from the broad shoulders of government to the skeletal frames of the public. As if the public were different from government, in matters of government expenditure! Governments meet almost all their expenditure from tax revenue and loans receipts. Governments earn very little income. Income is that which is paid to economic agents, and ultimately to individuals, as wages, profits, interest and rent. Government does not earn wages [though it pays out a lot of wages]. Government earns a small amount of profits from the enterprises it owns. It earns a very small amount of interest on loans that government gives to its employees. Finally, it earns some rent on its property, such as land and structures. All these in 2011 added up to about 2 percent of all government expenditure. Government revenue comes out of taxes paid by the public, that is you and me. Loans are made to government on government’s promise that loans will be paid back at a stipulated future date along with a further payment as interest. But, ask yourself, who will actually pay off those loans? Government, you have seen, meets its expenditure including interest on loans and repayment of debt out of tax revenue or loans from the public. Loans are paid back by government, in fact by the public, by you and me, again, but in the future! So the decision to pay for government expenditure out of government revenue and from loans receipts is a decision whether that expenditure is paid for by tax payers today or by tax payers in the future, who will over a number of years pay the lender interest on the loan and the principal of the loan. Therefore the decision of government to borrow to meet its expenditure whether from taxes or from loans is a decision to pay taxes today or tomorrow. With that information in the background, let us think about who pays for CEB losses and revised prices.

Do not confuse these questions with the high price of electricity however paid. That high price of electricity is on account of the high price of fossil fuel, corruption, bad judgment, incompetent management and common theft. These problems are not touched by the revision of prices and should be handled separately.

Year after year for more than 20 years, CEB has run at a loss. Consumers have been by and large happy with the price they paid for electricity though not with the service they received. In that time a private sector firm would have gone bankrupt, its expenditure far exceeding its revenue over a long period of time. But CEB is a government enterprise and the losses have been covered by loans on its own from government owned banks or out of tax revenue and loan receipts of government. We learnt just a paragraph ago that tax revenue is paid by the public now and loan receipts of government are repaid in the future. So whether by way of the price of electricity or by way of taxes and loans, the public pays for the electricity they use. There is nobody else who will pay. So all this noise about shifting the burden from government to the shoulders of the public is ugly nonsense. The public pay, any way! However who comprises the ‘public’ may vary depending on the method of payment.

Let us put this in simple symbols to remember it more easily. The total expenditure of CEB is X. An amount Y is paid for by consumers of electricity. The balance Z is paid by government. Then Y + Z = X. All that is now proposed is that the proportions in which consumers and government pay change. Under the new proposals, R[[= Y+Q] + S [=Z – Q] =X. R is what customers pay when revised and S is what government pays. Yet Y + Q +Z –Q = X, as +Q and –Q cancel [Q – Q = 0] each other. So that all that happens under the new dispensation is that the public as consumers will pay more and as tax payers less. As tax payers are also the public it is an untidy bit of nonsense to argue that government has shifted the burden from the government [the people] to the people. But that shift has economic consequences and the next few paragraphs are devoted to bring some of those consequence to your attention.

Then the decision of government to make actual consumers of electricity pay more for electricity sold by CEB is in the first place a decision that the current generation pay for a greater part of what it consumes [electricity] today rather than ask the future generations to pay for what is enjoyed today. This decision is fundamentally fair in that the present generation enjoys the supply of electricity and do not force a yet unborn generation to pay for the present generation’s consumption. The contrary is fundamentally unfair because there is no way of asking generations unborn whether they would prefer to forgo their comfort for the benefit of the generation that went before them. Odd question, isn’t it? I doubt they would. What would you think?

In the second place, a decision to make consumers of electricity pay more for electricity they consume and not force undifferentiated tax payers and lenders to pay for it is far better economic policy than permitting some to consume and others to pay for it. When a consumer pays only a part of the price of electricity, he will consume more than he could afford and ask others to pay for it. That is not the way a market economy works: the price paid by a consumer must measure [however imperfectly] the value of electricity used by him. When government arranges for him to pay a price which covers only a part of the cost of production of a unit of electricity, consumers would use electricity for purposes of lower priority than if the price were higher. As CEB loses more money with every unit of electricity it sells, the policy of government to sell electricity at a low price forces the general public, who have nothing to do with Ranil Wickremesinghe’s consumption of electricity, to pay for his profligate consumption. A decision made by Ranil Rajapakse to which Mahinda Rajapaksa was no party, forces Ranil Wickremesinha to pay a part of the larger tax bill incurred by Mahinda Rajapaksa’s excessive consumption of electricity. It is far more efficient that the consumer of electricity Mangala Samaraweera, a former minister in a Rajapakse administration informs the public that ministers pay no more than Rs.2,000 per month no matter what their actual electricity bill. This is intolerable fraud on the part of Ministers. One sole minster in the present administration denied this claim, but he protesteth too little. Imagine that, in the limit, electricity is sold at zero price or completely free to consumers and that tax payers [government] would pay all costs incurred by CEB. The result would be colossal losses for CEB which would be paid as higher taxes by the public at large. Since the public as a whole must pay for the electricity it consumes one way [price of electricity] or another [higher taxes], it is more efficient for the economy that consumers pay a much larger part of the whole cost and the whole cost itself, where feasible. The complaints already aired by people at large make it most likely that in the past users of electricity had used up amounts well beyond what they would have used had they had had to pay full cost of producing electricity.

The decision of government to make the consumer pay a larger proportion of the price of electricity does impose difficulties for some consumers, especially those at the lower end of income receivers. But this is true with respect to this category, whatever they consume, parippu or electricity. A decision to subsidise their consumption of electricity must form a part of an income support programme to low income groups and not a payment to encourage the consumption of electricity. Why not instead subsidise with the same amount, the consumption of milk by children? Government does give some special concessional prices to organisations and persons for reasons not altogether clear to ordinary persons, who bear the consequences of those concessions. Why do religious organizations receive highly concessional prices? Would people go to heaven more slowly [and chaps like me to hell faster] were we to spend less electricity for purposes of illumination at Vesak or Christmas? Why would spoilt young brats run car races without paying the full cost or indeed any cost of electricity used for the purpose?

Who pays for CEB losses...

Why can’t we play cricket during day light hours, especially now that we play that game in remote places where transport at night is costly and difficult? Higher prices of electricity would do a great deal to cut down these extravagances engendered by the wrong low prices of electricity.

There are a set of other consequences that arise from the rise in the price of electricity to consumers. Many users of electricity produce other goods and services. Motor cars would be painted or repaired, rice would be milled, Juki machines would be run and rooms in hotels air-conditioned using electricity. They will all have to re-consider the use of electricity as a primary source of energy. The history of the growth of economic output is a history of the use of more efficient primary sources of energy in place of animal [including human] and wind energy [windmills or sails]. There is a very powerful set of arguments and evidence marshaled behind those arguments that the relatively low price of coal [source of energy] in England compared to that in other countries then in the growth forefront was the primary factor that determined why England led the world in the 18th century with the Industrial Revolution. If there is substance in that argument, as I trust there is, the higher cost of electrical energy to entrepreneurs will entice them to substitute less productive sources of energy in processes of production or shift to techniques of production or industries that are less energy intensive. In all probability, that shift will reduce total factor productivity in the economy. What are the substitutes? Solar power and wind power are yet far more costly to entrepreneurs than coal or petroleum powered electricity. Nuclear power may be cheaper and is not to be ruled out any more on the grounds of likely dangerous accidents as Kundankulam in Tamil Nadu is as capable of incinerating us as would be Rajapakse Nuclear Power Plant in Magampattu.

Entrepreneurs will be pushed to look for industries or services that produce high value per unit of energy [say, per kilowatt hour] as the higher price of energy will make other techniques of production uncompetitive and therefore unprofitable. My competence here is very limited but I suspect that producing software services of all kinds, electronic components of all kinds for new and newly designed products may be appropriate here; engineers are for more competent to answer these questions.

Let us think clearly about the economics of the proposed revision in the price of electricity. The first ilIusion to shed is that somebody other than the public of this country will bear the cost of providing electricity. There is no entity known as government which can reduce the burden of the cost of electricity to the public. Government and the public are the same for these purposes. So the price of electricity to the consumer in our country is a contract as to what proportion of the total cost of providing electricity should be paid by the consumer and what proportion by the tax payer now or in the future. I find it more comfortable to be honest with the public and tell them that all users, with some few exceptions, must pay the full cost of electricity. That exceptional group is not difficult to identify: any household that over the past 12 months has used less than 51 units of electricity per month should be asked to pay no more than it pays now [with a well understood formula for future increases] and any higher consumption must subject his entire consumption to the higher prices paid by all others. Secondly, it is fundamentally unfair that some use electricity and ask some others to pay for it and grossly inefficient that our society encourages the use of electricity by selling it at low subsidized prices. We do not produce energy cheap and it must not be put to cheap uses. Finally, more highly productive uses include new industries producing both goods and services. Entrepreneurs with the help of engineers will have to think hard to find those industries which in our circumstances maximize output per unit of energy and maximize profits to entrepreneurs simultaneously.

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