Distributional Implications of Power Sector Reforms in the Philippines WONDIELYN Q. MANALO-MACUA University of Tsukuba

2 Power Sector Reforms National Power Corporation Monopoly in Power, Owned by the Government Generation and Transmission Generation Distribution Utilities (DUs)/ Electric Cooperatives (ECs) Customers End-Users of Electricity Residential, Commercial, Industrial, Others Before the Reforms Central dispatch and price setting Generation and Transmission used to be a State Monopoly handled by the National Power Corporation; The Distribution Business is likewise a monopoly given to private sector per franchise area.

3 Power Sector Reforms Customers End-Users of Electricity Residential, Commercial, Industrial, Others Due to Reforms Generation will be privatized; Transmission will be offered through a concession contract /franchise for 25 years to private sector. Competitive dispatch and price setting The Distribution Business remains a private sector business per franchise area. Private Competitive Electricity Market Supply Demand

4 Problem Statement What are the distributional implications of the power sector reforms in the country, if it results in change in power prices?

5 RationaleRationale Welfare will vary over families according to how much energy they consume; and with: (a) Family income; (b) Demographic makeup. If welfare differences are substantial, their recognition is necessary for formulating more equitable policy responses to soften impact of price shocks.

6 MethodologyMethodology Estimation of Demand –Non-linear pricing –Non-random sample selection –Endogeneity and simultaneity problems Estimation of Welfare –Compensating Variation –Percentage loss (CV)

7 Estimation of Demand 3Step Methodology: 1. 1.Probit Model for household spending above the kink. Compute the Inverse Mills Ratio Instrumenting virtual income: regression of virtual income with real expenditure. Take the Predicted Residuals Regression of demand including the inverse mills ratio and residuals. The estimation of demand considers the problems created by kinked budget constraint via a 3Step procedure that employs correction for nonrandom sample selection, linearizes the budget constraint and instrumenting for the latter to correct for endogeneity Y x M = pX+Y X* = kink (seg.1) (seg. 2) (seg. 3) Block rates give rise to kinks and nonlinear budget line at (1), X=0  M=Y at (2), 0<X<X*  M = F+Y at (3), X>X*  M = F+ p(X-X*)+Y Figure 1: Nonlinear budget constraint

8 Estimation of Demand Excluded Variable for the Probit: Fixed Payment –Fixed payment does not enter the demand equation –Fixed payment may affect whether the consumer is beyond the kink or not. –Fixed payment is completely exogenous variable since it is determined by the government –Time-variant variable.

9 Estimation of Welfare* Exact compensating variation (CV) from Jerry Hausman (1981): CV refers to the amount of money that one would have to pay, say a family, under the new prices to make it as well off as it was under the initial prices.

10 ResultsResults Total Compensating Variation computed using the parameters of demand from all observations; and parameters per income quartile: Loss is strictly increasing as income increase.

11 Results: Percentage Loss Using the all observations demand parameters: Welfare loss is strictly increasing as income increases. Using the per quartile demand parameters: The lowest and the highest income group lose as much.

12 Comparison of Elasticity Estimates StudyPrice Elasticity Income Elasticity Country Barnes et. Al US/Household Reiss and White (All Households) to Reiss and White (Quartile Range) US/Household 1 st Quartile-0.49 to -0.36n.a. 2nd Quartile-0.34 to -0.24n.a. 3rd Quartile-0.37 to -0.27n.a. 4th Quartile-0.29 to -0.19n.a. Danao (2002)-0.25 to to 0.64Philippines/Households

13 Implications/ConclusionImplications/Conclusion If welfare is computed in terms of percentage loss, (and using the parameters of per quartile regression) then while welfare loss is increasing as income increase, the loss of lowest income group is greatest among the lower income groups. This may imply that the poorest group lose because it has very low income to start with. Any price increase is translated into higher percentage loss. As such, electricity price subsidies may provide relief to the poor, but cannot address the real cause of higher welfare loss, low real income.

14 Annex: Block Rates and Kinks The block rates, rate above the minimum (price) and the minimum kWh consumption (kink) are different per region. Block rates give rise to kink in the budget line.

15 Results: All observations Table 1

16 Results: Per Quartile Regression Table 1: Correct signs and significant coefficients. 3Step and OLS results are almost the same except for the estimates for price elasticity wherein the OLS reported lower coefficient. Significant members, age, education dummies. Table 2: Lowest (1 st ) income group has relatively inelastic demand second only to the fourth income quartile HH in first quartile have already limited appliance ownership compared to other income groups; as such even if price of electricity increase they no longer have freedom to adjust their consumption. 1 st and 4 th quartiles have relatively highest income elasticity Table 2

17 Appendix: Power Network Structure Power Network Structure