Residential Electricity Subsidies in Mexico

Residential Electricity Subsidies in Mexico

-

English
96 Pages
Read
YouScribe would like you to have this content free of charge

Description

Large and growing subsidies to residential consumers in Mexico have become a major policy concern. This report explains the growth of subsidies, the current distribution of subsidies across income classes, and uses utility and household survey data to simulate how alternative subsidy mechanisms could improve distributional and fiscal performance. The goal is to help inform discussion in Mexico about how to reduce subsidies and redirect them toward the poor. The findings also offer lessons for other countries that are planning tariff reforms in their electricity sectors.

Informations

Published by
Published 04 February 2009
Reads 21
EAN13 9780821378861
Language English
Document size 1 MB
Report a problem

WORLD BANK WORKING PAPER NO. 160
Residential Electricity Subsidies
in Mexico
Exploring Options for Reform and for Enhancing
the Impact on the Poor
Kristin Komives
Todd M. Johnson
Jonathan D. Halpern
José Luis Aburto
John R. Scott
THE WORLD BANK11503-00a_FM_rev.qxd 1/6/09 9:44 AM Page i
WORLD BANK WORKING PAPER NO. 160
Residential Electricity Subsidies
in Mexico
Exploring Options for Reform and for Enhancing
the Impact on the Poor
Kristin Komives
Todd M. Johnson
Jonathan D. Halpern
José Luis Aburto
John R. Scott
THE WORLD BANK
Washington, D.C.11503-00a_FM_rev.qxd 1/6/09 9:44 AM Page ii
Copyright © 2009
The International Bank for Reconstruction and Development / The World Bank
1818 H Street, N.W.
Washington, D.C. 20433, U.S.A.
All rights reserved
Manufactured in the United States of America
First Printing: January 2009
printed on recycled paper
1234512111009
World Bank Working Papers are published to communicate the results of the Bank’s work to the
development community with the least possible delay. The manuscript of this paper therefore
has not been prepared in accordance with the procedures appropriate to formally-edited texts.
Some sources cited in this paper may be informal documents that are not readily available.
The findings, interpretations, and conclusions expressed herein are those of the author(s)
and do not necessarily reflect the views of the International Bank for Reconstruction and Devel-
opment/The World Bank and its affiliated organizations, or those of the Executive Directors of
The World Bank or the governments they represent.
The World Bank does not guarantee the accuracy of the data included in this work. The
boundaries, colors, denominations, and other information shown on any map in this work do
not imply any judgment on the part of The World Bank of the legal status of any territory or
the endorsement or acceptance of such boundaries.
The material in this publication is copyrighted. Copying and/or transmitting portions or
all of this work without permission may be a violation of applicable law. The International Bank
for Reconstruction and Development/The World Bank encourages dissemination of its work
and will normally grant permission promptly to reproduce portions of the work.
For permission to photocopy or reprint any part of this work, please send a request with
complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers,
MA 01923, USA, Tel: 978-750-8400, Fax: 978-750-4470, www.copyright.com.
All other queries on rights and licenses, including subsidiary rights, should be addressed
to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA,
Fax: 202-522-2422, email: pubrights@worldbank.org.
ISBN-13: 978-0-8213-7884-7
eISBN: 978-0-8213-7886-1
ISSN: 1726-5878 DOI: 10.1596/978-0-8213-7884-7
Library of Congress Cataloging-in-Publication Data
Residential electricity subsidies in Mexico: exploring options for reform and for enhancing the
impact on the poor/Kristin Komives ...[et al.].
p. cm. — (World Bank working paper; no. 160)
Includes bibliographical references and index.
ISBN 978-0-8213-7884-7 (alk. paper)—ISBN 978-0-8213-7886-1 (electronic: alk. paper)
1. Electric utilities—Subsidies—Mexico. 2. Electric utilities—Rates—Mexico. 3. Subsidies—
Mexico. I. Komives, Kristin.
HD9685.M62R47 2009
333.793'23—dc22
200805180611503-00a_FM_rev.qxd 1/6/09 9:44 AM Page iii
Contents
Acronyms and Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Residential Electricity Subsidies and Tariffs in Mexico . . . . . . . . . . . . . . . . . . . . . . 5
3. Distributional Incidence of Residential Electricity Subsidies . . . . . . . . . . . . . . . . 15
4. Assessment of Alternative Subsidy Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5. Synthesis of Findings and Ways Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
APPENDIXES
A: Evolution of Residential Electricity Subsidies and Tariffs in Mexico . . . . . . . . . . . . 51
B: Residential Electricity Tariffs in 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
C: Tariff Reclassifications, 2002–06. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
D: Analysis of Subsidies Using CFE Data61
E: Analysis of SUsing ENIGH Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
F: Tariff Reform Scenarios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
iii11503-00a_FM_rev.qxd 1/6/09 9:44 AM Page iv11503-00a_FM_rev.qxd 1/6/09 9:44 AM Page v
Acronyms and Abbreviations
CAS Chile’s Means-tested Program (Caracterización Social)
CFE Mexico National Electricity Commission (Comisión Federal de
Electricidad)
DAC High Consumption Residential Tariff (Tarifa Doméstica de Alto
Consumo)
ENIGH Mexico National Household Income and Expenditure Survey
(Encuesta Nacional de Ingresos y Gastos de los Hogares)
GDP Gross domestic product
HH Household
IBT Increasing block tariff
IPP Independent power producer
kWh Kilowatt-hour
LFC Central Light and Power, Mexico City (Luz y Fuerza del Centro)
MP Mexican peso
MWh Megawatt-hour
OECD Organisation for Economic Co-operation and Development
Oportunidades Mexico’s conditional cash transfer program for the poor
Oportunidades Oportunidades program focused on energy (established 2007)
Energéticas
Pidiregas Deferred financing mechanism to support private sector energy sector
investment in Mexico (Programas de Inversión de Impacto Diferido
en el Gasto)
RES Residential Electricity Schedule
SEDESOL Ministry of Social Development (Secretaría de Desarrollo Social)
SENER Ministry of Energy (Secretaría de Energía)
SHCP Ministry of Finance (Secretaría de Hacienda y Crédito Público)
VDT Volume differentiated tariff
Currency Equivalents
Currency Unit = Mexican Peso
Exchange Rate
(Exchange Rates Effective April 3, 2008)
1 US Dollar = 10.557 Mexican Pesos11503-00a_FM_rev.qxd 1/6/09 9:44 AM Page vi11503-00b_Exec_Sum_rev.qxd 1/6/09 9:46 AM Page vii
Executive Summary
This report addresses a pressing issue in Mexico’s electricity sector—the large and growing
subsidies to residential consumers and their regressive incidence across different segments
of the population. It responds to requests from the Ministry of Energy (SENER) to provide
a preliminary assessment of alternatives to the current subsidy system, building on prior
collaboration between the Government of Mexico and the World Bank on the distribu-
tional impact of public spending, the performance of conditional cash transfer programs
and other poverty-targeted programs, and related work on pricing and subsidies for infra-
structure services. This study was designed as the first phase of a multiphase program of
collaborative analytical work. This first phase provides estimates of the distributional and
fiscal performance of alternative subsidy targeting mechanisms to help inform discussion
and deliberations on feasible goals and practical approaches over the medium term. A sec-
ond phase would address transition paths, specific compensatory mechanisms, and deci-
sion processes for pursuing the options that the Mexican authorities deem most promising.
Electricity subsidies in Mexico are among the largest in the world (US$9 billion in
2006) and have absorbed a significant proportion of public resources. Subsidies in 2006
were equivalent to about 1 percent of gross domestic product and were more than one-third
of total electricity sector revenues. Over two-thirds of electricity subsidies go to residential
consumers, and the volume of subsidies to residential customers increased by 46 percent
between 2002 and 2006 in real terms.
Tariff subsidies of this magnitude impact heavily on the performance of the electric-
ity sector and on Mexican society more generally.
■ First, the cost of the subsidies needs to be covered in some way—if not by con-
sumers, then by government; if not directly by the government, then by reduced
spending on system expansion to meet growing demand, on service quality upgrades,
and on operations and asset maintenance. Fiscal transfers to the utilities divert
resources from priority social and economic programs and reduce fiscal space for
financing priority investments in the electricity sector. The 2006 federal budget for
investment in electricity (excluding the Programas de Inversión de Impacto Diferido
en el Gasto [Pidirigas]) was 40 billion pesos, only slightly larger in nominal terms
than it was in 2001 and less than half the total volume of subsidies.
■ Second, subsidies distort price signals, elevating demand above what it would be if
electricity was priced at marginal or average cost. Massive underpricing also mutes
incentives for customers to take energy saving measures, such as replacing old
equipment and appliances. Higher customer demand requires additional power
supply, especially to meet periods of peak demand. Because elevated residential
electricity demand tends to lower load factors for the power system, it leads to
reduced efficiency in the use of generation and transmission facilities and thus to a
higher marginal cost of supplying all customer classes. This has negative implica-
tions for economic competitiveness.
■ Subsidies also engender environmental costs. Elevated demand leads to incremen-
tal emissions from power plants, including local pollutants responsible for poor
vii11503-00b_Exec_Sum_rev.qxd 1/6/09 9:46 AM Page viii
viii Executive Summary
air quality (such as particulates and ozone precursors) and global pollutants linked
to climate change. Further, standard merit order dispatch rules exacerbate the ten-
dency for marginal generating plants (those with low capital costs, but high fuel
costs, such as small fuel-oil and diesel-fired facilities) to generate higher levels of
pollutants. In rural areas, electricity subsidies for irrigation pumping exacerbate
overexploitation of groundwater resources.
Moreover, the bulk of subsidies go to the non-poor. Numerous reports in the last sexenio
have pointed out the regressive distributional incidence of these subsidies among residen-
tial customers. Cognizant of this problem, the Mexican authorities expressed a strong inter-
est in evaluating the impact of a shift from quantity-based targeting through the tariff
structure to means testing, building upon the poverty profiling and verification systems
established under Oportunidades, Mexico’s well-functioning, means-tested conditional
cash transfer program. The pilot effort for such a system was recently implemented with
Oportunidades Energéticas, which, with its 3 billion peso annual budget, is small relative to
existing tariff subsidies. This program, begun in 2007, did not replace or modify existing
tariff-based subsidies, but rather operates in parallel with them.
Among the alternatives to the current subsidy system, the study examines the use of
means testing to allocate subsidies and modifications in electricity tariff structures based
on international experience. It also assesses the impact of achieving lower unit costs of sup-
ply on subsidies. Each alternative is assessed in terms of its potential to reduce the overall
magnitude of electricity subsidies and improve distributional outcomes.
Residential Electricity Subsidies and Tariffs in Mexico
Electricity subsidies as reported in Mexico are financial subsidies that result from below-
cost pricing, with cost measured as accounting costs. Subsidies are measured as the differ-
ence between the price of electricity paid by consumers and the average cost of supply. This
approach to measuring subsidies does not capture the economic cost of electricity provi-
sion, which could differ significantly from the accounting costs. Accounting costs are
reported by the two operating utilities—the Mexico National Electricity Commission
(Comisión Federal de Electricidad, CFE) and Central Light and Power (Luz y Fuerza del Cen-
tro, LFC)—according to government accounting standards. CFE’s subsidies have largely
been financed by a bookkeeping transfer. The federal government essentially reimburses
the CFE for providing subsidies to its customers by discounting the taxes and dividends
1(aprovechamiento ) that CFE would otherwise have to pay the government. Since 2002, the
volume of subsidies has exceeded the notional amount of aprovechamiento and has there-
fore begun to erode CFE’s capital base. For LFC, the electricity provider for the Valle de
Mexico and surrounding areas, its financial situation has been so dire that the federal gov-
ernment provides the company with a direct cash subsidy to cover its mounting operating
deficits and customer subsidies.
The current system of residential subsidies is not consistent with the basic precepts
prescribed in Mexico’s legal framework for the electricity sector. The legal framework gov-
1. Equal to 9 percent of net fixed assets.11503-00b_Exec_Sum_rev.qxd 1/6/09 9:46 AM Page ix
Executive Summary ix
erning electricity tariffs in Mexico establishes that tariffs should cover costs and promote
efficient consumption. The tariffs of state-owned enterprises are to be set “in accordance
with economic efficiency and financial health criteria” (Article 26, Reglamento de la Ley de
Empresas Estatales). Electricity tariffs in particular are to be “fixed, adjusted, and restruc-
tured in a way that covers financial and public service expansion requirements, and rational
energy consumption” (Article 31, Ley de Servicio Público de Energía Eléctrica). Current res-
idential electricity tariffs are far from meeting these objectives. Because only a tiny pro-
portion of residential customers pay the marginal cost of electricity service, current tariffs
achieve neither the cost recovery nor the efficient consumption provisions of the current
legislation.
With respect to subsidies, the legal framework establishes that subsidies “shall be tem-
porary” and subject to the criteria of “objectivity, equity, transparency, publicity, and selec-
tivity.” The law further states that, “in programs of direct benefit to individuals or social
groups, amounts [of the subsidy] and percentages shall be determined on the basis of redis-
tributive criteria that must privilege the lower income population and aim at equity amongst
regions and states” (Article 75, Ley Federal de Presupuesto y Responsabilidad Hacendaria). In
actuality, the regressive nature of residential electricity subsidies in Mexico is widely known,
and the situation has deteriorated further since the 2002 tariff revision.
Mexico’s current system of tariff-based subsidies is among the most complex in the
world, and is largely a product of accretion rather than deliberate policy. Electricity subsi-
dies were first introduced in Mexico in 1973 in response to persistent inflation, when the
single electricity tariff was changed into a three-part, increasing block tariff, with sub-
sidized rates for the first two blocks. The first “summer subsidy” (Tariff 1A) was introduced
in 1974, providing additional subsidized rates to customers living in hotter areas (1A was
defined as regions with more than four months of average temperatures above 25 degrees
Celsius [°C]). Successive climate-based tariffs with increasingly subsidized rates over larger
volumes were introduced in 1988 (Tariff 1B > 28 °C; 1C > 30 °C), 1990 (1D > 31 °C), 1995
(1E > 32 °C), and 2002 (1F > 33 °C). Today, Mexico has an extremely complex tariff sys-
tem with over 112 different billing possibilities for residential consumers.
Among the most important changes undertaken as part of the 2002 tariff revision was
the introduction of a new tariff schedule for households consuming large volumes of elec-
tricity known as the High Consumption Residential Tariff (Tarifa Doméstica de Alto Con-
sumo, DAC), which was to raise tariffs slightly above long-run marginal costs for roughly the
top 5 percent of customers in each of the seven tariff categories. The 2002 tariff reform had
no long-lasting impact on subsidy volumes—although residential subsidies dropped slightly
in real terms in 2002, by 2003 they had risen above 2001 levels. The primary reasons for the
rebound in subsidies were: (a) the introduction of yet a more highly subsidized summer tar-
iff category (Tariff 1F), (b) the reclassification of large numbers of consumers (3.4 million
between 2002 and 2006) to more highly subsidized tariff schedules, and (c) increasing elec-
tricity supply costs.
The unit cost of providing electricity service is a key driver of both the magnitude and
distributional incidence of electricity subsidies. Given the way that subsidies are measured—
tariff minus accounting cost—the magnitude of subsidies is directly related to the cost of
supplying electricity. Reducing costs can offset, at least partly, the need for raising tariffs in
an effort to reduce subsidies. Any cost reduction would result in a greater proportion of
subsidies going to low-income households. Since 2002, CFE’s average cost per Megawatt-
hour (MWh) delivered has increased by about 20 percent, while LFC’s costs were over twice