44
Mitigating Vulnerability to High and Volatile Oil Prices
For most of the countries analyzed in this study, consumers are shielded to varying degrees by tariffs with embedded generalized subsidies. Because tariff increases are often insufficient to cover rising generation costs, the financial position of the utilities may deteriorate. This has been the case for the Dominican Republic, Haiti, and Honduras (box 4.2). A full pass-through power-pricing policy is in effect in The Bahamas and St. Vincent and the Grenadines—where the government is the majority owner of the power utility—and in Barbados, Dominica, Grenada, Jamaica, and St. Lucia—where the private sector is the majority owner. This policy is sustainable in the long run as it forces consumers to eliminate waste and then seek pathways to improve consumption efficiency. Guyana’s move from a partial to a full pass-through regime in 2008 highlights the trade-offs of such decisions on final users and the regulatory implications for managing volatility (box 4.3).
Economic Impacts on the Sector Government intervention in energy price stabilization has often proven costly or, in some cases, financially unsustainable. In the case of Peru, the government’s price stabilization fund has faced challenges to remain
Box 4.2
Subsidies and Fiscal Vulnerability in Honduras In Honduras, the tariff structure and subsidy policies have fully exposed the government to oil price volatility. The pricing mechanisms used to protect consumers from exposure to high and volatile prices, including a stabilization fund and price bands, have affected the budget directly, meaning that the government bears the entire risk of oil price volatility. The national utility, National Electricity Corporation (ENEE), has experienced problems implementing cost-covering tariffs and managing subsidy distribution. In 2008, the subsidy program created a deficit of US$72 million, which grew by another $18 million by 2010. The government’s commitment to supporting the electricity sector above a price level of $79 per bbl resulted in $2 billion in outstanding arrears to generators, which the government paid in September 2010. To address ENEE’s delicate financial situation, the government raised tariffs, except on residential users who consume less than 150 kWh per month. In 2010, the overall tariff increment was 12 percent. Source: Authors, with ENEE data.