A COST-BENEFIT APPROACH
10.5 Data Requirements
The analysis presented in the preceding sections rests on a set of assumptions, not all of them explicit, on the values of certain key variables for the outcome of distributional analysis. The objective of this section will be to explain the main assumptions and provide guidance on alternatives to improve approxi-mations.
Let us begin with the projections of the quantity of electricity demanded according to the type of customer. Given that the quantity of electricity demanded for type of customer i in year t depends on the price p't and on other variables jcj
projection G\ requires exogenous projections of the tariff and the remaining variables jc(J. The tariff was assumed to be constant throughout the planning period, since it is considered the signal that encourages or discourages elec-tricity consumption. Given that, as discussed in Section 10.2, adjustments in consumption require adjustments in equipment stocks, which take time, the system of signals should ideally not change from year to year. This does not exclude the possibility of short-run adjustments in response to exceptional situations (for example, rainfall far below the average in a predominantly hydro-electric system) provided the users are aware that the change is a short-run change, and that decisions on equipment have to be taken on the basis of the long-run tariff. Consequently, the quantity of electricity demanded can be presented as a function of a price, which is constant over time
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The breakdown of residential demand by income groups and its separate projection is an important element in estimating the distributional effect. This projection can be conceptualized as the number of residential clients of type i in year t (N!) times the average consumption per customer (g/)
It should be borne in mind that in most Latin American countries, cus-tomers who have no access to the grid are mainly low-income people, and that this access is determined principally by the electricity firm's connection pol-icy. Furthermore, elasticity of consumption per customer with respect to variables x^ will in general be different for different income levels. Conse-quently, projections per type of customer should ideally take account of these effects. All this will result in different annual growth rates for the quantity demanded for each group. This of course requires an effort in the estimates of functions N! and g/ which did not exist for the case in hand, in which a uniform growth rate was used for each group (see Table 10.3).
As a result of the above, there will be different price elasticities of demand for each group. In particular, price elasticity is expected to diminish (in absolute value) as the customer's income level increases.24 This aspect was not taken into account either in the analysis carried out, in which price elasticity was assumed to be equal for both groups of residential customers.
Lack of data also made drastically simplifying assumptions necessary with regard to the price elasticity of industrial and commercial demand.
In summary, the application of cost-benefit analysis to the field of selecting expansion plans and, in particular, estimating the distribution of income changes, requires a considerable effort with regard to estimating electricity demand functions, an effort that has scarcely begun.25
A second set of problems concerns the transfer and final effect of the change in industrial and commercial tariffs. In the case of relatively small tariff increases, which do not give rise to strong substitution effects, it is very likely that assuming a transfer (in the long run) to the final consumers of 100% of the effect will be a reasonable approximation. However, the dearth of studies on this subject makes it advisable to use a second transfer hypothe-sis, as in the case presented. This approach will provide a range that is likely
24. See Westley (1981).
25. Westley (1981 and 1984) gives estimates for residential and commercial demand in Para-guay and Costa Rica.
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EXPANSION PLANS FOR ELECTRICITY GENERATION
to include the real effect, but hopefully not too wide as to make the results useless.
Finally, there is the problem of which part of the increase in the industrial and commercial tariffs will be absorbed by the final consumers. In section 10.4, we assumed that it was proportional to the expenditure on consumption of each group. However, the indirect content of electricity in consumer bas-kets, i.e. the direct and indirect requirements for electricity of the goods making up the basket, will not be identical for all groups. Using the input-output model presented in section 7.4, the indirect requirements for electricity in the consumption basket can be approximated. To simplify presentation, let us assume that there is a simple model with only three sectors corresponding to the "products" agriculture (X,), industry (X2) and electricity (X3), and that the final demand matrix D can be broken down into the following vectors:
consumption by low-income people (Cb), consumption by the rest of the private sector (CO, Government consumption (C8) and the remainder of final demand (DO- Thus, according to expression [7.2], production values can be expressed as
Total direct and indirect requirements for electricity corresponding to the low-income group's consumption basket will be
which can be interpreted in the following way. To supply one peso's worth of industrial output (1) it is necessary to produce T3, pesos of electricity, so that T3l C\ indicates the value of electricity production "contained" in C\ pesos' worth of consumption. Thus, X3(Cb) will be the electricity "content" of the low-income group's consumption basket, made up of its direct consumption C* and its indirect consumption through the electricity needed to produce basket C*. Direct consumption of electicity C* is low-income residential consumption, the effect of which has been dealt with separately (see Table
10.12), while indirect consumption will be
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Similarity, the indirect consumption of electricity by the rest of the private sector and Government consumption could be calculated, thus yielding the indirect requirements of each group of consumers
Then the share of the tariff increase that the industrial and commercial sectors are assumed to transfer to the final consumers through prices, can be distrib-uted in proportion to the share of indirect consumption of each group of final consumers in total indirect consumption.