BY DR. ARA KHANJIAN
About one month ago, the single electricity distribution company in Armenia, Electric Network of Armenia, ENA, formally requested the Public Services Regulatory Commission, PSRC, to increase the price of electricity that consumers pay by 40 percent. This generated a public outcry and large scale protests, because electricity is a necessary service and a large price increase hurts low and middle income families significantly.
On June 12, a parliamentary hearing is scheduled where members of the Regulatory Commission will present explanations about electricity price increase to the members of the parliament. It is essential that members of parliament who are not corrupt, to be actively present during this meeting and find out if there is justification to raise the electricity price. They have to make sure that the regulators are not corrupt and that they are doing their job adequately. Finally if there is a justification to raise the price, then the honest members of the parliament should figure out how to address this challenge without imposing huge burden on the standard of living of low and middle class families. For example they could implement the price hike gradually and meanwhile subsidize the cost of the distribution company through government general budget.
In general electricity sector is divided into three separate areas: generation, transmission and distribution of electricity. In Armenia roughly one third of electricity is generated through Metsamor nuclear power plant, one third through hydroelectric power plants, such as Sevan and Vorotan and one third through thermal power plants, which operate mostly by imported Russian natural gas, such as Hraztan power plant. All these power plants belong to Russian companies, except the Vorotan, which belongs to a US company.
The high voltage transmission infrastructure is still owned by the government of Armenia. These are the high towers with connected electric wires scattered throughout the country. Once the electricity reaches the cities, towns and villages where the electricity is consumed, the distribution of it is done by a single Russian company, Electric Network of Armenia, ENA. In other words there is just one company, a monopolist, in the distribution of electricity to the consumers. In order to prevent this monopolist from charging very high prices a government agency, Public Services Regulatory Commission, regulates and determines the price of electricity that consumers pay.
It is important to figure out how the Regulatory commission determines the retail price or the price of electricity that consumers pay. The distribution company, ENA, is a private company; therefore the main purpose of the company is to maximize profit. Profits are equal to the revenues or the electricity payments collected from consumers minus cost of operation. Distribution companies, in this case ENA, is supposed to invest and maintain the electricity distribution infrastructure in good condition. This implies that the Regulatory commission, through its electricity experts, determines the cost of operation of the company, ENA, and the cost of maintaining the infrastructure and then adds a profit margin and comes up with the price of the electricity that consumers have to pay.
This method gives huge incentive to the electricity distribution company, ENA, to inflate the cost. If ENA is able to convince the regulators that the cost increased significantly, then this could create justification to raise the price of electricity significantly, and increase its profit. In the US, during the last 120 years, in many cases the price of electricity was determined in this way. In this kind of set up the electricity company has incentive to bribe the regulators and convince them to accept that the cost of the company went up and that a raise of electricity prices is warranted.
Government or public regulatory commissions are themselves supervised by the members of the parliament or in the case of U.S. by the members of the congress. The parliament and the congress have committees that oversights, regulates or supervises the regulatory commissions. The private electricity companies have also incentive to bribe the members of parliament who are in the committees that supervise the regulators.
This implies that in order for the system to work well and the interest of the consumers be protected, we need regulators who are not corrupt and are not under the influence of the electricity company and we need members of parliament who are not corrupt and don’t take bribes from the electricity company.
In the case of Armenia, there is a possibility that because of corruption, some consumers are using the electricity without making payments to the company. This reduces the revenue and the profit of the company. In this case, in order for the company to make reasonable amount of profit, they have to collect higher prices from those who are paying. If there is this kind or similar types of corruption, then members of parliament should take steps to reduce such corruptions, instead of raising the price of electricity. If electricity regulators in Armenia have low credibility, then it is a good investment for the country to bring a foreign electricity distribution expert and commission that expert to present the true condition of the electricity distribution sector and recommend alternative solutions. The cost of this expert will be small relative to the benefit.
It is useful when the masses protest and express their outrage about the electricity price increase. This public outcry puts pressure on the politicians to do their job and to make sure that regulators are adequately monitoring the electricity distribution company. Hopefully on Friday, June 12, the honest members of the parliament, such as the ARF members of the parliament, will actively question the representatives of the Public Services Regulatory Commission and figure out the true state of the distribution of electricity in Armenia. Based on that knowledge they should take steps to maintain the long term flow of electricity without imposing heavy burden on the low and middle income families.
Dr. Ara Khanjian is a Professor of Economics at Ventura College. He is also member of the Armenian Revolutionary Federation Western US Central Committee.