For Asia Times Online www.atimes.com
TAIPEI – The Taiwanese are feeling inflationary pressures, with a government-enforced rise in the electricity price, previously the lowest in Asia, about to follow already implemented fuel price increases averaging about 10%.
The result will drive up prices and slow economic growth say critics, who charge that the government has misled the public and misread the need for the price rises. The big power companies are also being blamed for costly crony deals with independent power producers, driving up costs.
To cushion the public from direct impact of the electricity price increase, the government thought up a staggered power rate structure. It says household electricity rates will rise by an average of 16.9%, but those that use as few as 120 kilowatt hours
of electricity per month will see a decrease in their bills.
The private business sector will be much more painfully squeezed, as rates for commercial purposes will jump about 30% and to around 35% for industrial electricity. Average residential and industrial power rates will now be higher even than in South Korea, Taiwan’s arch trade rival, after the changes come into effect on May 15.
More than 8 million Taiwanese households, 1 million commercial clients and 210,000 industrial clients will pay more for their electricity, the Taiwanese government calculated.
While the political opposition has criticized President Ma Ying-jeou’s Kuomintang (KMT) government for having waited until after his re-election in January for the announcement of the prices increases, he has been urging understanding.
“The Ministry of Economic Affairs had no choice but to normalize fuel prices and electricity rates because it is impossible to subsidize them with tax revenue forever”, Ma said. “The public should understand that it will be more difficult to make price adjustments if we don’t do it now.”
The Taiwanese government’s main argument is that fuel prices and power rates should be raised to reflect increased costs at Taiwan Power Co (Taipower), the state-run utility, and CPC, Taiwan Corp, the state-owned petroleum, natural gas and gasoline company.
Taipower says it has been absorbing annual losses of between NT$4 billion (US$135 million) and NT$5 billion to serve Taiwan’s outlying islands as it costs up to seven times more to generate a kilowatt hour of electricity there compared with Taiwan proper.
Taipower says this money-losing effort is for the good of the nation and must therefore be subsidized, and likewise are the demands by CPC, which points out that the government has kept gas prices artificially low at its expense over the past five years.
Opposition parties see the dilemma very differently. The Democratic Progressive Party (DPP) finds Taipower’s reserve capacity, which has averaged 23% in recent years, is far too high, and if the rate had been reduced to 16%, the company would be profitable, so that there was no need to raise electricity prices in the first place.
The allegations don’t stop here: Taipower kept unnecessarily purchasing electricity from independent power producers (IPPs) for years, thereby making rich former senior Taipower and CPC officials, who after their retirement became heads of these IPPs.
Whoever deserves the blame, observers do agree that the tariff increases will come with repercussions for the economy. Electronics companies expect their annual operating costs to be driven up by about 20%, while for some other industries, such as textile and steel, it could make a difference of as much as 50%.
Taiwan’s metal and petrochemical players such as China Steel and the Formosa Plastics Group, which have heavy power usage, fear a particular strong impact. Private consumption momentum will also be dragged down. On average, the rise in electricity and fuel prices is expected to lower gross domestic product (GDP) growth this year by 0.50 percentage points and to increase the consumer price index (CPI) by about 0.2%, according to revised forecasts for 2012 by think tanks and financial institutions.
Chung-Hua Institution for Economic Research, with the most recently published estimate, cut its 2012 GDP growth forecast to 3,55% from its 4.07% forecast in December, citing the negative impact of electricity and fuel price rises. It raised its Consumer Price Index (CPI) inflation growth forecast to 1.93%, up 0.45 percentage points from its December prediction.
Things could possibly turn out even worse. Although the predicted CPI rise seems relatively low, there are some signs of panic-level domino-effects: bakers, whose water and electricity costs make up 10% of total costs, have been telling TV audiences that they fear mass bankruptcy; rice wholesalers are mulling a price surge of more than 20%; local eateries have cut back on food portions; restaurant chains like Pizza Hut creatively implement “cancellation of promotions”; and karaoke businesses and love hotels already bemoan a significant drop in customers.
On the winning side, are firms in the green energy sector, such as vendors of energy-saving light-emitting diode, or LED, fixtures. Their shares are gaining as corporate customers place large orders to cut operating costs.
Yang Yungnane, director of National Cheng Kung University’s Department of Political Science & Institute of Political Economy, sees relatively mild dangers but also significant opportunities.
“The CPI will be increased a little bit. But the change may not be very high since the government puts her efforts on controlling the CPI”, Yang said, likely having in mind earlier statements by Premier Sean Chen who hinted at adjustments to interest rates and exchange rates.
“But this could be a turning point for the Taiwanese government to promote alternative energy and make Taiwan becoming a low-carbon society. Taiwan’s competitiveness will be increased if alternative energy policies could be emphasized and thoroughly developed”, Yang said.
Local environmentalists aren’t impressed.
“The price hike is because Taipower and CPC lose money. They lose money because of their bad decisions, bad management, corruption and inefficiency,” said Jay Fang, chairman of the Green Consumers’ Foundation, who described the government electricity price program as “stupid”. “The top management should be changed or corrected not the prices raised as this rewards indecent moves by the leadership even more.”
Fang insisted that for the good of the environment, new taxes are the way to go. “We should use energy, carbon and environment taxes to induce incentive to low-carbon behaviors.”
To Hu Sheng-Cheng, an economist at Academia Sinica, Taiwan’s most respected research institution, the price increases highlight the fickle and inconsistency of the government’s decision-making mechanism.
“Before the elections, they said prices for water, gas and power mustn’t be raised. But now it’s: ‘If we don’t raise today, we’ll regret tomorrow’,” Hu said.
Not only will the gas and power increases unnecessarily harm the economy with inflationary expectations, but there were two additional negative factors – the government will raise the minimum wage and tinker with certain tax categories. Hu believes that the government got the timing for the price hikes very wrong.
“Barring international political conflict, the upward pressure on oil prices will continue to ease because global economic growth is mild. But thanks to the government, manufacturers, retail and heavy industry will all be hit, with ordinary workers and middle-income earners certain to emerge as the main victims.”