Depoliticising utility tariffs in 2010

The start of 2010 was again marred with controversy and disagreements between the government, social partners and the public over utility tariff rates. The electricity and water rates have clearly impacted the competitiveness of locally based enterprises and also limited consumers' spending at a time when Malta faces significant economic and social challenges.

The most worrying factor associated with the electricity and water rates is that the price determination has become increasingly politicised.

It is acknowledged that some improvements were made to the regulatory process wherein the Malta Resources Authority now independently reviews proposed tariff structures. However, the involvement of the regulator was too late in the day.

We now have a situation where the government, as Enemalta's owner, is involved in determining the corporation's strategy on fuel procurement and also hedging strategy.

Consultations between the government and the social partners have also been focused on whether Enemalta should fix the price of electricity through hedging or otherwise, with the Finance Minister attempting to transfer responsibility of price determination to the constituted bodies.

This saga will continue to repeat itself on an annual basis unless a concerted effort is undertaken to depoliticise the establishment of Utilities tariffs. This will enable the country to move forward and focus on other issues of competitiveness.

While this is challenging in a small state like Malta, I believe that depoliticising the utility tariffs can be achieved if we commit to three fundamental principles.

The first principle which needs to be adopted is to enable the customer to choose whether to buy electricity at a fixed price by entering into a contract with the supplier or whether to buy electricity at market rates, which will reflect the market price of fuel.

These pricing models are adopted by many utilities across Europe and will require Enemalta to develop a strong commercial function to be able to offer such tariff structures.

Moreover Enemalta will need to adopt financial instruments to enable it to supply a proportion of its generating capacity on a fixed price contract basis for customers who choose to. The rest of its generation capacity could be retailed at market rates.

This principle will give choice to the customer to decide whether to fix the electricity tariffs and ensure predictability or otherwise. The decision on risk and price predictability will be determined by the customers depending on their individual circumstances and not by politicians. A sensible first step would be to offer such a model to the business sector. Indeed, different businesses face different competitive pressures and different pricing models may be suitable for different circumstances.

The second principle which will also enable a depoliticisation of utility tariffs is a real commitment to introduce competition in the sector.

The government needs to encourage and incentive investment in the sector which will provide the customer with more choice and also put pressure on Enemalta to change into a commercially driven organisation. There should be a real commitment to do so with clear targets, and a focus on which aspects of the market should investment be incentivised.

The third principle is to radically improve Enemalta's performance and ensure that the right decisions are made on key strategic issues such as choice of generating technology. Once again Enemalta was faced with controversy on its latest choice of generating technology. Enemalta is resourced with an outstanding and capable workforce who delivers despite significant constraints. Their efforts should be lauded. However, these efforts need to be complemented with strong leadership and a commitment to doing things better, improving operations and accelerating implementation of major projects. A stronger commitment to renewable technology is also required.

However, the environment needs to be conducive for Enemalta to improve its operations. In this respect, I recommend that Enemalta's generation, distribution and retail functions are separated.

This will enable real transparency of costs between functions which are not very clear in Enemalta's financial estimates, and provides a better framework to enable investment from private sector niche operators in generation and retail segments while Enemalta retains a monopoly on transmission and distribution related functions.

Real change is indeed possible in the sector. However, the utility tariffs needs to be depoliticised, and the government's energies should be channelled on other aspects of energy policy. New leadership at the Malta Resources Authority and efforts being undertaken by the Authority's team to enable a more favourable environment for competition and introduction of renewable initiatives are indeed positive signals. However, there needs to be a sense of urgency around creating the right environment for putting in place an energy infrastructure which is clean, efficient and enables customer choice with respect to pricing models and tariffs.

Mr Mizzi is a senior programme leadership professional.