Caracas Chronicles

Electricity Minister Jesse Chacón said today that the government would raise electricity rates so that people who use too much electricity begin to pay more.

This is a terrible idea.

On the surface, Chacón’s idea would seem to make sense. The electricity sector is bankrupt, and part of the reason for this is that rates are heavily subsidized. Hence – in theory – raising rates would bring much needed cash to the industry, and this would speed up necessary investments to slowly bring supply in line with demand.

The problem for Chacón is that raising electricity rates is not going to do much in an environment such as Venezuela, with its astronomical inflation rates.

Suppose the rates go up by (gasp!) 30%. After a year, when the price of everything has also gone up by 30%, you will be left with the same undervalued electricity rates we have right now. The rate hike will be useless because all other costs – the cost of the machinery needed to increase production; the cost of labor needed to produce electricity; and even the cost of the paper your electric bill comes in – will have risen. What economists would call the real electricity rate – that will not have budged.

Aside from that, the industry needs investment now. As in yesterday. As in six months ago. Raising rates now will only (marginally) improve the cash flow for the company … six months from now. It does nothing for the pressing cash shortages the industry is facing currently, courtesy of Chávez’s boneheaded electricity policies.

The worst part about this proposal is that the government will pay a heavy political price for the rise. It doesn’t matter that the hike in rates will be a thing of the past in a year’s time – the government will still suffer from it. With Chacón, you get all the minuses, and none of the pluses. It’s all bone and no meat.

The Chacón recipe is drenched in stupidity – then again, this is the same guy who said the problem was a bloated workforce, but that he was not going to fire anyone from the industry. With this new proposal, people will be paying higher rates for the same crappy service they get now – which in Chacón’s dimly-lit mind surely means soaring customer satisfaction.

The solution to the problem of subsidized electricity rates is easy: indexation. Electricity rates should go up alright, but their level should go up with monthly inflation. In fact, many things here in Chile rise with inflation, and their prices are calculated on a daily basis according to the monthly inflation rate from the preceding month. It’s all done automatically.

With the current rate hike proposal, Chacón depletes political capital with very few benefits. It’s a lesson in profound stupidity.