Philippine electric demand and equivalence scales.

• Author: Lyman, R. Ashley

1. Introduction

   The literature on residential electricity demand in developing countries is small, based principally on Latin American experience and, with the exception of Westley |24; 25~, employs highly aggregated data.(1) Price elasticities are generally found to be less than U.S. elasticities |26, 39~. One explanation by Westley is that energy substitution possibilities may be more limited in Latin American countries. He further suggests that since the household budget share of electricity is smaller in these countries, the Slutsky equation would imply an own-price elasticity closer to the compensated elasticity and less influenced by income elasticity. As a refinement, Westley also suggests that substitute fuels are more available in rural versus urban settings and that, as a result, price elasticity may be larger. Empirically, however, he found no difference |25, 257, 261; 26, 125~.

   Income elasticity findings, on the other hand, are varied. Pindyck's |17~ evidence and inferences are that these elasticities are larger in developing than developed countries and, in both cases, decline with per-capita income. Berndt and Samaniego |3~, find results for Mexico that agree, in the first part, with Pindyck. In fact when electric-system connection rates are considered, they suggest that their findings show an income elasticity greater than one.(2)

   Westley, however, finds low income elasticities for Paraguay and Costa Rica. He suggests such results are plausible with the higher estimates in other research possibly attributable to the use of aggregated data and left-out-variable problems |26, 217-19~.

   Pindyck's second result is not confirmed. Berndt and Samaniego did not consider a variable elasticity and Westley drew the opposite conclusion. With data for Paraguay, Westley found that income elasticity increased with income. In Costa Rica, the indirect evidence suggested no relationship.(3) Specifically, urbanization, frequently correlated with income, exhibited no influence on either price or income elasticity.

   The purpose of this paper is to further investigate electric demand and elasticities in developing countries. The analysis is the first to consider data from the Philippines, household demand with commercial usage excluded and demand disaggregated to the level of rural electric cooperatives.(4) In fact, this research is the first to examine data from an established rural electrification program.

   While the model is dynamic, the data are cross-section for only two years and no attempt is made to consider flexible adjustment models of the type proposed by Westley |25; 26~. The relevant electric tariff incorporates a fixed charge or minimum bill entitling a customer to a given or first-block quantity of kilowatt-hours (marginal price = 0) and a marginal price for remaining consumption. The minimum bill is marginal price times the given, first-block quantity of kilowatt-hours. Since "minimum-bill" customers can be numerous, their relevance to price specification and the estimation of price elasticity is an important feature of this research. It leads to a separation of intra-marginal and marginal price effects.

   A second and central feature is the use of equivalence scales.(5) Historically a topic in welfare analysis, such scales purport to measure differences in welfare across households by accounting for relevant differences in demographic profiles or environmental factors. The usual approach indexes implied variations in expenditure patterns.

   In applied demand research, equivalence scales could be employed to represent or otherwise account for demographic and environmental profiles as determinants of demand. This might involve a priori specification of the model or it may involve the introduction of equivalence scales as variables. Following Pollak and Wales |18~, demand would then exhibit a conditional specification with equivalence scales best referred to as "conditional" equivalence scales. The conditional equivalence scales proposed in this research are useful for model specification and interpretation--but, more directly, enter to provide information on consumption and the accumulation of consumption patterns reflective of the role and importance of underlying variables for which data were not available. Since simultaneity problems can arise, the scales employed are measured with data from a previous period or otherwise specified a priori. To examine the conditional nature of some scales, functions determining these scales are specified and estimated with the earlier data.

   In the remainder of the paper, part II presents the model and part III describes data and the sample employed. Part IV summarizes econometric procedures, hypotheses and findings. Finally, part V presents conclusions.

2. Theoretical Framework

   Individual household electricity demand requires a stock of electricity-using durable goods. The associated investment problem suggests that lagged responses are likely to be important. One approach in allowing for such responses is, following Taylor |20~, to directly include in the demand model variables measuring stocks of electricity-using durables, related utilization rates and information on stock adjustments. However, the required data are not available. A partial or flow adjustment model of demand is therefore employed which implicitly recognizes investment and appliance-stock adjustments. In this model, desired electricity consumption (|Q*.sub.t~) is a function of appropriate economic and non-economic variables. Actual consumption (|Q.sub.t~) is adjusted to desired consumption in proportion (k : 0 |is less than~ k |is less than~ 1) to any existing disequilibrium (|Q*.sub.t~ - |Q.sub.t-1~).(6) Aggregation and Functional Form

   Since the data analyzed are aggregate for residential customers in the service area of each rural cooperative, the individual theory of household demand must be imbedded in an aggregate model.

   It is assumed here that the homogeneity postulate carries over and that the adjustment structure rationalized by the individual theory is maintained.(7) While the distribution of household income is measured only by mean income, variables are considered which measure the distribution of households across household size ranges and between the first and second blocks of the electric rate schedule. The specification and estimation of price elasticity depends on the last distribution and is discussed below.

   The model, for simplicity and convenience, is specified in log-linear form. In several instances, variables are entered in linear form as they are not amenable to the log transformation or because the theoretical interpretation is improved. Ignoring the variables appearing in linear form, the model is generally given by equations (1) and (2).

   ln(|Q*.sub.t~) = |b.sub.0~ + |summation over i~ |b.sub.k~ ln(|X.sub.it~) + |summation over j~ |b.sub.j~|interact.sub.j~ + |e.sub.t~ (1)

   ln(|Q.sub.t~) - ln(|Q.sub.t-1~) = k|ln(|Q*.sub.t~) - ln(|Q.sub.t-1~)~ (2)

   or, in reduced form for estimation

   ln(|Q.sub.t~) = |c.sub.0~ + |summation over i~ |c.sub.i~ ln(|X.sub.it~) + |summation over j~ |c.sub.j~|interact.sub.j~ + |c.sub.2l~ ln(|Q.sub.t-1~) + |e.sub.t~ (3)

   TABULAR DATA OMITTED where interactions are of the form

   |interact.sub.j~ = ln(|X.sub.it~)ln(|X.sub.mt~) (4)

   and where the b's, c's and k are parameters to be estimated; |c.sub.i~ = k|b.sub.i~; i, m and j index independent variables; t indexes time; and all variables are defined in Table I and later listed in Table III as they appear in the model.

   Price Specification

   Rural electric cooperatives in the Philippines uniformly employ a rate schedule with a minimum bill or fixed charge which allows a household to consume within a first-block of kilowatt-hours at a zero marginal price. A constant, non-zero marginal price (MP) applies to the second block or all additional consumption. Across cooperatives the maximum, first-block consumption (MKWH) under the minimum bill varies significantly.(8) For each cooperative the minimum bill or fixed charge is usually computed as MP times MKWH. Significantly, not all customers in the service areas of rural electric cooperatives in the Philippines consume beyond the first-block or MKWH. In fact, for some cooperatives as many as 80% of the customers may be minimum-bill customers and, for others, as few as 5%.

   The presence of minimum-bill customers requires that care be taken in specifying price and price elasticity in a demand equation representing average household electricity usage. Variations in marginal price (MP) produce a pure price response for those customers consuming more than the minimum or allowed kilowatt-hour level.

   For those customers consuming within MKWH, the marginal price is zero. At the same time, since the minimum bill itself is usually MP times the minimum-bill consumption, variations in MP are associated with variations in the minimum bill and can...