13 November 2008

Representative Fuel Oil Reference Price

Energy Market Authority uses the 3-month forward price of fuel oil to dampen the effects of volatility on the electricity tariff.

A forward price is strongly correlated to the spot price on the fixing day.  So when determining the average forward price, as many fixing days as practical should be used to smoothen out price volatility.

Why then does EMA fix the forward price of fuel oil for, say, January to March 2009 based on the average forward prices in October only.  Forward prices in October may not necessarily be representative of forward prices in November or December.

Perhaps, EMA should base the forward price for January to March 2009 on the average forward prices from October to mid-December.  Or better still, use rolling 3-month periods such as mid-September to mid-December or September to November, so that over four consecutive calendar quarters, every market day in a year is used for fixing.

We may not necessarily get lower tariffs by doing so, but we will avoid being hit by exceptionally high prices if these should occur in January, April, July or October.

17 January 2008

Annual Values Of Our Homes

The annual value of our homes is used in the implementation of some government policies.

It determines, either by itself or together with other metrics:
  • How much property tax we pay.
  • How much we receive under initiatives such as Progress Package, New Singapore Shares, Economic Restructuring Shares etc.
  • How much GST offset we receive.
  • How much subsidy economically inactive people are entitled to when means testing is implemented in hospitals.

The fact that annual values are not static — they may rise or fall in the short term, and have trended upwards in the medium to long term — has adverse implications for us when they are used in implementation of these government policies.

Property tax. While it may be argued that we should pay some tax on property that we own, should this tax be based on the prevailing annual value of the property? Such linkage between property tax and annual value may be justifiable if the property generates income, as in the case of commercial or industrial property, or if the residential property is rented out.

The situation with owner-occupied properties is different. We don’t benefit when the annual values of our homes rise. We cannot monetise or realise the higher annual values unless we rent out or sell our homes, but we can’t because we need to live somewhere.

However, higher annual values mean higher property tax.

Also, at higher annual values, the GST rebate for property tax drops, as if we deserve less rebate just because our homes could be rented out for more.

But, unless we rent out our homes, we do not derive any incremental or, for that matter, any property income, yet have to pay more property tax. We end up being worse off.

And, as annual values trend upwards in the medium to long term, we become increasingly worse off as property tax trends upwards.

GST offsets, Progress Package, ERS and NSS. These have been linked to the annual value of our homes (among other factors). The more expensive our homes, the less we should receive.

But, higher annual values do not necessarily correspond to, nor result in, higher disposable income. We may have bought our homes at much lower prices and the annual values have risen as the property market rose. Should we receive less GST offsets etc. just because the annual values of our (otherwise unchanged) homes have risen?

As it is, with the sharp increase in annual values last year, some families may receive smaller GST offsets this year.

Means testing in hospitals. This is likely to be based on the annual value of the homes of economically inactive people. But, higher annual values do not necessarily, and are unlikely to, correspond to higher disposable incomes, especially for retirees.

Next, it is difficult to understand why subsidies should fall as the annual values of their (otherwise unchanged) homes rise. Unlike higher incomes, higher annual values do not increase their ability to pay for their hospitalisation.

Finally, as the annual values of their (otherwise unchanged) homes trend upwards over time, they may face smaller and smaller hospitalisation subsidies.

Conclusion. For many of us, our homes are just that — homes. Nice if the capital or annual value appreciates, but it’s irrelevant because we mostly cannot benefit from it. It certainly does not raise our disposable income. Yet, we pay more property tax, may receive less in GST offsets and other budget surplus sharing initiatives, and may pay more for health care in hospitals in the future.