In relative terms, however, the distributional impact varies depending on whether all households, both connected and unconnected, or only the sub-sample of households that are connected and reporting positive expenditures are included in the calculations. Table 5 reports summary information the impact of the gas price increase, under the two scenarios, expressed in percent of household expenditure. The calculations allow for some substitution away from the relatively more expensive goods.<sup>15</sup> The cumulative impact of higher energy costs, expressed in percent of household expenditures, is neither strongly progressive nor regressive **.** For Moldova as a whole, taking all households together—both connected and unconnected households—the combined impact of the price increase of all gas and energy products is neither progressive nor regressive (Table 5, Item A). However, the impact in percent of household expenditures can be quite large. Under the second scenario, for example, the cumulative impact of the rising cost of energy is between 4 and 5.5 percent of household budgets.

Among connected households that are reporting expenditure information, the distributional effect of the price increase, expressed in percent of household expenditures, varies by location and by energy product (Table 5, Items B to B3) **.** Rising tariffs on central gas and LPG will impact all households in small towns and in rural areas, while growing central heating costs will be the most painful for dwellers of large cities. Not surprisingly, because almost all households are connected to electricity, its increasing cost will be burdensome for households across all locations. Its impact is also consistently regressive across all locations. Similarly, there are regressive effects following the LPG price hike in small towns and rural areas. Rising central gas tariffs have somewhat regressive effects in large cities and progressive effects everywhere else. The impact of the increasing cost of central heating is neither regressive nor progressive.

The effects on the budgets of connected households can be large, particularly for the poorest households (Table 5, Items B to B3). For example, for the poorest households, the price increase of LPG under the two scenarios amounts to 3.2 to 7.2 percent of their budget in rural areas and 4.3 to 9.6 percent of their budget in small towns. In contrast, the price increase amounts to 2 to 4.5 percent and 1.4 to 3 percent of the budgets of the richest households in rural areas and small towns, respectively. Even for energy products that are projected to have progressive effects—that is, tariff increases reflect a larger share of the budgets of the richer households—the impact on the poorest 15 This is based on a geometric mean of the relative price change where consumption behavior is assumed to be responsive to a change in relative prices and households substitute consumption away from the relatively more expensive good (see also Pollak, 1989; Gupta and others, 2000; U.S. Bureau of Labor Statistics, 1997; Dalton, Greenlees and Stewart, 1998). Alternatively, one could assume zero substitution (arithmetic mean) corresponding to the case when consumption levels (quantities) remain fixed following a price increase (see, for example, Freund and Wallich, 1997). There is empirical evidence that the elasticity of electricity and gas consumption is about 0.1, i.e., 100 percent increase in the price of gas/electricity would cause a 10 percent reduction in consumption. Thus, impact estimates that allows for some substitution may be more appropriate. However, the estimated effects based on zero substitution, though of larger magnitudes, are in the same direction as those reported in Table 4. See Appendix Table 2.

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