hankyoreh

By Noh Hyun-woong and Lee Seung-jun, staff reporters

Korea Electric Power Corporation employees recently submitted statements as evidence in a case by small shareholders against the government and the corporation’s former president Kim Ssang-su.

Exclusively obtained by the Hankyoreh, the statements show the irrationality of the system that currently determines electricity prices.

“In early 2010, we began working to convince the Ministry of Knowledge Economy (MKE) and the media that an increase in electricity prices was inevitable,” one employee said. “Crude oil prices had gotten so high that we were hemorrhaging red ink. The MKE is the main agency in charge of power supply and demand, and when they reacted positively we voted on a plan for an 8.7% hike and submitted it to them. But the Ministry of Strategy and Finance was against raising the rates. We finally settled on a plan with a 3.5% hike, and that’s what got reported to the Blue House. But then there was a National Assembly by-election on July 28, which was close to the time when electricity demand would be at its peak. The Blue House and Grand National Party asked us to put off raising the rates until after the election, and it wasn‘t until August 1 than we implemented the 3.5% hike.”

According to the statements, the government is ultimately the side that determines when and how much to raise electricity rates. Even if the KEPCO board of directors decides to raise rates, the size of the increase is only decided after first wrangling with the MKE, and then again with the MSF. Not only that, but once reported to the Blue House, the plan’s timing is based on public factors such as major holidays or elections. In other words, the hurdles just keep getting higher before changes in production costs can be reflected in sales price decisions.

“When the KEPCO board of directors votes on something, it’s already been decided on,” said one employee in a statement.

The situation suggests that the anticipated profits for KEPCO, including reasonable investment returns and overall costs as set forth by the Electricity Business Act, are being left out of the equation.

The setting of electricity prices is a matter of policy judgment, with a strong element of public service. As such, accepting some degree of losses and making up the difference with public funds may come with the territory. But one notable development is how much KEPCO losses have snowballed under the Lee Myung-bak administration.

Indeed, litigation records showed KEPCO’s losses, or its overall production costs less total revenues - in other words, its anticipated returns by law - more than triple between 2007 and 2011, from 1.9 trillion won (US$1.7 billion) to 6.5 trillion won (US$5.8 billion). On its financial statement, current net profits dropped from 1.6 trillion won (US$1.4 billion) in 2007 to a loss of 3.51 trillion won (US$3.08 billion) in 2011. With net losses of 2.9 trillion won (US$2.55 billion) for the first half of 2012, the cumulative losses are more than 8 trillion won. In essence, the government, in its push to rein in prices for the working class, has forced KEPCO to shoulder very heavy losses, and now its very asset soundness is at the breaking point.

“When your goal is to manage prices, you need to do it in a way that ensures it performs its public service function,” a KEPCO official said. “At this point, KEPCO’s core strength is as good as exhausted.”

An even bigger problem is the fact that this price management approach has applied only to KEPCO, while private providers have received preferential treatment. The government accepts expensive rates solely for private power companies, on the logic that it ensures them suitable returns. KEPCO affiliates like Korea South-East Power and Korea Midland Power are obligated to sell electricity at cheap rates, while private power companies have been permitted to sell at rates tied to their raw material costs.

The result has been a boon for private companies affiliated with chaebol like POSCO, GS, and SK, which have seen their operating profits reach 15% to 30% every year under the administration. The expectation of tidy profits is also what led 24 companies, including Samsung C&T and Daewoo Engineering & Construction, to apply for private power company operator status according to the “Sixth Basic Plan on Electricity Supply,” which goes into effect next year.

“It seems rather contradictory for private power companies to be making off with huge profits while KEPCO suffers deepening losses due to the Lee administration’s emphasis on price stabilization,” said a Korea National Electrical Workers’ Union official.

Some observers said this double standard can be tied in with the declining public service contribution of the power industry.

Korea Energy Economics Institute chief researcher Jhung Han-kyung said that while KEPFO was guaranteed a certain level of profitability before 2007, government price regulations have not been working since 2008.

“For instance, you can’t have KEPCO shouldering the kinds of losses it’s facing now if you want it to supply power to mountainous or island regions, where it costs a lot to transmit and distribute electricity,” Jhung explained.

Public Policy Institute for People researcher Song Yu-na agreed, saying the current power supply structure ensures profits go solely to private providers.

“If we were to restrict the private power companies’ profit levels and raise industry power rates, which account for about 60% of consumption, we would be able promote KEPCO’s strength while still maintaining its public service character,” she said.

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