Gov`t torn over raising electricity rates, curbing inflation

With demand for electricity hitting record highs four times this winter, calls for raising electrical charges are growing.

Not only Korea Electric Power Corp., or KEPCO, but also civic groups and the government agree that electrical charges in Korea are lower than those of other countries. They also say the low fees can undermine the state-run power company`s operations and the national economy.

The government has repeatedly said a hike in electricity charges is impossible because this will cause inflation.

○ KEPCO`s deficit grows

KEPCO said the cost compensation rate, or the share of electricity production cost to the sale price, reached 93.7 percent in August last year. Under this structure, the more electricity the company sells, the more losses it suffers.

The company has run a deficit since 2007 and likely suffered another last year as well.

A KEPCO source said, "The price of kerosene mainly used for heating rose 98 percent from 2002 through last year, but that of electricity grew a meager 12 percent over the same period," adding, "This abnormal price structure caused kerosene consumption to fall 55 percent while electricity use grew 49 percent over the same period."

"Electricity charge that is lower than the cost will cause KEPCO to go into the red, and this will burden the national economy since the deficit should be compensated by taxes."

On fears that a rise in electrical charges will burden households, KEPCO said, "A 1-percent increase in electrical charges will raise the manufacturing cost in every industry just 0.01 percent and lead to just a 300-won rise per month in electricity rates for households on average."

○ Efficient management

Civic groups also agree on the necessity for higher electrical fees but say a hike in electrical rates for industrial use, which is lower than that for households, should come first.

Electricity consumption for industrial use accounted for 53.7 percent of all power consumption last year, 2.7 times that of household consumption. Electrical rates for industry, however, were 75 percent of those for households.

Cha Jeong-hwan, director of a civic coalition on energy, said, "Electricity prices should be increased in a gradual manner, with that for industrial use raised first."

KEPCO`s management, however, is under fire for not being efficient. People still believe that the company is suffering from reckless management.

In a parliamentary inspection of the government last year, lawmakers blasted KEPCO for giving its employees more than 400 billion won (363 million U.S. dollars) in bonuses despite running a deficit of more than 900 billion won (817 million dollars) in the first half of last year.

○ In a dilemma

President Lee Myung-bak is also aware of the necessity of raising electrical rates. "Energy prices were somewhat distorted," he said after a briefing by the Green Growth Committee last month.

The problem is inflation. Though the government considered raising electrical charges early last year, it did not for fear of a backlash from the working class in the run-up to the June 2 local elections.

The government target of keeping inflation at the 3-percent level is preventing a hike in the rates this year. In this context, Knowledge Economy Minister Choi Joong-kyung said in his inauguration speech, "It`s difficult to raise electrical charges soon due to inflationary pressure."

According to the Strategy and Finance Ministry, 32 public service charges, of which electricity charges account for 19 percent, are responsible for 16.3 percent of inflation. This makes the government, which places top priority on curbing inflation, unable to raise electricity charges.

alwaysj@donga.com