Bonus Despite Heavy Deficit

Payment of bonuses is an agenda item every time the National Assembly conducts its annual inspection of Korea Electric Power Corp., or KEPCO. Several lawmakers and media have been quick to criticize KEPCO, a state-run company with a heavy deficit, for giving bonuses. The company has cried “unfairness” in refuting such criticism. This year will likely be no exception. KEPCO was 2.3 trillion won (1.9 billion U.S. dollars) in the red in this year’s first half. Because it received the highest grade in last year’s assessment of state-run companies, however, KEPCO executives and staff will get 500 percent of their basic monthly salary as an "incentive."

The term "incentive" at state-run companies is another name for bonus. In the past, employees at all public companies were all paid a 400-percent bonus. Employees at certain state-run entities, however, have received bonuses of 300 to 500 percent in recent years after annual management assessments. After former LG Electronics Vice Chairman Kim Ssang-soo was appointed CEO, KEPCO topped managerial assessment among 92 state-run companies last year, earning recognition for managerial reform and self-improvement efforts and for landing a major contract for nuclear power plants with the United Arab Emirates. The company depends on utility fees for most of its revenue, however, and its deficit stems from structural problems, such as low utility rates set below production costs and distorted utility rate systems. In light of the so-called Act of Public Sentiment prevailing in Korea, a 500-percent “incentive” at a state-run company with an enormous deficit sounds ridiculous. A closer look, however, shows that such a bonus does not blindly deserve criticism.

The proper average cost for electricity production was 88.45 won (7.46 cents) per kilowatt hour as of 2008. That year, KEPCO finished nearly four trillion won (3.4 billion dollars) in the red by selling 385 billion kilowatt hours at 78.76 won (6.64 cents) per hour, 11 percent below production costs. The rates on power for industrial use, education, farming, late-night electrical use and street lights are set below production costs. Power for industrial use, which accounts for 52.8 percent of all electricity sales, has worsened KEPCO’s finances this year, a time when the recovering economy has stimulated a rise in power consumption. If the company’s deficit and debt ratio keep rising, the burden will eventually weigh heavily on the public.

The government and KEPCO are taking steps to raise utility rates an average of three percent. The distorted rate system requires urgent correction. Considering the scale and competiveness of conglomerates, fees for industrial power utilities, which had been set below production costs, should be adjusted to reflect real costs. The portion of electricity costs in conglomerates` production costs is 1.5 percent on average, a level companies can absorb. The normalization of the electricity rate system will help reduce energy waste and allow KEPCO to normalize its business structure, which has caused the company to incur a bigger deficit in proportion to sales volume.

Editorial Writer Kwon Sun-hwal (shkwon@donga.com)