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Why are electricity tariffs so high? By Leong Sze Hian.

Electricity – why is the “messenger” earning more than the gencos?

Leong Sze Hian / Columnist

It may not be appropriate for a privatised state asset operator, to think like the Government and try to save it money, whilst at the same time trying to maximise profits like a private company.

According to the EMA’s, “How is your electricity tariff determined?”, published on 31 October, it said: “EMA cannot reveal further how the gas is priced as the information is commercially sensitive”.

Going forward, what measures are we taking to prevent the current state of affairs from continuing, whereby I understand our retail electricity tariffs are one of the highest in the world?

By the way, with about $ 1.6 billion in combined profits for the electricity sector for the last reported financial year, is Singapore the highest “electricity profits per capita of population” nation in the world?

Does this mean that with about 1.1 million households, the average profits made on a per household basis, is about $1,500 a year ($1.6 billion profits divided by 1.1 million households)?

A fundamental flaw in formula?

I refer to the article “SP Services : Don’t shoot the messenger” (Today, Nov 1).

The transmission charge, together with the fee for billing and reading of meters, makes up for only 17 per cent of the electricity tariff.

The remaining 83 per cent of the tariff is paid to gencos.

The total profits of the power sector in Singapore was about $1.6 billion.

So, the question is why is it that SP’s profits of $ 1.086 billion is about 68 per cent of the total power sector’s profits of about $ 1.6 billion?

Why are the gencos’ (power generation companies) share of profits at about $600 million, only about 38 per cent of the total sector profits, against their 83 per cent proportion of the tariff ?

Does this mean that SP’s component in the tariff formula has resulted in its disproportionately high profits?

Is this a fundamental flaw in the tariff formula, pricing, and the general principle of enabling costs recovery plus inflation ?

Factors to also consider

Citing SP’s profit from the regulated electricity market here of $ 423 million, may simplistically ignore the fact that it is its monopoly, branding, strength, etc, which enables it to derive other revenues and profits, including the non-regulated (competitive) market.

As an analogy, it may be akin to a train operator saying that revenue from rental at stations, advertising, etc, should not count in the formula for the fare tariff.

The 6-per-cent return on total assets (Rota) should not be the only criteria. We may also need to look at the Return on Equity, Profit Margin, etc.

SP’s Return on Shareholders’ Equity was 26 per cent, and its Ratio of Net Profit After Tax to Operating Revenue was 20 per cent.

In any case, the assets growth are in a sense, derived from the revenue earned from Singaporeans over the decades, and total assets will surely grow with an increasing population and economy.

In the provision of an essential public good as a monopoly, the principle of cross-subsidy of core and non-core revenues and profits should also be considered, as it ultimately impacts how much people pay.

According to the Department of Statistics’ Yearbook of Statistics 2008, the Consumer Price Index (CPI) Electricity Tariff component increased by 41 per cent from 1997 to 2007. In index-based terms, the tariff increase was the highest amongst the 14 items of expenditure in the CPI.

Why is the messenger earning more than the provider?

As to the statement that “it would be unfair to ask the Government for funding because that would mean taking from taxpayers”, I feel that it may not be appropriate for a privatised state asset operator, to think like the Government and try to save it money, whilst at the same time trying to maximise profits like a private company.

Like most power operators in other countries, it should seek an optimal combination of funding, instead of excluding the possibility of Government funding altogether, particularly in infrastructure.

Look at it this way - with a $ 6.4 billion budget surplus, estimated transfer of $ 5.2 billion to the Development Fund, $12 billion of land sales that may not be included in the budget accounting, and the change in the constitution to dip into the reserves - taxpayers have already paid a lot in taxes, some of which may be utilised to reduce the people’s electricity costs.

To borrow the analogy used of “shooting the messenger” who is only delivering the goods, why must the messenger earn so much more than the maker of the goods ?

Some questions remain unanswered

Since the pegging of the electricity tariff to forward fuel oil prices started in 2004, why was this changed? What was the pricing mechanism before the change?

Although we know that the power distributors buy electricity which is pegged to forward fuel prices, what is the pricing mechanism that power generation companies pay for the natural gas which accounts for about 80 per cent of our electricity needs?

As I understand that the gas contracts which we signed with foreign countries are typically for a decade or longer, what pricing mechanisms are in place now, and historically? Can these gas supply, electricity sale, etc, contracts be made public?

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Mr Leong Sze Hian will be on Radio 100.3FM every Tuesday, from 9am to 10am to discuss issues which may have been raised here on TOC. Do tune in!

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