Lessons From California's Power Crisis

Korea''s Plan for Restructuring the Power Industry Is Greatly Flawed

For the first time since World War II, shortages of electricity available to California''s utilities have resulted in temporary blackouts in the San Francisco Bay area. On Jan. 17, Governor Gray Davis proclaimed a state of emergency.

Governor Davis said that California lacked 45 percent of the power it needed to keep the lights on and that the two and a half hours of power interruption in parts of the state had been, therefore, unavoidable. The greatest cause of the power crisis was the deregulation measures California implemented four years ago, based on the assumption that decontrol would lower the price of electricity. As a fundamental solution for the power crisis, Governor Davis announced that he was reimposing controls on the electricity industry and setting up a state energy authority, which will directly regulate utility charges and power supply as well as take exclusive charge of building and managing power plants.

Last Dec. 9, the National Assembly approved a bill to restructure the electricity industry, with the key goal of introducing an open competition system to the nation''s power market monopolized by the Korea Electric Power Corp. The bill calls for splitting the state-run KEPCO into five power-generation subsidiaries and one nuclear power generating unit.

The government''s defense for pushing the privatization bill through the National Assembly, despite stiff resistance from experts and labor unions, was that privatization would introduce a market competition system, lower electricity rates and end KEPCO''s ballooning debts. California''s woes show us, however, that privatization might not be the best strategy.

While working as an outside director at KEPCO for years, I was able to gain a detailed knowledge of Korea''s power industry. It was based on this that I took every opportunity to call for caution in pursuing the privatization of the power industry because it could produce results running directly counter to the government''s objectives. Following are the reasons.

First, the government is planning to divide KEPCO into power-generation companies with a capacity of 7 million kilowatts each and to build more power plants. The intended capacity is prohibitively high for either Korean or foreign investors. Throughout the world, very few private companies specializing in power generation exceed 5 million KW in capacity unless they also transmit and distribute electricity, like KEPCO or the Tokyo Electric Power Company. Because of the uneconomically high capacity, the government will have a hard time finding private investors to acquire any of the power-generation companies to be spun off.

Second, Korea applies inflexible power purchase contract terms, which in their current form are more liable to discourage than promote investments in power generation facilities. Korea''s benchmark companies, such as Hyundai, LG, SK and POSCO, which have obtained a business license for power generation, are either building power plants or undergoing trial operations. Hardly any of them managed to attract foreign investments, however.

Apart from the companies that entered the power industry earlier, no other company, local or foreign, is interested in competing in the market and the government has failed to designate a new licensee during the last three years.

Third, a power supplier always has to have an appropriate level of facilities in reserve to ensure a stable power supply. Private companies are apt to cut back on the necessary facility investments since their primary goal lies in maximizing profits. The nation cannot secure the power reserves required by the economy if the electricity industry is solely in the hands of private companies. A large part of the recent power problems in California came from the power-generation companies'' reluctance to invest in new facilities to maintain the necessary rate of power reserves following the deregulation in 1996.

Fourth, power supply and demand fluctuate severely throughout the year. This means the industries and consumers can suffer from dramatic increases in the price of electricity during peak use times due to shortages of electricity available if electricity rates are determined wholly by open competition based on the principles of supply and demand.

Fifth, the power-generation market could fail to attract local and foreign investors because of the lengthy period of construction and the long time it takes to recover investments. The government must prepare for this possibility and devise countermeasures, such as holding KEPCO or other institutions responsible for developing power sources and supplying power based on accurate forecasts of supply and demand.

We can draw a significant lesson from the California''s decision to reimpose controls, four years after deregulation. Once the power industry is privatized, the government cannot order private companies to build more power plants or lower the price of electricity. Its current plan for restructuring the electric power industry contains many flaws and must undergo great revision.

The writer is an honorary professor at Korea University.

by Kim Dong-ki