[VIEWPOINT]Restructuring Energy Calls for Caution

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[VIEWPOINT]Restructuring Energy Calls for Caution

A few days ago, I attended a workshop held at the main office of Citigroup in New York City. During the seminar, I participated in a discussion on Korea's energy industry that was organized by several major U.S. energy companies and law firms. While listening to the heated debate on the issue, my anxiety about the restructuring of the energy industry under the supervision of the Korean government grew stronger.

It's been almost a year since the restructured energy industry bill passed the National Assembly, and the legislation of the restructuring of the gas industry is still pending in the assembly.

Major controversies have resulted from the monopoly held by the Korea Electric Power Corp. and the Korea Gas Corp. But considering the huge influence the two energy companies have on our economy, I would like to point out that there will be some problems if the restructuring of these companies goes forward.

In 1996, California implemented a competitive system through a restructuring of its energy industry. At that time, no one in the state predicted a long-term power shortage would begin in 2000.

Moreover, the people who had implemented the system in California even went on to say that the price of electricity would decline. The faulty restructuring by the state of California ended in a power shortage, which lasted for almost half a year. The three electrical companies that provided power to the state are now in debt for $13 billion, and one of the companies filed for bankruptcy last April. The price for the electricity, which was said to be going down, has surged seven times between 1999 and 2001.

The U.S. government investigated the main cause of the California power shortage and the three companies have now filed a lawsuit against the Federal Energy Regulatory Commission.?

The price of electricity, which dramatically went up when availability went down, stabilized after the U.S. government started to distribute additional supplies of energy.

I predict several situations could occur once the restructuring of the Korean energy industry proceeds as planned. First, the foreign and domestic companies participating in the bidding to purchase subsidiaries of the Korea Electric Power Corp. would most likely try to cut down the purchasing price.

However, subsidiaries of the corporation would form a cartel, which will set a prearranged price, as is happening with domestic oil refinery companies. This would in turn add to the consumer price.

If the government set the upper limit of the consumers' price at its lowest level this might provoke a power shortage situation as private energy companies would reduce the supply of generated power.

Therefore, domestic and foreign companies that plan to purchase subsidiary companies would demand during the biddings higher profit rates than the rates that the companies are earning now.

If the government refuses to set the limit, the number of companies participating in the bidding will be limited. Why? Companies would refrain from buying large-scale power companies due to the stagnant global economy as well as capital stringency of domestic enterprises.

It takes approximately three to eight years to construct a power plant. Considering the time to regain the capital invested, unless the plant expects solid earnings, companies would back away from the bidding. In the worst-case scenario, energy companies would be sold at giveaway prices.

If pending legislation on the restructuring of the Korea Gas Corp. passes through the National Assembly and the corporation is divided into several affiliates, the corporation would lose the advantage it once enjoyed as the largest gas company negotiating to buy gas.

It's questionable whether the companies that would purchase a divided Korea Gas Corp. would invest sincerely, even under the best of circumstances.

The companies might have to face a reduction in price due to the expansion of the amount of supply, and their profits might decline as they resort to using pipelines and storage facilities.

Electricity and gas have definite influences on our economy. Therefore, restructuring both industries must be done with extreme care.


The writer is a professor of economics at Columbia University in New York City.

by Moon Hi-hwoa

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