With debts mounting, Kogas asks to hike prices

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With debts mounting, Kogas asks to hike prices

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The government is considering a hike in city gas prices in September, pointing to increases in the price of liquefied natural gas (LNG).

The hike is expected to be between 4 to 5 percent.

The request came from the state-run Korea Gas Corporation (Kogas), which previously asked the government to allow it to raise prices at least 9 percent.

The company has more than 4.27 trillion won ($3.6 billion) in corporate debt, primarily because the government won’t allow it to immediately adjust prices when LNG becomes more expensive.

But the September increase is being criticized by the public, with some saying it doesn’t make sense for Kogas to charge more when the global oil price has fallen to nearly $40 a barrel.

In the first half of this year, the Ministry of Trade, Industry and Energy and its affiliate Kogas dropped city gas prices by 24.1 percent over five months: 5.9 percent in January, 10.1 percent in March, and another 10.3 percent in May.

City gas prices in Korea are determined by global oil and LNG prices four months earlier

Based on this principle, the Energy Ministry sets the city gas price every two months, considering the LNG price four months earlier and the won-dollar exchange rate. Raises or drops happen if the LNG price shifts more than 3 percent.

The problem occurred this time because the LNG price rose to the year’s highest level at $65 per barrel in May - the month that determines Korea’s gas fee in September - which was much higher than January’s $45.77 per barrel.

The Energy Ministry and Kogas say that the city gas price should now be raised to reflect the increased LNG price in the first half, explaining that the low gas fee has significantly contributed to the company’s corporate debt.

“Kogas has suffered mounting corporate debt because it wasn’t allowed to raise city gas fees [reflecting the global LNG price and production costs] ever since 2008,” Kogas’ new CEO Lee Seung-hoon told reporters at a press conference on Wednesday in Sejong City. “The government didn’t allow it to raise the city gas fee in times of rising oil prices, instead making us freeze the gas fee.”

After the Park Geun-hye government’s initiative to reduce the debts of public companies, Kogas slimmed its debt-to-asset ratio down to 381 percent last year, from 389 percent in 2013. However, the sheer amount of debt rose by 3 trillion won to 37.05 trillion won last year.

The debt levels resulted in Kogas being the lowest-ranked in a corporate management assessment done by the Finance Ministry.

A hike of 9 percent is excessive considering the current state of the economy, said Energy Ministry officials, and because of its potential impact on household economy.

The ministry also said it can’t fully accommodate Kogas because a utility fee hike would contradict the government’s other policies to revive consumer sentiment, such as slashing the individual consumption tax.

However, Lee Ho-hyun, head of the gas industry department at the Energy Ministry, said the ministry admits that gas prices need to be higher, and that Kogas doesn’t have many other options to get rid of its debt.

“There are many ways of slashing corporate debt, including selling off assets and properties, attracting investment funds or raising service fees,” said Lee. “However, Kogas’ disposable assets are not so big. It has much larger debt coming from accounts due, because its gas fees aren’t high enough.

“For Kogas, every 1 percent rise in accounts due is actually worth several billion won,” Lee added. “If the fee hike doesn’t happen in September, the debt will get even larger and the fee hike may happen in November.”

According to Kogas, LNG’s initial price accounts for 83 percent of the actual fees levied on regular households, followed by the company’s production costs, at 10 percent, and regional distribution, at 7 percent.

Some critics say Kogas should tighten its belt further, by slashing productions costs within the company and reducing employee benefits or selling off unnecessary properties, before calling for fee hikes.

Kogas says that it has done as much as it can, selling off its former headquarters in Seongnam, Gyeonggi, worth 131.2 billion won, and restructuring its business to procure 1.05 trillion won.

However, some studies show that Korean utility fees are already too cheap.

In a report last month, the Bank of Korea pointed out that the rising prices of raw materials imported haven’t been sufficiently reflected in utility prices.

The Korean government has kept utility prices like electricity, city gas and water low as the nation’s inflation rate has slowed since 2013, the BOK said, in order to stabilize the real
economy.

According to the BOK, a 10 percent drop in city gas fees was estimated to result in consumer prices dropping up to 0.45 percent.

This means that a 10 percent hike may result in a extra burden of 0.45 percent on household economy.

“Limiting the utility prices’ hike definitely helps reducing burdens for mid- to low-income households’ livelihoods,” the BOK report wrote. “However, the government should raise prices up to the point where service providers can cover the production cost.”

Intentionally holding off the price hike may hurt public corporations’ financial soundness, and eventually reduce the quality of public services, the BOK report wrote.

Korean utility service prices have been steadily set below 100 percent since the 2008 global financial crisis, the BOK wrote, which means service providers spend more in production costs than they collect in return.

According to data from the International Energy Agency and the BOK, Korean city gas is priced at 88.8 percent of the average for countries in the Organization for Economic Cooperation and Development.

The Energy Ministry is scheduled to announce the exact amount of the price hike tonight, after undergoing negotiations with other economy-related ministries.


BY KIM JI-YOON [kim.jiyoon@joongang.co.kr]

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