Time to normalize our cheap utility charges

Chief executives of two state utility firms — the Korea Electric Power Corp. (Kepco) and the Korea Gas Corp. (Kogas) — are pleading the government to allow them to raise utility charges to ease their deficits and snowballing debt. The two public energy companies have been sinking into the red and into debt after populist reasoning dictated energy charges. Rate hike is the only answer to their exit from the pit of debt.

In a press conference, Kogas CEO Choi Yeon-hye confessed that the company’s deficit from the gap between import costs and collected utility fees stretched to the extent that it cannot be covered even if all of its employees work without pay for 30 years.

“We are standing on the brink of a cliff due to the pressure from the surge in the debt financing cost and U.S. dollar exchange rate against the local currency,” Choi said.

She stressed that gas rates should go up in the summer season when heating demand is low to ensure a stable supply in the peak of winter. Cost coverage stops at 74 percent for the state gas importer. Due to the entrenched loss-making structure, the deficit in question reached 13.5 trillion won ($10 billion) as of March. It has been issuing bonds to keep up with import payments. The widening gap translates into a spike in its financing cost. Interest payments cost the gas supplier 4.7 billion won per day.

Kepco is also sinking in debt. The company’s deficit has accumulated to 43 trillion won as a result of the forced nuclear phase-out under the Moon Jae-in administration and politicization of power rates. Its debt hit 203 trillion won at the end of last year, costing an interest of 4.5 trillion won a year. Kepco CEO Kim Dong-cheol called for rate normalization even at a marginal level, as it cannot solve its financial woes by only streamlining.

Households and companies are grappling with entrenched high inflation and interest rates. A hike in utility bills can add to inflationary pressure, and a raise in power rates during the summer season can also be burdensome. But it is not wise to keep to energy rates below international levels to deepen losses for state utility companies for immediate relief for consumers, as cheap rates contribute to energy overconsumption.

If state utility companies defer needed infrastructure upgrades and investments, they can damage the overall energy habitat. Their losses eventually could be billed on taxpayers. France had to fully bail out and nationalize EDF, its loss-making power company. The government must draw up a road map for an incremental rate hike to soften the shock and its side effects, along with relief actions for the socially vulnerable. It must also consider setting up an independent rate-setting committee to keep political influence at bay.