[Insight & Opinion] The Government-Determined Electricity Rate System: It's Better to Change It

The government raised the electricity rate by 8 won per kWh (kilowatt-hour) for the second quarter of this year on the 15th. This rate should have been decided by the end of March. However, it is far from sufficient to resolve Korea Electric Power Corporation’s (KEPCO) accumulated deficit, which has exceeded 44 trillion won. According to the "KEPCO Management Normalization Plan" submitted to the National Assembly by the Ministry of Trade, Industry and Energy in December last year, an increase of 51.6 won per kWh in electricity rates is necessary this year to eliminate the accumulated deficit by 2026. But including the 13.1 won increase in the first quarter, the total electricity rate hike this year amounts to only 21.1 won.

But isn’t this strange? Electricity rates are simply the fees paid to KEPCO based on the amount of electricity consumed. They are not electricity taxes. Yet the government sets and announces them. The process of determining electricity rates is stipulated by the "Electricity Business Act." The body responsible for adjusting electricity rates is the Electricity Commission, an organization under the Ministry of Trade, Industry and Energy. However, the final decision is made by the Minister of Trade, Industry and Energy. When KEPCO submits a rate adjustment proposal to the ministry, the minister grants final approval after review and resolution by the Electricity Commission. During this process, consultation with the Minister of Strategy and Finance is also required.

Electricity is a monopoly market and affects the lives of all citizens. Naturally, careful decisions are necessary. However, there are standards for setting public utility rates. They must be at a level that recovers appropriate costs and a reasonable return on investment. This is known as the principle of full cost recovery. But it is difficult to uphold this principle. The way electricity rates are determined is not much different between the previous and current administrations. The fuel cost linkage system, introduced to avoid excessive government interference in the rate-setting process, is being operated ineffectively. In fact, no government can freely decide electricity rates. The government is always caught between "price stability" and "rate rationalization." Rather than criticizing the government, the system itself needs to be changed. If possible, reform should aim to reduce the possibility of government intervention.

The current administration already proposed separating the Electricity Commission into an independent body as a national agenda during the transition committee period. Of course, securing independence does not mean the commission should be free from public oversight or that mechanisms for reflecting opinions should be removed. Consumer opinions must naturally be reflected in the process of setting public utility rates, especially for monopolistically supplied services, and related information should be transparently disclosed. Even if an independent Electricity Commission is established, it will be difficult to completely exclude government or political influence. Nevertheless, if the decision-making process can be made more rational even slightly, it is better to make changes.

KEPCO announced a self-rescue plan to raise 25.7 trillion won through the sale and leasing of owned real estate and the return of wage increases by executives and employees. Criticism of KEPCO’s reckless management is valid. However, the 44 trillion won deficit is not due to reckless management. Labor costs account for only 1.3% of KEPCO’s budget. Moreover, delaying investment in the power grid for cost-cutting reasons is undesirable. Stable electricity supply is more important than supplying it cheaply. Reduced investment in power facilities can also negatively affect safety.

The government will soon have to decide on the electricity rates for the third quarter. The third quarter is when electricity consumption peaks. We are likely to see another round of indecision. The results of a research project commissioned by the Ministry of Trade, Industry and Energy for reorganizing the Electricity Commission are expected as early as this month or next. Originally, normalizing the energy market function was a basic direction of the current administration’s energy policy. The longer it drags on, the harder it will be to push forward.

Sangcheol Kim, Economic Columnist

This content was produced with the assistance of AI translation services.