[Debt Dinosaur in Crisis]③ Fuel Cost Linkage 'Ineffective' · Independent Fare Decision 'Stalled'

"A new item called 'fuel cost adjustment fee' will be established to reflect fuel cost fluctuations in electricity rates periodically (every 3 months)." This is the main point of the 'Electricity Rate System Reform Plan' finalized and announced by the Ministry of Trade, Industry and Energy and Korea Electric Power Corporation (KEPCO) in December 2020. At that time, the Moon Jae-in administration explained, "The existing electricity rate system does not timely reflect cost fluctuations such as oil prices in the rates," and "the purpose is to strengthen the linkage between cost fluctuation factors and electricity rates."

The main content of the reform plan is to determine electricity rates quarterly by reflecting the difference between the 'actual fuel cost,' which is the average of the previous three months based on the trade clearance prices of liquefied natural gas (LNG), coal, and oil announced by the Korea Customs Service, and the 'standard fuel cost,' which is the average of the previous year.

An electric meter is installed in a commercial building in Seoul. Photo by Jinhyung Kang aymsdream@

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KEPCO lowered the fuel cost adjustment unit price by 3 won per kilowatt-hour (kWh) in the first quarter of 2021, the first quarter of the fuel cost linkage system introduction. This reflected the downward trend in oil prices in the second half of 2020. However, despite the need to raise it by 0.2 won in the second quarter due to rising international oil prices, the adjustment unit price was maintained at -3 won following government notification. Critics pointed out that the fuel cost linkage system became ineffective from the start as it only operated when prices fell.

Afterward, KEPCO estimated that the actual fuel cost in the first quarter of 2021 was 446.5 won per kg, which was 107.6 won (31.7%) higher than the standard fuel cost (338.9 won), requiring an increase of 24.6 won per kWh. However, since the adjustment fee can only vary by up to ±5 won and by a maximum of 3 won compared to the previous rate, KEPCO requested a 3 won increase from the government. The government, however, instructed to freeze the rates "considering the need to stabilize the lives of citizens suffering from prolonged COVID-19 and high inflation."

Such incidents have continued to repeat to this day. Although a 38.7 won increase was needed in the second quarter of 2022, the rate was frozen, and although a 38.5 won increase was necessary in the third quarter, the increase was limited to 5 won. Since then, the fuel cost adjustment fee has been maintained at +5 won for nine consecutive quarters up to the third quarter of this year.

City gas, which introduced the fuel cost linkage system before electricity rates, is still under government price control. Yuje-guk, a legislative researcher at the National Assembly Research Service, pointed out, "The government is suppressing increases in residential city gas rates used for household consumption as much as possible," adding, "As a result, in 2022, when the import price of natural gas rose sharply, the city gas rate for business heating increased by 73.2%, while the residential city gas rate only increased by 18.3%."

The government decided to raise the wholesale price of residential city gas by 1.41 won per MJ (megajoule), a 6.8% increase, starting this August. This is 15 months after raising the wholesale prices for residential and general use in May last year. Researcher Yu said, "According to the International Monetary Fund (IMF), the price of natural gas on the European Netherlands TTF spot market was $10.8 per MMBTU in June this year, surpassing last year's third-quarter price of $10.6, indicating that international natural gas prices are rising again," and expressed concern that "this reflects the possibility that the cost of natural gas imports during the winter, when heating demand is high, may increase, potentially offsetting the recent rate increase effects (profit improvement)."

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The Yoon Seok-yeol administration also agrees on the need to independently determine electricity rates. At its launch, it listed "strengthening the independence and expertise of the electricity rate regulatory agency" as a national task. Accordingly, the Ministry of Trade, Industry and Energy, the competent ministry, commissioned a study in October 2022 titled "Strengthening Independence and Expertise of Power Market, Rates, and Regulatory Governance." The study results were originally scheduled to be announced eight months later in June last year but were only released in May this year. In the meantime, in October last year, Kim Dong-chul, KEPCO president, ignited discussions on establishing an independent organization free from political influence, saying, "An organization that can independently decide whether to raise electricity rates, like the Bank of Korea's Monetary Policy Committee, is needed."

The final report containing the study results recommended "strengthening the independence of the Electricity Commission." The report emphasized, "Currently, the Electricity Commission is very weak in terms of organization and functions compared to other foreign regulatory agencies, as well as the Fair Trade Commission and the Korea Communications Commission," and stated, "Relevant systems should be improved so that the Electricity Commission can fulfill its role as an independent regulatory agency in the future." In particular, it specified, "An independent regulatory agency free from external pressure or political interests that reasonably regulates various interests surrounding electricity rates is very important for the sound development of the power industry," and "It is recommended to grant the Electricity Commission the authority to approve electricity supply terms, which is currently held by the Minister of Industry, so that it can regulate electricity rates as an independent regulatory agency."

Although the conclusion of the long-term study over one year and seven months was to strengthen the Electricity Commission's independence, the government still maintains a "under review" stance. A Ministry of Trade, Industry and Energy official said, "Based on the study results, we are reviewing related agendas while collecting opinions from various stakeholders," adding, "No specific measures have been established yet, and there is no set deadline for a conclusion."

Lee Deok-hwan, emeritus professor at Sogang University (Chemistry and Science Communication), criticized, "The government is ignoring market logic." Professor Lee said, "In the energy sector, policy tools that allow market logic to operate should have been developed, but successive governments have used the easiest method of rate control," and argued, "The independence of the electricity rate determination system should not be a mere wish but must operate as the most important principle."

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