[Column] A dystopia from the utility fee freeze

As the conservative government had stood tough on the illegalities of umbrella labor unions based on the principle of law and order, it must normalize energy rates on the principle of fair burden-sharing.

Suh Kyoung-ho

The author is an editorial writer for the JoongAng Ilbo.

The economy has a lot in common with the law of nature. You reap what you sow. If you put off what must be done today, the result could come in a heavier price. Every choice in life has an opportunity cost. In other words, there is no such thing as free lunch.

The government and the People Power Party (PPP) on Friday decided to postpone the planned hike in electricity and gas bills for the second quarter. The stock price of Korea Electric Power Corp. (Kepco), a public utility company, ended the day 4.7 percent lower than the previous day. NH Investment & Securities, a major securities firm in Korea, shaved the target price for Kepco stocks by as much as 27 percent to 22,000 won ($16.72) from 30,000 won.

The Korea Gas Corp., fortunately, can pile up its losses in accounts receivables, but Kepco cannot. The public power company bought electricity at 153.7 won per kilowatt-hour and supplied it at an average of 120.5 won, 78.4 percent of what it had paid. The more power the company sells, the bigger the loss. As a result, Kepco was saddled with an operating loss of a whopping 33 trillion won ($25 billion) last year alone. The colossal deficit affects the bond and foreign exchange markets in Korea. A freeze in power bills can bring about severe consequences.

First of all, the financial market becomes unsettled. Kepco borrowed 43 trillion won ($32.7 billion) from outside due to its lack of operating funds. Of the amount, 37 trillion won was financed through debt issuance. Kepco bonds took up nearly a half, or 45.6 percent, of all corporate bonds issued in Korea last year and 4.8 percent of total bonds in the country. It means Kepco has stolen away that much of the funds that could have gone to smaller companies. The alarming squeeze in the debt market last year after the default of a municipal bond related to Legoland Korea can be partly attributed to the oversupply of Kepco bonds.

A freeze in electricity bills will certainly signal a further drop in the prices of Kepco bonds in the market. If bond investors weighing a business outlook three to six months ahead sell off the bonds, it can help lift market interest rates. The Bank of Korea (BOK) did not raise the base rate in February for the first time in a year. BOK Governor Rhee Chang-yong compared our economic situation to “driving in a heavy fog.” He said, “When the fog is heavy, it is best to wait until the fog lightens up.” If the market rate rises, the effect of the government’s monetary policy cannot but be mitigated.

Second, there is an impact on the foreign exchange market. Exports have been contracting for six straight months and the trade balance is running a deficit streak for the 13th month. If the current account also shows a red, the forex market could shake. When the Korean won to U.S. dollar exchange rate rises, import prices go higher and add to inflationary pressure. According to the Ministry of Industry, Trade and Infrastructure, when power rates go up by 51.6 won per kilowatt-hour, consumption of power decreases by 15.2 percent and the trade deficit is cut by $12.4 billion — which amounts to 26 percent of last year’s deficit — due to reduced energy imports.

Third, Kepco’s poor financial condition bodes badly for Korea’s nuclear reactor exports. The Yoon Suk Yeol government promised to restore the nuclear reactor ecosystem, and that is only possible through reactor exports. Given the ominous 459 percent debt ratio of Kepco, it cannot be competitive when it joins a consortium to bid for reactor construction overseas.

The National Assembly passed a revision to the Korea Electric Power Corporation Act to raise the upper limit of issuing corporate bonds up to three times the previous level on Dec. 28, 2022. [YONHAP]

There are greater repercussions to consider. The government had to inject a whopping 1 trillion won ($7.6 billion) into the Korea Development Bank as the state lender has a 33 percent stake in the public utility company. When the rate system is not rationalized, investment to upgrade the company’s power grids will be stalled to worsen energy efficiency.

The PPP put the brakes on the government’s plan to raise electricity bills after President Yoon ordered closer policy coordination between the party and the government. After the rate-setting norm at the end of each quarter has been broken, the predictability in policymaking has been impaired. An independent body, free from political influence, should decide utility rates. When a hike is put off, the burden only increases. Kepco’s outstanding bonds have reached 75 trillion won, costing an interest of 3.8 billion won a day. That costs each person 2,200 won a month.

The Yoon administration had criticized the previous liberal administration for delaying the overdue rate normalization for populist cause. As the conservative government had stood tough on the illegalities of umbrella labor unions based on the principle of law and order, it must normalize energy rates on the principle of fair burden-sharing. It is the only way it can defend the governing power granted by voters disappointed in the former government’s over-meddling in prices.