Tariff raise eases cost burden for KEPCO, complicates inflation fight


The government announced Tuesday it will raise electricity tariffs by an average 4.9 percent starting August to reflect rising energy costs even as inflation remains high.

The Economy Ministry said electricity bills will rise 6.1 percent for industrial use but said the raise for home use will only be 2 percent.

Finance Minister Bahk Jae-wan, addressing policymakers at a price stabilization meeting earlier in the day, said Seoul would do its best to keep the increase as small as possible and implement the raise gradually.

“Current power tariffs cover only 86.1 percent of production costs but the government has decided to raise tariffs by a minimum after considering the burden on low income-earners and on inflation,” the government said in a statement.

The average hike of 4.9 percent is a compromise after the Finance Ministry, in charge of the budget, negotiated the figure down from a 7.6 percent rise demanded by the Economy Ministry, tasked with reducing accumulating loss at state-run Korea Electric Power.

Seoul did not allow KEPCO to raise electricity bills for the past six months even as energy production costs soared, causing the company to double its net loss to 549.65 billion won ($522.1 million) in the first quarter of this year compared to a year ago. KEPCO forecasts it needs a raise of about 16 percent to 17 percent to cover the company’s energy production costs.

The raise is likely to ease the burden on the state company but is complicating the government’s inflation fight. It expects the tariff raise to lift the inflation rate by an average of 0.038 percentage point.

The Consumer Price Index has stayed above the central bank’s target range of 2 to 4 percent since January and hit a 29-month high in March.

The Lee Myung-bak administration has widened the range of red meat and processed food items subject to tariff exemption and pressured oil refiners and telecommunication providers to freeze prices in the recent months.

Judging that consumer prices would remain high in the second half, the Finance Ministry said it would discuss ways to improve shortcomings in the distribution network at a newly established taskforce comprised of relevant ministries.

“In order to address structural problems in our industries and the distribution network, we are going to launch a taskforce,” Bahk said during the price stabilization meeting. He also said Seoul would consider giving multiple expiration dates on food items of varying qualities so that edible items are not wasted.

A survey by the Bank of Korea said more than half of consumers expect inflation to remain in the 4-percent range for the second half of the year.

By Cynthia J. Kim (cynthiak@heraldcorp.com)