ENERGY MARKET AUTHORITY

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ENERGY MARKET AUTHORITY:

(Review of tariff-setting mechanism): 9.

Mr Seah Kian Peng asked the Minister for Trade and Industry whether the Energy Market Authority will be reviewing the tariff-setting mechanism in determining the electricity tariffs to better reflect prevailing fuel prices in the market.

The Senior Minister of State for Trade and Industry (Mr S Iswaran) (for the Minister for Trade and Industry): Mr Speaker, Sir, at the last parliamentary session, I had informed the House that the Energy Market Authority (EMA) would study whether the formula for tariff-setting can be further improved. Any change to the formula should take into

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account how electricity tariffs can be more reflective of the prevailing market price for oil, while minimising volatility so that consumers would not be faced with large adjustments frequently. EMA is now studying the tariff-setting formula, and targets to complete its review by the middle of next year.

Sir, the three-month forward fuel oil price has dropped significantly over the last month. Hence, as the Prime Minister mentioned yesterday, we can expect a reduction in the electricity tariff for the coming quarter of January to March 2009. Besides fuel costs, the electricity tariff also includes non-fuel costs of generation, transmission and distribution costs, and miscellaneous fees like meter reading and billing. The exact tariff will be known in the first week of December, after these components are computed and finalised.

Mr Seah Kian Peng (Marine Parade): One supplementary question, Sir. I would like to ask the Senior Minister of State whether he agrees that the current formula is certainly deficient in that it does not address the intended objective of smoothening the impact of volatility of the electricity tariffs. Can this revision that he is looking at be brought forward, instead of middle of next year, to a much earlier date?

A simple suggestion: as it is now, it is done every quarterly. One easy way is to just change it to monthly revisions. This will clearly ensure that we do not get to see some of these hefty hikes that we have seen of late.

Mr Iswaran: Mr Speaker, Sir, at the last sitting we had an extensive discussion on this. I do not propose to go into the full details but I thank the Member for raising this. I want to just highlight a few key points. Is the current formula deficient? I think we need to think about it in the context of what is the alternative.

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In the last session, we circulated a table chart showing the trend in the electricity tariff and oil prices. I think the key take-away from that is – using the formula that we have been using for the last four years or so – in these last 16 quarters, 11 have produced outcomes which are actually more favourable to consumers than if we had used spot oil prices – meaning the price of oil in a month – as the Member has suggested. The reason why this looks like a more attractive proposition today is because oil prices have come crashing down and so there is a disjoint between a price set based on a number that was determined three months ago as opposed to the current price. So, naturally, in a downward trend, this is going to be the case. So taking on the position that when we set a formula and when we review the formula, we need to look at the overall picture – not just at the current context but at the longer-term trends – to the best of our ability, and find a formula that will best serve our needs, both to protect consumer interests and at the same time, ensure the long-term viability of the industry.

As for the timing, the reason why it needs to go on till middle of next year is primarily because – as the Member would appreciate significant market sensitivity – many companies are involved and they base a lot of their decisions on this formula, amongst other things. So we want to make sure that we have done a deliberate consultative process before we come up with an outcome which all parties can subscribe to.

Ms Sylvia Lim:

Sir, I would like to ask the Senior Minister of State whether in EMA's review, it is also considering something like the fuel equalisation fund that the public transport operators maintain to tide over the volatility in fuel prices.

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Mr Iswaran: If I understand the Member's point correctly, she is drawing the analogy from the transport system where the transport operators put money towards a fund which they then draw upon when there is volatility in the fuel oil price. We have done away with that in the electricity market for a simple reason. The objective is really to have a very competitive market and ensure that price competition, with a transparent pass-through of costs, would serve our interests best.

The other thing is if we insist that the electricity generating companies put money towards a fund of this nature, bearing in mind that the cost of fuel is more than half the cost of their total production, they will need a substantial allocation of their capital for this. Then, what we inevitably are doing, is imposing higher cost on them and this cost will be passed through to our consumers as well. So I do not want to preclude any options, but I just want to highlight to the Member that these are the downside risks of doing so. But we welcome any feedback from Members, as well as the general public, in the review process.