HIKE IN ELECTRICITY TARIFFS

HIKE IN ELECTRICITY TARIFFS: 7.

Mdm Ho Geok Choo asked the Minister for Trade and Industry (a) what is the rationale for the increase in the electricity rates when oil prices have been on the decline, from a high of US$147 in July to a low of US$87 in recent weeks; and (b) whether he will clarify on the electricity rate pricing model.

8.

Er Lee Bee Wah asked the Minister for Trade and Industry with electricity tariffs rising several times, (a) how does the Ministry regulate the market to ensure that (i) the revenue earned by Singapore Power (SP) can be translated into benefits for households in Singapore; (ii) the revenue of SP is ploughed back into making it more efficient in supplying electricity to all households and businesses; and (b) what is being done to ensure that pricing by energy companies are reasonable.

9.

Ms Sylvia Lim asked the Minister for Trade and Industry (a) whether the 21% hike in electricity tariffs with effect from October 2008 indicates that the present formula for determining the electricity tariff is not sustainable in view of the volatile oil market; and (b) how will the Government protect the consumer against drastic surges or sudden spikes in electricity tariffs.

10.

Mr Gautam Banerjee asked the Minister for Trade and Industry whether the sale of all our power companies to entities (possibly all foreign) whose objectives will be to maximise returns for their shareholders, be in the best interest of Singaporeans in the long term.

The Senior Minister of State for Trade and Industry (Mr S Iswaran) (for the Minister for Trade and Industry): Mr Speaker, Sir, may I have your permission to take Question Nos. 7 to 10 together, please. I also propose to address Ms Ellen Lee's Question which appears later in the Order Paper substantively.

Mr Speaker, Sir, allow me first to explain the basis of the formula used to determine the electricity tariffs for households, and the rationale for the recent tariff increase.

SP Services Ltd, which is a subsidiary of Singapore Power, buys electricity from the generation companies and on-sells it to households. The components of the electricity tariff are: (a) cost of fuel for power generation which accounts for 62% of the overall costs; (b) non-fuel costs of generation (21%); (c) cost of transmission and distribution (16%); and (d) miscellaneous fees like meter reading and billing (1%).

About 80% of our electricity is generated using natural gas. In the US, there is a separate and distinct market for natural gas which determines its price. In Asia, however, there is no such distinct market and the price of natural gas is indexed to the price of fuel oil, which is the alternative fuel for power generation. So many have wondered why if we use gas to generate electricity, why is there a link to oil, and this is the reason, because you index it to the next best alternative. Countries like Japan, Korea, Taiwan and Singapore buy natural gas through long-term contracts at a price which is tied to the current price of fuel oil. Therefore, when the fuel oil price increases, so too will the natural gas price with a consequential increase in our electricity tariffs.

Therefore, SP Services adjusts the electricity tariff every quarter to reflect changes in the cost of fuel oil. Since 2004, SP Services has pegged the tariff to a three-month forward fuel oil price. This forward fuel oil price is not a projection. It is the actual price in the commodities market for future delivery of fuel oil in three months' time. This is in contrast to spot price of fuel oil which is the price paid for immediate delivery to customers.

Why use the three-month forward fuel oil price and not the spot price to set the electricity tariff? The aim is to provide as much certainty as possible to consumers. A formula based on spot price, which is usually more variable, would mean households experiencing frequent and more volatile changes in their electricity tariffs.

Sir, I have asked the Clerk of Parliament to distribute a chart* which compares the spot fuel oil price and the three-month forward fuel oil price since January 2004. It is clear from the Chart that the spot fuel oil price has greater variability compared to the three-month forward fuel oil price used by SP Services. Members should also note that the three-month forward fuel oil price used in the formula has been lower than the spot fuel oil price in all but five of the 16 quarters since 2004. In other words, the forward fuel oil price number that has been used in the formula to set tariffs had been lower than the spot price and, therefore, the impact on the electricity tariffs is to have it low. Although the tariff formula using this three-month forward fuel oil price cannot insulate the price of electricity from the rising and volatile price of oil, it does help to moderate the impact.

Sir, Mdm Ho Geok Choo has asked and Ms Ellen Lee is about to ask why tariff is increasing when spot prices are falling. With the current approach, there is a three-month time lag between changes in the fuel oil price and the actual tariff revision and this time lag works both ways, ie, electricity tariffs move up more slowly when fuel oil prices are rising, and move down more slowly when fuel oil prices are falling. For instance, in July 2008, the spot fuel oil price was Singapore dollars – we converted everything to Singapore dollars – $153 a barrel, which was higher than the corresponding three-month forward fuel oil price of S$112 a barrel. So in July this year, if we had used the spot price to compute the electricity tariffs, it would have been 21% higher than that computed using the three-month forward price.

The converse is true in the current quarter, with the average spot fuel oil price in October (about S$109 a barrel) being lower than the corresponding three-month forward fuel oil price (S$155 barrel). If the current lower fuel oil prices are sustained, the benefits will flow through with the same time lag to electricity tariffs in the next quarter.

Mr Speaker, Sir, on balance, under the current formula, the volatility of electricity tariffs has been relatively low and households have generally paid less for their electricity than if we had used spot prices, as indicated by the green shaded areas of the Chart. The Energy Market Authority (EMA) is studying whether the formula can be further improved.

To Ms Sylvia Lim's question, I would caution that we should refrain from making arbitrary changes just because the outcomes are inconvenient in a particular quarter or two. What we ought to really think about is, if we make such changes and if they are not well thought out and they are seen by the market to be arbitrary, that would increase regulatory risks, adversely affect investors' sentiment and confidence and, ultimately, it will do more harm than good to our consumers and businesses.

The Government has sought to mitigate the impact of the rise in electricity prices by providing focused and targeted assistance through U-save rebates for those who need help the most. We are also conducting programmes to raise awareness of electricity conservation and facilitate efforts by households and businesses to reduce their utility bills. We have opted not to subsidise electricity because this encourages over-consumption and is unsustainable in the long run, as it is quite evident from the experience of many countries.

Ms Lee Bee Wah has asked what has been done to ensure that the pricing by energy companies is reasonable. Since the liberalisation of the electricity industry, the EMA has ensured that electricity tariffs are set efficiently through competition in the electricity generation market, and by regulating Singapore Power on its tariffs for the transmission and distribution of electricity, because Sing Power is a regulated monopoly and also by regulating SP Services, which retails electricity to households. EMA has both in-house expertise and external consultants to advise on its regulation of the electricity industry.

The liberalisation of the electricity industry has brought about greater competition and efficiency gains among the power generation companies and these have been passed on as real benefits to our consumers. This is clear from the fact that although fuel oil prices have risen substantially by more than 300% since the onset of competition in 2001, electricity tariffs have risen by about 50%.

With the sale of the power generation companies by Temasek Holdings, a point that Mr Gautam Banerjee has raised, we can expect market competition to continue to exert downward pressure on electricity prices without compromising the reliability and security of our energy supply. This is because our electricity market regime allows and encourages new generation plants to be built, which incentivises generation companies to innovate and produce or provide electricity at competitive rates. Senoko Power, for example, which was recently sold to a foreign consortium, has since decided to invest in repowering its oil-fired plants with the more efficient gas generators. The divestment of the power companies will benefit Singaporeans over the long term as it will enhance competition, help raise our industry standards to international levels by attracting global energy players, and promote innovation in our energy industry.

Ms Lee Bee Wah has also asked how Singapore Power (SP) is regulated to ensure that its revenues are translated into benefits for households and businesses in Singapore. Singapore Power’s electricity transmission and distribution and its retail business are regulated by the EMA to ensure that the electricity supply is reliable and affordable. In particular, the electricity grid is regulated such that Sing Power is incentivised to enhance system efficiency, and the savings from such efficiency gains are passed on to consumers. In fact, Singapore Power has announced that from 1st October 2008, the charges for transporting electricity have been reduced by between 8% and 11%.

On Mdm Ho Geok Choo’s suggestion for more clarity on the electricity pricing model, EMA will put out more information on its website to help Singaporeans understand how electricity is priced. EMA is also taking steps to further liberalise the electricity market for households. It has developed a prototype Electricity Vending System (EVS) which allows households to purchase electricity from competing providers with different price plans. Feedback from the upcoming EVS trial runs will allow EMA to evaluate the system, establish its viability, and it will eventually open the market for more retailers to compete to sell electricity directly to households.

*Cols. 669-670.

Mdm Ho Geok Choo: Sir, I want to thank Minister for his very comprehensive response but, honestly speaking, it is quite tough trying to understand what has been explained. I am not representing everybody in the Chamber but I am sure if we were to ask anyone to try to reiterate the formula, it is quite a tall order.

The experience of my grassroots leaders in trying to explain to residents who have come to see us on the increase in electricity rates has been quite tormenting, because they themselves are also finding difficulties in trying to explain. So what I really would like to ask for is for Singapore Power perhaps to do a bit of a PR job here in terms of sending down its officials to help grassroots leaders to do a better job at explaining this increase in electricity rates.

Secondly, Sir, in order to boost the confidence of residents so that they know that this is not just an arbitrary decision to increase electricity tariffs, perhaps we could form a council, like the Public Transport Council (PTC), and this may give more confidence and a better chance of understanding how this formula was made.

Mr Iswaran: Mr Speaker, Sir, I understand the Member's sentiment. It is an inherently complicated industry and the formula reflects that. I have tried to present it in as simple a manner as I can and will be very happy to work with Members to see how best we can translate this into even plainer language that we can communicate on the ground. But the core message which I think it will be difficult to communicate to anybody's satisfaction is why have prices gone up by so much. The reality is that it is a reflection of the underlying trends in the fuel market and that volatility has been reflected in our electricity prices. And that is something that we will take some effort to explain to residents. But I think giving more data or simplifying the language would not address that in full.

On the second point about setting up a council or other mechanisms to regulate the industry or to oversee the formula, I appreciate the Member's sentiment and the sentiment of many in this House that we want to do the best we can for our consumers, households and businesses. But we should just be careful that we do not, because we have one or two inconvenient outcomes in particular quarters, over react and set up new mechanisms and regulatory channels which will completely change the perception of our market. It will be seen as having a greater regulatory risk. And if there is greater regulatory risk, then we must expect that the electricity generating companies here will expect a higher rate of return than what they currently have.

Mr Gautam Banerjee (Nominated Member): My question was not so much about the competition. It was about whether in a strategic area like power generation, all the players could be owned by foreign shareholders. The UK experience is rather sad in this area. Because, as Members know, the UK nuclear power plants were owned by foreign companies and they found that the development of the industry had been compromised. If we have shareholders in China, India, UK or Japan owning our power companies, they are not likely to look at the interests of Singapore as the first thing but look at the interests on a global basis. Will the Ministry feel that it is strategic enough and that we should at least have some control over the power generation companies in the long term?

Mr Iswaran: First of all, we operate it on the principle that it has served us well thus far, that we create a regime where we promote competition. And when we promote competition, the players are incentivised to optimise. Mr Banerjee's point here is that they may be tempted to run down their assets and sub-optimise the long-term development of the assets and the industry. But there are two points here.

First, if we look at the example that we have today. We have a foreign consortium buying over Senoko Power and the first order of business is to change from oil fired to gas plants which are more efficient. And they know that in the long run, it is going to serve their interests better, business-wise and, of course, in the process, it is going to help our consumers better as well. So the evidence actually is mixed on this and that is why we also need a keen regulator who looks into this.

The other important element in our regulatory regime is to allow ease of entry and exit in two ways. First, the existing players can plan new plants and they are given this flexibility and EMA will be happy to license them. So if a particular Genco is running down its assets and, therefore, sub-optimising, and that they can do better in other fields with a newer plant with better technology, then that will be facilitated and that will ensure some progressivity in our industry.

Secondly, we also allow new entrants into the industry. It is an open market. We are prepared to allow new players to come in. And this is also why we have opened up our electricity and gas grids. It is a common user system. So anyone who comes in can use the electricity grid to push out the electricity that they generate and use the gas grid to fuel the electricity they generate.

Ms Sylvia Lim (Non-Constituency Member): Sir, three questions for the Senior Minister of State.

Sir, earlier, he mentioned that the regulator would arrange for Singapore Power to publish more information about the electricity tariff formula. I am just wondering whether the formula is actually a state secret. Can the full details of the formula be published? And even though not everyone may understand that, there will be some people who may understand the formula,

and that would help greatly in transparency of pricing issue.

Secondly, the Senior Minister of State mentioned that there are some inconvenient outcomes in certain quarters. But if we trace back the tariff hikes over the last two years, in fact, less than two years since January last year, it has been more than 50% increase. If we look back to January 2004 to now, it has actually doubled. For the public good, which has only one supplier, does the Minister agree that this kind of price increase is not an acceptable situation?

Thirdly, could we not, for example, take a leaf from what is happening in Hong Kong? For example, in Hong Kong, when the Hong Kong electricity company sells electricity, they look at the basic consumption that an average household uses, and that usage is priced at a more favourable rate. And for households that consume more, the excess units are paid at a higher rate. If we are prepared to look at that as a principle, I think the electricity price could possibly be more stable and more affordable.

Mr Iswaran: Mr Speaker, Sir, on the formula, subject to any commercial confidentiality issues, I am sure EMA may be happy to oblige.

Secondly, whether the electricity change has been excessive, we have got to put it in context. It is against the backdrop of an unprecedented series of price increases in the oil market, and we are all well aware of that. So when we posit that the extreme, we have got to compare it against what is the backdrop, and whether it squares up. I would argue that if we look at the comparison, actually our system has done fairly well, and I think the chart shows that. But that does not mean that we cannot do better. Yes, we can look at what other systems that we can put in place. But I also want to just mention that it is not clear whether there is a better formula or point that we can use as a reference. If we say we want to use spot prices, we can see the implications. If we say we want a fixed price, then the power generating companies are going to say, "I want a very high fixed price because I have to put up with the volatility in the spot markets." So when we design a system, we have to take these things into account. Yes, it is very unhelpful that the timing of this increase and the extent of the increase on this occasion. But when we think about whether we should change and how we should change, we should be quite circumspect about it, and take into account the implications across the board, and not just at one component of the market.

Finally, the Member compared us to Hong Kong and talked about the Hong Kong pricing system and so on. There are some basic differences between us and Hong Kong I want to highlight, which is one of the reasons why a direct comparison is a bit difficult. One reason is because Hong Kong fuels two thirds of its electricity generation using coal, which is a significantly cheaper fuel. We do not have that option, and I am not sure if we price coal for its carbon emissions and so on whether it will, in fact, be a cheaper fuel. That is the first point.

The second point is that the power generating industry in Hong Kong is a more integrated one, meaning the company that sells the electricity, the equivalent of our SP services, is also the company that runs the grid and is also the company that generates electricity. We have broken the industry up into contestable and non-contestable components. Whereas in the case of Hong Kong, they have used an integrated approach and then they deal at that level. There are pros and cons. I think they are different approaches. But, fundamentally, what we want to do is this. We recognise that the oil and fuel market has great volatility. We want to try and minimise the impact of that volatility on our households through electricity tariffs. But we cannot shield our households from the full impact of that volatility or the price increases, because that is not the reality. I think we have to accept that.

Er Lee Bee Wah: Mr Speaker, Sir, I believe whichever company buys over Genco, they will find ways to make it more efficient. But is the Minister convinced that whatever dollar that they make will go into the investor's pocket or will go into the consumer's pocket? Based on the recent emails that I received, our SP services makes millions of dollars and yet the electricity tariffs go up. Maybe we really have to look into ways of having a separate formula of pricing the electricity tariffs. Perhaps one of the yardsticks is the profits that they make.

Mr Iswaran: Mr Speaker, Sir, Singapore Power (Private) Limited, the parent company, has three businesses. One is the electricity grid; the second is the gas grid; and the third is SP Services, which does the selling of electricity to households. All of these are regulated monopolies, regulated by the EMA. SP Services is not quite a monopoly but is regulated because it deals exclusively with households. And, essentially, it is regulated to make sure that they do not earn a super normal rate of return. So the EMA uses international industry benchmarks to ensure that whatever rate of return they earn is a reasonable rate of return compared to international standards.

Why should there be a reasonable rate of return? It is simply because if we do not have that, and this is the point which Mr Banerjee raised earlier, how do we ensure continual improvement and upgrading of our infrastructure. Let me take Singapore Power's electricity grid as a case in point. They have to invest S$5 billion over the next five years to enhance the grid infrastructure. If they do not earn what is considered to be a fair rate of return by industry and market standards, then they will be tempted to cut back on that investment, because it is not in their shareholders' interest and, therefore, not in the company's interest. So to frame it as investors' pockets versus households' pockets is actually not quite correct. What we should be saying is that we should ensure that there are no super normal returns. But if there are reasonable returns ensured for our companies in the electricity market, then we can be assured that they will do the right things in terms of ensuring the system continues to upgrade itself in technology and efficiency, and those benefits will then percolate to our consumers.