PUB ELECTRICITY TARIFF SYSTEM

3.25 p.m.

Dr Tony Tan Keng Yam: Mr Speaker, Sir, I am making this Statement to explain to the House why the PUB is revising its system for setting Electricity Tariffs and how the revision will affect consumers, in particular the smaller domestic consumers. Half of the oil which is consumed in Singapore is used to generate electricity. We have no oil wells of our own. We have to import and pay the going market price for every drop of oil that we use. In 1981, the PUB spent $803 million on fuel oil, $206 million or 35% more than in 1980. Unfortunately, oil is a depleting natural resource. Barring periods of temporary glut, as at present, we can expect the price of oil to rise relentlessly. There is no way that we can prevent the rise in oil price and therefore of our electricity tariff.

We can, however, contain the effects of rising oil price by adopting correct policies:

(a) Becoming more efficient in our generation of electricity and less wasteful in our daily use of electricity in homes, offices and factories;

(b) Upgrading our skills so that we can produce better quality and higher-valued exports to pay for higher priced oil and electricity; and

(c) In the long term, diversifying to alternative sources of energy, such as coal, for the generation of electricity.

One thing we must never do. We must never pretend that we can, by some fiscal or budgetary magic, restrain the increases in the price of oil or electricity by resorting to subsidies. To subsidize consumption is to inflate demand. The subsidies inevitably become an unbearable burden. When the subsidies are removed, as they must be at some stage, there will be a sharp jump in price leading to social and economic disruption. This has happened so often in other countries that I do not need to belabour the point. The sound, economically sensible way is to allow oil price increases to be passed on to the consumers as soon as possible. Increase in electricity tariffs will then be more gradual and consumers will be better able to adjust their consumption and their budget.

PUB's Present Electricity Tariff System

The Public Utilities Board is guided by this sound principle in its electricity tariff policy. I shall now elaborate on how the principle is applied by the PUB.

The generation of electricity requires fuel oil, manpower and plant equipment. Manpower costs form a relatively small part of the cost of running this capital-intensive operation. Once the plant and equipment are installed, changes in the cost of electricity generation come primarily through changes in fuel cost. This is reflected in the PUB electricity tariff schedule, which has two parts, the basic tariff and the fuel adjustment charge. Manpower and equipment costs and the basic fuel price are recovered through the basic tariff which is based on a fuel oil price of $260 per tonne, equivalent to US$18 per barrel. The basic tariff is not changed when fuel prices increase.

Increases in fuel oil prices are recovered through the fuel adjustment charge. When fuel oil price goes up, the fuel adjustment charge is moved up in accordance with a fixed formula stipulated in the Public Utilities (Tariffs for Electricity) Regulations, 1972, enabling this cost increase to be recovered equitably from all classes of consumers. To assist Members, I have circulated a note (Annex 1) (Cols. 79 - 90) containing some illustrations on how the fuel adjustment charge works. [Copies distributed to Hon. Members] Annex 1 - PUB ELECTRICITY TARIFF SYSTEM (Cols. 79 - 90)

At this point, I would like to touch on the two types of prices in the oil market. First, there is the official or posted price, which is declared by the oil companies or producers for the purpose of determining the price charged for oil supplied on a contract basis. Second, there is the spot price, quoted for individual cargoes of oil purchased without any long-term contract. The spot price depends on the immediate supply and demand position and fluctuates widely. At the height of the oil crisis in 1979-80, the price for crude oil in the spot market exceeded US$40 per barrel at one stage while during the recent glut, it fell to as low as US$28 per barrel. In recent weeks the spot price has risen to US$33 per barrel, which is close to the official price of US$34 per barrel. Oil transacted in the spot market forms only a small portion of the total oil traded.

PUB purchases its fuel oil from oil companies in Singapore under 5-year contracts with the prices pegged to posted prices and not to the spot market prices. Price of fuel oil to PUB is therefore more stable than would otherwise be the case. Thus, when the spot market for oil went above US$40 per barrel in 1980, PUB was paying the much lower price of US$27 per barrel. Correspondingly, when spot prices fall below the posted prices, PUB has to take delivery of its oil supply at the posted price in accordance with its contract.

PUB's long term contracts for fuel oil have served us well. Because PUB's suppliers have an obligation to try their very best to meet our requirements, we avoided disruption to our oil supply during the oil crisis in 1973-74 and 1979-80. Unlike some countries, we did not have to ration the use of electricity. Also, we were spared from having to pay the astronomical spot market price at the time, which would have taxed our financial resources.

Fuel oil prices under PUB's long-term contracts are varied as and when the posted price of fuel oil is adjusted in accordance with the official price of crude oil as announced by the producer countries. Hence, PUB's fuel oil cost can go up during the term of the contract and PUB has to recover this cost-increase through the fuel adjustment charge which I described earlier.

Since 1973, the PUB has recovered the cost of oil price increases on five occasions, in November 1973, January 1974, May 1979, August 1979 and March 1980. Posted prices have actually moved up more than five times since 1973 but PUB has allowed small increases to accumulate before adjusting the tariff. To do this, PUB has a Fuel Equalization Reserve. This is actually a buffer fund. When the fuel adjustment charge is greater than the actual fuel price paid by PUB, the difference is transferred to the reserve. When it is the other way around, the reserve is drawn down until it is exhausted, at which point the fuel adjustment charge has to be raised.

Although no one is happy when tariffs are increased, the PUB practice has worked satisfactorily. Consumers have adjusted to the higher price of oil and of electricity. We have become more efficient in our usage of energy. In 1973, every 1% increase in our GDP required 1.6% increase in electricity supply. By 1981, every 1% increase in GDP required only 0.75% increase in electricity supply.

New System of Electricity Tariff

Although the existing system of passing on fuel oil cost increases has served us well, it can be further improved. Instead of accumulating a number of fuel oil price increases before making a large adjustment of electricity tariff at irregular intervals, fuel oil price increases can be passed on automatically at shorter intervals, i.e. every three months. And if fuel oil prices fall in any three-month period, the benefits can be passed back immediately to the consumers.

This system of three-monthly automatic adjustments of tariffs is more equitable as consumers will be charged the prevailing fuel oil price paid by the PUB. Tariff changes will be smaller on each occasion although the cumulative increase will be the same as under the present practice. It will be easier for consumers to adjust their budgets. Moreover, when fuel oil cost declines with market conditions, consumers can enjoy a reduction in electricity tariff. The principle is the same as that followed in the pricing of petrol sold at the pumps.

Because oil prices are now more stable, this is an appropriate period to make the change. Consumers will have time to get used to the new system. The PUB will therefore implement this system as from 1st August 1982. The fuel oil price used to compute the fuel adjustment charge for the months of August to October will be based on the prevailing fuel oil price paid by the Board in the months of May to July. The fuel adjustment charge for November to January will be based on the fuel oil price for August to October. And so on.

Changes to the Fuel Adjustment Charge

I will now explain the effect of the new system on the fuel adjustment charge. The current fuel adjustment charge was fixed in March 1980, corresponding to a fuel oil price of S$390 per tonne or US$27 a barrel. Since then, the actual fuel oil price paid by PUB has risen to S$458 per tonne or US$32 a barrel. For over two years consumers have been charged electricity tariff based on outdated fuel costs. The PUB has been able to provide consumers with this benefit because there were sufficient funds in the Fuel Equalization Reserve. This reserve came from:

(i) the difference between fuel oil price charged and the fuel oil cost paid in the first few months after the last revision;

(ii) better fuel efficiency; and

(iii) favourable exchange rate due to appreciation of the Singapore dollar against the US dollar.

The higher fuel oil costs over the last 18 months have been paid for through withdrawal from the Fuel Equalization Reserve. Without an increase in the fuel adjustment charge, the reserve will be exhausted by the end of this year. Consumers will therefore have to pay the current fuel oil cost in the electricity tariff. Because of the savings arising from improvement in power generation efficiency, the PUB does not have to charge consumers the full fuel oil price of S$458 per tonne. Instead, the PUB intends to recover a cost of S$430 per tonne. The fuel adjustment charge will be increased from 4.29 cents to 5.61 cents per kWh, an increase of 1.32 cents per unit. For households, the final increase is one-third of this increase in the fuel adjustment charge. I will explain how this will come about.

Gradual Removal of Promotional Tariffs

One of PUB's policies to encourage efficiency in electricity usage is to gradually phase out the system of promotional block rates under which tariffs decrease with increasing consumption. This system was inherited from the era of cheap oil price, when utilities all over the world gave incentives to big consumers in order to obtain economy of scale and to optimize the usage of installed capacity. As with other utilities elsewhere, we should now discontinue this practice. However, we intend to do it very gradually. We have already begun to restructure the tariff schedule in the revisions in 1979 and 1980 when the tariff blocks were reduced in number. PUB intends to further reduce the tariff blocks together with the change in the system of recovering fuel oil costs.

It will not be necessary for me to go into the details of how PUB proposes to restructure the tariff in this part of the exercise, which will affect the industrial and other non-domestic users. The details can be found in the Annex 2 (Col. 79 - 90) which I will ask the Clerk of Parliament to distribute to Members. [Copies distributed to hon. Members.] I would, however, like to highlight the following points: Annex 2 - PUB ELECTRICITY TARIFF SYSTEM (Cols. 79 - 90)

(a) The revision of the tariff will enable PUB to reduce the basic tariff for low consumption blocks. Small and efficient consumers will benefit. For domestic households, the basic tariff will be lowered from 15.86 cents per kWh to 15 cents, a reduction of 0.86 cents per kWh. This will offset the increase in the fuel adjustment charge so that domestic consumers will have to pay an increase of only 0.46 cents per kWh or 2.3% more. The monthly electricity bill of the average HDB household will be increased by 57 cents, which is less than the price of half a packet of cigarettes or 1� cups of coffee without milk!

(b) Domestic consumers who use an exorbitant amount of electricity will not enjoy the full reduction in the basic tariff. Instead, they will be charged a higher basic tariff at the rate of 17.5 cents per kWh for consumption above 2,000 kWh a month. This is to discourage excessive use of electricity particularly for air-conditioning. The number of such domestic consumers is small (0.6% of the total). On 1st February 1983 this higher basic tariff will be increased further to 20 cents per kWh for consumption above 2,000 kWh per month. These domestic consumers are therefore given six months to adjust their consumption habits.

Financial Implications

Finally, I would like to brief the House on how the above revisions will affect PUB's financial position. As at 1st January 1982, the PUB had $42 million in its Fuel Equalization Reserve. If the fuel adjustment charge is not raised, the Reserve would be exhausted by the end of the year and PUB would be faced with a deficit of $45 million for its electricity operations after meeting interest payments and servicing the repayment of its loans. With the raising of the fuel adjustment charge on 1st August, fuel oil cost actually paid after this date will approximate the fuel oil cost charged in the tariff. For the full year, PUB's financial position will be in balance. Any remaining balance in the Fuel Equalization Reserve will be used to defray quarterly imbalances between fuel oil cost recovered and fuel oil cost paid under the new system.

The restructuring of the tariff schedule will have minimal effects on PUB's total revenue. In adjusting the schedule, the higher tariff for the larger consumption blocks are balanced by the reduction in tariff for the smaller consumption blocks. Because of rounding off, the restructuring will result in a marginal increase of 0.2% or $2.8 million in revenue in 1982.

Concluding Remarks

The PUB has taken great pains in the past to ensure that the burden on our consumers due to rising oil prices is eased as much as possible. Part of the increase in oil price is absorbed by improving the efficiency of electricity generation. If not for this improvement, PUB would have had to spend an additional $155 million in 1981.

In the past five years, the PUB spent $1.2 billion in capital development to expand and improve the electricity system. In the next five years, out of a total development budget of $3.2 billion, the PUB will spend $2.6 billion on electricity projects. Only 37% of PUB's development budget can be funded from internal sources. The other $2 billion or 63% will have to be financed from loans. Total outstanding loans of the PUB at end-1981 amounted to $1.1 billion.

In 1981, fuel cost constituted 73% of total cost of electricity generation. Depreciation took up 13% and interest on loans 7%. The remaining 7% was for manpower, maintenance, property tax, and other expenses. The PUB will never have the means to subsidize oil price increases. Indeed the Board will be doing well if it can, through greater efficiency, absorb manpower and other cost increases.

To illustrate what PUB has done to minimize the burden of oil price increase to our consumers, we should note that the average electricity price over the past 10 years, from 1972 to 1981, increased by 177%, from 6.38 cents per kWh in 1972 to 17.70 cents in 1981. During the same period, fuel oil price to the PUB increased from $39 to $463 per tonne, an increase of 1087%. Annual manpower cost per employee increased by 174%. Gross fixed assets utilized by the Electricity Department increased from $759 million to $2.5 billion, an increase of 234% which resulted in higher charges for depreciation and interest.

I assure Members that the PUB will continue to spare no efforts in its drive for higher efficiency so as to moderate, where possible, the rising cost of supplying electricity. The measures, which I have announced today, will ease the burden on consumers, particularly domestic consumers and help the PUB to fulfil its mission.

Mr Speaker, Sir, this ends my Statement and I shall be happy to answer any questions which Members may have. Much obliged, Mr Speaker.

Mr Eric Cheong Yuen Chee (Toa Payoh): Mr Speaker, Sir, in view of the fact that PUB meters are read only once in two months, PUB bills are therefore based on actual and estimated readings. Can the Hon. Minister explain how this new system of three-monthly adjustments in the electricity rates will affect the bills?

Encik Othman bin Haron Eusofe (Geylang Serai): Mr Speaker, Sir, the tariff revision will result in an average Housing and Development Board household having to pay 57 cents more per month. This may be quite acceptable considering the fact that the last increase was in March 1980. However, the Minister in his opening remarks cautioned that oil is a depleting natural resource and that we can expect the price of oil to rise relentlessly. Can the Minister enlighten the House on the steps the Public Utilities Board will take to mitigate the effects of future increases of oil price, and consequently electricity price, particularly on the lower income group?

Mr Speaker: Would you like to answer them first, Dr Tan?

Dr Tony Tan: Yes, Mr Speaker, Sir. Sir, may I take advantage of the first question to give a little bit more information on how the new system will work. With the implementation of the revised tariffs on the 1st August 1982, the PUB will, first of all, read all meters in August so that the new rates will be applicable from the dates the meters are read. This is necessary because of the changes in the tariff structures. The system of three-monthly adjustments in the declared fuel oil price affects only the fuel adjustment charge. This charge is applicable to all units consumed, irrespective of consumer categories or levels of consumption.

The PUB has looked into the practical aspects of implementing the new system and has decided that there is no immediate need to change the present practice of bi-monthly meter readings. Under the present practice, for the month the meter is not read the consumer's bill will be based on estimated consumption for the month. In estimating the consumption, the average of the consumer's consumption which is computed on his previous actual meter readings is used. Unless there is a sudden change in the consumer's consumption pattern, the estimated consumption should be quite close to his actual consumption. When a consumer's meter is read the next month, the bill will be automatically adjusted to reflect his actual consumption for the two months. Differences, if any, will be small, and on balance will even out for the consumer over a period of time. Consumers who read their own meters and submit their readings to PUB for billing will be charged the actual consumption for the month. PUB, as we all know, has instruction booklets on how to read meters and convenient pre-paid post cards to be used for sending meter readings to the PUB. The PUB would encourage consumers to read their own meters and would be very happy to make available these instruction booklets and pre-paid post cards to Members of Parliament and consumers who would like to read their own meters.

Members may also be interested to know that the PUB is undertaking a feasibility study to see if meters can be read on a remote basis using the telephone lines. A block of about 100 flats in Delta Avenue has been selected for a field trial. The flats will be installed with meters which have been modified to enable the meters to be read remotely from the PUB Headquarters using the telephone lines. The field trial will start next month and will last for one year. When the results of the field trial have been evaluated, we can then consider the use of this remote telemetering system on a wider basis. I shall now go on to the second question.

The PUB is very conscious of the plight of the lower income group each time the tariffs are revised to recover the higher fuel oil cost. Adjustment of the fuel adjustment charge is applicable to all units of electricity consumed. However, wherever possible, the PUB has taken steps to mitigate the effects of increases on the lower income group. This is done, Mr Speaker, for example, in the present exercise. The final increase for households is only one-third the increase in the fuel adjustment charge.

There is, however, one thing which, I repeat, we must never do, and that is, to subsidize consumption. This will inflate demand. Reduction of basic tariffs to domestic consumers will have to come from savings achieved by the PUB as a result of greater efficiency in its operations and higher productivity. In this connection, it is pertinent to compare our revised electricity rates with those of Hong Kong and Japan, two countries like ours, which also have to import the major part of their energy requirements for the generation of electricity. As from August, the PUB's electricity rates for domestic use will be 20.61 cents per kWh except for consumption above 2000 kWh per month. In Hong Kong the average domestic rate in 1981 was 22.69 Singapore cents per kWh, or approximately 10% higher than the PUB's new rate. In Tokyo the average domestic rate in 1981 was 28.48 Singapore cents per kWh, or approximately 38% higher than PUB's new rate.

Dr Augustine H.H. Tan (Whampoa): Mr Speaker, Sir there seems to be quite an array of tariff schedules covering different users. I was listening to the Hon. Minister but I did not get the rationale for the different rates charged for different users.

Reading page 2 of Schedule 1, the category called HT Industrial Tariff is charged the lowest rate of all. Between 1 and 100,000 kWh per month the rate is 15.61 cents and above 100,000 it is 14.61 cents. I notice that these are the lowest rates in all the tariff schedules. It seems to me therefore that we appear to be subsidizing this particular category. Furthermore, if we look at the last category HT Non-Industrial Tariff 16.11 cents per kWh per month, it is again rather low compared to the others. One particular category seems to benefit from the adjustment in the tariff rate, i.e. the users of less than 100,000 kWh per month under Non-Industrial Tariff. Presently they are paying 16.55 cents and under the new rates they will be paying 16.11 cents. Is there any particular reason why this group should be enjoying a reduction?

Dr Tony Tan: Mr Speaker, Sir, I was afraid that somebody might ask that question in Parliament. So he will have to listen to my reply now.

The supply of electricity by the PUB is in different forms, depending on whether the electricity is used by a domestic household or by an industry. The tariffs which the Member for Whampoa referred to earlier are the High Tension Industrial Tariffs. When electricity is supplied from the PUB generating plants to the industries, it is supplied on a high tension basis and the industries themselves have to have their own generators by which to convert the high tension electricity into low tension electricity for their own use. The low tension electricity is the electricity which is used in domestic households. Therefore, there is the additional cost to the industries, when they buy electricity from the PUB, of converting it into a form which they can use.

Furthermore, the charges which the industries have to pay for the use of the electricity do not comprise only the charges which are listed in Schedule I and Schedule 11. As you can see from the explanatory notes (Annex 2), industries have also to pay what is called the maximum and declared demand charges for high tension electricity, and these will be doubled as part of the restructuring of the high tension tariffs. This affects only the large industrial and commercial users, These are charges for utilization of installed capacity and are meant to ensure that industrial and commercial firms use their electricity supply capacity efficiently. So the electricity which is charged to the domestic consumers, to put it in a nutshell, is not the same type of electricity which is supplied to industries. Is this clear?

Dr Augustine Tan: Not quite, Mr Speaker. Sir, may I seek clarification. The Hon. Minister mentioned that the PUB supplies high tension electricity to the industries and they have to do a conversion at a cost to themselves. I fail to see why the PUB should be concerned that the industries have to incur a cost to use electricity. Surely what is pertinent to the PUB is the cost of supplying the electricity to the user, be it high tension or low tension. And the more pertinent point is, what is the per unit cost of supplying to the industrial users as compared to the domestic users? If the cost is the same, why not charge them the same rate?

Dr Tony Tan: Mr Speaker, Sir, I am afraid this is becoming a lesson in electrical engineering. However, the reason why the tariffs are not the same is that the cost to the PUB of supplying electricity is not the same. When we supply high tension electricity, there is a lower loss of electricity as it is transmitted through the distribution system, and when we transmit low tension electricity the loss is higher. Therefore, it costs the PUB very much more to supply low tension electricity to domestic households than to supply high tension electricity to industrial users. I hope this suffices for the moment.

Dr Augustine Tan: Sir, what about the category called Entertainment Tariff? Does it cost the PUB more to supply electricity to places of entertainment, or is it meant to discourage entertainment?

Dr Tony Tan: Mr Speaker, Sir, as you can see again from Schedule I of Annex 2, the charge for Entertainment Tariff is very much higher than the charge which is levied on domestic households. This is to persuade those enterprises running places of entertainment to conserve energy.

Mr S. Chandra Das (Chong Boon): Mr Speaker, Sir, in his Statement, the Minister stated that domestic consumers who use more than 2,000 kWh per month should pay a higher rate. I am of the opinion that it is unlikely that the basic rate of 20 cents will deter higher consumption. Can the Minister inform the House whether other steps will be taken to discourage wasteful consumption by these consumers?

Dr Tony Tan: Mr Speaker, Sir, the Member for Chong Boon has asked how the PUB can help to encourage those consumers who use large amounts of electricity to reduce their usage. There are some 2,900 domestic consumers who use more than 2,000 kWh per month. These 2,900 households who comprise 0.6% of a total of 483,000 domestic consumers use about 10% of total domestic consumption. The objective of introducing the higher basic tariff - actually it is 17.5 cents per kWh for the moment rising to 20 cents per kWh from February 1983 - is to discourage these consumers from using more than 2,000 kWh per month. They have six months to adjust their consumption rates.

The PUB will be writing to large domestic consumers to advise them on how they can do an electricity consumption audit in their homes and how they can save energy. The facilities at the Energy Conservation Centre at the PUB building are also available to teach these consumers how to conserve energy usage.

Sir, in this day and age, with energy an increasingly scarce and valuable commodity, no domestic consumer should use more than 2,000 kWh of electricity per month to meet domestic needs. I would urge large domestic consumers to reassess their pattern of consumption and bring down their usage to below 2,000 kWh per month. If my verbal exhortations do not succeed, then PUB will have to consider increasing the basic tariff for high consumption even further to persuade the few large electricity consumers to reduce their consumption. I think this will be effective.

Dr Chau Sik Ting (Thomson): Mr Speaker, Sir, with oil being a depleting natural resource, and the Minister mentioning coal as a possible alternative, does the PUB, in fact, intend to switch to alternative sources of energy?

Dr Tony Tan: Mr Speaker, Sir, the PUB has been studying the feasibility of using coal for the generation of electricity. The use of natural gas is another possibility which is being investigated. In the longer term there is no doubt that we have to diversify to alternative sources of energy to reduce our present total dependence on oil.

There are, however, several factors which we would need to consider carefully before committing ourselves to any particular course of action. The impact on our environment and the security of supply are, for example, two very important factors which have to be taken into account. The success of our industrialization programme is due in part to our ability to provide the necessary electrical power at competitive rates, and we need to ensure as far as possible that we maintain an efficient and reliable electricity supply. Oil, despite its uncertainties, has served us well in the past. In formulating our future policy to diversify, we need to be satisfied that we will not be worse off.

Mr Ho See Beng: Mr Speaker, Sir, may I ask whether the Minister will consider giving incentives to consumers who read their own meters?. I ask this question because it will save PUB a substantial amount of money by way of salaries for meter readers, if the PUB succeeds in teaching consumers how to read their own meters.

Dr Tony Tan: I will refer the Member's suggestion to the PUB for consideration. However, the problem may only be a temporary one. If this experiment in remote telemetering succeeds, then meters will be read automatically every month and there will be no need for either the PUB or the consumers to do any reading. Everything will be taken care of by the computers.