ELECTRICITY TARIFFS (Increases)

Mr Tay Beng Chuan asked the Minister for Trade and Industry (a) what is the total amount and what are the rates of the three consecutive increases in electricity tariffs by Singapore Power since the beginning of this year; and (b) what is the justification for such increases in light of the fact that Singapore Power had raised its after-tax profits to a new record of $904 million soon after our economic recovery in 1999.

The Minister for Trade and Industry (BG George Yong-Boon Yeo): Mr Speaker, Sir, this year, Power Supply raised electricity tariffs on three occasions:

On 1st January 2000, by an average of 1.91 cents per kilowatt-hour (kwh) or 16%;

On 1st May 2000, by an average of 0.43 cents per kwh or 3%; and

On 1st August 2000, by an average of 2.81 cents per kwh or 20%.

In total, the average electricity tariff is now about 16.89 cents per kwh or 44% higher than the average rate of 11.74 cents per kwh in December last year.

The tariff increase is solely due to rising fuel cost. Fuel cost makes up about half of the cost of producing electricity. Singapore imports all the fuel oil required for power generation. Our electricity tariffs are reviewed quarterly and adjusted, if necessary, to pass on changes in fuel oil prices to consumers. The computations are based on forecast of near term oil prices. Any discrepancy between the forecast and actual oil prices will result in either an over- or under-collection of revenue by Power Supply. Under the current price regulation regime, Power Supply is allowed to recover the under-collected revenue or, alternatively, required to return over-collected revenue to consumers in the following quarter.

In May 1998, Power Supply reduced the electricity tariffs by 14% to an average of 11.74 cents per kwh when fuel oil prices fell. Since then, fuel oil prices have increased by 109%, from US$11 per barrel in May 1998 to US$23 per barrel in July 2000. It has gone up even further since then. Nevertheless, Power Supply kept electricity tariffs unchanged until December 1999. I have distributed a graph (Cols. 771-772). which is available on Members' seats which shows how much fuel oil prices have gone up since March 1999 and how our electricity tariffs have also changed during that period. But because tariffs were kept unchanged for many months, this has resulted in a substantial under-recovery of cost by Power Supply and therefore the need for the electricity tariffs to be adjusted three times this year. Altogether tariffs have increased by 44% since May 1998 compared to fuel oil cost increase of 109% over the same period. Graph - Average Electricity Tariff and Fuel Oil Price (Cols. 771 - 772)

To mitigate the impact of the increase, Power Supply has spread the last tariff increase in August 2000 over a period longer than the usual 3-month period. For residential and small non-domestic customers, the adjustment is spread over eight months. For large non-domestic customers, it is spread over five months.

In addition, Singapore Power has granted rebates to consumers to help them tide over the economic crisis. Since July 1998, Singapore Power has implemented a series of rebates, increasing in steps from 0.3 cent per kwh in July 1998 to 1.3 cent per kwh in January 2000. Up till end March 2000, Singapore Power has given back a total of $355 million to the consumers in rebates. The rebates will continue until the end of this year.

In his question, Mr Tay pointed out that Singapore Power made a record profit of $904 million in 1999. This translated into a Return on Total Assets (ROTA) of 8.3%. However, this was not the result of any tariff increases. Singapore Power actually reduced tariffs in May 1998, and kept them unchanged till December 1999. The profits were the result of productivity and efficiency gains by Singapore Power. Singapore Power's tariffs are regulated through a price cap using the CPI-X approach, ie, Singapore Power is allowed to adjust tariffs (excluding fuel costs) by less than the increase in the Consumer Price Index, because we expect Singapore Power to show productivity gains and reduce its costs from year to year.

The CPI-X formula depends on X, the amount by which we expect SP to improve productivity. If productivity goes up by more than X, SP gets to keep the gains. X was set in April 1997 for a 3-year period, at 1% per annum. PUB reviewed this formula in March, at the end of the 3-year period, and decided to maintain X at 1% for one more year until next April, since Singapore Power's expected ROTA was within the targeted 7-8% range.

We are now in the process of restructuring the electricity industry into a competitive market. I briefed Members on this during this year's Committee of Supply. Next April, the generation companies will be taken out of Singapore Power. Once the industry is fully liberalised in about 3 years' time, consumers will enjoy more competitive electricity rates, better services and choice of suppliers.

Mr Low Thia Khiang: Is the Minister aware that the recent increases in electricity tariff have exerted great cost pressure on families? Secondly, the Minister in his answer said that in 3 years' time consumers would enjoy more competitive electricity tariffs. Is he sure of that? Does he mean that it would be much lower?

BG George Yong-Boon Yeo: We are very aware that the increase in utility prices has been a point of much concern to many households. For that reason, I thank Mr Tay Beng Chuan for raising this issue in this House.

I have attached, with the chart, a page (Cols. 773-774) entitled "Rebates for Utilities Bills" to show what the Government has done to offset the increase in utility prices. In January 1997 when the Government restructured the water tariff, water conservation tax and water-borne fees, we introduced a system of rebates to be phased in over four years. It is shown in Table 1. We have loaded it in favour of those who are living in 1- to 3-room HDB flats. The rebates are given annually on 1st September to help households overcome the effects of utility prices, without subsidising utilities because we do not want to subsidise utilities directly as this will encourage over consumption. What we found is that over the last two years, 1- and 2-room flats have not increased their electricity or water consumption. For 4-room flats and above, there has been an increase. The rebates that we have given will completely offset the increase in electricity and water tariffs this year for 1- to 3-room flats. This is according to the numbers which we have calculated. Consumers can expect the rebates to be included when they receive their bill at the end of September. For 1- to 3-room flats, the rebates of $200 will kick in. For 4-room HDB flats, the rebate will be $100. This answers Mr Low's first question. Page - Rebates for Utilities Bill (Cols. 773 - 774)

As for his second question whether we can expect more competitive prices when we deregulate the electricity industry, I think so. In other words, if he takes out the fuel oil component, which depends on international energy market prices, he will find more products available to consumers. In New Zealand, where the electricity market has been deregulated, every household has a choice of maybe 4 to 8 electricity suppliers. These suppliers, which are electricity retailers, will have their own long term contracts with the power generating companies. They may package them in different ways for different consumers. For instance, if you are prepared to accept interruptible electricity supply, you may get a lower rate. If you use electricity at night, whether for air-conditioning or to heat water or recharge electric cars, then you may enjoy low rates. There could be other bundles created. For instance, instead of buying air-conditioners and electricity separately, you may well go into a contract with a service provider who undertakes to provide a certain level of air-conditioning or dehumidification for a certain fixed price.

So all kinds of new products would be possible once we deregulate. It is a complicated exercise. We are starting with the privatisation of the Gencos (generation companies) next year, and then we will progressively open up more of the market for competition. And we hope that, say, within three years, all households will have choices available to them.

Mr Tay Beng Chuan (Nominated Member): Would the Minister explain how Singapore Power determines the basic rate of electricity tariffs? What is the profit margin for Singapore Power to charge the consumers for electricity? And in the light of these huge record profits for year 1999, can Singapore Power be asked to trim the tariffs?

BG George Yong-Boon Yeo: Although the profits appear very large, in fact it is over a very big asset base, which was why the Return on Total Assets was only 8.3% even though the profits exceeded $900 million. Our target for Singapore Power is 7% to 8%, which is a reasonable return on utility type assets.

How does Singapore Power set tariffs? There are two components. There are fuel prices for which the regulatory structure requires a complete pass through. In other words, Singapore Power should make no money from fluctuations in fuel oil prices. Then for the non-fuel component, for transmission cost, for grid charges, it is a regulated monopoly. So there has got to be argy-bargy. We say, all right, this is your base, and every year you are expected to show an X% increase in productivity after netting off for inflation, and we have worked out 1%. They have done better than that, principally because between the management and the unions, they managed to galvanise the workers to really review all operations in the industry and to see how they can make efficiency gains. They have done a good job. In the last two years, they increased productivity substantially and this has enabled them to increase their profit margins. Should we now, having encouraged them to increase efficiency, tax their efficiency by saying, "Look, since you have made the efficiency gain, now we claw it back and subsidise consumers."? I do not think that is a good principle because if you do that once, then in future when you set targets for them, they will say, "No, no." Just do nothing. Because if you do more, you will be penalised for doing more.

So it is important to maintain the integrity of the regulatory structure and keep in place the incentives which are important for the long term. If rebates should be given, they should be given outside this system directly, which is what we have done.

Mr Jeyaretnam: May I ask the Minister whether he has not missed the point in the question that was posed to him? The question was: what is the justification for increase, if you have made a profit of almost a billion dollars? The Minister says even with reduced prices, we made that profit. So could he tell us what is the justification for this increase?

BG George Yong-Boon Yeo: I am not very clear about Mr Jeyaretnam's question. I thought I have made it very clear that the increase is directly explained by the surge in fuel oil prices in the last one year. Let me draw Mr Jeyaretnam's attention to the graph which I have circulated. You have it on your chair. Take a look at the graph. We have on the left hand side "Fuel Oil Price"; on the right hand side "Average Electricity Tariff". The graph starts January 1998. Around March 1999, fuel oil prices, because OPEC had an agreement, surged all the way from about US$9 reaching US$30+ in August 2000. So it is this tripling of fuel oil prices which had led to a necessary increase in electricity prices. Of course, you may want to make an argument that we should subsidise electricity consumption in Singapore. But that is a different argument. We have for a long time taken the position that it is harmful to us, as a country, to subsidise the use of electricity, because it will lead to over-consumption and structural vulnerability to energy fluctuation in the world or, rather, to the fluctuation of energy prices in the world.