Fuel and Electricity Prices: Scrutinize the System Before Raising Prices
United Daily News editorial (Taipei, Taiwan, ROC)
July 9, 2008
Summary: Taiwan's electric power industry and oil industry are structured irrationally. The main reason is the government subsidizes state-owned energy companies. Under such protective umbrellas, Taipower and CPC have no competition. They need not worry about cost-savings or wasteful expenditures. They willingly accept unreasonable policies, subsidies, and expenditures because any deficits can be passed on to consumers. If profits are below expectations, they need not ask themselves whether their operations are efficient or their costs are reasonable. Price increases are the simplest, most expedient way of solving their problems.
Full Text below:
In July, both fuel and electricity prices increased, fuelling the threat of stagflation. Ordinary people's cost of living increased. But the energy policy of the Ministry of Economic Affairs, the Executive Yuan, even President Ma's inner circle, has so far been merely to toss the people a bone, to offer them a few energy-saving incentives. These consumer-oriented measures are necessary and important. But they do little to ease severe pressure on energy supplies and prices. Reforms must be supply-side oriented to play a real role. This includes the liberalization of the electric power industry and the rationalization of oil prices. For decades the government has done nothing. It has been derelict in its duty.
Taiwan's electric power industry and oil industry are structured irrationally. The main reason is the government subsidizes state-owned energy companies. Under such protective umbrellas, Taipower and CPC have no competition. They need not worry about cost-savings or wasteful expenditures. They willingly accept unreasonable policies, subsidies, and expenditures because any deficits can be passed on to consumers. If profits are below expectations, they need not ask themselves whether their operations are efficient or their costs are reasonable. Price increases are the simplest, most expedient way of solving their problems.
Consumers who have been abroad must remember seeing Exxon, Texaco, Shell, and other service stations at every major urban intersection. These gas stations compete not only over price, but also service. But on Taiwan, besides China Petroleum, there is only Formosa Plastics. These two oil companies control every gas nozzle on Taiwan. Taiwan is the only region in Asia with no access to foreign oil companies. Taiwan's two oil companies have always had an "understanding" regarding price increases. The two compete you say? Consumers don't think so.
Taiwan's two oil companies have so far avoided giving the public the impression they are in bed together. But they operate within an environment of guaranteed profits. Their cavalier indifference to operating costs was made abundantly clear when the former DPP government froze gas prices. When gas prices were frozen, China Petroleum was able to supply the domestic market by itself. This showed that a considerable percentage of the two oil companies' refining capacity was normally idle. If Taiwan's oil market had free competition, how could it tolerate so much idle equipment? How could consumers obediently accept higher gasoline prices?
The electric power industry's monopoly is even more serious than the oil industry's. Taipower's activities include power generation, transmission, and distribution. Its "Four in One" business model for all forms of electricity is long out of date. In fact Taiwan has about two dozen private power plants. But electric power industry regulations require Taipower to purchase privately-generated electricity at regulated prices. As a result, Taipower and private power plants are not competitors, but partners. This guarantees that the consumer gets exploited.
Taipower's "Four in One" business model has fallen far behind global trends within the electric power industry. These include demands for economic liberalization, increased efficiency and safety, and reduced waste. The Ministry of Finance knows that only a economically liberalized, competitive environment can lead to cost consciousness and efficiency. Only economic liberalization can provide high quality electric power service to households at a reasonable price. But 10 years of liberalization later, it has still taken no action.
Take the Eastern Interconnected System in the United States for example. Over a hundred private power plant managers must accurately estimate fuel prices, personnel costs, the probability of natural disasters, even such variables as industrial sabotage, months in advance. They must make a detailed accounting of costs to keep prices low, in order to be awarded contracts to supply electricity to the Public Utilities Commission. On Taiwan, meanwhile, profits are guaranteed. No one competes to supply electric power. Electricity prices are determined by politics and not by technical expertise.
We all know that in recent years Taiwan has experienced an over-supply of electricity due to industrial outsourcing. Yet the irrational policy of granting special concessions and purchasing electricity from private sector power plants has continued unabated. Taipower has revealed their contempt for consumers by reflexively passing these expenses on to consumers.
Taipower spends nearly 10 billion a year constructing steam and electric cogeneration, wind, and private sector renewable energy power generation plants at preferential prices. These account for over one-fifth of Taiwan's total electrical generating capacity. In order to purchase this electricity legally, Taipower has reduced utilization of its own power generation equipment, or even idled it, resulting in an incalculable waste of hardware. On the other hand, well-heeled private sector power plants use their own lower-cost electricity at peak hours. Off-peak electricity is sold to Taipower at high prices. Since the selling price is guaranteed, why not make the most of it? To make matters worse, Most of the privately-operated steam and electric cogeneration power plants do not use natural gas or other clean energy. They use low efficiency, low-cost, low-yield coal-fired or oil-fired units. Very little waste heat is recovered. The more electricity they generate, the more harm they inflict upon Taiwan's environment.
Taiwan's consumers are of course aware of the grim nature of the energy supply problem. They know the increased costs must be borne by all. But the government must ensure that fuel and electricity prices remain reasonable. They must not treat the people like ATMs, forcing consumers to bear unreasonable costs.
2008.07.09 02:48 am