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9 December 2008, The Straits Times Power rate formula can be more fair I REFER to last Saturday's editorial, 'Should power rate formula be tweaked?', which lamented the long time lag of about six months for falling fuel oil prices to be reflected in electricity rate reduction. I fully agree with the editorial as it parallels a letter I wrote to Forum the day before. In the illustrations, the forward fuel oil price prevailing in July was US$147 (S$262) a barrel or thereabouts. This was used to price the power rate in the final quarter, October to December, when fuel oil prices dropped drastically from US$100 to US$60 to US$40 currently. Let us say the average oil price comes to US$70 in this quarter. Depending on the actual purchase timing and costs of the power generation companies (gencos), there could be an extraordinary margin of as much as 50 per cent to be gained, simply from the way the present formula is structured. This prompts a further question consumers need to be answered. Who pockets such extraordinary profits, whatever the actual amounts, and is it fair that consumers are made to pay for these profits, which arise simply from the leakiness of the present formula? Hence I believe the case for the power rate formula to be tweaked is even more iron-clad and urgent as this situation will extend to the impending first quarter of next year, given the continuing falling trend in oil prices. I hope the authorities can illuminate and comment. Much as oil price movement is an uncontrollable fact of life, we should not accept the inevitability of our 'sitting duck' fate by even making controllables uncontrollable. Quek Soo Beng 6 December 2008, The Straits Times Should power rate formula be tweaked? SINGAPOREANS will be relieved that power rates will decline by a quarter in the three-month period that begins in January. This will be the first cut since April last year, and follows a 21 per cent hike in rates this quarter. Residents will gladly take the relief that is coming. Yet, they might also note that if the Energy Market Authority, or EMA, had a more oil-market sensitive mechanism to determine fuel costs, next quarter's energy prices would be even lower. The EMA says the fuel-cost component in tariffs is determined by the average three-month forward price of fuel oil. No problem with that, but the devil's in the details. As the EMA itself explains it on its website: Fuel costs are 'updated every quarter based on the three-month forward fuel oil price in the first month of the previous quarter'. It's the price in just the first month of the previous period that determines the fuel-cost component of power charges for the three months of the current period. This means that this quarter's rates are based on a time when crude oil hit an all-time high of US$147 a barrel in July, but not when oil dropped to as low as around US$90 in September. The high in the quarter was captured, but not the low. Indeed, the calculations that prompt the cut for next quarter will have included fuel oil prices related to crude oil costs ranging from around US$100 to the mid-US$60 level in October, but they won't reflect the fact that oil now is trading around US$45. EMA says that in a current review, the regulator 'will have to see if we want to adopt a formula that is more reflective of the prevailing energy market'. And why not? It shouldn't take over a month to crunch the numbers. And if the rates can be set later, it can include almost all the data in the period under consideration. True, under such a system, consumers likely would have paid higher tariffs when fuel prices were shooting up. But they would also more quickly reap the benefit of falling prices during a reversal. Rates rightly are determined by the market price of fuel. That is how it should be; subsidies don't work. But market pricing can be made more efficient. Indeed, a more dynamic formula would provide greater accuracy in pricing utility rates. Not to mention, of course, avoiding consumer confusion at having to pay more to run the fridge when it suddenly cost less to run the car. Reply From EMA I REFER to Tuesday's letter by Mr Quek Soo Beng, 'Power rate formula can be more fair', and last Saturday's editorial, 'Should power rate formula be tweaked?' Mr Quek expressed concerns about the profits of power generation companies (gencos) due to the way the electricity tariff formula is structured. The current arrangement does not allow gencos to make 'extraordinary profits' as they have to lock in their gas purchases at the same forward fuel oil price as that used in the electricity tariff to minimise their exposure to market fluctuations. Hence, this forward price determines the actual fuel costs of the gencos. Mr Quek also commented on the time lag for falling fuel oil prices to be reflected in electricity rate reductions. The current electricity formula works both ways - although the tariff moves down gradually in a falling oil market, it also moves up slowly in a rising market. As a result, consumers have been better off with this formula over the past few years and have, for the most part, paid less for their electricity when the fuel oil price was on a persistent rising trend. For example, under the present formula, the electricity tariff between October last year and September this year was, on average, 10 per cent lower than it would have been if we had used the prevailing oil market price as the benchmark. While the current tariff formula has served us well, we recognise that the situation today has changed because of a markedly volatile energy market. The editorial also called for a more dynamic formula to make market pricing of the electricity tariff more efficient. The Energy Market Authority is reviewing the tariff formula to make it more reflective of the prevailing market oil price, as well as to minimise volatility of the tariff. We welcome and will take into consideration all feedback and suggestions before deciding on any change to the formula. |
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