JEDDAH, 2 October 2006 — The Saudi Electricity Company (SEC) finally broke its silence and spoke of the crisis the company is undergoing. H.E. Engineer Mahmoud Abdullah Taibah, SEC chairman and the vice chairman of the Shoura Council, in his announcement published in a local newspaper on June 22, 2006, referred to the problem the SEC is facing in that it is unable to secure financing for its necessary system reinforcement project to meet the growing demand.

Engineer Taibah explained that the company is in a critical situation and

facing many challenges and difficulties that threaten economic development in the Kingdom. His statement was published in a local newspaper under the title “Taibah does not exclude the possibility of blackouts in some cities.” With regard to this I would like to point out two important issues he mentioned in his statement.

Firstly, the Company’s generation plants are operating at their maximum

capacity. This means that there is no available reserve to meet any sudden increase in loads, or in case of a sudden exit from service of one of the main generators, or if the supply from the Saline Water Conversion Corporation (SWCC) plants, which supply the SEC grid with 12 percent of its requirement, is interrupted.

This is exactly what happened during the month of August when the Connected Grid that supplies the Central and the Eastern Regions had to shed some residential loads and ration industrial loads because one of the main generators in the Qurayah Power Plant went out of service. Fortunately the SEC had the necessary spare parts in its warehouse.

Secondly, that any new generation project needs between 30 to 42 months from the date of inception before it can be brought into service. This means that blackouts and load shedding, that is planned blackouts, cannot be avoided in the next one or two years if corrective measures are taken now, and of course it would be more if those measures are delayed or postponed. Therefore it is rather important that action begins as soon as possible so as to shorten this period. It should be noted here that, beside the importance of satisfying the industrial load, the months of Ramadan and Hajj are moving into the summer for the next 10 seasons. These are very critical seasons especially in the Western Region because of Makkah and Madinah.

Many critics have criticized the SEC for failing to anticipate such a situation and take corrective action in time to avoid such a sad state. From my humble (and old) experience in the electricity sector, I believe that the SEC has the capability and experience to estimate accurately the time when a situation like this would arise at least three years ahead. I also believe that the current financial crisis the company is experiencing was not a surprise for those in charge of the electricity sector. Most probably the company’s chairman and executive manager have raised a flag, at least internally.

It is my experience that when such a crisis arises, the public and sometimes some officials end up focusing on administrative expenses. They have a habit of demanding that the company must cut those expenses, which are mainly salaries. Unfortunately, this concept is prevalent due to a lack of sufficient awareness of the nature of the electric utilities business. In this respect it is sufficient to note that the SEC’s administrative expenses represent only 1.6 percent of its operating expenses in 2005.

This should not be construed as an argument in defending the electricity company because I am sure that the company is capable of defending itself. Rather my aim is to direct attention to the actual reasons that brought the SEC – which is the largest electric utility in the Middle East – to this sad, and worrying, state.

It is my observation that the present electricity crisis is mainly due to financial factors as the SEC’s official spokesman announced on Sept. 5. The situation can be easily explained by quoting two numbers from the Auditor’s Annual Report of 2005. In this report it is mentioned that net revenues from operations activities was SR 9.7 billion while net cash expenses on investment activities was SR11.5 billion. In other words the company is suffering from shortage in liquidity. This problem of liquidity is a chronic one that the electricity sector has been facing for more than two decades.

Under normal conditions extending loans to utilities is a dream of any lending institution provided that the utility can show a sustainable positive cash flow stream. However, a company that is suffering from a chronic negative cash flow can hardly be in a position to get loans from lending institutions. This is the case with the SEC. Therefore the only way out for the SEC is to have the means to increase the net revenue from operations activities so that it exceeds the net expenses on investment activities. In other words, providing the necessary financial resources for the company, and it can only be achieved by increasing the net profit – increasing income and/or decreasing expenses.

The present liquidity problem that the SEC is suffering from is a result of decisions concerning the electricity policy that were taken over the past 32 years under different economic circumstances. The first decision was taken in 1974 when the government issued a uniform discounted electricity tariff scale to be applied by all utilities in the country. This tariff was lower than what was prevailing at the time and lower than the actual cost. To compensate the electric utilities from incurred losses the government has initiated a subsidy program. This is what became to be known as the “Electricity Subsidy.”

At that time the number of subscribers in the Kingdom did not exceed 350.000, and the amount of energy sold did not exceed 3,850,000 megawatt an hour. Between the years 1975 and 1983, the economic boom years, the number of subscribers increased four folds and the amount of energy sold increased eight folds. This was due, in large, to pressures from the economic boom and the generous financial support provided by the government to electric utilities in the form of soft loans through a special lending program administered by the Saudi Industrial Development Fund (SIDF). Naturally the amount of electricity subsidy has jumped to levels that were not expected at all.

In 1983 the impact of the oil-price-collapse started showing on the government’s expenditures. The electricity subsidy was one of the first victims when in 1984 the government stopped paying it. In 1985 the electric utilities loan program was cancelled.

In spite of all of this, and for understandable reasons, the electricity

companies, which were consolidated between 1976 and 1981, continued to supply their customers with electricity at the discounted tariff and stayed on the course laid down during the boom years that “every citizen has the right to have electricity wherever he lives.”

All these developments have created a huge financial burden on the electricity companies, something that has reflected on their ability to sustain necessary system reinforcement to cope with persistent load growth. To alleviate the utilities’ woes the government has increased the tariff slightly in 1984 and repeated this action few times but it did not seem to be sufficient to satisfy the companies’ financial needs. In 1984 the government imposed a consumption surcharge of five halalas/kwh for consumption exceeding 2000 kwh per month. The proceeds of this surcharge would go to a special fund, the Electricity Fund, which is controlled by a ministerial committee. The fund’s proceeds are used to finance necessary and urgent reinforcement projects. But even this step did not provide the required solution. This situation continued until the end of 1999.

At the end of 1999 the government made two strategic decisions to, hopefully, solve the electricity financial crisis. The first decision was to consolidate all electric utilities into one company that became the Saudi Electricity Company.

The second decision was related to the electricity tariff that was adjusted on the basis of a criteria consisting of two points:

The first is that the electricity sector must rely on income derived from services provided to the public to cover its operational and capital expenditures and to secure reasonable profit for its shareholders (the government is the major shareholder).

The second is that the well to do (financially) consumers should support low-income consumers.

The new tariff scale was made of nine consumption brackets the lowest was five halalas per kwh and the highest was 38 halalahs per kwh. This scale was implemented for a period of seven months then it was revised and adjusted. The revised scale consisted of eight brackets the lowest remained five halalahs and the highest was adjusted down to 26 halalahs. The past five years experience proved that this medication was not really sufficient and the financial crisis persisted.

It goes without saying that if the present situation persists it will definitely lead to incalculable consequences, both economic and social. Therefore, I believe it is necessary to reconsider the structure of the electricity economy on a realistic basis taking into consideration the historical background that led to this unfortunate state. Some may suggest increasing the consumption tariff. This is an alternative, but it is not the only one. There are certainly other alternatives that should be explored. This is something best to be left to the experts. The important thing here is that we have to diagnose the disease before prescribing the medicine.

Former Director-General of Saudi Consolidated Electric Company for the Western Region (now part of SEC) 1981-1986