In an earlier article that I wrote, “The Electricity Crisis: Diagnose the Disease Before Prescribing the Medicine,” I said that the present electricity crisis was mainly due to financial factors and that the Saudi Electricity Company (SEC) was suffering from a chronic and acute shortage in its cash liquidity.
I said also that this liquidity shortage was a natural consequence of earlier decisions related to the electricity policy that were taken over the past 32 years under different economic situations, the first being the decision taken by the government in 1974 to unify the electricity consumption tariff on a Kingdomwide level at prices that were less than the actual cost, whereby the government compensates electricity companies for the losses that may be incurred by them as a result of the application of the tariff. Then I pointed out that the persistence of this situation does not serve the public interest, and that it is incumbent to consider restructuring the electricity sector’s economy on more realistic principles taking into account the historical background of this problem. I also said that some may be calling for considering the possibility of increasing the current tariff, but this is not the only solution, and that it is more important to diagnose the disease before prescribing the medicine.
That article was one of several that were published in the local press about the electricity crisis following a statement by Engineer Mahmoud Abdullah Taibah, chairman of the board of directors of the company and deputy speaker of the Shoura Council on June, 22, 2006. The chairman described the situation of SEC as “critical, and that the company is facing difficulties and obstacles that threaten development and progress in the Kingdom.”
In this statement the chairman alluded to the present consumption tariff by saying that “the new consumption tariff approved by the Shoura Council, as well as the Council of Ministers, in the early 2000, has been applied for only 7 months, and was later reduced without any study or examination, benefiting high consumers only. This has deprived the company of an income of about SR4 billion a year on the average.”
Later a newspaper article on Oct. 5, stating that Custodian of the Two Holy Mosques King Abdullah “had issued his directives to both the Ministry of Finance and the Ministry of Water and Electricity to take every measure needed to provide the necessary support and assistance to the electricity sector in all financial, organizational and planning areas, in order to enable the Saudi Electricity Company to meet the requirements and needs for electricity-related services, both on short term and long term.” The newspaper said the Ministry of Finance and the Ministry of Water and Electricity would implement those directives through a number of mechanisms, the first being to instruct all government agencies to promptly pay any future electricity consumption bills to the SEC, while present outstanding payments due to SEC will be re-scheduled over three years. In addition, there are attempts to resolve the financial outstanding disputes between SEC on the one hand and Saudi Aramco and the Saline Water Conversion Corporation on the other hand, in respect of the payments due to them from SEC.
The newspaper also said that “government loans will be extended to support the company to carry out its expansion projects in order to cope with the annual increase and growth in electricity loads in various locations of the Kingdom and to maintain the stable and continued supplies of electricity to meet the growing loads.”
SEC’s reaction to this development came from Taibah and Engineer Saleh Al-Barrak, SEC’s chief executive officer. Each issued a statement published in local newspapers on Oct. 5. In his statement, Taibah said, “the company has drawn up a long-term plan including its requirements of electricity projects in the fields of generation, transmission and distribution, and that the plan will be submitted to the board of directors and then will be discussed with the experts at the Ministry of Water and Electricity and the Electricity and Dual Production Regulation Authority “ECRA” in order to be approved and implemented according to the set timetable.” Al-Barrak said: “With this unlimited subsidy that the state contributes to providing electricity services to the citizens, particularly the lowest brackets, at token prices which are far lower than cost.”
Shortly afterward SEC announced, in a statement published on Oct. 18, a growth in its net profit to SR1.90 billion during the first nine months of the year 2006. This means that the company’s net profit by the end of the year is expected to reach some SR2.50 billion. In any case, I will come back to discuss the concept of this profit later on. However, I would like to point out here that being profitable, or having a surplus, by applying the current tariff, means that the tariff itself is not the real problem behind the company’s woes, as Taibah has alluded to earlier.
Dr. Talal A. Bakr is former director general of Saudi Consolidated Electric Company for the Western Region (now part of SEC).)