In the previous article we mentioned that Saudi Electricity Co. (SEC) has been declaring annual “profit” consistently for the last 5 years. However, irrespective of whether the company is recording a surplus in revenue by applying this tariff, we believe that the current tariff, in terms of structure and the criteria on which it is based, need to be reviewed in order to make it more efficient, equitable and flexible.
Perhaps the statement made by the minister of water and electricity that ECRA is currently examining the electricity consumption tariff in line with the Council of Minister’s directives” is only the beginning of the reform process in this respect. However his statement published in a local newspaper yesterday that the ministry is considering reducing tariff for some consumption brackets and raising it for some others is a signal that the intended review would not go deep to touch the basic flaws of present tariff system. Reviewing the tariff in any form is a matter of extreme concern to all consumers more than the company’s shareholders. This is because the company has a monopoly as a public utility, and therefore it is expected to provide service to consumers at the lowest possible prices, before being a shareholding company making profit for its shareholders, particularly when the state (the government and Saudi Aramco) is the major shareholder with about 81 percent holding. Therefore, the government, undoubtedly, does not need to make profit for providing basic services to the citizens. When the state sets a tariff for the services provided by a public utility, its main objective is to safeguard the survival of the utility in the long term. Such a tariff should enable the utility to recover its expenses and have the ability to borrow to finance its expansion to meet the growing demand for its services. This is, in my opinion, a sound business practice that we want to be applied to all the basic utilities, such as electricity, water and postal services in order to enable them to stave off adverse consequences resulting from the state’s falling revenues from time to time as a result of fluctuating oil prices. I understand that many people may not concur with me on this, but in my view, this is the only guarantee for the continuity of these important utilities, regardless of the state’s financial condition. Now let us leave this aside and come back to the consumption tariff.
The premise of a consumption tariff evolves around determining the unit cost of delivering the service to the consumer. In the case of electricity this unit is kilowatt-hour (kwh) which is defined as “a unit of electric power equal to the work done by one kilowatt acting for one hour” and hence the lower the cost, the lower the tariff level becomes or the more the profit that the utility makes in case the tariff is fixed in advance. There are various means of reducing cost. For example, it can be achieved by increasing the load factor (utilization) of generation plants, Reducing losses in transmission and distribution networks. These are some of the methods of reducing the cost of production and providing the electric power to consumers. Perhaps one of the most important factors for reducing generation cost in the networks of the SEC is the industrial loads of Jubail Industrial City and the installations of Saudi Aramco. On the other hand, one of the most important factors for increasing production cost is to supply electricity to uneconomical regions, such as villages and outlying areas. Therefore, the effect of these factors should be taken into account for the foreseeable future when reviewing the current tariff. Let me elaborate further. I understand that Saudi Aramco is building its own generating capacity and withdrawing gradually from SEC’s system. If this is true, it will mean that SEC’s system will be deprived of a major industrial load, which will eventually increase the average production cost of the electric power by SEC. As one energy expert said, “The immigration of industrial load from a public utility means the death of that utility.” In addition, SEC is obliged by law to provide electric power to villages and outlying areas that have not been provided with public utility service so far. This will also increase the average production cost of the electric power of SEC. Naturally, there are large residential and commercial complexes being constructed in major cities, and this will have a positive effect on reducing the average cost of providing the service. What is important here is the overall effect of these factors on the average sale price of electric power. In my view the net result will not be in the average consumer’s favor. Overall, the rise in the average production cost of the electric power will be borne by the “wealthy” bracket of consumers if a balance is to be maintained between the company’s revenues and expenses. ECRA will find itself obliged to recommend increasing the tariff applied to major consumers. This will be the case, of course, if the principles on which the current tariff remain the same. I shall deal with this topic in my next article.
(To be continued)
(Dr. Talal A. Bakr is former director general of Saudi Consolidated Electric Company for the Western Region (now part of SEC). He can be reached at [email protected].)