In the preceding part of this article, I argued that the financial woes of Saudi Electricity Company (SEC) could not be solely attributed to the present tariff as it has recorded profit since 2001, though the said tariff has to be restructured so that the company could be more efficient and responsive.

Nonetheless, according to the minister of water and electricity, even the Council of Ministers directed such review, a task that should consider the criteria as well as some relevant important aspects in the process.

I want to digress a bit to discuss two important issues, each has a direct bearing on the tariff structure. The first issue is the various roles that the state plays in the electricity sector. The second issue is the structure of the consumers as defined by the present tariff.

If we consider the various roles that the State plays in different aspects of the electricity sector activities, we will see that the State is:

1. The legislator that enacts electricity policy that conforms to its overall objectives (Council of Ministers).

2. The performance monitor of the utility (ECRA).

3. Major shareholder (PIF and Saudi Aramco).

4. Supplier of fuel (Saudi Aramco) and power (Saline Water Conversion Corporation (SWCC).

5. Financier (PIF).

6. Consumer (various government agencies and Saudi Aramco).

These interlaced government roles, some having conflicting objectives, have blurred the responsibility of the electricity sector.

As for the consumers’ structure, the current consumption tariff has classified consumers into five major sectors: Residential, commercial, government (public), industrial and agriculture. Under the industrial sector, some non-industrial consumers were included — hospitals, private clinics, private schools and educational institutions — which are licensed to provide educational and training services. It is clear that this classification is based on the nature of the consumer, and not on the consumption characteristics, whether it is retail or bulk, fixed or cyclical. Therefore, one can see that this classification does not consider the cost accounting concept, which is indispensable if the tariff is to be based on economic principles. Structuring consumption tariff requires first of all the determination of the revenue that must be earned by the utility to keep it viable. This revenue includes three main elements: (a) a reasonable return on the capital invested in the utility, (b) a reasonable depreciation of the utility assets, and (c) a charge to cover reasonable operating expenses. After that, it is left to the state to determine the part of this revenue to be covered by the tariff. A tariff can be designed to achieve certain objectives. It can be simple and it can be refined. The more refined the tariff, the more equitable it would be and would achieve more objectives.

In general, it can be said that there are two types of tariff: A tariff that is based on economic principles, which we will call the “economic tariff”, whereby each consumer pays a fair price covering the cost of supply of electricity to him. This cost varies according to the consumption mode and quantity. The more stable the load and the higher the quantity, the lower the cost. The second tariff type is the one based on social considerations, the first of which is the income bracket of the consumer, defined by the level of consumption. In fact, the cost of supplying electricity to this category of consumers is higher than that of major consumers, while the price paid by small consumers is less than the average actual cost. The consumption tariff currently applied is of the second type, a social tariff. In other words, it is a tariff based on social considerations.

Unfortunately the prevailing economic lot of small consumers whether they are in cities or in villages, when the current tariff was introduced in 2000 has not changed much. Therefore it is expected that this factor will be taken into consideration when introducing a new tariff. The question which will face the party tasked to review the current tariff is: Who will pay the difference? In my view, the answer to this question is the yardstick for the success of the new tariff, if a new tariff is introduced. As to the current tariff, when it was introduced in 2000, the difference is borne by major consumers in residential, commercial and government sectors.

(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].)