SEC Can Be Made Profitable by Raising Level of Tariff

This is the fourth of a quadripartite essay on the electricity consumption tariff. I want to begin it by discussing the nature of profit that the Saudi Electricity Company (SEC) has been declaring through the last 5 years, one year after applying the new consumption tariff that was enacted in 2000. There are many definitions of profit, but this one is more relevant for the case of a utility where profit is defined as “The amount received for a commodity or service in excess of the original cost”.

This is true in a competitive market, but SEC is a monopoly where consumption tariff (price) is not based on cost of service. Instead it is based on the notion that “the well-to-do consumers will support low income consumers”. This was translated by setting below-average-cost tariff for consumption below certain amount and above-average-cost tariff for consumption above that amount. It is not clear on what basis those boundary lines, between low and high consumption are set or what is a reasonable tariff for each consumption bracket.

But one thing for sure is that the government can make SEC profitable by raising the level of tariff in general or just for “high” consumption brackets, as some are calling for. But regardless, a legitimate question can be raised here. Is what SEC calls “profit” is in fact a “surplus”? And in this case would it not be right that the present tariff to be adjusted in order to reduce the cross-subsidy paid by high consumers in favor of the low-income consumers?

Electric power is one of the major locomotives of economic and social progress. Therefore the main objective of any properly designed consumption tariff should be first and most to safeguard the economic viability of the utility/utilities that are providing it. Moreover, a consumption tariff can be designed to achieve other desirable objectives that the government is pursuing for the well being of the society as a whole.

The present consumption tariff was introduced in the year 2000 when the electricity sector was experiencing tremendous financial woes. The tariff was part of an overall radical restructuring scheme of the electricity sector, given its recent history. The first measure was to consolidate all electric utilities and projects into one national utility, the Saudi Electricity Company (SEC), that:

1. Will be responsible for providing electricity to villages and rural areas that are still deprived from public service.,

2. Will not receive any subsidy from the Government, and

3. Should rely only on its revenue to carry on its business.

Together with this a new, self-contained, consumption tariff was introduced with an extremely skewed cross-subsidy on the tenet that the “well-to-do” will aid the low-income consumers.

Looking back at the last 6 years one can conclude that the present tariff has achieved its main objectives in stabilizing the electricity sector and enabled it at the same time to extend its services into more villages and rural areas. However it failed in some other aspects mainly, keeping SEC viable, and providing incentives to large industrial loads to remain within the SEC network. We feel that a revised consumption tariff is needed at this stage. This revised tariff should be designed to achieve the following objectives:

1. Maintain financial viability of the electricity sector, SEC in this case,

2. Enable SEC to provide its major customers, at the least, with reliable, uninterrupted service,

3. Discourage its major industrial and bulk customers from seeking alternative sources,

4. Create incentives to encourage energy conservation as a means of stemming peak load growth and reducing harmful emissions into the atmosphere, and

5. Stem, or reverse, population migration from villages and rural areas to highly congested urban centers.

Finally, I would like to venture here in bringing up a subject that I believe requires a more careful economic scrutiny. This is the subject of the tendency of lumping together the systems that are serving large urban centers and industry with that serving villages and rural areas since SEC was established. In the past, about 30 years ago, the latter task was the responsibility of the General Electricity Corporation (GEC). This responsibility was phased out gradually when the four consolidated companies (SCECOs) were established.

Then in the year 2000 GEC was abolished and the full responsibility of serving villages and rural areas was transferred to SEC as part of its charter. This resulted in a mixture of highly sophisticated and reliable, at least this is what they should be, systems serving important load centers like Makkah, Madinah, Riyadh, Jeddah and large industrial centers in the Eastern and Western Provinces with very simple systems serving villages and rural areas.

Such a mixture may look easier to administer, but could be more expensive to operate than if those two levels of services were separate. I believe that this aspect of the electricity sector needs to be looked into carefully from an economical point of view.

What is important in this context is to remember the adage coined by a famous mathematician that, “We can’t solve problems by using the same kind of thinking we used when we created them.”

In conclusion I hope that by writing this essay on electricity consumption tariff I have contributed a bit to the raising of the public’s awareness of this very important aspect of the electricity sector. I have raised some issues hoping that it would lead to more critical assessment of the subject as a whole. Whether I have succeeded or not is not important. What is important is that I made the case for the need to review the present tariff on more economically sound grounds rather than socially correct attitude alone. Such a subject cannot be treated in depth in such articles as it is much more complicated than I tried to show. But what cannot be grasped in full should not be abandoned in total.