Monday, November 17, 2008 11:19
Electricity – why is the “messenger” earning more than the gencos?
In Main Stories, Top Story, Uncle Leong, Uniquely Spore • 2,269 views • 23 Comments
Leong Sze Hian / Columnist
It may not be appropriate for a privatised state asset operator, to think like the Government and try to save it money, whilst at the same time trying to maximise profits like a private company.
According to the EMA’s, “How is your electricity tariff determined?”, published on 31 October, it said: “EMA cannot reveal further how the gas is priced as the information is commercially sensitive”.
Going forward, what measures are we taking to prevent the current state of affairs from continuing, whereby I understand our retail electricity tariffs are one of the highest in the world?
By the way, with about $ 1.6 billion in combined profits for the electricity sector for the last reported financial year, is Singapore the highest “electricity profits per capita of population” nation in the world?
Does this mean that with about 1.1 million households, the average profits made on a per household basis, is about $1,500 a year ($1.6 billion profits divided by 1.1 million households)?
A fundamental flaw in formula?
I refer to the article “SP Services : Don’t shoot the messenger” (Today, Nov 1).
The transmission charge, together with the fee for billing and reading of meters, makes up for only 17 per cent of the electricity tariff.
The remaining 83 per cent of the tariff is paid to gencos.
The total profits of the power sector in Singapore was about $1.6 billion.
So, the question is why is it that SP’s profits of $ 1.086 billion is about 68 per cent of the total power sector’s profits of about $ 1.6 billion?
Why are the gencos’ (power generation companies) share of profits at about $600 million, only about 38 per cent of the total sector profits, against their 83 per cent proportion of the tariff ?
Does this mean that SP’s component in the tariff formula has resulted in its disproportionately high profits?
Is this a fundamental flaw in the tariff formula, pricing, and the general principle of enabling costs recovery plus inflation ?
Factors to also consider
Citing SP’s profit from the regulated electricity market here of $ 423 million, may simplistically ignore the fact that it is its monopoly, branding, strength, etc, which enables it to derive other revenues and profits, including the non-regulated (competitive) market.
As an analogy, it may be akin to a train operator saying that revenue from rental at stations, advertising, etc, should not count in the formula for the fare tariff.
The 6-per-cent return on total assets (Rota) should not be the only criteria. We may also need to look at the Return on Equity, Profit Margin, etc.
SP’s Return on Shareholders’ Equity was 26 per cent, and its Ratio of Net Profit After Tax to Operating Revenue was 20 per cent.
In any case, the assets growth are in a sense, derived from the revenue earned from Singaporeans over the decades, and total assets will surely grow with an increasing population and economy.
In the provision of an essential public good as a monopoly, the principle of cross-subsidy of core and non-core revenues and profits should also be considered, as it ultimately impacts how much people pay.
According to the Department of Statistics’ Yearbook of Statistics 2008, the Consumer Price Index (CPI) Electricity Tariff component increased by 41 per cent from 1997 to 2007. In index-based terms, the tariff increase was the highest amongst the 14 items of expenditure in the CPI.
Why is the messenger earning more than the provider?
As to the statement that “it would be unfair to ask the Government for funding because that would mean taking from taxpayers”, I feel that it may not be appropriate for a privatised state asset operator, to think like the Government and try to save it money, whilst at the same time trying to maximise profits like a private company.
Like most power operators in other countries, it should seek an optimal combination of funding, instead of excluding the possibility of Government funding altogether, particularly in infrastructure.
Look at it this way – with a $ 6.4 billion budget surplus, estimated transfer of $ 5.2 billion to the Development Fund, $12 billion of land sales that may not be included in the budget accounting, and the change in the constitution to dip into the reserves – taxpayers have already paid a lot in taxes, some of which may be utilised to reduce the people’s electricity costs.
To borrow the analogy used of “shooting the messenger” who is only delivering the goods, why must the messenger earn so much more than the maker of the goods ?
Some questions remain unanswered
Since the pegging of the electricity tariff to forward fuel oil prices started in 2004, why was this changed? What was the pricing mechanism before the change?
Although we know that the power distributors buy electricity which is pegged to forward fuel prices, what is the pricing mechanism that power generation companies pay for the natural gas which accounts for about 80 per cent of our electricity needs?
As I understand that the gas contracts which we signed with foreign countries are typically for a decade or longer, what pricing mechanisms are in place now, and historically? Can these gas supply, electricity sale, etc, contracts be made public?
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Mr Leong Sze Hian will be on Radio 100.3FM every Tuesday, from 9am to 10am to discuss issues which may have been raised here on TOC. Do tune in!
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Related posts:
- Electricity: Why does Singapore’s tariff raising ranked 2nd amongst 21 cities?
- Just the messenger? Then SP Services should petition EMA!
- Electricity cost rise? I can’t explain to you.
- Higher fuel prices, so electricity will go up next month
- Fuel oil prices are falling, so why are tariffs still high?
23 Comments
aygee
SP has to do this, what.
where else are they going to get money to be able to buy all the other power companies in the region and the world? They are doing this for our benefit, and we have to look at the long-term – 20 to 30 years from now. coz it will only take 5 years to ruin singapore, and there are people out there to do us in.
If one think its too expensive, one can leave and go to a country with cheaper electricity, because there’ll be FT who earns more than oneself and is prepared to pay…they’re more welcomed.
Collective Bargaining Agreement
Oil is cheap again. Is the reason still valid?
Hallo? Anybody home? Singaporeans are you aware of this issue?
People will say 'no choice lah'
I asked colleagues what they think about this electric hike and cheap oil price.
They say, as usual, ‘no choice lah , have to accept lor.’
I dream of serving the people also. I love these singaporeans.
do usa, uk, europe, aus, nz, my, th, hk, tw envy sg?
no idea.
Sylvester Lim
2) aygee on November 17th, 2008 12.19 pm
Yes, that is right. As Singaporeans have already given up their rights to the best of best Elites called MIWs. When the MIWs think that the way to do things is right, who are the citizens to say anything? After all, once in a while the MIW gives out money on a yearly basis. So what if they treat our CPF as their piggybank. They are spending it for our benefit. So Singaporean’s should shut up and let the FTs enjoy our wonderful country. The FTs are saving our jobs and country and we have to welcome them and get our sons to serve NS/Reservist to protect their interest. If some of our sons die during training, it is a small sacrifice for our wonderful way of life. Way to go Singapore!! Other countries are learning about our great system and how to create a docile society. This makes the job of the politicians so much easy unlike Asia countries like HK, Taiwan & South Korea.
lol…Didn’t some smart mini star suggest to companies recently to look at ways of reducing business costs instead of retrenching? I find it very amusing since the major impediment of business here is the running cost of business, i.e. employees’ salaries, rent, utilities.
What ways to help companies reduce costs? Didn’t the recent increase just up their operating expense for utilities by 22%? And translating that, business cost went up..and for starters, coffee shops have to charge more, and in cycle goes on, the business cost gets passed to us, the ordinary people on the street.
So, I say this greed must be removed in order to make Singapore a more liveable place.
The SS
Because THEY CAN! and there is NOTHING WE CAN DO ABOUT IT!
There is just no Check and Balance…… We just give them our Cheques and we live on the Balance under one party rule.
tiredsingaporean
Exactly SS, this is how the ruling party works in singapore because they know that there is nothing, absolutely nothing you people can do to them, call whatever you like, this is the price singaporeans have to pay for putting these ppl in power for too long, now when you people wants to check on them, they starts to bite you back.
Gilbert Goh Keow Wah
I pity our countrymen that cotniue to live in such abject state of governance.
It all boils down to a lack of check and balance for those in power and a politically apathetic population that lives in a climate of fear and paralysis.
We are already conditioned to accept such unfair treatment on it’s population. We are helpless nevertheless and feel hopeless. “What to do? They are always right,” is the ready reply from many whom I spoke to. Their melancholic expression bertrayed their brave acceptance of such nonsense.
I think it is time to:
1. Fuel up the new movement of civil consciousness among our population. We are too detached from the country’s woes for our own liking. The main issue is also the lack of a centralised body or leader to spearhead such activities. TOC in all likelihood should be able to fill up this big vacuum. The govt has enjoyed 43 years of monopolistic power and will not give up without a fight. There may be blood here.
2. Protest in unity at HLP regularly at seemingly unpopular and unfair insititutional practices e.g. tariff increase, transport increase, etc. Such open regular protest will not only attract a nation’s attention but also attract those who are fearful to come up and be counted. Hopefully, this will attract swing votes sympathetic to the cause.
3. Those who do not have to vote for uncontested wards should go over to those that are having a close fight to foster national attention. Support those who are standing for election to send a signal that they country is ready for a change. We do not have to sit at home and fret over the fact that we don’t have to vote. We can still support other wards in their battle.
4. Constantly remind ourselves that enough is enough. Do we want ourselves, our children and out children’s children to be subjected to such atrocious governance? The answer is obvious.
5. Branding of the opposition politics – there is a lack of marketing for opposition politics in SIngapore here. We are too brainwashed to think of our opposition camp as useless, troublemaker and dissent. They have to re invert themselves to attarct people not only to stand up for election but to vote for them. They need a complete remaking and alot of marketing to attract votes.
Unless we act Singapore will be like this for the next few years, decades and centuries. The country’s destiny is on some of our hands and perhaps we are the ones to be called. Many are called but few are chosen!
SIMPLE
Mr Leong. Great analysis, If I may add:
1) I agree SP seems to be shaving off the cream of electricity earnings. Their cut currently is about 5 cents FIXED out of the 30 cents VARIABLE tariff which is bechmarked on peak oil orice of over US$140/barrel. They proudly proclaim that that’s only 17% of the total tariff, implying that the cut is not high and hence reasonable. But when the tariff is reduced in due course based on oil price which has fallen by more than 50%, SP’s cut willstill remain at a fixed 5 cents. But then that will translate to huge 34% or more!! That’s too much just for delivering.
2) SP justifies that they deserve to fair returns for the effort, using measure like Return on Assets. SP has been in the business for decades and a substantial part of its distribution network must have been recovered many time over. I wonder if these assets are still factored in its ROA computation because if they do then their 6% ROA rate is under-stated and hence they are actually earning a much higher ROA. We must also be aware that the bulk of SP’s operating cost in distributing electricity is FIXED. So as volume grows which has been the case for decades, as reflected by our GDP growth, per unit cost of distribution will logically fall. SP claims that their charges have reduced by about 20+% over the last 5 years, the question is whether that is enough relative to actual costs. Maybe the answer is “no” and that’s why we see SP making huge profits.
3) I think the high amount of SP’s non-operating earnings come from the transfer-sale of the gencos to private buyers through Temasek. I wonder how much extra profits they were able to cream off from these sales and how much these were attributed to higher valuatiion of the gencos attributed to high tariff pricing mechanism and the resulting higher revenue in past years. This is linked to your question about the timing of the change in pricing mechanism. If this is how it is, the implication is that consumers are overcharged to yield higher profits to yield higher valuations to yield higher profits from sale of gencos. That means we the consumers paid to give SP and Temasek the higher profits. But a question of greater concern is that how long more are the gencos assured under the sale terms to continue to lock consumers to this unfair electircity pricing mechanism and benchmarks. If this is not corrected, we may be paying lower tariff come next year just because of falling fuel oil prices. But the over-charging mechanism remains which means we will still be paying unfair and relatively high prices for as long as the gencos are promised.
pigscanfly
goodness gracious! so that’s where my money goes to!
is that efficiency – pap style?!
i wonder if there are similar types of “middle-men” in other sectors.
Tan
Everytime we have such issues in S’pore, people get fed-up and want to speak up. Some resort to public protests but get charged and there are those who take to forums. But in the end, the government has till now not done anything about it. If want to protest, cannot, feedbacks on forums; government ignore. Am I the only one having this feeling that the gahmen don’t give a damn about the people? I have this feeling the gahmen is saying “Ah, who cares about whether S’poreans having a hard time. It’s dog eat dog In this capitalist society. The citizens are just tools and they are to be discarded once it’s used” I dun have to look elsewhere for the answer, something in my heart tells me this is the case here. And cut the technical talk about having to increase blah blah % so that the tariff will blah blah profit to this company and so that’s why the blah blah additional cents and so on. This is just a way of avoiding the people’s questions. People are not stupid even if they dun understand this form of explanation, but people know prices are increasing. This one SP cannot siam.
smallvice585
Oil is cheap again. Is the reason still valid? – Collective Bargaining Agreement (#3)
Oil price has dropped to less than US$60/bbl, but People’s disposable income has also dropped too. Oil is still not cheap. Oil is still a lot more expensive than it was at the beginning of the boom period in 2001 at US$20/bbl.
Hernandes
Can I say that regardless of :
1. Hikes of so many items, eg electric company, tel co, news paper
2. TC investment
3. mini bon bons
4. oil price down , electricity up by whopper burger size
singaporeans will continue to accept in terms of letting it be as they believe they can do absolutely nothing about it but to accept?
YES / NO ?
If so,
Is singaporeans more unique than any other country people ?
YES / NO ?
If so,
since this is what the people ACCEPT,
why should we be still talking and discussing about all these ?
last but not least,
Why do you think people quit this place?
So, lets not even discuss anything else until we answer all the above questions and recognise what is the REALity. And the REALity of Alternative leaders.
WE are ALL now paying prices for electricity and fuel which is MANY TIMES more with respect to the current price of oil.
This is blatant profiteering (daylight robbery, if you were to ask for a layman’s term) of each and every person here.
no hope
Before we can garner swing votes, we need to have a transparent voting system. US dun have numbers tagged to name to their vote. So why you think we need it? For making backtracking easier?
inconvenient truth
One fundamental fact I have never understood is – Why on earth are S’pore’s natural gas prices pegged to oil prices? Which imbecile agreed to this method of pricing?
The world (and especially so this region) has far more natural gas than oil, so its plainly obvious that oil will surely become dearer faster than natural gas.
S’pore electricity generation is about 70% natural gas fired, but we get none of the benefits of the lower price of gas (although we do emit less pollution!)
I believe lots of SP’s earnings come from its Australian subsidiaries. So they don’t make the full $1bn from Singapore.
jpfand
why is the messenger earning more than gencos ???? bcos this is UNIQUELY SINGAPORE… ha ha ha . not happy? vote them out….. as simple as that..
hitachi08
no choice … singaporean very stupid will just follow what the papaya set for them, including asking them to pay more and more each year,
from electicity, water, HDB conservation fee, HDB carparks, ERP, general grocery, medication, childcare fee, primary & secondary school fee (including hidden school fee for ECA), TV licenses (mind u its $110 even you do not watch the contents they provide), public transport – mrt & buses, elderly care (mind u they now introduce voluntary AMD and future mandatory AMD so they can legally killed you when you are old & jobless and deem to not having contribute to CPF & income tax) … etc etc
Fed Up
If we look start to drill down on the charging procedures from our service providers – Singtel, SP etc – I am sure we will find a pile of crap that does not serve the common citizen. I wonder what the point was to privatisation? It was supposed to improve service quality, give us better pricing etc. That only works in theory when consumers can vote with their feet and move to a competitor. We don’t have an alternative to SP so, whatever crap gets dished out, we have to swallow it. Privatisation also creates new boards so that certain people could sit on them and earn fiduciary fees and share options etc, in addition to their regular salary ie, a form of political favour. We have a very fat government. I wonder…are we really that complicated a country to run? That’s where your tax dollars are going.
And now, they are talking about dipping into our reserves to get through the recession. Have they not taxed us enough, directly and indirectly, without needing to do this?
Observer
Its the same way they do anything. Look at petrol prices.
Today its at least S$1.60.
If in Malaysia, the non-subsidized price is RM2 or S$0.85
Why is there this US$0.75 difference. So, we tax higher, land cost is higher, etc, etc.
Is it justified to charge S$0.75/liter more?
aiyoyo
aiyoyo
water + electricity bill
cant stand them, SO EXPENSIVE!!!
who buy EXPENSIVE OIL huh???
aiyoyo……
RH:
1. Another excellent article from TOC! Thanks.
2. If you want a short answer to all the OverTax & UnderSpend polices/ripping-off of Singaporeans, look no further than LIE KY LHL WKS Cronies self interest and deep pockets.
3. GLCs control some 80% of the economy. Their profitabilities are directly controlled by LIE KY and his LIEgime since all GLCs are monopolies like DBS bank and the gencos in this article. Thus, if DBS bank pays out to victims of its minibond scams, profits are reduced. Same reason for gencos rip-offs.
4. So, this means that all the GLCs and even govt depts like HDB, CPF, etc, etc, all keep driving to ever higher and higher profits at our expense.
5. Why? Because LIE KY LHL WKS Cronies all have huge shares/stocks in these GLCs whose profitability they directly control. They knew ages ago from Day 1 that they can actually directly make all these GLCs very, very, profitable. So all of them, including judges, top civil servants, etc, all with money to invest, invest in GLCs whose profitability they directly control. Without any fear of loss, to boot.
6. Thus, they enjoy huge dividends on the GLCs profits, plus enormous capital appreciation when their stock holdings keep increasing in value year after year.
7. Thus, LIE KY LHL WKS Cronies govern directly for their pockets and self interests. This is why no compensation to DBS victims, no regulatory attempts to keep prices reasonable. The more OverTax & UnderSpend, the better.
8. To understand Singapore, look no further than LIE KY LHL WKS famiLIE pockets. Everything is done to fill to overflow those pockets. Understand this and you understand everything in Singapore.