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Progressive Pricing System: Origins and Issues
[ Issue 148 Page 8 ] Friday, November 25, 2016, 17:14:26 Chonghyuk Song Senior Staff Reporter chonghyuksong@gmail.com

     The origins of the current price structure for KEPCO-generated power dates back to 1973, when the world was struck by one of the worst energy crises in modern history. During the Arab-Israeli war, Arab members of the Organization of Arab Petroleum Exporting Countries imposed an oil embargo, sending oil prices, and hence energy prices, soaring. The progressive pricing system was thus introduced in 1974 for the household sector in a bid to curb domestic power consumption and protect low-income households.

     Since then, the price structure has been largely shaped to promote energy-saving within the consumer sector and enhance competitiveness via cost reduction within the production sector of the economy. As a result, household rates have become increasingly progressive over the years, while industry rates have remained more or less flat.

     With such a pricing system having remained the status-quo for several decades, there have been rising concerns over the system’s growing lack of relevance in this day and age. Many have suggested that rapidly changing circumstances have rendered progressive pricing less able to fulfill its founding philosophy. For example, the summer heat waves in recent years have shed light on the limits to which current progressive pricing methods can protect the poor and redistribute income.

     Progressive pricing on electricity works under the assumption that those with low power-consumption rates are most likely to be low-income families. Ideally, these poor households are thus rewarded with lower-than-cost rates, safe from having to pay enormous fees. However, low consumption rates can also come from small-sized households, regardless of their income; it is possible that a middleclass family pays lower-than-cost fees, typically limited to low-income families, simply because the middle-class family is yet to have any children. More critically, it is also possible that a low-income family can be charged larger fees than that for a typical middle-class family because the low-income family has more children.

   
 

          The current punitive price structure ironically does not fully reflect the decreasing need to curb the nation’s household power consumption. In fact, power consumption rates have been stagnating across all sectors. The 1970s were marked by a strong annual growth rate of 15.5% in power consumption, but the following decades the growth rates dropped to 11.2% in the 1980s, 9.8% in the 1990s and 6.0% after the 2000s. And no other sector epitomized this downward trend in power consumption growth as well as the residential sector, whose growth rates dropped five-fold, to 4.7% by the turn of the century. Also accounting for the fact that Korean households consume less than the OECD average, checking household consumption may no longer be considered as a pressing agenda as it was back in 1973.

     Progressive pricing does indeed curb excessive power consumption and does provide the poor access to modest amounts of electricity at lower-than-cost rates. Yet recent changes in demographics and the economy have rendered parts of the price structure obsolete. It is no wonder that the government finally devised a task force to reform the billing system.

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