Why 20% hike despite $1 billion profit?

ELECTRIC NEWS
http://newpaper.asia1.com.sg/news/story/0,4136,181207,00.html?

WHERE YOUR TARIFFS END UP POWER BILLS
Why 20% hike despite $1 billion profit?
By Desmond Ng
October 25, 2008

SINGAPORE Power (SP) made more than $1 billion in profit in the last financial year.

Yet, it increased electricity tariffs by about 20 per cent earlier this month.

Asking for more, when the cash box is already full, puzzles ordinary people.

And why a hike now, when Singapore is in a technical recession and inflation is high?

Singapore Power's profit after taxation was $1.09b for the last financial year, according to its March 2008 financial report.

This included an exceptional gain from the sale of the Singapore Power Building.

SP, a wholly-owned subsidiary of Temasek Holdings, has explained that the tariff hike was due to fuel oil price increases and the profits are to fund future infrastructure projects. (See report, right.)

But this, clearly, has not appeased consumers despite detailed replies from the Government to queries from Members of Parliament (MP) in the House earlier this week.

MP Lee Bee Wah (Ang Mo Kio GRC) and Nominated MP Gautam Banerjee were among those who queried the excessive returns.

Ms Lee asked: 'Our SP Services made millions of dollars and yet the price of the electricity tariff goes up.

'So maybe we really have to look into a separate formula of pricing the electricity tariffs. Perhaps one of the yardsticks is the profitability that they make.'

Singapore Power is the parent company of SP Services, which supplies electricity to all households here.

The Energy Market Authority (EMA) regulates the transmission charges of SP Services as it is a monopoly.

Given the billion-dollar profit, it is little wonder that consumers remain unhappy over the hike, despite painstaking explanations from the company.

Why can't our billion-dollar Singapore Power absorb the hike? Or cushion the blow with a smaller hike?

Technician Alvin Cheong finds the raised tariffs difficult to stomach.

The 39-year-old, who is married with a son, 2, pays electricity bills of about $120 a month.

'I understand that the company needs to make money. But I find it hard to accept when they make a huge profit and still increase prices,' he said.

Some asked if SP, which is essentially a monopoly service provider, should make such huge profits.

Dr Huang Fali, an assistant professor of economics from SMU, explained that public utility firms providing essential services such as electricity, water and transport should focus on maximising the welfare of society.

She said: 'This includes making consumers better off. That's the aim of a public utility firm.
'But when these providers make money, it's tough to justify price increases.'

Assistant professor Gopi Rethinaraj of the Lee Kuan Yew School of Public Policy noted that the Government is usually cautious and plans for the future, especially in terms of infrastructure.
'Obviously, anyone would be upset when prices go up. But ultimately, this revenue would be going back into the economy in other ways such as the creation of more jobs and infrastructure for future generations.

'Sometimes, profits are made for capital investments. If it's going to find its way back to infrastructure, then it's fine,' said Prof Rethinaraj, who specialises in climate policy and energy technology.

MP Lee Bee Wah told The New Paper that many of her residents still find it difficult to accept the company's explanation.

She said: 'The sentiment among them is that you (Singapore Power) made a billion dollars profit and upi still increase tariff by 21 per cent. That's a lot of money.

'If the company has already made so much, does it still need to raise the tariff?'

She hopes the company will revise its pricing formula and consider pegging profitability to the formula.

Infrastructure: Who should pay?

Mr Leong Sze Hian, president of the Society of Financial Service Professionals, questioned the logic behind consumers paying for future infrastructure.

'In most countries, such infrastructure funding is rarely borne by the operators. (It) is part of national development and, rightly, should come from the state's coffers.'

Mr Leong said that few companies dip into their past profits for future growth and expansion.
Usually, these funds are raised through bank loans or the issuance of bonds.

He said: 'No company will rely solely on their past profit for growth; it'll come from a mix of sources.

'If their growth is based purely on profits, they'll never grow because you never know if your profits will be sustainable into the future.'

In its annual report, SP said its electricity grid is rated 'as one of the world's best performing networks'.

SP recorded revenue of $5.4b and assets of $29b in the last financial year.

Fair rate of return helps investment

ABOUT $5 billion will be used to invest in the Singapore electricity grid infrastructure over the next five years, said Singapore Power.

The company said its bottomline does not benefit from the tariff increase to consumers.
This is because all the extra earnings go into paying for the higher cost of fuel, according to a Straits Times report last week.

Singapore Power said that the $1.09b profit included the results of their international operations and the sale of investments.

Singapore Power has three arms of business.

First is the electricity grid, the second is the gas grid and the third is SP Services.

Minister of State for Trade and Industry SIswaran told Parliament on Tuesday that all three are regulated by the the Energy Market Authority (EMA) to make sure that they do not earn a super normal rate of return.

Said Mr Iswaran: 'So the EMA uses international industry benchmarks to ensure that whatever rate of return they earn is a reasonable rate of return compared to international standards.

For investment

Mr Iswaran continued: 'Why should there be a reasonable rate of return?'

He said it is because if there wasn't such a rate, 'how do you continue to improve and upgrade your infrastructure?'

If Singapore Power does not earn what is considered a fair rate of return by industry standards, then the company will be tempted to cut back on that investment.

This is because it is not in their shareholders' interest and therefore not in the company's interest.

Mr Iswaran added that with reasonable returns, the company will continue to upgrade itself in terms of technology and efficiency and those benefits will then filter down to consumers.