Abolish the Progressive Electricity Rate System

As the heat wave continues, citizens’ calls to abolish the progressive household electricity rate system are gaining momentum. The progressive rate system, which was introduced in 1974 as an energy-saving measure, has now reached the point where it should be abolished. This is the time for policy consideration that takes citizens’ health into account and improves their quality of life.

In fact, the progressive rate system is not a desirable system. Electricity rates are currently structured in three progressive tiers. Unlike the usual purchase of goods, the more one consumes, the higher the price one pays.

This kind of progressive pricing for consumption is a method used in economies that ration limited resources. It is not common in a normal economy.

The progressive rate system is particularly disadvantageous for multi-person and large families because it is a method of charging by household. There is no reason to disadvantage larger households compared with single-person households, yet an irrational pricing system has been adopted. Residential electricity accounts for only 13.5% of total electricity consumption. Even so, the government is forcing people to conserve electricity, calling Korea a country that “overconsumes electricity per person.”

The current electricity rate system is irrational because it is based on a supplier-centered allocation method. Because the government holds a monopoly, it has come to consider only the supplier’s position rather than that of consumers. People often call electricity charges an “electricity tax” and say, “Please lower the progressive tax rate.” There is a tendency to think of it as though it were a tax.

Electricity is simply one of the ordinary goods and services for which individuals bear the cost according to their use. If electricity consumers increase their usage, power companies should respond by increasing generation and distributing more electricity. In the process of such choice and competition, electricity prices fall, and users can use electricity at lower prices. The reason this simple principle does not work in our country is that our people have no freedom to choose in electricity generation and distribution.

In our system, the government controls transactions of buying and selling, and consumers must unilaterally accept what public enterprises supply. Because market transactions do not occur autonomously and competition is lacking, market efficiency is inevitably low. The government also recognized the problem of this electricity monopoly and attempted a restructuring of the power sector in 2004. However, it halted the effort after yielding to union opposition and pressure. As a result, electricity supply failed to respond to demand and was constantly out of sync.

For a time, there were concerns about blackouts due to a shortage of power generation facilities.

In fact, on September 15, 2011, we experienced an unprecedented large-scale blackout. It was the result of the government’s neglect of expanding power facilities. But now is not a time when electricity is in short supply. Since then, sufficient generation capacity has been secured, enough that there is room to spare even if the operation of some nuclear power facilities is reduced.

The fundamental solution is to allow electricity supply and demand to operate in the market according to price principles. Even public enterprises can improve efficiency if they are made to compete in the electricity market. Consumers should be able to choose among multiple electricity suppliers, and power generation companies should be made to compete to provide high-quality electricity at low prices. In that case, consumer satisfaction can increase even further.

Sung-no Choi

President, Center for Free Enterprise (CFE)

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Original title: 전기요금 누진제 폐지해야

Author: Sung-no Choi

Date: 2018-08-05

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=26&idx=11058