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CPI to increase .025% with electricity hike

Update: November, 30/2006 - 00:00

Talking Shop


CPI to increase .025% with electricity hike

The industry and finance ministries have proposed the Government increase electricity rates by 8.8 per cent sooner than initially planned. On November 24, the Government reportedly approved the plan, yet there has been no confirmation prices will rise on December 1 instead of January 1 next year. Nguyen Tien Thoa, deputy director of the Ministry of Finance’s Price Control Department, talks about the hike and its effect on production costs.

Why did your ministry suggest raising electricity rates in December? Is it possible to implement such a price hike on such short notice?

If the Prime Minister agrees with the ministries’ proposal, the price hike can realistically be implemented for these reasons: firstly, a detailed table of electricity rates has already been prepared; secondly, there is no electricity inventory to worry about; and thirdly, it is not that difficult or time consuming to compile statistics on consumed electricity based on old and new prices.

The three reasons why the Ministry of Finance recommended December 1 are:

Firstly, the CPI [Consumer Price Index] in 2006 will likely be around 7 per cent, which is lower than previous years so there is room for it to rise further. The hike in rates will add another 0.25 per cent to CPI, which is acceptable and still below the economic growth rate.

Secondly, oil prices and other oil-related products have stabilised.

Thirdly, we want to avoid any major economic shocks. If the electricity rate is raised in January 2007, it would coincide with rising demand for many other goods and services, pushing prices even higher before the Lunar New Year in February.

Will electricity prices be increased again in 2007?

Electricity generated by Electricity of Viet Nam [EVN] is from two sources. The first source is from EVN’s own power plants, which accounts for 57.46 per cent of the country’s total demand.

The second source is from independent power producers like Phu My, Hiep Phuoc and companies in China.

The average cost of producing or buying electricity from the independents is VND847.5 per kWh.

Meanwhile, the current price that consumers pay is VND783 per kWh. In essence, the State loses VND65.5 per kWh, which is equivalent to VND3.4 trillion ($212 million) a year.

When electricity prices increases by 8.8 per cent, EVN will not only cover the loss but also make a 4 per cent profit.

If prices increase in December, we may not have to change rates again in 2007. The next hike may be in July 2008.

Starting in 2010, electricity prices will be determined by market forces and other related input costs.

This year, the electricity industry is expected to supply more than 50 billion kWh. At current prices, does the industry lose money?

Despite the fact that many input costs have increased many times over since 2002, the electricity price hasn’t changed, resulting in falling profitability over the years.

EVN indicated its return on investment in 2002 stood at 6.04 per cent.

This number fell to 3.65 per cent in 2004 and 2.48 per cent in 2005. The company hasn’t reported the 2006 figure yet.

EVN estimates that it will produce 57 per cent of total demand with the remaining 43 per cent bought at much higher prices from independent power producers.

If these estimates are correct, the company will lose VND3.4 trillion this year.

However, the figures are not finalised.

Some people believe that before increasing price the electricity industry should study whether it has managed its costs reasonably, and whether it has a transparent road-map in increasing rates. What do you think about this idea?

I do not object to the idea. As a matter of fact, we mentioned this idea a year ago. The industry also publicized four scenarios of power price increases.

We also have a professional organisation to study and control costs. We must believe in them and their report.

Electricity prices have been appraised by a Government working group comprising of many officials and agencies. The final appraisal is by the Ministry of Finance.

When the electricity prices increase by 8.8 per cent, how will other goods and services be affected?

As I mentioned before, when the electricity price increases by 8.8 per cent, it will have a direct impact on the CPI, which will rise by 0.25 per cent.

Production costs should increase by about 1 per cent. Although production costs will rise, we are uncertain whether consumers will be hit. The selling price of final goods and services will depend on market forces, not producers alone.

Will it be difficult for enterprises that use a lot of electricity during peak hours to cope with the 8.8 per cent hike?

The amount of electricity used during production in peak hours accounts for 4.88 per cent of the total demand.

Electricity prices for normal hours will not increase, while prices for electricity used for production purposes during peak hours will increase by 4 per cent. This increase will affect some industries including steel and cement.

Enterprises will overcome difficulties if they re-organise their production and limit electricity use in peak hours. — VNS

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