South Korea’s state utility Korea Electric Power Corp. (KEPCO) said on Thursday that it and its subsidiaries paid a total of 1.48 trillion won ($1.12 billion) in interest expenses during the first quarter of this year, which means its average daily interest expense almost doubled to 11.6 billion won from 6.2 billion won a year ago.

This shows that KEPCO’s debt has increased with small hikes in electricity rates. The government recently raised electricity rates by 8 won per kilowatt hour, but it is perceived as insufficient to resolve the debt-ridden state utility’s severe financial difficulties, especially in the current structure where the more electricity KEPCO sells, the greater losses.

According to KEPCO, the company issued corporate bonds worth 11.2 trillion won from January to May 24. Among them, long-term bonds accounted for 10.35 trillion won, with an average coupon rate of around 4 percent. As of Thursday, the outstanding balance of KEPCO bonds reached 78.2 trillion won. At the end of last year, KEPCO increased the limit on its corporate bond issuance to 104.6 trillion won through a revision to relevant laws, but if it incurs an operating loss of about 9 trillion won this year as estimated, the company may exceed the limit next year.

KEPCO’s debt also snowballed to 192.8 trillion won at the end of last year as it raised funds from outside to cover operating expenses. “The cost of purchasing electricity accounts for about 90 percent of KEPCO’s business and in order to finance the cost in the current structure, KEPCO has no choice but to issue corporate bonds,” said an official from the power industry. “If KEPCO does not issue corporate bonds, it may lead to the collapse of the national electricity system.”

The problem is that there is little likelihood of another electricity rate hike ahead of the general elections in April next year. South Korean Minister of Trade, Industry and Energy Lee Chang-yang said on Wednesday that the government would decide whether to raise electricity rates for the second half this year, taking into account several factors, including the burden of small business owners and small- and medium-sized enterprises.

In the meantime, KEPCO is reportedly running into difficulties in selecting its new chief executive officer. Its current CEO, Cheong Seung-il, recently offered to step down from the post amid mounting political pressures over the company’s ballooning loss. If this situation continues, it is certain that the state utility will suffer a large operating loss at the end of this year. However, it is practically impossible for the state utility to raise electricity rates under pressure from the ruling party ahead of the upcoming elections. The CEO position at KEPCO is virtually becoming a poisonous holy grail.

By Song Gwang-sup and Yoon Yeon-hae

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]