Public utility performance indicators under price regulation

Under the Price Stabilization Act and its enforcement regulations, the price of services provided by public corporations involved in electricity generation, or railway, gas, and water services are subject to rate-of-return regulation (i.e., the price is set at the level of overall cost). This study explains the possibility of an increase in public utility rates resulting from overinvestment in capacity by public institutions when public utility rates are subject to rate-of-return regulation. A related case on the profitability of businesses (K-Water) is discussed. Despite the government’s claim that rates fall short of overall costs, K-Water earns sizable profits from its regulated businesses, and this tendency is more pronounced in businesses with higher ratios of capital expenditure to overall costs. Next, this research explores attributes required in performance indicators for public institutions under price regulation and explains the need for strengthening four criteria, including: 1) evaluation from the perspective of effectiveness, 2) evaluation of cost reduction, 3) evaluation of debt ratios, and 4) evaluation of features that induce a lower-cost level. Finally, as a result of analyzing the quantitative performance indicators of K-Water based on the 2015 Public Institution Management Evaluation Manual, we conclude that current indicators are generally consistent with these four criteria. This result suggests that current system of public institution management evaluation partly contributes to alleviating the negative side effects of rate regulation that consider overall cost.