Cablegate: Facing Reality--China Petroleum and Taipower Raise

VZCZCXYZ0001
RR RUEHWEB

DE RUEHIN #2412/01 1980638
ZNR UUUUU ZZH
R 170638Z JUL 06
FM AIT TAIPEI
TO RUEHBJ/AMEMBASSY BEIJING 5417
RUEHUL/AMEMBASSY SEOUL 7930
RUEHKO/AMEMBASSY TOKYO 7826
INFO RHMFIUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 02 TAIPEI 002412

SIPDIS

SIPDIS

EPA FOR OIA - DAN THOMPSON

E.O. 12958: N/A
TAGS: ENRG ECON SENV TW
SUBJECT: FACING REALITY--CHINA PETROLEUM AND TAIPOWER RAISE
PRICES

REF: A. 05 TAIPEI 3096 B. 05 TAIPEI 04548

TAIPEI 00002412 001.2 OF 002

1. (U) SUMMARY. Last year, Taiwan authorities vowed not to
raise fuel or utility prices (ref a). Facing rising
international oil prices and mounting losses by state-owned
energy and utility companies, the
Executive Yuan relented and allowed price hikes at China
Petroleum Company (CPC) and Taipower. CPC has increased its
gasoline prices by 15.6 percent since February. Taipower
raised electricity rates on July 1 by about 5.8 percent. CPC
and Taipower say that the latest price increases will reduce
its financial losses due to rising oil costs. The increase
in prices could encourage energy conservation. END SUMMARY.

CPC PERSPECTIVE: PRICE HIKE ONLY TO CUT LOSSES
--------------------------------------------- -
2. (U) China Petroleum Corporation (CPC), a wholly-owned
government company, increased its gasoline prices by NT$1.00
per liter on July 7 to NT$28.6 per liter (NT$ 32.5 = $1.00).
This follows a NT$2.00 increase in April and a NT$1.00
increase in February for a cumulative increase of 15.6
percent in gasoline prices. CPC estimates that since January
cumulative losses on gasoline sales have reached NT$200
billion. In the future, CPC plans to use an index price of
gasoline in neighboring countries as a guide when considering
price adjustments. The Executive Yuan also lowered the
import tax on petroleum from the current 10 percent to 5
percent. CPC sources told AIT that CPC is also considering
raising its natural gas prices since that sector is losing
about NT$2 billion per day.

3. (U) Formosa Petrochemicals, a subsidiary of
privately-owned Formosa Plastics, also increased its gasoline
prices by NT$2.00 on April 19. Formosa Petrochemicals has
not experienced the massive revenue losses that CPC has
because its market is largely overseas, giving it more leeway
to adjust prices in the absence of a state-owned competitor.
According to news reports the latest gasoline price increases
will likely drive Taiwan's inflation rate above 2 percent.

NEXT: ELECTRICITY PRICES TO RISE
---------------------------------

4. (U) Taipower Company has not raised electricity prices
since 1983. It has drawn from surplus revenue accrued over
the years as a result of a price structure which puts the
heaviest burden on commercial users. Households pay an
average NT$2.4 for kW/hour versus an industry average NT$ 1.7
kW/hour. The
higher revenue gathered from commercial and household users
allows Taipower to keep industrial rates low. Higher summer
rates for electricity, which normally are in effect from June
to late September are also a source of additional revenue.
While these measures promote industry and exports by keeping
production costs low, rising coal and fuel oil costs have
forced the company to raise prices an average of 5.8 percent
effective July 1. Households using over 330 kW/hours per
month will pay 3 percent more. According to Taipower, the
average monthly electricity use of small households is around
328 kW/hours
so many consumers will not be affected by the price
adjustments. Despite planned rate hikes Taipower estimates
that it will lose NT$9.2-17.8 billion over the next two
years.

EFFECTS ON THE PUBLIC: MINIMIZED
--------------------------------

5. (U) Electricity rates for street lights, traffic signals
and schools will not be increased in order to ease the burden
on local governments. Since June 21 Airlines have been
adding fuel surcharges in their ticket prices. One bus
company claimed that new gasoline prices will add
NT$300,000/day to its operating expenses. However, bus
companies with existing long-term contracts with CPC will not
be subject to gas price increases. Taxis will not be
affected if they don't exceed a monthly quota of 550 liters.
Bus companies are proposing to raise the base fare to
NT$20.00 from the current NT$15.00. Because city officials
are concerned that immediate increases in bus and taxi fares
would be disruptive, they
are considering phased-in price hikes to minimize the impact.
The Ministry of Economic Affairs estimates that the
increases will have a slight, less than one-tenth of one
percent, negative impact on GDP.

COMMENT

TAIPEI 00002412 002.2 OF 002

------

6. (U) Taiwan's public has enjoyed cheap energy and utility
prices for two decades largely due to the fact that policy
makers have preferred to subsidize costs rather than face up
to economic reality and pass energy costs along to consumers.
As a result, wasteful energy practices have continued, and
CO2 emissions have increased. Eminent Taiwan scientist Lee
Yuan-tseh has called for Taiwan to reduce its CO2 emissions
through energy conservation. These latest price hikes may
encourage the public and businesses to be more conscious
about energy conservation and start thinking about
alternative energy sources. End Comment.
YOUNG

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