Korea Electric Power Corporation (Kepco)

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Korea Electric Power Corporation (Kepco)

167 Samsong-dong, Kangnam-gu
Seoul 135-791
South Korea
Telephone: ( + 82) 2-3456-3633
Fax: ( + 82) 2-3456-3699
Web site: http://www.kepco.co.kr

Public Company
Incorporated: 1898 as Hansung Electric Company
Employees: 18,912
Sales: W 21.04 trillion ($17.53 billion) (2002)
Stock Exchanges: Korea New York
Ticker Symbol: KEP
NAIC: 221122 Electric Power Distribution

State-owned Korea Electric Power Corporation, also known as Kepco, is in the process of dismantling its more than 40-year monopoly of South Koreas electric power industry. Since 2001, Kepco has been restructuring its operations, splitting up its nonnuclear power generation operations into five separate, regional businessesKorea South-East Power Co. (KOSEPCO), Korea Southern Power Co. (KOSPO), Korea Midland Power Co. (KOMIPO), Korea Western Power Co. (KOWEPO), and Korea East-West Power Co. (KEWESPO). The restructuring also includes plans to privatize these subsidiaries, with the first of the new companies, Kosepco, slated to be privatized by the end of 2003. As part of its restructuring, Kepco also has created a sixth business, Korea Hydro & Nuclear Power Co. (KHNP), which takes over all of the companys nuclear power and hydroelectric power generating facilities, accounting for nearly 40 percent of the groups total power generation capacity (with virtually no domestic resources, the groups coal- and gas-powered generators rely almost entirely on fossil fuel imports). Following deregulation of the domestic power generation market, Kepco will give up its monopoly on power distribution by 2009. In response, Kepco has begun to diversify its operations, primarily with a move into the international power generation arena. The company has been operating in the Philippines since the early 1990s, including the countrys largest power plant, which began providing power in 2002. The company also expected to expand into China. Listed on both the Korean and New York Stock Exchanges, Kepco remains 54 percent controlled by the Korean government.

Royal Origins in the Late 19th Century

Soon after Thomas Edison connected the first electric light bulb, the Korean government, then in the waning decades of the final Han dynasty under King Kojong, sent a delegation to visit Edison and view his invention. Edison convinced the delegation of the need for electric lighting in King Kojongs Kyongbok palace. Orders for a generator were placed in 1884; political unrest, including an attempted coup, pushed back completion of the first generator, and the palace lights were not switched on until early 1887.

Initial reception of the new technology was limited, with many fearful of electricity as a supernatural force. The technology suffered a new setback when the original engineer assigned by Edison to install the generator died in an accidental shooting. Nonetheless, King Kojong remained supportive of the technology and ordered a new generator for Changdok Palace, which, at the time of its completion in 1897, was the largest power generator in the region. By 1891, the original Kyongbok power plant was replaced with a new and larger facility, which was completed in 1894.

By the end of the decade, the royal government had recognized the potential of electrical power and became determined to extend it to the public sector. In 1898, King Kojong granted authorization for the creation of a joint venture with two American businessmen, Henry Collbran and Harry Rice Bostwick, called the Hansung (or Seoul) Electric Company. The new company, 50 percent owned by the king himself, was charged with establishing a public electrical lighting network in Seoul, and contracted with Collbran and Bostwick Company to build an electric streetcar system as well.

Hansung Electric completed its first power plant in 1899 at Tongdaemun. By the end of that year, the company had succeeded in launching its streetcar service, and soon after had turned on its first electric lights in Seouls Chongno Street. With a monopoly on Seouls electricity and streetcar systems, Hansung Electric continued to build up its public lighting network into the turn of the century, and began offering electrical service to private homes as well.

The occupation of Korea by Japan following 1905 brought new competition to Hansung Electric. A group of Japanese businessmen set up a rival, gas-lighting system, which proved highly competitive for some time. Meanwhile, Hansung Electrics American owners were under increasing pressure to sell out to its Japanese rivals, in a deal that cut out the countrys former ruler. Under Japanese occupation, Koreas electrical power system continued to develop, and a number of new companies were established, including Kyungsung Electric Company in 1915, the Chosun Electric Company in 1943, and the Namsun Electric Company in 1946. Nonetheless, the bulk of Japanese investments in power generation went to the northern half of the countryas Korea itself had virtually no natural fuel deposits, the countrys power plants were established closer to Chinese coal supplies.

Japans capitulation at the end of World War II led to the division of Korea into the Allied-dominated south and the Soviet-dominated north in 1945. In the initial postwar years, the northern half of the country continued to supply the southern half with electrical power. Yet the outbreak of the Korean War in 1950 caused the power grid between the two halves to be cut overnightleaving South Korea, with its undeveloped power generation capacity, in economic chaos. Power shortages became commonplace, especially as the war destroyed much of South Koreas existing electrical power infrastructure. In the years following the war, the Korean government initiated a number of power-saving measures, such as not allowing elevators to stop at the first three floors of buildings, and barring escalators from early subway stations.

Government-Led Electrical Power Company: 1960s80s

The military-backed coup of 1961 and the installation of a military government introduced a new period not only to Koreas economy but to its electrical power sector as well. In 1961, the government grouped together the three existing regional companies, Kyongsung, Namsun, and Chosun, to form a single, nationally operating electric power entity, Korea Electric Company, which became known as KECO.

While austerity measures continued through the 1970s, the government began ambitious investment and development programs that were ultimately successful in transforming South Korea into one of the regions financial and industrial heavyweights. Part of that development program included massive investments in boosting the countrys power generation capacity.

Yet the government recognized early on that South Koreas lack of natural resources made it too dependent on foreign resources for its power supply. As early as 1962, the country initiated plans to develop its own nuclear power industry with the aim of reducing its reliance on fossil fuels. Backed by the United States, Korea launched its nuclear development program. In the meantime, the country was hit hard by the Arab Oil Embargo and the resulting worldwide recession in the early 1970s, stimulating its drive toward nuclear power capacity.

Korea brought its first nuclear-based power generation facility online in 1978. That plant, the Kori-1, was built by the United States Westinghouse and boasted a capacity of nearly 600 megawatts. The country also began awarding contracts for new nuclear plants, with eight new plants to open by the end of the 1980s. In the meantime, the Korean government moved to take complete control of KECO, which was then renamed Korean Electric Power Corporation, or Kepco, a move that took place in 1982.

Throughout the 1980s, Kepco continued adding nuclear power facilities to its grid, bringing the countrys total to nine by the end of the decade. The company also began planning its next phase of reactorsmeant to bring the countrys total to some 17 by the turn of the century. Yet now the companys awards went toward companies willing to include technology transfers in their bids, as Kepco sought to develop its own reactor designs in the late 1980s. In the meantime, the companys total nuclear output topped 4.75 million kilowatts by 1986, representing 26 percent of its total power generation capacity.

Preparing for Deregulation in the New Century

Kepco went public in 1989 as part of the Korean governments larger privatization program. In that year, the company, already one of Koreas largest nonfinancial corporations, listed some 21 percent of its stock on the Korean stock exchange. The government remained in control of the decision-making, howeverparticularly its policy of charging low rates to industrial and other customers, including farmers, in order to stimulate the economy. While this policy achieved its goal, it hampered Kepcos ability to invest in new power generation capacity. The company remained profitable, however, posting earnings of $557 million on 1993 revenues of $9.3 billion.

Kepco continued to target growth in its domestic market into the mid-1990s, announcing a five-year, $40 billion investment program to boost its generating capacity by more than 60 percent. The company, which listed its shares (as ADRs) on the New York Stock Exchange in 1994, also had adopted a new strategic direction: that of international expansion. This new strategy came in part because of increasing signs of the Korean governments interest in opening up the domestic power market to competitiona move that originally was expected to occur as early as 1997.

Company Perspectives:

KEPCO of the future will be a major world player that provides all customers with the best electric power products and services available.

Kepcos first step onto the international front came in 1993, when it was awarded a contract to upgrade and operate a power generating facility in Minala, in the Philippines. In 1995, Kepco increased its presence in that country when it received a contract to relocate two of its existing Korean power plants to Cebu, also in the Philippines, which boosted the groups total generating capacity in the Philippines to more than 1,000 MW (as compared with its total Korean capacity of 28,000 MW).

Calls for deregulation gathered steam in the late 1990s as the Korean economy reeled again from the crisis that had affected much of the region. Kepco began a new restructuring drive in preparation for the coming deregulation. Part of the companys preparation involved the hiring of a new chief executivethe first to be chosen through an open recruitment process. The new CEO, Chang Young-sik, launched the company on a restructuring drive, shedding a number of businessesincluding its telecommunications investments, some of which were spun off into a new company, Powercomm, in 2000. Kepco also cut back its workforce by more than 3,700.

Nonetheless, Kepco remained hampered by a spiraling debt, which in the last half of the 1990s had more than doubled, topping W 33 trillion by 2000, including some $10 billion in foreign debt. By then the broad outline of the governments plans for the company were in place, involving the breaking up of Kepco into a number of independently operating power generating subsidiaries. But these plans met with growing resistance from the countrys unions, forcing the company to make a number of concessions, including a pledge to retain majority control of the companies to be spun off. At the same time, analysts warned that Kepco would have to raise its ratesand especially its artificially low industrial ratesif the privatization effort was to succeed.

Massive strikes across the country forced the government to place Kepcos restructuring and the deregulation of the Korean market on hold until 2001. In that year, the company created six new subsidiaries, five of whichKorea South-East Power Co. (KOSEPCO), Korea Southern Power Co. (KOSPO), Korea Midland Power Co. (KOMIPO), Korea Western Power Co. (KOWEPO), and Korea East-West Power Co. (KEWESPO)represented the companys regionally operating fossil fuel generating facilities and were slated to be sold off as privatized companies to foreign and domestic investors. The sixth company, Korea Hydro & Nuclear Power Co. (KHNP), which grouped the company nuclear and hydroelectric facilities, was to remain under Kepcos control.

The first of the companies slated for privatization was KOSEPCO, which was also the smallest. Initially slated for 2001, the sale, which faced continued resistance, appeared to be finally under way at the beginning of 2003, when the government promised to select its preferred bidder. At the same time, the government reiterated its determination to privatize all five of Kepcos power generating subsidiaries, with an eye toward full deregulationincluding distribution to private homesby 2009.

Before then Kepco expected to become one of the regions powerhouses, announcing plans to expand throughout the region. As part of that strategy, the company created a new subsidiary, Kepco International, in November 2002, which took over the operations of its former overseas division. At the same time, the company debuted its latest foreign venture, a 1.2 MW natural gas power plant in Ilijan, in the Philippines, the countrys largest.

Kepco continued to seek new international projects in 2003, with bids on ten different projects in markets including Saudi Arabia, the United Arab Emirates, and Myanmar. In February 2003, the company announced plans to build a new 500 MW power plant in Indonesia, with construction slated to start in 2004. At the same time, Kepco was finalizing contracts to begin construction of two coal-fired power plants in China. Kepco expected to have the first of the two plants, which were to have a combined capacity of more than 600,000 MW, operational by the end of 2004. Kepco, which celebrated more than 100 years of history lighting Korea, expected to become a regional powerhouse for the new century.

Principal Subsidiaries

Korea Hydro & Nuclear Power Co. Ltd.; Korea South-East Power Co. Ltd.; Korea Midland Power Co. Ltd.; Korea Western Power Co. Ltd.; Korea Southern Power Co. Ltd.; Korea East-West Power Co. Ltd.; Korea Power Engineering Co. Ltd.; Korea Plant Service & Engineering Co. Ltd.; KEPCO Nuclear Fuel Co. Ltd.; Korea Electric Power Industrial Develop Co. Ltd.; Kepco International Philippines, Inc.

Principal Competitors

State Power Corporation of China; Huaneng Power International Inc.; SembCorp Industries; Perusahaan Listrik Negara PT; Hongkong Electric Holdings Ltd.; Manila Electric Company.

Key Dates:

The first electric lights are turned on in Koreas Kyongbok palace.
Americans are contracted to build an electric network in Seoul, forming the Hansung (Seoul) Electric Company (50 percent owned by the King).
Japan occupies Korea and takes over Seoul Electric.
Kyungsung Electric Company is founded.
Chosun Electric Company is founded.
Namsun Electric Company is founded.
Korean War cuts off South Korea from the North Korean electricity network.
South Korean government leads the merger of Kyungsung, Chosun, and Namsun into the new Korea Electric Company.
South Korea launches an investment program in nuclear power generation facilities.
The first nuclear-powered generator in South Korea comes online.
Korea Electric is taken over by the government and renamed Korea Electric Power Corporation, or Kepco.
Kepco goes public with 21 percent of shares.
Government announces deregulation of the domestic electricity market and the restructuring of Kepco.
Kepco restructures by separating its power generation operations into six independently operating subsidiaries.

Further Reading

Chon, Gina, South Korea to Resume Sale of Power Plants, Daily Deal, April 2, 2002.

KEPCO Eyeing Boosting Power Industry Efficiency Through Restructuring, Korea Herald, July 30, 2002.

KEPCOs Aggressive Restructuring to Bring W2.3 Tril. in Profits, Korea Times, March 11, 1999.

Kim, Mi-hui, All Five Power Companies to Be Privatized, Korea Herald, Jan 28, 2003.

, KEPCO to Expand Overseas Business, Korea Herald, November 15, 2002.

Kirk, Don, South Korea: Utility to Start Privatization, New York Times, October 10, 2002.

Koreas Kepco to Decide on Prime Bidder for Kosep Next Month, Asia Pulse News, February 7, 2003.

Ward, Andrew, Korea Begins Kepco Sell-Off, Financial Times, July 16, 2002, p. 31.

M.L. Cohen

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