The amendment to the Commercial Code, which includes the "duty of loyalty to shareholders," has passed the National Assembly, raising expectations that the stock prices of energy public enterprises such as Korea Electric Power Corporation and Korea Gas Corporation will rise.

In the meantime, the government has kept public utility rates for electricity and gas at a low level under the premise of price management and household support. However, there are analyses suggesting that if low public utility rates are considered to undermine shareholder profits due to the amendment to the Commercial Code, electricity and gas rates may normalize. In particular, these public enterprises have faced criticism for continuously accumulating deficits that have led to declining stock prices and reduced dividends.

The electric meter in the vicinity of the traditional market in Yeongdeungpo, Seoul./Courtesy of Yonhap News

Korea Gas Corporation has continuously deteriorated in its financial health due to "consumer receivables" arising from supplying gas below cost. Consumer receivables refer to the outstanding amounts owed from supplying gas below cost.

According to the National Energy Statistics Comprehensive Information System (KESIS) on the 4th, Korea Gas Corporation's consumer receivables increased sharply from 1.7656 trillion won in 2021 to 8.5856 trillion won in 2022 and 13.011 trillion won in 2023. Although the increase has slowed to 14.871 trillion won in the first quarter of this year, it remains at a high level.

The problem is that as receivables increase, operating funds must rely on external borrowing. The burden of interest costs is also significant. Choi Yeon-hye, president of Korea Gas Corporation, noted last year, "Korea Gas Corporation is currently managing its operations through borrowing due to a low cost recovery rate, with daily interest costs amounting to 4.7 billion won." As of the end of March this year, the corporation's liabilities reached 44 trillion won.

Korea Electric Power Corporation's situation is not different. As of the end of March this year, KEPCO's liabilities amounted to 206 trillion won, with daily interest costs reaching 13 billion won. During the 2021-2022 period, when natural gas prices soared more than twice due to the Russia-Ukraine war, electricity rates were increased by only 21.1%. This is very low compared to major countries like Italy (702%), the United Kingdom (173%), and Japan (44%) during the same period. The debt issue has intensified as the company has frozen rates for eight consecutive quarters since the second quarter of 2023.

The power meter on the street in Jongno-gu, Seoul./Courtesy of News1

However, the situation has changed with the passing of the amendment to the Commercial Code. If the government, as the major shareholder, continues to control rates, there is a high possibility that small shareholders' complaints will arise along with concerns over breach of fiduciary duty. As of the end of March, Korea Gas Corporation (42.07%) and Korea Electric Power Corporation (36.83%) have a high proportion of small shareholders. If the ongoing deficit is recognized as a violation of the duty of loyalty to shareholders due to conservative management, it is anticipated to provoke further scrutiny.

Kwon Jae-yeol, a professor at Kyunghee University School of Law, said, "Now, the board of directors in the process of determining public utility rates will be held accountable for the decisions made considering various interests such as shareholder profits, government influence, and public interest," adding, "With the amendment, there is now a basis for holding board members legally responsible if they are deemed to have violated shareholder profits."

However, some analyses suggest that the legal effects of the amendment to the Commercial Code may not significantly increase public utility rates. The newly added "duty of loyalty to shareholders" applies mainly when company and shareholder interests diverge, while the issue of public utility rates intertwines company and shareholder interests, making it difficult for this duty to be practically applied.

Lee Sang-hoon, a professor at Kyungpook National University School of Law, stated, "In the past, there have been instances of breach of fiduciary duty cases filed against companies, but all were dismissed. The introduction of shareholder loyalty will not change this issue. The key point is that the costs of freezing electricity rates, which benefit the entire nation, are being passed on to publicly listed companies without any compensation."

Additionally, maintaining a balance between the risks of breach of fiduciary duty and public interest among publicly listed state-owned enterprises such as Korea Electric Power Corporation and Korea Gas Corporation is expected to become a new challenge.

Kim Kwang-seok, head of the Economic Research Office at the Korea Economic Research Institute, remarked, "In the future, small shareholders are likely to demand the resolution of deficits, normalization of management, and rise in stock prices through participation in board meetings or lawsuits. However, if shareholder interests are excessively prioritized and efficiency alone is emphasized, the original purpose of state-owned enterprises to supply public goods could be undermined, so it seems that countermeasures will be necessary."

A representative from Korea Electric Power Corporation stated, "Currently, the structure of electricity pricing involves discussions between the Ministry of Trade, Industry and Energy and the Ministry of Economy and Finance to finalize the increase rate," adding, "We will review our business direction to reflect shareholders' interests as much as possible in consultation with the government."

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