Korea Electric Power Corporation

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1 Korea Electric Power Corporation Response to Rate Regulation Standard Setting - Request for Information

2 [Question 1] For the types of rate regulation that you think would be useful for us to consider in the Discussion Paper (or would not be useful to consider, if applicable), what types of goods or services are subject to the rate regulation being described? In providing this information, please also tell us: whether you are a rate-regulator, a financial statements preparer, auditor, user or other(please specify); <Answer> A Financial statements preparer. what jurisdiction the rate regulation that you are describing is in; <Answer> South Korea whether that jurisdiction is a recent adopter of IFRS; and <Answer> The conversion date for South Korea was January 1st, 2010 and the company adopted it in whether the main suppliers of the rate-regulated goods or services (ie the rateregulated entities), including your company if applicable, are predominantly private-sector entities, government entities or closely related to the rate regulator. <Answer> A government-owned company (the Government of Korea owns over 50% of the company shares equity)

In providing this information, please also tell us: whether you are a rate-regulator, a financial statements preparer, auditor, user or other(please specify); <Answer> A Financial statements preparer.

3 [Question 2] What are the objectives of the rate regulation and how do they influence the interaction between the rate regulator, the rate-regulated entity and customers? <Answer> Electric utility business is a network business, unable to store or substitute the goods. Electricity has a great impact on the national economy because it is not only consumer goods closely associated with people s daily life but also intermediate goods essential to industrial activities. In providing this information, please tell us: what are the high-level objectives of the rate regulation(for example, to restrict prices of to influence the levels of supply and demand or to restrict or encourage competition); and <Answer> The rate regulation is implemented to increase the public benefits and improve the management efficiency of the electric utility companies. The regulatory bodies carry legal binding force/are binding on the rateregulated companies and the customers. how these objectives are reflected in the nature of the rate-setting mechanism? For example, to what extent:

Electricity has a great impact on the national economy because it is not only consumer goods closely associated with people s daily life but also intermediate goods essential to industrial activities.

4 (i) is the rate-setting mechanism designed to give the rate-regulated entity a 'fair rate of return'(for example, a cost-plus mechanism) or is the focus more on reducing the cost to customers(for example, a price-cap or other incentive-based mechanism); <Answer> The rate regulation gives the right to recover the cost of supplying electricity under the assumption that the entity is operating with diligence and efficiency. Also, considering the fact that electric utility business requires a high level of capital expenditures, the minimum costs required for the expenditures such as interest on borrowings, dividends and other related costs are accounted as a part of the rates to implement a cost-plus mechanism. (ii) are there incentives to meet targets that are not directly related to the cost-rate relationship(for example, efficiency, service levels, infrastructure investment, increased supply capacity or reliability, use of alternative resources or reduction in customer demand or usage); <Answer> Not applicable

5 (iii) does the rate regulation fix the price per unit or does it provide some flexibility for the entity to set prices (for example, through price ranges or caps, based on either unit prices or total revenue or total profitability); and <Answer> The projected total revenue is determined by adjusting the electricity rates. (iv) are there other aspects of the rate-setting mechanism that reflect any specific objectives not envisaged above? <Answer> Not applicable [Question 3] What sort of rights or obligations does the regulation create? In providing this information, please consider: <Answer> The fluctuating portion in the fuel cost adjusted rates is appropriately calculated based on a guideline and the request for the government approval should be submitted. If approved by the government, the right to charge the fluctuating portion of the fuel costs to the customers is obtained. whether the rate-regulated entity has an exclusive right to operate in the market;

(iv) are there other aspects of the rate-setting mechanism that reflect any specific objectives not envisaged above?

6 <Answer> Although there s a system that allows the electricity market for the smallsized sellers and the customers, KEPCO practically has a monopoly on the market. if the entity's right to operate in the market is established by license: (i) is there a cost to acquire the licence; and (ii) can the licence be revoked, renewed or transferred; <Answer> A license does not exist since it is a legal right. how competition is excluded or encouraged; <Answer> KEPCO is not under the competitive environment as it is the only electricity supply company in Korea. how the rights and obligations are expressed, for example, as a cap on the rate of return, as the right to recover entity-specific costs, as a right to recover an allowed level of cost(whether or not incurred by the entity), or as a right to recover specific types of costs without limit if and when incurred; and <Answer> The fuel cost pass-through adjustment is a revenue neutral policy intended to provide signals to the customers about the fluctuating fuel prices and to allow the operator to recover uncontrollable costs. The difference between the base fuel costs and the actual fuel costs is added or deducted to the customers monthly electricity rates.

does not exist since it is a legal right. how competition is excluded or encouraged; <Answer> KEPCO is not under the competitive environment as it is the only electricity supply company in Korea.

7 whether the entity can choose to stop providing the goods or services that are subject to rate regulation and, if so: (i) how is this achieved; and (ii) what are the consequences for the entity? <Answer> Electric Utility Act Article 14 (Obligation to Supply Electricity) disallows the operator to stop providing the goods or services. [Question 4] For the rights and obligations identified in response to Question 3, how does the rate-regulated entity enforce its rights, or how does the rate regulator enforce the settlement of the rate-regulated entity's obligations? In providing this information, please tell us: does the rate regulation provide for retrospective recovery or reversal of under- or over-recoveries of allowable costs? If so, how is this achieved, for example through cash payments or other assets transfers to or from parties outside the rate-regulated entity(such as individual customers or groups of customers, the rate regulator or the government);

[Question 4] For the rights and obligations identified in response to Question 3, how does the rate-regulated entity enforce its rights, or how does the rate regulator enforce the settlement of the

8 <Answer> In case of the electricity rates, if a significant gap exists between the expenses used to calculate the fully distributed cost and the actual expenses, the rates can be adjusted in consideration of the reasons for each item (Indicated in the announcement by Ministry of Trade, Industry and Energy). For the fuel cost pass-through adjustment, the difference between the fluctuations in fuel cost that have been passed through to the customers and the actual fuel cost is neither recovered nor reversed. are the rights and obligations separable from the business; and <Answer> The rights and obligations are inseparable from the business. what happens to the rights or obligations when the entity ceases to provide the rate-regulated goods or services? <Answer> The laws disallow the entity to stop providing the goods or services. [Question 5] How does the rate regulation ensure the recovery or reversal of under- or overrecoveries of allowable cost (ie variance amounts) (if applicable)? Are these

For the fuel cost pass-through adjustment, the difference between the fluctuations in fuel cost that have been passed through to the customers and the actual fuel cost is neither recovered nor

9 mechanisms effective in recovering or reversing those amounts within the targeted time frame? <Answer> The coefficient applied in the current fuel cost pass-though adjustment is in fixed quantities and prices. Therefore, the variance amounts do not exist. However, the variance amounts do exist depending on the consumption of electricity by the customers when the fees are billed and the under or over-recoveries of allowable cost is currently not in place. In providing this information, please tell us: what is the mechanism for tracking the recovery or reversal of such variance amounts; <Answer> The fuel cost adjusted rates are determined by the monthly electricity consumption of each individual customer (fuel cost adjusted unit cost x electricity consumption), and they are individually managed similar to the billing and collecting processes for the electricity rates. how does the rate-setting mechanism adjust for unexpected changes in demand for the rate-regulated goods or services;

However, the variance amounts do exist depending on the consumption of electricity by the customers when the fees are billed and the under or over-recoveries of allowable cost is currently not in

10 <Answer> No adjustment is made. has there been a recent trend whereby the balances of the variance amounts have been increasing? If so: (i) is this caused by an increase or a decrease in the demand of the rate-regulated goods or services; (ii) has the trend resulted in a net debit position (ie under-recovery of costs) or a net credit position (ie over-re of costs); and (iii) what are the main components of the variance amounts (ie what are the main categories of cost or income variances)? <Answer> Not applicable for (i) through (iii) above.

resulted in a net debit position (ie under-recovery of costs) or a net credit position (ie over-re of costs); and (iii) what are the

May 30, 2013. International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom

May 30, 2013. International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom The Japanese Institute of Certified Public Accountants 4-4-1, Kudan-Minami, Chiyoda-ku, Tokyo 102-8264 JAPAN Phone: +81-3-3515-1130 Fax: +81-3-5226-3355 e-mail: kigyokaikei@jicpa.or.jp http://www.hp.jicpa.or.jp/english/