(Updates with comments from analyst in fourth paragraph.)

Dec. 2 (Bloomberg) -- South Korea will raise electricity prices by an average 4.5 percent this month, the second increase this year, to help the country’s monopoly power distributor cover higher fuel costs.

The new prices will take effect starting Dec. 5, the Knowledge Economy ministry said today in an e-mailed statement. Korea Electric Power Corp., the state-controlled utility known as Kepco, advanced 1.2 percent at the close of Seoul trading, after the ministry’s statement.

The adjustment, which follows a 4.9 percent increase in August, will allow Kepco to cover 87 percent of its generating costs, the ministry said. The utility posted a 1.94 trillion-won ($1.7 billion) net loss in the first nine months.

“It’s good to see the utility raising tariffs, which has been expected for a long time,” said Shin Min Seok, an analyst at Daewoo Securities Co. in Seoul. “It’s a bit less than market consensus of a 7 to 8 percent increase, but it will help erase losses starting next year,” said Shin, who has a “buy” recommendation on the shares.

Kepco had posted three straight years of losses as government controls on prices to curb inflation meant the utility was unable to fully pass on higher fuel costs to users.

“There’s a need to raise prices by another 6 to 7 percent to match generating costs,” Deputy Knowledge Economy Minister Chung Jae Hoon told reporters at a briefing, without giving a timeline. “The ministry will try to adjust tariffs.”

Higher Costs

The shares advanced 300 won to 25,000 won at the close, paring a 2.4 percent gain earlier. The benchmark Kospi index fell less than 0.1 percent.

Standard & Poor’s Ratings Services affirmed today its ‘A’ long-term and ‘A-1’ short-term credit ratings on Kepco and six power-generating units, citing “an extremely high likelihood of the government providing Kepco with timely and sufficient extraordinary support in times of financial distress.”

Power tariffs for industrial plants and buildings will increase 6.5 percent, while those for households and farms will be unchanged, the ministry said in its statement. The cost for education facilities will climb 4.5 percent.

The higher tariffs will add 0.116 percentage point a year to the producer price index and boost costs by 0.0076 percentage point for manufacturers, the ministry said.

South Korea’s inflation accelerated to a three-month high of 4.2 percent in November, above the central bank’s target limit.

Curbing Power Demand

The utility imposed rolling blackouts Sept. 15 for the first time since 2001 as a surge in demand that day coincided with reduced supplies because of seasonal plant maintenance.

The government plans to impose progressive tariffs in winter, asking large factories and buildings to reduce electricity use by 10 percent during the period, according to another statement from the ministry.

Electricity consumption increased 31 percent in the six years to 2010, compared with declines of 1.9 percent in Japan and 5.1 percent in the U.K., according to the ministry. South Korea’s power shortages may last until 2013, Chung said.

--Editors: Ryan Woo, John Chacko.

To contact the reporter on this story: Sangim Han in Seoul at sihan@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net.