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JOINT UNDP / WORLD BANKENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP)

PURPOSE

The Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) waslaunched in 1983 to complement the Energy Assessment Programme, established three years earlier.ESMAP's original purpose was to implement key recommendations of the Energy Assessmentreports and ensure that proposed investnents in the energy sector represented the most efficient useof scarce domestic and external resources. In 19C,Can international Comrnrission addressed ESMAP'srole for the 1990s and, noting the vital role of adequate and affordable energy in economic growth,concluded that the Programme should intensify its efforts to assist developing countries to managetheir energy sectors more effectively. The Commnission also recommended that ESMAP concentrateon making long-termn efforts in a smaller number of countries. Today, ESMAP is conducting EnergyAssessments, performing preinvestment and prefeasibility work, and providing institutional andpolicy advice in selected developing countries. Through these efforts, ESMAP aims to assistgoverrunents, donors, and potential investors in identifying, funding, and implementing economi-cally and environmentally sound energy strategies.

GOVERNANCE AND OPERATIONS

ESMAP is governed by a Consultative Group (ESMAP CG), composed of representatives of theUNDP and World Bank, the governments and institutions providing financial support, and repre-sentatives of the recipients of ESMAP's assistance. The ESMAP CG is chaired by the World Bank'sVice President, Finance and Private Sector Development, and advised by a Technical AdvisoryGroup (TAG) of independent energy experts that reviews the Programme's strategic agenda, itswork program, and other issues. ESMAP is staffed by a cadre of engineers, energy planners andeconomists from the Industry and Energy Department of the World Bank. The Director of thisDepartment is also the Manager of ESMAP, responsible for administering the Programme.

FUNDING

ESMAP is a cooperative effort supported by the World Bank, UNDP and other United Nationsagencies, the European Community, Organization of American States (OAS), Latin AmericanEnergy Organization (OLADE), and countries including Australia, Belgium, Canada, Denmark,Germany, Finland, France, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway,Portugal, Sweden, Switzerland, the United Kingdom, and the United States

FURTHER INFORMATION

An up-to-date listing of completed ESMAP projects is appended to this report. For furtherinformation or copies of ESMAP reports, contact:

ESMAP

c/o Industry and Energy Department

The World Bank

1818 H Street N.W.

Washington, D.C. 20433

U.S.A.

Strategic Options for Power SectorReform in China

Summary, Speeches, and Documents from a Workshop,Beijing, July 8-10, 1993

Convened by theMinistry of Finance and the Ministry of Electric Power

People's Republic of China

Report No. 156193

Cosponsored and jointly organized with

The World Bank China and Mongolia Department and theJoint UNDP/World Bank Energy Sector Management Assistance Programme

(ESMAP)

This paper is one of a series issued by the Industry and Energy Department and the JointUNDP/World Bank Energy Sector Management Assistance Programme (ESMAP). The papermay not be published or quoted as representing the views of the UNDP, World Bank Group,ESMAP, or any of their affiliated countries and organizations, and none of the foregoing areresponsible for the accuracy or compleeness of the matrial presented.

ContentsPreface ................................................ vii

Steps in the Process ............................................... vii

Achievements of the Process.. ................................. . ........ viii

Puture Direction of Reforms ............................................... ix

Acknowledgments ................................................. x

Workshop Schedule ................................................ xi

Day 1: Thursday, July8 ............................................... xi

Day ': Friday, July 9 ................................................ ........ xi

Day 3: Saturday, July 10 ............................................... xiii

Workshop Participants ................................................ xv

1. Introduction ................................................. 1

2. International Experience of Power Sector Reform .............................................. 3

Modes of Ownership and Management ....................... 3........................ 3

Vertical Integration of Activities ................................................ 5

Concentration or Fragmentation and Level of Coordination .................. ............ 6

Competition and Monopoly ............................................... 7

Conclusions from International Experience ............................................... 10

3. Power Sector Overview ................................................. 13

Organization and Recent Trends ............................................... 13

Future Demand Growth ............................................... 18

Power Sector Reform in dLe 1980s . ............................................... 19

4. Structural Options for Power Sector Organization .............................................. 21

The Current Hybrid Structure ............................................... 21

Key Organizational and Institional Issues .......................................... ..... 22

Future Trend for Structural Reform ................ ............................... 22

5. Regulatory and Legal Framework ................................................ 25

The Current Situation and the Need for Regulatory Reform .................. ............ 25

Regulatory Responsibilities ............................................... 26

iii

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6. Arrangements of System Reform for Power Sector ....................................... 68

Members of Task Force One ...................................................... 69

Annex 5 Interim Report of Task Force Two ........................................................ 71

1. Background ...................................................... 71

2. Existing Problems ...................................................... 71

3. Basic Needs ...................................................... 72

4. Options for Establishment of Electricity Law ............................................... 73

5. Proposal for the Establishment of a Legal System ........................ ................ 74

6. Arrangements for Setting up an Electric Power Regulatory System ............. 76

Members of Task Force Two ........................................... 77

Annex 6 Interim Report of Task Force Three ..................... ....................... 79

1. Background .......................................... 79

2. Problems During the Reform of Power Enterprises ....................................... 80

3. Objectives of Power Enterprise Reform ........................................................ 80

4. Power Enterprise Reform Options ................................................................. 80

5. Proposals and Suggestions for Corporatization and Commercialization ....... 82

Members of Task Force Three ..................... .................................... 83

Annex 7 Interim Report of Task Force Four ........................................................... 85

1. Background .......................................................... 85

2. Existing Problems ......................................................... 86

3. Objectives ......................................................... 87

4. Options for Fund-raising ......................................................... 87

5. Proposals for Fund-raising ..................... ..................................... 94

6. Short-term Targets ......................................................... 97

Members of Task Force Four ............................................................................. 97

Annex 8 Observations and Recommendations from the Study Tours .................. 99

Study Tour to the United Kingdom and France .................................................. 99

Study Tour to the United States .................................................... 100

Study Tour to Austalia .................................................... 101

Study Tour to New Zealand .................................................... 103

v

Preface

On July 8-10, 1993, the Ministry of Finance and the Ministry of Electric Power ofthe People's Republic of China sponsored a workshop, "Strategic Options for PowerSector Reform in China." The workshop, whose proceedings are summarized in thepresent document, was part of a technical assistance effort supported by the InstitutionalDevelopment Fund (IDF) of the World Bank and aimed at developing a sustained andcohesive effort to restructure China's power sector. Participating in the effort with thetwo ministries are the World Bank China and Mongolia Department and the JointUNDP/World Bank Energy Sector Management Assistance Programme (ESMAP).

Because the serninar was part of a larger and continuing process of creatingdialogue and stimulating reform in the sector, this volume (essentially a summary of theworkshop as seen by the World Bank and ESMAP participants), seeks to convey not onlythe results of the discussions but also a sense of how the participants analyzed the optionsand arrived at a consensus. A brief review of some of the features of the overall reformeffort may also help to clarify the context within which the seminar took place.

Steps in the Process

Activities to organize for reform were initiated by the cosponsors in February1993 and were designed from the outset to be process driven. The process tasks thatwere identified, and that have been largely completed, are as follows. The first task wascreating a high-level steering committee to supervise and coordinate the entire effort toinvolve all agencies that have a substantial involvement in the Chinese reform process asa whole and the power sector in particular. The representation included but was notlimited to the Ministry of Finance; the State Planning Commission/Energy ResearchInstitute of the State Planning Commission; System Reform Commission; State EnergyInvestment Corporation; Economic and Trade Office of the State Council. The SteeringCommittee was established in February 1993.

The second part of the effort involved defining the thematic areas for studying andunderstanding the implications of reform in the power sector. It was decided to focus onfour areas: the structure and organization of the sector; its legal and regulatoryframework; reform of the power enterprises; and financing for the sector. This wasfollowed by constituting task forces of Chinese experts that were each to focus on one ofthe thematic areas. The task forces were organized to ensure broad representation by thevarious actors in the power sector and included officials from central governmentagencies and regional/provincial power companies.

Intemational experts were also selected. Their role would be to work closely withthe task force members to help prepare a preliminary paper that outlined the principalissues and options for refonn. This joint effort was carried out in April-May 1993.

vii

After the task forces and international experts had drafted discussion papers on thefour thematic areas, the workshop detailed in this document was convened to bringtogether senior power sector officials, executives, and international experts to discussthese preliminary analyses. The workshop was intended to facilitate a free exchange ofideas and views among the Chinese participants and with an international team that couldshare the lessons of power reform experience in their own countries.

The workshop represented a highlight in the reform development process, but itwas essential to follow up. Immediately after the event closed, therefore, the task forcesbegan revising the preliminary notes they had prepared, incorporating the issues,principles, and directions for reform that were raised and debated during the workshop.

To gain further perspective on the options and complexities of reform, task forcemembers traveled to countries whose experience was highlighted during the workshopand whose institutions and personnel might impart lessons that could be relevant toChina. Three teams visited the United Kingdom and France in November 1993, theUnited States in November 1993, and Australia and New Zealand in March 1994.

Finally, the task forces prepared a final report that is to be widely circulated fordiscussion within China and that then will become a key document in charting the reformprogram in the country. The first volume the task forces' five-volume report, including atranslation of the new World Bank policy, was issued in March 1994.

Achievements of the Process

The most important outputs of the process have been a clear articulation by theconcemed Chinese of the reform's key processes and objectives. These are as follows:

a. Reform should be driven by provincial realities and strengths. Regions andprovinces are diverse in terms of levels of development, sophistication of powersystems, and degree of decentralization in decisionmalding.

b. Competition should be introduced gradually. To facilitate efficientdecisionmaking and economic decentralization, competition should be introducedgradually, where possible, specifically in generation.

c. Conmmercialization and corporatization of power companies are necessary. Toattract the large volumes of required investment capital from domestic as well asforeign sources, power companies must be commercialized and corporatized.Legal instruments are in place to achieve these objectives.

Future Direction of Reforms

With this consensus in hand, further reform efforts are expected to focus on thefollowing steps, which require coordination at the provincial and national level:

a Commercialization of companies at the regional and provincial leveL This willinvolve financial and organizational restructuring to make progress on thefollowing fronts: (1) establish transparency in cost structures in order to

viii

rationalize tariff setting mechanisms that provide a reasonable return; (2) establishstandards of performance that can serve as a basis to separate governmentfunctions clearly from the productive activity of companies; and (3)implementation of the new accounting standards.

b. Corporatization of the power companies. Incorporation of commercialized powercompanies as joint-stock limited liability entities will enable them to takeadvantage of reforms in the financial sector and national capital markets. Thesereforms should reflect reforms in Chinese company law. Once corporatized,power companies could access domestic and foreign sources of finance by (1)floating equity; (2) issuing bonds; and (3) contracting commercial debt.

c. Reorganization of the industry structure based on the provincial realities.Tentative first steps could include (1) encouraging transparency in prices betweenthe generation, transmission, and distribution segments, through contracts orpublication of prices by competent provincial and national authorities; (2) makingpower allocation procedures more transparent to allow for development of marketmechanisms; (3) encouraging the entry of independent (nonutility) producers tospur competition at the generation level; and (4) promoting contractualarrangements to achieve greater operational efficiency and economic dispatch.

d. Creating a system for sector oversight to support the reforms at all levels.Procedures and systems for decisionmaking needing articulation include (1)establishing regulatory functions with the appropriate provincial and nationalcompetent authorities for price regulation and contract oversight; (2) settingnorms for efficient bulk power transfer between provinces, through thedevelopment of systems and procedures for pricing and operation of transmissionservices; and (3) setting guidelines for the entry of independent power producers.

This document presents the main conclusions of the workshop in detail. After anintroduction, chapter 2 describes the conceptual basis of power sector restructuring andinternational experience in the field. Chapter 3 surveys China's power sector and its keyissues for the 1990s. The subsequent chapters of the main text summarize the workshopdiscussions of the task force reports, dealing, in turn, with power sector structures,regulatory and legal framework, commercialization and corporatization, and financing ofexpansion. Annexes present the opening-day address of Mr. Richard Stem, Director ofthe Industry and Energy Department of the World Bank; the closing-session speech ofMr. Shao Shiwei, Director of the Department of Policy and Legislation, Ministry ofElectric Power, and a summary of a closing-day talk given by Mr. Richard Newfarmer,chief of the Industry and Energy Operations Division of the China and MongoliaDepartment of the World Bank. The foregoing material is being publishedsimultaneously as an Industry and Energy Departnent Occasional Paper (No. 3). ThisESMAP version of the report contains as additional documentation the texts of the fourtask force reports, along with a summary of the observations and recommendations ofChinese study tour groups, which examined and analyzed power systems in the UnitedKingdom, France, the United States, Australia, and New Zealand.

ix

AcknowledgmentsThe workshop resulted from a collaborativc effort by the government of China,

the World Bank, and ESMAP. The work of the Chinese task forces formed the basis forthe entire effort, and special thanks are expressed for their dedication and hard work.Coordination and leadership were provided by Mr. Shao Shiwei, Director, Department ofPolicy and Legislation, Ministry of Electric Power; Mr. Ye Rongsi, Vice President, ChinaElectricity Council; Mr. Zhou Fengqi, Director, Energy Research Institute of the StatePlanning Commission; Mr. Tang Zhongnan, Advisor, China Electricity Council; and Mr.Zhu Chengzhang, Advisor, Ministry of Electric Power. Mr. Xian Zhu and Mr. ZhangWencai of the Energy, Industry, and Transport Division of the World Bank Department,Ministry of Finance, provided invaluable assistance in organizing the initiative andmanaging the Institutional Development Fund Grant Facility.

Thanks also go to Mr. John Rhys, Ms. Sally Hunt, and Mr. Graham Houston ofNERA, UK; Mr. Andrew Pocock, consultant; Mr. Robert Fitzgibbons of Hunton &Williams, USA; and Mr. Athar Hussain of the London School of Economics, for theirprofessional inputs into the discussions and deliberations of the task forces. NationalPower and NERA in the UK, El6ctricit6 de France (EDF), Pacific Power in Australia, theMinistry of Foreign Affairs in New Zealand, and Hunton & Williams in the United Statesprovided vital support in the organization of the study tours to their respective countries.

The international participants at the workshop provided extremely usefulperspectives: Mr. Charles Stalon, Director of the Institute of Public Utiiities, U.S.A.; Mr.Raymond Laban, Professor, CNAM, France; Mr. Roger Witcomb, Director of CorporatePlanning, National Power, UK; Mr. Adilson de Oliveira, Professor, University of Rio deJaneiro, Brazil; Sir Roger Douglas, former Minister of Finance of New Zealand; Mr.William von Blasingame, Senior Manager, Mission Energy, U.S.A.; and Mr. MarcRegnard, Senior Expert, EDF International.

The staff of the Industry and Energy Operations Division of the World Bank'sChina and Mongolia Department were closely associated with all phases of the work;their assistance is greatly appreciated. The advice and assistance of Peter Cordukes, ofthe Bank's Industry and Energy Department (IEN) is gratefully acknowledged. The workwas managed by Nourredine Berrah of the Industry and Energy Operations Division ofthe China and Mongolia Department, and by Ranjit Lamech of IEN. Publication of thereport was managed by Paul Wolman, also of IEN.

The expenditures of the workshop were borne by the Ministry of Electric Power,the Ministry of Finance, the World Bank's Institutional Development Fund (through theMinistry of Finance), and the joint UNDP/World Bank Energy Sector ManagementAssistance Programme (ESMAP). This report has been prepared as a record of theproceedings of the workshop. It reflects the discussions and recommendations of theworkshop and may not be published or quoted as representing the views of the Chinesegovernment or those of the sponsoring intemational agencies.

x

July 8-10, 1993

Workshop ScheduleDay 1: Thursday, July 8

MORNING SESSION

Chairperson: Jin Liqun, Deputy Director, World Bank Department, Ministry of Finance

9:00- 9:45 InauguralWelcome Address: Jin Renqing, Vice Minister, Ministry of Finance

Brief Speeches: Richard Stem, Direccor, Industry and Energy Department,World Bank; Zhao Xizheng, Vice Minister, Ministry of Electric Power;Pieter Bottelier, Head, Resident Mission in China, World Bank

9:45 - 10:00 Coffee Break

10:00 - 12:30 Power Sector Reform

Chairperson: Richard NewfaTmer, Chief, Industry and Energy Division, China andMongolia Department, World Bank

International Trends in Power Sector Reform, John Rhys, Director, NERA

World Bank Policyfor Power Development, Richard Stem, Director, Industryand Energy Department, World Bank

Objectives of Power Sector Reform in China, Ye Rongsi, Vice President,China Electricity Council

AFTERNOON SESSION

Chairperson: Karl Jechoutek, Chief, Power Development Division, Industry and EnergyDepartment, World Bank

2:00 - 4:00 Intenational Experience in Power Sector Reform

Panelists: Charles Stalon, Director, Institute of Public Utilities, Michigan,USA, Former Commissioner FERC. USA; Raymond Leban, Professor,CNAM, France; Roger Witcomb, Director, Corporate Planning, NationalPower, U.K.; Adilson de Oliveira, Professor, University of Rio de Janeiro;Sir Roger Douglas, Fonrer Fmance Minister, New Zealand

4:00-4:15 Coffee Break

4:15 - 5:30 Discossion Open to the Floor

6:30 Banquet

Chairperson: Shao Shiwei, Director, Department of Policy and Legislation, Ministry ofElectric Power

Speakers: Jin Renqing, Vice Minister, Ministry of Finance; RichardNewfarmer, Chief, Energy and Industry Division, China and MongoliaDepartmnt, World Bank

xl

Day 2: Friday, July 9

MORNING SESSION

Chairperson: Shao Shiwei, Director, Department of Policy and Legislation, Ministry ofElectric Power

8:30 - 9:30 Task Force One Report: Options for Power Sector OrganizationPresentation of Task Force One Report. Zhou Fengqi, Director, EnergyResearch Institute of the State Planning CommissionComments by taskforce consultant (John Rhys, NERA)

9:30 - 9:45 Coffee Break9:45 - 12:00 Discusdon of Task Force One Report

Prepared comments: Raymond Leban, Professor CNAM, Paris, CharlesStalon, Director, Institute of Public Utilities, Michigan, USA, and formerCommissioner, FERC, USA; Sally Hunt, Director, NERA, U.K.; Adilson deOliveira, Professor, University of Rio de JaneiroDiscussion Open to the Floor

AFTERNOON SESSIONChairperson: Wu Qian, fonner Director, State Economic and Trade Commission

Task Force Two Report: Legal and Regulatory Framework2:00 - 3:00 Presentation of Task Force Two Report: Tang Zhong Nan, Advisor, China

Electricity CouncilComments by taskforce consultant (Robert Fitzgibbons, Hunton & Williams)

3:00- 3:15 Coffee Break3:15 - 5:30 Discussion of Task Force Two Report

Prepared comments by Charles Stalon, Director, Institute of Public Utilities,Michigan, USA, former Commissioner of FERC, USA; Sir Roger Douglas,former Finance Minister, New Zealand; Raymond Leban, Professor, CNAM,Pais.Discussion Open to the Floor

NIGHT SESSION7:30 - 9:30 informal discussion with international experts on the relevance of

international experience to China

xii

Day 3: Saturday, July 10

MORNING SESSION

Chairperson: Cao Zhengyan, Deputy Director, Energy Resources Department, StatePlanning Commission

Task Force Three Report: Enterprise Reform and Corporatization

8:30 - 9:30 Presentation of Task Force Three Report: Zou Chijia, Deputy Director,Department of Policy and Legislation, Ministry of Electric Power

Comments by the task force consultant

9:30 - 9:45 Coffee Break

10:45 - 12:30 Diussion of Task Force Three Report

Prepared comments: Athar Hussain, Director, STICERD, London School ofEconomics; Sir Roger Douglas, former Finance Minister, New Zealand;Marc Regnard, Senior Expert, El6ctricit6 de France Intemational

Discussion Open to the Floor

AFTERNOON SESSION

Chairperson: Wang Chaozong, Deputy Director, Department of Planning, State EnergyInvestment Corporation

Task Force Four Report: Diversification of Fiuapcing Sources

2:00 - 3:00 Presentation of Task Force Four Report: Zhu Chengzhang. Advisor,Ministry of Electric Power

Comments by die task force consultant (Andrew Pocock)

3:30 - 5:00 Discussion of Task Force Four Report

Prepared comments: Rauf Diwan, Principal Investment Cfficer, IFC;William Von Blasingame, Senior Manager, Mission Energy, USA; AtharHussain, Director, STICERD, London School of Economics; Peter Cordukes,Principal Financiel Analyst, Industry and Energy Department

Discusdon Open to the Floor

CLOSING SESSION

Chairperson: Jia Heting, Deputy Director, State Eoonomic and Trade Commission

5:00 - 5:30 Speeches: Shao Shiwei, Director, Department of Policy and Legislation,Ministry of Power; Richard Newfarner, Chief, Industry and EnergyDivision, China and Mongolia Department, World Bank

6:30 Banquet

Chairperson: Ministry of Finance

Speakers: Vice Minister, Ministry of Electric Power; Abdallah El Maamufi,Operations Advisor, East Asia and Pacific Vice Presidency, World Bank

xiii

Workshop Participants

World Bank Participants

Name Affiliation TLile

Richard Stern Industry and Energy Department Dirctor

Abdallah El Maaroufi East Asia and the Pacific Region Operation Adviser to the VicePresident

Pieter Bottelier Resident Mission, China Head, Resident Mission

Zhao Jianping Econorist

Su Guoli Economist

Karl Jechoutek Industry and Energy Deparitent, Division ChiefPower Development, Efficiency, andHousehold Fuels Division

Peter Cordukes Principal Fmancial Analyst

Mangesh Hoskote Private Sector DevelopmentSpeciaist

Ranjit Lamech Restructuring Specialist

Richard Newfarmer Industry and Energy Operations Division Chief

Barry Trembath Senior Electrical angineer

Noureddine Berrah SeniorEconomist

Robert Taylor Senior Energy Economist

Rauf Diwan Infrastructure Department, IFC Principal Investment Officer

Ministry of Finance Consultants

Name Affiliaton Titie

John Rhys National Economic Research DirectorAssociates (NERA)

Sally Hunt Director

Andrew Pocock Consultant in Banling andFmance

Robert Fitzgibbons Hunton & Williams, US Attorney

Athar Hussain STICERD, London School of DirectorEconomics

xv

International Experts

Name Affiliation Title

Sir Roger Douglas New Zealand Ministry of Finance Former Minister of Finance

Charles Stalon Institute of Public Utilities, U.S. Director (formercommissioner, FERC)

Roger Witcomb National Power UK Director

Raymond Leban CNAM, CEPRIM, France Professor

Adilson de Oliveira Universidade Federal do Rio de ProfessorJaneiro, Brazil

William Von Blasingame Mission Energy, United States Vice President

Marc Regnard EdF

Observers

Name Affiliation rtie

Tay Sin-Yan Asian Development Bank Senior Project Engineer

Sean O'Sullivan Project Economist

Vu Van Thai Vietnam

Chinese Participants

Name Affiliaion Tile

Jin Renqing Ministry of Finance (MOF) Vice Minister

Jin Liqun World Bank DepL, MOF Vice Director

Chen Yuening Department of Industry & Transport Division ChiefFinance, MOF

Zhang, Wencai Industry Energy and Transport EconomistDivision, World Bank DepartmentMinistry of Finance

Cao Zhengyan Energy Department, State Planning Vice DirectorCommission

Wu Qian Production Dispatch Department, Forner DirectorState Economic and TradeCommission

Jia Heting Production Reform Departnent, DirectorState System Reform Comniission

Zhu Hongfei Development Center, State Council Senior Research Fellow

continues on ne-t page

xvi

continued from previous page

Wang Chaozong State Energy Investment Company Vice DirectorLiu Huibin Vice DirectorYu Changjie ChiefLan Guohua ChiefGan Shixuan Chief

Xia Liqing People's Construction Bank

Zhou Fenggi Energy Research Institute of SPC Director

Wu Zhonghu

Zhou Jianqiang Plan. & Econ. Commission, Jiangsu Deputy Chief

Ministry of Electric Power


Shi Dazhen Minister's Office Minister

Thao Xizheng Vice Minister

Liu Shunda Vice Director

Jiang Shaojun General Office DirectorMs. Zhaoping Chief

Yang Qing Planning Departrnent Chief

Xie Songlin Economy Adjustment & Operation Directorof State Owned Assets Department

Li Wenyi Production Coordination and Safety - Deputy ChiefSupervision Department

Tan Aixing International Cooperation Deparanent DirectorGuo Hao ChiefLiu Jiayu

Ms. Lu Manli Personnel & Education Department Deputy Chief

Bing Fengshan Science & Technology Department Vice Director

Shao Shiwei Policy Legislation & Reform Dept. DirectorZou Chijia Vice DirectorZhu Chenzhang Former Vice DirectorMs. Ren Hua Deputy Chief

Zhao Jianqi EconomistGong Jianzu Deputy ChiefLi Youyong Deputy Chief

continues on next page

xvii

continued from previous page

Zhang Shaooxian China Electricity Council Director

Ye Rongsi Vice Director

Tang Zhongnan Senior Engineer

Wang Yonggan Chief

Zhou Guangjun Huaneng Intemational Power Vice General AuditorDevelopment Corporation

Wang Wenbuo Northeast China Power Group Vice General Economnist

Yang Ji North China Power Group Vice General Manager

Yan Jianming Deputy Chief, General Office.

Chen Weiheng East China Power Group Vice General Economist

Ding Zhongzhi Middle China Power Group Vice General Manager

Yang Minzhou Economist

Hu Yaogua Senior Economist

Fan Buotao Northwest China Power Group Vice General Economist

Pan Binglin Shandong Power Company General

Liu Guangren Jiangsu Power Company Vice General, Energy

Li Pinsheng Deputy Chief

Yang Dali Sichuan Power Company Vice General Manager

Lin Jianren Fujian Power Company Vice General Economist

Dao Erji Inner Mongolia Power Company Vice General Manager

Chen Qingda Zhejiang Power Company Deputy Chief, General Office

Li Zheng Hydro Power Economic Research DirectorInstitute

Sun Jiaping Electric Power Information Research DirectorInstitute

Wang Xiliang Deputy Chief

Ms. Chen Lijen Engineer

Interpreters

Shi Limin; Liu Dezheng; Ms. Wang Ning; Feng Jinbao.

ress

Xinhua News Agency

People's Daily; China Daity; China Electricity News.

xviii

1

Introduction1.1 The power sector in China is on the brink of the momentous expansionthat it requires to support China's rapid economic growth, which is expected to run atmore than 8 percent per year during the 1990s. The present power capacity of 166 GWneeds to grow at about 12 to 15 GW per year (equivalent to the total installed capacity ofBelgium) to alleviate present shortages and meet fast-growing demand. This expansionwill require about US$150 bilion in investment by the end of the twentieth century.

1.2 Meeting this demand will require a comprehensive restructuring of thesector if China is to avoid perpetuating the problems that have hampered the developmentand performance of its power sector and if the country is to address new problems arisingfrom the fragmented approach to reforming the sector adopted during the 1980s-

1.3 This document arises from a request by the Chinese government for theWorld Bank's assistance in articulating objectives for reforming the power sector and inidentifying and appraising options for restructuring the sector. A secondary goal of thetechnical assistance was clarification of concepts underlying power sector restructuring.

1.4 As part of the overall assistance, the Chinese government and the WorldBank cooperatively organized a workshop on strategic options for the power sector inearly July 1993. Leading up to the conference, Chinese power sector experts, workingwith intemational consultants, prepared four task force reports covering power systemstructure; regulatory and legal requirements; commercialization and corporatization; andfinancing of sector development. The four reports were presented and discussed at theworkshop, held in Beijing, and were revised in the light of three days of discussions.They are to be submitted for approval by the government

1.5 The workshops and the task force reports drew the followmg conclusions:

Optimal expansion will require combining multiple sources of finance. Theprojected expansion will require mobilizing funds from several sources: first, self-financing by existing enterprises, which will require reform of tariffs andcorporatization of enterprises; second, domestic savings, which are about US$200billion (the Chinese savings rate exceeds 30 percent); and, third, foreigninvestments, which may account for 25 to 30 percent of the required investment

1

2 Strategic Options for Power Sector Refonn in China

Restructuring should be guided by commercial principles. The best guarantee ofsuccess in the power sector is to hasten the transition toward a structure in whicheach enterprise is run as an efficient business. Restructuring thus should ensurethat customers pay enough to cover the costs of the new investments; thatincentives are in place to promote the most efficient construction and operation ofthe plants; that the industry takes advantage of economies of fuel use created byeconomic (or merit-order) despatch; and that it fully utilizes other economiesavailable to a network system.

* Competition, along with regional markets and power pools, should constitute themain thrust of the sector's reformL Owing to the diversity of China, the provincesare likely to choose different structures to increase efficiency and mobilize thefunds to meet the huge investment requirements. However, competition wherepossible, and enhanced coordination and/or establishment of regional powermarkets or pools, should constitute the main thrust of reform.

* A new regulatory and legal apparatus should be emplaced to ensure theachievement of the foregoing objectives. It is important to shelter regulatoryactivities from political pressures even though international experience shows thattotal independence of regulatory bodies is difficult to achieve. The Chinesegovernment's objective is to issue a new electricity law by the end of 1996. Itsmain thrust would be to (a) complete the separation of government administrationfrom enterprise management; (b) establish a regulatory framework, essentiallybased on economic incentives for the power sector, (c) protect the autonomy andcommercialized operation of the business enterprises; and (d) reduce barriers tothe introduction of market forces within the power sector.

e A rapid pace of reform is desirable. Commercialization of power enterprisesshould proceed rapidly, paving the way for full corporatization and access todomestic and international financial markets through issue of bonds and stocks.

2

International Experience ofPower Sector Reform

2.1 There are so many variations in the expenence of different countries andso many ways to describe an industry that it is necessary to elaborate a clear conceptualbasis for comparisons. This chapter distills some of the intemational experiencedescribed at the conference under four headings:

* Modes of ownership and management

* Vertical integration of activities

* Fragmentation or concentration and cooperation

* Degree of monopoly/competition.

2.2 These dimensions are not the only things distinguishing one country fromanother countries also have different laws and regulations, fuels, growth rates, and so on.These four dimensions (which conference participation later reduced to two), are the mosteconomically and commercially important

Modes of Ownership and Management

2.3 A primary distinction, especially for China, is between modes ofownership. Owners are defined as those 'who are endded to the profits of the industry."Owners appoint managers to ensure that the enterprise is run efficiently, give themauthority to do so, and hold them accountable for the results. The three most commonforms of ownership/management are as follows:

* Direct government ownership. Here, the government both owns and has directmanagerial control over the industry, as in China at present (and as was formerlythe case in many countres). The same people are owners and managers, althoughsometimes they have different "nameplates" in their different roles.

* A government-owned corporation. The government may own a corporation thatthen manages the industry, thus removing the national government a step fromday-to-day control. A Board sets goals for the industry and appoints a separate

3


management to achieve those goals. This is the case with EDF in France, and itused to be the case in the United Kingdom, under the CEGB.

A privately owned corporation. A third form is private ownership of thecorporation and its assets, as in the United States and now the United Kingdom.Private companies (usually joint stock companies, limited-liability companieswhose shares are listed on a stock exchanges) are expected to make profits fortheir shareholders. Their managers are accountable to a Board of Directors, whichrepresents the shareholders.

2.4 Note that various transitional or hybrid arrangements may be made in thetransformation from public to private ownership. A joint stock company may becompletely owned by private interests, or the government may own enough shares tocontrol the company. One way of gradually privatizing an enterprise is to form a jointstock company with only a minority of shares held privately, and then gradually to selloff the government's shares. Moreover, distinctions in ownership are never rigid inpractice: the government may in effect have total control even over completely privatecompanies. Actually, the level of govermment control may depend more on the intentionsand behavior of the govemrnment than on the formal organization of the sector.

2.5 However, experience in many countries has shown that steps to separateownership and management are important in the reform of energy sector enterprises.Incentives for efficiency are greater if management is separate from government, sincegovernments intrinsically have many objectives and may force an enterprise to meet somany objectives that it loses focus on its main task. If, on the other hand, the governmentsets broad objectives for a separate corporation and holds managers accountable, theefficiency of the enterprise will increase. Incentives for efficiency may be greater sti ifmanagement is subjected to the disciplines of stock market valuation of the companywhen the enterprise is privatized.

2.6 Separation of ownership and management comprises the following steps:

* Commnercialization. This happens when the government relinquishes detailedcontrol and the company is run as a business. This is happening in all industriesin China. Note that it is a change in behavior rather than organization.

* Corporatization. This is the formal and legal move from direct governmentcontrol to a legal corporation with separate management. This may be agovernment-owned corporation.

* Privatization. This is the move from a public corporation to a private corporation.

2.7 Most countries with government-controlled power sectors have beenmoving toward corporatization and commercialization. Examples are New Zealand,Korea, Jordan, and Malaysia. But there is also evidence that government ownership itselfis not a bar to efficiency:

* The recent restructuring in the U.K. introduced competition along withprivatization. The whole exercise induced very large efficiency gains. However,

Intemational Experience of Power Sector Refonn 5

Nuclear Electric, which remains a government-owned corporation, has also shownlarge efficiency gains, suggesting that competition rather than private ownershipwas the determiningfactor in the U.K.

In France, EDF, a government-owned company, manages to create incentives forefficiency. The management of EDF agrees on specific, written goals with thegovernment each year, in a process known as "le Contract Plan" (the PlanningContract). The management then must meet these goals.

* Finally, it was noted that privatizing too early creates vested interests that maymake further moves difficult. As one international expert at the seminar put it,"reforming a regulatory system is more difficult than reforming a power sector."

2.8 The foregoing points suggest that getting the competitive and efficiencyaspects of the structure right may be more important than establishing immediate privateownership, but that it is important to separate management from government.

Vertical Integration of Activities

2.9 Another dimension in the choice of a structure for the sector is in terms ofthe activities of generation, transmission, distribution, and retail sales, and whether theseactiviues are managed separately or together.

* If the activities are managed together the structure is called vertically integrated.

* If activities are managed separately the structure is vertically dis-integrated orseparated

2.10 The relevant consideration is whether the costs of making contractsbetween the separated companies is greater than the benefits of greater accountability of asmaUler-scale enterprise. '

2.11 Before enterprises are corporatized, a decision must be made on the scopeof the activities of the enterprise and on whether existing enterprises should be separatedor consolidated. Chinese distribution enterprises and generation and transmissionenterprises already have some vertical separation between them.

Separation of Generation and Transmission from Distribution

2.12 The relevant consideration for separating generation and transmissionfrom distribution is whether the costs are greater than the benefits. The costs are formetering and for developing prices for the sale of power from the generator to thedistribution company. The benefits are, first, the greater accountability of smaller-scaleenterprises; and second, the possibility of eventually permitting local distributioncompanies to choose among suppliers.

1. The costs of making and enforcing contacts are transaction costs.

6 Strategic Options for Power Sector Reforn in China

2.13 There seems to be no intrinsic difficulty in making this separation, since itis found in so many countries. The systems in France and the United States are verticallyintegrated (generation, transmission, and distribution are all managed by the samecompany). Yet in Brazil they are partially integrated, and in the United Kingdom they arenow fully separated (the U.K. distribution companies were separate before privatization).Moreover, EDF in France has decentralized management of distribution and retailing, andits decentralized distribution operations might almost be considered separate companies.

2.14 China currently has a large variety of solutions: some separateddistribution systems and some vertically integrated systems.

Separation of Generation from Transmission

2.15 Generation may be separated from transmission to help create morecompetitive markets and to allow competing generators access to customers. The processis complicated, however, by the need to coordinate operations between generators toensure the technical stability of the transmission system. When the two operations arecontrolled by the same company, coordination can be accomplished by command. Butwhen generation and transmission are owned and managed by separate companies, andwhen several competing generators are involved, the situation is complicated by thedifficulties of making contracts between the generators and the transmission company foraccess to the transmission system. The U.K., New Zealand, Sweden, Norway, andFinland have separated generation from transmission, although only in the last decade.

2.16 The key step that must be taken to separate generation from transmissionis thus the making of contracts for access to the transmission system. In comparison,separatng distribution from generation and transmission is much simpler, involvingprincipally metering and a pricing policy for wholesale power.

Concentration or Fragmentation and Level of Coordination

2.17 An industry can also be described in terms of how many enterprisesconduu;t the same activity within a geographic or administrative area. The concept isrelative, but an industry with many small enterprises relative to its overall size in an areais called fragmented One with only few enterprises in an area is called concentrated

2.18 China will need to decide at what level the enterprises need to becorporatized: should it be at a single-plant level, the provincial-bureau level, or somethingin between? The relevant considerations are economies of scale and scope: the enterpriseshould be large enough to exhaust the economies of scale. The more fragmented theindustry, the more coordination is required for building transmission, for transferringpower, and for making optimal investment in generation.

2.19 International experience suggests that most existing industries obtainedtheir present form -concentrated or fragmented-long ago, and many different examplescan be found at the generation level. However, in most market economies, companies doown more than a single plant, and multiplant finns are the norm in most industries.

Intemational Experience of Power Sector Reform 7

* In the United States, the industry is fragmented into many relatively smallcompanies, some of less than 1 GW, some of 20 GW.

* In France, one company of 100 GW serves the entire country.

* The United Kingdom has three large generating companies, of 10 to 25 GW, sothe industry is fairly concentrated. Northern Ireland may be the extreme case offragmentation, where each plant is separately owned.

* It was noted at the seminar that in Brazil, where there is fragmentation, the lack oftransmission capacity prevented much of the generating plant from operating atfull output. In distribution, the sizes of enterprises range from very small (a singletown) to very large (the whole of France). There is no good evidence indicatingan optimal scale for generation companies or for distribution companies, althoughthe international evidence points to viability at a relatively small scale.

Competition and Monopoly

2.20 A fourth useful distinction, arising from the reforms of recent years, hasbeen the extent of competition and monopoly in the industry. Generation has becomemore competitive, and many countries have encouraged this, including the United Statesand the United Kingdom. They have done it quite differently, however. (Transmissionand distribution to small customers remain a monopoly in all countries.)

2.21 Historically, most countries have started out with monopolies, sometimesone monopoly for the whole country, sometimes local monopolies. These enterprises arerequired to serve everyone and in return get exclusive rights. This pattem has facilitateddevelopment of transmission systems, permitted subsidies for rural or poor areas, andenabled introduction of larger plants. Having largely accomplished such goals, manycountries are now wondering whether central control of generation is efficient, and theyare thinking increasingly about introducing competition.

2.22 There are two basic ways to introduce competition into generation. Thequestion is, to whom may a competitive, independent power producer (IPP) sell power?Sometimes, as in the United States, the IPP has only one choice: to sell to the companythat has the local monopoly over final customers. This is known as the purchasingagency model, because there is only one purchaser for each area, and all customers in thatarea must buy from it. Sometimes, as in the United Kingdom, the IPP has the choice ofselling directly to final customers, to distribution companies, or into a short-term or"spot" market. This is known as the fldl competition model.

2.23 The difference between the two alternatives-purchasing agency and fullcompetition-is very important. First, they imply different commercial arrangements:

* The central purchasing agency model requires contracts for the sale of powerfrom the IPP to the purchasing agency. It is often associated with bidding systemsto choose the cheapest source of power.

8 Strategic Options for Power Sector Reform in China

The full competition model requires a market mechanism, such as a spot market,and open access to the transmission system. These are difficult to put in place.IPPs then make their own contracts with customers.

2.24 Another important difference is that the two models have differentimplications for central control overprices to final customers.

* In the purchasing agency model, the agency retains a monopoly over customersand allows prices to be set at regulated levels; this can include the cost ofsubsidies or past mistakes.

* In the full competition model, the price of power is determined by marketforces.In the U.K., market forces have increased the efficiency of existing plants andshifted the fuel choice from coal and nuclear to gas. Generation costs have fallen.

2.25 In the United States, which has used the purchasing agency model since1978, when the Public Utilities Regulatory Policy Act of 1978 (PURPA) was passed,each local utility is a purchasing agency, taking bids for new power plants and paying forpower under contract. Now, competition has become intense, and utilities are worriedabout their ability to maintain prices at levels high enough to cover their costs.

2.26 The fundamental concept here is the degree of monopoly. Monopolymeans that customers have no choice; hence, the price can be set to whatever level thegovernment or the regulator chooses, and the profitability of enterprises can be more orless guaranteed. If no monopoly exists, prices will be determined by the market. Thebenefits are asserted to be increases in efficiency through the effects of competition.

2.27 From the preceding discussion, we can conceptualize four models ofalternative levels of competition. These are broad concepts, although the names ofcountries that most nearly approximate the concept are noted. The models are shown inFigure 2.1 (the gray-shaded boxes show the monopolies).

Model 1. No competition. There are no competing generators in an area.Customers buy from a generator, which has a monopoly over them. (Examples:EDF, the United States before 1978, and many other countries.)

* Model 2. Separate distributors. Here, distributors are separated, but thedistributor in turn has no choice over which generator to buy from. This is still afull monopoly model, but it might be considered a step toward full competition.(Examples: the United Kingdom before 1990 and many other countries.)

* Model 3. Purchasing agency. Here, competition in generation exists, but all salesmust be to a designated purchasing agency, which then sells to retailers or to itsown customers, who have no choice of supplier. (Examples: most of the UnitedStates since 1978; Spain.)

* Model 4. Full competition. This includes competition to generate, and customersor retailers have a choice of supplier. (Examples: U.K., Norway.)

International Experience of Power Sector Reform 9

monopoly Monopolyo

ll Genorgtlon lI oeeln 1|

Trnmslnj Tasmisslon l

Distribution

Distrlbutlon Distribution

Model 1. Monopoly at all Levels Model 2. Separate DistributionNo competition Monopoly at all lewls

No compettlion(some compettlion possible Itdistribution franchises areawarded competltvely)

Generaton Generation

OpenOAcons ng~~~~~~~~ TfanwnblWon

Distribution Distribution

Loaa monopall.. Induma

Model 3. Competition in Generation Model 4. Competition In GenerationSingle purchasing apncy CompeUIIon at etallvel for lirgeMonopoly at the retall levol CofUmrhs

Local monopoly - captive relollconsumers

Figure 2.1 Four Models of Power Sector Organization

10 Strategic Options for Power Sector Reformn in (hina

Conclusions from International Experience

2.28 There are many dimensions to the choice of industry structure, and manyvariations exist and work reasonably well. We have discussed four dimensions in thepreceding text. At the workshop, the two most important dimensions seemed to be thoseof ownership and competition. The workshop was shown a chart that integrated the fourstructural models (monopoly/competition) and the three ownership models. This chart,which proved extremely useful in promoting discussion, is reproduced as Figure 2.2.

i-MOCFELI | MODEL 2 | ODEL3 ||MODEE 4 lMonopoly at ISepsanm Con>Won in Compedtion Inall levels | DLisrbtion |genamon and b gerneaton

l l ~~~~Reteii Monlopoly .and reai

| Government Austrnla Mew ZualandIOwnrship

Corporatizzon

|Public AUJ UK NZICorpomafien I

I|j1 -o. IJ~ UK

Figure 2.2 Intemational Experience in Power Sector Reform

2.29 The vertical choices ar- government ownership and management, agovernment-owvned corporation, and a private corporation. In moving from one toanother, certain steps are required, which are also shown in Figure 2.2. Corporatizationand commercialization comprise the first move down the page, to a public corporation;privatization is the second move. In China, where government ownership and control arepervasive down to the most detailed level, the first tasks seem to be commerciaizationand eventual corporatization. The section on enterprise reform discusses this issue.

Intemational Experience of Power Sector Reform 11

2.30 The horizontal choices in Figure 2.2 are the four models described inparagraph 2.27 above. As one moves from left to right across the page, more competitionis introduced. The point was made that China needs to choose where to aim on bothdimensions and to choose the path it will follow to get there. The chart also shows wherevarious countries are in terms of the models, and where they are moving. The fact that somany countries are in fact moving from one form of organization to another onlyemphasizes the extent of the changes in the power sector throughout the world.

2.31 The chart in Figure 2.2 can also be developed to show the transitionalfeatures necessary for the movements i:cross the page. This is done in Figure 2.3. Tomove from Model I to Model 2, metering and transfer prices arc necessary (transferprices are the prices charged at the wholesale level by the generation company to thedistribution company). To move from Model I or 2 to Model 3 (the purchasing agencymodel), IPP contracts are necessary. To move to full competition, transmission access,and markets are necessary as well.

MODEL 1 MODEL2 MODE23 MODEUMonopoly at Separate Competion in Conpetition inale hels ditribution generation and both generation

l n!lai~~rol monopoly and retail

Government|Ownership l

Public

Fige 3t Private OwICorpomdnSwI

Figure 2.3 Features of Transition from Government to Private Ownership


2.32 Planning is associated with the top left of the chart, with governmentownership, with public ownership and monopoly decreasing in importance as competitionis introduced. Regulation is associated with the bottom left, with private ownership andmonopoly, and is also redl'ced in importance as competition comes in.

2.33 In evaluating the steps toward reform, the following words of caution wereoffered at the serninar:

* The benefits and costs of each step should be evaluated before changes are made.

* Beware of taking steps that are irreversible. Some steps, such as privatizing tooearly can lock you in.

a Prioritize reform objectives; they might conflict with each other.

* Be prepared to accept a compromise solution.

3

Power Sector Overview

Organization and Recent Trends

3.1 China does not have a unified electric power system. Rather, it has 13power networks with capacities of 1 GW or more. These include 5 regional power grids,which coordinaw the systems of several interconnected provincial grids, and 8 majorseparate provincial grids (see Figure 3.1).

3.2 The power industry consists of several different types of enterprises:

a. Regional power bureaus/groups/corporations. These entities cover groups ofprovinces and are responsible for regional power projects, coordination of gridoperations, and interprovincial transmission.

b. Provincial power companies/bureaus. These core utilities are engaged inconstru tion, power generation, intraprovincial transmission, and distribution(mostly in urban areas).2 They are responsible for economic dispatch within theboundaries of the provinces. Their role in generation is decreasing, and in someprovinces they supplied less than 50 percent of the total generation in 1993.

c. Independent (nonutility) power producers. This category includes entities thatbuild and operate power generation plants but do not engage in transmission anddistribution. Included are power plants owned by public groups such as HuanengInternational Power Development Company (HIPDC) of the Huaneng Group,Xinli (Sunburst) Power Company of the China Investment and Trade InternationalCorporation (CMC), and private power companies such as the Hopewell PowerCompany. HIPDC operates several power plants in different provinces with atotal capacity of 6,000 MW, and the Hopewell Power Company built one of thefirst BOTs in a developing country, the 700 MW coal-fired Shajiao "B" powerplant

2. This also includes companies of Municipalities (Beijing, Tianjin, and Shanghai) andAutonomous Regions of provincial-level rank.

13


| Ministry of Electric Power |

(MOEP)|

Chiina Electricity CoUUi

* ~~~~~~~~~~~~~~I

MOEP Groups and Provincial ProvincialCompanies under CompaniesInt ernal Organization t Auspices of MOEP under Groups

DPrer cn pan es- Glleral Office | Northeastd JiiGn - Dqmt of Plamning E:lectic Povver Group | liciloniang

- DePL of Policics & Legislation Shnnxi.etof Economics. Regidation & North Ch'ina FHebei

Contol of State Prpetny Electric Pbwer Group unnr Mongolia

-Dept. of Prsonel & Education Tmnjin-Shanghai:- Dept of Intenational Est China

Coopertion-DepL of SCiencc & Technology Electric POwer Group Anhui_ Dept of Safety & -Hei

Producion Coordintion Central Cbina lHenan

Dept. of Capital Construction Electric Power Group HunanCoordination Jiangxi

LDepL of Hydropower Devdopment Gznu& Rural Electrification Northwest

Electric Power GrOn _ i

Xniang:MOEP Affiliated H-Huaneng Group

Enrteprises & Institufions= ~~~~~~~~~~- Soudi China Ew-tric Power Joint Ventuire CoPortion

National Power Dispatching &Communication Centier Shondong Power CD. Provincial compan

Informaifon Ccnter Fujian Power Co Idirecftliy under MOEP .- __

-Logistics Bureau - Sichumn Power Co.

Planning. Design -Guangxi Power Co.& Engineering Institutes GHainan Power Co.

.Research Institutes - Yunnan PoHweroCoC-Research Institutes Yu_naa Power CoCXizang Indusuy and Power

-Universities & Colleges Guizhou Power Co. Administration

Speciahzed Corps

_Scholarly Sociei> 4

AssocF __. 1oP

Figure 3.1 Organization of China's Power Sector

Power Sector Overview 15

d. Associated power producers (Joint-investment power plants). These are powerplants that are jointly owned by various central, provincial, and local governmententities. Most are managed by the provincial companies under managementcontracts, but some are managed independently. All are dispatched with theprovincial system.

e. Local (prefecture, county) power companies/bureaus. These are mainlyindependent distribution companies even if some may engage in power generationin their localities. There are more than 1,500 companies of this type;approximately 800 of them rely mainly on small hydropower plants and are underthe supervision of the Ministry of Water Resources (MWR).3

f Service companies. These national or provincial companies are engaged mainlyin engineering and construction of power projects.

3.3 Total installed capacity in China increased from 66 GW in 1980 to about167 GW in 1992, an average growth of about 8 percent per year. With 167 GW installedin 1992, China has the fourth largest generating system in the world. However, comparedwith the power infrastructures of developed countries, the power sector in China is stillunderdeveloped. In 1992, Chinese per capita electricity consumption was about 630kWh, and 120 million Chinese stiHl did not have access to electricity. The rule of thumbfor electricity needs is 1 kW per person, which would mean a capacity of 1,100 GW-seven times as much as China has at present

3.4 Total power generation in China increased from 300 TWh in 1980 to 754TWh in 1992, an average growth of 8 percent per year over 12 years, with growth ofmore than 10 percent during the last two years. The elasticity of electricity generationgrowth over GDP growth during 1980-92 was 0.84-an exceptionally low elasticity forany country over a sustained period, and particularly for an industrializing country suchas China (see Figure 3.2).

3.5 The fuel mix in China is increasingly dominated by coal. About 80percent of the 100 GW of new generating capacity added to the system from 1980 to1992 consisted of coal-fired units. During the same period, the share of electricitygenerated by coal-fired power plants increased from 60 to 75 percent, in part because ofstrict government policies to limit generation of oil-fired units. The share of hydroelectricpower accounted for about 17 percent in 1992, 2 percent less than 1980 (See Table 3.1and Figure 3.3).

3. ESMAP tas been active in providing technical assistance to these decentralized powercompanies to improve their efficiency and increase th-eir business and murket orientation.


20 - -' GNP growth

18 - \ * Elecictly generatongrowth

16-

14--

12 - -

10

8

6-

4-

2

O - a l

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

Figure 3.2 GNP and Electricity Generation in China, Annual Growth, 1981-1992

3.6 China's recent power development program has emphasized addition ofprogressively larger generation units (e.g., 200, 300, and 600 MW coal-fired units) totake advantage of economies of scale. This objective is being achieved through acombination of modernization and expansion of domestid manufacturing capabilities toproduce 300 MW units, the development of new capabilities to produce 600 MW units,and imports of state-of-the-art generating equipment, in part with multilateral or bilatelloans. The share of imported generation units in meeting the new added capacity isestimated at 25 to 30 percent by the Ministry of Electric Power (MOEP). Despite theprogress achieved, however, more than half of the installed thermal capacity stillcomprises inefficient units of 125 MW and below. Very few old and inefficient units arebeing decommissioned because of the persistent power shortages.

3.7 China has a long tradition of designing and building small- and medium-sized hydropower plants and is improving its designs and modernizing its manufacturingcapabilities. However, China lacks experience and needs technology and know-how inbuilding large hydropower plants, which will account for more than three-quarters of thenew added hydro capacity. Assistance is sought for projects funded through multilateralor bilateral channels, particularly in connection with general project layout, design ofsophisticated structures and large underground work, selection of equipment, andefficient construction management. More than 20 GW of such projects are currentlyunder construction or being negotiated.


140000

120000 -100000

80000 .600004000020000X

0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

| Hydr * Col Fired El Totaw

Figure 3.3 Installed Generating Capacity in China, 1980-1992, by Type (MW)

Table 3.1 Power Generation Data for China, 1980-92

Measure 1980 1985 1991 1992

Total capacity (GW) 65.9 87.1 151.5 166.5

% hydro 30.7 30.0 25.1 24.4

x thermal 69.3 69.3 74.9 75.6

Total generation (TWh) 301.0 411.0 678.0 754.2

% hydro 19.4 22.5 18.5 17.4

% coal 59.3 64.6 73.8

% hydrocarbons 21.3 12.0 7.8

Capacity factors (%) 52.1 53.8 51.1 51.7

Thermal 61.0 60.0 56.0 54.7

Hydro 22.0 40.0 38.0 36.8

Thermal power conversion efficiency (%)(Gross efficiency units over 6 MW) 29.8 30.0 31.5

Source: Ministry of Electric Power, Electnic Power Industry in China (1992-1993).

18 Stategic Options for Power Sector Reform in China

3.8 China took a cautious approach to nuclear power development during the1980s. China's first nuclear power plant (300 MW) is in operation at Qinshan, ZhejiangProvince, and planned generation is 1.5 TWh per year. The construction of a secondnuclear plant (2 x 900 MW) at Guangdong Province is complete and was commissionedin 1994.

3.9 The opening of the power sector to the outside helped, during the 1980s, toincrease awareness of the environmental impact of power sector development. Majorprogress has been achieved in carrying out thorough enviromnental assessments for majorprojects, minimizing TSP emissions in coal-fired plants, minimizing adverseenvironmental impacts of hydroelectric projects, and, in most cases, successfullyresettling displaced populations.

Future Demand Growth

3.10 Prepared in the late 1980s, China's "Ten Year Development Program forthe 1990s" envisioned an average economic growth of 6 percent per year and a growth inelectricity demand of 6.5 to 7 percent per year. However, with the acceleration of theeconomic growth in 1992 and 1993, the targets of the Ten Year Development Programwere readjusted up to 8 to 9 percent for GDP. Electricity demand is expected to growaccording to a electricity demand/GDP growth elasticity of about 1.0, even withaggessive conservation efforts.

Table 3.2 Electricity Forecast (1995-2000)

Forecast item 1990 1995 2000

Electricity demand (I7Wh) 621 965 1560

Installed capacity (GW) 138 200 300

Average additional capacity per year (GW) 12.5 20

Source: Ministry of Electric Power (1993).

3.11 This sustained rapid growth will put tremendous pressure not only onChina's electric power industry but also on the coal mining industry and railwayinfrastructure.4 Capacity additions of some 20 GW per year will be required by the endof the decade, outstripping the average yearly increase of 12 GW from 1987 to 1992.Even so, it is esfimated that the revised supply targets would only reduce existing electicpower shortages from 10 to 5 percent of the total demand, and would not alleviate them.

4. For further discussion of problems related to coal use in the power industwy and to coalnansportation. see '"Cina: Efficiency and Enviromment Impact of Coal Use" (World Bank Report #B915-CHA, 1991), and the forthcoming World Bank report, "China: Coal Trasportation Study."


Power Sector Reform in the 1980s

3.12 Until the early 1980s, all profits and provisions for amortization weretransferred by the power enterprises/entities to government financial/planningdepartments, which, in tum, allocated all investment funding on a grant basis and madeprovisions for any operating losses. One of the first steps of the reform was to changeinvestment allocations to loans, with repayment requirements at low interest rates. Thischange, coupled with high demand growth, led to a capital crisis in the sector andprovided much of the impetus for reform. During the mid- and late 1980s, reformsfocused primarily on decentralization of sector management, initial attempts tocommercialize power entities, and development of alternative financing schemes andrelated new pricing mechanisms.

Decentralization

3.13 In 1980, the power sector was highly centralized and fully controlled andmanaged by a hierarchy of government departments, with strong vertical command fromcentral through regional, provincial, and local levels. Over the decade, however,provincial power entities gained increasing autonomy and gradually became the coreutilities in the industry, playing a more important role in the mobilization of investmentfunds, and managing the day-to-day affairs of the provincial power systems5 (see Figure3.1). The role of the five regional power groups, whose operations correspond withChina's five interprovincial regional grids, changed to more of an oversight role, focusingmore on grid coordination and dispatch and less on vertical management of what wereonce considered provincial subsidiaries.

Commercialization

3.14 Efforts were initiated in 1988 to create power companies, at most regionaland provincial levels, separate from the government power bureaus. The powercompanies were charged with responsibility for managing power systems according tocommercial business principles, while the power bureaus were to play a governmentregulatory role. This reform, however, was not implemented in functional terms;although nominally separate, government and utility functions and staff were in practicenot separated, a situation known in China as "one organization with two name plates."Indeed, in some aspects, the government involvement in utility operations increased, asprovincial and local governments, in addition to the central government, became moreinvolved.

5. Although their franchises are defined a: the provincial level, provincial power companiescontinue to be considered central-government-owned enterprises.

20 Strtegic Options for Power Sector Reform in China

Altemraive Financing Schemes

3.15 By the mid-1980s, the central government was less and less able to copewith increasing power investment needs. In response were two practical-minded reformsthat have had far-reaching significance:

a. Substantial price increases through introduction of multiple-tier pricing. A seriesof cumbersome and complicated systems were devised to mobilize more funds forinvestment, especially from local governments and major power consumers,including higher "out-of-plan prices" for power from many new plants, certainother "above quota" prices, the levy of a 2-fen per kWh surcharge for powerdevelopment collected by provincial governments, and the sale to enterprises ofsupply quotas for additional powtr.

b. Joint-investnent projects (jizibandian). These are new generating projects thatare jointly financed by "loans" from various levels of government (e.g., central,provincial, prefecture, and county), and sometimes other companies, such as thestate-owned Huaneng Group and its affiliates, or the Sunburst Power Company,an affiliate of CMC. By the tum of the decade, the majority of new generationprojects were these joint-investment projects. This development is the mostimportant from the structural point of view because it implicitly opened entry tothe sector at the generation level to other investors, and broke the monopoly of theprovincial power companies.

4

Structurai Options forPower Sector Organization

4.1 This section summarizes the discussions and recommendations of TaskForce One, which examined the structural options for sector reform in China.

4.2 Using the conceptual framework described in chapter two and drawing onthe experiences of other countries, the task force identified the problems and issuesstemming from the current organization of the sector, reviewed the options available, andconcluded that it is inadvisable to select a single model as a structure for the Chinesepower sector. It recommended the adoption of varied approaches suited to the particularconditions of each region and province in the country. It also encouraged, as a commongoal for all regions, growth in investment, improved efficiency, and development ofcompetitive power markets for all.

The Current Hybrid Structure

4.3 The backbone of the current structure is the provincial powercompanies/bureaus, which were established as independent entities and separated fromthe regional (interprovincial) bureaus in 1988. The directive gave provincial powerentities the responsibility for financial affairs, part of investment programming andplanning, management of most of the power plants, day-to-day management of theprovincial power systems, and bulk power sales to local distribution companies andretailing in some cases. The role of the regional power bureaus was scaled down to focuson intergrid coordination, management of "interprovincial" power plants, exchange ofpower between provinces, and regional despatch. Local (prefecture, city, and countylevels) distribution companies are responsible for retail sales and management of smalllocal power plants within their administrative areas.

4.4 This structure is the result of several, sometimes uncoordinated, changesmade during the last decade. It now differs in many ways from the monolithic andcentalized structure of the early 1980s. Hence, although the provincial circumstances areextremely diverse, China's power industry structure is mainly characterized by thefollowing:

21


A dominant public ownership. Most of the generation power plants and alltransmission and distribution systems continue to be owned by the state orprovincial/local governments.

Limited entry at the generation leveL The government has opened the powersector to the private sector, but despite some successful examples the role ofprivate investors remains marginal.

* Horizontal and vertical dis-integration. The recent trends of the power sectorreform are clearly toward decentralization and autonomy of the 30 provincialpower companies and creation of independent distribution companies at themunicipal, city, and county levels.

Key Organizational and Institutional Issues

4.5 Despite the impressive progress achieved through the recent reforms, thestructure of the power sector in China still does not allocate resources efficiently, improveoperational efficiency, and attract the funds it needs for a sustained growth. The mainproblems in this context are as follows:

* Barriers to competition caused by limited entry of independent producers at thegeneration level, limited access of the distribution companies (to only onesupplier), and lack of incentives for power entities to improve efficiency andpromote profits.

* Inadequate planning and coordination caused by decentralization ofdecisionmaking without safeguards against overfragmenting of the industry. Thishas induced proliferation of small, local, and inefficient generation schemes anddevelopment of distribution systems within strict administrative boundaries whenlarger areas sometimes would be more efficient.

Future Trend for Structural Reform

4.6 After reviewing the four generic models (set out in chapter 2), the taskforce concluded that Model 4, full competition, is inappropriate for China in the short-and medium-term. China's power sector has a very diverse and complex structure thatincludes elements of the three other models. The basis of the inapplicability of modelfour is that it faces the most difficult tasks in creating new market mechanisms andregulatory institutions, and its operation would place the heaviest demands on personneland management resources for the sector.

4.7 The task force therefore declined to prescribe a single approach tostructural reform and recommended instead that reform should be adapted to theparticular conditions of each region and province according to the following principles:

* Gradual introduction of competition, especially at the generation level.

Structural Options for Power Sector Organization 23

Gradual progress toward free entry of independent power producers (IPPs),including foreign joint ventures and wholly foreign owned companies.

* Separation, as a general rule, of distribution companies with clear definition offranchise areas to avoid overlaps and inefficiencies.

* Improvement of planning and coordination and development of power markets.

4.8 Although supporting the gradual and pragmatic approaches proposed bythe Chinese, several international participants in the task forces warned that to achievethese medium-term objectives immediate measures should be taken to encourageindependent generation, clarify the role of regional power groups, and increase theautonomy of distribution supply bureaus/companies. The most important decisions relateto control of and access to the transmission network (especially if the entity that controlsthe transmission also owns power plants), contractual agreements for power sales andexchanges, and finally definition of retail franchises and possible access of industrialcustomers to IPPs.

5

Regulatory and Legal Framework5.1 This section summarizes the discussions and recommendations of TaskForce Two, which dealt with the legal and regulatory enviromment in which powercompanies cperate.

5.2 The main conclusion of the task force and workshop discussions was thatthe existing legal and regulatory framework is inadequate and does not support theoperation of market forces. The main recommendation of the task force, endorsed duringthe workshop, is to remedy this situation by enacting a comprehensive law to establish aregulatory framework for the power sector that would protect the autonomy andcommercialized operation of the business enterprises and reduce barriers to theintroduction of market forces within the sector.

The Current Situation and the Need for Regulatory Reform

5.3 Important, if slow, progress has been accomplished toward an improvedregulatory and legal framework more suitable to a market-oriented industry. However,China's institutional endowment is still limited, and the Chinese experts identified severacritical problems with the current legal and regulatory framework

5.4 The power sector is governed by a set of more than 500 laws, provisions.administrative rules, regulations, and policy circulars. Most of these laws, enacted beforethe acceleration of reforms in the sector, reflect the command and control approach andestablish no clear separation between regulation and management. They hence do notsupport the reform and the movement toward market-oriented operation of the sector.

5.5 Responsibilities for regulating the system and enacting laws and rules aredivided among several centrl governments and commissions including the State Council,Ministry of Finance, State Planning Commission, State Economy and Trade Commission,Ministry of Electric Power, Bank of China, and State Energy Investment Corporation. Inaddition, the People's governments of various provinces, municipalities, and autonomousregions impose legal obligations and surcharges on the electric power sector.

5.6 The multiplicity of actors, unclear division and definition ofresponsibilities among central govermment agencies (and more importantly between the

25


central government and the provincial, municipal, or autonomous regional authorities),and the fragmented approach tri reforming the legal and regulatory framework have led toredundancies, inconsistencics, and sometimes conflicts in the laws and provisionsgoverning the sector.

5.7 The discussions during the workshop focused on the need, design,functions, and structure of regulation. The consensus of foreign participants was thatregulation is needed to encourage economic efficiency and quality service by segments ofthe industry that remain monopolistic, as well as to ensure "fair" prices to consumers and"reasonable" retums to investors. They warned, however, that regulation is difficult andshould not be viewed as a substitute for competition, lest it introduce significantdistortions into the operation of the power sector and become an impediment to furthersectoral reform.

5.8 Regulation could take a variety of forms. In New Zealand, it has taken arelatively simple form, subjecting the corporatized, government-owned electric utility tothe competition (antitrust) laws. In the United States, it conisists of numerouscomplicated rules enforced at the state and federal levels. In France, the verticallyintegrated and government-owned utility is committed to achieving performance targetsset forth in responsibility contracts ("Contract Plan").

Regulatory Responsibilities

5.9 The workshop participants also agreed that regulatory responsibilities ofgovernment should be established by law to reduce government interference in day-to-day management. The precise definition of regulatory responsibilities would depend onthe industry structure and the degree of competition. The main functions andresponsibilities of regulation are expected to include the following:

* Review and approval of tariffs that have been proposed by enterprises based onpricing principles defined by law and regulations.

* Issuance of franchises and licenses that specify enterprises' responsibilitiesconsistent with structural reform adopted in each province.

* Development of technical and performance standards designed to ensure systemreliability and efficient performance.

* Review and approval of investment plans and power project proposals developedby power enterpnses.

* Review and approval -f transmission, pooling, and dispatch arrangements.

5.10 There was a great deal of discussion about the division of regulatoryresponsibilities among the different levels of government. The international expertsstressed the need for regulation at a level that captures the full impact and consequencesof the regulated activity. For example, problems have occurred in the United Statesbecause regulation occurred at the state level, whereas the regulated activity (transmission

Regulatory and Legal Framework 27

siting) affected several states. There was agreement, however, among the workshopparticipants that since the provincial companies were likely to become the key componentof structural reform, the national government should focus on macroeconomic policy,leaving the provincial governments responsible for most regulation. Based on thesediscussions, the Chinese task forces recommended the following division of regulatoryresponsibilities between national and provincial authorities:

National responsibilities:

- Review and approval of interprovincial projects and projects affectingmore than one province

- Review and approval of technical standards

- Participation in establishing environmental standards

- Review and approval of armngements for power transfer iad poolingbetween provinces

- Review and approval of terms, conditions, and prices for transmissionservices

Development of model franchise and licenses for use by the provinces

Development of model transaction documents for private power projects

- Participation in national energy policy

Dispute resolution for interprovincial problems

- Possible forum for appeal of provincial regulatory decisions.

v I'Provincial responsibilities:

- Review and approval of bulk power and retail tariffs

- Issuance of franchises and licenses consistent with structure of sectorselected for province

- Establishment and enforcement of performance standards

- Enforcement of contracts.

Regulatory Structure

5.11 The task force considered three possibilities for structuring the regulatoryauthorities at the national and provincial level:

* Create "independent" authorities at the national and provincial level that would beindependent of the government.

* Separate regulatory entities within existing ministries at the national andprovincial levels.


Make existing ministries at the national and provincial levels responsible forregulation.

5.12 Workshop participants emphasized the importance of sheltering regulatoryactivities from political pressures. Government wvill always seek to use economicregulation to pursue social objectives, but, even "independent" regulatory commissions-such as those of the United States-are not entirely protected from political pressure andcan never be totally independent. Further, doubt was expressed as to whetherindependent authorities were even feasible in China at this point. It was therefore agreedthat existing ministries at the national and provincial levels could be responsible, in theshort term, for regulation.

Priorities for Legal Reforms

5.13 The task force recommended that the new electricity law should be issuedby the end of 1996. However, highest priority should be given to certain specializeditems that will be issued by the end of 1995. These priority items included rules of priceregulation, power investment and investment management, power supply managementand utilization, protection of electric facilities, and power control. Also to be givenpriority were rules, guidelines, model transaction documents, and competitive biddingdocuments for private investrnent in new generation.

5.14 The new electricity law, regulations, and legal framework shouldencourage private sector investment in generation as follows:

* The rights and obligations of private investors in power projects must be clearlyspecified in law and regulations. This specification must include the govemingregulatory regime and provide for contractual sanctity and stability of prices.

* Guidelines should be developed to address how the private sector may invest andoperate private power projects.

* A key ingredient for the success of private investment in power projects isinvestor confidence in contract enforceability and an effective forum for resolvingcontractual disputes. Arbitration by the regulatory authority or another neutralsource should be explored.

* Model transaction documents (e.g., power purchase, fuel and interconnectionagreements) should be developed and made available to provincial companies andinvestors in power projects.

5.15 The new electricity law and regulations should reduce barriers to theoperation of market forces within the electric power sector over a reasonable transitionperiod. Steps recommended to be taken include the following:

e The statute or new regulations should encourage the use of competitive biddingfor new generation capacity. Model bidding and evaluation procedures andcriteria should be developed.

Regulatory and Legal Framework 29

* A government entity would be ma le responsible for collecting and distributingthe infornation necessary to support a competitive electric power sector.

* The new electricity law and regulations should provide for the gradual eliminationof electicity allocations, as supply conditions permit. Existing allocations shouldbe converted into contractual rights that can be traded.

* The new electricity law and regulations should expressly endorse and encouragethe development of competitive wholesale power markets.

6

Commercialization and Corporatization6.1 This section summarizes the discussions and recommendations of TaskForce Three, which dealt with separation of government and enterprise functions andcommercialization and corporation.

6.2 Successful international experiences and lengthy discussions during theworkshop suggest that in the Chinese context, where government ownership and controlare pervasive down to the most detailed level, the first priority of power sector reform isto make further progress toward commercialization and corporatization.Commercialization is defined as the steps required to focus the activities of the enterpriseon commnercial objectives and to increase the profitability and efficiency of use of theenterprise's assets. Corporatization is defined as specifying the rights of parties with astake in the profits eamed on assets ("stakehoIder") and increasing discipline on financialperformance through capital market pressures. The task force therefore recommendedspeeding up the implementation of the Regulations on Transforming the ManagementMechanism of State Owned Enterprises (the fourteen rules) and the new accountingsystem, respectively enacted in July 1992 and July 1993 (see Table 6.1).6

Commercialization

6.3 In the Chinese context, commercialization of enterprises engaged in powergeneration, transmission, and distribution will mean the following:

* Establishment of managerial autonomy. The first major step will be to separatepower enterprises from the government and to reduce government interference inday-to-day operation, leaving it to managemenL In addition, this will require thereplacement of administrative directives by an explicit contract between thegovernment and power enterprises. The contract would recognize the autonomy ofthe management and specify performance targets and social responsibilities thatthe government expects of enterprises.

6. In December 1993. the Chinese adopted and enacted a new "Company Law."

31


* Reforn of pricing policy. The current price structure is complicated and hasadverse effects on both suppliers and users of electricity. A reform of the pricingstructure is urgent and crucial to enhancing efficiency and increasing investmentin the industry. The tariff structure should be simplified and operate on theprinciple that prices received by the producer should be sufficient to cover thecost and yield a fair rate of return to all power enterprises. Currently, thisprinciple applies only to newly established power generators.

* Adoption of GAAP (Generally Accepted Accounting Principles of internationallyrecognized standard) and valuation of assets. An essential component ofcommercialization is the adoption of GAAP and internal cost accounting. Powerenterprises in market economies use internal cost accounting for monitoring andassessing the performance of their constituent departments. China's powerenterprises will need to adopt such practices. Moreover, commercialization willalso need a valuation of assets to assess the commercial potential of the enterprise.

* Raising of outsidefinance. At present, the government (at various levels) is theprincipal source of investment funds for power enterprises. The development ofthe power industry requires diversification of investment funds. The governmentwill need to specify in the contract the power of the commercialized enterprise toborrow and float bonds, which will have to be more limited than the power of anindependent corporation under the company law.

* Adoptionofcommercialprinciplesfortaxationanddividendpayment. Currently,the power industry is subject to heavy taxation, and taxes are not separated fromdividends to the govermnent as owner. The power industry should be treated thesame as other industries for enterprise taxation, a principle already accepted bythe government and due for implementation. Moreover, electricity is subject to ahigh product tax and an additional tax of 2 fen per kilowatt hour. These taxes willneed to be rationalized along with the rationalization of prices. Moreover, incometax will need to be separated from dividend payments to the government, aprinciple accepted by the government but still to be implemented in the electricityindustry.

* Accelerated split-off of noncore activities. Currently, power enterprises carry outmany activities not directly connected with the generation, transmission, anddistribution of power. To provide a clear focus, it is necessary to split off theseactivities into separate enterprises, each with its own budget and a responsibilityto operate on a commercial basis. This is already under way, and it is desirable toaccelerate the process.

c "Socialization" of social welfare responsibilities and social objectives. Likemany other enterprises in China, power enterprises carry extensive social welfareresponsibilities for their labor forces, such as providing housing and runninghospitals and clinics. In keeping with the decisions of the State Council on thereform of housing and the social security system, it is necessary to "socialize" the

Commercialization and Corporatization 33

welfare obligations of power enterprises and to "commercialize' housing. Thepower industry is central to the economy, and it is understandable that thegovemment would want power enterprises to fulfill social objectives during thetransition period to full corporatization. As part of commercialization, then, itwill be necessary to specify the character and cost of such objectives in thecontract between power enterprises and the government. The government willalso have to commit to paying for such costs from the budget at some future date.

6.4 Although some of the above steps, such as rationalization of prices, require achange in general policy applying to all enterprises, others, such as the signing ofcontracts, involve decisions that must be made on a case-by-case basis. It would seemdesirable to proceed with general policy changes as speedily as possible. In particular, itis important for the government to show its commitment to commercialization byimplementing some major changes in policy toward power enterprises. Moreover, someof the above changes, such as the adoption of GAAP, will need to be carried a stagefurther during corportization.

Table 6.1 Key Regulations and Directives for Power Sector Reform, 1985-1993

Doe Regulaton or directive Significance

May State Council, "Provisional Broke the central govemment's monopoly on large-1985 Regulations on Encouraging loint- scale power investnent by encouraging provincial and

Investmnent Power Development and local governments and other entities to invest inImplementation of Multiple Power power generation. Allowed for high pricing forPrices" power from non-cental-government funded capacity,

based on debt repayment principles- Provided thebasis for the establishment of the JuanengCorporation.

December State Council, "Provisional Empowered provincial governments to collect a 2-fen1987 Regulation on the Collection of the per kilowatt hour surcharge for their investment in

Electric Power Construction Fund" power generation.

November State Council, 'On Management Established pmvincial power entities as legal entities1988 System Reform Directions for the independent from the regional power bureaus with

Electric Power Industry" principle management authity over provincialsystems. First attempt at commercialization, throughestablishment of power companies alongsidegovernment power bureaus.

July State Council, "Regulations on Established a series of clear operating rights for state-1992 Transforming the Management owned enterprises and the basis for SOEs (including

Mechanisms of SOEs" power enterprises) to operate as commercial entities.

July SPC. MOEP, Directives on Increased and rationalized centrally administered1993 Electricity Pricing Tables (various) components of power tariffs. Allowed central-

govermment-funded projects to charge the same debtrepayment prices as other power generation projects.


Corporatization

6.5 In the process of corporatization, an enterprise is transformed into acompany, with rights and liabilities in accordance with the forthcoming company law. Asenvisaged, the company may be a limited liability company (without stocks traded on thestock market) or a joint-stock company. This decision as to its formn will have to be madeaccording to the circumstances of the enterprise. The transformation of power enterprisesinto companies will involve a number of strategic decisions in the light of the desiredfuture structure of the industry. These include the following:

* At what level would corporatization take place? Would the corporation be aprovincial level company, and would it involve a group of enterprises?

* To what extent would these enrerprises be vertically integrated? It seems that thepreference is in favor of a mixed structure, whereby some enterprises will bevertically integrated and others will be specialist companies confined to powergeneration or distribution. Whatever structure is chosen it will be important topay attention to its implication for efficiency and the future evolution of theindustry.

D How big would the companies be and what would be their geographicalcoverage? When answering this question it will be important to take into accountthe economies of scale and scope in power generation, transmission anddistribution.

The general point that needs special emphasis is that the decisions about corporatizationwill require some industrial restructuring and should be taken in conjunction withconsiderations of efficiency in operation and investment. Some of these considerationsare particular to power industry.

6.6 Corporatization will involve the following steps, some of which are likely totake some time:

* It will require Articles of Association specifying the company's main areas ofactivity, objectives, procedures for the appointment of senior managers, and rightsand responsibilities of owners and the management.

v The assets of existing power enterprises have been financed by grants and loansfrom various govemment tiers and organizations. Corporatization will involve aclarification of ownership claims on the assets and profits of the company. Thiswill have to be based on a valuation of assets and on establishment of clear linksbetween past contibutions to investment by various agencies and their projectedownership stake in the company. No single procedure can be set for resolvingcompeting claims of these sorts. A settlement will have to be based on pragmaticconsiderations and may involve some financial restructuring in which some loansor grants are written off. The process of evaluating the settlement of claims may

Commercialization and Corporatization 35

take considerable time, and it will be important to agree on a transitionalarrangement.

Sequencing and Transitional Arrangements

6.7 Commercialization and corporatization are likely to take time and to proceedon a piecemeal basis. For some time, then, commercialized and corporatized powerenterprises are likely to coexist with noncommercial, noncorporatized enterprises. It willbe important to consider special policies during the transitional period, in particular toensure that the commercialized and corporatized enterprises do not suffer any relativedisadvantage-

7

Financing the Expansion7.1 This chapter summarizes the discussions and recommendations of TaskForce Four, which examiined options for financing the expected huge growth of China'spower sector during the coming years.

7.2 The task 'force and workshop discussions stressed that China, after 14years of high growth, is on the brink of a momentous expansion required to supportstrong economic growth. it has been estimated that the financing requirements of thesector during the period 1993-99 will soar to about $150 billion. The sources of fundsshould be, first, funds generated by existing enterprises, which will be required to speedup the reform of tariffs of GNP and corporatization of the enterprises; second, Chinesesavings, which exceed 30 percent, should be tapped. Finally, foreign debt and equity willprovide a substantial resource. It must be noted in this last regard that foreign investmentrecently nearly tripled-from $4 billion in 1991 to $11 billion in 1992.

Current Situation

7.3 Historically, funding of the power sector in China was based or. directgovernment allocations. Since the sector remitted profits and paid taxes to the centralgovernment that in aggregate exceeded direct govemment allocations, the effective resultwas sector decapitalization.

7.4 Although various measures introduced during the last years (see Box 7.1)have been relatively successful in diversifying sources of finance from almost totaldependence on direct government allocation, the sector's current overall financial flowsare in deficit except in certain cases of new plants developed by Huaneng and Xinli orfinanced jointly by state and local governments. The sector remains dependent forapproximately 75 percent of its investment finance needs on sources under centralgovernment jurisdiction (Table 7.1). Although the sector as a whole continues todemonstrate strong gains in productivity and generating capacity expansion and is nowable to retain a larger proportion than previously of depreciation funds, the problem ofadequate capitalization has not been resolved, since the sector is expected to service as

37


debt an excessive proportion of its investment finance that ought more properly to betreated as "equity."

7.5 The main issues and inadequacies identified by the group are as follows:

* China's domestic money, banking, and capital market is underdeveloped andcurrently is unable to meet the requirements of the power industry. Hence, allfunding channels and instruction funds still have to be approved and allocated bygovernment, making it difficult to meet the capital demand in time.

* Self-generated capital is very limited, so there is very little scope for self-financing and development.

* Inadequate financing (maturities are too short compared to the economic life ofthe equipment) leads to structural financial imbalances at the enterprise level.

* Lack of enterprise-level autonomy and government restrictions on the bondmarket hamper the ability of the sector to mobilize funds from the market.

Economic Tariffs and Rationalization of Taxes

7.5 If internal funding is to be used, tariffs must be reformed to generate thesefunds, and changes must be made to ensure that the funds generated stay in the enterprise:

* Tariffs received and retained by power enterprises should be raised to economiclevels sufficient to enable enterprises to finance their appropriate share of newinvestments from their internally generated sources.

* 1Al special taxes and fees currently imposed only on the power sector should berationalized to ensure that power enterprises are subject to the tax regimeapplicable to all industries.

Mobilization of Domestic Funds

7.6 Endorsing the task force recommendations, the workshop stressed theurgent need for action to raise as much finance as possible from domestic sources,consistent with financial sector reforms.

Domestic Equity

7.7 Free entry and clarification of ownership rights especially at the generationlevel should help in bringing new companies to develop major new investments in fixedassets. If such new companies (public, private, or joint ventures) are authorized, alongwith commercialized/corporatized power entities, to list their shares on China's, HongKong's and other international stock exchanges, it will also enhance the attractiveness ofthe sector.

Annex 4: Interim Report of Task Force Four 39

Table 7.1 Power Sector Investment Sources, 1980-1991, in Billion Yuan

Source 1980 1985 1988 1991

Govemment appropriation 2.737 3.981 0.193 0.146(66.4%) (41.1%) (0.9%) (0.5%)

Operational funds 2.061 2.223(9.5%) (7%)

Domestic loans 1.032 2.325 1.583 7.464(25%) (24%) (7.3%) (23.6%)

Foreign funds 0.488 2.241 3.436(5%) (10.4%) (10.9%)

Transferred to local authority 1.403 0.968(6.5%) (3%)

Fund raising 0.866 3.750 5.858(8.9%) (17.4%) (18.5%)

Bonds 3.646 2.353(16.9%) (7.4%)

Self-financing 0.355 0.615 2.409 4.963

(8.6%) (6.4%) (11.2%) (15.7%)

Oil to coal fund 2.214 1.470(10.3%) (4.6%)

Energy conservation fund 0.348 0.338(1.6%) (1.1%)

8.275 19.848 29.167(85.6%) (92.4%) (92-3%)

Other (not identified) 1.394 1.638 2.433(14.4%) (7.6%) (7.7%)

Capital constuction 4.124 9.669 21.486 31.601*investment completed (100%) (100%) (100%) (100%)

Domestic Loans

7.8 Power companies should seek to raise loans from domestic banks andfinancial institutions on terms and conditions more appropriate to the particular needs ofthe power sector than has been possible in the past For this purpose, it has beenrecommended to envisage offening, as security to the lenders, a mortgage over certainpower enterprise assets.


7.9 The task force recommended examining the merits of establishing a newlong-term infrastructural finance institution, taking into account financial sector reformsand existing sources of infrastructural finance. However, several participants in theworkshop warned that if such an institution were lo continue to carry out "policy lending"activit:. s and were not considered as a commercially oriented, truly economic entity, itwould not significantly alter the present system of fund raising and investmentdecisionmaking.

Domestic Debt-Bonds

7.10 Power companies should seek the consent of monetary authorities forpower enterprises to issue bonds targeting different categories of savings holders:

* Bonds combining different characteristics of maturity (short, medium, and long)and interest rate (fixed and variable, but maintaining a constant relationship withrates indicated by the government or China's consumer index).

* Bonds with warrants giving the investor the right to acquire either new bonds tobe issued at a predetermined future date at a predetermined rate of interest orshares in the enterprise in the future ("convertible bonds").

Foreign Currency Finance

7.11 It was stressed during the workshop that China should take advantage ofthe great appeal of its fast-growing power sector to outside investors. Although foreigncurrency debt will continue to play a role through bilateral, commercial, or cofinancingsources, the government should adopt all measures to encourage foreign equityinvestment on a commercial basis, in both wholly foreign owned projects and jointventures. Three main steps were emphasized during the workshop:

* Clarification of "the rules of the game" by spelling out the conditions for entryand exit of foreign power producers, especially BOT and preferably BOOprojects.

* Enhancement of planning and coordination procedures and selection of foreignequity investment proposals on the basis of competitive bidding.

* Clear identification of the risks involved and the options to mitigate them to givepotential investors acceptable guarantees, in line with international practice.

Development of China's Project Financing Expertise

7.12 The Chinese participants pointed out China's lack of expertise infinancial packaging especially in complex power project. The task force recommendedthat the World Bank, in conjunction with the Ministries of Finance and Electric PowerIndustry, organize further technical assistance activities, seminars and workshops onmodern international techniques and options for financing power projects in China.


Box 7.1 Regulations on Transforming the Managemert Mechanisms ofState-Owned Industrial Enterprises

The Regulations on Transforming the Management Mechanisms of State-OwnedIndustrial Enterprises, approved by the State Council on June 30, 1992, were promulgatedon July 23, 1992.

Briefly, these Regulations are a subsidiary document under the 1988 Law onState-Owned Industrial Enterprises. They provide more detail in transferring severalmajor operating rights from the government to the enterprises:

* Production and management decisionmaking powers* The right to decide prices of products and servicese The right to sell products

v The right to purchase goods and materials* Import and export rights* The right to make investment decisionse The right to determine application of reserve fundse The right to dispose of assetse The right to operate joint ventures or undertake mergers* The right to hire workers* The right to determine personnel management* The right to determine distribution of wages and bonuses* The right to decide the organization of international divisionsi The right to refuse proration (demand for resources from government

departments).

Most if not all of these rights are also given under the Enterprise Law, but only ingeneral terms and usually qualified by the proviso "according to state regulations." TheRegulations now issued provide the detailed scope of the enterprise's rights that waspreviously lacking. However, it is important to note that these rights are not absolute,and the thrust of the Regulations is to define the sphere of enterprise autonomy.

The Regulations also provide for the detailed implementation of the enterprise'sresponsibility for profit and loss and for its relationship with government entities. Finally,in a welcome improvement on legal drafting, legal responsibilities are spelled out indetail.

Annex 1 Speech of Mr. Richard SternDirector, Industry and Energy Department, The World Bank

Opening Session, July 8

Thank you very much, Mr. Chairman, for your words of welcome.

What I would like to do this morning is to give you the World Bank's perspective onsome of the issues confronting our clients around the world, and give you a flavor of theapproaches and remedies they are trying to develop to deal with these problems. I would like thento talk about the World Bank's current policies in the power sector. Because of the changes in thesector and the problems our clients around the world are facing, we have streamlined and changedour own policies somewhat, and I think it will be useful for you to know about them.

This is a time of experimentation. It is a time of very rapid change in the power sector,not just in China but worldwide. It is important to emphasize that while the principles and basicissues remain the same, and in many cases the basic prescriptions are unchanged, there are manydifferent ways of resolving those problems. Many, of course, have to be resolved at the locallevel, individually for each country. What will work in Argentina will not necessarily work inChina and what will work in India will not necessarily work in China, and, of course, vice versa.That is why these issues are so difficult. It is also why they are so fascinating and challenging.

Energy Sector Characteristics: Developing vs. Developed CountriesAt the risk of being cavalier and of over-simplifying, I will try to compare the typical

characteristics of and differences between developed and developing countries.

I. Per capita consumption in less developed countries is typically about one-tenth that of thedeveloped world. It is a very important number to remember. It has major policyimplications because no matter what you do to improve efficiency, expanding supply andfinancing that expansion have got to be the principal concern in the developing world.Developing countries have extremely high power growth rates, while developed nationsanticipate a growth of I percent or less over the next few years. Consequently, the powerneeds in developed nations may largely be met through efficiency gains. That cannothappen in the developing world. We have not yet learned how to develop withoutincreasing the need for energy, and we are unlikely to do so.

2. Prices in developing countries tend to be low and subsidized, while pricec in developedcountries tend to be market-based.

3. Developed and developing countries often have very different market structures. Whenenergy-consuming industries are not subject to market disciplines, in that they do nothave to compete on price a-d quality with others, they are obviously going to be ratherinsensitive both to electricity prices and supply problems. For them the bottom line doesnot matter. This is, of course, a major problem for some of the former state-ownedenterprises in China

4. Supply-side institutions in developing countries tend to be pubic monopolies and tofollow command and control systems. Again, this is changing rapidly.

43


5. Developing countries are also characterized by the tremendous barriers to the exchange ofinformation. Information avai' :bility and transfer in terms of market demand and supplypatterns, financial intermediation, and technology are hampered by distortionary policies.

The Investment Requirements

Energy consumption in the developing world is less than one third of total worldwideconsumption. By the year 2000, and certainly by 2010, these ratios are going to reverse. Thathas very major implications to the financing requirements to meet this consumption growth.

Assuming major gains in efficiency, both on the supply and demand side, and rapideconomic growth rates, energy consumption per capita in the developing world will still be aboutone-sixth of what it is in the developed world by the year 2010. Now these are very robustprojections. There is not much you can do to change the assumptions without changing theseorders of magnitude.

Now let us translate these findings into investment requirements. It is said that only foolsand World Bank economists make estimates. But again these estimates are reasonably robust andwe should not be overly concerned if they are wrong by an order of magnitude of 25 or 30percent. In the developing countries, we will need to mobilize something in the order of $1,000billion over the next seven years and, because of her importance. China will take a large portionof that sum. In fact it would be useful later on to spend a little time talking about China'sinvestment requirements.

Deteriorating Sector Performance

Despite impressive gains in capacity, the power sectors of developing countries havesuffered from lack of financial stability, below-average production efficiencies, and uncheckedtechnical and nontechnical losses

Let us consider the main reasons for this deterioration in perfornance. Again, there areno surprises; problems include the following:

* Lack of clarity in sector policies- Inappropriate energy pricing* A weak regulatory environment* Inadequate financial markets

* Command and control structures.If we examnine average tariffs in developed and developing countries, for example, we

find that rates in OECD countries are about double those in developing countries. There is notechnical reason why that should be so. Techniques for producing energy and power are verysimilar in the developed and the developing world. In fact, technical efficiency in the forner ishigher than in latter. With full cost recovery under rational economic pricing principles, onewould expect this to be reversed.

We are taLking about a huge subsidy to energy consumers, estimated at roughly $100billion a year. This is, incidentally, about the level of investment needed to meet those previoustargets. However, even though some of those investment requirements appear rather daunting,,we in the World Bank are absolutely convinced that they can be financed. We are also absolutelyconvinced that the savings are there to fund them. So the problem again is an organizational andpricing one and is probably not a question of affordability.

Annex 1: Speech of Mr. Richard Stem 45

Factors such as the weak regulatory environment, inadequate financial markets, and acommand and control structure make it very difficult for enterprises to operate independently andeffectively. The enterprise-related factors, of course, are particularly pertinent to China. As iswell known, state enterprises often face conflicting objectives. There is a lack of autonomy.Because managers of state enterprises are not always in control of their objective functions,management accountability is lacking.

Another area where we can work closely together is the structure of electricity tariffs,which are just as important as the level of tariffs. China, through the new plant price system, hasmade very major gains in the overall level of tariffs. In fact we think that the average tariffs fornew plants are financially adequate. However, the distinction between new-plant and old-planttariffs is a severe distortion in tariff structure. It is costing China potential investment andenormous revenues, and it is also creating considerable inefficiencies on the demand side becausethe producers, manufacturers, and users of electricity (who are getting it so cheaply) have verylittle incentive to use it effectively.

Toward an Improved Enabling Environment

Let us address the steps we can take toward establishing an improved enablingenvironment. The govemrnent must first focus on pDlicies that are necessary to increase supplyefficiency. There will require designing a sound regulatory policy, clarifying ownership, andputting in place a tariff regime that will encourage the efficient use of energy. It is important toconsider what organizational changes are necessary to achieve those objectives.Commercialization and corporatization are obviously key elements. These all relate to findingnew ways of securing finance for sector development.

Let me just quickly run over these areas, because they consume most of our time in ourworik in the World Bank on the energy sector.

Govemment Policy toward Increasing Efficiency in the Power Sector

Sornie of the policy changes that are often suggested are as follows:

- Shifting thefinancing burden from public resources to private savings. It is important tonote here that, in China's case, we are not advocating privatization. We arerecommending that you begin to use private rather than public savings so that stateenterprises, if they are properly structured and have a sound per capita strurture, canmobilize private savings effectively. Our recommendations should not be misconstruedas being inconsistent with China's socialist market economy. In fact, I would submit thatthey are totally consistent with China's current system. But one thing is very clear, andthat is that the public sector and the budget can no longer carry these huge investments.China has far too many pressing needs in the social, social security, and health reformand educational sectors that she cannot possibly carry the burden of the public provisionof power as well.

* Reducing the cost of electricity by subjecting producers and distributors to competitivemarket forces. Now, again, this can be done in various ways. As far as I am aware, thereare no longer any natural monopolies in the generation of electricity. In the case of thetransmission and distribution of electricity it is different and we will be talking about thatlater. But subjecting generators to the rigors of the market place and to competition, as inthe productive sectors, is clearly a possibility.


* Establishing a transparent regulatory environment. This cannot be overemphasized. Ilook forward in the next couple of days to discussing how that might be introduced intoChina. Again I should emphasize that this is not a switch. You cannot enact a law andmake changes overnight. We are talking about progressive changes in behavior.Provincial governments used to giving instructions to power bureaus, and powercompanies cannot be expected to stop issuing instructions overnight. That is justimpossible. But over time, if the right regulatory frameworks are set up and the rightincentive schemes introduced, that behavior can begin to change. And I would submitthat there are a lot of examples in the industrial sector in China that I would urge you tolook at. There are some major lessons to be drawn from the results achieved in some ofthe industrial sectors and state enterprises that have become more efficient as a result ofbeing increasingly subjected to market forces.

v Shifting social and employment obligations from the enterprises to the governments. Thisstep will have to be taken at some point in the reform process.

Possible Organizational Changes

In our efforts to increase the efficiency of the power sector there is clearly a need to startto expose utilities to competition. In due course, it is hoped, this will lead to a shift fromcentralized public monopolies. Some of the suggested steps required to effect the transformationwill include the following:

- Developing the structure and capacity for independent profit centers with separateaccounting systems.

* Separating generation and transmission wherever possible. Many countries with systemsmuch smaller than China are seriously contemplating this move and have taken steps toensure the separation.

* Encouraging independent power production at the margin, as well as industrialcogeneration. I would suspect that there are enormous possibilities for cogeneration inChina. There are trermendous efficiency gains, but there are also very majorenvironmental gains from doing so. And again, within the constraints of the socialistmnarket economy in China, new forms of ownership should be encouraged. Many of thetownship, village, and local enterprises have elements of private ownership. I see noreason why that cannot become the case in the power sector.

Commercialization and Corporatization

Commercialization and corporatization are also absolutely critical. It will involveobligations on the part of the Government and on the utilities alike. For the government, it meanssubjecting the utilities to corporate legislation and then clarifying their ownership and legal status.We would encourage looking at the possibility of establishing share holding companies for powerutilities.

Taxing utilities at a common corporate rate, rather than requiring them to remit theirprofits to the provincial or central govemment, will be crucial to be consistent with corporate law.I understand that some major experiments are already taking place in the productive sectors inChina using this sort of model. I would urge you to look at them to see what is relevant for thepower sector. What is not relevant, discard. What is relevant, see if it can be used in the powersector.


Apart from paying interest and taxes, as other industrial corporations do, power utilitiesshould also eam commercial retums on their equity capital. Many of these utilities are sitting onhuge volumes of assets that are being financed by the people through taxes and remissions. Is itnot right that those utilities should be expected to earn a return on those assets? Not only wouldthat provide tax revenues to the government but it would also provide much-needed self-generated funds to finance investments.

Options for Increasing Private Sector Participation

In terms of encouraging private sector participation, I want to re-emphasize that I am notadvocating privatization. We are recommending participation by private investors, primarilydomestic and to the extent possible, foreign. There are several options to achieve thisparticipation; some will be very applicable to China, and some will not. The following is just alist with some comment on what is being used elsewhere in the world:

* Selling some orall assets. My own view on the relevance of selling some or all assets inChina is that it is probably a very limited option in China. You are worried about growth.Your existing assets, even though they are large, will be a very small part of the total, andthose existing assets are not going to do much to finance future growth. In the developedworld the situation is very different, as growth is not the principal concern, efficiency is.If you want to sell assets for reasons of efficiency, that is fine. However, I would notnecessarily advocate selling for financing reasons.

e Stock exchange listing- Stock exchange listing becomes a viable option only when powerutilities are corporatized as joint stock companies. In this context, it is extremelyimportant to consider ways in which the power bureaus and power companies can bemade joint stock companies.

- ;Franchising and leasing. Franchising is a possibility being tried in some countries, as areleasing and contracting out various services (I will discuss this last in a minute). There isno need for the utility to manage all the services it provides. Much of operation andmaintenance can be undertaken by contractors, and that is again something that can beexplored when considering improved efficiency.

* Contracting out services. With reference to contracting out services and IPPs, I to referagain to the growth of demand and the changing balance between the developed anddeveloping world. The reduced growth rates in the electricity supply industry ofdeveloped countries have produced an important commercial proposition for developingcountries. Power companies in the developed world have nowhere to go in terms of theirown investment and exxrtise. They are now condemned simply to replace their existingassets as they cease to be economically viable. They no longer have an investmentfunction, so what is to become of their expertise? What these power companies know ispower generation. They want to invest and provide services. There is a lot of competition,which has made them much more eager for opportunities to invest and use their expertise.China should exploit this opportunity.

* Generating non-utility power. The generation of non-utility power is also an importantoption and is something I think we should encourage. There is a lot of interest in Chinafrom independent power producers (IPPs). If the regulatory and bidding regimes areright, there are many ways with which you can attract very efficient [PPs. If the rightregulatory regime, tariff structure and bidding procedures are not in place, you may still


attract some IPPs, but you will certainly get them at a much higher cost than you wouldotherwise. Again this is something I think has to be looked at with some care.Build, own, and operate (BOO); build, own, operate, anc transfer (BOOT).

Financing Options

The availability of options for financing power sector development in China is closelylinked to the complementary reforms in other sectors . For example, as China reforms her socialsecurity systems and moves social security obligations away from state enterprises, these newinsurance and pension funds must have somewhere to invest their resources. Since many of youpresent here will be beneficiaries of those pensions and insurances, I am sure you will have amajor interest in making sure they are safely invested. Historically, in the developed world, thereare only two places where these funds have been safely invested: power and telecommunicationsutilities.

Other sources can include investment by banks and insurance companies. Again, thelinks to the rest of the reforms in China are absolutely crucial.

One of the interesting facts about China that differentiates her from other countries isthat as I understand it, self-generated funds are a very small proportion of the funding of futurepower investment. Funding is almost entirely through debt. Now I think there is a possibility ofdoing something here. I suspect that it is related to the structure of the tariff and the fact that, forthose old assets, the utilities are charging low prices and not the new, higher prices. If they wereallowed to charge the new prices for the power provided by those older assets, there would be asignificant new financing source for investment in the sector.

The World Bank's Role in the Power Sector

As I said I would at the beginning of this presentation, let me conclude by looking at theWorld Bank's role. Although sometimes misrepresented, the World Bank has no ideology topeddle. We are concerned with efficiency, both in pricing and operation, and in mobilizing theresources necessary to fund these efficient investments. This is what consumes us in terms of ouranalysis at the project level, but now, even more importantly, it is what consumes us in terms ofour analysis at the sector level- Clearly China is so vast that even if the Bank were to manage tofinance two or three very good projects (and to date the record of projects in the power sector hasbeen excellent) this would be constructive, but it would not make a big impact. How we in theWorld Bank can really help is by advising you on making the necessary sector and structuralreforms so that you can find the $150 billion dollars you need over the next ten years.

Finally, here are some of the guiding principles we are following. Again there are nosurprises. I am basically just reiterating the points I made earlier. However, now they are WorldBank policies as opposed to our analysis of the problems.

All power divisions in the World Bank are asked to look for clear separation of policyand regulatory and operational functions when considering potential projects in the sector. Againwe fully realize that the form these functions will take will be different in each country. We arelooking for more transparent regulatory frameworks and trying to assist our clients withcommercialization and corporatization. I cannot overemphasize the importance of that at thispoint. We are also looking at improved ways of private sector participation, and we see manynovel ways of achieving this objective.


Finally, one very important change has taken place in the Bank. We are now underexplicit instructions to lend only to countries we judge to be committed to the broad reformagenda that I have just outlined. This is not a change of policy, because the criterion has alwaysbeen there, but it is certainly a change of emphasis. The staff of the Bank have come under heavycriticism from the Board of Directors, who charge that we have not been stringent enough inimplementing our policies. So we now have to be more diligent than ever in seeing that ourpolicies are implemented in any projects with which we become involved.

It has been an honor for me to address this auspicious gathering, and I thank you verymuch for your interest and patience.

Annex 2 Speech of Mr. Shao ShiweiDirector, Department of Policy and Legislation,

Ministry of Electric PowerClosing Session, July 10

Mr. President, distinguished experts, ladies and gentlemen,

This intemational seminar is not only a milestone in the exploration of strategic optionsfor power sector reform in China but also a central feature of the research process itself. It isobviously a bit too early to draw final conclusions, but I think, as this seminar approaches its end,we are stili justified in making a preliminary assessment of its results.

AccomplishmentsTo begin with, I think we can say that this seminar has been successful in the following

ways. First, this seminar has increased the value and influence of the entire project of findingstrategic options for reform of the power sector:

- The participation of the Minister and Vice Minister of Electric Power, Vice Minister ofFinance, and leaders of other related sectors of the State Council and experts not onlyindicates the concem and support of all our government sectors for power sector reforn,but also increases the chance that the research project will influence policymaking at ahigh level.

- 'We have invited representatives from the regional power groups, provincial powercompanies, and investment companies to attend. Their grassroots experience hasenriched the seminar and therefun has also increased the power of the research project toinfluence enterprise reform.

- 'We have also invited friends from the media. Their participation shows the concern of thewhole society for our reform and will help our research projects to influence publicopinion. This will no doubt lead to practical results for our projects and will helpconsiderably to quicken China's power sector reformn.Second, the seminar has promoted mutual understanding between China, the World

Bankc, and foreign experts. We now understand better the investment policy of the World Bankand have learned much about the successful experience of power sector reforms in othercountries. At the same time, foreign experts understand better the present conditions in China, thedevelopment of power reform, and the general situation of our power enterprises. This mutualunderstanding will help Chinese and foreign experts to reach a consensus on China's powersector reform objectives and ways to achieve them.

Third, the argumentation and exploration in each part of the research project and on eacbproposal has proved very valuable to us and has given us a lot of food for thought; that will beobvious when we complete our report.

Fourth, the work and lively discussions in the last three days have not only deepened ourmutual understanding regarding our work. They have also developed a friendship among us,which will lay the bases for even more pleasant cooperation in the future.

51


Lessons

Apart from its achievements, the seminar has inspired and taught us in several ways.

First, it is clear that we should note that every successful experience has distinctivefeatures and conditions. Our consultative experts have told us a lot about the experience of othercountries in power sector reforrns, including system options and operational mechanisms. Despitethe variety of their experiences, the reforms share a common feature-that is, behind eachsuccessful reform model there are specific conditions that make it successful. The French modelis based on French conditions, and the British model is based on British conditions.

If we neglect the importance of characteristic conditions, we will be blind and biased inconsidering reform options. As a great Russian thinker said, without a context, one can't evenanswer a simple question such as whether it is good to have rain. So we have to pay specialattention to context when we try to learn from successful foreign experiences.

Second, and following from the first point, we must be fully aware of the complexity ofChinese conditions. The complexity lies in the fact that the current situation of China's powersector reform can not be simply described by one word. For instance, it can not reflect the realsituation to describe a problem simply as one of a highly centralized planned economic system, orto attribute it to the enterprises' lack of investment functions, or to define the power sector reformas occupying a certain coordinate position in the reform of national economy. We should acceptthe fact that the realities of present-day China are complicated. Our reform did not of course startfrom scratch. It has a rather solid basis.

We have already made a breakthrough in reforming our planned economic system withregard to the ownership system, management system, planning system, investment system, pricepolicies, and fund-raising channels. On the other hand, the old and new systems still exist side byside, and they are still playing their own roles in different fields and in different degrees. We alsoface problems of incomplete and inconsistent policies and stubborn resistance of conventionalideas and attitudes.

Every new step in our reform involves a readjustment of vested interests and therefore isbound to encounter resistance. And behind this resistance lies an obsolete idea in a new guise.Hence, in power sector reform, we have successful experiences, and we also often find ourselvesin a transitional state. We even have to face chaos sometimes as a necessary cost of reform. Weshould take all these factors into consideration when considering reform options.

The complexity is also demonstrated in the fact that power sector reform is only part ofthe whole of China's economic reform. It cannot be carried on independently from the economicsystem. It must develop at a speed in conformity with that of the economic reform. Besides, sincethe power sector is closely connected with the whole society, its reform may be restricted not onlyby the outmoded system and ideas but also by the imbalanced development of all sectors in thenational economy and by problems arising from policy differences in the reform. We shouldinvestigate solutions for these problems as well.

The complexity can also be illustrated by the fact that the market is sufferingsimultaneously from both shortages and surpluses of commodities. The way the market functionsin not always the same. The ways the government regulates the market, the market guidesenterprises, enterprises compete with other enterprises, prices regulate production andconsumption, and power is distributed and managed are all different in China. At present, themarket is not yet fully developed in China. Therefore, where the market does not function well or

Annex 2: Speech of Mr. Shao Shiwei 53

has broken down completely, governmental intervention is not only necessary at present but alsoa precondition for its diminishing role in the future.

Third, the key links of the reform should be further emphasized; one is the government,the other is the power enterprises, Some experts emphasize the functions. Undoubtedly, functionsare important, but the performer of the function, and the way it is organized, is more important.Our government department should change its functions and become a regulatory organizationthat respects the market principle as well as principles of power production and regulates powerenterprises in accordance with the law. Power enterprises on the other hand, should becomecorporations in their real sense, operating in accordance with market principles, guided by thesupply and demand situation and by price fluctuations, and with a view to making maximumprofits. In order to achieve this objective, the first important step is to separate the governmentadministration and the enterprise.

Fourth, reform models may have three characteristics: each region has one dominantmodel supplemented by and combined with other compatible models; the dominant models maydiffer in different regions; and the dominant model in the a region may change at different stagesin the development of the reform.

These characteristics of reform options reflect not only the inherent principle that a powernetwork is indivisible but also the need to give incentives to various parties, the need for a powerenterprise reform based on local conditions, and the trend of power sector reform to be in aconstant state of change and development.

This reminds me of the speech made by Mr. Zhao, Vice-Minister of Electric Power, at theopening session of this seminar. He announced the 20-word policy of China's Power SectorReform, and the principles of taking into account the specific local and power networkconditions. The correctness of these policies and principles has been borne out by the inspirationswe have drawn from the seminar. It shows that this policy and these principles can and should bethe basis of our strategic reform options.

Follow-up

Finally, I'd like to mention some things we should do in the near future to follow up onour successful seminar.

First, we should collect all the materials of the seminar and put them into the form of abook. Meanwhile, we should write a summary of all the views presented, which can reflect theachievements of the seminar.

Second, the Experts Group should keep on working for another week to absorb theachievements of the seminar on specific topics and to work out a draft of a general report.

Third, we will invite all related government departments and organize all national powerenterprises to participate in the research projects in different forms. This will bring our research toa new plane and make our research projects more useful for the further development of thereform.

Fourth, we should organize inspection on the spot and complete all our research projects,and then subrnit them to related departments to be recommended to the govemmenL

Ladies and gentlemen,


China's power sector refonn is irreversible. Although at times the reform may appear tobe taking a tortuous and complicated road, we should remember that social progress is neversmoothly achieved. And in the particular context of power sector reform, many of the foreignexperts present here have also mentioned the hardships they experienced during their reforms. Allthis notwithstanding, we have faith in the final victory of the overall reform of our socialisteconomic system, and in the success of China's power sector reform. Therefore, in a spirit ofsolidarity, we look forward to cooperating with all domestic sectors. We also look forward, withmore open policies, to coopemting with the World Bank, other countries, and all experts present.

Please allow me to express our sincerest gratitude to Chinese and foreign experts, and toall the delegates present. Every beneficial contribution you have made will be embodied in thegreat achievements of China's power sector reform.

Thank you very much.

Annex 3 Synopsis of Presentation ofMr. Richard Newfarmer

Chief, Industry and Energy Operations Division,China and Mongolia Department,

The World Bank

Power Sector Reform in China:Directions for Change

The workshop and the discussions between the Chinese and international experts havebeen extremely useful in developing a consensus on sector priorities and constraints and anindicative strategy for reform in the power sector.

Reform Principles and Objectives

As a fundamental principle it was agreed that rapid growth in installed capacity wasrequired to sustain high economic growth rates. In order to meet this demand, pragmaticallyoriented power sector reform strategies should recognize the following:

I. Reform initiatives should be driven by provincial realities and strengths. Regions andprovinces are diverse in terms of levels of development, sophistication of power systems,and degree of decentralization in decisionmaking.

2. Commercialization and corporatization of power companies are necessary. Withoutthem, China will not be well situated to attract the large volumes of required investnentfromn domestic, as well as international, sources, .

3. Competition should be introduced gradually, where possible. This will facilitate efficientdecisionmaldng and economic decentralization.

Reform Strategies

To achieve these objectives, the design and implementation of a reform program are mosteffectively addressed at iwo levels-provincial and national.

The micro-level initiatives could specifically address the following:

1. Conmnercialization of companies at the regional andprovincial levels. This wil involvefinancial and organizational restructuring to make progress on the following fronts:(a).establish transparency in cost structures in order to rationalize tariff settingmechanisms that provide a reasonable retun; (b) establish standards of performance thatcan then serve as a basis to clearly separate government functions from the productiveactivity of companies; and (c) implement international accounting principles adopted onJuly 1. 1993.

2. Corporatization of the power companies. Incorporation of commercialized powercompanies as joint-stock limited liability entities will enable them to take advantage ofreforms in the financial sector and national capital markets. These reforms should reflect

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56 Strategic Options for Power Sector Rcform in China

reforms in Chinese company law. Once corporatized, power sector companies couldaccess domestic and foreign sources of finance by (a) floating equity, (b) issuing bonds,and (c) contracting commercial debt.

3. Reorganization of industry structure7 based on thc provincial realit;es. Tentative firststeps would include (a) encouraging transparency in prices between the generation,transmission and distribution segments, either iirough contracts or publication of pricesby competent provincial and national authorities; and lb) transparency of the powerallocation procedure to allow for development of a market mechanism, where possible.To support reforms at the provincial level, certain procedures and systems of

decisionmaking will have to be articulated clearly at the national level as well. These initiativesand sector oversight functions could include the following:

1. Establishing normsfor the efficient bulk power transfer between provinces. This wouldbe done through the development of systems and procedures for the pricing and operationof transmission services.

2. Establishing regulatory functions. This will need to be done through the appropriateprovincial and national competent authorities to ensure reasonableness of end-useconsumer prices and transparency and enforcement of contracts.

3. Establishing guidelines for the entry of independent power producers (IPPs). Thegovemment could develop guarantees that provide security to the investors during theperiod of transition to a consistent electricity law and credible regulatory framework.These guarantees should cover noncommercial risks, allowing the commercial risks to beborne jointly by the parties involved in the IPP transaction.

4. Exploiting economies of scale. This can be facilitated by encouraging and assisting thedevelopment of high-return cross-provincial projects.

5. Developing pollution control norms. The norms for the power industry should beuniform across provinces and should not result in inefficient location decisions.

6. Establishing a legal dispute-resolution mechanism. This is necessary for resolvinginterprovincial transaction disputes and violation of contractual obligations in IPPprojtcts.

7. Encouraging commercialization/corporatization of interdependent sectors. These wouldinclude fuels (coal, oil, and gas), and fuel transportation systems.

Annex 4 Interim Report of Task Force OneStructural Options for Power Sector Reform

1. Background

1.1 Administrative system. The administrative system of China's power industry, asshown in Figure 3.1 in the main text, is a five-level structure-that is, central, interprovincial (orregional), provincial (municipal, autonomous-r-ional), city (prefectural), and country (town).

1.1.1 The Ministry of Electric Power, as a leading authority of the power industryunder the State Council, takes the responsibility of establishing electric power developmentplanning, strategy, and regulations, exercising professional management, and conductingcoordination, supervision, and provision of services for the power industry.

1.1.2 The China Electric Power Enterprises Association is a united organization of allpower enterprises and institutions, whose main tasks are trf provide technical services to all powerenterprises and serve as a bridge or a link between government and power enterprises andinstitutions.

1.1.3 The interprovincial (or regional) electric power administrations are the agenciesof the Ministry of Electric Power under the State Council, put in charge of interprovincial powernetworks and power management within the given region.

1I.1A The provincial (municipal or autonomous-regional) electric power bureaus takecharge of power networks and power management in their own province (municipality orautonomous region).

1.1.5 The cities' electric power bureaus (or power supply bureaus) take charge ofpower industry and power supply within their own territory.

1.1.6 The counties' (or cities' equivalent to county) electric power bureaus (orhydropower bureaus) are the authorities in charge of power supply and utility within their ownareas. Some power bl'reaus also manage small hydropower and thermal power plants.

1.2 Administrative system of power enterprises. Again, Figure 3.1 in the main textshows an overview of the organizational system of the nation's electric power enterprises.

1.2.1 Five Large Electric Power Groups. The five large electric power groups areestablished on the bases of five regional power networks. Each power group is a consolidatedorganization of "legal persons" power enterprises, but the group itself does not possess legal-person status. Each power group consists of the key enterprises (or group companies), severalclosely related enterprises, and several less closely related and loosely related enterprises. Theadministrative headquarters of both the power group and power administration are actuallyincorporated in one, while the group companies, closely related, and less closely relatedenterprises are legal persons of their respective enterprises, with independent accounting. All theheadquarters of provincial electric power companies under these five electric power groupsincorporate with the corresponding provincial electric power bureaus in one.

1.2.2 The International Power Development Corporation and Power Company of theHuaneng Group.

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5B Strategic Options for Power Sector Reformn in China

1.2.3 Associated Power Company. First there is the South Associated Power Companycomposed of the four provinces of Guangdong, Guangxi, Guizhou, and Yunnan, which relies onboth hydropower and thermal power. There is also Yimin Thermal Power Company.

1.2.4 The Provincial (or autonomous regional) Power Companies in Shandong,Sichuan, Fujian, Yunnan, Guizhou, and Guangxi are at present under the direct jurisdiction of theMinistry of Electric Power. The headquarters of provincial (or autonomous-regional) powercompanies incorporate with that of the provincial (or autonomous-regional) electric powerbureaus in one.

1.2.5 The Guangdong and Hainan provincial electric power company and the electricpower enterprises under Tibet Electric Power Department are run by of provincial (orautonomous-regional) governments. The Ministry of Electric Power merely provides them withprofessional guidance and services. The Electric Power Company of the Inner MongoliaAutonomous Region is also under the control of the local government. However, since its powergrid is closely linked with the North China Power Network, this Regional Electric PowerCompany has joined the North China Electric Power Group as a semi-related enterprise. Theheadquarters of provincial (or autonomous-regional) electric power company incorporates withthat of the provincial (or autonomous-regional) electric power bureau in one.

1.2.6 City (Prefectural) electric power bureaus (power supply bureaus), which areinternal accounting units under the provincial electric power company, take charge of powersupply operation within their own areas. In the meantime, they also perform power administrativefunctions in the locality.

1i2.7 Power plants. Most of the large and medium-sized power plants (larger than 250MW) are operated by respective provincial (municipal or regional) electric power companies. Afew hydropower stations and thermal power plants are operated by water conservancy agencies orthe Huaneng Group, which sell power to power network. Qinshan Nuclear Power Station ofZhejiang is operated by China Nuclear Industry Generai Company, which sells power to thepower network. A few other power plants are joint ventures (Such as Shajiao B Station), whichare also inidependently run and sell power to the network.

1.2.8 County (including cities equivalent to counties) electric power bureaus (powersupply bureaus or electric power companies) manage local power grids and power supplybusiness. There are more than 2,300 county electric power enterprises in more than 1,890counties and suburbs around big cities in the whole nation, among which 711 are managed andoperated directly by provincial electric power companies, as their internal accounting units;around 650 power enterprises that mainly depend on small hydropower are managed and operatedby water conservancy sector; around 900 power enterprises are supplied by wholesale fromprovincial electric power companies; and a few other small electric power companies that mainlydepend on small thermal power are managed by local governments. All these county electricpower companies practice independent accounting.

1.2.9 All the rural low-voltage distribution grids behind distribution transformers aremanaged by township power supply stations.

1.2.10 The self-provided power plants that belong to metallurgical, chemical, orpetroleum enterprises are respectively managed by their own administration and sell their surpluspower to power networks.

Annex 4: Inteim Report of Task Force One 53

1.2.11 The State Energy Investment Corporation and all provincial power investment(development) companies are authorized by the central and provincial governments to undertakepower investment. The power construction funds raised by levying 2 cents surcharge per kilowatthour. attached to the electricity bill, are managed by provincial electricity power investment(development) companies. These companies are under the leadership of the respective provincialplanning commission.

1.2.12 In every province, prefecture (city), and county, there is an office for planned,safe, and effective use of electricity "(the PSE office"). Ile PSE office is responsible forproviding customers service for planned, safe and effective use of power. Some of these PSEoffices are also responsible for organizing power generation with fuel provided by customers andarrange the planned use of this kind of electric power as well as the electric power generated bylocal enterprises.

2. Major Existing Problems2.1 The central government does not exercise tight control over the power industy;it is much too decentralized. Therefore, policies regarding power planning, power investment,electricity laws and regulations, and tariffs can come from many different sectors, and thedecisionmaking process is complex and slow, which obstructs the development of the powerindustry.

2.2 No clear separation exists between the admninistration and the enterprises.Govemments at different levels have intervened too often and too much, making decisions for theenterprises on such minute details that electric power enterprises have lost autonomy. On theother hand, some power enterprises have to undertake too many administrative functions. Thisstate of affairs prevents the power enterprises from becoming a real legal person with fullresponsibiity for loss and profit, able to operate on self-management, self-development, and self-resaint basis in the market economy.

2.3 No competition exists among enterprises; thus there is less incentive forefficiency.

2.4 No incentives are present within enterprises All production and managementactivities within enterprises should conform to goals specified in state plans by the government.Therefore, the enterprises cannot but get their "meals" for the "big pot"-the govemment. Thereis no incentive for the enterprises to cut costs, raise efficiency, and increase profits.

25 Severe power shortages and scarcity of capital are problems. Meanwhile, thegravely insufficient fuel supply and inadequate transmission network also obstruct furtherdevelopment of the power industry.

2.6 The traditional mode of relying on small-sized local power plants not only cannotmeet the demand for power supply but also causes a tremendous waste of resources.

3. Main Oblecthies of the Reform

3.1 Separation of enterprises from the government. The administraive and regulawryfunctions of the government should be clarified. And the independent status of power enterpisesin market economy should be established.

32 Playing down the government role in power allocation.


3.3 Gradual introduction of competition into all power enterprises.

3A Diversification of power investnmnt resources to meet the demand of the wholesociety for the development of the power industry.

3.5 Introduction of incentives within enterprises for maximizing efficiency.

3.6 Elimination of the confusion arising from having too many bosses. The powersector should play its leading role to provide planning, coordination, supervision, and services forpower industry.

4. Options for Power Sector Organization

Including the organization of the regulatory authority and that of enterprises.

4.1 There are three options for regulatory authority.

4.1.1 Option 1: Set up power regulatory authorities at the national and provincial(municipal or autonomous-regional) levels apart from the leading authorities for power industry(or certain comprehensive economic department) at the national and provincial (municipal orautonomous regional) levels.

In this option, the leading authority for power industry at the national level ismainly responsible for approving and promulgating policies and regulations and for exercisingmacro-control over power industry, while it refrains from interfering with day-to-day businessactivities of enterprises. Meanwhile, regulatory functions of power enterprises should beseparated from functions of all govemment administrative departments. These regulatoryfunctions should be transferred to the newly established regulatory authorities at the national andprovincial (municipal, autonomous-regional) levels.

4.1.1.1 (Control) The term regulating here means that a certain regulatory commissionauthorized by the government or other organs of state power according to related laws, exercisescontrol, regulation and management over a certain line of business. The power regulatoryauthorities are administrative organizations set up by the People's Congress at the national andprovincial (municipal, autonomous-regional) levels to regulate the power industry. The regulatoryauthorities are responsible to the People's Congress at the corresponding level, and to the law. Nopower bureau is to be set up at the provincial level. No regulatory authorities are to be set upbelow the provincial level.

4.1.1.2 The terin of office for members of regulatory authorities is the same as that of thePeople's Congress at the same level. The regulatory authority normally has five to sevenmembers. No government department has the right to the activities of the members who arefulfilling their obligations except when they have committed criminal offenses and with theapproval of the government organs which appointed them.

4.1.1.3 The regulatory authority usually consists of members who are power experts,financial experts, legal experts and representatives of consumers.

4.1.1.4 The main functions and responsibilities of the regulatory authority are to

* Review and approve the tariffs proposed by power enterprises based on related laws andregulations.

* Issue power operation licenses and lay down the responsibilities of the enterprise.

Annex 4: Interim Report of Task Force One 61

Participate in the standardization of technology and management. Guarantee thereliability and operating efficiency of the system.

* Review and approve the investment plans and power project proposed by the enterprises.

* Review and approve the power dispatch and power selling project.4.1.1 .5 lThe division of responsibilities of the power regulatory authorities at the nationaland provincial level is fixed by the law as follows:

The responsibilities of the national regulatory authority are to

* Review and approve interprovincial power project and multi-provincial power project.* Participate in the standardization of technology.* Participate in the standardization of environmental protection.

* Review and approve the terms and price of power transmission service.

* Review and approve the arrangement of interprovincial power transmission and powerexchange.

* Make a sample of power operation license for all provinces.* Participate in the national energy policy-making.

a Resolve the conflicts and disputes among provinces.a Arbitrate or mediate the appeal against the decision of the provincial regulatory authority.

The responsibilities of the provincial regulatory authority are to:

a Review and approve the tariffs of power wholesale and power retail.

* Review and approve investment project and power project within the province.

a Check and issue the power operation license within the province.i Participate in the standardization of technology.

a Supervise the execution of the contract.4.1.1.6 The advantages and disadvantages of this option:

Advantages:

- Centralized regulatory rights may improve efficiency.* Organization is relatively stable and will not be influenced by govemment changes or

other factors. Therefore drawbacks such as decentralized power and confusion ofresponsibilities could be overcome.

Disadvantages:

* New conflicts and contradictions will arise between govemmental departments andregulatory authority after the separation of regulatory power from the govemment.

* It is difficult to accept this option since it has not been tried out. Therefore it is also hardfor high-level departments to make final decisions on it.

4.1.2 Option 2: To set up regulatory authorities within the leading power authorities atthe national and provincial (municipal, autonomous regional) levels.

In this option, functions, responsibilities and personnel composition of theregulatory authorities are the same as those of the first option. The national regulatory authority isset up within the national leading power authorities (currently, within the Ministry of ElectricPower). The provincial regulatory authority and the provincial power bureau merge into one. No


regulatory authority is set up below the provincial level. The members of the regulatory authorityare appointed by the govemment at the same level and are responsible to the government at thesame level as well.

Advantages:

* Ii is easier to this get option accepted compared with the former option.

Disadvantages:

* The regulatory authority is still somewhat mixed up with administrative authority and issusceptible to government changes and the local government interference.

4.1.3 Option 3: No regulatory authority is set up. The above mentioned regulatoryresponsibilities are transferred to govemmental power authority.

Advantages:

* The existing system needs less change. It is easy to get this option accepted and thepower transfer will be smooth.

* The administration is simplified and efficiency can be raised.* It can help to ease the contradiction between govemment and regulatory authority.

Disadvantages:

a Since the regulatory responsibilities of other departments in the government (such asreviewing and approving investment size and budget, reviewing and approving powertariff) are amalgamated and transferred to the governmental power authority, it is difficultfor the power authority to get support from other govemmental departments.

42 Regarding the power enterprises organization, there are five options. Theprinciples of these options are to:

* Maintain the ability of power industry to keep increasing and meet the demand ofcustomers for more power.

a Help to increase competition, coordination and efficiency.* Be useful for power enterprises to achieve better investment results.= Possess sufficient technology and management resources.

* Take into consideration the problems which appear in the establishment of new enterpriseand market mechanism.

4.2.1 Vertical Integration (The EDF model)

4.2.1.1 Description of the EDF model:

* The provincial power company has the integrated responsibilities for generation,transmission and distribution of power (not excluding some vertically integrated inter-provincial networks that are also responsible for generation, transmission anddistribution).

* It monopolizes the operation within the province.* A regional power pool will be built covering several provinces within the power network.

And it will be controlled by a group company.* All power enterprises can trade with each other within provincial companies in the power

market in the form of contracts.


* The model is also responsible for providing adequate supplies of power within theprovince.

* The model is responsible for organizing dispatch, maintenance, network, power supplyand allocation of power.

* The model proposes power prices and the price proposal is subject to regulatory reviewand approval.

* The model prepares plans for investment in new power genertion plant, transmissionproject, and for fuel and other resources requirements.

4.2.1.2 In order to implement this mtodel, one should:

a Bring together power distribution enterprises and set up a distribution division within theprovincial power compau,'.

* Transfer independent operation power for allocating power to this provincial company.

* Amalgamate existing generating facilities and set up a power generation division withinthe provincial power company. This power generation division is responsible formanaging all power generation plants.

* Establish a set of regulations necessary for the new company to operate power within theprovince.

a Readjust the existing power market to maintain its continuity.

a Set up a new provincial regulatory authority.

4.2.1.3 Advantages and disadvantages of this model:

Advantages:

A The model has highly centralized and unified administration which is easy formanagement regulation and production.

* It makes it easy to build the provincial power company so as to promote independentoperation.

Diladvantages:

* There is no competitive pressure for efficiency.

* It may also be difficult to achieve regional coordination.* The provincial power company may lack adninistrative efficiency due to its large size.

4.2.2 Partial separation model. The company is divided into two parts. One is in chargeof power distribution, and the other, of generation and traiismission.

4.2.2.1 Description of this model:

* To set up an enterprise that is responsible for all generation, transmission coveringseveral provinces (e.g., grid company).

* This generation-transmission enterprise wholesales power to distribution companies.* There are many distribution companies, each of which has a monopoly of supply within

its own territory.

* There can be one or several distribution companies widiin a province.

* Distribution companies are not permitted to engage in the generation of power, or theirright to do so should be strictly limited.

64 Strategic Options for Power Sector Rcform in China

* Distribution companies are responsible for the maintenance of local power network andpower allocation.

* Generation-transmission companies are responsible for providing adequate supplies ofpower and implementing necessary construction of power source and network to meet thedemand for fuel and other energy resource.

* Price proposals are put forward by distribution companies and are subject to regulatoryview and approval.

* Generation-transmission companies are responsible for power dispatch and maintenanceof power plant and network.

* Price proposals put toward by generation-tansmission companies to charge distributioncompanies by wholesaling are subject to regulatory approval.

4.2.2.2 To implement this model, one should:

* Build the distribution companies into a certain model with highest efficiency.* Transfer responsibility for allocating power to distribution companies.* Amalgamate existing generation and transmission facilities to create an integrated

company.a Establish a set of regulations to meet the requirements of this model.

- Establish new regulatory authorities.

4.2.2.3 Advantages and disadvantages of this model:

Advantages: It could

= Achieve good regional coordination.* Eliminate local interference.

* Introduce competition to distribution companies to achieve easy transition of enterpriseorganizational structure.

- Make power prices more likely to reflect costs.

Disadvantages:

* Generation-transmission companies may be too big to manage efficiently.* Competition is not introduced to generation-transmission companies.4.2.3 Central purchasing body model4.2.3.1 Description* Set up an integrated transmission company covering several provinces.

* Set up dozens of distribution companies, each of which has a monopoly of supply withinits own territory.

* Each province can have one or several distribution companies.* Distribution companies are not permitted to engage in power generation plants

administration, or their right to do so is strictly limited.* There can be many power generation companies.* Transmission companies are responsible for power dispatch. They purchase power from

power generation companies and sell power to distribution companies. The rights andobligations of both power purchasing sides are defined in the form of contracts.

Annex 4: Interim Report ol Task Force One 65

* Generation companies are not regulated. They are responsible for selling power totransmission companies by fulfilling their contract and operating power plants accordingto industry standards.

* Distribution companies are responsible for power supply within their territory andpurchasing power for their territory From the regional generation and transmissioncompanies by way of contract.

* The network price to be charged to generation companies, power wholesaling pricesproposed by transmission companies and price proposed by distribution companies to becharged to customers are subject to regulatory review and approval.

* The regional transmission company has an obligation to provide adequate supplies ofpower for the region, and also for implementing network construction. It is alsoresponsible for signing contracts with new power generation plants for power purchase,and secure necessary fuel and other power generation resources within the region.

* The regional transmission company is the only body which is permitted to purchasepower from the generation companies within the region. It is responsible for organizingdispatch and maintaining the operation of network.

4.23.2 To implement this model, one should:

* Set up distribution companies (one or several) so as to maintain its most effectiveoperation size.

* Transfer the responsibilities for allocating power to distribution companies.

* Bring together existing transmission facilities to set up an integrated regionaltransmission company.

= Merge existing power plants in each province into several generation companies.* Establish regulations necessary for the new companies' smooth operation.- -Strengthen management of power dispatch within the territory.* Make commercial contracts for power purchase by the regional transmission company.* Improve power wholesaling prices and commercial arrangements.* iEstablish new regulatory authorities.

4.2.3.4 Advantages and disadvantages


* Achieve good regional coordination and obtain benefits of interprovincial network.* Improve independent management and establish a powerful regional transmission

company.* Introduce competition to generation companies.* Make price more likely to reflect costs.

Disadvantages:

* It is difficult to achieve smooth transition of the system, particularly, when powergeneration plants are separated from the network.

* It requires more management personnel.

4.2A Competition model


4.2.4.1 Description

* A single enterprise is responsible for the control of the transmission network which cancover several provinces.

* There are several distribution companies, each of which has a monopoly of supply withinits own territory.

* There may be only one or several distribution companies in each province.* Distribution companies one not permitted to operate power generation plants, or their

right to do so is strictly limited.* There are several generation companies.* Each distribution company may purchase power from any generation company.* Generation companies are not regulated. They are responsible for fulfilling their contract

to supply power and complying with industry standards.* Each distribution company is responsible for satisfying the need for power within its

territory and contracting for the power purchasing from generation enterprises.* Distribution companies organize maintenance of local network and all activities of power

supply, including power allocation.* Transmiission companies are responsible for providing adequate transmission capacity for

the region and preparing necessary equipment for transmission project within the region.* Transmission companies manage dispatch and maintenance of the transnission network.X Prices proposed by generation companies to be charged to distribution companies, prices

proposed by distribution companies to be charged to consumers and transmission priceproposed by transmission companies are subject to regulatory review and approval.

4.2A.2 To implement this model, one should

* Establish one or more efficient distribution companies and transfer power allocatingresponsibilities to distribution companies.

* Merge existing power transmission facilities into a single transmission company.a Separate existing generation facilities from network and group together several new

generation companies.* Establish regulations for this new management model.

* Develop the wholesale market of power purchasing to achieve power dispatch amongdistribution companies within the region.

a Establish new regulatory authorities.

4.2.4.3 Advantages and disadvantages of this model


* Achieve regional transmission coordination and power dispatch within the region.* Introduce competition to all aspects of network.

Disadvantages:

a It requires a more difficult transition to separate generation companies from network andcreate a new power market.

* It requires a great number of management personnel and modern management techniques.


4.2.5 Mixed model

4.2.5.1 Descriptions

Provincial or interprovincial power companies manage and operate network, dispatch andpurchase power from their own key generation companies, from independent powerplants of provincial (or interprovincial stock-holding, stock-participating companies andalso from totally independent power plants established by other investors.

* independently managed generation companies sell power to provincial or interprovincialcompanies via regulations and contract. All generation companies become competitors.

* Provincial or interprovincial power companies manage the distribution companies of thekey cities, practice integrated operation, and have a monopoly over their network ofpower supply.

* County distribution companies manage on their own and have a monopoly over their ownterritory of power supply.

* Distribution companies beyond key cities are under direct management of provincial orinterprovincial power companies. They may also be managed independently by powerwholesaling.

4.2.5.2 To implement this model, one should

* Encourage investors to establish independently managed generation companies anddevelop power market.

* Some power plants of provincial and interprovincial power companies have to qualify forindependent management after being transformed into the joint-stock system.

* In order to maintain the normal operation of power network, provincial andinterprovincial power companies have to control a certain proportion of key power plants

a Separate a majority of county distribution companies from the network and let themmanage their own business independently.

4.25.3 Advantages and disadvantages of this model:


* Provide more options to suit different situations in different regions.* Achieve coordination of the network.

* Ease the present power shortage in China and facilitate the operation of the network.* The structural transformation and commercialized operation of the power enterprises and

introduction of competition into the system all need time so that the obstructions againstthe reform could be diminished to the minimum.

Disadvantages:

* Since distribution companies are sepated from network and have to establish theirpower market, they have to deal with property rights and other economic relations.

* It requires a relatively complete legal guarantee to deal with the relations amongprovincial interprovincial power enterprises, independent generation companies, andindependently operated distribution companies.


5. Advice on These Options

5.1 Advice for three options for power regulatory organizations

* The three options for power regulatory organization when they are ready, should beproposed to organs of state power or central govemment for final decision.

* Taking into consideration Chinese existing system and the need to carry out reform in agradual manner, the second and third models should be given priority.

5.2 Advice on options for structural organization of power enterprises

* Among the five models, the fourth model does not suit Chinese short and mid-termdevelopment targets. The reasons are that this model requires complete transmissionnetwork, modern management system, corresponding law and regulations and sufficientpower supply. It is difficult to establish structural organization suitable to this new marketmechanism and management system.

* There may not be one fixed model that can be applied to all power enterprises, due to thecomplicated situation in China and the diversity of the structure of power enterprises.However, no matter which model is adopted, competition should be introduced so as tostrengthen the coordinating role of the network and achieve higher efficiency.

- With the establishment of socialist market economy, the forms of structural organizationfor power enterprises will not only be different in different regions, but also differentwithin the same network. Therefore, the mixed multi-model will be the major trend of thestructural organization reform for power enterprises in China.

6. Arrangements of System Reform for Power Sector

6.1 The reform mode of power regulatory authorities conformns to the general trend ofdevelopment. The structural organization of power regulatory authority should be accomplishedat a proper time. The main measures should be taken to:

a Establish corresponding regulatory authorities by separating staff and responsibilitiesfrom power sector and also by transfenring some staff from power administrative bureaus.specify their functions and define their rights and responsibilities.

* Establish regulations to be observed by regulatory authorities.* Gradually transfer rights to new regulatory authorities, including issuing licenses and

establishing ruifes and regulations.* Transfer part of the regulatory responsibilities to new regulatory authorities.

6.2 The reform of enterprise organizational structure can choose from among theexisting models in accordance with the specific conditions. Measures that should be taken before1995 are to

* Set up corresponding companies, based on the choice of model.* Transfer responsibilities for power allocation to corresponding companies.* Adopt the method of power purchasing by contract to replace power allocation.* Make it possible to transfer power consuming rights at a certain price to meet the

requirements of power supply in the power market.

* Work out wholesale prices for selling power to corresponding companies.


* Gradually resolve ownership problems based on objective neeob.6.3 Measures should be taken after 1995 are:

* Implement the major reform plan.* Further develop and promote the structural reform of the corporation and commercialized

operation of enterprises.* Complete the regulatory authorities reform and preferred structure of enterprises.

For the Workshop, July 8-10, 1993, Beijing

Members of Task Force One


1. Zhong Fenggi Department of Policy and Head of Institute(Convenor) Legislation of MOEP2 Li Youyong (Writer) Zhejiang Provincial Power Bureau Economist3. Chen Qingda (Writer) Department of Energy of the State Deputy Division Chief

Planning Commission4. XU Huailong Division of Production and Deputy Division Chief

Dispatching of the State Economic& Trade Commission

5. Wu Guihui Division Chief6. Huang Xuenong Department of Production System, Engineer

State Commission For Restructuringthe Economic Systems

7. Lu Pu Deputy Division Chief8. Zhou Yanping Department of Operation of the State Economist

Energy Investment Corpomtion9. Zhang Lijun Energy Institute under the State Deputy Division Chief

Planning Commission10. Qu Shiyuan Deputy Head of Institute11. Peng Fangchun Associate Researcher

Annex 5 Interim Report of Task Force TwoEstablishment of a Legal and Regulatory System

1. Background

Up to now, a China has not established a legal and regulatory system for theelectric power sector. In particular, no basic law has been established for power management. Butrules and regulations are established with reference to different legal resources from othercountries. China also has a lot of administrative documents and documents on laws andregulations that meet all the requirements for electric power in a planned economy. They includeregulations for

a Electric power development (long- and medium-term strategic planning and annualplanning and approval for power; proposals and approval of projects; managementplanning during construction).

* Construction management of electric power projects (bids of construction parties, signingand approval of contracts for projects, requirements and approval of designs at diffen. itstages, standards for buildings and quality management of projects).

* Funding and relevant policies for new projects and technical reform projects.* Use of foreign funds.* Electric power production (management and economic-technical policies for power

generation, transmission, and distribution; regulations for safety in power production;quality requirements; and supervision and all kinds of econornic policies).

* Electric power allocation and use (principles of electric power allocation, supervision ofall levels of government for power allocation and use, and economizing on the use ofelectiriity).

* Protection of power facilities.

2. Existing Problems

2.1 Inseparable relations between administation and enterprises.

2.2 Multisectoral administation.

23 Existing laws and regulations are mostly shaped by the past-the model of theplanned economy under a centralized administration. They thus do not reflect the needs ofChina's present socialist market economy.

2.4 Existing laws and regulations have limited effect due to the low legislative rankand lack of legal responsibilities.

25 There is no law to abide by, and even when there is law it is ignored.

Reform objectives for legal institutions. To create a new electricity law and withthis law, to set up a whole set of regulations and details for their implementation in order toestablish a legal system for electric power industry, to suit the laws of other countries, and to meet

71


the needs of the socialist market economy so that they can help achieve healthy operation andsmooth development of the power industry.

3. Basic Needs

3.1 The framework of electric power laws and regulations must be simplified.

3.2 The electric power laws and regulations must comport with and link up withother laws and regulations of the state.

3.3 The system of electric power laws and regulations must be clear at differentlevels and must be compatible with and complementary to regulations at different levels.

34 Distinct and practical operational regulations should be defined, along with theelectric power laws and regulations. They should reflect the following requirements:

* Strict separation of govemmental responsibilities from operational functions ofenterprises (especially separation of administrative and managerial functions andseparation of ownership from management).

* Authorities of government at different levels must be clearly defined and separated.Authorities of different departments in governments at the same level should also beclearly defined and separated.

* All work of the electric power administration should be relatively centralized inadministrative departments. According to the framework of electric power industryadministration discussed by Task Force One the administration of the electric powerindustry (such as issuing licenses, price management, strategic planning, and submissionof projects for approval) should be centralized with the regulatory authorities or withcorresponding committees of the electric power industry.

* The approval procedure of the electric power develop nent plan and projects should besimplified as much as possible.

3.5 The new electricity law system should protect all the self-operating rights and thecommercialized and corporatized operational mechanism of electric power enterprises. Goals:

* Clearly specify the authorities, obligations, and legal rights for electric power enterprisesso that when they operate act ,rding to law and regulations, they will not be interferedwith by the government and cther parEes.

* Governments at all levels should be prohibited from imposing extra charges or other feesexcept as authorized by national statutes.

3.6 The new electricity law should reduce barriers to the Qperation of a socialistmarket economy duiing transition from the old to the new economic system:

* Remove barriers against non-state-owned sector (including the private sector) investnentin new power generation plants and electric power construction.

* Permit limited participation in operation and management of electric power enteprises.* Permit "market forces" to porticipate and influence the operation of electric power

enterprises (e.g., permitting limited market supply and demand regulation, introducinglimited competition into electric power market vhile establishing regulations for price-setting).

Annex 5: Interim Report of Task Force Two 73

4. Options for Establishment of Electricity Law

4.1 There should be one set of laws and regulations to regulate the economy of theelectric power sector. The following options may be implemented:

4.1.1 Option 1: Establish an electricity law to replace all existing law, regulations,administrative documents, and other relevant documents.

Advantages:

* A new set of electric power laws may be established.

* Present confusion in legislation may be eliminated.* Overlapping and redundancy of all existing regulations may be eliminated.* The establishment of the electricity law may ensure consistency with principles of

socialist market economy.* It may also increase legislation efficiency to meet the requirements of market system in

shorter time.Disadvantages:

e TBe electricity law imposes a threatening pressure on transforming the existing law andregulations, and the transition will be achieved with difficulty.

4X1.2 Option 2: Gradually revise existing regulations and laws.

Advantages:

* Pressure and barriers m-ay be reduced or removed.* Continuity can be maintained.

Disadvantages:

* Enormous work and time-consuming.* It is difficult to eliminate unreasonable factors in the existing regulations when revising

the regulations.

* It is extremely difficult to keep the completeness and rationality of the new regulationswhile revising the old ones.

4.1.3 Option 3:

* l^,Establish and enact new electricity law and its auxiliary regulations, details, andimplementation methods.

* Eliminate old rules and regulations after new regulations have been put into practice.Advantages:

* This option may help establish a comprehensive legislative system for the electric powersector.

* It may reflect he needs of market mechanisms to a greater degree.* It may transfer old regulations to the new laws and regulations with greater ease.

Disadvantages-

* The existing regulations would function for an indefinite period-

* It is difficult to maintain consistency of the of old and new regulations when they coexist.


5. Proposal for the Establishment of a Legal System

5.1 Option 3 is the proposed to be adopted, but during its implementation, one shouldtry one's best to eliminate the contradiction between the old and new regulations. One should alsoanticipate all kinds of problems and barriers that may appear and maintain the authorities of thenew regulations.

52 Requirements for the new system of regulations:

5.2.1 The new power regulation system should define the structural organization of theregulatory authorities selected by Task Force One. The definitions include:

* Authority of the government and its corresponding responsibilities and obligations.

* Separation of responsibilities and regulatory tasks of government entities for the powerindustry's administration.

* Separation of responsibilities between national power regulatory authorities (orcorresponding authorities) and provincial power regulatory authorities (or correspondingauthorities); separation of responsibilities for power industry administration of allgovemmental departments at the same level.

* The form of structural organization of power regulatory authorities (or correspondingauthorities).

* Policy making procedure and policy implementing channels of regulatory authorities (orcorresponding authorities).

* Rights and obligations of power enterprises (companies).

* Introduction of market mechanism with regulatory forces for power enterprisesadministration (such as reducing restrictions on investment by the private sector andrelieving control over prices, etc.).

5.2.2 The new regulation system should clearly define the structural organization, theoperating mechanism, and the necessary self-operating rights of the power enterprises selected byTask Force Three.

* Qualifications of power enterprises and corresponding legal approval procedure.* Regulations of license-issuance system and corresponding legal procedure.* Structural framework of power enterprises and corresponding responsibilities, rights, and

obligations (different models of power generation enterprises, transmission enterprises,distribution enterprises, generation-transmission-distribution complex enterprises, andtheir corresponding responsibilities).

* Service obligations and service requirements for power enterprises.* Intemal organization and the operation mechanism of the power enterprise (referring

mainly to the composition of its leading board, its roles and responsibilities;responsibilities, rights, and obligations of enterprise managers, etc.).

* Relations between various kinds of enterprises and adoption of economic contracts todeal with such relations.

* Regulations for relations between power enterprises and consumers and for strictprotection of their interests.


5.2.3 The new power regulation system should clearly define all responsibilities forfunding enterprises according to the option selected by Task Force Three.

* Types of funding for power projects (including stock, credit donation, subsidies, privateinvestment, government investment, etc.).

* Types of investment for power projects (independent fund, corporate fund, fund by joint-ventures, etc.).

* Legal status of investors and their rights and obligations in a power enterprise.5.2.4 The "new law on electric power" and its auxiliary regulations should removebarriers against power enterprises so that they can adopt a market mechanism during their reformn.

5.2.4.1 Regulations for reducing barriers against private investment

* Rights and obligations of private investors should be clearly defined in the new ElectricPower Law and its auxiliary regulations (including power regulations and all otherrelevant regulations). These rights and obligations of private investors may includeadministrative procedures of the govemment public notary of contract and price-setting.

* Regulations about how private investors conduct their investment and how theyparticipate the management of power enterprises. Procedures of projects establishmentand procedures of negotiation (including procedures for negotiation with relevantgovemrnmental departments).

* Requirements for environment protection and obtaining licenses should also be defined,including conditions set up by the govemrnmental sectors.

* lReliability and authority of the contract should be clearly defined. Mediation proceduresshould be perfected to settle the disputes during the implementation of the contract.Arbitration of regulatory authorities and interference of other authorities should bestrengthened, when there are disputes over contract, to protect the interests of privateinvestors.

* tRegulations for commonly used agreement documents (such as power purchasing, fuelsupply and network connection, etc.) between provincial power companies and private-projects.

5.2.4.2 Reducing barriers against the introduction of competition. The new electricpower regulations and auxiliary rules should take steps to introduce competition.

They include:

* The Electricity Power Law and its auxiliary regulations should define new powerconstruction projects to introduce competition. Implementation procedures and standardsshould also be clearly specified.

* Government organizations are responsible for collecting and exchanging various kinds ofinformation that may encourage competition in the power industry.

5.2A.3 Removing barriers against price reform and implementation of the reform. TheLaw on Electric Power and its auxiliary regulations should clearly define that power allocationshould be gradually eliminated and replaced by contracts according to the situation of powersupply. These kind of contact rights should be transferable. Power supply in the new power loadshould be pmvided according to contracts in order to ensure the safe return on the service cost.


5.2.5 The new electric power regulation system should define types of power prices,including classified power price, two-price system, favorable prices (for special social strata suchas the disabled and those who need special care).

The new law should also define the principle of power price-setting, its method,price approval system, regulations on price revision and readjustment.

5.2.6 The Law on Electric Power should also clearly define the various kinds of legalresponsibilities for the violation of laws and regulations (including administrative, civil, andcriminal responsibilities).

6. Arrangements for Setting up an Electric Power Regulatory System

6.1 To organize a small but able, highly efficient, and long-term group to work on theelectric regulatory system, responsible for drafting and revising the regulations. The group shouldinclude the following personnel:

* Legal experts* Experts on electric power technology and specialists on the management of e;ectric

power enterprises* Fnmancial and accounting experts.62 Is goals will include studying and establishing the framework of the law andregulation system, the work of which includes:

* The most fundamental part of the Law on Electric Power and other relevant articles onelectric power available in all other state laws.

* Various specialized articles on electric power management approved and issued by theState Council.

* Sector regulations and local statutes.* Details or methods to implement various specialized articles on electric power

management.6.3 Begin to draft the new law and in the meantime, choose a portion of specializedregulations on electric power management that are urgently needed at the moment to be draftedtogether with the new law. Some of these regulations can be submitted and approved prior to theapproval of the new law. Needed specialized regulations on electric power management include:

* Management regulations on the price of electric power* Power investment law or investment management relations

* Regulatory law on power industry or regulatory rmies* Management regulations on power supply and use* Protection regulations on electric power facilities (already issued by in need of revision).6A The working group on drafting the Law on Electric Power should organizemanpower to translate and study foreign law and regulations, to lean from the advancedexperience on law enforcement and to improve the quality of our own law and regulations onelectric power.

6-5 Work Schedule


6.5.1 Specialized management regulations in need, as listed above, should be approvedand promulgated by late 1995.

6.5.2 The Law on Electric Power should be approved and promulgated by late 1996.

6.5.3 A relatively complete system of electric power law should be set up by the year2000.


Members of Task Force Two

Naame Affiliation Title1. Zhou Zhongnan Ministry of Energy Senior Consultant(Convenor)2 Ren Hua (Writer) Department of Policy and Lawyer/Economist

Legislation of MOE3. Hu Yaoguo (Writer) Central China Electric Power Lawyer/Economist

Administration4. Gu Zhengxing Department of Energy of the State Deputy Division Chief

Planning Commission5. Wu Guihui Division of Production and Division Chief


6. Guo Dong Department of Operation of the State Deputy Division ChiefEnergy Investment Corporation

7. Wu Zhonghu Energy Institute under the State Associate ResearcherPlanning Commission

Annex 6 Interim Report of Task Force ThreeCommercialization and Corporatization

1. Background

1.1 Before the commencement of refonrs in the power sector, central planningenabled the government to control production, marketing, sale, procurement of materials,personnel, and financing of enterprises controlled, regulated, and administered by thegovernment. A typical management system incorporated administration and enterprise functionsin a single organization. Enterprise income thus was remitted to the government, and enterpriseexpenditures had to be cleared by the government. Personnel and wages were controlled by thegovernment. In short, production and operation were done according to state planning.

12 In the early 1980s, the government stopped making appropriations from thecentral budget for financing construction and began to provide funds on a loan basis. In 1985, theState Council issued "Tentative Stidpulations on Encouraging Fund-raising for Power Constructionand Implementing Multi-rate Tariff." The monopoly of power investment by the centralgovemment was changed to a multichannel model. Meanwhile, the Huaneng International PowerDevelopment Corporation and Xinli Power Company and energy investment companies were setup. Thus, the sole-investor model was changed to multi-investor model at the state level.

1.3 The tariff system has also been reformed. The major points are as follows:

The tariff for the electricity generated from power plants built by funds raised throughvarious channels (e.g., Huaneng, Xinli and other joint-venture companies) is priced andverified on the basis of real cost, tax, plus a reasonable profit. There might be a certainprofit after repayment of capital and interests.The escalation of coal prices and transportation charges will increase operational costs,and the tariff will now rise accordingly. Comprehensive power tariffs are beingimplemented in some provinces (municipalities and autonomous regions).

1 A In the early 19 0s, power enterprises implemented in succession "EnterpriseFunds" and "Retained Profits," the first and second stages of -Profit Submission Transformedinto Tax," system. Since 1988, power enterprises have implemented the responsibility system, bywhich enterprises can retain their operating surplus if they "turned over the prescribed profit,completed technical innovation tasks, electricity sales and materials consumption linked with thetotal amount of payroll." This reform has strengthened enterprise management and the sense ofeconomic efficiency, and to some extent it has given enterprises more incentives. But themanagemrent model of "unified revenue and expenditure" remains unchanged.

15 For internal enterprise management according to "Enterprise Law," the "ManagerResponsibility System" has been implemented. Since 1992, the "Regulations of ConvertingManagement Mechanism of the State-owned Industrial Enterprises" have been implemented topush forward the reform in the labor, wage, and personnel systems of power enterprises.

1.6 The new "General Rules on Enterprise Finance" and "Enterprise AccountingStandards" were issued by the State and were put into effect in July 1993 to conform tointemational standards.

79


2. Problems During the Reform of Power Enterprises

2.1 Administration and enterprises are too closely interrelated. At present, powerenterprises are essentially government-affiliated agencies, and government interferes in themexcessively.

2.2 The ownership of power enterprises is not clearly defined. There are stillproblems about who owns the power enterprises and who represents the main body of ownership.

23 Enterprises have inadequate autonomy and low operational efficiency.

2.4 The electricity tariff is distorted. Power enterprises lose their initiative foraccumulation and development because of heavy taxation and low depreciation.

3. Objectives of Power Enterprise Reform

3.1 The primary objective is to establish a mechanism for managing powerenterprises that is suitable both to the socialist market economic system and to die need for powerenterprises to become self-operating, self-financing,, self-developing, and self-constrainedaccording to relevant regulations. The enterprises must also become independent enterprise legalpersons and play a major role in market competition. Three key goals arc as follows:

* To accelerate sectoral development and remedy the extreme electricity shortage.D To enhance the operational efficiency of power enterprises.* To provide customers with adequate and reliable electricity at a reasonable price.

4. Power Enterpuise Reform Options

4.1 Commercialization of enterprise operation. Power enterprises enjoy independentlegal-person status and are self-operating, self-financing,, self-developing and self-constrained.The basic principles are to adapt to market requirements and to initiate profitable production andcommercialized operation. Power enterprises should aim at higher capital operation efficiency.

At present, power enterprises are ready to implement two important regulations.One is the International Financing Accounting Principle (GAAP). The other is implementation ofthe granting of the decisionmaking power in 14 areas to enterprises stipulated by the Regulationsof Converting Management mechanism of the state-owned Industrial Enterprises. The Ministry ofElectric Power will work out detailed rules to implement the "Regulations" according to theprinciples of separation of administration and enterprises, separation of operation and ownership,and market economy. Power enterprises should use their operational autonomy according to theRegulations to assist the reform. Key aspects of commercialization are to set up its operationalobjectives, establish an operational autonomy mechanism, and make contracts of responsibility.

4.1.t Setting up operational objectives of commercialization

4.1.1.1 Separate administration and enterprise for related organizational reform and legalregulation are covered in the reports by Task Forces One and Two.

4.1.1.2 Strictly separate noncommerci. lized social objectives from commercializedoperational objectives. Noncomnnercialized social objectives refer to two points:

* Noncommercialized social objectives within power enterprises (such as hospitals,housing, canteen, nursery, etc.)

Annex 6: Interim Report of Task Force Three 81

* Noncommercialized social objectives beyond power enterprises (such as levying lowpower tariff in poverty areas, electricity supply for agriculture, electricity supply forproducts used to aid agriculture, electricity supply for relieving disasters, etc.)

The two noncommercial social objectives require measures to:

* Clearly define the scopes and content of noncommercialized social objectives.* Ensure funding to achieve these objectives and the losses for power enterprises.

* Separate nonoperational assets from power enterprises and establish service-providingcompanies with independent accounting, which make contracts of responsibilities withenterprises. These companies provide service to the public and can charge for theirservice. They enjoy operation autonomy and are self-financing.

* Power enterprises make contracts of responsibility with the government to achieve non-commercialized social objectives. The government should promise to compensate for theexpenses and loss of power enterprises.

4.1.1.3 Develop multiform and corporatized operation. The main business anddiversified operations should have separate and independent accounting in that they haveindependent commercial interests and economic responsibilities. Competition should beintroduced to the main industry and diversified economy to avoid overlapping suibsidies.

4.1.2 Establishing a mechanism for operational autonomy requires the following steps:

* Grant enterprises the legal-person rights to manage capital. Make full use of regulationsand accomplish corporatization to obtain operational autonomy.

* Perfect the management and board of directors system. The board should separateadministration from enterprises. Govemment should not interfere in routine operations.

* sBreak up internal accounting units, establish an independent financial reporting andinternal responsibility system, and give enterprises autonomy, including personnelmanagement, employment and wages, intemal organization, prize distribution, retentionof capital allocations, goods and material procurement, and refusing apportion rights.

4.1.3 Set up a contract responsibility system to replace administrative intervention withcontracts between power enterprises and the govemment. As to the monopolistic industry, thebest option at present is to replace competitive pressure with contract pressure.

4.1.3.1 Control of quality standards. Power enterprises are responsible for providingsufficient, qualified, reliable power at a reasonable price. At present, the priority should be givento increasing the reliability of power supply.

4.1.3.2 Tariff policy should:

* Reflect cost and profits and revaluate assets with accuracy and establish depreciationprinciples. Tariff should also follow international accounting standards and provideaccurate accounting information to regulators and owners.

* Establish reasonable power tariff-fixing principles. Long-term marginal cost method andlong-term average cost method are recommended to fix power tariff.

* Power tariff structure adopts no discrimination principles to customers (equal bases).4.1.3.3 Cost control will involve control of capital, invesrment, and operational costs.

4.2 Corporatization of enterprises


4.2.1 Power enterprises will be transformcd to companies, and implement companylegal person system. Enterprises will be transformed to companies according to the CorporationsLaw which is about to be issued. Hence power enterprises will become legal person withindependent civil rights and civil obligation.

4.2.2 Power enterprises can be either limited liability company or limited stockcompany. Corporations will be established by law and get legal person qualification by law.

4.2.3 Any department or agency authorized by the government to conduct investment,any legal person, individual, or foreign investor can become an investor or shareholder in a powercompany. Regional power company groups, provincial power companies, and distributioncompanies, should be subject to shareholding implemented by delegated agencies of the state-owned assets administration. The state can hold joint or non-joint shares in generation. Otherlegal persons or foreign investors can hold shares, joint shares, or own solely with foreign funds.

4.2A The key to corporation reforrn is to identify ownership and operation relations:

* Implement financial accounting system to comply with international standards andreassess capital and assets according to capital funding system. Ownership must beclarified, and legal ownership must be established. Define share ownership of allinvestment parties and establish share ownership structure of power companies.

e Define the ownership of the existing assets.

* General principle: Separate equity investment and loans. Equity investors can have theownership and draw profits without capital and interest repayment, while lenders canhave creditors' rights and get back their loans and interest until the maturity of loans. Butthey do not have the ownership and do not draw profits.

4.2A.2 Separate enterprise from govemment administration. First, government shouldchange its functions, reduce direct intervention of power enterprises. On the other hand, powerenterprises no longer have the government function. Therefore the relationship betweengovemment and power enterprises will be changed from administrative to contract relationship.

4.2A.3 Separate the right of mnanagement and ownership. The assets of power companieswill follow the principle of separation of management and ownership. Power companiesimplement the operation right and have the responsibility for assets balance and promotingincrease by regulations.

5. Proposals and Suggestions for Corporatiation and Commercialization

5.1 In 1993, the Ministry of Electric Power and other comprehensive economicsectors jointly issued detailed implementing rules of the "Regulations."

5.2 An international accounting system was adopted on July 1, 1993.

5.3 New power tariff catalogue and power tariffs with capital and interest repaymenthave been in force since the second half of 1993. By June 1993, Tentative Power TariffManagement Rules (Draft) was finished; it wiU be approved by the State Council to implement in1994. The power tariff will be able to reflect its cost around 1996.

5A Assets check, assets revaluation, and ownership issues are to be resolved in 1994.

5.5 Separation of noncommercial social objectives from commercial-operationalobjectives will be finished in 1994.

Annex 6: Interim Report of Task Force Three 83

5.6 Pilot establishment of Limited Liability Companies and Stock Company limitedwill start during 1993-94, and commercial transformation will be accomplished gradually by then.

5.7 Separation of government administration from enterprises and corporatization ofenterprises will be finished around 1997.

For the Workshop, July 8-10, 1993. Beijing

Members of Task Force Three

Name Affiliation Title1. Ye Rongsi (Convenor) Department of Policy and Deputy Director

Legislation of MOE2 Yan Hongxun (Writer) Deputy Division Chief3. Yang Mingzhou Central China Electric Power Economist(Writer) Administnaion4. Gu Zhengxing Department of Energy of the State Deputy Division Chief

Planning Commission5. Huang Xuenong Division of Production and Division Chief


6. Lu Pu Department of Production System, Deputy Division ChiefState Commission For Restructuringthe Economic Systems

7. Zhong Yanping Economist8. Chen Yueming Department of Industrial Division Chief

Transportation of MOF9. Chen Zongfa Economist10. Gan Shixuan Department of Planning of the State Division Chief

Energy Investment Corporation11. Lan Guohua Department of Fmance of the State Division Chief

Energy Investment Corporation12. Qu Shiyuan Energy Institute under the State Deputy Head of Institute

Planning Commission13. Yang Zhirong Researcher

Annex 7 Interim Report of Task Force FourOptions for Power Industry Financing in China

1. Background

1.1 In the period before reform and opening of China to the outside world (1949-79),the power sector operated on the system of "total reimbursement and total appropriation." That is,all investments in the sector came from direct government allocation, and the net income of thepower sector had to be turned over to central and local governments' treasuries in the form ofprofit and taxes. Because the power tariff set by the government was very low for a long time,reimbursement of the power sector to the state was more than the state's appropriation so that thepower sector was in serious shortage of construction capital. This limited the development of thepower industry.

1.2 After reform and opening to the outside world (i.e., since 1979), governmentappropriations were changed to government loans. The government also adopted a number ofpolicies to obtain diversified financial resources and to encourage joint financing for powerdevelopment. A few power investment companies and power development companies such as'¶Huaneng" and "Xinli" were established for the purpose of utilizing foreign funds. Thesepolicies achieved great success in promoting the development of the power industry. Majormeasures included the following:

1.2.2 In 1980, government appropriations for budgets were changed to governmentloans. The use of capital would be repayable with a maturity of 15 years at 3.6 percent interest.

[.2.2 Since 1981, China has pursued an oil-to-coal conversion policy and established aspecial fund for this purpose. This fund was to be used to convert oil-fired power plants to coal-fired power plants or to build new hydropower plants.

1.2.3 In 1983, the government published fund-raising regulations for energy,transportation construction, which stipulate that any funds beyond budget from all enterprises andlocal governments shall be levied to an amount equal 10 percent (later increased to 15 percent),and all theses funds were to be submitted to the Ministry of Finance and allocated according tothe state plan, partly for power development.

1.2.4 In 1985, the govemment began to encourage local govemments and electricitvusers to participate in po-wer financing in two ways: (a) to invest directly and (b) to buy the rightof power consumption quota (i.e., if you use more electricity, you should pay more).

1.2-5 In 1987, the govemment started to issue power construction bonds.

1.2.6 In 1987, the State Council approved "Regulation for Levying Power ConstructionFunds" stipulating that a surcharge of 2¢IkWh would be collected from all except agicultural andresidential consumers, with the money to be used by local governments for power construction.

1.2.7 In 1991, pilot projects setting up s:ock companies for power industry wereinitiated. A few enterprises have tried issuing internal shares and a few have tried marketingbonds for power construction.

85


1.2.8 Government also set up a special energy conservation fund to provide loans forrehabilitation of power facilities with significant benefits in energy conservation .

1.2.9 In addition to the above measures, power enterprises could also obtain loans frombanks and financial institutions. The amount of the loan would be arranged by the government.Besides, when appropriations were changed to loans, a small appropriation was still given tosupport the construction of small projects and some preparatory work.

1.3 Since the implementation of reform and opening to the outside world, the use offoreign funds has been gradually expanded, and the domestic investment system has beenreformed. The various ways of foreign fund utilization include:

1.3.1 The utilization of export credit and the associated favorable government andcommercial loans.

1.3.2 Sino-foreign joint ventures to construct power plants.

1.3.3 Sino-foreign joint cooperation to operate power plants.

1.3.4 Utilization of loans from international financial institutions such as World Bankand the Asian Development Bank.

1.3.5 Utilization of loans from foreign Consortia such as Kuwait, Arabian economicDevelopment Fund, Belgium Consortium, and Jordan Consortium.

1.3.6 Utilization of loans form foreign governments, such as Overseas EconomicCooperation Fund of Japan, mixed loans from French government, Italian govemment, Austriangovemment, and Spanish government.

1.3.7 Lease practice.

1.3.8 Barter trade with the former Soviet Union to purchase power equipment.

: A During the reform of power sector in China, a number of measures were adoptedto attract investment while maintaining relatively stable power tariffs. In order to ensure aproject's capability to repay power construction capital, a few measures were taken, such aspermitting the fixing of power prices according to the principal and interest of loans, andpermitting utilization of pretax profit and 70 to 80 percent of the basic depreciation fund to repaydebt. Since 1986, part of the product tax can also be used to repay debt

2. Existing Problems

2.1 The financial market in China is far from perfect. All funding channels andconstruction funds have to be approved and allocated by the government. Administrativeinterference is excessive, and investment for power projects cannot be made in a timely way.

22 Equity investment is not separated from loans. Loans are regarded as rights andinterests, and investors demand the repayment of principal, property ownership, and rights to getpower and profits, making power property ownership rather unclear.

23 Lack of equity fund. Since power companies do not own capital, and the stateoperational fund has been changed to loans, along with the power construction fund, newconstruction projects have to depend solely on loans. This is inconsistent writh tlie fundingprinciples of the market economy, for operational fund and power construction fund should beused as equity capital.


2.4 The maturities of loans are too short. Except that operational and constructionfunds enjoy long maturities and low interest rates, most power investment resources belong toloans and bonds, which are too costly with short maturities and high interest rates. This does notsuit the power industry, which is characterized by capital concentration and durable equipment.

2.5 The power cooperation and power groups lack investment capability. As thesystem of total reimbursement and total appropriation has not been thoroughly abolished, and thepower tariff for plants constructed by national operational funds and central government loans isset on the basic principle of loan repayment, the power enterprises lack self-developingcapabilities.

2.6 The approval procedures for power construction projects are too complex.Government overexerts its power in the various phases of project development, such as projectplanning, preliminary design, cost estimation, and equipment selection, thus prolonging theconstruction cycle.

2.7 It is difficult to implement reasonable plans. Driven by power shortages andregional interests, each province or city would like to construct power facilities within its ownregion. This often results in the unreasonable location of power plants and the building ofuneconomicaHly small plants (small hydropower and thermal plants).

2.8 The multiple tariff scheme results in unfair and unreasonable competition,complex power tariff and confused administration. The levy of construction funds as well as thelevy of various taxes by local governments in the electricity bill put a heavy burden on customers.

2.9 The assets of the power sector have not been reassessed. The depreciation rate israther low, and depreciation funds are too limited. Besides, these depreciation funds may not beused to expand production.

3. Objectives

To begin by establishing a system with socialist market economy and to regardmarket as the basic form for resource allocation. Upon considering the possible options for therestructuring of the power sector and its regulations, evaluate altemative funding practices byboth the domestic and foreign power industry in urder to identify and select the most promisingand vigorous reform options, and ensure power enterprises a priority position for fund-raising sothat they can raise funds independently. In fund-raising by power enterprises, the focus should beon raising domestic capital, with foreign funds used as a necessary supplement. Accumulation ofdebt should be avoided as much as possible so as to guarantee that the needs of the developmentof our national economy and the increasing needs of the people for power supply are met

4. Options for Fund-raising

4.1 A precondition for independent fund-raising by China's power enterprises iscomprehensive reform of the domestic financial and tax system, banking system, and investmentsystemL This will help to establish an environment in which power enterprises can accumulatefunds according to market requirements and principles. The following steps must be taken:

4.1.1 Separate government functions from enterprise management; corporatize andcommerciaLze power enterprises.


4.1.2 Promulgate a "power sector investment law" as early as possible to ensure powerconstruction funding according to law.

4.1.3 Establish reasonable power tariff system and rationalize and adjust power tariff tocomply with value principle.

4.1.4 Reduce tax burden, increase profits, strengthen enterprises' capabilities for self-development and self-transformation.

4.1.5 Clearly define property ownership, separate ownership from management, andtum over state power capital to powet companies for management.

4.1.6 Reevaluate the capital of power enterprises and increase depreciation rate.

42 Clearly define capital ownership and publicize financial information of powerindustry according to the General Rules for Enterprise Finance and Enterprise AccountingStandard acknowledged by the international society; set up objectives of financial operation forthe present management and the future fund-raising of enterprises. Objectives of financialoperation include:

4.2-1 Rate of profit from the capital is 10 to 12 percent after inflation deduction.

4.2.2 Rate of self-capital investment: 35 percent of total investment.

4.2.3 Ratio of repayment: Ratio between annual profit and repayment (i.e., profitbefore interest and tax payments) should be no less than 1.5: 1.

4.2.4 Ratio of long-term debt: in the financial statement equity ratio shnuld be 40 to 35percent; debt ratio (including various kinds of security issued by the company and debt guaranteeprovided by enterprises) should be no more than 60 to 65 percent.

Advantages:

* High operational transparency.

* Enable s enterprise to discover its shortcomings and weak points.

e Finds the best solution and favorable fields for investment in time.

* Enable s enterprises to compare with one another.

* Improves operational quality and service standard.

Disadvantages:

* Poor current financial situation and insufficient financing information for the enterprise.

* Possibility of information interception and distortion.

* Lack of high-quality personnel.

4.3 Loan-borrowing rights and liabilities should be clearly defined in the powercompany charter as an important part of the decisionn:aking power of the enterprise.

Advantages:

* Further improves the operational autonomy and clarify the responsibilities.

* Establishes an independent financial system and increases credibility of the enterprises.

Disadvantages:

Annex 7: Interim Report of Task Force Four U

* As the national banking and investment system have not yet been reformed, it is difficultto take the above-mentioned measures; interference from other related leading sectors inthe govemment is inevitable.

4.4 Raise power tariff to achieve economic pricing as soon as possible.

Advantages:

* Enable s power enterprises to achieve objectives of financial operation.

* Encourages consumers of electricity to economize on power and encourages energy-efficient investment.

* Eases power shortage by way of value principle.

Disadvantages:

* Social pressures.

* Pressures on new regulatory umits.

4.5 While aiming at a gradual establishment of economic pricing, continue withfund-raising which is an effective measure for power construction, increase the 2¢11kWh powertariff to 4ICkWh and collect 2¢ surcharge levied by power enterprises as state capital and invest itonto power constmction. It must be made clear that governments at the provincial level or beloware not permitted to levy power construction funds. This regulation may be eliminated only whenpower tariff becomes economic pricing and equity ratio of an enterprise reaches 35 percent

Advantages:

* Obtains a large capital fund for power enterprises to enhance the development of thepower industry.

* Maintains stable power construction capital resources during the transition ofcommercialization and standardization for fund-raising.

* Increases the fund-raising ration for enterprises to solve the problem of insufficientcapital fund.

* Reduces the unreasonable burdens on power consumers.

Disadvantages:

* Capital management and confusion of equity investennt and loans in the present powerconstraction still exist.

4.6 Authorize power companies(including Huaneng, Xinli Power Group) to raisefund to meet their investment requirements.

Advantages:

* Further improve the operational autonomy and accountability of company management

* Create conspicuous operation characteristics and degree of credibility.

* Reduce Central Govemment's financial burden.

* Simplify managemnent and improve efficiency.

a Eliminate the current failure to classify correctly equity and debt

4.7 Pennit power companies to issue securities, including shares and bonds.


Advantages:

* The dynamic and flexible financial market will provide the power sector with enoughsources of capitals.

* Power industry may become major borrowers of long-term bonds because the long-termbonds could match the stigma of equipment of the power sector.

* Contribute to the development of China's capital and currency markets.

* Reduce the need for foreign loans.

* Gradually reduce dependence on government and contribute to separation of governmentfrom enterprise.

Disadvantages:

* Face challenges and pressures of how to regulate new security markets.

* Undeveloped information and transmission system are unable to meet the needs ofsecurity market development.

* Securities clearing and settlements system are far from perfect.

* Lack of experience in transparent and consistent financial reporting and analysis.

Securities to be adopted include:

4.7.1 Shares can be utilized in both individual power project and in the whole of apower company. Cumulative Redeemable Preference shares, company staff shares could also beinsured. Foreign currency shares can be issued abroad(i.e. shares).

4.7.2 Bonds: 6 types

* Commercial papers, short-term promissory notes (with maturities of 90, 120, and 180days).

* Fixed Rate Bonds.- Floating Rate Bonds.

- CPI-Indexed Bonds.

a Bonds that can be exchanged to shares.* Bonds with warrants to acquire new bonds issued at a later date at a higher coupon.

4.8 Establish a credible secondary market with all types of securities, and for powersupply contracts after the approval by govemment authorities.

Advantages:* Reduce the resistance against investors to purchase securities.* Enable power consumers who are in bad need of power to obtain sufficient power supply

from power market.Disadvantages:

* Some energy-inefficient consumers will be affected.49 Loans from international financing organizations (including World Bank, AsianDevelopment Bank) and government loans and commercial loans, and joint capital funding canbe utilized to compensate for the domestic capital shortage.


Restrict foreign currency borrowing to financing of projects, which can either directly generatesufficient foreign currency to service the corresponding liability, or which enable the entireforeign exchange risk to be shifted to the power users (such as charging foreign currency tousers).

Advantages:

* Reduce foreign debt and no longer be afraid that foreign currency reserve and foreigndebt repayment ability will be weakened.

* Establish rules and regulations to construct power projects by using foreign fund andassess the true cost of power projects.

* Minimize the company's risk of using foreign fund.

Disadvantages:

* The Govermment may interfere with an enterprise's managerial autonomy in utilizingforeign fund.

* Limit the size and scope of foreign fund utilization.4.10 Establish Credit Bank of China (CBC) to be responsible for loans of keyconstruction and fundamental facilities for power sector. Its capital mainly comes fromoperational fund provided by financial sector, postal savings, social protection fund surplus andgovemnent-guaranteed bonds, etc. Consideration to be given to inviting the World Band Groupto form a stable association with Credit Bank of China so as to obtain necessary support from theWorld Bank and other agencies.

Advantages:

* Provides long-term, low investment loan to huge power projects, particularly hugehydropower station, long-distance. inter-regional, extra-high voltage transmission lineprojects, so as to suit the long-term huge construction projects.

a Improve the fund-raising capability and channels of the power sector in international anddomestic financial market.

* With the participation of the World Bank, identify the promises of the World Bank andChinese Govemment through the

* Intemational Financing Cooperation (IFC), and send a very* Positive signal to both potential borrowers and domestic, intemational depositors and

creditors, based on the promises* Train financing and banking experts so that they can compete with others in domestic and

intemational marketDisadvantages:

* It is difficult to obtain enough capital, since postal savings accounts have just beenopened in China, the social protection system is far from perfect, and capital surplus is farfrom enough.

* Lack of high quality human resources. At present, the Bank of Construction is sbort oftechnical experts while energy investment companies are short of financial personnel.

* There will be fierce competition of capital and human resources of a provincial CreditBank is to be established.


4.11 Establish provincial specialist long-term credit banks (or establish China long-term Credit Bank Branch in each province, city, and autonomous region).

Advantages:

* Concentrate the long-term credit capital within each province to finance key projectsconstruction.

* Establishing a provincial credit bank means less risk than setting up branches. By doingthis, one bring the initiative of the region into full play.

Disadvantages:

* Lack sufficient capital resources.

* There will be competition of capital and human resources of the provincial credit bankmay be established together with the national one.

4.12 Transfer the loan offered by public power sector to the Bank of Construction toLong-term Credit Bank of China.

Advantages:

* Centralized management of basic facilities loans can increase project managementefficiency and improve the financing operation.

Disadvantages;

e Such transfer could burden the Long-term Credit Bank of China with heavy loans. Afterthe transfer, some poorly operated projects will become its heavy burden.

4.13 Shares of power companies could be listed on Hong Kong stock exchange, evenon London, New York, and Tokyo and other international stock exchanges, with the approval ofthe Stae Council.

4.14 Adopt BOT (Build-Operate-Transfer), BOOT (Build-On Operate-Transfer) tobuild power plants.

Advantages:* They can accelerate the construction of power projects.

* The adoption would not affect the loan burden of China.

Disadvantages:

* Since the project investors arrange loans and purchase equipment, there is insufficientcompetitive bids. Therefore, construction costs will be higher than domestic projectinvestment.

* There may appear inappropriate debt amortization.

a Heavy tariff may be needed to cover the debt.* Inadequate maintenance of facilities after the transfer.

4.15 Adopt BOO (Build-Own-Operate) to build power station.

Advantages:

* It can provide extra capital resources for power construction

* It can attract international experts' technical management, which is an important methodof management technology transfer

* rime can be saved, and cost can be reduced.


* It can provide regulations, standards of operation, and service for domestic powerindustry.

* It can establish a more transparent and more stable system to attract foreign investment.* Power enterprises enjoy full autonomy, thus restricting the interference of government.

Disadvantages:* Investors require greater autonomy concerning capital return. Therefore they may

demand greater power tariff than regulators are willing to accept.* Investors are after the maximum profits, and therefore are likely to conflict with business

policies and rational distribution of power industry.* Investors seek commercial interests and they are not interested in economic development

of the state.* The government may have to make compromises with investors including promising non-

intervention and non-nationalization of the power plant ownership and operation.* The government could only regulate or influence through policies and regulations, since

it does not hold stocks.4.16 Restrict BOT, BOOT, and BOO modes to cogeneration plants.

Advantages:

* It can use the energy resources more efficiently.Disadvantages:

* This restricts the widespread application of BOT, BOOT, and BOO modes.

4.17 Revaluate the fixed assets of power industry, gradually raise depreciation ratesand increase depreciation fund. Raise the depreciation rates of the old units on a large scale so asto secure enough funds for rehabilitation of the old units. Depreciation fund can be used to build,expand and transform power projects.

Advantages:

C It provides more construction fund for power enterprises.

* It prevents the loss of state-owned assets.* It accelerates the transforrnation of medium and low-voltage units, improves power

equipment level, and economizes on the use of energy.

Disadvantages:

* It increases the power cost

4.18 The ownership of the state-owned assets still belongs to the State. But the powercompanies have legal status and operating autonomy. Some key projects with national andstrategic importance (such as the Three Gorges, Longtan Hydropower Station, and large pit-mouth thermal power plants) would be operated by specific state companies. The normal powerprojects would be operated by regional power company groups or provincial power companies.Power companies would use the profits or dividends from the state-owned projects forreinvestnent after paying taxes to assure the value and (increase in value) appreciation of thestate-owned assets.

Advantages:

* It brings profits of enterprise operation.


d It enables power companies to have enough capital.

Disadvantages:* The government may have difficulties regulating the power companies as they have too

much power.4.19 Make full use of loans from domestic banks (including People's Bank of China,Bank of Construction, Bank of Agriculture, and other commercial banks).

Advantages:

* It can increase loan resources for power industry.* Compared to using foreign loans, there will be no risk from the fluctuating foreign

exchange rate.Disadvantages:

* Loans provided by domestic banks would be insufficient.* Compared to other industries, the loan-bearing capacity of power enterprises is poor.

4.20 After the approval of the government, some power plants can be sold to domesticand foreign enterprises and the capital returned could be used in new power projects. Somepower plants may also be mortgaged for raising loans.

Advantages:

* It can create more capital resources for power enterprises.* It can improve the equipment for public power facilities.

Disadvantages:

a There exists the problem of reasonable assessment. Low price will cause great loss of thestate-owned assets.

* If energy consumption cannot be reduced, old units should rather be discarded.4.21 The World Bank, the Ministry of Finance and Ministry of Electric PowerIndustry jointly organize seminars or workshops (for example, once every two years) in powersector financing to introduce international financing techniques and improve the fund raisingcapability of the Chinese power sector.

Advantages:

* It creates a more effective way for training fund-raising, and financing personnel.e It improves financial management of China's power industry.* It improves the financing structure of China's power industry.* aLreduces the financing cost of China's power industry.

Disadvantages:

a It is difficult to secure the capital needed to hold seminars and workshops.

5. Proposals for Fund-raising

After the commercialization and corporatization of power enterprises, doniinating status in fund-raising for the power enterprises should be established and fund-raising channels should beexpanded and multiplied.

5.1 Economic price.


5.1.1 Raise power price to achieve reasonable economic price so that power enterprisescan raise sufficient funds internally to finance new power projects and to comply with the capitalratio set by international practice (i.e., capital funding no less than 35 percent).

5.1.2 Gradually achieve economic power price. Meanwhile continue the practice ofcollecting power construction funds by raising 2-cent kwh surcharge to 4-cent kwh. The newsurcharge will be invested in power enterprises as government capital. The surcharge will beabolished when the power tariffs achieve the self-funding objectives.

5.13 Regulation taxes for power enterprises should be abolished. Other taxes, such asturnover tax on products (tariff rates to be set reasonably) and income tax, should be reduced.

5.2 Commercialized and corporatized financing.

5.2.1 Reassessment of assets and adoption of GAAP.

5.2.2 Financing of power enterprises.

* Issuing shares* Getting loans from banks and other channels

* Issuing bonds.5.2.3 Adopt Accounting Principles acknowledged by the intemational community toestablish the following basic financial objectives in power enterprises:

- The after-inflation profit rate of capital should reach 10 to 12 percent.

* Self-funding rate: Self-funding capital should account for 35 percent of the total capital.* hlMaximum debt rate: in the balance sheet of power enterprises, the capital fund (equity)

should be 40 to 35 percent, whereas debt (including enterprise debts and guaranteeoffered by enterprise) should be no more than 60 to 65 percent.

53 Domestic fund raising.

Domestic fund raising methods of the power sector must comply with the reform of the statefinancial and investment system. Considering the great shortage of power capital active measuresmust be taken to raise as much power construction fund as possible, apart from increasing powerenterprises self-funding capital.

5.3.1 Bond-issuing:

Conditions permitting, such bonds can be adopted as commercial paper, short-term, fixed rate bonds, secure bonds, bonds transferable to shares. Long-term secure bondsshould be adjusted every half a year or every fiscal year to ensure a rate higher than the domesticconsumption price index. While issuing bonds, new credit can be raised to repay old debts.

5.3.2 Long-term Investment and financial funding: explore the possibility ofestablishing new financial organizations to provide long-term loans for basic industries based onthe joint reform of the financial and investment systers and existing industrial finance channels.

5.3.3 Stock-holding can adopt three types:

5.3.3.1 Type 1:

State-owned power enterprises have to be transformed into some kind of stockholding companyltd. Those transformed into joint-stock companies ltd. which could issue shares to the generalpublic and attract private investment.

53.3.2 Type 2:


Organize and establish new joint stock power companies for launching, newpower projects. Either let state-owned power companies hold shares of the company and attractprivate individual or private capital to invest in a power company ltd. or issue bonds to the publicand establish s joint stock power company limited.

5.3.3.3 Type 3:

Give permission to establish stock company limited whose shares are held byprivate individuals or private capital. These companies independently funded power producers,may also issue shares to the general public.

Of4the above 3 types, stock companies ltd. may issue shares to domestic orintemational financial market (including Hong Kong, New York, London) with the approval ofthe related govemment departments.

A secondary market for power purchasing contract and power securities may beestablished after the approval of relevant govermment sectors.

5.4 Fund-raising abroad.

5.4.1 Capital stock: All measures should be taken to encourage foreign investment inundertaking solely foreign-funded or jointly funded power projects on purely commercial non-subsidized basis.

All foreign capital stock investments to adopt competitive bidding. They can alsoadopt BOT, BOOT, and BOO for power projects (the latter are more attractive than the former).

5.4.2 Debts:

The power industry should get its loans first from domestic market. If domesticcapital is not enough, foreign capital can be used, but with care. Foreign capital can be first usedin the regions that can pay back foreign capital loans in principal and interest. Power industrymay charge power users foreign currency, who have foreign exchange in their income.

While utilizing foreign capital loans, give the priority to favorable loans frominternational financial organizations (such as the World Bank, the Asian Development Bank, theIntemational Financial Company and the joint financing in the expanded joint financing items ofthe World Bank) or from friendly governments. If the above loans still can not meet the needs, ifconditions permit, the power sector should select the best export credit and commercial loansthrough bidding. In order to attract foreign loans, the Chinese Government should take measuresto reduce non-commercial risks for foreign loaners.

5.5 Fund-raising for key power projects of strategic importance.

For key power projects with national and strategic importance (such as ThreeGorges Hydropower Station, Longtan Hydropower Station, etc.), establish specific state-ownedpower companies to be in charge of fund-raising, construction, ownership, and operation.

6. Short-term Targets

6.1 Evaluation of assets in pilot power enterprises is in progress and will becompleted in 1994. Revaluation of assets depends on the progress of share system. It willcommence in some enterprises in 1993 on trial basis.

62 Implement and adopt Enterprise Finance General Principles and EnterpriseAccounting Standards on July, 1,1993-


63 Implement the 1992 regulations issued by the State Council on industrialenterprises owned by the state transferring their operation autonomy, so as to enable powerenterprises to obtain investment autonomy.

6A Achieve reasonable economic price by the end of 1995. Meanwhile stop levying2-cent kwh surcharge as power construction fund. Property ownership of power plants before thisshould be clearly defined and the right and interest of investors should be protected.

65 Establish Long-term Credit Bank of C.'ina (LTCBC) and start operation in 1995.


Members of Task Force Four


1. Zhu Chengzhang Department of Policy and Deputy Director(Convenor) Legislation of MOE

2 Xue Jiazhang (Writer) Department of Economic Regulation Deputy Division Chiefof MOE

3. Gan Shixuan (Writer) Department of Planning of the State Division ChiefEnergy Investment Corporation

4. Zhang Shitong North China Electric Power Deputy Division ChiefAdministration

5. Xu Huailong Department of Energy of the State Deputy Division ChiefPlanning Commission

6. Wu Guihui Division of Production and Division ChiefDispatching of the State Economic& Trade Comrnission

7. Chen Yueming Department of Industrial Division ChiefTransportation of MOF

8. Chen Zongfa Economist

9. Zhou Dadi Energy Institute under the State Deputy Head of InstitutePlanning Commission

10. Wu Zhonghu Associate Researcher

I1. Zhang Qingmin Department of Planning of the State Deputy Division ChiefEnergy Investment Corporation

Annex 8 Observations and Recommendationsfrom the Study Tours

Currently in China, people have many misconceptions about the power sector. These include thefollowing:

a People do not recognize "electricity" as a commodity; rather, they emphasize its specialfeatures and its nature as a public utility. Such thinking has hindered the rationalization ofpower tariffs and the fornulation of power markets.

b. The government should have a "macro-regulatory" relationship with the enterprises: itshould not manage all the details. The govemment should use sector policy as means formacro-control and use laws and regulations to govern the behavior of enterprises;enterprises, in turn, should maximize their profits under government macro-control.

c. The establishment of a reasonable price system is a precondition to moving the powerindustry onto a market basis. It is also an important pillar of the new sectoral structure.

d. The establishment of a comprehensive and scientific legal system is crucial to creating anhospitable environment for the development of the power industry. In the future, thegovernment should use legal means to guide, protect, and promote power sector reform;its should significantly reduce its role as an admninistrator of the system.

Study Tour to the United Kingdom and France

Observations

The basis of the U.K. reform is to introduce competition and to strengthen market regulation.Such a structure requires the following conditions:

* A reasonable pricing mechanism

* Power markets and detailed market operation rules and regulations

a Supply that is greater than demand

* Well-established information processing system

* A weli-established legal system.

China's current situation does not permit it to copy the competitive U.K. model in itsentirety. At the same time, the contrasting national monopoly model in France is also notappropriate, as the Chinese power system is already characterized by multiple players.

The current reform trend in China is that power generation, transmission, and distributiondo not have to be controlled by one company; they can be separated as appropriate.

Potential Approaches for China

Potential approaches that nnght work in China are as follows:


a. The state-controlled provincial power companies have a monopoly over the provincialgrid; they also operates peaking power plants and municipal distribution grids in order tomaintain the stable operation of the grid and to strengthen grid construction.

b. The county power distribution companies could be separated to increase their viability.Power plants should be incorporated as independent profit centers, thus introducingcompetition in generation.

c. Power pooling should be introduced and tried in China. Currently in China, serious powershortages and seasonal overcapacity coexist; efficient units have lower load factors thaninefficient units, and construction of the power grid lags behind constiuction of powersources. These are arguments for trying power pooling regionally in China.

d. The Chinese power industry should be commercialized gradually, and the powercompanies should enter the intemational capital market to absorb foreign capital directly.

Study Tour to the United States

Observations

Although the power industry in the United States is in a highly developed state (adequatecapacity, modem equipment and technology), with which China can not compare, the UnitedStates can provide experience and practice from which China can learn. The principalobservations and recommendations are summarized below.

Potential Approaches for China

The main points of relevance to the Chinese situation are as follows:

a. State, collective, and private ownership coexist in the U.S. power industry. Each type ofentity can survive and seems to operate reasonable efficiently. Two factors make thispossible: (1) all entities (state, collective, or private) are corporatized and have fullautonomy to manage their behavior; (2) each entity is under pressure from neighboringcompetitors to mninimize its supply cost.

b. Government should be separated from enterprise management as soon as possible inorder to revitalize big power enterprises. Governmental functions should be taken out ofthe provincial power company. The power company should be commercialized and havefull autonomy to operate independently.

c. In United States the government's regulatory control over the power sector isconcentrated in one authority. In China, too many agencies have authority over the powerindustry. Planning, investment, construction, and pricing must be approved by multipleagencies, and the approval procedure is long and time consuming. This practice shouldnot be continued : instead, a single regulatory authority should be established.

d. Considering the size and geographic distribution of the U.S. industry structure, the two-level regulatory system in seems to be reasonable. The division of functions between theFederal and State authorities seems to be reasonable and operable. China's size andpower industry structure are similar to those of the United States, and the U.S. regulatorysystem might be more applicable to China.

Annex 8: Observations and Recommendations from the Study Tours 101

e. Power pools are very effective means to reduce reserve capacity, increase systemreliability, and improve service. Power pools could be organized in different forms(tightly integrated or loosely connected) depending on needs. But pools should beformed on voluntary basis, and the participants should have differences in theirgeneration features (such fuel type, unit characteristics) and demand curves (daily,monthly etc.). The pool practice should be tlied in China.

f. Bidding for new generation is rhe best way to gel the cheapest additional supply. Thepractice of paying for capacity cost and energy cost separately would promote economicdispatchinig. When conditions mature, China should adopt such practices.

g. A reasonable and scientific pricing system should established. One the one hand, thepricing system should protect consumers' interests against monopoly, on the other, itshould be flexible enough to adjust as conditions change. It should be simple, clear,transparent, and easy to implement.

h. Above all, a comprehensive legal system should be established to deepen power sectorreform The current work force on lawmaking should be strengthened, and its progressshould be accelerated.

Study Tour to Australia

Observations

Before reforn, Australia's power sector had many similarities with the current Chinese powersector: (1) it comprised mainly state-owned enterprises, with a lack of separation of governmentfrom the enterprises; (2) most states had vertically integrated industry structures, a few stateelectricity commissions owned power generation and transmission, and local govemments owneddistribution; (3) there was no competition in generation and distribution sectors. But there arealso many distinctive features: (1) The Australian federal government is not involved in powerconstruction and operation, does not own the assets, and cedes all responsibilities to state andlocal govemments; (2) the Australian power industry has a commercialized tariff that reflectssupply costs, and the tariff is relatively low due to low fuel price; (3) power generation andtransmission technologies are advanced and equipment is of high quality; (4) with advancedmanagement, Australian productivity is high, and only a few staff were released during thereform; (5) grid integration is weak, and most grids are formed within a territory; (6) the socialsecurity system is well-established and provides a good extemal environment.

Pnotential Approaches for China

Taking the above distinctive features into account, the reform experiences of Australia are a goodreference for China but cannot be copied directly. Taking China's specific conditions intoconsideration, the following proposals are presented:

a Formulate a "state power industry reform strategy." The study conducted with theWorld Bank, "Options for Power Sector Reform in China," could be a good basis forformulating a state power industry reform strategy. The Australian "State PowerStrategy" can also serve as good reference for China

b. Deepen recognition of the importance of power sector reform. The various agencies inChina have recognized the importance of power sector reform, but power sector reform is


behind oLher sector reforms. Especially regarding separation of government fromenterprise, commerciolization, and corporatization, the power sector is seriously affectedby the traditional planning economy ideology. It should be realized that power sector isnot a money-losing sector-it is a sector capable of generating enormous profit and ofcontributing to social development.

Australia's "State Power Strategy" cicarly defines the importance of the power industry:

a. It is the largest setor in the country.

b. Power price advantage is important, it indirectly reflects the competitiveness of goods fordomestic consumption and exports.

C. In an environment with intense competition, Australia should achieve its biggestadvantage in the power sector.

d. Although each state has taken preliminary reform stcps, the full benefit of reform can beachieved only when the state governments, power sector, and consumers work together.

Adopt Multiple Models

China is a large country, and its economic and power sector development differ significantly fromprovince to province. Each province should adopt reforms based on actual conditions. In eastemprovinces, more advanced strategies could be adopted, whereas in the poorer western provinces,the traditional vertically integrated structure might be more appropriate.

The direction of China's power sector reform is to separate government from enterprisemanagement, commercialize and corporatize power enterpnses, and establish a comprehensivelegal framework.

China has a serious power shortage, and grid integration is weak. The mechanism forcommercialization has not been established, and the degree of automation for power dispatch islow. Conditions do not allow competition even at the generation level. Internationally, there is nosuccessful experience to introduce competition at the distribution level. In New South Wales andQueensland, Australia, the distribution sector has been commercialized and corporatized fordecades, but no plan to introduce competition has been introduced yet. Especially in China, wherethe power grids in urban and rural areas are very weak, it is not appropriate to introducecompetition. Thus, competition in generation and distribution should be considered in a late stage.

During the cutrent reform, the following issuez should be solved first:

a The key issue for the success of the current reform is to accelerate the separation ofgovernment from enterprise management. Once govemment administration is trulyseparated from enterprise management, power enterprises can be corporatized andcommercially operated.

b. Speed up the commercialized operation of the power industry. Even before reform, thepower industry in Australia was commercialized; thus, corporatization is easier. In China,though most provincial power bureaus have been named as power companies, they are farfrom real companies and are not operating on a basis at all. The key to comnmercializedoperation is tariff reform. Thus tariff reform is the precondition for all other reforms.

Annex 8: Observations and Recommendations from the Study Tours 103

c. Strengthen lawmaking. In order to ensure the healthy development of power sectorreform, law making has to be strengthened. During the Australian reform process, largeamount of preparation work was to formulate the necessary '.tws. In 1992, "State PowerStrategy" was prepared, and many laws and regulations were promulgated thereafter.

d. Study the establishment of regulatory authority. In the long term, competition will beintroduced into the power sector. Hence, government macro-regulation has to bestrengthened after separation of government from enterprise management. Australia'sfederal government plans to establish a State Power Industry Committee, with theregulatory authorities at the state level. In China, the central govemrnent owns a largeamount of the assets in the power industry. Thus, the manner in which regulatoryagencies should be established needs further study.

e. Strengthen propaganda and try to get the maximum participation by various governmentagencies, enterprises, and consumers.

Power sector reform needs the support of various central government agencies, localgovernments, power enterprises, and consumers. Australia's "State Power Strategy" indicates thatmany players will have key roles in power sector reform. Thus, the basic development policy is tolisten to the opinions of all those concerned. The draft strategy was distributed to all agencies andpeople concerned in order to get maximum participation and support by the whole society.

Study Tour to New Zealand

Re,fom Study Should Be Strengthened and Reform Plans Developed Rapidly

New Zealand's reform experience indicates that a special expert group should be organized toundertake investigation and study prior to reform. Then reform plan can be drawn according todomestic political, economic, and social conditions. The plan will be implemented gradually,after review and approval by the State.

Reform Should Be Implemented According to the Domestic Situation

China's present power industry has many similarities with that of New Zealand prior to itsreforn, such as state monopoiy, lack of separation of govermment from enterprise, undevelopedcapital markets, and power supply bureaus owning some plants. But New Zealand has many morefavorable conditions, such as basically commerr ialized power companies, slow demand growthand adequate capacity, well-developed social security system and legal framework, so theenvironment for reform is better. Also the reform would raise prductivity, lower supply costsand power tariffs, and increase taxes and dividends for the govemment. Thus, reform issupported both by the government and consumers. In China, the general tariff has to be increased,and demand can not be met fully during reform. Thus, China should be more careful aboutreforTn. Also issues arising from reform in generation, transmission, and distribution require moreattention. We should also note that New Zealand is slowing reform in introducing competitionand privatization.

State Ownership Should Be Treated with Caution

In New Zealund, the generation and transmission assets ake owned by the State. During reform,the government plans to use 50 percent as state equity and 50 percent as loan, and would like the


loan to be paid back within three years. As the capital market is not well-developed, the target isnot likely to be achieved. The assets of the power supply bureau belong to the power commissionand municipal power bureau; the ownership of the former is unclear, however. The municipalpower bureaus belong to municipal governments. After five years of dispute, the assets of thepower commission have been awarded to consumers, voters, local govemments, and taxpayers.This shows that ownership is a big issue.

The Legal Framework for Sector Reform Should Be Strengthened

New Zealand has a well-established legal framework. In order to promote reform, China's legalframework should be strengthened.

Joint UNDPIWurld BankENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP)

LIST OF REPORTS ON COMPLETED ACTIVITIES

Region/Country Activity/Repor Title Date Nummber

SUB-SAHARAN AFRICA (AFR)

Africa Regional Anglophone Africa Household Energy Workshop (English) 07188 085/88Regional Power Seminar on Reducing Electric Power System

Losses in Africa (English) 08188 087/88Institutional Evaluation of EGL (English) 02189 098/89Biomass Mapping Regional Workshops (English - Out of Print) 05189 --Francophone Household Energy Workshop (French) 08189 103/89Interafrican Electrical Engineering College: Proposals for Short-

and Long-Term Development (English) 03/90 112/90Biomass Assessment and Mapping (English - Out of Print) 03/90 --

Angola Energy Assessment (English and Portuguese) 05/89 4708-ANGPower Rehabilitation and Technical Assistance (English) 10/91 142/91

Benin Energy Assessment (English and French) 06/85 5222-BENBotswana Energy Assessment (English) 09/84 499S-BT

Pump Electrification Prefeasibility Study (English) 01/86 047/86Review of Electricity Service Connection Policy (English) 07187 071187Tuli Block Farms Electrification Study (English) 07/87 072/87Household Energy isues Study (English - Out of Print) 02/88 -

Urban Household Energy Strategy Study (English) 05/91 132/91Burkina Faso Energy Assessment (English and French) 01/86 5730-BUR

Technical Assistance Program (English) 03/86 052186Urban Household Energy Strategy Study (English and French) 06/91 134/91

Burundi Energy Assessment (English) 06/82 3778-BUPetroleum Supply Managernent (English) 01/84 012/84Status Report (English and French) 02/84 011/84Presentation of Energy Projects for the Fourth Five-Year Plan

(1983-1987) (English and French) 05/85 036/85Improved Charcoal Cookstove Strategy (English and French) 09/85 042/85Peat Utilization Project (English) 11/85 046/85Energy Assessment (English and French) 01/92 9215-BU

Cape Verde Energy Assessment (English and Portuguese) 08/84 5073-CVHousehold Energy Strategy Study (English) 02/90 110/90

Central AfricanRepublic Energy Assessement (French) 08/92 9898-CAR

Chad Elements of Strategy for Urban Household EnergyThe Case of N'djamena (French) 12/93 160/94

Comoros Energy Assessment (English and French) 01/88 7104-COMCongo Energy Assessment (English) 01/88 6420-COB

Power Development Plan (English and French) 03/90 106190Cote d'Ivoire Energy Assessment (English and French) 04/85 5250-IVC

Improved Biomass Utilization (English and French) 04/87 069/87Power System Efficiency Smdy (Out of Print) 12/87 -

Power Sector Efficiency Study (French) 02/92 140/91

RegionICounry ActvitylReponl Ttle Date Number

Ethiopia Energy Assessment (English) 07/84 4741-ETPower System Efficiency Study (English) 1085 045185Agricultural Residue Briquetting Pilot Project (English) 12/86 062186Bagasse Study (English) 12/86 063186Cooking Efficiency Project (English) 12/87 --

Gabon Energy Assessment (English) 07/88 6915-GAThe Gambia Energy Assessment (English) 11/83 4743-GM

Solar Water Heating Retrofit Project (English) 02/85 030/85Solar Photovoltaic Applications (English) 03(85 032/85Petroleum Supply Management Assistanoc (English) 04/85 035185

Ghana Energy Assessment (English) 11/86 6234-GHEnergy Rationalization in the Industrial Sector (English) 06/88 084188Sawmill Residues Utilization Study (English) 11/88 074J87Industrial Energy Efficiency (English) 11/92 148/92

Guinea Energy Assessment (Out of Print) 11/86 6137-GUIHousehold Energy Strategy (English and French) 01(94 163194

Guinea-Bissau Energy Assessment (English and Portuguese) 08184 5083 -GUBRecommended Technical Assistance Projects (English &

Portuguese) 04/85 033/85Management Options for the Electric Power and Water Supply

Subsectors (English) 02(90 100/90Power and Water Institutional Restructuring (French) 04(9l 118/91

Kenya Energy Assessment (English) 05(82 3800-KEPower System Efficiency Study (English) 03184 014/84Status Report (English) 05/84 016/84Coal Conversion Action Plan (English - Out of Print) 02187 -

Solar Water Heating Study (English) 02187 066/87Pen-Urban Woodfuel Development (English) 10(87 076/87Power Master Plan (English - Out of Print) 11/87 -

Lesotho Energy Assessment (English) 01/84 4676-LSOLiberia Energy Assessment (English) 12(84 5279-LBR

Reconmmended Technical Assistance Projects (English) 06/85 038/85Power System Efficiency Study (English) 12/87 081187

Madagascar Energy Assessment (English) 01/87 5700-MAGPower System Efficiency Study (English and French) 12/87 075187

Malawi Energy Assessment (English) 08/82 3903-MALTechnical Assistance to Improve the Efficiencyr of Fuelwood

Use in the Tobacco Industry (English) 11/83 009183Status Report (English) 01/84 013184

Mali Energy Assessment (English and French) 11/91 8423-MLUHousehold Energy Strategy (English and French) 03/92 147192

Islamic Republicof Mauitania Energy Assessment (English and French) 04/85 5224-MAU

Household Energy Strategy Study (English and French) 07/90 123/90Mauritius Energy Assessment (English) 12/81 3510-MAS

Status Report (English) 10/83 008f83Power System Efficiency Audit (English) 05/87 070/87Bagasse Power Potential (English) 10/87 077/87

-3-

Re&gio/Coune" Activity/Reponl lit! Date Number

Mozambique Energy Assessment (English) 01187 6128-MOZHousehold Electricity Utilization Study (English) 03/90 113/90

Namibia Energy Assessment (English) 03)93 11320-NAMNiger Energy Assessment (Fnrnch) 05184 4642-NIR

Status Report (English and French) 02)86 051/86Improved Stoves Project (English and French) 12187 080/87Household Energy Conservation and Substitution (English

and French) 01/88 082/88Nigeria Energy Assessment (English) 08/83 4440-UNI

Energy Assessment (English) 07/93 11672-UNIRwanda Energy Assessment (English) 06/82 3779-RW

Energy Assessment (English and French) 07/91 8017-RWStatus Report (English and French) 05/84 017/84Improved Charcoal Cookstove Strty (English and reach) 08/86 059/86Improved Charcoal Production Techniques (English and Frnch) 02187 065/87Commealization of Improved Charcoa Stoves and Carbonizaton

Techniques Mid-Term Progress Report (English and French) 12191 141/91SADCC SADCC Regional Sector Regional Capacity-Building Progam

for Energy Surveys and Policy Analysis (English) 11191 -

Sao Tomeand Principe Energy Asssmet (English) 10t85 58034WI

Senegal Energy Assessment (English) 07/83 4182-SEStatus Report (English and French) 10/84 025/84Industrial Energy Conservation Study (Engish) 05/85 037/85Preparatory Assistance for Donor Meeting (English and French) 04/86 056/86Urban Household Energ Strtegy (English) 02/89 096189Industrial Energy Conservation Program 05194 165/94

Seydcheles Energy Assessment (English) 01184 4693-SEYElectic Power System Efficiency Study (Eglish) 08/84 021184

Sierra Leone Energy Assessment (English) 10/87 6597-SLSomalia Energy Asesment (English) 12/85 5796-SOSudan Management Assismace to the Ministry of Energy and Minig 05/83 003183

Energy Assessment (English) 07183 451 1-SUPower System Efficiency Study (English) 06184 018/84Status Report (English) 11/84 026/84Wood Energy/Forestry Feasibility (English - Out of Prim) 07/87 073/87

Swazland EneWr Assessment (English) 02/87 6262-SWTanzania Energy Assessment (English) 11184 4969-TA

Pei-Urban Woodfiels Feasibility Smdy (English) O8f88 086/88Tobacco Cuing Efficiency Study (English) 05189 102/89Remote Sensing and Mapping of Woodlands (English) 06f90 -

Inustrial Energy Efficiency Technical Assistance(ngish - Out of Print) 08t90 122/90

Togo Energy Assessment (Englih) 06/85 5221-TOWood Recovery in the Nangbeto Lake (English and Frnch) 04/86 055/86Power Efficiency Improvement (Eish and Frch) 12/87 078187

Uganda Energy Assesment (English) 07/83 4453-UGStatus R rt (English) 08/84 020184Institutional Review of the Energy Sector (English) 01185 029185

-4 -

Region/Couwy Actvity/Report r7e Date Number

Energy Efficiency in Tobacco Curing Industry (English) 02/86 049186Uganda Fuelwood/Forestry Feasibility Study (English) 03(86 053186

Power System Efficiency Study (English) 12(88 092/88Energy Efficiency Improvement in the Brick and

Tile Industry (English) 02(89 097/89Tobacco Curing Pilot Project (English - Out of Print) 03/89 UNDP Terminal

ReportZaire Energy Assessment (English) 05/86 5837-ZRZambia Energy Assessment (English) 01/83 4110-ZA

Status Report (English) 08/85 039/85Energy Sector Institutional Review (English) 11/86 060/86Power Subsector Efficiency Study (English) 02189 093/88Energy Surategy Study (English) 02189 094188Urban Household Energy Strategy Study (English) 08/90 121/90

Zimbabwe Energy Assessment (English) 06182 3765-ZNMPower System Efficiency Study (English) 06/83 005183Status Report (English) 08/84 019/84Power Sector Management Assistance Project (English) 04/85 034/85Petrolcum Management Assistance (English) 12f89 109/89Power Sector Management Institution Building

(English - Out of Print) 09189 --

Charcoal Utilization Prefeasibility Study (English) 06190 119/90Integrated Energy Strategy Evaluation (English) 01/92 8768-ZIM

EAST ASIA AND PACIFIC (EAP)

Asia Regional Pacific Household and Rural Energy Seminar (English) 11/90 -

China County-Level Rural Energy Assessments (English) 05/89 101/89Fuelwood Forestry Preinvestment Study (English) 12/89 105/89

Fiji Energy Assessment (English) 06/83 4462-FlIIndonesia Energy Assessment (English) 11/81 3543-IND

Status Report (English) 09/84 022/84Power Generation Efficiency Study (English) 02/86 050/86Energy Efficiency in the Brick, Tiie and

Lime Industries (English) 04187 067/87Diesel Generating Plant Efficiency Study (English) 12188 095188Urban Household Energy Strategy Study (English) 02/90 107/90Biomass Gasifier Preinvestment Study Vols. I & I (English) 12/90 124/90

Lao PDR Urban Electricity Demand Assessment Study (English) 03/93 154/93Malaysia Sabah Power System Efficiency Study (English) 03/87 068/87

Gas Utilization Study (English) 09/91 9645-MAMyanmar Energy Assessment (English) 06/85 5416-BAPapua New

Guinea Energy Assessment (English) 06182 3882-PNGStatus Report (English) 07/83 006/83Energy Strategy Paper (English - Out of Print) - -Institutional Review in the Energy Sector (English) 10/84 023/84

- 5 -

Region/Country ActivitylReprt Title Date Number

Power Tariff Study (English) 10/84 024/84Philippines Commercial Poicntial for Power Production from

Agricultural Rcsidues (English) 12193 157/93Solomon Islands Energy Assessment (English) 06/83 4404-SOL

Energy Assessment (English) 01/92 979/SOLSouth Pacific Petroleum Transport in the South Pacific (English-Out of Print) 05/86 --Thailand Energy Assessment (English) 09/85 5793-TH

Rural Energy Issues and Options (English - Out of Print) 09/85 044/85Accelerated Dissemination of Improved Stoves and

Charcoal Kilns (English - Out of Print) 09/87 079/87Northeast Region Village Forestry and Woodfuels

Preinvestment Study (English) 02/88 083/88Impact of Lower Oil Prices (English) 08/88 --Coal Development and Utilization Study (English) 10/89 --

Tonga Energy Assessment (English) 06/85 5498-TONVanuatu Energy Assessment (English) 06/85 5577-VAVietnam Rural and Household Energy-Issues and Options (English) 01/94 161/94Western Samoa Energy Assessment (English) 06/85 5497-WSO

SOUTH ASIA (SAS)

Bangladesh Energy Assessment (English) 10182 3873-BDPriority Investment Program 05/83 002/83Status Report (English) 04/84 015/84Power System Efficiency Study (English) 02/85 031/85Small Scale Uses of Gas Prefeasibility Study (English -

(Out of Print) 12/88 --India Opportunities for Commercialization of Nonconventional

Energy Systems (English) 11/88 091188Maharashtra Bagasse Energy Efficiency Project (English) 05/91 120/91Mini-Hydro Development on Irrigation Daams and

Canal Drops Vols. 1, 11 and III (English) 07/91 139/91WindFarm Pre-Investment Study (English) 12/92 150/92Power Sector Reform Seminar 04/94 166/94

Nepal Energy Assessment (English) 08/83 4474-NEPStatus Report (English) 01/85 028/84Energy Efficiency & Fuel Substitution in Industries (English) 06/93 158/93

Pakistan Household Energy Assessment (English - Out of Print) 05/88 -

Assessment of Photovoltaic Programs, Applications, andMarkets (English) 10/89 103/89

Sri Lanka Energy Assessment (English) 05/82 3792-CEPower System Loss Reduction Study (English) 07/83 007/83Status Report (English) 01/84 010/84Industrial Energy Conservation Study (English) 03/86 054/86

- 6 -

Region/Counyt Acivity/Repern 71le Date Number

EUROPE AND CENTRAL ASIA (ECA)

Eastern Europe The Future of Natural Gas in Eastern Europe (English) 08(92 149/92Poland Energy Sector Restructuring Program Vols. I-V (English) 01193 153/93Portugal Energy Assessment (English) 04184 4824-POTurkey Energy Assessment (English) 03183 3877-TU

MIDDLE EAST AND NORTH AFRICA (MNA)

Morocco Energy Assessment (English and French) 03184 4157-MORStatus Report (English and French) 01/86 048186

Syria Energy Assessment (English) 05/86 5822-SYRElectric Power Efficiency Study (English) 09/88 089(88Energy Efficiency Improvement in the Cement Sector (English) 04/89 099(89Energy Efficiency Improvement in the Fertilizer Sector(English) 06/90 l15(90

Tunisia Fuel Substitution (English and French) 03/90 -

Power Efficincny Study (English and French) 02/92 136/9lEncrgy Management Strategy m the Residential and

Tertiary Sectors (English) 04/92 146192Yemen Energy Assessment (English) 12/84 4892-YAR

Energy Investment Priorities (English - Out of Print) 02/87 6376-YARHousehold Energy Strategy Study Phase I (English) 03/91 126/91

LATIN AMERICA AND THE CARIBBEAN (LAC)

LAC Regional Regional Seminar on Electric Power System Loss Reductionin the Caribbean (English) 07189 -

Bolivia Energy Assessment (English) 04/83 4213-BONational Energy Plan (English) 12/87 -

National Energy Plan (Spanish) 08/91 131/91La Paz Private Power Technical Assistance (English) 11/90 111/90Natural Gas Distribution: Economics and Regulation (English) 03/92 125/92Prefeasibility Evaluation Rural Electrification and Demand

Assessment (English and Spanish) 04/91 129/91Private Power Generation and Transmission (English) 01/92 137/91Household Rural Energy Strategy (English and Spanish) 01194 162/94Natural Gas Sector Policies and Issues (English and Spanish) 12193 164/93

Chile Energy Sector Review (English - Out of Print) 08/88 71294CHColombia Energy Strategy Paper (English) 12/86 --Costa Rica Energy Assessment (English and Spanish) 01/84 4655-CR

Recommended Technical Assistance Projects (English) 11/84 027184Forest Residues Utilization Study (English and Spanish) 02/90 108/90

DominicanRepublic Energy Assessment (English) 05/91 8234-DO

Ecuador Energy Assessment (Spanish) 12/85 5865-ECEnergy Strategy Phase I (Spanish) C7/88 -

Energy Strategy (English) 04/91 -

Regioet/Country Activity/Reponl 7Etle Date Number

Ecuador Privatc Minihydropower Developmeni Study (English) 11/92 --Guatemala Issues and Options in (he Energy Sector (English) 09/93 12160-GUHaiti Energy Asscssment (English and French) 06182 3672-HA

Status Rcport (English and French) 08/85 041/85Houschold Energy Strategy (English and French) 12/91 143/91

Honduras Enemgy Assessment (English) 08/87 6476-HOPetroleum Supply Management (English) 03/91 128/91

Jamaica Energy Assessment (English) 04/85 5466-JMPetroleum Procurement, Refining, and

Distribution Study (English) 11/86 061/86Energy Efficiency Building Code Phase I (English-Out of Print) 03/88 -

Energy Efficiency Standards andLabels Phase I (English - Out of Print) 03188 -

Management Information System Phase I (English - Out of Print) 03188 -

Charcoal Production Project (English) 09/88 090/88FIDCO Sawmill Residues Utilization Study (English) 09/88 088/88Energy Sector Strategy and Investment Planning Study (English) 07/92 135/92

Mexico Improved Charcoal Production Within Forest Management forthe State of Veracruz (English and Spanish) 08/91 138/91

Panama Power System Efficiency Study (English - Out of Print) 06/83 004/83Paraguay Energy Assessment (English) 10/84 5145-PA

Recommended Technical Assistance Projects (English-(Out of Print) 09/85 -

Status Report (English and Spanish) 09185 043/85Peru Energy Assessment (English) 01/84 4677-PE

Status Report (English - Out of Print) 08/85 040/85Proposal for a Stove Dissemination Program in

the Sierra (English and Spanish) 02187 064/87Energy Strategy (English and Spanish) 12190 --Study of Energy Taxation and Liberalization

of the Hydrocarbons Sector (English and Spanish) 12/93 159/93Saint Lucia Energy Assessment (English) 09/84 5111-SLUSt. Vincent andthe Grenadines Energy Assessment (English) 09184 5103-STV

Trinidad andTobago Energy Assessment (English - Out of Print) 12(85 5930-TR

Region/Country Activity/Report 7Ttle Date Number

GLOBAL

Energy End Use Efficiency: Research and Strategy(English - Out of Print) 11/89

Guidelines for Utility Customer Management andMetering (English and Spanish) 07/91 -

Women and Energy-A Resource GuideThe International Network: Policies and Experience (English) 04/90 --

Assessment of Personal Computer Models for EnergyPlanning in Developing Countries (English) 10/91

Long-Term Gas Contracts Principles and Applications (English) 02/93 152/93Comparative Behavior of Firms Under Public and Private

Ownership (English) 05/93 155/93

053194

ESMAPdo Industry and Energy DepartmentThe World Bank1818 H Steet, N. W.Washington, D. C 20433U.S. A.

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