China : power sector regulation in a socialist market economy

Iw oRLb EI CIII sdU S S I ON PAdER NO. 361 '\iV D P3 G, I Work in progress for public discussion SOfialltO /11 (1 i//K)/1~~~(//1O/i t1' +' t '''S'l4~~~j i I1S11(1 i/(////)i//g P! dir b I,rI >Sh/ao Shwiarezi 1.,,il,/tnUille flrl- AaotZ ./if/Wpin?g'  Recent World Bank Discussion Papers No. 292 Regutlated Deregulation of the Financial System in Korea. Ismail Dalla and Deena Khatkhate No 293 Design Issuies in Rural Finance. Orlando J Sacay and Bikki K Randhawa No. 294 Financing Health Services Throuigh User Fees and Insuirance. Case Studiesfrom Suib-Saharan Africa. R. 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Edited by Lauritz Holm-Nielsen, Michael Crawford, and Alcyone Saliba No. 326 The East Asian Miracle and Infornation Technology, Strategic Management of Technological Learning. Nagy Hanna, Sandor Boyson, and Shakuntala Gunaratne (Continiied on the inside back cover)  WORLD BANK DISCUSSION PAPER NO. 361 China Power Sector Regulation in a Socialist Market Economy Edited by Shao Shiwei Lu Zhengyong Nourreddine Berrah Bernard Tenenbaum Zhao Jianping The World Bank Washington, D.C.  Copyright K) 1997 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing March 1997 Discussion Papers present results of country analysis or research that are circulated to encourage discussion and comment within the development community. To present these results with the least possible delay, the typescript of this paper has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923, U.S.A. Cover photograph is of Shuikou Hydroelectric Power Plant, Fujian Province, People's Republic of China. ISSN: 0259-210X Shao Shiwei is director and Lu Zhengyong is deputy director of the Policy and Legislation Department, Ministry of Electric Power, Beijing, China. Noureddine Berrah is a senior economist in the Infrastructure Operation Division of the World Bank's China and Mongolia Department. Bernard Tenenbaum is a former power sector regulation specialist in the Bank's Industry and Energy Department. Zhao Jianping is operations officer in the World Bank's Field Office, Beijing, China. Library of Congress Cataloging-in-Publication Data China: power sector regulation in a socialist market economy / edited by Shao Shiwei ... [et al.]. p. cm. - (World Bank discussion papers ; 361) ISBN 0-8213-3913-3 1. Electric utilities-Government policy-China. 2. Electric utilities-China-Management. 3. Electric utilities-China -Finance. 4. Electric power systems-China. 5. World Bank. I. Shao, Shiwei. II. World Bank. III. Series. HD9685.C62C434 1997 333.793'2'0951-dc2l 97-7350 CIP  - iii - CONTENTS Foreword ..........................................................v Abstract ..........................................................vii Preface .......................................................... ix Acknowledgments ......................................................... xi Abbreviations And Acronyms Used ......................................................... xii Executive Summary ......................................................... xiii CHAPTER 1. INTRODUCTION ..........................................................1 Achievements ..........................................................1 Challenges Facing the Power Sector ..........................................................2 Impediments to Sector Reform ..........................................................3 Reform Objectives ..........................................................7 Two Reform Measures to Enhance Efficiency ........................................................9 Regulation of the Power Sector in a Socialist Market Economy ........................... 10 CHAPTER 2. SECTOR STRUCTURE AND REGULATION .................................. 15 Meaning of Sector Structure ......................................................... 15 The New Regulatory System Must Accommodate Different Structures ............... 16 Regulation Will Fail if the Structure Is Flawed ..................................................... 17 The Current Structure of the Power Sector ......................................................... 18 Expected Changes in Structure ......................................................... 18 The Purchasing Agency Model: A Useful Target ................................................. 20 Creating Wholesale Markets: The Role of Power Pools ....................................... 25 The Role of Industry Associations ......................................................... 27 A Potential Structural and Regulatory Problem of the Purchasing Agency Structure ......................................................... 28 What Needs to Be Regulated in this Structure? ..................................................... 29 CHAPTER 3. PROPOSED REGULATORY SYSTEM ............................................. 33 Regulatory Tasks ......................................................... 34 Allocation of Regulatory Tasks ......................................................... 44 Creation of the Regulatory Institutions .......................................................... 46 Internal Structure and Procedures of Power Regulatory Commissions ................. 49 CHAPTER 4. PROPOSED LEGAL FRAMEWORK ................................................ 53 Objectives ......................................................... 53 New Electric Power Law ......................................................... 54 Proposed Use of Legal Instruments ......................................................... 55 Enforcement of Regulatory Decisions ......................................................... 66 Regulatory Process ......................................................... 68  - lv- CHAPTER 5. TARIFF REFORMS ..................................................... 73 Current Tariff System .74 Critique of Existing Tariffs .77 The Need for a Comprehensive Reform of the Pricing System . 81 CHAPTER 6. IMPLEMENTATION OF REGULATORY SYSTEM . 91 Staged Implementation of Reforms . 91 Immediate Reforms . 95 Appendix 1: Design Questions for the Purchasing Agency Model . 97 Appendix 2: Design Issues for New Power Pools . 99 Appendix 3: Expected Power Sector Regulations . 101 Appendix 4: International Case Studies in Power Sector Regulation . 103 TABLES Table 1: Summary of Recommended Reforms .. xxv Table 2: Recommended Implementation Steps .. xxvi Table 2.1: Regulatory Tasks Under the Purchasing Agency Model . 29 Table 3.1: The Vertical Allocation of Regulatory Tasks . 47 Table 4.1: Recommended Use of Legal Instruments . 57 Table 5.1: Summary of Tariff Recommendations . 74 Table 5.2: Tariff Review Process . 90 Table 6.1: Immediate Legal Actions Necessary to Establish Regulatory Framework . 96 Table A4. 1: Key Characteristics of Regulatory Entities . 105 BOXES Box 3.1: Responsibilities Not Assigned to Regulatory Institutions . 45 Box 5.1: Five Basic Power Services . 76 FIGURES Figure 2.1: Purchasing Agency Model . 21 Figure 4.1: Tradeoff Between Stability and Flexibility . 57 Figure 5.1: Current Tariff Structure . 75 Figure 5.2: The Current Producer Tariffs Result in Uneconomic Dispatch . 79 Figure 5.3: Cost Structure of Electricity Delivery . 81 Figure 5.4: Principles for Detennining Bulk Sales Tariffs . 86 Figure 5.5: Capacity Costs . 88 Figure 6.1: Implementation Stages . 92  FOREWORD Since the early 1990s, the World Bank has supported the Chinese Government's efforts to assess power sector reform progress and provide guidance on the direction and implementation of further reforms. As part of that process, the Ministry of Electric Power (MOEP) requested Bank assistance to review the progress of the structural reforms and explore options to adapt the regulatory system to the emerging socialist market economy. The timing of the study was opportune: it took place in 1996 in the wake of the enacting of the "Electricity Law" that provided a solid foundation to deepen reform of the power sector. MOEP took a leading role in conducting the study and preparing this report. It organized one seminar and two one-week working sessions attended by Bank staff and international consultants to discuss issues and options related to the establishment of a regulatory system, discuss working papers and interim reports prepared by Chinese experts and learn from international best practice. MOEP is currently disseminating the recommendations of the study to build consensus among concerned Chinese agencies on transitional steps to accelerate the move from the "heavy-handed" rules of the centrally planned economy to a new regulation of the power sector consistent with the new role and autonomy of diversified power enterprises in a socialist market economy. In publishing this volume we very much hope it proves to be useful to the international community that is interested in recent and future development of the power sector in China. Nicholas C. Hope Director China and Mongolia Department East Asia and Pacific Region   - vii - ABSTRACT This paper discusses issues and explores options related to the reform of the power sector regulatory system in China. It stresses that for the power sector reforms to succeed, regulation must be transformed from old-style command and control to that of "light-handed" supervision of diversified, autonomous, commercially oriented enterprises. Chapter 1 reviews the power sector's current situation and impediments to reform. Chapter 2 examines the relationship between power sector structure and regulation and suggests several structural changes to improve the economic performance of the power sector. Chapter 3 recommends a regulatory system and legal and economic techniques to improve commercial autonomy of power enterprises. Chapter 4 proposes a legal framework for implementing the recommended regulatory system. Chapter 5 presents a brief summary and critique of the current pricing system and recommends acceleration of ongoing reforms to increase the market orientation and economic performance of the sector. Chapter 6 presents a four-stage implementation plan for developing the proposed regulatory system and legal framework over a period of 10 years. Finally, the report presents in Appendix 4, case studies on power sector regulation in India (the state of Orissa), the United Kingdom (England and Wales), Colombia and the United States and highlights the relevance of different aspects of the foreign regulatory and reform experience to the Chinese context.  I  -ix - PREFACE 1993 V X. R M In 1993, the Ministry of Electric Power 99 A , P $ X 14 tt P la t (MOEP) and the Ministry of Finance of the g 11 9 Al f T " iX 04 1 )J People's Republic of China and the World Bank ) 11h A lk g k 4 t iS-"1O successfully undertook a study of the "Strategic YE * A ft k I a T " &