China - Tianhuangping Hydroelectric Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 11428-CiA STAFF APPRAISAL REPORT CHIA TIANUAGPING HyDROELECTRIC PROJECT MARCH 31, 1993 L 7 , T 1- rr . '' ' .{. ;1: Industry and Energy Operations Division China and Mongolia Department East Asia and Pacific Regional Office This document has a resicted disibuton and may be ad by repients only in the perfomance of their official duties Its contens may not oherwse be disdosed witot World Bank authorizatin.  CURRENCY EQUIVALENTS (As of December 31, 1992) Currency = Yuan (Y) Y 1.00 = lOOfen $1.00 = Y 5.8 Y 1.00 = $0.17 WEIGHTS AND MEASURES km = Kilometer (= 0.62 miles) kWh = Kilowatt hour (= 860.42 kcals) GWh = Gigawatt hour (1,000,000 kilowatt hours) TWh = Terawatt hour (1,000,000,000 kilowatt hours) kW = Kilowatt (1,000 watts) MW = Megawatt (1,000 kilowatts) OW = Gigawatt (1 million kilowatts) kV = Kilovolt (1,000 volts) kVA = Kilovolt-ampere (1,000 volt-amperes) MVA = Megavolt-ampere (1,000 kilovolt-amperes) mg = Milligram m3 = Cubic meter tce = tons of standard coal equivalent ABBREVIATIONS AND ACRONYMS USED APPDC - Anhui Provincial Power Development Company BERIWREP - Beijing Economic Research Institute for Water Resources and Electric Power ECEPUC - East China Electric Power United Corporation ECIDI - East China Investigation and Design Institute ECPG - East China Power Grid GNP - Gross National Product HIPDC - Huaneng International Power Development Corporation JPIC - Jiangsu Provincial Investnent Company MOE - Ministry of Energy MOF - Ministry of Finance NEPA - National Environmental Protection Agency SAA - State Audit Administration SBC - Special Board of Consultants SEDC - Sunblast Energy Development Company SEIC - State Energy Investment Corporation SPC - State Planning Commission SPDC - Shenneng Power Development Company TCC - Technical Cooperation Credit THP - Tianhuangping THPCC - Tianhuangping Pumped Storage Project Construction Company ZPPDC - Zhejiang Provincial Power Develoment Company FISCAL YEAR January 1 to December 31  FOR OMCUIL Use ONLY CHINA TIANHUANGPING HYDROELECTRIC PROJECT LOAN AND PROJCT SummARY Bonvwer: People's Republic of China Beneicidry: East China Electric Power Unitd Corporation (ECEPUC) A _mn: $300.0 million equivalen Terms: Twenty years, including a five-yergrace period, at the Bank's standard variable iterest rate. Onlending Terms: The proceeds of the loan would be onlent from the borrower to ECEPUC under a subsidiary loan agreement for a term not to exceed 20 years, Including a five-year grace period, at the Bank's standard variable interest rate. ECEPUC will bear the commitment charges and fidreign exchange risk. Project Objectives and Description: The main objectives of the project are to: (a) alleviate an acute shortage of peaig power and enable more efficient use of power plants in a predominantly coal-fired thermal power system by transferring off-peak energy to peak energy with construction of the cost-effective and environmentaly sound Tinhuangping pumped-storage hydroelectric plant and associated facilities; O) support economic reform and provide an enabling enviroment for attracting foreign investments and promoting private sector development by improving the quality of the power supply and enhancing socioeconomic conditions in the densely populated East China region; (c) improve load management and promote energy consevation by introducing appropriate power pricing; (d) support institutional development of the beneficiary by strengthening its organization through an advanced management and staff training program; (e) contrib to the development of an improved power utlity reutory framework; (f) assist in transfefring new power technologies for what will be the largest pumped-storage hydroelectric plant in Chma, and in applying modem power system operation optimion methods; and (g) extend technical assistance in project design and implementation, and in prmotng prudent financi management. The project consists of: (a) construction of a pumped-storage hydroelectric power plant together with upper and lower reservoirs, a water conveyance system, an underground powerhouse, and a switchyard; (b) provision and insalation of six 300-MW reversible pump-turbine This document has a roestrd dribution and may be used by recipients ony in the petfornance of their offlcial duties Its contents may not othawise be disclosed without World Bank authoriation.  - ii - units nd associaed equipment; (c) erection of 500-kV transmission lines (about 250 km long) and reinforcement of the existing power tmission etwork; (d) constucion management and engineering services; (e) studies of optimal power plant operation and its output pricing; and (f) strenghening of the beneflciary's orgaizaton through the provision of technical asstace and training. Benefits ad Misks: The proposed pumped-torage hydrlectric plant represents the least- cost solution for meeting peaking power demand in the East China power system. Also, through the project, the Bank will be able to support the Government's power subsector policy and furher pursue its sectoral objectives in China. The technical and economic feasibility of the project has been well established. Potential project risks may include delays in implementation due to multiprovincial financing and ECEPUC's lack of experience in managing the construction of similar projects. Necessary precautions and measures will be undertaken to avoid these risks. The project has been designed to comply with aplicable Bank and Chinese standards in order to minimze the environmental impact. An environmental management program will be icluded under the project to prevent and reduce the possibility of deveoping any adverse environmental problems. The project risks, thereore, are considered to be minimal.  - ilii- Estimated Costs: Forei TM - ($ million) Preparatoxy works 19.6 0.0 19.6 7.8 0.0 7.8 Civil works 96.1 10.1 106.2 Metal works 2.9 0.0 2.9 Plant equpment and matrials 27.2 219.9 247.1 Transmission system 14.9 17.4 32.3 Engineering services 18.8 9.4 28.2 Consructon management 16.4 0.0 16.4 Environmental progam 0.6 0.2 0.8 Studies 0.3 0.5 0.8 Thining 0.8 2.1 2.9 IamoSst 7A 2592 45 Contingencies Physical 18.4 13.8 32.2 Price 19.2 29.5 48.7 Tax & dutes 1.4 0.0 1.4 Interet during construction A 103.7 69.3 173.0 Plnmdng Plan: lmd Porei ($ million) StateEergy Investment Copoadon (SEIC) 116.0 23.1 139.1 Shenneng PPower Dervlopment Company MSPDC) 87.0 17.3 104.3 Jiangsu Prvincia Invesantmn Company (JPC) 58.0 11.6 69.6 Zhejiang Provincia Power Dvedopmet Company (ZFPDC) 38.8 7.7 46.5 A" Prvnca Power Deivopment Company (APPDC) 19.3 3.8 23.1 ECEPUC 29.0 5.8 34.8 DB - 300.0 300.0 IDA (trCC)I 2.9 2.9 InItest during constuCion (MDC I based on onlendiag rats for projected disbursements of loan procs. heforeign currecy porion of MDC is based on the Bank's vaiable loan rate. h Second Technic Cooperatin Credk (Cr. 16644CMA).  -iv - FE_at d Dbursements: Bank FY 12924 lI Im 1997 122 1229 2M 2QQ1 2Q) (S million) Annual 33.1 44.1 84.5 76.2 36.0 12.6 6.3 4.5 2.7 Cuulative 33.1 77.2 161.7 237.9 273.9 286.5 292.8 297.3 300.0 Economic Rate of Retun: 23 percent Map: IBRD 24363  .-V. CONTENTS 1 hneElatgSector .................................. 1 A. Overview ..................................... 1 B. Energy Sector Issues .............................. 3 C. Energy Sector Strategy ............................. 5 D. Bank Role in theEnergy Secor ....................... 6 2 ntePower Subsectw ................................ 7 A. Backgrund .................................... 7 B. Instiutions, Reform, Planning and Technology Transfer ....... . 8 C. Power Pricing .................................. 10 D. Subsector Lssues and Stregy ......................... 1o E. Role of the Bank In the Power Subsector . ................. 11 3 he BenefidaT .................................... 13 A. LegalStatusand OrgaizationofECEPUC ................ 13 B. Magement............................... 14 C. Sflig and rnig........................... 14 D. Pbnnng,BudgetgdCotol ....................... 15 B. Accouning .................................... 16 F. Audit ........................................ 17 G. Eectricity Tariffs ................................ 17 B. BiMingandCollections ............................. 18 Ihis eport is based on the findings of an appraisal mLison which vsited Cbia In October 1992. The report was prepared by V. Mastilovic (rask Manager), S. Kataoka (Senior Power Engineer), H.E. Sun (Financial Analyst), R. Taylor (Economist), T. Hassan (Senior Counsel) and KC. Ling (consultant). Peer reviewers comprsed: W. Cao (Senior Power Engineer), K. Jechoutek (Prncipal Economist), and S. Shum (Senior Financial Analyst). The Division Chief is R. Newfrmer, and the Department Director is SJ. Burki.  - VI - 4 The Power Market and Program ......... . . .................. . 20 A. The East China Power Grid ......................... . 20 B. Load Forecast .................................. 21 C. Power Development Ptogram (t m-2000) ......... ........ 22 S Tbe Project ........................... * .......... 23 A. Project Objectives ................................ 23 B. Project Description ........ ....................... 23 C. CostF.tinlate . .................................. 27 D. Finanu;ng Plan .................................. 27 E. Procurement . ................................... 29 F. ProjectImlmnain.... 30 G. Dis bu rs em enat ...30 H. Environment ati ons . . ....................... 33 6 FGisbcAspects .................................. 35 EI. Intirodu ntlCnidroin .... ....................................... 35 AL. Inrdcion..o n35 B. ECEPUC's Past and Present FinancW Perforbace . .36 C. Financial Performance Targets ..36 D. Future Finances ..37 e. Financing Plan .38 7 Economic JustIficaIon ..40 A. Role of the Project ..40 B. Least-Cost Studies ..41 C. Economic Rate of Return ..41 D. Senstivity Anaysis ..42 8 Agreements and Re.ommendatIon .. . ..43 1.1 Prmary Energy Output in China (1949-91) .46 1.2 Total Producdon and Consumption of Energy vs. GNP Growth 47 2.1 Installed Capacity, Electricity Generation, and Sales in the Power Subsector.. 48 2.2 Growth Index of Electricity Generatio and Primary Energy Demand ... 49 2.3 Electricity Consumption by SectorsO.5 2.4 Major Ongoing Hydro and Ihermal Power Projects by Extnal Financing 51  v ii- 3.1 ECPGPerformance ndicators ....................... .... 53 3.2 StaffingofECPG S....... 54 3.3 Schoolsand T tngCeersUnderECPUC....... 56 3.4- Pbnnilng,BudgetandControlofChinesePower Bureaus . 57 3.5 Curran ElectricityTaft InEast Chna S..58 3.6 SummaryofECEPUC's1992-95Power TaiffReformPn. .. 60 3.7 ConsumptionandRevenuebyCategoryofConsumers (1991). .61 4.1 MajorPower OentingStationsInECPG. 62 4.2 Generating Capacity and Trsmission Faciities in ECPG . .63 4.3 S00-kV Transmission Lnes in ECPG ..66 4.4 Energy Generation and Consumption in ECPG ....... . . 67 4.5 ECPG Power Devlopment Program ..68 4.6 Power and Energy Balancesn ECPG ..71 5.1 Project Description. 72 5.2 Consulting Services (rerms of Refernce) ..76 5.3 Staff-Months Estimate for the Consulting Services . .83 5.4 Peaking Power Pricing Study rerms of Reference). 84 5.5 Study of Optial Plat Operation Cems of Reference) . .87 5.6 Management Development and Tai ......89 5.7 Project Cost Estimae ..92 5.8 Procurement Schedule. 96 5.9 Key Dates of Projectl . .lemeation .. 97 5.10 Disbursemet Schedule ..99 5.11 EnviromneaManagementProgram. ... 100 5.12 Bank Supervision nput into Key Activities ..106 5.13 Framework for Project Monitoring and Report.ng . .107 6.1 Actual inancia Statements of ECEPUC (1989-91) .109 6.2 Forecast Financial Sttements of ECEPUC (1992-2000) .112 6.3 AssumptionstoECEPUC'sFimmncal Projections .116 7.1 Economic Justificatonof the Project .118 8.1 SelectedDocumentsandData AvailableinthePojectFile .125 CARTS 1. OrgzationChartoftheMinistryofEnery(MOE) . . 128 2. Organization Chart of the East China Eectric Power Uid Coporaion (ECEPUC). 129 3. Organization Chart of the Tianhuangping Pumped Storage Project Construction Company (IWCC:) ....... ........................... 130 4. ImplemenaionSchedule .131  - viii- F!GURZS 1. Gener Layout (CrT-Sedon) .......................... 133 2. Gena Layout (Plan) ......... ............................... 134 3. Typical Daly Load Curve for the ECPG with Tianhuangping (Augu 2000) 135 MAP IBRD 24363 .......................................... 137 TAXS EN TEff 3.1 DistributionofECEPUC Comumption ...................... 18 4.1 Load Growth of East China PowerGdd ...... ............... 21 4.2 LoadForecastforEastChinaPower Grid .................... 21 5.1 Summary of Projectcosts .............................. 28 5.2 Financing Plan for the Project ........................... 29 5.3 Summary of Proposed Procurement Arangemen ............... 31 5.4 Imlementation Schedule: Estimated Annual Contractu and Other Paynents ........................................ 32 6.1 ECEPUC'sKeyFinanciIndicators, 1989-91 ................. 37 6.2 KeyFinancial dicators,1992-2000 ........................ 38 6.3 ECEPUC'sPimncing Plan,CYI-2000. .39  -1- THE ENERGY SECTOR A. Ovuvmw 1.1 ChIna has been remarkably successful in developing its energy resoues and has become the third lagest producer of energy in the world. In 1991, tha country's primary commercial enerW supply and cosumption amoumed to 1,048 and 1,023 million tons of standard coal equivalent (tce), respectively. Coal is the most important source of energy, accounting for about 74 percent, and oil for 19 percent of the total production. Hydroelectric power (4.6 percent), natural gas (2 percent), and small quantities of shale oil and geothermal power make up the balance. The largest consumer of energy is the industrial sector (62 percent), followed by households (24 percent), services (9 percent), and agriculture (5 percent). Coal meets 70 percent of the fuel requirements for indusry and power generation, and satisfies 80 percent of the commercial energy needs of households. About 20 percent of oil and 2 percent of coal production are exported, accounting for about 7 percen and 1 percent, respectively, of China's merchandise exports. Details of the primary energy outputs are given in Annexl.l. Energy Resources 1.2 Coal. China has large coal depoits, with recoverable reserves of about 900 biRlion tons, of which 30 percent are proven. In 1991, the country produced 1.1 billion tons of raw coal. By the year 2000, China aims to produce 1.4 billion tons of coal a year. The best quality coals are found in North China, where Shaumi and Inner Mongolia each have reserves of 200 billion tons. However, insufficient transport capacity makes it extremely difficult to move coal to the large consuming centes in Centra and East China. 1.3 Hydroelectic Potential. China is rich in water resources and has a long tradition of harnessing them for energy and other uses. The country's hydroelectric potential is estmated at 1,900 TWh a year, but only about 9 percent of it has been developed. Most of the poteial is located in the Southwest (70 percent), about 1,500 km away from the main demand centers. The long gestation period for hydroelectric projects has also inhibited the rapid development and utilization of hydroelectric resources. 1.4 Crude Oil. China's ultimately recoverable reserves of crude oil are estimated at some 80 billion tons, of which 16 percent are proven. The country produced 140 million tons of crude oil in 1991, and the target output for the year 2000 is 200 million tons. China's refining capacity is the sith largest in the world.  -2 - 1.5 Natural Gas. Cbina's natual gas resources are estimated at 33 trillion cubic meters (mi, of which 3 percent are proven. In 1991, China produced IS billion m3 of natud gas, the bulk of which is located in Sichuan. About 50 pent of the gas produced is nonassocied gas. Most of th gas is used as feedstock for fetiizers and petrochemicals. 1.6 Blowass. Noncommercial biomass energy use currently amounts to about one- quarter of total energy consumption in China. Fuelwood and agicultural straw and stalks are the chief blomass fuels, and they are consumed almost entirely by rural households. China is promotig a variety of measures to achieve e tall sustainable biomass supply and consumption levels, including more efficient use of biomass, tree planting, and substitution of other fuels for traditional biomass fuels. 1.7 Nucear Energy. Known uranium reserves in China ar sufficient to sustain 15,000 MW of nuclear power capacity for 30 years. China commissioned its first commercial nuclear power plant (300 MW) in 1992. In 1993/94, Daya Bay nuclear power plant (2x900 MW) should be commissioned; 70 percent of its output is intended for nearby Hong Kong. The construction of a few additional plants is planned to start before the year 2000, primarily in regions which lack coal and hydroelectric resources. 1.8 Other Energy Resources. Other energy resources play a small role In energy supply and are used mostly in remote areas. Geothermal energy has been found in many locations covering nearly all the country. 'he Yangbajing geothermal power plant, located in Tibet, supplies about 50 GWh a year. Although wind and solar energy have promising prospects (e.g., wind in Inner Mongolia), they are not expected to affect the overall supply of energy significandy during the next two decades. Unofficial esdmates of oil shale suggest that deposits are large, but little is exploited because of lack of viable tecology. Instittons of the Energy Sector 1.9 The Ministry of Energy (MOE), established in 1988, has primary responsibility for policy, planning and regulations to promote the rational development and use of energy resources. It also oversees various enites responsible for energy operaions i China. Chr 1 shows the organization of MOE. The State Energy Investment Corporation (SEIC), also established in 1988, handles project finncing in the coal and electricity subsectors. SEIC is responsible for onlending funds for projects of national importance and representing the Govemment in the joint financing of projects with other parties; it is expected to operae as a revenue earning entity. Both MOE and SEIC operate with the guidance of the State Planning Commission (SPC), which has ultimate authority for project approval, budget allocations, and financing arrangements. Energy Investments 1.10 Energy investments in the 1980s were planned based on an expected economic growth rate of 7.5 percent a year. Actual economic growth rates exceeded this target by a significant margin, which has exacerbat eergy shortages already existng at the outset. Under the Seventh Five-Year Plan (1985-90), the Government gave high priority to energy and also to the transport sector, a bottleneck in economic development. In 1991, China dedicated 3.4 percent and 1.7 percent of its Gross National Product (GNP), respectively, to develop infastructure for energy production and transportation. It invested a total of Y 64.6 billion ($12  -3- billion) in the energy sector, represendng 30.5 percent of state capital construction, as against 21 percent in the early 1980s. 7lhe power subsector accounted for 62 percent of the total. About 20 percent of the Investment requirements of the Chinese energy sector are met by foreign loans and direct investments (para 2.7). B. ENERGY SECrOR lSUVES 1.11 In addition to the already noted shortages, the main energy sector issues in China are: (a) the efficiency of energy supply and use; (b) the dominance of coal and associated environmental problems; (c) improvement in scale and technology in energy industries; (d) rationalization of energy pricing policies; and (e) institutional, regulatory and enterprise reform. Efficiency of Energy Use 1.12 China's energy conumption per capita is low, but consumption per unit of GNP is high compared with other counties. The high share in GNP of industrial output, the structure of industry, the use of inefficient tedhnology, and inadequate energy management practices are major factors that contribute to this. Efforts to improve the efficiency of energy use have been a cornerstone of China's energy policy. Particular progress has been made in building a strong institutional framework for energy conservation. During 1981-90, China's energy intensity per unit of GNP fell by about 30 percent in real terms, and the elasticity of growth in energy use relative to GNP growth was about 0.5 (Annex 1.. Nevertheless, further improvements in energy efficiency are crucial. Economic growth and energy supply targets for the 1990s imply hat only about one-half of the increased energy services reqired will come from new energy supplies, while the other half must come from energy efficiency improvements. This will require major progress in addressing structural and systemic issues, as well as still stronger programs to upgrade inefficient technology and strengthen energy management. Dominance of Coal and Associated Environmental Problems 1.13 Many of China's air pollution problems are related to the heavy use of coal and its dispersed, small-scale application in industry and households. Unlike the situation in most other countries, the electric power subsector is not the largest consumer of coal in China (about 25 percent of the total). Environmental problems occur at every stage of the coal chain; mining and disposal of mine waste, coal washing, transport and handling, processing and combustion, and ultimately ash disposal. The ambient concentration of particulates is the most serious problem; it is largely related to the dominant small-scale use of coal, its high-ash content (20-30 percent), and the often incomplete combustion. The average sulfur content of the coal is relatively low (about 1.5 percent), but because coal is used so extensively sulfur emissions are increasing. 1.14 The environmental implications of continued increases in coal use highlight the need for the strict enforcement of environmental regulations and more investment to conserve coal and mitigate its envronmental effects. The scope for substitting cleaner fuels remains limited. The country has insufficient proven natural gas resources; its production of oil is increasingly absorbed by transport and petrochemicals; and large hydropower resources are located far away from major consuming centers.  -4- Scale and Technology in Energy Industries 1. 1S Coal Subsector. Over half of the coal produced in China comes from small- scale mining operations. Exploitation of large coal reserves through uncoordinated small-scale mining has often led to inefficiencies in production and a waste of coal resources. In the larger mines, productivity and safety could be increased by making greater use of mechanized systems and applying more efficient designs. 1.16 Power Subsector. Large-scale power development in China is beneficial from the standpoint of both energy conservation and environmental protection. Modern thermal power plants, with unit capacities of 600 MW, are about 20 percent more efficient than smaller units. The boilers of the modern utilities also support better pollution control, thus raising the efficiency of particulate removal. 1.17 Petroleum Subsector. In the petroleum subsector, there is a need to employ more modern equipment and technology at aU stages of exploration and development; seismic survey and related data processing, exploratory drilling, and enhanced oil recovery in order to increase production from aging fields. Improvements in operating and maintenance practices are also needed to increase the efficiency of the subsector. Energ Pricing 1.18 Energy price reform has proceeded steadily during recent years, resulting in substantial increases in real energy prices. Ibis has resulted in continuous increases in administered prices for the portion of energy still allocated under mandatory planning. More importantly, the share of energy provided at market prices has grown dramatically, resulting in a much reduced role for centrally administered prices. In general, average consumer energy prices are now close to the economic costs of supply in the principal demand centers. However, the prevailing pricing system has become inordinately complex, consisting of a wide variety of both producer and consumer prices for the same commodities, based more on historical or administrative criteria than on any economic rationale. In addition, while most consumer prices may be high, this is often due to charges for out-of-plan supply or other local government levies. Producer prices currently charged by many of the large energy industry enterprises are well below incremental production costs. 1.19 Coal supplied at market-determined prices now accouns for over one half of coal consumption. In early 1993, the Government announced its intention to decontrol prices over the next three years, through further step-by-step increases in the share of coal supplied at market prices. Market prices are generally in line with the economic costs of domestic production and distribution and, in East China, local market coal prices are close to or even above international price levels. Although their role is declining, administered producer prices remain substantially below incremental cost levels, and the coal industry still remains a major loss-making sector. 1.20 While the average price levels of light perolewn products are close to international prices, average prices of crude oil and heavy fuel oil have been kept substantialy lower. In 1992, however, the Government indicated that crude oil prices would be increased to inernational levels by the end of 1995, and actual implementation is expected even sooner.  - 5 - Producer prices for natural gas remain distorted and should be adjusted to provide better Incentives to find and develop more resources. 1.21 Substanta progress has been made in increasing elecricity prices; in East China, for example, average consumer prices are now close to the long-run marginal costs (LRMC) of supply. The 'new plant, new price" policy guarantees that power prices will be sufficient to allow power producers to fully service the debt on newly commissioned projects. However, average ptoducer price levels still need to be adjusted upwards to improve the contribution of internal cash generation to the large investments of the subsector. The structure of current tariffs also remains overly complex and distorted (see paras. 2.15-2.18). 1.22 The Government remains committed to overall energy price reform. Key directions for the reform include: (a) firther adjustments to close the gap between administered, in-plan prices and market-determined prices, particularly through further contraction in the scope of application of the administered price system; (b) unification and simplification of multitiered price systems, to yield more transparent, equitable and economically rational pricing structures; (c) further adjustments in producer prices; and (d) adjustments in pricing structures to better reflect quality differences, including expanded differentiation in tariffs between peak and off-peak power supply. Instuional and Enterprie Reform 1.23 As China makes the transition to a market economy, reforms to increase the autonomy of energy sector enterprises, diversify sources of funding, and improve the regulatory enonment need to be futier deepened. In the power subsector, initial steps have been taken to separate utlity companies from government bureaus; this effort needs to be further strengthened in the coming years as part of the overall enterprise reforms. In contrast to the past, a variety of funding sources are now being tapped for large projects and, in the power subsector, joint fiancing arrangements Involving different central and local government entities are becoming the norm. This reform needs to be deepened through use of additional funding sources and introduction of equity financing. EspeciaUy in the power, oil and gas subsectors, development of more transparent reguatory regimes is needed to allow more autonomous and varied enterprises to develop and operate efficientiy. C. ENERGY SECTOR STRATEGY 1.24 China is endeavoring to eliminate energy shortages in an environment of rapid economic growth, and its principal objectives are to: (a) accelerate the expansion of electric power and oil/gas production; (b) expand and improve the scale of coal production; (c) increase the efficiency and change the forms of coal utilization; (d) minimize the environmental impact of energy use; (e) further rationalize energy prices and investment funding; (f) deepen instutional and enterprise reforms in the sector; and (g) encourage the transfer of modern know- how and technology in energy industries. 1.25 Allowing the power subsector a larger share in fina energy consumption will help to modernize the Chinese economy, increase end-use efficiencies, and curtail pollution through the harnmessing of hydropower, more efficient technologies, and larger-scale plants. The same holds tmue for the oil and naural gas subsectors, both of which yield cleaner, more efficient fuels than coal. The continued developmen of coal mining is an inescapable necessity in China,  -6 - but it must occur under conditions of higher efficiency, adequate safety, and environmental acceptability. D. BANK ROLE IN TIIE ENERGY SECIOR 1.26 The Bank has supported 12 projects in electric power development, 5 in petroleum (including one natural gas project), and one in coal. In all three subsectors, objectives have included support for technology transfer, modem management practices, and the development of efficient, large-scale energy production. Through sector work and project- related technical assistance, the Bank has also assisted the Government in the areas of energy price reform, improving ener efficiency, mitigation of the environmental impacts of coal use, and enterprise management reforms. Specific aspects of the Govements strategy and the role of the Bank in the power subsector are covered in paras. 2.19-2.21. 1.27 With the Bank's assistance, the Chinese have developed capabilities to properly assess the economic costs of electric power and coal, and utilize these techniques in developing their price reform strategies. In the case of electric power, a joint effort to establish LRMC and pricing principles for East China has been followed up through the development of provincial tariff reform action plans under new power loans. These action plans are now at various stages of implementation (see para. 2.26). 1.28 Ihe Bank is pursuing a multidimensional, sustained program of assistance to improve coal utilization practices, increase energy efficiency, and reduce air pollution stemming from coal use. A condnuing dialogue with the Government has been established through the completion of two joint studies, Efficiency and Environmental Impact of Coal Use (Report No. 8915-CIA, 1991) and the China Energy Conservation Study (Report No. 10813-CHA, 1992). Further follow-up technical assistance and pre-investment work is currently under way with support from the Global Environment Facflity. Because the issues involved concern the use of energy across the economy, assistance through the lending program involves operations in a variety of sectors. Investment and policy support has been, and wfll contine to be, provided through industry and urban/environment operations, in addition to current and future lending operations in the energy sector. 1.29 Ihe Bank is also launching a program of sector work and technical assistance activities on institutional development and enterprise reform in the power subsector (para. 2.27). The recently-initiated, joint effort is iniilly focusing on identification and analysis of principal reform options, especially on issues relating to the role of the central versus local governments, how to delineate the role of government and utilities/enteprises, and how to establish an improved regulatory framework. This will be followed by an effort to develop concrete measures for implementation.  -7- 2 THE POWER SUBSECTOR A. BACKGROUND 2.1 China is the ft largest producer of electicity in the world. In 1991, the country had a total insalled capacity of 151.5 GW (75 percent based on therma power and 25 percent based on hydropower) and generated 677.5 TWh of electricity (552.6 TWh from thermal). Plant use and bigh-voltage network losses accounted for 6.9 and 8.1 percent of generation, respvely. Fuel consumption in thermal plants has been reduced to about 424 grams of standard coal per kWh. At the end of 1991, there were 12 power networks with capacity over 2,000 MW each, of which the capacities of 4 regional power networks exceeded 20,000 MW. Ihe tot length of the extra high voltage transmission lines reached 7,957 km and the capacity of substations amounted to 21.5 GVA. 2.2 The Chinese rural electrification policy emphasizes the developmen of local energy resowces. Iherefore, as much as possible, mini hydropower development is encouraged in Isolated areas. In 1991, mini-hydro, small themd, and diesel generan sets had a total instled capacity of 21.3 GW. Mini-hydro plants alone had a capacity of 10.1 GW and an annual generation of 31.1 TWh. Approxmaely 96 percent of villages are electrified. 2.3 The growth of imstalled capacity, electricity generation and sales is depicted in Anmex 2 1. Annex 2.2 shows the historical trend of electricity generation, primary energy demand, and the GNP. The target of quadrupling the GNP between 1980 and the year 2000 should result in average power demand growth of 7 percent a year. On this basis, the Ten-Year Program for National Economic and Social Developmet (1991-2000) calls for an increase in geneating capacity to 285 GW from 138 GW, and electricity geeration to 1,300 TWh from 621 TWh. Ahough this program has not been officially revised, growth in both GNP and power demand is now expected to exceed these targets, based on the robust economic performance experienced in recent years. Large thermal power stations are being constructed mainly near ports and major coal mines. Major hydroelectric stations are planned at the middle and upper reaches of the Yangtze and Hougshul rivers. A 500 kV transmission network is being built to Integrate regional grids. 2.4 In 1991, China consumed 576 TWh of electricity; 73.0 percent was consumed by industry, 16.0 percent by agriture including rral househols, 9.3 percent by municipal and reddential users, and 1.7 percent by transportation/communications. Details of electricity consumtion by sectos are given in Annx 2.3 Electricity consumption per capita in 1991 reached 585 kWh; average houehold us was about 85 kWh in cities and 20 kWh in rural areas.  -8- 2.5 In the late 1980s, electricity demand increased faster than generating capacity, and power shortages reached about 20 percent of electricity requirements, which translated into the idling of industi capacity for one or two days a week. Electricity is still allocated through quotas based on priorities set by authorities, and demands for new connections are closely screened. The rapid growth of demand can be attriu both to the very high economic growth and to the increasing share of electricity in commercial ener consumptdon: 13 prcet in 1970, 18 percent in 1980, 24 percent in 1990, and possibly 30 percent by the year 2000. NotwihstandW concerted efforts at energy conservation, the growth of power supply should not be allowed to fall behind GNP growth. A faster pace of power system development would be justified in order to accelerate the retirement of the less efficient and more polluting small coal-fired plants. B. INSTnurONs, REFOzM, PLANNNG Am TECHNOLOGY TRANsER 2.6 Instittions. MOE oversees all strategic aspects of power development (para. 1.9), including seven regional power administrtons which coordinate the operations of the power systems and prepare long-tm development programs for the approval of MOE. Under the regional administrtons, there are 19 provincial and 1 municpal power bureaus, and 6 other provincial and autonomous regional bureaus which operate in isolation. A mnmber of investigation and design institutes are affiliated with MOE, as are the 16 construction companies involved primarily in building power projects. Several universities, colleges, and research and taining centers also fall under the auspices of MOE. 2.7 The Huaneng Inernational Power Development Corporation (HIPDC) was created in 1985 with the aim of atracting forein capital and technology for power generating plants located mainy in the open coasta areas. HIPDC has a mandate to raise funds directly from the iational financial market, and it has been active in tapping bilateral and suppliers' redits, and commercial bank loans. The recenly established Sunblast Energy Development Corporation (SEDC) is another window for the Government's investment in cofinancing with the local goverments and foreign sources in energy projects. The three thermal power stations now being implemented by SEDC are Ligang in Jiangsu (2x350 MW), Zhenzhou in Hunan (2x200 MW), and Baotou in lnner Mongolia (lxlO0 MW). Pardy as a result, the power subsector in China has claimed a significant share of the coutry's external financing (Ann 2.4. 2.8 Separate corporations have also been created for developing major hydroelecric schemes. These new Instional aangemen are beneficial because such corporations are alowed to maximize their efficiency through specialization and economies of scale, and to reinvest their eanings into fuure power development 2.9 The power industry in China employs about 1.8 million people. However, there is a shortage of trained manpower, particularly technical and administrative staff. MOE has initiated a long-tem program to upgrade the skills of the staff at all levels. The program is caried out primarily by the provincia power bureaus and regional power administrations. The trainng component of the proposed project is designed to support the MOE program, and assist in developing manpower to meet the project's human resource needs (para. 3.7). 2.10 Entwprise Refom. China's efforts to grduay eform stateowned enterprises, including those in the power subsector, aceWerated during 1992. Key aspects in the current enteprise reform movement throughout the country include: (a) reform of the legal framework,  -9- including both the development of new laws and regulations and a strengthening of faith in legal institutions; (b) governance reform, especially relations between Goverment and enterprises; (c) ownership reform, and the related issues of corporatization and shareholding, and private/ nonstate sector development; and (d) subsector restructuring, enterprise development, and improvements in enterprise management. 2.11 Simflar to other state-owned enterprises, the accountability of China's power enterprises for their own profits and losses has been strengthened through adoption of new provisions under the contract responsibility system (see para. 6.2). A framework for separation of Government and enterprise roles in the subsector recently has been established through the formation of power corporations at regional and provincial levels. Efforts to diversify fimding sources for new investment projects have proceeded aggressively, focusing primarily on joint- venture financing arrangements involving different public entities, but also through increased participation of foreign investors. One example of the latter is a recently announced joint Chinese/foreign financing scheme for a major thermal power plant at Jiaxin in Zhejiang Province. The Bank is actively supporting these efforts (para. 2.27). 2.12 Power Systan Paning. The coordination of power system planning in China is the responsibility of MOE, which reviews the plans proposed by the regional power ainistrations and bureaus. For the expansion of thermal power plants and transmission networls, the research, planning and designs are carried out by the regional electric power design institutes, and for hydroelectric projects by the hydroelectric investigation and design institutes and MOE's Water Resources and Hydropower Planning Institute. 2.13 As planning for China's power development becomes increasingly complex, there is a compelling need to apply state-of-the-art system planming techniques. Ihis is particularly importat for evaluaing large-sce projects which have long lead times and for making decisions about generation mix, power plant location, and grid configuration. Least-cost generation plaing techniques were first introduced for thermal generaion in East China through technical assistance from the International Atomic Energy Agency.l/ Under the Planning Support and Special Studies Project (Credit 1835-CHA), least-cost plaming methodologies were also applied for hydroelectric and transmission expansion plans for the Sichuan and East China power systems. Training in the use of these techniques has been provided to staff of the concerned power bureaus and MOE's research institutes. 2.14 Moden Technology Transfer. For China to achieve its ambitious goals for the power subsector, the transfer of appropriate modern technologies will be crucial. This is particularly important for thermal power plants, where incrses in the steam parameters and unit sizes can reduce fuel consumption. Since thermal generation from coal-fired units is expected to provide about three quarters of total generation until the end of the century, reducing the amount of fuel consumed for power generation would reduce pressures on both the supply and transport of coal, as well as on the environment. Technology transfer is also needed for large hydroelectric projects, particularly in connection with the project general layout, the design of sophisticated structures and large underground works, the selection of equipment, efficient constrcion management, environmental assessments and operational matters. Assistance in tednology transfer for pumped-storage hydroelectric projects will be provided under the proposed project (para. 5.8). 1/ Under th Baks Second Power Project an 2493-CHA).  - 10- C. POWE PrICJ 2.15 Chia's curr-ent electricity pricing system is a complex combination of "old ratew," "new rates," and various surcharges, which has been put together, through various incremental adjusments, to improve cost recovery. Ihe base prices which form the basis for the revenue of provincial power companies now consist of (a) basic fees, steming from the 1976 national power tariff; (b) some additional charges arising from an averaging in of higher pnces dharged for power frui some new plants recentiy constructed by these companies; and (c) fuel surcharges, which are adjusted each year to reflect increases in fuel costs. Although the gap is natrowig, the average revenue derived fiom these prices is still lower than the LRMC of supply and, by itself, the revenue collected still provides insufficient contribution towards new investment. 2.16 Average consumer prices, however, are substantally higher than the base prices charged by provincia power companies. The tariff applied to consumers also includes (a) surcharges to raise funds for energy investments by local governments, (b) some additional charges for power from some new plants (especialy those fianced primarily with local funds), (c) charges for certain sources of supply outside of the state allocation system, and (d) a variety of local taxes. With these additional charges, the average electricity prices now paid by c-onsumers are close to the LRMC of supply in many areas, such as East China (see para. 3.22). However, the system of base fees and numerous surcharges is too complex and lacks transparency. In most areas, unfair "old and "new" rates continue to be applied to different consumers, whereby some consumers are protected from most of the surcharges because they still hold "in-plan" quota allocations, but other new or small consumers must pay high prices well above actual supply costs. 2.17 In 1991, the Government announced its intention to unify old and new system rates imto sigle, more transparent tarlfft, and some concrete measures have now been taken. A mbaer of provincial power companies-the necessary focal points of this effort-have implemented reforms in this direction, and a further deening of the program is under way. The Bank has provided actve support for this effort, through the provincial power tariff reform action plans sponsored in each of the last three power lending opeations. 2.18 Peak-load pricing is another area where reform is now required. In the current rates applied to medium- and large-scale industries, the ratio of basic demand charges to energy charges is far too low, as demand charges have not been significandy increased in decades. The application of seasonal rates in regions dominated by hydropower needs to be strengthened. Time-of-day rates for large consumers have been introduced on a tial basis in a few areas. Given the shortage and high cost of peak-oad power, this effort now needs to be expanded into new areas. TSme-of-day rates also need to be introduced for bulk sales. A specific study dealing with these issues is included in the proposed project (para. 5.10). D. SuSeas Or ISSt ES AND SRATzY 2.19 The major issues in the power subsector include: (a) acute power shortages; (b) protracted implementadon periods for large projects; (c) environmental impacts of power supply; (d) weak interconnecton within the regional power system; (e) scarcity of skilled manpower; (f) need of modern methods for planning, operation, and financial management; (g) fiurer rationalization of the tariff structure; () power enterprise autonomy, through further  - 11 separation of power companies and government supervisory agencies; (i) the need to expand and diversif investment funding; and () regulatory enironment improvements. 2.20 The Govenment's policy for the power subsector Is to modernize and expand it, as well as to increase its efficiency at a rate sufficient to meet the requirements of economic development and improve the living conditions of the population. This policy translates into the following objectives: (a) expand coal-fired thermal capacity at mine-mouths or near ports and load centers in order to reduce the rail transportation requirements and use of lower grade coal In urban centers; (b) replace small- and medium-size thermal units with larger, less poUuting, and more efficient units; (c) accelerate the pace of hydroelectric development; (d) construct tranmission networks; and (e) adopt modern methods in system planning, project design and environmena impact mitigation. Supported tbrough a well-eveloped institutional network at aU levels of government, China's programs to improve the efficiency of electricity use include efforts to reduce power system losses, replace outmoded inefficient equipment, improve industial process technology, and produce new models of high-efficiency electrical equipment. In terms of policy reform, the Government remains committed to a further deepening of power tariff reform, further separation of utilities and govermnent agencies, and additional measures to "corporate" the subsector in keeping with overall enterprise reform. E. RoLE OF TE BANK iN TnE POWER Su9 CTR 2.21 The Bank's participation in the power subsector in China has particularly focused on institution building, price reform and the transfer of appropriate modern technologies. The Bank has supported the Government's stae through sector work, policy dialogue, and a series Of lendint operations. The Bank also has helped to introduce state-of-the-art system planning methodologies, which identify cost-effective, sustainable development policies for the power subsector. 2.22 The Bank has helped to finance 11 large power generation projects (5 thermal, 6 hydro) and one transmission project. Through these operations, the Bank has successfuly (a) introduced international competitve bidding (ICB) for works and goods; (b) supported the transfer of modern tcnologies in project constuction and management; (c) helped to improve the efficiency of pollution abatement; (d) promoted the integration of regional power systems; (e) supported the development of mast plans for modern distribution networks; and (f) promoted operational efficiency and prudent financial management. 2.23 Most of the power projects financed by the Bank are being implemented in a satisfactomamer, on schedule, and within budget. The first operation, Lubuge Hydroelectric Project (Lo 2382-OA) has been succully completed. The 500-kV Xuzhou-Shanghai Trasmission Project (Loan 2493-CHA) has been put into service as scheduled. The Yantan Hydroelectric Project (Loan 2707-CHA) is progressing satisfactority; the first unit was put into operation in 1992. Several problems which were encountered early in ths implementation of the Shuikou Hydroelectric Project (Loan 2775-CHA) have been resolved and the second loan for ShuikDu Project R (LAn 3515-CHA) was approved recentiy. The constrcton of the Ertan Hydroelectric Project (Loan 3387-CHA) and the Daguangba Multipurpose Project (Loan 3412- CHA and Credit 2305-CHA) is now progressing well. Furthermore, the Bank is involved in financing five thermal power projects-Beiuang (Loan 2706-CHA), Wujing (Loan 2852- CHA), BeiWungMg Extesio (Lnm 2955-CHA), Yanshi (Loan 3433-CA) and Zouxian (Loan 3462-CHA). Wujing was completed on schedule. Beitungang encountered delays due to  - 12 - procurement problems and poor coordination of goods supplies. Unit No. 1 was commissioned in 1991 and Unit No. 2 is expected for commissioning in 1993, about one year behind schedule. Tne implementation of Yanshi and Zouxian projects has started successfilly. 2.24 The lessons learned from lending operations for the power projects in China have been taken into account in preparing the proposed project. These lessons basically include: (a) improving procurement and contractual arrangements; and (b) enhancing the role of project management and the use of engineering consultants. Particular attention has been given to the environmental aspects of the projects. 2.25 The Bank's support for the proposed project wiUl ensure the timely implementtion of a pumped-rage hydroelectric project urgently needed to meet peaking power system requirements. Through this project, the Bank will be able to cooperate for the first time with several provincial power bureaus in East China and help to strengthen their capabilities for tariff reform, investment programming and financial planning as well as the applicable regulatory framework development. 2.26 Power Pridng Reform. The Bank's active effort to support power tariff reform began with a major tariff study completed in 1988 under the Beilungang Thermal Power Extension Project (Loan 2955-CHA). The marginal cost pricing principles introduced in this study have now gained wide acceptance in China. Subsequent loans for power development at provincial levels have included agreements on implementation of provincial power tariff refbrm action programs. Further support for price reform will continue under this proposed project. ECEPUC has prepared a regional reform program which incorporates programs in the three provinces and one municipality in the East China region to complete tariff unification reforms and greatly expand use of time-of-day rates by 1995 (para. 3.24). This project also includes a detailed study of peak power pricing (para. 5.10). 2.27 Institional and Reguatory Reform. The Bank has laumched a program of technical assistance and sector work on institutional development and enterprise reform in the power subsector. Initial efforts focus on review and analysis of the issues and options regarding (a) more complete separation of the Government and power utility corporations, and clearer definition of the role of the Government and enterprises in the subsector; (b) improved organization of the subsector; (c) further diversification of financing sources, including options involving direct foreign investment; and (d) strengthening the legal and regulatory framework to enable improvements m the above areas to proceed effectively. These initial efforts wil be followed by development of concrete measures for implementation. The proposed project wiU enable an active dialogue on these issues with regional authorities in the East China region, within which future provincial-level power lending operations also are planned to further deepen reform efforts. 2.28 Demand-Ide Management. Regarding load management, one of the most fnAmtal objectives of the proposed project is to improve load management in the East China power system by transferring off-peak energy to pe energy. Regarding end-use efficiency, the Bank's broad program of support for energy conservation (pa 1.28) includes a focus on improving the efficiency of elecricity use, especiaUy in the industrial sector.  - 13 - 3 ThE BENEFICIARY 3.1 China is in the process of reforming its state enterprise system through progressive development of a suitable corporate legal system. It has thus come a long way from carrying out its economic agenda through state enterprises wholly owned, controlled and operated by line departments and agencies of the Government. In 1983, the State Council promugated the Provisional Rules for State Industrial Enterprises, which allowed state enterprises a limited range of operational autonomy. These Rules were superseded by the Law of the People's Republic of China on Industrial Enterprises Owned by the Whole People enacted by the Chinese National People's Congress in 1988. The Law introduced the concept of semi- independent management and allowed some more operational autonomy. Presently, the Government is promoting, on an experimental basis, the restructuring of state enterprises as shareholding companies pursuant to its Regulations on Enterprises' Sbareholding System Experiment issued in 1992. For this purpose, it has also issued its Views on Standards for Limited Share Companies and Views on Standards for Limited Liabitity Companies (both dated May 15, 1992). A mber of other related regulations have also been issued on a provisiona basis. All these efforts are indicative of the Government's resolve to eventually transform the state enterprise system into a full-fledged independent corporate structure. A. IzGAL STATES AND ORGANEZTAON OF ECEPUC 3.2 The beneficiary of the proposed loan is the East China Electric Power United Corporation (ECEPUC). This would be the first Bank loan to be onlent to ECEPUC. ECEPUC is a corporate entity with limited liability having a registered capital of Y 14.1 billion. It was established in 1989 under the Law of the People's Republic of China on Industrial Enterprises with Ownership by the Whole People. Prior to its establishment, ECEPUC was the East China Electric Power Adminison (ECEPA), a government agency under the jurisdiction of MOE with the authority to oversee the Power Bureaus of Shanghai Municipality, Jiangsu, Zhejiang, and Anhui Provinces. As part of the reform efforts to separate government administration and eneprise management, power companies at provincial and municipal levels are being formed to gradually replace power bureaus. The principal responsibility of ECEPUC is the coordinated development and operation of the East China power system, which covers Shanghai municipality and Jiangsu, Zhejiang and Anhui provinces. It is a kind of "amalgamation" of the Shanghai Municipal Power Company, Jiangsu Provincial Power Company, Zhejiang Provincial Power Company and Anhw Provincial Power Company-which retain their independent corporate status. ECEPUC is empowered to provide services in accordance with the scope of authorization given by MOE. A Charter (Standing Rules) of ECEPUC acceptable to the Bank has been issued. It would thus appear to have the power to undertake the proposed project as authorized by MOE. In terms of financial management, ECEPUC is required to implement the price policy and the relevant directives of the State. ECEPUC finctions under the supervisory control of MOE and the East China Power Network Leading Group (constituted by representatives of  - 14- MOE, ECEPUC and the provincial governments of Jiangsu, Zhejiang and Anbui Provinces and Shanghai Municipality). Headed by a General Manger, ECEPUC is managed by a Board of Directors appointed by MOE. The General Manage of ECEPUC and present of the provincial and municipal companies are ex-oflcio diector of ECEPUC. While the Board of Directors of ECEPUC exercises policy-making powers in respect of matters dealing with the interests of the provincial and municipal companies, the major responsibility of the General Manager of ECEPUC includes the implementation of general and specific policies of the State and the relevant directives given by MOE. ECEPUC has adequately carried out its mandate and effectively coordinated development and operations in the four provinces/municipality. Arrangements for interprovincial/municipal coordination under the project are set forth in the agreements signed by all project participants. Ihese agreements are saisfctory to the Bank. 3.3 ECEPUC has been authorized by MOE, inter alia, to: (a) make economic contracts with domestic and foreign enterprises (X the latter case with the approval of the responsible department of the State), (b) obtain various loans from domestic units according to the credit system of the State and from foreign banks or corporations under approval of the responsible department of the State for purposes of power construction, (c) calculate product cost and profit according to the financial account system of the State, (d) purchase equipment and materias from the domestic market and from abroad (in the latter case with the approval of the responsible department of the State), and (e) market generated energy to all districts and enterprises within the power supply area of ECEPUC in accordance with the sales program of the State. The General Manager of ECEPUC has the power to sign contracts on behalf of the corporation. The provinc and municipal companies are authorized to make power delivery/ reception contracts and other economic contracts with each other. B. MANAGEMENT 3.4 Recent performance indicators for the East China Power Grid (EGPG), which includes the power systems of three provinces and Shanghai Municipality, reveal high plant capacity factors and rather low transmission and distribution losses (Ann 3.1. ECEPUC prepares accounting information in a timely fashion and operates an effective billing and collection system (paras. 3.26 and 3.27). However, the successful upgrading of management systems and procedures, and the strengthening of fiancial planning deserve special attention (paras. 3.8-3.12). The Goverment used to maintain strict control over the power subsector. As the institutional framework becomes less centralized and the power bureaus receive greater financial autonomy and responsibility for decision-making, ECEPUC is preparing itself to manage this transition. The proposed project includes specific training in udlity mnmagement and financial planning for this purpose (para. 5. 11). 3.5 ECEPUC is capable of formulatng its own expansion program and implementing power projects by itself. However, for a large project such as the one proposed, outside assistance will be required for the preparation of bid documents, bid evaluation, contract negotiations, and construction management (para. 5.8). C. STAFFNG AND TRANIG 3.6 ECEPUC is understaffed in engien and tedhnical work, financial control and planning and management, especially in dispatching opeations of large power gids. As of December 31, 1991, the corporation had a total staff of 5,627, of which about 18 percent were  - 15 - engineers and technIilans, 15 percnt administrve staff, 49 percent workers, and the rest service staff and others. Except for the core group of key tecbnical and managerial personnel who are assigned by the State, almost al of ECEPUC's employees are recmited locally. Most of th employees are hired on a peaet basis, except for laborers contras4.ad for conuction. E CEPUC has 15 diisions and offices (Cknrt2). The total number of staff and workers in ECPG was 208,655 as of December 31, 1991. Dels of staffing of the ECPG are shown In Annex 3.2. 3.7 ECEPUC runs 31 schools and trainng centers, including a polytecc college, and 14 technical and vocational schools (details in AnX,.3!. This training capacity is basically sufficient to meet ECEPUC's long-term needs. However, the skills of teaching staff and quality of teaching facilities need to be upgraded and modernized. Training should be designed to help senior managerial, financial and technical staff adapt to the new situafions brought about by a larger and more complex power grid. The taining component included In the proposed project is designed to meet these needs. It also covers upgrading and equipping of ECEPUC's training insttutions and project-related traing for technical staff (Pas. 5.11- 5.14). D. PLANNIG, BuDGU1G AND CONTROL 3.8 The evolution of systems for planning, budgeting, and controlling China's power entities is discussed in detail in Annex 3.4 Power bureaus and corporations are responsible for developing annual and five-yea- production and investment plans which are integrated into the national plans and are approved, through MOE's and SEIC's auspices, by SPC. In the past, financial planning was confined to attaching monetary values, predetermined by MOE, to the quantities being planned. Although a power bureau's plan might be revised to reflect changes, It would ordinariy not be revised to reflect differences between estaed prices and act prices. 3.9 However, with the economic changes in the 1980s, prices have begun to move toward market levels and the Government has begun to finance more investments through loans rather than grnts. Centralized control is being relaxed and replaced by greater financW autonomy and responsibilities for the power entities. To address these changes, ECEPUC will need to adjust its plaraning system to include moderm financial planning. 3.10 MOE and SEIC recognize the importance of fnacial management in the power subsector in China and are organizing a comprehensive training program for all the power instiutions under their control. MOE has already started providing many of the power bureaus with computers and software for automated planning, budgeting, and accounting fimntions. Information from the bureaus can be transferred to MOE and consolidated into regional and national data. 3.11 The new systems represent a good first generation of automated management information; however, they still are not sufficiently flexible to take into account price changes at the local level or those associated with large-scale debt senrice obligations. Currently MOE and SEIC, with assistance from the Bank, manage a number of seminars in China and overseas. These seminars cover computer-based management information sysems as well as tarffs, cost control, project finncing, comparative accounting systems (Chinese vs. Western), and the organization and structure of financial management.  - 16 - 3.12 MOE has agree to inoduce a financial plannig system in power entitles Implementing Bank-financed projects. Assurances were obtaned from ECEPUC that, by April 30 of each year commening In 1994, It would furnish to the Bank a rolling eght-year fibaiplan containngiprojected Income statemns, satemens of sources and uses offwids, and balance sheets. E. ACCouNTING 3.13 Different accounting systems are used by enteprises (autonomous units), construction units (which execute investment projects) and local government departments, in accordance with regulations prescribed by the Ministry of Finance (MOF). Entwprise Accounting 3.14 All the state-owned enterprises in China follow a unified enterprise accounting system on an accrual basis. The current accounting framework was developed in the context of a highly centralized planned economy. With a view to complementing the ongoing efforts to deepen reforms in the finmcial sector and enterprise management, the acountig system in China needs modernization to permit satisfactory financial management in an increasingly decentralized and market-oriented environment. As a first step, the general principles of enterprise accounting have recendy been revised by MOF. Tlese revised principles are generally consistent with those of international accounting standards. Within this broad framework, specific accounig standards would be developed with the assistance of the Bank under the Financial Sector Technical Assistance Project (Credit 2423-CHA). ixed Asset Accounting 3.15 Up to now, the power entities have maintained two sets of accounts, one set for capital construction and the other for operation. Since these two sets of accounts are not consolidated, the balance sheet for operations does not include construction work-in-progress and the relating financing. However, under the newly revised general principles set forth by MOF, enterprises will have to consolidate the capital construction accounts with the operation accounts. Revauation of Fbied Assets 3.16 The current Chinese accounting system does not employ the concept of revaluing fixed assets. However, with recent inflation and depreciation in the value of the renminbi, the need to revalue assets has become more compelling. Under the revised accounting principles, enterprises in special categories, such as joint ventures with foreign partners, merger, enterprise on auction, etc., will have to revalue their assets. Currently, North China Electric Power Corporation has been selected to conduct an experiment on assets revaluation. A pro forma revaluation of ECEPUC's assets was performed during appraisal of the proposed project which indicated a reduction in the average rate of return on assets of about 11 percent for the period 1991 through 2000.  - 17- F. AUDn Extmal Audit 3.17 The State Audit Adminiation (SAA) was established In 1983 and given the status of a ministry rqeot direcy to the State CouncL. In addition, provinci audit bureaus are being established in each province and municipafit (arge cities). Ihe audit regaons and standards prepared by MOF are based on inteatonal auditing practdes and were promulgated by the State Council on October 21, 1988. 3.18 Audits of Bank-finaced projects have been conducted by SAA's Foreig Inavestment Audit Bureau or one of the Provici Audit Bureaus (PAB) under its guia. The audits have focused on enterprises with foeign participation in the form of equity or loan finmcing. SAA and PAB have been receiving tining ttrough the TCC nanced by the Bank Group. 3.19 Under the proposed project, E PUCs annual accounts wi be auditedby SAA. This a ement is sfactory. Assances were obtaied from ECEPUC ha It would maitain separte accounts for the project and tw e audted prject accounts, tatme of eeditres, and fanal amet oECEPUC would be jfiw hed to he Bank wihin sx months fe the end of each fiscal year commecg In 1994. Intenal Audit 3.20 ECEPUC has developed an intern auditing section (staffed with chartered accountants) which periodically will examine the accounts of each operating unit. The objective of these examinations is primarily to test for accuracy and compliance with MOP regulations. The inte auditing section is not expected to review the app d of accoundng .egutions or procedures; such reviews are considered to be the responsibility of MOF and MOE. However, the section wil serve as liaison between external auditors and the project entity. The Bank wll review the inrnal audiig function during project implementation with a view toward increasng its efficiency and usefness to ECEPUC. The frst SAA audit of ECEPUC for FY94 is expected to includo a review and commentary on ECEPUC's controls and interna audi G. EucccY TARMS 3.21 The average revenue per kWh collected by ECEPUC increased by about 24 percent in curren terms between 1989 and 1991, when it reached 14.6 fw&lWh.Jl/ Ihis change reflects the application of the surcarge for incres in coal prces, and the increasing weight of new plant tariffs. Yet, the tariff level is still too low to provide an adequae level of self-financing to ECEPUC. Financial projections (pa 6.9) indicate the need for an increase of about 48 percent in current terms betwee 1991 and 1994 to reach a covenanted self-financing ratio of 30 percent. 1/ Mm averag rven of ECEPUC icudes buk odes, and ecudes swhage uch as the 2 fenlkWh for the Povincial Powe Constuction fid intoduced in 19rS.  - 18- 3.22 l he al elecicity prices paid by consume rs, however, are far hihr tn the avage uni revenue levds collected by the provinci power copanies and ECEPUC. In the case of Sanhai, for emple, the base price collected by the Sha i Municipal Power Company and ECEPUC was about 18 fen/kWh in July 1992 (the higest in the reglon), but the weighted average price paid by coUsumers was 26 fenlkWh, duo to the addifion of a varety of local surcharges which do not accrue as revenue to the Municipal Power Company or ECEPUC (Ae 3. .The consmer price in Sh i amounts to 90-95 percent of the estimated LRMC of supply, including distribution costs, to consumers in East Chin. In the three provinces of the East China Region (Jlangsu, Zhejlang and Anhui), actual average conumer prices are reported to be higher than in Shanghai, due to the addition of yet higher surcharges. 3.23 Shanghi Municipality has a unified retail power tariff which is relaively simple to understand (An 3. , as opposed to the more complex, multitiered retai tariffs which still prevail in the three provinces of the region. As of July 1992, resident consumers In Shanghai pay 25 fen/kWh, or slightly under the average, while industri and commercial motive power tariffs range between 26 to 33 fenkWh, or slightly higher than the average. Consumers with agricultural supply quotas (about 5 percent of total) remain susdie, paying rates of 10- 12 fen/kWh. 3.24 In 1992, ECEPUC prepared a powe tariff refom action plan, which It is encouraging the three provinces and one nWnicipality of the East China region to implement by the end of 1995. MOE also endorses this plan. This plan reflects the findings of the Bani's previous East China pricing study (para 2.26). Key elements include the unification of multitiered tariffs throughout the region by the end of 1995, and a major expansion in the application of time-of-day rates (AI" 3.. H. BlujG A.ND COLLIECIONS 3.25 As of Dember 31, 1991, ECEPUC sales were distributed according to the consumer categories shown in Table 3.1. Detais of the consumption and revenues by provinces/ municipality are given in Annex 3.7 Table 3.1: DwrumoN OF ECEPUC CONSUmIJON (As of December 31, 1991) Customer category Consumptio (GWh) 2 Large industry 47,288 54.2 Small lduetry 13,272 15.2 Agrlculture 4,665 5.4 Lighting 8,555 9.8 Bulk uply 13,398 15.4 total 87.178 100.0 3.26 ECEPUC conducts its billing and collection activities through twelve power supply units. AU major industial consumers receiving supply over 320 kVA are charged in advance three times per month at approximate ten-day intewis. The last two bill, rendered on about the siteenth and twenty-fift days of the month, are based on estimated usage derived  - 19 - from the consumeres contractual power consumption. The first bill, rendered on about the sith day of the month, s also based on esimated usge but includes an adjusent to rfled the previous mont's acual usago as computed hom a meter readg. AU other customers an billed once a month based on actua usage. 3.27 Industrial, commeril and bulk consumers pay thek bils thouh direct debit ffom their bank accounts. Urban reidential and low voltage agricutural consumers receiving power directly from ECEPUC render payments to local branches of the Nation Bank. Payment is due within five days of recipt of the bill. Regulations sta tht consumers who do not pay withinth isperiod are to b charged a fe of .O3 pacet per day of delay, andthat after several notices those who stil refu