Wall Street Journal
January 28, 1999

SHANGHAI, China– A reform designed to bring competition to China’s electricity supply could be good news for consumers but bad for foreign businesses, which say the new policies may slow investment. Under the landmark reform, State Power Corp., the monopoly owner of China’s power grid, has started buying limited amounts of electricity through an open-bid process known as “power pooling,” where the lowest-cost power is purchased first. Chinese regulators hope the change will lower prices and spark demand for electricity in China’s mostly undeveloped countryside, where economic growth has suffered partly because of high electricity prices and unstable supply.

While the reforms promise lower prices for China’s consumers who pay as much as three times as much as U.S. consumers for the same amount of electricity foreign power companies are unhappy. That is because about half of all the electricity produced in China comes from plants that enjoy government subsidies of one form or another. The lower costs mean Chinese power generators can undercut foreign companies, which have poured billions of dollars into China’s energy industry.

“If the power project hasn’t started construction, or concluded financing, it could be a problem,” says William Ruccius, president of AES Orient, a unit of AES Corp. of Arlington, Va., and a major investor in China. “We certainly won’t invest any more money in China without a [power purchasing] contract, or without majority control.”

British Firm Worries

National Power PLC is worried that it may be forced to delay a major investment that it has been trying to hammer out for nearly seven years. The United Kingdom company is negotiating to take a minority stake in a new $1.8 billion power plant in Zhejiang province, one of China’s fastest- growing regions.

Until recently, company executives thought they were close to signing the deal. But last month, regulators from the Zhejiang Power Bureau told the company it may have to accept a lower purchase price for its power. “It’s not clear what will hap- pen, but for foreign investors, the uncertainty isn’t good,” says Zhang Wei, a National Power executive in Beijing.

The foreign companies’ problems have their roots in the government’s low investment in transmission lines. Over the past 15 years, Beijing has lured more than $6 billion in direct investment from foreign power companies, mostly by pledging to buy their electricity at fixed prices over a fixed period. While power generation surged, spending on transmission lines that distribute the electricity to factories and homes was largely ignored.

The result: China now has a surplus of electricity, but can’t distribute it evenly throughout the country. That has pushed electricity prices sharply higher in parts of China’s interior, preventing millions of rural Chinese from buying appliances or televisions that they have been saving for, government officials say.

Broader Effort

The power-pooling reform is China’s attempt to resolve the problem. It is also part of a broader government effort to spark a revival in domestic consumption by cutting electricity costs. According to the plan, Zhejiang and Shandong provinces, and the city of Shanghai, are launching the power-pooling reform first. Local power-grid operating units of State Power Corp. will purchase about 15% of their electricity each year through the pooling program, while the remaining 85% will be obtained through existing contracts with companies and individual plants.

Later this year, the reform will be introduced in three other Chinese provinces, and then gradually extended throughout the country. Meanwhile, the amount of power purchased through open bidding will rise 3% to 4% annually until eventually all electricity is bought and sold through power-pooling.

Officials for State Power Corp. say it could take more than a decade to complete the reform process, because grid operators must negotiate their way through existing, guaranteed power-supply contracts with foreign investors.

“The goal is to foster competition between power generators, and gradually lower the price of electricity,” says Wen Xuting, a spokesman for the State Power Corp. “Ultimately, power producers in China will need to compete for electricity sales, but under the current system, it’s still impossible for prices to be completely market oriented.”

Shock to the System

China’s power deregulation program will:

Start in three coastal regions: Zhejiang and Shandong provinces and Shanghai city.

Expand to three more provinces in April: Heilongjiang, Jilin and Liaoning

Provide for each province to buy 15% of its power through an open-bid process that rewards the lowest bidder

Increase the amount of electricity