The days may be numbered for disputes over who owns the power grids built throughout rural China over the past decade.
Li Qiyan, Caijing 21 January 2009
Government regulators are preparing to untangle the complex ownership issues that have tied China’s rural electric power distribution network in financial knots.
More private investment may be welcomed, and the network may be redrawn to clearly define the interests of central and local governments, which between 1998 and 2003 invested more than 300 billion yuan in the massive grid system.
Caijing learned of the government’s plan from a source who attended a recent seminar sponsored by the China Electricity Council (CEC), which operates under the direction of the State Electricity Regulatory Commission (SERC).
Participants were told that CEC plans to publish a report on rural power reform based on two years of research. The report’s core includes recommendations for policymakers on issues including the ownership of grid-related assets in rural areas, and measures for the next round of rural power reform.
“Rural power reform, a major task set by the 11th Five Year Plan for electric system reform, will be a breakthrough for separating power generation and distribution,” a SERC official told Caijing, adding the report would be issued after China’s Spring Festival ends in early February.
Ownership Questions
A top priority for reformers is the ownership structure for the 300 billion yuan in grid assets strung across rural areas, which were amassed in four stages.
The first stage, at the beginning of 1990s, was highlighted by chaotic fund management. Financial records were incomplete or nonexistent.
Grid construction in the second stage, 1994-’98, relied heavily on central government investment as well as local government funds, bank loans, private capital and foreign investment.
The largest grid investment came in the third stage – 1998 to 2002 – with 20 percent of the capital from treasury bonds. The rest was financed by provincial governments through loans.
After 2003, funding for fourth-stage construction was financed with bonds earmarked for projects in the nation’s interior and western regions, as well as provincial grid company investments for expanding the rural network.
Controversies over the 300 billion yuan investment involved grid enterprises as well as central and local governments. Capital allocated by the State Council from June 1998 to late 2003, as well as loans from the Agricultural Bank of China, amounted to 288.4 billion yuan. The central government also invested 33.42 billion yuan to build grid infrastructure in towns.
“In addition to the 300 billion yuan in assets, poor management obscured asset ownership in the first and second stages,” a CEC expert said. “The rural power system reform cannot be pushed forward until ownership is straightened out.”
The State Council made a list of investments from the central government and local governments, as well as bank loans. However, the list did not clearly identify major investors. Complicating the issue is that local enterprises are required to repay bank loans.
Disputes have focused on whether these assets are owned by the central or local governments. But grid companies are making claims as well.
Grids argue that they have been repaying the commercial loans while also taking responsibility for network construction. “The assets should belong to provincial power grid companies, as we have paid the debt,” said one provincial grid system manager.
Government officials plan to settle these ownership disputes. An expert close to one research agency said ownership will be resolved according to a principle called “whoever invests, owns.”
According to this principle, State Grid Corp. and China Southern Power Grid would own assets built with bank financing, while local governments would own assets financed by local investors. More specifically, the report suggests an industry watchdog should be assigned to officially unravel the intertwined ownership structure.
Corporate Governance
The reform also may open a door to more private investment in rural grid companies as well as further expansion, based on market maturity.
“The diversification of ownership can attract more capital for grid construction,” said the CEC expert.
Currently, many local grid enterprises are controlled by major state-owned grid companies. In the next reform stage, they would be allowed to transfer all assets to provincial grid enterprises, or form subsidiaries controlled by provincial grids.
Corporate governance reform could also help resolve long-term conflicts among government agencies as well, a research expert told Caijing.
The CEC report also says “separating power generation from distribution” is a goal for further reform of the electricity market. Power distribution companies in provinces may try to attract qualified market competitors, while power generation companies in developed regions may be allowed to supply distributors directly.
Meanwhile, some experts have urged combining rural electricity system reform with the reform of power generation and distribution networks. Trials of the separation may kick off in provinces such as Shanxi, Shaanxi and Sichuan provinces as well as Guangxi Autonomous Region.
“We recommend launching the trial in provinces with various power-selling entities in rural areas, and with several listed power enterprises,” said an expert at CEC.
Sichuan Province could be an ideal field for an experiment, since it already boasts a sound corporate governance structure among listed companies, while its rural power grids are scattered and a monopoly operates the power generation and transmission systems.
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Rural Power Network Ready for Unravelling
The days may be numbered for disputes over who owns the power grids built throughout rural China over the past decade.
Li Qiyan, Caijing
21 January 2009
Government regulators are preparing to untangle the complex ownership issues that have tied China’s rural electric power distribution network in financial knots.
More private investment may be welcomed, and the network may be redrawn to clearly define the interests of central and local governments, which between 1998 and 2003 invested more than 300 billion yuan in the massive grid system.
Caijing learned of the government’s plan from a source who attended a recent seminar sponsored by the China Electricity Council (CEC), which operates under the direction of the State Electricity Regulatory Commission (SERC).
Participants were told that CEC plans to publish a report on rural power reform based on two years of research. The report’s core includes recommendations for policymakers on issues including the ownership of grid-related assets in rural areas, and measures for the next round of rural power reform.
“Rural power reform, a major task set by the 11th Five Year Plan for electric system reform, will be a breakthrough for separating power generation and distribution,” a SERC official told Caijing, adding the report would be issued after China’s Spring Festival ends in early February.
Ownership Questions
A top priority for reformers is the ownership structure for the 300 billion yuan in grid assets strung across rural areas, which were amassed in four stages.
The first stage, at the beginning of 1990s, was highlighted by chaotic fund management. Financial records were incomplete or nonexistent.
Grid construction in the second stage, 1994-’98, relied heavily on central government investment as well as local government funds, bank loans, private capital and foreign investment.
The largest grid investment came in the third stage – 1998 to 2002 – with 20 percent of the capital from treasury bonds. The rest was financed by provincial governments through loans.
After 2003, funding for fourth-stage construction was financed with bonds earmarked for projects in the nation’s interior and western regions, as well as provincial grid company investments for expanding the rural network.
Controversies over the 300 billion yuan investment involved grid enterprises as well as central and local governments. Capital allocated by the State Council from June 1998 to late 2003, as well as loans from the Agricultural Bank of China, amounted to 288.4 billion yuan. The central government also invested 33.42 billion yuan to build grid infrastructure in towns.
“In addition to the 300 billion yuan in assets, poor management obscured asset ownership in the first and second stages,” a CEC expert said. “The rural power system reform cannot be pushed forward until ownership is straightened out.”
The State Council made a list of investments from the central government and local governments, as well as bank loans. However, the list did not clearly identify major investors. Complicating the issue is that local enterprises are required to repay bank loans.
Disputes have focused on whether these assets are owned by the central or local governments. But grid companies are making claims as well.
Grids argue that they have been repaying the commercial loans while also taking responsibility for network construction. “The assets should belong to provincial power grid companies, as we have paid the debt,” said one provincial grid system manager.
Government officials plan to settle these ownership disputes. An expert close to one research agency said ownership will be resolved according to a principle called “whoever invests, owns.”
According to this principle, State Grid Corp. and China Southern Power Grid would own assets built with bank financing, while local governments would own assets financed by local investors. More specifically, the report suggests an industry watchdog should be assigned to officially unravel the intertwined ownership structure.
Corporate Governance
The reform also may open a door to more private investment in rural grid companies as well as further expansion, based on market maturity.
“The diversification of ownership can attract more capital for grid construction,” said the CEC expert.
Currently, many local grid enterprises are controlled by major state-owned grid companies. In the next reform stage, they would be allowed to transfer all assets to provincial grid enterprises, or form subsidiaries controlled by provincial grids.
Corporate governance reform could also help resolve long-term conflicts among government agencies as well, a research expert told Caijing.
The CEC report also says “separating power generation from distribution” is a goal for further reform of the electricity market. Power distribution companies in provinces may try to attract qualified market competitors, while power generation companies in developed regions may be allowed to supply distributors directly.
Meanwhile, some experts have urged combining rural electricity system reform with the reform of power generation and distribution networks. Trials of the separation may kick off in provinces such as Shanxi, Shaanxi and Sichuan provinces as well as Guangxi Autonomous Region.
“We recommend launching the trial in provinces with various power-selling entities in rural areas, and with several listed power enterprises,” said an expert at CEC.
Sichuan Province could be an ideal field for an experiment, since it already boasts a sound corporate governance structure among listed companies, while its rural power grids are scattered and a monopoly operates the power generation and transmission systems.
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