Study On The Regulatory Reform Of Chinese Electricity Industrial Structure

For a long time, vertically integrated monopoly has been operating in electricity industry as an organization structure including power generation, transmission, distribution and sale. With the development of electricity industry, such as scale, technology and market, serious defects have exposed in this organization structure which was suitable in certain technical conditions. In monopoly structure with lack of competition, the most outstanding problem was low efficiency because there was not enough force and pressure to the corporations and whole industry to reduce costs, promote technological progress as much as possible. With the new development of natural monopoly theory, it has been recognized that natural monopoly will gradually weaken or even disappear when certain factors change. In the 1990s, supporting by the new theory, the electricity market was reformed by some measures which were put in practice in order to overcome the defects and to smash up this monopoly structure in many countries all over the world. The measure for Chinese electricity industry reform is provided by the international practice: the monopoly can be broken by separating the traditional vertically integrated structure into competitive sectors (power generation and sale) and monopoly sector (power grids). On the same level after separation, the monopoly should be prevented in competitive sectors and the motivation should be pushed in monopoly sector. Therefore, the essence of electricity industry reform is market structure reform. In fact, there are many problems in the market structure reform because of the lag of government regulation, and this dissertation focus on how to rebuild the market structure regulation of electricity industry.Guided by Marxist economic theory, dialectical materialism and modern Western theory of industrial organization, the dissertation bases on summarized previous studies and uses many research methods together, such as: norm analysis and substantial evidence analysis, qualitative analysis and quantitative analysis, etc.The basic research way of thinking of this dissertation is: following electricity industry reform clue, it focuses on how to rebuild appropriate regulation under a new structure, and organizes the full text followed as the logic structure:"research background—literature review—theoretical analysis—existed problem research—reason analysis—policy framework—resolve measures".Firstly, this dissertation summarizes the relevant literature and basic theory about electricity industry market structure regulations, and separates electricity industry market structure into vertical structure and horizontal structure. Vertical structure refers to the relations among power generation, transmission, distribution and sale, such as integration or separation. Horizontal structure refers to the relations among the same level, such as competition or monopoly. Secondly, this dissertation reviews the evolution of electricity industry regulations along Regulation, Deregulation and Regulation rebuilding. Thirdly, this dissertation gives its option that government regulations should be rebuilt in vertical structure and horizontal structure.Based on China's specific conditions, this dissertation analyzes Chinese current status in electricity market structure and finds out the future structure. because government regulation has not keep up with the pace of reform, many problems are exposed: in vertical structure, which the power plants are not really separated from networks leads to discriminatory access to power grids; in horizontal structure, high concentration for investors who invests power plants lead to the phenomenon of market power; the high barriers to enter or exit, products differentiation and diseconomy lead to low competition in power generation link; owing to heavy demand, the corporations would rather expand investment to obtain benefit than improve efficiency or reduce costs; as a natural monopolistic link, power grids do not make full use of their advantages based on economic scale, and many problems are occurred such as insufficient investment, lagged construction, poor security, bottleneck phenomenon.According to the above analysis, this dissertation suggests that risk management regulations framework ought to be implemented in the process of separating vertical structure in order to beware the risk should beware of the risk, and incentive compatible regulations framework ought to be implemented in horizontal structure, because to separate horizontally should pay more attention to motivation. This dissertation also provides specific regulation policies and measures to be put in practice.There are seven chapters in this dissertation, including the introduction and the text of six chapters, the structure is following as:The first chapter introduces the writing background, basic ideas, logical structure, writing significance, innovation and faults about this dissertation, reviews the concept of electricity industry market structure and the electricity industry market regulations, and also establishes the starting point and theoretical basis.The second chapter and third chapter are the theoretical basis of the dissertation. Chapter two introduces the new progress of natural monopoly theory, analyzes the natural monopoly in electricity industry, investigates the vertical structure and the horizontal structure, and studies the regulations about risk management and incentive compatible .Chapter three discusses the details and the discipline of electricity industrial structure reform practicing in USA, UK and Japan, and provides international experience for China.The fourth chapter and the fifth chapter analyses the current situation. Chapter four displays the status of Chinese electricity industrial structure by abundant data, and concludes all the problems in a word"There is not successful separation in vertical structure, there is not enough competition and motivation in horizontal structure"In vertical structure, power plants are not really separated from power grids. Although the first step of separation was finished by liquidating the assets of "920" "647" million kilowatts in 2007, the competition among various power plants is unfair because the adjustment power station and internal stockholder lead to discriminatory access to power grids, in other words, the separation is not really completed. In horizontal structure, the competition has not fully launched in competitive links. In the one hand, although the concentration of power generation corporations is low, the price competition is not applied because the only investor is the government. In the other hand, unsystematic laws lead to high barriers to enter or exit and the price inconsistency with historical causes leads to great product difference among Chinese power generating corporations. As stated above, the effects of electricity market structure reform is not in accordance with expectations, the first five power generation groups compete in investment and capacity but do not save cost and inefficiency. The power grids should be benefited by the scale, but weak investment and security are occurred after the separation between power plant and power grids, the fundamental reason is that the government neither established the price of transmission and distribution nor motivates the power grids link, so the power grids can not make rapid and efficient progress. Based on Chinese vulnerable power grids, low levels of technology and international experience, this dissertation considers that in the future the vertical structure should be required as follows: the separation of power plants and power grids, the separation of transmission and distribution, the limited separation of sales (only very important consumer can be allowed to choose power sellers but common users could not). In chapter five, based on substantial evidence analysis with six indicators, this dissertation considers that the regulation in Chinese electricity market structure has played a positive role in developing economic, reducing business costs, increasing utilization rate of power assets and improving productivity. However, the overall growth of the power industry is not entirely provided by the regulation which leads to the effective allocation of resources. The reason is that the regulation has lagged behind in costs reduction and lacked motivation, which resulted in elements investment distortion, higher costs, lower economic efficiency and lower social welfare. In order to adapt to the new electricity market structure, the regulation should be rebuilding. In vertical structure, the reform should establish a regulation framework under risk management because some risks should occur after the separation of various links, such as power price, power shortage and links coordination. In horizontal structure, the reform should establish a regulation framework under incentive compatibility in order to improve competition and motivation.The sixth chapter and the seventh chapter provided measures to optimize the electricity market structure. In accordance with the coordination requirements of vertical links, chapter six designed trade coordination regulation, price coordination regulation and network coordination regulation. According to the requirements of horizontal links, chapter seven designed enter regulation, market power regulation, asymmetric regulation and motivation regulation to improve competition and motivation. Innovations as follows:1. This dissertation considers that the essence of electricity industry reform is market structure reform and market structure regulation is one of the most important aspects to market structure reform.2. About the electricity market reform in vertical structure and in horizontal structure, this dissertation considers that risk should be controlled to rebuild vertical structure and motivation should be promoted to rebuild horizontal structure, meanwhile, risk management regulation framework and incentive compatible regulation structure are provided in this dissertation.3. Based on current situation, technical constraint and international experience, this dissertation provides strategic model for Chinese electricity market structure and considers that power distribution can not be separated from power sale completely, and the option of common users should be limited.4. This dissertation deeply analyzes the basic influence factors of Chinese electricity market structure by substantial evidence analysis and revealed reference for research workers to analyze the current situation.