A Study On Price Regulation Of Chinese Electricity Transmission&Distribution And Supporting Measures

For a very long time, electricity industry has been operating in a vertically integrated structure including power generation, transmission, distribution and sale, and was strictly regulated by government. However, with the development of economy and technology, many serious defects have exposed in the electricity industry in this operating mode. The most outstanding problem was low production efficiency because there was not enough pressure to the enterprises and the whole industry to reduce costs or promote technological progress. Since the late1980s, with the new development of natural monopoly theory and regulation theory, many countries around the world have restructured the electricity market by separating the traditional vertically integrated structure into competitive sectors (power generation and sale) and monopory sector(power grids). And from then on, the focus of regulation has shifted to the grid because of its natural monopoly characteristics.Price reform is the core of electricity industry reform, especially the transmission and distribution price. Unfortunately, there is no independent transmission and distribution pricing mechanism in our power industry. The so-called transmission and distribution price is received by retail price minus the generation price. Because of the information asymmetry between the grid corporations and the regulator, and lack of excitation, this pricing mechanism is unable to improve enterprises’ internal production efficiency. Price-cap regulation (PCR) is one of the performance-based incentive regulations, and has been widely implemented in many countries. Price-cap regulation has obvious advantages in overcoming information asymmetry and encouraging regulated enterprises promoting efficiency.Based on China’s specific conditions, by adding expansion factor and quality factor into the basic PCR model, we constructed a new PCR model which is applicable for Chinese grid corporations. This model not only has the function of encouraging grid corporations to raise the productivity, maintaining and improving the quality of services, but also has the excitation of promoting network investment. Meanwhile, this paper makes summary introduction of how to determine the factors in the model. However, price reform is only part of the solution, but not all. According to other countries’ experience, an independent and authoritative regulatory agency is also needed. Besides, as the population expands, we must pay more attention to the resource depletion and environmental pollution problems in order to maintain the harmony between social community and natural environment.