Pilot Projects for the Direct Purchase of Electricity from Power Generation Enterprises by Electricity Users Tentative Procedures

The launch of pilot projects for the direct purchase of electricity from power generation enterprises by electricity users that use electricity of a higher voltage class or consume a larger amount of electricity (hereafter, Major Users) in regions with the appropriate conditions is the main substance in deepening the reform of the power system. These Tentative Procedures have been formulated pursuant to the requirements of the State Council, Issue of the Power System Reform Plan Circular (Guo Fa [2002] No.5) and the spirit of the sixth meeting of the State Council Power System Reform Working Group in order to ensure the standardized and orderly conduct of the pilot project work.

1. GUIDING IDEOLOGY, OBJECTIVES AND PRINCIPLES FOR THE PILOT PROJECTS

(1) The guiding ideology in respect of launching pilot projects for the direct purchase of electricity from power generation enterprises by Major Users (hereafter, including power distributors that conduct business accounting independently) is: by starting with China's power industry as an actual basis, drawing on useful foreign experiences, adhering to the laws of power industry development and ensuring the safe and stable operation of power grids, to actively cultivate market entities; promote the formation of a scientific and rational power pricing mechanism; and gradually build a government-regulated power market system that has fair competition, is open and orderly, develops in a healthy way, and in which government and enterprises are separated; on the basis of fair, open power grids, with definite and rational transmission and distribution electricity prices at the core and a direct link between supply and demand as the key characteristic.

The direct purchase of electricity from power generation enterprises by Major Users is a complicated systematic project for which experience must be accumulated and conditions created through the pilot projects in order to actively make progress in a stable way.

(2) The work for the launch of the pilot projects for the direct purchase of electricity from power generation enterprises by Major Users must achieve the following objectives:

- optimize the allocation of power resources to boost efficiency in resource utilization and promote the development of electricity;

- introduce a competition mechanism for the power generation and power sales sides to promote cost reduction for enterprises, and boost efficiency and the overall competitiveness of the national economy;

- seek effective channels and methods to separate transmission and distribution, and open up power grids in a fair way so as to change the structure of exclusive power purchasing by power grid enterprises, promote competitive bidding for access to the grids, further break up monopolies, and accelerate the establishment of a competitive and open power market; and

- seek the establishment of a rational power transmission and distribution pricing mechanism to promote the reform of electricity prices and promote the sustainable development of power grids.

(3) The pilot project work shall adhere to the following principles:

- uniform deployment, stable progress, planned and step-by-step proper organization of the pilot projects, and prevention of ad hoc actions;

- a standardized launch with rules at the fore, conscientious safeguarding of the lawful rights and interests of the Major Users, power generation enterprises and power grid operators, and prevention of irrational and disordered actions;

- creating more profit after previous earnings, and give full play to the roles of Major Users, power generation enterprises and power grid operators;

- with pilot projects at the fore, proceeding gradually in an orderly way and maintaining a balanced amount of electricity supply on the power grids and maintaining stability in the overall level of electricity prices;

- active promotion of pilot projects and steady progress, upholding of the overall interests of the state, promotion of the related auxiliary reforms, and creation of the necessary external conditions for the pilot project work; and

- maintaining order in power dispatch and ensuring the safe and stable operation of power grids. Power generation enterprises and Major Users that participate in the pilot projects shall, in line with the requirements for uniform dispatch of power, participate in dispatching, alternating or avoiding peaks of electricity use in power grid emergencies.

2. SCOPE AND CONDITIONS FOR THE PILOT PROJECTS

(4) In principle, entities that participate in the pilot projects shall be located in regions that have relatively relaxed supply and demand and meet the following conditions:

Major Users, power generation enterprises (including power plants with internal accounting systems) and power grid operators participating in the pilot projects shall be economic entities with legal person status, independent accounts and be capable of independently undertaking civil liability.

Major Users who comply with state industrial policies, use relatively stable power loads, and have low energy consumption per unit of output and low pollution emissions may apply to participate in the pilot projects.

Power generation enterprises that comply with state industrial policies and are connected to a grid and, in the case of thermal power generation enterprises (including nuclear power) with an installed capacity of 600MW or more or with single-unit capacity of 300MW or more, or in the case of hydroelectric power generation enterprises with installed capacity of 200MW or more or with single-unit capacity of 100MW or more, may in principle apply to participate in the pilot projects.

(5) The direct purchase of electricity from power generation enterprises by Major Users shall generally be achieved through the existing public power grid circuits. Where new circuits actually need to be built or circuits actually need to be expanded or altered, they shall conform with the power grid development plan, be reported for approval, and be built and operated by power grid operators in line with the limits of authority for investment administration. Where Major Users have their own power lines that comply with the relevant state provisions, such lines may be used for transmission of directly purchased electricity following safety checks by a power grid operator organized by the relevant provincial government department and after having entrusted a power grid operator to dispatch and operate the power lines.

(6) The amount of electricity directly purchased by Major Users that are not power distributors is limited to self-use and must not be resold or covertly resold to another user. Sale of the amount of electricity directly purchased by a power distributor must be in strict compliance with the relevant state policies.

(7) For the time being, power plants under state centralized power distribution shall not participate in the pilot projects. Relationships in respect of the amount of electricity entering the grid, grid dispatch and settlement of accounts for accessing the grid originally approved with the power generation enterprises that participate in the pilot projects shall remain unchanged.

(8) The relevant taxes and fees, and funds specified by the state, shall be paid on the amount of electricity for the pilot projects in accordance with law.

3. MAIN SUBSTANCE OF THE PILOT PROJECTS

(9) Fair openness of the power grids. If the power grid transmission capacity, means of operation and safety constraints allow, power grid operators shall provide cross-grid power transmission services.

(10) Self-negotiated prices for directly purchased electricity. The prices and calculation methods for direct purchase of electricity from power generation enterprises by Major Users shall be determined through consultations between the buyer and the seller, and defined in the related contracts.

(11) Rational determination of power transmission and distribution prices. Pursuant to the requirements of the General Office of the State Council, Issue of the Electricity Price Reform Plan Circular (Guo Ban Fa [2003] No.62), power transmission and distribution prices shall be formulated by the government departments in charge of pricing pursuant to the principles of "reasonable cost, reasonable profit, tax calculated in accordance with the law and fair burdens". For the short term, measurements and calculations shall temporarily be made in accordance with the principle employed by the exchanges whereby the average power purchase price is deducted from electricity prices used by large industries with the corresponding power voltage class on the power grids, and shall be implemented following approval by the State Council department in charge of pricing. After the state has issued new policies on power transmission and distribution prices, such new policies shall prevail.

(12) Standardized administration of direct electricity purchase contracts. Major Users, power generation enterprises and power grid operators that participate in the pilot projects shall enter into and strictly implement relevant contracts (agreements) with reference to the (Model) Contract for Direct Purchase and Sale of Electricity and the (Model) Contract for Entrustment of Power Transmission Services. The main contents of direct purchase and sale of electricity contracts (agreements) shall include loads, amount of electricity, means of supplying electricity, production plan arrangements, calculations, accounts settlement, electricity prices, dispatch management, liability for breach of contract, compensation and dispute resolution methods, etc.

(13) Specialized and auxiliary services. Power grids shall be responsible for providing specialized and auxiliary services in accordance with standards for reliability and service quality. Power generation enterprises and Major Users shall provide auxiliary services to the power grid operators as stipulated in the contract. The price standards for specialized and auxiliary services shall be implemented pursuant to the relevant state provisions.

In the short term, when the power transmission and distribution price is determined pursuant to the principle employed by the exchanges whereby the average power purchase price is deducted from electricity prices used by large industries with the corresponding power voltage class on the power grids, power grid operators shall no longer separately accept fees for specialized and auxiliary services from power generation enterprises and Major Users.

When Major Users already have their own lines and entrust power grid operators to dispatch and operate such lines, the fees for the specialized and auxiliary services, etc. shall be measured, calculated and submitted for approval in accordance with the relevant regulations, and defined in the related contracts (agreements).

(14) Strengthening dispatch management and dispatch information disclosure. Power generation enterprises and Major Users shall adhere to unified power dispatch, and promptly submit the relevant information and forms for direct purchase of electricity and cross-grid power supply services to the power dispatch body. The power dispatch body shall carry out dispatch pursuant to the principles of "fairness, equity and openness" and the related contracts (agreements) and shall disclose power dispatch information to the power generation enterprises and Major Users in a timely manner.

4. ORGANIZATION AND IMPLEMENTATION OF THE PILOT PROJECTS

(15) The State Council Power System Reform Working Group shall provide uniform leadership for the pilot project work, and the State Electricity Regulatory Commission and the National Development and Reform Commission shall formulate implementing rules and related contract model texts pursuant to these Tentative Procedures and shall be specifically responsible for the organization and the implementation of the pilot projects and ensure the pilot project work is conducted in a standardized way. Specific pilot project provinces shall be determined by the State Electricity Regulatory Commission in consultation with the National Development and Reform Commission after study of the provinces that request to launch pilot project work.

(16) Work units that participate in the pilot projects shall formulate pilot project plans pursuant to these Tentative Procedures and the implementing rules. Such plans shall be implemented following preliminary examination by the relevant work units organized by the provincial government department with overall management of the economy designated by the provincial people's government, reporting to the State Electricity Regulatory Commission and the National Development and Reform Commission, and examination by the State Electricity Regulatory Commission in consultation with the National Development and Reform Commission.

(17) Without the state's approval, no work unit may conduct an unauthorized pilot project. The State Electricity Regulatory Commission and the National Development and Reform Commission shall investigate and handle violations of provisions in accordance with their respective duties.