Administration of the Prices for the Transmission and Distribution of Electricity Tentative Procedures

(Issued by the National Development and Reform Commission on March 28 2005 and effective as of May 1 2005.)

Fa Gai Jia Ge [2005] No.514

PART ONE: GENERAL PROVISIONS

Article 1: These Procedures have been formulated pursuant to relevant state laws, administrative regulations, the State Council, Issuance of the Reform Plan for the Electric Power System Circular (ref. Guo Fa [2002] No.5) and the General Office of the State Council, Issuance of the Electricity Price Reform Plan Circular (ref. Guo Ban Fa [2003] No.62), in order to establish a sound and rational mechanism for setting prices for the transmission and distribution of electricity, promote the development of power grids, improve the efficiency of power grid operators and safeguard the safe and stable operation of power grids.

Article 2: For the purposes of these Procedures, the term "price for the transmission and distribution of electricity" collectively refers to the prices charged by power grid operators for the provision of access system, inter-grid connection, electric power transmission and sales services (Power Prices).

Article 3: Power Prices shall be set by the government, subject to a unified policy and administered by level.

Article 4: In terms of financial affairs, independent accounting shall be implemented in stages for the electric power transmission business and the electric power distribution business of power grids.

Article 5: Power Prices shall be set based on the principles of reasonable costs, reasonable profits, calculation of taxes in accordance with the law and fair burden, so as to be conducive to attracting investment in power grids, improving the power grid structure, promoting the establishment and development of regional electric power markets and satisfying the development requirements of the national economy and society.

Article 6: These Procedures shall apply to power grid operators lawfully approved and registered in the People's Republic of China.

PART TWO: POWER PRICE SYSTEM

Article 7: Power Prices are divided into prices for electric power transmission and distribution services via public grids, prices for dedicated services and prices for ancillary services.

Article 8: The term "prices for electric power transmission and distribution services via public grids" means the prices that a power grid operator charges an electric power user that is connected to the public grid for providing electric power transmission and distribution services and sales services, hereafter the "Grid Power Price". Once transmission and distribution are separated, separate prices for the transmission and distribution of electricity shall be set.

Article 9: The term "prices for dedicated services" means the prices charged by a power grid operator utilizing its proprietary facilities to provide services to certain customers. Such prices are divided into access price, proprietary works electric power transmission price and inter-grid connection price. The term "access price" means the price charged by a power grid operator to an electricity generation plant for access system services.

The term "proprietary works electric power transmission price" means the price charged by a power grid operator for electric power transmission services using its proprietary works.

The term "inter-grid connection price" means the price charged by a power grid operator for inter-grid connection services provided between grids by utilizing its proprietary inter-grid connection works.

Article 10: The term "ancillary service prices" means the prices charged for paid ancillary services provided by an electric power enterprise. The procedures therefor shall be formulated separately.

PART THREE: DETERMINATION OF POWER PRICES

Article 11: During the initial phase of electric power price reform, Grid Power Prices shall be determined by subtracting the average power purchase price and electricity lost in transmission and distribution from the grid's average electric power sales price (excluding the governmental fund withheld on behalf of the government). Thereafter a gradual transition to an administrative method comprising costs plus returns shall be made.

Article 12: In the course of the transition to the administrative method comprising costs plus returns, those grids whose disparity between current transmission/distribution costs and transmission/distribution prices is relatively large shall gradually revise their transmission/distribution prices.

Article 13: Under the administrative method comprising costs plus returns, the government pricing departments shall regulate the overall revenues of power grid operators generated from their transmission and distribution businesses and shall set the various prices for the transmission and distribution of electricity based on the determined permitted revenues.

Article 14: The permitted revenues derived from public grid services and dedicated services shall be determined separately. Permitted revenue is comprised of permitted costs, permitted returns and taxes.

Article 15: Permitted costs are comprised of depreciation charges and operational maintenance expenses. Depreciation charges shall be determined based on the original value of the depreciable fixed assets among the effective assets approved by the government pricing department and the fixed depreciation rate formulated by the State Council' pricing authority. In principle, the operational maintenance expenses shall be determined based on the average costs of power grid operators in the society.

Article 16: Permitted returns equal valid assets multiplied by weighted average capital costs.

Valid assets shall be determined by the government pricing department. They comprise three elements, namely current assets, intangible assets (including the value of land use rights, and that of patents and non-patented technologies) and the net value of fixed assets, and exclude non-core businesses, multi-operation assets and third-production assets that should be hived off from power grid operators. Investments in projects under construction shall be included in the valid assets under actual valid investments of the previous year.

The term "valid investments" means investments approved by the competent government department and that comply with provisions on project verification, the law on the invitation for and submission of bids, etc.

Weighted average capital costs (%) = equity capital costs x (1 _ asset-liability ratio) + debt capital costs x asset-liability ratio.

The equity capital costs are determined by adding the non-risk remuneration rate and the risk remuneration rate. Initially, they shall be determined by adding a certain number of percentage points to the rate of interest on long-term sovereign bonds of the current period. Debt capital costs are determined based on the rate of interest on long-term loans specified by the state. When conditions permit, the weighted average capital costs of power grid operators shall be determined based on the normal financing costs in capital markets.

Article 17: Taxes shall be handled in accordance with relevant state provisions.

PART FOUR: GRID POWER PRICES

Article 18: The prices for the transmission and distribution of electricity of public grids shall be determined on a regular basis based on those power grid assets that have the function of transmitting and distributing electricity respectively.

The price for the transmission of electricity by a public grid in a regional grid shall be uniformly set based on the stamp method. The provincial-level prices for the distribution of electricity shall be set by taking the province as the pricing area and by different voltage class. Electricity loss during transmission and distribution shall be determined by voltage class and included in the electricity sales price.

Article 19: The price for the transmission and distribution of electricity of public grids shall be uniformly set based on voltage class. Costs and expenses of the higher voltage class shall be reasonably apportioned by the lower voltage class. The same price shall apply equally to any one voltage class in one region.

PART FIVE: PRICING OF DEDICATED SERVICES

Article 20: After the implementation of competitive pricing, with a view to facilitating fair competition between electric power generation enterprises, access pricing shall be implemented where the access system works have been invested in and constructed by a power grid operator. If the same has been invested in and constructed by an electric power generation enterprise, access pricing shall not apply.

Article 21: Access prices shall be set based on the permitted revenue for access system works approved by the government pricing department and be subject to unitary capacity prices. They shall be paid by the power plants using the access system.

Article 22: The prices for transmission of electricity using proprietary works shall be set based on the permitted revenue approved by the government pricing department, and be subject to two-component pricing. They shall be paid by the parties using such works.

Where two or more users jointly use proprietary works to transmit electricity, their permitted revenue shall be apportioned in proportion to the transmission capacity used by them.

Article 23: Prices for inter-grid connection shall be based on the permitted revenue and set in accordance with either of the following circumstances:

(1) for integrid connection works that do not have long-term output transaction arrangements, the inter-grid connection price shall be subject to unitary capacity prices and paid by both inter-grid connection parties;

(2) for integrid connection works that do have long-term output transaction arrangements, the inter-grid connection price shall be subject to two-component pricing. The inter-grid connection capacity price is the price set for inter-grid connection standby services and shall be paid by both inter-grid connection parties, whereas the inter-grid connection output price is the price set for long-term output transmission services, and shall be paid by the grid receiving the electricity.

Article 24: The inter-grid connection expenses incurred by both inter-grid connection parties shall be recovered through the Grid Power Price.

PART SIX: ADMINISTRATION OF POWER PRICES

Article 25: The State Council's pricing department shall be responsible for setting Grid Power Prices, inter-grid connection prices and the prices for the transmission of electricity by dedicated electricity transmission works. The State Council's pricing department shall be responsible for setting the access prices for access to cross-provincial grids, while the provincial-level pricing departments shall draw up the proposals for the access prices for access to the grids within their provinces and submit the same to the State Council's pricing department for examination and approval. The prices for the distribution of electricity by independent electricity distributors shall be set by the provincial-level pricing departments.

Article 26: For major policies on Power Prices, the State Council's pricing department shall fully consider the opinions of the electric power regulatory departments, electric power industry associations and the relevant market entities. The electric power regulatory departments shall submit proposals to the government pricing department on the adjustment of the price of electricity in accordance with laws, administrative regulations and the relevant provisions of the State Council.

Article 27: The government pricing departments and electric power regulatory departments at each level shall supervise and inspect Power Prices within their respective purviews.

PART SEVEN: SUPPLEMENTARY PROVISIONS

Article 28: The National Development and Reform Commission shall be in charge of interpreting these Procedures.

Article 29: Local authorities may formulate appropriate implementing rules based on these Procedures and by taking into consideration their actual circumstances, and shall implement the same after receiving the consent of the National Development and Reform Commission.

Article 30: These Procedures shall be effective as of May 1 2005.