Administration of the Prices of Electricity Uploaded to Grids 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 improve the mechanism for the pricing of electric power uploaded to grids and promote the reform of the electric power system.

Article 2: The term "price of electric power uploaded to a grid" (Power Price) means the price at which an electricity generation enterprise and power purchaser settle the electric power uploaded to the grid.

Article 3: The administration of Power Prices shall be conducive to the safe and stable operation of the electric power system, conducive to promoting increased efficiency by electric power enterprises and an optimal power structure and conducive to a smooth transition, for providers and suppliers, to the reform of electricity pricing determined through competition.

Article 4: These Procedures shall govern the administration of Power Prices charged by lawfully registered electricity generation enterprises of electricity generation projects constructed in the People's Republic of China in compliance with relevant state provisions on the administration of construction.

PART TWO: POWER PRICES UNTIL THE IMPLEMENTATION OF COMPETITIVE PRICING

Article 5: Electricity generation enterprises that were formerly directly under the original state power company system and that have been separated from the power grids shall provisionally implement the Power Prices determined by the government pricing departments based on the principle of cost compensation, to be followed, in stages, by pricing implemented in accordance with Article 7 hereof.

Article 6: Those power plants retained by power grid companies whose Power Price has been approved shall continue to implement the Power Price determined by the government pricing department. The Power Price of those power plants whose Power Price has not been determined and that are wholly-owned by power grid enterprises shall be determined in accordance with the principle of cost compensation, to be followed, in stages, by pricing implemented in accordance with Article 7 hereof. The Power Price of power plants that are not wholly-owned by power grid enterprises shall be handled in accordance with Article 7 hereof.

Article 7: The Power Price of independent electricity generation enterprises shall be determined by the government pricing department based on the economic lifespan of the electricity generation project and in accordance with the principles of reasonable cost compensation, reasonable determination of returns and inclusion of tax in accordance with the law. The electricity generation costs shall be the average social costs, and reasonable returns shall take the internal rate of return on capital as the norm and be determined based on the rate of interest on long term sovereign bonds plus a set percentage point. If the Power Price is determined through a government invitation for bids, the Power Price so determined shall apply.

Article 8: With the exception of Power Prices determined through a government invitation for bids and of electricity generation enterprises using new energy sources, the Power Price for the electricity generated by all new generator sets installed in one region shall be the same and be published in advance. The Power Prices of electricity generation enterprises whose price has previously been determined shall progressively be unified.

Article 9: While maintaining basic stability in the overall level of Power Prices, such systems as peak and valley pricing, seasonal pricing, etc. shall progressively be implemented.

Article 10: At times when fluctuations in fuel prices are relatively large, Power Prices, while reflecting demand and supply for electric power in a timely manner, shall move in lockstep with the price of fuel.

Article 11: Power Prices for cross-provincial and cross-regional electric power transactions shall be handled in accordance with the relevant provisions of the Promoting Cross-Regional Electric Power Transactions Guiding Opinions issued by the National Development and Reform Commission.

PART THREE: POWER PRICES AFTER THE IMPLEMENTATION OF COMPETITIVE PRICING

Article 12: After the establishment of competitive regional electric power markets and the implementation of competitive pricing, competing electricity generation sets shall be subject to two-component Power Prices. The capacity Power Price component thereof shall be set by the government pricing department whereas the output Power Price shall be determined by market competition. Capacity Power Prices shall make a gradual transition to determination by market competition.

Regions may adopt other transition methods based on their actual circumstances.

The Power Prices of electricity generation sets not subject to competitive pricing shall be handled in accordance with Article 7 hereof.

Article 13: Government set capacity Power Price levels shall reflect electric power costs and market supply and demand and shall be conducive to attracting investment in power sources.

Article 14: Within one electric power market, capacity Power Prices shall be subject to one rate.

Article 15: The capacity Power Price shall be set based on the average investment costs of the various types of competing electricity generation sets within the regional electric power market or within the territory of the electric power dispatching and trading centre. The formula for calculating the same is as follows:

capacity Power Price = capacity power charge ¡Ò actual available capacity of the generator set,

where capacity power charge = K x (depreciation + financing charges),

K being the coefficient of proportionality determined based on market supply and demand.

Depreciation shall be determined based on the valuation depreciation rate determined by the government pricing department.

The financing charges shall be calculated and determined based on a loan percentage of 80% of average investment costs.

Article 16: Capacity Power Prices shall remain relatively stable.

Article 17: Capacity power charges shall be paid to electricity generation enterprises on a monthly basis by electricity purchasing parties based on the actual available capacity of the electricity generation sets.

Article 18: Output Power Prices shall be determined by market competition. A market trading model consistent with the realities of the region shall be selected for each regional electric power market, and consistency shall be maintained in the price competition rules of the electric power dispatching and trading centres in a regional electric power market.

Article 19: In electric power markets where the power grid enterprise is the only purchaser, part of the output of electricity generation enterprises may be subjected to price competition on the spot market or all of their output may be subjected to price competition on the spot market. Subject to an open invitation for bids being conducted or to there being sufficient competition, power grid enterprises may also implement long-term electric power transaction arrangements with electricity generation enterprises.

Article 20: In qualified regions, electric power markets in which both the electricity generation and user parties jointly participate may be established, with a market model combining bilateral transactions and spot transactions. Users of certain voltage classes or with certain consumption capacities, electricity distribution companies that keep independent accounts and electricity generation enterprises are encouraged, after approval, to directly carry out contractual transactions and participate in spot market competition.

Article 21: In electricity markets where both electricity generation and user parties participate, the quantity and price of electricity in bilateral transactions shall be determined by the parties through consultations. The quantity and price of electricity on the spot market shall be determined based on the corresponding price level for the point where the supply curve reported by the seller and the demand curve reported by the buyer intersect. During the initial stages of competitive pricing, appropriate rules may be formulated and transaction prices appropriately regulated in order to ensure that market transactions occur smoothly.

Article 22: After the introduction of competitive pricing, a mechanism whereby the sales price of electricity and the Power Price move in lockstep shall be implemented.

With a view to averting abnormal rises and drops in the spot market price, the government pricing department may, in concert with the relevant departments, place restrictions on price quotes for generated electricity based on the conditions in the regional electric power market.

During the initial stages of competitive pricing, an electricity price balancing mechanism shall be established to maintain relative stability in the sales price of electricity.

Article 23: Conventional hydroelectricity generation enterprises, coal, oil and gas burning electricity generation enterprises (including heat and electricity co-generation power plants) and nuclear power enterprises that are newly established and those that already meet relevant conditions shall be subject to market competition. Enterprises that generate electricity using new and renewable energy sources, such as wind power, geothermal power, etc., shall not be subject to market competition for the time being, with their output purchased on a priority basis by power grid enterprises at the government set price or the price set through the invitation for bids. At the appropriate time, the government will specify the percentage of the output sold by electricity supply enterprises that is to be accounted for by output generated using new and renewable energy sources and establish a dedicated competitive market for new and renewable energy sources.

Article 24: Concerning electricity generation enterprises with direct foreign investment that comply with state examination and approval procedures, if they were constructed and power purchase contracts were executed prior to 1994, or established in or after 1994 with State Council approved undertakings on electricity prices or rates of return on investment, new consultations may be carried out and best efforts made to cause them to operate in accordance with the new system, provided that reasonable returns are ensured for the investors.

Article 25: With a view to safeguarding the safe and stable operation of the electric power system, electricity generation enterprises shall provide ancillary services to the electric power market. The procedures for the administration of the pricing of paid ancillary services will be formulated separately.

PART FOUR: ADMINISTRATION OF POWER PRICES

Article 26: Prior to the implementation of competitive pricing, Power Prices of uniform dispatch generator sets on regional power grids and on local power grids subordinate to regional power grids shall be set and published by the State Council's pricing department, whereas those of other electricity generation enterprises shall be set and published by the pricing departments of the provincial-level governments.

Article 27: After the implementation of competitive pricing, the capacity Power Prices of regional electric power markets and the electric power dispatching and trading centres established therein shall be set by the State Council's pricing department. The Power Prices of electricity generation enterprises not subject to electric power market competition shall be administered in accordance with Article 26.

Article 28: Government pricing departments and electric power regulatory departments shall supervise and administer the implementation of electric power market prices within their respective purviews. Electric power regulatory departments shall submit proposals on the revision of Power Prices to government pricing departments in accordance with laws, administrative regulations and relevant State Council provisions. Information on power pricing shall be disclosed to, and be subject to the supervision of, the public.

Article 29: Electric power regulatory departments shall have the authority to halt violations of pricing laws by market trading entities and government pricing departments shall impose administrative penalties in accordance with relevant state laws. If a concerned party is dissatisfied with such act, it may apply for administrative review to the relevant department in accordance with the law or institute legal proceedings in a people's court in accordance with the law.

PART FIVE: SUPPLEMENTARY PROVISIONS

Article 30: The National Development and Reform Commission shall be in charge of interpreting these Procedures.

Article 31: These Procedures shall be effective as of May 1 2005.