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Liberalisation and Restructuring of Electricity
Markets in South East Asia

• Michael Sonnenberg
• October 2002

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Overview

• Introduction
• Setting the scene and objectives
• What is the significance of energy sector reform
  in South East Asia?

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Overview (contd)

• Why reform the ESI?
• Why have reform of the energy sector?
• Pluses and minuses of reform? If it aint broke,
  why fix it?
• What types of reform are there? How can reform be
  structured best?
• How to prepare for reform?
• Ingredients for successful reform

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Overview (contd)

• Why reform the ESI?
• Obstacles to deregulation
• Modern power pools
• Privatisation issues (as a consequence of
  restructure)
• Process
• Preparation
• Due Diligence - vendor and purchaser
• Financial issues/Bankability

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Overview (contd)

• Case studies of electricity reform in certain
  South East Asian countries
• Further issues
• Reform of other industries
• Debunking the myth deregulation does not mean no
  regulation
• The need for an independent regulator

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Introduction

• Setting the scene and the objective of this talk
• Deregulation is a process which turns a fully
  government owned entity into a fully or partially
  publicly owned corporation, operating in a more
  competitive environment
• Deregulation is the change in ownership and
  decision making
• Deregulation is not necessarily a change in the
  degree of regulation

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Introduction (contd)

• Governments still make policy for the sector
• The Process of Reform the ingredients for
  successful reform
• The Reasons for Reform engine for growth
• The Extent of Reform is privatisation always the
  best way forward?
• The Reform of other Industries more than just
  electricity (eg gas, water, roads)

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Introduction (contd)

• What is the significance of energy sector reform
  in South East Asia?
• The need of competition
• The need for infrastructure provision
• Reform will fuel growth
• it lowers costs for consumer
• allows for greater competition in electricity
  intensive industries

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Introduction (contd)

• Reform will fuel growth
• produces better resources allocation
• produces better service and more innovation
• allows Government to apply its resources to other
  sectors of the economy

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Why reform the ESI?

• Pluses and minuses of reform? If it aint broke,
  why fix it?
• What are the benefits of reform?
• Lower costs and price per unit of production
• More competition in energy intensive industries
• Improved technical efficiency
• More reliable power

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Why reform the ESI? (contd)

• What are the benefits of reform?
• Better industrial relations behaviour
• Creation of more infrastructure
• Owner interests an important aspect
• Minuses of reform
• The negative effect of a poor model
• High concentration of generation assets with less
  competition
• Excessive regulation
• Reformist must look at structural competition
  policies

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Why reform the ESI? (contd)

• What types of reform are there?
• How can reform be structured best?
• Basic models for electricity reform
• Models for breaking up State-owned vertical
  monopoly
• single buyer model
• wholesale competition model
• retail competition model

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Why reform the ESI? (contd)

• Corporatisation v Privatisation
• Corporatisation
• Privatisation
• Is Privatisation always the best model?

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What is the best way to reform an ESI?

• Ingredients for reform
• Planning issues
• Long term preparation/the iceberg principle
• Good model suited to specific country
  circumstances should be followed
• Ongoing monitoring of reliability and measurement
  of progress

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What is the best way to reform an ESI? (contd)

• Political issues
• Political will and long term support
• Buy in by stakeholders
• Structural issues
• Legislation, Regulations and Industry Codes
• Legal enforceability
• Transparency
• Provision of information

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What is the best way to reform an ESI? (contd)

• The right people
• Good advisers
• Champions for change
• Dedicated team
• Continuity

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Obstacles to Deregulation

• Union activity
• Tenure of employment
• Obligatory transfer of employees
• Retrenchments
• Strategic issues
• Timing
• Utility investment appetite/world conditions
• Depth of capital markets/Bankability

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Obstacles to Deregulation (contd)

• Stakeholder aversion
• Why change what works?
• Can the private sector really do it better - and
  cheaper?
• Regulatory risks
• Vested interests/fiefdoms

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Obstacles to Deregulation (contd)

• Independent legal system
• Without a reasonably sound legal system there is
  no real machinery to facilitate or support sale
• Transparency
• Access to courts for relief
• Reputation and sanctity of contracts
• Enforceability of remedies

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Modern power tools

• Australia
• National Electricity Market (NEM)
• Single dispatch process determines a merit order
  for the dispatch of generation based on a 5
  minute dispatch cycle and half hourly trading
  intervals
• Maximum spot price is set under a National
  Electricity Code (NEC)
• Pool operated by National Electricity Market
  Management Company (NEMMCO)

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Modern power tools (contd)

• New Zealand
• New Zealand Energy Market (NZEM)
• Price is established for each of 48 half-hour
  trading periods every day, at 250 grid connection
  points around New Zealand
• Electricity priced at market clearing levels and
  the price is not capped
• NZEM has a voluntary, self-regulated electricity
  market
• Operates within the NZEM Rules

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Modern power tools (contd)

• Norway
• International pool for Nordic country
  participants
• No legal monopoly on arranging transactions
  competes against a non-centralised bilateral
  market
• Pool owned by a profit-making corporation

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Modern power tools (contd)

• United Kingdom
• United Kingdom Power Exchange (UKPX)
• Spot market which allows trading up to one hour
  ahead of dispatch (delivery) of the electricity
  contract
• System operation - National Grid Company
• Full integrated exchange and clearing house. UKPX
  guarantees all contracts against counterparty
  credit default

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Modern power tools (contd)

• Others
• Spain
• Argentina
• Chile
• Colombia
• Bolivia
• United States (various examples)

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Privatisation issues

• Process
• Competitive tendering process
• Expert advisers
• Dedicated team
• Risk allocation and management
• Quick process
• Bid evaluation
• Probity and transparency

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Privatisation issues (contd)

• Preparation
• The Iceberg principle
• Due Diligence
• Financial issues/Bankability

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Case studies of electricity reform in certain
South East Asian countries

• Levels of deregulation
• Total or Near Semi-Deregulation None or
  Minimal Total Deregulation Deregulation
• Australia China (Hong Kong) China
• New Zealand Japan Indonesia
• United States Malaysia Philippines
• Korea (later) Taiwan
• Singapore Thailand
• Vietnam

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Case studies of electricity reform in certain
South East Asian countries (contd)

• Singapore
• Current status
• Mainly state ownership in generation
• Separate state utility responsible for
  transmission and distribution
• Public monopoly in retail supply to small
  customers, competition for larger customers

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Case studies of electricity reform in certain
South East Asian countries (contd)

• Singapore
• Future direction
• The Governments plan was for Government owned
  generation assets to be sold, and all consumers
  to have choice of supplier by 2003. However this
  has been delayed due to technical problems.
• The Government may also be delaying because of
  likely poor sales due to a slump in the utilities
  market

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Case studies of electricity reform in certain
South East Asian countries (contd)

• Australia
• Current status
• Generation separate from network functions in
  most states
• Mixed private and public ownership
• Compulsory wholesale pool, third party access and
  retail competition in the national market
  (southern and eastern states)

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Case studies of electricity reform in certain
South East Asian countries (contd)

• Australia
• Current status
• Independent regulators
• Future direction
• Full retail competition in the national market by
  2003

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Case studies of electricity reform in certain
South East Asian countries (contd)

• New Zealand
• Current status
• Competing private and public generators
• Single public transmission company
• 29 independent distributors with mixed ownership
• Five major competing retailers, four of which are
  significantly integrated with generation, and
  five smaller retailers

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Case studies of electricity reform in certain
South East Asian countries (contd)

• New Zealand
• Current status
• Voluntary wholesale market
• Lighthanded regulation
• Future direction
• New governance board to be established
• New regulatory powers for the Minister for Energy

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Case studies of electricity reform in certain
South East Asian countries (contd)

• New Zealand
• NOTE In New Zealand (unlike Australia),
  ownership of the poles and wires business was
  legally separated from ownership of retail
  businesses by legislation

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Case studies of electricity reform in certain
South East Asian countries (contd)

• Malaysia
• Current status
• Mixed private and public ownership in generation
  (IPPs account for around a third of total
  capacity)
• Vertically integrated public utilities with
  regional monopoly in transmission, distribution
  and retailing
• Tariffs regulated by an independent authority

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Case studies of electricity reform in certain
South East Asian countries (contd)

• Malaysia
• Future direction
• More IPPs and open bidding for new power plant
  projects
• Structural separation of the main public utility
• Retail competition to be adopted progressively

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Case studies of electricity reform in certain
South East Asian countries (contd)

• Philippines
• Current status
• Mixed private and state ownership in generation
• State generator, National Power Corporation
  (NPC), is also monopoly supplier of transmission
  services
• Private utilities have regional monopolies in
  distribution and retailing

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Case studies of electricity reform in certain
South East Asian countries (contd)

• Philippines
• Current status
• NPC is also a regulator
• Currently there is an investigation being
  conducted into the legitimacy of the set of IPPs,
  but so far no problems have been found

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Case studies of electricity reform in certain
South East Asian countries (contd)

• Philippines
• Future direction
• NPC to be separated and privatised, with
  transmission likely to be privatised first
• However, at present, further reform is being
  delayed

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Case studies of electricity reform in certain
South East Asian countries (contd)

• Korea
• Current status
• Corporatisation of generation functions April
  2001
• Creation of wholesale power pool operated by KPX
  April 2001
• Transmission, distribution and retail remain
  vertically integrated and are operated by the
  majority (51) state owned Korea Electricity
  Power Company (KEPCO)

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Case studies of electricity reform in certain
South East Asian countries (contd)

• Korea
• Current status
• No privatisation yet apart from limited IPPs
  (around 6 of generating capacity)
• Future direction
• Competition in generation through sale of KEPCO
  assets and entry of IPPs
• Distribution system to be privatised
• Full contestability in retail supply after 2009

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Case studies of electricity reform in certain
South East Asian countries (contd)

• Thailand
• Current status
• Mainly state ownership in generation
• Separate state utility responsible for
  transmission and distribution
• Public monopoly in retail supply to small
  customers, competition for larger customers

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Case studies of electricity reform in certain
South East Asian countries (contd)

• Thailand
• Future direction
• Competition between private generators and
  corporatised subsidiaries of EGAT
• Distribution open to private companies and
  consumers to choose retailer, post 2003
• Independent regulator to be established
• Unlikely that a gross power pool will be created,
  more likely it will be a net power pool, similar
  to the current UK (NETA) model

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Case studies of electricity reform in certain
South East Asian countries (contd)

• Indonesia
• Current status
• State owned vertically integrated utility (PLN)
  involved in all stages
• Some self generation and IPPs. IPPs must sell to
  PLN
• Future direction
• IPP share to increase
• Unbundling of PLN
• Transmission to be opened to private companies

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Further issues

• Other industries
• What can other industries teach us about the ESI?
• What can ESI teach us about other industries?
• A new frontier The possibility of a South-East
  Asian transnational electricity grid

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Further issues (contd)

• Debunking the myth Deregulation doesnt mean no
  regulation
• Deregulation is a change in ownership
• Considerable regulation is required
• The need for an Independent Regulator (NOT
  VICTORIA)
• What is the function of a regulator?
• Why does a deregulated industry need one?

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Further issues (contd)

• The need for an Independent Regulator
• What does a good regulator need?
• Independence is full independence possible? Is
  semi-independence enough?
• Clear objectives
• Clear powers
• Special purpose legislation
• Mechanism for review
• Judicial review
• Administrative review

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Case Study 1 Korea

• RISKS/ISSUES RELEVANT TO FIRST SALE
• Financial issues
• Revenue certainty for Gencos not yet firmly
  established
• Depth shallowness of Korean capital markets
• Balance Sheet of KOSEPCO debt issues
• No tariff order (or equivalent) in place yet for
  monopoly services (distribution and transmission)
• No clarity regarding monopoly pricing resets
  (over period)

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Case Study 1 Korea (contd)

• RISKS/ISSUES RELEVANT TO FIRST SALE
• Other issues
• Non-independent regulator
• Power market not yet fully developed (Cost Based
  Pool - leading to Price Based Pool)
• Risk Government may discontinue sales program
  after first sale
• Incomplete reform program (eg no retail
  deregulation timetable yet)
• Distribution not yet separated from rest of
  utility

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Case Study 1 Korea (contd)

• RISKS/ISSUES RELEVANT TO FIRST SALE
• Other issues
• Vesting/Transitional contract regime not yet in
  place (but being developed)
• Risks of litigating in Korea
• Trade union activity against program / Protection
  for workers on sale of KOSEPCO
• Joint and several liability - issues as
  consequence of reform program

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Case Study 1 Korea (contd)

• RISKS/ISSUES RELEVANT TO FIRST SALE
• Other issues
• Fuel purchasing issues - implications for KOSEPCO
• KOSEPCO plans under construction
• Potential market power of nuclear Genco (KHNP)
  and the impact on KOSEPCO
• Foreign ownership issues - limit on ownership
  in Gencos

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Case Study 1 Korea (contd)

• ISSUES CONCERNING AN INDEPENDENT REGULATOR FOR
  KOREA
• Why would an independent regulator help in Korea?
• Attraction for investors from jurisdictions used
  to independent regulator
• Good selling point providing high level of
  comfort
• Adoption of appropriate models for ESI regulation
  - customers, Government Interference

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Case Study 1 Korea (contd)

• ISSUES CONCERNING AN INDEPENDENT REGULATOR FOR
  KOREA
• What would be necessary for the KEC to be truly
  independent?
• Change in legislation
• Change in culture/political attitude

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Case Study 1 Korea (contd)

• ISSUES CONCERNING AN INDEPENDENT REGULATOR FOR
  KOREA
• Is it realistic to expect Korea to adopt the
  (truly) independent regulator model?
• Not at this stage
• Korea has had the debate and feels it cannot
  adopt this model at this time

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Case Study 1 Korea (contd)

• ISSUES CONCERNING AN INDEPENDENT REGULATOR FOR
  KOREA
• What are the obstacles?
• Mainly political
• Some cultural
• Some ESI-related
• But mainly not wanting to let go of some control

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Case Study 2 The Victorian system (the Essential
Services Commission)

• Established by the Essential Services Commission
  Act 2001 (the Act) and having commenced
  operations on 1 January 2002, the Commission has
  subsumed the Office of the Regulator-General and
  its work builds on the regulatory foundation laid
  by that Office

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Case Study 2 The Victorian system (the Essential
Services Commission) (contd)

• Objectives
• The Act establishes the following objectives for
  the ESC
• to protect the long-term interests of Victorian
  consumers with regard to the price, quality and
  reliability of essential services
• to promote a more certain and stable regulatory
  framework which is conducive to longer-term
  infrastructure investment and to maintain the
  financial viability of regulated utility
  industries

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Case Study 2 The Victorian system (the Essential
Services Commission) (contd)

• to have regard to relevant health, safety,
  environmental and social legislation in its
  decision-making
• to be consultative and transparent in its
  processes and to publish a Charter of
  Consultation and Regulatory Practice
• to co-ordinate formally with other regulators to
  avoid duplication and to achieve more integrated
  decisions and outcomes

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Case Study 2 The Victorian system (the Essential
Services Commission) (contd)

• Functions of the ESC
• Makes price determinations and approves prices
  for various essential services provided by
  natural monopoly utility businesses
• Sets standards for natural monopoly services
  through enforceable codes of conduct, and sets
  financial and other incentives for regulated
  businesses to meet key performance standards

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Case Study 2 The Victorian system (the Essential
Services Commission) (contd)

• Functions of the ESC
• Issues guidelines that detail how it interprets
  specific licence or code obligations and approves
  market rules to assist customers to exercise
  choice in newly competitive markets
• Ensures that utility customers have an effective
  consumer protection framework and access to fair
  and efficient external dispute resolution
  processes

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Case Study 2 The Victorian system (the Essential
Services Commission) (contd)

• Functions of the ESC
• Issues licences to new entrants and existing
  suppliers of essential services that set out
  licensees rights and obligations
• Monitors, audits and enforces compliance with
  regulatory obligations in licences and other
  statutory and regulatory arrangements and
  published reports on the financial and service
  performance of licensed businesses

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Case Study 2 The Victorian system (the Essential
Services Commission) (contd)

• Functions of the ESC
• Makes binding decisions on access disputes about
  the terms on which a potential user has been
  offered the use of natural monopoly
  infrastructure services

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Case Study 2 The Victorian system (the Essential
Services Commission) (contd)

• Powers
• s32 - Price regulation
• s33 - Price determinations
• s37 - General power to obtain information and
  documents
• s40 - Inquiry by Commission (and power to make
  summons s44)
• s53 - Enforcement orders

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Case Study 2 The Victorian system (the Essential
Services Commission) (contd)

• Structure
• Governing law Essential Services Commission Act
  2001 (the Act)
• Fully independent
• S12 Except as provided by or under this Act or
  any other Act, the Commission is not subject to
  the direction or control of the Minister in
  respect of any determination, report or inquiry

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Case Study 2 The Victorian system (the Essential
Services Commission) (contd)

• Structure
• ESC shares responsibilities with ACCC
• Mechanism for review
• Appeal Panel
• Judicial review

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