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p. 11 of 30 BACK | NEXT Introduction Regional Energy Context Energy Policy Issues Structural Reform Background Multilateral Coordination Power Subsector Reforms Hydrocarbon Subsector Reforms Private Sector Role Energy Efficiency Energy Pricing Energy and Environment Rural Energy Development Regional Cooperation and Energy Development Conclusions and Recommendations

Bank Policy Initiatives for the Energy Sector : Energy Policy Issues : Structural Reform

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Power Subsector Reforms

15. The Bank's power sector lending experience since 1968 has borne out certain broad characteristics common to the poor power sector performance in some DMCs. These are (i) institutional weaknesses; (ii) uneconomic pricing; (iii) inefficient generation, delivery, and use of power;¹ (iv) high demand growth; (v) adverse environmental impacts; and (vi) indigenous fuel supply limitations. Power subsector expansion during the 1980s, in particular, was largely based on foreign borrowing, and government loans and equities because internal cash generation was insufficient to support the expansion due mainly to tariffs lagging significantly behind cost of supply in many utilities. The debt-service burden carried by many utilities is now so large that they would not be able to put through the forecast expansion based on past practices.

16. Utilities should not continue to depend on the government for incremental equity and debt, especially when governments have to cut budget deficits, control inflation, and meet requirements in the social sectors. Thus, utilities need to raise equities and loans from sources other than the government and to rely more on equity. Also, the envisaged power subsector expansion program for the next 10 years is so large that it is beyond the implementation capacity (especially in terms of trained and experienced personnel) of many utilities. It is, therefore, necessary and urgent that new participants and institutions come into the field. Restructuring of the DMCs' power subsector has therefore become necessary to (i) introduce competition, (ii) allocate a greater role for the private sector, (iii) separate the roles of owning and regulating, (iv) provide for fair, objective, stable, and transparent regulation, and (v) broaden the financing base. Such a restructured power subsector will also be conducive to technologies and methods facilitating higher operational efficiency and environmental improvement.

17. Major changes are taking place in many parts of the world to restructure the power sector to introduce competition. In the United States, legislation has brought into existence a large number of independent power producers (IPPs) who have introduced an element of competition. The United Kingdom and New Zealand are the two countries which have introduced far-reaching reforms to enable competition and transparent regulation (see Box 1). France, on the other hand, has not followed the restructuring approach, but has a highly autonomous national power utility which is heavily decentralized with every profit center having a performance contract with the utility management to maximize efficiency in planning, construction, and operation, and thereby ensure achievement of quantified performance levels. Experience in the OECD countries, as well as the modest beginnings made in the PRC, India, Indonesia, Malaysia, Pakistan, Philippines, and Thailand, shows that there is a wide range of options for power subsector restructuring. Thus, the Bank will encourage DMCs to undertake restructuring efforts appropriate to the maturity of their stock exchange and capital market, the extent of autonomy of their public utilities as well as the existing structure of the subsector. The overall medium-term goal will be to reach market structures which allow freedom of entry, remove restrictions on ownership and management, enable competition, and allow to the extent possible costs and prices to be determined by market forces.

18. Whatever model is regulatory, most feasible in terms of the pace and sequencing for restructuring, the key objectives should be to (i) separate the management, and ownership functions of the government; (ii) restructure utilities as corporate, commercial entities so they can function with managerial autonomy; (iii) enable the utilities to issue equity and bonds and raise long-term borrowings from the capital markets based on their financial performance; (iv) enable utilities to raise the needed equity to finance expansion through retained earnings; (v) retain nationwide least-cost planning and optimal loading of generating units in operation; (vi) improve operational performance in terms of heat rates, plant factors, system losses, and collections; and (vii) aggressively pursue demand side management (DSM) programs.

19. Some DMCs have started moving in the right direction. The Metropolitan Electricity Authority in Bangkok and the Electricity Generating Authority of Thailand (EGAT), for example, are government-owned utilities that are efficiently managed and that enjoy considerable autonomy and a good credit rating in the market. EGAT is implementing new large power plants jointly owned with the private sector and envisaged for full privatization some time after their commissioning. The Philippines has most of the distribution function in the private sector and has recently promulgated legislation to allow private sector participation in power generation through build-own-operate- transfer (BOOT) and build-own-operate (BOO) options. The Philippines already has an independent Energy Regulatory Board with jurisdiction over all energy supply entities. The National Electricity Board of Malaysia has been restructured as a corporation and renamed Tenaga Nasional Berhad, and 25 percent of its shares have been successfully issued to the public. Malaysia is also encouraging the entry of private sector in power generation by BOOT and BOO options and has allocated the overall electricity regulation function to the newly created office of the Director General of Electricity. Pakistan has formulated a set of rules and procedures to enable the entry of large private generating units. India has opened its power subsector to local and foreign investors for setting up new power generation units and is offering a range of incentives and guarantees. The PRC has permitted the construction of privately owned large power generating units.

20. It is envisaged that during the next 10 years, restructuring of the power subsector in the DMCs would take place on the following lines. The power transmission function and some hydro generating units would remain with the existing utilities, which may be privatized. Most of the existing thermal units would be privatized and most of the new thermal units would be in the private sector or jointly owned by the private sector and the utility. In the smaller DMCs, the distribution functions may be handled within the transmission function mentioned above. In the larger DMCs, the distribution functions would be separated from generation and transmission and entrusted to one or more distribution companies that are owned privately, by the government, or by local authorities, each with a specified franchise area. An independent regulatory board would regulate the transactions among the various entities, ensuring quality and reliability of supply and adjudicating on tariff adjustments. The extent to which these structural changes will take place and the timing might vary among the DMCs depending on their present structure and the momentum for change.

21. The focus of power subsector work in the Bank will be to assist DMC governments to (i) identify the optimal structure for the subsector, (ii) prepare the legislative framework needed to establish independent energy regulatory boards, (iii) formulate an appropriate compensation and benefit package to stem the exodus of skilled staff as well as to soften the impact on staff identified for severance, and (iv) carry out the restructuring work in an agreed time frame. Wherever necessary, this work will be undertaken in close coordination with the World Bank and other funding agencies. The thrust of institutional work will be to identify government-owned utilities that cannot be privatized straight away and to prepare them for eventual privatization through a program of public enterprise reforms to restructure the utilities as corporate, commercial entities. Bank assistance to the power subsector from the public sector window will be in the context of demonstrated willingness by DMC governments to undertake meaningful subsector restructuring and institutional reforms. Simultaneously, the governments will be encouraged to create the legal framework and the necessary incentive and guarantee packages to allow and attract private sector entrepreneurs to build, own and operate the new power generating units supplying power to the grid at contracted prices.

22. Nuclear power generation is a proven technology that provides about 20 percent of the world’s electricity production. About 4,000 MW of nuclear power generating plants are in operation at present in the DMCs. They are located in the PRC (2,100 MW), India (1,800 MW), and Pakistan (100 MW). The PRC and India, in particular, are carrying out large-scale expansion of their nuclear power generating facilities. There is however widespread public concern about the safety of nuclear power operations and waste disposal methods. Past accidents such as that at Three Mile Island in the United States in 1979 and that Chernobyl in the former Soviet Union in 1986 have contributed to public fears while also providing numerous lessons to the nuclear industry and its regulators. In addition, nuclear power generation requires high initial capital expenditure and skilled manpower.

23. Continued use of nuclear power in developed and developing countries and its further expansion require not only firm assurances that technical and institutional measures will be effective in protecting public health and safety, but also sustained public confidence and broad political support. The technical complexity of nuclear power technology is a barrier to public understanding, which makes it difficult for members of the public to evaluate safety questions for themselves. The Bank is very much aware of this background and has not been involved in the financing of nuclear power generation projects in the DMCs due to a number of concerns. These concerns include issues related to transfer of nuclear technology, procurement limitations, proliferation risks, fuel availability and procurement constraints, and environmental and safety aspects. The Bank will maintain its policy of non-involvement in the financing of nuclear power generation.

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