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Market Watch
Cover Stories Series 2012> Sustaining Economic Growth> Market Watch
UPDATED: April 13, 2012 NO. 16 APRIL 19, 2012


Tiered Electricity Pricing System

The latest mechanism for China's electricity price reform has been determined. The tiered electricity pricing system will be enacted in the first half of 2012 and will maintain the electricity price for 80 percent of households and give a certain electricity quota for free to low-income groups, said Peng Sen, Vice Chairman of the National Development and Reform Commission (NDRC).

The tiered electricity pricing system is a widely acknowledged and reasonable one that has been applied in many developed countries. For instance, the United States, where the power market is fully competitive, adopts differentiated prices in summer and winter on the basis of a tiered pricing system for electricity use. Each month, numerous grid companies will give every household their electricity bills, including fixed expenses— such as basic expenses, fuel surcharges, sales tax and state income tax—and variable expenses determined by the household's monthly electricity consumption.

Those bills offer evidence for the government to strictly supervise the practices of grid companies. Therefore, on the basis of open and transparent statistics in the power sector, the government should take many factors into consideration when adopting the tiered pricing system and make corresponding adjustments according to residents' actual electricity consumption.

The good news is certain flexibility is given to local governments. But local governments should be warned of the "trust crisis" that has happened during resource price adjustments in the past.

It's rumored that whenever there is a public hearing on water prices, a price hike will follow. The reason for residents' distrust is that industrial information and statistics are not transparent and residents feel they don't have a say in the decision-making process.

Local governments have specific data on how each tier is determined. Successful implementation of the tiered electricity pricingsystem depends on whether residents know clearly how the level for each tier is decided and whether all consumption data are open and transparent.

Other decisions, such as merged electricity meters, per-capita consumption quota and punitive charges for overuse, should be made after soliciting public opinion.

The tiered pricing system has only involved household users of the marketoriented reform of China's electricity system. Household electricity consumption only accounts for 12 percent of the total. To restrain consumption of industrial users and accelerate energy conservation and emission reduction in the power sector, the government should fully introduce a market mechanism in all links in the sector.

Right now, due to rising costs, power plants are reluctant to produce electricity and deliberately create "power shortages," resulting in a huge waste of resources.

The State Grid, which transmits electricity, has been enjoying high profits due to its monopoly in the sector.

These barriers, caused by administrative intervention, have hampered the free flow of price information in the market, resulting in an inefficient allocation of power resources.

Therefore, in order to clarify the pricing system in the power sector, the government should step back as a referee of the market to realize price negotiations between power companies and consumers.

Then consumers' concerns, such as intransparent consumption data and unreasonable standards of the tiers, will be readily solved.

This is an edited excerpt of an article by Ma Hongman, a financial commentator, published in The Beijing News

Email us at: yushujun@bjreview.com

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