While launching electricity reform, the Chinese government aimed to achieve various policy goals including improving production efficiency, expanding infrastructure, promoting consumer welfare, and developing a viable market system. Nonetheless, creating an IRA is not sufficient to fulfill all these goals, and it requires the involvement of other government entities. This
necessary engagement has not come about in a cooperative way but in a disjointed manner instead. While multiple government bodies have been delegated authority to take charge of various duties, they have used the power to pursue their own interests, and their enforcement has turned into political intervention in the regulation process. While SERC is expected to further push power reform and promote market competition, it is in fact unable to avoid interference from other bureaucratic bodies. Possessing formal independence does not make SERC a functional IRA when it has not been given full authority. The regulatory power is scattered among different government entities, with each sharing a similar administrative rank but having different and conflicting goals and interests. Therefore, the regulatory framework of the power sector is not a holistic, unitary scheme but a hybrid, fragmented system.
Between 1998 and 2003, the Chinese government did not have a specific ministry in charge of electricity affairs, and instead they adopted a multi-agency supervisory structure in which the
52 Shan 2002.
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SETC, SDPC, MOF, and ODCCP all had respective regulatory duties. In addition, although the SPCC was a SOE, it also performed certain regulatory functions such as electricity dispatch and technology development. This multi-agency structure was a temporary, expedient substitute since another round of reform was underway and an innovative regulatory system with an IRA was coming into being. The central leadership planned to integrate the regulatory authorities and to achieve professional regulation in tandem with industrial restructuring. SERC, however, was created as an alternative to the SETC in the power industry rather than as a comprehensive, overarching state regulator. A fragmented regulatory structure remains (see Figure 2). In a multi-agency setting, SERC’s capability is seriously discredited when facing the electricity
corporations. Accordingly, state regulation is beset by an intractable and hydra-headed bureaucracy.
Figure 2: Current Supervisory Structure of China’s Electricity Industry
State State Council
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Source: by author.
In addition to SERC, the current regulatory structure is comprised of three other major agencies. The NDRC, a mighty policymaker, holds a wide range of administrative duties and inherits two exclusive rights regarding the supervision of electricity affairs as a part of its institutional legacy – setting the tariffs and reviewing and approving construction projects.
Moreover, the NDRC deliberately misapplies these regulatory tools in an effort to manage the national economy.53 The NEC, a top-level coordinator, was delegated with drafting the nation’s energy development strategy. It makes policy recommendations and enforces its suggestions.
SASAC, the state assets watchdog, manages the ownership and operation of the central SOEs.
Since the five leading power generation companies and two major grid corporations are all central SOEs under SASAC’s purview, the conflicts of interest between SASAC and SERC are unavoidable. While SASAC seeks to maximize the corporations’ revenue and promote an oligopolistic market, SERC devotes itself to developing a functional electricity market that ensures fair and robust competition.
Although some other ministries do not directly intervene in electricity affairs, they are involved in the regulatory process due to their responsibilities—these include the Ministry of
53 For example, the NDRC has purposely kept the electricity prices low in order to not contribute to the increase in the consumer price index (CPI).
Vice-Ministerial-level Unit Ministerial /
Provincial-level Unit Bold Lines: ownership relationship
Solid Lines: supervisory relationship Broken lines: consultative relationship
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Environmental Protection for its environmental impact evaluation of power plant projects, the Ministry of Land Resources for its land-use reviews, and the Ministry of Water Resources for water-related affairs in hydropower issues. Moreover, because of the close relationship between power development and economic growth, local governments are very sensitive to electricity affairs. They are expected to play the role of gatekeeper in the regulatory process and to be in charge of preliminary reviews of prices schemes and power plant projects. Nonetheless, the local governments side with the power companies due to their own economic considerations and do not follow the central directives as part of the supervisory framework. As a result, local governments help the power firms to lobby the central authority or to evade state monitoring, thereby gaining revenues in return. They become rent seekers and a hindrance to state
regulation.54
Although the Chinese government aims to allocate authority and clarify the supervisory structure in the power sector, the ambiguous designation of IRAs has complicated the system and seriously weakened the credibility of SERC. It is the interaction and contradiction among these institutions that lead to regulatory failure and reform stagnation. The problematic design of the supervisory mechanism has resulted in a regulatory paradox in the Chinese electricity industry:
the creation of an IRA was supposed to improve regulatory effectiveness, but it failed to make regulation work. SERC is a nominal IRA that only has formal regulatory independence. Its practical regulatory independence is significantly less than the level of independence anticipated by the reform plan.