Power grid firms face difficulties
By Xie Ye (China Daily)
Updated: 2004-04-02 11:29

Penny-pinched power grid firms, which oversee billions of US dollars in power transmission and distribution assets in China, are studying fundraising plans, which could include listing on domestic or overseas stock markets.

But the listing plan is still a long way off until the government reforms the electricity pricing scheme to improve profitability for companies and loosen restrictions on private and foreign capital to the strictly controlled grid networks, experts said.

China's two grid firms State Grid Corp and China Southern Power Grid Corp have been saddled with insufficient capital.

According to a research report by JP Morgan and the Development Research Centre (DRC) under the State Council, the annual cash flow of the State Grid is estimated at about 33-35 billion yuan (US$4.0-4.2 billion) for 2004-10, should the current electricity pricing system remains unchanged. It only accounts for 38 per cent of planned investment in building and improving the grid networks during that period.

Southern Grid Corp faces a similar financial situation.

Southern Grid oversees transmission assets in the five provinces in the south, while the State Grid controls grids in the rest of the country.

Earlier this year, Zhao Xizheng, president of the State Grid, said shareholding reform and the study on the listing plan are some of its priorities this year.

"(We should) broaden the channels to raise funds, tap various ways to raise funds, and lower the costs of fund-raising," said Zhao at the company's annual working conference.

Media reports indicated that the State Grid aims to float on the stock markets by 2008.

Wang Yeping, president of China Southern Power Grid, said grid companies are facing unprecedented opportunities in accelerating development.

Since China is speeding up the construction of power generating plants to alleviate the current electricity shortage, the building and improvement of power grids should catch up, said Wang.

The grid companies, however, are running short of capital to finance the construction, said Wang, adding that the listing is one of the options to solve the problem.

The Chinese Government has the tendency to push large domestic State-owned firms, such as China Telecom, China Unicom, PetroChina and Sinopec, to overseas stock markets. The government hopes the listing can help the companies raise funds and that strict market supervision could help the companies improve management and efficiency.

For grid firms, however, the listing is merely theoretical rather than practical, experts said.

A senior vice-president of the State Grid Corp said conditions for listing are premature for the time being due to two reasons.

One is that the government still places transmission assets as off limits to foreign capital. The government is concerned that grid assets are too strategically essential for the nation's economic security and that placing these in foreign hands would not be prudent.

And more importantly, grid companies cannot meet listing requirements given their weak profitability, the official said.

The State Grid Corp last year posted a net profit of 4.2 billion yuan (US$507.8 million) with a turnover of 427.7 billion (US$51.7 billion).

The return on equity is merely 0.49 per cent as compared with 4-7 per cent for power grid companies in most industrialized countries. The profit on sales is 0.1 per cent, versus 5.1 per cent in the national average for all industries in China.

The Southern Grid has a better balance sheet than the State Grid, but is still far from meeting requirements.

Weak profitability is mainly due to the current pricing system which favours generating firms.

China doesn't have separate prices for transmission and distribution. Only one-fourth of the total electricity tariff goes to transmission companies, as compared with 60 per cent in developed countries.

The DRC report said the State Grid will be in the red by 2005 under the current pricing system.

The profitability problem had not emerged until the government forced State Grid Corp to shed its own generating plants under an industry restructuring at the end of 2002. The State Grid used to use revenues from generating plants to finance the construction of grids.

Meanwhile, grid operators are crippled by huge debts.

The companies have spent more than 300 billion yuan (US$36.3 billion) in improving the power grids in rural and urban areas in the past few years under the government's proactive fiscal policy to stimulate the economy.

Most of the investments were borrowed from State banks, and were due for repayment last year.

Although the government promised to subsidize the State Grid by raising the tariff by 0.02 yuan (0.24 US cents) per kilowatthour, it comes out to be only 0.011 yuan (0.13 US cents) per kilowatt paid back to the State Grid, said an official with the State Grid who is involved in the project.

The State Grid has to pay the additional costs, said the official.

The shortfall will become even larger as the State Grid will use 81.5 billion yuan (US$9.9 billion) to invest in the construction of transmission lines and the upgrading of grids this year amid the electricity crunch.

The debt asset ratio of the State Grid Corp reached more than 61 per cent last year, and is expected to rise to 66 per cent this year, company statistics show.

To add to these woes, the government has called off the power construction funds and the electricity supply subsidiary to subsidize the State Grid. The subsidies are estimated to be valued at billions of yuan.

"After these charges were abolished, we have been lacking capital for the construction of power grids," said Zhao.

To increase the profitability of grid companies, the government, in the long run, will increase the competition on the generating side to push down the on-grid electricity price, analysts said.

It could help increase the price margin for grid companies while keeping end-user prices stable.

In the short-term, the government may also consider raising end-user prices to satisfy the immediate needs of grid companies for cash flow, analysts said.

But the government would be very cautious to raise the electricity charge which will increase the production costs for millions of industrial users, they added.

Industrial consumers account for over 60 per cent of total power consumption.

At present, the government is debating on whether to increase end-user electricity prices by about 0.02 yuan (0.24 US cents) per kilowatthour within the second quarter of this year.

The DRC report even said the transmission charge should increase by 0.04 yuan (0.48 US cents) per kilowatthour to bring the profit on assets to a reasonable 6 per cent.

And most industries are able to accommodate the electricity bill hike, the report said.

But other analysts disagree that the electricity bill will surge dramatically.

"The government hopes the end-user price for electricity remains stable, not to add pressure on inflation," said an analyst with the Beijing Economic Research Institute of Electricity Power. "The government uses the electricity price as a tool to steer the national economy as a whole, not only to satisfy the needs of grid companies."

Analysts said the government should separate the transmission price from the combined electricity price in the long run so as to force grid companies to cut down costs.

"No one knows exactly the finances of grid companies when there are no such separated prices for electricity transmission," said the analyst.

The vice-president of the State Grid said the company has not reached a consensus on whether to float the company on the stock market as a whole, or to push its better-financed subsidiaries such as East Grid on the market first.

"Big companies should centralize their decision making, rather than decentralize it. Some said it is not a good idea to list the subsidiaries," said the vice-president.

The plan to list the State Grid as a whole, on the other hand, is afflicted by poor profitability, he added.

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