Regulator makes about-turn on policy

PUBLISHED : Saturday, 11 February, 2006, 12:00am
UPDATED : Saturday, 11 February, 2006, 12:00am

Commission seeks to let power firms continue to raise tariffs

The central government has proposed extending a policy allowing power firms to raise tariffs to offset coal cost increases in a bid to break a deadlock between coal and power producers over coal contract negotiations and avert a power crisis.

Industry policymaker National Development and Reform Commission had submitted a proposal to the State Council asking it to approve the continuation of a coal cost pass-through policy implemented in May last year, China Securities Journal quoted the proposal document as saying.

The plan would be an about-face on the part of the commission, whose officials hinted late last year that a power price increase this year was unlikely.

At the time, industry watchers interpreted the officials' comments to mean an end to the coal cost pass-through policy as a way to lower expectation of price increases in the coal industry.

But the strategy did not pay off, with the five state-owned power companies - controlling more than half of the country's power generation capacity - banding together to oppose coal firms' price demands in the annual coal sale and purchase conference held last month.

Officials from the five power companies have said that they have virtually signed no coal procurement contracts for this year at the conference.

Officials at Datang International Power Generation and the nation's largest coal producer China Shenhua Energy said they had not seen the highly restricted proposal document submitted to the State Council.

But they said the content of the reported proposal made sense given the commission had issued earlier this week a directive to power and coal firms, which hinted its consent for higher coal prices.

The directive said that it would be 'reasonable' for certain 'key contracts' to see some price rises.

'With the NDRC agreeing to let coal costs increase, it would only be logical for it to also allow power firms to raise tariffs,' a power industry official said. 'The government may be reluctant to see power tariffs rise, but they don't want to see a power crisis either.'

Under the pass-through policy, power firms can pass more than 70 per cent of coal cost increases beyond 5 per cent to customers through bi-annual power tariff adjustments. A tariff increase was due in November but none was made due to inflation concerns.

Coal prices, which have more than doubled in the past two years, have put a major margin squeeze on the profits of power companies.