Workshop Summary China's Downstream Gas Sector Regulatory Framework Workshop: China's Downstream Gas Sector Regulatory Framework April 9 and 14, 2002 - Beijing, China Summary Report September 2002 Sponsored by Institute for Economic System and Management, State Council Office for Restructuring Economic System, World Bank, and Private-Public Infrastructure Advisory Facility (PPIAF) Foreword The workshop "China's Downstream Gas Sector Regulatory Framework" and a high level meeting parallel to this workshop were held in April 2002 in Beijing. Both meetings were organized by the Institute of Economic System and Management under the State Council Office for Restructuring the Economic System (SCORES), the World Bank and the Public-Private Infrastructure Advisory Facility (PPIAF). The purpose was to present the results of the joint study concerning establishment of a downstream gas regulatory framework in China, which was implemented during the past year by the Institute and the World Bank. This report is a summary of themes discussed during the workshop and the high level meeting. The study on "China's Downstream Gas Sector Regulatory Framework" is task for the second stage of the major project "China's Oil and Gas Sector Regulatory System", conducted jointly by the Institute of SCORES and the World Bank. The whole project began in 1999 and the study of the first stage was completed at the end of 2000. An overall regulatory framework for the oil and gas sector was presented and as result of the study, a report with the title "Modernizing China's Oil and Gas Sector: Structure Reform and Regulation" was published in March 2001. From 2001, the focus of the project shifted to downstream gas sector, namely long distance gas transmission and urban gas distribution. The results of the study during this stage are presented in two reports "China: Economic Regulation of Long Distance Gas Transmission and Urban Gas Distribution"(already published in August 2002) and "Preparing The Regulatory Framework For Long Distance Transmission and Urban Gas Distribution"(still under final revision). During the workshop, a briefing to the main components of the two reports was given which led to exchange of opinions in broader scope. Through the publication of the present report, we hope to provide a summary of the problems the gas sector is now facing as well as the alternative reform concepts that could be applicable in China. 2 Contents ACRONYMS AND ABBREVIATIONS.....................................................................................................4 A. BACKGROUND OF THE WORKSHOP..............................................................................................5 CREATION OF A REGULATORY FRAMEWORK FOR DOWNSTREAM GAS .......................................................6 FULL-DAY WORKSHOP...............................................................................................................................6 HIGH-LEVEL MEETING ...............................................................................................................................6 WORKING GROUP DISCUSSIONS .................................................................................................................6 B. CONCLUSIONS OF THE WORKSHOP..............................................................................................8 AREAS OF CONSENSUS................................................................................................................................8 China's Gas Sector System and Status Quo of Its Administration ........................................................8 The Necessity for Reform of Gas Sector in China.................................................................................8 Objectives of Gas Sector Reform in China............................................................................................8 Tasks of Gas Sector Reform ..................................................................................................................8 Separation of Downstream and Upstream Gas Regulation and Legislation.........................................9 Setting Out a Transition Period ............................................................................................................9 AREAS OF DIFFERENCES .............................................................................................................................9 National versus Regional Regulation..................................................................................................10 Downstream Gas Pricing....................................................................................................................10 Is there Any Need for Separation of Gas Transmission from Production?.........................................10 Balance of Upstream versus Downstream Interests............................................................................11 C. PROCEEDINGS OF THE WORKSHOP............................................................................................12 HIGH-LEVEL MEETING: OPENING ADDRESS.............................................................................................12 SECTION 1: PREFACE ................................................................................................................................14 Opening Address .................................................................................................................................14 Welcome Address ................................................................................................................................15 Presentation: Gas Market Development in China...............................................................................16 SECTION 2: REGULATORY FRAMEWORK FOR DOWNSTREAM GAS SECTOR...............................................18 Establishment of Modern Regulatory Framework for China's Downstream Gas Sector ...................18 International Experiences in a Developing Modern Regulatory Framework for Downstream Gas Sector--Rules-Based and License-Based Models ...............................................................................20 Designing a Regulatory Framework for China's Downstream Sector................................................22 Urban Gas Administration--Status Quo and Reform .........................................................................23 Policy Recommendations on China's Gas Market Development and Regulatory Reform..................25 SECTION 3: ECONOMIC REGULATION OF DOWNSTREAM GAS SECTOR .....................................................27 Economic Regulation of the Downstream Gas Sector: Technical Regulation, Price, and Access......27 Reform of Urban Gas Distribution System and Concept of Gas Projects Operating System in Shanghai..............................................................................................................................................29 Reform and Development of Urban Gas System in Shengzhen ...........................................................32 SECTION 4: LEGISLATION OF DOWNSTREAM GAS SECTOR .......................................................................33 Study and Analysis of Issues in Downstream Gas Legislation in China .............................................33 International Experiences in Downstream Gas Legislation................................................................34 Status and Prospect of Chinese Downstream Natural Gas Legislation ..............................................37 China to boost Sustainable and Rapid Development of Natural Gas Industry by Law.......................38 Views on Downstream Gas Legislation...............................................................................................39 APPENDIX 1: WORKSHOP AGENDA ..................................................................................................41 APPENDIX 2: WORKSHOP PARTICIPANTS....................... ERROR! BOOKMARK NOT DEFINED. 3 Acronyms and Abbreviations BCM Billion cubic meters GOC Government of China LNG Liquefied natural gas LPG Liquefied petroleum gas NOC National Oil Company PPIAF Private-Public Infrastructure Advisory Facility SCORES State Council Office for Restructuring Economic System SETC State Economic and Trade Commission SINOPEC China PetroChemical Corporation UGDC Urban Gas Distribution Company WTO World Trade Organization 4 A. Background of the Workshop In 1999, the Government of China (GOC) requested that the World Bank provide assistance in establishing a new market-oriented, modern regulatory framework for its oil and gas sector. Work initially began in 1999 with a joint team of experts (referred to as the "working group") from the World Bank, the Institute of Economic Systems and Management under the State Council Office for Restructuring Economic System (SCORES), and other concerned agencies. As a result of this collaboration, the working group undertook a range of work in regulatory reform summarized and presented in the table below. Work executed Description Recommendations and key issues I. Modernizing China's The report discusses the policy, market Reviewed progress of already Oil and Gas Sector: Structure structure, and regulation of the oil and completed sector reform and Reform and Regulation gas sector. discussed major challenges. Identified need for further reform, set March 2001 out objectives and principles of the reform, and recommended changes in the sector structure, as well as regulatory framework. Outlined need for transition period and legal framework. Provided detailed roadmap for further reform. II. China Oil and Gas Sector The conference provided a forum for Market reform and restructuring is Regulatory Reform Workshop discussions on deepening reforms necessary. within the oil and gas sector to promote Modern regulatory system, based on December 2000 competition and foreign investment and international experience, is key. on modernizing the regulatory system. Regulatory agencies must be independent. III. Economic Regulation of Long- The report focuses on the development Gas regulation should be entrusted to Distance Transmission and Urban of a regulatory framework for China's a specialized commission, whose Gas Distribution downstream gas sector, including the organization, power, and behavior are need for a regulatory commission, and modeled on international practice and June 2002 a study on the principles and techniques subject to general policy direction. of downstream gas regulation. The principles should be based on the franchising of gas distribution, and for the authorizing of "unbundled" transmission pipelines, on a nonexclusive basis, to provide open- access service. IV. Preparing the Regulatory Report discusses the creation of a Recommends Framework for Long-Distance downstream regulatory framework, as · passing a primary law. Transmission and Urban Gas well as the structure and scope of · transitional regulation during Distribution regulation, and discusses the need for the time required for the and the content of a gas law for preparation and approval of the Under preparation downstream gas regulation. law. (including this workshop) · a license-based approach for regulation. · a national downstream gas regulation agency. The Private-Public Infrastructure Advisory Facility (PPIAF) provided part of the funding for the work conducted under III and IV above and for the downstream gas regulation workshop presented in this report. Workshop: Background 5 Creation of a Regulatory Framework for Downstream Gas Since the working group began its efforts in 1999 on the study project of establishing a modern regulatory framework for China's oil and gas sector, an overall framework for implementing modern regulation in this sector was provided after investigations, analyses, and studies for more than year. On this basis, the working group began work on establishing a downstream gas sector regulatory framework in 2001, and significant progress has been made on regulatory reform initiatives. In order to present results of this work and to exchange views, a number of workshops and discussions were undertaken in April 2002, including the following: · A full-day workshop on China's downstream gas sector regulatory framework with domestic and international energy players. · A high-level meeting with leading government representatives that summarized the full-day workshop. · Individual meetings with Chinese national oil companies (NOCs), distribution companies, and agencies of central, provincial, and municipal governments. The purpose of these meetings was to discuss important conclusions and to provide an opportunity for government oil and gas administrative agencies, as well as domestic and international companies involved in the downstream gas sector, to review and discuss progress on downstream gas regulation. Full-Day Workshop A full-day workshop, chaired by Vice Minister Peng Sen of the SCORES, was held on April 9. Its purpose was to expose a wide audience to the progress on gas regulation completed by the working group, to hear relevant views expressed by government departments and the Chinese oil and gas companies, and to obtain feedback from other stakeholders. Some 200 delegates attended, from government departments, research institutes, universities, domestic and foreign oil and gas companies, municipal governments, municipal gas distribution companies, other gas enterprises, and the power industry, to the investment community. High-Level Meeting This half-day briefing and discussion hosted by Vice Minister Li Jiange on April 14 was attended by a representative group of senior officials from a cross-section of ministries, commissions, and oil and gas companies, as well as from Beijing Gas and the Gas Administrative Office of Beijing Municipal Government. The group was briefed on the proposed regulatory framework, and discussions followed on gas sector restructuring and the introduction of modern regulation. Working Group Discussions From April 10 to 18, the mission had detailed discussions of the draft report entitled "Preparing the Regulatory Framework for Long-Distance Transmission and Urban Gas Distribution." Discussion focused special attention on the draft outline of gas legislation in the report for the purpose of further study in working group meetings with different groups of stakeholders. Workshop: Background 6 This report summarizes the workshop and the activities mentioned above. It is also a summary of the work on downstream gas regulation and reform completed by Chinese working group under SCORES and the World Bank. The report consists of the following components: · A conclusion of consensus reached and differences exposed during the workshop. · Major points of view extracted from each presentation at the workshop and Vice Minister Li Jiange's opening address at the high level meeting. [[check]] The workshop on April 9 was conducted in four sections that are presented in this summary report: Section 1: Preface Section 2: Regulatory Framework for Downstream Gas Sector Section 3: Economic Regulation of Downstream Gas Sector Section 4: Legislation of Downstream Gas Sector The report also contains the following appendixes: Appendix 1: Workshop Agenda Appendix 2: Workshop Participants Workshop: Background 7 B. Conclusions of the Workshop At the workshop and in subsequent meetings, two principal areas of discussion emerged concerning the scope and principles of regulation: areas of consensus and areas of differences. Areas of Consensus A comprehensive regulatory framework should include a downstream gas law. China's Gas Sector System and Status Quo of Its Administration Since 1998, three major domestic oil and gas companies have been granted the market power of integrated operation according to geographical division which led to a situation of coexistence of administrative monopoly and natural monopoly in the gas sector. The lack of a market environment for competition and an integrated independent, transparent, fair, and efficient modern regulatory and legal framework for the sector hinders a rapid development of China's gas sector. The Necessity for Reform of Gas Sector in China China's gas sector is now experiencing a critical period of great changes and vigorous development, but the current sector management is not able to cope with the challenges emerging in such circumstances. Further reform is therefore imperatively necessary. This reform would include the creation of a competitive market structure and the establishment of a modern regulatory regime. Objectives of Gas Sector Reform in China The objective of the reform is to create a fair and competitive market environment for all participants in the gas sector through a balance between market orientation and government regulation of natural monopoly elements. Only then can the necessary conditions for a healthy development of the sector be achieved. Tasks of Gas Sector Reform Different structural and regulatory policies should be adopted for activities with characteristics of natural monopolies (downstream long-distance transmission and urban gas distribution) and for those of nonmonopolies(upstream exploration and development): Activities of nonmonopolies should be deregulated progressively to bring markets into full play, whereas modern regulation should be introduced in areas of natural monopolies where markets do not work, with the purpose of creating a fair and competitive market environment. International experience provides some good examples in this regard, and every effort should be made to include international best practices in gas regulation that are applicable and adaptable to the conditions of the Chinese gas market and that could facilitate its development. A regulatory framework should be established for the gas sector according to the principles of separation of a government's policymaking function from its policy- implementing function and removal of the remaining regulatory functions undertaken by state-owned enterprises. At the same time, a "one-window" regulatory model should be Conclusions 8 adopted to increase efficiency. The main content of the regulatory framework would include the following: · Establishing a regulatory commission for the gas sector. · Clarifying its objectives, tasks, and the powers needed to implement these tasks. · Designing its regulatory processes. · Defining its regulatory principles and approaches, as well as techniques. The necessary legal system should be developed to ensure stability, transparency, and fairness of the regulation. Given the complexity and timing in promulgating primary laws by the National People's Congress, it is envisaged that a primary gas law could not be achieved within the time span of the Tenth Five-Year Plan. As a result, a State Council Decree is needed to cover the transition period until a primary law can be enacted. Separation of Downstream and Upstream Gas Regulation and Legislation Because of the basic differences--not only in their market structure, but also in the regulatory policies and approaches--between the upstream and downstream sectors, pursuing an upstream oil and gas law integrated with the downstream gas law would add to the complexity of the reform. The general conclusion, therefore, was to keep the two laws and related regulation of the two areas separate. Setting Out a Transition Period The choice of legal instrument to implement a gas law for China requires a policy decision. For the long term, a new primary law that would give stability and certainty to the new regime is strongly recommended. Because of the long lead time to obtain such a law, however, State Council powers should meanwhile be employed. A viable option is to establish an Interim Regulatory Agency, whose tasks would include the following: · Taking over the regulatory responsibilities currently being carried out by the state-owned enterprises. · Filling in the gaps in current regulation and carrying out these new regulatory responsibilities. · Coordinating the existing regulation dispersed in different government departments and agencies. This Interim Regulator should also be responsible for regulatory changes during the transitional period. Areas of Differences Representatives from oil and gas companies shared the view that, given the specific characteristics of China's oil and gas reservoir, the investment capital and operational costs for upstream exploration, development, and long-distance transmission are relatively high. Thus, they have to bear enormous investment and operational risks. In contrast to these upstream companies, urban gas distribution companies (UGDCs) are traditional public utilities whose management system and technological innovation changes lag behind relatively. Reform and regulation therefore should focus mainly on Conclusions 9 urban gas distribution system. However, representatives from urban gas companies believed that gas production and transmission are now handled in a monopolistic way. Hence, the gas production and transmission companies have a strong incentive, as well as ability, to abuse their market power. Regulation should therefore focus mainly on the production and transmission links of the sector. National versus Regional Regulation All representatives accepted that regulation at different levels is necessary, but views were divergent on the approaches of national versus regional regulation. Representatives from the Ministry of Construction insisted that their ministry is currently the competent authority for urban gas distribution; a fairly comprehensive management system has already been formed under their direction. Future urban gas distribution reform should take into account the practical circumstances in China following the inherent laws of urban construction and administration and focus on the establishment and improvement of a management system that makes local administrations its core and that covers all types of gases, such as liquefied petroleum gas (LPG) and town gas. According to other arguments during the workshop, however, an integrated regulatory framework covering both gas transmission and distribution should be established because urban gas distribution system is an indispensable link in the gas chain and, like transmission, is also monopolistic. As to the questions concerning division of central and regional regulatory responsibilities and establishment of two-level regulatory system under this integrated framework, further deepening studies and considerations could be taken into account. Downstream Gas Pricing Divergent views were presented by UGDCs and the large upstream gas suppliers. The ability of UGDCs to pay a high gas price at the city gate is constrained by distorted pricing of competing fuels and by gas price controls exercised by municipal price bureaus. As a result, they require city-gate prices to reflect these constraints. The large upstream gas suppliers recognize the existence of these constraints, but would fail to recover the costs of production, gathering, purification, and transmission if they were compelled to set prices at the city gate in relation to the UGDCs' ability to pay. Is there Any Need for Separation of Gas Transmission from Production? Most participants agreed that a separation of gas transmission from production is required. They considered the separation of these two operations a necessary condition for ensuring a healthy and rapid growth of gas markets without control of monopolistic powers. They recognized that, at the initial stage of gas industry development where infrastructures are still quite underdeveloped, producers should be allowed to invest in transmission areas to lower risks and encourage investment in the gas sector. Such investment, however, should be subject separation of transmission from production, and third party access to the pipeline should be enforced on a nondiscriminatory basis. Some participants, however, argued that production and transmission activities in an integrated manner should be permitted, and third party access conditions should not be enforced because of the enormous risks in pipeline investments. Conclusions 10 Balance of Upstream versus Downstream Interests The principle disagreement is between the large Chinese NOCs and the UGDCs. Upstream gas players believe that UGDCs are not aggressively pursuing market development, thereby restricting demand growth. The UGDCs counter that city gate prices for gas are so high compared with the prices of competing fuels and the costs of distributing gas, thus creating a disincentive to pursue market development. As a result, the UGDCs believe that they are in a difficult position that restricts their ability to generate reasonable profits and grow the business, leading to excessive reliance on municipal or city operating subsidies. Conclusions 11 C. Proceedings of the Workshop High-Level Meeting: Opening Address (April 14, 2002) Li Jiange, Vice Minister of State Council Office for Restructuring Economic System "The Regulatory Framework of China's Oil and Gas Sector" is a major joint research project of the World Bank and the Institute of Economic System and Management of State Council Office for Restructuring Economic Systems that started in 1999. With support of relevant government agencies and oil and gas companies and after two years' investigation, study, and demonstration, we drafted a report on the modern regulatory framework of the oil and gas sector. In December 2000, the World Bank and our Institute held an international conference on "Regulatory Reform of China's Oil and Gas Sector." During that conference, research results were discussed with the participants extensively, and broad consensus was reached on many vital issues. Our research report was also submitted to the State Council and related ministries, and attracted great attention. That marked a great success of our research in the first stage. After the first international conference, the focus of our research shifted to the downstream gas sector, that is, long-distance gas transmission and urban distribution. The reasons follow. China's gas sector is now experiencing an important period of rapid development with the start of West­East pipeline project. It is clearly pointed out in the Tenth Five-Year Plan that we should accelerate natural gas exploration and utilization. According to our plan, by year 2005, the consumption of natural gas in China will reach 60­70 billion cubic meters, and the domestic output of gas will reach over 50 billion cubic meters. In comparing the perspective with the reality, we found that the coexistence of administrative monopoly and natural monopoly has seriously hampered the development of the gas sector on the one hand. On the other hand, the lack of regulations and laws has caused inconsistency, instability, and discontinuity of industrial policies, which has discouraged the investors and hampered the exploration of natural gas and the construction of pipelines and urban distribution system. All these led to a slow development of the gas market and the low capacity of gas supply. Further adjustment of market structure in the gas sector is thus needed, and it is also necessary to establish a modern regulatory regime, so that a favorable environment for sector development can be created. The gas sector is one of those industries depending on networks. Because the construction of networks itself asks for large investment that results in the scale economy effect, market entry barrier is therefore very high, and natural monopoly is formed. On the one hand, the lack of market mechanism in natural monopoly sectors impairs the consumers' interests. On the other hand, entry barrier and noncompetitive environment Conclusions 12 caused by monopoly operation have hindered the gas sector from obtaining funds and technology necessary for their development. Therefore, our point of view is to establish a modern regulatory framework of the gas sector. We should start with differentiating between natural monopoly and non-natural monopoly fields. In non-natural monopoly sectors, regulation should be gradually released, and competition encouraged, with the emphasis of regulation on creating a fair competition environment, bringing into full play the fundamental functions of the market. In the natural monopoly fields with market failures, the government's regulatory function must be strengthened, that is, through regulations on prices, market entry, and general services, and while guaranteeing the scale economy of the sectors, the government will prevent the abuse of monopoly power, so as to protect public interests. Accordingly, the key points of the regulatory framework include (1) establishing a regulatory commission; (2) specifying the regulatory guidelines, responsibilities, and power of the committee; and (3) designing the regulatory techniques and methods of the committee. Meanwhile, the legal foundation for regulation must be established. The above regulatory ideas as themes for today's discussion are reflected in our research reports, that is, "Economic Regulation of Long-Distance Transmission and Urban Gas Distribution and the Report on Regulatory Framework." In today's conference, the experts from the World Bank will introduce the major contents of these two reports first. Then I hope all participants will exchange ideas, comment freely on the problems to be solved in the sector, and advise on the revision of the reports, so as to promote the establishment of the modern regulatory framework. The transition period to join the World Trade Organization (WTO) is short. As foreign investments flow in, if the regulatory framework and the downstream legislation remain lacking, the gas sector will face a chaotic competition. Within the transition period of five years, the improvement of the government's regulatory functions and the legislation will determine the progress and development of the gas sector. So, your wisdom is highly appreciated. And I believe that with our joint efforts, we will create a good environment for the development of the gas sector, provide a successful model for reforming monopoly sectors, and bring about new opportunities for China's opening up. Conclusions 13 Section 1: Preface Opening Address Peng Sen, Vice Minister, State Council for Restructuring the Economic System (SCORES) Since 1999, a joint World Bank­Institute of Economic Systems and Management of SCORES working group has been focusing on the development of a regulatory framework for China's oil and gas sector. The group recommended a preliminary regulatory framework for the oil and gas sector and presented it for decision during the international workshop on China's Oil and Gas Sector Regulatory Reform held in December 2000. The leaders of the State Council and relevant Ministries recognized the importance of this project, and since the latter half of the year 2000, a second stage was initiated on economic regulation and regulatory framework of the downstream gas sector. Today's conference is a summary of recommendations from the joint working group and presents an opportunity to exchange ideas and comment on the results of the project's second stage. The conference consists of three main sections: establishment of a modern regulatory framework in the downstream gas sector, economic regulation of natural monopolies in the gas sector, and the legal basis for regulation in the gas sector. From the agenda of the conference we can see clearly that this approach parallels the needs of industrial development and reform in China. The gas sector in China will experience rapid growth and development due to increased demand for clean, sustainable energy, especially with the construction of the West­East pipeline and the subsequent gas market development activities. Under this background, promulgating legislation will create a fair and competitive environment and introduce a modern regulatory framework to prevent abuse of monopoly power in the noncompetitive segments of the industry. The current legal framework for gas is incomplete, and regulation is fragmented and still based on command-and-control and administrative procedures. There are currently no laws and regulations for economic regulation of long-distance transmission and distribution pipelines, except rules and standards for technical regulation of safety, health, and environmental protection and the regulations at the ministry level issued by the Ministry of Construction that pertain to urban gas distribution. The current situation will not facilitate the rapid development of the gas market. As a result, it is urgent to establish a modern economic regulatory framework and to accelerate introduction of gas legislation. Today's conference provides an opportunity for participants from different institutions to exchange ideas and comments, which will help to accelerate the process of establishing a modern regulatory framework and to create a legal basis for economic regulation. At present, China's gas sector is generally characterized as a monopoly, though it is more accurately a coexistence of natural monopoly and administrative monopoly. Although the administrative monopoly has played an important role in China's traditional planned Section 1: Preface 14 economy, after China's entry into the WTO, the abolishment of administrative monopolies, especially in basic industry sectors, will accelerate. President Jiang Zemin has repeatedly emphasized that impediments in the current economic system affecting productivity should be eliminated through deepening reform initiatives. Premier Zhu Rongji also noted recently that reform and restructuring of monopoly industries should be accelerated, the separation of government functions from enterprise functions promoted, and competitive mechanisms strengthened. Therefore, with the exception of some areas such as national security, natural resources, and public goods, reform should create an open and competitive environment in place of current monopolies. Reform of monopoly sectors is a priority of the Tenth Five-Year Plan. Given this background, this research project will not only promote gas sector reform, but also help reform in other monopoly industries. Consensus on reforming and restructuring sectors with characteristics of administrative and natural monopolies and on introducing a modern regulatory framework was reached through this joint project with participation of several ministries. The restructuring and reform of electricity, telecommunication, and civil aviation is now under implementation. Issues concerning implementation of modern regulation in natural monopolies have been considered in the Tenth Five-Year Plan for the oil and gas industry by some ministries. Some practical results of this research project and the idea of implementing modern regulation are now well known. This achievement is the result of cooperative work conducted by experts of the World Bank and Chinese counterparts. This also reflects the fact that the research project has fulfilled the need for adjustment, reform, and continued development of vital industries after China's accession to the WTO. Welcome Address Mohammad Farhandi, Sector Director EASEG The oil and gas sector in China, despite recent reforms, is still relatively complex, and additional reforms and restructuring are necessary to help transform and develop the sector into a modern and competitive one. After 10 years of impressive reform, including sector unbundling and the listing of national oil companies on international stock exchanges, a legal and regulatory regime is still needed to formalize changes, to establish a clear picture, and to provide the right signals to the private sector. Since 1998, restructuring of the China PetroChemical Corporation (SINOPEC) and CNPC has led to increased competitiveness among Chinese companies. As well, with ongoing changes, the policymaking function has been separated and returned to relevant government agencies. However, excessive market and monopoly power continues to limit competition among gas companies, including not only the big three national oil and gas companies, but also smaller players. The World Bank began working on energy sector reform in China in 1993, and since 1999 it has provided advice to the oil and gas sector through the joint working group and SCORES. This conference and other activities are a direct result of this collaboration. Beginning in 2000, the joint working group began developing a legal framework and the Section 1: Preface 15 regulatory regime for the downstream gas sector. It was immediately recognized that a sound legal framework is necessary to promote investment and that achieving this would be a significant challenge. A key conclusion of the joint working group was that a gas law was essential if a sound regulatory framework was to be implemented. After a detailed review by the working group, the preferred approach--drawing on international best practices--was to develop a license-based system of regulation, applied by a rules- or principles-based type of organization. Before reaching this goal, interim steps are necessary, specifically the coordination of existing regulations and identification of necessary changes. Two issues identified included the establishment of third-party access to gas transmission pipelines to facilitate market development and competition and second, the restructuring of transmission pipeline tariffs to more accurately reflect the full cost of gas transport. By proceeding with these interim steps, the transition to a more permanent regulatory regime can be initiated. Presentation: Gas Market Development in China Mu Shuling, Vice President, China PetroChemical Corporation (SINOPEC) A focus of future activities in the Chinese gas sector should be the development of exploration and production opportunities and on the creation of a downstream gas market. Gas is a key component of SINOPEC's corporate strategy and the focus will be on creating a diversified gas development strategy. In 2001 total gas output for SINOPEC was 4.6 BCM, a 7.8 percent growth from 2000, and this growth is expected to continue. As a result, gas development activities are on a fast track, as indicated by the company's 5 percent share in the West­East gas pipeline and East China Sea developments together with CNOOC. SINOPEC is focusing its gas strategy on five areas of development. First is exploration of gas in the Tarim Basin delivered via the West­East pipeline to consumption centers and to SINOPEC subsidiaries in the Nanjing area. Second is development of assets in the East China Sea, with foreign participation, delivered to target markets in Zhejiang and Shanghai. Third is that Sichuan investments are expected to begin operation by 2004 and this would increase 200 to 300 million cubic meters of gas output annually. Last, accelerated development at Zhongyuan oil field would increase the supply to the gas market in Shandong Province. SINOPEC's goal is to increase its operation capacity by 10 percent annually over the next several years through a systematic approach of simultaneously developing gas markets and focusing on new exploration and production opportunities. However, the success of this approach is dependent upon successful market development. In order to accomplish this, the focus must be on the development and promotion of end uses for gas and this is predicated on building gas pipelines to reach new demand centers. China's three national oil and gas companies are focused on this development. It is also recognized that to Section 1: Preface 16 achieve this objective, China needs to develop a modern and efficient regulation, promote competition, and avoid duplication in pipeline infrastructure and excessive market monopoly power. The conference is thus essential in achieving the goal of increasing revenue as it will facilitate the development of a competitive and growing gas market. It will help address China's recent admission to the WTO and subsequent need to develop a regulatory framework for the downstream gas sector. SINOPEC actively supported the project and has taken part in this research at the government's request and is willing to continue supporting all government agencies involved. Section 1: Preface 17 Section 2: Regulatory Framework for Downstream Gas Sector Establishment of Modern Regulatory Framework for China's Downstream Gas Sector Chen Li, Executive Director, Institute of Economic System and Management, SCORES Establishment of a modern regulatory framework for the downstream gas sector is a challenging task for China, and significant focus is now placed on meeting this objective. The Tenth Five-Year Plan for economic and social development serves as a useful guide to the future development of the gas industry. The focus of the plan, in terms of gas, is substantive and includes a strategy of parallel development of oil and gas industries, accelerated gas exploration, development and utilization, gas import strategy and establishment of gas supply sources abroad, and last, an increased share of gas in the country's energy balance. Accelerated development of the gas industry in China is essential to address environmental concerns. As well, current gas consumption in China of about 3 percent of total primary energy demand lags significantly behind other parts of the world, as compared to 8.8 percent in Asia and 25 percent in the United States. As a result, the Tenth Five-Year Plan for China has established specific goals for the gas industry to achieve by 2005 including: gas consumption of 60­70 BCM, equivalent to 5 percent of primary energy balance, gas production of over 50 BCM, and new gas pipelines of 14,500 kilometers. There are two factors restraining gas sector development: first, lack of an enabling environment for fair competition due to the existence of an administrative and natural monopoly and the lack of proper separation of government regulation from enterprise management; second, absence of an integrated, independent, fair, and transparent modern legal and regulatory framework. The existence of all these disadvantages restricts creation of a favorable market environment to attract diversified investment and would hinder development of the gas sector. Government actions to achieve these ambitious objectives of the Tenth Five-Year Plan focused on restructuring of the sector to improve efficiency and capture the benefits of economics of scale, and the introduction of regulation to avoid monopoly abuses, protect consumers, and create a favorable market environment. These are key links of the reform process. Development of a regulatory framework would include establishment of a regulatory body or commission with clear and legally defined duties and powers, and definition of regulatory principles and approaches. The establishment of the regulatory commission will ensure the separation of policy implementation from policymaking. Policymaking includes the strategy for sector development, rules for market access, taxation, pricing principles for oil and gas services, and laws and regulations. Policy implementation by the regulatory commission include development of concrete rules and standards needed for implementing the overall economic and sector policies set out by the government and oversight of their enforcement. Independence is key to effective regulatory efficiency and enforcement of laws. The regulatory commission cannot be just another government body. It must have a relatively significant degree of independence. Policy implementation Section 2: Regulatory Framework for Downstream Gas Sector 18 follows policymaking and focuses on the terms and standards necessary to comply with macroeconomic policies. The establishment of a regulatory commission encompasses a range of responsibilities, including regulation of oil and gas resources, market access, pricing, service and quality standards, and safety and environmental issues. The focus of the commission would be on economic regulation and would cover both decisionmaking and a working level or executing function. Decisionmaking includes two approaches: single decisionmaking, or a committee approach, and a tribunal approach as defined by relevant laws. A secretary or chief executive is responsible for day-to-day functions and would be either nominated by the regulatory commission or appointed by the premier. Funding for the commission would come from a number of sources, including government tax revenues, fees for services paid by regulated companies, and a levy on the activities of regulated companies. Duties of the regulatory commission include approving projects, terms of access and quality of service, and rates, as well as interacting with regulators in adjacent countries concerning cross-border pipelines. The commission would specially focus on avoiding cross-ownership between distributors and suppliers, fighting against abuse of monopoly power, protecting third-party access, and ensuring adequate return of investment for pipeline companies. Regulatory principles to be followed by the commission include open decisionmaking with adequate consultation, transparency and public access, consistency of procedures to ensure predictability, accountability through regular administrative reporting, and independence from outside interference. Regulatory approaches under consideration include a license-based approach, an industry-focused approach adopted in Europe and several Latin American countries, and rules-based approach, such as those in North America, Australia, and New Zealand. The license-based system assesses corporate behaviors relative to specific conditions spelled out in the licenses. Under the rules or principles-based approach, corporate actions respond to broad criteria, such as a requirement that tariffs must be "just and reasonable." Regulators then assess those actions based on practices that have developed over a long period. In short, international experience suggests that a license-based approach is effective in implementing regulation of activities of the regulated entities, whereas a rules- or principles-based approach focuses mainly on the process regulation. A combination of these two approaches, therefore, would be more objective and better suited to China's gas industry. Last, the regulatory techniques applied depend upon what is being regulated. Regulation of long-distance transmission pipelines focus on separation of transmission from supply, the terms and conditions of network access to enforce adequate separation, and enhanced regulation for new pipelines to avoid duplication of construction. Urban gas distribution focuses on establishing the terms for exclusivity of service of the franchise, and for the sale of gas. In the initial stage of market development, UGDCs should be allowed to possess both executive rights of distribution service and gas supply, In the future these two functions will be separated when distribution networks become well developed. Section 2: Regulatory Framework for Downstream Gas Sector 19 Urban gas distribution also includes regulatory techniques for unbundled service to eligible consumers, such as large users, and for bundled service for small consumers. Current gas laws are still based on a centrally planned approach and monopolized development of natural resources and extraction. They neglect to a considerable degree the diversified interests of different parties and market competition, and also lack transparency, predictability, and stability. As a result, a strong legal basis for regulation is needed to support the development of an adequate regulatory framework. International Experiences in a Developing Modern Regulatory Framework for Downstream Gas Sector--Rules-Based and License-Based Models Roland Priddle, Consultant, World Bank China supports the use of modern regulation by government to protect consumers against monopolies, such as pipelines. Understanding international experiences and best practices in downstream gas regulation is important in establishing a competitive gas industry structure and market. In a market-based industry, it is necessary to regulate monopolistic segments, such as pipelines, distribution systems, and gas storage fields. Regulation is thus directed at protecting consumers from abuse of dominant market players, such as the owners of these monopolies. There is no economic reason to regulate gas commodity prices or trade, because consumers are best protected by the operation of the competitive market. To create a competitive industry structure, China will need three essential elements: · Competing gas suppliers. · Nondiscriminatory open access to pipelines to enable all suppliers to reach buyers. · Buyer access to purchase gas directly, particularly for the largest buyers, such as electric power generators and large industrials. The expanding gas industry will require large investments, not just in new transmission and distribution, but also in gas production, purification, and end-use equipment. The natural gas industry comprises a physical "supply chain" through which gas flows from multiple sources, such as indigenous gas fields, pipeline imports, and liquefied natural gas (LNG) imports. Its three salient components are the following: · The upstream gas industry, domestic producers, imports and processing. · Long-distance transmission; and distribution to light industry, residential, and commercial consumers. The natural gas industry also presents a "commercial chain" of transactions that differs from physical gas flows. Commercially, in terms of selling and buying arrangements, sellers and larger buyers connect with each other in the wholesale market where prices Section 2: Regulatory Framework for Downstream Gas Sector 20 are formed and contracts entered into. The "commercial chain" is reflected in figure 1 in section 3 below, by the broken lines leading into the wholesale market. The regulatory framework serves as the basis for policy decisions and legislation. There are five essential features: · Create an organizational focus within the GOC for gas policy. · Separate policy function from the regulatory function. · Create a downstream gas regulatory commission. · Give that commission a "tool box" of powers. · Provide a system for regulation, such as a licensing system. The Joint Working Group considers the organizational essentials to include a commission to make decisions, an expert staff to support them and some form of "user pay" financing. The commission and its procedures would be modeled on the North American "rules- or principles-based" approach. The system for regulation would draw from modern U.K. and European practice known as the "license-based" approach. Licenses would embody the rights and obligations of regulated entities and would also regulate intercorporate relationships (for example, between transmission pipelines and the shippers who use their services). This combination of "rules or principles-based and license-based regulation" is considered the embodiment of the features of international best practices that are most relevant to the structure and stage of development of China's gas industry. The Joint Working Group recommended a flexible, pragmatic transition for oil and gas restructuring. This approach is preferred because many changes are taking place, adjustments may be necessary during this process, and creation of the legal framework takes a long time if a new primary law is be created. As a result, interim regulation has been proposed to manage this process, to secure cooperation of existing departments and agencies, and to prepare for the creation of a permanent regulatory commission. Questions have been raised about the impact of "energy convergence" and regulation. Convergence means "coming together to a single point." Convergence is taking place, particularly in the network energy industries, such as gas and power, where the respective energy businesses have become interdependent. Examples of convergence include the combining of gas and power businesses--gas-fired power generation--and the trading of these energy forms. Despite this "energy convergence," it does not mean that there should be "convergence" of regulatory institutions. Energy convergence has not caused problems for regulators in other countries--and gas and electricity regulators remain separate in many of these countries. Moreover, China's downstream gas industry should have a specialist regulator because gas needs special attention and should not be linked to electricity regulation, where it would be overshadowed. Convergence issues can be dealt with by seeing that there are no conflicts Section 2: Regulatory Framework for Downstream Gas Sector 21 at the regulatory interfaces, for example, that there should be no regulatory obstacles to using gas in the power sector. A consensus has emerged in recent years about best practices in gas regulation. The establishment of an independent regulatory commission is now widely recognized as an international standard. Such a commission would need an expert staff and clear responsibilities defined by law. It would make decisions on the basis of the facts of each case, maintain transparent decisionmaking, and ensure public input. There is a consensus that the best system for regulating the gas industry in countries where a former integrated state-owned industry has been restructured should be a license-based system with clearly set-out rights and obligations of regulated entities. These licenses would regulate relationships between different corporations, such as suppliers, pipelines, and pipeline shippers. Last, there is also a consensus that the regulatory commission should be organized with several decisionmaking members. As well, there is also agreement on the importance of transparency of regulatory processes and on the accountability of regulatory organizations for their activities and decisions. Designing a Regulatory Framework for China's Downstream Sector Xu Dingming, Director of Office for West­East Pipeline, SDPC The principal objective of designing a downstream regulatory framework is to ensure that the reform program is developed in parallel with the current state of development of China's oil and gas sector. In order to accomplish this, a deep and comprehensive understanding of the current problems and issues facing the sector is necessary. The World Bank­Institute project has been successful and has provided realistic and instructive guidance. The reports, including the one discussed today issued by the group, are very detailed and complete with reasonable conclusions and specific recommendations. To date, areas that the Joint Report identified as key to developing China's gas market include sector restructuring in parallel with regulatory reform to ensure a healthy transition to a competitive market structure. Given the political sensitivity and complex administration transition required for sector restructuring, implementation of reform measures is a major challenge for the GOC, and the most difficult thing is to change corporate behavior and performance. Regulation is considered a basic element and prerequisite for successful market development. Principles recommended in the Joint Report should also be introduced into the upstream sector as well. The development of the West­East pipeline project has opened some new areas of exploration and development to international energy companies, and it provides a basis for promoting downstream gas regulation and incorporating regulation into aspects of this project. The West­East pipeline project provides an opportunity for applying aspects of downstream gas regulation to an actual project that has characteristics of China's developing gas industry. Areas where Section 2: Regulatory Framework for Downstream Gas Sector 22 regulation could be applied to this project includes midstream and downstream. There are several difficulties and potential conflicts concerning this project, however, that require changes in traditional expectations and management of conflicting interests and powers of key players. Reform and regulation can address some existing problems facing the oil and gas sector development in China, including the dominant position of national oil companies, barriers to entry and competition, lack of a legal basis and overlapping regulatory responsibilities. Key reform objectives as highlighted in the Tenth Five-Year Plan, include improvement of the quality and competitiveness of Chinese major players and restructuring the sector according to the laws of a market economy. Last, restructuring the sector and establishing a regulatory framework would ensure that the role of government and the market are complementary and that they contribute to smooth development of the sector. Urban Gas Administration--Status Quo and Reform Liu Heming, Director, Department of Urban Construction, Ministry of Construction Urban fuel gas for industrial and commercial applications includes coal gas, petroleum gas, LPG, and natural gas, although the latter has become the predominant fuel gas in urban areas. The three areas necessary to promote gas market development include lowering costs, expanding use, and upgrading technology to international standards. The country's fuel gas industry has experienced rapid development since the introduction of reforms, especially over the past decade, and can be divided into three stages of development. In the initial development stage in the 1980s, China built urban fuel gas projects mostly utilizing gas discharged by coke ovens and chemical fertilizer plants. During the second stage in the early 1990s, imported LPG was used in coastal regions to alleviate energy shortages. In the third stage of the late 1990s, increased utilization of natural gas became the focus. By 2005, natural gas use will climb to over 50 BCM, an annualized growth rate of 13 percent from 2000. During the Tenth Five-Year Plan period, the country will intensify its efforts to develop the natural gas market by pursuing exploration activities, constructing natural gas transmission pipelines, and promoting LNG projects to develop downstream markets. The Tenth Five-Year Plan states explicitly that the country should actively develop urban fuel gas industry to raise urban living standards, improve air quality and conserve energy. Concurrent with the development of the West­East gas transmission project, the country will promote utilization of natural gas along transmission pipelines. The urban fuel gas industry provides a foundation for urban economic and social development, and provides a vital public service delivered through a natural monopoly. Currently, the industry is under multilevel government administration. The central Government formulates the industry's development plan, and local governments administer the industry directly. Because enterprises are state-owned with no autonomy, most operations are managed by related government departments, which has resulted in low productivity and high losses in the sector. Section 2: Regulatory Framework for Downstream Gas Sector 23 A number of issues and needs have developed recently in the sector. First, a comprehensive annual demand profile of different consumers is needed to assist suppliers in coordinating gas supply to consumers. By doing so, suppliers will be able to reduce current losses resulting from the unused portion of prepaid gas supply contracts. Second, increased development of high-pressure gas distribution systems to reduce investment costs is needed, including upgrading and renovation of existing pipelines. Third, an assessment is needed of the economic impact of the conversion of LPG consumers to a natural gas pipeline network. Last, rational urban gas pricing includes gas commodity cost, taxes, and profit--however this pricing policy was never implemented resulting in chronic losses. With industrial users becoming a major consumer base, gas suppliers should try to obtain profits comparable with upstream and midstream players who are also a target of corporate reform. The Ministry of Construction is the competent authority for urban gas distribution. Based on its works implemented in the past, it has formed a fairly complete system of administration and industry rules that could be perfected through deepening reforms in accordance with the internal laws of urban construction and administration. Key recommendations on reforming urban gas administration include the following: · Reducing administrative interference. · Introducing new concepts and accelerating marketing activities. · Establishing an open market and operating franchises. · Establishing a reasonable pricing mechanism. · Promoting more objective government decisionmaking. · Establishing a sound regulatory system. Reducing Administrative Interference This includes legislative work to formulate laws and regulations related to the construction and administration of the sector. Because China has no special laws and regulations concerning urban gas industry, a law on gas and the regulations on the administration of urban gas should be pursued. Local governments should also formulate corresponding local regulations. Introducing New Concepts and Accelerating Marketing Activities The government should take the opportunity of institutional reform to redefine its functions to ensure efficient and fair competition by no longer playing a role in the market. Instead, the government should strengthen its service function to provide public information and create an open and fair environment. Concurrently, local governments should eliminate regional protectionism and remove market entry barriers to foster competition and efficiency. Establishing an Open Market and Operating Franchises An open market and operating franchises should be established as soon as possible to regulate market access while maintaining a certain level of competition and protecting the interests of competitors. This will require establishing market entry requirements for Section 2: Regulatory Framework for Downstream Gas Sector 24 urban gas supply, coordinating planning of pipeline networks and service standards, and supervising of pricing. Establishing a Reasonable Pricing Mechanism A failure of China's downstream gas sector has been the inability to guarantee adequate returns for investors, which has discouraged sectoral investment. To encourage investment and guarantee a high-quality service, the government should set an attractive price for public utility services, publicize the price adjustment procedure, and introduce a price-hearing system. This will enable the investors to gain reasonable returns through increased production efficiency and decreased costs. Promoting More Objective Government Decisionmaking The government should end administrative interference and adopt scientific technologies and advanced managerial measures in the administration of public utility sector. The latter will gradually put in place an objective decisionmaking mechanism featuring public consulting, modern management, and sound information disclosure. Establishing a Sound Regulatory System An urban gas regulatory system should be established that takes into consideration the country's needs, administrative system, and legal system, and that meets the needs of industry at all stages of development. Policy Recommendations on China's Gas Market Development and Regulatory Reform Tang Yali, Natural Gas and Pipeline Company, PetroChina It is expected that gas demand growth will rise faster than coal and oil demand over the next 20 years. Gas penetration, as a percentage of primary energy consumption, is forecast to increase from 3 percent in 2001 to 8 percent in 2010 and 10 percent in 2020. With China's entry to WTO, the role and functions of government will change. In terms of the gas sector, regulation will become important and should include a regulatory body and necessary policies and laws that work efficiently and fairly while serving the needs of the market. Policies and laws for downstream gas sector regulation should address the characteristics of the Chinese gas industry and encourage future market development. The main issues in this regard include the following: · Encouraging both domestic and imported gas supply sources as more domestic and international producers are emerging. · Developing gas transmission pipelines (both domestic and cross-border pipelines) and constructing LNG terminals to carry domestic and imported LNG to consumption areas. · Building a pipeline transportation network with branch distribution pipelines. · Diversified investment in main transmission pipelines, laterals, and urban gas distribution systems. · Ensuring integration of gas production and pipeline transmission. Section 2: Regulatory Framework for Downstream Gas Sector 25 · Freeing gas prices in the competitive market and encouraging futures trading. · Developing internationally acceptable market standards and trading rules. Regulation should be carried out fairly with unified standards and suitable market rules. Huge construction expenditures and high operating costs of upstream production and transmission pipeline are not adequately reflected in the gas price chain that consists of upstream, midstream, and downstream. There is still enough room for distribution price adjustment. It is, therefore, necessary to take into consideration the balance of interests between upstream development, transmission pipelines, and urban distribution. As well, government should increasingly address the low gas price for fertilizer plants and assess the impact on agriculture through appropriate policies, such as direct aid to farmers and lower corporate taxes for the sector. By taking this approach, gas price increases would be more acceptable to the economy. A number of further recommendations concerning gas policies and laws within the regulatory framework can be made. Gas resources should be distributed equitably with reasonable policies to support this approach. The government should enact policies to aid gas industry in meeting environmental protection objectives and resolving the problems raised by high investment risks, such as insufficient return on these investments. Last, the regulatory system should be a comprehensive one and based on a legal system that includes a gas law and that covers transmission, environmental protection, taxation and pricing issues, and operating standards. Section 2: Regulatory Framework for Downstream Gas Sector 26 Section 3: Economic Regulation of Downstream Gas Sector Economic Regulation of the Downstream Gas Sector: Technical Regulation, Price, and Access Paul Hunt, Consultant to World Bank Important policy issues will need to be addressed before the legal and regulatory instruments can be established and appropriate regulatory techniques to deal with pipeline access, tariffs, and investment developed. These policy issues comprise the identification and establishment of the appropriate industry structure and the restructuring of the existing downstream gas sector enterprises to ensure that they are capable of operating effectively and efficiently in this industry (or market) structure. It is our understanding that the Chinese government is considering establishing an industry model that may be described as "wholesale competition" or competition in the bulk supply of gas, as illustrated in figure 1. Figure 1. Gas Industry Structure National oil Producer/ Producer/ Producer/ companies supplier #1 supplier #2 supplier #3 Transmission Transmission Wholesale market DistCo #1 DistCo #1 DistCo #2 DistCo #2 DistCo #3 DistCo #3 Power Large generators industry Residential and commercial Outlet of purification plant Trading Transportation This industry model is based on a clear separation of the transmission and supply or trading activities. The long-distance transmission businesses will provide the capacity and operate the pipeline systems to deliver the gas presented by upstream competing producers or suppliers at the outlets of their purification plants to urban gas distributions companies (UGDCs), electricity generating plants, and large industrial consumers that are connected to the transmission system. This model allows any large-volume consumer who has access to a transmission system to enter into bilateral negotiations (either individually or in cooperation with other buyers) with any supplier or to cooperate with other buyers and sellers to establish physical markets at convenient locations either where Section 3: Economic Regulation of the Downstream Gas Sector 27 a number of pipelines interconnect or close to major market centers and where additional services can be provided. Establishing this industry model in China will require consideration of the appropriate legal, regulatory, and commercial instruments. This includes three types of instruments: primary legislation, licenses, and regulated commercial arrangements. This hierarchy corresponds to the license-based approach to applying regulation, although there are important elements that are shared with the principles- or rules-based approach. The government will be responsible for drafting and ensuring the enactment and implementation of primary legislation. The primary legislation will establish the regulatory body. The government has the policy responsibility for downstream gas and, in consultation with the regulatory body, will issue the first drafts of licenses. These licenses will contain standard conditions setting out the rights and obligations of regulated businesses and details of the regulatory controls that will be exercised. The regulatory body will have the freedom to modify these conditions in response to license applications by the individual regulated businesses. This freedom will be circumscribed by the application of the process and procedures set down in the primary legislation and subsequently developed by the regulatory body. UGDCs should be allowed to access transmission systems and secure gas from the suppliers of their choice, but they will continue to have an exclusive right to supply smaller volume consumers within their distribution areas. This will provide these companies with the "breathing space" to corporatize and to improve the efficiency of their operations. The duration of the exclusive right to supply and the treatment of large volume users connected to distribution systems will be a matter for further consideration. The priority is to promote a functioning wholesale market; extending choice of supply to smaller-volume distribution system consumers can only be considered when this exists and when the longer-term financial viability of these companies is secured. The development and application of these instruments will have major implications for the existing transmission businesses and urban gas companies. For transmission there will be separate management of transmission and supply activities; no exclusive right to provide transmission service; and unbundled, contractual, nondiscriminatory, cost-based transmission service. In the case of distribution, entities will be corporatized with geographically defined exclusivity; public service obligations; a separate cost basis for distribution and supply; and unbundled service for larger consumers. These issues should be addressed with specific policies that should be taken before the legal and regulatory framework is implemented. An international consensus is beginning to emerge between the principles- or rules-based approach and the license-based approach. For China, a license-based approach is recommended because it addresses issues for state- (or municipality-) owned integrated energy businesses undergoing restructuring and listing; provides ready-made, but flexible, arrangements; provides a consistent and comprehensive basis for commercial and contractual arrangements; and limits recourse to appeals. Section 3: Economic Regulation of the Downstream Gas Sector 28 It is envisaged that four types of licenses will be required in China including: · Transmission enterprise licences. · Storage enterprise licenses. · Distribution enterprise licenses. · Shipper's licenses. Licenses can cover issues, such as administration, pricing, and investment. Key recommendations include pursuing effective industry restructuring, adopting the emerging international consensus on regulation, applying best international practice carefully and using licenses and license conditions to secure the commercial and contractual framework for the gas industry. Reform of Urban Gas Distribution System and Concept of Gas Projects Operating System in Shanghai Wang Yizhong, Shanghai Municipal Engineering Administration Bureau In 1997 restructuring of the Shanghai gas sector began by first transferring state ownership, separating production and sales, and establishing a financial subsidy program, which resulted in market development, improved quality of service, and reduction in losses. Subsequently, three commercial gas production and sales companies were established with separate service territories. Gas pricing methodology was gradually normalized reducing subsidies, and price inversion was eliminated. Natural gas demand is expected to increase to 3 BCM in 2005 from 0.25 BCM in 2000. Concurrent with the West­East gas project and the development of natural gas resource in the East China Sea, the fuel gas market in Shanghai will be changed greatly with natural gas becoming the leading fuel. Reform of the gas sector will continue in Shanghai with accelerated asset restructuring, diversified investment and gas supply sources, market-oriented construction and operation, standardized serves and management, and improved government regulation according to laws and regulations. The overall goal is to ensure that natural gas use grows through market-oriented reform and the introduction of efficient regulation. The overall goal should also address the needs of the West­East pipeline project. Continued restructuring of the urban gas market includes two stages. The first stage focuses on establishing an integrated high-pressure natural gas transmission and distribution system throughout the entire municipality. For pipeline networks with pressure greater than 1.6 Mpa, a gas pipeline network company will be responsible for investment, construction, operation, management, gas gathering, transmission, peak shaving, and gas sales to companies, power plants, chemical industry parks, and coal gas producers. This system will be the platform for gas supply in the entire municipality and will be controlled by government to ensure security of gas supply. For pipeline networks below 1.6 Mpa, several separate and regional gas sales companies Section 3: Economic Regulation of the Downstream Gas Sector 29 will be created to provide a similar service to consumers in both the city of Shanghai and the surrounding nine towns. The second stage will include the creation of a wholesale market for natural gas to open the market and increase competition. The first step will be to separate the pipeline network function from sales. Gas sales companies and large users will be able to directly purchase natural gas from gas suppliers in the wholesale market, and gas sales companies will be able to sell gas outside their own regions. Subsequently, a natural gas supply chain will be established in which natural gas midstream pipeline networks will be exclusively controlled by the central government with multiple gas supplies (from East China Sea, West­East gas pipeline, or LNG imports and gas sellers. Gas infrastructure investment, construction, operation, and regulation will be separated. An industry structure will be created where there is only one high-pressure transmission pipeline network and many city distributors competing with each other. An investment and financing mechanism will be used to attract qualified domestic or foreign investors for midstream, downstream, and gas sales. Corporatization of urban gas distribution entities should be carried out, which would facilitate market growth. A special market for fuel gas operation will be established, and investors will be encouraged to arrange operating contracts through a sales agent system that incorporates bidding, thereby gradually opening the fuel gas sales market. Gas sales companies will operate in their own region, although large consumers will be able to choose their own suppliers. Last, government regulation will be covered by the Shanghai Municipal Public Utilities Administration and will include stronger regulation and control of the industry. The scope of regulation will include gas supply from upstream gas resources, operation of high-pressure transmission system, some large users, and downstream gas sales and production companies. Regulation will include ensuring supply stability, safety and quality, service regulation, and price regulation. Introduction of a market-oriented pricing system would allow the full recovery of gas cost and would be better adapted to market realities than the current pricing system. At present, there is a significant gap between the sales price and production cost of fuel gas (principally coal gas) in Shanghai. Production costs are high due to significant sunk costs associated with gas production and prices of volatile raw material that constitute 65 percent of the fuel gas production costs. Price should thus be adjusted through market mechanism. The cost of fuel gas should be divided into two parts. The first part consists of fixed expenses, such as gas production and sales costs, and profits, and the second part consists of raw material costs that fluctuate with market prices, which should be adjusted monthly as part of the total gas price, as is the practice in Hong Kong. It is further recommended that the central government establish the average gas cost based on a competitive market and authorize a gas distribution company's fixed expense, which would remain constant for several years. An upper limit of the gas sales price, based on the price of raw materials, would be set. Gas distribution companies should also consider the relationship between the price of electricity and oil prices when adjusting the gas price. Section 3: Economic Regulation of the Downstream Gas Sector 30 A regulatory system that is favorable to industry development should be established. The ultimate objective in strengthening government regulation is to ensure efficient regulation of the fuel gas industry, which is essential for social welfare and to ensure the healthy development of a competitive industry with limited government interference. Regulation should cover a range of issues, including planning of construction and development of the fuel gas pipeline network; gas tariffs, including authorizing costs and holding public hearings; service contracts and dispatch; safety and quality supervision; and construction quality standards. Regulation methods (mechanisms) would cover qualifications for industry participation, franchise rights, product prices, and equity participation. In Shanghai, all entities involved in the production and sale of fuel gas must have qualification certificates issued by the relevant government department. The principal requirements for entrance into industry include having updated production and service facilities, capable management systems, rational operation plan for gas pipeline networks, and a secure gas supply. The basic principle of franchise rights is to ensure fair and impartial operation of fuel gas, ordered and moderate competition, and transparent regulation based on consistent decisionmaking. Franchise rights should include operating period, operating area, operating scope, operating rights and obligations, and exclusive regulation. A mathematical model for fuel gas pricing should gradually be established with strict procedures for approval of prices and transparency. Last, state ownership of gas enterprises can be used to exercise some control of the industry, although pipeline networks and dispatching would still need to be controlled by the central government. Investment could be made in other areas, including production and sales of fuel gas, LNG, and gas appliances. Government ownership through stock holding--even a minor share--provides a level of control, particularly if the state has preferred shares. Once diversified investments have been made by the state, franchise and price regulation could still be used. Recommendations for transmission and distribution of natural gas in urban areas include the following: · Ensuring participation by the state construction ministry and regional construction departments in the development of relevant laws and regulations for city transmission and distribution. · Limiting the scope of national regulation to long-distance transmission pipelines. · Reserving local regulation to each city. · Allowing each region to establish its own regulation method according to low needs and the relevant department in each region. Section 3: Economic Regulation of the Downstream Gas Sector 31 Reform and Development of Urban Gas System in Shengzhen Li Qingping, Vice President, Shenzhen Gas Corporation Ltd. In 1982, the Shenzhen LPG management corporation was established to construct LPG supply stations and as of 1991, 7 stations were built with 60 miles of pipeline network. In 1995, the Shenzhen LPG management company was integrated with the Shenzhen coal gas management company into the Shenzhen Gas Corporation, and by 1997 this company was given monopoly management of the pipeline gas supply. In 2001 there were 600,000 residential consumers, of which 360,000 used LPG and 250,000 piped gas, and 1,000 industrial and commercial consumers. Shenzhen Gas Corporation is wholly owned by Shenzhen Investment Management Company, a government holding company. Ongoing restructuring will make available 51 percent of the company's shares to four shareholders with stock listing to follow restructuring. With the importation of LNG, a natural gas network in Guangdong Province will be constructed. This project consists of the construction of LNG receiving terminals, 397 km transmission pipelines (laterals included), new power plants as major consumers, conversion of existing power plants, and urban gas consumption projects. The whole construction would be divided into two phases. The capacity for the first phase would be 3 million tons annually, and the new facilities would go into operation in 2005. For the second phase, the annual capacity would reach 6 million tons. All systems would go into operation in 2009. CNOOC, BP, Shenzhen Investment Holding Corp., Hong Kong & China Gas, together with other 5 companies will invest jointly in the project that starts with over 170 km of high-pressure pipelines and over 800 km of midpressure (400 km already completed) in the Shenzhen special economic zone. The total investment cost will be Y 2.3 billion, and will comprise government funds, shareholder capital, and long- term loans. Several government policies have been introduced to support development of the natural gas network, and a customer development plan was created to coordinate development of customers. Several key points concerning reform, development, and regulation of the urban gas sector are worth mentioning. Restructuring of gas companies should be made based on a shareholding system with international bid standards and stock listing. A price system must be developed based on market pricing to ensure sufficient return on investment and to eliminate government subsidies for losses. Internal management of enterprises should be strengthened, especially accelerating the development of state-owned enterprises, in order to reduce costs. Last, the regulatory framework should ensure that the market for natural gas is fully developed, including limiting new competitors until it is large enough. Section 3: Economic Regulation of the Downstream Gas Sector 32 Section 4: Legislation of Downstream Gas Sector Study and Analysis of Issues in Downstream Gas Legislation in China Huan Guoyu, Professor, Institute of Economic System of Management Current legislation for the gas sector consists of general laws and special laws. The latter ones include mainly (a) the "Mineral Resources Law" and two regulations relating to cooperative operations with foreign partners, both onshore and offshore, that focus solely on upstream; (b) regulations on oil and gas pipeline safety protection for midstream transmission; and (c) some departmental rules that include technical and environmental standards with "Measures of Urban Gas Administration" enacted by the Ministry of Construction as their core component for downstream. The current legal system was created at the initial stages of sectoral reform, and it incorporates the approaches and characteristics of a planned economy that are now inconsistent with development of the sector. This includes a framework based on state- owned monopolies, regulatory approaches focused on administrative control, and legislation aimed at protecting the interests of state-owned companies rather than standardizing behaviors of market participants. Moreover, there is an absence of a legal framework with only low-level laws and gaps in the regulation of natural monopolies. Lack of an integrated, transparent, and market-oriented regulatory and legal framework has hindered development in the sector. This has led to increased investment risk; limited use of advanced technologies, management skills, and domestic and foreign capital; and restrained market growth. The current policy environment is supportive of gas legislation: · With China's entry into the WTO, market openness would increase further, and the manner of government administration would change progressively. Reform of monopolistic industries has been taken as one of the major tasks in China during the Tenth Five-Year Plan. Legislation for the economic area is now speeding up. · Increased demand for energy and environmental policies to support clean energy sources provide unprecedented opportunity for gas sector development in China. · Current changes in the natural gas sector are supportive, such as restructuring of the gas sector, changes in government regulation, transformation of the roles of state-owned enterprises, the breakup of administrative monopolies, and rapid sector development, including development of domestic and international sources of gas. Based on this environment and an analysis of international best practices, a priority is to develop appropriate legislation and regulations. Only then will a fair environment for market competition be established with a transparent legal framework necessary to support gas market development. Development of a downstream gas law is based on several principles. Based on the basic theory of modern regulatory economics, competitive businesses should be separated from natural monopolies. Establishment of a modern regulatory structure includes separation Section 4: Legislation of Downstream Gas Sector 33 of policymaking from regulatory functions and enterprise management. Upstream and downstream gas laws should be developed, respectively. Because upstream laws and regulations, such as the Mineral Resources Law and the two regulations for cooperation with foreign partners, both onshore and offshore, are already in place, and the behaviors of enterprises could be regulated accordingly. The urgent task at present is, therefore. to develop a downstream gas law that covers areas such as purification plants, transmission, distribution, storage, and marketing. Gas would include both natural gas and coal bed methane. At the initial stage of development, the regulatory scope could be extended to all types of gas in urban distribution networks. As to the upstream sector, legislation could include both gas and oil. A downstream gas law should include the following components: · General national guidelines, basic principles, and policies of the government for regulation of the sector. · Principles for establishment of a regulatory commission, the nature of this commission, its position in the government, its responsibilities, organizational structure (including central versus local regulation), staffing, resourcing, and decision processes. · Principles for balancing the interests between different links of the downstream gas chain. · Gas pricing policy and price formulation mechanism. · Conditions for downstream gas market access and qualifications of participants. · Code of operation for gas transmission, and distribution and principles for the code of conduct. · Relations between downstream regulatory policies and those for upstream and other energy sectors. Last, in order to accelerate the gas legislation process, the gas law should be included in the legislation plan. The working group in charge of drafting the law should study international legal and legislation experience and review and assess existing laws and regulations. International Experiences in Downstream Gas Legislation J. Jay Park, Consultant to World Bank International experience in downstream gas legislation can serve as a useful guide for developing recommendations applicable to China. Downstream gas legislative models in a number of countries were examined including North America, the United Kingdom, Argentina, and Brazil. The review demonstrated that legislation used in each of these countries had remarkable similarities, even though their regulatory structures often differed. The review highlighted the importance of gas legislation to address matters such as the following: · Purpose of legislation. · Role of policymaking in the regulatory structure. Section 4: Legislation of Downstream Gas Sector 34 · Structure of the regulator and rules of conduct. · Granting of powers to the regulator. · Functions of the regulator. · Principles and process of regulation. In order to focus the discussion on downstream gas regulation, a Draft Gas Law (the "Draft Outline") was prepared by the working group that distills the principles of international experience in gas law and adapts and applies them to China. The term "Draft Outline" is used because its recommendations are still under discussion, and second, it is an outline for a complete piece of legislation. The Draft Outline was written using international legal drafting norms, not Chinese norms, and it serves as an example of what is being done in other countries. In the future, Chinese legal experts should determine the appropriate drafting style. The government must also determine which of the components of Chinese downstream gas legislation should be enacted as a primary law passed by the National People's Congress, and which components should be enacted as secondary legislative instruments of the State Council. Primary law provides the kind of legal certainty investors want to see, whereas a secondary legal instrument is easier and faster to enact. In other countries, legislation of the type contained in the Draft Outline would be contained in a primary law. Legislation presented within the Draft Outline has four purposes: · To encourage efficient and safe development of gas transmission and distribution. · To ensure effective economic regulation of pipeline monopolies. · To foster competitive behavior for nonmonopoly aspects of the downstream gas industry. · To establish the China Gas Regulatory Commission to apply the regulatory principles. The Draft Outline addresses only downstream gas regulation, not technical, safety, or environment matters, whether upstream or downstream. The Draft Outline deals with China's current downstream gas market and includes manufactured gas and propane-air systems that are likely to become obsolete in the future. However, it is also forward- looking and addresses the needs of a growing gas industry. There will be inconsistencies and conflicts with existing laws and regulations that will need to be addressed as part of the implementation of new gas legislation. The Draft Outline describes how a regulator, the China Gas Regulatory Commission, would be formed to regulate gas transmission and distribution. This commission would interact with a government department or ministry that would be responsible for setting gas policy. The commission would be guided in its work by these policy decisions, and its members would be appointed by the State Council. The Draft Outline recognizes the unique nature of China by establishing a central commission. However, it also recognizes that in a country as vast as China, some regions Section 4: Legislation of Downstream Gas Sector 35 may have enough gas regulatory work to warrant the creation of a regional office of the commission. Where this is justified, a regional office would be established, with the State Council appointing local residents as its members. The regional office would apply the same regulatory principles as the central office of the commission. The Draft Outline provides guidance and rules concerning the conduct of the commission. Members and staff of the commission would be prohibited from having any conflicting interests, so they could not be employees, owners or investors in the gas industry. The commission establishes its own procedures, but when performing its functions, it must comply with the principles of "natural justice." This means that the commission should give notice to all interested persons of matters it is considering; conduct public hearings where appropriate; and give reasons for its decisions, which must be based only on the evidence provided to the commission. The functions of the commission are to regulate construction, service, access and tariffs for gas transmission, distribution, storage, and shipping. It must also ensure that gas enterprises are technically and financially qualified. It will police the compliance with licenses and rules, and monitor developments in the gas industry in China. In order to perform these functions, the commission is empowered with a "regulatory toolbox" that allows it to do the following: · Grant, modify, and revoke licenses for transmission, distribution, storage, and shipping. · Establish rules governing the conduct of gas enterprises, and issue orders, directions, and penalties to ensure compliance with them and with the licenses. · Conduct hearings into relevant matters. The Joint Working Group recommended that licenses form the basis for the right to construct and operate transmission, distribution and storage facilities. The process by which these licenses will be issued and managed involves the commission's receiving an application for the issuance or modification of a license based on standard terms or with such variations as are applied for. After conducting the relevant inquiries in accordance with rules of procedural fairness, the commission will issue or modify the license as it sees fit. The Draft Outline contemplates that the commission would have considerable power in exercising its functions, because its decisions would not be subject to appeal except if it failed to comply with appropriate procedure. The Draft Outline describes certain other aspects of gas legislation, such as the following: · All existing gas operations will receive licenses, and they will be subject to the new legislative regime. · Transition of some powers from existing ministries and agencies must be conducted smoothly over time. · Funding of the commission may come wholly or partly from levies on gas enterprises. Section 4: Legislation of Downstream Gas Sector 36 Status and Prospect of Chinese Downstream Natural Gas Legislation Zhou Yubo, Director-General, Economic Regulation Department, SETC China has no specific gas legislation, but instead has adopted integrated legislation for both the oil and gas sectors. In general, there are two features of Chinese gas legislation. First, there is no special gas law as compared to other countries in the European Union and Latin America. Second, administrative regulations are integrated to include both oil and gas and to address issues such as gas exploration, pipeline transmission, and foreign cooperation. The main reason for this legislation structure is first that gas and oil are listed as special mineral resources governed by Law of the People's Republic of China on Mineral Resources and related regulations. Second, most natural gas in China is associated gas, the main reason for integrated legislation for both oil and gas. Third, gas represents a small share of primary energy demand in China. Although there are significant holes in many areas of downstream gas supervision and regulation, there are other laws and regulations with provisions related to downstream gas. Given the classification of oil and gas as special mineral resources, the current legislation for upstream gas activities, including exploration and exploitation, is relatively complete and appropriate. In addition, the Chinese government has promulgated other regulations for onshore and offshore exploration and development activities with foreign companies. As noted earlier, in contrast with upstream gas legislation, no specific downstream gas regulations exist. Some related provisions in other laws and administrative regulations include legislation concerning long-distance gas pipelines; gas storage, transportation, and safety; and gas distribution. The latter refers to laws that relate to issues concerning gas supply contracts and consumer protection. Despite the fact that legal provisions can be invoked from other laws and regulations, no rules exist for directly adjusting downstream gas activities. Therefore, existing downstream gas supervision and regulation does not provide a systematic legal system for supervision and regulation to protect and develop the gas industry. There are a number of issues to consider in terms of enacting a gas regulatory system. First, there is an actual need to enact a substantive or independent gas law to support gas development. To support continued energy exploration, including the West­East gas pipeline project, it is necessary to formulate uniform rules between central and local government, take into consideration international standards, and clarify the role and responsibilities of regulatory bodies to promote rapid development of the gas industry. Second, taking into consideration the difference between oil and gas development, the same legal rules can be applied only in upstream exploration and development and pipeline transmission. For downstream supervision and regulation, the integrated legal system governing both oil and gas should be abandoned, and a separate gas law should be enacted. It is necessary to carefully differentiate the features and duties for upstream, midstream, and downstream. The gas law should focus mainly on long-distance Section 4: Legislation of Downstream Gas Sector 37 transmission, storage, distribution, marketing, and safety management. As to the grade of legislation, it is further recommended that the State Council formulate an administrative regulation, which shall be upgraded as a law after some initial implementation experience. Finally, gas legislation should follow the principle of proper regulation, but also encourage competition. For the purpose of resource management, environmental protection, and public safety, administrative regulations are needed in exploration, transmission, storage, and distribution. Administrative licenses can be adopted as an instrument of such a regulation. In the meantime, in those gas sectors without a natural monopoly, competition should be introduced and encouraged in order to increase resources utilization efficiency. With China's entry into the WTO, effective competition should be encouraged according to the principle of equal treatment toward both domestic and foreign companies.. Second, the principle of coordinated legislation for upstream, midstream, and downstream should be followed. Gas legislation as a whole is generally weak and, to promote development of the gas industry, a whole set of laws must be created. An upstream-downstream concerted legal mechanism can be established with multilayers of legal instruments, including laws, administrative regulations, regulations at local levels, and regulations in industrial sectors. Last, gas legislation should include organization, long-distance transmission, storage, distribution, marketing, safety, and dispute settlement. China to boost Sustainable and Rapid Development of Natural Gas Industry by Law Liu Yan, Development Planning Department, SINOPEC Since the 1980s, China's gas industry has undergone rapid growth in both reserves and production, including a number of gas transmission projects and the current construction of the West­East pipeline project. Although the gas sector is expected to grow rapidly, a precondition for the development of the industry is to create a conducive investment environment by establishing a legal framework for oil and gas development. The natural gas sector has lagged compared to other sectors, such as power and telecommunications, which have laws and a legal framework for sectoral development. There are two approaches for the creation of a legal framework. The first approach is to create regulations and rules that would serve as the basis for the development of related laws for the gas sector. The second approach is to first establish a law and then formulate regulations and rules within this framework. From the perspective of SINOPEC, the latter approach is more conducive to the development of the sector and market and the construction of a gas pipeline network. The current environment is favorable to the creation of a gas law based upon a number of factors, including China's entry into the WTO and the corresponding establishment of a framework for reform of monopolies, separation of government administration from enterprise operation, and a strategy for promoting increased competitiveness with internal markets. Second, there are number of problems throughout sector development, including the role of government, a pricing system for transmission and natural gas, and safety and Section 4: Legislation of Downstream Gas Sector 38 foreign cooperation, which hinder the sector development. Third, existing related laws and regulations can serve as a reference for creating a gas law. Last, experiences from other countries can serve as lessons for China. Both industrial countries and developing economies created a law first prior to developing accompanying rules and regulations. This experience can be used to guide China in the practical introduction of legislation. Because legislation will take quite a while to implement, political, economic, and legal changes can be reflected within the legislation. In addition, the development of a natural gas law does not contradict the formulation of rules and regulations. The creation of a natural gas law will support the ongoing and rapid development of the natural gas industry. Some upstream natural gas regulations have already been included in aspects of the Mineral Resources Law, so the proposed law should focus on the mid- and downstream. In the absence of consensus among the key players in the Chinese gas industry, a broad gas framework is appropriate. The law should cover the role of government at all levels, covering issues, such as finance and management, operation of the natural gas network, licensing of gas production and sales enterprises, pricing system, safety, and cooperation with foreign companies. With consideration for conditions in China and the experiences in other countries, a natural gas law should separate decisionmaking from law enforcement. The government should also act to guide industry development through the creation of a natural gas supervisory and management institution. This will help to reduce arbitrary decisionmaking and promote fairness. This institution should be familiar with current approaches in industry to ensure that laws and policies are strictly enforced. The development of a gas law and creation of a regulatory agency would help reduce overlaps of responsibility in the different government departments and avoid the transfer of national interests to relevant departments. Departmental interests could also be reflected in the legislation. Views on Downstream Gas Legislation Liang Zhili, Lawyer, China National Offshore Oil Corporation Gas development in China will serve as the basis of development of the Chinese energy industry in the 21st century. Industry restructuring, initial public offerings, and WTO accession have created a favorable internal and external environment for gas sector development. Rapid industry development requires modern regulation and a sound legal basis. However, there are some problems pertaining to gas legislation in China, such as the lack of a legal framework, gaps in government regulation, and overlapping regulatory functions among multiple government agencies. There are several levels of gas legislation. A downstream regulatory framework is only one component of gas sector legislation, and what we are now discussing is still far from an overall legal framework for the whole sector. It could only be seen as a "Long- Distance Gas Transmission and Distribution Law." It is, therefore, recommended to enact Section 4: Legislation of Downstream Gas Sector 39 State Council regulations as a first step with consideration of primary legislation after a certain period, so as to accelerate gas development and to regulate the operational activities in the downstream gas sector. A license-based approach has been recommended for China with three levels of legislation: laws and regulations, licenses and exclusive rights, and commercial contracts. Key components of a downstream gas law include the following: · General provisions that include purpose of legislation, coverage of the law, basic principles for government regulation, and division of responsibilities between the competent authority and the regulatory agency and their relationship. · Creation of a regulator, its organization, staffing and qualification requirements, responsibilities and powers, working process, and so forth. · Licenses, including types of licenses, process of license application, and granting. · Legal liability. · Supplementary provisions. Policymaking should be separated from regulation with only one regulator to avoid overlapping responsibilities. In the delegation of regulatory responsibility, local regulatory offices may be needed, with interprovincial pipelines regulated by central government. Last, the gas law should cover both LNG and coal bed­methane. Section 4: Legislation of Downstream Gas Sector 40 Appendix 1: Workshop Agenda Tentative Agenda for the Workshop on China's Gas Sector Legislation and Regulatory Reform SCORES­PPIAF­World Bank April 9 2002 Century Hotel Beijing Moderator: Chen Li Executive Director, Institute of Economic System and Management, SCORES 9:00­9:45 Opening Address Peng Sen Vice Minister, State Council for Restructuring Economic System Welcome Address Mohammad Farhandi Sector Director EASEG Presentation Mu Shuling Vice President, China PetroChemical Corporation (SINOPEC) Session One: Regulatory Framework for Downstream Gas Sector Moderator: Jin Deben Director-General, General Secretariat, Scores 9:45­10:15 Main Presentation: Establishment of Modern Regulatory Framework for China's Downstream Gas Sector Chen Li Executive Director, Institute of Economic System and Management, SCORES 10:15­10:45 International Experiences in Developing Modern Regulatory Framework for Downstream Gas Sector--Rules-Based and License-Based Models Roland Priddle Consultant, World Bank 10:45­11:00 Coffee Break 11:00­11:20 Design a Regulatory Framework for China's Downstream Sector Xu Dingming Director of Office for West­East Pipeline, SDPC 11:20­11:40 Urban Gas Administration--Status Quo and Reform Liu Heming, Appendix 1: Workshop Agenda 41 Director, Department of Urban Construction, Ministry of Construction 11:40­12:00 Policy Recommendations on China's Gas Market Development and Regulatory Reform Tang Yali Natural Gas and Pipeline Company, PetroChina 12:00­12:30 Q & A 12:30­13:30 Lunch Session Two: Economic Regulation of Downstream Gas Sector Moderator: Bent Svensson Lead Energy Economist, Oil, Gas and Chemicals Department, World Bank 13:30­14:00 Main Presentation Economic Regulation of Downstream Gas Sector: Technical Regulation, Price and Access Paul Hunt, Consultant to World Bank 14:00­14:20 Reform of Urban Gas Distribution System and Concept of Gas Projects Operation System in Shanghai Wang Yizhong, Shanghai Municipal Engineering Administration Bureau 14:20­14:40 Reform and Development of Urban Gas System in Shengzhen Brief Introduction of Guangdong LNG Terminal and Trunkline Project Li Qingping (Vice President, Shenzhen Gas Corporation Ltd.) 14:40­15:10 Question and Answers 15:10­15:25 Coffee Break Session Three: Legislation of Downstream Gas Sector Moderator: Huang Taihe Vice Director, Institute of Economic System and Management, SCORES 15:25­15:55 Main Presentation Study and Analysis of Issues Regarding Downstream Gas Legislation in China Huan Guoyu Professor, Institute of Economic System of Management 15:55­16:20 International Experiences in Downstream Gas Legislation J. Jay Park Consultant to World Bank 16:20­16:40 Status and Prospect of Chinese Downstream Natural Gas Legislation Zhou Yubo Appendix 1: Workshop Agenda 42 Economic Regulation Department, SETC 16:40­17:00 China to Boost Sustainable and Rapid Development of Natural Gas Industry by Law Liu Yan Development Planning Department, SINOPEC 17:00­17:20 Views on Downstream Gas Legislation Liang Zhili Lawyer, China National Offshore Oil Corporation 17:20­17:50 Q & A 17:50­18:00 Closing Remarks 18:00 Dinner Appendix 1: Workshop Agenda 43 Appendix 2: Workshop Participants (Participants of the international workshop on"China Downstream Gas Sector Regulatory Framework" and the High Level Meeting) Ministers Li Jiange Vice Minister, State Council Office for Restructuring Economic System Peng Sen Vice Minister State Council Office for Restructuring Economic System Qiu Baoxing Vice Minister, Ministry of Construction Chen Geng Vice President, CNPC Shi Xingquan Vice President, PetroChina Co. Ltd. Mu Shuling Vice President, China Petroleum & chemical Corporation Cao Yunshi General Legal Counselor, CNOOC Huang Shaohe President, China United Coal-bed Methane Corporation, Ltd. The World Bank Mohammad Director, Energy & Mining Development Sector Unit, East Asia & Farhandi Pacific Region Members of the Chinese Working Group Chen Li Executive Director-General, Institute of Economic System and Management, SCORES Huan Guoyu Professor, Institute of Economic System and Management, SCORES He Xiaoming Professor, Institute of Economic System and Management, SCORES Li Xiaodong Associate Professor, Institute of Economic System and Management, SCORES Wang Jianmei Research Assistant, Institute of Economic System and Management, SCORES Sun Jian Institute of Economic System and Management, SCORES Xu Xinyu Institute of Economic System and Management, SCORES Zhou Yubo Deputy Director-General, Department of Economic Regulations and LawsSETC Liu Heming Division Chief, Department of Urban ConstructionMinistry of Construction Xing Jun Deputy Division Chief, Department of Laws and Regulations Ministry of Construction Tang Yali Vice President, Natural Gas & Pipeline Company, PetroChina Cui Hongsheng Deputy Division Chief, Natural Gas & Pipeline Company, PetroChina Xu Wenman Economist, Natural Gas & Pipeline Company, PetroChina Zhao Bo Deputy Division Chief, Beijing Gas Transmission Company, PetroChina Zhang Xuzhi Team Leader, Strategic Research TeamSINOPEC Appendix 1: Workshop Agenda 44 Liu Yan Deputy Director-General, Department of Corporate Planning, China Petrochemical Company LimitedSINOPEC Fang Zhongyu Vice Director General, Economics & Development Research Institute, SINOPEC Liang Zhili Advisor, Legal Department, CNOOC Peng Li Deputy Director, Department of International CooperationCUCBM Guo Weiqi Director, Gas Office, Beijing Municipal Management Commission Wu Liya President, Beijing Gas Group Co. Members of the Foreign Working Group Noureddine Principal Energy Specialist, Energy & Mining Development Sector Berrah Unit, East Asia & Pacific RegionThe World Bank Zhao Jianping Senior Energy Specialist, The World Bank OfficeBeijing Bent R Svensson Principal Energy Economist, Oil & Gas Division, Energy, Mining & Telecommunication DepartmentThe World Bank Roland Priddle Consultant Paul Hunt Consultant J. Jay Park Consultant State Council Office for Restructuring Economic SystemSCORES Jin Deben Director General, Department of Secretariat and Administration, Dong Hong Director-General, Department of Industrial and Market System Huang Taihe Deputy Director-General, Institute of Economic System and Management Shi Xiaomin Secretary-General, China Society for Research on Economic System Reform Wen Tiejun Deputy Secretary-General, China Society for Research on Economic System Reform Li Fang Division Chief, Department of Secretariat and Administration, Qu Zhaolin Division Chief, Personnel Department Yu Yanshan Division Chief, Department of Industrial and Market System Wang Zhaolong Department of Industrial and Market System Gao Shiji Division Chief, Division of International Comparison, Institute of Economic System and Management Qi Yongfeng Division Chief, Division of Enterprises, Institute of Economic System and Managemen Zhu Baoshun Division Chief, Office of AdministrationInstitute of Economic System and Management Peng Shaozhong Deputy Division Chief, Division of Comprehensive Research Institute of Economic System and Management, SCORES Feng Jing Deputy Division Chief, Office of AdministrationInstitute of Economic System and Management, SCORES Chang Zhixiao Associate Professor, Institute of Economic System and Management, SCORES Zheng Xin Institute of Economic System and Management, SCORES State Development Planning CommissionSDPC Xu Dingming Director-General, West-East Pipeline Office Appendix 1: Workshop Agenda 45 Zhu Ronggai Engineer, West-East Pipeline Office Gao Yunhu Division Chief, Department of Development and Planning Song Chaoyi Deputy Director-General, Department of Basic Industries Zhang Yuqing Division Chief, Department of Basic Industries Han Huifang Deputy Director-General, Price Department Liu Zhenqiu Division Chief, Price Department Niu Yubin Price Department Zhou Fengqi Senior Advisor, Institute of Energy Han Wenke Deputy Director-General, Institute of Energy Wu Zhonghu Professor, Institute of Energy Zhu Xingshan Professor, Institute of Energy Liu Xiaoli Associate Professor, Institute of Energy Wang Jiacheng Professor, Institute of Industry Technology and Economy State Economic & Trade Commission (SETC) Chen Shihai Deputy Director-General, Department of Industry Planning Jia Like Division Chief, Department of Industry Planning Shao Yong Engineer, Department of Industry Policies Ren Jingdong Department of Economic Operation Ministry of Finance Li Guanghui Division Chief, Department of International Cooperation Zhang Wenhe Deputy Division Chief, Department of International Cooperation Lin Shengqiang Project Coordinator, Department of International Cooperation Zhang Minwen Department of International Cooperation Ministry of Construction Zhang Guoyin Director, General Office Wang Tianxi Deputy Director-General, Department of Urban Construction Cao Jinbiao Deputy Director-General, Department of Laws and Regulations Zhang Kai Division Chief, Information Center Ministry of Land and Resources Che Changbo Division Chief, Department of Geological Exploration Yao Yichuan Division Chief, Department of Policy and Regulations Gao Bingqi Deputy Division Chief, Department of Geological Exploration Ministry of Foreign Trade and Economic Cooperation Shao Wei Department of Foreign Investment Administration Office of Legislative Affairs of the State Council Guan Renlin Department of Industry, Communication and Commerce, Research Department of the State Council Liu Jiansheng Division Chief, Department of Industry Transportation &Trade Zhang Tai Division Chief, Department of Industry Transportation &Trade Development Research Center of the State Council (DRC) Lv Wei Deputy Director-General, Department of Technical Economy Li Guoqiang Division Chief, Institute of Enterprises Research Appendix 1: Workshop Agenda 46 Deng Yusong Institute of Market Economy, Chinese Academy of Social Sciences (CASS) Yu Hui Associate Professor, Institute of Industrial Economics Liu Jiejiao Associate Professor, Institute of Industrial Economics Universities and Associations Wu Zhipan Vice President, Beijing University Wu Jingming Associate professor, Department of Economic laws, China University of Policies & Legislation Long Weiqiu Associate Professor, China University of Policies and Legislation Liu Danping Associate Professor, China University of Policies and Legislation Hong Cuiying Assistant Director, Research Center, China Policy Research Association Yu zhian Senior Engineer, China Petroleum and Chemical Industry Association Chi Guojing Deputy Secretary-General, China Gas Association China National Petroleum Corporation Gao Wenhui Deputy Division Chief Liu Hequn Manager, Market Department of Sino-Russia Oil & Gas Cooperation Committee Liu Keyu Division Chief, Economic Division of China Petroleum Economics & Information Center Xu Xiaojie Division Chief, Department of Oversea Affairs, China Petroleum Economics & Information Center Liao Qin Engineer, Economic Division of China Petroleum Economics & Information Center Xiang Ze Deputy Chief-Accountant, Finance Department, PetroChina Chen Kequan Senior Economist, Finance Department, PetroChina Liao Yu Economist, Finance Department, PetroChina He Jia Division Chief, Department of Legal Affairs, PetroChina Zhang Rong Senior Accountant, Office of West-East Pipeline Project, PetroChina Liu Mingke Division Chief, Market Department, Southwest Oil and Gas Branch, PetroChina China Petrochemical Corporation (SINOPEC) Li Gansheng Deputy Chief-Engineer, China Petrochemical Company Limited Liu Rushan Vice Director General, Department of Oil Fields Management Hai Peng Professor, Economics & Development Research Institute Guan Defan Director, Institute of Exploration and Development, China Petrochemical Company Limited Chen Jiangzhi Division Chief, Department of Oil Field Exploration and Development, China Petrochemical Company Limited Liu Chongen Shengli Oil and Gas Branch Company, China Petrochemical Company Limited Ma Aishan Senior Engineer, Star Oil Branch Company, China Petrochemical Company Limited Ou Yangyu Senior Engineer, Marketing Department, Star Oil Branch Company, China Petrochemical Company Limited Appendix 1: Workshop Agenda 47 Zhu Xuehai Division Chief, Department of International Cooperation Wang Shiqing Division Chief, Institute of Exploration &Development, China Petrochemical Company Limited China National Offshore Oil Corp (CNOOC) Zhou Shengwei Division Chief, Department of Enterprise Reform, Li Yunfei Department of Enterprise Reform, China United Coal Bed Methane Co. Ltd(CUCBM) Du Ming Assistant of General-Manager Zhang Yanqing Director, Department of Enterprise Management Local Governments and Gas Distribution Companies Zheng Qing Director, Finance Department, Beijing Gas Group Co.,Ltd Yang Mingzhou Deputy Director, Department of Enterprise Management, Beijing Gas Group Co. Zhou Ciming Director, The Preparatory Office for Natural Gas Projects Shanghai, Wei Shu Senior Engineer, The Preparatory Office for Natural Gas Projects Shanghai Wang Yizhong Deputy Director, Shanghai Municipal Engineering Administration Bureau Zhu Weihua Deputy Chief-Engineer, Shanghai Municipal Engineering Administration Bureau Ying Jianguo Division Chief, Department of Laws and Regulations, Shanghai Municipal Engineering Administration Bureau Huang Yanhua Senior Economist, Shanghai Municipal Engineering Administration Bureau Ying Shisheng Advisor, Shanghai Gas Management Division Liao Shaoguo Energy Office, Chongqing Municipal Economic Commission Yang Qi Deputy Division Chief, Sichuan Provincial Construction Bureau Wu Jianzhong Deputy Division Chief, Energy Division, Sichuan Provincial Development Planning Commission Peng Junfu General Manager, Chengdu Gas Company Meng Qinghua Assistant of General Manager, Chengdu Gas company Liu Shaoxin Division Chief, Planning Division, Chengdu Gas company Feng Yu Deputy Division Chief, Division of Communication and Energy, HeFei Municipal Planning Commission Hu Delong Chief-Engineer, HeFei Gas Company Chen Yun Senior Engineer, HeFei Gas Company Xu Jiang Division Chief, Division of Gas and Heating, Wuhan Municipal administration Bureau Zhang Weiming President, Hangzhou Gas Company Wu Xiaosu Vice General Manager, Hangzhou Gas Company Zhang Jun Director, Natural Gas Office, Wuxi Gas Company Li Qingping Vice General Manager, Shenzhen Gas Company LTD Wei Donghong Engineer, Shenzhen Gas Company LTD Banks, Security and Advisory Companies He Chenghong Deputy Manager, China Construction Bank Appendix 1: Workshop Agenda 48 Guo Pingsheng Division Chief, China State Development Bank Chen Ru President, International Holding Company, Bank of China Lu Ying Corporate Banking Department, Bank of China Tang Zhenhua Consultant, China International Engineering Consulting Corporation YuanWeixin Deputy Director, Project Department, China International Engineering Consulting Corporation Zhang Wei Deputy Division Chief, Project Department, China International Engineering Consulting Corporation Yuan Dong Director, Research Department, China Galaxy Securities Company Limited Liu Yanming Analyst, China Galaxy Securities Company Limited Li Chen Analyst, Shenyinwanguo Securities Research Institute Huang Yanming Director, Shenyinwanguo Securities Research institute The World Bank and International Agencies Dean Girdis Consultant Cliff Garstang Consultant Augustine Vinh Regional Advisor Asia, PPIAF Sohail Hasnie Energy Specialist, Infrastructure Division, East & Central Asia Department, Asia Development Bank Norio Ehara Head, Non-Member Countries Division Asia/Pacific & Latin America OECD Participants from Hong Kong and Foreign Oil Companies Kuang Wen Coordinator, Market Development, Exxon China Inc Du Chuanning Coordinator, Mobil Oil (China) Investment Co.,LTD Edmond Lee Analyst, Asia Ex-Japan Equity Research Regional Utilities J.P.Morgan Milton Lim Analyst, Asia Ex-Japan Equity Research Regional Utilities J.P.Morgan Glen Edwards Vice President, Unocal China Ltd Wu Qingle Business Representative, Unocal China Ltd Huang Weijing Market Analyst, Unocal China Ltd Chen Zhide CLP Enterprises Limited Huang Bingxiu Business Development Manager, CLP Enterprises Limited Zhang Yanggan Business Development Manager, CLP Power China Limited Michael Kung Senior Advisor, West-East Pipeline, Shell Exploration(China) Ltd Peng Ningke Senior Advisor, Regulatory Affairs Gas & Power, BP China Limited Zhang Shuansuo Policy Coordinator, Guangdong LNG Project, BP China Limited Gao Chenghua CFO, The Hong Kong & China Gas Company Ltd Liu Jie Chief Representative Assistant, Beijing Representative Office, The Hong Kong & China Gas Company Ltd Journalists XinHua News Agency; CCTV; Outlook Weekly; People's Daily; Appendix 1: Workshop Agenda 49 China Daily; Economic Daily; China Economic News China Industry and Economic News Financial and Economic Times 21cn Business Herald; China Business News China Enterprise News; China Petroleum News; China Petro-Chemical News Offshore Oil News Jinghua News Futures Daily Internal Information of Reform China Reform News China Reform Magazine Financial and Economic Magazine Economic Management Digest Economic Systems Comparison International Petroleum Economic Journal China Oil and Petrochemical Magazine Oil Company Management Monthly Appendix 1: Workshop Agenda 50