Deregulating Energy MARKETS in APEC

Deregulating energy markets in APEC
Economic and sectoral impacts
2002
Lindsay Fairhead Jane Mlanie Leanne Holmes Ye Qiang Helal Ahammad Karen Schneider
Asia-Pacific Economic Cooperation Energy Working Group
2002 APEC Secretariat
ISBN 0 642 76459 X APEC#202-RE-01.3 Fairhead, L., Mlanie, J., Holmes, L., Ye Qiang, Ahammad, H. and Schneider, K. 2002, Deregulating Energy Markets in APEC: Economic and Sectoral Impacts, APEC#202-RE-01.3, ABARE Research Report 02.5, Canberra.
Australian Bureau of Agricultural and Resource Economics GPO Box 1563 Canberra 2601 Telephone Facsimile Web site +61 2 6272 2000 +61 2 6272 2001 www.abareconomics.com
Published by ABARE for the APEC Energy Working Group APEC Secretariat 438 Alexandra Road #14-00 Alexandra Point Singapore 119958 Telephone Facsimile Email Web site +65 276 1880 +65 276 1775 info@mail.apecsec.org.sg www.apecsec.org.sg
foreword
In many economies, including in APEC, energy industries are subject to extensive government involvement. This includes direct government ownership and management of energy resources and assets, as well as regulation of various aspects of energy supply and use. Many APEC economies, however, are seeking to implement change in the regulatory structures and institutions in their energy sectors. While the regulatory reform agendas being proposed and implemented throughout the region vary, their common objective is to encourage more efcient energy supply and use. Reform is expected to deliver benets such as productivity improvements, prices that more accurately reect costs, and more dynamic energy industries that are responsive to consumer demands. The objective in this study is to contribute to the assessment of the economic and sectoral implications of regulatory reform in APEC energy industries. This is done by providing quantitative analysis of the impacts of regulatory reform on key economic and energy variables. The study demonstrates that there could be significant economywide benefits from regulatory reform, including enhanced productivity and higher gross domestic product. These in turn are likely to lead to higher energy consumption across APEC and more intense energy trading relationships. The study also indicates that energy market reform can contribute to meeting some of the key energy policy objectives endorsed by APEC Energy Ministers. These include the development of more efcient production, distribution and consumption of energy, the facilitation of open energy markets and the promotion of capital ows. Reform can also help APEC economies achieve their important policy objective of ensuring stable, secure and reliable energy supplies. The study was undertaken by ABARE for the APEC Energy Working Group.
BRIAN S. FISHER Executive Director August 2002

Deregulating energy markets in APEC iii
acknowledgments
The authors gratefully acknowledge the contributions made to the study by the Asia Pacific Energy Research Centre (APERC) and the many government and energy industry organisations that were consulted throughout its preparation. In ABARE, the authors thank Muhammad Akmal, Alan Copeland and Kim Donaldson for their contribution to the analysis of regulatory regimes in APEC member economies; Christopher Short for international consultations; and Vivek Tulpul for overall advice and guidance.
iv
contents
Summary 1 Introduction
Regulatory reform what, how and why? Measuring the impacts of regulatory reform Structure of the report 1 13 14 15 16 17 18 23
2 Energy markets in APEC

Energy consumption, production and trade in APEC Structure and regulation of energy industries in APEC
3 Reforming energy markets expectations and outcomes

Rationale for regulatory reform in the energy sector Policies to capture the potential benets of reform Impacts of reforms Conclusions
34 34 39 63 69 71 71 72 73 76 84 85
4 Analytical framework
Global trade and environment model Regional and sectoral aggregation Developing a reference case Policy simulations Interpreting results Reference case projections
5 Quantifying the impacts of energy market liberalisation

Comprehensive liberalisation of energy markets in APEC economies
91 92
v
Sensitivity of results to the coverage of liberalisation Sensitivity of results to the timing of liberalisation Sensitivity of results to market and regulatory design Investment in deregulated energy markets
105 108 110 112 116
6 Conclusions Appendixes
A Energy reform plans and progress selected APEC economies B Global trade and environment model C Simulation results, by region
119 135 142 149
References
vi
Boxes
1 2 3 4 Policy design problems the case of Californias electricity market 50 Problems with partial reforms the case of British Gas 58 Problems with wellhead price controls gas markets in the United States 59 Energy market liberalisation and energy security in APEC 104
Figures summary
A Change in APEC energy consumption, 1999-2010, reference case 3 B Change in APEC GDP, 2010, following comprehensive liberalisation 5 C Change in APEC production in selected sectors, 2010, following comprehensive liberalisation 5 D Change in APEC electricity consumption, 2010, following comprehensive liberalisation 6 E Change in APEC gas, oil and coal consumption, 2010, following comprehensive liberalisation 7 F Change in coal, oil and gas production in selected APEC economies, 2010, following comprehensive liberalisation 8 G Change in APEC gas, oil and coal trade, 2010, following comprehensive liberalisation 8 H Change in APEC GDP and energy consumption, 2010, following comprehensive liberalisation and electricity liberalisation only 10 I Change in APEC GDP and energy consumption, 2010, following comprehensive liberalisation and gas liberalisation only 10 J Change in APEC GDP and energy consumption, 2010, following full and partial electricity liberalisation 11 K Change in APEC GDP and energy consumption, 2010, competitive and noncompetitive electricity market outcomes 12
vii
Figures main report

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Primary energy consumption, by fuel, 1999 Energy consumption, by end use, 1999 Fuel mix for electricity generation, 1999 Primary energy production, by fuel, 1999 Energy import dependence, 1999 Deviation from the reference case in a GTEM simulation Change in APEC energy consumption, 2010, reference case Change in APEC coal, oil and gas consumption, 2010, reference case Change in APEC electricity production, 2010, reference case Change in APEC production of energy intensive goods, 2010, reference case Change in APEC coal, oil and gas production, 2010, reference case Change in APEC coal, oil and gas imports, 2010, reference case Change in APEC coal, oil and gas exports, 2010, reference case Change in APEC GDP, 2010, following comprehensive liberalisation Change in APEC GDP, 2010, following comprehensive liberalisation, compared to GDP of selected APEC economies Change in APEC production in selected sectors, 2010, following comprehensive liberalisation Change in energy intensive production in selected APEC economies, 2010, following comprehensive liberalisation Change in APEC energy intensity, 2010, following comprehensive liberalisation Change in APEC electricity consumption, 2010, following comprehensive liberalisation Change in APEC energy consumption, 2010, following comprehensive liberalisation 19 20 20 21 23 84 86 86 86 88 89 89 89 93
93 95 95 96 96 98
16 17 18 19 20
viii
21 Change in APEC gas, oil and coal consumption, 2010, following comprehensive liberalisation 98 22 Share of gas in electricity generation fuel mix, 2010 99 23 Change in gas, oil and coal production in selected APEC economies, 2010, following comprehensive liberalisation 100 24 Change in APEC gas, oil and coal trade, 2010, following comprehensive liberalisation 102 25 Change in APEC GDP and energy consumption, 2010, following comprehensive liberalisation and electricity liberalisation only 106 26 Change in APEC GDP and energy consumption, 2010, following comprehensive liberalisation and gas liberalisation only 107 27 Change in APEC GDP and energy consumption, 2010, following full and partial electricity liberalisation 109 28 Change in APEC GDP and energy consumption, 2010, competitive and noncompetitive electricity market outcomes 111 29 Change in investment in electricity generation capacity to 2010, following comprehensive liberalisation 113 30 Investment in electricity generation capacity at 2010, following comprehensive liberalisation 114
ix
Tables
1 APEC member economies 17 2 Structural and regulatory characteristics of selected APEC electricity industries 24 3 Proposed electricity reforms, selected APEC economies 26 4 Structural and regulatory characteristics of selected APEC natural gas markets current and planned 29 5 Structural and regulatory characteristics of selected APEC oil markets current and planned 31 6 Energy prices following reform 65 7 Improvements in technical efciency following reform 67 8 Regions and sectors in GTEM 73 9 GDP assumptions, reference case 74 10 Share of electricity generated by each fuel under the reference case, APEC economies 75 11 Assumed productivity and price impacts in the electricity sector 77 12 Assumed productivity and price impacts in the gas sector 78 13 Assumed productivity and price impacts in the downstream oil sector 78 14 Assumed productivity gains in the electricity sector under partial liberalisation 83 15 Simulation results, by region 143
summary
The economic and strategic importance of energy has long provided a case for extensive government intervention in energy markets in APEC and other economies. However, in response to growing pressures to minimise costs, attract private investment and deliver energy products and services at cost reective prices, many APEC economies are initiating policies to liberalise their energy industries. While there is considerable variation in the approaches to deregulation, the reforms being adopted or proposed share some common principles. These involve a greater reliance on market forces in segments of the industry where competition is feasible, and the design of an effective regulatory framework where there is a need for government intervention to address issues associated with natural monopolies and externalities. Increased market pressure, combined with improved regulatory design, has the potential to generate significant productivity improvements along the energy supply chain. These productivity gains can in turn be expected to deliver energy at lower prices than would be the case without regulatory reform. Well functioning markets can also provide the basis for better service quality and greater innovation. These expectations are largely supported by the evidence emerging in energy markets where major reforms have been implemented and new industry structures are well established. The key objective in this study is to provide quantitative analysis of the broad economic and sectoral impacts of policies to deregulate energy markets in the APEC region. The projects ndings demonstrate the benets that deregulation can deliver for both energy markets and the wider economy, particularly in APEC economies where energy sectors remain highly regulated. The emphasis is on electricity, natural gas and downstream oil sectors areas that are currently still subject to extensive government regulation in some economies.
Analytical framework
The analysis of the impacts of energy market deregulation reported in this study is based on simulation results from ABAREs global trade and
Deregulating energy markets in APEC 1
environment model (GTEM). GTEM is a dynamic, multiregion, multisector, general equilibrium model of the world economy. It is an appropriate tool for analysing the impacts of policies relating to energy sector liberalisation because, among other features, it has: the capacity to model the interaction between different sectors in the economy; the capacity to capture the linkages between economies through trade and investment ows; a detailed representation of the world economy, including the majority of APEC economies; a detailed treatment of energy and energy intensive commodities; and an explicit representation of interfuel substitution possibilities and technological change in key industries that are primary energy users. In GTEM a reference case or a business as usual simulation provides a benchmark against which the impacts of policy changes can be assessed. The reference case projects growth in key variables in each region in the absence of policy changes. In this study the reference case represents the likely outlook for APEC energy production, consumption and trade in the absence of new regulatory reform measures in electricity, natural gas and downstream oil industries.
Reference case projections

In the reference case, total energy consumption in the APEC region is projected to increase by almost 30 per cent over the period to 2010 (gure A). This growth implies that energy consumption in APEC reaches 6371 million tonnes of oil equivalent in 2010, compared with 4996 million tonnes of oil equivalent in 1999. The developing and newly industrialised economies are expected to account for much of the growth in energy consumption, driven by strong economic growth, an expanding population and increasing demand for personal services such as transport and the use of electrical appliances. Growth in energy consumption in these economies is moderated to some extent by continued improvements in the efciency of energy use.
A
60 40 20
Change in APEC energy consumption, 19992010, reference case
% China Other developing Newly industrialised Developed Total APEC
Lower economic and population growth in developed economies translates into lower energy consumption growth in these economies, with total energy consumption expected to increase by 16 per cent over the period to 2010. However, as developed economies contribute more than two-thirds of APEC energy consumption, this implies large increases in the absolute levels of energy consumed in the region. The substantial increase in APEC consumption of fossil fuels in the reference case is driven to a large extent by the expansion of electricity generation in developing and newly industrialised economies. The reference case highlights the relatively strong growth in coal and gas consumption relative to oil, reflecting the favored position of these fuels for power generation across the APEC region. The increase in gas consumption is particularly strong in economies that have access to competitive supplies of pipeline natural gas and where environmental considerations are an important inuence on the fuel mix. Coal red power generation increases more rapidly in economies such as Indonesia, where large indigenous coal reserves give coal a cost advantage over other technologies, or Japan, where the cost of imported LNG is significantly higher than the cost of imported coal. The transport sector provides the main impetus for increased oil consumption in both developed and developing economies. Cost effective energy production and growing energy consumption provide the basis for signicant intraregional energy trade within APEC. The region is generally self sufcient in energy terms, with the major exception of oil imports that are sourced primarily from the Middle East. These patterns are
maintained in the reference case, with energy production in APEC projected to grow by 30 per cent over the period to 2010. The slower growth in consumption of oil relative to other fuels implies that APEC will become increasingly energy self sufcient over the outlook period.
Impacts of energy market liberalisation

The liberalisation of electricity, natural gas and downstream oil markets in APEC economies will have both direct and indirect impacts on the energy sector. These include: macroeconomic impacts, or the increase in productivity and output that are driven by competition in energy sectors these indirect economywide impacts arise as efciency in energy markets is enhanced and lower energy prices ow through to the rest of the economy; structural changes in economic output, at both the national and global levels, in response to changes in relative energy prices and comparative advantage; and microeconomic or direct impacts on energy consumption, production and trade.
Impacts of comprehensive energy market liberalisation on GDP

Energy market liberalisation can be expected to lead to higher national incomes as the productivity gains achieved in electricity, gas and oil sectors flow through to the rest of the economy. This effect is reinforced by the resource allocation benets of liberalisation that is, the efciency gains derived from the shift of resources to their most valuable use within APEC economies as energy consumers and producers respond to price signals. The implementation of comprehensive energy sector liberalisation in APEC economies generates an increase in regional GDP of 0.3 per cent in 2010 relative to the reference case. From an APEC-wide perspective, this gain in GDP is signicant and translates into an increase in regional economic output of around US$71 billion (in 1999 prices). This is broadly comparable to the current size of the economy in Chile, the Philippines and New Zealand. It is also equivalent to around half the size of the Indonesian economy. The largest gains in GDP occur in the developing economies with increases of up to 1 per cent at 2010 relative to the reference case (figure B). This
4 Deregulating energy markets in APEC
B
0.5 0.4 0.3 0.2 0.1 %
Change in APEC GDP, 2010, following comprehensive liberalisation Relative to the reference case
China
Other developing
Newly industrialised
Developed
Total APEC
reflects the currently highly regulated regimes affecting energy sectors in most developing economies and the relatively large contribution of oil and gas sectors to economic output. GDP gains are generally lower in the newly industrialised and developed APEC economies as a result of the lower productivity impacts that are expected to occur in economies that have already introduced some or most of the major elements of energy market reform.
Energy sector impacts of energy market liberalisation

Associated with the economic output effects, energy consumption in APEC is expected to increase signicantly as a result of deregulation. The impacts of higher income growth on energy consumption are reinforced by structural
C
0.6 0.4
Change in APEC production in selected sectors, 2010, following comprehensive liberalisation Relative to the reference case
Energy intensive Other manufacturing Services Agriculture
0.2
effects within APEC economies, as lower energy prices improve the competitiveness of industrial and commercial output. In particular, lower energy prices have a favorable impact on the cost structures of energy intensive industries such as iron and steel, nonferrous metals and other manufacturing. This leads to an increase in the competitiveness of the regions energy intensive sectors relative to other sectors of the economy and relative to energy intensive production in economies outside APEC. The reallocation of resources to energy intensive production is more pronounced in developing economies that are currently least advanced in implementing energy sector reform and, consequently, where the potential efciency gains from reform are most signicant (gure C). Expansion of energy intensive sectors is more limited in the newly industrialised and developed economies, reecting the relatively smaller productivity benets that are yet to be realised in regions that have already implemented some or most of the major reform elements.
Energy consumption impacts
The macroeconomic and sectoral impacts of energy market reform lead to a substantial increase in APEC electricity consumption at 2010 relative to the reference case level (gure D). Electricity consumption grows strongly, primarily in developing economies, where electricity prices are projected to fall substantially as a result of the fundamental restructuring required to achieve reform objectives. The signicant reductions in electricity prices not only stimulate industrial and commercial demand in these economies but also lead to stronger electricity demand growth from the residential sector.
D
6 5 4 3 2 1 % China
Change in APEC electricity consumption, 2010, following comprehensive liberalisation Relative to the reference case
Other developing
Developed
Total APEC
E
12 10 8 6 4 2 %
Change in APEC gas, oil and coal consumption, 2010, following comprehensive liberalisation Relative to the reference case
China Other developing Newly industrialised Developed Total APEC
Gas
Oil
Coal
Energy market liberalisation also has important implications for the composition of primary energy consumption. When all key energy sectors are deregulated concurrently, there is significantly higher demand for natural gas relative to the reference case, reecting the enhanced competitiveness of gas for electricity generation (gure E). The shift toward natural gas occurs in all APEC economies, with the most substantial increases arising in economies that are currently the least deregulated and in which gas already plays a major role. Compared with natural gas, the impacts of energy market deregulation on oil consumption are moderate. This reflects the commonly open regimes affecting downstream oil sectors in the majority of APEC economies. Similarly, the indirect impacts on coal as a result of deregulation of energy markets are small for APEC generally. However, coal consumption, primarily for electricity generation, rises markedly relative to the reference case in the newly industrialised economies where coal currently accounts for a large share of the fuel mix, mainly owing to its competitiveness relative to imported LNG and oil.
Energy production impacts
In response to stronger regional energy demand, production of fossil fuels in APEC economies increases relative to the reference case following deregulation (figure F). Production of natural gas rises the most, as substantial efciency improvements in gas extraction and reticulation industries result in the APEC region becoming a more competitive gas supplier to international markets.
F
China Australia Mexico Indonesia China Mexico Malaysia Indonesia Canada
Change in coal, oil and gas production in selected APEC economies, 2010, following comprehensive liberalisation Relative to the reference case
Coal Oil Gas
10
15
20
Energy trade impacts
Changes in regional energy consumption and production underpin changes in energy trade relative to the reference case following the introduction of regulatory reforms (gure G). Gas trade is affected substantially by energy market liberalisation, driven primarily by higher LNG consumption in the key north east Asian markets of Japan, Korea and Chinese Taipei. This increased consumption is met primarily by developing gas exporting economies such as Indonesia and Malaysia. Liberalisation in these economies enhances their international competitiveness against other gas exporting APEC economies such as Australia and Canada, where most of the potential gains from gas reform have already been realised.
G
10 8 6 4 2 %
Change in APEC gas, oil and coal trade, 2010, following comprehensive liberalisation Relative to the reference case
Gas Oil Coal
Exports
Imports
Liberalisation of energy markets also creates additional demand for coal imports, primarily in the regions key import markets Japan, Korea and Chinese Taipei as their economies grow, and as energy intensive output increases following liberalisation. Australia meets most of the increase in demand for coal imports relative to the reference case. Coal exports by other major suppliers to these markets China and Indonesia are constrained by higher domestic consumption and the shift of resources to deregulated energy sectors. Consistent with the small changes in APEC oil consumption and production relative to the reference case, oil trade at the regional level is only marginally affected by liberalisation. However, this aggregate result masks some important differences across APEC economies that have diverse oil resource and policy contexts. In particular, developing economies with signicant oil resources such as Indonesia and Mexico are projected to increase exports of rened oil products substantially as deregulation of downstream oil sectors increases the international competitiveness of crude oil processing in these economies.
Sensitivity analyses
In addition to the analysis of comprehensive and simultaneous liberalisation of electricity, gas and downstream oil sectors, a range of sensitivity analyses is undertaken in the study. The objective of these is to assess the contribution of specific energy sectors to the overall gains from energy market reform and to examine the implications of alternative assumptions about the pace and design of reform programs.
Liberalisation of the electricity sector only

The results demonstrate that deregulation of electricity sectors in APEC economies makes the single largest contribution to the GDP gains that follow energy market reform. This reflects the fundamental role of electricity in most economies as an input to production processes and as a component of household expenditure. The results also reflect the highly regulated electricity market structures that currently exist in a number of APEC economies. Narrowing the coverage of liberalisation to the electricity sector only also affects the composition of total energy demand. Coal assumes a greater role in the energy mix for electricity generation when gas sectors are not liberalised (gure H).
H
5 4 3 2 1 %
Change in APEC GDP and energy consumption, 2010, following comprehensive liberalisation and electricity liberalisation only
Relative to the reference case
Electricity only All energy sectors
GDP
Electricity
Gas
Oil
Coal
Liberalisation of the gas sector only

The macroeconomic and energy sector outcomes when gas markets are liberalised independently of reform in other key energy sectors are generally modest compared with the impacts of a broadly focused reform program. This is because gas accounts for a small share of energy consumption and production in APEC. Further, gas markets in some of the major gas producing APEC economies are already open and competitive. Nonetheless, gas market deregulation leads to a significant increase in gas consumption at 2010 relative to the reference case (gure I). These impacts are concentrated to a signicant extent in developing APEC economies where gas industries are least deregulated and where gas production and distribution sectors contribute to a relatively large share of GDP.
I
5 4 3 2 1 % 1
Change in APEC GDP and energy consumption, 2010, following comprehensive liberalisation and gas liberalisation only
Relative to the reference case Gas only All energy sectors
GDP
Electricity
Gas
Oil
Coal
10
Slowing the pace of liberalisation

Slowing the pace of liberalisation in APEC economies that are currently least advanced in terms of electricity market reform weakens the productivity gains that could be achieved under a faster timetable. Consequently, the impacts on GDP and energy consumption are lower in economies that achieve only partial liberalisation by 2010, compared with the changes that arise when all APEC economies remove all regulatory and structural impediments by 2010 (gure J). Economies that endeavor to attain all reform objectives by 2010 are also affected by partial liberalisation in other APEC economies because of the dynamic trade linkages within the APEC region.
J
2.0 1.5 1.0 0.5 %
Change in APEC GDP and energy consumption, 2010, following full and partial electricity liberalisation
Relative to the reference case Full electricity liberalisation by 2010 Partial electricity liberalisation by 2010
GDP
Electricity
Gas
Oil
Coal
Suboptimal market or regulatory design

The benets from reform are also likely to be constrained when ineffective market design or regulatory frameworks result in the exercise of market power by energy suppliers (gure K). Poor market design could, for example, allow electricity generators to exercise market power, especially in the wholesale market that is vulnerable to noncompetitive behavior. This could result in generators retaining the efficiency dividends of liberalisation as higher prots rather than passing them through to end users in the form of lower prices.
Key policy implications

The findings in this study indicate that the implementation of policies to liberalise energy sectors in member economies will generate economic
K
2.0 1.5 1.0 0.5 %
Change in APEC GDP and energy consumption, 2010, competitive and noncompetitive electricity market outcomes
Relative to the reference case
Fully competitive electicity market Residual market power
GDP
Electricity
Gas
Oil
Coal
benefits for APEC as a whole, but particularly for developing and newly industrialised economies. These benefits will increase if a comprehensive and broadly based approach to liberalisation is adopted. Further, the results demonstrate the importance of effective regulatory and market design in ensuring that the benefits of liberalisation are fully realised by APEC economies. The study also highlights some important implications for APEC energy policy makers. The significant additional demand for energy in APEC economies that results from liberalisation will require substantial investment in energy infrastructure, particularly in electricity and natural gas sectors. In this context, policy initiatives to facilitate investment, including private and foreign investment, will be critical to ensuring that the benets of liberalisation are realised. The study also indicates that energy market reform can contribute to meeting some of the key energy policy objectives endorsed by APEC Energy Ministers. These include the development of more efcient production, distribution and consumption of energy, the development of open energy markets, and the promotion of capital ows. Reform can also assist APEC economies to achieve their important policy objective of ensuring stable, secure and reliable energy supplies.
12
1
introduction
The energy sector in most economies, including those in the APEC region, has long been subject to extensive government involvement. This has included direct government ownership and management of energy resources and assets as well as regulation of various aspects of energy supply and use. The reasons for public sector involvement are many and include the economic and strategic importance of energy and the desire of governments to ensure reliable and secure energy supplies. The technical and economic characteristics of some parts of the energy supply chain that make it efcient to have a single supplier have also encouraged government intervention in energy markets. Social and other policy objectives, such as ensuring the availability of energy at affordable prices for some consumers, have also been important in some economies, as have concerns about the environmental impacts of energy supply and use. Pressures to reform the role that governments play in energy markets have been increasing over the past two decades. Consumers seeking lower energy prices have been a key source of pressure in many economies. Concerns about the poor performance of regulated energy utilities and government budget constraints have also been important. Examples of benets such as lower energy prices, more efcient energy supply, better service quality and greater innovation in some economies that have implemented reforms have provided further stimulus for change. Reform of regulatory structures and institutions in the energy sector, as elsewhere in an economy, can involve some dramatic changes. For example, supply by private rms in competitive markets may replace centralised, public control of energy supply; restrictions on prices, trade and other activities of energy suppliers may be lifted; consumers may be given choices for the rst time; and the role of regulation may be narrowed and redened. To deal with the complex changes involved, regulatory reform is usually an ongoing process. Policies are gradually implemented to allow people and institutions time to adjust and to allow policies to be reviewed and rened
as markets grow, technology changes and competition develops. The major changes involved also mean that governments considering a reform program generally want to undertake extensive assessments of options and likely impacts. Regulatory reform often involves a substantial long term commitment to change, so governments need to be convinced that the changes will be worthwhile. Analysis of likely and actual impacts of reform is therefore vital for the policy development process. Information is required on different levels. For policy makers assessing options for electricity reform, detailed analysis of possible impacts of alternative arrangements for trading in wholesale markets may be required. For APEC members seeking to progress reform on a wide front, analysis of impacts of reform on a broad scale, looking beyond the energy industries directly affected to wider economic activity and trade and investment, is required. The objective in this study is to contribute to the assessment of the economic implications of regulatory reform in APEC energy industries. This is done by providing quantitative analysis of the impacts of regulatory reform on key economic and energy variables. While some issues and impacts for individual energy industries are examined, the emphasis is on the broad picture the economywide and regional impacts of the reform process.
Regulatory reform what, how and why?

Regulatory reform refers to changes to improve the effectiveness of regulation in achieving its stated objectives and to reduce the costs of regulation. It encompasses policies to restructure or liberalise industries and markets by removing restrictions on entry, exit, ownership and operations of rms, as well as policies to redesign existing regulatory frameworks or introduce new ones. Approaches to reform vary widely across economies and energy industries in the APEC region. In some cases, reform was initiated more than two decades ago as in the natural gas industry in the United States and the electricity industry in Chile. In other cases, governments are just beginning to assess options. There is wide variation in approaches within industries. In electricity, the industry that has been subject to the most reform activity, many different models for reform have been used. Within economies there can also be considerable diversity in approaches to different energy types.
Different approaches reect different starting points, priorities and judgments about the potential benets from reform. While the aims of reform vary, a common theme is the desire to encourage more efcient supply and use of energy (OECD 2000; IEA 2001a; APEC 2001). Reform is expected to deliver benefits such as productivity improvements, prices that more accurately reflect costs, and more dynamic energy industries that are responsive to consumer demands.
Measuring the impacts of regulatory reform

Most of the available evidence on the impacts of reform is based on observations of key energy variables before and after reform. Examples of productivity improvements, falling energy prices, more reliable energy supply and the development of new products and services after reforms are introduced are often cited in support of reform. While this type of evidence may provide some interesting insights into the potential impacts of regulatory reform, its usefulness for guiding policy makers needs to be qualied. The effects of reform should be disentangled from the effects of other variables such as changes in technology. Prices may have fallen, for example, because of some technological development, regardless of reform. The relevant question is not whether prices are higher or lower after reform, but whether they are higher or lower than they would have been in the absence of reform. The fact that reform is often a gradual process also complicates the analysis of outcomes in actual markets. It may take many years before a market can fully adjust to changes. Furthermore, given the diversity in energy industries across the APEC region and in approaches to reform that are being considered or implemented, it is difficult to draw general conclusions based on observations from selected economies where reforms have been introduced. Different market characteristics and approaches to reform need to be explicitly considered. It is also important to look beyond the immediate and direct impacts of regulatory reform on the energy sector because this captures only a part of the overall effects of reform. Because energy is an input to all economic activity and energy and energy intensive products are widely traded, the effects of reform will spread well beyond the bounds of the energy markets and the economies in which they are implemented.
15
The economywide impacts of energy reforms have been analysed in several studies (for example, Korea Institute for Industrial Economics and Trade 1999 and Industry Commission 1995 for Australia). In this report, this type of analysis is taken a step further using ABAREs global trade and environment model (GTEM). GTEM is a multiregion, multisector, dynamic general equilibrium model of the global economy designed to analyse international economic issues, including those relating to energy markets. The GTEM framework explicitly incorporates the different characteristics of energy industries across the APEC region and the linkages between them and other economies. It recognises, for example, that electricity reform in major coal importing economies will affect not only electricity using industries in those economies, but also coal exporting economies. It also permits a range of different policy scenarios to be examined.
Structure of the report

An overview of the energy sector in APEC and a summary of the structure and regulation of the electricity, natural gas and petroleum industries in each economy is provided in chapter 2. In chapter 3, the rationale for reform in the energy sector is discussed as well as issues related to the implementation of reform in each energy industry. Evidence on the outcomes of reform in selected markets is also examined. Chapter 4 includes a description of GTEM and how the model is used to measure the impacts of regulatory reform in the energy sector. Results from the model simulations are presented in chapter 5. The policy implications of regulatory reform for the APEC energy sector and the APEC Energy Working Group are discussed in chapter 6.
16
2
energy markets in APEC
APEC energy markets provide a diverse and dynamic setting for implementing regulatory reform. Differences in economic development, resource endowments, population growth and economic policies have resulted in considerable diversity in patterns of energy consumption, production and trade across the region. APEC member economies (table 1) include the worlds largest producers and consumers of energy (the United States, China and the Russian Federation), the largest exporters of coal (Australia), natural gas (the Russian Federation and Canada) and liqueed natural gas (Indonesia), and the largest net importers of energy (the United States and Japan) (EIA 2000). Trade plays a vital role in APEC economies of all sizes, with many economies highly dependent on imports to meet their energy needs. APECs membership also includes some of the most rapidly expanding economies in the world, where energy consumption has been growing at an average rate of more than 5 per cent a year over the past twenty years. Much of the growth in APEC energy consumption is driven by demand for energy to generate electricity. Developments in the electricity supply industry, one of the largest users of primary energy, are a key inuence on energy
APEC member economies
Developed economies Australia Canada Japan New Zealand Russian Federation United States
Newly industrialised economies Hong Kong, China Republic of Korea Singapore Chinese Taipei
Developing economies Brunei Darussalam Chile Peoples Republic of China Indonesia Malaysia Mexico Papua New Guinea Peru Republic of the Philippines Thailand Viet Nam 17
supply and use throughout the region. The mix of fuels used to generate electricity varies widely and is changing continually. The industry has also been the focus of most reform efforts to date and is the highest priority on the regulatory reform agenda for many economies.
Energy consumption, production and trade in APEC

APEC economies account for approximately 60 per cent of world primary energy consumption. In 1999, the latest year for which comprehensive data are available, the developed economies together accounted for 69 per cent of total APEC primary energy consumption, followed by China (17 per cent), the other developing economies (8 per cent) and the newly industrialised economies (6 per cent). Growth in energy consumption over the past twenty years has varied widely across the region, with relatively slow growth in the developed economies of 1.4 per cent a year, and more rapid growth in the other groups. In the newly industrialised economies and the developing economies (other than China), energy consumption has expanded by 7.2 per cent and 4.5 per cent a year respectively. This has been underpinned by strong economic growth, rapid industrialisation and increased use of energy services such as transport, electricity and heat that occurs with rising personal incomes. Growth in energy consumption in China has averaged 4 per cent a year since 1980.
Energy consumption in APEC

Oil is the dominant fuel used in APEC, accounting for 39 per cent of total primary energy consumption in 1999 (gure 1). This has declined from 48 per cent in 1980, largely in response to energy security and fuel diversication concerns in some economies. Coal, natural gas and nuclear power have increased their shares of energy consumption over the period since 1980. Coal now accounts for 30 per cent of the regions primary energy consumption and gas for 22 per cent. The fuel mix varies across economies, reflecting differences in resource endowments, energy costs, economic development and economic structure. Crude oil and petroleum products are the major fuels used in the developed economies, accounting for 38 per cent of the total (gure 1). This is largely because of the extensive use of petroleum products in the transport sector where there are few fuel substitution possibilities. Gas accounts for 27 per
1
100 80 60 40 20 % China
Primary energy consumption, by fuel, 1999

Coal Oil Gas Nuclear Other
Other developing
Developed
Total APEC
cent of energy consumption in these economies, compared with 23 per cent in 1980. The growth in the share of gas is largely a result of increased gas consumption in electricity generation. Crude oil and petroleum products also dominate energy consumption in the newly industrialised economies, accounting for 87 per cent of the total (gure 1). In addition to extensive use for transport in all the newly industrialised economies, oil is widely used for electricity generation in some economies such as Singapore and to a lesser extent, Chinese Taipei. Coal is by far the dominant fuel used in China because of the availability of extensive and low cost domestic reserves. In the other developing economies, crude oil and petroleum products dominate the energy consumption mix (61 per cent), followed by gas (23 per cent). The share of gas is particularly high in some of the developing economies where there are abundant gas reserves. Gas accounts for 41 per cent of total energy consumption in Malaysia, for example, and 31 per cent in Indonesia. Electricity generation and industry are together the major energy end uses in APEC, each accounting for 23 per cent of the total in 1999. Transport accounts for 21 per cent of the APEC total. However, these shares vary significantly across development groups in the region (gure 2). Growth in electricity demand has been a driving force behind the increase in total primary energy consumption in many parts of the APEC region. Electricity output in the region has grown at an average rate of almost 4 per
2
Electricity 100 80 60 40 20 % China
Energy consumption, by end use, 1999

Other transformation Industry Transport Other
Other developing
Developed
Total APEC
cent a year for the past twenty years. This has been more rapid in the developing and newly industrialised economies than in the developed economies, where growth in electricity output has averaged around 2.7 per cent a year. Coal is the major fuel used to generate electricity in APEC, accounting for 44 per cent of the total in 1999, followed by natural gas (17 per cent), nuclear (16 per cent) and hydropower (14 per cent). Again, however, the fuel mix varies widely between and within the groups in the region (gure 3). In the developed economies, 41 per cent of electricity is generated by coal. This share has gradually fallen, however, as the share of gas (19 per cent in 1999) has risen. Twenty per cent of total electricity output in these economies
3
100 80 60 40 20 % China
Fuel mix for electricity generation, 1999

Other developing
Developed
Total APEC
20
is generated in nuclear plants, with Japan and the United States the largest users of nuclear power. While hydropower accounts for only 13 per cent of total electricity output in the developed economies overall, it is the dominant form of electricity generation in Canada and New Zealand where hydro capacity is relatively abundant. Coal is also the major source of electricity generation in the newly industrialised economies (40 per cent) and in China, where it accounts for more than 75 per cent of the total. In the developing economies (other than China), 33 per cent of electricity is generated in gas red plants. Gas use is particularly high in Indonesia and Malaysia, where there are relatively abundant reserves. The trend toward new gas fired power plants also partly explains why economies with relatively new, and developing, electricity supply industries have relatively high gas use.
Energy production in APEC

APEC economies account for around 54 per cent of world energy production, and are particularly dominant producers of coal and gas. The United States, China and Australia are the worlds largest coal producers, while the Russian Federation, the United States and Canada are the largest producers of natural gas. Coal accounted for 39 per cent of total APEC production in 1999, oil for 27 per cent and gas for 21 per cent (gure 4). The production mix varies widely
4
100 80 60 40 20 % China
Primary energy production, by fuel, 1999

Other developing
Developed
Total APEC
21
across the region, mainly due to differences in resource endowments. Coal is the major fuel produced in the developed economies, accounting for 33 per cent of the total in 1999. In the newly industrialised economies, with limited energy reserves, nuclear power is by far the dominant source of primary energy production, accounting for 89 per cent of the total. Coal dominates energy production in China, accounting for 75 per cent of the total, followed by oil at 19 per cent. In the other developing economies, oil production is also significant, at 56 per cent, while gas accounts for 28 per cent of total primary energy production.
Energy trade in APEC

The major energy producers in APEC are also among the worlds largest energy exporters. Australia is the largest coal exporter in the world, the Russian Federation and Canada the largest gas exporters and Indonesia the largest exporter of liqueed natural gas. The developed economies together accounted for 65 per cent of total APEC energy exports in 1999. The developing economies (other than China) accounted for the next largest share, with 24 per cent, reecting signicant oil and gas exports from Indonesia, Mexico and Malaysia. Despite the strong export orientation of several member economies, APEC as a whole is a net importer of energy. The largest importers are the United States and Japan and their imports are dominated by oil. Oil accounted for 86 per cent of energy imports to the United States in 1999 and 65 per cent of imports to Japan. Economies that are particularly reliant on imports to meet their overall energy requirements include Hong Kong, China; Japan; the Republic of Korea; Singapore; and Chinese Taipei, each with import dependence greater than 80 per cent. As a group, the newly industrialised economies are the most dependent on imports (97 per cent of energy consumption in 1999), followed by the developed economies (25 per cent) and China (2 per cent) (gure 5). In the developing economies other than China energy exports exceed energy consumption. The major energy exporters in the developing group are Indonesia, Mexico and Malaysia. With the major exception of oil imports from the Middle East, APEC energy trade is predominantly intraregional. Coal is widely traded within APEC. Japan, the worlds largest importer of coal, relies predominantly on APEC
5
80 40 % 40 China
Energy import dependence, 1999
Other developing
Developed
Total APEC
suppliers (Australia, the United States, Canada, China and the Russian Federation), as well as South Africa. Australia, China and the United States are also the major suppliers of coal to Korea. There are also several major gas trading relationships in the region. Indonesia, Malaysia and Australia are the largest LNG suppliers to Japan, which is the worlds largest LNG importer. Brunei Darussalam is another major LNG supplier to Japan. Indonesia and Malaysia are the major suppliers of LNG to Korea, the worlds second largest LNG importer. Canada is a major supplier of pipeline gas to the United States. More than half of Canadas total gas production is exported to the United States. Pipeline gas is also traded, in both directions, between the United States and Mexico. Within south east Asia, Malaysia supplies pipeline gas to Singapore.
Structure and regulation of energy industries in APEC

Electricity
Strong growth in electricity consumption across the APEC region over the past two decades has been accompanied by major changes in the structure and regulation of electricity supply industries. Further substantial changes are proposed or are being considered over the next decade. In some economies substantial reforms have already been implemented. In Chile, for example, all electricity industry assets have been privatised and competition has been
introduced in all stages of supply. In many other economies, state owned vertically integrated monopolies still dominate. However, most economies have introduced some competition and private participation in the generation sector of the industry, with further reforms planned. The current characteristics of APEC electricity industries and approaches to reform vary widely across the region (table 2 and appendix A). However, there are some common features. Vertical integration (where an enterprise controls two or more of the four stages generation, transmission, distribution and retail supply in the supply chain) is common. In many economies there is full integration from generation through to retail supply, while in some economies generation has
Structural and regulatory characteristics of selected APEC electricity industries

Generation separate from network functions in most states. Mixed private and public ownership. Compulsory wholesale pool, third party access and retail competition in the national market (southern and eastern states). Independent regulators. Varies across provinces. Mainly vertically integrated public monopolies, regulated by provincial governments. Two provinces (Alberta and Ontario) have retail competition, several have wholesale competition. All private ownership 26 generators, ve transmission companies and 36 distribution companies. Network owners required to offer open access. Competition in all stages. Independent regulator. State owned vertically integrated State Power Corporation of China (SPCC) involved in all stages. IPPs sell to SPCC or regional utilities. Regulated by local and central governments. Two vertically integrated private utilities with regional monopolies, monitored by a regulator. State owned vertically integrated utility (PLN) involved in all stages. Some self generation and IPPs. IPPs must sell to PLN. Ten private vertically integrated utilities with regional monopolies. Limited retail competition for large consumers. Majority (51 per cent) state owned vertically integrated monopoly, Korea Electric Power Company (KEPCO), limited IPPs (around 6 per cent of generating capacity).
Continued
Australia
Canada
Chile
China
Hong Kong, China Indonesia Japan Korea
24
Structural and regulatory characteristics of selected APEC electricity industries continued

Mixed private and public ownership in generation (IPPs account for around a third of total capacity), vertically integrated public utilities with regional monopoly in transmission, distribution and retailing. Tariffs regulated by an independent authority. State owned, vertically integrated companies dominate generation (IPPs account for only 2 per cent) and have monopolies in transmission, distribution and retail. IPPs sell to the main utility (Federal Electricity Commission) under long term contracts. Tariffs for end users are regulated by a government committee.
Malaysia
Mexico
New Zealand Competing private and public generators, single public transmission company, 29 independent distributors with mixed ownership, ve major competing retailers, four of which are signicantly integrated with generation, and ve smaller retailers. Voluntary wholesale market. Light handed regulation. Philippines Mixed private and state ownership in generation. State generator, National Power Corporation (NPC), is also monopoly supplier of transmission services. Private utilities have regional monopolies in distribution and retailing. NPC is also a regulator. Mainly state ownership in generation, separate state utility responsible for transmission and distribution, public monopoly in retail supply to small customers, competition for larger customers. State owned vertically integrated monopoly (Taipower), limited IPPs which must sell to Taipower. State owned Electricity Generating Authority of Thailand (EGAT) dominates generation and is also the sole supplier of transmission services. Public utilities with regional monopolies are responsible for distribution and retail supply. EGAT is also a regulator. Mixture of private and public ownership. Vertical integration is common. Distribution companies have monopolies in most states, while retail competition has been introduced or is scheduled to be introduced in seventeen states. Wholesale markets have been established in California and PennsylvaniaNew JerseyMaryland (PJM). New England is adopting the PJM model. Independent regulators. State owned Electricity of Viet Nam (EVN) is a vertically integrated monopoly. Local and provincial electricity departments, responsible for distribution and retail, are independent accounting identities within EVN. Regulator is the Electricity Department of the Ministry of Industry.
Singapore
Chinese Taipei Thailand
United States
Viet Nam
Sources: Communication with government representatives; EIA (2000, 2002b,c); IEA (1999, 2000, 2001a,b,c); World Energy Council (2001).
25
been separated from the other functions. Chile and the eastern states of Australia have full ownership separation of all functions. State ownership is also common. Chile and Hong Kong, China are the only economies with full private ownership of assets in the electricity industry. All of the economies included in the study have some private ownership in generation, although in many cases the private share is small. Consumer choice is limited in most cases, with full retail competition implemented in only two economies, Chile and New Zealand, and in parts of Australia, Canada and the United States. Large consumers are able to choose their supplier in several economies. While the entry of IPPs, restructuring and privatisation has created some competition in generation, the most common supply arrangement involves a single buyer, usually state owned, purchasing all electricity for sale to consumers. Reform proposals for the economies included in this study are summarised in table 3 (with further details provided in appendix A). The details and timing of reform packages vary widely. The most widely adopted and proposed reform measure is the introduction of private ownership, particularly in generation, through both privatisation of state owned assets and the entry of independent power producers (IPPs). In some cases private generators have already captured substantial market shares. For example, in the Philippines the National Power Corporation was the sole generator until 1987, but private generators now account for 50 per cent of total capacity (World Energy Council 2001). However, in many cases the private share remains small.
Proposed electricity reforms, selected APEC economies
Australia Canada Chile
Full retail competition in the national market by 2003. Plans in several provinces to promote competition and develop wholesale markets. Plans to make private investment more attractive to meet growing demand. Separation of transmission and generation assets. Transparent open access tariffs to network.
Continued
26
Proposed electricity reforms, selected APEC economies continued
China Hong Kong, China Indonesia Japan Korea
IPPs and state owned generators to compete, separation of all transmission and generation to be considered. Agreements covering the two current utilities expire in 2008, various proposals being considered. IPP share to increase, unbundling of PLN, transmission to be opened to private companies. Competition in generation through entry of IPPs, open access to networks, full contestability in retail supply. Competition in generation through sale of KEPCO assets and entry of IPPs, distribution system to be privatised, full contestability in retail supply after 2009. More IPPs and open bidding for new power plant projects, structural separation of the main public utility, retail competition to be adopted progressively. State owned generators and distributors to be sold, encouragement of additional IPPs. Federal Electricity Commission will continue to own the transmission system. New regulatory framework to be established.
Malaysia
Mexico
New Zealand New governance board to be established, new regulatory powers for the Minister for Energy. Philippines National Power Corporation to be privatised, separate and independent regulated monopolies to be responsible for transmission and distribution. Wholesale spot market to be established in 2002, retail supply to be competitive in 2004. Government owned generation assets to be sold, all consumers to have choice of supplier by 2003. More private sector involvement to be encouraged, integrated utilities to be allowed, consumers to eventually be given choice of supplier. Competition between private generators and corporatised subsidiaries of EGAT. Distribution open to private companies and consumers to choose retailer, post 2003. Independent regulator to be established.
Singapore Chinese Taipei Thailand
United States Further development of wholesale markets and introduction of retail competition. Viet Nam Plans for competition in generation by accounting separation of generators in EVN and entry of IPPs.
Sources: Communication with government representatives; EIA (2000, 2002b,c); IEA (1999, 2000, 2001a,b,c); World Energy Council (2001).
27
Separation of the network functions of the electricity supply industry (transmission and distribution) from the potentially competitive functions (generation and retail supply) has also been widely adopted and is widely proposed. Approaches vary, with full ownership separation in Chile and parts of Australia, Canada and the United States, and weaker forms of separation, requiring vertically integrated rms to keep separate accounts for each function, adopted in other cases. Introduction of full retail competition is often the final stage in a phased program of reform. In addition to those economies or parts of economies where retail competition has been introduced, several economies have rm plans in the form of enabling legislation and a reform timetable. Details and timing vary widely. Economies with relatively short term plans for an extension of retail competition to smaller consumers include Japan, Singapore and parts of Australia and the United States. In some cases, retail competition is a long term plan for example, in Korea, full retail contestability is planned to be introduced after 2009. Regulatory arrangements for electricity supply industries are usually complex. Independent regulators independent from the relevant ministry are widely considered a desirable feature of a liberalised electricity industry (IEA 1999). Only six of the listed economies currently have independent regulators, and ve plan to follow suit.
Natural gas
As with electricity, natural gas industries in APEC are characterised by diversity in patterns of ownership, structure, market organisation and regulation (table 4 and appendix A). There is government involvement in exploration and production in most economies. As owners of all or most gas reserves, governments decide the terms and conditions of access to gas resources. State oil and gas companies are directly involved in exploration and production in all but four of the gas producing economies identied in table 4 (Australia, Canada, New Zealand and the United States). The state rms are typically involved in exploration and production joint ventures with private rms. All but one (ENAP in Chile) of the nine state oil and gas companies are also integrated into downstream activities. Some private producers are also vertically integrated, mainly through the ownership of pipeline assets.
28
Competition to supply end users is limited in most cases. There is competition to supply some users (mainly large users) in Australia, Canada, Chile, Mexico, New Zealand and the United States. Pipeline owners in these economies are required to provide access to their pipelines under either regulated or negotiated terms. Among the gas producing economies, Indonesia and Thailand propose major reforms, including privatisation, structural changes and pipeline access and regulatory arrangements to encourage competition in supply to end users. Japan, Korea and Singapore (which each import all their gas requirements) also plan reforms. While major reforms have been implemented in Australia, Canada, New Zealand and the United States, the reform process is ongoing. For example, reforms to encourage greater upstream competition are currently being considered in Australia.
Structural and regulatory characteristics of selected APEC natural gas markets current and planned
Mainly private ownership, some vertical integration, third party access to major pipelines, some competition to supply large consumers. Upstream reforms are being considered. Mainly private ownership, competition to supply most users. Pipeline access regulated by an independent regulator. State owned oil company, ENAP, is responsible for exploration and production, with some joint ventures. Private rms responsible for all other functions, pipeline owners are required to provide third party access. Four state owned rms dominate exploration and production, while China Petrochemical Corporation (SINOPEC) dominates transmission, distribution and retailing. Foreign participation via joint ventures. Reforms in 2000 allow possibility of majority foreign stakeholdings. State owned Pertamina is involved in all stages, with some joint ventures in exploration and production. Proposed reforms include: privatisation of Pertamina; establishment of an independent regulator; producers to sell directly to consumers. Private rms undertake exploration and production, regional monopolies control distribution and retailing. Consumers to be allowed eventually to deal directly with producers.
Continued
Australia
Canada Chile
China
Indonesia
Japan
29
4
Korea
Structural and regulatory characteristics of selected APEC natural gas markets current and planned continued
Vertically integrated state monopoly, Kogas, involved in all stages. Proposed reforms include: separation and privatisation of Kogass importing and wholesaling functions; competition in wholesale market by 2003, retail competition to follow. State owned Petronas involved in all stages joint ventures in upstream, monopoly in transmission, distribution and retail supply. Main reform proposal independent regulator to oversee increasingly privatised upstream industry. State oil company, PEMEX, has a monopoly over gas exploration and production and is also involved in transmission, distribution and retailing. PEMEX is required to provide private rms with third party access to its pipelines.
Malaysia
Mexico
New Zealand All private ownership, apart from minor government involvement ending in 2001, separation of rms responsible for upstream activities and transmission and distribution/retailing. Pipeline owners normally provide third party access. Light handed regulation, no gas specic regulator. Review to be completed by end 2002. Singapore Natural gas currently only used in electricity generation. Proposal for state owned manufactured gas company, PowerGas to convert pipelines to carry natural gas and provide third party access. State owned Chinese Petroleum Corporation (CPC) is responsible for all exploration, production and pipelines. LNG facilities also owned by CPC but private bids being sought for new facilities. State owned Petroleum Authority of Thailand (PTT) is the sole supplier of gas. Reform proposals include: separation of retail supply from transmission and distribution, with PTT Transmission to provide third party access to excess capacity. Retail competition after the completion of the Bangkok Ring distribution network.
Chinese Taipei Thailand
United States Private rms responsible for all exploration and production and most transmission and storage. Interstate pipelines required to provide third party access, with gas and transport prices unbundled. Large buyers can buy directly from producers. Four states have implemented choice for retail consumers with more set to follow. Independent regulators. Viet Nam State owned Petro Viet Nam and its subsidiaries are responsible for all stages of supply, with some joint ventures with foreign companies. The only liquefaction plant is fully foreign owned.
Sources: Communication with government representatives; EIA (2000, 2002b,c); IEA (2000, 2001b,c); World Energy Council (2001).
30
Oil
Oil industries in APEC are also characterised by extensive state involvement in upstream activities, often and increasingly with private joint venture partners. Of the thirteen oil producing economies listed in table 5, nine have state oil rms. Vertical integration is also common, with international oil companies often involved in exploration and production as well as rening, distribution and retailing. All of the nine state owned rms in table 5 are vertically integrated. Governments are also involved in downstream activities in a variety of ways, including ownership of facilities, regulation of prices, control of trade in petroleum products and regulation of retail supply activities. The major upstream reform implemented and proposed is the removal or easing of controls on private and foreign involvement. Downstream reforms have also been widely implemented, although these activities remain heavily regulated in many economies. Some controls on importation of rened products have been lifted to promote competition and some restrictions on retail prices and other retail activities, such as petrol station location and ownership, have been eased. Downstream activities have been deregulated over the past decade in Hong Kong, China; Japan; Malaysia; the Philippines; Chinese Taipei; and Thailand. Further major upstream and downstream reforms are planned in Indonesia, with legislation passed by the parliament in October 2001.
5
Chile
Structural and regulatory characteristics of selected APEC oil markets current and planned
All private ownership, high degree of vertical integration. No specic oil regulation. Mainly private ownership (small state share in upstream), provincial and federal regulators. State owned rm, ENAP, responsible for exploration and production, with some joint ventures. ENAP also owns all three domestic reneries which face competition from imported petroleum products. Private oil companies compete in open retail market. State owned, vertically integrated companies dominate all upstream and downstream functions, with some foreign joint ventures permitted.
Continued
Australia Canada
China
31
Structural and regulatory characteristics of selected APEC oil markets current and planned continued
No upstream. Three private vertically integrated rms downstream. Recent reforms include removal of restrictions on ownership of petrol station sites. State owned, vertically integrated Pertamina has monopoly downstream, some joint ventures with private rms in upstream activities. Proposed reforms: privatisation and unbundling of Pertamina, competing reners and retail suppliers to be allowed. Deregulated rening and retail supply sectors, no upstream industry. Deregulated downstream sector, no upstream industry. State owned Petronas involved in upstream joint ventures; six private rms involved in rening; privatised retail supplier competes with international oil companies. Proposed reform greater use of private capital in upstream activities; establishment of new regulatory authority. State owned PEMEX is vertically integrated with a monopoly in exploration and transportation. Some private involvement allowed in production and distribution and petrochemical plants. Retailers are PEMEX franchises.
Hong Kong, China Indonesia
Japan Korea Malaysia
Mexico
New Zealand All private ownership, with some vertical integration producers jointly own the single renery, as well as distribution network and retail outlets. Some independent retailers. Light handed regulation. Philippines Singapore Chinese Taipei Thailand Downstream deregulated in 1998; state involvement in one of the three reneries and also in exploration and production. No upstream; private ownership downstream; no retail regulation. State owned Chinese Petroleum Corporation (CPC) is involved in all stages; downstream sector open to competition. New laws passed in October 2001 to promote competition; plan eventually to privatise CPC. State owned Petroleum Authority of Thailand (PTT) part owns reneries and is involved in production and petrochemical plants. Retail market deregulated since 1991.
United States All privately owned, with a high degree of vertical integration. Viet Nam Upstream controlled by state owned Petro Viet Nam, with some joint ventures with foreign rms. Pipelines and storage also controlled by Petro Viet Nam and distribution/retailing controlled by several state enterprises.
Sources: Communication with government representatives; EIA (2000, 2002b,c); IEA (2000, 2001b,c); World Energy Council (2001).
32
Coal
Ten of the eighteen economies included in this study have domestic coal industries (Australia, Canada, Chile, China, Indonesia, Mexico, New Zealand, Thailand, the United States and Viet Nam). Japan announced recently the closure of its last domestic coal mine. Of the ten producers, six (Australia, Canada, China, Indonesia, the United States and Viet Nam) are signicant exporters of coal to world markets. As owners of all or most coal resources in each economy, governments are involved in exploration and production through the granting or allocation of permits. In Australia, Canada, Mexico and the United States all exploration and production is undertaken by private rms holding permits. In the other economies state owned firms own and operate all or some coal mines. Compared with the electricity and gas industries, however, regulation is not a signicant issue in APEC coal industries.
33
3
reforming energy markets expectations and outcomes
The widespread regulatory reforms that are being implemented or considered across the APEC region represent a major shift from extensive government involvement and heavy handed regulation to greater reliance on market forces and a narrower regulatory role. The potential benets of this shift are substantial, but there are many complex issues to resolve in implementing reform policies. The aims in this chapter are to review the rationale for regulatory reform in the energy sector and the role of markets and regulation; to outline the policies that are being implemented in various APEC economies and elsewhere; to discuss some design issues for each energy type; and to examine the available evidence on the impacts of regulatory reform on key energy variables such as prices and the performance of energy supply industries in economies that have already implemented reforms. These include some outside the APEC region. Conclusions on the expected and actual outcomes of reform provide a starting point for the quantication of impacts on the energy sector and wider economic activity and trade, presented in chapter 5.
Rationale for regulatory reform in the energy sector

Pressures for reform
The pressures for regulatory reform in the energy sector vary across economies and energy types. However, there are some common driving forces.
Energy prices
Consumers seeking lower energy prices have been a key source of pressure for reform. In the United States, for example, much of the pressure for electricity deregulation has come from large industrial users concerned about relatively high prices in some regions (Joskow 1997). While differences in fuel costs and load characteristics could partly explain the price gaps between
and within states, the gaps largely reflected the impact of regulation and limited competition. In Japan, policies such as the requirement for electricity generators to use relatively high priced domestic coal have resulted in the highest electricity prices in the OECD (IEA 2001d). In a recent survey of electricity reform in APEC, the need to reduce prices was considered an important issue in seven of the nine economies examined (World Energy Council 2001). The potential for signicant reductions in natural gas prices through increased competition has also been a driving factor behind gas reform policies in Australia (Industry Commission 1995). Large price differentials across Australian states partly reected the costs of transporting gas from remote elds, but they also reected the effects of limited competition and extensive regulation. The initial pressures for natural gas reform in the United States can also be traced to price differentials between interstate and intrastate markets and attempts by large users to seek lower priced gas (Jess 1997). In many developing economies, reform has been encouraged by the need to keep prices for energy (and other inputs) at competitive levels as part of efforts to attract private investment in various sectors of the economy (Gausch and Hahn 1997).
Poor performance by regulated utilities
Evidence of poor performance in many utilities, including excessive costs, low labor productivity, poor capacity utilisation and excessive reserve margins, has also created pressure for reform. In Australia, for example, a major study of energy transmission and distribution found that there were substantial gains to be made by improving the performance of energy utilities to international best practice (Industry Commission 1991). To deal with concerns about poor performance in regulated utilities, governments have sought ways to promote competition and thereby reduce the need for regulation, or, where competition is not feasible, to redesign regulation to provide better incentives for efcient energy supply. For example, there has been a move away from cost recovery or rate of return regulation, which may allow rms to use labor and capital inefciently and pass excessive costs onto consumers, to incentive based regulation. Pressures for privatisation to be a central feature of reform in many economies have been driven by international evidence that, on average, publicly owned
utilities operate less efciently than private utilities, especially over the longer term (IEA 1999; Gonenc, Maher and Nicoletti 2000).
Fiscal pressures
Budget constraints have made many governments reluctant to continue to subsidise inefcient energy suppliers or to commit to new large energy infrastructure projects. This factor has been particularly important in some of the rapidly growing economies in the Asia Pacic region, where governments have been keen to encourage entry of independent power producers (IPPs) to meet increasing demand for electricity (World Energy Council 1998). However, it may be difcult to attract private investors into heavily regulated industries, particularly if social and environmental concerns are addressed through energy pricing and supply policies. Trying to strike a balance between creating incentives for more private sector involvement and addressing social and other policy objectives has been an important factor shaping the reform process, especially in the electricity sector. Energy market reform has also been required in some economies seeking assistance packages after the Asian economic downturn in the late 1990s. Thailand, for example, is planning to split and privatise the assets of the Petroleum Authority of Thailand as part of a package of reforms agreed with the International Monetary Fund in 1998 (EIA 2000).
Security of supply
Concerns about the effectiveness of government involvement and regulation in ensuring the security of national energy supply (that is, avoiding major supply disruptions or price shocks) have been a further impetus for reform. Policies such as regulating to protect domestic suppliers from import competition, controlling depletion rates of nonrenewable resources or minimum stockholding requirements are unlikely to be the best strategy for ensuring security. Protecting local producers, for example, is likely to enhance their monopoly power and reduce supply diversity, thereby undermining supply security and reliability. In Britain, before privatisation and deregulation, coal consumers were dependent on a single nationalised supplier and supplies were frequently disrupted by strikes and other actions. Since privatisation and deregulation, electricity generators have diversied their sources of fuel supply and it has been argued that system security has increased (Robinson 2000).
Technological developments
The development of new technologies for producing and delivering energy has also created pressures for reform. The development of the combined cycle gas turbine, with greatly reduced minimum efficient plant size and shorter construction times, for example, increased the feasibility of creating competitive generation markets quickly (Joskow 1997). Developments in natural gas powered plant have also added to pressure for gas market reform as potential generators have sought access to cheaper gas and for coal reform, to ensure that its ability to compete was not constrained by regulation. Further, views about the need for public investment in large scale energy investments have been challenged by the technical feasibility of smaller plants.
Evidence of successful reforms in other sectors and economies
With a history of regulatory reforms now spanning more than two decades in some sectors, there is a growing body of evidence of the possible benefits that may be generated (see Winston 1998 and Gonenc et al. 2000 for surveys). Examples of benets such as lower prices, more efcient supply, better service quality, greater customer satisfaction and increased innovation have provided impetus for reform. At the same time, critics of reform point to outcomes such as rising prices and supply disruptions in deregulated markets to support their case. Evidence of the impacts of energy sector reform, and the care needed when interpreting such evidence, is examined later in this chapter. One problem with drawing conclusions about the success or otherwise of reform on the basis of observations about prices is that it is very difcult to disentangle the effects of deregulation from other determinants of price. Another fundamental issue is that to judge outcomes, it is necessary to understand what the reform process is trying to achieve. While a desire to reduce prices has been one driving force behind reform, successful reform will not necessarily reduce all prices for all consumers.
The role of markets and regulation

While the objectives of reform vary across economies and energy types, a primary aim is to encourage efcient supply and use of energy (APEC 2001; IEA 2001a; OECD 2000).
37
Regulatory reform has generally involved a two-pronged approach to meeting the objective of encouraging efciency: allowing markets to play a greater role in determining what is produced, consumed and invested, by removing restrictions on rms and consumers; and where there may be a case for intervention in markets, to deal with natural monopolies, externalities or abuse of market power, designing or redesigning regulations to ensure that they promote efcient outcomes. Reforms to create or liberalise markets and redesign regulation are expected to encourage efciency and generate benets in several ways.
Incentives to minimise costs technical efciency
Replacing the poor incentives associated with regulation or public ownership with market disciplines puts pressure on suppliers to minimise costs. Privately owned rms in a well functioning capital market need to minimise costs in order to generate maximum prots for their shareholders. This market pressure should translate into productivity improvements, more efcient use of capacity and more cost effective choices of inputs. Competition between suppliers should force them to pass savings onto consumers in the form of lower energy prices. In the natural monopoly parts of the energy supply chain, where one firm can supply the market at lower cost than two or more, competition may not be feasible. The challenge for regulators is to design a regulatory framework that provides incentives to minimise costs in these market segments. A shift away from cost of service or rate of return regulation to price capping or incentive regulation is an attempt to do this.
Responding to price signals allocative efciency
In a well functioning market, consumers face prices that accurately reect the costs of supply and suppliers face prices that tell them how consumers value their services or products. Prot maximising suppliers have an incentive to allocate resources to their most valuable use, as signaled by the prices that consumers are willing to pay. Compared with a situation where prices are controlled by regulation or distorted by subsidies, this should create benets in several forms. For example, if prices can adjust to reect the cost of capacity constraints, say for electricity in peak periods, consumers may switch demand away from peak periods, thereby reducing the amount of capacity
required. With limited price signals, energy suppliers nd it difcult to determine whether consumers value some product or service at more than the cost of supply. Prices may fail to reect the full costs of supply because of externalities in energy production or consumption. Compared with some of the traditional policies that have been used to deal with externalities, such as regulation of the location and operation of energy plants to deal with environmental externalities, policies that use market mechanisms to deal with externalities are likely to generate better outcomes. For example, if governments introduce instruments targeted at reducing pollution rather than trying to specify certain limits on rm behavior, the rm can determine the least costly way to reduce pollution.
Incentives for innovation dynamic efciency
Innovation is encouraged in well functioning markets because firms must continually seek ways to maximise prots. One way to increase prots is to nd new or innovative ways to deliver existing products or services at lower cost. Another is to develop new products or services that consumers consider to be valuable. Provided they are condent of being able to capture adequate returns into the future, rms will undertake the risky investments associated with innovation. Ensuring that there are incentives for innovation in regulated monopolies is a difcult challenge for regulators. Regulations that result in transfers from owners of assets to users may undermine the incentive to innovate. Furthermore, investors need to be sure that regulations are not going to change over time, undermining their rights to a return on the risks that they take when being innovative.
Policies to capture the potential benets of reform

The broad principles of increasing the role of market forces and designing regulation to encourage efficient outcomes underpin reform across each energy type. However, different economic, technical and institutional characteristics of each energy type shape the policies that are required to achieve the broad objectives. Much of the policy focus has been on electricity, where the expected gains are the greatest due to its relatively high degree of regulation and government ownership and its important role in most economies.
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Electricity
Electricity supply can be divided into four stages. Generation involves the production of electricity, using various technologies with diverse cost structures. Transmission is the high voltage transport of electricity from generators to distribution centres. Distribution involves transport at lower voltages from the transmission grid to end users. The nal stage is supply to end users, which includes arrangements for delivery of electricity as well as associated services such as metering, billing and servicing. In many economies, all four functions have traditionally been supplied by vertically integrated public utilities or regulated private utilities with monopoly rights to supply electricity to specied areas. These supply arrangements have long been considered the best way to deal with the special features of electricity supply and demand. The options for changing the structure and operation of the industry are also inuenced by these special characteristics. Electricity demand varies hourly, seasonally, cyclically and randomly, but electricity cannot be economically stored. Generation capacity must be sufcient to meet the regular peaks in demand and random uctuations. Further, generation and consumption must be balanced continuously to maintain the stability of the network and avoid sudden losses of power. The transmission system performs this complex coordination task, along with providing the service of transporting the electricity. The fact that there is no physical link between the power supplied by a specic generator connected to the network and a specic customer taking energy from the network adds to the cost and complexity of the coordination task, as the nancial obligations of generators and customers must be measured and settled (Joskow 1997). Important externalities are also associated with transmission network operation and use. Failure of one generator can affect the stability of the whole network. Vertical integration allows these externalities to be internalised that is, the integrated operator can take account of the interactions and quickly respond to problems that may arise. Reliance on a single electricity supplier has evolved because of the natural monopoly characteristics of electricity transmission and distribution. The high fixed costs and low marginal costs of providing the physical transportation system mean that delivering electricity through two or more networks would involve higher total costs than using one more intensively
(up to the point where capacity constraints become a problem). It can be argued that in some cases duplication of the actual wires within a network may be efcient, although the system operation and coordination function remains a natural monopoly (IEA 2001a). The average costs of the coordination function of the transmission system fall as the network expands and the system operator is able to better manage the risks of system failure, pool reserve capacity, bundle demand and achieve the least cost order of dispatch of different types of generating capacity. Generation and supply to end users are the potentially competitive parts of the electricity supply industry. While both functions have often been carried out by a publicly owned monopoly or regulated private monopoly, technological advances have enhanced the potential for entry by competing suppliers. For example, the development of the combined cycle gas turbine reduced the minimum efcient plant size from 1000 megawatts in the early 1980s to between 50 and 350 megawatts currently. Developments in information technology have also reduced the price of sophisticated metering and grid control equipment, thereby facilitating decentralised electricity supply (IEA 1999).
Basic model for electricity reform
The timing and approach to electricity sector reform vary widely across economies in the APEC region. However, the basic elements in most reform models include: separation of generation from transmission and distribution; competing generating companies (privately owned or corporatised) bidding into a power pool; transmission and distribution companies (privately owned or corporatised) providing access to all network users on nondiscriminatory terms; establishment of an independent regulatory body; and all or part of the retail market open to competition. It is beyond the scope of this report to examine in detail all of the complex issues involved in moving from the basic model to a practical approach to reform. The following discussion provides an overview of some of the issues, emphasising the types of complexities and tradeoffs involved and some broad implications for the expected outcomes of reform.
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Unbundling and open access
When the owner of monopoly transmission and distribution assets also owns generation assets it may be able to discriminate against potential generation competitors when setting access terms and conditions and making decisions about investments in the network. Such behavior could limit the scope for competition in generation. Three different approaches have been used to deal with this problem. First, complete structural separation of generation, transmission and distribution, through compulsory divestiture, directly removes the incentive to discriminate against potential competitors in generation. The possible loss of economies of vertical integration must be balanced against the expected competitive gains in deciding whether to use this approach. Complete separation is likely to be more difcult where utilities are privately owned than when they are publicly owned, as compulsory divestiture raises important property rights issues. This largely explains why this option has mainly been used where utilities are publicly owned, or were so prior to reforms. A second option is accounting separation of generation, transmission and distribution within vertically integrated rms, but this is a much weaker form of separation. Firms can remain vertically integrated, but they must retain separate accounts for each part of the business. They must offer separate prices for generation and transmission services, rather than the bundled price that the vertically integrated utility would charge. Prices must be nondiscriminatory the utility must charge itself the same price for transmission services as it charges competitors seeking third party access to the network. Any cost advantages associated with vertical integration are maintained. However, this approach is likely to be the least effective in controlling anticompetitive behavior. Extensive regulatory oversight is required and it can be difcult to determine what constitutes a reasonable price and allocation of costs for different services. A third unbundling option involves separation of the system operation functions. The utility can remain vertically integrated in the sense that it can own generation and transmission assets, but decisions about network use are made by the independent operator, to ensure nondiscriminatory grid access for competing generators. This option avoids the problems associated with compulsory divestiture of assets and does not require the extensive regulatory oversight that accounting separation involves. However, the separation of grid ownership from operational and investment decisions raises some
difcult issue. For example, who should own the independent system operator, will it face incentives to make optimal decisions about use of the grid, should it be regulated? Separation of the other potentially competitive part of supply supply to end users from distribution is also an important issue. While distribution and retail supply account for a relatively small share of the total cost of electricity supply, compared with generation (which accounts for a half to twothirds), retail reforms can have a substantial impact on efciency throughout the industry. Unbundling distribution and retail supply is an important step in the process of introducing competition and consumer choice. Unbundling of retail supply can take the form of either accounting separation or complete separation through divestiture. Accounting separation is most typically used. Ownership separation is required in New Zealand (IEA 2001a). In short, there is no unambiguously optimal approach to unbundling. The best option will depend on the starting point and judgments about the balance of costs and benets of each option. For example, do the competitive benets and lower regulatory burden associated with complete separation more than offset the possible loss in operational efciencies and, where the utilities are privately owned, the costs of impinging on private property rights?
Market organisation
Another fundamental issue for electricity reform is market design in essence, which buyers and sellers can interact and how they can interact. Under the traditional vertically integrated monopoly model all consumers must purchase electricity and associated services, such as transport and metering, from a single supplier. There is no competition at any stage of the supply chain and no choice for consumers. Unbundling of transmission and distribution from generation and retail supply opens up a range of alternatives. Many different models have been used throughout the world and they can be characterised and labeled in various ways. A useful way to distinguish models is in terms of the extent of competition and consumer choice they involve. The single buyer model represents the smallest change from the vertically integrated monopoly model. The main difference from the traditional model is that generation is separated and generators compete for the right to supply the single buyer (usually state owned) which then sells to captive retail customers. The model is widely used where reforms have allowed the entry
of IPPs. APEC economies currently using the single buyer model include Indonesia, Japan, Korea, Malaysia, Mexico, the Philippines, Thailand and Viet Nam (APEC 2001). If the process of deciding who builds and operates generation plants is open and competitive, this model should provide incentives for cost efciency in generation (IEA 2001a). However, the model retains many of the weaknesses of the traditional vertically integrated monopoly model and, given the very limited role of competition and consumer choice, it is unlikely to encourage allocative or dynamic efciency. Under the wholesale competition model, the local distribution utility retains its monopoly over supply to retail customers, but the distributors purchase electricity in a competitive wholesale market. Generators may be required to sell through a pool, or bilateral contracts between generators and distributors or large industrial users may be permitted. The retail competition model represents the next step toward full competition. Retail consumers have choice, either through choice of a retail supplier (as the local distributors monopoly over retail supply is removed) or by direct access to the wholesale market. Wholesale competition is often used in the transition to retail competition, as progressively smaller customers are allowed access to the wholesale market. Given that it involves competition between generators and choice of suppliers for consumers, retail competition offers the best prospect for meeting the objective of efcient electricity supply and use. However, the potential benets from greater competition need to be balanced against the costs of implementing the model. For example, full retail competition requires time of day metering, and metering costs are high relative to the margin paid for retailing services. The potential benets to consumers may well exceed the direct effects on the retail margin, because the introduction of consumer choice will provide market discipline and put pressure on costs and prices throughout the industry. However, in terms of convincing consumers that moving to full competition is worthwhile, the size of direct costs such as metering will be important. Consumers have shown limited willingness to take advantage of the opportunity to buy electricity and associated services from competing suppliers. In California, for example, of the 300 new electricity service providers (ESPs)
that entered following the opening of the retail market in 1998, only a handful remain (Sioshansi 2001). In Japan, contestable consumers account for almost 28 per cent of retail electricity sales, but only 1 per cent of these has switched to a competing supplier (Fairhead, Schneider and Ye 2001). Implementation of both the wholesale and retail competition models raises a range of market design issues. For example, should the wholesale market involve a mandatory pool or bilateral trade with a voluntary pool? How should the price for power dispatched from the pool be determined? How frequently should bids be taken? The choice between mandatory pools and bilateral contracts illustrates the complexities involved in designing just one aspect of the market. A mixture of mandatory pools and bilateral contracts supplemented by optional pools is used across the Asia Pacic region (World Energy Council 2001). There is no consensus on which approach is best. Under a bilateral contract market, the network operator is a passive player, receiving demand and supply schedules from market aggregators. The aggregators must have transmission rights to use the network. The network operator will make up any imbalances in the network, enforce transmission rights and manage any conflicts over rights (Short, Swan, Graham and MackaySmith 2000). In a pool system, the network operator plays a central coordination and allocation role, receiving bids and determining the lowest cost dispatch of capacity to meet demand, ensuring that demand and supply are balanced and the reliability of the system is preserved. For most commodities it would be reasonable to expect that allowing bilateral trade, either exclusively or in parallel with some centralised market, would encourage efcient outcomes as it would provide more exibility and scope to take account of specic requirements of different buyers and sellers. However, a key problem is that for bilateral markets to work it is necessary to dene rights to transmission capacity. There is no unambiguous way to do this, given the interdependencies between users of the grid (Joskow 1997). Pools and bilateral markets have been compared in terms of the extent to which they may facilitate uncompetitive behavior by bidders. There is no
conclusive evidence that one is likely to result in less competitive outcomes than the other (Short et al. 2001).
Regulation of transmission and distribution
Regulation of prices for access to and use of transmission and distribution networks has been a central component of electricity reform packages. It represents one of the most difcult challenges for policy makers. The challenge is to control monopoly power while ensuring that prices provide incentives for efcient operation and use of networks and optimal investment and innovation. To encourage efcient use of a network, prices should reect the marginal cost of use. If there is excess capacity, the relevant costs are short run marginal costs, which include the value of marginal transmission or distribution line losses and any additional costs of maintaining and operating the grid. Setting prices above short run marginal costs when there is excess capacity will result in inefciently low levels of network use. If there is excess demand for use of the network, prices should also reect the costs of capacity constraints that is, they must increase to ration the available capacity. If prices do not reect the costs of capacity constraints when there is congestion then some less efcient mechanism must be used to ration the available capacity. In addition to providing signals for efficient use of given capacity, prices guide investment decisions and determine whether costs are covered. Long run costs, or the costs of expanding capacity, are relevant for investment decisions. To encourage new investment, prices must cover long run average costs. However, in network industries where long run average costs are falling, pricing to ensure efcient use of given capacity will not generate sufcient revenue to cover costs. The price structures that have been adopted around the world vary in the extent to which they reect costs. Nodal pricing offers the greatest potential for encouraging efcient use of a network. Nodal prices adjust continuously to balance supply and demand for delivered energy, including both the price of energy and the price of transmission (IEA 2001a). Nodal prices are relatively high at those nodes and times when there is congestion. Higher prices provide an incentive for users to reduce demand at congested times. If prices do not reect congestion costs then some alternative mechanism, such as priority rules for generators, must be used to
allocate scarce capacity. High nodal prices also provide incentives to invest in new interconnections to congested areas. However, they will generally not generate sufficient revenue to cover costs. Nodal pricing is used in New Zealand and the PennsylvaniaNew JerseyMaryland (PJM) market in the United States. Zonal pricing is a simplied version of nodal pricing, with prices set for each zone reflecting average congestion costs across the nodes in the zone. Its effectiveness in providing signals for efcient use of existing capacity and investment in new capacity therefore depends on how close the zone average is to the actual costs at each node. The main advantage of this method over full nodal pricing is its relative simplicity. Zonal pricing is used in some parts of Australia and the United States. Postage stamp pricing involves a at rate across all nodes and over pre-specied time periods. It therefore does not signal the costs of congestion at different nodes and times. If congestion is not a significant issue, then the disadvantages of this approach may be small, relative to the advantages of having a simpler pricing system where users know prices in advance. This method is widely used in the European Union. Distance related prices are a function of the distance between the buyer and seller. While they do not reect congestion costs, they do reect marginal transmission losses, which vary with the distance between the buyer and seller (IEA 2001a). To deal with the need to generate sufcient revenues to cover costs, prices for use of networks are usually supplemented with additional charges. The most commonly used price structure is a multipart tariff, with xed connection charges and capacity and energy use charges that may depend on the time of use (IEA 2001a). In principle, each part of the tariff can be set to reect different costs for different locations, times and users, thereby providing signals for efficient use of electricity. However, high implementation costs and informational requirements mean that the same tariff usually applies across broad customer groups and locations. While the structure of prices is relevant for encouraging efciency, regulators are also interested in controlling average price levels set by monopoly suppliers of transmission and distribution services. Rate of return regulation is the most widely used method. For example, 74 per cent of OECD economies
had rate of return regulation for transmission in 1998 (Gonenc et al. 2000). However, a feature of many electricity reform packages has been a move away from cost based or rate of return regulation to incentive based regulation. Rate of return or cost based regulation allows the rm to recoup costs and earn a set rate of return on a specied base. The rm has an incentive to inefciently expand the capital base to which the allowed rate of return applies, even though this may increase costs. In contrast, incentive based regulation is designed to provide incentives for cost minimisation, innovation and efcient investment. Prices or revenues, not prots, are regulated. The regulator sets a price or revenue cap, including an adjustment factor X which represents the scope for productivity improvements, for a specied period that the rm can charge for a dened basket of services. Prots are retained so the rm has an incentive to increase them by reducing costs or nding innovative ways to meet demand. The effectiveness of incentive regulation in providing incentives for efficiency depends on the choice of key parameters, such as the level of X and the frequency with which the caps are adjusted (OECD 2000). Furthermore, the rm may be able to reduce costs by reducing service quality, say by reducing supply reliability.
Regulation of end user prices
While reforms have created effective choices for some electricity users, particularly large users, most end users remain captive to a single distributor. Governments therefore continue to regulate their prices to control abuse of monopoly power, using the methods outlined above. In addition, governments often regulate end user prices to achieve social or other policy objectives. Reform often means that these objectives and their implications must be explicitly set out, rather than being implicitly embodied in the policies of government owned utilities. For example, legislation covering the supply of electricity, gas and water in the United Kingdom species that the regulator must take account of the special needs of certain groups such as rural customers, pensioners and the disabled (Waddems 1999). Regulation of end user prices can limit the scope for reform to deliver benets. For example, a desire of governments to ensure that all households have electricity supply at affordable prices, despite the relatively high costs of supplying some consumers, has often resulted in cross subsidies from
industrial and commercial consumers to domestic users and from urban to rural consumers. Cross subsidies cannot be sustained in a fully competitive market. If governments wish to continue to protect certain consumers from higher prices, and are not prepared to use alternative instruments such as direct nancial assistance, they must restrict the pricing policies of electricity suppliers. This will limit the role of prices in providing signals for efcient supply and investment and efcient use by consumers. An example of end user price regulation creating problems for reform comes from the Californian electricity market. The failure to allow retail prices to adjust to reflect changing market conditions has been an important factor contributing to the electricity supply problems in that market (see box 1).
Horizontal market power
The potential for generators to exercise signicant market power by limiting supply to increase prices has been recognised since the early stages of reform of the British electricity market (Green and Newberry 1992). Studies of actual behavior in several deregulated markets claim that strategic bidding has been responsible for raising prices above estimated competitive levels. For Australia, it has been estimated that in certain months up to half of the price paid for wholesale electricity in the states of New South Wales, Victoria and South Australia may be attributable to strategic behavior in the market (Short, Swan and Rolph 2000). In California, strategic bidding is estimated to have resulted in prices rising 22 per cent above competitive levels in 1999 (Borenstein, Bushnell and Wolak 1999). Prices in the British market were estimated to be around 26 per cent higher than the imputed marginal cost of the marginal supplier over the period 199294 (Wolfram 1999). There are several policy options for dealing with abuse of market power. One option is to identify and remove any remaining barriers to entry or other regulatory restrictions on generators, such as lengthy licensing procedures, that may limit competition. Another is to require compulsory divestiture of assets by horizontally integrated generators to create competing generators. A further option is some form of price regulation, or at least the threat of regulation. However, the costs of any regulation must be balanced against the potential benets. It may be difcult to design cost effective regulation, given the difculty in determining to what extent high prices reect strategic behavior by generators and to what extent they reect changing demand and capacity conditions and costs.
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Privatisation
Privatisation has been a feature of reform in many economies, driven by government budget considerations plus a desire to encourage better performance by utilities.
Policy design problems the case of Californias electricity market
The problems with Californias electricity reform program with wholesale price increases of up to 500 per cent over a year (Joskow 2001a), rolling blackouts and utilities in severe nancial difculties has led some policy makers to reconsider the benefits of reform. However, the problems in California are not inherent problems with deregulation, but instead result from the way that the regulatory reforms were implemented, combined with problems that were emerging before reform (limited capacity) and some factors that were independent of the reform process (soaring fuel prices for gas red generation, reduced imports of hydro power because of water shortages). The wholesale and retail markets in California were opened to competition in April 1998. For the first two years progress was relatively smooth (Sioshansi 2001). However, in the summer of 2000 a combination of limited generation and transmission capacity, growing demand, soaring wholesale prices and a market that was only partially deregulated led to serious problems. The problems with limited capacity can be traced to the time before deregulation. In the four years leading up to deregulation, no new generation capacity was built in California, as investors were uncertain about the new regulatory setting. When the new rules were introduced, development proposals were delayed by community opposition and lengthy environmental review processes. The rst signicant addition to capacity did not come on stream until summer 2001 (Joskow 2001b). With growing demand pushing the system to its capacity limits, and rising gas prices resulting in generation cost increases, wholesale prices soared. For the rst four months of 2001, wholesale spot prices averaged ten times their level in 1998 and 1999 (Joskow 2001a). Rather than providing price signals to allow suppliers and consumers to respond to these circumstances, price regulation exacerbated the problems. While wholesale prices were deregulated, retail prices were frozen for up to four years. Incumbent utilities were required to purchase electricity in the wholesale market and sell to all consumers who did not choose to switch to a new competing supplier at the regulated price. The regulator rejected the utilities request to be allowed to negotiate xed price long term contracts with generators, to hedge wholesale market price risks (Joskow 2001a). The utilities were therefore forced into severe nancial difculties. Further, retail prices were not allowed to adjust to moderate the peaks in demand and to provide signals for capacity expansion.
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Privatisation is expected to generate benefits by providing incentives for managers to make better use of existing capacity and better decisions about investment in new capacity. In privately owned rms, nancial rewards and penalties for managers are generally closely linked to performance, where performance is measured in terms of generating returns for shareholders. This provides the decision makers in private rms with clearer incentives for good management, compared with those in publicly owned firms, where penalties and rewards are unlikely to be as strongly linked to economic performance and where there may be multiple, and in some cases conicting, objectives that may be difcult to measure. The absence of capital market pressure, including the threat of takeover, also weakens the incentives facing public managers. In the electricity industry, as well as being a means for promoting better performance in utilities, privatisation has often been an integral part of the package for promoting a more competitive industry. The sale of publicly owned vertically integrated utilities has been an important step toward facilitating competition in generation and, to a lesser extent, retail supply. In some cases, horizontal separation and privatisation has provided stimulus for competition. For example, in the state of Victoria in Australia four publicly owned generators were sold to separate buyers, creating four independent players in the market. Privatisation may also be necessary to ensure that potential entrants are not deterred by the prospect of competing with a publicly owned incumbent, which would not face market pressures and may be considered unlikely to be allowed to fail by the government. The impacts of privatisation depend on the economic and regulatory environment in which the privatised entity operates. Turning a public monopoly into a private one is likely to encourage better performance in terms of lower costs and improved production techniques, as managers try to maximise profits for shareholders. However, consumers are unlikely to benet. Regulation can be used to control the monopoly power and ensure that some benefits are passed on to consumers, although regulation will to some extent dampen the market signals that the private rm receives and will involve costs. In cases where it is considered too difficult or costly to regulate a private monopoly or privatisation is not politically feasible, some utilities have been corporatised. This involves creating incentives for the utility to operate more like a private firm. However, in practice it is difficult to design incentives that mimic those generated in markets. For example, in contrast to a private
rm, a corporatised rm does not face a threat of takeover to discourage poor performance. There is likely to be an expectation that the government will support a poorly performing firm, particularly if the firm is serving noncommercial functions for the government. Identifying and measuring the effects of privatisation is difcult. Privatisation is usually part of a package of reforms and disentangling the effects of various components of the package is difficult. Further, any analysis needs to recognise that it will take time for a privatised rm to adapt to its new environment, so it may be several years before sufficient time series data are available to compare a given rms performance before and after privatisation. An alternative to time series analysis is cross sectional analysis, comparing similar private and publicly owned rms. However, nding comparable rms and isolating the effects of ownership can be difcult. Despite these difculties, the available evidence from studies of rms over time suggests that privatisation does tend to improve protability and performance (Gonenc et al. 2000).
Incorporating environmental objectives
The interaction between environmental policies and other regulatory reforms is a further important policy design issue. Reforms to promote competition and encourage efciency in electricity supply can be expected to deliver environmental benets in several ways. For example, unbundling and open access has facilitated the utilisation of smaller scale, more efcient generating capacity with lower emissions of greenhouse gases and certain air pollutants. Given that the full environmental impacts of energy supply and use are not reected in market prices, governments often take additional steps to address environmental concerns. These environmental policies are likely to involve tradeoffs. For example, lower emissions may come at the expense of higher generation costs and prices. Restrictions on generating plants locating in certain area may improve local air quality, but if capacity shortages result then prices may rise. Restrictions on new capacity, for environmental and other reasons, were one factor contributing to the supply shortages and high prices in California in 2000 and 2001 (see box 1). Regulatory reform helps to make these types of tradeoffs explicit and transparent, as prices can adjust to signal costs and benets. Policy makers can then decide whether the benets of environmental policies more than offset the costs.
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Natural gas
The natural gas industry was one of the earliest to be subject to regulatory reform in the APEC region, with deregulation commencing in the United States in 1978 with the removal of some wellhead price controls in the Natural Gas Policy Act. Since then many economies have initiated gas reform programs, often in parallel with electricity reform. The close links between the two industries, with natural gas a major input to electricity generation and a competitor with electricity in end use markets, has created pressure for concurrent reforms. Faced with opportunities to supply gas for power generation in competitive electricity markets, gas producers have been keen to obtain access to pipelines on the best possible terms. As in the electricity industry, a central issue for gas market reform has been how to create more competitive and exible markets in the presence of natural monopolies in transmission and distribution. However, there are many differences between the two industries, in terms of physical and economic characteristics, and these shape the policies adopted and expectations about the potential benets of reform.
Key characteristics of natural gas supply and demand
Compared with electricity, gas supply and demand issues are less complex. Demand varies across seasons and with time of day, but gas can be economically stored, so there is less need for excess capacity. Continuous balancing of supply and demand is not required and, because gas moves relatively slowly in pipelines, unexpected disruptions to supply or demand need not affect the stability of the whole supply network. Further, gas supply does not involve the diversity of cost structures that characterise electricity supply, so the key role that the electricity network operator plays in organising the least cost order of dispatch is not relevant for gas. Without the complexities of network interactions and the need for system coordination, the gas supply industry would seem to be more amenable to competition and light handed regulation than electricity markets. In addition, in most economies the natural gas industry, prior to any reforms, has been characterised by greater private ownership and less vertical integration than electricity supply, so problems of entrenched poor performance and limited competition are likely to be less severe. However, gas supply does have some characteristics that make it more difcult to create competitive markets compared with other commodities such as oil.
While oil and gas have similar production technologies and costs, gas is much more costly to transport. For transport across land, pipelines are the only economic option. The gas must be compressed and, compared with oil, considerably larger pipelines and extensive investment is required. A given section of pipeline can carry fteen times as much energy in the form of oil than it can in the form of compressed gas (Jensen 1992). For transport by tanker, which accounts for a small but growing share of world gas trade, gas must be liqueed. This makes it considerably more costly to transport than oil. Most of the gas consumed in the world is primarily transported to consumers via pipelines. While many Asian economies do not have well developed pipeline networks, relying instead on imported LNG with major users located near import terminals, several major pipeline projects are in progress or being considered to exploit the massive gas reserves in the region (EIA 2000). The experience of other economies in the region in promoting efcient pipeline based gas industries is therefore relevant. Pipelines exhibit natural monopoly characteristics. They involve large xed costs and low marginal costs such that a given level of demand can usually be met at lower cost by using one pipeline more intensively rather than building a second one. Even when a market grows beyond the initial design capacity of a pipeline, capacity can usually be expanded by adding compressors at considerably lower cost than building a new pipeline. Natural gas supply has traditionally been characterised by long term contracts. Such contracts, usually involving some take or pay obligation, are a way to manage the risks of opportunistic behavior where large specific investments in pipelines are required to link particular gas elds with particular customers or groups of customers. Gas supplies are often located long distances from markets, and a large commitment to pipeline investment will generally have to be made before a eld is developed. Long term contracts are also a feature of LNG markets. LNG projects usually involve integrated development of gas elds and capital intensive processing and transport facilities, often in joint venture arrangements. Investors in these large projects usually require long term contracts and a long term plan for project development. Vertical integration is an alternative mechanism for managing the risks involved in large scale specific investments. It has been used to various
degrees in APEC gas markets, although generally less extensively than in electricity.
Unbundling and open access
In the context of gas reform, unbundling refers to separating the market for the gas commodity from the market for gas transport services. The purpose is to separate, and regulate, the natural monopoly part of the supply chain transport services and allow competition to develop in the potentially competitive part of the industry, gas supply. In the traditional model for gas supply in many economies, consumers have only been able to purchase delivered gas from a single pipeline owner at a bundled price incorporating the cost of the gas plus the cost of transporting it. Unbundling and open access to pipelines creates the opportunity for gas consumers and producers to negotiate directly for the sale of gas, and then separately arrange for its transport. Creating a distinct market for transport services is less complex in gas than in electricity because it is possible to define clear capacity rights to gas pipelines. Pipeline companies sell transport contracts, specifying conditions such as whether the holder has rights to rm or interruptible service, a distinction that determines the priority given to the contract holder during capacity shortages (Juris 1998). In some relatively developed markets there are also secondary transport markets, where capacity contracts can be resold. Secondary markets promote efcient allocation of transport capacity. Short term changes in demand or supply may leave some transport contract holders with unused capacity rights. Reselling these to others who need capacity will result in a more efcient outcome than simply wasting the capacity. Most gas commodity sales are arranged through bilateral contracts, often long term, supplemented by sales in spot markets in some cases. The effectiveness of unbundling and open access in creating or contributing to a more efcient gas industry depends on several key issues, including: regulation of pipeline access and pricing; vertical separation and privatisation; upstream competition; and regulation of wellhead prices.
Regulation of pipeline access and pricing
Whether and how to regulate access to natural monopoly pipelines is one of the most difficult issues facing gas policy makers. Without regulation, a pipeline owner who is also a seller of gas has an incentive to restrict access to the pipeline for potential competing gas sellers, in order to extend its market power into the downstream market. Even if it is not a seller of gas, but sells transport services only, the unregulated owner of a natural monopoly pipeline has an incentive to charge monopoly prices for access, restricting use to less than efcient levels. Regulation of access and pricing can potentially deal with these problems. However, regulation also has costs. For example, given that it impinges on the property rights of pipeline owners it may deter new investment. Finding the right balance between the rights of pipeline owners and users is a crucial issue, because the cost of failing to invest in new pipelines is likely to be greater than the cost of restricting access or setting monopoly prices (Productivity Commission 2001). Access regulation has tended to be more light handed in gas markets than in the electricity industry. This largely reects the judgment that, even without regulation, there are some important constraints on the market power of pipeline owners. For example, while the technology and cost structure of pipelines mean that it is usually more efcient to have a single pipeline linking a given gas source with a given market, there may be multiple pipelines delivering supplies from different locations. This has long been the case in the United States, with several transmission pipelines often carrying gas which is then delivered into a single distribution network. Even in the relatively small market of New South Wales in Australia, a second transmission pipeline was completed in 2000 to provide competition for the existing pipeline.
Vertical separation and privatisation
Separation of vertically integrated firms is not essential for an effective unbundling and open access policy. As discussed in relation to electricity reform, rms can remain vertically integrated, provided accounts for each activity are separated and it can be established that prices for transport for third parties are nondiscriminatory. However, the difculty in making this weaker form of separation effective may mean that full separation is the preferred option. The appropriate policy depends on the circumstances in
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the markets involved and judgments about the costs and benets of vertical integration. The diversity of policy approaches to vertical integration in gas markets is illustrated in the case of Australia. Prior to reforms, transmission and distribution were vertically integrated in only two states, Victoria and Western Australia. In both states, the vertically integrated utilities have been split into two companies and privatised as part of the reform process. In contrast, one of the major privatisations in the reform process has resulted in the major distributor in the state of New South Wales taking a 51 per cent share of ownership in the major transmission pipeline serving the state. The degree of private ownership in gas varies widely across the APEC region. In some economies, gas production is carried out by multinational petroleum companies while in others there are publicly owned vertically integrated monopolies. Privatisation and its sequencing with other reforms, particularly structural reforms, has been an issue in some economies. The case of British Gas illustrates that the potential benets of privatisation may not be realised unless it is accompanied by reforms to facilitate competition, including structural reforms (see box 2).
Upstream competition
As in the electricity sector, reforms to control monopoly power in gas transmission and distribution are only part of the requirement for the potential gains from competition to be realised. There must also be competition in the upstream segment of the supply chain. In some large markets, such as the United States, there are many competing gas producers. However, smaller or less mature markets are often supplied by a single producer or joint venture arrangement, usually under a long term contract. The presence of a single supplier is not necessarily a cause for concern. While there will not be ongoing competition in such a market, there may have been strong competition between suppliers to secure the long term contract. However, lack of upstream competition has been a cause for concern in some reforming economies. In Australia for example, upstream competition was not addressed as part of the initial gas reform package, but in recent years it has been identied as a major issue for reform (Harman and Mlanie 1999). As an illustration of its potential importance, in the only state where signicant upstream reform has been initiated Western Australia wellhead prices have fallen by 2550 per cent (National Competition Council 2001).
Allocation of permits for exploration and development is a key issue affecting upstream competition in gas and oil. Government involvement is inherent in upstream gas and oil (and also coal) because the resources are often publicly owned or lie under publicly owned land or water. Governments must decide whether and how to allocate rights to explore, develop and produce these primary resources. There are several possible permit allocation systems. The effectiveness of each in encouraging the optimal level of exploration and development depends on a range of factors such as the level of exploration maturity, prospectivity and the level of competition in the bidding process (Harman and Mlanie 1999).
Problems with partial reforms the case of British Gas
Gas reform in the United Kingdom commenced in 1982 with the Oil and Gas (Enterprise) Act giving other firms the right to compete with British Gas to supply large customers and to use pipelines owned by British Gas (Yarrow 1991). However, the reform process failed to address other factors that limited the scope for competition to develop. Market liberalisation was not accompanied by unbundling and structural reform. Transmission and distribution were not separated, even in accounting terms, and in contrast with subsequent reforms in most economies, there was no unbundling of gas sales and transport. British Gas was able to use its market power in transmission and distribution to limit competition in the potentially competitive market for supply of gas to consumers. Furthermore, the scope for new entry by competing suppliers was severely limited by the availability of gas supplies, with British Gas holding long term contracts with most of the producers on the United Kingdom continental shelf. British Gas was privatised in 1986 as a vertically integrated enterprise. Because the underlying impediments to competition were not addressed, the privatisation effectively turned a public monopoly into a private one. A long series of regulatory interventions followed the privatisation, in an attempt to control this monopoly power and stimulate competition. Not long after otation, the pricing policies of British Gas were referred to the Monopolies and Mergers Commission. That investigation and many subsequent ones led to an extension of regulation of the rms tariff structure, restrictions on its access to new gas supplies and an agreement to offer some of its contracted supplies to potential rival suppliers. Only after repeated interventions and the separation of British Gas into two companies in 1996 could competition nally develop (Juris 1998).
58
Wellhead price controls
A further issue for the upstream part of the gas industry in some economies has been wellhead price controls. Removal of these is intended to generate benets by allowing prices to provide signals to guide efcient supply and use of existing reserves as well as signaling the need for new exploration and development, in the case of high or rising prices, or the need for some rms to exit the industry, where prices are low or falling. The United States experience clearly illustrates the problems that can arise when prices are not allowed to adjust to balance supply and demand and provide signals for investment in new capacity (see box 3).
LNG issues
The upstream competition and wellhead price control issues discussed above are relevant to the LNG part of the gas supply industry. The reform policies that relate directly to pipelines may also indirectly affect LNG markets, to the extent that LNG and pipeline gas are alternatives or complements (for
Problems with wellhead price controls gas markets in the United States
Natural gas wellhead price controls resulted in major supply shortages in the United States in the early 1970s, which in turn led to further costly regulation of the supply and use of gas. Price controls on gas sold in interstate markets were introduced by the federal government in 1958. When gas demand started growing strongly in the early 1970s, prices increased and the ceilings eventually became binding. Supply shortages began to emerge. Prices in intrastate markets were not controlled, and as they rose with demand, the limited supplies were diverted to them rather than the interstate markets, thereby exacerbating the problems in the regulated market (Jess 1997). In response to the supply shortages, the government partially deregulated wellhead prices. The Natural Gas Policy Act 1978 began the partial deregulation of prices for new gas supplies, while maintaining controls on old gas supplies. However, the government also introduced the Power Plant and Industrial Fuel Use Act 1978 which prohibited the use of natural gas and oil in new power plants and phased out natural gas use in existing plant by 1990 (Joskow 2001a). The restrictions on the use of gas were eventually lifted in the 1980s, and the Natural Gas Wellhead Decontrol Act 1989 completely removed controls by 1993.
59
example, where the viability of a large LNG export project may depend on the concurrent development of a domestic pipeline based industry). In addition, there are some regulatory issues that relate specically to LNG. Some governments place restrictions on the sale of LNG in both contract and spot markets. These may involve approval of sales to ensure that they are not contrary to the national interest. However, even where approval is rarely withheld, as in the case of spot market exports from Australia, an extra layer of government involvement creates costs, and these must be balanced against any benets. Restrictions may also apply to the ownership, location and operation of LNG processing facilities.
Petroleum
Oil is one of the most widely traded commodities in the world. Compared with electricity and gas, there are fewer potential natural barriers to competition in oil markets. Large scale investment is necessary to develop petroleum reserves and transport to rening facilities and consumers. However, the resources involved are generally more mobile and not specic to particular trades, as gas pipelines tend to be. For example, tankers can be switched between different routes and markets. Transport costs are relatively low and transport infrastructure does not exhibit natural monopoly characteristics. However, the oil industry has been one of the most heavily regulated in the APEC region, largely reecting the strategic importance of oil and the desire of governments to ensure that national supply is not vulnerable to major external shocks. Policies adopted have included: support or protection for local suppliers, including limits on imports and subsidies for local production; government ownership of production, rening and distribution facilities; restrictions on foreign ownership; price controls; stockpiling requirements; and restrictions on access to exploration and development rights. In addition, the political sensitivity of high petroleum prices and the potentially large economic costs of having inflated prices for a key input in the
economy have frequently resulted in regulation of retail prices or some regulatory oversight of retail prices to control any abuse of market power. Reforms are underpinned by the view that national energy security is better served by policies that encourage more diverse and efcient supply arrangements, supplemented by special arrangements for genuine emergency situations (such as the Strategic Petroleum Reserve in the United States see Joskow 2001a). Policies such as protecting or fostering domestic production by restricting import competition result in costs as inefcient producers can survive and are also likely to limit the ability of domestic energy markets to adjust to external shocks. Similarly, price controls designed to protect domestic consumers from external shocks can exacerbate supply shortage problems. In the United States, for example, price controls were introduced after the first oil price shock in 1973-74. However, in 1979 oil shortages became a major problem after Iran ceased exporting oil. In response to the shortages the government announced the gradual decontrol of oil prices (Joskow 2001a). Rising prices should encourage conservation efforts by consumers and increased exploration and development. As for electricity and gas, structural reforms and privatisation have been important components of oil reform packages. These are designed to improve incentives for efficient performance and to facilitate greater competition. Removal of restrictions on entry of new producers is also designed to encourage competition. In Indonesia, for example, the requirement that all foreign oil and gas companies operating in the country do so in partnership with Pertamina, the state owned oil and gas rm, is to be lifted (EIA 2000). Potential barriers to downstream competition are also being addressed. For example, in Australia, implementation of an open access regime for oil terminals should allow large users of petroleum products to purchase their goods from the terminal gate at wholesale prices, thereby putting pressure on distributors to keep prices at competitive levels (IEA 2001b). Restrictions on the number and location of retail outlets are also being lifted in some economies, with the aim of increasing competition and putting downward pressure on retail prices.
Coal
Like petroleum, coal has traditionally been considered an essential strategic resource in many economies. Given its role as a fuel for electricity generaDeregulating energy markets in APEC 61
tion, steel making and, historically, for transport and heating, governments in some economies have considered it important to ensure a stable and reliable coal supply. This has been achieved through policies such as: government ownership of mines, often in conjunction with ownership of power plants; subsidies to local producers; restrictions on imports and exports; and price controls. As discussed in relation to petroleum, these policies tend to allow inefcient mines to survive, with costs borne by taxpayers or domestic consumers. Policies that have given coal a special protected status have often been accompanied by government regulations affecting the management, staffing and operations of coal mines, which have further reduced incentives for efcient performance. Common features of reform packages in the coal industry have included: privatisation and structural reforms, including vertically separating coal mines and power plants and splitting publicly owned monopoly coal producers into several competing producers; removal of subsidies to domestic production; removal of restrictions on the sale and use of coal, including obligations to sell to public utilities and restrictions on trade; and nondiscriminatory access to rail and port facilities. As in other energy industries, structural reforms should help to facilitate the development of competition and more efficient supply, but there may be some offsetting costs as the advantages of vertical integration are lost. However, long term contracts between coal suppliers and major users can provide an alternative to vertical integration. Privatisation should also encourage productivity improvements, provided it is accompanied by removal of restrictions on the operations of mines. Removal of subsidies to local producers and restrictions on the level of imports should also encourage more efcient supply, as inefcient supply can no longer compete with imports at world prices. Prices received by local producers will fall, but consumers should continue to face the world price. As the major supplier of fuel for electricity generation in the APEC region, the coal industry is also affected by regulatory reform in the electricity industry and the gas industry (the major competitor for thermal coal), as well as reforms in related industries such as rail and port services. Electricity and
gas reforms should put pressure on coal suppliers to improve productivity and ensure that prices are at competitive levels. Policies to provide open and nondiscriminatory access to rail and port facilities are also designed to facilitate the development of competition between coal suppliers. However, as in the electricity and gas industries, open access policies involve tradeoffs between the interests of users and owners of major infrastructure, and achieving the appropriate balance can be difcult.
Impacts of reforms
Evidence of impacts such as reduced energy prices, improved productivity and better service quality in energy supply industries is widely cited in support of regulatory reform. Before examining the evidence it is important to note the potential problems with empirical analysis of the impacts of reform. It is difficult to disentangle the effects of reform from the effects of other economic and technological changes. Comparisons of prices, productivity or other variables before and after reform therefore need to be interpreted with caution. For example, improved productivity after reform is not necessarily an indication that reform has been successful. The relevant question is not whether productivity has improved after reform, but whether it is higher than it would have been in the absence of reform. Productivity may have improved anyway, because, for example, of some technological improvement or changes in some other variables not directly affected by reform. The analysis of price changes is particularly difcult, as the determinants of energy prices are often complex and constantly changing and it is hard to separate the effects of reform. Furthermore, some prices could be expected to rise as a result of reform. This could occur, for example, when subsidies or cross subsidies are removed, or when prices are allowed to adjust to provide signals for efcient use of scarce capacity (say in periods of peak demand) and incentives to invest in new capacity. A broad assessment of average price movements after reform may therefore be misleading. One study that attempts to identify various factors affecting electricity prices and technical efciency is Steiner (2000). Indexes are developed to summarise the characteristics of reform in each economy, and economy specic economic and technological conditions are controlled for. While emphasising the difculties in undertaking this type of empirical analysis, Steiner concludes that broad expectations about the price and productivity effects of deregulation
are supported by the evidence for nineteen OECD economies (including ve APEC economies Australia, Canada, Japan, New Zealand and the United States). Unbundling of generation and transmission, expansion of third party access to networks and the introduction of electricity markets reduce both industrial and residential prices. Industrial prices are reduced more than residential prices because the larger industrial users can benet from directly dealing in wholesale markets, while residential consumers still buy through local distribution companies. Unbundling and private ownership also improve capacity utilisation and bring reserve margins closer to optimal levels (Steiner 2000). A further problem with any analysis of the impacts of energy market reforms is that reform tends to be a gradual process. Changes are often phased in, to allow market participants time to adjust, and policies are reassessed and modified as technologies and markets change. Markets where reform has been in progress for many years, such as in the United States and the United Kingdom, are likely to provide the best guide to likely long term impacts. However, even in these markets, policies are still evolving. Despite these difculties and qualications, there is a considerable amount of evidence of broad changes in energy markets, both before and after deregulation. These trends help to illustrate the types of impacts that could be expected over the long term.
Prices in restructured energy markets
Evidence on trends in energy prices in deregulated markets is summarised in table 6. Most of the evidence relates to markets where major changes have been implemented and several years have passed since reforms were first initiated. The evidence shows significant falls in real average prices over time. In some cases industrial prices have fallen more sharply than domestic. The evidence from the United States gas industry also illustrates that the benets of reform may continue to develop over time. Price increases were larger the longer the time period since the introduction of the reforms. Evidence on trends in average prices over several years may mask some other important changes, including price increases for some consumers or some products and increased price volatility. Each of these is a likely outcome of reform. Prices may rise where subsidies or cross subsidies are removed, or
Energy prices following reform
Energy type Economy Electricity Electricity United Kingdom United Kingdom
Prices Average real prices fell 13 per cent
Time frame 199097
Source IEA (1999) Littlechild (1999)
Average prices for 199099 domestic customers fell around 26 per cent in real terms Average prices for industrial customers fell 25 to 34 per cent in real terms
Electricity
Australia
Average real prices fell 14 per cent Average real prices fell 10 per cent
199198 19912001 19922000 19902000
IEA (2001b)
Electricity
Victoria, Australia
Average industrial prices fell 29 per cent Average commercial prices fell 40 per cent
Institute of Public Affairs (2001)
Electricity
New Zealand Average commercial 198595 prices fell by about 25 per cent, while average domestic prices were virtually unchanged in real terms Chile Wholesale price fell by 34 per cent, nal user price fell by 17 per cent 198798
IEA (1999)
Electricity
Fischer and Serra (2000)
Electricity
Germany
Average industrial 199699 prices fell 9.6 per cent, but average domestic prices increased by 0.8 per cent
IEA (2001a)
Natural gas
United States Average 30 per cent fall for residential customers, more for some industrial and commercial
Winston (1998)
Continued
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Energy prices following reform continued
Energy type Economy Natural gas
Prices
Time frame
Source Crandall and Ellig (1997)
United States Average real prices fell 198486 by 1038 per cent Average real prices fell by 2345 per cent Average real prices fell by 2757 per cent 198489 198494
Natural gas
Western Australia
2550 per cent fall in wellhead prices
National Competition Council (2001)
where there are problems with the design of reforms for example, where regulations do not effectively control abuse of market power by some suppliers. Prices are likely to be more volatile in deregulated markets because they are driven by the interaction of supply and demand rather than set by regulators. Markets are not insulated from external shocks. If the price of fuel inputs for electricity generation rises, then this should be reected in the price of electricity. A key difference between a regulated and deregulated market is that in the latter there are more likely to be mechanisms available for consumers and producers to respond to the price variability. For example, electricity utilities who supply customers at set prices are able to manage spot market price volatility through long term contracts with generators. However, problems arise when utilities do not have the exibility to manage price risks, as in California (see box 1). The spot electricity market in California provides some of the most dramatic examples of price volatility in deregulated markets, with wholesale price increases of up to 500 per cent over a year (Joskow 2001a). However, in terms of identifying the impacts of reform, the relevant question is how prices in the deregulated market compare with what they would otherwise have been. It is difficult to say how regulated prices and supply would have responded to the combination of factors evident in California such as rapidly increasing demand and rising fuel costs.
Regulatory reform and technical efciency
Examples of efciency improvements in some industries following reform including improved labor and capital productivity and lower costs are presented in table 7.
Improvements in technical efficiency following reform
Energy type Economy Electricity United Kingdom United Kingdom
Efciency indicator
Time period
Source Littlechild (1999)
Staff levels reduced by 1990-91 to a third in transmission, 1997-98 a half in distribution Operating costs net of 1992-93 to depreciation reduced 1997-98 by 40 per cent in transmission, 27 per cent in distribution Average power plant mid-1980s to availability increased 1999 from less than 75 per cent in the mid-1980s to 84 per cent in 1992 and 93 per cent in 1999 Average labor productivity across all states has more than doubled Customers per employee increased by 240 per cent Number of employees reduced by half Output per employee more than doubled 199199
Electricity
Littlechild (1999)
Electricity
Australia
World Energy Council (2001)
Electricity
Australia
Short et al. (2001)
Electricity
Australia
199099
IEA (2001b)
Electricity
Victoria, Australia
Brown coal plant utilisation increased from 66.6 per cent to 83.7 per cent Customers per distribution worker doubled
1995-96 to 1998
Institute of Public Affairs (2001)
Electricity
Chile
Rudnick (1998)
Continued
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Improvements in technical efficiency following reform continued
Energy type Economy Electricity
Efciency indicator
Time period
Source IEA (1999)
New Zealand Cost savings in generation and transmission of 1015 per cent Argentina Staff reduced by 48 per cent Workers per MW capacity reduced from 0.91 to 0.57 199294
Electricity
World Energy Council (1998)
Natural gas
United States Real operating and maintenance costs fell by roughly 35 per cent
Winston (1998)
Regulatory reform and the reliability and quality of energy supply
There have been many high profile problems with reliability of supply in deregulated energy markets in recent years. In each case a complex mix of factors has been identied as contributing to the problems. For example, in the state of Victoria in Australia a series of power cuts in February 2000 reected a combination of circumstances, including an industrial dispute that had taken around 20 per cent of generating capacity ofine, two unplanned generator outages and an extremely high peak demand caused by a heat wave across south eastern Australia (IEA 2001b). In Auckland, New Zealand, cable failures resulted in extensive blackouts in February 1998. While the utility, Mercury Energy, and the reform process were widely blamed, the problems can be traced back to the late 1980s and a failure to undertake necessary investments in new capacity because of approval problems. In the late 1980s it was determined that by 1997 there would be a need to enhance supply security by building a new tunnel to carry extra cables. The project was delayed because of difculties in securing a route, but was completed in 2000 (IEA 2001c). While these supply problems have arisen in deregulated markets, they cannot be judged to be an outcome of regulatory reform.
There is evidence that service quality has improved in some deregulated electricity markets. In the Australian state of Victoria, supply reliability improved following deregulation. Average outage minutes per year and per customer were reduced from 510 in 1989-90 to 266 in 1993-94 and 260 in 1994-95 (IEA 1999). In Argentina, the frequency and duration of power cuts fell between 1992 and 1996 from an average of thirteen a year lasting 22 hours to less than four a year lasting six hours (World Energy Council 1998). In the United Kingdom electricity industry, the average number of interruptions per customer is down and the average number of minutes lost is about half its level before privatisation. The number of complaints about the electricity companies has fallen by over 60 per cent (Littlechild 1999).
Conclusions
This overview of the rationale for reform points to several potential impacts of the regulatory reform process: improved productivity in energy supply industries, in response to market pressure or improved regulatory design; prices that more accurately reflect costs lower prices in cases where they had been inflated by inefficient supply or lack of competition, and higher prices where they had been subsidised or regulated at below market levels; and more innovative and exible energy supply and use, responding to changing energy prices. Translating policy principles into practice raises complex economic and technical issues. The presence of natural monopolies and the technical complexities of energy supply, especially electricity, complicate the task of designing policies to capture potential benets. For example, there are difcult tradeoffs involved in decisions on whether and how to separate vertically integrated utilities. Similarly, decisions on whether and how to regulate access to gas pipelines or electricity grids must balance the interests of the owners and the users of the assets. If incentives to invest are undermined, the potential benets of reform may be reduced. Furthermore, governments pursuing social or other objectives through energy pricing and supply policies can limit the scope for benefits to be realised. For example, maintaining retail price regulation to protect consumers from
price rises undermines the role of prices in providing signals for efficient energy supply and use. While empirical evidence needs to be interpreted with caution, it does provide some broad support for the expectations about the impacts of reform. In markets where reforms have been in place for several years, there is considerable evidence of improved productivity, lower prices and enhanced service quality. The effects of improved productivity and lower energy prices on energy production, consumption and trade, as well as wider economic activity and trade, are examined in chapter 5.
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4
analytical framework
As discussed in the previous chapter, liberalisation of energy markets is typically a long and complex process. The dynamics of energy market reform will vary widely across economies according to their different circumstances and the specific objectives they seek to achieve. Modeling the potential outcomes of energy market reform at the APEC level is complicated by such diversity as it is difcult to account for the individual characteristics of each economys reform policies. In order to simplify the modeling process, this study has adopted the notion that the broad objectives of energy market reform that is, to create more efcient and competitive energy markets can be captured by increases in productivity in the sectors that are being liberalised. The modeling framework used in the analysis is described below.
Global trade and environment model

The analysis of the impacts of energy market liberalisation reported in this study is based on simulation results from ABAREs global trade and environment model (GTEM). GTEM is a dynamic, multiregion, multisector, general equilibrium model of the world economy. It is derived from the MEGABARE model (ABARE 1996) and the GTAP model (Hertel 1997). The model code is available on ABAREs web site (www.abareconomics. com). GTEM is an appropriate framework for analysing the economywide and intereconomy dimensions of energy market reform because it takes into account the interactions between different sectors in an economy and estimates the impacts of policies on key economic variables. These variables include productivity; the price of energy inputs into production; primary and nal energy consumption; sectoral and regional output; trade and investment ows between regions; and regional income and expenditure levels. The models database is highly suited to an assessment of APECs energy sector liberalisation. The database separately identifies all but four APEC member economies and incorporates all of the other major players in international energy markets. The database also includes a high level of
commodity disaggregation, including detailed treatment of energy and energy related sectors. GTEM also includes a detailed representation of technological change and interfuel substitution in energy and energy intensive sectors. In GTEM, the technology bundle approach is adopted to model electricity generation and iron and steel production. This approach allows electricity to be generated from seven explicitly recognised technologies: brown coal, black coal, petroleum, gas, nuclear, hydro and other renewables based technologies. Substitution between technologies in response to changes in their relative costs is allowed. This feature of GTEM is important for analysing the impacts of policies that affect the relative costs of energy inputs such as those related to energy market liberalisation on the fuel mix for electricity generation. Further, GTEM captures the substitution possibilities in iron and steel production between blast furnace and electric arc technologies. The iron and steel industry is able to substitute between these technologies in response to changes in their relative costs. In this way, GTEM restricts substitution possibilities to known technologies, thereby preventing technically infeasible combinations of inputs being chosen as model solutions. For all other energy using sectors, GTEM allows substitution between different fuels as well as between fuels and other primary factors of production labor, capital and natural resources. A more detailed description of GTEM is provided in appendix B.
Regional and sectoral aggregation

At its most disaggregated level, GTEM consists of equations and data that describe the production, consumption, trade and investment behavior of representative producers and consumers in 45 regions across 55 sectors. The database used to simulate the impacts of energy sector deregulation in this report has been aggregated to the 22 regions and 19 sectors presented in table 8. The sectoral aggregation has been chosen to include the three fossil fuels coal, oil and gas and electricity, as well as the major energy intensive sectors that are likely to inuence total energy consumption. The regional aggregation separately identies all APEC economies with the exception of
8
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Regions and sectors in GTEM
Regions Australia Canada Chile China Hong Kong, China Indonesia Japan Korea, Rep. of Malaysia Mexico New Zealand Philippines Singapore Chinese Taipei Thailand United States Viet Nam European Union Transition economies Other OPEC Rest of Latin America Rest of World 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
Sectors Coal Oil Gas Other minerals Electricity Petroleum and coal products Chemicals, rubber and plastics Nonmetallic minerals Iron and steel Nonferrous metals Fabricated metal products Motor vehicles and other transport equipment Electronic equipment Textiles Other manufacturing Agriculture, forestry and sheries Processed food Transport and trade Services
Brunei Darussalam, Papua New Guinea, Peru and the Russian Federation. Other key economies or groups of economies OPEC, the European Union, the transition economies of eastern Europe and the former Soviet Union, Rest of Latin America and the Rest of World are also identied. These represent large energy producing and trading regions that might be affected by energy sector liberalisation within APEC. As a result, GTEM is able to capture the effects of domestic policy reform at both regional and global levels.
Developing a reference case

GTEM requires a reference case against which the impacts of policy changes can be measured. The reference case projects the growth in key variables in each region in the absence of any policy changes. In this study, for example, the reference case represents the likely outlook for APECs energy sector
and general economic conditions in member economies over the period to 2010. The reference case is a business as usual simulation in which it is assumed that APEC economies implement no new regulatory reform measures in energy markets beyond those that have already been implemented. The reference case provides a baseline against which the impact of further energy market reforms can be assessed.
Economic growth
In developing a reference case for APEC, assumptions have been made about the likely rates of economic growth over the projection period. The GDP growth rates used in the study are based on historical data from 1995 to 2001. Long term projections to 2010 are from ABARE. The GDP growth assumptions used in the study are shown in table 9.
Fuel mix in electricity generation

A further key assumption with implications for the reference case is the fuel mix in electricity generation. The shares of electricity produced by ve different technologies (coal; oil; gas; nuclear; hydro and other renewables) to 2010 are determined exogenously (outside the model) in the reference case on the basis of government and other projections (table 10). These assumptions reflect a wide range of factors that affect the fuel and technology choices for electricity generation. Wide regional variation in cost factors and structures implies that the relative competitiveness of alternative electricity generation technologies is likely to vary significantly across APEC economies. In addition to the regional cost differentials affecting capital, operations
74
GDP assumptions, reference case Average annual growth

200110 %
Australia Canada Chile China Hong Kong, China Indonesia Japan Korea, Rep. of Malaysia Mexico New Zealand Philippines Singapore Chinese Taipei Thailand United States Viet Nam European Union Transition economies Other OPEC Rest of Latin America Rest of World
3.6 2.9 4.7 7.8 4.0 4.6 0.5 4.9 5.2 4.0 3.1 3.8 5.3 4.3 3.9 3.0 5.1 2.4 4.2 3.5 3.7 4.9
and maintenance, and fuel costs, the total cost of electricity generation in a specic APEC economy can also be affected by environmental policy settings. The adoption of stringent environmental controls on electricity generation can be expected to affect the relative cost of competing generation technologies. Nonetheless, in some economies noncost factors also play a significant role in influencing the fuel mix in power generation. These factors include broader government objectives such as those related to regional development and security of energy supply. The assumptions related to GDP growth in APEC economies and to the shares of electricity production by different technologies are important factors underpinning the reference case projections. Changing these assumptions would lead to different reference case results. This could also have an impact on the results of policy simulations but it is unlikely that these would be significant. The reference case assumptions have been chosen to reflect a likely path of these variables over the period to 2010.
10
Share of electricity generated by each fuel under the reference case, APEC economies
Coal 1998 2010 % % 79.2 13.8 34.0 73.0 54.0 39.1 22.0 37.6 13.9 14.0 7.8 35.0 0.0 44.0 26.9 52.0 22.6 Oil 1998 2010 % 1.1 3.3 5.3 4.5 % 1.2 0.7 5.3 4.0 Gas 1998 2010 % 9.0 4.6 12.2 0.6 33.8 34.3 21.1 11.2 69.7 13.1 23.2 0.1 17.0 8.5 53.6 14.7 15.9 % 12.4 16.1 12.2 3.0 44.8 34.1 22.0 10.6 65.2 37.0 20.0 20.0 49.9 21.0 68.7 21.3 10.7 Nuclear 1998 2010 % 0.0 12.7 0.0 1.2 0.0 0.0 32.1 38.1 0.0 5.1 0.0 0.0 0.0 22.0 0.0 18.8 0.0 % 0.0 11.3 0.0 2.0 0.0 0.0 36.0 41.3 0.0 3.0 0.0 0.0 0.0 21.0 0.0 17.0 0.0 Other 1998 2010 % 9.9 60.2 48.6 17.9 0.1 15.8 11.3 1.8 8.1 16.6 72.9 34.0 1.0 6.5 6.0 9.9 51.2 % 7.2 58.1 48.6 18.0 0.1 11.2 11.0 2.6 12.5 19.0 72.2 23.0 0.1 8.0 3.1 9.2 64.5 75
Australia Canada Chile China Hong Kong, China Indonesia Japan Korea, Rep. of Malaysia Mexico New Zealand Philippines Singapore Chinese Taipei Thailand United States Viet Nam
80.0 19.1 34.0 75.8 65.1 28.8 19.1 42.8 3.2 9.8 3.9 22.8 0.0 42.6 19.0 52.7 16.1
1.0 1.0 21.0 15.66 16.4 9.0 6.1 7.9 19.0 8.4 55.4 27.0 0.0 0.0 43.1 22.0 82.1 50.0 20.5 6.0 21.4 1.2 3.9 0.4 16.9 2.2
Policy simulations
Although some of the objectives of energy sector deregulation are specic to individual APEC economies, the broad principle underpinning reform is that there are signicant long term efciency benets from allowing markets to play a greater role in what is produced, consumed and invested. This process is expected to have direct impacts on the regional energy sector by affecting energy prices, output and trade. Experiences of regulatory reform in economies that have already implemented liberalisation policies provide some evidence of the types of gains that may be generated in energy markets, including productivity improvements, lower prices, more efficient investment and wider consumer choices. Further, as energy is a fundamental input to economic activity, lower energy prices are likely to have economywide implications for the structure and level of economic output. While the trend toward energy market liberalisation is already evident in the APEC region, the approaches to reform as well as the extent of reform undertaken to date vary considerably across APEC economies. Variation in the progress of reform is also signicant between different energy sectors within an economy, with reform of the electricity sector the most advanced in many economies. As a result, it can be expected that the benefits flowing from further reform initiatives are likely to differ across economies and between energy sectors. For the purposes of this study, APEC economies have been classied into three broad categories on the basis of information in the economic literature as well as information from relevant government representatives in APEC. For each type of energy (electricity, gas and petroleum products) these are: economies that have already implemented all or most of the elements of reform across all market segments (from production to retail distribution); economies that have implemented only some major reforms but have not yet extended the reform process to all market segments or moved beyond transitional arrangements in some or all market segments; and economies that have introduced only very limited reforms or are yet to implement any reform plans. Classification of APEC economies into these three groups is intended to highlight the relative magnitude of the productivity gains that could be
expected in economies that are currently at different stages of energy market reform if they pursued fully liberalised markets. The policy simulations undertaken in the study are designed to assess the impacts of the implementation of comprehensive deregulation that is, a move from current market structures to market designs that deliver fully competitive outcomes. Within this framework, it can be expected that economies most likely to have the highest efficiency gains are those that are currently the furthest from competitive markets. Conversely, the efciency gains to be achieved from further liberalisation are likely to be lowest in economies that are relatively advanced in their energy market reform agendas and that have already realised some or most of the potential gains. The assumed gains in productivity used in the study and the corresponding energy price impacts for different categories of APEC economies and energy subsectors are presented in tables 1113. These assumptions are based on a range of sources. In the case of electricity, the productivity estimates for economies in category one those that have implemented all or most of the elements of reform are derived from OECD studies for the United States. In particular, the
11
Assumed productivity and price impacts in the electricity sector
Classication
APEC economies
Productivity impacts %
Average price impacts % 6.1
Economies that have implemented all or most of the elements of reform across all market segments Economies that have implemented only some major reforms or have not yet extended the reform process to all market segments
Australia; Chile; New Zealand; United States Canada; Japan; Korea; Singapore
10
20
9.6
Economies that have introduced only China; Hong Kong, China; limited reforms or are yet to Indonesia; Malaysia; implement any reform Mexico; Philippines; Chinese Taipei; Thailand; Viet Nam Deregulating energy markets in APEC
30
12.0
77
12
Assumed productivity and price impacts in the gas sector

Productivity impacts % Average price impacts % 5.9
Classication
APEC economies
Economies that have implemented all Australia; Canada; or most of the elements of reform New Zealand; across all market segments United States Economies that have implemented only some major reforms or have not yet extended the reform process to all market segments Chile; Hong Kong, China; Philippines
10
8.8
Economies that have introduced only China; Indonesia; Japan; limited reforms or are yet to Malaysia; Mexico; Korea; implement any reform Singapore; Chinese Taipei; Thailand; Viet Nam
20
15.2
13
Assumed productivity and price impacts in the downstream oil sector

Productivity impacts % Average price impacts % 0.4
Classication
APEC economies
Economies that have implemented all or most of the elements of reform across all market segments
Australia; Canada; Chile; Hong Kong, China; Japan; Korea; Malaysia; New Zealand; Philippines; Singapore; Chinese Taipei; Thailand; United States Indonesia
Economies that have implemented only some major reforms or have not yet extended the reform process to all market segments Economies that have introduced only limited reforms or are yet to implement any reform 78
30
7.9
China; Mexico; Viet Nam
35
3.2
OECD estimates that any future comprehensive electricity market reform in the United States could lead to electricity prices that are approximately 5 per cent lower than they would be in the absence of regulatory reform (OECD 1997). This implies an overall improvement in total factor productivity of around 10 per cent. This expectation is also broadly in line with another OECD study that suggests that the electricity sector in the United States is behind international best practice by around 12 per cent (OECD 1999). Similarly, studies undertaken on the liberalisation of the Australian electricity market point to potential productivity gains ranging between 4 and 15 per cent (Quiggin 1997; Whiteman 1999). On the basis of these studies, productivity or efciency gains from further reforms are assumed to be 10 per cent for economies where most reforms are already complete (table 11). Productivity in the electricity sector in APEC economies that have only implemented some major reforms is assumed to increase by 20 per cent following the implementation of complete liberalisation (table 11). This assumption is based on OECD estimates for Japan where the implementation of comprehensive liberalisation initiatives is expected to reduce electricity prices by around 12 per cent (OECD 1997). This reduction in price corresponds to an increase in total factor productivity of 20 per cent relative to the reference case. In the case of APEC economies classied in group 3, the productivity and price impacts are expected to be higher than in other groups because the deregulation programs in these economies are relatively less advanced. China is representative of APEC economies in this category. A study undertaken by Blackman and Wu (1999) suggests that the efciency of power plants in China is below worlds best practice by almost 30 per cent. This provides some indication of the potential productivity gains that could be expected when comprehensive structural and regulatory reform is initiated in economies with highly regulated electricity supply industries. Estimates of the potential efficiency gains from reform of gas markets in APEC economies are more difficult to obtain, reflecting the fact that completed and proposed gas reforms are not as extensive as reforms in the electricity sector. Most of the measurement of the productivity impacts of gas market deregulation is conned to the United Kingdom where British Gas, a publicly owned vertically integrated enterprise, was privatised in 1986, and subsequent reforms adopted to allow competition to develop. In this context, the results of a study by Price and Weyman-Jones (1996) are used
to estimate the maximum potential productivity impacts that could be derived from the implementation of comprehensive liberalisation programs in natural gas sectors characterised by extensive regulatory barriers. APEC economies that have introduced only limited reforms or are yet to implement any reform in gas markets are assumed to benet from a productivity improvement of 20 per cent when gas markets are fully liberalised. This estimate is lower than the corresponding assumption for electricity markets, reflecting the generally more liberal environment affecting gas industries relative to electricity industries. To reect the relative position of other APEC economies on the reform spectrum at the beginning of the simulation period, the productivity improvements for economies that are further ahead in terms of gas sector reform are adjusted downward (table 12). For example, economies that have already implemented some of the major reforms are assumed to realise only half of the productivity gains that are assumed to accrue to those that are yet to implement most reforms. This is also reected in the relative magnitude of the reductions in gas prices that are expected to occur across different groups of APEC economies. Downstream oil markets in the majority of APEC economies have undergone signicant deregulation in recent years. However, given the lack of data on the impacts of these policies, the potential productivity implications of liberalisation are approximated by the potential increase in the utilisation rate of oil renery capacity in different APEC economies. At one end of the reform scale, the United States is representative of economies that already have fairly deregulated and competitive downstream oil sectors. Based on EIA data (2002a), the utilisation rate of renery capacity in the United States is around 92 per cent. Assuming that there are no technical barriers to reaching full capacity utilisation, this implies a maximum potential efficiency improvement of 8 per cent from further reform. At the other end of the reform scale, the oil industry in China is still characterised by dominant vertically integrated state owned enterprises. Based on renery utilisation rates in China, it is estimated that the productivity of oil rening industries in economies with highly regulated regimes could rise by as much as 35 per cent following the implementation of comprehensive liberalisation programs (Horsnell 1997 and ABARE estimates). Because the results presented in this study are based on assumptions, they should be viewed as illustrative only of the general impacts and direction of change that can be expected from regulatory reform.
The focus of the policy simulations in the study is on the electricity, natural gas and downstream oil sectors. These are the areas where the expected gains from regulatory reform are greatest because of their currently relatively high degree of regulation. Within this framework, particular attention is given to electricity and natural gas sectors, reecting the importance of network industries as the target of reform agendas in a wide cross-section of APEC economies, and the significant potential benefits from the introduction of competition in these areas. Global oil markets are driven to a signicant degree by factors that are exogenous to the APEC region, including the strategies adopted by OPEC producers. In addition, within the oil sector, reform of the upstream part of the industry has already occurred to a large extent, centred primarily on the easing of controls on private and foreign investment in crude oil production. Proposals for further structural reforms and privatisation in APEC economies are mainly focused on the downstream segment of the oil industry and cover deregulation of oil renery businesses, open access to port terminals, removal of restrictions on the number and location of petroleum retail outlets, and liberalisation of petroleum products pricing. For these reasons, the productivity assumptions presented in table 13 are applied only to the downstream petroleum sector. In comparison with electricity, natural gas and petroleum markets, the coal industry in major coal producing APEC economies has undergone major restructuring over the past decade and is generally free of government intervention. Most of the remaining distortions affecting international coal markets are in the form of production subsidies, primarily in the European Union, and the underpricing of coal resources in some developing economies. Given that coal industries within the APEC region operate mostly under liberalised regimes, the impacts of coal sector deregulation are not included in the study.
Implementing policy simulations

To assess the impacts of regulatory reform in energy markets in APEC member economies, the following simulations have been examined: 1. Implementation of comprehensive liberalisation of key energy sectors in all APEC economies by 2010: This simulation is designed to demonstrate the impacts of a comprehensive and simultaneous approach to energy market reform across all energy sectors. Economies are assumed to implement
policies that remove all regulations that constrain the development of competition in electricity, gas and downstream petroleum markets and to realise all the productivity gains specified in tables 11, 12 and 13 by 2010. The productivity assumptions are implemented in equal annual increments over the period from 2002 to 2010. 2. Implementation of comprehensive liberalisation of the electricity sector in all APEC economies by 2010: In this simulation economies are assumed to implement policies that remove all regulations that constrain the development of competition in electricity markets only and realise all the productivity gains specied in table 11 by 2010. This analysis is designed to identify the contribution of electricity market reform to the potential gains derived from reforming all key energy sectors. Given that electricity is generally the highest priority for energy market reform in a wide range of APEC economies, the simulation provides insights into the potential outcomes if policy makers in APEC chose to focus liberalisation initiatives on the electricity sector alone. 3. Implementation of comprehensive liberalisation of the gas sector in all APEC economies by 2010: In this simulation economies are assumed to implement policies that remove all regulations that constrain the development of competition in gas markets only and realise all the productivity gains specied in table 12 by 2010. This analysis is designed to identify the contribution of gas market reform to the potential gains derived from reforming all key energy sectors. Further, as natural gas is the fastest growing source of energy demand in APEC and also a key priority for reform in the APEC region, this simulation provides insights into the potential outcomes if policy makers in APEC chose to focus liberalisation initiatives on the gas sector alone. 4. Implementation of partial liberalisation of the electricity sector: This simulation recognises that the actual timing and pace of liberalisation may differ from the assumptions adopted in the above analyses. In particular, it is possible that market reforms may not be implemented as rapidly as assumed in the above simulations in all APEC economies, resulting in the achievement of only partial liberalisation by 2010. In this sensitivity analysis, APEC economies that are yet to implement most of the major reforms required to reach competitive electricity markets (groups 2 and 3) are assumed to move only half way toward the achievement of competitive markets by 2010. Consequently, the productivity assumptions in this scenario are only 50 per
cent of those in the standard simulations for these economies (table 14). On the other hand, APEC economies that are already advanced in terms of electricity market reform (group 1) are assumed to complete the reform process by 2010 and, thus, achieve the full productivity benets of liberalisation by the end of that period. 5. Residual market power in electricity markets: In some cases, liberalisation may not lead to competitive outcomes in energy markets because of the presence of residual market power resulting, for example, from poor market or regulatory design. Market power can also be a feature of particular segments of the energy supply chain where competition may not be feasible because of natural monopoly characteristics (see chapter 3). In these circumstances, the productivity gains from deregulation may not result in lower prices to energy users. Wholesale electricity markets are particularly vulnerable to the exercise of market power because of the economic and physical characteristics of electricity production and delivery. In this sensitivity analysis, it is assumed that liberalisation of electricity markets in APEC economies is not fully effective in removing the scope for the exercise of market power by generators. Consequently, the cost savings achieved by electricity producers through liberalisation are not passed on to electricity consumers in the
14
Assumed productivity gains in the electricity sector under partial liberalisation

APEC economies Productivity impact %
Classication
Economies that have already implemented all or most of the elements of reform across all market segments Economies that have implemented only some major reforms but have not yet extended the reform process to all market segments Economies that have introduced only very limited reforms or are yet to implement any reform
Australia; Chile; New Zealand; United States
10
Canada; Japan; Korea; Singapore
10
China; Hong Kong, China; Indonesia; Malaysia; Mexico; Philippines; Chinese Taipei; Thailand; Viet Nam
15
83
form of lower prices but contribute instead to increasing the prot margins of electricity utilities. In particular, it is assumed in this simulation that electricity prices to households and industry are unchanged relative to the reference case.
Interpreting results
General equilibrium models of the world economy such as GTEM are able to capture the impacts of policy changes on large numbers of economic variables. These include the prices of producer and consumer goods, sectoral and regional output, trade and investment flows and regional income and expenditure levels. The estimated impacts of policy changes, such as the introduction of competition in energy markets, on economic variables are expressed as the percentage deviations between the equilibrium levels of those variables in the reference case and their equilibrium levels in the policy simulation. For example, the impact of electricity market liberalisation on the level of gross domestic product in an APEC economy can be identied by comparing the growth in GDP in the policy simulation against GDP growth in the reference case, as illustrated in gure 6. To provide a numerical example, consider that reference case GDP at 2010 is projected to be $100 billion (distance ab). Following the introduction of regulatory reform in the energy sector, GDP at 2010 is projected to be $102 billion (distance ac). This corresponds to a 2 per cent increase in GDP from the reference case (distance de). Hence the effect of electricity market liberalisation in this example would be to increase GDP by 2 per cent at 2010 compared with the reference case projection.
84
6
102
Deviation from the reference case in a GTEM simulation
GDP $ billion c Policy simulation b Reference case
100
a 1995 2010
Deviation from the reference case % 2 e
0 1995
d 2010
Reference case projections

Total primary energy consumption in the reference case is projected to increase by 28 per cent in the APEC region over the period to 2010. This signicant growth implies that the regions energy consumption reaches 6371 million tonnes of oil equivalent in 2010, compared with 4996 million tonnes of oil equivalent in 1999. The increase in primary energy consumption in the APEC region is not evenly distributed across all economies (gure 7). The developing and newly industrialised economies (see table 1) are expected to account for much of the growth in APEC energy consumption, with some economies such as China and Malaysia projected to sustain average annual growth of 4.5 per cent or more over the period to 2010. Relatively strong economic growth, combined with an expanding population and emerging demand for personal services such as transport and air conditioning, provides the basis for these projections. Growth in energy consumption is moderated over the projection period by continued improvements in energy efciency that are assumed to occur, especially in the developing and newly industrialised economies as opportunities for technological catchup are exploited. Lower economic and population growth in the developed APEC economies translates into lower energy consumption growth over the outlook period. Total primary energy consumption in these economies is projected to rise by 1.3 per cent a year over the period to 2010. However, because these economies account for more than two-thirds of APEC energy consumption, this implies large increases in the absolute quantity of energy consumed in the region. In line with growing energy consumption, APEC consumption of fossil fuels in 2010 is signicantly higher than in 1999 (gure 8). In particular, APEC consumption of coal and natural gas is expected to grow by 30 per cent and 36 per cent respectively over the outlook period, driven to a large extent by the expansion of electricity generation (gure 9). This applies primarily to the developing and newly industrialised economies where economic growth is high and expected to continue to support further electrication. In China, electricity output is projected to be approximately 84 per cent higher in 2010 than in 1999 and in other developing economies around 65 per cent higher. However, the relative growth rates for coal and gas consumption differ substantially across APEC economies, reecting different resource endowments and energy policy priorities.
7
1999=1.0 2.0
Change in APEC energy consumption, 2010, reference case
1.5
index China Other developing Newly industrialised Developed Total APEC
8
1999=1.0 2.0
Change in APEC coal, oil and gas consumption, 2010, reference case
1.5
index Coal Oil Gas
9
1999=1.0 2.0
Change in APEC electricity production, 2010, reference case
1.5
86
The increase in gas consumption is particularly notable in some of the advanced APEC economies, including the United States and, to a lesser extent, Australia. The shift to gas red technologies for power generation in these economies is underpinned by a range of factors including competitive supplies of pipeline natural gas and the implementation of electricity market reform initiatives. To the extent that liberalisation of the electricity sector implies higher rates of return requirements by private or corporatised investors in electricity capacity, gas red technologies are likely to be favored because of their lower capital intensity and shorter construction lead times. Gas also increases its share of electricity generation in many of the developing and newly industrialised economies in APEC over the outlook period. Environmental considerations, as well as policies related to diversification of the electricity generation fuel mix, also have a bearing on the adoption of gas red technologies in the APEC region. However, coal red electricity generation is expected to increase more rapidly in economies such as Indonesia where large indigenous coal reserves give coal a cost advantage over other technologies. Similarly, the contribution of coal to the fuel mix is expected to increase in Japan, where the cost of imported LNG is signicantly higher than the cost of imported thermal coal. While coals share of total energy consumption in China is expected to fall over the period to 2010, the increase in coal consumption is significant in absolute terms. And because China accounts for more than 65 per cent of the growth in energy consumption in APEC it has a marked impact at the regional level as well. The projected increase in coal consumption in China is underpinned by robust economic growth assumptions that are offset to some extent by continuing improvements in the efciency of coal use in the industrial sector and in electricity generation, and declining direct use of coal in the residential sector as personal incomes rise. Oil consumption in the power generation sector in APEC increases less than consumption of coal and gas, reecting the relatively high marginal cost of oil fired power generation and ongoing energy security considerations in many economies. The main impetus for increased oil consumption in both developed and developing economies is demand from the transport sector where there are limited fuel substitution possibilities. However, oil is expected to remain the dominant fuel in total primary energy consumption in developed economies such as Japan and the United States and in some developing economies, including Mexico and Thailand.
10
1999=1.0 2.5 2.0
Change in APEC production of energy intensive goods, 2010, reference case
1.5
The shares of nuclear and hydropower in total electricity generation are projected to decline over the outlook period, primarily as a result of continued problems with the siting of projects and the relatively high cost of power generation from these technologies. A major factor underlying the growth in energy consumption in the APEC region is the expansion of energy intensive industries (gure 10). In particular, production of iron and steel, nonferrous metals, nonmetallic minerals and chemicals, rubber and plastics products increases signicantly in developing economies, especially China. The growth in these industries is relatively modest in developed APEC economies, including the United States, where structural change toward less energy intensive sectors, including services and information and communications technologies, is leading to an overall decline in energy intensity. In parallel with the growth in energy consumption, energy production in APEC is projected to grow by 30 per cent over the outlook period (figure 11). With the exception of oil, energy production in APEC is sufficient to meet energy demand requirements within the region. The combination of cost effective production by the worlds major energy producers and exporters, and the inclusion of the worlds largest energy consumers provides the basis for signicant intraregional energy trade within APEC. Nonetheless, energy trade between APEC and non-APEC economies also plays an important role in providing access to low cost energy supplies.
88
11
1999=1.0 2.0
Change in APEC coal, oil and gas production, 2010, reference case
1.5
index Coal Crude oil Gas Refined oil
12
1999=1.0 2.0
Change in APEC coal, oil and gas imports, 2010, reference case
Developing Newly industrialised Developed Total APEC
1.5
13
1999=1.0 2.0
Change in APEC coal, oil and gas exports, 2010, reference case
Developing Newly industrialised Developed Total APEC
1.5
89
Within APEC, energy imports are projected to increase strongly, particularly in economies with limited indigenous energy resources (figure 12). This applies to Japan and Chinese Taipei, for example, reecting the increasing reliance on coal for power generation. On balance, for the APEC region as a whole, the growth in energy imports is expected to be lower than the growth in energy exports from the region, maintaining APECs position as a net exporter of nonoil energy to the rest of the world (figure 13). Higher coal exports are anticipated to be supplied primarily by Australia. However, increasing competitive pressures from other major thermal coal suppliers in the APEC region particularly China and Indonesia will influence Australias coal export performance. Increased gas exports are projected to be sourced mainly from Australia and Indonesia.
90
5
quantifying the impacts of energy market liberalisation
The liberalisation of energy markets in APEC economies is expected to have far reaching implications. By enhancing the efciency of energy supply and investment in the region, reform processes are likely to have both direct and indirect impacts on the regional energy sector. The direct impacts will occur as impediments to market forces in energy industries and services are removed, affecting energy prices, output and trade. However, as energy is a fundamental input to economic activity, changes in relative energy prices will have economywide implications for the composition and level of economic output. The energy sector liberalisation scenarios described in chapter 4 and analysed in this chapter are: comprehensive liberalisation of electricity, gas and downstream petroleum sectors in all APEC economies by 2010; comprehensive liberalisation of the electricity sector only in all APEC economies by 2010; comprehensive liberalisation of the gas sector only in all APEC economies by 2010; partial liberalisation of the electricity sector by 2010 in APEC economies where most of the major reforms are yet to be implemented; and liberalisation of the electricity sector with residual market power as a result of inappropriate market and regulatory design. Results in this chapter are presented for groups of economies according to their level of development. These groups are the developed economies, the newly industrialised economies, China, and the other developing economies. Similarities in terms of the characteristics of energy markets and broader economic structure within these groups mean that the general pattern of responses to energy market liberalisation are comparable. However, there are important differences within these broad groups that can be expected to lead to divergent outcomes. In particular, resource endowments, energy production and consumption patterns and trade proles of individual APEC
economies will affect their responses to energy market reform. Examples of where these factors play a determining role in the outcomes of energy market liberalisation are highlighted in the text. Detailed results for individual economies are presented in appendix C.
Comprehensive liberalisation of energy markets in APEC economies

The liberalisation of energy markets in APEC economies will have both direct and indirect impacts on the energy sector. These include: macroeconomic impacts, or the increases in productivity and output that are driven by competition in energy sectors these indirect economywide impacts arise as efciency in energy markets is enhanced and lower energy prices ow through to the rest of the economy; structural changes in economic output, at both the national and global levels in response to changes in relative energy prices and comparative advantage; and microeconomic or direct impacts on energy consumption, production and trade.
Macroeconomic impacts
As a result of the productivity improvements generated in the electricity, gas and downstream oil sectors by the removal of regulatory and structural barriers to competition and the associated fall in energy prices, total demand for goods and services expands in the APEC region relative to the reference case. This effect is reinforced by the resource allocation benets of liberalisation that is, the efciency gains that are realised when an economys resources are employed in their most productive end use as energy consumers and producers respond to price signals. At the APEC-wide level, gross domestic product (GDP) at 2010 is 0.3 per cent higher than its level in the reference case (gure 14). This is equal to an increase in regional GDP at 2010 of around US$71 billion (in 1999 prices) relative to the reference case. This is broadly comparable to the current size of the individual economies of Chile, the Philippines and New Zealand (gure 15). It is also equivalent to around half the size of the Indonesian economy.
14
0.5 0.4 0.3 0.2 0.1 %
Change in APEC GDP, 2010, following comprehensive liberalisation Relative to the reference case
China
Other developing
Developed
Total APEC
However, the magnitude of the increase in GDP varies widely across APEC economies, reecting, partly, the different degrees of liberalisation required in each economy to achieve fully competitive outcomes in energy markets and, partly, specic resource and structural contexts in each economy. In particular, the gains in economic output are relatively higher for developing APEC economies where signicant reform of energy markets remains to be implemented. Consequently, regulatory and structural impediments to competition at the beginning of the simulation period tend to be more significant in these economies and the potential gains from reform are higher. In developing APEC economies, excluding China, GDP in 2010 is on average around 0.6 per cent higher than the reference case level. This compares with a corresponding increase of 0.4 per cent for the newly industrialised
15
Change in APEC GDP, 2010, following comprehensive liberalisation, compared to GDP of selected APEC economies Relative to the reference case 140
120 100 80 60 40
US$b
(1999 prices)
New Zealand
APEC
Chile
Philippines
Indonesia
93
economies and 0.25 per cent for the developed economies. In China, GDP increases by around 0.3 per cent relative to the reference case in 2010. While it be can be inferred that economies implementing more extensive reforms are likely to achieve relatively higher percentage increases in income growth relative to the reference case, other factors also play a role in determining the scale of expected GDP gains. One of the key factors is the composition or structure of economic output, especially the contribution that energy based sectors, including oil and gas, make to total economic output. Where this is signicant, economies will receive commensurately large direct benets from liberalisation because a greater proportion of their economic output benets directly from regulatory reform. These sectors tend to be relatively larger in developing economies such as Indonesia than in the newly industrialised or developed economies where the manufacturing and services sectors account for a higher share of GDP.
Structural impacts
Underlying the increase in GDP in APEC economies are improvements in the competitiveness of industrial and commercial output resulting from higher productivity in energy industries and lower energy prices. In particular, lower energy prices have a favorable impact on the cost structures of energy intensive industries such as iron and steel, nonferrous metals and other manufacturing. This leads to an increase in the competitiveness of the regions energy intensive sectors relative to other sectors of the economy and relative to energy intensive production in economies outside APEC. Consequently, demand for energy intensive goods rises relative to the reference case, together with the share of energy intensive industries in total economic output from the region. The increase in output of specic industries varies extensively across APEC economies and depends on a range of factors, including the energy intensity of production. The largest expansion in output is projected to occur in electricity intensive industries such as iron and steel, chemicals, rubber and plastics and nonferrous metals (figure 16). This is because electricity is an important input to economic activity and the price effects of deregulation are assumed to be strongest for electricity relative to other energy sources. The reallocation of resources to energy intensive sectors is more pronounced in the developing economies than elsewhere in the APEC region. Developing
16
0.6 0.4
Change in APEC production in selected sectors, 2010, following comprehensive liberalisation Relative to the reference case
Energy intensive Other manufacturing Services Agriculture
0.2
economies are least advanced in the electricity reform process and, therefore, the gains from comprehensive deregulation are most significant. In China, for example, output of nonferrous metals increases by 1.5 per cent relative to the reference case at 2010 while in Thailand, the chemicals, rubber and plastics industry expands by 1.4 per cent relative to the reference case (gure 17). Given that the productivity impacts of further deregulation are assumed to be lower in economies that have already introduced competition in their energy markets, the shift of resources to energy intensive sectors is more limited in the newly industrialised and developed regions (figure 16) but these sectors still expand relative to their reference case levels.
17
1.5 1.0 0.5 %
Change in energy intensive production in selected APEC economies, 2010, following comprehensive liberalisation Relative to the reference case
China Nonferrous metals
Japan Iron and steel
Indonesia Nonmetallic minerals
Philippines Thailand Nonmetallic Chemicals, minerals rubber and plastics
95
18
3 2
Change in APEC energy intensity, 2010, following comprehensive liberalisation Relative to the reference case
1 % China Other developing Newly industrialised Developed Total APEC
The net effect of these structural changes is that economic activity in APEC at 2010 is more energy intensive than in the reference case (gure 18).
Energy consumption impacts

Energy market reform leads to an increase in APEC electricity consumption at 2010 of 2.4 per cent relative to the reference case (gure 19). Electricity consumption grows strongly in economies such as Indonesia, Mexico and Thailand, where electricity prices are projected to fall substantially as a result of the fundamental restructuring required to achieve competitive outcomes in their electricity markets.
19
6 5 4 3 2 1 % China
Change in APEC electricity consumption, 2010, following comprehensive liberalisation Relative to the reference case
Other developing
Developed
Total APEC
96
The increase in electricity consumption in developing economies is driven not only by industrial and commercial sectors but also, importantly, by the residential sector. Liberalisation of electricity markets affects household electricity consumption through two major channels. First, as productivity of the electricity sector is enhanced and the efciency gains ow through to other sectors of the economy, rising personal incomes allow a larger volume of all goods and services, including electricity, to be purchased. This is illustrated in China, for example, where rising incomes have led to an increase in residential electricity use as more urban dwellers move into apartments with central heating and consumers switch to more convenient and cleaner forms of energy for cooking and other energy services. Second, as the price of electricity falls relative to other items consumed by households, residential consumers substitute electricity for other energy sources for personal services such as heating and cooking. Aligned with the increase in electricity consumption and economic output, total primary energy consumption in the APEC region rises by 1.5 per cent in 2010 relative to the reference case (gure 20). While energy consumption rises in all APEC economies, the energy sector implications of energy market liberalisation are different across the region. Growth in energy consumption relative to the reference case is highest in developing economies where structural changes following deregulation favor more energy intensive production. For example, total primary energy consumption rises by more than 4.5 per cent in Mexico and 3 per cent in Thailand relative to the reference case levels in 2010 following the strong expansion of energy intensive industries in these economies. Energy markets in both Mexico and Thailand are currently highly regulated and, therefore, the implementation of comprehensive liberalisation programs leads to significantly higher productivity performance in energy sectors, and lower energy prices. On an APEC-wide basis, natural gas consumption is most affected by the removal of structural and regulatory barriers to competition in energy markets (gure 21). Consumption of natural gas in the APEC region is projected to increase by close to 5 per cent relative to the reference case in 2010. This signicant increase in gas consumption is driven primarily by the enhanced competitiveness of gas as a fuel for power generation relative to coal and oil sectors where the scope for productivity driven price reductions is more limited.
20
4 3 2 1 % China
Change in APEC energy consumption, 2010, following comprehensive liberalisation Relative to the reference case
Other developing
Developed
Total APEC
The shift toward natural gas in the fuel mix for electricity generation features in all APEC economies, with the most substantial increases in gas consumption arising in economies that are furthest from competitive energy markets at the beginning of the simulation period, and in which gas already plays an important role (gure 22). For example, the share of gas in the fuel mix for power generation in Malaysia increases from 65 per cent in the reference case in 2010 to 70 per cent. Similarly, the share of gas red generation in Thailand expands by 3 percentage points relative to the reference case in 2010. In both economies, the gas sector is currently subject to a wide array of regulations and the fuel mix for electricity generation is dominated by natural gas. With the majority of APEC economies having relatively competitive oil markets, the impact of deregulation in the downstream oil sector on oil
21
12 10 8 6 4 2 %
Change in APEC gas, oil and coal consumption, 2010, following comprehensive liberalisation Relative to the reference case
Gas
Oil
Coal
98
22
40 30 20 10 % China
Share of gas in electricity generation fuel mix, 2010
Reference case Comprehensive liberalisation
Other developing
Developed
Total APEC
consumption is less strong than in the case of natural gas and electricity (gure 21). APEC consumption of both crude oil and rened oil rises by less than 1 per cent relative to the reference case in 2010. The largest price and demand impacts occur in developing APEC economies such as Mexico and Indonesia the third and fth largest oil producing economies in the APEC region where oil industries are large and highly regulated. Demand for transport services accounts for the largest share of oil consumption in APEC and is the main driver of increased oil consumption in the region. In contrast with most other APEC economies, oil consumption in Malaysia declines following the deregulation of energy markets. This occurs because, unlike other APEC economies, the transport sector in Malaysia accounts for only one third of total oil consumption. Substitution possibilities for oil are more extensive in residential and industrial sectors than in the transport sector. Consequently, the liberalisation of energy markets in Malaysia leads to a high degree of fuel switching in the nontransport sector primarily toward electricity and natural gas. Even though no liberalisation of coal markets is assumed in this study, deregulation of other energy sectors has indirect implications for coal. With coal accounting for close to 50 per cent of the fuel mix in electricity generation, higher electricity consumption in APEC leads to an increase in coal consumption across the region (gure 22). This is most noticeable in the newly industrialised economies, particularly in Korea and Chinese Taipei, where coal already accounts for more than 40 per cent of the fuel used in electricity generation. Both of these economies have limited indigenous energy
resources, with imported coal being highly cost effective relative to imported LNG and oil. The relatively smaller impacts on coal consumption in developed economies such as Australia and the United States reect not only relatively competitive energy markets in these economies but also their substantial natural gas reserves. As the gas market is liberalised further in these economies, the competitiveness of natural gas for electricity generation is enhanced relative to coal.
Energy production impacts

Stronger demand for energy following the liberalisation of energy markets in APEC is matched by higher regional production of gas, coal and oil. The increase in natural gas output is most signicant and larger than the increase in gas consumption in APEC. As APECs production and consumption of natural gas are largely in balance on a regional scale in the reference case, the relatively higher growth in production implies that APEC becomes a more important supplier of natural gas to the world as a result of liberalisation of energy markets. This is underpinned by the substantial efciency improvements in gas extraction and reticulation industries following deregulation in the region. The expansion of natural gas production is concentrated in APEC economies that are furthest from competitive gas markets and that have large indigenous gas reserves (gure 23). These include, principally, developing APEC economies such as Indonesia, Malaysia and Mexico where gas production is expected to be 1420 per cent higher at 2010 than in the reference case.
23
China Australia Mexico Indonesia China Mexico Malaysia Indonesia Canada
Change in gas, oil and coal production in selected APEC economies, 2010, following comprehensive liberalisation Relative to the reference case
Coal Oil Gas
10
15
20
100
In contrast, APEC oil production is projected to grow only marginally following energy market reform, with an increase in total oil production of less than 1 per cent relative to the reference case in 2010. This occurs because of the more limited scope for reform and productivity improvements in the oil sector in most APEC economies. The bulk of the expansion in the oil industry is attributed to rened oil products in major oil producing economies, particularly Mexico and Indonesia, that are assumed to implement substantial reform in their downstream oil industries (gure 23). Even though the coal sector is assumed not to undergo further deregulation in this study, the enhancement of competition, particularly in the electricity sector, leads to a small increase in coal output. China is the single largest contributor to the expansion in regional coal production (figure 23). The limited impact on coal production in other coal producing APEC economies reects the reallocation of resources toward other sectors such as natural gas and energy intensive manufacturing where competitiveness increases most as a result of reform in the energy sector.
Energy trade impacts

The impacts of energy market liberalisation on energy trade are determined in large measure by the changes in regional energy consumption and production. For electricity, the changes in consumption and production are almost identical across most APEC economies, reecting limited cross-border electricity trade in the region. The main exceptions to this observation are electricity sales between the United States and Canada, the United States and Mexico, and between China and Hong Kong, China. The changes in relative competitiveness resulting from the reform of energy markets determine the electricity trade impacts in economies with established transborder transmission networks. For example, as electricity generated in Canada and Mexico becomes more competitive relative to electricity generated in the United States because of more fundamental reform in the former two economies, imports of electricity into the United States increase by 17 per cent compared with the reference case in 2010. However, this is of little significance for overall electricity consumption in the United States because electricity imports account for just 1 per cent of consumption.
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In contrast, gas trade is highly affected by the removal of barriers to competitive energy markets (gure 24). Increased demand for imported gas is particularly strong in key north east Asian markets where substantial deregulation is implemented. For example, Japan and Korea are expected to increase their LNG imports by around 8 per cent and 10 per cent respectively relative to reference case levels in 2010. Similar but less pronounced trends are anticipated in other smaller markets for imported natural gas such as Chile and Mexico. Increased demand for gas imports, mainly in Asian economies, relative to the reference case is supplied primarily by major gas exporters to the region, in particular Indonesia and Malaysia. These economies not only have a comparative advantage in gas production because of their large gas reserves but, more importantly, realise a substantial improvement in their international competitiveness relative to other gas exporting APEC economies such as Canada. Indeed, gas exports from Canada, representing more than half of total gas trade in APEC, are largely unchanged as a result of energy market liberalisation. Gas exports from Canada are dominated by pipeline gas to the United States and as gas markets in both Canada and the United States are already widely liberalised, the impacts of further deregulation are small. In addition, liberalisation of electricity markets in the newly industrialised economies of Korea and Chinese Taipei, as well as in Japan, creates an additional demand for coal imports to these resource poor economies. Low cost coal producers that do not increase their domestic coal consumption substantially as a result of energy market deregulation are the main suppliers of the higher regional demand for coal. Australian coal exports at 2010,
24
10 8 6 4 2 %
Change in APEC gas, oil and coal trade, 2010, following comprehensive liberalisation Relative to the reference case
Gas Oil Coal
Exports
Imports
102
for example, are around 1 per cent higher than in the reference case. Conversely, coal exports from other major suppliers to the APEC region, such as China and Indonesia, are projected to decline relative to the reference case as resources are attracted to deregulated oil and gas sectors and coal exports are constrained by higher domestic consumption. In comparison with gas and coal, oil trade in APEC is less affected by energy market liberalisation. At the aggregate regional level, oil imports are virtually unchanged as a result of liberalisation initiatives (gure 24). This result is consistent with the relatively small changes in APEC oil consumption and production. Further, more than two-thirds of APEC oil imports are sourced from non-APEC economies, with major oil importers in the Asian region, namely Japan and Korea, dependent on imports from the Middle East for the vast majority of their domestic oil requirements. Despite the small trade impacts for APEC as a region, there are signicant differences across individual APEC economies, reecting their oil resource endowments and oil industry structures. Larger changes in oil trade are expected to occur in developing APEC economies relative to newly industrialised and advanced economies. Deregulation of the downstream oil sector in developing economies that are assumed to require more extensive reforms to reach a fully competitive market, such as China and Indonesia, leads to an increase in crude oil imports in these economies relative to the reference case. Crude oil imports in Indonesia, for example, are 16 per cent higher than the reference case level in 2010, albeit from a low base. On the other hand, imports of rened oil products are projected to fall in these economies, with Indonesian imports, for example, falling by 8 per cent compared with the reference case. In net terms, Indonesias total oil imports increase by around 2 per cent relative to the reference case in 2010. This implies that, as the rened oil sector becomes more competitive relative to the upstream oil sector following deregulation, it is more cost effective to import crude oil for domestic processing than to import refined oil for domestic consumption. In the case of Indonesia and Mexico, the gains in international competitiveness in the oil rening industry are sufciently large to generate a substantial increase in exports of rened oil products from these economies relative to the reference case. The increase in exports of rened oil by developing APEC economies largely displaces exports from other APEC economies. For example, the results
indicate that exports of refined oil products from Canada are likely to be lower than the reference case level in 2010 by approximately 1.5 per cent. Both newly industrialised and developed APEC economies are projected to import less crude oil but more rened oil products in response to the shifts in relative competitiveness arising from the different patterns of productivity gains within APEC. From an APEC perspective, deregulating the oil sector in tandem with electricity and gas industries leads to slightly lower oil imports relative to consumption. The lower reliance on oil imports could be interpreted as an improvement in energy security. Nonetheless, the introduction of competition in energy markets can have wider repercussions for the reliability and security of energy supply (see box 4).
Energy market liberalisation and energy security in APEC
Energy security has long been a key policy priority in many APEC economies. The need to strengthen the security and reliability of energy supply to meet energy demand requirements in APEC economies has been reinforced in the light of the terrorist attacks in the United States in 2001. In this context, APEC Leaders and Ministers endorsed the APEC Energy Working Groups strategic approach to implementing the APEC Energy Security Initiative as part of the Shanghai Declaration in October 2001. Against this background, it is pertinent to consider the implications of energy market liberalisation for energy security in the APEC region. Energy security considerations in APEC are dominated by oil, reflecting the high dependence of APEC economies on oil imports, the concentration of proven global oil reserves in the Middle East and concerns about the security of shipping routes linking the Persian Gulf to Asia. In 1999, crude oil imports accounted for around 55 per cent of regional oil consumption. For APEC as a whole, oil supplies from the Middle East accounted for approximately 28 per cent of oil consumption, while the corresponding gure for Asian member economies was as high as 55 per cent. Reecting widely disparate patterns of oil production and consumption, net oil import requirements vary strongly across APEC member economies, with Japan, the United States and Korea the largest oil importers, and Mexico, Canada and Indonesia the leading oil exporters. The impact of energy market deregulation in APEC on oil imports is characterised in this study by a small increase in crude oil imports matched by a small
Continued
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Sensitivity of results to the coverage of liberalisation

The analysis presented above is based on the assumption that liberalisation initiatives are adopted in the APEC region concurrently across all key energy sectors where there are still signicant impediments to competition, namely electricity, natural gas and downstream oil sectors. The sensitivity analyses presented in this section are designed to identify the sectors where most of the signicant impacts arise under a multisectoral approach to liberalisation. Further, given that energy market reform is a complex and resource intensive process, it is likely that some economies will focus on priority sectors and implement liberalisation policies in a less comprehensive manner within the timeframe of this study. These sensitivity analyses provide some insight
Energy market liberalisation and energy security in APEC

continued
decrease in imports of petroleum products. In net terms, oil imports are virtually unchanged for the region as a whole. Given the relatively larger increase in regional oil consumption, this suggests that, from an APEC wide perspective, the pursuit of energy security objectives, dened narrowly in terms of lower oil import dependence, is likely to be advanced through regulatory and structural reform in energy markets. However, there are other aspects of energy sector deregulation that are not captured by the concept of oil import dependence but which contribute to enhanced energy security in a broader sense. Energy security is highly contingent on the improved efciency of energy markets and an outward looking regime that ensures reliable trading networks. In relation to oil, this involves the opening of trade regimes, the development of adequate infrastructure in terms of receiving terminals, pipelines and reneries, and the removal of impediments to the efcient operation of domestic oil markets. More generally, the achievement of energy security objectives in APEC is closely linked to the liberalisation of other key energy markets in particular electricity and natural gas. Deregulation of these markets can be expected to improve the reliability of access to energy resources by providing economic incentives to expand interregional gas pipelines and electricity networks, particularly in the Asian APEC region where network industries are relatively less developed. Such developments not only provide opportunities for APEC economies to complement each other in the provision of energy resources but also to lower the cost of energy supply.
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into the potential impacts of deregulation if it is limited to only one key energy sector.
Liberalisation of the electricity sector only

Because electricity is an important input to economic activity and reform of the sector has the potential to deliver a significant productivity boost to economies implementing wide ranging deregulation programs, the electricity supply industry has led the reform agenda to date. It is also the focus of proposed reform programs in many APEC economies. The results of the simulation presented in this section illustrate the potential impacts when the coverage of liberalisation policies is limited to the electricity sector. The results suggest that a large proportion of the gains in GDP from comprehensive liberalisation is attributable to the liberalisation of electricity markets (gure 25). This is supported by the signicant role that electricity plays as an input to production processes and in household expenditure. The results also reect the highly regulated regimes that currently characterise the electricity industry in many APEC economies. As a result of the liberalisation of electricity markets only, GDP in the APEC region at 2010 is 0.25 per cent higher than the reference case compared with a difference of 0.3 per cent in the comprehensive liberalisation scenario. A shift in the production structure to energy intensive sectors is also evident in this scenario as electricity intensive sectors enhance their competitiveness relative to other sectors in the economy.
25
5 4 3 2 1 %
Change in APEC GDP and energy consumption, 2010, following comprehensive liberalisation and electricity liberalisation only Relative to the reference case
Electricity only All energy sectors
GDP
Electricity
Gas
Oil
Coal
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While the impacts of electricity sector liberalisation on income and energy intensive output are broadly comparable with the impacts of comprehensive deregulation on these variables, the effects on the composition of primary energy consumption are signicantly different. When the electricity sector is liberalised as part of a comprehensive reform package that includes the gas and oil sectors, there is a marked shift to natural gas in the energy consumption mix. Alternatively, when liberalisation is restricted to the electricity industry alone, coal assumes a greater role in primary energy consumption (figure 25). Coal consumption in the APEC region rises by 1.7 per cent relative to the reference case at 2010 while the corresponding change under a comprehensive deregulation scenario is 1.4 per cent. Conversely, gas consumption increases by only 0.6 per cent with partial liberalisation compared with 5 per cent under comprehensive liberalisation. This is because coal is an important substitute for gas in electricity generation. When the gas market is not liberalised, the relative competitiveness of natural gas and coal is unchanged, thereby reducing the incentive to switch to gas in the power generation sector.
Liberalisation of the gas sector only

As the fastest growing source of energy demand, natural gas is likely to play an increasingly important role in the fuel mix in the APEC region. It is already the dominant fuel used for electricity generation in several developing APEC economies. In this simulation, it is assumed that energy market liberalisation initiatives in APEC are focused on the natural gas sector alone.
26
4 2
Change in APEC GDP and energy consumption, 2010, following comprehensive liberalisation and gas liberalisation only Relative to the reference case
Gas only All energy sectors
2 GDP Electricity Gas Oil Coal
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Compared with the benefits achieved under comprehensive liberalisation, the income, structural and energy sector outcomes of gas market liberalisation undertaken independently of reform in other key energy sectors are relatively modest (gure 26). This is because natural gas represents only a small component of energy consumption and production in APEC. Further, around 80 per cent of natural gas production in APEC is in the United States, Canada and Australia economies that already have relatively open and competitive gas markets. The benefits of liberalising natural gas markets alone are concentrated in developing APEC economies where substantial reform is assumed to occur and where gas production and distribution sectors contribute to a larger share of economic output. These include economies such as Indonesia, Malaysia and Mexico where significant domestic gas resources are available. The competitiveness of gas and energy intensive industries in these economies is enhanced substantially relative to competing industries in the United States, Canada and Australia in particular. Gas exports from developing economies therefore expand significantly at the expense of exports from developed economies. For example, exports of natural gas from Indonesia and Malaysia are more than 20 per cent higher at 2010 than in the reference case. For these two economies, the export results are broadly in line with those achieved under a comprehensive liberalisation scenario. Even though the macroeconomic impacts of liberalisation of the gas sector are relatively modest, the substantial increase in gas consumption that is likely to result from regulatory reform underscores some important policy implications for APEC. In particular, the enhanced role of natural gas will require signicant investment in both gas supply infrastructure and end use equipment.
Sensitivity of results to the timing of liberalisation

In addition to the coverage of energy market liberalisation, the timing of liberalisation is another element of reform that can vary from the assumptions adopted in this study. Given the considerable uncertainty about the timing and pace of reform proposals across APEC economies, it is possible that the actual time horizon for liberalisation will be much longer than that assumed in this study. Indeed, adjustment to original reform schedules has already been evident in a number of member economies, often in response to political pressures, and to a lesser extent, as a result of technical issues.
The analysis presented above assumes that APEC economies commence the liberalisation process, as dened in the simulations, in 2002 and realise the full benefits of reform by 2010. The results are indicative of the potential impacts of reaching fully liberalised energy markets. In order to illustrate the impacts of potential setbacks in the reform process, it is assumed in this simulation that some economies progress electricity liberalisation agendas at a slower pace than others. In particular, APEC economies that are yet to implement many or most of the major reforms required to attain fully competitive electricity markets (groups 2 and 3 in chapter 4) are assumed to move half way toward the achievement of fully competitive markets by 2010. These economies are assumed to realise only 50 per cent of the productivity gains that are assumed in the standard simulations. The revised productivity assumptions are outlined in table 14. On the other hand, APEC economies that are already advanced in terms of electricity market reform (group 1 in chapter 4) are assumed to complete the reform process by 2010 and achieve the full benets of liberalisation by the end of that period. The productivity assumptions for these economies are the same as in the original simulation, as outlined in table 11. Reecting the weaker productivity performance when most APEC economies implement only a proportion of the reforms necessary to create a liberalised electricity market by 2010, the benets obtained in terms of real output growth are smaller. This is more evident in developing and newly industrialised economies where delayed or slower reform processes reduce the scope for achieving a more efficient allocation of resources over the period to 2010
27
2.5 2.0 1.5 1.0 0.5 %
Change in APEC GDP and energy consumption, 2010, following full and partial electricity liberalisation Relative to the reference case
Full electricity liberalisation by 2010 Partial electricity liberalisation by 2010
GDP
Electricity
Gas
Oil
Coal
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(gure 27). In the developing economies (excluding China), GDP in 2010 is 0.15 per cent higher than in the reference case compared with an increase of 0.25 per cent when liberalisation objectives are met by 2010. As a corollary of the strong trade linkages within the APEC region, developed economies are also affected by partial liberalisation in newly industrialised and developing economies. Advanced APEC economies that realise all the potential benefits of liberalisation by 2010 improve their competitiveness relative to most developing and industrialised economies compared with the situation where liberalisation of the electricity sector is finalised across all APEC economies by 2010. This is highlighted by the signicant expansion of energy intensive output in Australia, for example, where exports of energy intensive commodities are principally targeted to newly industrialised APEC economies. However, enhanced international competitiveness in these developed economies is largely offset by lower economic growth in APEC economies that only partially reform their electricity industries by 2010. The energy consumption impacts of slower electricity market liberalisation are strongly correlated with the impacts on GDP. When liberalisation is implemented over a longer time frame, energy consumption rises less strongly in 2010 relative to the reference case. For the APEC region as a whole, total primary energy consumption rises by 0.6 per cent relative to the reference case at 2010 while the corresponding increase under a faster timetable is 0.8 per cent.
Sensitivity of results to market and regulatory design

Appropriate market and regulatory design is critical to ensuring that liberalisation of energy markets delivers the expected benefits. A competitive market structure will only develop if energy suppliers are not in a position to exercise market power by raising prices above competitive levels or restricting output below that which would prevail in a competitive environment. Further, as markets are allowed to play a more important role in inuencing energy consumption and production decisions, the regulatory framework required to address issues associated with natural monopolies and externalities needs to be compatible with a system that seeks to foster competition and efciency.
In the earlier simulations analysed in this chapter, it is assumed that energy sector liberalisation undertaken in APEC economies is designed in a way that achieves fully competitive market outcomes. In particular, it is assumed that the improvements in efciency and reductions in production costs that result from increased competition are passed on to the consumer in the form of lower energy prices. However, if poor market design and regulatory policies are adopted, liberalisation efforts may fail to deliver the expected outcomes. Policy failures of this nature are well demonstrated by the events related to the energy problems in California in 2001. In addition to tight supply and demand conditions, the exercise of market power by generators, compounded by the lack of demand-side participation were key factors that led wholesale electricity prices to escalate to levels well beyond expectations (Swan and Short 2001). This experience provides the basis for considering the potential impacts of residual market power in electricity markets. Electricity wholesale markets are highly vulnerable to the exercise of market power because of the economic and physical characteristics of electricity production and delivery. In this sensitivity analysis, it is assumed that liberalisation of electricity markets in APEC economies is not fully effective in removing the scope for the exercise of market power by generators. Consequently, the cost savings achieved by electricity producers through liberalisation are not fully passed on to electricity users in terms of lower prices but instead contribute to increasing the prot margins of the electricity utilities.
28
2
Change in APEC GDP and energy consumption, 2010, competitive and noncompetitive electricity market outcomes Relative to the reference case
Fully competitive electicity market Residual market power
% GDP Electricity Gas Oil Coal
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In line with expectations, the results of this analysis suggest that the implications of liberalisation under these circumstances are likely to diverge from those in a fully competitive market. By limiting the availability of lower priced electricity to end users, liberalisation with residual market power leads to lower electricity consumption and primary energy consumption than would be the case under full competition (gure 28). This is because the economywide impacts of liberalisation and the underlying shift of resources toward energy intensive sectors are reduced. For the APEC region, electricity consumption increases by 0.2 per cent relative to the reference case in 2010. This compares with a corresponding increase of more than 2 per cent relative to the reference case where end users are also direct beneciaries of the reform process.
Investment in deregulated energy markets

All of the simulations presented above indicate that energy market liberalisation is likely to lead to increases in energy consumption that could be quite signicant. When markets are liberalised comprehensively and simultaneously, as discussed in the rst simulation, the largest increases in consumption occur in electricity and natural gas. This implies that in order to realise the benefits of liberalisation, substantial investment in electricity and gas infrastructure could be required. This investment will be additional to that which is necessary to satisfy the increased demand for electricity in the reference case. The reference case projections indicate that electricity generation capacity in all APEC would need to rise by more than 25 per cent over the period from 2001 to 2010 to accommodate the expected increase in electricity consumption. Increases in gas pipelines and LNG processing facilities would also be substantial. In the case of electricity, it is estimated that additional generation capacity of approximately 330 gigawatts would be required to meet the projected increase in electricity consumption throughout the APEC region. Of this, around 205 gigawatts would be required in the developing and newly industrialised economies. This implies investment in generation capacity for all APEC of approximately US$530 billion (1999 dollars). These investment cost estimates are based on a number of assumptions relating, principally, to the discount rate used and the electricity generation capacity factor. In this case, a discount
rate of 5 per cent is used to approximate the opportunity cost of capital. The total investment costs would rise if a higher discount rate were used. The plant capacity factor, or the proportion of total capacity that is used to generate electricity, is assumed to be 75 per cent. Additional investment costs would increase if a lower capacity factor were assumed. Information on the cost of investing in new capacity by fuel is from NEA/IEA (1998). In the comprehensive liberalisation scenario described earlier, total electricity consumption in APEC at 2010 is almost 2.5 per cent higher than its reference case level. In the developing and newly industrialised economies the increase relative to the reference case is much higher at up to 6 per cent. Using the same assumptions as above, the additional investment required to ensure that this level of electricity consumption can be met is estimated to be around US$48 billion (1999 dollars) (figure 29). This is equal to 9 per cent of the total investment in electricity generation capacity over the reference case period. About 54 per cent of this investment will be required in the developing and newly industrialised economies (gure 30). These estimates of investment requirements in the electricity sector are lower than they are likely to be in reality because they are related to generation capacity expansion only. In fact, additional investment will also be required in other areas of electricity supply such as transmission and distribution networks. A signicant proportion of these additional investment requirements will also be in the developing and newly industrialised economies, reflecting the relatively large potential changes in energy consumption in regions where most of the major elements of reform are yet to be introduced.
29
Change in investment in electricity generation capacity to 2010, following comprehensive liberalisation Relative to the reference case
Capacity factor: 75% Capacity factor: 65%
60
40
20
1999
US$b Discount rate: 5% Discount rate: 10%
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30
Investment in electricity generation capacity at 2010, following comprehensive liberalisation Relative to the reference case
Developed 46%
Developing 40%
Newly industrialised 14%
The enhanced role of natural gas in APEC economies will also create the need for more investment in gas supply infrastructure relative to the reference case. Gas consumption in APEC in the comprehensive and simultaneous simulation expands by 5 per cent, or approximately 55 million tonnes of oil equivalent, by 2010 relative to the reference case. Again, a large proportion of the increase is projected to occur in the developing and newly industrialised economies. Delivering additional gas of this magnitude will involve investment in both gas producing and consuming economies in the region. In gas producing economies this will involve the further development of gas pipelines or the expansion of LNG export terminals and related infrastructure. In gas importing economies, expansion of LNG receiving terminals and gas distribution networks will be required. The total additional investment in gas supply infrastructure that will be necessary to support the substantial increase in natural gas consumption in APEC is difcult to estimate because of the considerable variation in gas consumption, production and trade proles throughout the region. Nonetheless it is likely to be high. Ensuring that sufcient investment is available to support growth in energy markets is a particularly important issue for the developing and newly industrialised economies. This is because it is in these economies that the largest energy supply capacity expansions are projected to occur. Further, new capacity additions will represent a greater proportion of total capacity in these economies and they are, therefore, at greater risk of not achieving secure energy markets if the necessary investment is not forthcoming. This can be compounded by the actual and perceived risk attached to investment in
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developing regions by lending institutions. Underdeveloped or uncertain regulatory or investment frameworks can add to this assessment. Liberalisation of energy markets can, of course, be a key factor for attracting investment in the sector. By removing impediments to private investment, both domestic and foreign, by establishing property rights and by otherwise increasing returns to capital, regulatory reform can create an attractive environment for investment ows. Nevertheless, if the benets of liberalised energy markets are to be fully captured it is important that economies ensure that their investment regimes, including foreign investment, are open and supportive. APEC initiatives that encourage the facilitation of investment ows in parallel with energy market reform will be particularly benecial in this regard.
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6
conclusions
Energy markets in APEC are undergoing signicant reform in response to competitive pressures to deliver lower energy prices and secure adequate private sector capital for the expansion of energy infrastructure. While the specic objectives of reform vary across APEC economies, the overriding aim is to encourage efcient energy supply and use. Even though the details and timing of reform proposals vary widely, several key elements characterise the reform models that are being considered or implemented throughout the APEC region. In general, the reforms are focused on limiting government intervention, allowing market forces to work in segments of energy industries where competition is feasible and establishing an effective regulatory framework for the segments that are not amenable to competition. The ndings in this study indicate that comprehensive liberalisation of electricity, natural gas and downstream oil markets could have signicant implications for economic growth in the APEC region, as well as for energy consumption, production and trade. The most substantial impacts are expected to occur in developing APEC economies where energy market reform is least advanced. For APEC as a whole, the gain in GDP translates into an increase in regional economic output at 2010 of around US$71 billion (in 1999 prices) larger than the current size of the New Zealand economy and approaching the size of the current economy of Chile. The results from the modeling simulations also demonstrate that the increase in economic activity in APEC following energy market reform leads to increases in energy consumption. This is in response to lower energy prices and a shift in the structure of economic output to more energy intensive sectors. Most of the productivity gains following energy market reform occur in the electricity and gas sectors where regulation is currently strongest. Indeed, the results indicate that liberalisation of electricity sectors in APEC economies
makes the single largest contribution to the overall GDP gains. This is because electricity plays a fundamental role in most economies as an input to production processes and as a component of household expenditure. As a result, consumption of electricity and natural gas rises more strongly in APEC economies after regulatory reform than consumption of other fuels. The increase in gas consumption reects in large part its increasing competitiveness for power generation. The shift toward natural gas is a feature in all APEC economies, with the most substantial increases occurring in economies that are furthest from liberalised markets and in which gas already plays a signicant role. In response to stronger regional energy demand, production of fossil fuels in APEC economies also increases following the implementation of regulatory reform, relative to the reference case. This is, again, particularly strong for natural gas. Because of the productivity boost to the natural gas industry in the region APEC also becomes a more competitive gas supplier to international markets and total gas trade increases. In the case of oil, APECs net dependence on imports declines following energy market reform, although lower dependence on imports of oil products is partly offset by increased imports of crude. The results of the modeling simulations also demonstrate the importance of effective energy market design if the benets of liberalisation are to be fully realised by APEC economies. Poor market design could, for example, allow electricity generators to exercise market power, especially in the wholesale market that is vulnerable to noncompetitive behavior. This could result in generators retaining the efciency dividends of liberalisation as higher profits rather than passing them through to end users in the form of lower prices. The study highlights some important implications for APEC energy policy makers. The size and structure of member economy energy sectors will change following comprehensive liberalisation of energy markets. This will necessitate signicant investment in energy infrastructure, particularly in the electricity and natural gas sectors. Investment in the developing economies, in particular, will be critical to ensuring that the benets of liberalisation are achieved. In this context, the development of policy initiatives to facilitate investment, including private and foreign investment, will be important. The APEC
Natural Gas Initiative provides a useful example of a framework for accelerating investment in natural gas supplies, infrastructure and trade networks in the APEC region. The initiative recognises that, with growing demands on limited government resources, the private sector will play an increasing role in meeting gas infrastructure nancing requirements. The initiative highlights the need to establish stable, transparent and predictable legal, scal, regulatory and trade regimes affecting natural gas markets in APEC economies. The study also indicates that energy market reform can contribute to meeting some of the key energy policy principles endorsed by APEC Energy Ministers. These include the development of more efcient production, distribution and consumption of energy, the pursuit of open energy markets, and the promotion of capital ows. Reform can also assist APEC economies to achieve their important policy objective of ensuring stable, secure and reliable energy supplies.
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appendix
energy reform plans and progress selected APEC economies

Australia
The Australian electricity supply industry has undergone substantial reform since the federal and state governments together endorsed the introduction of a competitive national electricity market in 1995. Prior to the implementation of reforms, the industry largely comprised publicly owned, vertically integrated monopoly suppliers which operated in separate regulated state markets. Restructuring has included the vertical separation of generation, transmission and distribution, and retail supply, while deregulation has removed barriers to interstate trade in electricity. Assets have been privatised to varying degrees across the states. Reforms to corporatise or commercialise all remaining government utilities have placed publicly owned electricity suppliers on a more competitively neutral footing with their private sector counterparts (Productivity Commission 1999). The national electricity market, which commenced operation in 1998, is a mechanism for balancing electricity demand and supply in five states and territories in eastern and southern Australia. The market is structured around a compulsory pool or spot market for the wholesale trade of electricity between generation and retail businesses. An independent system operator operates the national electricity market according to the national electricity code. The code requires nondiscriminatory access to the entire transmission and distribution network. The code also gives consumers the ability to choose their retail supplier. The contestability of consumers is to be phased in according to state based timetables. Full retail contestability has already been introduced in some states. Before the initiation of a reform process in the mid-1990s, the downstream Australian natural gas industry was also largely characterised by separate state markets served by vertically integrated monopolies, mostly state owned. The utilities generally relied on one or a few private producers to supply gas under long term contracts. Since 1995, reforms have progressed in three key
areas: the development of a national pipeline access regime; removal of legislative and regulatory barriers to competition; and structural reform of gas facilities and utilities (Productivity Commission 1999). All public gas utilities have been either privatised, corporatised or prepared for privatisation. Oil exploration and production in Australia is undertaken by private rms under permits granted by the federal government (for offshore resources) and the state governments (for resources onshore and in coastal waters). Four vertically integrated oil companies each own two of the eight reneries. They also own retail petrol stations. Reforms to promote downstream competition have been introduced since a major review in 1996 (IEA 2001b).
Canada
Vertically integrated state owned monopolies have traditionally dominated the Canadian electricity industry, and continue to do so in many provinces. However, major reforms have been implemented in some provinces. Alberta has implemented a major reform program, starting with the introduction of wholesale competition in 1996 and culminating in the introduction of full retail competition in January 2001. Ontario planned to implement full retail access in May 2002 (National Energy Board Canada 2001). Most other provinces have implemented or are planning to implement wholesale competition. Aside from Alberta and Ontario, no other provinces are planning to introduce full retail competition. The upstream gas industry comprises around 1000 private companies. Transmission is also carried out by private rms (with the exception of one system in Saskatchewan). Distribution is carried out by 16 utilities, mainly privately owned, each with a regulated monopoly over certain regions. Third party access is allowed to distribution networks. Ontario was one of the rst jurisdictions in north America to allow residential and other small consumers to buy gas competitively, from 1984 (IEA 2000). All oil exploration and production is carried out by private firms under licences granted by federal and/or provincial governments. The federal government holds a small stake in one oil company, Petro Canada, but it is planning to sell its share. Coal production in Canada is mainly from privately owned surface mines. With the exception of support for the government owned Cape Brereton
Development Corporation, which is to be privatised, Canada provides no subsidies to coal mining (IEA 2000).
Chile
Chile was the rst economy worldwide to restructure its electricity supply industry. Over the past decade the industry has been completely privatised and generation, transmission and distribution have been separated. The industry now comprises 26 generation companies, 5 transmission companies and 36 distribution companies. Generators can sell to the spot market or directly to distribution companies or large consumers. Owners of transmission networks are required to offer open access, with prices negotiated between generators and transmission companies. Consumers have access to competitive retail markets. Consumers with annual consumption less than 2 megawatts are required to purchase from distributors, but plans to reduce the limit, to allow smaller consumers to deal directly with generators, are currently being considered. New regulations to make private investment in the industry more attractive are expected to be approved in 2002. The state owned oil and gas company, Empresa Nacional de Petroleo (ENAP), dominates the upstream oil and gas industries. Private rms are involved in exploration and production joint ventures with ENAP. All natural gas transmission and distribution pipelines are privately owned, and owners are required to provide open access. Gas distribution companies do not have the right to be sole providers of gas in any region. ENAP also owns the three domestic oil reneries, which compete with imported petroleum products. Private oil companies compete in an open retail market. Chile has limited coal production. Imports account for almost 80 per cent of its thermal coal demand, and 100 per cent of coking coal demand. Domestic production is controlled by the national coal company ENACAR.
China
The State Power Corporation of China (SPCC) is involved in all stages of electricity supply in China. State owned generators, which are afliated with either SPCC or regional utilities, account for approximately half of total supply, with IPPs accounting for the rest. IPPs, which have been allowed
since 1984, must sell to SPCC or the regional utilities under long term contracts. The six regional transmission networks are controlled by SPCC, while the distribution arms of SPCC and the regional utilities are responsible for distribution and retailing. The industry is regulated by central and local governments. Proposed electricity reforms are designed to encourage competition between generators. IPPs and state owned generators will compete to sell electricity to a single buyer which will then be the single seller to the state owned distribution utilities. A new state owned enterprise will operate the unied transmission network. Pilot programs involving competitive generators selling to a single buyer have been run in Zhejiang, Shandong and Shanghai (World Energy Council 2001). Upstream oil and gas activities are dominated by four state owned enterprises. Foreign companies are involved through production sharing arrangements. Downstream gas functions are largely controlled by China Petrochemical Corporation (SINOPEC). Foreign rms have been involved in gas pipeline projects with minority stakes. Regulatory changes made in 2000 open the way for foreign rms to take majority stakes. China National Petroleum Corporation (CNPC) and SINOPEC own most of the rening capacity and pipeline and storage infrastructure. The two rms are also responsible for sales and marketing of petroleum products and petrochemicals. Imports are subject to tariffs, quotas and taxes. Price restraints apply to domestic sales of rened products. Chinas upstream coal industry comprises more than 90 key state owned mines as well as local mines administered by provincial and county governments and township or private mines managed by small collective organisations or individuals. A legal framework is in place to attract foreign investment in coal exploration and production. China plans to aggregate the large state mines into seven corporations by the end of 2005.
Hong Kong, China

Two vertically integrated private rms, the Hongkong Electric Co. Ltd (HEC) and CLP Power Hong Kong Ltd (CLP Power) supply electricity in Hong Kong, China. HEC supplies Hong Kong Island, Ap Lei Chau and Lamma Island and CLP Power supplies Kowloon and the New Territories. The
Scheme of Control Agreement between the government and the power companies denes the regulatory framework. The current agreement expires in 2008. There are no rm plans for reform. Natural gas, sourced from the South China Sea, is used solely for power generation. All aspects of supply are controlled by private rms. Towngas and LPG are supplied to residential and commercial consumers by private rms. While there have been calls for imports of natural gas as an alternative to towngas, no rm plans have been put forward. The market for petroleum products in Hong Kong, China is highly concentrated and vertically integrated, with three oil companies (Shell, Caltex and Mobil) occupying 90 per cent of the petroleum market and 80 per cent of the diesel market. Over the past year the government has taken some steps to encourage competition restrictions on bidders for petrol station sites have been relaxed, existing sites have been put up for tender when leases have expired and petroleum product prices, among the highest in the world, are being monitored.
Indonesia
State owned Perusahaan Listrik Negara (PLN) is involved in all stages of the Indonesian electricity supply industry. IPPs account for around 20 per cent of total output and are required to sell to PLN under power purchase agreements. Around 50 per cent of industrial demand is met by self generation, largely due to concerns about supply reliability. The Directorate-General for Electricity and Energy Development of the Ministry of Mines and Energy regulates the industry. Legislation to encourage new investment and competition in generation is currently before the parliament. The government recently raised regulated electricity tariffs by about 29 per cent in an effort to encourage private investment (World Energy Council 2001). Further major reform plans, outlined in the Power Sector Restructuring Policy 1998 include unbundling of PLN and establishment of competitive, multibuyermultiseller, markets in Java and Bali by 2003. Indonesias oil and gas industries are dominated by state owned Pertamina. There is some private sector involvement in upstream activities through production sharing contracts with Pertamina. Pertamina owns the nine oil
reneries and has a monopoly over distribution and retailing of petroleum products. It also has a monopoly in transmission and distribution of natural gas, and retails gas along with state owned PT Gas Negara. Indonesia is the worlds largest LNG exporter. New oil and gas legislation, passed by the parliament in October 2001, will abolish Pertaminas upstream and downstream monopolies and open the way for unbundling and privatisation after 2003. Indonesia is a major coal exporter exports representing around three-quarters of total production. The government, through the Ministry of Energy and Mineral Resources, grants permits for coal production. There are no specic export restrictions.
Japan
Ten privately owned vertically integrated utilities with regional monopolies dominate the Japanese electricity industry. The rst step toward deregulation of the industry was an amendment to the Electricity Utilities Industry Law in 1995 to allow IPPs to tender to supply wholesale power to the ten regional monopolies. The successful IPP tenders should, when on stream, provide around 3 per cent of power to the established companies. Further reform was initiated in March 2000 with the partial liberalisation of retail sales to large users. A requirement that all new thermal power stations from 2009 be subject to competitive bidding from all sources was also introduced in 2000. A review of the effectiveness of the reforms is due in March 2003. Imported LNG accounts for around 97 per cent of Japans gas supply. It is mainly used for electricity generation. The limited gas distribution network is owned and operated by private vertically integrated utilities with regional monopolies. Consumers with annual consumption greater than two million cubic feet are permitted to negotiate directly with producers. There are plans to reduce the threshold for contestability to one billion cubic feet annual consumption. There is no upstream oil industry in Japan. The downstream industries were deregulated in the mid-1990s. Removal of restrictions on imports of petroleum products has resulted in consolidation of oil rening companies while deregulation of the retail sector has resulted in an increase in the number of service stations.
Japan also relies on imports to meet its coal demand. The last coal mine in Japan ceased production in early 2002 (EIA 2002c).
Korea
The Korea Electric Power Corporation (KEPCO), majority (51 per cent) state owned and vertically integrated, currently dominates the Korean electricity supply industry. IPPs account for only 6 per cent of generating capacity (World Energy Council 2001), and must sell their output to KEPCO, which is also the monopoly supplier of transmission, distribution and retailing services. The Base Law for Restructuring the Electricity Supply Industry, announced in 1999, proposes the phased unbundling of generation, transmission and distribution, privatisation of KEPCOs generation and distribution assets from 2002, the introduction of a competitive wholesale market from around 2003 and the eventual introduction of full retail competition after 2009. The rst phase is currently being implemented. KEPCOs generation assets are being split into ve separate companies plus a nuclear subsidiary. The nonnuclear generation companies are to be privatised. State owned Kogas is the monopoly supplier of natural gas in Korea. It is the sole importer of LNG, which Korea relies on for virtually all of its gas. Under major reform plans, Kogas is to be split into two groups one responsible for importing and wholesaling, the other for supply facilities, including import terminals, pipelines and storage infrastructure. The company responsible for supply facilities will be a regulated monopoly, while the other will be broken into three subsidiaries and sold to the private sector. The wholesale market is to be opened to competition in 2003, followed by the retail market. Korea has no upstream oil industry. The downstream industry has been deregulated and the four local reneries compete with imports. Reneries are able to sell through agents or direct to petrol stations. Agents provide transport and service facilities.
Malaysia
State owned utilities Tenaga Nasional Berhad (TNB), Sabah Electricity Sdn. Berhad (SESB) and Sarawak Electricity Supply Corporation (SESCo) are
vertically integrated and have regional monopolies. IPPs, rst established in the early 1990s, supply around 37 per cent of total demand, selling to TNB through power purchase agreements. There are no interconnections between the three utilities, but TNBs network (in Peninsular Malaysia) is connected to Singapore and Thailand. Electricity tariffs are regulated by the Minister of Energy, Communications and Multimedia to reect the nancial cost of supply. As a result of the 1997 economic downturn, the government postponed significant reform plans. Under the current reform agenda, further IPPs are to be encouraged, although the state generators are to remain dominant, accounting for around 60 per cent of output. A gradual approach to industry restructuring will be adopted, involving the establishment of an appropriate infrastructure and regulatory framework. An Energy Commission, with responsibility for both the technical and economic regulation of the industry, has been established. Petrolium Nasional Berhad (PETRONAS) has exclusive rights to gas exploration and production. Private rms are involved in upstream gas businesses through production sharing arrangements with PETRONAS. PETRONAS Gas has exclusive rights over transmission and distribution, while Gas Malaysia, a business unit of PETRONAS, is responsible for retail supply. Prices are set by a government authority. PETRONAS supplies about half of its gas production to TNB and IPPs for power generation at about half world gas prices. The main reform proposals are to encourage further private participation in upstream activities, through partnerships with PETRONAS. The single wholesale buyer and distributor arrangement is to be retained. State owned PETRONAS dominates the upstream oil industry. Private participation is allowed via production sharing arrangements, often with PETRONAS as a minority partner. Six independent private companies are responsible for rening. A privatised subsidiary of PETRONAS, PETRONAS Dagangan Berhad, competes with international oil companies in retail supply. The government regulates petrol prices. The government does not intend to privatise PETRONAS.
Mexico
The Mexican electricity supply industry is currently dominated by the Federal Electricity Commission (CFE), a vertically integrated public utility. CFE faces limited competition from IPPs (around 6 per cent of total production)
in generation and has regional monopolies in transmission, distribution and retailing. State owned Light and Power Company (LPC) and Petroleos Mexicanos (PEMEX) each account for small shares of total capacity (2 and 4 per cent respectively). IPPs, permitted since 1992, are required to sell to CFE under long term contracts. Proposals for privatisation and structural reforms were submitted to the Congress in 1999, but no rm plans have been submitted by the new government which was elected in 2000. PEMEX dominates the Mexican gas industry. Reforms introduced in 1995 allow private involvement in gas transportation, storage and distribution but PEMEX retains control over exploration and production. PEMEX is required to provide third party access to its network and private pipeline owners are required to grant access to PEMEX. The Mexican Energy Regulatory Commission regulates transportation, storage and distribution. PEMEX also dominates the petroleum industry. The Mexican Constitution grants PEMEX a monopoly over exploration and production. PEMEX also owns and operates Mexicos six reneries, has a monopoly over the transportation of crude oil and rened products and is authorised to manage the distribution network. Petrol and diesel stations operate as PEMEX franchises. The Ministry of Energy regulates the oil industry. The coal industry is dominated by Mission Energy, a US based company which purchased the state owned vertically integrated Minera Carbonifera Rio Escondido (MICARE). The Energy Regulatory Commission regulates the industry.
New Zealand
Following extensive reform since the late 1980s, the New Zealand electricity supply industry is now one of the most deregulated and competitive in the region. The competitive generation and retail sectors have been separated from the monopoly transmission and distribution sectors and there is private sector involvement in all functions except transmission. Three state owned generators compete with a private generator, which supplies about 24 per cent of total demand. Transpower, a state owned enterprise, operates the transmission network with an access regime. There are 31 distribution companies that are all separate from the generation and retail businesses. Ownership of distributors varies from publicly listed companies to locally owned community trusts. There are currently ten rms operating in the retail
market. Following the removal of franchise restrictions in 1994, competition has been extended to all consumers (World Energy Council 2001). The wholesale market, established in 1996, is a voluntary market with nodal pricing. Regulation is light handed, relying on the general provisions of the Commerce Act 1986 to control anticompetitive behavior and the Information Disclosure Regulations 1997. New legislation that came into force in August 2001 enables the government to establish a new governance board and gives the Minister for Energy new regulatory powers. The natural gas industry in New Zealand is characterised by light handed regulation, with no specific gas regulator. Exploration and production are carried out by private rms. Two companies, Maui Developments Ltd and the Natural Gas Corporation (NGC) (privatised in 1988) own the transmission network. NGC provides nondiscriminatory third party access to its network. Contractural restrictions mean only gas from the large Maui eld can use the Maui pipeline. There are five distribution companies and six retailers. Distributors can also be retailers but distribution charges must be unbundled from energy costs. It is common for distribution companies and retailers to operate in both gas and electricity markets. The industry is currently being reviewed. Oil exploration and production are carried out by private rms under permits granted by the government. There is one renery, which is jointly owned by ve oil companies. The oil companies compete to supply large customers, independent retailers and distributors in rural areas. They also retail through their own service stations. The New Zealand coal industry is dominated by state owned Solid Energy New Zealand (SENZ), which accounts for around three-quarters of total production. Approximately half of total coal production is exported. As in the electricity, gas and oil industries, the competitive behavior of coal companies is subject to the Commerce Act 1986.
Philippines
Electricity generation in the Philippines has undergone substantial change over the past decade. Until the introduction of IPPs in the late 1980s, state owned National Power Corporation (NPC) had a monopoly over power generation. IPPs now account for almost 50 per cent of generating capacity, and since 1995 they can contract directly with distributors and large industrial
users (World Energy Council 2001). The transmission system is owned and operated by NPC. Private rms with regional monopolies are responsible for distribution and retailing. The Electricity Power Industry Reform Act 2001 contains further extensive reforms. A corporation has been established to manage the privatisation of NPC. Transmission and distribution functions will be carried out by regulated monopolies. The regulated transmission monopoly will not be permitted to own any assets outside the transmission network. The wholesale market will be a mix of an electricity pool and direct contracting between large consumers and generators. The Department of Energy is to establish wholesale spot market rules before June 2002. Retail supply is to be competitive by 2004. The Philippines is currently a small producer of natural gas, but the new Malampaya eld is expected to produce signicant quantities that will mainly be used for electricity generation. Domestic oil production is also small. The petroleum rening and distribution industries were deregulated in 1999 and price controls on petroleum products were removed. The government owns a 40 per cent share in Petron, the largest of three rening companies in the Philippines.
Singapore
The electricity supply industry in Singapore has undergone major changes over the past seven years. In 1995 the generation, transmission and distribution functions of the vertically integrated public utility were separated. Three generating companies were created, along with a single transmission and distribution company, PowerGrid, and a retail company, Power Supply Ltd. Power Supply holds the franchise to supply small consumers, while other retailers compete to supply those with annual demand above 2 megawatts. The Singapore Electricity Pool commenced operation in April 1998. Following the passing of legislation in March 2001, Singapore Power has sold its two generating companies. Power Seneka and Power Seraya are now controlled by Temasek Holdings, which is state owned. The Energy Market Authority, a new statutory board, also commenced its role as a regulator for the electricity and gas industries. Further planned changes include the sale of the state owned generating companies, establishment of a new voluntary
wholesale market with nodal pricing and extension of retail competition to all consumers by 2003. Singapore has no upstream oil or gas industries. Natural gas is used only in power generation and pipelines are owned by private rms. Consumers have access to manufactured gas, which is supplied via pipelines and distribution facilities owned by PowerGas, a state owned company. LPG is distributed by private oil companies. The major reform proposal is for the PowerGas pipeline network to be converted to carry natural gas. PowerGas will not be involved in any other aspect of gas supply.
Chinese Taipei
The electricity supply industry in Chinese Taipei is dominated by state owned vertically integrated Taipower. IPPs have been permitted since 1995 and two are currently operating. They sell power to Taipower, which is solely responsible for transmission, distribution and retailing. Major reforms are contained in new electricity legislation currently before the parliament. Under the proposed changes to the Electricity Act, the industry will be split into separate generation, transmission and distribution segments and private investment will be allowed in all segments. Taipower will eventually be privatised but may be allowed to remain vertically integrated. A wholesale pool is to be established and eventually all consumers will have a choice of supplier. An independent regulatory authority is to be established. State owned Chinese Petroleum Corporation (CPC) is responsible for all exploration and production of Chinese Taipeis gas and oil resources. Gas pipelines are owned and operated by the Taiwan Marketing and Transportation Division of CPC. Distribution facilities, including the LNG import terminal and gas storage facilities, are also currently owned by CPC, but international bids are being taken for construction of a second LNG terminal and supply of gas for power generation. CPC is also involved in the downstream oil industry, together with several private rms. The Formosa Petrochemical Corporation operates a renery that opened in 1999 (EIA 2000). Private firms own and operate approximately 70 per cent of retail petrol stations and CPC around 30 per cent.
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The new petroleum management law, passed in October 2001, opens the import and export of all petroleum products to competition. Oil importers will be required to contribute to a security reserve. The government will no longer have access to CPCs security reserve as CPC is to be privatised by 2005.
Thailand
State owned Electricity Generating Authority of Thailand (EGAT), Provincial Energy Authority (PEA) and Metropolitan Energy Authority (MEA) dominate electricity supply in Thailand. EGAT owns 84 per cent of generating capacity. IPPs, which account for the rest of capacity, must sell their output to EGAT. The transmission network is owned and operated by EGAT and the distribution network by PEA and MEA. PEA and MEA purchase electricity from EGAT and are responsible for distribution and retail supply. Regulation and planning is under the control of EGAT. As part of the Thai governments privatisation plan, the transmission system will be separated from generation to prevent monopoly abuse and to promote competition. The Master Plan for State Enterprise Sector Reform of 1998 species that competitive generation companies will bid into a power pool as well as having individual bilateral contracts with major customers. Gas supply in Thailand is dominated by the Petroleum Authority of Thailand (PTT) which, with only a few minor exceptions, acts as the sole purchaser, transporter and distributor. PTT purchases all locally produced gas from the producers, mainly PTT Exploration and Production (PTTEP) and two private oil and gas companies. Private participation in pipeline construction has been introduced. The National Energy Policy Ofce (NEPO) regulates transmission and distribution tariffs. Under reforms announced in 1999, pipeline functions are to be separated from gas supply and marketing, third party access is to be introduced for transmission pipelines, PTT was privatised in 2001 as PTT Public Company Ltd and an independent regulatory agency is to be established (NEPO 1999). PTT is also involved in both the upstream and downstream oil industries, as part owner of exploration and production companies, a petroleum pipeline company, each of the four refineries, and petrochemical plants. The retail petroleum market was deregulated in 1991.
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United States
Electricity industry structure, ownership, market organisation and reform progress vary widely across the United States. Generation is carried out by a mixture of investor (or privately) owned utilities, public (local, state, federal) utilities and IPPs. IPPs account for around 20 per cent of total electricity supply. The investor owned utilities, which have traditionally been vertically integrated monopolies, are the largest suppliers. As part of the reform process, the investor owned utilities have been under pressure to separate their generation and transmission assets, put transmission assets under the control of an Independent System Operator and provide nondiscriminatory access to their distribution networks for electricity service providers. There are three separate transmission grids. Ownership of regional grids within these three systems varies, as does the degree of vertical integration. Distribution is carried out by regulated monopolies that are privately or government owned. In most states, utilities have exclusive franchises to serve all consumers in designated regions. Seventeen states have either enacted enabling legislation or issued a regulatory order to implement retail access, with consumers able to choose their electricity service provider. Seven states have either passed legislation or issued regulatory orders to delay implementing choice. One (California) has suspended choice for residential and small business customers and 26 have not enacted legislation to restructure the industry and introduce choice (EIA 2002b). Competitive wholesale markets have been established in only a few states. California was the first, with major reforms initiated in 1994 and the new competitive wholesale and retail markets commencing operation in 1998 (Joskow 2001a). The Pennsylvania New Jersey Maryland market has developed a standard market design that is being adopted by New England and considered by New York. The natural gas industry in the United States has undergone substantial reform since the mid-1980s and has provided a model for restructuring the electricity supply industry (Joskow 2001a). Prior to the reforms, local distribution companies, power companies and large users purchased gas from interstate pipelines under long term contracts. The local distribution companies then sold to small consumers at regulated prices. The pipeline
companies had long term contracts with gas producers. In 1985 the Federal Energy Regulatory Commission issued an order requiring open access to interstate pipelines, to allow utilities and large users to negotiate directly with producers and then purchase unbundled transport services from the pipeline companies. Several states have extended the unbundling concept to retail customers. The upstream and downstream oil industries are privately owned. There is a high degree of vertical integration, with reners owning a signicant proportion of retail petrol stations. The Department of Energy maintains control over a strategic level of petroleum reserves. All coal production in the United States is carried out by private rms. About a third of the resources are developed under leases granted by the federal government. There are no direct controls on production levels, no domestic price controls and no controls or duties on coal imports and exports. Most coal is transported on the largely unregulated rail system.
Viet Nam
State owned vertically integrated Electricity of Viet Nam (EVN), established in 1995, and its subsidiaries dominate Viet Nams electricity supply industry. Private foreign rms are gradually becoming involved in generation, with the rst major BuildOperateTransfer project licensed in September 2001. A new electricity law is currently being drafted, but it is not expected to be submitted to the National Assembly until 2004. Electricity reform plans involve a shift to competing generators selling to a single transmission company which will in turn sell to distributors and large consumers. EVNs generating units are to become independent accounting units and compete with IPPs. The current four transmission companies are to be consolidated into a single, state owned, transmission company, while the local and provincial electricity departments, which are independent accounting identities within EVN, are to continue to be responsible for distribution and retailing. The Electricity Department of the Ministry of Industry will continue to be the main regulator for the sector. Petro Viet Nam, a state owned corporation, dominates the oil and gas industries. It is responsible for all oil and gas exploration and production, in some cases with foreign joint venture partners which have been allowed since 1998.
Petro Viet Nam Gas Company, a Petro Viet Nam subsidiary, owns and operates the gas pipeline network and supplies gas, mainly to power stations. The downstream oil sector is controlled by several state owned companies. The economys rst renery, a joint project between Petro Viet Nam and a Russian company, is due to be completed in 2002. The coal industry is dominated by state owned Viet Nam Coal Corporation (Vinacoal), which was formed in 1995 through a merger of state owned coal mines and coal processing, trading and engineering companies. Foreign companies are involved in coal exploration and mining through joint ventures with Vinacoal. Viet Nam is a signicant coal exporter.
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appendix
global trade and environment model

GTEM is a dynamic, multiregion, multisector, general equilibrium model of the world economy. It is based on the GTAP model (Hertel 1997) and the MEGABARE model (ABARE 1996). GTEM has a detailed representation of production sectors and regions in the global economy. The starting point for the GTEM database is the GTAP 4e database (McDougall, Elbehri and Troung 1998). GTEM was developed at ABARE to analyse global change issues and has been used in assessments of international climate change policies, domestic and international trade policies, and energy policies, including energy market reform. It is highly suited to analysis of policies that involve complex interactions between sectors and between regions. A detailed description of the model can be found on ABAREs web site (www.abareconomics.com). A nontechnical description of the major assumptions and features of GTEM is presented below.
Dynamics
GTEM is a dynamic model that includes relationships between variables at different points in time. This is in contrast to comparative static models, which compare two equilibriums, one before a policy change and one following. As a dynamic model, GTEM requires a reference case against which the results of policy simulations can be compared. The reference case provides projections of growth in labor and capital in each economy or region, and the associated growth throughout the rest of the economy in the absence of any policy measures. The results of policy simulations are then interpreted as deviations from the reference case.
Factors of production
The four primary factors of production in GTEM are capital, land, labor and natural resources. The capital stock in each region accumulates by investment less depreciation in each period. Both capital and labor are mobile
between industries and, to a lesser extent, across regions through international capital ows and labor migration. Land is used only in agriculture and is xed in each region. GTEM explicitly models natural resource inputs as a factor of production in resource based sectors (coal mining, oil and gas extraction, other minerals, forestry and shing). For example, the coal mining industry uses three factors of production labor, capital and a natural resource (reserves of coal). The natural resource is a factor used solely in the production of resource based commodities and is not mobile between sectors or regions. Returns to the natural resource adjust to maintain its full employment. If, for example, the demand for coal declines, returns to the natural resource (its price) fall, leading to a reduction in the supply price of coal. Population and labor supply for each region are determined endogenously (within the model) over time. GTEM contains an elaborate description of population dynamics, which captures the idea that as economies move along the economic development path, increasing per person incomes lead to well dened changes in fertility and mortality rates. The model uses estimates of the dependence of fertility and mortality rates on income and an exogenously imposed migratory pattern to predict age and gender specific population changes.
Natural rate of unemployment

It is assumed that the imposition of any policy change does not raise unemployment above the so-called natural rate of unemployment for any economy. Any downward shifts in the demand for labor are assumed to be offset by reductions in real wages growth sufficient to prevent the emergence of unemployment above the natural levels. This assumption is often known as the full employment assumption and its use is justied in cases where policy changes are introduced progressively, allowing time for wages to adjust to new market conditions. In practice, however, it could be expected that changes in patterns of production caused by a policy shock such as the implementation of trade and investment liberalisation or the imposition of greenhouse gas emission constraints could lead to the emergence of some unemployment, especially if liberalisation has negative impacts in sectors where the skills of the labor force are not easily transferable.
Prices
For each commodity and primary factor in the model, taxes on production, sales, exports and imports are accounted for separately. As a result, the supply price, market price, domestic user prices and the export price (including export taxes) for a commodity in the producing region and the import price (including international freight), duty paid market price and user prices in the importing region of a given commodity are clearly distinguished. In the standard model closure, prices adjust fully to equate the supplies of and demands for all factors and commodities in each region in each period.
Producer behavior
Producers in GTEM are assumed to operate in perfectly competitive markets using constant returns to scale technologies. Under these assumptions, prices will be set to cover costs and GTEM industries earn zero prots at all times, with all returns paid to primary factors of production, including any returns paid to owners of natural resource assets. Thus, changes in output prices are determined by changes in input prices of materials and returns to primary factors.
National income, savings and consumption

In GTEM, a representative household in each region owns all factors of production and receives all payments made to the factors, all tax revenues and all net interregional income transfers. The representative household allocates its net income across private and public consumption and savings. National savings are assumed to move in line with national income. Total consumption expenditure is calculated as the difference between current household income and savings, with the ratio of private consumption to government consumption assumed to be constant. Given total private consumption, the representative consumer maximises current period utility by choosing consumption levels for each of the commodities in the database, from both domestic and imported sources.
Trade
A key feature of GTEM is that it models bilateral trade ows of all commodities between all regions. In GTEM an Armington preference structure is
adopted. This implies that a good produced in one region is an imperfect substitute for goods produced by the same industry in other regions (Armington 1969a,b). In other words, the same commodity from different sources can trade at different prices. Consumers in a region can substitute goods produced in that region with the same goods produced in other regions. For any given consumption activity, demand for a commodity is allocated between a domestic product and a composite imported product according to a constant elasticity of substitution (CES) function. The demand by a region for each composite imported commodity is then allocated between sources of imports according to a further CES function. Substitution between domestic and imported commodities and between imported commodities from different sources will depend on movements in relative prices and the specied elasticity of substitution the Armington elasticity. The Armington elasticities in GTEM vary between commodities and are derived from current literature and from empirical work undertaken by Jomini et al. (1991) in the construction of the SALTER world trade model. As with all parameters in a global computable general equilibrium model, there is uncertainty about the appropriate size and relativities of the Armington elasticities for various commodities. These elasticities are important determinants of the model results as they affect the estimated trade impacts on commodities resulting from policy shocks. In equilibrium, the exports of a good from one region to the rest of the world are equal to the import demand for that good in the remaining regions. GTEM does not require the current account to be in balance every year. It allows the capital account to move in a compensatory direction to maintain the balance of payments. Goods are transported between regions by an international transport industry. The cost of international transport is added to the cost of imports to each region.
International capital mobility

Global investment equals global savings in GTEM. It is assumed that regional borrowers (investors) issue bonds to global savers at a risk free, global average rate of return. At the regional level, however, rates of return may differ
to reect country specic differences in the risk premium required by global savers. For example, global savers tend to place a higher risk premium on investing in developing countries in GTEM to reect the greater uncertainty of investing in these regions. The equilibrium rates of return in developing countries are therefore higher than in developed countries. Investment demands, in turn, are determined by changes in regional GDP and regional expected rates of return relative to expected global rates of return. Thus, changes in investment ows represent changes in demand from expansionary or contractionary effects (changes in real GDP) and expectation effects. Any excess of investment over domestic savings for a given region causes an increase in net debt for the region. Borrowers service the debt at the global rate of return (interest rate).
Exchange rates
The exchange rate in GTEM is the price of converting local currency into global currency. It is the price that adjusts to keep the balance of payments in equilibrium. For example, if a policy such as trade liberalisation leads to a significant decline in export earnings from a particular region this will, other things being equal, result in an exchange rate depreciation for that region. The depreciation in the exchange rate will improve the competitiveness of exporters and import competing producers in that region. Exports will increase and imports decline, restoring balance of payments equilibrium. A change in the exchange rate will also inuence international transfers associated with foreign debt or lending. For example, a region that has borrowed from international capital markets in GTEM that experiences an exchange rate depreciation will have a greater level of debt denominated in foreign currency. The debt servicing requirement (interest paid) will increase in domestic currency terms. On the other hand, a region holding foreign assets through international lending will earn more interest income in domestic currency if its exchange rate depreciates.
Energy markets
Energy markets are well represented in GTEM. Electricity and the three fossil fuels coal, crude oil and natural gas are modeled explicitly.
Petroleum products are also separately identified. While not used in this study, GTEM also has the capacity to separately identify three types of coal brown coal, black steaming coal and coking coal. The detailed representation of various forms of energy, the incorporation of a technology bundle approach to modeling electricity generation and iron and steel production, together with interfuel, interfactor and factorfuel substitution possibilities in the production of other commodities make GTEM particularly suitable for analysing energy issues.
Technology bundle
In the standard general equilibrium modeling approach, industries produce a commodity by combining primary factors and intermediate inputs in xed proportions. Substitution is only possible between primary factors. In GTEM, electricity generation and iron and steel production are modeled using the technology bundle approach. With this approach, different production techniques are used to generate a homogeneous output from each industry. Electricity can be generated from coal, petroleum, gas, nuclear, hydro or renewable based technologies, while iron and steel can be produced using blast furnace or electric arc technologies. Industries are able to substitute between technologies in response to changes in their relative costs. By modeling these energy intensive industries in this way, GTEM restricts substitution to known technologies, thereby preventing technically infeasible combinations of inputs being chosen as model solutions.
Production and interfuel substitution

For industries other than those characterised by the technology bundle, production in each region is assumed to use only one technology. This technology requires xed proportions of intermediate inputs, with the exception of energy inputs and primary factors. Non technology bundle industries obtain a least cost combination of four energy commodities (coal, gas, petroleum products and electricity) to produce an energy composite and a least cost combination of the three primary factors to produce a primary factor composite. The industry then forms a least cost combination of these two composites to obtain an energyfactor composite. Allowing for interfuel substitution and substitution between fuel and primary
factors in this way means that industries can alter their production input structure in response to price changes by substituting between energy and primary factors or by changing the energy mix.
Database
The starting point for the GTEM database is the GTAP 4e database that contains 50 commodities and 45 regions. This is based on 1995 production and trade data (expressed in US dollars). The GTAP database has been substantially upgraded to form the GTEM database, particularly in the energy sector, and additional data (principally energy sector, emissions and population data) have been collected. For example, the data underpinning the representation of two major fossil fuel using industries (electricity and iron and steel) have been enhanced to reflect inputoutput relationships in the range of known technologies. In addition, the contribution of each technology to total electricity and iron and steel production has been derived to reflect external data (IEA 1998; International Iron and Steel Institute 1996). Also, signicant demographic detail is required in GTEM to model population and labor force growth over time. Underpinning the demographic module are historical data showing the age and gender composition of the population in each region in one year cohorts from age 0 to 100. These are sourced from United Nations (1998).
Greenhouse gas emissions accounting

GTEM models emissions of three greenhouse gases carbon dioxide, methane and nitrous oxide. Emissions of methane and nitrous oxide are represented in GTEM in carbon dioxide equivalents. The carbon dioxide equivalent is derived by multiplying the emissions by the appropriate global warming potential, a measure of the relative radiative forcing of different greenhouse gases. The global warming potential values are 1, 21 and 310 for carbon dioxide, methane and nitrous oxide respectively over a one hundred year time horizon (IPCC 1996). At current atmospheric concentrations, an additional tonne of nitrous oxide in the atmosphere, for example, is considered to be 310 times more potent in terms of radiative forcing than an additional tonne of carbon dioxide, over a one hundred year time horizon.
141
appendix
simulation results, by region

The following tables present the principal results from this study for each region and from each simulation. The tables report the impacts of policy reforms, relative to the reference case, on the important variables of GDP, energy consumption, by fuel, and fossil fuel red electricity output. These are reported for all five of the simulations discussed in the report. These simulations are described briey below. In the simulation entitled All sectors, all APEC economies are assumed to implement comprehensive liberalisation of key energy sectors by 2010. Electricity and Gas are simulations of comprehensive liberalisation in all APEC economies by 2010 in the electricity and gas sectors respectively. Partial electricity is a simulation of partial liberalisation of the electricity sector, in which it is assumed that economies that are yet to implement most of the major reforms achieve only half of the productivity gains assumed under comprehensive electricity liberalisation. Similarly, the simulation, Residual market power, electricity, indicates the consequences of electricity market reform that falls short of a competitive outcome as a result of the presence of market power. Refer to chapter 4 of the report for further detail regarding the design of these simulations.
142
15
Simulation results, by region

Partial electricity 0.14 1.35 0.93 0.86 0.07 0.06 1.11 2.19 3.21 Residual market power, electricity 0.13 a 0.09 0.42 0.21 0.08 0.08 0.23 0.11 1.49
All sectors Australia GDP 0.15
Electricity 0.14
Gas 0.00
Energy consumption, by fuel Electricity 1.41 Gas 3.39 Coal 0.37 Rened oil 0.04 Crude oil 0.15 Electricity output, by fossil fuel Coal red 0.55 Oil red 1.70 Gas red 6.71 Canada GDP
1.21 0.16 0.65 2.75 0.60 0.31 0.06 0.00 0.05 0.03 0.87 0.40 2.53 0.48 3.25 3.43
0.51
0.45
0.05
0.24 1.29 0.46 1.67 0.12 0.06 2.35 4.04 3.25
0.40 a 0.35 0.36 0.05 0.30 0.27 0.24 0.72 0.37
Energy consumption, by fuel Electricity 2.71 Gas 3.08 Coal 3.48 Rened oil 0.14 Crude oil 0.14 Electricity output, by fossil fuel Coal red 4.80 Oil red 7.01 Gas red 12.38 Chile GDP
2.43 0.23 1.17 1.80 4.79 1.31 0.26 0.07 0.13 0.06 6.69 1.85 9.71 2.15 7.86 4.01
0.27
0.25
0.01
0.26 2.27 1.35 1.45 0.17 0.16 1.84 2.76 2.59
0.21 a 0.30 0.39 0.14 0.20 0.19 0.12 0.40 0.47

Continued
Energy consumption, by fuel Electricity 2.28 Gas 3.91 Coal 1.11 Rened oil 0.21 Crude oil 0.16 Electricity output, by fossil fuel Coal red 1.31 Oil red 2.33 Gas red 5.60
2.20 0.06 1.37 2.47 1.20 0.18 0.16 0.04 0.15 0.05 1.58 0.36 2.79 0.41 2.62 2.85
143
15
China GDP
Simulation results, by region continued

All sectors 0.33
Electricity 0.25 2.79 0.03 2.48 0.15 0.08
Gas 0.01 0.02 12.81 1.86 0.02 0.03
Energy consumption, by fuel Electricity 3.02 Gas 13.20 Coal 2.54 Rened oil 0.92 Crude oil 0.97 Electricity output, by fossil fuel Coal red 2.07 Oil red 6.19 Gas red 25.17 Hong Kong, China GDP
2.19 0.84 5.18 0.09 3.45 20.12
0.16
0.06
0.10
0.03 0.96 0.13 2.27 0.05 0.09 2.59 3.80 3.70
0.06 a 0.10 0.06 0.08 0.07 0.19 0.10 0.40 0.47
Energy consumption, by fuel Electricity 2.00 Gas 3.77 Coal 3.59 Rened oil 0.21 Crude oil 9.43 Electricity output, by fossil fuel Coal red 3.45 Oil red 4.64 Gas red 18.81 Indonesia GDP
1.89 0.00 0.25 4.14 4.71 1.30 0.09 0.30 0.16 9.33 5.37 2.05 7.24 2.22 7.02 10.46
0.89
0.10
0.47
0.06 1.09 0.02 0.31 0.12 0.00 0.27 2.25 0.22
0.08 a 0.10 0.19 0.70 0.07 0.15 0.87 0.07 0.56

Continued
1.99 4.19 0.05 12.28 0.32 4.68 0.21 0.18 0.00 1.72 0.22 5.87 4.00 8.93 0.30 22.52
144
15

All sectors Japan GDP 0.42
Electricity 0.40
Gas 0.00
Energy consumption, by fuel Electricity 3.54 Gas 9.79 Coal 1.67 Rened oil 0.64 Crude oil 0.25 Electricity output, by fossil fuel Coal red 4.84 Oil red 6.24 Gas red 10.62 Republic of Korea GDP
3.32 0.17 3.76 5.25 2.06 0.41 0.63 0.15 0.21 0.11 6.18 1.27 7.29 1.27 6.66 3.61
0.35
0.35
0.00
0.19 2.32 1.24 0.91 0.31 0.09 3.70 4.46 3.56
0.28 a 0.35 0.55 0.50 0.34 0.28 0.96 1.27 1.25
Energy consumption, by fuel Electricity 4.79 Gas 10.78 Coal 1.86 Rened oil 0.64 Crude oil 0.58 Electricity output, by fossil fuel Coal red 6.19 Oil red 7.75 Gas red 18.38 Malaysia GDP
4.50 0.22 2.40 8.37 1.85 0.06 0.59 0.07 0.19 0.13 7.33 1.18 8.60 1.03 6.90 10.81
0.38
0.11 1.16 0.72 1.19 0.43 0.20
0.25 1.92 12.76 7.78 1.29 0.63
0.06 0.64 0.43 0.51 0.24 0.11 0.98 2.73 0.65
0.09 a 0.13 0.43 0.48 0.17 0.13 0.04 0.60 0.05

Continued
2.11 11.53 4.91 11.41 1.09 13.32
145
15

All sectors Mexico GDP 0.49
Electricity 0.14 3.83 0.58 1.40 0.84 0.43
Gas 0.16 2.92 10.10 1.96 0.79 0.09
Energy consumption, by fuel Electricity 7.90 Gas 11.60 Coal 0.31 Rened oil 3.61 Crude oil 5.15 Electricity output, by fossil fuel Coal red 3.55 Oil red 3.43 Gas red 26.04 New Zealand GDP
4.28 7.67 5.36 7.64 2.90 23.41
0.26
0.20 1.96 0.78 1.42 0.04 0.03
0.03 0.38 2.30 0.11 0.00 0.01
0.19 2.03 0.79 1.69 0.05 0.03 3.81 4.79 3.73
0.18 a 0.15 0.21 0.12 0.16 0.16 0.32 0.31 0.42
Energy consumption, by fuel Electricity 2.36 Gas 3.30 Coal 1.64 Rened oil 0.23 Crude oil 0.33 Electricity output, by fossil fuel Coal red 2.46 Oil red 4.34 Gas red 7.40 Philippines GDP
3.39 1.03 4.64 1.72 3.65 3.55
0.57
0.57
0.00
0.32 2.65 3.01 1.01 0.77 0.45 1.37 3.28 3.41
0.39 a 0.58 1.31 0.18 0.50 0.49 0.38 0.38 1.33

Continued
4.92 0.01 5.47 5.55 2.20 0.26 1.38 0.04 0.81 0.03 2.88 0.24 5.93 0.07 6.20 6.02
146
15

Partial electricity 0.06 0.57 0.32 0.29 0.08 0.88 0.25 Residual market power, electricity 0.10 a 0.14 0.79 0.27 0.10 0.02 0.30
All sectors Singapore GDP 0.14
Electricity
Gas
0.11 0.01 1.06 0.44 0.65 6.90 0.54 0.79 0.16 0.39 1.60 4.78 0.52 5.72
Energy consumption, by fuel Electricity 1.69 Gas 6.76 Rened oil 0.03 Crude oil 1.35 Electricity output, by fossil fuel Oil red 2.40 Gas red 5.81 Chinese Taipei GDP
0.68
0.55
0.05
0.30 2.93 2.99 2.51 0.48 0.23 3.86 5.24 4.46
0.45 a 0.51 0.66 0.37 0.53 0.51 0.30 0.94 0.80
Energy consumption, by fuel Electricity 6.43 Gas 11.46 Coal 3.52 Rened oil 1.37 Crude oil 0.76 Electricity output, by fossil fuel Coal red 5.28 Oil red 6.80 Gas red 17.40 Thailand GDP
5.48 0.71 5.46 5.41 4.75 1.34 0.87 0.14 0.43 0.11 7.33 2.06 9.63 3.43 8.12 8.46
0.78
0.65 5.67 3.59 0.81 0.63 0.21
0.10 1.15 14.65 0.76 0.26 0.12
0.36 3.03 1.99 0.39 0.34 0.11 1.51 6.00 2.29
0.53 a 0.76 1.31 0.43 0.59 0.58 0.21 3.29 1.41

Continued
2.83 1.79 11.65 4.41 4.15 15.66
147
15

All sectors United States GDP 0.16
Electricity 0.14
Gas 0.01
Energy consumption, by fuel Electricity 0.94 Gas 2.07 Coal 0.23 Rened oil 0.09 Crude oil 0.01 Electricity output, by fossil fuel Coal red 0.22 Oil red 0.57 Gas red 4.46 Viet Nam GDP
0.89 0.04 0.18 1.87 0.43 0.67 0.05 0.05 0.02 0.05 0.48 0.72 1.52 1.20 1.26 3.11
0.36
0.35
0.02
0.19 2.10 0.74 0.24 0.16 0.22 1.82 3.48 1.59
0.25 a 0.38 0.45 0.38 0.38 0.63 0.70 1.46 0.61
a GDP at factor cost.
3.82 0.32 1.26 7.39 0.57 0.50 0.29 0.07 0.40 0.17 3.59 1.86 6.42 2.06 2.77 10.60
148
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Economic and sectoral impacts

Asia-Pacific Economic Cooperation Energy Working Group

2002 APEC Secretariat

BRIAN S. FISHER Executive Director August 2002