1

Regulatory Framework of Thai Electricity Sector

Pornchai Wisuttisak PhD candidate School of Business Law and Taxation Australian School of Business The University of New South Wales Sydney, Australia [email protected]

Paper to be presented at Third Annual Conference on Competition and Regulation in Network Industries Brussels, Belgium November 19, 2010

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Abstract: Thailand has experienced the rapid reform of electricity sector in aspect of market structure, organization efficiency and regulation. The reform was originated by the consideration that the electricity utility under Thai government tended to be underperform on the cost efficiency by overcapacity in supplying electricity to consumers. However, it is experienced that the framework lacks of consideration to increase market competition and coordination with competition law that could contribute to the development of efficient competition in Thai electricity market. Therefore, the research paper aims to critically examine the issue in the regulatory framework and competition policy in Thai electricity sector. The research employs the method of study on the institutional and legal characteristics of existing Thai regulatory framework. The research method would focus on analysing elements of the regulatory frameworks that relate to Thai electricity and to assess whether the framework helps or hinders development of Thai electricity market competition. In the first part of the research paper, it focuses on historic background of regulation on Thai electricity sector from the initial period until the current reform. It reviews the change of regulatory institution since the establishment of electricity to the current situation that the Supreme Administrative Court made decision to revoke the inappropriate corporatization of SOEs in electricity market. In the second part of the chapter, it attempt to explore on the existing regulation on the electricity sectors. It considers on regulatory framework that provide favour to oligopoly of Thai government enterprises and the framework of Thai electricity tariff with adherence on Gas prices from Petroleum Authority of Thailand( PTT) which is a government monopoly on gas supply for electricity generation. In the third part of this chapter, it critically discusses on ineffective regulatory framework for dealing with anticompetitive structure of Thai electricity sector by considering on the new Energy Industry Act BE 2550 (2007), the Thai independent energy regulator, and the competition law. The last part of the chapter presents the conclusion of Thai regulatory framework on electricity and possible development of regulatory framework in order to create competitive electricity market in Thailand.

Keywords: Regulation, Competition, Electricity sector, Thailand

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Introduction Thailand has experienced the rapid reform on electricity sector in aspect of market structure, organization efficiency and regulation. The reform was originated by the consideration that the electricity utility under Thai government tended to be underperform on the cost efficiency by overcapacity in supplying electricity to consumers. The reform program was also influenced by the IMF from which Thailand requested for the financial assistance after the Thai financial crisis 1997. The IMF stated preconditions that Thai government had to liberalise and deregulate the electricity sector in order to increase efficiency of the sector. The initial step of electricity liberalisation was by the introduction of the private participation of Independence Power Producer (IPP) and Small Power producer (SPP) in the electricity market. The introduction was aimed to increase private participation in electricity market. The following step of liberalisation was, then, on the policy of market oriented reform. The government, under requirement of IMF, proposed corporatization plan of many Thai state owned enterprises, including state’s monopoly entities of electricity supply. The government claimed that the corporatisation plan would lead to the increase of efficiency on electricity service, decrease of electricity prices, and lowering government financial burden. However, the reform by liberalisation via the corporatization and attraction of private participation were opposed by the point that the implementation process had inappropriate regulatory framework to govern the Thai electricity market. The framework lacks of consideration to increase market competition and coordination with competition law that could affect the development of competition in Thai market economy. In this paper, therefore, it will critically examine the regulatory framework of Thai electricity. In the first part of the chapter, it focuses on historic background of regulation on Thai electricity sector from the initial period until the current reform. It reviews the change of regulatory institution since the establishment of electricity to the current situation that the Supreme Administrative Court made decision to revoke the inappropriate corporatization of SOEs in electricity market. In the second part of the chapter, it will discuss on the existing regulation on the electricity sectors. The

4 discussion is on regulation relating to oligopoly of government enterprises, the regulation of electricity tariff and the privatised Petroleum Authority of Thailand (PTT) which is monopoly of gas supply for electricity generation. In the third part of this chapter, it critically discusses on the new Energy Industry Act BE 2550 (2007) and independent regulator established to supervise Thai energy market and the competition law that are incapable to deal with uncompetitive market structure and access. The last part of the chapter presents the conclusion of the paper on Thai regulatory framework on electricity.

Part I: Historical development of Thai energy regulation Early development of electricity sector In the early period, Thai electricity sector was established by the Royal government in order to supply electricity to the King’ Palaces and homes of Royal families.1 The sector was then developed by expansion of capacity and to formally generate the electricity to lighten up the street and government building in Bnagkok. The sector was run by two government electricity plans, the Bangkok Electricity Authority and the Royal Samsen Electricity Division.2

In 1894, The Danish

Company, took over the both royal electricity plants and operated the electrification to the Bangkok areas, due to the purpose for supplying electricity to the Bangkok’s electricity trams ways and streets. However, the Danish company went bankrupt and sold its concessional operations to the American Company, Bangkok Electricity Light Syndicate Company. The American company which ran the electricity generation with no prosperity transferred the electricity operation back to Danish company and the name of electricity plants were changed to Siam Electricity Limited Company.3 In 1950, when the concession expired, the government subsequently took over and operated 1

2

3

Chullakesa, C. (1992) "Rural Electrification in Thailand", In S. G (ed.), for Asia and the Pacific. Bangkok Thailand: Asian Institute of Technology and the Commission of the European Communities. pp. 439-454. Metropolitan Electricity Authority (MEA), (2010), Background of The Electricity Generating Authority of Thailand (Thai Language), Retrieved May 2, 2010, from http://www.mea.or.th/menu1_2.htm Ibid

5 the electricity plants under the name of the Bangkok Electricity Authority within the Ministry of the Interior.4

In 1958, the electricity sector was reform by the

Metropolitan Electricity Authority Act BE 2501(1958).

The act established the

Metropolitan Electricity Authority (MEA) as the sole authority to operate electricity infrastructure for the Bangkok and suburban areas.5 It entitled MEA to generate, transmit, and sell the electricity in Bangkok and suburban areas. The MEA, by the act, has power to expropriate the people’s properties and develop electricity line over and under the people properties.6 For the provincial areas, the electricity sector was originated by the 1930 establishment of the rural electricity division under the Ministry of Interior department.7 In 1934, there was the reform of organization of Ministry of interior by upgrading the rural electricity division to be Department of provincial electricity.8 Nakorn Pathom was the first province that built power plant for supplying electricity to its areas and nearby provinces.9 The provincial electricity services were then spread to main provincial areas and followed with the expansion by the opening of government concessions to small electricity plants to the various provinces 10 Most of the provincial power plants were operated only during the night time and supplying uneven service. During the initial period, there were no common standards for electricity systems and the structure of the industry was fragmented. The provincial electricity sector was dispersed from government central control because there was diversification of the ownership of the industry with 200 separate small cooperative, municipal or privately owned utilities.11 The government with the view to enhance the electricity service in rural area adopted the policy to centralize the electricity sector and to increase capacity on supplying electricity to provincial areas.12 Thus, in 1954, Thai government established the Provincial Electricity organization which then became the Provincial Electricity Authority (PEA), to be in charge of electricity 4

Ibid Metropolitan Electricity Authority Act BE 2501(1958) section 6 6 Ibid section 11 7 Provincial Electricity Authority (PEA),(2010) History of PEA (in Thai Language), retrieved June 2 2010 from http://www.pea.co.th/th/about/aboutPEA_history.htm. 8 Ibid 9 Ibid 10 Ibid 11 Wattana, S., and Sharma, D., et al. (2008) "Electricity Industry Reforms in Thailand: A Historical Review", GMSARN International Journal 2. 12 See Provincial Electricity Authority (PEA), supra note 7 5

6 distribution in all Thai provinces.13 The establishment of PAE is according to the enactment of the Provincial Electricity Authority Act BE 2503 (1960). The Act authorizes PEA to dominate the electrification for all Thai cities except metropolitan and suburban areas.14 It permits PAE to produce, distribute, and sale electricity to provinces as well as neighboring countries.15 PAE also has right to expropriate the people land asset and property in order to operate its electricity businesses. It became clear that both MEA and PEA were the main states’ entities for servicing electricity to Thai public. They significantly expanded their electricity infrastructure to satisfy the rapid increase of electricity consumption.

However,

Thailand was experienced insufficient and inefficient generation of electricity. The Thai government, thus, established new entity as the main generators that supplying electricity to PEA and MEA. The establishment of the generator was according to the National Social and Economic Development Plan 1961-1967 that recommended the construction of state’s large power plants to solve the shortage of electricity supply in the metropolitan and provincial areas.16 The various entities of state’s electricity plants of Yanhee Electricity Authority, Lignite Authority and the Northeast Electricity Authority then consolidated to one single organization of Electricity Generation Authority of Thailand (EGAT) in 1968 by the promulgation of the Electricity Generating Authority of Thailand Act B.E. 2511(1968) which require the merger of entities above.17 The Act provides extensive power to EGAT to produce and supply electricity18, and expropriate the public assets in order to operate its businesses.19By the Act, EGAT, then, became important state’s enterprise that dominated the generation and transmission of electricity for entire nation. Thailand, thus, has MEA, PEA, and EGAT, as the electricity operators that are vertically integrated in electricity supply industries with the result of tri-poly SOEs on Thai electricity market. The three SOEs become an oligopoly, controlling all four stages of electricity supply - generation, transmission, distribution and retail service 13 14 15 16

17 18 19

Ibid Provincial Electricity Authority Act BE 2503 (1960) ( PAE Act) s 6 Provincial Electricity Authority Act BE 2503 (1960) ( PAE Act) s 6 and 8 Thai Ministry of Energy, History of Thai Energy Sector development (In Thai Language, Prawat Khan Pattana Kijakarn Plang Ngan Thai), Retrieved June 5 2010, http://www.energy.go.th/?q=th/energy_history. Electricity Generating Authority of Thailand Act B.E. 2511(1968) ss 3 and 7 Electricity Generating Authority of Thailand Act B.E. 2511(1968) s 6 Electricity Generating Authority of Thailand Act B.E. 2511 (1968) ss 28 and 35

7 within a given geographical area. They played significant role for Thai economic development by supplying electricity for necessity of Thai industrialisation period during 1980s.20 However, the increase of electricity capacity for Thai economic development provided important means of achieving political image. The expansion of electricity through the rural areas was adhered by the King’s political image. It led to the perspective that Thai King is the person who develops electricity to Thai rural people.21 By this political strategy, it raised the significance of King as well as translating to the political power of the three electricity utilities. The other aspect that contributes the three electricity utilities to have significant political influence is from the state- led approach that Thai government, considered three utilities as the centralised representative of mainstreaming broad public interest.22 The centralised approach created the three utilities to have crucial role of government services that contain authoritative power. The three utilitiesthen employ the authoritative roles to gain political power and expand their organisation. The rapid expansion of government-centralized agencies, like PEA, MEA, and EGAT provided both highly successful and costly stories. On the one hand, the tri-poly is the main facilitators in modernising Thai electricity infrastructure as well as assisting to the development of Thai business and industrial sectors. The Thai electricity utilities were able to maintain the industrial confidence on a concern of reliability and effectiveness of electricity supply.23 This contributed to the rapid development of Thai businesses and industries. On the other hand, the expansion of electricity supply capacity led to the substantial international debt for Thai economy. The three electricity utilities were owned share of international debt for nearly half of all of Thailand’s external borrowing between 1967 and 1971.24 This was due to the rapid fluctuation of international funding according to the advice of World Bank. The advice made developed countries confident to finance developing countries’ plans on building electricity generation at exceptionally low

20 21

22

23 24

See Thai Ministry of Energy , supra note 16 William, J. H. and Dubash, N. K. (2004) "Asian Electricity Reform in Historical Perspective", Pacific Affairs, 77 (3): 411-436. See Ibid p 412 – William presents that the state-led electricity sector were used by many developing countries in Asia. See Thai Ministry of Energy , supra note 16 Jarvis, D. S. L. (2009) Risk, Regulation & Governance: Institutional Processes and Political Risk in the Thai Energy Sector, Lee Kuan Yew School of Public Policy National University of Singapore, Working Paper No.: SPP09-15.

8 interest rates with long repayment periods.25 The finance contributed to the flourishing of the expanding on electricity capacity of the three Thai utilities. The results was a tripling of Thailand ’s external energy bill during 1979-1981, and a blow out in national debt, reaching 39% of GDP.26 The expansion of electricity capacity by international finance was the important strategy for satisfying the surge of electricity demands but the electricity tariffs were not coherent with the burdens of that high amount of borrowing. The tariffs were set at low and uneconomic level in order to facilitate the development of the other industrial and business sectors. It contributed to the significant financial depreciation for the Thai electricity utilities. Moreover, the financial problem of three utilities was also fired up by the oil prices crisis that amounted to the Thai economic crisis and huge increase of public debt.27 The substantial rise of debt rendered Thailand to seek the structural adjustment program from World Bank in 1982 that recommend Thailand to reform the electricity sectors by increase of electricity prices and privatising the electricity utilities.28

However, the

privatization and liberalization were met with fierce resistance from labour unions and academics, and were ultimately failed.29

The economic crisis with the significant debt of the electricity utilities made Thai government recognised that the electricity sector is important part of economy on which it need to pay an appropriate supervision. The government thus considered apprehending the electricity policy and planning that were mainly subjected to the politically strong and self-regulated electricity utilities. Government came out with the solution to establish an agency for making a policy and plans for Thai energy sector.

Liberalization of electricity 1980-1998 During 1980s, World Bank changed its policy for developing countries from financing state own enterprises that directly servicing market to the policy on

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Greacen, C. S. and Greacen, C. (2004) "Thailand's electricity reforms: privatization of benefits and socialization of costs and risks", Pacific Affairs, 77 (3): 517(25). 26 Ibid 27 Pongpaichit, P. and Baker, C. (1998) Thailand’s Boom and Bust. Chiangmai, Thailand.: Silkworm Book. 28 World Bank, (1982) Report and Recommendation of The president the International Bank for Construction and Development to the executive Directors on a structural adjustment Loan to The Kingdoms of Thailand 29 See Greacen, C. S. and Greacen, C., supra note 25 p 521

9 liberalisation and deregulation for stimulating more private participations.30

The

policy conditioned, by the structural adjustment program, Thai government that it had to deregulate the electricity sector and other public utilities. The government then adopted the policy of privatisation on the state enterprises in order to allow private investment to participate in the electricity sector with the purpose to reduce the public debt.31 However, there was no regulatory institution to supervise the liberalization of electricity market. The Thai government units and departments that had duties on regulation, policy, and planning on energy and electricity sectors were dispersed. The government was in lack of unity in administering the country energy affairs and lacked of permanent body to oversee the planning and development of national energy policy.32 In 1986, the issues of lack of unity on authorities for energy sector, thus, brought into consideration of Council of Economic Ministers with the result on the enactment of the National Energy Policy Council Act, B.E. 2535 (1992) to establish the council (NEPC) and its office (NEPO), having duties on making national energy plan

and

policy

to the cabinet

and

to lay down rules and conditions for prescribing the price of energy, mainly on fuel and electricity33 Moreover, the Act on the Administrative Organization of the State Affairs (No.3), B.E. 2536 (1993) and the Act Organizing Ministries, Sub-ministries and Departments (No.9), B.E. 2536 (1993) were enacted to upgrade NEPO to be a permanent department under the Office of the Prime Minister, which can directly report to the Prime Minister. The establishment of NEPO, having power to supervise the Thai energy sector and able to directly report to the Prime Minister was originated to deal with high political power of the SOEs in energy sector. The NEPO would be the important regulatory institution, authorised to supervise and coordinate with SOEs operating in energy market.34 The NEPO, thus, became the most influential energy authority assuming considerable powers over all facets of energy policy, planning and pricing.

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World Bank, (1993). The World Bank's Role in the Electric Power Sector. Policies for Effective Institutional, Regulatory and Financial Reform. Washington, DC: World Bank, p 84 31 Ibid above n 25 p 520 32 EPPO (2006) Energy Policy and Planning Office. Energy Policy and Planning Office, Ministry of Energy p 9 33 National Energy Policy Council Act, B.E. 2535 (1992) s 6 34 National Energy Policy Council Act, B.E. 2535 (1992) s 6 (3)

10 The NEPO played significant role as the strong institution facilitating the

process of liberalisation of electricity market. Under Dr Piyasavasti as the Director , NEPO could reach high achievement of lobbying and recommending Thai government to reform the electricity market.35 The successful of the NEPO as an institution, stimulating the liberalisation of electricity market is from the fact that the office receive significant budget from the Energy Conservation Promotion Fund and technical assistant to framing the reform policy from World Bank.36 Under the bold position of NEPO, the regulation on electricity market was changed toward liberalised market. The initial step was the introduction of small power producers (SPPs) and independent power producers (IPPs). In 1992, the Electricity Generating Authority of Thailand Act B.E. 2511(1968) were amended to permit EGAT to cooperate with both SPPs and IPPs.37 EGAT and NEPO established the SPP programs, allowing participators with 60 MW to EGAT and the remaining capacity could be sold to nearby industries.38 Eventually, The Thai government agreed to permit EGAT to take, on a case-by-case basis, up to 90 MW of capacity from each SPP.39 The IPP were also permitted to operate the electricity generation to EGAT’s grid. The first IPP was the EGAT wholly- owned subsidiary, the Electricity Generating Company Limited (EGCO) that was incorporated on May 12, 1992 which marked the commencement of the Thai government’s privatization initiatives to allow broader private sector investment in the electricity sector.40 EGCO was transformed its entity to public company on March 23, 1994 and its shares was started trading in the Stock Exchange of Thailand (SET) on January 16, 1995.41

Later, there was

establishment of the other important IPP, Ratchaburi Electricity Generating Holding Public Co., Ltd. (Ratchaburi), incorporated as a subsidiary of EGAT to operate power generation business. The shares of Ratchaburi were offered and traded in stock

35

See Greacen, C. S. and Greacen, C., supra note 25 p 521 See Jarvis , D. S. L. Supra note 24 p 8 37 Electricity Generating Authority of Thailand Act B.E. 2511(1968) amendment No. 5 38 WOO, P. Y. (2005) Independent Power Producers in Thailand. Program on Energy and Sustainable Development, Stanford University, Working Paper 51. 39 Ibid 40 EGCO, History of EGCO, Retrieved on July 10 2010 from http://www.egco.co.th/en/corperate_profile_history.asp. 41 Ibid 36

11 Market of Thailand in October 2000 with EGAT as the majority shares holder of 45 per cent.42 After the initial step of liberalisation on electricity sector by introduction of SPP and IPP, the NEPO enhanced to the second stage to further establishment of reform of electricity market toward the privatisation. In 1998, the NEPO stated its plan on liberalisation and privatisation of Thai energy sector with the focuses on the Electricity Supply Industry (ESI). The plan is according to the stages of;43 •

I: Reform of Electricity Supply Industry (ESI) - The reform is to restructuring and privatisation of Thai electricity supply industry (ESI) to promote competition and attract private investment. The cabinet resolution of 1 September 1998 stated the consent on the Master Plan for State Enterprise Sector Reform (the Master Plan) that envisaged the future structure of the ESI, according to competitive model by making the separation of generation, transmission, and distribution business. The three stages were planned and will require five or more years to accomplish.

•

II: Using EGAT as the primary power purchaser (1998-2001) – There will be a limitation on private sector participation in generation in order to gain the capital needs of EGAT. The long-term central electricity planning will be under EGAT’s responsibility. The sector will be improved to competitive circumstance between generators with expected result of productivity efficiencies. The commercial risk of electricity trading will be shared by private sector and government -owned entities. No customer access to competitive power, except through SPPs. There will be establishment of independent regulator.44

•

III: EGAT as the central supplier of power, with gradual introduction of competition. (2001-2003) - EGAT will continue its role as the central agency for long-term planning and system operation but it will face competition in bulk purchase and supply of power by permitting private participation in both generation and retail supply and by permitting generators to sell directly to large customers. Electricity Generators will be

42

Ratchaburi Electricity Generating Holding Public Co., Ltd, Corporate Fact Sheet, Retrieved on July 12 2010 from http://ratch.listedcompany.com/shareholdings.html 43 National Energy Policy Office, (1999) Privatisation and Liberalisation of the Energy Sector in Thailand. National Energy Policy Office, (NEPO). 44 See Diagram of Stage II and Structure of the ESI are in Appendix of the paper.

12 required to compete for sales to large customers, thus enhancing the efficiency drivers on the generation sector. The transmission and distribution prices will be regulated by efficiency incentive scheme of the independent regulator. MEA and PEA will be placed on level playing field with new competitors. Continued role for EGAT as the central agency for long-term planning and system operation. Increased private investment in electricity generation.45 •

IV: Competitive wholesale power pool / introduction of retail competition (From year 2003 onward) - Generation owned by EGAT would be unbundled into separate groups. An independent system operator would be established. PEA would be separated into distribution companies. The energy consumption in each provincial area would determine to new distribution entity’s performance and its customers. A separate supply function would be established and corporatized, either owned or independent from the distributors. Private sector could participate in both generation and retail supply. Competitive neutrality between state-owned and private sector generation companies, fostering real competition in bulk and retail supply of power. With the correct design of a competitive structure, there would be strong efficiency drivers in power generation and retail supply. Market signal then will replace central planning and new electricity generation capacity will only be added as economically justified by competitive supply-and-demand of market.46

The NEPO’s stages on implementing privatisation of electricity sector were facilitated by the enactment of State Enterprises Corporatization Act 2542(1999), which aims to corporatize the whole or part of government owned enterprises to be either private limited company or public limited company.47 The Act was passed by aftermath of Asian financial crisis that Thai government propose to IMF financial restructuring loans with the Letter of Intention to privatise its SOE utilities.48 The act

45 46 47 48

See Diagram of Stage III Structure of the ESI Appendix of the paper See Diagram of Stage IV Structure of the ESI Appendix of the paper State Enterprise Act 2542(1999) section 4 Sukkumnoed, D., Greacen, C. S., et al. (2006) Governing the Power Sector: An Assessment of Electricity Governance in Thailand. World Resources Institute, National Institute of Public Finance and Policy and Prayas Energy Group, p 10.

13 requires the establishment of Committee of State Enterprises Corporatization which will give the cabinet the opinion on strategy to corporatisation of the SOEs.49 In 2000, the government under Prime Minister Cheun, by the act above, approved the implementation of the NEPO’s stage plans on reforming electricity utility.50 The EGAT would be unbundled into three companies with the establishment of the spot power pool market. EGAT would maintain the holding of sole electricity transmission.

The MEA and PEA would be separated into electricity delivery

companies and meet with the competitive market. There would also be the establishment of independent regulator that can supervise and stimulate the competitive initiation to the electricity sector. However, the NEPO and its plans were substantially affected by the new government policy under Prime Minister Taksin. The Taksin’s government made the new structure of ministerial authorities by enactment of the Organization of State Administration Act B.E. 2545 (2002) and the Act Amending Ministry, Sub-Ministry and Department B.E.2545 (2002). Both acts restructure the Ministries of Thailand to be twenty ministries that included the ministry of energy, having duties on administrating Thai energy market.51 The Ministry of energy then assume controlling power over NEPO. Under the Ministry of energy, role of electricity policy making has been transferred to the Ministry of energy and the executive body, rather than being determined by NEPO as in the past.52 This significantly reduced the power of NEPO in conducting the restructuring and liberalisation of Thai electricity sector according to its plans. The NEPO was then changed to the Energy Policy and Planning Office (EPPO).

New reform arrangement for Electricity sectors

After the new establishment of ministry of energy and the downgrading the NEPO to EPPO, the government had come with the new plan for reforming and privatising electricity market. Under Taksin’s cabinet the reform of electricity 49 50 51 52

State Enterprise Act 2542(1999) section 5 See Wattana, S., and Sharma, D., et al supra note 11 Organization of State Administration Act B.E. 2545 (2002) Sukkumnoed, D., Greacen, C. S., et al., supra note 48 p. 6

14 liberalization was cautioned and government requested for the restudy on the plan on electricity reform. The power pool model, recommended by EPPO was rejected and there were proposals of the new studies from various institutions. The EPPO proposed the model of New Electricity Supply Trading Arrangement (NESA) basing on UK current model.53 In contrast, EGAT proposed different model that is Multiple Buyer SellersPartial liberalization (PL). The model maintains the EGAT’s dominant position and allows large industrial users to purchase directly from generators. However, EGAT also employed the other two consulting firms, Kema consultant and Siam Commercial Bank with the recommendation for reform to the model of Cost base power pool. The other models were offered by the Asian Institute of Technology that recommends the Transitional model to New Pool. Although there was seminar held by EPPO to exchange idea on the variety of models above, the agreed models for Thai electricity reform could not reach consensus. In 2003, Taksin’s Cabinet swiftly cancelled the reform model of NEPO and the Ministry of Energy hired the Boston Consulting Group (BSG) to conduct new study. The hiring of the BCG, which had a close relationship with EGAT, mirrored EGAT's ability to influence policies within the Energy Ministry.54 The BSG proposed to government five models of reform- ESI structures: Full Competition (FC) model, Competitive Bilateral Contract (CBC) model, Partial Competition (PC) model, Enhanced Single Buyer (ESB) model and Super National Champion (SNC) model.55 The government then chosen the ESB model which was similar to the existing model of EGAT as the dominant generator. Under the ESB, EGAT would not be unbundled and new generation competitors would have to compete directly with EGAT. The selection of government on ESB models reflect the less consideration on reform but emphasis more on only transfer of EGAT’s owner from state to private sector. The government then scheduled the Initial Public Offering (IPO) of EGAT’s shares in Stock market of Thailand at the fourth quarter of 2004 but the IPO faced with high pressure of protest from EGAT’s labour union. It contributed to the decision of Taksin’s cabinet to hold the plan of privatising EGAT indefinitely.56 53

54 55 56

EPPO (2002) "The Electricity Supply Industry Reform, " Seminar of the electricity supply industry reform. Sofitel Central Plaza, Bangkok. ( In Thai Language) See Greacen, C. S. and Greacen, C, supra note 25 p 536 See Wattana, S., and Sharma, D., et al, supra note 11 p 47 Ibid

15 The plan on privatising EGAT was then resurrected after the Taksin’s successful re-election in early 2005. Taksin’s government pursued the privatisation by enacting two decree of Royal Decree stipulating powers, rights and benefits of EGAT Pcl, B.E. 2548 (2005) and Royal Decree stipulating time clause for repealing the law governing EGAT, B.E. 2548 (2005). The first Royal decree authorised EGAT Pcl to have power ,obtain exemptions, have special rights and receive protection as prescribed and granted by the EGAT act 2511 (1968) and other laws applicable to EGAT.57 EGAT Pcl would be able to expropriate and use land and asset on land of people as it is the State authority. Specified employees of EGAT Pcl performing work on electricity systems would have official powers under the Criminal Code.58 This Royal Decree established an Electricity Generating Business Committee with power to approve new power plants, transmission line rights-of-way and other policy decision.59 The second Royal decree frames the time to repealing the EGAT act at June 24 2005 which means the EGAT would become the public limited company on that date. The EGAT PLC then planned to conduct an IPO in November 2005, offering up to 25% of its shares to the public. Nevertheless, the Foundation for Thai consumers and other claimants requested to the Supreme Administrative court regarding to the lawfulness of the Royal decrees that stemmed from the cabinet’s misuse of government power and lead to the unavoidable economic effect to consumers. This Supreme Administrative Court case reflects the doubt on government policy in privatisation of EGAT whether it can lead to benefit of public or of interest group.

Supreme Administrative court decision on EGAT corporatisation The claimant, Foundation of Thai Consumers and other made a request to the Supreme Administrative court to decide whether

60

the Royal Decree stipulating

powers, rights and benefits of EGAT Pcl, B.E. 2548 (2005) and Royal Decree stipulating time clause for repealing the law governing EGAT, B.E. 2548 (2005) are unlawful by conflicting with public interest or not. The reasons of the claims were that the both royal decrees had been issued without appropriate public hearings and were 57 58

60

Royal Decree stipulating powers, rights and benefits of EGAT Pcl, B.E. 2548 (2005) s 4 Royal Decree stipulating powers, rights and benefits of EGAT Pcl, B.E. 2548 (2005) s 45, 46, and 48 59 Royal Decree stipulating powers, rights and benefits of EGAT Pcl, B.E. 2548 (2005) s 6 and 9 Thai Supreme Administrative court, (2006) Decision on Black case no. For. 14/2548 and Red Case No. For.5/2549

16 against the interest of the people and contrary to the intention of State Enterprise Corporatisation Act, B.E. 2542 (1999). The claimants were unable to debate or opine on the issue of EGAT corporatization. The decrees also transfer the authoritative right and power of EGAT as the public and government entities to the EGAT Pcl without concerning the fact that such transfer would contribute to the negative effect on the important right and freedom of Thai citizen according to the Chapter V of the Thai constitution BE 2540 (1997) that required the government to maintain its operation of the public utilities in case that it can maintain benefit to public interest.61 The Supreme Administrative court held that the two Royal Decrees should be revoked and all the privatisation process by listing the EGAT in stock Exchange was nullified. The court provided the reasons that;

-

the conflicts of interest by the unqualified formation of the committee for implementing EGAT’s corporatisation

- the conflict of interest in the appointment of a chairman for the public hearing committee and the improper process of the hearings

- the issue on the EGAT Plc that are entitled to have state power of land expropriation after the corporatisation

The court explained on its first reason that two members of committee for implementing the EGAT corporatisation were having vested interest with EGAT. The corporatisation by inclusion of the both committees’ opinions, therefore, contributes to the conflict of the EGAT and public interest. 62 In the second point, the court stated that the Chairman of public hearing was disqualified because he had political position that are prohibited to conduct public hearing, according to section 26 of the State Enterprise Corporatisation Act, B.E. 2542 (1999).63 By the inappropriate public

61

62 63

Ibid at page 1; Thai constitution BE 2540 (1997) Chapter V on Directive Principles of Fundamental State Policies at section 87 The State shall encourage a free economic system through market force, ensure and supervise fair competition, protect consumers, and prevent direct and indirect monopolies, repeal and refrain from enacting laws and regulations controlling businesses which do not correspond with the economic necessity, and shall not engage in an enterprise in competition with the private sector unless it is necessary for the purpose of maintaining the security of the State, preserving the common interest, or providing public utilities. Ibid at page 42, 44 and 46 Ibid at page 45

17 hearing under the royal decrees, it is contributed to conflict with section 58 and 59 of Thai constitution BE 2540(1997).64 In the last point, the court reasoned that the conferring of the right to expropriate the land or property to the corporatized EGAT is unconstitutional because, according to the section 49(1) of Thai constitution BE 2540(1997), the right to expropriate has to be under the state action not the private one. 65 The transferring of such a right would render to the creation of inequality on business competition with the result of inconsistency with the section 30 and 50 of the constitution BE 2540 (1997).66 Moreover, the court pointed out that not only transfer of the right to expropriate land and property will lead to the uncompetitive market circumstance but the transfers of property and asset of electricity infrastructure would also led to the inequality of competition as well.67 Therefore, on 23 March 2006, the Supreme Administrative Court ordered the revocation of the both Royal decrees, contributing the corporatisation of EGAT invalid. By the decision of Supreme Court, The EGAT Plc was delisted from Stock Market of Thailand and the reform by corporatisation of electricity sector was paused. From the Supreme Court case above, it is seen that the inappropriate reform and restructuring of EGAT would lead to unfair market structure. The corporatized EGAT, without appropriate market restructuring and prudential regulatory framework, would have substantial market power on the generation and transmission of Thai electricity. The upstream section of Thai electricity market would be monopolised and EGAT are able to determine the electricity prices. EGAT may also able to cause market abuse by increase barrier to access or prohibit new competitors to pair with its monopoly infrastructure. This, therefore, important to make further and prudential reform of market structure, regulation and relate laws, especially competition law that correlates with electricity sector regulation and that would determine the development of the electricity sector via the creation and protection of 64

65 66

67

Section 58 and 59 of Thai constitution BE 2540(1997) prescribe that Thai person are entitled to receive and access to the information of State Agency, State enterprise and local government before the implementation of any governmental project. Thai Supreme Administrative court, supra note 60 at page 51 Section 30 of Thai constitution BE 2540(1997) state that “the person is equal before the law and shall equal protection under the law”; Section 50 of Thai constitution BE 2540(1997) states that “ the person shall enjoy liberties to engage in an enterprises or and competition and to undertake free and fair competition.” Thai Supreme Administrative court, supra note 60 at page 52

18 market competition. The suitable regulation on market structure and competition law on market behaviour would then lead to fair and competitive market with the result on the increase of efficiency on the electricity market. However, after the decision of the Supreme Administrative Court, the reform on electricity market was put on hold. The Taksin’s government were unable to gain the public confidence on its merit of the electricity reforming by privatising Thai electricity market. The public sphere were disintegrated to groups of people who support Taksin’s government and group that like to see the stepping down of Thaisin’s government. The conflict between the groups of people was, then, followed by the military coup d'état, taking place on Tuesday 19 September 2006, when the Royal Thai Army completed plan of a coup against the elected government of Prime Minister Taksin. The Junta became in power and arranged new election. However, after new election, arranged by the Junta government, the political conflict in Thai society has not been solved. The bargaining of political power between Taksin’s supporters and the opponent of Taksin’s government is still not defined and result to instability of Thai government. The reform of the electricity sector, thus, is on stalled direction and SOEs are still maintaining roles of providing electricity service to Thai consumers.

Part II: Current regulation on electricity Oligopoly SOEs under EGAT, MAE and PAE The existing structure of Thai electricity market is oligopolised by government own entities. As stated above that the Thaksin’s government implemented inappropriate liberalisation of electricity, leading to the Supreme Court’s decision to revoke the Royal decrees for corporatisation of EGAT. The structure of Thai electricity market, thus, has not changed. The EGAT, PEA, and MEA occupy whole Thai electricity market and have oligopoly position in the electricity supply for Thai industries and consumers. EGAT, as the government electricity generator, has sole and significant role on supplying electricity to the other vertical linked distributors - PEA and MEA.

19 EGAT is presently the largest electricity producer, owning and operating its own power plants countrywide. Its capacity to generate the electricity can be accounted for 63,930.68 million kWh which means 43.14 percent of total country wide electricity generation.68 It also has the sole right to purchase power from other private producers under the government regulation of enhanced single buyer scheme (ESB). It approximately purchases electricity from private producers at the amount of 84,270.25 million kWh, equal to 56.86 percent of the country’s total electricity generation.69 In 2008, EGAT has purchased 67,420.14 million kWh (45.49 %) from domestic IPPs, 14,065.20 million kWh (9.49 %) from SPPs, and 2,784.91 million kWh (1.88 %) purchased from neighbouring countries.70 Moreover, EGAT maintains its shares holding in large IPPs of Ratchaburi Electricity Generating Holding Public Company Limited (RATCH) at 45 per cent, Electricity Generating Public Company Limited (EGCO) at 25 .41 per cent, and District Cooling System and Power Plant Co.,Ltd (DCAP) at 35 per cent.71 The RATCH and EGCO are the main IPPs that have market shares of electricity generation at the 14 and 11 per cent, respectively. 72 It thus can be seen that EGAT are able to control the electricity generation sector by the factors that 1) it has own operation of power plants ( around 43 per cent of market shares), 2) the entitlement of single purchaser of electricity generated from IPP and SPP, and 3) the majority share in the significant IPPs (the main IPPs that EGAT hold significant amount of shares have electricity generation market shares at 25 per cent).73 For the distribution and retailing sectors, the markets are oligopolized by and geographically separated under the PEA and MEA. The PEA is the sole distributor and retailer of electricity in provincial areas of Thailand. PEA is responsible for serving 73 provinces of Thailand and, according to the 2006 annual report, it supplied

68

69 70 71 72

73

Electricity generation Authority of Thailand, (2009), Annual report 2008, Electricity generation Authority of Thailand Ibid p 15 Ibid p 16 Ibid p 24 See RATCH (2009) Ratchaburi Electricity Generating Holding Public Company Limited (RATCH) annual report 2008. RATCH p 60 and EGCO (2009) Corporate Presentation Quarterly Financial Results Ended 31 March 2009. EGCO p 5 Electricity generation Authority of Thailand has market share at 43.14 per cent- EGAT affiliated company and subsidiary (RATCH and EGCO) have market shares at 25 per cent.

20 electricity 88,799 million kWh for 13 million customers.74 The PEA is vertically linked with EGAT and purchased EGAT’s electricity at 88,630 million kWh in 2006. MEA is responsible on supplying the electricity for Bangkok Metropolis, Samut Prakan and Nonthaburi provinces. In 2008, it serviced around 42,235.9 million kWh to the three major urban areas. MEA is vertically linked with EGAT electricity supply. With the current structure of Thai electricity, EGAT, PEA and MEA can enjoy their oligopoly position over Thai consumers. The SOEs are also under no direct competition and able to act as the government authority by law of their establishment under Ministry of Interior.75 They are also treated as the self regulated SOEs because the regulator has no effective information to supervise the three SOEs.

Price tariff regulation with ROR and floated Ft As provided above that the structure of electricity sector is under oligopoly SOEs, it, thus, requires the regulation on price of electricity for protecting consumers. However, the existing tariff structure tends to be uneconomic and give disadvantage interest to consumers. The current tariff framework was from the regulatory review on electricity prices, initiated by the NEPO. In 2001, NEPO hired PricewaterhouseCoopers (PwC) and Merz & McLellan to conduct the Review of Thai Electric Power Tariffs with the purpose of; “(1) to have a tariff that genuinely reflects the economic costs and to promote efficient use of electricity, in particular to encourage less consumption during the peak period of the power system, which will help reduce generation and distribution costs in the long run; (2) to secure the financial status of the three power utilities, which will enable future expansion of their operations; (3) to provide fairness for all power consumer categories by reducing cross subsidization from one category to another; and (4) to achieve a mechanism of the electricity tariff adjustment that is flexible and automatic, corresponding with changing fuel prices in the competitive market.”76

74 75

76

Provincial Electricity Authority,(2007), Annual report 2006, p 118 See the establishment law of EGAT PEA and MEA, requiring three entities to be under Ministry of internal affair, and see the information on the website of Thai State Enterprise Policy Office Retrieved 20 August 2010 from www.sepo.go.th. National Energy Policy Office (2001) , ELECTRICITY TARIFF RESTRUCTURING. EPPO, Retrieved on July 22 2010 from http://www.eppo.go.th/power/pwc-tariff-E.html

21 By the study, the electricity tariff structure was based on Rate of Return (ROR), Incentives regulation, and Fuel Adjustment Charge (Ft). This structure has been used as the main indictor of electricity prices for Thai industries and consumers until now. The ROR tariff structure is based on the revenue requirement for the Thai power utilities to ensure their stability of the financial position and ability to expand operations of the power utilities. The EGAT, PEA and MEA have to estimate their revenue requirement by considering on their financial status, fuel prices, inflation rates or consumer price index (CPI), efficiency improvement of the transmission system, distribution system and retail business( X factor).77 The three utilities also have to determine their plan of future capacity investment by the estimation of electricity load forecast, prepared by Load Forecast Sub-committee (TLFS).78 Upon the development of investment plans of the power utilities, an appropriate level of revenue requirement of each utility would then be determined. However, according to Puree Sirasuntorn the expert on tariff regulation on Thai electricity sector, the existing regulations do not reflect the efficiency and the appropriate electricity prices for consumers because the regulations tend to neglect the supply side efficiency.79 The rate of return regulation and incentive regulation are employed to meet demand-side efficiency, capital attraction, consumers-distribution, and tariff flexibility but they do not consider on improving the supply side efficiency.80 Puree furthers that although there are use of rate of return and incentive regulation, the main regulation tend to be the rate of return that give exaggerated favour to the financial status of three SOEs utilities.81 The high favour on financial status of the three utilities is evidenced from the annual profit reports, providing that the EGAT, PEA and MEA have annual profit at million Bht 27,902.01 million, million Bht12, 822 million, and Bht 4,783.97 million, respectively.82 These annual

77 78

79

80 81 82

Ibid EPPO, (2007),Electricity demand forecast and power development plan in Thailand( In Thai language). Sirasoontorn P. (2008) Tariff Regulation in Electricity Supply Industry in Thailand. Faculty of Economics Thammsat Univerisity Discussion Paper No. 0007. Ibid 12 Ibid p 13 See EGAT(2009), Annual report 2008, Retrieved on April 28 2010 from http://pr.egat.co.th/AnnualReport/annual2008/annual08_th/index_th.html ; PEA (2007), annual report 2007, Retrieved on May 20 2010 from http://www.pea.co.th/annualreport/2007/PEA.swf ;

22 financial gains can be the significant rent attraction from Thai consumers to the three SOEs electricity utilities. Moreover, the regulations that assure the three utilities the high return would not lead to the improvement of performance on efficiency and cost reduction. This is because the ROR has two drawback of encouraging overcapitalization and disincentive of efficiency improvement.83 By basing on ROR, The more investment on their capacity to supply electricity, the more utility firms can increase their electricity tariffs to consumers. It facilitates the electricity utilities to invest on their capacity to pushing the permit limit line of return on investment. The increase of capacity investment, then, may lead to the overcapacity in supplying electricity, which can result to the inefficiency of supplying electricity.84 When such inefficiency of overcapacity cost arrives, the oligopoly utilities can transfer the cost to consumers via the increase of electricity tariff. This can be applied to the current Thai electricity tariffs which enable the three SOEs to increase the tariff for offsetting their overcapacity of electricity production. In addition, the using of Fuel Adjustment Charge( Ft) as determinant for regulating electricity price can contribute to the risk free business for tri-nod utility. While the Ft is considered to be the appropriate factor for calculating electricity prices, it can be also noticed that the Ft is used by the three utilities to transfers fuel risks to the consumers. The SOEs can enjoy risk free of fuel prices with the monopoly position and they can gain considerable benefits. Therefore, it asserts that the price regulation of electricity in Thailand have to be scrutinized. The electricity regulations that provide SOEs a non- competitive pressure as well as a risk free of business operation would transfer to the insufficient development of the electricity sector. The oligopoly position of three utilities, without appropriate price regulation, would lead to inefficiency of rent attraction and result to the inefficient development of Thai economy.

PTT’s Monopoly of Gas supply for electricity generation

83

84

MEA (2007) annual report 2007, Retrieved on May 21 2010 from http://www.mea.or.th/internet/report51.html Parker, D. and Kirkpatrick, C. (2005) "Regulating prices and profits in utility industries in lowincome economies: Rate of return, price cap or sliding-scale regulation?", International Journal of Public Sector Management, 18 (3): 241-255 p 245 Ibid

23 In Thailand the electricity are produced by various resources but highly depends on the natural gas. In 2008, 70 per cent of electricity for Thai economy was generated by natural gas, 12.6 percent by lignite, 8.2 per cent by coal, and 4.6 by hydro.85 EGAT, in producing electricity, has to heavily rely on the natural gas for its 12 large thermal power plants.86 It is also expected that the electrification by EGAT for Thai economy will be more dependent on natural gas due to the EPPO’s statistic on the increase of gas usage for electricity plants.87 However, the Thai gas supply market is monopolised by the PTT Public Limited Company, Ltd, the privatised SOEs. The government’ s implementation of PTT privatisation did not contribute to the reform of Thai gas market but it only conducted the transferring of monopoly right to PTT Public limited company, Ltd (PTT Plc). After privatised and listed as public company, the PTT are able to dominate the gas supply market that is essential energy sources for consumers, industrials and power plants. PTT Plc occupies all of the gas pipelines in Thailand and control the gas market as sole transporter of gas by the entitlement of state right, according to the Royal Decree Describing Powers, Rights and Benefits of the PTT Public Company Limited, B.E. 2544 (2001) and the Royal Decree Stipulating Time Clause for Repealing the Law Governing PTT BE. 2544 (2001). Both royal decrees confer the transferring of the state assets and right to PTT Plc which would have special rights and receives protection as prescribed and granted by the law governing Petroleum of Thailand.88 Specified employees of PTT Pcl who perform work will have authoritative powers under the Criminal Code.89 The Foundation of Consumers, with the view that PTT privatisation would lead to substantial effect on consumer interest, filed the suit in the Supreme Administrative court to determine whether the privatisation of PTT by the both Royal

85

EPPO (2007) Power Development Plan 2007-Strategic Seminar on Thai Power Development Plan (in Thai language), Retrieved June 28 2010 from http://www.eppo.go.th/power/pdp2007/index.html 86 EGAT(2009), Location map of EGAT's Thermal Power Plants, Retrieved July 15 2010 from http://www.egat.co.th/en/index.php/egat-power-plants/49-location-map-of-egats-thermal-powerplants 87 EPPO(2010) , Thailand’s electricity statistics, Retrieved July 22 2010 from http://www.eppo.go.th/info/5electricity_stat.htm 88 See Special right in Petroleum Authority of Thailand Act, B.E. 2521 (1978) that provide privilege right for PTT to operate as the major state oil and gas business. 89 Petroleum Authority of Thailand Act, B.E. 2521 (1978), Article 7

24 Decrees above can amount to the severe effect on the consumers interest or not.90 The Foundation of Consumers claimed that the PTT privatization was intended to give benefits to interest groups and the state government had failed to transfer its gas transmission pipeline business, considered a state asset, back to the state ownership according to the plan of the privatization process.91 The Supreme Administrative court held that it is not necessary to revoke the Royal decrees but ordered that there must be the; -

“Separation of state assets of land and gas pipelines from PTT Plc

-

Cancel transferring of the state authoritative power to PTT Plc”92

The reason behind the Supreme Administrative court’s orders is because the Royal decrees that do not limit the state authoritative power to privatised PTT Pcl would be invalid upon public law. The court furthered that without separation of state asset from PTT Plc and without transferring back authoritative power, PTT Pcl would have significant power and control over Thai oil and gas market.93 It, thus, would contribute to an unfair market competition to private firms that operate or intend to operate in the gas market.94 Nevertheless, after the order of the court, the PTT Pcl is still be able to occupy the market power over Thai gas supply by the fact that PTT has concluded Memorandum of Understanding (MOU) with the Treasury Department determining criterion for charging compensation for the use of assets on February 1, 2008. The MOU will enable PTT to employ the state assets that were return back to Ministry of Finance according to the court decision.95 The MOU gives the privilege to PTT Pcl to use the land for its business operation on gas and oil business. The MOU also provides 30 years rental period of gas pipeline to PTT with the rental fee, set at the progressive rate with the minimum annual rental fee of Baht 180 million and the maximum annual rental fee of Bht 550 million.96 The giving license of pipeline

90

91 92 93

94 95

96

Thai Supreme Administrative court (2007) Decision on Black case no. For. 57/2549 and Red Case No. For.35/2550 Ibid page3-5 Ibid page 87 The power were from the Petroleum Authority of Thailand Act, B.E. 2521 (1978) that permit PTT to expropriate people asset for its business operation. Supra note 92 p 73 PTT Pcl (2008), the 2008 Annual General Meeting of Shareholders, Bangkok, DocNo.500/02/142, p5 Ibid

25 operation would maintain PTT’s monopoly position over gas market which correlates with the electricity prices for Thai consumers. In 2008, EGAT reported that it used natural gas own generation facilities amounted to 339,786 million cubic feet, supplied from various gas fields including the Gulf of Thailand, Nam Phong, Phu Hom, Sirikit, the A-18 field of the Thai-Malaysian joint development area (JDA) in the Gulf of Thailand, Arthit, and Myanmar’s Yadana and Yetakun gas fields.97 Theses pipelines, directed to the EGAT generation plants are under the PTT Plc operation and the prices of gas are set by PTT Pcl’s marketing and margin cost.98 PTT will determine its marketing margin charge as a percentage of the gas pool price.99 This charge is classified for different category of customers. For example, PTT charges marketing margin to EGAT and Independent Power Producer (IPP) at 1.75% of gas pool prices but it charges Small Power Produce (SPP) at 9.33% of the gas pool prices.100 The different on gas margin prices for EGAT, IPP and SPP would also determine the advantage position in market competition. EGAT and IPP would be able generate electricity at cheaper rate when compare to the SPP. It thus leads to the unfair prices competition and may also lead to the behaviour of margin squeeze by the large generation of EGAT and IPP. The EGAT’s reliance on the PTT Pcl gas supply would contribute to double cost of monopolistic markets of gas and electricity generation. The PTT Pcl monopolises and charges gas cost to EGAT and EGAT monopolise the electricity generation with benefit from their supply of its electricity. This double monopolistic structure in gas and electricity generation would render to uncompetitive market circumstances that will result to the lack of sector development and electricity costinefficiency for consumers.

97

98

99

100

EGAT(2009), Annual report 2008, Retrieved on April 28 2010 from http://pr.egat.co.th/AnnualReport/annual2008/annual08_th/index_th.html p PTT (2010), Gas Unit, Retrieved May 15 2010 from http://www.pttplc.com/en/ap_oil3-1.aspx and See also PTT, Gas Unit – Gas transmission pipeline, Retrieved May 15 2010 from http://www.pttplc.com/th/ap_oil3-3.aspx Nakawiro, T. and Bhattacharyya, S. C. (2007) "High gas dependence for power generation in Thailand: The vulnerability analysis", Energy Policy, 35 (6): 3335-3346. The authors provided that PTT calculates gas pool prices by averaging the gas prices from all producers in the Gulf of Thailand and from neighbouring countries (such as Myanmar). The quantity of gas supply does not considerably vary due to the long term contract between PTT and gas producers but the wellhead and the quality of gas can also determine the prices of gas from producers. Ibid p 3336

26

Part III: Energy Industry Act BE 2550 (2007) and Energy Regulatory Commission Establishment of Energy Regulatory Commission

By the concern on the monopolistic structure and the Supreme Court Decision on the case privatisation of EGAT above, the junta government has established the independent energy regulator to regulate and supervise energy sector of gas and electricity industries. The Thai energy regulator, Energy Regulatory Commission (ERC) was established by the enactment of Energy Industry Act BE 2550 (2007) (Energy Act 2007). The Act was based on the purpose to make the separation of policy-making and regulatory functions in the electricity and natural gas sectors. By the act, ERC will focus on regulatory supervision on the operation of the electricity and natural gas industries, including related interconnection networks, and the Ministry of Energy and the National Energy Policy Council will consider on the energy policy-making function.101 Energy Regulatory Commission is comprised of one Chairman and six other commissioners.102 They, then, have duty to regulate the energy industry and operation to ensure the compliance with the objectives of the Energy Act 2007, under the policy framework of the government.103 The ERC has to issue regulation for energy firms in order to make reliable energy supply as well as protecting consumer interest.104 The ERC, by considering on efficiency of the energy utilization, plant operations and

101 102 103 104

WTO (2008) TRADE POLICY REVIEW Report by the Secretariat Thailand Revision. WTO, p 109 Energy Industry Act BE 2550 (2007) s 10 Energy Industry Act BE 2550 (2007) s 11 Energy Industry Act BE 2550 (2007) s 11

27 market competition is also entitled to give licenses to firms that would like to operate in electricity and fuel industry.105 However, upon the passing of Energy Act 2007, the ERC has not provided significant regulation relating to the reform on the structure and the tariff of electricity and gas industries. According to Jarvis study on the ERC by the interview with the Chairman of ERC, there are problems and issues for ERC that it has ;106 -

No clear line of authorities in reviewing and setting tariffs because the tariffs review is in bargaining situation by ERC, NEPC, and Ministry of Energy. This would lead to the ERC role as commentator rather than the serious regulator for electricity and gas tariffs

-

Lack of regulatory capacity due to the fact that ERC has a limit personals and budgets. The absences of adequate officers who are able to supervise and surveillance on complicate electricity and gas market function would contribute to ERC as the only new institution with no rigid work toward energy market development. The

-

ERC structure and research on energy sector mostly relies on private sector consultancies, with insufficient

internal input into the

adequacy of energy market development -

The applying of UK energy regulatory model in the Thai bureaucratic system and governance may create potentially large risks of ineffective institution.107

-

ERC will have to face with EGAT that has a monopoly position in the transmission sector and over price determination for transmission rates.

It is thus can be implied that the expectation of ERC that will be the major regulator to create an energy market reform is in doubt of a possibility. The institutional problems could render ERC unable to have a rigid role of regulator for

105 106 107

Energy Industry Act BE 2550 (2007) s 51 Jarvis, D. S. L. (2009) supra note 24 p 16-20 ibid p 17-19; According to Jarvis, it is implied that the ERC is only institution that established for superficially modernising the energy regulatory body. Jarvis also states that ERC purely perfunctory compliance obligations rather than being approached as tools that can further regulatory performance through establishing the regulator’s legitimacy or increasing industry understanding of the regulators processes, decision making systems, and its aims and objectives.

28 energy market, especially for electricity industry that the liberalisation has been stalled by the decision of Supreme Administrative court.

Competition protection and promotion The Energy Industry Act BE 2550 (2007) prescribe the role of the ERC to promote the competition of energy market by stating that the objectives of the act are to “promote competition in the energy industry and prevent abusive use of dominance in the energy industry operation and to promote fairness and transparency of the service provision of the energy network systems, without unjust discrimination”108 However, the provisions requiring promotion of competition in electricity market seems to be insufficient for reforming the market structure of Thai electricity market. The market, as provided above, is under the vertically integrated and monopoly EGAT as the single electricity buyer. There is no provisions stipulating the reforming of electricity market structure, and managing market dominance position of EGAT. The act rather preserves the market dominant position of the three SOEs as the main suppliers of electricity market. This can be seen in the section 8(5) of the Energy Act that requires the government to; “Support the electricity industry as the fundamental public utility, the maintenance of the power system security and reliability; in this regard, the government will be responsible for the operation of the power network system business, the power system operator and hydropower plants – with the Electricity Generating Authority of Thailand being the operator of the power transmission system, and the Metropolitan Electricity Authority and the Provincial Electricity Authority being the operators of the power distribution systems -- including the retention of an appropriate share of the power generation capacity of the state-owned electricity industry.”109

108 109

Energy Industry Act BE 2550 (2007) section 7 (3), (4) Energy Industry Act BE 2550 (2007) s 8(5)

29 This section 8(5) that explicitly champion and maintain the oligopoly of Thai electricity market under SOEs would render ERC unable to make further reform in respect of the privatisation and deregulation in order to increase the private participations that can offer more efficient cost and services of electricity for Thai consumers. This also discourages the private participants to entering and competing with the existing SOEs, when considering to their disadvantage on the business competition.110 It is noticed that the draft of the energy act has no provision supporting the SOEs. The draft is prepared by the EPPO to NEPC but it was changed to include the section 8(5) that support the dominant market position of EGAT as well as support the existing structure of public electricity utility under the SOEs.111 It would then contribute a lack of private participation or there will be private participations but have to heavily rely on the coordination from EGAT, PEA and MEA. Moreover, The ERC is unable to take action against the anti-competitive conduct of firm because there is no provision prohibiting the misuse of market power in the Energy Act. The Energy act neglects to forbid the conduct of competition distortion by the firm that has significant market shares, especially EGAT that can control the electricity supply sector. The Act also overlooks the possibility of EGAT, MEA and PEA in using their market power to create market barrier of their essential electricity infrastructures. By this, the ERC may have to face with the situation of inability to deal with the market abuse by the EGAT, PEA and MEA. Furthermore, the general competition law are unenforceable to SOEs. The Thai Competition Act B.E.2542 (1999) section 4 provides the enforcement exemption to Government entities and State owned enterprises. The EGAT, PEA and MEA as the state owned enterprise thus can enjoy privilege rights over their competition law exemption and over non-regulatory mechanism prohibiting their conduct of an abuse of market power.112 This could be the risks and threats to the new coming private participants that would like to enter market and operate at competitive rate with the

110

111

112

See, Geddes, R. (2004) Competing with the Government: Anti-Competitive Behaviour and Public Enterprises. Hoover Institution Press. See draft of Energy act at section 7, from EPPO website Retrieved on June 20 2010 from http://www.eppo.go.th/power/EnergyAct-rev27feb50-E.pdf and Energy Industry Act 2007 section 8 for a comparison See Sioshanisi, F. P. and Pfaffenberger, W. (2006) Electricity Market Reform: An International Perspective. Elsevier Science. See p. 49-52 for discussion on the market power of electricity utilities.

30 three SOEs. When the private participants are abused from the SOEs, there will be no such a legal remedy by which they can seek for protection from an unfair competitive conducts.

Legal framework on Access to essential facilities or Third Party access on electricity infrastructure

The legal framework of Access to Essential Facility (AEF) and Third Party Access (TPA) for the Thai electricity sector has not been established either in the Energy Act or the competition law. The access to essential electricity and TPA on transmission and infrastructures are the important framework for competition to work in electricity market. The frameworks would permit participants, operating in the electricity sector, to have a legally enforceable right to access and use various electricity network facilities owned by other companies.113 Without such framework, EGAT MEA and PEA would prohibit private participants to gain access and operate in their electricity infrastructure. There was an attempt to set up the TPA framework in the master plan of privatisation of electricity sector from NEPO that proposed in its second stage of the plan that EGAT would be a holding company, with a transmission operator under third party access, gradually introduced to allow power producers to sell directly to users, using the wheeling services of EGAT, and MEA’s or PEA’s distribution lines.114 Nevertheless, upon the government’s inappropriate corporatisation and the decision of Supreme Administrative court on EGAT case, the electricity market reform plan was hold, causing the lack of a creation of AEF or TPA frameworks for 113

114

Kotlowski, A. (2007) "Third-party Access Rights in the Energy Sector: A Competition Law Perspective", Utilities Law Review, 16 (3). p 101; PITOFSKY, R. The Essential Facilities Doctrine Under United States Antitrust La,w US Federal Trade Commission, Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy: Notice of Public Hearings and Opportunity for Comment.; Waller, S. W. and Tasch, W. (2009) "Harmonizing Essential Facilities and Refusals to Deal", Antitrust Law Journal, Vol. 76, No. 3, 2010. National Energy Policy Office, (1999) supra note 43

31 Thai electricity sector. The Energy Act that has passed after the court decision also contains no provisions obligating the SOEs to open their electricity infrastructures for private participants.115 This would raise a barrier of market entry to the private participants and renders them to face with the difficulty for market competition. In case that the private investors would like to enter in the electricity markets, they have to considerably rely on the permission from SOEs in order to start their business for supplying electricity to Thai consumers.116 Moreover, the Thai competition law also has no provision concerning AEF or TPA. While competition law can be the instrument to obligate the dominant utility firms to open their infrastructure to the other competitors, Thai competition law seem to be ineffective on this point. This is because, as provided above, the competition law provide exemption for EGAT, MEA and PEA. The exemption would make the private sector disadvantage to compete with the three SOEs. The competition law is also in the silence point on the AEF and TPA cases. Since its enactment, the competition law have not been used in any cases, relating to AEF or TPA. The refusal to deal and refusal to open network for competitors have never been brought to the attention of the competition law authority or to the court determination. This thus requires considerable attention to develop AEF or TPA for Thai electricity sector.

Conclusion The paper presents the development of the Thai electricity sector from the initial period until the current liberalisation reform. It reviews the change of regulatory institution since the establishment of electricity to the current situation. It provides that EGAT, MEA and PEA were established as the government authority 115

116

Energy Industry Act BE 2550 (2007) only states its objective on section 7(6) that the act is to protect the rights and liberty of the energy consumers, local communities, general public and licensees in terms of participation, accessibility, utilization and management of energy under the criteria that are fair for stakeholders. This objective is only focus on protecting consumers but neglect the market operators that have to rely on the SOEs electricity infrastructures. The EGAT, MEA and PEA are able to employ legal authority to permit or prohibit other electricity participants to operate with them

32 providing electricity services to Thai consumers. The three tends to have significant political and market power in determining electricity tariffs. The government, with the view to balancing the strong power of the three SOEs, then established the NEPC with the NEPO to be a government unit assuming power to regulate and make policy for EGAT, MEA and PEA. The NEPO has boldly attempted to reform the electricity market toward liberalisation with the consideration to creating market competition. However, NEPO’s liberalization plan was deviated to only transferring of governmental owner to private owner of electricity utilities. The implementation, without regulatory reform toward competitive structure, rendered the creation of unfair market competition. This determined by the Supreme Administrative court that the both Royal Decrees of EGAT privatisation have to be revoked. After the order of the court, Thai political turmoil has erupted, contributing to instability of Thai government. The implementing reform on the electricity market remains inactive process. The EGAT MEA and PEA still dominate and oligopolize Thai electricity industries.

The regulations of electricity sector has not been

liberalised and still give significant favour to the three SOEs. The ROR and incentive schemes do not lead to the efficiency of Thai electricity sector but provide considerable profits to the three SOEs that tend to create the overcapacity of electricity. The regulation also neglects the PTT gas monopoly that supplies gas to the EGAT and other electricity generators. This causes a double monopoly cost to the electricity prices with which Thai consumers have to face. Therefore, it is necessary to make reform on regulation in order to reshape the Thai electricity industry to have a competitive environment with the expectation on efficiency of market.117 With the newly established Energy Regulatory Commission, it is hoped that the Thai electricity sector would be reformed and developed to meet the high efficiency. It is expected that there will be regulations that improve the electricity tariffs with the supports and protection of market competition. However, it is experienced that the ERC would not reach the expectation of reform and development of electricity market because it still face with institutional problems on shortage of resources and has insufficient information to regulate the politically strong SOEs. Moreover, the requirement for competition protection in the Thai Energy Act would 117

Sirasoontorn, P. (2005) "Regulatory regime and finance: Electricity distribution in Thailand", Thammasat Economic Journal, 23 (4).114-183

33 run at conflict with the provision that set to maintain a structure of SOEs oligopoly and this would not contribute to the increase of market competition in electricity sector. It is also seen that the Access to essential facilities or Third party Access has not been considered both in the Energy act and competition law. This would cause the substantial barrier to the private participants that like to compete with the three SOEs by having to rely on their electricity infrastructures. Therefore, with the view that the regulatory framework and the competition law on electricity still incapable to reform and liberalise Thai electricity market, it is necessary to fine the appropriate construction of both regulatory framework and application of competition law in the electricity market in order to achieve competitive market contexts in the sector that it then will translate to an efficiency of the sector with the result of development of Thai economy.

34

Appendix NEPO’ Plan on liberalisation on Thai electricity sector Stage II: Structure of the ESI

Source: NEPO (1999), Privatisation and Liberalisation of the Energy Sector in Thailand, Retrieved on May 20 2010 from http://www.eppo.go.th/DOC/IDP-07-PRIV29MAR99.HTML

Stage III: Structure of the ESI

Source: NEPO (1999), Privatisation and Liberalisation of the Energy Sector in Thailand, Retrieved on May 20 2010 from http://www.eppo.go.th/DOC/IDP-07-PRIV29MAR99.HTML

35 Stage IV: Structure of the ESI

Source: NEPO (1999), Privatisation and Liberalisation of the Energy Sector in Thailand, Retrieved on May 20 2010 from http://www.eppo.go.th/DOC/IDP-07-PRIV29MAR99.HTML