Document of

The World Bank

Report No. 13468-CHA

STAFF APPRAISAL REPORT

CHINA

SICHUAN POWER TRANSMISSION PROJECT

JANUARY 20, 1995

Industry and Energy Operations DivisionChina and Mongolia DepartmentEast Asia and Pacific Regional Office

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CURRENCY EQUIVALENTS(As of December 1, 1994)

Currency = Yuan (Y)

Y 1.00 = 100fen$1.00 = Y 8.5

Y 1.00 = $0.11

WEIGIITS AND MEASURES

km Kilometer (= 0.62 miles)kWh Kilowatt hour (= 860.42 kcals)GWh = Gigawatt hour (1,000,000 kilowatt hours)TWh = Terawatt hour (1,000,000,000 kilowatt hours)kW = Kilowatt (1,000 watts)MW = Megawatt (1,000 kilowatts)GW = Gigawatt (I million kilowatts)kV = Kilovolt (1,000 volts)kVA = Kilovolt-ampere (1,000 volt-amperes)MVA = Megavolt-ampere (1,000 kilovolt-amperes)mf = Milligramm = Cubic metertce tons of standard coal equivalent

ABBREVIATIONS AND ACRONYMS USED

BERIWREP - Beijing Economic Research Institute for Water Resources and ElectricPower

CNPC - China National Petroleum CorporationCRISPP - China Reform, Institutional Support and Preinvestment ProjectEAR - Environmental Assessment ReportEHDC - Ertan Hydroelectric Development CorporationGEF - Global Environment FacilityGNP - Gross National ProductHIPDC - Huaneng International Power Development CorporationMOEP - Ministry of Electric PowerMOF - Ministry of FinanceSAA - State Audit AdministrationSDB - State Development BankSEDC - Sunblast Energy Development CompanySEPA - Sichuan Electric Power AdministrationSEPC - Sichuan Electric Power CompanySIC - Sichuan Investment CompanySOEs - State-Owned EnterprisesSEIC - State Energy Investment CorporationSPC - State Planning CommissionSPG - Sichuan Power GridSWEPDI - South West Electric Power Design Institute

FISCAL YEAR

January 1 to December 31

CHINA

SICHUAN POWER TRANSMISSION PROJECT

LoAN AND PRoJEcr SUMMARY

Borrower: People's Republic of China

Beneficiary: Sichuan Electric Power Company (SEPC)

Amount: $270.0 million equivalent

Terms: Twenty years, including a five-year grace period, at the Bank'sstandard variable interest rate.

Onlending Terms: The proceeds of the loan would be onlent from the Borrowerthrough Sichuan Province to the Beneficiary under a subsidiary loanagreement on the same terms and conditions as the Bank loan, withthe Beneficiary bearing the foreign exchange risk.

Project Objectivesand Description: The main objectives of the proposed project are to: (a) alleviate an

acute shortage of electricity by the construction of a 500-kVtransmission network for connecting the ongoing Ertan hydroelectricproject to the Sichuan power grid, as well as reinforcing theexisting power transmission system; (b) assist in designing andimplementing a time-bound program to implement power subsectorreforms in Sichuan Province; (c) support the implementation offurther power tariff rationalization; (d) promote transfer ofcontemporary technologies for extra-high voltage transmissionnetworks; (e) strengthen institutional capabilities for environmentalmanagement and resettlement planning; and (f) upgrademanagement and operation capabilities through well-focused stafftraining programs. The proposed project would include:(a) construction of a new 500-kV transmission network consistingof about 2,260 km of 500-kV transmission lines, five transformersubstations (5,250 MVA) and one 500-kV switching station, andreinforcement of the existing transmission network; (b) carryingout of environmental management and resettlement programs;(c) extension of technical assistance for implementation of SEPC'sreform plan, organization improvements, and development ofaccounting and financial management systems; and (d) provision ofengineering and construction management services and training.

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The feasibility study and design report for the project wascompleted by consultants in 1993.

Benefits and Risks: The project will greatly increase the critically needed powertransmission capability of Sichuan Province and the SouthwestChina power grid as a whole. The project is clearly part of theleast-cost development program for meeting future power supplyneeds. The internal economic rate of return of the full Ertanhydroelectric generation and transmission project is estimated atabout 17 percent; the rate of return for the transmission investmentalone is considerably higher. Other intangible benefits are alsoimportant, such as enterprise reform and institutional development,improved power grid operation, and the favorable influence onsociety at large by helping relieve hardships caused by the acutepower supply shortages. Also, through the project, the Bank willbe able to support the Governments power subsector policy andfurther pursue its sectoral objectives in China. The technical andeconomic feasibility of the project has been well established. Inview of the advanced preparatory works, risks associated withproject construction, cost overruns, and implementation delays arewithin reasonable limits and manageable with the agreed supervisionarrangements and involvement of competent engineeringconsultants. Particular attention will be given to the safety aspectsof the project, and to capabilities and performance of majorcontractors. Failure to implement the power subsector institutionaland pricing reforms in an efficient and timely manner is anotherrisk that would be addressed through active and continuous sectorwork and supervision of the project. The economic risks would beminimal. Both the borrower and the beneficiary have givenassurance that tariff increases required for SEPC to achieve itsfinancial targets will be forthcoming, and China's record in thisregard has been good. The project has been designed to complywith applicable Bank and Chinese standards in order to minimizethe environmental impact. An environmental management programwill be included under the project to prevent and reduce thepossibility of developing any adverse environmental problems.

Estimated Costs: Local Forein Total($ million)

A. Transmission Network ExpansionPreparatory works 68.2 0.0 68.2Civil works and installations 123.7 0.0 123.7220-kV transmission system 128.4 0.0 128.4500-kV transmission lines 130.0 60.2 190.2500-kV substations equipment 40.1 175.4 215.5

B. Resettlement and RehabilitationLand acquisition and relocation 12.2 0.0 12.2

C. Technical AssistancePreparation/lImplementationEngineering and administration 12.0 4.2 16.2

Institutional DevelopmentEnvironmental protection 0.3 0.5 0.8Reform plan and management information systems 1.0 1.7 2.7Training 1.0 3.3 4.3

Base Cost 516.9 245.3 762 2

Contingencies:Physical 46.6 15.1 61.7Price 37.9 12.6 50.5

Total Proiect Cost 601.4 273.0 874.4

Interest during construction /a 151.2 53.1 204.3

Total Financing Reuired 752.6 326.1 1.078.7

FInancing Plan:

State Development Bank 526.8 37.2 564.0Sichuan Investment Company 150.5 10.6 161.1Sichuan Electric Power Company 75.3 5.3 80.6IBRD 0.0 270.0 270.0IDA (CRISPP) /b 0.0 3.0 3.0

Total 752.6 326.1 1.078.7

/a Interest during construction (IDC) is based on onlending rates for projected disbursements of loanproceeds. The foreign currency portion of IDC is based on the Bank's variable loan rate.

/b CRISPP (Credit 2447-CHA).

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Estimated Disbursements:

Bank FY 1995 1996 1997 1998 1999 20--------------------- ($ million) -----------------------

Annual 22.5 64.2 75.1 62.8 36.1 9.3Cumulative 22.5 86.7 161.8 224.6 260.7 270.0

Poverty Category: Not applicable.

Economic Rate of Return: 17 percent

Map: IBRD 25932R

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CONTENTS

1 The Energy Sector ................................. 1

A. Overview ................................... 1B. Energy Sector Issues ............................. 2C. Energy Sector Strategy ........................... 5D. Bank Role in the Energy Sector ...... . . . . . . . . . . . . . . . . 6

2 The Power Subsector ............................... 8

A. Background ......... . .. . . .. . . . .. . . .. . . .. . . . . . 8B. Power Sector Reform ....... . . . . . . . . . . . . . . . . . . . . . 9C. Power Pricing ................................. 12D. Electricity Conservation and Environmental Protection ... ..... 13E. Power System Planning and Technology Transfer ........... 14F. Role of the Bank in the Power Sector .................. 15

3 The Beneficiary ................................... 18

A. Legal Status and Organization of SEPC ................. 18B. Action Plan to Commercialize SEPC ................... 19C. Management .................................. 22D. Staffing and Training ............................ 22E. Planning, Budgeting and Control ..................... 23F. Accounting .................................. 23G. Audit ...................................... 25H. Billing and Collections ........................... 25I. Electricity Tarifs ............................... 26

This report is based on the findings of an appraisal mission that visited China in June/July1994. The report was prepared by V. Mastilovic (Task Manager), S. Kataoka (SeniorPower Engineer), H.E. Sun (Financial Analyst), R. Taylor (Senior Economist), N. Berrah(Senior Economist), J. Fritz (Environmental Engineer), Y. Zhu (Resettlement Specialist),and K.C. Ling (Consultant). Peer reviewers comprised: W. Cao (technical), M. Layec(economic), and S. Shum (institutional and financial). The Division Chief is RichardS. Newfarmer, and the Department Director is Nicholas C. Hope.

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4 The Power Market and Progmm ........................ 28

A. The Sichuan Power Grid .......................... 28B. Load Forecast . ................................ 29C. Power Development Program ....................... 29D. Electricity Conservation ........................... 30

5 The Project . .................................... 32

A. Project Objectives .............................. 32B. Project Description .............................. 32C. Cost Estimate ................................. 35D. Financing Plan ................................ 35E. Procurement .... ............................... 37F. Project Implementation ........................... 38G. Disbursement ......... ........................ 38H. Environmental Considerations ....................... 41T. Relocation Aspects .............................. 42J. Project Risks .......... ....................... 42K. Monitoring and Reporting ......................... 43

6 Fiancial Aspects . ................................. 44

A. Introduction . ................................. 44B. SEPC's Past and Present Financial Performance .... ........ 46C. Financial Performance Targets ....................... 47D. Future Finances ......... ....................... 48

7 Economic Justification .............................. 50

A. Project Benefits . ............................... 50B. Least-Cost Analysis ......... .................... 50C. Economic Rate of Return .......................... 51

8 Agreements and Recommendation .......... ............. 52

ANNEXES

1.1 Primary Energy Output in China (1949-93) .571.2 Total Production and Consumption of Energy vs. GNP Growth 58

2.1 Installed Capacity, Electricity Generation, and Consumption in the PowerSubsector .59

2.2 Electricity Consumption by Sectors ...................... 602.3 Major Ongoing Power Projects with External Financing ... ...... 612.4 Future Thermal Power Projects under BOT and BOO Arrangements . 62

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3.1 Action Plan for Commercialization of SEPC ................ 633.2 Performance Indicators for Sichuan Power System ..... . . . . . . . . 683.3 Staffing of SEPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 693.4 Schools and Training Centers Under SEPC ...... . . . . . . . . . . . 703.5 Power Pricing in Sichuan Province ....... . . . . . . . . . . . . . . . 71

4.1 Installed Generating Capacity of Sichuan Power Grid .... . ...... 784.2 Transmission Network of Sichuan Power Grid ...... . . . . . . . . . 794.3 Energy Generation of Sichuan Power Grid ...... . . . . . . . . . . . . 804.4 Energy Consumption by Category of Consumers in Sichuan Province . 814.5 Energy Forecast for Sichuan Power Grid ...... . . . . . . . . . . . . . 824.6 SEPC's Power Development Program (1994-2003) ..... . . . . . . . . 83

5.1 Project Description ................................ 855.2 Consulting Services (Terms of Reference) ...... . . . . . . . . . . . . 965.3 Accounting and Financial Management Systems ..... . . . . . . . . . 1025.4 Management Development and Training ...... . . . . . . . . . . . . . 1065.5 Project Cost Estimate ............................... 1115.6 Procurement Schedule .............................. 1145.7 Key Dates of Project Implementation ..................... 1155.8 Schedule of Disbursements ........................... 1175.9 Environmental Management Program ..................... 1185.10 Land Acquisition and Relocation .1265.11 Bank Supervision Input into Key Activities .1365.12 Framework for Project Monitoring and Reporting ............. 137

6.1 Actual Financial Statements of SEPC (1989-93) .............. 1396.2 Forecast Financial Statements of SEPC (1994-2003) .... ........ 1426.3 Major assumptions to Financial Projections ................. 146

7.1 Economic Justification of the Project ..................... 148

8.1 Selected Documents and Data Available in the Project File ... ..... 150

CHARTS

1. Organization Chart of the Ministry of Electric Power .... ....... 1532. Organization Chart of the Sichuan Electric Power Company ... .... 1543. Project Construction Office ........ . . . . . . . . . . . . . . . . . . . 1554. Implementation Schedule ........ . . . . . . . . . . . . . . . . .. . . 156

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MAP

EBRD 25932R ....................................... 159

TABLS iN TEXT

3.1 Electricity Consumption in Sichuan Province ................ 25

4.1 Load Growth of Sichuan Power Grid ..................... 294.2 Load Forecast for Sichuan Power Grid ....... ............. 30

5.1 Summary of Project Costs . ........................... 365.2 Financing Plan for the Project ........... .............. 375.3 Summary of Proposed Procurement Arrangements .395.4 Implementation Schedule: Estimated Annual Contractual and Other

Payments .40

6.1 SEPC's Key Financial Indicators, 1990-93 .466.2 Key Financial Indicators, 1994-2003 ..................... 48

1. THE ENERGY SECTOR

A. OvERvIEw

1.1 China has become the third largest producer of energy in the world. In 1993,the country's primary commercial energy supply and consumption amounted to 1,117 and1,122 million tons of standard coal equivalent (tce), respectively. Coal is the mostimportant source of energy, accounting for about 74 percent, and oil for 19 percent of thetotal production. Hydroelectric power (5 percent), natural gas (2 percent), and smallquantities of oil shale and geothermal power make up the balance. The largest consumerof energy is the industrial sector (70 percent), followed by households (14 percent),services (10 percent), and agriculture (5 percent). Details of the primary energy outputsare given in Annex 1.1.

Energy Resources

1.2 The main primary energy resources in China are coal, hydroelectric potential,crude oil and natural gas. In 1993, the country produced 1.14 billion tons of raw coal.By the year 2000, China aims to produce 1.4 billion tons of coal a year. However,insufficient transport capacity makes it extremely difficult to move enough coal to the largeconsuming centers in Central and East China. China is rich in water resources and has along tradition of harnessing them for energy and other uses, but only about 9 percent ofit has been developed. Most of the potential is located in the Southwest (70 percent),about 1,500 km away from the main demand centers. The long gestation period forhydroelectric projects has also inhibited the rapid development and utilization ofhydroelectric resources. The country produced 144 million tons of crude oil in 1993, andthe target output for the year 2000 is 200 million tons. In 1993, China produced16.5 billion m3 of natural gas. About 44 percent of the current production is nonassociatedgas, mostly from Sichuan Province. The remaining gas production is associated withonshore crude oil production.

1.3 Noncommercial biomass energy use currently amounts to about one quarterof total energy consumption in China. Fuelwood and agricultural residues are the chiefbiomass fuels, and they are consumed almost entirely by rural households. China ispromoting a variety of measures to achieve environmentally sustainable biomass supply andconsumption levels, including more efficient use of biomass, tree planting, and substitutionof other fuels for traditional biomass fuels.

1.4 Known uranium reserves in China are sufficient to sustain 15,000 MW ofnuclear power capacity for 30 years. China commissioned its first commercial nuclearpower plant (300 MW) in 1992. In 1994, Daya Bay nuclear power plant (2x900 MW) was

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commissioned; 70 percent of its output is intended for nearby Hong Kong. Theconstruction of a few additional plants is planned to start before the year 2000, primarilyin regions that lack coal and hydroelectric resources.

1.5 Other energy resources play a small role in energy supply and are used mostlyin remote areas. Geothermal energy has been found in many locations covering nearly allthe country. Although wind and solar energy have promising prospects, they are notexpected to affect the overall supply of energy significantly in the near future. Oil shaledeposits are large, but little is exploited because of lack of viable technology.

Institutions of the Energy Sector

1.6 The Ministry of Energy (MOE) that had maintained primary responsibilitywithin the Central Government for policy, planning and regulations for the energy sectorwas disbanded in 1993 during a broad govemment reorganization, and a new Ministry ofElectric Power (MOEP) was established, along with a Ministry of Coal and the existingChina National Petroleum Corporation (CNPC). Chart 1 shows the organization ofMOEP. The State Development Bank (SDB), established in 1994, took over the previousresponsibilities of the State Energy Investment Corporation (SEIC) for project financingin the coal and electricity subsectors. SDB is responsible for onlending funds for projectsof national importance and representing the Government in the joint financing of projectswith other parties. The State Planning Commission (SPC), on behalf of the State Council,has the responsibility for review and approval of the strategic plans, investment programsand general pricing policy of the energy sector.

Energy Investments

1.7 Energy investments in the 1980s were planned based on an expected economicgrowth rate of 7.5 percent a year. Actual economic growth rates exceeded this target bya significant margin, which has exacerbated energy shortages already existing at the outset.Under the Seventh Five-Year Plan (1985-90), the Government gave high priority to energyand also to the transport sector, a bottleneck in economic development. In 1993, Chinadedicated 3.3 percent and 1.9 percent of its Gross National Product (GNP), respectively,to develop infrastructure for energy production and transportation. It invested a total ofY 80.4 billion ($14 billion) in the energy sector, representing 27 percent of state capitalconstruction, as against 21 percent in the early 1980s. The power subsector accounted for61 percent of the total. About 20 percent of the investment requirements of the Chineseenergy sector are met by foreign loans and direct investments.

B. ENERGY SECTOR ISSUES

1.8 In addition to the already noted shortages, the main energy sector issues inChina are: (a) the efficiency of energy supply and use; (b) the dominance of coal andassociated environmental problems; (c) scale and technology in energy industries;(d) rationalization of energy pricing policies; and (e) institutional, regulatory and enterprisereform.

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Efficiency of Energy Use

1.9 China's energy consumption per capita is low, but consumption per unit ofGNP is high compared with other countries. The high share in GNP of industrial output,the structure of industry, the use of inefficient technology, and inadequate energymanagement practices are major factors that contribute to this. Efforts to improve theefficiency of energy use have been a cornerstone of China's energy policy. Particularprogress has been made in building a strong institutional framework for energyconservation. During 1980-92, China's energy intensity per unit of GNP fell by about 30percent in real terms (Annex 1.2). Nevertheless, further improvements in energyefficiency are crucial. Energy supply targets for the 1990s imply that only about one halfof the increased energy services required will come from new energy supplies, while theother half should come from energy efficiency improvements. This will require majorprogress in addressing structural and systemic issues as well as still stronger programs toupgrade inefficient technology and strengthen energy management.

Dominance of Coal and Associated Enviromnental Problems

1.10 Many of China's air pollution problems are related to the heavy use of coaland its dispersed, small-scale application in industry and households. Environmentalproblems occur at every stage of the coal chain; mining and disposal of mine waste, coalwashing, transport and handling, processing and combustion, and ash ultimately disposal.The ambient concentration of particulates is the most serious problem; it is largely relatedto the dominant small-scale use of coal, its high-ash content (20-30 percent), and the oftenincomplete combustion. The average sulfur content of the coal is relatively low (about1.1 percent), but because coal is used so extensively sulfur dioxide emissions areincreasing.

1.11 The environmental implications of continued increases in coal use highlight theneed for the strict enforcement of environmental regulations and more investment toconserve energy to mitigate the environmental effects of unnecessary coal consumption.Incorporation of modern technology, achievement of suitable scale economies, andelimination of backward small-scale capacity units is a key to improving coal utilizationin many subsectors such as thermal power generation. The scope for substituting cleanerfuels remains limited. The country has insufficient proven natural gas resources; itsproduction of oil is increasingly absorbed by transport and petrochemicals; and largehydropower resources are located far away from major consuming centers.

Scale and Technology in Energy Industries

1.12 Coal Subsector. Over half of the coal produced in China comes from small-scale mining operations. Exploitation of large coal reserves through uncoordinated small-scale mining has often led to inefficiencies in production and a waste of coal resources.In the larger mines, productivity and safety could be increased by making greater use ofmechanized systems and applying more efficient mining methods.

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1.13 Power Subsector. Large-scale power development in China is beneficial fromthe standpoint of both energy conservation and environmental protection. Modem thermalpower plants, with unit capacities of 600 MW, are far more efficient than smaller units(para. 2.28). The boilers of the modem utilities also support better pollution control, thusraising the efficiency of particulate removal.

1.14 Petroleum Subsector. In the petroleum subsector, there is a need to employmore modem equipment and technology at all stages of exploration and development;seismic survey and related data processing, exploratory drilling, and enhanced oil recoveryin order to increase production from aging fields. Improvements in operating andmaintenance practices are also needed to increase the efficiency of the subsector.

Energy Pricing

1.15 Energy price reform has proceeded steadily during recent years, resulting insubstantial increases in real energy prices. In the mid-1980s, dual-track energy pricingwas developed, whereby energy supplies allocated under the national plan were priced at"oin-plan" prices, at levels well below incremental production costs or border prices, whilehigher, market-based prices were charged for energy supplied through the market ("outsideof the plan"). Over the years, in-plan prices increased in real terms, and the portion ofenergy allocated at in-plan prices greatly declined.

1.16 The Govemment has declared its commitment to abolish low, in-plan pricesfor all the chief forms of energy by the end of 1995, with the exception of a few consumercategories (e.g., ammonia-based fertilizer producers). The country is now in the processof completing this transition to market-driven prices. In general, average consumer energyprices are now close to the economic costs of supply in the principal demand centers.Distortions remain, however, in both the structure of prices and inequitable treatment ofdifferent producers and consumers, requiring further concerted action to complete thetransition to a truly efficient pricing system suitable for the emerging market economy.

1.17 In 1994, the Government is completing implementation of full deregulation ofcoal prices, so that all coal will be supplied at market-driven prices which are generallyin line with the economic costs of domestic production and distribution and are close to orabove international export price parity levels.

1.18 The average retail price levels of major light petroleum products now are equalto or exceed border prices. Average prices of crude oil and heavy fuel oil, however, havebeen kept substantially lower. In 1992, the Government indicated that crude oil priceswould be increased to intemational levels by the end of 1995. In July 1994, crude oilprices were sharply increased, closing the gap with intemational prices in the case ofsecond class crude. Natural gas well head prices were increased by 40 to 50 percent in1992, and as part of a gas pricing reform action plan under the Sichuan Gas Developmentand Conservation Project (Loan 3716-CHA) by a further 80 percent in 1994. Producerprices for natural gas remain distorted and the Sichuan Project provides for continuingprice reform to provide better incentives to find and develop more resources.

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1.19 Major progress has been made in increasing electricity prices; in East China,for example, average consumer prices now approximate the long-run marginal costs(LRMC) of supply. Substantial improvements also have been made in producer prices in1993 and 1994. Although average levels still need to be increased to better reflecteconomic costs in some areas, such as Sichuan Province, many of the remaining problemsin the electricity pricing system lie with its structure, unnecessary complexity, lack oftransparency, and continued inequitable treatment of different types of producers andconsumers (para. 2.21).

Economic System and Enterprise Reform

1.20 The process of transformation from a command economy to a market-basedeconomic system was initiated in China in the late 1970s. It has gained momentum inrecent years, fueled by past successes and the strong economic performance of the moreliberalized sectors of the economy. Considerable progress has been made in putting inplace the appropriate macroeconomic policy framework for the transition to a marketeconomy, from trade to price liberalization, to encouragement of foreign investment andnonstate enterprise development, to decreased involvement of Government agencies in themanagement and operations of state enterprises. Since mid-1992, efforts to reform China'sstate-owned enterprises (SOEs) have stepped up sharply, with the promulgation of newregulations granting greater autonomy to enterprises, and reorganization of the Governmentto reduce its role in enterprise operations. A wave of initiatives also has been launchedto untie the social obligations which constrict SOEs and provide a more market-orientedoperating environment, through reforms in the financial sector, fiscal system, pricing,housing and the social security system. These reform efforts are indicative of theGovemment's resolve to transform gradually the state-owned enterprise system into astructure of truly independent corporations. However, given the complexity and multi-dimensional nature of the enterprise reform, it will take time to complete the process.

1.21 System reform in the energy sector has been following the trends in the otherparts of the economy. In the power subsector, the pace and depth of the reform programhas increased especially since mid-1992; the Government is proceeding with a far-reachingprogram to commercialize the country's power companies, to revamp the regulatory andlegal framework within which these companies operate, and to develop more diversifiedsources of financing, including private participation (para. 2.18). In the oil and gas sector,recent achievements include the further opening of concessions to international oilcompanies, major price reforms, and the introduction of competition among the variousnewly created subsidiaries of CNPC. Emphasis is now being given to thecommercialization and corporatization of CNPC, as part of the drive towards greatermarket orientation (see China: Sichuan Gas Development and Conservation Project, SAR).In the coal sector, progress in reform has been slower.

C. ENERGY SECrOR STRATEGY

1.22 Sector reform now plays a central role in China's energy development strategy.To reduce the prevailing energy shortages in today's environment of rapid economic

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growth will require further major improvements in the efficiency of the supply system, indomestic and foreign capital mobilization, and in energy use. The Government iscommitted to the reforms needed to make these improvements, including thecommercialization of enterprises, the achievement of greater autonomy with respect to thegovernment, regulatory and legal reforms to provide the framework for more market-oriented enterprises, promotion of competition, completion of price reforms, and adoptionof a variety of new means to mobilize financing.

1.23 Efforts to improve the efficiency of energy use remain a comerstone ofChina's energy policy; it is well recognized that China's economic development goalscannot be attained without further major efficiency gains. Focus on environmental issuesin China's energy policy also has increased sharply in recent years. While heavy relianceon coal is an unescapable necessity in China for the foreseeable future, improvements inthe efficiency of coal use and reduction of pollution from coal are recognized as critical.The Govemment's strategy focuses on (a) strengthening environmental policy andregulation of emissions, (b) restructuring and renovation of inefficient, polluting industrialcapacity, (c) achievement of greater efficiency and enhanced pollution control throughdevelopment of large-scale power and industrial plants that properly capture scaleeconomies, and (d) transfer and development of more efficient and cleaner industrial andcoal utilization technology.

D. BANK ROLE IN THE ENERGY SECTOR

1.24 The Bank has supported 14 projects in electric power development, 5 inhydrocarbons (including one natural gas project), and one in coal. In these projects,particular progress has been achieved in the Bank's support for transfer of moderntechnology, development of efficient large-scale energy production facilities, promotion ofmodem management practices, improvements in power system planning, rationalization ofenergy pricing, and greater attention to environmental issues. With the Bank's assistance,the Chinese have developed capabilities to assess properly the economic costs of electricpower and coal projects, and formulate their price reform strategies. In the case of electricpower, a joint effort to establish LRMC and pricing principles for East China has beenfollowed up through the development of provincial tariff reform action plans under recentpower loans. A strengthening in environmental and resettlement policies and programs hasbeen achieved through Bank assistance to develop and apply new methodologies andapproaches for environmental impact assessments and resettlement planning, and adoptionof environmental and resettlement procedures in strict conformity with Bank and nationalstandards.

1.25 The Bank's assistance program for energy in China places special emphasison energy conservation, improved coal utilization and sector reform. Through sectorwork, technical assistance and lending operations, the Bank is pursuing a program ofassistance to increase energy efficiency, improve coal utilization and reduce air pollutionstemming from coal use. A dialogue with the Government has been established throughthree joint studies, Efficiency and Environmental Impact of Coal Use (Report No. 8915-CHA, 1991), Environmental Strategy Paper (Report No. 9669-CHA, 1992), and the

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Energy Conservation Study (Report No. 10813-CHA, 1993). Further technical assistanceand pre-investment work is under way with support from the Global Environment Facility(GEF), including a joint study by Chinese agencies, the Bank and UNDP, to examineoptions for greenhouse gas emission control (China: Issues and Options in Greenhouse GasEmissions Control, 1994). A program of new GEF investment projects is beingdeveloped, including projects to promote the development and production of high efficiencyindustrial boilers, encourage energy conservation investment in industrial enterprises, andothers. Because the issues involved concern energy use across the economy, investmentand policy support also will continue to be provided through industry andurban/environment Bank lending operations, as well as those in the energy sector.

1.26 The Bank is actively involved in providing assistance for China's reformefforts in the oil, gas sector and power subsectors. Following completion of a successfuljoint workshop in China on petroleum sector reform in 1992, a major technical assistanceeffort has been launched with Japan Grant Facility assistance to review (a) establishmentof an appropriate legal and regulatory framework for the oil and gas sector, (b) competitionpolicy and petroleum market development, and (c) institutional restructuring of CNPC.The Bank's power sector assistance program includes sector work, technical assistance andlending operations, at central, regional and provincial levels. At the central level, a 1993study, "Strategic Options in Power Sector Reform in China," supported by the InstitutionalDevelopment Facility (IDF), provided a vehicle for dialogue between the Bank and keynational and provincial representatives. Follow-up sector work culminated in the recentsector report "China Power Sector Reform: Towards Competition and ImprovedPerformance," Report 12929-CHA, 1994. The dialogue at regional and provincial levelsis being developed primarily through lending operations, which focus on implementationof key aspects of power sector reform and extension of the reform program from advancedcoastal provinces to less-developed interior provinces.

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2. THE POWER SUBSECTOR

A. BACKGROUND

2.1 China is the fourth largest producer of electricity in the world. By the end of1993, China's total installed capacity reached 182.9 GW, with 75.6 percent based onthermal power and 24.4 percent based on hydropower (Annex 2.1). China has 13 powernetworks with capacities of 1 GW or more. They include five regional power grids (EastChina, North China, Northeast China, Central China and Northwest China), whichcoordinate the systems of several provinces together, and eight major separate provincialgrids. The total length of the extrahigh voltage transmission lines reached 8,660 km andthe capacity of substations amounted to 30.9 GVA. Including all aspects of the powersupply, regardless of ownership, transmission and distribution losses in China's powersystem amount to about 16 percent of generation.

2.2 Total power generation in China reached 836 TWh in 1993, of which thermalpower accounted for 82 percent. The share of hydroelectric power has remained fairlystable over the last decade and the Government has maintained a strong commitment tohydropower development, but the distance of major resources from load centers inhibitsmore rapid development. In thermal power, coal-fired plants provide about 90 percent ofgeneration. The share of oil-fired generation, accounting for most of the balance, hasdeclined sharply since the early 1980s. Natural-gas based generation is virtually negligibleand is expected to remain so barring unforeseen major natural gas discoveries.

2.3 Although China's current power development program emphasizes addition of200-600 MW units, over one half of China's thermal power capacity is still in units below200 MW. Only about 15 percent is in units of 300 MW or more, compared to 60-80percent in industrialized countries. The average gross conversion efficiency of thermalunits over 6 MW has improved steadily over the 1980s, reaching 31.8 percent in 1992.This efficiency level is not unreasonable given the low average unit sizes in operation, butis substantially lower than the 36-37 percent typical of systems with larger units.

2.4 Industry continues to dominate electricity consumption in China, accountingfor 76.6 percent of electricity use in 1993; 6.3 percent was consumed by agriculture,8.9 percent by residential users, 6.3 percent by municipal and commercial consumers, and1.9 percent in transportation/communications (Annex 2.2). Although service is of unevenquality, rural access to electricity is high; 96 percent of the nation's villages and about80 percent of rural families now have access to electricity.

2.5 Between 1980 and 1993, total power generation in China grew at an averagerate of 8.0 percent per year. Growth was particularly robust during 1985-88. It tapered

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off during 1989-90, when economic growth slowed, but picked up once again, withincreases in generation of 9 percent in 1991, and 11 percent in 1992 and 1993. Industrialdemand has continued to drive overall power demand; 74 percent of incremental electricityuse between 1985 and 1993 was in the industrial sector.

2.6 Despite the strong growth in electricity output, most areas of China continueto suffer from severe power shortages. Since GNP grew by 9.3 percent per year duringthe 1980-93 period, the elasticity of electricity consumption growth relative to GNP growthwas only 0.86, an exceptionally low elasticity for any country over a sustained period, andparticularly for an industrializing country such as China. Chinese officials estimate thatthere is a shortfall between peak power demand and supply of 10-20 percent. Daily loadcurves are relatively flat, as industries have had to respond to power shortages during thepeak daytime periods through rescheduling of work shifts. The minimum load factor inthe Sichuan power grid in 1993, for example, was 82 percent.

2.7 China's GNP is expected to grow by at least 8.0-9.0 percent per year during1994-2000. This rapid economic growth will put tremendous pressure on China's electricpower industry to avoid yet worse shortages. Building further upon the gains achievedover the last 10 years, the country's programs to increase the efficiency of electricity usemust be greatly intensified. Even so, China's electric power construction program for the1990s will almost certainly be the world's largest. Assuming that an aggressiveconservation effort can enable an electricity demand/GNP growth elasticity of 1.0 to besustained, electricity demand could be expected to continue to grow at average rates of8-9 percent per year during 1994-2000. This implies an increase in production from621 TWh in 1990 to 1380-1480 TWh in 2000, and a growth in installed capacity from138 GW in 1990 to 300-330 GW in 2000. To keep pace with this demand growth, Chinawould need to add some 17-20 GW of capacity per year, compared to the 14 GW addedin 1991 and 13 GW added in 1992.

2.8 The principal issues which must be addressed in order to successfully meetChina's development challenge in the power sector are discussed in the sections below.

B. POWER SECTR REFORM

Achievements

2.9 General. Reforms in China's power sector during the 1980s involved a seriesof incremental adjustments, largely responding to the need to mobilize additionalinvestment capital to finance rapid growth. Taken together, however, these adjustmentshave resulted in a sector structure that is largely unrecognizable from that of the previousthree decades. In 1980, the power sector was fully controlled, managed and funded byCentral Government departments, led by the Ministry of Water Resources and ElectricPower. By the early 1990s, however, the sector had become much more decentalized andless vertically integrated. Particular progress has been made in diversification of financingsources, institutional restructuring, and electricity pricing reform.

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2.10 Diversification of Financing Sources. Following change in investmentfunding from Government grants to loans in the early 1980s, the Government encouragedthe development of financing for new projects from additional sources including provincialand local governments, independent corporations, and, in some cases, private foreignpartners. Since the mid-1980s, the Government has allowed power produced from powerplants financed through these nontraditional sources to be sold at prices that provide foradequate debt servicing and reasonable profit. The share of Central Government financingin power sector investment has fallen sharply, from 91 percent in 1980 to 30 percent in1992. Empowered with rights to impose surcharges to accumulate funds for investmentin power construction, provincial and local governments have become a key source offinancing, providing about 40 percent of the investment funding for the sector in 1992.

2.11 Newly formed corporations also have become important players. The HuanengInternational Power Development Corporation (HIPDC) was formed in 1985 with the aimof attracting foreign capital and technology for power plants located mainly in coastalareas. HIPDC had a mandate to raise funds from the intemational financial market, andit has tapped bilateral and suppliers' credits, and commercial bank loans. It is now seekingforeign equity participation. The recently established Sunburst Energy DevelopmentCorporation (SEDC) is another window for the Government's investment in cofmancingwith the local govemments and foreign sources in energy projects, with three large thermalpower projects now under implementation.

2.12 As an independent power producer, HIPDC operates its 15 plants (5,800 MWtotal) under a build, own, and operate (BOO) framework. Build, own and transfer (BOT)schemes also have been introduced in China, most notably the privately financed ShajiaoB thermal power plant in Guangdong Province. Current Govemment policy encouragesgreater foreign direct investment in the sector (para. 2.18, and Annexes 2.3 and 2.4!.

2.13 Institutional Restructuring. Provincial power companies have become theutilities in charge of management and operation of the bulk of the nation's power system.The newly created MOEP is charged with overall sector coordination and policy guidance,and is no longer involved in enterprise management. Regional power entities are chargedwith responsibilities for regional grid coordination and dispatching.

2.14 The nature of the provincial power companies varies substantially, but fewremain as monopolies of the power supply systems in their respective provinces. At thedistribution level, about one third of the country's urban distribution companies and fivesixths of the country's rural distribution utilities are separate economic entities. At thegeneration level, semi-independent joint-investment plants and fully independent powerplants have been developed in many areas, selling power to the provincial powercompanies.

The Current Reform Agenda

2.15 In line with stepped-up national reforms towards a market economy begun inmid-1992, the Government recently initiated a broad program of sector reforms in the

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electric power industry. The reform agenda includes: (a) further commercialization ofpower companies, including provision of greater autonomy; (b) rationalization of powertariffs; (c) realignment of the regulatory and legal framework for the sector, including thepromulgation of a National Electricity Law, and (d) strong encouragement for furtherdiversification in financing for power development, including private sector participation.

2.16 Commercialization and Corporatization. The goal is to develop the nation'spower companies into efficient, commercial, autonomous entities, fully responsive tomarket forces. The most important steps towards this goal, which also will be supportedin Sichuan through this project, are:

(a) Separation of government functions from power companies. To transformcompanies into commercial entities, government regulatory functions must beentrusted to agencies separate from the power companies, and the powercompanies should be given the mandate to operate as business-orientedenterprises.

(b) Strengthening of power company autonomy. In particular, provincial powercompanies need to be granted greater financial autonomy, including expandedrights to undertake investments and to raise funds.

(c) Adoption of modem, commercial accounting and financial reporting practices.In line with the introduction of international accounting practices, efficient costaccounting and financial reporting systems are necessary to enable powercompany managers to control costs and accept financial accountability.

(d) Clarification of asset ownership rights.

(e) A narrowing in power company operations to core activities, and gradualelimination of social welfare responsibilities, initiated through current effortsto "spin off" peripheral operations, and deepened as reforms proceed in thesocial security system, unemployment insurance, etc.

(f) Corporatization in the form of limited liability or limited shareholdingcompanies.

2.17 Legal and Regulatory Reform. China is in the process of developing anoverall legal and regulatory framework for operations in the power industry. The existinglegal framework consists of a multitude of inconsistent regulations and rulings, developedover many years. There is a need to establish both the principles and model contracts forestablishing more transparent and efficient economic relationships between the variousentities now involved in the sector, including different grids, semi-autonomous joint-investment power plants and independent power producers. To meet the needs of the newmarket-oriented environment, the Central Government is preparing a new Electricity Law,which will provide the umbrella principles for the legal and regulatory system for thesector, for possible promulgation in 1995. The Central Government also is preparing a

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series of more specific regulations, consistent with the principles of the proposed Law.The emerging new regulatory system for the sector will include different governmentregulatory functions at central and provincial levels, and will include the separation ofgovernment oversight functions from power company management.

2.18 Further Diversification of Fnancing Sources and Private Participation.Financing of China's major power expansion program during the 1990s (para. 2.7) willrequire aggressive efforts to mobilize increased resources through all potential financingchannels. The Government recognizes that domestic sources of financing and borrowingsfrom international multilateral and bilateral institutions will not be sufficient to meet thesector's financing needs. Accordingly, the Government is encouraging direct foreigninvestment in the power industry. Independent power production schemes that havealready been developed or are slated for future expansion include privately owned BOTschemes and Chinese/foreign joint venture BOO schemes. Many other such schemes arein the negotiation stages, but progress is slow because the Government has no clearregulatory framework and policies to encourage competition at entry. Rapid expansion ofthis form of foreign investment may also require Government acceptance of higher ratesof return to investors and acceptance of a greater share of risks especially foreign exchangeconvertibility and other policy-related risks. Competitive bidding for power projects wouldbe the best means of establishing the market rate of return to international investors.

C. POWER PRICG

2.19 Electricity price reform in China has involved a series of incremental changestaken over the last 10 years. In the mid-1980s, multiple-track pricing was introduced forboth producers and for consumers, in line with the shift away from full vertical integrationin the industry (para. 2.13). This strategy was successful in increasing overall tariff levelsin most regions but, by the end of the decade, the power pricing system had become toocomplex and difficult to manage. Recent reforms have therefore focused on simplificationand rationalization of the system.

2.20 Producer Prices. A full overhaul was completed during the summer of 1993of the state catalog prices charged for power produced by plants financed by the CentralGovernment. Prices for the electricity produced from all new power plants are now setby contract to cover financing and operating costs, on a plant-by-plant basis, and rolledinto the power tariff. Cost recovery through the tariff system for new investments is thusensured. The electricity tariff applied for plants built with grant financing before 1985 hasbeen revised and rationalized, and now includes an improved mechanism for automaticadjustment in prices to reflect annual changes in fuel costs. Revision of producer pricesfor old power plants to provide for an appropriate rate of return on revalued assets isexpected shortly.

2.21 Consumer Prices. Consumer electricity prices include summations of the statecatalog prices; the costs of the growing other sources of power supply not financed throughthe Central Government; and a series of local fees and surcharges. While the situationvaries somewhat between regions, the nature of the existing pricing system is such that

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average consumer prices can now be expected to approximate LRMC levels in areas withrapid load growth, such as the coastal provinces. Prices in less-developed areas relyingheavily on hydroelectric power, such as Sichuan Province, may still be somewhat belowLRMC levels, but should gradually be brought into line with growth in new capacity.

2.22 While tariff levels are approaching satisfactory levels in most regions, thestructure of consumer prices, however, remains too complex, lacks transparency, and isinequitable. In most areas, unfair "old" administered rates and "new" guidance ratescontinue to be applied to different consumers. Some consumers are protected from highcost electricity supply charges and certain local surcharges because they still hold "in-plan"quota allocations, but other new or small consumers must pay high prices well above actualsupply costs.

2.23 Directions for Further Reform. While the 1993 reforms brought majorimprovements, further reforms are still necessary to increase tariff levels in the regionswhere they still remain somewhat under the cost of economic supply, and to simplify andrationalize the power tariff system. Reforms to both increase the price level and tosimplify and rationalize the consumer tariff in Sichuan will be supported under theproposed project (paras. 3.28-3.31).

D. ELECTCIY CONSERVATION AND ENVIRONMENTAL PRoTECTIoN

Electricity Conservation

2.24 The industrial sector is the key to more efficient use of electricity (para. 2.4).At a macro level, the most important factors determining China's ability to produce moreeconomic output with less electricity are the share of industry in future growth and changesin industrial structure. Other especially important issues include the rate of modernizationin industrial process technology and China's ability to produce and disseminate highefficiency electricity-using equipment, such as transformers, motors, fans, pumps, andcooling equipment.

2.25 China has over 10 years of experience in the active promotion of electricityconservation, with a solid record of achievement. The strength of its program lies in thewell-developed institutional framework. Electricity conservation is handled by the networkof Three Electricity Offices, with offices at central, provincial, prefectural and countylevels throughout the country. These offices are under the leadership of local EconomicCommissions, and coordinate their work with provincial power companies. They monitorelectricity intensity and use pattems in all major enterprises, promote adoption ofconservation technologies and electricity management improvements, and assist, at times,in organizing funding for efficiency improvements.

2.26 Further improvements in the efficiency of electricity use are imperative ifChina is to realize its economic growth goals. Three areas that are receiving increasedattention include: (a) improvements in coordination between industrial planning andelectricity demand and supply planning at local levels; (b) expansion of programs to reduce

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losses in power distribution systems; and (c) development, production and disseminationof high efficiency equipment, including variable-speed motors and modem appliances.

Environmental Protection

2.27 Thermal power production currently accounts for about one quarter of China'scoal consumption, and this share is expected to increase gradually. Improvements in theefficiency of coal use in this sector not only alleviate pressure on the coal production andtransportation system, but also have a major impact on particulate, and sulfur and carbondioxide emissions.

2.28 The achievement of economies of scale in thermal power production, throughexpanded development of large generating units, is an issue of overriding importance.Particularly disturbing is the recent rapid growth of small coal-fired power plants, in unitsizes of 50 MW or less. While national policy emphasizes the addition of 300 MW and600 MW units, new projects have lagged behind demand, largely due to difficulties inmobilizing the necessary large investment resources. As a consequence, local governmentsare continuing to invest in large numbers of new small plants. Compared with a state-of-the-art plant, these plants consume over 60 percent more coal per unit of electricityproduced. This results in at least 60 percent higher sulfur dioxide emissions (dependingupon the coal used), and roughly 60 percent greater emissions of carbon dioxide.Particulate emissions from the small plants are proportionally even higher, due to use ofinefficient particulate control technology. If a sufficient pipeline of large-scale projectscannot be brought on stream in a timely fashion, there is little doubt that this problem willworsen.

2.29 Jn terms of emission control in large- and medium-scale plants, China hasmade substantial progress in particulate control, through deployment of high-efficiencyelectrostatic precipitators. As the country has large reserves of low sulfur coal, China isjust beginning to employ sulfur dioxide control devices in the power sector. Top priorityshould be given to areas that must rely on local high sulfur coal, such as in SouthwestChina. In these regions, thermal power plants often bum coal of over 4 percent sulfurcontent (e.g., 5-10 times the level typical through most of North and East China), anddevelopment of sulfur dioxide control strategies and corresponding investments are nowurgent in these areas.

E. POWER SYSTEm PLANNING AND TECHNOLOGY TRANSFER

2.30 Power System Planning. Support for strengthening China's capabilities inleast-cost generation planning in both East China and Sichuan was provided under previousBank loans. As provincial systems become more complex, increased emphasis is requiredon transmission and distribution planning.

2.31 Modern Technology Transfer. For China to achieve its ambitious goals forthe power sector, the transfer of appropriate modem technologies will be crucial. This isparticularly important for thermal power plants, where increases in the steam parameters

- ~~ - - -- - - - -_- -

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and unit sizes can improve efficiency and reduce atmospheric emissions. Technologytransfer is also needed for large hydroelectric projects, particularly in connection withproject management to reduce construction times, generating equipment quality andenvironmental assessments.

F. ROLE OF THE BANK IN TEI POWER SECTOR

2.32 The Bank has supported the Government's efforts to foster efficient andsustainable development of the power sector through sector work, policy dialog, and aseries of lending operations. In previous years, the Bank's participation in the powersector in China has particularly focused on institution building, price reform, improvementsin system planning, and the transfer of appropriate modern technologies.

2.33 The Bank has helped to finance 14 large power generation, load managementand transmission projects (six thermal, seven hydro, and one transmission). Through theseoperations, the Bank has helped to introduce: (a) latest techniques in generation,transmission and distribution planning, and system operations and control; (b) modernequipment for generation, pollution abatement and system control; (c) new methods ofproject planning, design, construction management, and environmental impact assessment;and (d) improved financial planning and utility management.

2.34 All of the power projects financed by the Bank are being implemented in asatisfactory manner, generally on schedule, and within budget. The first two operations,Lubuge Hydroelectric Project (Loan 2382-CHA) and the 500-kV Xuzhou-ShanghaiTransmission Project (Loan 2493-CHA) have been successfully completed. The YantanHydroelectric Project (Loan 2707-CHA) is also nearing completion. Several initialproblems in the implementation of the Shuikou Hydroelectric Project (Loan 2775-CHA andLoan 3515-CHA) were resolved and commissioning was almost on schedule. Theconstruction of the Ertan Hydroelectric Project (Loan 3387-CHA), DaguangbaMultipurpose Project (Loan 3412-CHA and Credit 2305-CHA) and TianhuangpingPumped-Storage Hydroelectric Project (Loan 3606-CHA) is now progressing well. Thesix thermal power projects were Beilungang (Loan 2706-CHA), Wujing (Loan 2852-CHA),Beilungang Extension (Loan 2955-CHA), Yanshi (Loan 3433-CHA), Zouxian (Loan 3462-CHA) and Yangzhou (Loan 3718-CHA). Wujing was completed on schedule. Beilungangencountered some delays due to poor coordination of suppliers during erection andcommissioning. Unit No. 1 was put into commercial operation in 1992 and Unit No. 2was commissioned in 1994, about one year behind schedule. Yanshi and Zouxian areproceeding on schedule.

2.35 The lessons learned from lending operations for the power projects in Chinahave been taken into account in preparing the proposed project. These lessons basicallyinclude: (a) improving procurement and contractual arrangements; and (b) enhancing therole of project management and the use of engineering consultants. Particular attention hasbeen given to the environmental aspects of the projects. Supported by the use of CRISPPand other technical assistance funds, implementing agencies have shown improvements incarrying out management development, staff training and studies. Commitments related

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to meeting financial performance targets and enterprise reform are also being fulfilled moreconsistently.

The Current Bank Power Sector Assistance Program

2.36 To support the Government's ambitious program in power sector reform(paras. 2.9-2.23), and in keeping with the Bank's assistance policies in the power sector,the Bank has developed a new power sector assistance program in China that places centralfocus on reform. This program is discussed in detail, together with complete analysis ofthe related issues in the recently issued report "China Power Sector Reform: TowardsCompetition and Improved Performance (Report 12929-CHA, 1994)."

2.37 In line with the Bank-wide power policy (The World Bank's Role in theElectric Power Sector, 1993), the Bank's power sector assistance program includes anintegrated package of sector work, technical assistance and lending operations, at central,regional and provincial levels. At the central level, a strong dialog on reform has beendeveloped through completion in 1993 of a study entitled "Strategic Options in PowerSector Reform in China," involving the Bank and key national agencies, with support fromIDF. Arising from this study was the recently completed Power Sector Strategy Paper.Specific follow-up also was provided with a study aimed at identifying options formobilizing domestic and foreign savings in the power sector. In the area of regulatorypolicy, a new initiative has been launched with central authorities, with IDF support, toprovide technical assistance for the development of an improved legal and regulatoryframework for the power industry.

2.38 The dialog at the regional/provincial level is being developed primarily throughlending operations. While the concentration of each operation varies, all new power sectorlending operations in China are being designed to focus on implementation of key aspectsof the overall reform program. Some operations, such as the Yangzhou and ZhejiangProjects, concentrate on deepening the reform program in relatively advanced provinces,and the implementation of reform initiatives that can serve as models for other areas.Other operations, such as this proposed project, concentrate on extending the reformprogram to less-advanced inland regions, in part through dissemination of experiencesgained elsewhere.

2.39 The Power Sector Reform report identified six main points to provide the focusfor Bank assistance:

(a) Clarification of ownership and movement towards corporatization of powerenterprises. Key goals are to delineate ownership and regulatory functions andclearly separate them from enterprise management. Corporatization also willprotect the autonomy and commercialized operation of power enterprises.

(b) Promotion of competition in generation and contractual arrangements topromote market mechanisms, with proper regulation of monopolistic segments.

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(c) Further rationalization of electricity pricing, focusing in the short term onunification of industrial tariffs, to provide equal treatment to consumers andgradually to reduce cross-subsidies.

(d) Promotion of new sources of financing and further involvement of domesticand foreign equity investment in wholly foreign-owned projects and jointventures.

(e) Improved investment planning and technical efficiency, taking furtheradvantage of potential economies of scale and means to reduce losses in thepower system.

(f) Reduction of the environmental impacts through energy conservation andpromotion of modem technologies and effective pollution control techniques.

2.40 Achievement of these objectives will require establishing a stronger legal andregulatory framework for the power subsector. The Bank will therefore continueassistance efforts in several areas, but will especially strengthen the ongoing, moreintegrated dialog on legal and regulatory reform issues with central authorities, and supportthe Government's efforts to introduce the Electricity Law and design and implementdetailed regulatory procedures.

2.41 As explained in Chapter 3, the proposed project supports the Bank strategy inthe power sector in a number of areas. Through this project, the Bank will support theimplementation of an ambitious program of tariff reform, and the process of transformingSEPC-one of the largest provincial power companies in the country-from its currentstatus as a company just beginning to emerge as a commercial entity distinct from thegovernment to a commercially managed, self-sufficient, and autonomous powercorporation.

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3. THIE BENEFICIARY

3.1 China is in the process of reforming its state enterprise system throughprogressive development of a suitable corporate legal system. It has thus come a long wayfrom carrying out its economic agenda through state enterprises wholly owned, controlledand operated by line departments and agencies of the Government. The Law of thePeople's Republic of China on Industrial Enterprises Owned by the Whole People enactedby the National People's Congress in 1988 has introduced the concept of semi-independentmanagement and allowed more operational autonomy. Following the promulgation of theCompany Law in late 1993 that became effective July 1, 1994, the Government is activelypromoting the transformation of state enterprises into shareholding or limited liabilitycompanies.

A. LEGAL STATUS AND ORGANIZATION OF SEPC

3.2 The Beneficiary of the proposed loan is the Sichuan Electric Power Company(SEPC), an independent economic entity that possesses the legal status of a wholly ownedstate company under its Charter (registered with the Industrial and CommerceAdministration on December 25, 1992), formulated pursuant to the Law on IndustrialEnterprises (para. 3.1), and the Scheme of Structural Reformation of Power Network inChina, approved by the State Council. SEPC's Charter is a self-implementing legalinstrument.

3.3 The registered capital of the SEPC is Y 3.3 billion. The Charter empowersSEPC to obtain funds from various sources such as: (a) investments from the state, theprovince, and local governments; (b) loans from financial sources such as banks andfinancial organizations both domestic and foreign; (c) electricity sales and charges forspecific power use; (d) stocks and bonds; and (e) joint ventures with foreign companies.SEPC is also authorized to use its retained profits for investment purposes. AlthoughSEPC has the corporate powers to invest and issue bonds, these activities are regulated andgovernment approvals are required therefor at various levels.

3.4 SEPC has been entrusted by central and provincial governments with themanagement and administration of generation, transmission, distribution and electricitysupply in Sichuan Province. The scope of SEPC's business includes undertakingconstruction of power projects funded either by the state or by local finance. Thefunctions and powers of SEPC have been outlined in the Charter. Pursuant to thisdocument, SEPC has the power to obtain loans from and to enter into contracts withvarious organizations including foreign institutions (with the permission of the concernedgovemment authorities).

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3.5 The Charter does not provide for the establishment of a Board of Directorsostensibly to manage the company, and SEPC plans to develop a management system ledby a Board of Directors as part of its overall reform program. Currently, however, theoverall management and administration of SEPC is entrusted to a General Manager(assisted by four deputy General Managers) appointed by MOEP in consultation andagreement with the Sichuan Provincial Government. The General Manager is the legalrepresentative of the company and responsible for its operations. The exercise ofmanagerial and administrative powers (e.g., hiring and firing of staff and labor) is,however, controlled by "relevant state rules and regulations." SEPC has pursuant to theCharter established various administrative rules and regulations including regulations onpower grid management. SEPC has adequately carried out its mandate and effectivelycoordinated power system development and operations in Sichuan Province. SEPCexercises control over the electric power enterprises operating in Sichuan Province on thebasis of contractual arrangements. These arrangements include only a general nonstandardformula for pricing that is based on the government's pricing policy. The actual prices areestablished by the State Pricing Bureau. SEPC also has the requisite authority to receivethe proceeds of the proposed Bank loan through the Central Government, to carry out theproposed project, and to enter into a project agreement in respect thereof with the Banksubject, of course, to necessary government approvals.

B. ACTION PLAN TO COMMECILIZE SEPC

3.6 The 1980s and early 1990s brought major changes in the structure of thepower industry in Sichuan. Although SEPC is at the core of the system, controlling 54percent of the total generating capacity in the province, much of its function today is to actas a purchaser and seller of power to other entities. The industry now includes a varietyof domestically financed independent power producers (IPPs), joint-investment plants,small hydroelectric and thermal plants controlled by local governments or individualenterprises, and independent rural power networks. The 3,300 MW Ertan HydroelectricPower Plant, which will become the largest generating facility in the province, is beingdeveloped with Bank support by an IPP-the Ertan Hydroelectric Development Corporation(EHDC).

3.7 As institutions, however, SEPC and its sister agency, the Sichuan ElectricPower Administration (SEPA), had remained largely untouched until early 1994 by thepower reform process taking place in many other parts of China. SEPA, a provincial-levelgovernment agency under the supervision of MOEP, remained responsible for bothgovernment functions and the commercial operation of the provincial utility until 1993.SEPC was formed from SEPA in 1993, with responsibilities for the commercialmanagement of the provincial utility. In early 1994, however, SEPC was just beginningto develop as an entity, and in many ways its functions and operations remainedindistinguishable from those of SEPA.

3.8 In contrast with a number of the coastal provinces such as Jiangsu andZhejiang, where power sector reforms are more advanced, the process of transforming

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SEPC into a commercially oriented power corporation is just beginning. The followingissues must be addressed in the process:

(a) although SEPC has been established as a separate legal entity, its operationsand management are fully intertwined with those of SEPA, the governmentdepartment responsible for overseeing Sichuan's power industry;

(b) during the last few years, SEPC's net income, rate of return on fixed assetsin service, and debt service converge have all shown a declining trend, andwithout new tariff reform, SEPC will have no surplus to finance new capitalinvestments;

(c) the company's original charter does not conform with the new Company Law,and the ownership of the company's various assets are not defined; and

(d) although SEPC is implementing accounting reforms in accordance withnational regulations, the financial management system of the company and itsmany subsidiaries remains founded upon previous government administrationprinciples.

3.9 A key objective of the proposed project is to implement an integrated packageof reforms to address these issues and transform SEPC into a commercialized provincialelectric power corporation. In consultation with the Bank, SEPC and SEPA have preparedan Action Plan for the Commercialization and Corporatization of SEPC, which includesan integrated, time-bound package of reform measures (Annex 3.1). The Action Plan wasapproved by MOEP on September 19, 1994. The objective of the reform package is todevelop SEPC into a limited liability company in full conformity with the Company Law,separated from the government, financially autonomous and self-sufficient, with clearlydefined ownership structures and rights, and operated according to modern commercialmanagement principles and procedures. SEPC's Action Plan includes an integrated, step-by-step program of measures to achieve this objective by 1998. The principle features ofthe package include:

(a) SEPC will reform its internal accounting and financial management system,beginning at the outset of 1995. The authority and responsibilities ofsubsidiary power plants and power supply bureaus will be clarified, andimproved, commercially oriented management mechanisms, such as internal-transfer tariffs, will be introduced. Diagnostic analysis and the design of anew financial management system will be completed by June 1997, andimplemented in 1998.

(b) SEPC and SEPA will complete a study assessing the structure of the powerindustry in Sichuan, identifying needs for further structural reform, and clearlydemarcating an optimal role for SEPC as the province's core utility andmanager of the unified power grid. Recommendations will be submitted torelevant authorities for approval in 1996.

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(c) A package of tariff reforms will be implemented, including (i) adjustments inthe level of tariffs applied to SEPC's own generating facilities, in order toconform with the financial covenants of this project (para. 6.12); (ii)implementation of time-of-day and seasonal tariffs for all customers suppliedat the 100 kVA level or above by the end of 1995, accounting for about 60percent of power sales; (iii) application of time-of-day and seasonal tariffs tothe sales of all power stations above 10 MW, between 1995 and 1997; (iv)gradual implementation of reforms to unify the two-track system ofadministered and guidance consumer prices into one consumer tariff, withcompletion in all prefecture in the province in 1997, and (v) development andimplementation of improved power purchase agreements between IPPs andSEPC, beginning in 1995.

(d) During 1995-97, the variety of service-sector, manufacturing, construction andresearch and design enterprises affiliated with SEPC will be separated fromSEPC and put under independent operation, some as subsidiaries. The costof noncommercial social services currently performed by SEPC will beassessed, and more transparent compensation mechanisms reviewed withrelevant government authorities.

(e) SEPC and SEPA will implement a plan to incorporate SEPC and fully separategovernment functions from the company by 1998. The plan includes: (a)preparation of a detailed corporatization program, and its approval by mid-1995; (b) reorganization of existing or new joint-investment plants intoindependent legal entities, including domestic shareholding companies orinternational-domestic joint ventures; (c) completion of a revaluation of state-owned assets and clear definition and demarcation of ownership rights ofexisting assets by mid-1997; (d) separation of government functions fromSEPC by 1998, beginning with the assignment of sole responsibility forgovernment functions to one SEPA manager from among the leading managersof SEPA/SEPC, and assignment of separate staff to implement SEPA'sresponsibilities, by January 1995; and (e) completion and approval of a revisedSEPC charter by the end of 1994, to better conform with the spirit of theCompany Law, followed by registration of a fully reformed charter for SEPCas a limited liability company, in 1998.

3.10 Technical assistance is provided under this project to assist SEPC to implementthe approved Action Plan (para. 3.9). Assurances were obtainedfrom the Government thatit would take necessary measures to enable SEPC to implement the Action Plan in amanner satisfactory to the Bank. Furthermore, assurances were obtainedfrom SEPC thatit would prepare by September 30, 1995, in consultation with the Bank, a detailed programfor implementation of the Action Plan and, thereafter, implement the Action Plan,undertake organizational improvements, and develop and implement improved accountingand financial management systems in a manner satisfactory to the Bank.

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C. MANAGEMENT

3.11 Recent performance indicators for the Sichuan Power Grid reveal high plantcapacity factors and rather low transmission and distribution losses (Annex 3.2). SEPCprepares accounting information in a timely fashion and operates an effective billing andcollection system (para. 3.26). However, the successful upgrading of management systemsand procedures, and the strengthening of financial planning, deserve special attention asa critical aspect of SEPC's commercialization reform program (para. 3.18). The proposedproject includes specific training in utility management and financial planning for thispurpose (para. 5.9).

3.12 SEPC is capable of formulating its own expansion program and implementingpower projects by itself. However, for a large project such as the one proposed, outsideassistance will be required for the preparation of bid documents, bid evaluation, contractnegotiations, and construction management (para. 5.6).

D. STAFFING AND TRAINNG

3.13 As of December 31, 1993, SEPC had a total staff of 73,131, of which about19 percent were engineers and technical staff, 10 percent administrative staff, 68 percentworkers, and the rest others. Except for the core group of key technical and managerialpersonnel who are assigned by the State, almost all of SEPC's employees are recruitedlocally. Most of the employees are hired on a permanent basis, except for laborerscontracted for construction. The company is currently reforming is personnel policies toprovide for improved performance-based review and accountability, and to reduce totalstaff levels. Total personnel is being reduced by 17 to 20 percent during 1993-94,followed by further planned reductions in 1995. SEPC has 22 functional divisions andoffices, and its organization structure is presented in Chart 2. Details of SEPC's staffingare shown in Annex 3.3.

3.14 SEPC is understaffed in engineering and technical areas, financial control andplanning and management, especially in dispatching operations of large power grids.SEPC runs one technical school/training center for skilled workers, two electric powerinstitutes for technicians, and two staff colleges. There are 1,503 teaching andadministrative staff in all these training and educational centers, which have a totalenrolment of 6742 students (details in Annex 3.4 . This training capacity is basicallysufficient to meet SEPC's long-term needs. However, the skills of teaching staff andquality of teaching facilities need to be upgraded and modernized. Training needs to bedesigned to help senior managerial, financial and technical staff adapt to the new situationsbrought about by a larger and more complex power grid. The training component includedin the proposed project is designed to meet these needs. It also covers upgrading andequipping of SEPC's training institutions and project-related training for technical staff(paras. 5.11-5.12).

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E. PLANNIG, BUDGEiaNG AND CONTROL

3.15 Power bureaus and companies are responsible for developing annual and five-year production and investment plans that are integrated into the national plans and areapproved, through MOEP's auspices, by SPC. In the past, financial planning was confinedto attaching monetary values, predetermined by MOE, to the quantities being planned.Although a power bureau's plan might be revised to reflect changes, it would ordinarilynot be revised to reflect differences between estimated prices and actual prices.

3.16 However, with the economic changes in the 1980s, prices have begun to movetoward market levels and the Government has begun to finance more investments throughloans rather than grants. Centralized control is being relaxed and replaced by greaterfinancial autonomy and responsibilities for the power entities. To address these changes,SEPC will need to adjust its planning system to include modem financial planning.

3.17 MOEP recognizes the importance of financial management in the powersubsector in China and are organizing a comprehensive training program for all the powerinstitutions under its control. Many of the power bureaus/companies have been equippedwith computers and software for planning, budgeting, and accounting functions.Information from the bureaus/companies can be transferred to MOEP and consolidated intoregional and national data.

3.18 The new systems represent a good first generation of automated managementinformation; however, they still are not sufficiently flexible to take into account pricechanges at the local level or those associated with large-scale debt service obligations.Currently MOEP, with assistance from the Bank, manage a number of seminars in Chinaand overseas covering computer-based management information systems as well as tariffs,cost control, project financing, comparative accounting systems, and the organization andstructure of financial management. After SEPC installs the new financing managementinformation system to be financed under the proposed project (para. 5.8), it will be ableto significantly upgrade the existing financial planning, budgeting and control system.

F. AccouNTING

Enterprise Accounting

3.19 All the state-owned enterprises in China, including SEPC, follow a uniformenterprise accounting system according to detailed regulations established by the Ministryof Finance (MOF). The old accounting framework in effect before July 1, 1993 wasdeveloped in the context of a highly centralized planned economy. With a view tocomplementing China's move toward a market-oriented economy and strengtheningenterprises' financial management, MOF introduced new regulations covering accountingrules and financial affairs on July 1, 1993. The revised accounting principles are generallyconsistent with international accounting standards. Within this broad framework, specificaccounting standards are being developed with the assistance of the Bank under theFinancial Sector Technical Assistance Project (Credit 2423-CHA).

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3.20 The main differences between traditional Chinese accounting practices andinternational practices relate to: (a) the approach for determining and accounting for equityand for separating those items now accounted for through special funds that relate toliabilities, such as provision for payments to employees; (b) the need to includingconstruction in progress and related liabilities in the accounts, which are now only includedafter construction have been completed; (c) the introduction of the concept for provisionagainst probable losses, such as provision for doubtful debts and for stating inventories atthe lower of cost and net realizable assets; (d) the need to deduct general administrativeexpenses allocated to products not sold from operating income during the year the expanseitems incurred; (e) the need to treat overall costs as capital expenditures; and (f) the needfor recording sales on an accrual basis. These differences have been generally addressedin the new regulations. Given the conceptual and practical gaps between the old and newregulations, implementation of the new accounting system is a challenge to SEPC.Particularly, it is essential for SEPC to implement a new accounting and financialmanagement systems that will recognize commercial practices in a market-orientedeconomy and provide transparent information for investors, govemment lenders, and thepublic in general. Under the proposed project, training in modern financial management,including international accounting practices, would be provided to financial staff of SEPC.

3.21 The proposed project would include a technical assistance component tosupport SEPC in making a speedy and smooth transition to the new accounting system,based on the principles promulgated by MOF in 1993 and upgrading its financialmanagement system, including provision of software and hardware, as well as enhancementof its staff skills, would be included (para. 5.8 and Annex 5.3). Training in modernfinancial management, including international accounting practices, would also be providedto senior managers and financial staff of SEPC (para. 5.10).

Revaluation of Fixed Assets

3.22 The Chinese traditional accounting system has not required revaluation of fixedassets. In the past, the revaluation of assets probably would not have had a major impacton enterprises' financial status because of low inflation and low foreign content in existingassets. However, with recent inflation and the depreciation of the renminbi, the need torevalue assets is more compelling. Under the revised accounting principles, enterprisesin certain categories such as joint ventures with foreign partners or merged enterprise willhave to undertake asset revaluation. Regular revaluation of fixed assets is recognized inChina as being essential for the future corporatization of power entities and for a betterfoundation for managing state assets. Following the guidelines for how to undertake assetrevaluation issued by the State Council in 1993, all power entities in China are revaluingtheir fixed assets. A proforma revaluation of SEPC's assets (using projected domesticinflation rates as indexes to revalue SEPC's assets with a steep increase of about 50percent in 1993) was performed during appraisal of the proposed project. The resultingestimated average rate of return on assets for the period 1994 through 2003 fell to 13.5percent, compared to 18.2 percent on a historically valued basis.

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G. AuDrT

External Audit

3.23 Under the proposed project, SEPC's accounts will be audited by SichuanProvincial Audit Bureau under the supervision of the State Audit Administration. Thisarrangement is satisfactory. Assurances were obtained from SEPC that it would furnishthe Bank with the audited project accounts, statements of expenditures, and financialstatements of SEPC within six months after the end of each fiscal year. In addition,Sichuan Provincial Audit Bureau would be required to: (a) include in the audited financialstatements a summary of any differences in the basis of accounts due to the conversion tonew accounting policies; (b) provide a management letter summarizing any significanterrors that may have been discovered during the audit, and any major weaknesses ininternal control; and (c) provide on request a copy of its audit plan.

Internal Audit

3.24 SEPC has developed an internal auditing section (staffed with qualifiedaccountants) that periodically examine the accounts of each operating unit. The objectiveof these examinations is primarily to test for accuracy and compliance with MOFregulations. The internal auditing section is not expected to review the appropriateness ofaccounting regulations or procedures; such reviews are considered to be the responsibilityof MOF and MOEP. However, the section will serve as liaison between external auditorsand the project entity. The Bank will review the internal auditing function during projectimplementation with a view toward increasing its efficiency and usefulness to SEPC.

H. BLING AND COLLECrIONS

3.25 As of December 31, 1993, electricity consumption in Sichuan Province,distributed according to the consumer categories, is shown in Table 3.1.

Table 3.1: ELEwCrrY CONSUMPTIONIN SIcHuAN PRoVJNcE (1993)

Customer category Consumption (GWh) %

Heavy industry 24,810 70Light industry 4,714 13Agriculture 919 3Residential 2,721 8Conmercial 264 1Others 1,917 5

TotW 35.345 100

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3.26 SEPC conducts its billing and collection activities through 15 power supplyunits. All major industrial consumers receiving supply over 320 kVA are charged inadvance three times per month at approximate 10-day intervals. The last two bills,rendered on about the sixteenth and twenty-fifth days of the month, are based on estimatedusage derived from the consumer's contractual power consumption. The first bill,rendered on about the sixth day of the month, is also based on estimated usage but includesan adjustment to reflect the previous month's actual usage as computed from a meterreading. All other customers are billed once a month based on actual usage.

3.27 Industrial, commercial and bulk consumers pay their bills through direct debitfrom their bank accounts. Urban residential and low voltage agricultural consumersreceiving power directly from SEPC render payments to local branches of the NationalBank. Payment is due within five days of receipt of the bill. Regulations stipulate thatconsumers who do not pay within this period are to be charged a fine of 0.03 percent perday of delay, and that after several notices those who still refuse to pay their bills are tobe disconnected from the power supply. These billing and collection arrangements haveestablished a reliable cash flow from sales. There were no arrears from consumers in 1993for SEPC.

I. ELEcRIcrry TARIFFS

3.28 Electric power pricing in Sichuan Province is described in detail in Annex 3.5.As in other parts of China, the pricing system includes three components: (a) state catalogprices, which are applied to the generation of capacity directly controlled by SEPC, andform the basis of SEPC's own revenue; (b) prices for purchased power, which arenegotiated on a plant-by-plant basis at levels enabling loan and interest repayment plus areasonable profit margin, and (c) additional fees and surcharges, which are levied on thevarious consumer categories, primarily to raise additional funds for capital investment inthe sector. There are two types of consumer tariffs: administered prices, which includethe state catalog prices plus the additional fees, and guidance prices, which include statecatalog prices, mark-ups for the higher cost of purchased power, plus the additional fees.

3.29 Electricity prices in Sichuan Province are among the lowest in China. Boththe average unit revenue level accruing to SEPC from the state catalog prices and theaverage consumer price levels in Sichuan are some 65-75 percent of the levels in thecoastal provinces of Jiangsu and Zhejiang. Average consumer prices in Sichuan in 1994,represented by the cases of Chengdu and Deyang Prefectures, were about 70-80 percentof the estimated long run average incremental cost (LRAIC) of supply, calculated ineconomic shadow prices. This gap between average consumer prices and the estimatedeconomic cost of supply contrasts with the situation in the coastal provinces, where averageconsumer prices approximate or exceed the LRAIC of supply.

3.30 Sichuan's existing multiple-tier consumer tariffs are relatively complex, andprovide different rates for similar types of consumers without clear economic rationale.The province is relatively advanced, however, in the development and implementation oftime-of-day and seasonal tariffs.

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3.31 The Action Plan for Commercialization and Corporatization of SEPCsupported under this project includes a program of tariff reform (para. 3.9). Under thefinancial covenants of the project (para. 6.12), tariff levels will be steadily increased toenable SEPC to make a reasonable contribution to its future investment program (para.6.12). These increases also will bring average tariff levels up to the economic cost ofsupply. In addition, the Action Plan includes a major program to eliminate the complexmultiple-tier consumer pricing system by 1997, in favor of a unified consumer tariffapplied to all consumers in a given consumer category and service area.

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4. THE POWER MARKET AND PROGRAM

A. THE SICHUAN POWER GRID

4.1 The proposed project would be located in Sichuan Province, which isexperiencing remarkable economic growth; its industrial output increased in 1993 about21 percent in spite of acute power shortages. Many problems with power supply in thearea have so far been averted by improved power subsector performance, especially energyconservation and load management measures. Also, increased capacity will be needed inview of the Government's open-door policy and the consequent foreign investments andprivate sector developments, which require an adequate supply of high quality power.Sichuan is expected to match the degree of market orientation that other provinces alreadydisplay.

4.2 In 1993, the Sichuan Province had a total installed generating capacity of10,527 MW; 5,968 MW thermal, and 4,559 MW of hydropower (Annex 4.1). The majorgenerating facilities include eight hydro and 12 thermal power plants owned by SEPC, twothermal power plants owned by Huaneng, and a number of captive and other local plants.The captive power plants total about 1,015 MW in installed capacity. Electricity generatedin the province in 1993 amounted to 47,087 GWh. SEPC's operated power plantsproduced 27,145 GWh, about 58 percent of the total.

4.3 The transmission system in Sichuan Province in 1993 consisted of 5,064 kmof 220 kV lines, and 9,257 km of 110 kV lines. SEPC owns and operates nearly all220 kV, and 110 kV networks. The system also includes transformer substations, with atotal capacity of 6,356 MVA in 220 kV and 8,117 MVA in 110 kV (Annex 4.2).Information related to the status of the Sichuan Power Grid, such as issues of the existingpower system, scope of the network reinforcement, and the least-cost solution for furtherimprovements in the system reliability and reducing losses is available in the Project File(Annex 8.1).

4.4 The growth of energy generation and requirements in Sichuan Power Grid(SPG) between 1987 and 1993 is shown in Annex 4.3 and summarized in Table 4.1.SPG's peak demand has increased more rapidly than energy requirements. The system hasa maximum daily load factor of about 93 percent and an annual load factor of 82 percent.The peak load usually occurs in September/October.

4.5 In 1993, electricity consumption of SPG amounted to 35,345 GWh; of whichindustry, 84 percent; agriculture, 2.6 percent; residential, 8 percent, commercial and othermunicipal customers in the cities, 3.4 percent; and the transport/telecommunication sector,2 percent (Annex 4.4.

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Table 4.1: LoAD GRowTu OF SICHUAN PowER GRID (SPG)

Year Energy requirement (GWh) /a Peak demand (MW)

1986 21,035 2,8941987 22,449 3,0881988 24,418 3,1881989 26,848 3,4881990 28,229 3,6661991 30,518 3,9261992 33,051 4,2901993 35,345 4,874

Average annual growth 7.6% 7.7%

/a Including generation and purchased energy.

B. LOAD FORECASr

4.6 Load forecasts for the years 1994 through 2005 have been developed as partof the economic planning process carried out by SEPC. The forecasts were obtained byapplying a combination of statistical methods and planning targets to every major consumercategory. In particular, industrial loads were estimated on the basis of a market surveyand the projected industrial output growth and electricity intensities for different categoriesof industry. Rural loads were estimated based on past trends for drainage and irrigation,rural industries loads, and lighting. Municipal loads were estimated based on marketsurveys of hotels, buildings, and government projects. Specific demand management andenergy conservation measures have been fully incorporated in the load forecasts. Detailsof the energy forecasts for SPG are given in Annex 4.5 and summarized in Table 4.2.

4.7 The load growth forecasts appear to be reasonable considering that (a) powershortages have been occurring for a long time, and there is considerable suppresseddemand for electricity; and (b) Sichuan Province has been one of the fastest growth areasin China. This load growth is expected to sustain a GNP growth of about 8-9 percent inreal terms up to the end of the century. Without further implementation of the province'selectricity conservation programs (para. 4.10), growth in demand would be yet higher.

C. POWER DEVEOPMENT PROGRAM

4.8 A study of the least-cost investment program was made by the BeijingEconomic Research Institute for Water Resources and Electric Power (BERIWREP) in1993 and revised in 1994. The study is based on an optimization of the SPG's expansionprogram for the period 1994-2010. The analysis shows that the development program forSPG should be based primarily on the construction of the Ertan Hydroelectric Project withother base-load thermal power plants. The study also confirms that there are no other

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Table 4.2: LOAD FORECAST FOR SICHUAN POwER GRID (SPG)

Year Energy requirement (GWh) Peak demand (MW)

1993 (actual) 35,345 4,8741994 39,000 6,1801995 42,300 6,7301996 45,900 7,3301997 49,800 8,0001998 54,000 8,7001999 58,000 9,4002000 62,000 10,0002005 87,000 14,100

Average annual growth:

1994-2000 8.3% 10.8%1994-2005 7.2% 8.5%

alternatives better than the proposed project (paras. 7.4 and 7.5) to meet the future powersupply requirements.

4.9 A summary of the power development program (1994-2005) for the SPGsystem is given in Annex 4.6. They demonstrate that the power system will be short ofenergy supply and capacity up to the year 1998. Only after completion of the Ertanproject would the power system have an adequate reserve margin in energy and peakingcapacity.

D. ELEc crrY CONSERVATION

4.10 Similar to most other provinces in China, Sichuan operates a well-organizedprogram for electricity conservation (demand-side management). The program is jointlyimplemented by the Provincial Economic Commission and SEPC, and their respectivesubunits at prefecture and county levels. The program focuses primarily on (a) closemonitoring of unit electricity consumption levels in individual industrial enterprises, as partof the power consumption quota system; (b) assisting enterprise managers to identify areasfor electricity savings; (c) implementation of electricity conservation measures in powerstations and the transmission and distribution network; and (d) promotion of newelectricity-saving technologies. Electricity conservation plans are prepared each year, andresults evaluated the following year, for overall improvement in the efficiency of electricityuse per unit of industrial output, electricity conservation within the electric power system,reduction in unit electricity consumption levels in specific enterprises, and adoption ofelectricity-saving equipment and specific technical renovation measures by consumers.

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4.11 During 1990-93, unit electricity consumption per unit of gross industrial outputin Sichuan Province fell by about 14 percent. Within the electric power system, electricityconservation measures focused particularly on replacement of inefficient fans and pumpsin older power plants, distribution line upgrading and renovation, replacement of high-losstransformers, and addition of capacitance for power factor correction. Electricity-savingtechnologies for consumers specially promoted during the last few years have includedcomputerized energy management systems, more efficient fans and pumps, more efficientlighting equipment, and a wide variety of specialized industrial process equipment. End-use technical electricity conservation initiatives monitored by SEPC yielded a total savingsof about 550 GWh during 1990-93.

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5. THE PROJECT

A. PRoJEcr OWEcnvEs

5.1 The proposed project is consistent with the Government strategy ofmodernizing the power subsector and improving its efficiency. The main objectives of theproject are to: (a) alleviate an acute shortage of electricity by the construction of a 500-kVtransmission network for connecting the ongoing Ertan hydroelectric project to the Sichuanpower grid, as well as reinforcing the existing power transmission system; (b) assist indesigning and implementing a time-bound program to implement power subsector reformsin Sichuan Province; (c) support the implementation of further power tariff rationalization;(d) promote the transfer of contemporary technologies for extrahigh voltage powertransmission networks; (e) strengthen institutional capabilities for environmentalmanagement and resettlement planning: and (f) upgrade management and operationcapabilities through well focused staff training programs.

B. PROJECT DEsCRWUON

5.2 The proposed project would comprise the erection of a new 500-kVtransmission network for connecting the Ertan hydroelectric plant to the Sichuan powergrid and also for forming a 500-kV backbone transmission network in Sichuan Province.The Ertan project, appraised in 1991 and supported by Bank loan 3387-CHA, includes theconstruction of a 240m high dam and an underground powerhouse complex with aninstalled capacity of 3,300 MW, resettlement of about 30,000 people, an environmentalmanagement program, consulting services, studies and training. There are no changes inits original description as described in the Staff Appraisal Report of June 11, 1991 (ReportNo. 8470).

5.3 The Sichuan power transmission project consists of:

(a) Transmission Network Expansion

(i) design and erection of about 2,260 km of 500-kV transmission lines;

(ii) design and construction of five 500/220 kV transformer substations(5,250 MVA) and one 500-kV switching substation;

(iii) reinforcement of the existing transmission network;

(iv) carrying out of environmental management and monitoring programs;

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(b) Resettlement and Rehabilitation. Relocation of persons affected bytransmission network expansion;

(c) Technical Assistance

(i) Strengthening of SEPC's capability to implement the Action Plan,undertake organizational improvements (including management andoperational capabilities), and develop improved accounting and financialmanagement information systems;

(ii) strengthening of enviornmental management and monitoring andresettlement capabilities of SEPC; and

(iii) provision of engineering and construction management services andtraining.

A detailed description of the project components is given in Annex 5.1.

Project Origin and Design

5.4 The proposed project was first brought to the attention of the Bank in 1988 bythe Govemment. An identification mission for the transmission network of the projectvisited the project in October 1993. The project feasibility study and design report wereprepared by the South West China Electric Power Design Institute (SWEPDI) in 1993, andrevised and updated in 1994. The project was approved by the SPC in 1993. AnEnvironmental Assessment Report (EAR) for the power transmission network was preparedin 1993 by SWEPDI in accordance with the Chinese and Bank environmental reviewprocedures and guidelines for power projects. The EAR has been approved by allGovemment authorities, and its summary was submitted to the Bank. The design of theproject is at an advanced stage, and appears to be satisfactory in its overall concept.

Consulting Services

5.5 SWEPDI has been retained by SEPC to assist in detailed design and projectimplementation. It is one of the most experienced design institutes in China, and hascompleted the design of several large power projects. SWEPDI has over 1,200professional staff and is equipped with modem facilities and laboratories. Internationalengineering consultants have also been selected in accordance with the Bank Guidelines forthe Use of Consultants. SEPC's engineering staff have visited a number of largehydropower power plants and high voltage transmission networks and shared experiencein building large and complex power projects.

5.6 The consulting services for the project comprise two stages: Stage I forproject preparation and Stage II for project implementation. Stage I services includereviewing and updating of feasibility study, special studies and verifying of designs for500-kV transmission lines and substations, reviewing of bidding documents prepared by

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SEPC and SWEPDI, assistance in bid evaluation, construction planning and training ofstaff. Stage II services include project management, contract administration, schedulingand reporting, construction supervision and quality control, cost control, etc. Terms ofReference for the consulting services are given in Annex 5.2.

5.7 The total cost of engineering services is estimated at about $4.3 million forabout 160 staff-months. The Government has approved $3 million out of the CRISPP(Credit 2447-CHA) funds for financing Stage I services. The balance would be financedunder the proposed project.

Reform Plan, Organization Improvements, and Management Information Systems

5.8 SEPC will implement the reform plan and develop more modem computerizedfinancial systems, which would take account of the new accounting regulations introducedin China (para.3.10). These would be eventually established on a computer networkserving SEPC's activities. SEPC also plans to send its representatives to visit othercountries to obtain a better idea of accounting and financial systems being used elsewhere.The scope of the assistance to develop the modern accounting and financial systems,together with the terms of reference, is given in Annex 5.3.

Management Development and Training

5.9 To meet the long-term needs of SEPC's staffing requirements and to furtherdevelop SEPC's management capability, a comprehensive training program is includedunder the proposed project. It consists of the following: (a) training in institutionaldevelopment and enterprise reform matters; (b) training in utility management and financialplanning; (c) project-related training for technical staff; and (d) upgrading and equippingof SEPC's training facilities.

5.10 High level management, planning and financial staff will receive training inmodem management and decision-making techniques, particularly in utility reform andmanagement, planning of investments, environmental and resettlement matters, engineeringeconomics, power pricing, financial operations and management information systems.Engineering personnel will also receive training in their specific fields, especially relatedto construction of transmission lines in rugged mountainous areas at high altitude, linemaintenance, etc. Part of the training will be carried out in China in the form of seminars,conducted by Chinese and foreign experts. This will then be followed by study tours andoverseas training through visits to a few selected utilities and modem power transmissionnetworks.

5.11 Project-related training will include: (a) on-the-job training for the engineeringand construction management staff to be implemented by working together with the foreignconsultants; (b) training of engineering staff under the contract for major projectequipment; and (c) training of operation and maintenance staff at other similar powertransmission networks in China and abroad. The cost of such training will be included inthe equipment contracts.

_ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~--- -------

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5.12 About 150 staff members, with total staff-months of 247, will be trainedabroad, of which 117 staff-months are for senior management, 16 staff-months for legalstaff, 74 staff-months for technical staff, 30 staff-months for financial staff, and 10 staff-months for environmental and resettlement staff (see Annex 5.4 for details). In addition,176 people will receive training with a total staff-month of 146 by foreign suppliers ofgoods and services. Training in China will involve 520 staff, totaling 605 staff-months.Assurances were obtained from SEPC that it would carry out the management developmentand training progran in a manner satisfactory to the Bank.

C. COST ESTMATE

5.13 The total cost of the project is estimated at $874.4 million equivalent excludinginterest during construction (IDC), of which $273 million (31 percent) represents theforeign exchange component. Annex 5.5 contains, in detail, the estimated cost of theproject, which is summarized in Table 5.1. The cost estimates reflect late 1994 prices andare based on the recent tendering information available for similar projects, includingprices of bids for major equipment and control systems. Physical contingencies arecalculated at 10 percent for preparatory, land acquisition and relocation, civil works, andtransmission line materials; and 5 percent for imported substation equipment, and studiesand services. Price-contingency allowances for foreign costs estimated in US dollars arecalculated according to anticipated international price increases of 2.2 percent a year onaverage for the period 1994-2001. The price escalation for costs expressed in localcurrency is calculated according to projected domestic inflation rates of 9.0 percent for1995, 8.0 percent for 1996, 7.2 percent for 1997 and 6.5 percent thereafter.

D. FINANCING PLAN

5.14 The total financing requirements (including IDC of $204.3 million equivalent),are estimated at $1,078.7 million equivalent. SDB, SIC, and SEPC would share thefinancing of the local costs, IDC, and principal repayments of the Bank loan during theproject implementation period. Their contribution to the local project financing has beenconfirmed to be as follows: SDB-70 percent of the total; SIC-20 percent; andSEPC-10 percent. It has also been agreed that part of the total domestic financing wouldbe in the form of self-financing, and the balance in the form of loans. The loans will havea variable interest rate (currently about 11 percent a year) and 15 years maturity, includingfive years' grace. The local financial arrangements are acceptable to the Bank.

5.15 The proposed Bank loan of $270.0 million will cover direct foreign exchangecosts, excluding IDC. Details of the financing plan are summarized in Table 5.2. TheBank loan will be used to finance the following project items:

(a) major power transmission network equipment, including power transformers,shunt reactors, switchgear, protection and control, etc;

(b) goods and materials for transmission lines;

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Table 5.1: SUMMARY OF PROJECT COSM

ForeignDecription Local Foreign Total Local Foreign Total as % of

(Y million) (S million) Total

A. Tranmssion NetworkPreparatory works 592.9 0.0 592.9 68.2 0.0 68.2 0.0Civil Works & instatlations 1,076.1 0.0 1,076.1 123.7 0.0 123.7 0.0220kVtranmiaionsystem 1,117.2 0.0 1,117.2 128.4 0.0 128.4 0.0500 kV tranumnision lines 1,131.6 523.4 1,655.0 130.0 60.2 190.2 31.6500 kV substations 348.5 1,526.2 1,874.7 40.1 175.4 215.5 81.4

B. Resettlement and RehabilitationLand acquisition & relocation 106.2 0.0 106.2 12.2 0.0 12.2 0.0

C. Technical AssistancePreparation/fnnlImentationEngineering & administation 104.4 36.5 140.9 12.0 4.2 16.2 25.9

InstitUtiOnil Dcvclooment

Environmental protection 2.7 4.4 7.0 0.3 0.5 0.8 61.7Reformplan & fincial MLS 8.7 14.4 23.1 1.0 1.7 2.7 62.3Training 8.3 29.2 37.5 1.0 3.3 4.3 78.0

Total Bae Cost 4.496.7 2.134.1 6.630.8 516.9 245.3 2. 32.2

Contingencies:Physical 405.4 131.6 537.0 46.6 15.1 61.7 24.5Price 1,266.9 426.4 1,693.3 37.9 12.6 50.5 24.9

Total Proiect Cost 6.169.2 2.692.0 8861.3 601.4 273.0 874.4 31.2

Interest During Construction 1,315.6 461.7 1,777.3 151.2 53.1 204.3 26.0

Total FinancingReauired 7,484.8 3.153.7 10.638.6 752.6 326.1 1.078.7 30.3

Notes: 1. Baw cots are at late 1994 prices and prevailing exchnge rate of Sl = Y 8.7.2. Interest during construction ([DC) is bawed on onlending rates for projected disbursements of loan proceeds. The

foreign currency portion of IDC is based on tde Bank's variable loan rate.

(c) construction and maintenance equipment;

(d) consulting services for engineering and construction management;

(e) environmental management program;

(f) assistance for reform plan, organization improvements, and development ofaccounting and financial management systems; and

(g) management development and staff training.

5.16 The proposed Bank loan will be made to the People's Republic of China at theBank's standard variable interest rate for a 20-year term, including 5 years' grace.Proceeds of the loan would be onlent from the Government to SEPC with terms and

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Table 5.2: FINANCING PLAN FOR THE PRoJECr($ million equivalent)

Local cost Foreign cost Total cost

State Development Bank (SDB) 526.8 37.2 564.0Sichuan Investment Company (SIC) 150.5 10.6 161.1Sichuan Electric Power Company (SEPC) 75.3 5.3 80.6IBRD 0.0 270.0 270.0IDA (CRISPP) 0.0 3.0 3.0

Total 752.6 326.1 1.078.7

conditions satisfactory to the Bank. Assurances were obtained from the Government thatit would onlend through Sichuan Province the proceeds of the proposed Bank loan to SEPCunder a subsidiary loan agreement with a term of 20 years, including a 5-year graceperiod, at the Bank's standard variable interest rate. SEPC will bear the foreign exchangerisk. Execution of the subsidiary loan agreements between the Government, SichuanProvince and SEPC, and approval of the Loan Agreement by the State Council will beconditions of effectiveness for the loan.

E. PRocuREmET

5.17 In the past, the main issues in connection with procurement of works andgoods in the power subsector in China included reluctance to use consulting services,delays in the procurement process and in domestic contract approval, lack of coordinationand clarity of responsibility among agencies involved in the procurement process, and veryoften inappropriate contract packaging. However, significant improvements have beenmade more recently in the sphere of procurement and these are expected to be continuedunder the proposed project. Expatriate engineering consultants will assist SEPC in theprocurement process, and the Model Bidding Documents following the Bank's StandardBidding Documents, would contribute to efficient procurement. Necessary efforts are alsobeing made to improve coordination and avoid undue delays in the procurement process.The project's civil construction works and some local goods (not financed by the Bank)will be procured through local competitive bidding (LCB). Project circumstances justifythe use of LCB for these works and goods, since foreign bidders are not expected to beinterested in civil works that are labor-intensive, contract values are not large enough, andlocal prices are well below the international market. Furthermore, Chinese contractors arewell-experienced and competent in carrying out such construction works. If foreign firmswish to participate in LCB for these works, they would be allowed to do so in accordancewith local procedures, which are acceptable to the Bank and considered appropriate for theefficient execution of the project.

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5.18 Major equipment for the transmission network component of the project willbe procured through ICB. Goods manufactured in China will be eligible for a preferencein bid evaluation of 15 percent of the c.i.f. price or the actual import duty, whichever islower. Some specialized equipment estimated to cost less than $300,000 per contract upto an aggregate amount of $4 million will be procured through limited international bidding(LIB) in accordance with the Bank's Procurement Guidelines. Goods, instruments andaccessories needed for construction and operation of the power transmission network,including equipment for environmental monitoring and training, estimated to cost less than$300,000 per contract up to an aggregate amount of $2 million will be procured byshopping or through direct negotiations with suppliers. Consulting services and trainingwill be obtained following the Bank's Guidelines for the Use of Consultants. Allconsultants' contract costing $100,000 or more for firms and $50,000 for individuals wouldbe subject to the Bank's prior review. The Model Bidding Documents for Procurementunder ICB and LCB in The People's Republic of China would be used to the maximumextent possible. All procurement documents pertaining to bidding packages for goodsfinanced by the Bank and estimated to cost more than $5.0 million equivalent will besubject to the Bank's prior review procedures (about 95 percent of Bank-funded purchases).Although the Bank will not finance the civil works (para. 5.17), they have to be carriedout efficiently, on time, and within a budget that will satisfy the economic and financialparameters of the operation. The proposed procurement arrangements are summarized inTable 5.3, and the related procurement schedules for various packages are given in Anne56.

F. PRoJEcr IMPLEMENTATION

5.19 Construction of the 500-kV transmission network is on the critical path of themajor undertaking related to the Ertan Hydroelectric Project (para. 5.2). SEPC will beresponsible for project implementation and operation. A specialized construction unit hasbeen established to manage site construction activities; its organizational structure is shownin Chart 3. Preparatory works including access roads and construction power supply havebeen started. The bidding documents for the procurement of the main equipment andsystems are expected to be issued in December 1994 and to be opened in April 1995. Thefirst line is expected to be completed by October 1998. The operation of the entire projectis expected in early 2001. Thus, the project completion date would be June 30, 2001 andthe closing date of the Bank loan would be December 31, 2001. Chart 4 presents theimplementation schedule for the various components of the project. Key dates of projectimplementation are given in Annex 5.7, and estimated annual payments are summarizedTable 5.4.

G. DIssu6EmEwr

5.20 The Bank loan will be disbursed against: (a) 100 percent of the foreignexpenditures for directly imported equipment and materials quoted on a c.i.f. basis; (b) 100percent of local expenditures ex-factory for locally manufactured items, and 75 percent oflocal expenditures for other items procured locally; and (c) 100 percent of the expenditurefor consulting services and training. For expenditures pertaining to (a) training; and

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Table 5.3: SUMMARY OF PROPOSED PROCUREMENT ARRANGEMEN($ million)

TotalProposed Method project

Project item ICB Other /a NBF /b costs

Works

Preparatory works - - 78.9 78.9

Land acquisition & relocation - - 13.9 13.9

Civil works & installations - - 143.8 143.8

Goods

Transmission line materials & 72.7 - 300.1 372.9systems (69.3) (69.3)

Substation equipment & 197.0 6.0 35.3 238.3systems (187.3) (6.0) (193.3)

Services

Engineering and administration - 17.9 - 17.9/c(1.3) (1.3)

Environmental protection - 0.9 - 0.9(0.5) (0.5)

Accounting and financial MIS - 2.9 - 2.9(1.8) (1.8)

Training - 4.7 - 4.7(3.7) (3.7)

Total 269.7 32.5 572.2 874.4/c(256.6) (13.4) (0.0) (270.0)

/a LIB and shopping for minor equipment and instruments, direct negotiations with suppliers for trainingand environmental monitoring equipment and hiring of consultancy services.

/b NBF = Not Bank Financed./c The CRISPP-related financing included.

Note: Figures in parentheses are the respective amounts financed by the Bank loan.

(b) contracts for goods valued at less than $5 million equivalent, reimbursement will bemade on the basis of Statements of Expenditures. Documentation supporting suchexpenditures would be retained in the SEPC offices and made available for review by theBank's supervision mission. To facilitate disbursements under this project, a SpecialAccount will be established with an authorized allocation of $15 million, representingapproximately four months of average project disbursements. Applications forreplenishment will be submitted monthly or when the amounts withdrawn equal 50 percentof the initial deposit, whichever comes sooner. Annex 5.8 presents the disbursementschedule for the proposed Bank loan as well as a standard profile of disbursements for all

Table 5.4: IMPLEMENTATION SCHEDuLE: ESrimATED ANNUAL CONTRACIUAL AND OTHE PAYMENTS($ million equivalent)

Proiect Year /a TotalProject element 1994 1995 1996 1997 1998 1999 2000 2001 paymets Remarks

& before

WorksPreparaory works 2.7 10.3 18.3 12.7 14.1 10.0 10.8 0.0 78.9 LCBLand acquisition and 0.0 3.4 1.7 3.3 2.6 1.4 1.1 0.5 13.9 NBFrelocationCivil works and installations 0.0 9.5 30.9 35.9 30.1 16.1 13.4 8.0 143.8 LCB

GoodsTransmission line 0.0 33.8 89.5 99.3 65.3 42.1 27.3 15.6 372.9 ICBmaterials and systems (14.3) (19.5) (18.6) (11.4) (5.4) (69.3)Substation equipment 0.0 35.6 69.9 54.2 52.9 13.8 10.1 1.9 238.3 ICBand systems (29.2) (61.7) (46.6) (45.3) (7.9) (2.6) (193.3)

ServicesEngineenng services & administration 1.0 3.9 2.3 2.2 2.2 2.3 2.0 2.0 17.9/b Other

(0.0) (0.3) (0.3) (0.3) (0.3) (1.3)Environmental protection 0.0 0.4 0.5 - - - - - 0.9 Other(0.3) (0.3) - - - - - (0.5)Reform plan and financial MIS 0.0 0.7 0.7 0.7 0.8 - - - 2.9 Other(0.4) (0.4) (0.5) (0.5) - - - (1.8)Training - 1.1 1.2 1.2 1.2 - - - 4.7 Other(0.9) (0.9) (0.9) (1.0) (3.7)

T-ot-al 3.7 98.8 214.9 209.4 169.3 85.7 64.7 28.0 874.4(0.0) (45.1) (83.2) (67.0) (58.5) (13.7) (2.5) (0.0) (270.0)

/a Based on calendar year./b Includes the CRISPP-related financing.Note: Figures in parentheses are the respective amounts financed by the Bank loan.

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sectors in China. The disbursements are expected to be completed in six years, very closeto the standard disbursement profile for China. The last year is for payment of retentionmoney.

H. ENVIRONMENTAL CONSIDERATIONS

5.21 In accordance with OD 4.01 (Environmental Assessment), the Sichuan powertransmission component of the project is designated as Category B. The EAR (para. 5.4)for both components have been approved by the Sichuan Environmental Protection Bureau,MOEP and the National Environmental Protection Agency. They have been reviewed bythe Bank; it is considered that all environmental aspects of the project are satisfactorilyaddressed and in compliance with all environmental policies and procedures. The projecthas been designed and will be carried out in accordance with current technologicalpractices and it is expected to cause minimum disturbance to the environment.

5.22 The Sichuan power transmission project is a greenfield operation, located ina mountainous and semirural agricultural area. Alternative routes for the powertransmission lines and transformer substation sites had been considered. The selectedroutes requires the least amount of land, affects the least number of people, and offers thesmallest impact on the natural and human environment. Also, appropriate technologieswill be applied in the power facilities design. Annex 5.9 presents the environmentalmanagement program, including a summary of key environmental issues associated withthe project and their anticipated impacts, the mitigating plan to assure these impacts areminimized, and the monitoring program with which environmental impacts will bemeasured and compared with the predictions in the EAR. Strengthening of SEPC'sinstitutional capabilities for environmental management will be carried out under the SEPCmanagement development and staff training program (para. 5.12). Monitoring equipmentin an amount of $0.8 million will also be provided under the proposed project.

5.23 Key environmental issues investigated in the EAR include: worker health andsafety, transmission line impacts (electric field, noise, and bird flight), and the influenceof the construction labor force on the local infrastructure. All mitigating measures for air,water, and land impacts are designed to meet appropriate Chinese requirements and/orWorld Bank environmental guidelines whichever is stricter. In the absence of either,international standards or codes of practice will be utilized. Environmental issuesassociated with the project and addressed in the EAR have been discussed at publicmeetings that were held by Sichuan Province. The local public and authorities supportedthe project and the recommended mitigating measures offered in the EAR. The mitigationplan recommended in the EAR will be fully implemented.

5.24 All environmentally related issues considered were deemed manageable, and,with the mitigation plan offered in the EAR, should result in a minimum environmentalimpact by the project. Assurances were obtained from SEPC that it would carry out theenvironmental management program in a manner satisfactory to the Bank.

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I. RELOCATION AsPEcrs

5.25 According to the resettlement action plan prepared by SEPC the proposedproject will require acquisition of 163 hectares (ha) of farmland, demolition of 290,557square meters of floor space, and relocation of 1,991 households or 8,126 people. Inaddition, about 80 ha of land will be used temporarily during the project construction.Almost all relocations are due to the transmission lines. The affected people will need tomove only a short distance from their existing houses (100-200 meters). They will begiven adequate compensation to rebuild their houses within the same villages, often withbetter quality. During the construction, some standing crops of trees will be damaged,which will be compensated after consultation with affected villagers. For those who willbe displaced economically, they will be given high priority to be employed by SEPC asregular maintenance workers. According to the resettlement action plan, a well organizedresettlement unit has been set up by SEPC to handle the resettlement planning andimplementation. Arrangements for relocation, which have been made through aparticipatory process with land users and local authorities, appear to be satisfactory. TheChinese have had extensive experience with World Bank policies and requirements forresettlement, and have, in the past, achieved good results in their implementation. Asummary of the resettlement action plan, including details on the affected people, theirlosses, and how those losses would be compensated to ensure no adverse impact on theirstandard of living, is presented in Annex 5.10.

5.26 Institutional strengthening of the resettlement unit is included in the project.In addition, an experienced resettlement team from SWEPDI has been actively involvedin the preparation of the resettlement program and related action plan. The monitoring ofprogress in the resettlement and rehabilitation program will be subcontracted by SEPC toSWEPDI. Assurances were obtained that SEPC would carry out land acquisition,relocation and rehabilitation of persons affected by the project in accordance with aresettlement plan acceptable to the Bank.

J. PRoJEcr RiSKS

5.27 In view of the advanced preparatory works, risks associated with projectconstruction, cost overruns, and implementation delays in both the Ertan hydroelectricplant and the proposed project are within reasonable limits and would be manageable giventhe continuous supervision arrangements, involving foreign and Chinese consultants, thathave been put in place. Particular attention will be given to safety aspects of the project,and to capabilities and performance of major contractors. The economic risks are minimal(para. 7.8).

5.28 Financial risks may result from delays in the availability of local funds. Thisis a generic problem to all new investment projects in China at this time. However, thisrisk has been mitigated through SDB's reconfirmation of assurances to provide 70 percentof the total local financing requirement in a timely manner. In addition, SEPC's abilityto achieve the financial target covenants under this project will require approval ofsubstantial tariff increases by the central and provincial governments, and there is risk that

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delays in approvals will compromise SEPC's ability to achieve adequate financial self-sufficiency. Assurances would be obtained from the beneficiary and borrower thatsufficient tariff increases will be implemented without delays (paras. 6.11-6.12). China'srecord in meeting similar financial assurances provided in connection with previous powerprojects has been good. Implementation of the power sector reforms in an efficient andtimely manner is another risk that would be addressed through the provision of technicalassistance and close project supervision. The project's nonquantitative risks are consideredto be minimal. The borrower and beneficiary will ensure the proper coordination of allproject participants and delineation of authorities. Other potential risks could include thecontinuity of goods supply, funding shortages, contract management difficulties, andeffective implementation of the environmental program. No major environmental problemsare expected under this project, and the implementation of the proposed environmentalmanagement program (including a monitoring process) would assure the adequate qualityof the environment at the project routes and in the nearby areas.

K. MoNIRING AND REPORTING

5.29 Satisfactory procedures for monitoring, evaluating, and reporting on the projecthave been agreed by SEPC. The Bank would be furnished with semiannual and annualproject progress reports. The timely implementation of the project is critical and dependson adequate financial resources being made available when needed. For this reason, theannual project progress reports would include, inter alia, SEPC's proposals regardingproject costs and financing plan for the following year. The scope and content of theproject progress reports have also been agreed. In view of the experience with similarpower projects in China, regular project supervision would be required. Bank supervisioninput into key activities is presented in Annex 5.11, and a framework for projectmonitoring and reporting in Annex 5.12.

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6. FINANCLAL ASPECTS

A. INIRODUCTION

6.1 SEPC follows MOF financial regulations applying to state-owned enterprises.These regulations have gradually evolved over the last decade from a system in which allinvestment funds were provided by the Government and all surpluses remitted to it, to onethat provides some autonomy and incentives for efficiency.

6.2 Prior to 1987, surpluses of a power entity were remitted to the Governmentthrough sales (25 percent), income (55 percent after debt service), and adjustment(28.5 percent) taxes as well as other levies. This system left power entities with almostno internally generated funds to finance new investments other than small renovations.Consequently, a conservative and passive approach was taken by many power entities.Actual capital expenditures fell far short of requirements and severe shortages of electricityhave been experienced.

6.3 Beginning from 1987, the contract responsibility system was introduced toincrease autonomy and accountability of enterprises. Under this system, power entitieswere required to submit a fixed amount of income and adjustment tax to the Governmenteach year and agreed to carry out all technology renovation projects at given costs to meetsome specific parameters, in particular, the unit coal consumption target. Employeescompensation was also linked to electricity sales and production costs. Starting from 1992,power entities are allowed to accelerate depreciation of fixed assets by 20 percent toincrease their self-financing capability and, by 1993, they are exempt from submitting25 percent of the depreciation funds to the Government. However, power entities stillhave to rely on tax exemptions and lax debt repayment schedule to maintain theiroperations and only retain about 5-15 percent of their net income for future expansionprogram. Mobilization of investment funds from provincial and local governments,independent enterprises, such as Huaneng, and foreign sources has helped financeexpansion, but financing gaps still remain.

6.4 The authorities are aware of the above systemic issues. In the absence ofdeepened enterprise reforms, the gap in financing the required sector investment wouldcontinue to increase in the 1990s. As a first step, the Government is now committed tothe implementation of the July 1992 regulations of the State Council ("Regulations onTransforming the Operating Mechanisms of State-owned Industrial Enterprises") in thepower sector, giving power entities expanded financing, investment and asset managementrights. Second, MOEP and SPC have provided built-in mechanisms for improving thefinancial status of provincial power companies through the 1993 reform of the state catalogelectricity prices. The state catalog prices are the rates charged for generation of power

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capacity financed by the central government, and form the basis for the revenue accruingto provincial power companies such as SEPC (see Annex 3.5). In addition to increases incatalog price levels, the 1993 reform established the principle that power from all newplants (retroactive to April 1, 1993), including those financed by the central governmentas well as those financed through other means, would be priced at levels enabling principleand interest payment of debt. There will be a phase-in period to have the full debt servicerequirements reflected in the prices. The new policy guarantees at least a break-evenposition for power entities and leaves them with all depreciation funds for newinvestments. It will encourage power company managers to take a more aggressiveapproach in investment.

6.5 The new accounting principles and financial rules effective on July 1, 1993will also have far-reaching impacts on the sector. First, they require power entities toclarify and separate debt from equity. This is an important step for power entities movingtoward limited liability companies and eventually shareholding companies. Diversificationof ownership is critical to mobilizing more resources to the sector. Secondly, under thenew profit allocation system specified in the new financial rules issued by MOF, theadjustment tax and special fund allocations have been abolished. The management ofpower entities are given greater autonomy in making decisions on profit distribution.Thirdly, enterprises are permitted to design their own internal accounting and financialmanagement system based on the business needs. Overall, the new financial rules togetherwith other reforms, such as state assets management, fiscal and financial sector reforms,will lead the state to gradually play a more indirect ownership role in the management ofpower entities. With new autonomy and increased accountability power entities will alsohave to improve their budgetary and cost controls as well as cash management in order tostay competitive in a market-oriented environment.

6.6 The Govemment promulgated a series of important new tax laws at the endof 1993. From 1994, the contract responsibility system is replaced with a transparent andsimplified tax system. A corporate income tax rate of 33 percent is being applied to alldomestic enterprises. The Govemment will then only collect income tax from enterprisesbased on a unified rate. Dividend distribution for Government equity contribution inenterprises will be decided by the management in consultation with various owners orBoard of Directors. The old sales taxes (about 25 percent of sales) levied for powergeneration and distribution were also consolidated into a new value-added tax (VAT) of17 percent. The new tax policy does not necessarily reduce the tax and remittance burdenfor power entities. However, it eliminates the lengthy and complicated negotiationsbetween enterprises and the Govemment. More importantly, it is really conducive tostrengthening the planning and financial management functions of the power companies.

6.7 SEPC's financial performance in the past was poor compared with most otherpower companies in China. It had to rely on the lax repayment schedule to maintain itsoperations. However, as many critical reforms, such as property rights, investment, fiscal,financial, trade, are gradually laid out by the Govemment, SEPC's future finances will besubject to greater uncertainties. Therefore, strengthening the financial management iscritical for SEPC to stay financially viable in a market-oriented economy. Toward this

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end, the proposed project would continue the process of institutional building alreadyinitiated under previous Bank-financed projects, including (a) a component to improve andupgrade SEPC's accounting and financial management system (para. 5.8); (b) training infinancial management for SEPC (para. 5.12); and (c) agreements with SEPC on financialperformance targets that would provide a framework for financial discipline (para. 6. 11).

B. SEPC'S PAsr AND PREsENT FINANCIAL PERFORMANCE

6.8 SEPC's income statements, fund flow statements and balance sheets for theperiod 1990-93 are set out in Annex 6.1. Salient points and features highlighting its pastand present finances are summarized in Table 6.1.

Table 6.1: SEPC's KEY FINANCIAL INDICATIORS, 199093(Million Yuan)

Growth Rate% p.a.

Year ended December 31 1990 1991 1992 1993 (1990-93)

Electricity Sales (GWh) 23,152 24,808 26,635 29,905 8.9Average Revenues (fenlkWh) 10.62 13.21 15.49 20.55 24.6Operating Revenues 2458 3,277 4,126 6,146 35.8Operating Income /a 367 577 536 396 2.7Net Income 116 300 248 161 11.8Net Fixed Assets in Operation 4,032 4,166 4,684 7,869 9.3Capital Expenditure 880 2,827 1,596 1,954 30.5Operating Ratio (%) 85.0 82.4 87.0 93.6Rate of Return (%) /b 2.9 7.3 5.3 4.0Debt Service Coverage (times) 1.7 1.9 2.1 1.3Current Ratio 1.2 1.2 1.2 1.2Debt as % of Debt and Equity 53.4 62.8 64.5 57.9

/a Operating revenues less the aggregate of fuel, power purchases, administration, operation andmaintenance, and depreciation.

/b Based on historically valued average net fixed assets in operation.

6.9 During the period 1990-93, SEPC reported modest profits in its financialstatements as it deferred or capitalized a substantial amount of interest payment each year.Moreover, SEPC's positive cash positions were maintained by lax debt service schedule.Despite the impressive sales growth of 29 percent and more than doubled operatingrevenue over the period, SEPC's finances had been weakened. Its net income, rate ofreturn on fixed assets in service, and debt service coverage have all been on a decliningtrend. The operating ratio deteriorated to about 94 percent in 1993 from 85 percent in1990. The most serious problem faced by SEPC is that it has no surplus to finance anynew capital investments. With a significant portion of interest and principal payments

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being deferred, SEPC's self-financing ratios were 0 percent and 2 percent in 1992 and1993, respectively.

6.10 SEPC's total average revenue increased by 94 percent during the past threeyears, but this was primarily due to a tripling of the unit cost of purchased power.Although included in SEPC's total revenue, the funds collected from the sale of purchasedpower are largely offset by the costs. Purchased power costs increased from less than8 fen/kWh in 1990 to 25.8 fen/kWh in 1993. The average revenue that SEPC receivedfor its own generation, based on the catalog prices, increased by less than 50 percentbetween 1990 and 1993, rising to 16.5 fen/kWh in 1993.

C. FINANCIAL PERFORMANCE TARGETS

6.11 As the Government is taking steps to reform rules governing enterpriseaccounting and financial affairs and to increase the financial autonomy of enterprises, theself-financing ratio is becoming a more meaningful indicator. In addition, the indicatorserves as an effective tool to ensure adequate tariff levels. It is particularly relevant inSEPC's case. SEPC needs to gradually build up its own financing capability in order torealize its planned investment program, as 100 percent debt financing is neither feasiblenor financially sound in today's environment. Given SEPC's present financial position incomparison with other power companies in China, a gradual approach is appropriate.

6.12 Even by taking this approach, the magnitude of required tariff increases islarge. With the large investment program anticipated and the low current state catalogtariff, major adjustments need to be initiated, beginning with the 1995 state catalog prices.In order to just break even in 1995, projections show that SEPC's average state catalogprice must be increased by a minimum of about 28 percent from the 1994 level. As shownin Table 6.2, substantial further increases in real tariff levels also will be needed duringthe remainder of the 1990s for SEPC to make a reasonable contribution to its futureinvestment program. With a view to promoting this reform and prudent financialmanagement, assurances were obtainedfrom SEPC that it would:

(a) take all necessary measures, including but not limited to tariff adjustments, toensure that its internal cash generation is sufficient to meet (i) cash operatingexpenses; (ii) interest charged to operations; (iii) income taxes; (iv) grossincreases in working capital; (v) loan repayments in 1995, and to maintainself-financing ratios of no less than 1O percent in 1996, 15 percent in 1997,20 percent in 1998, 25 percent in 1999, and 30 percent thereafter;

(b) not incur additional debt unless a reasonable forecast shows its internal cashgeneration would provide a debt service coverage ratio of no less than 1.2times during 1996-97 and 1.5 times thereafter; and

(c) by April 30 of each year, commencing in 1996, furnish to the Bank a rollingeight-year financial plan containing projected income statements, statementsof sources and uses offunds, and balance sheets.

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D. FUTInRE FINANCES

6.13 The projections of SEPC's finances for 1994-2003 are presented in Annex 6.2,and the salient features of these finances are highlighted below in Table 6.2. Theprojections are based on the assumptions contained in Annex 6.3. The average pricesshown depict the minimum tariff adjustments needed to allow SEPC to achieve the abovefinancial performance targets.

Table 6.2: KEY FNANCIAL INDICATORS, 1994-2003(Million Yuan)

Year Ended December31 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Energy Sales (GWh) 33,000 36,500 39,800 43,500 47,400 50,900 54,500 58,300 62,400 66,800Average Price (fen/kWh) 24.50 28.99 32.93 37.17 41.23 47.90 55.76 58.52 58.79 64.94

SEPC'a Own Avg. Price 20.10 25.71 29.94 34.47 38.65 45.17 53.00 54.48 53.26 60.84Purchased Power's Avg Price 32.54 35.66 39.45 43.17 47.25 54.31 62.70 68.25 72.29 77.48

Operating Revenue 8,082 10,590 13,118 16,151 19,549 24,394 30,384 34,090 36,671 43,378

Tariff in Real Terms of 1994 PricesAverage Price (fen/kWh) 24.50 27.74 29.05 30.48 31.64 34.52 37.73 37.18 35.08 36.38SEPC's Own Avg. Price 20.10 24.61 26.42 28.27 29.66 32.55 35.86 34.61 31.78 34.08Purchased Power's Avg. Price 32.54 34.13 34.80 35.40 36.26 39.14 42.43 43.36 43.12 43.40

Operating Income 1,222 2,233 3,049 3,927 4,902 5,863 7,970 7,768 7,479 10,416Annual Capital Expenditure 3,243 3,940 5,026 6,119 6,920 6,431 7,535 9,176 10,249 9,650Rate Base 8,345 10,069 12,048 13,999 18,411 23,568 27,589 31,076 34,740 39,984Long-term Debt 11,147 13,027 15,408 18,281 20,958 22,266 24,481 27,689 30,431 32,152Debt Service 1,265 2,023 2,336 2,634 2,909 3,885 5,116 5,145 5,096 6,597Cash in Banks 1,228 792 537 317 193 595 1,259 1,854 2,381 3,194

Rate of ReturnHistorically Valued Asets (%) 11.8 17.3 19.3 20.9 19.6 18.5 21.3 18.7 15.9 18.9Revalued Asseta(%) 10.0 13.1 14.9 15.5 13.7 13.8 15.8 13.8 11.3 13.1

Self Financing Ratio (%) 7.1 0.0 10.0 15.0 20.0 25.0 30.0 30.0 30.0 30.0Operating Ratio (%) 85.0 78.9 76.8 75.7 74.9 76.0 73.8 77.2 79.6 76.0Debt/Total Capital (%) 59.4 59.6 59.4 59.0 57.5 54.3 51.5 50.4 49.2 46.3Debt Service Coverage 1.1 1.1 1.3 1.4 1.6 1.5 1.5 1.5 1.6 1.6

6.14 Table 6.2 shows the projected levels of increases in purchased power prices,prices for SEPC's own generation, and the weighted average of these two that will berequired to meet the financial covenants. The prices for purchased power will bedetermined on a plant-by-plant basis, at "debt repayment price" levels, allowing for fulldebt service based on 10-year payback period after commissioning of new power plants.For plants invested by independent investors, such as Huaneng, in addition to the debtrepayment requirement based on even shorter payback period, seven years in Huaneng'scase, the pricing formula further incorporates a reasonable level of profitability. Thepricing formula for the electricity supplied by Ertan Hydroelectric DevelopmentCorporation will be decided by the ongoing tariff study.

6.15 SEPC's financial position, however, depends on the revenue that it collectsfrom its own generation. In order to meet the expansion plan and projected cost increasesin the future and comply with the financial performance targets set forth above, SEPC's

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average tariff will need to increase by an estimated 12.2 percent in current terms or4.7 percent in real terms a year from 1994 to 2003. Given the current low tariff level onSEPC's own generation, SEPC needs to have a step increase of 28 percent in 1995 tobreak even and a total increase of 81 percent in three years to achieve a very modest self-financing ratio of 10 percent in 1996. Moreover, in order to reach the final target of30 percent self-financing ratio by 2000, SEPC's own tariff will have to be more thantripled, an annual increase of 18 percent in current terms and of about 10 percent in realterms over the next seven years.

6.16 Although the rate of increases in the state catalog prices needed to achieve areasonable self financing ratio for SEPC are large, much of the increase should stem fromthe entry of new generating plant into the rate base. Based on the principles establishedby the Government in the 1993 state catalog price reform, prices for new plant controlledby provincial power companies such as SEPC will be set at "debt repayment' levels.Because of the rapid load growth, the bulk of the tariff increase required will be metthrough implementation of the new pricing principles. Even by 1996, about one third ofSEPC's own generation is expected to come from plants built since 1993. By 2002, theshare rises to over one half.

6.17 During the period 1994-2003, SEPC is projected to maintain relatively highrates of growth necessitated by the prospective strong economic growth in SichuanProvince. Based on the latest demand forecast and expansion plan assumptions, energysales are expected to increase by about 123 percent over 1993 levels, representing acompound annual growth rate of about 8.4 percent. SEPC's annual investment programis expected to expand by almost fourfold over the period, an annual increase of 17 percent.Net fixed assets in operation are projected to grow by about 446 percent, an annualizedgrowth rate of about 18.5 percent during the period. Moreover, to meet forecast powershortages, rapid increases in both the quantity, from 12,900 GWh to 24,250 GWh, andcosts of purchased power, an augmentation by almost five times, over the projection periodare expected. The electricity supplied by Ertan Hydroelectric Power Plant after reachingfull generating capacity in 2001 is projected to account for two thirds of SEPC's purchasedpower. Based on the assumption of 35 fen/kWh in 1994 prices for Ertan's power, theprojected cost for purchased power will grow by more than 19.5 percent per annum andconstitute over 44 percent of SEPC's operating cost in 2003.

6.18 From 1993 on, SEPC's performance is anticipated to improve gradually andsteadily as the tariff level of SEPC's own generation be raised to meet the financial targets,from 16.5 fen/kWh in 1993 to 60.8 fen/kWh in 2003, tariff structure is furtherrationalized, and self-financing as well as debt service requirements emerge as dominantfactors in pricing formulation. Based on the projected minimum tariff level, about13.9 percent increase per annum for its own generation and 11.6 percent for purchasedpower from 1993 to 2003, both revenues and net income are expected to growconsiderably over the period. Operational ratios are projected to revert from over93 percent in 1993 to 76 percent by 2003. Moreover, the rate of return on historicallyvalued assets and on revalued assets will also improve from single digits in the early 1990sto the high teens, averaging 18.2 and 13.5 percent, respectively, over the period of 1994-2003.

- 50 -

7. ECONOMIC JUSTIFICATION

A. PRoJECT BENEFI

7.1 The proposed Sichuan Transmission Project is an essential component of theelectric power development program in Sichuan Province because it is required for theoutput of the 3,300 Ertan Hydroelectric Project to be used. The Ertan plant is expectedto provide over one quarter of the electrical energy needs of the provincial grid in the year2000, and to play a backbone role in system regulation. Without construction of the500-kV transmission line to connect the Ertan plant to the main grid in the East SichuanBasin, and associated investments to reinforce the transmission system of the grid so thatit can proper receive Ertan's power, over 80 percent of Ertan's output cannot be utilized.The Ertan plant has been under construction for over three years. By the beginning of1994, 51 percent of the total investment cost of Ertan already was sunk. Withoutcompletion of the transmission project, this investment would essentially be wasted. Aneconomically attractive investment package from the beginning, the economic benefits thatcan be derived from the incremental costs of completing the Ertan plant and associatedtransmission facilities are now exceptionally high. Conversely, failure to complete thetransmission project in time to properly use Ertan's generation would be very costly, asit would most likely result in prolonged high levels of unserved load.

7.2 Completion of the Ertan plant and transmission line also is environmentallyattractive, compared to the principal alternative. In Sichuan, the least-cost alternative toErtan to meet the projected load forecast is development of coal-fired thermal powerplants. This alternative would result in the combustion of more than 8 million tons ofadditional raw coal per year. In addition to the negative global environmental impact,increased use of the low-quality, high-sulfur coal of this region could be expected to resultin yet more severe local air pollution impacts than common in other parts of China.

B. LEAST-COST ANALYSIS

7.3 The proposed project is unquestionably part of the least-cost expansionprogram for the Sichuan Power Grid. A variety of expansion sequences from 1994-2010were prepared and analyzed in detail by SEPC and the Beijing Economic Research Instituteof Water Resources and Electric Power (BERIWREP). Staged commissioning of the Ertanproject in 1998, 1999 and 2000, the earliest dates now feasible, remains part of the least-cost sequence under a wide variety of assumptions. Using updated economic shadowprices, and discounting at 12 percent into 1994 terms, the present value cost of a 'secondbest" expansion sequence-without the Ertan project or transmission investments-exceedsthat of the with-project expansion program by Y 10.8 billion ($1.2 billion) (Annex 7. 1).More than any other single indicator, this large cost savings compared to the next bestalternative shows the economic attractiveness of completion of the Ertan plant andtransmission facilities.

- 51 -

7.4 Confirming the earlier decision to proceed with the Ertan project,commissioning of the Ertan plant and transmission facilities as planned also remained partof the provincial grid's least-cost expansion plan in the recent study even when the sunkinvestment costs in Ertan were included.

7.5 The economic studies of the project also considered different transmission lineroutes, configurations and timing. Two alternative routes for the 500-kV transmission linewere rejected as higher cost options. Completion of three lines of 500-kV connection ofErtan with the main grid by 2000, when the last unit of Ertan goes into operation, isclearly urgent. The studies concluded, however, that completion of a fourth line is bestdelayed until 2003, when additional generating capacity near to Ertan also would bebrought on line.

C. ECONOMIC RATE OF REnrRN

7.6 The internal economic rate of return (IERR) for the full Ertan HydroelectricProject (including sunk costs) and the investments in the 500-kV transmission line andsystem reinforcements project is conservatively estimated at 17 percent. An economicprice of 33 fen/kWh, in 1994 prices, was used as a minimum proxy for the economic valueof electricity benefits, based on the existing power sales price of the independent LuohuangThermal Power Plant to the Sichuan Power Grid. Assuming an economic price of 37 fen/kWh in 1994 prices, in line with the estimated average producers' tariff level required tomeet the project's financial covenants, the IERR would be 18 percent. Actual consumerwillingness to pay for power from Ertan is likely to be substantially higher than theseprices, especially for power during the dry season.

7.7 In a more accurate reflection of the returns of the economic decision that isnow being made, the IERR for the incremental costs to complete the Ertan Project and itsassociated transmission is estimated at 29 percent. Finally, consideration of only the costsand benefits of the proposed transmission project yields an IERR of 37 percent.

Sensitivity Analysis

7.8 The proposed transmission project carries very little internal economic risk.If the transmission project were completed as planned but the generation stream from Ertanwere delayed by two years, leaving the line initially idle, the IERR of the transmissioninvestment would fall from 37 percent to 26 percent. With a cost overrun of 30 percent,the transmission project IERR would still be 30 percent.

7.9 The chief economic risk associated with the project is the risk of negativeimpact on the Ertan project and Sichuan's economy if there is a delay in the commissioningof the transmission line. Under current plans, the Sichuan Power Grid will haveinadequate reserve margins in energy and peaking capacity prior to completion of the Ertanplant and transmission line (para. 4.9), and delay will only exacerbate this shortage andcause high costs to the economy through increased unserved load.

- 52 -

8. AGREEMENTS AND RECOMMENDATION

8.1 The following assurances were obtained at negotiations:

(a) From the Borrower that it would:

(i) take necessary measures to enable SEPC to implement the Action Planin a manner satisfactory to the Bank (para. 3.10); and

(ii) onlend the proceeds of the proposed Bank loan through SichuanProvince to SEPC on terms and conditions satisfactory to the Bank(para. 5.16).

(b) From SEPC that it would:

(i) prepare by September 30, 1995, in consultation with the Bank, adetailed program for implementation of the Action Plan and, thereafter,implement the Action Plan in a manner satisfactory to the Bank (para.3.10);

(ii) furnish the Bank with audited project accounts, statements ofexpenditures, and financial statements within six months of the end ofeach fiscal year (para. 3.23);

(iii) carry out the management development and training program as agreedwith the Bank (para. 5.12);

(iv) carry out the environmental management program in a mannersatisfactory to the Bank (para. 5.24);

(v) carry out relocation of persons affected by the project in accordancewith a resettlement plan acceptable to the Bank (para. 5.26);

(vi) take all necessary measures to ensure that its internal cash generation issufficient to meet (a) cash operating expenses, (b) interest charged tooperations, (c) income taxes, (d) gross increases in working capital, and(e) loan repayments in 1995; and to maintain a self-financing ratio of noless than 10 percent in 1996, 15 percent in 1997, 20 percent in 1998,25 percent in 1999, and 30 percent thereafter [para. 6.12(a)];

- 53 -

(vii) not incur additional debt unless a reasonable forecast shows its intemalcash generation would provide a debt service coverage ratio of no lessthan 1.2 times during 1996-97 and 1.5 times thereafter [para. 6.12(b)];and

(viii) fumish to the Bank, by April 30 of each year a rolling eight-yearfinancial plan containing projected income statements, statements ofsources and uses of funds, and balance sheets [para. 6.12(c)].

8.2 Execution of the subsidiary loan agreements between the Borrower, SichuanProvince and SEPC, and approval of the Loan Agreement by the State Council would beconditions of effectiveness of the loan (para. 5.16).

8.3 Subject to the above agreements, the proposed project is suitable for a Bankloan of $270 million to the People's Republic of China. The loan would be for a term of20 years, including a 5-year grace period, at the Bank's standard variable interest rate.

- 54 -

- 55 -

ANNEXES

- 56 -

- 57 - ANNEX 1.1

PRIMARY ENERGY OUTPUT IN CBINA (1949-93)

Year Raw Crude Natural Electricitycoal oil gas Total of which:(in6t) (106t) (108m3) output Hydropower

(TWh) (TWh)

1949 32.0 0.12 0.07 4.3 0.71955 98.0 0.97 0.17 12.3 2.41960 397.0 5.20 10.40 59.4 7.41965 232.0 11.31 11.00 67.6 10.41970 354.0 30.65 28.70 115.9 20.51975 482.0 77.06 88.50 195.8 47.61980 620.0 105.95 142.70 300.6 58.21981 622.0 101.22 127.40 309.3 65.51982 666.3 102.12 119.30 327.7 74.41983 714.5 106.07 122.10 351.4 86.41984 789.2 114.61 124.20 377.0 86.81985 872.3 124.89 129.30 410.7 92.41986 894.0 130.69 137.60 449.5 94.51987 928.1 134.14 138.94 497.3 100.21988 979.9 137.05 142.64 545.2 109.11989 1,054.2 137.65 150.49 584.7 118.41990 1,079.9 138.31 152.98 621.3 126.41991 1,087.4 140.99 153.96 677.5 124.71992 1,115.0 142.10 157.90 754.2 131.51993 1,141.0 144.00 165.60 836.4 150.7

Source: MOEP.

TOTAL PRODUCTION AND CONSUMPTION OF ENERGY VS. GNP GROWTH

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

Production(million tons of standard

coal equivalent) 628 646 637 632 668 713 779 855 881 913 958 1,016 1,039 1,048 1,073 1,117

Proportion (%)

Coal 70.3 70.2 69.4 70.2 71.3 71.6 72.4 72.8 72.4 72.6 73.1 74.1 74.2 74.1 74.3 74.2Crude oil 23.7 23.5 23.8 22.9 21.8 21.3 21.0 20.9 21.2 21.0 20.4 19.3 19.0 19.2 18.9 18.5Natural gas 2.9 3.0 3.0 2.7 2.4 2.3 2.1 2.0 2.1 2.0 2.0 2.0 2.0 2.0 2.0 2.0Hydropower 3.1 3.3 3.8 4.2 4.5 4.8 4.5 4.3 4.3 4.4 4.5 4.6 4.8 4.7 4.8 5.3

Consumption(million tons of standard

coal equivalent) 571 586 603 594 621 660 709 767 809 866 930 969 980 1,038 1,087 1,122

Proportion (M%)00Coal 70.7 71.3 72.2 72.7 73.7 74.2 75.3 75.8 75.8 76.2 76.2 76.0 75.6 76.1 76.1 73.2Crude oil 22.7 21.8 20.7 20.0 18.9 18.1 17.4 17.1 17.2 17.0 17.0 17.1 17.0 17.1 17.1 19.4Natural gas 3.2 3.3 3.1 2.8 2.5 2.4 2.4 2.2 2.3 2.1 2.1 2.0 2.1 2.0 1.9 2.0Hydropower 3.4 3.6 4.0 4.5 4.9 5.3 4.9 4.9 4.7 4.7 4.7 4.9 5.3 4.8 4.9 5.4

GDP Index(constant prices) 100.0 107.6 116.0 121.2 131.8 145.4 166.9 188.2 203.5 225.7 251.2 262.1 272.7 295.0 333.4 379.0

Energy Intensity Index(consumption/GNP) 100.0 95.4 91.0 85.8 82.5 75.9 74.5 71.5 69.7 67.2 65.0 65.1 62.6 61.6 57.3 51.9

Notes: (1) Excluding bio-energy, solar, geothermal and nuclear energy.(2) All fuels are converted into standard coal with thermal equivalent of 7,000 kilocalorie per kilogram. The conversion factors are:

1 kg of coal (5,000 kcal) =0.714 kg of standard coalI kg of crude oil (10,000 kcal) = 1.43 kg of standard coal >1 cubic meter of natural gas (9,310 kcal) = 1.33 kg of standard coal

(3) The conversion of hydropower is based on the specific consumption of standard coal for thermal power generation of the year.

Source: China Statistical Yearbook 1991.1.

- 59 - ANNEX 2.1

INSTALLED CAPACITY, ELECTRICITY GENERATION ANDCONSUMPIION IN THE POWER SUBSECTOR

Installed Electricity ElectricityCapacity (MW) /a Generation (GWh) /a Consumption lb

Year Hydro Thermal Total Hydro Thermal Total (GWh)

1949 163 1,686 1,849 710 3,600 4,310 3,4601952 188 1,776 1,964 1,260 6,001 7,261 6,2771957 1,019 3,616 4,635 4,820 14,515 19,335 16,4071962 2,379 10,686 13,065 9,042 36,753 45,795 n.a.1965 3,020 12,056 15,076 10,414 57,190 67,604 56,8021970 6,235 17,535 23,770 20,450 95,420 115,870 n.a.1971 7,804 18,478 26,282 25,060 113,300 138,360 101,2741972 8,700 20,801 29,501 28,820 123,630 152,450 123,6001973 10,299 23,626 33,925 38,900 127,860 166,760 135,1061974 11,817 26,291 38,108 41,440 127,410 168,850 135,7081975 13,428 29,978 43,406 47,630 148,210 195,840 156,9691976 14,655 32,492 47,147 45,640 157,490 203,130 164,6981977 15,765 35,686 51,451 47,670 175,740 223,410 181,6911978 17,277 39,845 57,122 44,630 211,920 256,550 210,2391979 19,110 43,906 63,016 50,120 231,827 281,947 233,5771980 20,318 45,551 65,869 58,211 242,416 300,627 251,6391981 21,933 47,069 69,002 65,546 243,723 309,269 258,9761982 22,959 49,401 72,360 74,399 253,279 327,678 275,2991983 24,160 52,280 76,440 86,450 264,990 351,440 297,1261984 25,547 54,373 79,920 86,780 290,207 376,987 319,6001985 26,120 60,373 86,493 92,374 318,315 410,689 348,3531986 27,542 66,276 93,818 94,480 355,091 449,571 357,0571987 30,193 72,704 102,897 100,229 397,092 497,321 420,0191988 32,698 82,799 115,497 109,177 435,888 545,065 464,0131989 34,570 92,060 126,637 118,475 466,200 584,675 495,1351990 36,050 101,844 137,894 126,350 494,986 621,318 527,1541991 37,884 113,589 151,473 124,845 552,649 677,494 575,2191992 40,681 125,852 166,533 131,466 622,723 754,189 644,6961993 44,593 138,318 182,911 150,743 685,686 836,429 698,255

/a On a countrywide basis.Lk Energy consumption not including uses by stations and line losses.

Source: MOEP.

- 60 - ANNEX 2.2

ELECTRICITY CONSUMPTION BY SECTORS La

Total Industry Agri- Resi- Trans- Municipalconsumption Sub- cul- den- porta- and

Year (TWh) Heavy Light total tural tial tion commercial

1985 411.7 63.8 15.9 79.7 7.7 5.4 1.5 5.7

1986 456.7 64.9 15.8 80.7 7.1 5.5 1.5 5.2

1987 498.5 64.0 16.4 80.4 7.2 5.7 1.5 5.2

1988 546.7 62.8 17.0 79.8 6.9 6.3 1.6 5.4

1989 586.5 63.0 16.2 79.2 7.0 6.7 1.7 5.4

1990 623.0 62.2 16.0 78.2 6.9 7.7 1.7 5.5

1991 680.4 61.2 16.2 77.4 7.1 8.0 1.7 5.8

1992 745.5 61.2 15.9 77.1 6.8 8.5 1.8 5.8

1993 820.1 61.2 15.4 76.6 6.3 8.9 1.9 6.3

La On a countrywide basis, including station uses and line losses for power industry.

Source: MOEP.

- 61- ANNEX 2.3

MAJOR ONGOING POWER PROJECTSWITH EXTERNAL FINANCING OTHER THAN IBRD

Inlled Coognac- Loanapac ity tion amount

(Unit x MW) Location period Source of finance (S mln)

A. HYDRO POWEREast ChinaMianhuatan 4 x 150 Fujian 1995-2002 ADB 200.0

North ChinaShianling pumped storge 4 x 200 Hebei 1990-96 OECF 100.0Zhangjiawan 4 x 250 Hebei 1996-2001 ADB 250.0

Central ChinaWuqiangqi hydro 5 x 240 Hunan 1988-95 OECF 200.0lingintan 8 x 300 Hunan 1994-99 ADB 100.0Geheyan 6 x 200 Hubei 1988-95 Canada

Southwest ChinaTrienshengqiao (11) hydro 4 x 220 Guizhou 1988-96 OECF 478.5Tnenshengqiao (I) hydro 4 x 300 Guizhou 1991-2002 OECF 160.0Hongjiadu hydro 3 x 180 Guizhou 1995-2001 ADB 200.0

South ChinaGuangzh- Pumped Stoage (1) 4 x 300 Guangdong 1988-94 France 200.0

uarngzhou Pumped Storage (11) 4 x 300 Guangdong 1994-98 ADB 290.0Joint financing 71.1

Other PartHuanggou 4 x 300 Heilongliang 1999-2004 OECFGongbuoxia 5 x 300 Qinghai 1997-2005 OECFJitintai 4 x 415 Xinjiang 1997-2002 OECF

Subtotal 15 82020496

B. THERMAL POWERNorth ChinaSanhe 2 x 300/350 Hebei 1994-98 OECF 250.0Hejin 2 x 3001350 Shanxi 1994-98 OECF 250.0

Central ChinaEzhou 2 x 300 Hubei 1992-97 OECF 250.0liujiang 2 x 300/350 Jiangxi 1994-98 OECF 250.0

Subtotal 2.700 L

C. TRANSMISSION & SUBSTATIONTienahengqiao(1)-Guangdong 1,200km - 1994-98 OECF 140.0

axC)Subtotal 140.0

Total 14.620 MW in gnerating capacity1.200 km for 500-kV transmisaion line 3,189.6

Source: MOEP.

-62 - ANNEX 2.4

FUTURE THERMAL POWER PROJECTS UNDERBOT OR BOO ARRANGEMENTS ta

Installedcapacity Construction

Projects (No. x MW) period Location

Waigaoqiao (phase 2) 2x800 or 1997-2002 Shanghai2xl,000

Jiaxing (phase 2) 4x600 1996-2002 ZhejiangLigang (phase 3) 2x600 1995-98 JiangsuYangcheng 6x350 1995-2001 ShanxiTuoketuo No. 2 4x600 1999-2005 Inner MongoliaDaihai 4x600 1997-2001 Inner MongoliaDatong No. 2 2x600 1998-2002 ShanxiShalingzi (phase 2) 2x600 1996-2000 HebeiShuangyashan 2x600 1997-2001 HeilongjiangZhuhai 2x660 1995-2000 GuangdongBeihai 2x350 1996-2000 GuangxiShenzhen East 4x660 1997-2003 GuangaongRizhao 2x350 1995-98 ShandongShiliquan 2x300 1997-2000 ShandongLaicheng 2x600 1995-98 ShandongShiheng (phase 2) 2x300 1996-99 ShandongHanfeng 2x600 1996-2000 HebeiMeizhouwan 2x600 1993-97 FujianSongyu 2x350 1993-97 FujianHanchuan (phase 2) 2x300 1998-2003 HubeiGaobeidian 2x145 1995-99 Beijing

2x180Dalian (phase 2) 2x350 1995-98 LiaoningDandong 2x350 1995-98 JilinNantong (phase 2) 2x350 1996-98 JiangsuFuzhou (phase 2) 4x660 1995-98 FujianYueyang (phase 2) 2x350 1996-99 HunanLuohuang (phase 2) 2x350 1996-2000 SichuanShantou (phase 2) 2x350 1997-2000 GuangdongYingkou (phase 2) 2x600 1997-2000 LiaoningShajiao C 3x660 1994-96 GuangdongYahekou 2x350Huanggang 2x600

LA BOT: Build-Own (Operate)-TransferBOO: Build-Own-Operate

Source: MOEP.

- 63 - ANNEX 3.1

ACTION PLAN FORTILE COMMERCIALIZATION AND CORPORATIZATION OF

THE SICHUAN ELECTRIC POWER COMPANY(translation from Chinese language)

1. The Chinese Government recently has undertaken, or is about to undertake,a variety of measures, including promulgation of a series of new economic laws andregulations, to further promote the reform to a market economy and establish a modernenterprise system. These measures provide a solid basis for the completion of a socialistmarket economic system in China, and unprecedented favorable conditions for thedevelopment of the country's power industry. To develop the power industry efficiently,it is now necessary to make a transition in the management structure of the electric powerindustry to better suit the market system.

2. Accordingly, the Sichuan Electric Power Company (SEPC) and SichuanElectric Power Administration (SEPA) have worked out the following action plan for thecorporatization of SEPC and commercialization of its operations. This plan takes accountof the CCCCP's "Decision on Several Problems in Establishing the Socialist MarketEconomy," the "Company Law of the People's Republic of China," and the "Regulationsfor Transfer of the Operating Mechanisms of Enterprises Owned by the Whole People."It also takes account of the opinions of the World Bank expressed during preappraisal andappraisal of the Sichuan Transmission Project, combined with the actual conditionsprevailing in Sichuan Province.

3. The Action Plan will be submitted to the relevant authorities for approval,and will be implemented according to the approved version of the Plan. I/

A. OBJEC'nvEs OF THE REFORM

4. SEPC, by law a self-operated legal entity with independent accounting andresponsibility for its own losses and profits, is the most influential and largest enterprisein Sichuan Province today. Based on the needs of the modern enterprise system, SEPCwill be restructured into a corporation, with its operations commercialized. Under theplanned economy, enterprise and government functions were combined in this company,with sole ownership of all assets. Following the requirements of the 'Company Law,"SEPC will be transformed into a corporation in which property rights are clearlydemarcated, mandates and responsibilities are clearly defined, government and enterprisefunctions are separated, and management systems are scientific. It will be a 100 percent

1/ The Action Plan was approved as is by the Ministry of Electric Power on September 19, 1994.

- 64 - ANNEX 3.1

state-owned, limited-liability company. As the reform deepens, this will be furthertransformed into a limited-liability or shareholding company floating shares on thedomestic and international financial markets, in order to mobilize capital from home andabroad, and thus strengthen the company's investment capability and acceleratedevelopment of the Sichuan power industry.

B. ACTION PLAN FOR THE REFORM

5. Reform of SEPC's Accounting and Fmancial Management System.Starting from July 1, 1993, SEPC has already begun to adopt an internationally acceptedaccounting and financial system. SEPC will complete, in a timely manner, correspondingreform and adjustments in operations and management. In order to commercialize thecompany's operations, and with financial assistance under the World Bank Sichuan PowerTransmission Project, SEPC will begin to implement a new financial managementinformation system and structural reforms to the financial management system in 1995, forthe purpose of operational commercialization. Using international technical assistance,diagnostic analysis and the design of a new system will be completed by June 1997.Implementation will then be completed in 1998.

6. Ownership in the Sichuan electric power industry is being diversified witha number of different electric power business entities involved. Given this reality, and thefact that SEPC is the core electric power enterprise in Sichuan and the central manager ofthe transmission network, SEPC and SEPA will actively review the nature of structuralreform in the Sichuan power industry, in order to foster an environment conducive forcommercialized operations. Accordingly, it is necessary to complete a comprehensivestudy and evaluation of the structure of the electric power industry in Sichuan andassociated reforms, and to submit recommended options for further reform in 1996 for theapproval of relevant departments.

7. The study will focus on the improvement of the efficiency of the powerindustry, and pay special attention to the establishment of an fair power purchase and salesarrangements and the introduction of competition. Considering the abundant internationalexperience in this area, SEPC will undertake this study with international technicalassistance, as suggested by the World Bank, and discuss with the provincial authorities thepossible involvement of the provincial government as an active participant.

Power Pricing Reform Action Plan

8. SeasonallTime-of-Day Tariffs. Based on existing pilot cases, time-of-dayand seasonal tariffs will be applied to all the customers supplied at 100 kVA level andabove by 1995, which will cover 60 percent of total power sales. Between 1995 and 1997,all power stations above 10 MW will adopt time-of-day and seasonal tariffs.

9. Unification of Consumer Prices. Between 1995 and 1996, guidance tariffswill be unified at city and prefecture levels. Consumer prices will then be unified into onetariff by the end of 1997. The difference in tariffs between old power plants and new

- 65 - ANNEX 3.1

joint-investment power plants will be gradually narrowed, and eventually eliminated inthree to five years.

10. Tariff Levels. To ensure that SEPC can operate with a profit and make areasonable contribution to its future investment program, and to fulfill the necessaryfinancial assurances in connection with the Sichuan Power Transmission Project, SEPCwill propose new tariff levels to the government and implement them upon approval.

11. Power Purchase Agreements. Starting from 1995, SEPC will, step by step,develop and implement improved power purchasing agreements, particularly withindependent power producers. SEPC will ensure equitable treatment of all producers,ensuring reasonable profits and leading to economic dispatch.

Service and Noncommercial Functions/Relationship with Subsidiaries

12. During 1994-97, in order to achieve commercialized operations under themodern enterprise system, service and social-benefit operations and enterprises willgradually be separated from SEPC, and operated independently. The relationship of theseenterprises to the parent company or its branches will follow a parent-subsidiary companymodel and other models.

13. During 1995 and 1996, the separation of social-sector and other service-related operations from SEPC will continue. By the end of 1995, all manufacturing,construction and installation enterprises directly owned by SEPC will be put underindependent operation. The various research and design institutes owned by the companyalso will be gradually put under independent operation during 1995-97.

14. During 1995-98, SEPC will initiate and improve the management reformsin its subsidiary power plants and power supply bureaus, which will enjoy relativeindependence. As experience is gained, authority and responsibility will be clarified, andcommercial mechanisms will be further introduced into internal operations through theintroduction of internal-transfer tariffs and adoption of subordinate unit business accountingpractices. In the meantime, SEPC will explore internal management structural reform toimprove its own productivity and profitability. These internal organizational reforms willbe implemented based on the results of the technical assistance component provided underthe Bank loan (para. 6).

15. With relevant government approval, and following the progress in powertariff reform, SEPC will define the nature and scope of noncommercial social servicescurrently performed by the company, and complete an assessment of expenditures incurredor losses sustained due to provision of these services. Compensation mechanisms or othermeans to resolve these issues will then be discussed with relevant government authoritiesduring 1995-97.

- 66 - ANNEX 3.1

Corporatization Action Plan

16. At this stage, SEPC will reorganize newly built power plants and newlyexpanded power plants with the proper conditions into shareholding enterprises or mobilizeinternational funds by setting up joint ventures and cooperative enterprises. Theseenterprises will be organized as independent legal entities responsible for their own profitsand losses.

17. SEPC and SEPA will prepare an implementation plan for the reorganizationof SEPC into a proper limited liability company, in full conformity with the CompanyLaw, and for the final separation of govemment functions from the company. Thisimplementation plan will be submitted for the approval of relevant authorities, includingthe Ministry of Electric Power (MOEP), by the end of 1994 or the beginning of 1995.

18. Separation of govemment functions from enterprise functions should be animportant principle for Sichuan Electric Power Limited Liability Company and it will bereflected in the implementation plan.

19. Establishment of the Sichuan Electric Power Limited Liability Company(SEPLLC). Following completion of revaluation of existing assets, and issuance ofregulations concerning the supervision and management of state-owned assets in thisindustry, work to clearly demarcate and define the ownership rights to existing assets willbe completed by mid-1997. Various business enterprises, supplementary and service-related operations, research and educational institutions will either be separated or put intoindependent operations by 1997. The independent enterprises will be organized assubsidiaries.

20. Enterprises that are owned by multiple investors will be reorganized intoindependently operated limited-liability or shareholding companies. Companies in whichSEPC is the largest shareholder will be reorganized as subsidiaries of SEPC.

21. Power distribution companies, transmission assets and generation assetssolely owned by SEPC, or certain enterprises or social-service operations that cannot beindependently operated may remain as Sichuan Electric Power Limited LiabilityCompany's subsidiaries under the company's direct control.

22. By 1998, SEPC will be registered as the Sichuan Electric Power LimitedLiability Company.

23. Separation of Government and Enterprise Functions. SEPA and SEPCwill prepare a brief analytical report clearly defining the government functions andenterprise functions currently carried out by these two organizations; following the issuanceof the Electricity Law, SEPA and SEPC will propose a plan for the separation of thegovernment and enterprise functions according to the Electricity Law. The plan, uponapproval by the government, will be gradually implemented in collaboration with theestablishment and operation of Sichuan Electric Power Limited Liability Company.

- 67 - ANNEX 3.1

24. The objective is to separate functions of SEPA from those of SichuanElectric Power Limited Liability Company (SEPLLC). The company will be operatedfully as a business entity according to the Electric Law and other laws and regulations.A transitional period is needed for the separation of the dual functions since thecombination of the two functions has a history of several decades. The completion ofseparation is expected by 1998.

25. As a transitional measure to full separation of government functions fromSEPC, beginning in January 1995, a SEPA manager will be designated from among theleading managers of SEPA/SEPC and given sole responsibility for carrying out provincial-level government functions in power industry regulation. At the same time, staff andsubunits will be assigned sole responsibility for government functions in the power sector,under the leadership of the designated manager.

26. Revision of Company Charter. To better conform with the spirit of theCompany Law, SEPC will revise its existing company charter, and obtain approval of therevised charter by the end of 1994.

27. By 1998, SEPC will, based on the development of the reform, prepare arevised "Sichuan Electric Power Limited Liability Company Charter" in conformity withthe Company Law for final approval and registration of SEPLLC in place of SEPC.

Organization Measure for Reform

28. SEPA and SEPC will set up a joint reform executive team by the end of1994 in charge of planning and implementing the above-mentioned reforms.

Sichuan Electric Power AdministrationSichuan Electric Power Company

September 1994

- 68 - ANNEX 3.2

PERFORMANCE INDICATORS FORSICHUAN POWER SYSTEM

1987 1988 1989 1990 1991 1992 1993

Installed Capacity (MW)Whole province 5,605.9 6,048.1 6,575.6 7,489.7 8,690.9 9,565.3 10,527.1SEPC 3,733.0 3,933.0 4,114.5 4,644.9 5,024.0 4,982.0 5,646.7

Energy Generation (GWh)Whole province 26,287 29,402 32,695 34,565 37,958 41,940 47,087SEPC 19,696 21,751 23,284 24,017 25,208 24,708 27,145

Energy Generation (GWh)Thermal 11,604 13,152 14,684 14,854 15,505 16,830 19,586Hydro 14,683 16,250 18,011 19,711 22,453 25,110 27,501

Net energy purchased (GWh) 1,856 1,648 2,305 2,867 3,652 6,138 8,200

Capacity Factor (%)SEPC 64.8 64.7 65.8 65.2 61.1 57.0 59.1

Peak Demand (MW)SPG 3,088 3,188 3,488 3,666 3,926 4,290 4,874

Energy Sales (GWh)SEPC 18,475 20,111 21,985 23,154 24,823 26,656 29,920

Station Use (%)Whole province 6.06 6.16 6.41 6.60 - - -SEPC 6.40 6.37 6.64 6.82 7.13 7.10 6.95

Line Losses (%)Whole province 10.81 10.91 10.84 9.86 9.71 9.66 9.46SEPC 8.84 8.54 8.46 8.19 8.19 8.29 8.30

Average Coal Consumption (g/kWh)SEPC 428 422 412 406 401 387 382

Number of Employees 66,943 68,892 69,771 72,065 73,511 73,504 73,131

Sales per Employee (kWh)SEPC 27S,985 291,925 315,102 321,291 337,680 362,643 409,126

Source: SEPC.

- 69 - ANNEX 3.3

STAFFING OF SEPC(As of December 31, 1993)

Number of units Number of staff Percentage

By Functional UnitsHeadquarters 1 285 0.4Generation 18 26,531 36.3Supply and services 15 26,918 36.8Construction and installation 5 11,920 16.3Education 5 1,284 1.8Design 1 288 0.4Manufacture and repair 3 3,251 4.4Miscellaneous 9 2,654 3.6

TltI 57 73.131 10.0O

By SMiallyStaff

Administration 7,194 9.9Technical 10,333 14.1Engineers and technicians 3,390 4.6

Subtotal 20.917 28

WorkersJunior 4,475 6.1Average skilled 9,414 12.9Highly skilled 34,395 47.0Apprentices 1,724 2.4

Subtotal 50.008 6.4

Others 2,206 3.0

Total 73,131 100Q

By Schooling ReceivedPostgraduates 353College graduates 3,160Graduates of polytechnical institutes 5,391Graduates of secondary technical school 8,371Others 55,856

Source: SEPC.

-70 - A*NNEX 3.4

SCHOOLS AND TRAINIG CENTERS UNDER SEPC (1993)

Name of school Enrollment Staff Graduates

Chungqing Staff College La 604 134 113

Chengdu Staff Colege lb 485 115 114

Chungqing Technical Institute 1,876 454 477

Chengdu Hydro Power Institute 2,102 457 450

Chungqing Technical School forSkiUed Workers 1,675 343 593

iDta1 6.742 L50 1;747

La Chungqing Staff College is operating a TV University.l2 Chengdu Staff College is using as a training center for short-term courses and a

correspondent school for SEPC's staff on different subjects.

Source: SEPC.

- 71 - ANNEX 3.5

POWER PRICING IN SICHUAN PROVINCE

Overview of the Power Pricing System

1. As in other provinces, the power pricing system for electricity suppliedthrough the Sichuan Power Grid includes three components:

(a) State Catalog Prices. These are the prices charged for electricity generatedby capacity financed by the Central Government and managed by provincialpower companies such as SEPC. This capacity includes (i) virtually allpower plants constructed before 1985, primarily with grant funding, and (ii)plants, or shares of plants, constructed with loan funds allocated by theCentral Government since 1985. The state catalog prices provide the basisfor the revenue of SEPC and other provincial power companies. Since the1993 reform in state catalog prices, prices built into the state catalog pricetables for electricity from capacity constructed since 1985 should allow forfull repayment of loans and interest, plus a small profit margin. Statecatalog price tables are reviewed, revised and reissued every year byMOEP, in consultation with provincial governments.

(b) Prices for Purchased Power. Prices for power purchased by provincialpower companies such as SEPC from capacity not financed by the CentralGovernment are determined on a plant-by-plant basis, at levels allowing fullrepayment of loans and interest, usually over a period of 10 years, plus areasonable profit margin. These types of plants include joint-investmentplants (financed through a combination of central, provincial and localgovernment funding sources), plants of independent power producers suchas the Huaneng Corporation, and plants owned by local governments orindustries that sell surplus power to the grid.

(c) Additional Fees and Surcharges. A variety of surcharges are levied on thevarious consumer categories, primarily for different types of investmentfunds for the power sector. The most common and important includeprovincial and local government power investment surcharges, surchargesto raise funds for special projects (e.g., the Three Gorges Project), and localfees to raise funds for distribution system investment.

2. In most parts of China two types of consumer tariffs remain. Administeredprices, or "in-plan prices," include the state catalog prices plus the additional fees andsurcharges. These prices are charged for electricity supplied to enterprises under in-planquotas, generally set at 1985 consumption levels. Guidance prices include state catalog

- 72 - ANNEX 3.5

prices, markups for the higher cost of purchased power, plus the additional fees andsurcharges.

Power Pricing in Sichuan Compared to Other Provinces

3. Complexity. While the power pricing system in China is complicated ingeneral, the current system in Sichuan is particularly complex. One factor is theinteraction between the Sichuan Power Grid and the province's numerous semiautonomousor autonomous local plants and systems. SEPC's power purchasing arrangements numberin the hundreds. Especially in the countryside, there are ever-changing combinations ofdifferent categories of grid and local supply, priced in different ways for differentconsumers.

4. During the 1980s, Prefectural and County Power Supply Bureaus allocatednew sources of supply, under the guidance price system, separately to individualconsumers, with different prices for each supply source. By the early 1990s, this systemhad become unmanageable. The province is reforming the system, to pool all of thesources of supply subject to guidance prices together, and charge consumers a weightedaverage price, as is now common in most other parts of China. Because the reform willresult in some enterprises paying more, and some paying less, than before, the reform isbeing pursued over several years, prefecture-by-prefecture. The unreformed guidanceprice system remained in force in 5 of the province's 14 prefectures in July 1994. InDeyang Prefecture, where the reform has not yet been implemented, there are 14 separatesources of "out-of-plan" supply, each priced and allocated to consumers separately.

5. Low Price Levels. Electricity prices in Sichuan are among the lowest inChina. Both the average unit revenue level accruing to SEPC from the state catalog pricesand the average consumer price levels in Sichuan are only some 65-75 percent of the levelsin the coastal provinces of Jiangsu and Zhejiang. Consumer prices are significantly belowthe long-run average incremental costs of supply (see below). Recently, however, priceslevels in Sichuan have been increasing more sharply, so that the gap compared to otherprovinces is narrowing somewhat. Based on increases in the state catalog price, SEPC'sunit revenue levels are projected to rise by 21 percent in 1994, compared to 1993. InZhejiang, by comparison, the average state catalog price was increased by about 8 percentbetween 1993 and 1994.

6. One reason for the relatively low state catalog prices in Sichuan is therelatively high share of hydroelectric generation. During the late 1980s and early 1990s,the driving factor behind the increases in catalog prices throughout China was theincreasing costs of coal supply and delivery, which directly resulted in increased operatingcosts. There has been greater resistance to increases in prices for power from existinghydroelectric facilities, which were financed on a grant basis prior to the mid-1980s, tolevels approaching the incremental costs of new capacity. State catalog prices also arerelatively low in other provinces with a concentration of hydropower, such as Fujian.

- 73 - ANNEX 3.5

7. Another factor is that the certain types of industries which are eligible forsubsidized electricity prices according to national policy, such as the chemical fertilizerindustry, account for a larger share of the overall load than in most other provinces. Salesbased on the special subsidized prices accounted for about 9 percent of SEPC's total salesin 1993.

8. Factors contributing to the low levels of consumer prices compared with thecoastal provinces, in addition to the low state catalog prices, include the facts that(a) power supplied at the at the catalog prices (as opposed to power purchased fromindependent or quasi-independent producers) accounts for a higher share of total sales, and(b) price levels for power purchased from other sources by SEPC are somewhat lower.In Sichuan, sales at administered prices account for about 60 percent of SEPC's sales,while sales at guidance prices based on power purchased from outside of SEPC accountfor about 40 percent. In the fast-growing coastal provinces, sales at administered pricesaccount for one half or less of total sales. In Sichuan, average guidance price levels alsoare lower than on the coast, in part due to a high portion of power from small hydro plantsin the total amount of purchased power. Prices for power from small hydro plants tendto be relatively low, as much of the power is supplied during the wet season when its valueto the overall system is less.

9. Tine-of-Day and Seasonal Tariffs. Compared with other areas, SichuanProvince is particularly advanced in implementation of time-of-day and seasonal tariffs.Beginning in 1993, the province has been implementing a program to apply both daily peakand off-peak rates, and wet, dry and shoulder season rates for major consumers. By 1995,these tariff schedules will apply to about 60 percent of SEPC's total sales. (See also Table2 and para. 16 below.)

The Electricity Price Buildup in Sichuan

10. State Catalog Prices. The state catalog prices for Sichuan Province in 1994are shown in Table 1. Prices are highest for commercial sector use, followed by industry.Large industrial consumers face both an energy charge and a demand charge; the demandcharge amounts to an average of 2-4 f/kWh for most consumers. Consumer categoriesprovided with special subsidized rates include certain metals and chemicals, chemicalfertilizers, and irrigation in poor counties. The 1994 prices for regular and large industryincreased by 11 percent and 14 percent, respectively, compared to 1993. With projectedshifts in the composition of the load and other adjustments, SEPC's average revenue, basedon these prices, is expected to reach about 20 f/kWh (US¢2.3/kWh) in 1994, up from16.54 f/kWh in 1993.

11. Purchased Power. Key sources of purchased power include several largejoint-investment or independent plants, including two owned by Huaneng Corporation, anda large number of small hydro and captive thermal plants. Supply sources and their pricesvary in different parts of the province. In the case of Chengdu Prefecture, power fromthree large plants supply accounts for about one half of the purchased power, with sellingprices to the grid of 21.7 f/kWh (Chengdu Power Plant), 25.2 f/kWh (Jiangyou Power

- 74 - ANNEX 3.5

Plant), and 27.8 f/kWh (Luohuang Power Plant), and retail prices set 3-5 f/kWh higher,plus the additional surcharges and fees. The other one half of purchased supply comesfrom small hydro plants, with selling prices to the grid of 13.0-18.5 f/kWh, and smallthermal plants, with selling prices onto the grid of 27.5 f/kWh.

12. Consumer Prices. As in other parts of China, surcharges added to the statecatalog prices in Sichuan to form the retail administered price schedule include (a) a localsurcharge for urban grid construction-levied, in this case, at 10 percent of the catalogprice for residential and commercial consumers, and 8 percent of the catalog price forindustrial consumers; (b) the national 0.4 f/kWh levy for mobilization of funds for theThree Gorges Project; and (c) a surcharge to mobilize funds for provincial governmentinvestment in power, amounting to 2.5 f/kWh in the case of Sichuan. Additional leviesin this case also include (a) a 5.5 f/kWh surcharge to pay for the higher cost of powersupplied by two particular large plants, (b) a 0.13 f/kWh fee to support small hydro plantdevelopment, and (c) a 1.0 f/kWh surcharge to raise funds for Sichuan's ErtanHydroelectric Project.

13. In Chengdu City, "out-of-plan" sources of purchased power are pooledtogether and charged to consumers at one weighted average price of 28 f/kWh. Addingin a 2 f/kWh fee for the Ertan project, guidance prices in 1994 were 30 f/kWh. InChengdu, the guidance prices were applied to 32 percent of total sales, and administeredprices were applied to the remaining 68 percent.

14. Considering current load characteristics, the average consumer price inChengdu in mid-1994 is estimated at about 30 f/kWh (USC3.4/kWh). Consumer pricesin the neighboring Deyang Prefecture also were reviewed in detail, yielding about the sameaverage price.

15. The administered and guidance price levels are now relatively close (addingin the demand charge, typically amounting to 2-4 f/kWh, in the administered price forlarge industry). In the case of Sichuan, a number of the surcharges that other provincesoften apply only in guidance prices are levied in the administered prices, whereas thesurcharges on guidance prices are relatively small.

16. Table 2 shows the tariff for industrial consumers in use in Deyang Prefecturein 1994. Rates are sharply differentiated according to season and time-of-day. During thewet season, average prices are 10 percent below the catalog price, and during the dryseason, they are 20 percent higher. During each season, then, peak and off-peak time-of-day rates apply. Added together, therefore, the price of peak load energy during the dryseason is four times the price of off-peak energy during the wet season. This tariff isrelatively advanced compared with those used in other parts of China. It provides a muchimproved signal to consumers as to the actual costs of supply at different times-costs thatvary dramatically in Sichuan's system-and provides a good incentives framework forproper load management.

-75- ANNEX 3.

Comparison of Consumer Prices and the Economic Cost of Supply

17. Average consumer prices in Sichuan in 1994, represented by the cases ofChengdu and Deyang, were about 70-80 percent of the estimated long-run averageincremental cost (LRAIC) of supply, calculated in economic shadow prices. This gapbetween average consumer prices and the estimated economic cost of supply contrasts withthe situation in the coastal provinces, where average consumer prices are very close to, orexceed the LRAIC of supply.

18. As part of the economic analysis for this project, BERIWREP estimated theLRAIC of the least-cost expansion program for the Sichuan Provincial Grid during 1994-2010 at 40.5 f/kWh (USC4.7/kWh). Incremental supply costs in Sichuan are low becauseof (a) the availability of inexpensive hydropower (the investment costs for most of theprojects in Sichuan's hydropower expansion program are less than $1,000/kW); (b) theavailability of low-cost coal (shadow-priced at about $31/ton of 6,000 kcal/kg coaldelivered), and; (c) relatively low costs for development of new thermal power capacity,as in other parts of China. Incremental distribution system investment and operating costsin BERIWREP's calculations include only those costs incurred by SEPC or itssubdivisions, amounting to only about 10 percent of total incremental costs. Actualdistribution system costs are substantially higher, but much of the cost is paid for byconsumers, through their own investment, connection fees and other means not includedin the average consumer price. Hence, BERIWREP's estimate may be the mostappropriate calculation to compare with the estimated consumer price levels.

19. Compared with the weighted average price levels for different consumercategories in Chengdu City, commercial sector prices are close to the economic cost ofsupply, while industrial prices are on the order of 75-80 percent of supply cost. Prices forresidential, agricultural and industries with special subsidies are the furthest from the costof supply.

- 76 - ANNEX 3.5

Table 1: STATE CATALOG PRICES IN SICHUAN PROVINCE, 1994

Demand chargeEnerev charge (f/kWh) Maximum Substation

Low 35 kVA load capacityConsumer categories voltage 1-10 kVA & above (Y/kW/mo)(Y/kVA/mo)

Residences 22.0 21.0

Commercial sector 30.6 29.8

Regular industry 21.1 20.6 19.8

Large industry 14.2 13.5 13.5 9.0Special subsidies

Certain metals & chemicals 13.2 12.5 13.5 9.0Calcium carbide 12.2 11.5 13.5 9.0Chemical fertilizer /a 6.1 5.8 13.5 9.0

Agricultural production 16.6 16.1 15.3

Irrigation in poor counties 7.6 7.4 7.1

/a Small- and medium-scale chemical fertilizer plants are charged 12.2 f/kWh for 1-10 kVA supply and11.7 f/kWh for supply at 35 kVA and above.

Source: SEPC.

- 77 - ANNEX 3.5

Table 2: ELzeImcrrY PACES FOR INwSRL CONSUMERS,DEYANG PREFEcIURE, SIcHUAN PROVINCE, 1994

(f/kWh)

Regular industry Large industry /aLV 1-10kV 235 kV 1-10kV 235 kV

Catalog price 21.10 20.60 19.80 14.20 13.50

Wet-season average price(decreased 10%) 18.99 18.54 17.82 12.78 12.15

Dry-season average price(increased 20%) 25.32 24.72 23.76 17.04 16.20

ase TaiffWet season

Peak 28.49 27.81 26.73 19.17 18.23Off-peak 9.50 9.27 8.91 6.39 6.08

Shoulder seasonPeak 31.65 30.90 29.70 21.13 20.25Off-peak 10.55 10.30 9.90 7.10 6.75

Dry seasonPeak 37.98 37.08 35.64 25.50 24.30Off-peak 12.66 12.36 11.88 8.52 8.10

SurchargesSmall hydro fee 0.13 0.13 0.13 0.13 0.13Three Gorges fee 0.40 0.40 0.40 0.40 0.40Two-plant fee 5.50 5.50 5.50 5.50 5.50Ertan fee 1.00 1.00 1.00 1.00 1.00

La Energy charge only.

Source: Deyang Prefecture Power Supply Bureau.

- 78 - ANNEX 4.

INSTALLED GENERATING CAPACITY OFSICHUAN POWER GRII)

(as of end-1993)

No. ofInstalled units Commissioning Dependable Annual

Name of plant capacity & sizes date capacity output(MW) (MW) (MW) (GWh)

A. SEPC

1. Changshou 132 13 (1-15) 1954/64 120 6252. Gongzui 700 7 x 100 1971/77 700 3,6903. Yinxiuwan 135 3 x 45 1971/72 59 7134. Mofanggou 37.5 3 x 12.5 1971/73 10 2105. Yuzixi 320 8 x 40 1972/87 320 1,7606. Nanyahe 120 3 x 40 1983/84 31 6507. Tongjezhi 450 3 x 150 1992/93 450 3,2108. Longchi 10.5 5 (1.85 - 2.5) 1957/59 0 459. Others 48.7

Subtotal 1.953.7

Th"rmai1. Chongqing 600 4 x 50 1960/69 600

2 x 200 1986/872. Huayingsham 300 2 x 50 1978/79 300

2 x 100 1980/823. Wanyuan 24 2 x 12 1971/74 244. Chengdu 325 5 x 25 1958/65 325

1 x 200 19905. Jiangyou 860 4 x 50 1966/71 860

2 x330 19916. Wutonqiao 112 1 x 12 1977 112

2 x 50 1979/877. Yibin 500 2 x 50 1970 500

2 x 100 19741 x 200 1993

8. Baima (Neijiang) 400 2 x 200 1988/89 4009. Panzhihua 36 3 x 12 1966/67 3610. Hemenkou 200 4 x 25 1966/70 200

2 x 50 1972/8511. Xinzhuang 100 2 x 50 1975/77 10012. Baihe (Kaixian) 100 2 x 50 1991/92 10013. Others 136

Subtotal 3.693.0

Total 5.646.7

B. Huaneng Plants 828.3C. Local Plants 3,037.4D. Captive Plants 1,014.8

GRAND TOTAL (MW) 10.527.2

Source: SEPC.

- 79 - ANNEX 4.2

TRANSMISSION NETWORK OF SICHUAN POWER GRID(As of end 1993)

Province as a whole Owned by SEPCNumber of Circuit Number of Circuit

lines length lines length(km) (km)

A. Transmission Lines

220 kV 114 5,064.1 106 4,795.0110 kV 397 9,257.4 324 7,379.235 kV 1,425 20,410.5 408 4,862.3

TQW otal 1^9334,736.0 16.996.5

Province as a whole Owned by SEPCNumber of Capacity Number of Capacitysubstations (MVA) substations (MVA)

& transformers & transformers

B. Substations

220 kV 33/55 6,356.0 33/55 6,356.0110 kV 186/307 8,116.7 162/273 7,361.435 kV 613/967 3,967.7 208/332 1,881.2

Toal 832/1,329 18,440.4 403/660 15.598.

Source: SEPC.

- 80 - ANNEX 4.3

ENERGY GENERATION OF SICHUAN POWER GRID(Above 0.5 MW Only - Unit: GWh)

Name of plant 1987 1988 1989 1990 1991 1992 1993

GRAND TOTAL 26.287 29.02 3695 43.565 37.957 41.940 47.087Hydro 116i4 13.152 14.684 14.854 15.505 16.830 19.586Thermal 14.683 16.25 18.011 19.711 22.452 25.110 27.501

A. SEPC Plants 1.9696.0 21.751.0 23,284.0 24.017.0 25.208.0 24.708.0 27145.01. Changshou Hydro 518.8 500.5 692.7 580.4 514.7 542.3 597.82. Gongzui Hydro 3,268.2 3,404.0 3,448.8 3,298.1 3,215.8 3,172.6 2,997.53. Yinxiuwan Hydro 1,999.3 2,357.3 2,356.7 2,343.1 2,387.1 2,326.3 2,220.14. Mofanggou Hydro 190.2 179.8 190.7 214.4 196.1 154.2 148.15. Nanyahe Hydro 522.9 568.3 614.7 644.8 560.4 630.0 583.86. Tongiezhi Hydro - - - - - - 1,211.47. Chungqing Thermal 3,171.7 4,178.6 4,203.6 4,290.9 4,210.9 3,200.1 3,721.88. Huayingshan Thermal 2,158.3 2,204.9 2,208.6 2,118.5 2,208.8 1,959.5 1,923.69. Wanyuan Thermal 181.7 159.0 169.8 168.8 170.6 164.0 165.210. Chengdu Cogenerationl,092.9 1,027.6 1,032.2 1,463.4 2,137.1 2,050.5 2,086.611. Jianyou Thermal 1,492.2 1,346.2 1,303.8 1,285.1 1,759.3 3,157.2 3,834.212. Wutongqiao Thermal 34.8 7.5 4.0 78.0 79.4 83.1 89.413. Douba Thermal 2,012.4 2,202.1 2,076.3 1,915.9 2,009.1 1,855.7 1,812.614. Baima Thermal 725.8 1,049.2 2,444.1 3,071.7 3,240.9 2,834.4 2,083.415. Panzhihua Thermal 191.5 232.9 208.5 223.9 226.6 233.5 225.216. Hemenkou Thermal 1,242.8 1,416.1 1,463.1 1,402.4 1,438.9 1,447.6 1,378.917. Xinzhuang 630.6 656.5 661.5 709.8 657.3 624.0 681.218. Baihe - - - - 52.3 199.1 420.2

B. Huanen2 Plants - - 27.0 119.0 770.0 2.301.0 3.151.3

C. Local Plants 5003. 6138. 7.471.0 8363. 7.206.0 8859. 13.255.7

D. Captive Plants 1.550.0 1.493.0 1.883.0 1.959.0 2.479.0 3.470.0 3.534.2

E. Others 38.0 20.0 30.0 35.6 2.294.0 2.602.0 -

Source: SEPC.

- 81- ANNEX 4.4

ENERGY CONSUMPTION BY CATEGORY OFCONSUMERS IN SICHUAN PROVINCE_

(Unit: GWh)

Category of users 1987 1988 1989 1990 1991 1992 1993

A. Agriculture 436 370 364 394 579 626 9191. Irrigation 174 102 90 120 137 110 1552. Forestry 5 2 2 2 3 2 33. Cattling 6 8 8 10 13 15 194. Others 251 258 264 262 426 499 742

B. Industry 19.506 21.106 23.292 24.177 25.833 27.750 29.5241. Heavy 16,058 17,520 19,611 20,257 21,912 23,736 24,8102. Light 3,448 3,586 3,681 3,920 3,921 4,014 4,714

C. TrEprtalion 554 593 593 591 619 659 732

D. Commercial 70 90 100 107 165 201 264

E. Residential 1.232 1.528 1.736 2.117 2.162 2.610 2.7211. Municipal 936 1,175 1,317 1,632 1,635 2,010 2,0612. Rural 296 353 419 485 527 600 660

F. Others 651 731 763 843 1.60 1.205 1.185

Total 22.449 24.418 26.848 28.229 30.518 33,051 35.345

/a Including generation and purchased energy.

Source: SEPC.

- 82 - ANNEX 4.5

ENERGY FORECAST FOR SICHUAN POWER GRID

1994 1995 1996 1997 1998 1999 2000 2005

A. Energv Requirement (GWh)

Agriculture 546.6 571.6 593.3 615.7 638.5 655.8 670.3 855.5Industry 27,593.2 29,653.2 32,050.8 34,633.3 37,432.9 39,994.0 42,562.0 56,877.4Transport 1,043.7 1,154.6 1,267.8 1,391.9 1,526.9 1,659.0 1,793.7 2,888.8Building 282.0 314.6 348.5 386.0 427.1 468.2 510.7 829.0Tertiary 1,613.4 1,849.6 2,086.4 2,352.9 2,651.6 2,959.5 3,287.0 5,792.8Residential 2,515.6 2,834.4 3,125.5 3,445.5 3,796.1 4,141.3 4,496.3 7,576.5Line loss &

station use 5,405.3 5,922.0 6,427.7 6,974.7 7,526.9 8,122.2 8,680.0 12,180.0

Total 39.000 42.300 45900 49.800 558000 62.000 87.000

B. Peak Load (MW) 6.180 6.730 7.330 8.000 8.700 9.400 10.000 14.100

Utilization hours ofmaximum load6,311 6,285 6,262 6,225 6,207 6,170 6,200 6,170

Source: SEPC.

- 83 - ANNEX 4.6

SEPC'S POWER DEVELOPMENT PROGRAM (1994-2003)

A. GENERATION PROJEcTs

Construction ScheduledInstalled No. of Unit starting commissioning

Name of plant capacity units size date date(MW) (MW)

A. Hydro

Tongjiezi 150 1 150 1991 1994Baozhushi 700 4 175 1994 1994/96Zhilanba 102 3 68 1994 1994/95Taipingyi 260 2 130 1994 1995/96Yaoheba 120 1 120 1994 1996Ertan 3,300 6 550 1991 1998-2000Yele 220 2 110 1995 1999/2001Lizipin 120 3 40 1998 2000/02Pubugou 3,300 6 550 1997 2003/05Tongzilin 400 4 100 1995 2000/02Jinping 3,000 6 500 2000 2010/12Pengshui 1,080 6 180 1998 2007/10

B. Thermal

Jiangyou 1,200 2 600 1998 2002/03Baima 200 1 200 1993 1995Chungqing 200 1 200 1993 1995Luohuang Extension 700 2 350 1994 1997Huangjiachuang II 600 2 300 1997 2000/01Guangan 600 2 300 1994 1997/98

- 84 - ANNEX 4.6

B. 500-KV TRANSMISSION NErWORK

Transmission lines Length (km Commissioningd

Ertan - Zigong 3 x 470 1998, 1999, 2000Zigong - Chongqing 2 x 162 1994, 1998Zigong - Chengdu 2 x 190 1999, 2000Chongqing - Changshou 100 2000Ertan - Panzhihua 46 1999

Pubugou - Xingjin 2 x 200 2003, 2005Xingjin - Longwang 1 x 65 2003Longwang - Deyang 1 x 65 2004Pubugou - Ziyang 2 x 235 2004Hongxian - Zigong 1 x 90 2004Luohuang - Changshou 1 x 95 1999Hongxian - Luzhou I x 95 2004Luzhou - Qijiang 1 x 129 2005Qijiang - Luohuang 1 x 60 2001Qijiang - Chengjiaqiao 1 x 70 2001

Substafions Capacity (MVA) Commissioning date

Zhaojue Switching Station 1993Honggou (Zigong) 1 x 750 1998Chengjiaqiao (Chongqing) 2 x 750 1998Longwang (Chengdu) 2 x 750 1999Changshou 1 x 750 2000Panzhihua 1 x 750 1999Xingjin 2 x 750 2003, 2005Deyang I x 750 2004Gucheng I x 750 2003Ziyang 1 x 500 2004Hongxian 1 x 500 2004Luzhou 1 x 500 2004Qijiang 1 x 500 2001

Source: SEPC.

- 85 - ANNEX 5.1

PROJECT DESCRIPTION

General

1. The Ertan Hydroelectric Project is located in the southwest corner ofSichuan Province. The proposed 500-kV transmission lines from Ertan will go northeastto the Honggou substation near Zigong. From there, the lines will head north to theLongwang substation, near Chengdu and northeast to the Chongqing, Chengjiaqiao andChangshou substations.

2. The alignment for the Ertan 500-kV transmission system covers twogeographic areas. The first is the area between the Ertan Dam and substation, andHonggou substation near Zigong. The line passes through the Liang Mountains, andcrosses the Ming River into the low hill country of the western portion of the SichuanBasin in the center of the Province. Of the total length of transmission line from Ertan toHonggou, 80 percent is in the mountainous area, and 20 percent is in the hilly land withinthe Basin. The highest elevation is over 3,200 meters where the line goes overDaliangshan mountain chain and Luogi mountain. The area is generally sparselypopulated, mountainous and presents significant icing problems. In this area, theenvironment potentially may have a greater impact on the project and project design, thanthe project will have on the environment.

3. In the hilly areas of the Sichuan Basin, the line goes through agriculturalareas with rural populations and farmland until it reaches the Honggou (Zigong) substation.

4. The second area includes the lines connecting the Honggou substation to theLongwang substation to the north near Chengdu and the Chengjiaqiao and Changshousubstations to the northeast. This area is generally hilly farmland of the Sichuan Basinwith moderately high population density.

The Scope of the Project

5. The 500-kV Ertan Transmission System includes the following:

(a) Design, material procurement and construction of approximately 2,260 kmof 500-kV transmission lines.

(b) Design, material procurement and construction of one 500-kV switchingstation and five 500-kV/220-kV substations.

- 86 - ANNEX 5.1

(c) Design, material procurement and construction of a communication,protection and control system.

(d) Extension and improvement of the 220-kV grid system.

Detailed Description

6. Transmission Lines. The 500-kV transmission grid will be designed andconstructed to connect the Ertan hydroelectric station with the 220-kV grid system of theSichuan Electric Power Company (SEPC). The 500-kV transmission grid will consistinitially of three 500-kV lines out of the Ertan hydroelectric station, with a possible fourth500-kV line in the future. The selection of the corridors was based on the assumption thatthe fourth line would be constructed. Each circuit will be designed to carry 1,500 MWunder emergency or maintenance conditions. The lines will be arranged in a single circuitconfiguration on two separate corridors. The separation between the corridors varies from1 km to as much as 50 km. Each corridor will accommodate two single circuits with aminimum separation between circuits of 100 m. The line segments that comprise theproposed 500-kV grid are shown in Table 1.

Table 1: TRANSMISSION LINE SEGMENrs

Line name Length (km) Remarks

Ertan - Zigong Line #1 470 Single circuitErtan - Zigong Line #2 470 Single circuitErtan - Zigong Line #3 470 Single circuitZigong - Chongqing #1 162 Under construction LAZigong - Chongqing #2 162 Single circuitChongqing - Changshou 100 Single circuitZigong-Chengdu #1 190 Single circuitZigong-Chengdu #2 190 Single circuitErtan - Panzhihua 46 Single circuit

Total Length 2.260

la The Zigong-Chongqing #1 line is currently under construction for 220-kV operationin the initial stage and will be converted to 500 kV in 1999.

(a) Conductors

7. Conductors were selected on the basis of two operating conditions of Ertantransmission lines. Under normal conditions, with three lines in service, transmission load

- 87 - ANNEX 5.1

from Ertan is 3,300 MW. Under emergency conditions, with two lines in service,transmission load from Ertan is 3,000 MW.

Table 2: CONDUCOR AND BUNDLE CoNHGURATIoNs

No. ofconductors

Loading zone Conductor type per bundle Bundle spacing(mm)

Light ACSR 400/50 (54/7) 4 450

Medium ACSR 400/50 (54/7) 4 450

Heavy AACSR 465/60 (54/7) 4 450

Extra heavy AACSR 957/121 (54/19) 2 600

8. For the extra heavy zone because of the severe icing conditions, extra strongconductors will be utilized in a two-conductor bundle configuration. The two conductorbundle configuration was selected because the ice build-up on a two-bundle configurationis less than the ice build-up on a four-bundle configuration. In addition, the subconductorbundle spacing was increased to 600 mm to prevent ice bridging between thesubconductors during icing and prevent the subspan oscillation.

(b) Overhead Ground Wires

9. The ground wires were selected to sustain without breaking, the ice loadsof the line, and the phase to ground fault current of the line for a duration equal to thebreaker operation time without exceeding the thermal limit of 400 C. A summary of thedesign characteristics for each loading zone is given in Table 3.

(c) Insulators

10. The elevation of the line routes from Ertan to Zigong varies from 500 to3,200 meters. It is estimated that 20 percent of the total length of the line is located inhigh mountain areas, 62 percent in mountain areas and 18 percent in hilly areas. Thedifference in relative air density between the low and high elevations is significant andsections of the line located in higher elevations will require more insulators and more gapclearances. The proposed line insulations are given in Table 4.

- 88 - ANNEX 5.1

Table 3: GRoUND WIRE DESIGN CHARACTERISrlCS

Description Light Medium Heavy Extra heavy

Line length, km of single circuit 1,714 68 200 60Design ice thickness, mm 10 20 30 50Check ice thickness, mm - - 45 70Maximum wind speed, m/s 35/30 30 30 50Ground wire type GSW-70 GSW-100 GSW-120 GSW-230

Table 4: IUNE INSULATION

Number of Insulators per Elevation Range

Insulator Insulator 1,000 - 1,800 - 2,500 -

assembly strenith < 1,000 m 1.800 m 2500m 3.200 m

Xp - 16 160 kN 30 31 32 33Xp - 21 210 kN 26 27 28 29Xp - 30 300 kN 24 25 26 27

Gap Clearances (m) per Elevation Range

1,000- 1,800- 2,500-< 1,000 m 1,800 m 2.500 m 3.200 m

Power frequency 1.25 m 1.4 m 1.6 m 1.75 mSwitching surge 2.70 m 3.0 m 3.3 m 3.60 mLightning 3.70 m 3.8 m 3.9 m 4.00 m

(d) Steel Towers

11. Structures of the line will be of galvanized steel lattice type towers. Theywill be designed to sustain the structural loads at the different loading zones and withstandthe electrical stresses at the different elevation ranges. The following structures areproposed for the transmission lines:

- 89 - ANNEX 5.1

DESIGN SPANS

AttachmentLine height of

Loading Structure Horizontal Vertical angle towerszone designation Tower type (m) (m) (degree) (m)

Light 93LM-111 Suspension, delta, guyed 450 700 0 24 - 3693ZM-111 Suspension, delta, self 450 700 0 24 - 3993ZM-1 12 Suspension, delta, self 550 850 0 24 - 4893ZM-113 Suspension, delta, self 650 100 0 24 - 4893MJ-1 11 Suspension, delta, guyed 450 850 0-10 27 - 3393ZM-211 Suspension, delta, self 450 700 0 24 - 3693ZB-211 Suspension, horiz., self 450 700 0 24 - 3993ZB-212 Suspension, horiz., self 550 850 0 24 - 4893ZB-213 Suspension, horiz., self 650 100 0 24 - 4893ZB-214 Suspension, horiz., self 850 1,250 0 24 - 4893BJ-211 Suspension, horiz., self 450 850 0-10 27 - 3393ZM-212 Suspension, delta, self 550 850 0 24 - 4893MK-211 Suspension, delta, self 1,200 1,500 0 24 - 48

93JT-211 Tension, delta, self 550 800 0-30 24 - 3093JT-212 Tension, delta, self 550 850 30-60 24 - 3093HT-211 Tension, delta, self 550 850 0-30 21 - 2793JK-211 Tension, delta, self 100 1,400 0-30 21 - 30

Medium 93ZB-121 Suspension, horiz., self 400 650 0 24 - 3993ZB-122 Suspension, horiz., self 500 750 0 24 - 3993JT-121 Tension, delta, self 450 850 0-30 24 - 3093JT-122 Tension, delta, self 450 850 30-60 24 - 30

Heavy 93ZB-131 Suspension, horiz., self 400 600 0 24 - 3993ZB-132 Suspension, horiz., self 500 750 0 24 - 3993JT-131 Tension, delta, self 450 850 0-30 24 - 30

Extra 93ZB-151 Suspension, horiz., self 450 700 0 24 - 39heavy 93JT-151 Tension, delta, self 450 850 0-30 24 - 30

Substations

(a) General

12. The expansion plans for the 500-kV Ertan Transmission Project include thefollowing five substations and one switching station:

- 90 - ANNEX 5.1

* Zhaojue Switching Station* Honggou (Zigong) Substation* Chongqing Chengjiaqiao Substation* Chengdu Longwang Substation* Panzhihua Substation* Changshou Substation

(b) Zhaojue Switching Station

(i) Configuration - 500 kV

Insulation: The switching station will be designed for a1,550-kV BIL

Bus Arrangement: Breaker and one halfNo. of Bays: EightShunt Reactors: Each of four incoming lines will be connected

with a high voltage shunt reactors with a totalcapacity of four (150-180) MVAR

(ii) Main Equipment

13. The Zhaojue switching station will be the backbone of interconnecting andtransferring power generated at the Ertan hydroelectric station. The switching station islocated at relatively high altitude (2,100 meters) and heavy icing zone. To provide highreliability and minimize the operation and maintenance cost of the station, the equipmentselected for the switching station shall be of the GIS type.

(c) Honggou (Zigong) Substation

14. The substation will have three voltage levels 500 kV, 220 kV and 35 kV.One set of main 500/220/35-kV transformer with a total capacity of 750 MVA will beinstalled in this substation.

15. The 500-kV substation will be designed for eight bays in a breaker and ahalf configuration. Three bays will be used for the 500-kV lines to Zhaojue, two bays forthe 500-kV lines to Longwang, two bays for the 500 kV to Chenjiaqiao and one bay forthe 500/220-kV transformation.

16. The 220 kV will be designed for six outgoing lines in a double busbarconfiguration with tie breaker connections between the busbars.

17. To meet power system requirements (150-180), MVAR high voltage shuntreactors will be connected to the three incoming lines from Zhaojue Substation. Inaddition, low voltage capacitors and reactors with a capacity of 200 MVAR and 240MVAR, respectively, will be installed at the 35-kV side of the main transformer.

-91- ANNEX5.1

(i) Configuration

Voltage Levels: 500 kV, 220 kV and 35 kVInsulation: 1,550-kV BIL for the 500 kV, 900-kV BIL for

the 220 kV and 200-kV BIL for the 35 kVBus Arrangement: Breaker and half for the 500 kV, double

busbar for the 220 kVNo. of Bays: Eight for the 500 kV, six outgoing lines for

the 220 kVShunt Reactors: Three (150-180) MVAR 500-kV shunt reactors

connected to the lines from Zhaojuesubstation, one 240-MVAR 35-kV shuntreactor connected to the 35-kV side of thetransformer

Capacitors: 200-MVAR 35-kV capacitors connected to the35-kV side of the transformer

(ii) Main Equipment

18. The Honggou (Zigong) 500-kV/220-kV substation will be the maininterconnection terminal for transferring power generated at the Ertan hydroelectricalstation to the major load centers of Chengdu and Chongqing. Its reliability is essential fornormal operation of the Ertan 500-kV transmission system. The substation is located inan acid rain zone, and also in an area that is in relative proximity to salt and chemicalheavy industry. Heavy pollution and high humidity prevalent in the area will imposeserious operational problems for an open air substation at 500-kV level. To provide highreliability and minimize the operation and maintenance cost of the substation the equipmentselected for the substation shall be of the GIS type. The 220-kV substation will be of theconventional open air type (AIS) with SF6 breakers, live tank design.

(d) Chengjiaqiao (Chongqing) Substation

19. The substation will have three voltage levels 500 kV, 220 kV and 35 kV.

20. The 220-kV substation side is already constructed and connected to the 220-kV grid system. The 220-kV substation is designed for a maximum of 14 outgoing linesout of which 13 have been constructed and connected to the existing 220 kV grid.Modifications will be made to the existing substation to connect the two circuits from thetwo main transformers.

21. Two sets of main 500/220/35-kV transforrner with a total capacity of 1,500MVA will be installed in this substation.

22. The 500-kV substation will be designed for five bays in a breaker and a halfconfiguration. Two bays will be used for the 500-kV lines to Honggou, one bay for the500-kV lines to Changshou and two bays for the 500/220-kV transformation.

- 92 - ANNEX 5.1

23. The 220-kV has been designed for 14 outgoing lines in a double busbarconfiguration with tie breaker connections between the busbars.

24. To meet power system requirements, low voltage capacitors and reactorswith a capacity of 150 MVAR and 150 MVAR, respectively, will be installed at the 35-kVside of each of the main transformer.

(i) Configuration

Voltage Levels: 500 kV, 220 kV and 35 kVInsulation: 1,550 kV BIL for the 500 kV, 900 kV BEL for

the 220 kV and 200 kV BIL for the 35 kVBus Arrangement: Breaker and half for the 500 kV, double

busbar for the 220 kVNo. of Bays: Five for the 500 kV, 14 outgoing lines for the

220 kVShunt Reactors: 300 MVAR 35-kV shunt reactors connected to

the 35-kV side of the transformers.Capacitors: 300 MVAR 35-kV capacitors connected to the

35-kV side of the transformers.

(ii) Main Equipment

25. The 500-kV substation will be of the conventional open air insulation designwith three line-ups of SF6 breakers.

26. The 220-kV substation will be of the conventional open air type (AIS) withSF6 breakers, live tank design.

(e) Longwang (Chengdu) Substation

27. The substation will have three voltage levels 500 kV, 220 kV and 35 kV.

28. The 220-kV substation side is already constructed and connected to the 220-kV grid system. The 220-kV substation is designed for a maximum of 10 outgoing lines,and out of which seven have been constructed and connected to the existing 220-kV grid.Modifications will be made to the existing substation to connect the two circuits from thetwo main transformers.

29. Two sets of main 500/220/35-kV transformers with a total capacity of 1,500MVA will be installed in this substation.

30. The 500-kV substation will be designed for four bays in a breaker and a halfconfiguration. Two bays will be used for the 500-kV lines to Honggou and two bays forthe two main 500/220-kV transformers.

- 93 - ANNEX 5.1

31. The 200-kV substation has been designed for 10 outgoing lines in a doublebusbar configuration with tie breaker connections between the busbars.

32. To meet power system requirements, low voltage capacitors and reactorswith a total capacity of 150 MVAR and 360 MVAR, respectively, will be installed at the35-kV side of the main transformers.

(i) Configuration

Voltage Levels: 500 kV, 220 kV and 35 kVInsulation: 1,550 kV BIL for the 500 kV, 900 kV BIL for

the 220 kV and 200 kV BIL for the 35 kVBus Arrangement: Breaker and half for the 500 kV, double

busbar for the 220 kVNo. of Bays: Four for the 500-kV, 10 outgoing lines for the

220 kV.Shunt Reactors: 360 MVAR 35-kV shunt reactors connected to

the 35-kV side of the transformersCapacitors: 150 MVAR 35-kV capacitors connected to the

35-kV side of the transformers

(ii) Main Equipment

33. The 500-kV substation will be of the conventional open air insulation design(AIS) with two line-ups of SF6 breakers.

34. The 220-kV substation will be of the conventional open air type (AIS) withSF6 breakers, live tank design.

(f) Panzhihua Substation

35. The substation will have three voltage levels: 500 kV, 220 kV, and 35 kV.

36. The 220 kV substation will be designed for a maximum of six outgoinglines.

37. One main 500/220/35 kV transformer with a total capacity of 750 MVA willbe installed in this substation.

38. The 500 kV substation will be designed for two bays in a breaker and a halfconfiguration. One bay will be used for the 500 kV line to Ertan, and the other bay forthe main 500/220 kV transformer.

39. The 220 kV substation will be designed for six outgoing lines in a doublebusbar configuration with tie breaker connections between the busbars.

- 94 - ANNEX 5.1

40. To meet power system requirements, low volage reactors with a totalcapacity of 240 MVAR will be installed at the 35 kV side of the main transformer.

(i) Configuration

Voltage Levels: 500 kV, 220 kV, and 35 kVInsulation: 1,550 kV BIL for the 500 kV, 900 kV BIL for

the 220 kV, and 200 kV BIL for the 35 kVBus Arrangement: Breaker and half for the 500 kV, double

busbar for the 220 kVNo. of Bays: One (1) for the 500 kV, six (6) outgoing lines

for the 220 kVShunt Reactors: 240 MVAR 35 kV shunt reactors connected to

the 35 kV side of the transformers

(ii) Main Equipment

41. The 500 kV substation will be of the conventional open air insulation design(AIS) with one line-up of SF6 breakers.

42. The 220 kV substation will be of the conventional open air type (AIS) withSF6 breakers, live tank design.

(g) Changshou Substation

43. The substation will have three voltage levels: 500 kV, 220 kV, and 35 kV.

44. The 220 kV substation will be designed for a maximum of eight outgoinglines.

45. One main 500/220/35 kV transformer with a total capacity of 750 MVA willbe installed in this substation. The 500 kV substation will be designed for two bays in abreaker and a half configuration. One bay will be used for the 500 kV line to Chenjiaqiao,and the other bay for the main 500/220 kV transformer.

46. The 220 kV substation will be designed for eight outgoing lines in a doublebusbar configuration with tie breaker connections between the busbars.

47. To meet power system requirements, low voltage capacitors and reactorswith a total capacity of 150 MVAR and 150 MVAR, respectively, will be installed at the35 kV side of the main power transformer.

- 95 - ANNEX 5.1

(i) Configuration

Voltage Levels: 500 kV, 220 kV, and 35 kVInsulation: 1,550 kV BIL for the 500 kV, 900 kV BEL for

the 220 kV, and 200 kV BIL for the 35 kVBus Arrangement: Breaker and half for the 500 kV, double

busbar for the 220 kVNo. of Bays: One (1) for the 500 kV, eight (8) outgoing

lines for the 220 kVShunt Reactors: 150 MVAR 35 kV shunt reactors connected to

the 35 kV side of the transformerCapacitors: 150 MVAR 35 kV capacitors connected to the

35 kV side of the transformer

(ii) Main Equipment

48. The 500 kV substation will be of the conventional open air insulation design(AIS) with one line-up of SF6 breakers.

49. The 220 kV substation will be of the conventional open air type (AIS) withSF6 breakers, live tank design.

- 96 - ANN 5X.s.2

CONSULTING SERVICES

(Terms of Reference)

Scope of the Consulting Services

1. Consulting Engineer (hereinafter the Engineer) shall provide consultingservices for the 500-kV Sichuan Power Transmission Project to the Owner (SEPC) and theDesign Institute (SWEPDI), comprising the following tasks:

A. STAGE I SERVICES FOR PROJECT PREPARATION

Task 1: Review of feasibility study and design report.

Task 2: Special studies and review of design of the 500-kV transmission lines inhigh mountainous and heavy icing areas.

Task 3: Review of design of the 500-kV substations and switching station.

Task 4: Review of the bidding documents for ICB procurement and assistance forbid evaluations.

Task 5: Consulting services for construction planning.

Task 6: Training service.

Task 7: Other services.

2. Task 1 includes the review and updating of the feasibility study and designreport prepared by the Southwest China Electric Power Design Institute.

3. Task 2 includes:

(a) Review of design codes, criteria, and standards for foreign EHVtransmission lines in heavy icing areas. Optimization of basic technicalrequirements of design for the projects. Development and optimization ofdesign criteria, taking into consideration variation in altitude, icing and windconditions and contamination levels;

-97 - ANNEX 5.2

(b) Studies of icing or frost characteristics, verification of design icing thicknessand preparation of an ice thickness map for corridors of the 500-kV lines;

(c) Optimization for selection conductors and earth wires in high altitude andheavy icing areas, especially regarding mechanics characteristics of phaseconductor structure, corona features and measures for prevention ofgalloping. Assessment of wind conditions along the 500-kV line routes;

(d) Review of electrical features of insulators, insulation compensation oftransmission lines in high altitude and heavy icing areas. Insulationcoordination including power frequency overvoltage, switching surges andlighting, establishment of gap clearances and optimization of shielding andgrounding requirements;

(e) Review of design of metal fittings (hardware), spacers and insulators forheavy icing and high altitude;

(f) Optimization of steel tower, number of structure types and tower spottingfor 500-kV lines, loading combination and overload safety factors for thedesign of tower;

(g) Optimization of steel tower foundation, treatment of geological defects,measure for stabilization of side slope;

(h) Measures for prevention of impacts on telecommunication lines and radiofacilities resulted from EHV transmission lines; and

(i) Environmental impacts of EHV transmission lines, related regulations,environmental protection and assessment of width of corridor. Assessmentand evaluation of interference to communications.

4. Task 3 includes:

(a) Review of design for power sources requirement for the switching station;

(b) Review of insulation coordination and electrical rating and coronacharacteristics of electrical equipment located in high altitude area;

(c) Optimization of conductor structure, mechanical characteristics of largesectional heat resistant aluminum alloy conductors. Assessment ofprotection schemes, bus configuration and grounding layouts; and

(d) Environment impact studies, such as evaluation of contamination, corrosion,electromagnetic interference, noise, etc.

- 98 - ANNEX 5.2

5. Task 4 includes:

Review of the bidding documents for the following items which will beprocured under ICB, comprising:

(i) transmission line materials (conductors, ground wires, insulators)(ii) 500-kV/220-kV power transformers(iii) 500-kV GIS switchgear(iv) 500-kV SF6 circuit breakers(v) 500-kV/220-kV substation equipment(vi) PLC

(vii) SCADA(viii) protection relays

(ix) UPS(x) communications (microwave, fiber optic and mobile

communications)(xi) dispatching automation and stability control

Assistance for the bid evaluation for the items procured under ICB.

6. Task 5 includes:

(a) Construction methodology for specific items faced by the project such asapplication of balloon or helicopter in construction of transmission lines inrigorous mountain areas;

(b) construction schedule.

7. Task 6 includes:

Training of Owner's engineers for design and methodologies for EHVtransmission and substation technologies with particular attention to highmountainous and heavily icing area.

8. Task 7 includes:

(a) Advice for operation and maintenance of the 500-kV power grid; and

(b) Any other services as required by the Owner.

B. STAGE H SERVICES FOR PROJECT IMPLEMENTATION

Task 1: Project management.

Task 2: Contract administration for transmission line materials and substationequipment.

- 99 - ANNEX 5.2

Task 3: Scheduling and reporting.

Task 4: Construction supervision and quality control.

Task 5: Cost control.

9. Task 1 includes:

(a) Establishment of methodologies of various phases of the project constructionmanagement, implementation schedules, erection procedures andcommissioning procedures;

(b) Review of the contractor's plan for equipment delivery schedule anddispatching schedules of site supervising engineers;

(c) Providing the Owner's construction personnel the field training for siteconstruction management and establish and expedite the equipmentinstallation training schedule;

(d) Assisting the Owner in solving the problems encountered during projectimplementation and in managing deficiencies of products found during siteconstruction;

(e) Assisting the Owner in reviewing the qualifications of various contractor'srepresentatives for qualified site services.

(f) Assisting the Owner in coordinating the interfaces and interferences betweencontractors during construction and commissioning stages; and

(g) Assisting the Owner in setting up programmable computer system forinformation/document control which includes:

(i) all communications, letters, telexes, faxes, relating to siteconstruction, among the Owner, contractors, consultants, and otherselected organizations;

(ii) daily records of quantities of work performed under the Contract;

(iii) daily diary of all events occurring at the job site connected with theprogress of the work;

(iv) as-built records and marked drawings on a weekly basis at projectsite;

(v) quality control and quality assurance records including test data;

- 100 - ANNEX 5.2

(vi) documents recording authorized changes in the work on a weeklybasis; and

(vii) records of all Contractor's claims and their disposal on a weeklybasis.

10. Task 2 includes:

(a) Assisting the owner in setting up programmable computer-aided system forequipment and material management including site storage system for parts,equipment and materials, outdoor and indoor installation;

(b) Assisting in cooperation with Task 1 team, the Owner in controllingdelivery of the parts/equipment/material from various contractors in orderto meet with project schedule; and

(c) Assisting the Owner in managing construction machinery to meet therequirement of construction schedule.

11. Task 3 includes:

(a) Assisting the Owner to establish a master and submaster implementationschedules including monthly and weekly schedules;

(b) Assisting the Owner to monitor and expedite the master and submasterschedules. The schedule control shall include review of progress ofinterfacing and coordination among contractors, so that interfacescoordination should be carried out in a timely manner;

(c) Assisting the Owner to manage monthly progress reports provided by eachisland contractor and establish and expedite schedules of design and siteconstruction information exchange; and

(d) Assisting the Owner to prepare semiannual progress reports to be submittedto the Bank.

12. Task 4 includes:

(a) Assisting the Owner in setting up and implementing quality control systemand quality assurance system during site construction and commissioningstages, including:

(i) monitoring of performance of construction and technical supervisionthereof to ensure compliance with contracts;

(ii) documenting the progress and quality of all stages of constructionincluding daily records of progress, events and oral instructions,

- 101 - ANNEX 5.2

weekly updating of as built records and marked-up drawing,recording of quality control and quality assurance records includingtest data;

(iii) monitoring of contractor's quality control activities, review of testresults, and recommendation of remedial actions; and

(iv) review and approval of contractor's submissions with respect tosequence and timing of work, equipment, materials, temporaryworks, detailed working or construction drawings and otherdocuments submitted in accordance with the contracts.

13. Task 5 includes:

(a) Assisting the Owner in establishing and implementing methodologies forproject cost control and accounting system;

(b) Establishing and assisting to maintain a cost control system that continuouslymonitors in foreign and local currency, incurred costs, committed costs andcost estimate variations due to actual geological conditions, design changes,additional work, escalation and currency fluctuations; and

(c) Assisting in the six-monthly updates of cost estimate to completion andprojected disbursement schedules for each financier.

- 102 - ANNEX 5.3

ACCOUNTING AND FINANCIAL MANAGEMENT SYSTEMS

(Terms of Reference)

Objectives and Background

1. The Sichuan Electric Power Company (SEPC) is seeking a loan from theWorld Bank to finance the Sichuan Power Transmission Project. It is proposed to includein the proposed loan funds for financing the cost of consulting services for implementingthe SEPC's reform plan, and upgrading SEPC's accounting, budgeting, and financialmanagement systems. The objective of these services is to assist SEPC making a smoothand speedy transition to the new accounting framework that follows internationalaccounting principles and standards and strengthening SEPC's financial management. Thisalso includes introduction of computerized financial management information systems thatwill enable managers to obtain timely information on the costs of all aspects of thecompany's activities. The new systems would facilitate better budgetary control andreporting on costs and finances to managers responsible for incurring expenditures and alsofor external reporting to the Government, shareholders, lenders and the public.

A. ACCOUNTING AND FINANCIAL MANAGEMENT SYSTEMS

2. SEPC, like all state-owned enterprises has maintained its accounts inaccordance with China's uniform accounting system, which has been applied for manyyears under China's centrally planned economy. The Ministry of Finance has beenresponsible for issue of regulations relating to accounting by state enterprises in China.However, from July 1, 1993 new regulations covering accounting rules and financialaffairs are being introduced to strengthen the financial management of enterprises. Thesenew regulations largely reflect International Accounting Standards.

3. The new regulations will lead gradually to replacement of state control byaccountability mechanisms which will allow greater financial autonomy to enterprisemanagers. This will require enterprises to develop better budgetary and cost controlsystems. Financial statements will need to be adjusted to provide full disclosure of theirfinancial position; e.g., the ownership and value of fixed assets will need to be updated toestablish the amount of equity or value of share capital and the value of constructionworks-in-progress and related sources of funds will need to be brought to account.Enterprises will be permitted to retain profits after taxes and depreciation funds to financeexpansion needs. This will mean that managers will then have to establish better cashmanagement and reporting for government, lenders, shareholders and the public. Publicaccountability will replace state control as enterprises begin to obtain funds for expansionfrom financial markets through borrowing and issues of shares.

- 103 - ANNEX 5.3

Scope of Services

Phase 1-Diagnostic Phase to Determine System Requirements

4. Review in depth all existing accounting systems, including (a) policies,procedures, documentation, and reporting formats; (b) transactions and activities at alllevels, such as power plants, supply bureaus, substations, etc; both those that are presentlyon manual systems or computerized.

5. Identify (a) differences between SEPC accounting practices under the newregulations issued by MOF and international accounting standards; (b) issues/problemsexisting within SEPC to record its transactions and activities in accordance withinternationally accepted accounting standards.

6. Conduct a survey of the requirements of managers for financial informationand identify the functions and activities for which costs will be needed to be reported andcontrolled.

7. Assess SEPC's (a) existing organizational structure, including therelationships and linkages between SEPC and the external units under it; (b) presentpolicies and procedures for planning and financial management, including pricing,investment financing, cost controls and financial reporting.

8. Review existing computer hardware and software.

Phase 2-Detailed Design of New Systems

9. Using information collected under phase 1, prepare a detailed plan forupgrading and improving existing systems, including a new chart of accounts, reportingformats, disclosures, accounting policies and procedures, required documentation to covereach segment of electricity supply, e.g., generation, transmission, and distribution, mostsuitable for SEPC's business need. This will also require identification of priorities andselection of suitable hardware and software especially a new general ledger package andmainframe hardware that would be linked to computer terminals or PCs.

10. A new chart of accounts should be prepared incorporating appropriatebudgetary control techniques for planning, measurement and control of costs.

11. The level and frequency of reports should be determined and detailedformats and contents agreed for each level of management. These would be submitted formanagement review and approval. Reporting formats and contents as well as their flowsshould be designed and step-by-step flow charts should be prepared.

12. Internal and external auditors would have to be consulted and their needs foradequate controls and checks taken into consideration in developing the new systems.

- 104 - ANNEX 5.3

13. The staffing and skills required to implement the new systems would needto be identified. An appropriate training program would also need to be prepared. Inconnection with the new accounting and financial management information system, arecommended new organization chart for SEPC's financial department should be prepared.

14. Work sessions need to be organized to assist SEPC managers and financialstaff to fully understand the proposed changes.

15. A detailed work plan and timetable for implementation of the new systemswould be prepared. This would show how the new and improved systems would beprogressively interfaced with existing systems to ensure a smooth transition.

Phase 3-Implementation

16. Implementation of system improvements, including the organizational andstaffing changes, according to the scope and pace in the implementation plan.

17. Procurement and installation of new hardware and software.

18. The new and/or modified systems should be tested and installed preferablyat the start of the fiscal year and run in parallel with old systems until the new ones arefully operational.

19. New accounting procedures and manuals would be prepared to assist staffresponsible for operating the new systems.

20. Full documentation of the new systems should be prepared including userprocedures.

21. Training should be given to financial and other user staff (both formal andon-the-job) who will operate and maintain the new systems and prepare reports. Trainingshould also be given to managers who will make decisions based on information providedby the new systems.

B. APPROACH AND OUTPUT

Approach to the Work

22. The consultants would be expected to work under the direction of a SteeringCommittee set up by the SEPC. A proposed method of approach and a detailed work planshould be prepared showing the tasks to be undertaken by each member of the team andthe time period in consultant weeks which each would provide. A Chinese counterpartteam of accountants should be subcontracted by the consultant. The work plan for thestudy would show how this support would contribute to each phase of the services. Theforeign consulting team should represent appropriate capabilities and experience inaccounting system design and implementation, training, and public utility industryaccounting practices.

- 105 - ANNEX 5.3

Outputs

23. The main output of the work would be reports at the end of Phases 1 and 2and subsequently under Phase 3, the accounting procedures manuals and documentation ofthe systems, including all accounting policies, procedures, and reporting formats. Progressreports should be provided quarterly to the Steering Committee.

- 106 - ANNEX 5.4

MANAGEMENT DEVELOPMENT AND TRAINING

A. OnJEcTvEs

1. The management development and staff training program is designed toenhance SEPC's managerial, technical and financial capabilities. The main objectives ofthe program are:

(a) to enable SEPC to function as an autonomous entity for the efficient andaccelerated development of its long-range investment program; and

(b) to staff SEPC with professionally skilled personnel capable of handlingpower development and financial planning, modem construction,management and business operations.

B. SCOPE

2. The training program will consist of the following four main categories:

(a) Training in institutional development and enterprise reform matters;

(b) Training in utility management and financial planning;

(c) Project-related training for technical staff by working together withconsultants and those financed under vendors' contracts; and

(d) Upgrading and equipping of SEPC's training facilities.

C. ORGANIZATION OF TRAINiNG

3. SEPC will be responsible for planning and organizing the training programwith the approval and support of MOEP. The training program will be conducted bothabroad and in China. Initial training activities would aim at providing a general overviewof the selected topics by a series of training seminars in China. Both local and foreignexperts will be invited to give lectures on these specific topics. Study tours and overseastraining will then be followed for senior management and financial and technical staff.Particular attention will be paid to the selection of candidates to be trained and theiradequate preparation before sending them abroad for training.

- 107 - ANNEX 5.4

D. IIPLEMENTATION

4. Implementation plan for the management development and staff trainingprogram is presented below:

(a) Domestic Training. About 420 staff of various fields, totaling 305 staff-months will be trained in China (Table 1); plus 11 staff-months of foreignexperts will be required for training in China.

Table 1: DoMEsTIc TRAINNG

Foreignexperts Estimated

No. of Duration Staff- (staff- Training costCategories trainees (months) month months) period ($'000)

Senior mgmt.staff 60 0.5 30 2 1994-96 40

Business mgmt.staff 110 0.5 55 2 1995-97 40

Legal staff 30 1 30 1 1994-96 20

Financialmgmt. staff 110 1 110 2 1994-96 40

Technicalstaff 80 1 80 3 1995-97 60

Environment &resettlement 30 1 30 1 1994-96 20

Total 420 X 11 220

(b) Overeas Training. Study tours and overseas training will be conducted in1994-97 for 144 staff, totaling 247 staff-months. The number of trainees,duration of training, staff-months and timing of different specialties ofpersonnel are shown in Table 2.

- 108 - ANNEX 5.4

Table 2: OVERSEAS TRAINNG

EstimatedNo. of Duration Staff- Training cost

Categories trainees (months) month period ($'000)

Senior mgmt.staff 41 1 41 1994-96 328

Business mgmt.staff 38 2 76 1994-96 608

Legal staff 8 2 16 1994-96 128

Financialmgmt. staff 15 2 30 1994-96 240

Technicalstaff 37 2 74 1995-97 592

Environment &resettlement 5 2 10 1994-96 80

Ibtal 144 247 1,976

(c) Project-Related Training for Technical Staff. A total of 176 trainees witha total staff-months of 146 will be trained in manufacturers' offices andfactories. Another 100 staff totaling 300 staff-months will be trained inChina for line construction and substation equipment erection. Details areshown in Table 3.

(d) Training Equipment. Total training equipment to be procured is estimatedat about $1,104 million as detailed in Table 4.

(e) Estimated Training Cost. The total training cost will be Y 1.0 millionequivalent in local currency and $3.3 million in foreign currency (Table 5).

- 109 - ANNEX 5.4

Table 3: PRoJer-RELATED TRAING PROGRAM FOR TECHNcAL STAF

Training EstimatedNo. of period Staff- cost

Category of staff trainees (months) months Timing ($'000)

A. Training for Design and Engineering Staff

Design staff 20 1 20 1994/95 100Engineering staff 34 1 34 1994/95 170

12 2S 54Q

B. Training for Electrical and Mechanical Staff

Project management 32 1 32 1994/96 160Construction and erection 30 1 30 1994/96 150Operation and maintenance 60 0.5 30 1995/97 150

IQal 122 92 460

C. Domestic Training for Construction Personnel

Operations 50 3 150 1996/97Maintenance 50 3 150 1996/97

Tota 100 30Q

-110- ANNEX54

Table 4: PROCuEMENT OF TRANG EQUIPMENT AND SOFTWARE

Unit EstimatedCategories Quantity price cost

(set) ($'000) ($'000)

Digital real-time simulatingsystem for power system (RTDS)(hardware and software) 1 350 350

Power system transient simulatingprogram (PSCAD/EMTDC) 1 34 34

Substation simulating system(hardware and software) 1 150 150

Information management system (MIS),including subsystem (FMIS)(hardware and software) 1 450 450

Other software 110 120

Total ,104

Table 5: SUMMARY OF TRAINNG COST

EstimatedNo. of cost

Categories trainees Staff-months ($'000)

Domestic training 420 305 220Overseas training 144 247 1,976Training equipment and facil-

ities procurement - - 1,104

Tota 5 6 552 3,300/a

La This cost does not include the cost of project-related training, which will befinanced out of contracts of consulting services and equipment.

-111- ANNEX 5.5

PROJECT COST ESTIMATE

Description Local Foreign Total---------------- ($ million) ---------------

1. Prepartor WorkBase cost 68.2 0.0 68.2Physical contingencies 6.2 0.0 6.2Price contingencies 4.6 0.0 4.6Taxes and duties 0.0 0.0 0.0

Total 78.9 008

2. Land Acquisition & RelocationBase cost 12.2 0.0 12.2Physical contingencies 1.0 0.0 1.0Price contingencies 0.8 0.0 0.8Taxes and duties 0.0 0.0 0.0

Toal 139 13.9

3. Civil Works & InstallationBase cost 123.7 0.0 123.7Physical contingencies 10.9 0.0 10.9Price contingencies 9.3 0.0 9.3Taxes and duties 0.0 0.0 0.0

Total 143.8 Q0 143.8

4. 220-kV Transmission SystemBase cost 128.4 0.0 128.4Physical contingencies 12.8 0.0 12.8Price contingencies 8.6 0.0 8.6Taxes and duties 0.0 0.0 0.0

Total 149.9 Q± 149.9

- 112 - ANNEX 5.5

Description Local Foreign Total-------------- ($ milion) -------

5. 500-kV Transmission LinesBase cost 130.0 60.2 190.2Physical contingencies 13.0 6.0 19.0Price contingencies 10.7 3.1 13.8Taxes and duties 0.0 0.0 0.0

IQTl 5l3: 6 2230

6. 500-kV Substation EquipmentBase cost 40.1 175.4 215.5Physical contingencies 2.0 8.8 10.8Price contingencies 2.9 9.1 12.1Taxes and duties 0.0 0.0 0.0

lotal 4iAID 193.3 2Z38.2

7. Engineering & AdministrationBase cost 12.0 4.2 16.2Physical contingencies 0.6 0.1 0.7Price contingencies 1.0 0.1 0.1Taxes and duties 0.0 0.0 0.0

IT 136 41 17.9

8. Environmental ProgramBase cost 0.3 0.5 0.8Physical contingencies 0.0 0.0 0.0Price contingencies 0.0 0.0 0.0Taxes and duties 0.0 0.0 0.0

IQIAl QA 50

9. Technical AssistanceBase cost 1.0 1.7 2.7Physical contingencies 0.1 0.1 0.1Price contingencies 0.0 0.1 0.1Taxes and duties 0.0 0.0 0.0

Tota IA 2L8 2

-113 - ANNEX 5.5

Description Local Foreign Total($ million) --------

10. TrainingBase cost 1.0 3.3 4.3Physical contingencies 0.0 0.2 0.2Price contingencies 0.0 0.2 0.2Taxes and duties 0.0 0.0 0.0

IQta 116Q. 4.7

11. Total Proect CostsBase cost 516.9 245.3 762.2Physical contingencies 46.6 15.1 61.7Price contingencies 37.9 12.6 50.5Taxes and duties 0.0 0.0 0.0

GRA TOTAL, OLA 273 874.4

PROCUREMENT SCHEDULE

(1) (2) (3) (4) (5) (6)Conductor Microwave

insulator OH Substation Substation dispatching Constructiongroundwire & equipment equipment automatic maintenance

Steel accessories no. 1 /a no. 2 Lb equipment equipment

Begin preparation of bidding documents 05/01/94 05/10/94 05/01/94 08/01/94 01/01/94 07/20/94

Approval by Chinese government 09/24/94 10/14/94 10/25/94 01/25/94 05/25/95 10/30/94

Review by the World Bank 10/15/94 11/15/94 11/25/94 02/25/95 06/25/95 11/25/94

Issue bidding documents 10/20/94 11/20/94 12/01/94 03/01/95 07/01/95 12/01/94

Bid opening 01/10/95 02/05/95 03/01/95 06/01/95 10/01/95 03/01/95

Bid evaluation 02/20/95 03/20/95 04/30/95 07/31/95 11/30/95 04/30/95

Approval by Chinese government 03/15/95 04/25/95 05/30/95 08/30/95 12/30/95 05/30/95

Confirmation by the World Bank 03/30/95 05/30/95 06/30/95 09/30/95 01/30/96 06/25/95

Contract discussion and signing 05/05/95 07/30/95 08/01/95 11/01/95 03/15/96 08/10/95

/a Power transformer, GIS, reactor./b Disconnecting switch, SF6 switch, arrester, UPS, protection, PLC and automation complex in substation.

KEY DATES OF PROJECT IMPLEMENTATION

(a) TRANSMISSION LINES

Key dates Ertan- Ertan- Ertan- Ertan- Zigong- Zigong- Zigong- Zigong- Chongqing-Zigong Zigong Zigong Panzhihua Chongqing Chongqing Chengdu Chengdu ChangshouNo. 1 No. 2 No. 3 No. 1 No. 2 No. 1 No. 2

Construction contracting 02/15/95 10/01/95 06/01/96 08/01/97 03/01/98 11/01/95 08/01/96 02/01/97 08/01/97

Enter construction site 04/01/95 01/01/96 10/01/96 10/01/96 05/01/98 01/01/96 10/01/96 04/01/97 10/01/97

Start foundation works 07/01/95 04/01/96 01/01/97 01/01/98 07/01/98 04/01/96 01/01/97 07/01/97 01/01/98

Start tower erection 02/01/96 11/01/96 08/01/97 07/01/98 09/01/98 09/01/96 08/01/97 01/01/98 07/01/98

Start stringing 07/01/96 05/01/97 02/01/98 11/01/98 10/01/98 01/01/97 02/01/98 06/01/98 01/01/99

Testing and acceptance 07/01/97 04/01/98 01/01/99 05/01/99 11/01/98 07/01/97 08/01/98 01/01/99 07/01/99

Normal operation 07/01/98 03/01/99 02/01/00 04/01/00 12/01/98 07/01/98 07/01/99 01/01/00 06/01/00

Project completion 12/31/00

KEY DATES OF PROJECT IMPLEMENTATION

(b) SUBSrATIONS

Zhaojue Switching StationHonggou Substation Longwang Panzhihua Changshou

Chengjiaqiao Substation Substation Substation Substation

Equipment procurement contract signing 08/01/95 08/01/95 08/01/95 08/01/9511/01/95 11/01/95 11/01/95 11/01/95

Construction contract signing 09/01/95 06/01/96 02/01/97 06/01/97

Enter construction site 10/01/95 07/01/96 03/01/97 07/01/97

Start excavation 02/01/96 11/01/96 07/01/97 11/01/97

Start erection 02/01/97 11/01/97 07/01/98 11/01/98

Testing and acceptance 09/01/97 06/01/98 02/01/99 06/01/9902/28/98 11/30/98 07/31/99 11/30/99

Start operation 06/30/98 2/28/99 10/30/99 2/28/2000

-117- ANNEX5.8

SCHEDULE OF DISBURSEMENTS($million)

Bank FY and Semester Cumulative Project Bank profileLasemester -------- ($ million) --------- -------------- -------------

1995First - - - 0Second 22.5 22.5 8.3 6

i199First 22.6 45.1 16.7 18Second 41.6 86.7 32.1 26

1997First 41.6 128.3 47.5 38Second 33.5 161.8 59.9 50

i998First 33.5 195.3 72.3 58Second 29.3 224.6 83.1 66

999First 29.2 253.8 94.0 74Second 6.9 260.7 96.5 78

200First 6.8 267.5 99.0 82Second 2.5 270.0 100.0 86

La Bank-wide standard disbursement profile for the power sector in China (August1993).

- 118- ANNEX5.9

ENVIRONMENTAL MANAGEMENT PROGRAM

A. BACKGROUND

1. Environmental factors were incorporated into the selection process for theroute alignments and preliminary design for the 500-kV Ertan transmission system fromthe Ertan Hydroelectric Project to Zigong, Chengdu, and Chongqing. Considerable effortswere made to avoid populated areas, productive farmland, industrial facilities, and naturalconservancy areas, as well as forests, historic landmarks, and scenic areas. The mainresidual adverse environmental impact effects of this project include: steel transmissiontowers and substations taking farmland and other lands with resultant displacement of1,983 families [an average of 96.3 families or household, 393.7 individuals, per100 kilometers (km) of transmission line], the felling of trees during construction, theinterference of electromagnetic fields with communications, and potential health risks topeople and animals. All applicable national and local environmental protection policieshave been incorporated into project planning and design.

2. With the adoption of preventive measures, the project complies withapplicable environmental protection requirements. Expenditures for mitigation andmonitoring measures are relatively low and technological skills are locally available. Theeffects of high elevation and heavy ice loading of the line are important environmentalcharacteristics that affect project planning. Ice prevention measures and electromagneticconsiderations will be comprehensively studied as the project design stage continues.

Environment and its Relationship to the Project

3. The 500-kV Ertan Transmission system will be a very important segmentof the Sichuan electric network, transferring up to 3,300-MW of electric power from theErtan Hydroelectric Project to the load centers of the heavily populated Sichuan Basin.The selected route consists of two parallel transmission corridors with, initially, threesingle phase 500-kV lines from Ertan to the Zigong substation. From there, two lines willgo towards Chongqing and two towards Chengdu.

4. The alignment, and the environmental studies, can be considered as coveringtwo distinct geographical areas, the Sichuan Basin, and the mountainous area to thesouthwest, where the Ertan Project is located. In the western mountain area, the geologictexture is complex, and the forest resources are rich, with considerable climatic changewith increasing elevation. The population is sparsely distributed, and industry andagriculture are underdeveloped. However, in the eastern hilly land region of the SichuanBasin, the climate is warm, with concentrated populations and relatively developed industryand agriculture.

- 119 - ANNEX 5.2

5. The highest elevations along the route are over 3,200 meters, and heavy iceaccumulations and geologic problems including mudflow, landslides, and potentially highearthquake magnitudes are environmental factors that had to be considered in projectdesign.

6. In the thickly forested mountains, wildlife, including the giant and lesserpandas, monkeys, and other rare animals and Chinese medicinal plants are found. Acritical high area between Ba-Pu and Wahou has been designated as the Da Feng DingNatural Protected Zone. This area contains important panda habitat and virgin forest land,however, the transmission lines will be at some distance from this zone.

Incorporation of Environmental Considerations into Project Design

7. During the design of the project, effective measures have been adopted toeliminate or minimize adverse impacts. For example, the need for clearing of forests fortransmission lines was kept to a minimum during the development of the alignment. Also,based on the national environmental protection policies, the selected transmissionalignments were designed to avoid the natural conservation zone for the protection of pandaand other rare species by a minimum of 5 km from boundary of the zone, and are locatednear roads at a lower elevation than the significant habitat for endangered species. Theminimum distance from the transmission line alignments to the bamboo forest home of thepanda is 16 km. Elsewhere, the alignment is designed to minimize effects on forest andagricultural land, and other natural and sociocultural resources.

8. In China, only the foundations of the towers and newly built or extendedroads will require land acquisition. The land under the transmission lines will not beacquired, but houses may have to be relocated. Land requirements for each tower will beapproximately 225 square meters. The land under the lines between the towers will remainthe property of the original owner. Assuming an average distance between the towers of395 meters, and a total line distance of 470 km, approximately 27 ha of land will have tobe acquired for construction of towers for each circuit between the Ertan and ZigongHonggou Substations. In addition, approximately 23 ha will be required for the towers forthe lines to Chengdu and Chongqing, and approximately 10.5 ha will be required for newor extended roads. Likewise, 45 ha will be required for construction of the substations,for a total land acquisition of approximately 159 ha. The compensation paid foragricultural land is about 10 to 20 times that of the annual value of the crops. Paymentsare also made to the local government or other land owners for the expropriatednonagricultural land.

Relocation and Resettlement

9. After planning the transmission alignments so as to avoid the necessity ofdisplacing houses to the extent practical, it will still be necessary to displace some housingfor project construction. Approximately 2,000 families (houses), 8,100 individuals, willbe displaced to accommodate the transmission alignments for more than 2,000 km oftransmission line, one switching station, and the four located substations. Approximately265 families will be displaced for the construction of each of the three circuits from Ertan

- 120 - ANNEX 5.9

to Honggou. Within the more densely populated basin area, 1,183 families would haveto be relocated for the construction of the four proposed lines. The houses to be removedfor the construction of the transmission lines are relatively scattered, particularly in themountainous areas between Ertan and Zigong. Approximately 56 houses per 100 km foreach of the Ertan to Zigong lines, and approximately 186 houses per 100 km of line forhe lines within the densely populated basin will have to be relocated. Normally, thelocation of the new houses will be between 100 and 1,000 meters away for the originalposition.

10. Compensation and relocation assistance will be provided by SEPA and thelocal governments. Compensation will be based on the number of square meters ofhousing a family has, the value of crops, etc. This compensation will be provided bothin terms of money, and assistance in finding alternative locations to rebuild in the generalarea. In addition, SEPA will provide assistance in terms of building materials and otherrequirements for rebuilding.

Monitoring and Mitigation Plans

11. An environmental protection facility will be established to conductenvironmental monitoring programs and supervise the implementation of the preventive ormitigation measures. The estimated annual expenditures for environmental protectionmonitoring are 790,000 Yuan. Until the Ertan Project goes on line, these costs will beincluded as part of the overall project construction cost. After that, the program willcontinue and will be paid for from operating revenues.

B. ENvRoNMENTAL CONSTRUCTION IACS

12. Project construction will require land acquisition, cutting forests, damageto crops, and excavation of earth. In addition, blasting will create high level explosivenoise. Construction will also have adverse impacts on the wildlife, native vegetation, andnearby residents. The following measures have been identified for consideration, andadoption if justified, during construction in order to minimize the impact on theenvironment:

(a) Adopt the stringing of lines under tension.

(b) Adopt small piece erection techniques.

(c) Arrange the stringing of line after the fall harvest in agricultural areas.

(d) Forbid using the explosive method to connect wires, and use noise controlmeasure during excavation.

(e) Adopt aerial ropeways to transport the parts.

- 121 - ANNEX 5.9

(f) Rent existing houses for construction offices rather than building newfacilities.

(g) Assess the possibility of using helicopters for construction.

13. The weight of the bulky equipment for the substations and the switchingstation can reach up to 180 tons, and their dimensions may be up to 8 m by 4 m. In orderto ensure the safety of people and of shipments of the large components, it will benecessary to investigate the condition of the transportation routes to be utilized in movingthe equipment to the site where it is needed. This will include the status of the roads andrailways, the bearing capacity and dimensions of the bridges and tunnels, as well as theloading and unloading capacity of the train yards. Where necessary, these facilities willbe rebuilt, reinforced, or avoided to prevent accidents during the shipment of equipment.

14. Detailed planning will be conducted to minimize and control runoff anderosion at the construction sites. The soil erosion prevention measures include revegetationof the disturbed surfaces, or their conversion into agricultural land. In addition, thecontractors will be required to utilize suitable prevention measure to limit constructionnoise, dust, and smoke so as to minimize their impacts on the surrounding residents andthe environment.

15. Project design will be such that intemational standards of worker safety willbe included in all bidding documents of project equipment. Dangerous equipment will bedesigned to meet ASME standards of safety and will be so specified. Polychlorinatedbiphenyls (PCBs) are illegal in China and their use is therefore prohibited in the project.

16. The construction labor force will consist of a fixed of 1,000 to 2,000 skilledworkers and a variable number of unskilled workers numbering about 3,000 at the periodof maximum activity. It is estimated that the plant will take two to three years to build.Most of the skilled workers will move to the area without their families, and unskilledworkers will consist mostly of local farmers with about half of them living on-site and theother half commuting. Therefore, housing and infrastructure will be needed for the skilledworkers and some unskilled labor (about 3,000 units in total). For workers living on-site,Sichuan Electric Construction Company will build temporary housing on-site as well asmedical facilities, shopping, sewage and fire protection. Water supply and electricity willbe supplied from Yang City.

17. About 650 workers are needed to operate and maintain the network, ofwhich roughly 60 percent will be married. SEPC will construct apartments for marriedworkers in Yang City, and apartments for single workers at the plant site. Since YangCity has a population of over 400,000, the addition of transmission network personnelshould not present a significant burden on the city infrastructure. At the plant site, SEPCwill construct sewage facilities, a clinic, shops, dining facilities, clubhouse and library.It will also supply electricity. Operating plant personnel living at the plant site should notpresent a significant impact on the local community level.

- 122 - ANNEX 5.2

18. Noise estimates indicate that the project will conform with Chinese standardsand World Band guidelines.

Operational Impacts

(a) Substations

19. Five substations will be constructed in conjunction with the abovetransmission lines. They are Panzhihua, Honggou, Chengjaqiao, Changshou, Longwang,and the Zhaojue 550-kV Switch Station. The initial total capacity is 5,250 MVA, but thefinal capacity will be 7,500 MVA.

20. It is anticipated that each 500-kV substation and switching station will haveapproximately 100 employees. SEPA will provide housing for the employees and theirfamilies. Dormitories will be provided near the station for single employees and housingnear town will be provided for families. An average of 24 m2 of living area will beprovided per person. The total living area for each station will be approximately 0.5 ha.

21. The project construction area will a approximately 2.9 ha, 1.2 ha for livingareas, and 1.7 ha for working areas. A total of approximately 590 employees will berequired for project construction. 350 people would come from the civil work constructioncompany, and 240 people would come from the equipment installation company.

(b) Forests and Economically Important Trees

22. In China, the regulations stipulate that, when a transmission line passesthrough forest land, a cleared right-of-way must be established with a width that must beat least two times the width of the line plus the height of the trees. However, the fellingof trees destroys the ecological balance and may cause soil erosion. The protection offorest resources is an important policy of China, and therefore, the need for clearing offorests for transmission lines was kept to a minimum during the development of thealignment. Where possible, selective cutting techniques or other avoidance measures willbe utilized.

23. In China, transmission lines are not permitted to pass through designatedscenic locations or natural conservation zones unless there is no other alternative. Theselection of transmission alignments should also avoid passing through areas of virginforest and economically important trees. Triangularly arranged steel towers can reduce thewidth of the transmission corridor by 13 to 15 m compared with that of parallel arrangedsteel towers. Thus, it is planned that triangularly arranged towers be utilized in forestedand densely populated areas because they can decrease by 20 to 30 percent the requiredremoval of trees and buildings. In mountain areas, if the net height of the lines above thevalley trees is over 30 m, the trees may not need to be cut.

- 123 - ANNEX 5.2

(c) Wildlife and Vegetation

24. As mentioned above, there are some rare animals and plants in the mountainareas through which the line has to pass. For their protection, China has defined the areaof critical habitat for several endangered species in the project area as the Da Feng DingNatural Conservation Zone. This zone contains elevations in excess of 4,000 meters, andgiant panda and other endangered species are found there in the bamboo forest at highelevations. There are also reports of a few tigers still present. Based on the nationalenvironmental protection policies, the selected transmission alignments were designed toavoid the natural conservation zone for the protection of panda and other rare species bya minimum of 5 km from the boundary of the zone, and are located near roads at a lowerelevation than the significant habitat for panda and other endangered species. Theminimum distance from the transmission line alignments to the bamboo forest home of thepanda is 16 km.

(d) Farmland

25. According to national land laws, the land occupied by the tower foundationshall be expropriated. Because of the national population explosion and the importance ofmaintaining farmland in production, it is important to minimize the use of farmland for theproject. The 500-kV power system of Sichuan is still weak. Therefore, to ensure greaterreliability, double circuit towers are not allowed. The selected transmission alignmentsavoid impacting farmland to the maximum practical extent. Some 80 percent of the Ertanto Zigong transmission line is through mountainous areas where uncultivated land is about60 percent of the area, and only 5 percent is cultivated land. The remaining 35 percentis forest land where cutting will be minimized to the extent practical.

(e) Industrial Facilities and Mineral Resources

26. Chinese design criteria stipulate the required safe distances between atransmission line and potentially dangerous facilities, as well as from factory buildings,storehouses, etc. The minimum safe fire protection distance between the transmission lineand any first class dangerous workshop, storehouse, and combustible material stockyards,as well as combustible gas storage tanks cannot be less than 1.5 times the height of thetower. The fire protection distance between the transmission line and workshops thatdischarge combustible gas cannot be less than 30 meters.

27. Furthermore, there are basic requirements for transmission lines approachingor crossing highways, railways, river, telecommunication lines, power lines, etc. Theserequirements have been followed in the design of the transmission line. The route shouldalso avoid passing over mineral deposits that potentially could be exploited.

28. The transmission lines will be designed in such a fashion that the maximumelectric field strength at ground level will be 9 kV/m and the maximum noise level (rainydays) will be 62 db(A). There are no Chinese or World Bank standards for electric fieldstrengths, but the maximum value is considered safe (within the limits experienced byusing an electric heating blanket) and is expected to cause only minor damage to plant life.

- 124 - ANNEX 5.9

Additionally, the population along the transmission line will be relocated, so no one in thearea should be permanently exposed to the maximum field. The electric field intensitydiminished rapidly with distance and should not present a problem to local residents.Noise levels on the average comply with World Bank and Chinese standards. The rainyday extreme, evaluated at the point of maximum intensity (underneath the power line) is62 db(A), slightly higher than the Chinese nor [60 db(A)]. Where most of the people live,noise levels have been determined to be 45-50 db(A), which is within the Chinese normand World Bank guidelines. Both electric field and noise monitoring along thetransmission route are part of he overall monitoring program.

C. MrITGATION MANAGEMENT AND MON1TORING PLAN

29. The main characteristics of the project area are high elevation and heavy iceand snow. The corresponding preventive measures are considered in this report and willbe comprehensively addressed at the preliminary design stage of the project. As for theinterference problems of electromagnetic field on the overhead communication lines alongthe same route, they can be solved by changing the communication line to optic fibercable. An environmental protection facility will be established to conduct theenvironmental monitoring programs and supervise the implementation of the preventive ormitigation measures.

General Considerations

30. Besides SEPA, the organizations responsible for the environmental protectionof the project include: Panzhihua Electric Engineering Bureau, Xichang ElectricEngineering Bureau, Loshan Electric Engineering Bureau, Yibid Electric EngineeringBureau, and Zigong Electric Engineering Bureau. They are charged with the monitoringof both the project and the environment in order to identify, and correct, potentialproblems. The main monitoring items include:

Meteorological Observation Station

31. The ice observation station was established in 1982; the monitored itemsinclude: air temperature, humidity, precipitation, ice cover, inductive current of ice andwater, wind velocity and direction, etc. The main purpose is to forecast the ice coveringon the line. The observations will continue.

Earthquake Forecasting

32. The earthquake observation stations along the transmission line will forecastthe possibility of an earthquake.

ESDD Observations

33. Twenty ESDD observation stations have been established along thealignment to determine air quality and level of significant pollution and identify the likelyeffects on the insulators of the transmission line.

- 125 - ANNEX 5.9

Monitoring of Health of Humans and Domestic Animals

34. The environmental protection facility will monitor the condition of thevegetation, wildlife, and fish along the transmission alignment in order to identify potentialproblems, thus protect the environment from unnecessary damage.

Monitoring the Electromagnetic-Environmental Compatibility

35. The ground electric field, radio interference, radio signal field intensity, andcorona audible noise, will be monitored.

Estimated Expenditures for Environmental Protection Mitigation and Monitoring

36. Estimated annual expenditures for environmental protection mitigation andmonitoring are given in Table 1. Until the Ertan Project goes on line, these costs will beincluded as part of the overall construction cost. After that, the program will continue andwill be paid for from operating revenues.

Table 1: EsrMATED ANNUAL EXPENDrTURES FOR ENVIRONMENTAL PROTECTION

MIGATION AND MONITORING

Item Estimated Expenditure(10,000 Yuan)

Meteorological Observation 15Earthquake Observation 5ESDD Observation of Insulators 23Organism and Human Health Monitor 10Vegetation, Wild Animal, & Fish Monitor 5Electromagnetic Environmental

Compatibility Monitoring 20

Toita

- 126 - ANNEX 5.10

LAND ACQUISITION AND RELOCATION

Scope of Relocation

1. The Sichuan Power Transmission Project includes construction of a new500-kV network consisting of about 2,300 kilometers (km) of transmission lines, fivetransformer substations (5,250 MWA) and one switching station, and reinforcement of theexisting 220-kV transmission network. The components involve a certain amount of landacquisition and relocation of existing residents. According to the relocation action planprepared by SEPC, the project will acquire a total of 163 hectares (ha) of land, demolish290,557 square meters (m2 ) of floor space, and relocate 1,991 households or 8,126 people(Table 1). In addition, as many as 81.4 ha of land will be required temporarily during theproject construction.

Table 1: SCOPE OF RELOCATION OF SICHUAN POWER TRANSMISSION PROJECT

Number of Amount of Amount of Number ofrelocated removed land people

Item households floor space acquisition affected(m2) (ha)

500-kV transmissionlines (2,052 km) 1,982 289,117 106.0 8,094

Shaojue switchstation 0 0 4.9 0

Five transformerstations 9 1,440 52.0 32

Total 1.991 290,557 162.9 8,126

Source: SEPC.

(a) Transmission Line

2. The project includes four sections of 500-kV transmission line located in thesouthwest part of the project. The first section of the transmission line is from the ErtanHydroelectric Power Plant to the City of Zigong, with three separate circuits at 470 km

- 127 - ANNEX 5.1

each. The second section is from Ertan to the City of Panzhihua. The third and fourthsections are from Zigong to two major power consumption centers in Sichuan: Chengduand Chongqing, with a total length of 704 km. The project will involve 6 cities and 13counties. According to the design requirement, all houses within 40 meters (m) wide zoneunder the transmission line will be removed. Generally, the relocated households will beallowed to rebuild their houses near the original locations within the same villages. Duringthe construction, some standing crops will be damaged. But farmland under the power linedoes not need to be permanently acquired; only a small amount of land area will beacquired for the foundation of the towers, which average 1.3 mu or 0.08 ha per 1 km oftransmission line. According to the preliminary estimate, as many as 1,991 householdswill be relocated, and a total of 289,117 m2 of houses will be removed (Table 2). Theaffected people will be given replacement compensation at Y 80-150/n9 along withresidential plots provided by the same villages. The cost for providing the new residentialplots will also be paid by the project. The transmission lines component will be graduallyimplemented in the next seven years. At present, only those circuits between Ertan andZigong have completed engineering designs, while the alignments for the other sectionsof the transmission lines have not yet been finalized. As a result, in terms of the scopeof land acquisition and demolition for those sections, only a preliminary estimate isprovided. But compensation policies and standards adopted will be applied in all thesesections.

Table 2: DEMOLMTION AND RELOCATION ALONG 500-KV TRANSMIsION LINE

Length Householdsof the to be Land Demolished Affected

Line component line removed acquired floor space population(km) (ha) (m2)

Ertan-Zigong 1,410 795 80.3 98,626 3,390

Panzhihua-Ertan 45 5 2.6 551 21

Zigong-Chengdu 380 686 13.1 112,480 2,744

Zigong-Chongqing La 262 496 10.0 77,460 1,939

Total 2097 1.982 106.0 289,117 8.094

La It also includes a section from Chongqing to Changshou: the same situation as inZigong-Chengdu line.

Source: SEPC.

- 128 - ANNEX 5.10

(b) Substations

3. The Sichuan Power Transmission Project also includes construction of sixsubstations (one switch station and five transformer stations), which are in six differentcities or counties. According to a preliminary survey, the construction of these substationsand access roads will acquire a total of 56.9 ha of land area, which will demolish 1,440 n2

of floor space and displace nine households and 32 persons (Table 3). Most of acquiredland is low-yield farmland, with 80 percent being dryland and the rest of them as paddyfield. The requisition of farmland will also lead to job relocation for certain farmers.Based on experience of similar projects at these locations, the number of labor relocationscaused by farmland acquisition is estimated at 741. The local county or city labor bureauswill be responsible to assign nonfarm jobs for them. Most of them will be able to workin local township and village enterprises.

Table 3: LAND ACQULSMON AND RELOCATION AMONG Six SUBSTATIONS

Households Land Demolished Estimatedto be acquired floor space labor

Items relocated (ha) (i 2) relocation

Shaojue Switch Station 0 4.94 0 37

500-kV transformerstations at:Panzhihua City 2 (6) 9.97 252 75Honggou 2 (7) 8.22 325 123Longwang 1 (4) 10.61 126 150Chenjiaqiao 1 (5) 11.14 205 167Changshou 3 (10) 12.00 532 189

Total 2 2 5-6-8 1440 741

Source: SEPC.

Purpose and Strategy of Resettlement

4. For the project office, one main objective of resettlement efforts is tominimize the scope of resettlement throughout the project design and planning. In orderto achieve such an objective, four basic principles have been followed in determining thefinal alignment, which include (a) avoiding industrial enterprises and major infrastructurefacilities; (b) avoiding village settlements, urban area and individual houses; (c) avoidinggood-quality cultivated land; and (d) forbidding relocation of any ethnic minorities in theregion and protecting their cultural identity and local tradition. For example, for thetransmission line component, during the survey and design stage, the engineers worked

- 129 - ANNEX 5.10

closely with resettlement experts. They walked through the alignment and made manyrouting changes to avoid significant relocation. For the substation components, similarefforts have also been made in the process of site selection in order to avoid demolishinghouses or acquiring good-quality farmland.

5. For those demolitions or land acquisitions that could not be avoided, propercompensation and resettlement will be carried out so that the living standard of the affectedpopulation could be restored or even improved. For the 1,982 households whose housesare to be removed due to the construction of transmission lines, they will be able to rebuildtheir houses within the same villages not far from the existing site, averaging 100 to200 m. Since the scale of demolition and relocation is within a short distance andrelatively small in each county or township, and since local govemment will be responsibleto coordinate relocation and resettlement processes, no major impacts on social, culturalor production activities will be expected on the local communities, except for short-terminconvenience. During the line installation, a certain amount of damage on standing cropsmay occur, which will be compensated according to local regulations. Based on pastexperience, because the process always results in significant improvement of housingconditions for the affected population and economic benefits for the local economy, localcommunities generally welcome the project passing through their territories.

6. In order to ensure smooth implementation of the resettlement program, oneimportant step is to develop a detailed resettlement action plan based on extensiveconsultation with local government regarding compensation standards and baseline surveys.For the transmission line component, because of relatively small-scale land acquisition andrelocation within each county or township, there is no surplus labor problem after landacquisition. Since most farmland within the right-of-way will still be owned by the localvillages, no major disruption of local economy is expected. In the case of substations,since land acquisition is more concentrated in one location, labor compensation may berequired. One typical approach is to provide nonfarm jobs in local township and villageenterprises. In addition, as part of the resettlement policy, SEPC will give the affectedpopulation high priority to be employed as transmission line maintenance workers andtemporary construction workers.

Legal Framework

7. Forming the legal basis for land acquisition and resettlement of the SichuanPower Transmission Project are both laws or regulations from the state, andimplementation measures from provincial and local municipalities. The state laws orregulations include: "Land Administration Law" (1986) and "Administrative Regulationof Urban Building Demolition and Relocation" (1991). The local implementation measuresinclude: "Sichuan Provincial Implementation Regulation of the Land Administration Law"(1987), which specifies that during land acquisition, "construction unit has to pay landcompensation, young crop compensation, labor compensation, and attached propertycompensation," and various related regulations or decrees adopted by local municipal orcounty governments.

- 130 - ANNEX 5.1

8. Under this project, since most land acquisition and relocation will take placein rural areas, most such activities will be govemed by both the "Land AdministrationLaw" and its local implementation measures. According to the "Land AdministrationLaw," section 1, article 2: "for the public interest, the state could expropriate collectivelyowned farmland." The essence of the policy is that when the state acquires farmland, theland-using units will pay not only a basic compensation for land, crop and attachedproperties, but also a job resettlement subsidy (articles 23 and 24 of "Sichuan ProvincialImplementation Regulation of the Land Administration Law"). The other type of landacquisition is to acquire land use rights within the urban built-up area, such all urban landsare owned by the state. In this case, according to "Administrative Regulation of UrbanBuilding Demolition and Relocation," the construction unit has to provide adequatecompensation or resettlement housing for the displaced families and affected enterprises.

9. The job resettlement compensation for cultivated land acquisition will bedetermined according to the existing ratio of amount of cultivated land per person. If theexisting villages with per capita of cultivated land above 1 mu, the resettlementcompensation will be set at three times the average annual output value per mu in the threeyears before land acquisition. If the per capita land area is below 1 mu, the resettlementcompensation will be paid at four times the average annual output value. With a reducingper capita cultivated land ratio, the resettlement compensation could increase up to 10times the average annual output. If the land compensation and resettlement subsidy stillcannot guarantee the farmer's original living standard according to regulation, the totalland compensation and resettlement subsidy may be increased to a level no more than 20times the average annual output value per mu in the three years before acquisition. Adetailed breakdown of the land acquisition compensation is presented in the next section.

10. The compensation earmarked for resettlement will be used to generateemployment for displaced laborers or to provide pensions for the elderly. The countrygovernment through its land administration bureau will be responsible for creating nonfarmjobs for the affected farmers, or assisting local township and village enterprises to hiredisplaced village laborers.

11. Among various items in land compensation, only young crop compensationand attached properties will be paid directly to individuals. The rest of land compensationand resettlement subsidy will all be paid to townships and villages, which can be used fora wide range of purposes that serve the community or can be distributed as stipends forthose who are too old to work. By law, accounts must be kept of all village/town funds,including resettlement compensation. Financial reports have to be provided annually to thenext higher level of government.

- 131 - ANNEXS. 10

Compensation Determination and Payment 2/

12. The site selection and land acquisition for both the transmission line andsubstations components were approved by relevant city and county departments in 1993.In 1994, the concerned cities and counties have also adopted detailed decrees that specifydetailed compensation policies and standards for land acquisition, building demolition, andlost crops, and trees, etc. A list of such decrees for all affected counties is attached in theresettlement action plan.

13. For example, land compensation for the tower bases along the transmissionline will be Y 5,000-21,000 per mu (noncultivated land will be 50 percent of cultivatedland).

14. In terms of cash crop compensation:

- young crop: Y 300-900 per mu;- forest trees: Y 8-12 each;- bamboo: Y 0.2-0.4 per kg.

15. For building compensation:

- wood and brick structure: Y 60-130 per n2;- wood and mud structure: Y 40-80 per in2.

16. For the purpose of estimating total land acquisition and resettlement cost,a comprehensive compensation cost is used based on current practices in the affectedcounties. Here, comprehensive cost for land includes cost for land compensation, laborcompensation and young crop compensation. The comprehensive cost for buildingcompensation includes house construction cost, transfer assistance, land adjustment cost,as well as basic infrastructure cost. The comprehensive cost for land is Y 7,000-20,000per mu; and the comprehensive compensation for building is Y 80-150 for a brick andwood structure; and Y 60-100 for mud and wood structure. For some substation sites, dueto the relatively large number of nonfarm jobs to be provided, the resulting landcompensation could be as high as Y 53,000 per mu.

17. The compensation for land will be given to affected villages, which couldbe used to develop the village economy, social facilities, or distributed directly to allmembers within the villages. (All cultivated land within the affected villages will beredistributed after land acquisition.)

2/ These compensation standards may vary among different cities or counties. They are at least servingas reference for negotiating final compensation amounts. In general, the negotiated compensationamounts are much higher than these standards.

- 132 - ANNEXS. 10

Resettlement Institutional Responsibility

18. In order to effectively implement the land acquisition and resettlementprogram, a land acquisition and resettlement leading group has been set up, which is madeup of 4 to 5 staff from SEPC as well as the Southwest Electric Power Design Institute(SWEPDI). The main responsibilities of the leading group is to provide overall leadershipand coordination during the process of resettlement planning and implementation, whichinclude:

(a) participating in the process of preliminary design and alignment selection,including surveys of land acquisition and affected households, consultationwith local communities; and estimation of compensation costs;

(b) participating in the finalization of alignment design in the field withSWEPDI, including verifying area of land acquisition, number of affectedhouseholds, and other lost properties; and formulating "Project LandAcquisition and Building Demolition Table," which will be the basis for theresettlement implementation plan;

(c) discussing with relevant local government agencies on various compensationpolicies and resettlement programs, which will then be formulated into localdecrees issues by the local governments;

(d) negotiating compensation and rehabilitation contracts with affectedcommunities, particularly for all substations; and processing land acquisitionapplications with provincial and affected county land bureaus; and

(e) supervising and coordinating individual contractors in implementing theresettlement action plan. While SEPC and contractors will be responsibleto provide adequate compensation and coordinate rehabilitation, certainaspects of resettlement, such as land readjustment, housing plot allocationand approval, and reclamation of cultivated land, will be carried out bylocal governments.

19. For land acquisition and demolition under the transmission line component,due to the small size of impacts and nature of the project implementation, negotiation andimplementation of compensation contracts will be carried out by individual constructioncontractors. Because of this practice, in China, the construction contractors fortransmission lines are always equipped with an experienced land acquisition andresettlement team. In addition, each construction team within a contractor also has one ortwo people with resettlement experience. The Bank mission visited some resettlement sitesalong the Zigong to Chongqing Line, and found that resettlement implementation washandled satisfactorily by the contractors. Under the leadership of SEPC and the landacquisition and resettlement leading group, the responsibilities of these contractors include:

- 133 - ANNEX 5.1

(a) participating in the formulation of "Project Land Acquisition and BuildingDemolition Table" with design institution, and based on such document,developing relevant resettlement implementation plans;

(b) holding meetings with officials from affected counties, townships andvillages to exchange views on the scope of resettlement, compensationpolicies, and implementation arrangements;

(c) negotiating compensation contracts of rehabilitation measures with affectedtownships, villages and individual households. A number of samples ofsuch contracts are included in the resettlement action plan; and

(d) implementing the resettlement programs, and dealing with issues andcomplaints raised by affected farmers.

20. During the resettlement implementation, in addition to SEPC and individualcontractors, the relevant local government agencies will also be involved, which includeallocation and approval of new residential plots, readjustment of farmland within thevillage and assigning nonfarm jobs for the surplus farm laborers.

Consultation and Grievance Procedure

21. The resettlement planning and implementation process involves constantconsultation with local communities and individuals, from investigating the land acquisitionand building demolition, to negotiating the compensation and rehabilitation packages. Theagreed contracts are always the product of mutual agreement. If an affected person is notsatisfied with the compensation package or if, for any reason, the compensation does notmaterialize according to the agreed schedule, he or she could go through a grievanceprocedure specified in the resettlement action plan. In general, there are three differentways for anyone to resolve his grievance. The first approach is to voice his or hercomplaints to the responsible resettlement offices at township or county levels. Since theseresettlement offices are made of representatives from all relevant departments, they are inmuch better position to resolve issues brought by affected individuals. If the person foundthat such discussion does not yield any results, then he could bring his case to the relevantconstruction contractors or the "Public Complaint Office" of SEPC. The "PublicComplaint Office" has been widely used in China to address issues raised from localgovernment decisions or policies. The staff from that office, after hearing the complaintfrom the affected individual, will arrange meetings with responsible agencies and resolvethe dispute. If such meetings do not bring any result, they could directly call attentionfrom the governor. Finally, if the affected persons are still not satisfied with the rulingsfrom the above two channels, he could, within 15 days, request an administrative reviewof the case by the same or higher level of government, or to appeal directly in court. Thiswill follow the procedure of administrative appeal, since most land acquisition andcompensation decisions are determined by local government regulations or policies.

- 134 - ANNEX 5.10

Budget and Timetable

22. Based on preliminary budget projections, resettlement costs will totalapproximately Y 140.41 million (see Table 4). This includes a 10 percent reserve fundand a 24 percent inflation contingency. In addition, a detailed cost breakdown for allproject components, including both unit cost and total amount is included in theresettlement action plan. Table 5 presents an implementation schedule of land acquisitionand resettlement for each project component. As the table shows, the overall landacquisition and resettlement will be completed within five years (1995-99). A much moredetailed schedule for Ertan to Zigong (a), indicating the different steps involved forimplementing the relocation and resettlement program was included in the resettlementaction plan.

Table 4: RELOCATION CoSw EsgIMATE FORSICHUAN POWER TRANSMISSION PojEer

(Y million)

Transmission SubstationItems line component component Total

Building demolition 33.07 0.17 33.24Land acquisition 19.61 36.35 55.96Temporary land leasing 1.66 0.67 2.33Labor compensation 0.00 8.16 8.16Young crop compensation 2.58 0.00 2.58Standing tree compensation 3.87 0.00 3.87

Subtotal 60 80 45L3 106.16

Reserve fund 6.08 3.27 8.35Inflation contingency 18.90 7.00 25.50

Total 878 546 140.11

Source: SEPC.

Monitoring and Evaluation

23. By signing the contract with the China Electric Power ConstructionConsultancy Group-Southwest Company, a consultancy arm of SWEPDI, the project hasestablished a resettlement monitoring and evaluation team. The Southwest Company hasextensive experience in designing transmission line projects, including both engineering andresettlement components, and was involved in the early survey of land acquisition andresettlement for this project. The main responsibilities of the monitoring team is to

- 135 - ANNEX5.10

Table 5: IMLEMENTATION SCHEDULE FOR 500-KV TRANSMISSON IJNE

AND SUBSTATIONS

Land acquisition Building relocation

Ertan-Zigong I Sep 95 - Mar 96 Apr 96 - Jun 97Ertan-Zigong II Apr 96 - Dec 96 Jan 97 - Mar 98Ertan-Zigong III Jan 97 - Sep 97 Oct 97 - Dec 98Zigong-Chengdu I Oct 96 - Jun 97 Jul 97 - Mar 98Zigong-Chengdu II Oct 97 - Jun 98 Jul 98 - Jan 99Zigong-Chongqing Jan 96 - Sep 96 Oct 96 - Jun 97Chongqing-Changshou Jan 98 - Sep 98 Oct 98 - Jun 99Ertan-Panzhihua Oct 97 - Jun 98 Jul 98 - Mar 99

Shaojue Switch Station Oct 95 - Mar 96Panzhihua Transformer Station Jan 97 - Aug 97Honggou Transformer Station Jul 95 - Mar 96Longwang Transformer Station Jul 96 - Mar 97Chenjiaqiao Transformer Station Apr 95 - Dec 95Changshou Transformer Station Oct 97 - Jun 98

Source: SEPC.

monitor the implementation of land acquisition and resettlement for the Sichuan PowerTransmission Project, and to provide evaluation reports to SEPC. The objective ofmonitoring and evaluation is to ensure that the resettlement program is implementedsmoothly and to see whether resettled people restore their living condition and income levelafter relocation. A detailed work plan for carrying out the monitoring and evaluation hasbeen developed, which included CVs for key staff, the objective, main contents, and basicapproach. In addition, it also specified the reporting format and schedules during theproject implementation.

- 136 - ANNEX 5.

BANK SUPERVISION INPUT INTO KEY ACTIVITIES

Approximate Expected skill Staff inputsdates Activity requirements (staff-weeks)

09/95 SUPERVISION MISSION Engineering 5.0Project Implementation Financial analysisStart-up Procurement

EnvironmentCompensation/social

experts

06/96 SUPERVISION MISSION Engineering 4.0Status of the Project Financial analysis

06/97 SUPERVISION MISSION Engineering 5.0Status of the Project Economic/financial

analysisEnvironment

06/98 SUPERVISION MISSION Engineering 4.0Status of the Project Financial analysisExecution of the Studies

06/99 SUPERVISION MISSION Engineering 4.0Status of the Project Financial analysis

EnvironmentCompensation/social

experts

06/2000 SUPERVISION MISSION Engineering 4.0Status of the Project Financial analysis

06/2001 SUPERVISION MISSION Engineering 4.0Status of Project Completion Financial analysisand compliance with covenants

02/2002 SUPERVISION MISSION Engineering 5.0Preparation of PCR Economic/financial

analysis

Note: Supervision missions will be coordinated with other Bank-financed power projects in China.

- 137 - ANNEX 5.12

FRAMEWORK FOR PROJECT MONITORINGAND REPORTING

1. Framework for project monitoring would be discussed and agreed withSEPC. Monitoring will take a series of target dates for major events in the projectimplementation program (Annex 5 7.

2. Key indicators for development impact monitoring, inter alia, include:

(a) implementation of the Action Plan to commercialize SEPC;

(b) reform of SEPC's accounting and financial management systems;

(c) adjustments in the level of power tariffs;

(d) separation of government functions from SEPC; and

(e) provision of technical assistance to help implementation of the Action Plan.

3. Records of selected performance indicators would be maintained bycomparing the forecast against actual results for:

(a) activities of engineering consultants;

(b) procurement, i.e., preparation of bid documents, bid opening, contractawards;

(c) environmental management program implementation;

(d) construction progress;

(e) progress in staff training;

(f) progress of studies;

(g) energy production and purchases;

(h) maximum demand;

(i) electricity consumption;

() power losses;

- 138 - ANNEX 5. 12

(k) quality of power supply;

(1) number of outages and their duration;

(m) number of customers by category;

(n) staff statistics;

(o) tariff levels and movements;

(p) changes in project cost estimates and related financing;

(q) rates of return on revalued net fixed assets;

(r) self-financing ratio;

(s) operating ratios;

(t) debt/equity ratios;

(u) debt service coverage; and

(v) current ratio.

- 139 - ANX 6.1

ACTUAL FINANCIAL STATEMENTS OF SEPC (199093)

Table 1: INcOME STATEMENT(Y million)

Yr Ended December 31 1990 1991 1992 1993

Oeratina RevenuesSales Increase (%) 5.4 7.2 7.4 12.3

nerwgy Sales (GWh) 23,152 24,809 26,635 29,906Average Price (fenAlWh) 10.62 13.21 15.49 20.55

Total Onerai2 Revenues 2.458 3.277 4,127 6.146

92M&tin CostsFuel 764 816 795 1,034Purchased Power 197 506 1,204 2,462Operation & Maintenance 317 415 515 943Administration 110 133 177 297Sales Tax 496 561 603 693Deprociation 207 270 297 323

Total OReratine Costs 2.091 2.700 3.590 5.751

ODREAm rtinQIcme 368 577 536 395

Other Income (Losses) (2) (16) (37) 3Interest Chrged to Opertion 0 0 0 92

Not Income Before Income Tax 366 561 499 307

Income Tax 249 261 251 146

Not Income 117 300 248 161

Rate of Retum on Average Net Fixed Assetsin Sevice 2.9 7.3 5.3 4.0

- 140 - ANNEX 6.1

Table 2: BALANCE SHEa=(Y million)

Year Ended Decmber 31 1990 1991 1992 1993

ASSETSCurreat Aseb

Cash 484 710 1,216 1,178Inventories 335 285 384 404Accounts Receivable 982 1,264 1,207 1,055

Total Current Assets 1.801 2.260 2.807 2.637

Fixed A - stPlant in Service 6,134 6,542 7,139 12,021Les: Accumulated Deprociation (2,103) (2,376) (2,456) (4,152)

Net Plant in Service 4.032 4.166 4.684 7.869

Construction WIP 2,623 5,284 6,234 7,734

Total Fixed Assets 6.655 9.450 10.918 15.603

Deferred and Intangible Assets 30 42 101 214

Total Ases8.485 11.751 13.82 18.454

LIABILMTES &EOUITWYCurfent Liabilities

Accounts Payable 1,273 1,484 1,931 1,813Short-term Liabilities 43 31 51 134Other Payable 239 360 392 174

Total Current Liabilities 1.55 1.75 2.21

Long-term Liabilities 3,700 6,202 7,382 9,454

Equity 3,230 3,675 4,071 6,880

Total Liabilities & Eauity 8v485 11.751 13.826 18.454

Long-term Debt % as of LT Debt and Equity 53.4 62.8 64.5 57.9Current Ratio 1.16 1.21 1.18 1.24

- 141 - ANNEX 6. 1

Table 3: FUNDs FLOW STATEMENT

(Y million)

Year Ended December 31 1990 1991 1992 1993

SOURCES OF FUNDSInternal Cash Generation

Net Income 117 300 248 161Depreciation 207 270 297 323Connection Charge 53 67 120 257

Total Internal Sources 377 638 666 741

Other Bank Borrowings 734 2,804 1,386 1,759

Total Sources of Funds 1.110 3.442 2.051 2.500

APPLICATIONS OF FUNDSCapital Expenditure 880 2,827 1,596 1,954

Operational ReauirementsChanges in Worling Capital (147) (86) (457) 121Changes in Connection Charge Funds 10 6 12 26Loan Repayment 193 306 252 357

Total Operational Reauirements 56 226 f12 i9

Total Applications of Funds 936 3.053 1.402 2.458

In(de)creases in Cash 174 389 649 42

Annual Debt Service Coverage (times) 1.7 1.9 2.2 1.3

FORECAST FINANCIAL STATEMENTS OF SEPC (1994-2003)

Table 1: PROJEcTED INCoME STATEMENT(Yuan Million)

Year Ended December 31 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Sales Increase (%) 10.3 10.7 9.0 9.1 9.1 7.4 7.0 6.9 7.1 7.1Energy Sales (100 GWh) 330 365 398 435 474 509 545 583 624 668Average Price (fen/kWh) 24.50 28.99 32.93 37.17 41.23 47.90 55.76 58.52 58.79 64.94

SEPC's Own Avg. Price (fen/kWh) 20.10 25.71 29.94 34.47 38.65 45.17 53.00 54.48 53.26 60.84Purchased Power's Avg. Price(fenlkWh) 32.54 35.66 39.45 43.17 47.25 54.31 62.70 68.25 72.29 77.48

Sales Revenue 8.082 10.590 13.118 16.151 19.549 24.394 30.384 34.090 36,671 43,378

OmeatingC Costs Fuel 1,404 1,809 2,194 2,420 2,741 2,993 3,264 3,664 4,334 5,188Purchased Power 3,031 3,517 4,235 5,261 6,449 8,679 11,320 13,002 13,926 14,622Operation & Maintenance 1,153 1,379 1,535 1,978 2,343 2,861 2,933 4,052 4,764 5,634Administration 352 407 466 529 597 674 776 892 1,026 1,180Sales Tax 530 774 989 1,260 1,548 1,914 2,390 2,631 2,763 3,550Depreciation 391 471 649 776 969 1,410 1,731 2,081 2,378 2,788

Total Operating Costs 6,860 8.358 10.068 12.224 14.647 18.531 22.414 26.323 29.191 32.963

Operatine Income 1.222 2.233 3.049 3.927 4.902 5,863 7.970 7.768 7.479 10.416

Nonoperation Income 3 4 4 4 4 5 5 5 6 6Interest Charged to Operations 491 731 836 889 966 1,266 1,656 1,799 1,556 1,710

Net Income Before Income Tax 734 1505 2.217 3.042 3.940 4,602 6.319 5 974 5,930 87

Income Tax 242 497 732 1,004 1,300 1,519 2,085 1,972 1,957 2,875

Net Income 492 1.008 1.485 2.038 2.640 3.083 4 234 4.003 3.973 5,837

Table 2: PRojECD BALANCE SHEET(Yuan Million)

Year Ended December 31 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

ASSETSCurrent Assets

Cash 1,228 792 537 317 193 595 1,259 1,854 2,381 3,194Inventories 492 626 739 889 1,167 1,403 1,670 1,926 2,257 2,668Receivables 1,437 1,765 2,077 2,243 2,444 2,710 3,038 3,125 3,056 3,615

Total Current Assets 3.157 3.182 3.353 3.449 3.804 4.709 5.967 6.905 7.694 9.477

Fixed AssetsPlant in Service 13,363 16,332 18,442 21,659 29,012 34,352 40,195 45,137 51,980 60,793(less) Accum. Depreciation 4,543 5,014 5,664 6,440 7,409 8,819 10,549 12,631 15,008 17,797

Net Plant in Service 8.820 11.318 12.778 15.219 21.604 25.533 29.646 32.507 36,972 42.997

Construction WIP 9,636 10,611 13,531 16,438 16,009 17,106 18,804 23,044 26,457 27,302

Total Fixed Assets 18.456 21.929 26.310 31.657 37,613 42.639 48,450 55.551 63.429 70.299

Intangible and Deferred Assets 214 214 214 214 214 214 214 214 214 214

TOTAL ASSETS 21.827 25.325 29.876 35.319 41.630 47.562 54.630 62.670 71.337 79.989

LIABILITIESCurrent Liabilities

L-T loans due in 12 months 1,292 1,500 1,744 1,942 2,619 3,461 3,346 3,541 4,887 5,376Accounts Payable 1,435 1,593 1,807 1,936 2,071 2,589 3,208 3,657 4,017 4,491Short-term Loans 150 163 176 189 201 214 228 243 259 276Due to Government 195 213 230 246 263 280 298 317 338 360

Total Current Liabilities 3 072 3 469 3 957 4.313 5.154 6 544 7 079 7 758 9.500 10.501

Long-term Debt 11,147 13,027 15,408 18,281 20,958 22,266 24,481 27,689 30,431 32,152Equity 7,607 8,829 10,511 12,724 15,518 18,751 23,070 27,223 31,405 37,335

TOTAL LIABILITIES & EOUITY 21.827 25.325 29.876 35.319 41.630 47.562 54,630 62.670 71.337 79.989

Debt as % of Debt & Equity 59.4 59.6 59.4 59.0 57.5 54.3 51.5 50.4 49.2 46.3Current Ratio 1.3 1.2 1.1 1.0 1.0 1.0 1.1 1.2 1.1 1.2

Table 3: PROJECE FUD6 FLow STATEMENT(Yuan MiLion)

Year Endd Decmber 31 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

SOURCES OF FUNDSnqt_ea SOucS Of fudNet Income 492 1,008 1,485 2,038 2,640 3,083 4,234 4,003 3,973 5,837Depreciation 391 471 649 776 969 1,410 1,731 2,081 2,378 2,788Distribution Imprv. Funds 283 311 343 377 415 456 502 552 607 668

Total Internal Sources 1.166 1.791 2.477 3.191 4.023 4.950 6.466 6.636 6.957 9.293

n IBRD Loans 0 392 724 583 509 118 23 0 0 0Ertan line PCBC Loans 21 459 1,257 1,470 1,276 815 657 300 0 0Other Loans 2,558 2,102 1,650 2,082 2,599 2,903 3,975 5,263 5,946 5,271IDC Borrowed 407 426 496 680 912 933 906 1,186 1,683 1,825

TotalBofings 2.986 3.379 4.126 41 5.296 4.769 5.561 6.749 7.629 7.097TOTAL SOURCES OF FUNDS 4.152 5.169 6.603 8.006 9.319 9.719 12.027 13.384 14.587 16.390

APPLICATION OF FUNDSCaD1ta1 E3"ditre

Proposed Ertan-line Project 21 851 1,981 2,053 1,785 933 680 300 0 0Other ConsbwtiOn 2,815 2,663 2,549 3,386 4,222 4,565 5,949 7,690 8,566 7,824Interest During Cmstruction 407 426 496 680 912 933 906 1,186 1,683 1,825

Total Caital ExuenditUre 3 243 3.940 5.026 6.19 6.920 6.431 7L. 9.176 10.249 9.650

*O Ona1 Re uirementsInc/dec in Working Capital 37 272 182 158 315 (46) (56) (140) (135) 458Inc/dec in Distribution Imprv. 0 4 4 5 5 6 6 7 7 8Loan Repayment 774 1,292 1,500 1,744 1,942 2,619 3,461 3,346 3,541 4,887Benefit Funds ExpenditU 47 98 146 201 261 306 418 401 397 574

Total Oupctiot Requirements 858 1.666 1.832 2.108 2.524 2 885 3 828 3.614 3.811 5.927

TOTAL APPLICATIONS OF FUNDS 4.101 5 606 6.858 X26 MU 44 9.316 11.363 12J790 14.059 15.577Increase/Decrease in Cash 50 (436) (254) (221) (124) 402 663 595 528 813Annual Debt ServiceCoverage 1.1 1.1 1.3 1.4 1.6 1.5 1.5 1.5 1.6 1.6

Table 4: KEY FINANCIAL INDICAToRS

(Yuan Million)

Year Ended December 31 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Energy Sales (100 GWh) 330 365 398 435 474 509 545 583 624 668Average Price (fen/kWh) 24.50 28.99 32.93 37.17 41.23 47.90 55.76 58.52 58.79 64.94

SEPC's Own Avg. Price (fen/kWh) 20.10 25.71 29.94 34.47 38.65 45.17 53.00 54.48 53.26 60.84Purchased Power's Avg. Price (fen/kWh) 32.54 35.66 39.45 43.17 47.25 54.31 62.70 68.25 72.29 77.48

Opeating Revenue 8,082 10,590 13,118 16,151 19,549 24,394 30,384 34,090 36,671 43,378

Opeating Income 1,222 2,233 3,049 3,927 4,902 5,863 7,970 7,768 7,479 10,416Annual Capital Expenditure 3,243 3,940 5,026 6,119 6,920 6,431 7,535 9,176 10,249 9,650Rate Base 8,345 10,069 12,048 13,999 18,411 23,568 27,589 31,076 34,740 39,984Long-term Debt 11,147 13,027 15,408 18,281 20,958 22,266 24,481 27,689 30,431 32,152Debt Service 1,265 2,023 2,336 2,634 2,909 3,885 5,116 5,145 5,096 6,597Cash in Banks 1,228 792 537 317 193 595 1,259 1,854 2,381 3,194 LA

Rate of ReturnHistorically Valued Assets (X) 11.8 17.3 19.3 20.9 19.6 18.5 21.3 18.7 15.9 18.9Revalued Assets (%) 10.0 13.1 14.9 15.5 13.7 13.8 15.8 13.8 11.3 13.1

Self Financing Ratio (%) 7.1 0.0 10.0 15.0 20.0 25.0 30.0 30.0 30.0 30.0Operating Ratio (%) 85.0 78.9 76.8 75.7 74.9 76.0 73.8 77.2 79.6 76.0Debt/Total Capital (%) 59.4 59.6 59.4 59.0 57.5 54.3 51.5 50.4 49.2 46.3Debt Service Coverage 1.1 1.1 1.3 1.4 1.6 1.5 1.5 1.5 1.6 1.6

- 146 - ANNEX 6.3

MAJOR ASSUMPTIONS FOR SEPC'sFIANANCL PROJECTIONS

A. INcoMiE STATEMENT

1. Energy sales reflect SEPC's projected expansion program.

2. Tariffs are assumed to be adjusted so that the average revenues would beadequate for achieving the minimum financial performance targets.

3. General local inflation rates are assumed at 12 percent in 1994, 9 percentin 1995, 8 percent in 1996, 7.2 percent in 1997, 6.5 percent in 1998-99, and at 6 percentthereafter.

4. Fuel costs are based on 1993 actual price paid for coal and are assumed toincrease by 5 percent per year in real terms and also to escalate with the projected localinflation rates.

5. Purchased power is based on 1994 actual purchased price and is assumedto increase with the projected local inflations for electricity from Huanen, small hydroplants, local power plants, and both intergrid and local transfers. Purchase price forelectricity from power plants under Huaneng Corporation is based on "new plant, newprice policy" and derived by full recovery of operating cost and debt service requirement.Purchase price for electricity from Lrtan Corporation will be decided by the ongoing tariffstudy. 35 fen/kWh of 1994 price and increased with projected local inflation rates areassumed for projection purpose.

6. Operation and maintenance costs based on 1993 actual expenses includepayroll and materials are assumed to increase by 10 percent in real terms and escalate withprojected local inflation rates. Maintenance cost is assumed to increase per year by 2.5%of annual increase in the gross fixed assets.

7. Administration cost is based on SEPC's 1993 actual expenditure and isassumed to increase by 6 percent per year in real terms with projected local inflation rates.

8. Sales tax is assumed at the following percentage of each year's operatingrevenues:

- 147 - ANNEX 6.3

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

6.6 7.3 7.5 7.8 7.9 7.8 7.9 7.7 7.5 8.2

9. Depreciation is assumed to be 6 percent of gross fixed assets in operationat the beginning of the year.

10. Income tax is expected to be assessed at 33 percent of taxable income.

B. BALANCE SHEET

1. Inventories are assumed to increase per year by 3 percent of annual fixedassets additions.

2. Accounts receivable is assumed to decrease gradually from 64 days ofaverage collection period in 1994 to 30 days by 2002 onwards.

3. Accounts payable are assumed to decrease gradually from 88 days of costsfor fuel, purchased power, and sales tax in 1994 to 60 days in 1998.

4. Construction work-in-progress reflects the aggregate construction work-in-progress of SEPC's own construction units and other construction units work as contractorsfor SEPC.

5. Due to Government is expected to increase with the projected local inflationrates each year.

C. FUNDS FLOw STATEMENT

1. Distribution Improvement Special Fund represents the receipts ofconsumer connections and is assumed to increase by 10 percent per year based on 1993actual collection.

2. Distribution Improvements represent 90 percent of the year's receipts ofthe Distribution Improvement Special Fund.

- 148 - ANNEX 7.1

PROJECT ECONOMIC ANALYSIS

1. Economic analysis fcr the project included preparation and comparison ofa variety of scenarios for the expansion of the Sichuan Power Grid, calculation of a projectinternal rate of return, and relevant sensitivity analysis. The analysis was based on studiesand updates prepared by BERIWREP, in conjunction with SEPC, using BERIWREP'sGESP model for least-cost generation system planning. These studies are in the ProjectFile. Additional information also is available in the Staff Appraisal Report and relatingdocuments for the initial Ertan Hydroelectric Project (1991).

Shadow Pricing

2. All economic analysis was based on shadow prices. A discount rate of 12percent in real terms was used. For the least-cost analysis, the shadow foreign exchangerate (Y 9.0/$1.0) and official foreign exchange rate (Y 8.7/$1.0) at the time of appraisalwere used. Costs of imported goods and services were priced at their estimated financialcost (e.g., a conversion factor of 1.0 was used). Domestic costs were shadow priced ata standard conversion factor (SCF) of 0.97, except for certain key items for which specificconversion factors were used, most notably domestically produced power generatingequipment and coal. The shadow price for coal was established at Y 318/ton of coalequivalent or Y 273/ton of 6,000-kcal/kg raw coal. This is an export parity price,assuming an FOB price for 6,000-kcal/kg coal at Qinhuangdao of $35/ton and a shadowprice for railway transportation of 7.5 f/tkm.

Last-Cost Analysis

3. Least-cost analysis was based on the stochastic reliability criterion of lossof load probability (LOLP). Acceptable LOLP was set at no more than four days. Dueto the high proportion of hydropower in the Sichuan system, LOLP calculations were basedon typical dry hydrological conditions. Although a variety of other scenarios werecompleted initially, the principal least-cost system expansion scenarios in BERIWREP'sfinal report included:

(a) Program I. This was the least-cost expansion program, as outlined inAnnex 4.6. The transmission project included completion of three lines by2000, with a fourth line in 2003. Including only the incremental cost of theErtan project, the present value of the investment and operating cost of thisprogram, in 1994 prices, was Y 145.9 billion.

(b) Program II. This program was identical to Program I, except that all ofthe costs of the Ertan project, including sunk costs, were included. Thepresent value cost totaled Y 153.4 billion.

- 149 - ANNEX 7.1

(c) Program M. The Ertan project and the associated transmission projectwere excluded from this scenario, to assess the next best option. WithoutErtan, new thermal power plants in both the East Basin region and theDukou region near Ertan would be part of the least-cost expansion plan.The present value cost totaled Y 156.7 billion.

(d) Program IV. This program was identical to Program I, except that thefourth line in the transmission project would be completed in 2000. Thepresent value cost was slightly higher than for Program I, at Y 146.2billion.

- 150 - ANNEX8.1

SELECTED DOCUMENTS AND DATA AVAILABLEIN THE PROJECT FILE

Selected Reports and Studies Related to the Project

1. Project Report for The 500-kV Ertan Transmission System, Sichuan Electric PowerAdministration, March 1994.

2. The Environmental Impact Assessment Report for Sichuan Power TransmissionProject (Final Report), Sichuan Electric Power Company, September 1994.

3. Relocation Action Plan for Sichuan Power Transmission Project, Sichuan ElectricPower Company, August 1994.

4. Ertan Hydroelectric Project, Project Report for the World Bank, The Second StageLoan, Ertan Hydroelectric Development Corporation, Chendgu, April 1994.

5. Procurement Schedule and Construction Organization, Sichuan Electric PowerAdministration, June 1994.

6. Economic Evaluation of Ertan Transmission Project, Beijing Economic ResearchInstitute of Water Resources and Electric Power (BERIWREP), November 1993.

7. The Evaluation Report on Consultants' Proposals, SEPC, April 1993.

8. Financial Analysis of Ertan Transmission Project, BERIWREP, April 1994.

Selected Worksheets

1. SEPC Financial Forecast

2. Cost Tables

3. Implementation Schedules and Charts

- 151 -

CHARTS

- 152 -

- 153 - CHART 1

CHINASICHUAN POWER TRANSMISSION PROJECT

Organization Chart of MOEP

Ministrv of Electnc Power

|Minster Shi Dazhen

Vice Ministers: Zhao Xizheng Zha Keming Lu Yanchang Wang Shucfeng

Ch nis Electnc:ty Councii- -- -

MOEP's Intemal Organzat7ion] |Groups & Provincial Companies Provincial CompaniesM: OEP s Intemal Organization | JUnder Auspices of MOEP under Groups

-Generai Office Jilin Power Company- OeptofPlanning Electnc PowerGroup Heilongliang Power Company

D ept. ot Planning- Dept. of Policies & Legislation

Dept. of Economical Regulation Shanxi Power Company& Control of State Property - Hebei Power Company

- Dept. of Personnel & Education 4Electnc Power Group ] -inner Mongolia Power CompanyD Oept. ot Intemational Cooperation - aDept. ot Science & TechnologyDept. of Safery & Production

Coordination Shanghai Power Company-DepL of Capital Construcbon East China -Jiangsu Power Company

Coorcination Electnc Power Gioup -JAnhui Power CompanyD ept. of Hydropower Development AZhua Power Company

& Rural Elecctsnficabon Zhejiang Power Company

Hubi PwerCompany|MOEP's Affiliated Enterpnses & Institutions ue PerCentral China - Henan Power Company |

- Nabonal Power Dispatching & Electnc Power Group - Hunan Power Company ICommunication Center -Jiangxi Power Company

- Infom,ation Center- Logistics Bureau

Planning Design & Engineenng lnstitutses Gansu Power Company- Researcn Institutes QNorthwest -Ginghai Power Company- Uniersities & College Electnc Power Group -Ningxia Power Company- Specialized Corps.- Scholarly Societies & Associabons i P

-Huaneng Group, Electnc Power Enterpnses

-South China Electnc Power Joint Venture Corporation |

-Shandong Power Co. |-Fujian Power Co. |-Sichuan Power Co. Provincial Companies

Guangxi Power Co. non-directly under MOEP _Yunnan Power Co.

EGuizhou Power Co. Guangdong Power Co.Hainan Power Co.Xizang Industry & Power Admin.

EKNV56702F

CIINASICHIlAN POwVER TRANSMISSION PROJECT

Sichuan Electric Power Company ISEPCIOrganization Chart

GeneralManager

Deputy Depuly DeputyGtnL Manager Cbhid Enginecr CCcf Accounlan Gn. Manager Ccn. Manager GCen ManagerPower Prodlct_o Finance Planning & Int'l -apitsl Construclio

20

2. -~~~~~~~~~~1 l. W *2-4 ~~~~~~ *1

U~YC 1 -. a 0 -~~~~~~~

aX at 2

a9itii 00 1il

- 155 - CHART 3

m Ficid Ornice of Design.- i'lalllllllg Dep:lrlmenl | |Institute

LI - Constrtiction Dcpa3rt entContracting

_ 4 ~~~~~~~~Comprehensive MfTairs|

_ H Loc~~~~~~~~~~al Procurement |Procurcnicnt Dcpartmnctic

ntriational Procurement

Local Finance

Fesgn Finance

z eJ Construction MnnagemcrptO s _ ~~~~~~~~~Conlsultanlt omce

<~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Z Z RI'e egucatinagem7ent

_ _ ~~~~~~~~~~~~Genlerntl 0mce W Forcign fars

v: ;t ~~~~~~~~~~~~~~~~~~~~~~Legal Affrairs

_ i ~~~~~~~~~~~~~~~~~~~~~Files hlanagement

Quality Assuiraiice . , m ~~~Departmlent

Cd ~ ~ ~ ~ ~ ~ - Operation

| P roduclon rrep rllion LTraining

_manuals di ReguLations

CHART 4CHINA

SICHUAN POWER TRANSMISSION PROJECTImplementation Schedule

(a) Transmission Lines (Table 1)

Description 1994 1995 1996 1997 1998 1999 2000

Procurement (ICB)

Construction Preparation

. z jo Land Acquisition & Relocation _ _ _ _ _ _ _ _00Z Civil Works and Installation _ _ _ _ _ _ _ _ _

wi Test and Acceptance

Procurement (ICB)

S Construction Preparation

o E Land Acquisition & Relocation _ _ _ _ _ _ .

Civil Works and Installation I I I- IIL

Test and Acceptance

Procufement ([CB)C0 Construction Pfeparation

* 60 Land Acquisition & Relocation---------

2 11 Civil Works and Installation- -- - ----

Test and Acceptance

rConstruction Preparation

E Land Acquisition &Relocationmi - m

Civil Works and Installation m - -

LTTest and Acceptance>

EKIW56702c

CHINA CHART 4SICHUAN POWER TRANSMISSION PROJECT

Implementation Schedule(a) Transmission Lines (Table 2)

Description 1994 1995 1996 1997 1998 1999 2000

I- Construction Preparalion

c Land Acquisition & Relocalion

c,Z lo Civil Works and Installation

o Test and Acceptance _____________________rC)

C:

is ~~C-onst ruction P re paratlion__C:

c ~~~Construction Preparation__

0," Land Acquisition & Relocation _ _ _ _ _ _

o Z Civil Works and Installation _ _ _ _ _ _0 0CY) Test and Acceptance

oZ O Construction Preparation

- b Land Acquisition & Relocation _ _ _ + + -C-) 60

0)z Civil Works and Installation-- ----.C *-

Tcest and Acceptance

V Construction Preparation

0 CYJ Land Acquisition & Relocalion------

aZ 0) Civil Works and Installation- ---0c

Test and Acceptance

cm:) ~Construction Preparation

Land Acquisition & Relocation-------

o CS Civil Works and installation---- --

Test and Acceptance

EKJW567O2B

- 8SI -

MAP SECTION

IBRD 25932R

99: 'r,9' . < 104' C H I N A "°C SICHUAN POWER TRANSMISSION PROJECT

CONSTRUCTION EXISTING FUTURE PROJECT

. ESI - HYDRO POWER PLANTSS _ ! h * f THERmAL POWER PLANTS

A 500kV SUBSTAT ONS

0 ~< @ SHUNT REACTORS

CONVERTER STATIONS

-- . . - " \ ^ 500kV AC TRANSMISSION LINES

-A ~\\ , <, * .s 9- - 400 -750kV DC TRANSMISSION LINES

Jiongyou *

-' ~~~~~~~To;pihyi

.50 , 00 , A-'

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RIVERS

H- ,- . / Heenko.i t PROVINCE CAPITAL

Xezfhtoog S -- c PREFECTURE BOUNDARIES

PROVINCE BOUNDAR ES

INTERNATIONAL BOUNDARIES

OCCOBER 994

I