ELECTRICITY BILL

Order for Second Reading read.

The Acting Minister for Trade and Industry (Mr Peter Chen): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

Sir, as I have explained during the Second Reading of the Energy Market Authority of Singapore Bill, my Ministry will move for the enactment of three industry-specific legislation before the House today. The first industry-specific legislation is the Electricity Bill. This Bill designates the Energy Market Authority of Singapore (EMA) as the regulator of the electricity industry. It empowers the EMA to:

(a) set up a competitive industry structure,

(b) perform licensing and regulatory functions,

(c) set and enforce performance standards for and regulate prices charged by licensed monopolies, and

(d) set and enforce safety standards and code of practices for the electricity industry.

Evolving towards a Competitive Energy Market

Sir, all over the world, electricity markets are being liberalised and made more competitive. The experience in other electricity markets that had undergone deregulation has been positive, yielding higher efficiency, greater industry innovation, wider choice and better service to consumers. Electricity markets have been successfully deregulated in United Kingdom, Australia, New Zealand, Europe and in various states in the United States.

The setback in California was unfortunate. The Californian market failed because it had not been properly deregulated. It fixed the price consumers pay for electricity. When electricity wholesale prices increased, its electricity retailers ended up buying electricity at a price higher than what they were allowed to recover from consumers. This pushed the retailers towards insolvency and generation companies, not sure of getting paid, were subsequently reluctant to sell electricity to the Californian retailers. In addition, a combination of other factors such as a surge in electricity demand because of the economic boom and problems in getting new power plants approved created a situation where generation capacity was outstripped by demand. Thus, the lights went out.

We have kept pace with these global developments. We took the first step towards a liberalised market in 1995 by corporatising the electricity and gas undertakings of the PUB. We established an electricity wholesale market in 1998.

We have benefited from these initial steps. The wholesale market introduced competition in the generation sector initially between PowerSeraya, PowerSenoko and Tuas Power. The liberalised generation market attracted a new generator, SembCorp Cogen who entered the scene using piped natural gas as a fuel source for power. Natural gas is not only cleaner, it is also more efficient than fuel oil which we currently use. With the availability of natural gas, the liberalised market has driven the generation companies to rethink their strategies in order to stay competitive.

However, our current market structure includes a dominant Singapore Power that is actively engaged in all aspects of the electricity market. New energy companies are not prepared to come in to compete with Singapore Power which is dominant in the generation sector and is also the monopoly grid owner.

Further Restructuring to Enhance Competition

We have therefore decided to push ahead with further market liberalisation to derive the full benefits of competition. By 1st April, the generation companies, PowerSeraya and PowerSenoko, will be divested out of Singapore Power. These two companies together with Tuas Power and SembCorp Cogen will then compete to sell electricity. A fifth company will be starting up later this year and two other generation companies are currently planning to set up generation plants in Singapore. Hence, we will have more players competing in the generation sector.

We will open more customers to retail competition this year starting with the large industrial users. By end of this year, we expect to have about 70% to 80% of the electricity market opened to retail competition. The households and small consumers will be opened to competitive retailers by 2003. The EMA will run programmes to inform and help prepare all customers who are being opened to retail competition.

When the market opens later this year, Singapore Power will confine itself to owning, developing, maintaining and providing services related to the natural monopolies in the industry, namely, the electricity and gas grids. The company would have relinquished all commercial interests in the competitive parts of the electricity market. It will then be attractive for new entrants to enter and compete in the electricity and gas industries.

Key Features of the Bill

Mr Speaker, Sir, the Electricity Bill before the House is to create a competitive market framework for the electricity industry. It will also provide for the safety, technical and economic regulation of the generation, transmission, supply and use of electricity and for other matters connected to it.

I will now address the key provisions of the Bill.

Clause 3 provides for the EMA to administer the Bill and to exercise its functions and duties.

Control Mechanism and Protection of Consumers' Interest

Clauses 6, 7, 13 and 14 confer powers of licensing to the EMA. The EMA will license generation, transmission, retailing and any other electricity business activities and deal with all matters relating to licensing (eg, procedures for the application for an electricity licence, an extension or an exemption and matters to be considered in determining whether to grant or to extend an electricity licence). The EMA will, through licensing, achieve the commercial separation of the natural monopolies from the competitive parts of the industry and hence pave the way for competition to set in.

If an electricity licensee contravenes any condition of licence, any provision of the relevant legislation, or any directions issued by the EMA, the EMA can require the licensee to provide a performance bond and impose a financial penalty not exceeding 10% of the annual turnover of the licensee's licensed business, or an amount not exceeding $1 million, whichever is higher.

The EMA may also revoke or suspend the licence if the licensee fails to rectify any contravention.

To ensure the industry has clear guidelines to work with, clauses 16 and 46 empower the EMA to issue or approve codes of practice and other standards of performance for the regulation of activities and conduct in the electricity industry. They also allow the EMA to make the initial rules in consultation with industry for establishing and governing the electricity market. The Bill sets out the governance process for subsequent changes to the market rules and for the rules to be published in such manner as will ensure adequate publicity.

The EMA is empowered under clause 41 to, with the approval of the Minister, deem categories of consumers contestable. This will enable the EMA to open consumers to contestability in phases between this year and the year 2003.

Special Power to Manage Licensees

Clauses 28 to 30 provide for situations in which public interests are put at risk. Under specific conditions relating to insolvency of licensees, security and reliability of supply or a public emergency, the Minister is empowered to make a special administration order directing that the affairs, business and property of an electricity licensee be managed directly or indirectly by the EMA. The interests of shareholders and creditors of the licensee have to be protected in the execution of such an order. Anti-competition Provisions

The Bill empowers EMA to prohibit anti-competitive practices including restrictions on mergers and acquisitions. To ensure we have a competitive market, it will be necessary for all companies in the electricity market to trade in a way that is not anti-competitive as this will otherwise distort the market to the detriment of consumers. This principle must apply regardless of when anti-competitive practices if any, were put in place. The anti-competition provisions in Part VII (clauses 50 to 63) of the Bill will therefore have retrospective effect. Where the EMA finds that a person has acted in an anti-competitive manner, the EMA can give direction on the cessation of such conduct and impose a financial penalty on the person. The person, if aggrieved, can appeal to an Appeal Panel.

Appeal Process

There are two kinds of appeals provided for in the Bill. For grievances relating to market regulation, the aggrieved party may have their appeals heard by an Appeal Panel appointed by the Minister. These will include matters on modification of licence conditions and application of the anti-competition provisions as stipulated under clause 12 and Part VII of the Bill. The decision of the Panel will be final. Clauses 64 to 66 provide for the establishment, composition and powers of the Appeal Panel.

For other types of grievances, eg, refusal to grant a licence and matters relating to technical regulation, the aggrieved party may appeal to the Minister whose decision is final. These are set out in clauses 15 and 98.

Electrical Installations, Cable Detection and Electrical Workers

The relevant provisions for the licensing of electrical workers under the Electrical Workers and Contractors Licensing Act are subsumed, with modifications, under Part IX (clauses 67 to 82) of the Bill. With the modifications, the licensing of electrical contractors will be discontinued and regulation of electrical works will be done through the licensing of electrical workers. The Electrical Workers and Contractors Licensing Act will be repealed.

Conclusion

Mr Speaker, Sir, the Electricity Bill sets out a broad framework that supports a competitive electricity industry. Under the new regime, market forces are expected to exert pressure on market participants to offer greater choice, better product innovation and service quality at competitive prices. The new regime will be friendly to and will not unduly impede the introduction of new technology, such as micro-power or distributed generation nearer to the point of use. It also allows market participants to play a greater role in formulating market rules and codes of practice. This would enable EMA to regulate the industry with a light-handed approach, while ensuring that energy solutions would be market-driven without compromising security and reliability of the electricity system.

Sir, I beg to move.

Question proposed.

Mrs Lim Hwee Hua: Sir, I rise to support the Electricity Bill and wish to confine my comments briefly to the scope of competition to be afforded by the proposed framework. Firstly, few generation companies. As some colleagues have already raised, the scenario post-liberalisation will have a relatively small number of generation companies or Gencos. Moreover, the Government has stated an intention to divest the three big Gencos, namely, PowerSeraya, PowerSenoko and Tuas Power, which will generate the bulk of our needs. No foreign ownership limit will be imposed. In this context, how would the Minister introduce meaningful competition? How will the Minister ensure that a cartel-like behaviour, say, in setting full prices, will not develop to the detriment of suppliers and, ultimately, consumers? As is the allegation against oil companies supplying petrol to consumers which was referred to earlier on, does this structure lend itself to such anti-competition tendency?

Secondly, the role of Power Supply. As I understand, Sir, the role of the incumbent Power Supply will be limited to the provision of billing and other customer services. Sir, while this is meant to bring economies of scale for consumers as a whole, it can also be an impediment to the bundling of services by potential retailers. For example, telcos who do a fair bit of household-related billing may not find enough incentives to compete initially as they have to deal through Power Supply. Therefore, I would like to ask the Minister whether there is an intention for the role to be played by Power Supply to be a permanent feature of the electricity market.

Mr Inderjit Singh: Sir, first of all, I would like to commend the Ministry for drafting such a comprehensive Bill. I went through the whole Bill and must say that many of the issues have been well covered.

The thing that really needs to happen is that we create true competition for those areas which are contestable, that is, the power generation and the electricity retail parts of the whole value chain. I raised my concerns earlier about the transmission and distribution of electricity which is left to Singapore Power to manage. One issue which I have is the speed of changes in the initial phase. And if I got it right, Singapore Power will still be responsible for distribution as well as certain parts of retail of electricity. This I feel will put other retailers at a disadvantage and may just slow down the opening up of the electricity industry. The prudent thing to do is right from the beginning to spin off the two entities into two separate companies with different management control. Mr Low Thia Khiang earlier on brought up the issue of SingTel managing the fixed lines and therefore they have the perpetual advantage over other fixed line telephone operators. And this may result, again, in the electricity distribution sector if we are not careful in separating the roles.

One issue I fear is also that the Ministry will end up giving licences only to Government-linked companies and thus not achieve the objective of true liberalisation. So the new Genco that came into the picture is SembCorp which is actually a GLC too. I would like to ask the Acting Minister whether there are any true private companies which have shown interest to enter our energy market. How many players does the Ministry expect in the short and long term and how many can our market really support? The number of players will no doubt determine the cost of electricity as we move forward. Another fear I have on the expectations of cheaper electricity as a result of liberalisation is whether the various generators and retailers of electricity can really differentiate to the point that they can really offer cheaper electricity to consumers. If they are not able to do so and resort to price wars to win customers, will they be able to sustain themselves in the long run by earning thin or no margins at all? One thing we must realise is that Singapore is a market which is too small for many of us to actually attract even foreign interest in our energy market. We must be prepared that our companies must be able and must be allowed to supply electricity to other countries as well as to import electricity from other countries into Singapore to provide everyone with a bigger market to compete in. In this respect, what is the Ministry's view of allowing retailers to bring electricity from our neighbouring countries, including the fact that some day, some of these may be generated by nuclear means.

Sir, I would like to touch on a few specific issues on the Bill. In Part II, clause 3(3)(d) of the Bill, it mentions that prices of licensees have to be controlled. To do so, the authority will end up limiting the margins the licensees will be able to achieve. Because we will be going to have multiple sources of electricity, not all of which will be fully controlled by the Government, we will have to ensure that there is an overbooking situation where the Government will require a higher supply than the demand at any one time, just in case some of the licensees fail to deliver electricity reliability. This overbooking situation will result in higher cost for the licensees and, hence, higher prices to the consumers. How does the Ministry hope to ensure there is a good balance of demand and supply?

Clause 5(2) of the Bill allows the authority to disclose information of suppliers of electricity to third parties if the authority feels that the information would not cause detriment to the supplier. I feel that this clause should be amended to also get the consent of the suppliers before the authority releases any information, unless there is a national security issue involved. This should be the case because the authority would never be in a position to fully determine the impact of such information disclosure on the business of the supplier, especially if the information goes to competition. This is an important issue if we really want to attract private sector companies to come into this field.

Clause 9(7) mentions the fees payable by the licensees. Can the Minister share with the House the quantum or range of fees we expect to impose? I also feel that there is no need to license the transmission part, as I mentioned earlier, as this is not going to be subjected to competition anyway.

Sir, clause 24 allows the market support licensee to disconnect the supply of electricity, including those of domestic users. I would like to suggest that we add some safeguards in the Bill against possible abuse by some licensees who may become too quick to disconnect supplies for whatever reasons. And this may cause inconveniences to our residents.

Finally, Sir, I would like to touch on the issue of reliability of electricity supply. I did bring this issue up during the Committee of Supply and many Members brought up the issue of the Californian example. Specifically, we must put in place sufficient measures to hold licensees responsible and accountable when there are situations of recurrent power dips and power failures. I hope this move to liberalise the energy markets will not result in the drop of the quality and reliability of electricity supply.

In conclusion, Sir, I feel that the liberalisation of electricity is a significant milestone in Singapore's development and it will change the way we do things and change the mindsets about how utilities are supplied. I personally think that this is a move in the right direction, especially if we can ensure true market competition. I am excited about this move and look forward to the successful implementation of the very aggressive plans that the Ministry has laid out.

Sir, with that, I support the Bill.

Mr Peter Chen: Sir, allow me to thank the two Members, Mr Inderjit Singh and Mrs Lim Hwee Hua, for their support of the Bill. There are again a number of issues raised and some of them have to do with the continuing role of Singapore Power for the distribution as well as the retail of electricity in the initial phase. Opening retail to competition is a complicated process and it would take time. This has to be done in phases as the system has to be prepared. For example, meters that are able to register the consumption every half hourly will first have to be installed.

About 100 large customers are already contestable and, later this year, we will open up in phases up to 70% or 80% of the electricity market to retail competition. This will number about 10,000 customers who are mainly the large industrial and commercial customers. Power Grid will indeed not be retailing to these contestable customers. The remaining customers, mainly households, will be opened up by 2003, after which, Power Grid will completely exit from retailing.

Remarks have also been made whether or not there are truly private companies involved, and are they involved and also interested in entering our energy market. There are already two non-GLC private companies issued with generation licences, viz, ExxonMobil and Island Power Company. In the retail sector, Tractabel was granted a retail licence.

A common refrain on this subject in this House has been how would electricity consumers benefit from the electricity industry's restructuring, and how would the liberalisation of the market lead to cheaper electricity. We must say that the benefits would be the benefits brought about through competition - choice of supply, competitive pricing, including, most importantly, innovative pricing. We have received feedback from several MNCs, such as Shell and Sumitomo, that peak and off-peak tariffs have a wider spread in liberalised markets overseas than there are here. This allows users, especially large users, to plan their work schedules to benefit from the reduced off-peak prices. We expect competition to create this type of benefits.

Mrs Lim also wanted to know how would consumers enjoy different service packages and products. This is really up to the ingenuity of the retailers. Experience, again, from other countries, shows that electricity can be bundled with other products, such as appliances. Retailers could also offer electricity packages that are customised to the customers' needs at different levels of pricing. This includes lower off-peak rates, power management schemes, bundling of electricity with other services like telecommunications, and shielding its customers from fluctuations in electricity prices with financial hedging instruments. The competitive market will drive such innovations.

Questions and concerns have also been asked and expressed whether there would be enough players in the market, and how are we to ensure that there is no collusion as our market may be too small. I have already explained that our market is not too small. Are we prepared to import and export electricity? Our generation capacity is 6.6 gigawatts today. Demand is growing by 4%-6% per annum. In 10 years, our system will reach 10 gigawatts. This is not a small system. New Zealand and the State of Victoria in Australia liberalised when their capacity was about 7 gigawatts each. Our market is thus of a sufficient size to allow for competition and attract more players, local and foreign. For this to occur, EMA will have to ensure a level playing field and prevent anti-competitive behaviour, such as collusion, which the Member has mentioned. Like other markets that have liberalised, we will allow electricity to be imported or exported, so long as the system's security is not compromised.

It has also been asked how the licence fees are determined. The licence fees will be set to enable EMA to recover its costs of administering this industry legislation.

There was also concern expressed about quality. Will the restructuring exacerbate the problem of power dips, and should Singapore Power not be made liable for causing the dips? Mr Inderjit Singh again expressed concern about this problem, as he has done so in the Committee of Supply on 8th March. We had explained the slew of measures that have been taken to reduce power dips. As for liability, it is a commercial matter between Singapore Power and the affected companies.

There is also concern about how prices would be fixed and what the formula is. The current tariffs comprise a fuel component and a non-fuel component. At the moment, we allow Singapore Power to set the non-fuel tariff component at levels which allow them to earn a 7%-8% return on total assets. A price cap is applied to subsequent adjustments to this non-fuel tariff component. The price cap depends on the rate of inflation and productivity improvements, ie, the consumer price index minus a factor of "X". In other words, the non-fuel tariff component cannot be increased by more than the inflation rate minus an imposed productivity improvement factor which Singapore Power has to deliver and pass through to consumers. As to the fuel component, of course we buy our fuel from global markets, with no control over fuel prices. The pricing formula, therefore, allows changes in fuel prices to pass through but, as we mentioned several times, in order to alleviate hardship for those who may not be able to afford, the Government has already given a number of assistance schemes.

Mr Inderjit Singh also refers to clause 5(2) of the Bill and suggests that consent of suppliers be obtained before any information is released. The Bill does allow EMA to disclose information of suppliers of electricity to third parties, if EMA feels that the information would not cause detriment to the suppliers. In fact, this will require EMA to check with the suppliers before divulging the information.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Mr Peter Chen].

Bill considered in Committee.

[Mr Speaker in the Chair]

Clause 1 ordered to stand part of the Bill.

Clause 2 -

Mr Peter Chen: Sir, I beg to move,

In page 10, line 14, to leave out "or ancillary services.", and insert ", ancillary services or any other electricity related products or services.".

The Electricity Bill defines the "wholesale electricity market" as an electricity market established by the market rules for the trading of electricity or ancillary services. We anticipate that there will be new electricity-related products and services created over time, which will add value to our market and which we would like to encourage. In some cases, we may need to set the framework to nurture the growth of such products. To ensure the EMA is empowered to promote such new products and services as our market evolves, we need to expand the definition of the "wholesale electricity market" to include such electricity-related products and services.

Amendment agreed to.

Clause 2, as amended, ordered to stand part of the Bill.

Clauses 3 to 104 inclusive ordered to stand part of the Bill.

Clause 105 -

Amendment made:

In page 83, after line 23, to insert -

"(3) The Electrical Workers and Contractors Licensing Act (Cap. 89) and any subsidiary legislation made thereunder shall be administered by the Energy Market Authority of Singapore, and any references to the Board in that Act and its subsidiary legislation shall be read as references to that Authority.". - [Mr Peter Chen].

Clause 105, as amended, ordered to stand part of the Bill.

Bill reported with amendments; read a Third time and passed.