Download The Problems of Price Regulatory Constraint within Chinese Piping Gas Companies

The Problems of Price Regulatory Constraint within Chinese Piping
Gas Companies
Chenyin,
School of Finance and Accounting,Zhejiang Gongshang University, P.R. China, 310018
Abstract: Chinese piping gas companies established by local governments are kinds of state-owned big
and medium-sized business enterprises, Because gas are subject to the maintenance of people's
livelihood and society development, Therefore, gas price adjustment will raise doubts and query of
customers. On the base of practice research of gas public utilities enterprises, the author will give the
necessary suggestions and counterplan about the reform strategy of price adjustment mechanic of
Chinese piping gas companies.
Key word: gas price regulatory constraint strategy proposed
1 Introduction
Piping gas companies are the state-owed public utility enterprises in China, its products primarily
include: natural gas, oil gas, artificial coal gas and liquefied petroleum, and oil gas, artificial coal gas are
general called as coal gas. Despite that different gas has the different Btu or came from the different
upper stream enterprise, those gas is doomed to pass through the underground piping to the final
consumers including residential and business customers. Piping gas companies together with electric
power, water, public buses, and telecom, petroleum enterprises are so called the state-owed monopolize
enterprises. The product price and additional charges are governed by a regulatory constraint system.
Piping gas companies are seemed to have taken the advantage of nature and administration
monopoly. Compared with other state-owned business enterprises invested by central government with a
huge sum of working capital, get much benefit from monopoly price or charge received, piping gas
companies completely have never earned huge profits and had a better capability to pay higher wages or
salary for its employees. According to the history financial records, there is usually loss or deficiency
which should be covered by public finance funds of government. In reality, piping gas companies have
some special characteristics, such as products replaceable, price or charge various in different cities,
underground piping network limited in the local area, and its products are subject to the maintenance of
people's livelihood and society development, Once temporary selling gas price or charge adjustment
appears, doubts and query from residential customers they met are never fewer than the other richer
state-owned monopoly business enterprises. But to some scholars, problems of the price adjustment of
water, electricity, oil maybe more attractive to them for reasons of bigger effective scope, huge amount
of funds concerned. Therefore, there is only few research had be done before, but without this research,
it will be difficult to understand the advantage and disadvantage of current price regulatory constraint
system of whole public business enterprise. So, it’s worth for us studying based on the Public economics
theories.
2 Fundamental public economics theories and system background for gas price
regulatory constraint
Because that gas in underground piping is a kind of resource which relate to the people’ living and
has the characteristic of public products. in the international market, whatever the ownership of piping
gas company belongs to the government or private , gas price are always under the control of
government for the reasons to keep an eye toward aims of government concerned: Decline cost, lower
price, satisfy the society needs, and increase employment. How to set gas price and additional charge to
distribution facilities more reasonable and objective? Based on the international experiences, there had
been two kinds of model for regulatory constraint, the first is the mode of United State government used
which is called American price regulatory constraint mode based on return on investment, which is
stated as: R( p q)= C+ S, where R is income of a company, and p is a price of gas, q is quantity , C is the
cost, S represent the ratio of return on investment controlled by government. The second price mode
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adopted by British government, the function is showed: RPI- X, where RPI represents the national retail
price index , X is the percentages of efficiency improvement for a certain period which controlled by
government ( Sara Connolly, 2003 ).
As we know, China is a socialist country, government was used to invest at some industries such as
public utilities units, where ventures is big, the return will be taken a long period of time. Before 1980s,
the infrastructure of Chinese cities were behind the schedule, There was a few of cities which had piping
the coal gas company, customers the coal gas were not too much, So gas selling price were fixed below
the cost by local government whom gave price subsidy continuously. In 1990s, the reforms of
state-owned business enterprises become the main point of transforms the economic system. Chinese
government began to focus its centre of gravity on marketing improvement and on reform of the price
regulatory constraint system for public enterprises in an exploratory way. Because of special national
condition, the price controlling of piping gas business enterprises usually belong to local government,
Central government makes a point of the establishment of law and supervising. On December 29, in
1993, the price law of People Republic of China passed by the National Peoples Congress which made
the norm provision for price constraint, and the scope of regulatory constraint to nature monopoly price
setting. Later, a provision of regulatory constraint for charges ( ED) was then published in order to
make the national regulatory constraint for price or charge matching with principles of Fair, cost and
efficiency. On December in 2005, aim at price of the natural gas, liquefaction gas , national
development the reformation committee announced a statement for price controlling by prescribing the
highest selling gas price of downstream. its seem that piping gas price controlling still is considered on
the basis of people's bearing the ability and the cost of construction of distribution facilities covered.
Therefore, the welfare nature of piping gas price still has to be reserved. And the loss of gas piping
companies had to be made up by the government.
Along with the reform of country’ economy goes into deepen and the process of cities and town
reconstructed became much more accelerant, limited public finance of local government is deemed not
enough to satisfied the needs of new venture, and deficiency of piping gas enterprise which must be
compensated. So the financing of public business enterprises is forced to enter the free market, the
strength of regulatory constraint on gas price appears to be weakening. In these situation, rise in price
and additional charges had become the main means for the public business enterprise to make up the
loss in businesses. On the opposite, residential and business customers had to suffer the result of rising
in gas price, customers began to blame, to suspect that how much is result from political loss, how much
result from management inefficiencies of company itself. But, piping gas companies always
unwillingly to let information be published. In the condition of the information dissymmetry, this will
has not any advantage in the establishing of harmonious society. Underneath, this article will analyze
the shortage of the government regulatory constraint for gas price.
3. The present problems of piping gas price regulatory constraint and analysis
3.1 The problems within of price of piping gas
Along with the economic development, each city has had the circumstance adjustment. And parts
of piping gas companies had already to hold even. But, there is still left manifold price or charge
problem for a same gas product in the same economic district; therefore the cost principle encountered
the faintness. Its concrete data is represented in following table 1 :
Table 1 comparison of piping gas price for main cities in China
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residential nature gas price
Yuan/cubic metre
residential coal gas price
Yuan/ cubic metre
3
2.5
2
1.5
1
0.5
0
n
n
i
g
u
n
n
n
g
n
u
g
n
o
n
g
i
i
u
in nji nya lia rbi chu ina gda yua uha Zho muq min ngd Jin gha zho han efe
j
i
e Da ae ng
H
W ng lu un he an an ng nc
J in ai
a
a Wu
N Sh Ha Na
T
C
Q
K
Be Ti Sh
H ha
Gu
C
at the beginning of year 2006
Table 1 provides the two groups of data, where the group of price higher is price of natural gas in
main cities of China, because of the calorific value of natural gas is higher than coal gas, generally in
3
6500-8600 Kcal / m , a kcal equal to 3.986 Btu. And calorific value of the coal gas is at 3500
3
0
0
－ 6500
Kcal / m ( on the standard condition of 101.325kpa and 20 .C or 0 .C ), and the difference of
calorific value is between 1.3(6500/3500) to 1.8(8600/6500). Table 1 also shows that price of Coal gas
is from the lowest RMB0.75yuan per m
3
3
/to the highest RMB2.5 Yuan/ m , even in the cities of same
3
economic district, the price difference still seemed so clear, where price of oil gas is 2.2/ m in
3
3
Guangzhou, its calorific value / m is 6500 Kcal. In Shanghai, price of oil gas is only 1.05Yuan/ m , its
calorific value is at 4100 Kcal. Gas price in Guangzhou is obvious still higher than Shanghai. But to the
natural gas, price seemed a at RMBb1.2 Yuan to 2.5Yuan, even if consider the difference of calorific
value or heat effect of the gas, the price difference is still obvious. Hence this will do raises suspicion
about reasonable of cost published by piping gas companies from locality consumer, and give an unfair
impressions (www.stats.gov.cn).
3.2 The nature of additional charge is unclear; in addition fee problem seemed serious
The price of piping gas constitutes two parts in large part of Chinese cities. one part is the selling
price, another is the additional charge that must be paid which is informed to offset construction of
distribution facilities of gas piping companies, before customers can consume piping gas product, the
amount referred as install the fee, engineering fee, set up fee, fee for break through act, is at
RMB600-3500 Yuan for per register. At first, charges or fees were taken was the name of administration
charge, later, it became pure charge of gas piping companies. The amount of charge has characteristics
of big amount, scope widen, the long-term taken. The concrete data is to show on descend table 2:
Table 2
comparison of piping gas additional charge for main cities in China
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addtionalcharge of
piping gas (yuan/family)
4000
3500
3000
2500
2000
1500
1000
500
0
an ou qi ng ng ai ou ng
an ao an
ei
ng in an an ng un
ji anj eny ali rbi gch Jin ngd iyu Wuh nzh umu nmi nji ngh gzh cha Hef
i
D ae
a
l Ku Na ha an an
n
Qi Ta
Be Ti Sh
Gu Wu
S
H
N
H Cha
at the beginning of year 2006
After the examination of table 2, it is clear that besides Peking, Tienjin, residential customers in the
rest main cities have had to pay the charge before they have the piping gas usage, Among them , the
additional charges for the residential customers in Guangzhou' is the tallest, RMB3000
3500 Yuan
per family; Dalian, Changchun and Nanchang, charging of cities belong to the second floor class; about
RMB3000 Yuan per family, the additional charge in the rest main cities are at RMB600-2500 Yuan per
family. According to the principles about change setting published by National Development the
Reformation Committee statistic data of GDP, income of local public finance and average income of
resident are considered to be objective for evaluating cost coverage and social purchasing ability. For
the income of local government public finance reflects the government's ability to subsidize loss of
public business enterprises, GDP presents the local changes of economy and its revitalizing, average
income for resident reflects purchasing the ability of people in the district. because that in our country,
piping gas network only be limited in the cities now , therefore, data of purchase the ability adopted the
sample of residents in main cities, In order to analysis rationality for the additional charge ,
－
ρ xy =
cov( x, y )
σ xσ y
cov( x, y ) =
model
were used , where − 1 ≤ σ xy ≤ 1,
1 n
∑ ( x j − σ x )( y j − σ y )
n j =1
， the results will measure the relevance of economic index
and additional charge of gas usage. Data of 2003 and 2005 are used. In 2003 : Beta
βi
about
β i about local public finance income is
those β i are relatively -0.09722,-0.172959
additional charge and average income of resident is -0.29414,
-0.44302, β i about GDP coefficient is-0.36798; In 2005,
and-0.149898, it means that there is a few of relativity between main economic index and additional
charge of piping gas usage in main Chinese cities (2006, Chenyin).
Further more, because of the piping gas additional charge has been taken for a long time,
accumulated amount received by piping gas companies is huge, Based on the financial statement of the
companies, a large sum of money had been used for fixed assets purchasing or piping network
construction. It imply that amount of piping gas additional charge received had already been an
important funds source of investment in every local piping gas business enterprises. Total amount for
some smaller companies has already get over RMB ten million Yuan, to some large piping gas
companies, quantity is astonished, exceed more than RMB ten hundred millions Yuan.
As for the application of such a huge sum of the funds, there used to have few detailed information
published in times going, based on investigation of questionnaire to piping gas companies in 2005,
funds application mostly can be induced below: for the tube network reconstruction, engineering
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expenditure, paid for the liabilities. It is so clear that money did not resemble to is original intention
used for the piping to enter into the house, but to be investment fund for the downtown’ piping
developments, to pay for the engineering the expenditure, and the interest expenditure of liabilities. Also
it can be say, gas piping gas network were financed by consumers who paid the additional charge.
But the bookkeeping of piping gas companies for year after year recorded that amount in an wrong
account, For example, Before 93 year or Chinese accountancy reform, at first , the amount received
was as a credit ‘long-term liabilities’ , after installation into the consumer’ house completed , and that
amount then be posted into the ‘capital reserve fund ’account, the nature of funds ownership become
unclearly, consumer seemed to became owners who have no right of dividend or voting absolutely.
According to Chinese accounting standards for business enterprises, long-term liabilities refer to
the debits which will be redeemed after a year or an operating cycle longer than a year. When additional
charge received by piping companies was record in long-term liabilities account, it means that
costumers paid that charge be recognized as a creditor; when funds was converted to the account of
capital reserve fund account, costumers then as the same time change to be a kinds of owners whom
never to be informed in reality. Piping gas business enterprises used above method not only had already
violated accounting principles, but also had evaded a tax.
Certainly, after Chinese accounting reform in 1995, additional charge received was recognized as
one kinds of revenue of piping gas business enterprises. The bookkeeping has already changed.
However, the real nature of additional charge is still unclear. The reason is that additional charge is not a
reasonable revenue of piping gas companies, for the cost of distribute to construction and facilities in the
residential region and consumers’ house is about RMB 600 Yuan -800yuan based on the survey, it’s
seemed that its price is obvious higher than actual cost and reasonable profit.
4 The improvement and development strategy for price regulatory constraint of
piping gas companies
Aim at weakness of piping gas price setting and additional charge policy, allow with the
increasingly develop in the economy and reconstruction of the cities quickly , ever-growing demand for
commodities and serve, expanding of information network every in China, According to the initial
mission of the government including a fair, public, science, systematical regulatory constraint system.
The article will propose suggestions below:
4.1 Strictly follow price laws published, and to set up reasonable system of government price
To attain a better price regulatory constraint system being useful for the equilibrium of the
efficiency of business enterprise and social performance, at first, the price regulatory constraint of
piping gas should not only consider accounting cost and benefit of gas companies itself, but also to
emphasize the weighed average cost of gas in the industry or a region. Second, piping gas business
enterprise' product cost should adopt a complete cost rather than the manufacturing cost, because that
manufacturing cost of the piping coal gas and natural gas business enterprise occupies only a small part
of total cost, its period cost including the administrative expense, finance expenses, sale expenses are
huge and big. Therefore, in order to thoroughly resolve the cost dispute problem, we should reconsider
the nature of cost. Of cause, the benefit should point to public business enterprise’ the reasonable return
rate based the average level of the profession. Third, the gas price setting should consider indexing
which presents the economy and ability of the resident, for example the GDP, person income, the
finance of government. There is a special model established consulting the western national government
−
−
control price model, The formula is represented below: PQ = C + β ( R )
Where, P is price, Q, a
−
volume of production, C is for average the complete cost of in that industry.
β
is a flexible index,
−
R weighed average profit or loss. As for the loss of piping gas companies should be remedy by
business enterprise itself, if necessary, government should make up with the shortage.
4.2 Reform additional charge polity, and to break government monopoly on piping gas field, to
return to the market mechanism
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Along with ending of 5th years of WTO, public business enterprises in our country will directly
face the international competition on the price, services. So, the Additional charge must reflects the real
cost for offsetting the construction of distribution facilities. For in the free market, then additional price
policy will increase the weight of resident's economic purchasing capacity, which return to push the
resident to consume the other replacing energy much cheaper, such as electric power and heat or bottle
of nature gas. Now, this kind of evidence has already appeared in the resident of part of cities, this
shows that additional charges for some degree have already obstructed piping gas the company to
expand the customer's resources, and to capture the market, therefore should reform the additional
charge policy.
Again, For arming the safety of the state-owned business enterprise' property, avoiding the dilution
of the owner’ equity in future property reorganization, additional charge received by piping gas
companies which had be recorded in capital reserve fund account should be reviewed by auditors in
order to proof it had been used in construction of new network, than, to post it to the pay-in-capital
account. Further more, in order to solute the shortage of funds for piping network development in the
future, government monopoly of piping gas should be broken, share holder system can be application to
absorb the capital. Where, different pattern of ownership’ reform, Government can sell a part of shares
of the public business enterprises to private for raising much money used to input the industry needed to
expand; When some of public business enterprises face difficult to reform its ownership, Government
may sell the department in profit in order to attract the inflowing of congenital funds. On one hand, the
purchaser can extend reproduction; on the other hand, the seller can get funds inflow for making up the
other department on loss. Again, the government do the investment itself and than sign a contract with
an agent under which government engages the agent ( private) to perform some service on the
government behalf. Here has a kind of mode worthy of recommending is "entrust agency" mode,
including direct agency, the independence administer with assign agency.
4.3 Bring public product information into the open, and let auditing systemize, create the fair and
public product consuming environment
On the base of the system of ‘public hearing meeting’ to the price adjustment of public products,
Government then should establish an independence systemizing auditing system, before the time price
adjustment, the relatively financial data should be disclosed to citizenry for them do an informed
evaluation. Second, public business enterprise 'price setting should adopt grade system, except
according to rank of commercial or residential used, ranks of price setting based on consuming quantity
should be adopt. Third, Because that there still no standard evaluation of the social performance system,
therefore, auditors should distribute their effort to evaluation system, for some ratios such as paid-up
capital/ GDP, long-term liabilities/ index sign, such as, GDP, and fixed assets/ GDP etc, can be used to
evaluate the matching degree between public business enterprise capital and national economy , and
increasing rate of price raise or additional charges and native the controllable income, public finance
income increase the ratio, then reflects whether the business enterprise's price of raise level is exceed
the economic acceptance ability of the residents, or the ability of public finance to make up. Here the
relevant main factor constitute in below formula:
G=
∑ ai X i
where G presents synthesize the ratio; a is a weight average number; i, j Means
Fj
the nature number 1 …… n ; F means the main index of national economy, for example the GDP, GNP,
person increasing of index sign, X points main increasing of index sign the ratio of financial report data
and additional charges, employee wages. a can be adjusted on consider the relative importance of
finance index sign to investors, also use the experience date if it’s needed.
5 Conclusion remarks
So, the reform of the gas price regulatory constraint is only a part of whole reform in the process of
Chinese economic reform of ownership, existence of these fundamental problems does not means that
the reform is necessarily in wrong direction. It may indicate the reform of gas price regulatory constraint
is behind of its time and behind of the economic, social and legal system. For the Chinese economic
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reform of ownership is comprehensive. Reform in this area should catch up. And further more the
problems identified and solutions proposed in this article have the potential to provide additional input
for policymaking in China. For any tiny loss in the whole Chinese economic reform will left negative
influence. Of cause, through provision of technical assistance and exchange of academics and expertise,
reform process can be shortened and smoothed.
References
[1] Liweian zhangjunxi. the front along of corporate government- classic article .Peking, Chinese
finance economic publisher 9(2003 ), p3~P25.
[2] Three basic company- Oncors, TXU electric power of TXUs of TXU Australia company finance
report. the United States. 12(2003), p1~P235.
[3] www.stats.gov.cn. Provide main index sign of big and medium-sized industry business enterprises
and economic index sign of the main cities.
[4] www.nanfangdaily.com.cn,. Provide a great of questions to the piping coal gas company.
[5] Hangzhou piping gas company. the general chart of quantity of residential customers of piping gas in
Chinese main cities and price circumstance at the beginning of years 2004~2006 . copy.
[6] Chenyin, a finding report and analysis. supported by funds of Zhejiang social and science. 8(2006),
[7] Sara Connolly, economics of the public sector. Peking, Chinese finance economic
publisher .12(2003), p119~p543.
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