Asymmetric Transmission Of Price Signals On The Industrial Chain Of Powerin China And Its Effect On The Productivity Of Enterprises

Since 2002, the reform of "segregation of network from plant" was beginning in Chinese electric power industry. Competition was introduced into the section of power generation, and gradually a structure of "bidding online" will be forming. But the transmission, distribution and sale of electricity are still as a whole, which is not allowed into the section of power generation. Due to the technical characteristic of the grid which excludes the competition, the power transmission and distribution companies (PTDC) displays characteristic of natural monopoly. Although the grid is divided into south and north, the areas of south and north are different clearly, thus virtually no competition between them, so they are the only buyers for power generation companies in their area respectively, which makes the PTDC have the rights to choose the seller. At the beginning of "segregation of network from plant", PTDC still keep some power generation assets, Chinese scholars Bai Rangrang and Wang Xiaofang (2009) theoretically prove that PTDC implement price and non-price discrimination to independent power producers using their option, and they test it empirically. So it is necessary to regulate the PTDC which is natural monopoly. But due to the transmission, distribution and sale of electricity are as a whole, which leads to a complicated cost structure of the PTDC, the option of regulation is difficult. Currently the major regulation is to control the retail price of electricity. Although the regulated retail price avoids that the PTDC develop monopoly price to encroach on consumer welfare, perhaps regulator more hopes to incentive the PTDC to improve their total factor productivity (TFP) using the regulated price, so as to improve social welfare in nature. In an isolated market, reduce of price can force companies to improve their TFP, so as to decrease their costs, but in an industrial chain which has a vertical relationship, whether are the enterprises, especially a natural monopoly enterprise, to do so, which is open to question.Thinking the electric power industry chain in our country as the research object, this paper theoretically arguments that in such an industrial chain which is natural monopoly downstream, competition but not perfect competition upstream and market price regulated downstream, the PTDC will implement the unobservable vertical control to cope with the changes of regulated price by the mean of asymmetric transmission of price signals (ATPS), so as to avoid to improve their TFP. When the regulated prices fall, the PTDC will completely or doubly to transmit price signal the upstream, so as to avoid the loss; When the regulated prices rise, the PTDC will choose to reserve price signals, not transmit or convert the price signal to be the signal of demand reduce to the upstream, completely possess the profits owing to the increase of price. In addition, this paper also uses the data of Chinese electric power industry for empirical research, and found that such vertical control behavior do exist in the industrial chain of power. Which makes the regulation goal, which is government hopes to stimulate and improve the TFP of PTDC through the regulated sale price, transferred to the upstream power generation companies (PGC). PGC hence is under the dual regulation and the profit distribution and the TFP of companies on the power industrial chain is doubly twisted.Theoretical analysis followed the process of single market to vertical market and static to dynamic. And combining with the current structure of electric power industry chain, in terms of power supply is abundant or not and regulated price rises or falls of rules, combination of two of the four cases, the paper analyses the behavior of PTDC in the process of ATPS, and its impact on welfare distribution and the TFP of companies on industrial chain of power.First of all, theoretical analysis in single market shows the most likely response is to reduce cost when PTDC faces to the regulated price. There are two ways to reduce cost. Compared with enhancing TFP, the strong monopoly power makes PTDC easily to implement the behaviors of vertical control. The main behaviors of vertical control are obvious behavior and recessive behavior. The obvious behavior is monopoly and exclusive behavior by the extension of capital to downstream or upstream, in order to get more profit of industrial chain. The recessive behavior is vertical control by the mean of ATPS. This kind of control seems to be set up on the basis of the balance of supply and demand, hence hard to be found. And its implementation is based on monopolies’power of monopoly, so almost no cost. Which leads to such vertical behavior is widespread in the industrial chain of monopolistic downstream and competitive upstream.Second, this paper analyzes the vertical control behavior of ATPS implemented by natural monopolies in the static and dynamic circumstances. Static case, the regulated price is transferred to upstream as a false and low single by natural monopolies. And the ways of transfer are reduce purchasing or the menace of reducing purchasing. In dynamic case, there are two kinds of stats:regulated price upward and downward. When the regulated price is adjusted downward, the behaviors of PTDC are similar to the static case. The difference is that PTDC wants to transfer loss of profit to upstream, but its method of transfer is the same as the static situation, either reduce procurement, or threat to reduce purchasing, in order to force the upstream enterprise to lower prices. The result is the regulation goal that regulators expect to stimulate the PTDC improving TFP through regulated price was transferred to the upstream. So at the same time, the upstream enterprise loss the profit and maybe suffer dual regulation. Then the distribution of profit and TFP of companies on the power industrial chain are distorted. In addition, if the regulated price is adjusted upward, due to the ability of controlling the upstream purchase demand function, the natural monopoly enterprises can choose not to transfer the price signal to upstream and completely get the profit owing to the adjusted regulated price. Or, the natural monopoly enterprises can also convert the price single to the single of demand downstream. As a result, the upstream enterprise not only will not get any revenues due to price upward, but also it maybe loss. And the rise of regulated price means that the downstream consumer’s surplus is reduced. Then the only beneficiary is the natural monopoly enterprise. Therefore, the social welfare’s loss caused by increasing price may be more severe than falling price.Finally, based on the background of the structure of the Chinese power industry chain, this paper analyzes the necessary conditions that the natural-monopoly PTDC develop vertical control through the ATPS, and builds game models of up-and-down stream on the industrial chain of power under the four different conditions in the process of ATPS. And the influence of the behavior to the TFP of companies and the profit distribution on the industrial chain of power is also analyzed. Four kinds of cases are:(1) The regulated price declines, the upstream supply is bounteous; (2) The regulated price declines, the upstream supply is insufficient; (3) The regulated price rises, the upstream supply is bounteous; (4) the regulated price rises, the upstream is insufficient. Analysis shows that when the downstream regulated retail price of power changes, price signal will transmit to upstream in an asymmetric way. In the whole process of transmission, the behavior of enterprises is shown as:the PTDC accept the change signal of regulated retail price, and devise a feed-in tariff and supply power contract, then the upstream PGC choose to accept or not to accept the contract. Due to natural monopoly, the PTDC are dominant in the process of game. Only when the upstream supply is insufficient, the PGC have weak bargaining power. When the upstream supply is bounteous, the PTDC have the whole right of pricing. So, the PTDC will do everything possible to reserve the favorable retail price signals, or convert them into adverse signals to upstream companies, such as reduced demand signal, and transmit to upstream. But any adverse price signals will be transmitted to upstream, so as to avoid the loss of profit. In the process of ATPS, the PTDC move the target of TFP improvement regulated by government to upstream PGC. And the profit of chain will redistribute. In the four cases, the distributions of the profit are different, and the profit distribution is seriously distorted in the third case.In the empirical part, we think the Chinese power industrial chain as empirical object, and estimate the annual TFP of hundreds of coal-fired power enterprises and thousands of PTDC in the database of "Chinese industrial enterprises" 1999-2009, the data from the Chinese Industrial Enterprise Database (CIED). Using estimated TFP, we studied the relationship between feed-in price and the TFP of PGC, sales price and the TFP of PTDC, sales price and the TFP of PGC. In empirical process, we also controlled these variables influencing the TFP such as age, ownership structure, enterprise size, generation and natural growth of technology. In order to reduce the bad influence owing to omitted variables as far as possible.The empirical results show there is a significant negative correlation relationship between the feed-in price and the TFP of PGC. But the sales price shows no effect with the PTDC. This shows that in monopoly market, price rises or drops, is not necessarily accompanied by changes of the enterprises’TFP. The monopolies may transfer the loss of profit to upstream by controlling the falling prices signal. Or not to transfer the signal of increasing price, then monopolize the profits owing to the increasing price. So the monopolies will not have to improve their own TFP.Further, we studied the relationship between sales price and the TFP of PGC in the provinces of rising sales price and falling sales price respectively. The results show there is no causation between sales price and the TFP of PGC in the provinces of rising sales price, but their correlation coefficient is negative. Which indicates the when the sales price increases, the PTDC will not transfer the price signal to upstream PGC, and exclusive the profit brought by the increasing price. But in the provinces of falling sales price, the sales price shows significant negative correlation with the TFP of PGC. This indicates the PTDC does transfer the bad price signal to upstream through the vertical control. So the loss of profit is also transferred to upstream.So, the empirical results validate the theoretical analysis, and show that when the recessive vertical controlling behavior through ATPS implemented by the PTDC cannot be stopped, the single regulation of price downstream not only is not up to stimulate the PTDC improving the TFP, but also will cause the profit distribution and productivity of companies on the chain twisted doubly.Combining theoretical and empirical analysis, this paper argues that in terms of Chinese power industry chain, effective and feasible regulation preventing the PTDC to implement vertical control by AFPS is the separation of power transmission and distribution. After the separation, the net of power transfer can be regulated as pure network, no demand control. And competition can be introduced to distribution power enterprises, using the market mechanism to adjust the shape of these distribution companies. So the true price signals can be sure to transfer to upstream PGC.