In 1995, the Government decided that the electricity industry should be restructured from a state monopoly into a competitive market. The question was the scope and pace of deregulation. We were then among the pioneers in the world in electricity deregulation and decided to take a cautious evolutionary approach. That year, we corporatised the electricity and gas departments of the Public Utility Board (PUB). We formed Singapore Power (SP) as a vertically integrated group of companies, with wholly owned subsidiaries in power generation, power distribution and power retail. A separate wholly owned subsidiary of Temasek Holdings was set up to take charge of Tuas Power which then competed against the generation companies of Singapore Power. PUB was restructured to be the industry regulator and a spot market was set up.

Since 1995, many more countries have deregulated their electricity industries, resulting in significantly lower electricity prices, greater product innovation, better services and more consumer choice. We have now fallen behind due to our more cautious approach.

Meanwhile, investors have complained that our market rules lack clarity with PUB as regulator having to intervene in the market too often. Retail competition has yet to develop even though the rules already allow such competition for large consumers. EDB has received feedback from some MNCs that our electricity tariffs have become less competitive and this has reduced our competitiveness in their eyes.

The Ministry of Trade and Industry (MTI) therefore initiated a comprehensive review of the electricity industry with Temasek Holdings last year. The key objective of the review was to implement an electricity market structure and regulatory framework that will support a competitive electricity industry in Singapore, while ensuring that reliability and security of supply are maintained.

The experience in the last five years, including SP’s strong performance since corporatisation, has given us confidence to press on with further deregulation and obtain the full benefits of competition. Specifically, this requires a clear separation at the ownership level of the contestable and non-contestable parts of the market.

The grid, which is a natural monopoly, should not be owned by the same company that owns generation companies or retail companies. While it is in theory possible to mandate open access to the grid, in practice, this requires heavy regulation and leads to endless argument.

Last year, we announced that SP would divest its ownership of its generation companies and transfer them to Temasek Holdings by 1^st April 2001. We will press on with this decision and go further. Temasek will divest all three generation companies. There will be no foreign ownership limit. We have decided to lift the restriction on foreign ownership to increase competition and raise our standards to international levels. Energy security will not be a problem because foreign owners will not be able to walk away with their power plants. Our workers will still be here to operate them in an emergency.

These three existing generation companies and the new co-generator on Jurong Island will support a competitive market and lead to lower wholesale electricity prices. We will impose a cap on the cross holding of generation companies to ensure that there is no excessive build up of market power by any player. We expect even more players in the future as our power needs grow.

During the transitional period, we will put in place measures such as vesting contracts to prevent excessive volatility in pool prices while allowing the market to find its own level. As for the question on security of supply, we will first rely on a well-designed market which allows price signals to flow through. This will ensure that there is sufficient capacity planting to meet our future needs. Second, PUB will also play a watchdog role to ensure that this is indeed the case.

As with the generation sector, the electricity retail sector is also contestable. But to date, PowerSupply, which is wholly owned by SP, is the only retailer in the market. This is not desirable. Retail competition is important as it enables the gains of competition in generation to flow through to final consumers. Retail competition will also bring about greater choice. In New Zealand, an ordinary household has more than a dozen suppliers to choose from.

To bring about retail competition, we need to provide first a level playing field for new entrants into the retail segment. SP will divest the retail business of PowerSupply from 1st April 2001, thus separating the ownership of this retail business from PowerGrid. PowerSupply will be transferred to Temasek Holdings in the first instance.

The joint customer service functions, relating to meter-reading, field services and data management, will be taken out of PowerSupply to prevent these activities from becoming barriers to new entry. The joint customer services functions will be retained within SP.

With these measures, we can look forward to full retail competition for large industrial and commercial consumers from 1^st April 2001. Retail competition for smaller customers will take longer and is not likely to take place before year 2002 because all households are affected and a detailed study must first be done. Once it is done, we expect domestic consumers to enjoy lower charges and a wider range of services. We will pay particular attention to the impact of these changes on households.

Unlike the generation and retail sectors, the transmission and distribution network is a natural monopoly. It will be neither practical nor cost effective to have competing grid companies duplicating power lines on our small island. The grid will therefore be tightly regulated. Performance standards will be set and PowerGrid will be incentivised to improve efficiency further.

Currently, the system and market operation functions come under PowerGrid. The system operations function controls the entire electricity network. The market operations function has a significant commercial impact on all players: generation companies, retailers and grid. The current structure unduly favours the grid. We will hence separate the system and market operation functions from PowerGrid and establish an Independent System Operator (ISO). This will provide a greater degree of transparency to investors. The ISO will be responsible for maintaining real time system security. In view of its importance, we will put the ISO under PUB. We will have to make sure that the 40 to 50 workers affected are no worse off. PUB will hence continue to be the key agency responsible to ensure the security and reliability of electricity supply in Singapore.

The gas industry will be restructured in a similar way by separating the ownership of the gas transportation business, which is a natural monopoly, from the contestable sectors of gas import, trading and retailing

All the gas distribution and transmission network will be owned by a gas grid company which will allow players open and non-discriminatory access to the network. SembCorp Gas will have to give up its business of transporting gas if it stays in the contestable business of importing and retailing gas to large users.

SP has indicated that PowerGas prefers to stay in the gas transport business. The gas grid and the electricity grid, which are both natural monopolies can be owned by SP. Although the privatisation of SP will be slightly delayed, we still hope to carry it out by the end of 2001 or early 2002. After this restructuring, SP will be the power and gas network provider in Singapore.

The changes outlined today are substantial. Implementing them will take about 15 months. In making the changes, we must be fair to SP staff who support privatisation and have been gearing themselves up for greater competition. Minister for Trade and Industry BG (NS) George Yeo and key staff of MTI have met SP management and key union leaders of UPAGE two days ago. They had earlier been briefed on the changes that we are going to make. They gave many useful comments and suggestions that have been incorporated into this statement. We understand the difficulty they face explaining yet more changes in the industry to SP management and staff. Without the understanding and support of the union leaders and the staff, the process of restructuring will be slower and more complicated.

MINISTRY OF TRADE AND INDUSTRY

11 MARCH 2000