Restructuring of

Electric Power Industry

in KOREA

October, 2001

Ministry of Commerce, Industry and Energy

Korean Electricity Commission

Contents

Ⅰ. Status of Restructuring

1. Brief History	1

2. Basic Plan of Electric Power Industry Restructuring	2

3. Achievements	3

Ⅱ. Korean Electricity Commission	5

Ⅲ. Korea Power Exchange	8

Ⅳ. Pool Market	10

Ⅴ. Future Plan for Restructuring

1. Disaggregation of Distribution/Sales Sector	13

2. Openning of Two Way Bidding Pool	13

3. Improvement of Tariff System	18

4. Privatization of Gencos	19

5. Privatization of other Subsidiaries of KEPCO	20

Ⅰ. Status of Restructuring

1. Brief History

ㅇ July 1994 ∼ June 1996 : Management Evaluation on KEPCO

- Conducted by Korea Industry and Economy Research Institute, Ahnjin Accounting Firm and Samil Accounting Firm

	〈The results of the evaluation 〉
Considering drastic increase of electricity demand and temporary concentration of economic forces when KEPCO is privatized rapidly, it is desirable to pursue KEPCO□s privatization with a phase-in approach. However, as a precondition to the privatization, it is recognized that restructuring of the electric power industry is necessary.

ㅇ June 1997 :  Formation of the Electric Power Industry Restructuring Committee

- A committee of 12 members consisting of scholars, researchers,

industry personnel and experts from related fields

- The committee decided to develop a plan for restructuring of the

electric power industry and has held 11 meetings until now.

ㅇ July 1998 : Government announcement of directive to privatize     state-run public enterprises.

- Included the restructuring of the industry as a major component of KEPCO's privatization.

ㅇ November 1998 : Public hearing by MOCIE on the Restructuring plan

ㅇ January 1999 : Public announcement by MOCIE on the Blue Print of Restructuring

2. Basic Plan of Electric Power Industry Restructuring

◇ Unbundling of KEPCO's Power Generation, Distribution and Sales Sector by stages for a long time and introduction of competition in Electricity Market.

◇ The Network shall be exclusively owned by KEPCO to secure

stable supply of electricity.

◇ Establishment of an independent regulatory agency - Korean        Electricity Commission within the MOCIE for Market Monitoring,    Protection of Consumer and Privatization

◇ Phase 1 (∼2002) : Competition in Generation

- To Split up the Power Generation Sector into 6 power generation subsidiaries and privatize step by step

- Gencos trade electricity by bidding through Power Exchange

◇ Phase 2 (2003∼2008) : Wholesale Competition

- To introduce competition in power distribution and slaes sector

- To open the Transmission Network by ensuring that private

enterprises may freely use the national transmission network

thereby creating a fair and competitive environment

◇ Phase 3 (2009∼  ) : Retail Competition

- To open the Distribution Network

- Every customer can choose a supplier

3. Achievements

□ Preparation for restructuring

ㅇ Grouping of Power plants for Gencos (September, 1999)

- Separation of thermal plants into 5 Gencos in consideration of balanced

capacity·revenue value·asset value.

- Separation of Nuclear and Hydro plants into one Genco in consideration

of safety and water control

ㅇ Establishment of Power Exchange and simulation of competitive trade

(April, 2000 ∼ March 2001)

□ Revamping and legislation of related laws and regulations

ㅇ Failed in 1999 due to the resistance of labor union and others

ㅇ Retrial of revamping and legislation after constitution of new Parliament in

May 2000, and the Government party and Opposition party passed related        laws unanimously in December 2000.

- ACT ON PROMOTION OF RESTRUCTURING OF THE ELECTRIC      POWER INDUSTRY that prescribes the separation of generation sector    came into effect on 12.23, 2000

- THE ELECTRICITY BUSINESS ACT that prescribes electricity trade

market (Power Exchange) and regulation organization (Korean Electricity        Committee) came into effect on 2.24, 2001

□ Establishment of Gencos and Power Exchange(April 2, 2001 )

ㅇ Six Gencos were established and separated from KEPCO on April 2, 2001  through the passage by Board of Directors on February 24, 2001 and      the approval of General Meeting of stockholders on March 16, 2001.

- Korea South-East Power Co. Ltd(KOSEPCO)

- Korea Midland Power Co. Ltd(KOMIPO)

- Korea Western Power Co. Ltd(KOWEPO)

- Korea Southern Power Co. Ltd(KOSPO)

- Korea East-West Power Co. Ltd(KEWESPO)

- Korea Hydro & Nuclear Power Co. Ltd(KNHP)

ㅇ Korea Power Exchange was inaugurated on April 2, 2001 for the purpose

of transparent and fair management of electricity trade market as a

non-profit independent organization.

□ Establishment of Korean Electricity Commission (April 27, 2001)

ㅇ Electricity Commission controls conference on the bidding, unfair trading to

secure fair competition and protection of consumers

ㅇ Chairman and commission members were appointed and regulations for

operation were established.

Ⅱ. Electricity Commission

1. Legal position

ㅇ The Electricity Commission shall be formed within the Ministry of

Commerce, Industry and Energy in order to deliberate and resolve       matters with respect to the creation of an environment of fair           competition of the Electricity Business and the protection of the         rights and interests of electricity consumers and to arbitrate             disputes relating to the Electricity Business.

(THE ELECTRICITY BUSINESS ACT, Article 53 §1)

ㅇ The Electricity Commission shall have a secretariat to carry out

the affairs of the Commission

2. Function

ㅇ Restructuring of Electric power Industry

ㅇ Deliberation and resolution (of matters in respect of the granting       of permission, establishment of fair trade system)

ㅇ Arbitration (of disputes between Electricity Business Operators or

between Electricity Business Operator and electricity consumer)

ㅇ Investigation (of matters in respect of protection of public interests)

3. Constitution

ㅇ Memebrs : One Chairman and 8 members (Permanent memeber : 1)

- Members including the Chairman of the Electricity Commission shall be

appointed or retained by the President upon recommendation by the

Minister of Commerce, Industry and Energy.

ㅇ Expert Commissions : 37 members in 5 expert commissions

- Members shall be commissioned by the Chairman of the Electricity

Commission

ㅇ Secretariat : 1 Bureau and 5 Division (complement : 45members)

<Organization of Korean Electricity Commission>

										Chairman (Nonpermanent)
										Permanent Member (Concurrent by Deputy Minister for Energy & Resource Policy)											Nonpermanent Member (7)
										Director General
Competition & Regulation Policy Division							Market Management Division					Power System Management Division						Consumer Protection Division					Competition Planning Division

< Each Division's task >

ㅇ Competition & Regulation Policy Division :

- Planning and Overall management of Electric Power Industry Restructuring,

Operation and support of Electricity Commission, International Cooperation.

ㅇ Market Management Division :

- Analysis of market trend and Monitoring, Design of next pool market

and Development of Trade System

ㅇ Power System Management Division :

- Settlement of fees and terms for the use of electrical facilities for Power

transmission and Distribution Settlement and observation of Operation Frame        of Electric Power System such as maintenance of quality of electricity

ㅇ Consumer Protection Division :

- Task in respect of electricity rate including approval of rate and              improvement of tariff system, Investigation and mediation of disputes        related with consumers

ㅇ Competition Planning Division :

- Planning and implementation of privatization plan of subsidiaries      like Gencos and Korea Power Plants Service, Co., task in respect of

Labor Union

Ⅲ. Korea Power Exchange

1. Legal position and Major Mission

□ Legal Position

ㅇ Nonprofit juridical foundation established in accordance with the    Article 35, the Electricity Business Act

ㅇ Applying Corporation Aggregate Regulation by Internal Discipline

ㅇ Member Organization by market participants

(generation business, sales business, etc)

□ Major Mission (Article 36, Electricity Business Act)

ㅇ Management of electric power market

- Establishment and management of electric power market (bidding,  pricing, meterage, adjustment, etc)

- Design of the next electric power market and establishment and

reform of the market management regulation

ㅇ Management of electric power system

- Operation of electric power supply and demand including          management growth plan and control of electric generator output

- Stable operation of electric power system including maintenance of  electricity quality

ㅇ Support to Government's establishment of basic plan for power    supply and demand

2. Organization and Employee(as of July 2001)

□ Organization

																			CEO																												General metting of Membership
	Auditor (non-standing Executive)
																																															Board of Directors
					Executive Director																												Executive Director
General Management Department								Market Design Department								Power Planning Department										Power System Management Department										Market Operation Department										System Operation Department

ㅇ General metting of Membership : Reform of Articles of

Incorporation, assignment of directors, approval of budget, etc

- Full Member (8 companies) : KEPCO (Korea Electric Power

Corporation), 6 Generation companies, Sihwa Energy

- Associate Member (3 companies) : KIECO(Korea Independent

Energy coporation), LG Energy, LG Power

ㅇ Board of Directors : Reform and repeal of market management

regulation and principal bylaw, settlement of business program. etc

- Executive directors (3)

- Non-standing executive directors: member representatives 3, public  representatives 3, government representative 1

□ Employee (complement)

( Persons)

Executive	Staff	Technician	Total
3	230	12	245

* Excluding non-standing auditor

Ⅳ. Pool Market

1. Introduction

ㅇ Establishment and operation of the Electricity Market that enables market participants to buy and sell the electricity, following with the restructuring of the electric power industry(KEPCO's separation and privatization).

- The Electricity Market will be introduced consecutively by the phase of KEPCO's separation and privatization, pursuant to the basic plan of the restructuring of the electric power industry(21.Jan.1999)

	1st Stage	2nd Stage	3rd Stage
Market	CBP	PBP	TWBP
Competition	Generation	Generation	Wholesale
Term	1st stage of Generation Competition (Under Operation)	2nd stage of Generation Competition	After the separation of distribution/sales (2003. 1)

※ CBP   : Cost Based Pool

※ PBP   : Price Based Pool

※ TWBP : Two-Way Bidding Pool

ㅇ CBP market has been operated since last April 2. 2001.

- TWBP market system which would be applied after the separation of distribution/sales is under design

(TWBP is scheduled to open in Jan. 2003)

<CBP Market(Current)>      <TWBP Market(After Jan.2003)>

※ T & D : Transmission & Distribution

※ RECs  : Regional Electricity Companies

※ IPPs   : Independent Power Purchasers

2. CBP Market

ㅇ In each day before trading, each generator is required to submit

offers to the KPX indicating the available generating capacity(□)

ㅇ The KPX produces a Price Setting Schedule under the principle of

minimizing the system variable cost, calculates the marginal price

(SMP/BLMP)

- System Marginal Price(SMP) is determined by the most expensive

variable generation cost for the trading period in the Price Setting

Schedule

- After real time dispatching, the settlement are performed using the market price(SMP/BLMP, capacity Payment)

※ Because the market price is set by considering the real generation

costs, the current market is called 『Cost Based Pool (CBP)』.

※ The supplier(KEPCO) should purchase the electricity in accordance

with the price determined by KPX, and then supply customers

with the current electricity tariff approved by government

<Market Operation Structure of CBP>

Ⅴ. Future Plan for Restructuring

1. Disaggregaton of Distribution/Sales Sector

ㅇ Detailed programs are being studied to divide distribution sector of KEPCO

- Number of distributors, method of division, boundary between

transmission and distribution sector etc.

ㅇ The division program will be set up reflecting diverse opinions of all fields

by the end of this year. Distribution companies will be incorporated by the

end of next year with preparation of allocating assets and liabilities to each

company etc.

2. Openning of Two Way Bidding Pool

□ Overview of TWBP

① Consept : "TWBP" is the wholesale market which is operating to the last phase of restructuring of Korea, whole and retail competition.

- Many suppliers(Gencos) and many demanders(Retailcos and large customers) trade each other based on market priciples.

<Characteristics of TWBP of Korea>

* KPX is the only market and system operator

* Every suppliers and demanders offer or bid the quantity and price of electricity through KPX

* Market Clearing Price determinded from the balance of the supply and demand at the Unconstraint 5 minutes dispatch schedule(UFMD)

* Real Time Dispatch made by constraint 5 minutes dispatch schedule(FMD)

* KPX procure Ancililary Service by way of the contracts with A.S providers.

② The Market opening day : Jun 2003(After the separation of Distribution and Retailing sectors from Kepco)

③ The Objectives

- Competitive and stable electricity supply in long term basis

- Creating competitive market environment in which electricity is traded as a commodity

- Setting market clearing price by the principle of supply and demand

- Proper distribution of information about the market operation

- Ensuring non differentiated opportunity to new entrants

□ Brief chronology

ㅇ Apr 2000 ∼ : KEMA Consulting's market designing with the support of Korea Electrotechnology Research Institute, Korea Energy Economics Institute and Korea Electric Power Data Network Co. under the management of KPX.

ㅇ Apr 2000 ∼ Jun 2000 : Case study and basic consept designing

ㅇ Jul 2000 ∼ : Designing of pool rule

* 22 rules which consist of market rules, system rules, network rules etc

ㅇ Oct 2000 ∼ : Designing of the spec of market operating system(MOS)

ㅇ Jun 2001 : Government Electricity Commission authorises the principle of TWBP

ㅇ Aug 2001 : Invitation to bid for TWBP market operating system

□ Future Plan

<Mechanism for Implementation>

<Major Task for Implementation>

ㅇ Development of detail procedure

- based on 22 market rule, development of detail procedures explaining market & system operation

<Contents of Market Rules>

	Contents
Market Rules	Pool Rules, Settlement Rules
System Rules	Metering Rules, Dispatch Rules, Power System Operation Rules, Demand Control Rules, Frequency Rules, Voltage Control Rules, Contingency Planning Rules, Operational Liaison and Event, Reporting Rules, Outage Coordination and Security Assesment Rules, General Conditions System Rules
Network Rules	Planning Rules, Connection Rules, Plant Numbering and Nomenclature Rules, System Tests Rules, Safety Coordination Rules, General Condition Network Rules
Technical Rules	Ancillary Service Agreement, Connection Agreement
Pricing Methodology	Transmission Pricing, Distribution Pricing

ㅇ IT Installation

- IT installation for the electricity market working

□After defining details of spec based on the market rules, open bid,  manufacturer selection, and system installation

<Procedure>

Processing            2001.12                2002.12

ㅇ Task

	Major Task
Phase 1 Define technical spec	- Technical spec - Term and condition for the contract - Issue the invitation to tender
Phase 2 Bid & Contract agreement	- Open bid - Bid evaluation - Negotiation and Contract
Phase 3 System Implemetation	- Design and manufacture of system - Transport and equipment - Factory acceptance test & site acceptance test

ㅇ Reform of legal and regulation

- Reform of legal and regulation for the Two Way Bidding Pool

□Issues to be settled for introducing TWBP are below,

① mitigate volatility of wholesale market price

② reform the tariff structure compatible with competition environment

③ hedge the risk in the electricity spot market

3. Improvement of Tariff System

□ Current Electricity Rate System

ㅇ Electricity Rate is organized by 6 types of customers, and tariff

rates differ between those categories of customers, reflecting

factors of policy

ㅇ Electricity Rate, also, vary with factors such as seasons and time of day for Demand -side management

ㅇ And there are Electricity Rate reflecting supply voltage and supporting certain area

□ Reform Program for Tariff System

ㅇ To make competition between Distribution company and Sales

company possible after disaggregation of distribution sector from         KEPCO, it is necessary to change current rate system based upon        types of customers to a cost reflective tariff system varying with        services

ㅇ Detailed reform programs shall be studied through consultation of    Advisors from September 2001 to June 2002, and New Rate System is scheduled to be enforced by the end of 2002 after collecting opinions from various department of society

4. Privatization of Gencos

□ History

ㅇ December, 2000 : Enact and publication of 『The act on Promotion

of Restructuring of the Electricity Industry』that provides the            extraordinary clause for spin-off of the generation sectors

- Privatizations of Gencos will be commencing from in February 2002,

which was depicted in the subsequent supplementary clause, by

allowing the grace period of one year

ㅇ May 29, 2001 : Korean government set up the policies that

Government will make an investment in kind out of Government's shares of KEPCO to the Korea Development Bank, and that KDB will guarantee KEPCO's and Gencos' jointly and severally liabilities so that KEPCO may efficiently expedite the privatization of Gencos.

□ Schedule

ㅇ Preparation for coming up with 『the Basic Privatization Plan of Gencos』

- In July 2000, The Power Industry Privatization Research Team

proposed its recommendations on privatization plan to Government,      which was made through a series of seminar and a public hearing and opinions in various ways as well

- In May 2001, taking into consideration the atmospheric changes so far and technical hot issues, Government reorganized『Privatization Expedition Team of Gencos』until September of this year to review the aforementioned recommendations on privatization plan.

- Based upon the coming review results of The Privatization    Expedition Team of Gencos,『the Basic Privatization Plan of Gencos』will be prepared and brought up to the Government-owned corporations Privatization Expedition Committee for its review, which eventually will be finalized  as a governmental plan

5. Privatization of other Subsidiaries of KEPCO

□ Policy of privatization of Kepco's other subsidiaries was set up

pursuant to『Second Plan for Privatization and Management Reform of

Government-owned corporations(August, 1998)』

□ Privatization process is being stepped up to finish selling off of

Korea Power Engineering Co. Ltd, Korea Power Plant Service &

Engineering Co., Ltd and Korea Electric Power Industrial Develop'

Co., Ltd

<The Electric Power Industry Restructuring Plan>

※ Past System

	KEPCO
	Generation											□			IPPs
	Transmission
	Distribution
		Consumers

ㅇKEPCO had a monopoly       over Power Generation,

Transmission and Distribution.

□A small number of privately     owned power generators       provided KEPCO with

electricity.

※ Phase 1 (Power Generation Competition Phase)

		Genco (Public)						Genco (Private)
				Bid			Bid
						Generator Pool			Direct Trade
	Bid
	Existing IPPs				PPA		Transmission(Kepco)
Distribution(Kepco)
					Customers		Eligible. Customers

□There is a complete

separation of the Power

Generation Sector from           KEPCO, followed division     It into six power generation

companies which engage

in competition amongst

themselves.

□KEPCO maintains its

monopoly power over

Transmission and Distribution.

□A direct trading of

electricity to eligible

customers will be commenced.

* PPA: Power Purchase Agreement

※ Phase 2 (Wholesale Competition Phase)

		Genco (Public)						Genco (Private)
				Bid			Bid
	Bid					Generator Pool			Direct Trade
	Existing IPPs				PPA		Transmission Co.
					Bid							Bid
	Distri. Co.						Distri. Co.
	Customers				Customers		Eligib Cust.

□There will be a complete

separation of the Power     Distribution Sector from

KEPCO and introduction     of a competitive system     (Price Bidding Competition).

□The Transmission Network

will be opened and

ensured that the power     distribution companies

may freely use the network.

※ Phase 3 (Retail Competition Phase)

	Genco (Public)						Genco (Private)
					Bid	Bid
		Direct Trade	Generator Pool			Direct Trade
			Transmission Co.
										Bid
							Bid
						Distri. Co.					Distri. Co.
	Cust. Groups						Cust.				Customers
						`

□The Distribution Network

will be opened as well.

This is a final phase      where the general

end-users can directly

choose from several

power distribution companies.