2004 E E E International Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong
Preparing for More Competitive Markets
Benjamin Yue Zongbin, Member, IEEE and Charles Leong Pou U
Abstract-Companhia de Electricidade de Macau-CEM,
S.A. has established a grid metering system to collect energy
flow information of importation, generation, transmission
and distribution of electricity in Macao. With the available
information provided by the metering system and
implementation of ERP software within CEM, a simulation
of segregation of generation, transmission and distribution
was conducted to test ideas of reaction to a more competitive
market within a tiny electric power system. This paper
discusses concerns raised in the process of simulation and
problems of defining transfer price among different business
areas.
Index Terms-Power System Economics, Electric Utility,
Energy Measurement
I. INTRODUCTION
Located in the West Pearl River Delta of south China,
Macau consists of a peninsular attached to Mainland
China and islands of Tapia and Coloane. The islands
connect to the peninsular via bridges and causeways.
Macau is a Special Administrative Region (SAR) of
China, with a geographical area of 26.8 sq km and had a
population of 442,000 in 2002. Major economic activities
in Macau are tourism, gambling and entertainment with
only limited light industries.
Companhia de Electricidade de Macau - CEM S.A. is
the sole power utility in Macau and is responsible for
Generation, Importation, Transmission, Distribution and
Supply of electricity throughout Macau SAR. CEM
operates under a Scheme of Control Agreement (SOC)
based on a return-on asset regulatory model. The
Concession Contract under this SOC will terminate in
2010, with an interim review to be held in 2005.
Followings are the key statistics of year 2002 of the
CEM electric system:
Installed Generation capacity: 490 MW
Peak Load: 374MW
Gross Energy Consumption: 1864 GWh
Number of Customers: 191,164
The CEM electric system consists of power plants and
transmission and distribution (T&D) network. CEM has 3
power plants, CMC (Macau Power Plant), CCA (Coloane
A Plant), and CCB (Coloane B Plant). CCB is a combined
cycle plant and its first combined cycle unit was
commissioned in early 2003 with a capacity of 136 MW.
The Transmission & Distribution network consists of
high voltage (HV) llOkV and 66kV network, medium
Benjmain Yue Zongbin and Charles Leong Pou U are with
Companhia de Electricidade de Maeau-CEM, S.A. Their emails are
b c n j a m i n . y t ~ e ~ c e n ~ - n ~ a c a ~ ~and
. c o l ucli:irles.leo~ig~cem-~iiacau.coni,
respectively.
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voltage (MV) 1IkV network and low voltage 400/230V
network. To interconnect with the power network of
Mainland China, CEM has two 1lOkV dual cable intertie
lines with Guangdong Power Grid (GPG).
In the age of re-regulation, CEM, as a vertical
integrated utility, has been starting to prepare for more
competitive markets.
First of all, five business areas are classified within
company to have clear responsibilities defined for
different departments, namely Generation, Grid Market
Operator (GMO), Distribution, Retail and Support.
Support business area includes human resources,
procurement, financial support, etc; Generation business
area refers to generation department (GED) to produce
electricity, which is main product sold by the company;
Distribution business area covers the responsibility of
construction and maintenance of electricity distribution
network, which is done by transmission and distribution
department (DDI); while retailer business area is taken
care by customer service department (CSD) to supply
electricity to end customers; and finally Grid Market
Operator(GM0) business area is responsible by power
and networks dispatch department (PND) to coordinate
and optimize the operation of the whole power network.
As another step of improving efficiency of key
business areas (generation, distribution, retail and GMO),
a Remote Energy Metering System (REMS) was
established to collect accurate and timely information of
electricity flow among different part of the power
network.
One more measure is to implement Enterprise
Resource Planning software, or ERP. ERP is to integrate
all departments and functions across the company to
create a single software platform that runs off one
database. One of benefits that shall be delivered by the
ERP applications to the company is more accurate and
timely financial information on daily operation of the key
business areas, as defined before.
In the following sections, we will introduce the REMS
system and some modules of ERP software; then
functional segregation simulation among different
business areas is elaborated. Finally, we discuss some
issues that shall be considered in the future.
11. METERING
SYSTEM
To have a full picture on energy flow within electricity
network of CEM, a Remote Energy Metering System
(REMS) was established in year 2003. Figure 2-1 is
schematic diagram of the REMS system.
2004 IEEE Intemational Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong
GPG CIRS CEM Generation
Transmission Network
...........................
Distribution Network
Figure 2-1 Schematic diagram of REMS
The REMS system consists of three parts: electronic
energy meters installed at metering points in
substations, central station located at dispatching
center and communication network, which links the
meters and central station together.
The metering points were carefully defined so that
both electricity sources (including CEM generation,
interconnection with Guangdong Power Grid (GPG)
and Incineration Plant (CIRS) in Macau) and outgoing
of electricity at 11 kV level can be covered within the
system. Most of meters are of 0.5s class, but 0.2s class
meters are installed for CEM generation and
interconnection with GPG, due to big quantity of
electricity and important nature of electricity exchange
with GPG.
Main functions of the central station include data
collection, data processing, data storage, report and so
on. So far there are 62 meters installed in substations
and connected to central station. From these meters,
energy data is collected automatically once per 6 hours
or manually whenever necessary.
With the REMS system, energy flow information
among different business areas, including total energy
and details, can be reported and analyzed daily,
weekly, monthly and yearly, whenever necessary.
111. ERP SOFTWARE
To implement ERP software, a Business
Improvement Solution (EIS) project was started in July
2002. SAP was chosen as software supplier and
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MP: Metering Point
. Communication
66 kV
Communication Network
Central Station
CaseEdinfo was chosen as consultant. “The goal of
this implementation is to improve the efficiency of our
company by streamlining the business processes,
introducing better workflow between departments and
by supporting these processes and workflow using a
suitable vehicle - the SAP application”, stated by Mr.
Alvaro de Sousa, sponsor of the BIS project and
executive director of CEM.
In the SAP ERP package, there are several modules
to be implemented, such as Human Resources (HR),
Financial accounting (FI), Controlling (CO), Material
Management (MM), Project Schedule (PS) and Plant
Maintenance (PM), etc. But for purpose of this study,
only CO module will be discussed.
The Controlling module facilitates coordination,
monitoring and optimization of main business
processes in the company. As well as documenting
actual events, the main task of controlling is planning.
CEM can determine variances by comparing actual
data with planned data. These variance calculations
enable the company to control business flows.
Then with help of CO, different business areas can
monitor and analyze their performance monthly from
financial point of view. Basically, all the business areas
look at the income statements generated by CO.
Iv. SIMULATION OF BUSINESS AREASEGREGATION
Within CEM, before there were no clear financial
performance measures for different business areas. It
was considered that all the business areas were
2004 IEEE Intemational Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong
interrelated closely and they could not be separated.
But without good measurement and controlling, it is
difficult to improve and to meet requirements of
demanding customers and ever changing market; then
top management believes that there should be lots of
rooms for CEM to improve. So, having studied the
experiences of deregulation of oversea power sectors
and our parent companies, simulation of business area
segregation was put on the agenda in CEM at the
beginning of year 2002.
Under this concept, each business area is a
responsibility center and senior manager of relevant
business area is responsible for its operation and
performance. The performance of each responsibility
center is measured in terms of difference between
revenues it earns and the expenses it incurs, then each
responsibility center is a profit center. Core business
Business Area Description
GED Generation department
DDI Construction and maintenance of Transmission and
Distribution network
GMO Coordination and optimization of CEM generation,
CSD I Supply electricity to end customers - retailing
Importation from GPG
Figure 4-1 Energy Flow and Transfer Price
With the REMS system and CO module of ERP
being in place, the simulation was started from June
2003. All the business areas are involved in the
simulation but only the simulation related to four key
areas (generation, distribution, retail and GMO) will be
elaborated hereafter.
A. Energy infomation
As the basis of simulation, the quantity of energy
flowing among different responsibility centers should
be measured and reported timely. The REMS system
can collect energy information daily, weekly and
monthly.
In the simulation, monthly energy information is
reported to financial department as input of CO
database. The energy information includes:
CEM net energy generation per month
(denoted by Q A l ) , excluding internal
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areas in CEM and respective responsibility centers and
profit centers are defined as table 4-1. So, hereafter
business area, responsibility center and profit center
refer to the same entity.
Among responsibility centers, goods and service are
delivered or accepted. In this case, electricity is the
only good to be considered.
Figure 4-1 shows the energy flow among different
business areas, with arrows representing energy flow
among different part of power network.
When electricity is flowed from one profit center to
another responsibility center, transfer price shall be
defined to calculate revenues of the former or expenses
(cost) of the latter. Unlike market price, which
measures exchanges between a company and its
outside customers, transfer price measures internal
exchanges within a company.
Responsibility Profit Center
Center
GED GED
DDI DDI
GMO GMO
CSD I CSD
consumption by power plants. GED sells
Q A I to GMO.
Net energy importation from GPG power
network (denoted by QAZ), which is
purchased by GMO.
Energy purchase from CIRS (denoted by
Q A 3 ) , which is purchased by GMO.
Energy flowing into 11 kV distribution
network (denoted by QB). QB is the
quantity of energy that is sold to
Distribution business area (DDI) by
GMO.
Energy sold to the end customer (denoted
by Qc), Qc is the quantity of energy that
is sold to the end customer by CSD.
Summation of Q A l , Q A 2 and QA3is Q A , which is the
quantity of energy that GMO purchased from all
sources of electricity. Q A is different from and greater
than Q B ; the difference is transmission network loss
2004 IEEE International Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong
and is assumed by GMO. Qe is different from and
greater than Q,-; the difference is distribution loss and
is assumed by DDI.
The above energy information is reported to
financial department and, together with transfer price,
input to database for hrther processing and reporting,
once per month.
B. Transfer Price
With energy quantity information in hands, transfer
prices shall be defined to complete the internal
transactions. Basically there are three types of transfer
prices: market-based price, profit-based price and cost-
based price.
Market-based transfer price generally is the most
preferable pricing mechanism, as being reasonably
objective rather than a function of relative negotiating
skills of selling and buying profit center senior
managers. However, considering the practical situation
of Macau and the very small scale of electricity market
in Macau, market based price seems not applicable at
the moment.
Profit-based is the present situation of CEM, as
operating under a Scheme of Control Agreement
(SOC) based on a return-on asset regulatory model.
But for the preliminary stage of the simulation of
business areas segregation, the more important issue is
to let all business areas understand and become
familiar with the cost structure of them.
It is why cost-based price been chosen. If feasible,
the cost should be standard cost rather than actual cost.
If it is an actual cost, the selling responsibility center
has little incentive to control and improve efficiency,
because any cost increases will be automatically and
directly passed to the buying responsibility center in
the transfer price.
C. Current Practice of Pricing
GED responsibility center supplies generated
electricity to GMO responsibility center, with quantity
QAI. For this QAl, GED takes into account of capital
cost, fuel cost, personnel expenses and other variable
cost and then defines transfer price (price A) to GMO.
Actually, for different generator, different transfer
price is defined since capital cost, generation
efficiency, fuel type and so on are different from
generator to generator.
With quantity Q B , GMO adds a markup also based
on capital cost, personal expenses and other variable
cost to the average purchasing cost of electricity from
GED, importation and CIRS to calculate transfer price
(price B) charged to DDI.
DDI uses the similar mechanism like GED & GMO
to calculate the transfer price (price C) with quantity
QC that sells to CSD.
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D. Income Statements
With all the data being in database of ERP system,
monthly income statements are reported to relevant
departments and top management of CEM.
In the income statements, detailed information of
revenues, expenses and profit/loss of each business
area is presented. Variances between actual and budget
data are also presented for further analysis and
decision-making by relevant departments.
v . THOUGHTS
OF THE SIMULATION
Based on the results of 4 months simulation, several
points are worthwhile to discuss:
0 The simulation brings company a different
and new concept to operate.
Under this concept, even without deregulation, each
profit center has been paid more attentions to cost
and is trying to reduce cost and to improve
efficiency.
The simulation offers a way of business
monitoring and control in the company.
With the simulation, it is more possible to improve
more quickly and efficiently. Having monthly meter
readings and income statements, the company get a
full picture of energy losses, intemal electricity
consumption, why can or cannot make profit and so
on.
If the objective of improving efficiency
and reducing tariff can be achieved
through this simulation or similar process,
is electricity market deregulation necessary
and better solution for a small electricity
market, like those in Hong Kong and
Macau?
This could be a very sensitive topic and it could be
worthwhile to think about and study in the future.
Further analysis can reveal more ideas to indicate
some directions of next steps:
Transfer pricing policy shall be carefully
defined.
Senior management may specify a method of
computing cost and amount of profit to be included
in the transfer price, in order to be fair for all the
business areas involved. The policy should also
define what cost elements of a selling profit center
should be included in the definition of cost to
determine transfer price.
Especially for the transfer price between GED and
GMO, several different transfer prices may be more
feasible, considering different generation cost at
different time of day and different season of year.
Running hours of generators shall be one important
factor to be considered when setting up the policy.
Negotiation and pricing mechanism among
profit centers could be established to
negotiate a deal and to settle transfer-
pricing disputes.
This shall be one of next steps.
2004 IEEE International Conference on Electric Utility Deregulation, Restructuring and Power Technologies (DRPT2004) April 2004 Hong Kong

Study is needed to make it as possible as IX. BIOGRAPHIES

can to increase total company income
through increases of profit centers’
income. This is to avoid so-called ‘risk of
sub-optimization’.
The problem of ‘sub-optimization’ shall also be an
issue of electricity market deregulation. Non-
traditional thinking, analysis and study shall be
valuable.
In theory, to maximize the profit of the
entire company, the transfer price of
internally electricity transfer should be set
equal to its marginal cost, which is the
change in total cost due to the production
of additional electricity.
But in practice, how to define and calculate the
marginal cost and its elements? Deep
understanding of the processes of electric utility is
critical for this practice.
Benjamin Yue Zongbin was born in
Shandong China in 1969. He received
his both Bachelor (1992) and Master
(1995) of Electncal Engineenng
degrees from the Shandong University
in China.
Benjamn, Yue Zongbin has been
with Companhia de Electricidade de
Macau (CEM) since 1999. He was
technical leader of SDC project phase I
and was nominated as Unit Head in
year 2002. Before joining CEM, he worked with China Electnc
Power Research Institute in Beijing, China. He is co-author of IEE
book ‘Elcctricity distribution network design’ (2“d edition, Chinese
version). His email address is: yuezongbin@yahoo.com.

VI. CONCLUSION
With implementation of remote energy metering
system and ERP software, even though there are flaws
in the jewel of the simulation, it is drawing attentions
of management and staff of each department to
continuously improve efficiency of operation.
Improved efficiency works as cornerstone of
competitive marketplace position of an electric utility
and better power supply services. More important, the
concept requests management of different departments
to consider and meet needs of customers (both internal
customers and external customers) and development on
market, no matter which is internal market or external
market.
To perfect the simulation, more studies on setting
fair and competitive transfer price are needed in the
future. More metering points installation could be
helpful to improve the simulation and make it more
practical in the future.

VII. ACKNOWLEDGMENT
We would like to thank the management of CEM
for allowing us to prepare and present this paper. We
are also grateful to the colleagues of Power and
Networks Dispatch department, BIS project team and
other departments of CEM.

VIII. REFERENCES
[I] Ivan Png, Managerial Economics, second edition, Blackwell
Publishing, 2002
[2] Robert N. Anthony, David F. Hawkins, Kenneth A. Merchant,
Accounting: Text and Cases, tenth edition, McGraw-Hill, 1999

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