SECTION I: THE “SINGLE BUYER MARKET” MODEL – DESCRIPTION AND ASSESSMENT OF ITS EFFICIENCY

2.1. Transition to the “Single Buyer Market”

Immediately upon structural and functional reorganization of the national electric power system, the wholesale market transactions were implemented based on the system of vested bilateral obligations between distribution companies and generators. That system proved to be short-lived. Distribution companies were plagued with retail revenue collection problems. That and possible misappropriation of funds by distribution companies caused the situation where generating companies consistently under-collected a significant portion of the revenue needed not only to maintain the equipment but to pay their fuel suppliers.

Some generating companies also complained that the assignments of these bi-lateral obligations were unfair in the way that some generating companies were assigned most of the contracts with distribution companies with relatively high collection rates while other generating companies receive contracts with distribution companies with low collection rates. Although, as we were told, these bi-lateral obligations were legally enforceable in practice it was nearly impossible to obtain relief through the legal system. On average generators used to collect approximately 60 to 70% of the payments due them.

2.2. Description of the “Single Buyer Market”

Facing the above described problems in 2001, the ERA adopted a market model which became known in Mongolia as the “Single Buyer Market”. Under this model there are no longer any bi-lateral obligations between generating and distribution companies. The flow of funds under this model is implemented through a Cash Management System (CMS) under which retail customers of state owned distribution companies deposit their payments into the so-called “zero balance” accounts established by each distribution company. These accounts prohibit any withdrawals by distribution companies. At the end of each day funds from these accounts are transferred into what is called “Main Zero Balance” account (MZBA), established in the Mongolian Savings Bank. Private distribution companies are not mandated to establish “zero balance” accounts and are allowed to make direct payments to the “Single Buyer”. Disbursements to the market participants (distribution and generation companies) and to the dispatching entity are made from MZBA in accordance with the pre-agreed allocation formula approved by licensees at their annual meetings, by the Transmission Company, which acts as if it were a Single Buyer. The CMS ensures that each entity receives a “fair” share of collections. However, the only entity that receives full payment due is a supplier of imported power. The amount of payments to other entities varies depending on retail revenue collection.

It has to be mentioned that because the funds allocation formula is based upon forecasted levels of consumption and generation, within the framework of the “Single Buyer” market, it is also necessary to operate a spot market, where generation companies settle deviations from planned output. Only generating companies participate in this market under the rules approved by ERA. The settlement between concerned generation companies is performed by adjusting the allocation of revenue due to these companies.

According to representatives of the ERA, Ministry of Fuel and Energy and generation companies, since the CMS system was introduced the collection rate of funds available to the “Single Buyer” for disbursement has improved significantly. For example according to the management of Ulaanbaatar CHP 4, the station now receives 97% of the revenue that would be due it based on generated energy and the approved generation tariff.