Abstract

The pricing of utilities such as water, electricity, and gas is crucial to the well-being of the public. In recent years, the phenomenon of rising prices for these utilities has sparked widespread social debate. Some of these price increases have been implemented in a regulated manner following public hearings, while others have been irregular and infringed upon the rights of the public. In the current complex situation, it is necessary to view the price increases of public utilities rationally and objectively.

This paper organizes the pricing mechanisms of China's public utilities, compares the current charges for water, electricity, and gas with international levels, and answers the following questions: What is the international level of China's public utility prices? What are the reasons for the recent price increases in public utilities? Are they to rationalize the pricing mechanism or to increase revenue to cope with financial difficulties? How much will they affect inflation and the lives of residents? How can the relationship between government subsidies, enterprise charges, and resident payments be balanced from a holistic perspective?

Advertisement

We believe that there is no need to engage in meaningless emotional debates, whether it is good or bad, should or should not, and cannot be judged subjectively and by a one-size-fits-all "black and white" approach. Engaging in value judgment debates is unresolvable. Our goal is to solve problems by building consensus and considering the interests of all parties as much as possible. We can understand the pricing in China's public utility sector from the perspective of economic pricing mechanisms and global comparisons. The pricing issue is inherently a market issue, and China is accelerating the construction of a unified national market and promoting the market-oriented reform of factors, so prices can be determined by the market principles of supply and demand; however, water, electricity, and gas are not ordinary commodities, they have certain public welfare and public attributes, and due to historical reasons, they are even more complicated.

1. Pricing Mechanism and Charging Standards for Water Utilities

Regarding the water pricing mechanism, the retail water price is composed of the basic water price, sewage treatment fee, and water resource tax, following the principle of "allowable cost + reasonable profit" and is government-regulated.

China's current water prices are at a relatively low international level, with many places experiencing cost inversion in water prices, and the government provides a large amount of subsidies. According to a survey by the International Water Association (IWA), for water usage of 100m³ or less, the average water price in China's four major municipalities in 2021 was $0.7/m³. Ranked by price from high to low, they are all in the bottom 10% among the 173 major cities in the world. Many places in China have the problem of cost inversion in water prices, and the sewage treatment fees actually paid by residents are difficult to cover the actual costs, and the gap can only be filled by fiscal funds. Looking at different sectors, residential water prices are lower than non-residential water prices. As of the end of June 2024, the average non-residential water price in 36 key cities across the country was 5.27 yuan/cubic meter, and the average first-tier residential water price was 3.47 yuan/cubic meter, which is 65.8% of the non-residential water price. Looking at different regions, the water prices in economically developed and water resource-scarce areas are higher. The three cities with the highest residential tap water prices among the 36 key cities in the country are Shijiazhuang, Beijing, and Tianjin.

2. Pricing Mechanism and Charging Standards for Electricity Utilities

Regarding the electricity pricing mechanism, the retail electricity price (for users) is composed of the grid connection price (power generation companies), transmission and distribution price (power grid), and government funds and surcharges (collected by the power grid). Currently, following the principle of "regulate the middle, liberalize both ends," electricity price reform is being promoted, shifting from a planned pricing based on benchmark electricity prices to market pricing. However, looking at the actual operation, China's electricity market is in a special pattern where "planned electricity" and "market electricity" are running concurrently. Among them, the electricity prices for commercial and large industrial users are gradually implementing market-oriented pricing, while residential users are currently not entering the electricity market for transactions and are regulated by the government to adjust prices.China's electricity prices are at a relatively low level internationally. According to statistics from Global Petrol Prices, by the end of 2023, the average residential electricity price in China was 0.531 yuan per kilowatt-hour, only 58.6% of the global average; the industrial electricity price was 0.616 yuan per kilowatt-hour, 57.2% of the global average. Looking at it by sector, China's residential electricity prices are lower than industrial electricity prices, indicating cross-subsidies from industrial users to residential users. In 2019, the scale of cross-subsidies in national electricity prices exceeded 270 billion yuan. Regionally, electricity prices in the eastern and central regions are higher than those in the western regions.

3. Natural Gas Pricing Mechanism and Charging Standards

For the natural gas pricing mechanism, the selling price of natural gas = source price + pipeline transportation price + distribution fee. By establishing an upstream-downstream price linkage mechanism for natural gas, which links the upstream source cost with the downstream user's selling price, the pricing power for upstream source prices and downstream selling prices is gradually returned to the market. However, in practice, the current natural gas price system still operates under a dual-track system with two separate prices for sources and users. Classified by source, it is divided into regulated and unregulated gas, with regulated gas prices being lower than unregulated gas prices; classified by user, separate pricing is implemented for residential and non-residential users, with residential gas prices generally lower than non-residential gas prices.

China's residential gas prices are relatively low, with long-term fiscal subsidies and cross-subsidies from commercial and industrial users. According to CEIC statistics, in March 2024, the industrial natural gas price in 36 major Chinese cities was 3.57 yuan per cubic meter, while the residential natural gas price was 2.74 yuan per cubic meter. Commercial and industrial users consume a large amount of gas and have lower supply costs, so their gas prices should logically be lower than residential gas prices, but China's gas charges are the opposite. On the one hand, because in the actual natural gas price linkage, the adjustment range for non-residential users is higher than for residential users, causing cross-subsidies. On the other hand, local governments have provided fiscal expenditure subsidies for the purpose of ensuring supply and stable prices. Regionally, gas costs decrease from east to central to western regions.

4. Railway Transportation Charging Mechanism and Charging Standards

High-speed train and conventional railway pricing are categorized: the pricing power for first and second-class seats of high-speed train sets has been delegated to the national railway group, while the ticket prices for hard seats and hard sleeper berths of ordinary passenger trains are still coordinated by the State Council's price department. China's high-speed train ticket prices are only 1/4 or 1/5 of foreign ticket prices. As disclosed by the high-speed rail network, by the end of 2023, only six high-speed rail lines in China were profitable: Beijing-Shanghai, Beijing-Tianjin, Shanghai-Hangzhou, Shanghai-Nanjing, Nanjing-Hangzhou, and Guangzhou-Shenzhen-Hong Kong.

II. What are the underlying reasons for the recent concentration of public utility price increases? What are the impacts?

1. Phenomenon: Recently, there has been a concentrated increase in public utility prices such as water, electricity, and gas for residents.

Over 130 cities and counties have issued notices or documents on the upstream and downstream price linkage mechanism for natural gas, with residential gas price increases of about 5%-10%; Guangzhou held a hearing on the adjustment of water prices, with residential water price increases of about 25%-30%; Anhui has further optimized peak and valley time-of-use electricity pricing. In addition, four high-speed train routes have begun to implement a flexible pricing mechanism, with prices rising and falling, and currently, the upper limit of some ticket prices has increased by about 10%-20%.

2. Reasons: To alleviate fiscal and cost pressures, improve service quality, and comply with the requirements of public utility price reform.Firstly, it alleviates fiscal pressure. The land finance is unsustainable, and policies such as tax cuts and fee reductions have led to a decline in fiscal revenue capacity. Appropriately promoting the adjustment of public utility prices can reduce the burden of subsidy expenditures on local governments.

Secondly, the rise in costs has led to widespread losses in public utility enterprises. In the last global inflation cycle, upstream energy prices increased significantly, but the rise in costs could not drive price adjustments at the sales terminal, and the profits of most urban gas companies were damaged. Since 2023, although energy prices have fallen somewhat, they are still higher than pre-pandemic levels, and public utility enterprises still face significant cost pressures.

Thirdly, unstable profits affect the public utility enterprises' ability to fulfill social safety responsibilities such as equipment updates and pipeline maintenance. Promoting a new round of large-scale equipment updates is an important measure to accelerate the construction of a new development pattern and promote high-quality development. However, the prerequisite is that investment costs can be smoothly passed on to the terminal selling price; otherwise, the motivation of public utility enterprises to participate in equipment updates and renovations will be insufficient.

Fourthly, it conforms to the requirements of public utility price reform. The purpose of public utility price reform is to give full play to the decisive role of market allocation of resources, break the rigidity of civilian end prices, and reasonably pass on upstream costs. Recently, the adjustment of public utility prices in many places is in line with the above reform direction.

3. Impact: The price increase has a limited impact on inflation and may impact low- and middle-income groups, but it will gradually repair the profits of public utility enterprises.

From the data, the impact of public utility price increases on inflation is limited. Water, electricity, and gas account for about 4.7% of the CPI weight, and high-speed rail accounts for about 0.12-0.14% of the CPI weight. The combined环比 impact of this round of public utility price increases on CPI is less than 0.01 percentage points, and the year-on-year impact is about 0.02 percentage points.

From the perspective of the impact on residents, the overall impact of public utility price increases is limited, but it may have a certain impact on low-income groups, and it is necessary to provide support simultaneously during the economic downturn. By the end of 2022, the per capita cash expenditure on water, electricity, and gas accounted for 2.7% of disposable income per capita. If the expenditure on water, electricity, and gas increases by 10%, the proportion of disposable income increases by only 0.27 percentage points. According to the quintile grouping of national residents' income, for low-income residents and lower-middle-income residents, an increase of 10% in water, electricity, and gas expenditure will increase the proportion of disposable income by 1.14 and 0.51 percentage points, respectively.

For public utility enterprises, price increases will gradually repair enterprise profits. Since 2024, domestic energy prices have been weak, driving down costs, and coupled with price increases in some regions' public utilities, from January to April 2024, the cumulative year-on-year growth of operating profits of public utility enterprises was 40.8%.

III. Viewing this round of public utility price increases from a theoretical and global perspective

From a theoretical perspective, as quasi-public products, the supply of public utilities should follow the principle of shared responsibility between the government and the market, and public utility prices should adopt a combination of government subsidies and market payments.From a global perspective, most countries adopt government-guided pricing or government pricing for public utilities, and ensure supply and price stability through market regulation and fiscal subsidies. In terms of pricing mechanisms, major countries around the world strictly control the prices of public utilities and take price suppression measures during periods of significant energy price fluctuations, including subsidies and tax reductions. At the same time, they also grant market entities some pricing power by setting price ceilings, to alleviate the pressure of sudden cost increases.

China's public utility price reform has increased the market payment ratio, fully leveraging the role of prices as a lever, and improving the efficiency of resource allocation. In the past, China's public utility pricing mechanism of low prices and high fiscal subsidies made prices independent of supply and demand relationships and cost control, seriously deviating from their value, leading to public utility supply lagging behind social demand. The recent price increase in public utilities, by increasing the market payment ratio, is not only a correction of the past phenomenon of income cost inversion in public utilities but also aims to further improve the efficiency of resource allocation. Of course, as the economy and consumer confidence are recovering after the pandemic, relevant departments and local governments must pay close attention to the timing of price increases and the overall considerations after the increase, such as the affordability for low- and middle-income residents, the impact on consumer confidence and willingness to consume, and actively strengthen proactive communication with the market, taking corresponding countermeasures.

IV. Policy Recommendations: Balancing Short-term and Medium- to Long-term Issues, Avoiding Contraction Effects and Impact on Low- and Middle-income Groups in the Short-term, and Adhering to the Direction of Market-oriented Reform of Factors in the Medium- to Long-term

In the short term, the price increase of public utilities needs to balance efficiency and equity, avoiding impact and contraction effects on low-income groups. First, establish energy-specific subsidies for low-income groups; second, implement tiered price increases; third, replace energy-saving facilities for low-income groups; fourth, optimize enterprise management levels at the same time to protect consumer rights; fifth, the price increase process should be standardized and proactive communication with the market should be strengthened.

In the medium to long term, it is necessary to improve the public utility price regulation mechanism and adhere to the direction of market-oriented reform of factors. On the one hand, continue to improve the formation and transmission mechanism of public utility prices; on the other hand, promote the construction of a unified national market, improve resource utilization efficiency, and expand scale effects.

Risk Warning: The price increase of public utilities exceeds expectations, and there is a significant change in the public utility pricing mechanism.

Table of Contents

I. China's Public Utility Pricing Mechanism and Charging Standards

(1) Water Price Mechanism and Charging Standards

(2) Electricity Price Mechanism and Charging Standards(III) Natural Gas Pricing Mechanism and Charging Standards

(IV) Railway Transportation Charging Mechanism and Charging Standards

II. Reasons and Potential Impacts of Recent Public Utility Price Increases?

(I) Phenomenon: Concentration of Price Increases in Water, Electricity, and Gas, High-Speed Rail Lines Initiate Flexible Pricing

(II) Causes: To alleviate fiscal and cost pressures, improve service quality, and comply with the requirements of public utility price reform

(III) Impacts: Price increases have a limited impact on inflation, may impact low-income groups, but will gradually restore the profitability of public utility enterprises

III. Viewing the Current Round of Public Utility Price Increases from Theoretical and Global Perspectives

IV. Policy Recommendations: Balancing Short-term and Long-term Issues, Avoiding Contraction Effects and Impacts on Middle and Low-income Groups in the Short-term, and Adhering to the Direction of Market-oriented Reform of Factors in the Long-term

Main Text

I. Pricing Mechanism and Charging Standards of Public Utilities in Our Country(I) Water Pricing Mechanism and Charging Standards

The sale price of water is composed of the basic water price, sewage treatment fee, and water resource tax, following the principle of "allowed cost + reasonable profit" and is subject to government pricing. From the perspective of the regulatory authorities, the "Urban Water Supply Pricing Management Method" (2021) stipulates that the urban water supply price is generally subject to government pricing, with the price authorities at the county level and above being the regulatory authorities for urban water supply prices. In terms of pricing methods, different pricing is implemented based on the nature of use, specifically divided into three categories: domestic water use, non-domestic water use, and special water use. Among these, the domestic sector implements a tiered water pricing system, requiring that the tiered water pricing for domestic water use should have no fewer than three levels, with the price ratios arranged at no less than 1:1.5:3; the non-domestic and special water use sectors implement a progressive pricing system for water use exceeding the quota, where the water price remains unchanged within the quota, and increases progressively with the increase in water use beyond the approved quota. In terms of water price formulation, the allowed income of the water supply company is determined based on the method of "allowed cost plus reasonable profit," and then the water supply prices for various users are formulated on the basis of the allowed income.

China's current water prices are at a relatively low level internationally, with many places experiencing cost inversion in water prices, and the government provides a large amount of subsidies. According to a survey by the International Water Association (IWA), when using 100m³ of water or less, the average water price in China's four major municipalities in 2021 was $0.7/m³. Ranked by price from high to low, they are all in the bottom 10% among the 173 major cities in the world. There is a phenomenon of cost inversion in water prices in many places in China. Taking the sewage treatment fee as an example, the actual sewage treatment fee paid by residents is difficult to cover the actual cost, and the gap can only be filled by fiscal funds. It is estimated that the current sewage treatment fee collected can only reach 0.7-0.8 times the full cost. According to the calculation of 180 million tons of sewage treatment per day in cities at the county level and above, and a sewage treatment fee of 1 yuan per ton, the fiscal subsidy required per day is about 40 million yuan-60 million yuan, with an annual gap of tens of billions of yuan.

Looking at different sectors, the water price for residents is lower than that for non-residents. China prices the water for residents based on the principle of breaking even with a slight profit and reasonable profit for other uses, ensuring from the pricing procedure that the water price for residents is lower than that for non-residents. As of the end of June 2024, the average price of non-residential water use in 36 key cities across the country was 5.27 yuan per cubic meter, and the average water price for the first tier of residents was 3.47 yuan per cubic meter, which is 65.8% of the non-residential water price.

Looking at different regions, the water price is higher in economically developed and resource-scarce areas. Divided by geographical regions, the water price shows a pattern of being lower in the south and higher in the north. As of the end of June 2024, according to the latest tap water prices in 36 key cities, the average water price for the first tier of residents in 17 cities in the northern region was 3.77 yuan per cubic meter, while the average price in 19 cities in the southern region was 3.20 yuan per cubic meter. The northern cities were 0.57 yuan per cubic meter higher than the southern cities, mainly due to the distribution pattern of abundant water resources in the southern region and scarce water resources in the northern region. Divided by the eastern, central, and western economic belts, the water price shows a pattern of being higher in the east and lower in the west. The average water price for the first tier of residents in cities in the western region was the lowest, at 3.23 yuan per cubic meter, followed by cities in the central region at 3.38 yuan per cubic meter, and the highest was in cities in the eastern region at 3.69 yuan per cubic meter, which is 14.2% higher than the western region. According to the "Urban Water Supply Pricing Management Method" (2021), "Water price formulation needs to consider factors such as the local economic and social development level and the user's ability to bear the cost. If the price adjustment is not in place, causing the water supply company to be difficult to achieve the allowed income, the local people's government should give corresponding compensation." Generally speaking, economically developed areas have a large demand for water, the marketization level of water supply companies is relatively high, and the government subsidy is relatively small.

(II) Electricity Pricing Mechanism and Charging Standards

The sales electricity price (for users) is composed of the on-grid electricity price (power generation companies), transmission and distribution price (power grid), and government funds and surcharges (collected by the power grid). Currently, the electricity price reform is being implemented according to the principle of "regulating the middle and liberalizing both ends." In the past, China's power market implemented the "planned electricity" model, which simply means that the power grid, as a middleman, purchases electricity from power generation companies and then sells it to users, with both the purchase price and the selling price determined by relevant national departments. According to the new regulations on the electricity pricing mechanism reform, the "market electricity" model will be implemented according to the principle of "regulating the middle and liberalizing both ends," that is, the power grid only charges the middle transmission and distribution price, which is the "electricity transportation" fee, and the on-grid electricity price and sales price at both ends will be market-priced. The government funds and surcharges are non-tax revenues collected through electricity prices, used to subsidize renewable energy generation, major water conservancy construction, hydropower station reservoir resettlement, and rural network loan funds. Due to the different collection targets of various funds, the amount paid varies from place to place, and currently, the government funds and surcharges collected from residents in Beijing are less than one cent per kilowatt-hour.

Looking at the actual operation, China's power market is in the process of transformation, forming a special pattern where "planned electricity" and "market electricity" coexist. In terms of on-grid electricity prices, coal electricity is gradually implementing "market electricity," while hydropower, nuclear power, and gas electricity are dominated by planned electricity, with market electricity as a supplement; in terms of sales electricity prices, China's industrial and large industrial user electricity prices are gradually implementing marketization, while residents, agriculture, important public services, and public welfare services and other users are currently not entering the power market for transactions, but are guaranteed by power grid companies and regulated by government public welfare prices to ensure stable electricity prices.

In terms of billing methods, to guide users to save electricity and avoid peak periods, China mainly implements tiered electricity prices, peak and valley time-of-use electricity prices, flood and drought season electricity prices, and differentiated electricity prices for high-energy-consuming industries.

China's electricity prices are at a relatively low level internationally. According to statistics from Global Petrol Prices, as of the end of 2023, the average residential electricity price in China was 0.531 yuan per kilowatt-hour, while the average residential electricity price in major countries worldwide was 1.104 yuan per kilowatt-hour, and China's residential electricity price was only 58.6% of the global average; China's industrial electricity price was 0.616 yuan per kilowatt-hour, which is 57.2% of the global average.Breaking it down by sector, the electricity prices for residential users in China are lower than those for industrial users, resulting in cross-subsidies from industrial users to residential users. According to the characteristics of electricity load, residential electricity consumption is at the end of the power grid, and most of it occurs during peak hours, with supply costs much higher than those for commercial and industrial users. However, the electricity prices for residential users in China have long been lower than those for industrial users. According to data from the State Grid, in 2019, the average residential electricity price in 35 OECD countries with publicly available data was 1.53 times the industrial electricity price, while China's residential-to-industrial price ratio was 0.85 times, ranking second to last among 36 countries, just above Mexico. In China, large industrial and general commercial and industrial users have long subsidized residential and agricultural electricity, with the scale of cross-subsidies in China's electricity prices exceeding 270 billion yuan in 2019. However, cross-subsidies in electricity prices are not unique to China; many countries around the world had cross-subsidies in the early stages of power industry development, including emerging industrialized countries such as Thailand, India, Malaysia, and Brazil, where the residential-to-industrial price ratio is 1.03 times, lower than the average of OECD countries.

By region, electricity prices in the eastern and central regions are higher than those in the western region. Based on the current electricity prices in various regions, the first tier of residential electricity prices for areas with less than 1 kilovolt in the eastern, central, and western provinces are 0.55, 0.56, and 0.47 yuan per kilowatt-hour, respectively, with the western region being 14.5% lower than the eastern and central regions.

(III) Natural Gas Pricing Mechanism and Charging Standards

The sales price of natural gas = source price + pipeline transportation price + distribution fee. The pricing authority for upstream source prices and downstream sales prices is gradually returned to the market. Since 2015, China has been advancing natural gas price reform following the concept of "regulating the middle and liberalizing both ends." The pipeline transportation price and distribution fee can be simply understood as the "gas transportation fee," which is determined by the government based on the principle of "allowed cost + reasonable profit." The upstream source price and downstream sales price are formed through market competition. By establishing a natural gas price linkage mechanism between upstream and downstream, that is, linking the upstream source cost with the downstream end-user sales price, market-oriented pricing is achieved.

In practice, China's natural gas price system still has a dual-track system for both source and user prices, that is, regulated gas prices are lower than unregulated gas, and residential gas prices are lower than non-residential. Looking at the source price, the 2020 "Central Pricing Catalogue" classified upstream natural gas by source into regulated and unregulated gas, with differentiated pricing. Unregulated gas includes domestic marine gas and imported LNG, etc., with prices formed by the market and often higher; regulated gas includes conventional domestic land gas and imported pipeline gas put into production before the end of 2014, with prices determined by the government and at a lower level. Looking at the sales gas price, separate pricing is implemented for residential and non-residential users. When the upstream source price is adjusted, the non-residential gas price is more market-oriented and easier to pass through, while the residential gas price is less frequently adjusted, resulting in generally lower prices.

The relatively low residential gas prices in China are mainly due to fiscal subsidies and cross-subsidies from commercial and industrial users. According to CEIC statistics, in March 2024, the industrial natural gas price in 36 major cities in China was 3.57 yuan per cubic meter, and the residential natural gas price was 2.74 yuan per cubic meter. Theoretically, commercial and industrial users consume a large amount of gas and have lower gas supply costs, so their gas prices should be lower than residential gas prices, but China's gas charges are the opposite. On the one hand, because in the actual natural gas price linkage, the adjustment range for non-residential users is higher than for residential users, forming cross-subsidies. On the other hand, local governments provide fiscal subsidies out of the need to ensure supply and stabilize prices. When upstream source prices rise, there is greater resistance to adjusting residential gas prices, affecting the profits of city gas companies and the safe and stable supply of gas. To achieve the supply guarantee target, many local governments provide fiscal subsidies. For example, Hebei Province subsidized the "inversion" part of the city gas company's purchase and sales gas price during the 2023 heating season, with an estimated subsidy amount exceeding 2 billion yuan [1].

By region, gas costs decrease from east to central to west. According to the National Development and Reform Commission's 2019 published table of natural gas benchmark gate station prices for each province (region, city), the highest natural gas benchmark gate station price is in the eastern region, averaging 1889 yuan per thousand cubic meters, followed by the central region at 1791 yuan per thousand cubic meters, and the western region is the lowest, at 1401 yuan per thousand cubic meters.

(IV) Railway Transportation Charging Mechanism and Charging Standards

High-speed train and conventional railway implement category pricing, with the pricing authority for first and second-class seats of high-speed train sets delegated to the National Railway Group, while the ticket prices for hard seat and hard sleeper of ordinary passenger trains are still coordinated by the State Council's price主管部门. In 2016, the National Development and Reform Commission successively issued the "Notice on Reforming and Improving the High-Speed Train Passenger Ticket Pricing Policy" and the "Notice on Issues Concerning the Perfection of the Pricing Mechanism for软座 and Soft Sleeper Tickets of Ordinary Passenger Trains," delegating the pricing authority for first and second-class seats of high-speed train sets, as well as软座 and soft sleeper tickets of ordinary passenger trains to the National Railway Group; business class, first class, dynamic sleeping berths, ordinary passenger train high-grade soft sleeper compartments, and the ticket prices for passenger trains on newly built high-speed railway lines invested and controlled by social capital are subject to market regulation; the ticket prices for hard seat and hard sleeper of ordinary passenger trains are still coordinated by the State Council's price主管部门.

China's high-speed train ticket prices are only 1/4 or 1/5 of foreign ticket prices. According to the World Bank's 2019 report "China's High-Speed Railway Development," the ticket price per person per kilometer for second-class seats on high-speed trains traveling at 300-350 kilometers per hour in China is 0.46 yuan, while in France, it is 1.61 to 2.08 yuan, in Germany, it is 2.28 yuan, and in Japan, it is 1.94 to 2.08 yuan. China's high-speed train ticket prices are 1/4 or 1/5 of foreign ticket prices. According to the High-Speed Rail Network, as of the end of 2023, only six high-speed rail lines in China, namely Beijing-Shanghai, Beijing-Tianjin, Shanghai-Hangzhou, Shanghai-Nanjing, Nanjing-Hangzhou, and Guangzhou-Shenzhen-Hong Kong, were profitable.II. Reasons and Potential Impacts of Recent Public Utility Price Hikes

(I) Phenomenon: Concentrated Price Increases in Water, Electricity, and Gas, and Flexible Pricing for High-Speed Rail Lines

Recently, there has been a concentrated increase in the prices of public utilities such as water, electricity, and gas for residential users, with the rate of increase exceeding the average level of previous years. Since 2023, more than 130 cities and counties have issued documents or notices on the linkage mechanism for residential gas sales prices, promoting an increase in residential gas prices, with a price increase of about 5%-10%. On March 11, Anhui Province optimized the peak and valley time-of-use electricity pricing policy, adding months for the implementation of seasonal peak electricity prices, and further adjusted the upward floating ratio of peak prices and the downward floating ratio of valley prices. On May 9, the Guangzhou water price hearing proposed two sets of tap water price adjustment plans, with a price increase of about 25%-30%. According to statistics from the National Development and Reform Commission, from June 2006 to January 2022, the cumulative price increases for residential electricity, water (excluding sewage treatment fees and water price surcharges), and pipeline natural gas services in 36 cities were 4%, 43%, and 34%, respectively, with an average annual compound growth rate of only 0.3%, 2.4%, and 2.0%. The price increases for water, electricity, and gas in some areas this time have all exceeded the average level of previous years.

Four high-speed rail lines have initiated price adjustments, with prices rising and falling, and some ticket price limits increasing by 10%-20%. The lines being adjusted are high-speed trains running at speeds of 300 km/h or more on the Wuhan-Guangzhou section of the Beijing-Guangzhou High-Speed Railway, the Shanghai-Hangzhou section of the Shanghai-Kunming High-Speed Railway, the Hangzhou-Changsha section of the Shanghai-Kunming High-Speed Railway, and the Hangzhou-Ningbo section of the Hangzhou-Shenzhen Railway. Based on the currently announced ticket prices and announcements from various railway companies, the ticket price increases for the high-speed rail lines involved in this adjustment range from 10% to 20%, with a 55% discount being the lower limit for ticket prices.

(II) Reasons: Alleviating Fiscal Pressure, Cost Pressure, Improving Service Quality, and Complying with Public Utility Price Reform Requirements

Firstly, alleviating fiscal pressure. The difficulty in sustaining land finance and policies such as tax cuts and fee reductions have led to a decline in fiscal revenue capacity. In 2023, the ratio of general public budget revenue to GDP was 17.2%, a decrease of about 5 percentage points from the peak in 2015, and the general public fiscal revenue and expenditure gap reached 5.8 trillion yuan, an increase of 88.4 billion yuan from the previous year. Faced with fiscal pressure, there are generally three options to alleviate fiscal pressure: one is to increase taxes and non-tax revenue, but this is currently difficult, and local governments have been actively revitalizing existing fiscal resources and assets, and it is necessary to stabilize the macro tax burden in the future; the second is to increase debt to alleviate liquidity risks, but local government debt has already been subject to quota management, and it is necessary to strictly control hidden debt; the third is to cut fiscal expenditures. China's water, electricity, and gas prices have remained at a relatively low level in the world for many years, partly due to large-scale fiscal subsidies. However, against the backdrop of large-scale fiscal subsidies being unsustainable, appropriately promoting the upward adjustment of public utility prices can reduce the burden of subsidy expenditures on local governments.

Secondly, cost increases have led to widespread losses in public utility enterprises. Since 2021, geopolitical conflicts have affected global energy supply, causing a significant increase in global energy prices. The maximum increase in domestic steam coal futures prices reached 2.7 times, and in 2022, the average import prices of China's LNG and pipeline gas both increased by more than 40% year-on-year. China has taken a series of measures to ensure supply and stabilize prices, stabilizing the end-sale price of gas, but this has also led to the inability of urban gas companies to pass on the increased cost pressure to the sales end. In 2022, the net profits of leading urban gas companies such as Kunlun Energy, China Resources Gas, andENN Energy all showed a significant decline. Since 2023, although energy prices have fallen somewhat, they are still higher than pre-pandemic levels, and public utility enterprises still face significant cost pressure.

Thirdly, unstable profits affect the ability of public utility enterprises to fulfill social security responsibilities such as equipment updates and pipeline maintenance, which is not conducive to improving the quality of public utility services. Promoting a new round of large-scale equipment updates is an important measure to accelerate the construction of a new development pattern and promote high-quality development. Among them, accelerating equipment updates in the fields of construction and municipal infrastructure is one of the important actions, including promoting the upgrade and transformation of water plants and pressure regulating and storage water supply facilities in various regions, continuously promoting the update and transformation of heating facilities and equipment, and continuously implementing the update and transformation of aging pipelines such as gas. Professional operating units bear the main responsibility for the investment in equipment updates and transformations, but the premise is that investment costs can be smoothly passed on to the end sale price; otherwise, the motivation of public utility enterprises to participate in equipment updates and transformations is insufficient.

Fourthly, complying with public utility price reform requirements. In 2021, the National Development and Reform Commission issued the "Notice on the Action Plan for Deepening Price Mechanism Reform during the '14th Five-Year Plan' Period", which requires that by 2025, prices in competitive fields and links will be mainly determined by the market, and the scope of government pricing will be further narrowed to important public utilities, public welfare services, and network-type natural monopoly links. The government pricing items in the 2020 edition of the "Central Pricing Catalogue" were reduced by nearly 30% compared to the 2015 edition. Market-oriented pricing for competitive links such as on-grid electricity prices, sales electricity prices, and natural gas wellhead prices aims to break price rigidity, reasonably guide upstream costs, and ensure that the overall price level operates within a reasonable range. The recent price increases for water, electricity, and gas, as well as the adjustment of high-speed rail, are in line with the public utility reform thinking and overall direction.In the short term, the increase in public utility prices needs to balance efficiency and fairness to avoid impacting low-income groups and to protect the legitimate rights and interests of consumers. Firstly, energy-specific subsidies for low-income groups should be established. Some regions in China have introduced policies to reduce water fees for low-income groups, but these lack continuity and systematic subsidy policies. Secondly, tiered price increases should be implemented. Many countries around the world use tiered pricing for public utilities, and the price increases are not uniform across all tiers. Generally, the price increases for the first, second, and third tiers are progressively higher, which aligns with environmental protection concepts and mitigates the impact of price increases on low-income families. Thirdly, energy-saving facilities should be replaced for low-income groups. By improving the efficiency of energy use, it is also possible to reduce the rigid expenditure on public utilities. Fourthly, the management level of water, electricity, and gas supply companies should be optimized to protect consumer rights. Price increases that follow normal and standardized hearing procedures and obtain consent from all parties are acceptable to consumers. The recent "price increase chaos" mainly stems from issues such as incorrect meter reading and illegal estimation, confusion in billing cycles, and inadequate implementation of price policies by the companies involved. Companies should further improve their management level to ensure that the processes for meter replacement, meter reading, and billing are standardized and transparent, protecting the legitimate rights and interests of consumers. Fifthly, the price increase process should be standardized and proactive communication with the market should be strengthened. Public utilities are related to the well-being of people's livelihoods, and the prices of public utilities should be adjusted reasonably and increased clearly. The price increase process should be standardized, and opinions from representatives of all parties should be widely heard.

In the medium to long term, it is necessary to improve the mechanism for regulating public utility prices and adhere to the direction of market-oriented reform of factors. On the one hand, continue to improve the mechanism for the formation and transmission of public utility prices. Deepen the reform of the price formation mechanism in key areas, continuously deepen the reform of electricity prices, accelerate the rationalization of the electricity transmission and distribution price system, improve the price formation mechanism for renewable energy, and establish a new type of energy storage price mechanism; promote the construction of natural gas market competition system, steadily advance the reform of natural gas gate station prices, coordinate the fair opening of urban gas distribution networks, and reduce the levels of gas distribution; systematically advance the reform of water resource prices, in conjunction with the improvement of sewage treatment and discharge standards, raise the level of sewage treatment fees to compensate for costs and achieve reasonable profits; establish an early warning and response mechanism for significant price fluctuations; strengthen the analysis and judgment of international energy markets, terminal demand, and futures and spot markets, improve the price early warning mechanism, and smooth out price fluctuations through reserve absorption and regulation, and ensure the supply and price stability.

On the other hand, adhere to the direction of market-oriented reform of factors, promote the construction of a unified national market, and expand the scale effect. In 2022, the Central Committee of the Communist Party of China and the State Council issued the "Opinions of the Central Committee of the Communist Party of China and the State Council on Accelerating the Construction of a Unified National Market," proposing the construction of a unified national energy market and the cultivation and development of a unified national ecological environment market. The first electricity system reform to be promoted has achieved initial results. Currently, China has formed two national-level electricity trading centers in Beijing and Guangzhou. With the rapid growth of the country's renewable energy generation, it is appropriate to quickly promote the construction of a market mechanism adapted to the new type of power system. The reform of natural gas prices started late and achieved quick results. The natural gas price linkage mechanism for residents is accelerating, but the urban gas price linkage mechanism in most regions is still lagging. Compared with electricity and natural gas, China's water rights trading market is still in a state of dispersion and self-organization. According to the transaction data of the China Water Rights Exchange, as of the end of May 2024, the water rights trading volume is less than one-thousandth of the national annual water consumption, and it is necessary to strengthen the integration of water rights trading platforms across regions and promote the further expansion of trading entities.