Hongkong Electric

Leader Jan 08 2008

Under the new schemes of control to begin in September, CLP Power and Hongkong Electric have accepted smaller profits. As a result, the consumer will pay a lower basic tariff. The firms also face a cut in their rate of return if they exceed any pollution emissions caps, but will be entitled to a slightly higher rate if they do not.

They will be allowed to make a 9.99 per cent profit on the value of their investment in fixed assets, compared with 13.5 to 15 per cent at present. Analysts calculate their average return over the past 10 years at 14.4 per cent. The new deal therefore represents a 30 per cent cut in core profit, a remarkable concession in Hong Kong. To make up for it, they will have to source more of their earnings offshore, a strategy they have already employed with success. ”

But they will not find a better rate of return. The reduced rate remains superior to the single-digit returns obtainable in the heavily regulated electricity markets of Australia, where they are both significant players, or of Britain. On balance, that is a good deal in a stable market where customers have a name for paying their bills.

And they have driven a tough bargain. The government has achieved its aim of reducing the rate of return to a single digit, but only by a face-saving 0.01 per cent. The 0.2 to 0.4-point cuts in the rate of return for exceeding any of the emissions caps are also derisory in terms of deterrent value. And there may be a devil in the details of the caps and cuts. A more effective incentive to cut emissions will be to avoid provoking critical scrutiny of their privileged market position.

The government says consumers, who will soon face power bill increases of up to 6 per cent, stand to benefit from cuts in the basic tariff that could reach double digits. However, the saving could easily be eroded by further increases in fuel costs, which are passed on.

That said, the new agreements are to be welcomed. The existing scheme served the city well because it encouraged investment in new generators and power networks to supply the demands of a growing population and industry. Now that population growth has slowed and industry has largely moved elsewhere, there is no longer any reason for virtual monopolies to be allowed to milk their customers according to that formula.

A higher rate of return – 11 per cent – on investment in renewable energy reflects the higher costs and the case for environmentally friendly measures. However, this is a reminder that over the decades the existing schemes were criticised for encouraging overinvestment in fixed assets. Officials should exercise discretion in the public interest in pre-approving new capital works, such as CLP’s plan to build a terminal for liquefied natural gas.

The agreements are for 10 years instead of the existing 15, as the government mulls models and regulatory frameworks for opening up the market to other players. The duopoly has made a pretty safe gesture in accepting it. If there is to be any competition, it is likely to be introduced in an orderly way. The government will be mindful of the imperative of stability in power supplies in an overwhelmingly high-rise working and living environment, and is unlikely to refuse to renew the agreements. Hong Kong has only two power suppliers, from generator to front door. They and the city need each other.

Published in the SCMP on the 8th of January 2008:

• Two companies’ permitted rate of return reduced from between 13.5 per cent and 15 per cent to 9.9%
• Based on 2006 figures, total reduction in electricity payments by residential and commercial customers to amount to HK$5b per year
• If power companies exceed emissions cap for any pollutants, rate of return will be reduced by 0.2-0.4 percentage points
• If emissions of all pollutants remain below specified caps, companies will be entitled to an increase in permitted return of 0.05 to 0.1 percentage points
• Tenure of agreement will be reduced from existing 15 years to 10 years
• Government will consider rediness for open market in deciding whether to extend tenure for another 5 years

Electricity bills may not drop as much as companies’ cut in earnings

SCMP – Denise Tsang
Jan 08, 2008

Hong Kong’s electricity duopoly are bracing for a 30 per cent cut in core earnings as early as October, but a lower return rate does not necessarily mean consumers’ bills will drop accordingly.

CLP Holdings (SEHK: 0002) and Hongkong Electric (SEHK: 0006) Holdings will have the return of their earnings on electricity supply slashed to 9.99 per cent from 13.5-15 per cent return on net fixed assets in use, forgoing HK$5 billion in profits between them based on their 2006 audited profits, the government says.

As part of the new regulatory regime on the power utilities, the new return means their core earnings will be cut by 30 per cent from the 14.4 per cent return the two firms have earned on average in the past 10 years.

The government trumpeted that the new regime accomplished its three main missions – slashing the utilities’ return to a single digit, lowering emissions and paving the way for an open market.

CLP and Hongkong Electric also accept that their contract period will be shortened to 10 years from 15. The conclusion of 18 months of negotiations means a U-turn of the power firms’ ferocious opposition. “The deal is as good as they can get compared to what they are earning in developed countries like Australia and the UK,” said an analyst of a European brokerage who expected future returns to be 10 per cent.

“A 10 per cent return is perceived as very attractive in these countries, and the two companies obviously know this very well because they invest there,” he said.

Many analysts believe the deal is reasonable for the two electricity companies and clears up regulatory uncertainty. But academics and analysts believe power bills will not necessarily be reduced at the same rate, as the new regime continues to peg the utilities’ core earnings to capital investment in power generation, transmission and distribution.

One pointed out that the prevailing higher cost of fuel could offset a cut in the basic tariff, as consumers must pay for the cost of production despite the government’s forecast of a “double-digit” reduction next year.

CLP, which serves Kowloon, the New Territories and Lantau, will embark on the new regime in October and Hongkong Electric, which lights up Hong Kong and Lamma islands, in January next year.

SCMP Lina Lim
7:00pm, Jan 07, 2008

The government on Monday entered an agreement with the territory’s power companies – in the wake of community concern about utility fee rises scheduled for early 2008.

The two power companies are the China Light Power Company and Hong Kong Electricity Company.

The government said that under the new agreement, the rate of return of the two utility companies would be reduced to below 10 per cent to ease the public’s monthly electricity bills.

Secretary for the Environment Edward Yau Tang-wah said the new agreement would help allay community concerns gathered from two public consultations in 2005 and 2006. The new agreement would also be in line with the government’s environmental policies.

“I firmly believe that the new agreements have achieved a reasonable balance. On the one hand, we have responded to public aspirations for reduced tariffs.

On the other hand, the permitted rate of return under the new agreements will provide sufficient incentive for the power companies to continue investing in the electricity supply,” Mr Yau said.

Under the new agreement, the permitted rate of return of the two power companies would be reduced from the existing 13.5 per cent to 15 per cent to 9.99 per cent.

Customers of China Light Power Company and Hong Kong Electricity Company would see reductions in basic tariffs from October 1 this year, and January 1, next year, respectively.

However, the reductions would depend on the balance of the average net fixed assets of the two companies and their operating costs upon commencement of the new agreements.

“Based on the balance of the average net fixed assets of the two power companies for 2006, the total reduction in electricity payments for residential and commercial customers can amount to HK$5 billion annually,” Mr Yau explained.

Emission reductions are also an aim of the new agreements. If the power companies exceed the emission cap for any pollutants agreed upon, their rate of return would be cut by 0.2 to 0.4 percentage points depending on their actual emission levels. A maximum penalty of HK$200 million to HK$300 million would also be imposed.

Mr Yau said the government would also offer incentives. If emissions by the companies were kept below the stated caps, then an increase of 0.05 to 0.1 percentage points would be awarded.

“This also strikes a balance between the environmental obligations of the power companies towards our air quality as well as providing them with a stable operating environment,” he explained.

The environment minister said the government wanted to expand the electricity market to encourage friendly competition.

Studies on open market models and the regulatory frameworks, as well as enhanced interconnection between the grids of the two power companies, would be carried out in the next regulatory term.

“On the preparation for an open market, the tenure of the new agreements will be reduced from the existing 15 years to 10 years,” Mr Yau said.