We hear that following the row over higher electricity tariffs earlier this year, CLP has put more or less on “permanent hold” the work on converting its Castle Peak ‘A’ power plant from coal-fired to the cleaner gas-fired boilers. It will now continue to run on coal with just one experimental agglomerator, which removes particle matter, but no scrubbers, which take out sulphur.

The government is pressing the power companies to meet emission standards but it would appear that it only wants them to “meet” these standards rather than to better them by a wide margin. That is, the Environment Bureau doesn’t want them to improve their emissions too much, because the resulting capital expenditure would result in a rise in tariffs.

The scheme of control, which is negotiated with the government, allows companies an agreed rate of return from its depreciated net assets. At the same time, the government urges the power companies to reduce emissions, but it doesn’t have the guts to tell the public that this will cost more. Instead, it publicly blames the power companies when they try to raise tariffs.

CLP had wanted to raise tariffs by 9.2 per cent but after the government-inspired row, ended up with a 4.9 per cent increase. The direct effect of this is lower air quality in an arrangement agreed by the bureau.

At the same time, CLP has been forced by the Hong Kong government to buy its gas from the mainland at prices that will have to be negotiated with supplier CNOOC (SEHK: 0883). But since CLP has been cut off from global markets, it’s not hard to see who will have the advantage in those discussions.

The Environment Bureau, led by Edward Yau Tang-wah, plays a highly duplicitous role in the politics of Hong Kong air quality. On the one hand it claims that it can’t do much about Hong Kong’s dirty air and says much of the pollution comes from the Pearl River Delta; on the other it ignores effective measures that could be taken to get old buses and trucks off the road.

When CLP wants to convert to environmentally cleaner gas, the government and the bureau show they have no stomach for a fight with the public and agree to lower standards

Michael Kadoorie, chairman of CLP, announced last week that the utility’s rates could rise by 40 per cent by the end of 2015 due to an estimated 250 per cent hike in fuel costs. This projection is based on higher use of natural gas at prices that are expected to escalate over the next four years.

In response, several legislators have recommended open access to power transmission. That would introduce competition among generators, including those on the mainland, and fundamentally restructure Hong Kong’s electricity sector.

The sector is governed by a scheme of control, an agreement signed by the Hong Kong government, CLP and Hong Kong Electric (SEHK: 0006) in 2008. Set to expire in 2018, it allows the power companies to earn 9.9 per cent on net assets and 11 per cent on net renewable energy assets, as well as fully recover fuel costs via periodic rate adjustments.

In this context, how can we change Hong Kong’s electricity future? In addition to restructuring, we can make fuel cost-driven rate increases more transparent, or invest public funds in generation units and strengthen price regulations. To select the best option, we need to consider the following questions:

• Should Hong Kong have a public hearing process? Commonly used in North America, this would enable various stakeholders (for example, consumer groups, environmentalists and the government) to examine the evidence presented by utilities in support of their applications for fuel procurement, capacity expansion, renewable energy development and other actions.

As it invites wide participation, the process can become litigious, time-consuming and unmanageable. But, without it, how can consumers be confident that rate rises are based solely on CLP’s cost increases? Moreover, if CLP has bought fuel and managed costs efficiently, it should welcome this transparent process.

• Should Hong Kong have an independent regulatory commission? Such a commission could be necessary to manage the potentially voluminous filings by regulated companies, including CLP. It would facilitate the public hearing process with the participation of various stakeholders. But it may be seen as just another unwanted, wasteful and ineffective government bureaucracy.
• Should Hong Kong restructure its electricity sector? Restructuring has taken place in Europe, parts of North America, parts of South America, Australia and New Zealand. Competition in the electricity-generation market is designed to cut prices by reducing the sector’s cost inefficiencies and excessive earnings.

Restructuring could work under the right conditions: notably, where there is surplus capacity, many suppliers, easy entry and price-responsive demand. Integration of the electricity markets in Hong Kong and southern China could potentially lead to lower prices.

Without such conditions, however, restructuring has traditionally not succeeded in cutting prices or improving reliability. Thus, with its potentially large risks, restructuring may not be the most suitable path for Hong Kong.

• Should the Hong Kong government become a direct shareholder in CLP? Establishing an electricity fund to hold CLP stock would address the frequent complaint that CLP makes too much profit at the expense of consumers. The fund would recoup some of this profit to help pay the bills of CLP customers.

Yet many unanswered questions remain. Would the fund be financed through the budget surplus, the reserves or long-term bonds? What if CLP stopped paying dividends? Would the fund set a bad precedent for government intervention? And, if an electricity fund is so desirable, why not a real estate fund?

• Should Hong Kong municipalise its electricity sector? Some US cities (for example, Seattle and Los Angeles) and some Canadian provinces (British Columbia and Quebec) own their electricity utilities. To do this, the Hong Kong government would need to buy the local physical assets of CLP and Hongkong Electric. It could fund the purchase by issuing long-term revenue bonds, not affecting its fiscal spending or reserves. Since the bond rate is lower than the permitted returns of CLP and Hongkong Electric, such a move could mitigate the trend of rising rates.

There are a number of obstacles, however. First, CLP and Hongkong Electric could assert their property rights and refuse to sell at any price. Second, even if they were amenable to selling, they could demand a very high price. Third, the government could be unable to operate the electricity facilities safely and reliably. Finally, the purchase might be seen as anti-business, discouraging investment in Hong Kong – one of the most competitive and business-friendly cities in the world.

Each of these choices has its own implementation challenges and cost-risk trade-offs. Establishing a public hearing process, possibly administered by a regulatory commission, is easier and less risky than the other choices. In any case, the question of how Hong Kong’s electricity sector should evolve over the next few years is a critical issue that deserves collective scrutiny.

Professor Stephen Y. L. Cheung is dean of the School of Business and professor (chair) of finance at Hong Kong Baptist University

Power firm wants government to admit to public that rise in energy bills is down to its requirement that generators cut their carbon emissions

CLP’s group chief executive, Andrew Brandler, has called on the incoming administration of Leung Chun-ying to be more transparent over energy policy than its predecessor has been.

Brandler’s comments come as the 80 per cent of the city’s population who depend on CLP for electricity brace for a sharp rise in their energy bills starting from next year.

The expected rate increase stems from a deal CLP has struck through Capco, a joint venture of its subsidiary CLP Power (SEHK: 0002), with the National Development and Reform Commission and the state-owned fuel suppliers PetroChina (SEHK: 0857, announcements,news) and CNOOC (SEHK: 0883).

Brandler disclosed in an exclusive interview with the South China Morning Post (SEHK:0583, announcements, news) yesterday that the terms of the gas supply contract were agreed six months ago. But he said Chief Executive Donald Tsang Yam-kuen’s administration had yet to approve the deal. The slowness of the approval process angered CLP’s chairman, Michael Kadoorie, who attacked the government last week for its inefficiency but did not then disclose the delay in approving the contract. It was Tsang who agreed to the contract with Beijing in 2008.

The new contract provides for the purchase of clean fuel in the form of gas to generate electricity over the next 20 years from 2013. PetroChina will import gas from Turkmenistan to the mainland and funnel it through a submarine pipeline to the Black Point power station.

The new contract price, about three times more expensive than the existing gas contract price set 20 years ago, will lift fuel costs by 40 per cent.

The existing contract, which expires soon as a result of the depletion of the gas reserve in theYacheng field off Hainan Island, charges US$6 per unit, according to a source. That is roughly one third of what other places, such as Japan, pay.

“It is a reasonable price linked to [current] market levels,” Brandler said. “People are angry at CLP and said it’s ripping off customers, but we are not going to make any profit out of it.”

Regulations say the city’s two power producers, CLP and Hongkong Electric (SEHK: 0006), must pass fuel costs on to their customers.

Brandler blamed the Hong Kong government for failing to explain to the public the consequences of its energy policy, which requires CLP and Hongkong Electric to lower carbon emissions by up to 64 per cent by 2015 from 2010 levels. That means CLP needs to double its gas consumption.

“We want more transparency from the new administration,” Brandler said. “The government needs to explain to people about the impact of the energy policy on tariffs.”

The Environment Bureau said CLP had been involved in commercial negotiations with its mainland counterparts on the provision of natural gas. It said the bureau would monitor the developments to ensure the arrangements would be in line with its energy policy objectives.

CLP raised tariffs by 4.9 per cent in January instead of an originally proposed 9.2 per cent, after pressure from the government and the public.

denise.tsang@scmp.com