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Hong Kong must break firms’ tight grip on electricity market to help consumers, says study

04 December, 2014

Denise Tsang and Ernest Kao

Expert report calls on government to overhaul its regulation of power suppliers, branding it unfair to consumers and lacking transparency

The Hong Kong government should break up the dominance of electricity suppliers CLP Power and Hongkong Electric and revamp its regulatory framework, which is “unfair” to consumers, a study has concluded.

The Consumer Council report also calls for the development of renewable energy, the importation of electricity and more nuclear power from Guangdong, and greater use of natural gas to meet the government’s goal of supplying reliable, safe, sustainable and affordable energy.

Compiled over 18 months by three overseas experts, the study effectively sets the agenda for a public consultation next year on the post-2018 regulatory road map and the mix of fuels in the city’s electricity market.

“The goals are conflicting,” said Consumer Council chief executive Gilly Wong Fung-han. “But the reform can be done step by step.”

The 170-page report comes as CLP and Hongkong Electric prepare to reveal next year’s planned tariffs. CLP is reported to be considering a rise of 5 to 6 per cent, while Hongkong Electric may retain current charges.

For over a century, CLP has served households in Kowloon, the New Territories and Lantau, while Hongkong Electric provides power on Hong Kong Island and Lamma.

The council said the scheme of control agreements which allows CLP and Hongkong Electric to tie their earnings with investments in power assets and requires them to meet certain emission reduction obligations, was unfair to consumers.

It criticised the existing regulatory mechanism for allowing power firms to pass business risks on to consumers and lacking transparency.

The scheme of control agreements permits CLP and Hongkong Electric to earn a 9.99 per cent return annually on their average net fixed assets in use in the 10 years to 2018 – cut from 13.5-15 per cent before 2008. The scheme has triggered controversy in recent years, with the government under public pressure for a review to avoid a monopoly.

The Environment Bureau said next year’s public consultation would consider public expectations on having the power companies make returns that are commensurate with business risks in the power market.

CLP said it was “open-minded” on any future talks on market reform, but warned that “any effective discussions should be based on clear objectives, and future development should be based on a thorough understanding of the subject matter and relevant issues”.

Hongkong Electric declined to comment until it had read the council’s study.

Citigroup analyst Pierre Lau said the renewal of the scheme of control agreements with “high returns” could be politically sensitive and he did not expect any renewal to happen before the chief executive election in 2017.

The Consumer Council said the Hong Kong government should create competition in power generation by encouraging investors to invest in small-scale, gas-fired electricity generators in a commercial or a residential district to feed local needs.

Any excess supply could be sold to CLP or Hongkong Electric.

However, this would be viable only if the pair were willing to allow third parties access to their power grids.

World Green Organisation chief executive William Yu Yuen-ping said small-scale, gas-fired generation facilities were worth considering.

“The worldwide trend is the decentralisation of distribution,” he said, adding that it would be more ideal for large buildings or complexes to have their own waste-to-energy facilities.

Call to empower public over electricity supply

The public should get a greater say in where the city draws its power from and how the electricity is generated, the consumer watchdog says.

Energy-efficiency measures should also be targeted at those in the lower strata of society to alleviate the effects of rising power bills, advisers to the Consumer Council said.

The council saw the need for a regulator over the power sector, one that would be an independent institution open to public participation.

Such a regulating body could promote greater transparency and consumer representation, Thomas Cheng Kin-hon, chairman of the council’s competition policy committee, said.

“We believe this regulator needs to have a critical mass in order to match the resources of the two electricity companies,” Cheng said.

“The regulatory system must also be improved to allow greater public participation and a more direct reflection of consumer interests.”

The council report, released yesterday, sets the stage for debate next year when the government is due to gauge public views on how to reform the post-2018 regulatory regime of the city’s electricity market.

A 10-year contractual agreement, known as a scheme of control, lays down rules governing operations, from tariffs to development, of the two power suppliers, CLP Power and HK Electric. The agreement expires in 2018.

The report criticised the scheme as being unfair to consumers as the duopoly was allowed to earn high risk-free profits while passing on business risks to users to an “undue degree”.

At issue was how to protect low-income users, such as subdivided-flat dwellers, from “fuel poverty” – the state of being priced out by rising power bills.

Robin Simpson, a contributor to the report, noted an “in-built tension between environmental policy … which envisages people paying a cost recovery price for energy”. He raised the question “of how consumers, particularly the broader consumers, can afford to pay [these] higher prices”.

An Environment Bureau spokesman said the scheme had been improved over the years to “incrementally improve its operation, promote transparency and ensure consumers’ interests are addressed”.

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