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.