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Hong Kong Power Regulations Based in Part on Emissions

The New York Times
By KEITH BRADSHER
Published: January 8, 2008

HONG KONG — The two electric power companies here agreed Monday to a new regulatory system that sets their annual rate of return, based in part on how much pollution they emit, a carrot-and-stick approach that could some day be a model for mainland China’s giant power industries.

The 10-year agreement between the Hong Kong government and the territory’s two companies — Hong Kong Electric and CLP — authorizes the companies to charge electricity rates that will give them a 9.99 percent return on assets.

If either company exceeds regulatory limits for any pollutant, however, it would be required to charge customers less, reducing its allowed rate of return by 0.2 to 0.4 percentage point.

If the companies manage to cut their pollution more than required, then they are allowed to raise prices to the point where they effectively earn bonuses of 0.05 to 0.1 percentage point on their rate of return.

A complicated formula also allows them to charge slightly more for electricity as they exploit renewable energy sources.

Western regulators increasingly provide complex environmental incentives and impose penalties on power companies. But regulators in mainland China and Hong Kong have tended to rely mainly on fines if companies fail to meet basic requirements.

Particularly on the mainland, though, fines are seldom assessed, and violations are rampant, according to environmental critics.

Mainland power companies also have limited incentives and flexibility to choose fuels that are more environmentally friendly than coal. For instance, only a few provinces allow wind-turbine operators to charge significantly more than coal-fired plant operators for the electricity they sell to the grid. And the rate subsidy for burning agricultural waste to generate electricity is not high enough to make it economical in many areas.

Instead, the regulatory system on the mainland has focused on keeping electricity rates as low as possible, with little regard for the pressure this puts on power companies to choose cheap but highly polluting coal-fired power plants.

Melissa Brown, a specialist in Hong Kong power regulation, who is executive director of the Association for Sustainable and Responsible Investment in Asia, a research group, said the new system in Hong Kong sets a useful precedent for the mainland.

“Anything that is a bonus-and-penalty scheme is a positive,” she said.

But Ms. Brown cautioned that regulators there were unlikely to follow the example soon.

She also noted that the government released too few details on Monday on future allowable levels of specific pollutants to make it possible to calculate the actual effect of the new agreement on air pollution here.

Smog has become a chronic problem in the city. CLP and Hong Kong Electric have denied that they are the main sources of pollutants, hinting that nearby factories and power plants on the mainland are to blame.

Exxon Mobil owns 60 percent of a power-generating joint venture with CLP, and CLP owns the rest plus all of the distribution grid, which serves three-quarters of Hong Kong’s nearly seven million people.

Two officials at the State Electricity Regulatory Commission in Beijing said on Tuesday morning that while the mainland and Hong Kong maintain separate regulatory regimes, the mainland is looking at ways to make power companies more responsive to environmental concerns by encouraging the use of alternatives to coal, notably by allowing generating companies to charge distribution companies extra for electricity from renewable sources.

Edward Yau, Hong Kong’s secretary for the environment, said that the government had set the new regulated rate of return at 9.99 percent after deciding that public opinion strongly favored a rate below 10 percent.

The previous rate, under a 15-year agreement expiring at the end of 2008, was 13.5 percent to 15 percent, and was widely criticized as excessively generous to the politically influential power companies. The new rate of return is still well above the prime rate of 6.75 percent that the dominant local bank, HSBC, charges for loans to companies with strong credit ratings.

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