****************************************************
Following is a question by the Hon Kam Nai-wai and a written reply by the Secretary for the Environment, Mr Edward Yau, in the Legislative Council today (October 28):
Question:
The new Scheme of Control Agreements (SCAs) with The Hongkong Electric Company, Limited (HEC), the CLP Power Hong Kong Limited and Castle Peak Power Company Limited (collectively referred to as "CLP") came into effect on January 1, 2009 and October 1, 2008 respectively. After the commencement of the new SCAs, many members of the public have reflected to me that they do not enjoy significant reduction in electricity tariffs. In this connection, will the Government inform this Council:
(a) whether it knows the breakdown of the tariffs and average fuel costs of HEC and CLP from 2007 to 2009, and the projected corresponding figures for 2010;
(b) whether it knows the tariffs and average fuel costs (per kilowatt-hour) in the neighbouring places (including Taiwan, Japan, South Korea and Singapore) from 2007 to 2009;
(c) whether it knows the criteria and procedure for determining the levels of fuel cost charges by HEC and CLP;
(d) of the differences between the new SCAs with HEC and CLP and their respective old agreements which have just expired in terms of permitted rates of return, definitions for fixed assets, accounting treatment for fixed assets as well as determination of assets depreciation, etc;
(e) whether it had, in the past three years, assessed the rates of reduction in the relevant tariffs after power interconnection between HEC and CLP;
(f) whether it knows the latest balances in the Development Fund of HEC and the Tariff Stabilisation Fund of CLP;
(g) given the continuous increase in coal prices in 2008, the level of fuel clause charge set by HEC then was not sufficient to cover the actual fuel cost it incurred, as a result, HEC's fuel clause account had accumulated a deficit balance of about $1 billion by the end of 2008, and HEC said that it would carry the deficit balance to the end of 2009, which would only be gradually cleared in the remaining years in the Development Plan period under the new SCAs, whether it knows the format and calculation method HEC will use to clear the deficit balance;
(h) whether it knows if CLP has encountered the similar problem in (g); if so, how CLP will deal with such problem; and
(i) whether it had, in the past three years, assessed the impact of increasing the percentage of natural gas in the fuel mix for power generation by HEC and CLP on tariffs; if so, of the details?
Reply:
President,
(a) The tariffs of The Hongkong Electric Company, Limited (HEC), and the CLP Power Hong Kong Limited and Castle Peak Power Company Limited (collectively referred to as "CLP") from 2007 to 2009 are set out in the Annex.
The Government is currently conducting the annual Tariff Review with the two power companies on their respective tariffs for 2010. The results will be announced by the end of this year. The two power companies indicated that their average fuel costs are commercially sensitive information and hence cannot be disclosed to the public.
(b) As the average fuel costs of the power companies involve commercially sensitive information, such information is not publicly available. In addition, it is difficult to compare the non-residential tariff rates for different countries/cities. It is because there are many different types of tariff schemes for non-residential consumers (including commercial, industrial, agricultural, etc.) offered by the power companies in different areas; and these different tariff schemes are also affected by factors such as the policy (including different forms of subsidies) and economic consideration of individual country/city on individual industry.
(c) Pursuant to the Scheme of Control Agreements (SCAs), fuel costs of the power companies are passed through on the basis of actual spending and hence the two power companies cannot make any extra profit or return under the Fuel Clause Account mechanism. The SCAs stipulate that fuel cost is to be borne by consumers. Basic Tariff includes a standard fuel cost as agreed between the Government and the two power companies. The difference between the actual fuel cost and the standard fuel cost will be recovered or returned to the consumers by means of a charge or a rebate.
The Fuel Clause Charges or Rebates for each year are normally set during in the annual Tariff Review, after taking into account various factors including, inter alia, the difference in fuel cost, the balance of the Fuel Clause Account as well as the need to stabilise tariff. In the annual Tariff Review, the Government will also engage an independent energy consultant to review the two power companies' fuel price projections to ensure that they are in line with the trend movement of fuel prices in the international market and that the projections are set at a reasonable level. Through the above mechanism, the Government can ensure that the Fuel Clause Charge levels of the two power companies are reasonable.
(d) The Government entered into the new SCAs with the two power companies respectively on January 7, 2008 and briefed the Economic Development Panel of the Legislative Council on January 8, 2008. The major terms of the new SCAs as well as the differences between the old and new agreements were detailed in the paper submitted to the Panel (LegCo paper CB(1)546/07-08(01).
(e) Currently, the two power companies are already interconnected, mainly for providing mutual emergency power backup to each other. Enhancing the interconnection will involve significant investments for enhancing the capacity of the interconnection circuits and the supply networks of both power systems, but it cannot completely displace the need for additional generation facilities for meeting the electricity demand. Furthermore, as additional capital investments will be required for enhancing interconnection, this may not necessarily lead to tariff reduction. The benefit of interconnection will also be affected by the market environment, generation costs, electricity supply and demand condition, etc. Presently, the Government and the two power companies are assessing the viability of enhancing interconnection from various perspectives such as technical, economical and tariff impacts, etc., and no conclusion has been reached yet.
(f) According to the 2009 interim results announced by the two power companies, the Tariff Stabilisation Fund (TSF) balance for HEC at end June 2009 was about $600 million while the total balance of Scheme of Control reserve accounts (i.e. TSF and Rate Reduction Reserve) for CLP at end June 2009 was about $1.3 billion. The actual TSF balances by end 2009 will depend on factors including electricity demand, sales and operating costs during this period.
(g)&(h) Due to the increase in average coal market prices in 2008, the Fuel Clause Accounts of HEC and CLP accumulated deficit balances of about $1 billion and $800 million by end 2008 respectively. However, with the fall of the international coal prices in 2009, the deficit positions of the two power companies' Fuel Clause Accounts have been improved. According to the 2009 interim results announced by HEC and CLP, their Fuel Clause Account deficit balances were reduced to about $800 million and $300 million respectively by the end of June 2009.
The Government conducts annual Tariff Reviews with the two power companies. In discussing the magnitude of adjustments to the Fuel Clause Charges, the Government will take into account the updated projections of fuel prices and Fuel Clause Account balances of the respective companies to ensure that they are at a reasonable level.
(i) We have indicated in the public consultation paper on the Air Quality Objectives Review in July this year that according to our preliminary assessment, the electricity tariff will increase by phases by at least 20% from the current level if we increase the use of natural gas for local electricity generation to 50%. This is mainly due to the increased use of natural gas which is significantly more expensive than coal, and the need for additional gas-fired generators and other emission reduction measures. However, the actual level of tariff increase will depend on the timing for the implementation of the proposal, the then prevailing fuel prices, new generation units and additional emission reduction measures actually required. The Government is now consulting the public on Air Quality Objectives Review and has started to explore with the two power companies on the ways forward. It is not possible to make an assessment at this stage.
Ends/Wednesday, October 28, 2009
Issued at HKT 12:59
NNNN
