************************************************************
Following is a question by the Hon Emily Lau and a written reply by the Secretary for the Environment, Mr Wong Kam-sing, in the Legislative Council today (February 4):
Question:
Some members of the public have relayed to me that the average prices of NYMEX Light Sweet Crude Oil Futures and ICE London Brent Crude Futures dropped by over 50 per cent from their peaks in the past six months. The fuel cost, which makes up the major part of the operating costs of the transport industry, should have decreased significantly. They have pointed out that while franchised bus operators (bus operators) often applied to the authorities for fare increases in the past on grounds of rising operating costs due to high oil prices, the bus fares were not reduced correspondingly when oil prices dropped, resulting in a situation that the bus fares always rise and never drop. Moreover, some private car owners and taxi drivers have pointed out that in the same period, the retail prices of auto-fuel decreased by about 30 per cent only, arousing suspicion that when international oil prices are rising, oil companies usually increase prices promptly at a significant rate, but when oil prices are falling, oil companies reduce prices sluggishly at a marginal rate. As such, users of auto-fuel cannot be benefited at all. In this connection, will the Executive Authorities inform this Council:
(1) whether they have asked the bus operators to provide operational data for assessing the impacts of the significant drop in oil prices on bus operators' operating costs and, based on the outcome of such assessment, activated the procedures under the Fare Adjustment Mechanism, which provides for both upward and downward adjustments of fares, to demand bus operators to reduce their bus fares; if so, of the details; if not, the reasons for that;
(2) whether, in the past six months, they obtained operational data from oil companies to investigate if they have colluded to manipulate oil prices; if so, of the details; if not, the reasons for that; and
(3) whether they have measures to promote the further opening-up of the auto-fuel market so as to introduce greater competition among oil companies; if so, of the details; if not, the reasons for that?
Reply:
President, the consolidated replies of the Transport and Housing Bureau and the Environment Bureau to the three parts of the question are as follows:
(1) The Government is aware of the concerns that the public has over the fares of public transport services. We are of the view that fares should be set at a reasonable level, having regard to the acceptability and affordability of the public on one hand, and the long-term financial sustainability of public transport operators on the other. This is to ensure that the public can continue to enjoy quality and cost-effective services as well as modal choices.
According to the Fare Adjustment Arrangement for Franchised Buses (FAA), the Government would take into account a basket of factors in considering the need of any fare adjustment and the rate of the adjustment. These include:
(i) outcome of a fare adjustment formula;
(ii) changes in operating costs and revenue since the last fare adjustment;
(iii) forecasts of future costs, revenue and return;
(iv) the need to provide the bus operators with a reasonable rate of return;
(v) public acceptability and affordability; and
(vi) quality and quantity of service provided.
The above-mentioned formula is:
(0.5 x Change in Nominal Wage Index for the Transportation Section) + (0.5 x Change in Composite Consumer Price Index (CCPI)) – (0.5 x Productivity Gain).
The formula reflects the marco-economic situation, particularly with respect to the changes in the nominal wage for the transportation section and CCPI. Changes in fuel price are included in CCPI. According to the established arrangement, the adjustment formula would be applied on a quarterly basis. If the formula outcome reaches -two per cent, the Government would proactively initiate a fare review. The factors mentioned under (ii) to (vi) above would be taken into account in the review.
Moreover, there is a passenger reward arrangement under the FAA. According to the current arrangement, the passenger reward arrangement would be triggered when the rate of return for an operator reaches or exceeds the threshold of 9.7 per cent as a result of changes in the overall costs and revenue. The operator would then have to share the profit above the threshold as fare concessions with the passengers on an equal basis. Some franchised buses have been offering fare concessions to passengers under this arrangement over the past few years.
It must be pointed out that although changes in fuel price would inevitably affect the operating costs of franchised bus services, the operating costs are made up of various components apart from fuel cost. These include wage expense, maintenance and insurance, etc. The expenditures on various cost components (particularly the labour cost) have basically been increasing in recent years.
The Government will continue to keep the situation in view and handle the matters relating to the franchised bus fares in accordance with the FAA.
(2) Retail prices of auto-fuels in Hong Kong are determined by oil companies having regard to commercial practices and their operating costs. We appreciate the impact of the auto-fuels prices on the public and have been monitoring the changes in local retail prices of auto-fuels and comparing them with the trend movements of international oil prices (benchmarked against the Singapore free-on-board (FOB) prices for unleaded petrol and motor vehicle diesel). We have been in close contact with oil companies and in time of international oil price reduction, urge them to adjust prices promptly to lessen the burden on the public.
According to our observation, the trend movements of local retail prices of auto-fuels and Singapore FOB prices (i.e. Means of Platts Singapore (MOPS)) are generally in line, although the timing and magnitude of changes may not be exactly the same due to the following reasons:
(a) MOPS prices fluctuate day to day, but oil companies do not adjust their auto-fuels price daily;
(b) Import price of refined oil product is only one of the costs of local retail price. Retail price also includes tax ($6.06 per litre for unleaded petrol and tax free for diesel), and other operating costs, such as land costs, government rent, staff costs, transportation, promotion, operation of oil terminal, etc. When oil companies adjust their prices, apart from the import prices of oil products, they also take into account changes in these operating costs; and
(c) Oil companies generally provide various kinds of discounts and promotions to customers and drivers. Therefore, the actual selling prices of auto-fuels are effectively lower than their listed pump prices.
Since the beginning of July 2014, international crude oil prices have accumulated a reduction of about 50 per cent. The trend movements of MOPS for unleaded petrol and diesel are roughly the same during the period. In this period, oil companies, in response to falling import prices, have adjusted downwards the pump prices of unleaded petrol and diesel, each as many as 19 times, with maximum accumulated reduction of over $3.2 per litre. According to our observation, this is generally in line with the trend movements of international oil prices over the same period, and represents around 50 per cent of the import price of its refined oil products.
To sum up, in analysing whether the prices of local auto-fuels are adjusted in tandem with the changes in import prices of refined oil products, we should consider the portion of import price of refined oil product within the pump price, and should not take into account other components which do not have direct relationship with the international oil prices (that is, tax and other operating costs). Therefore, it is not appropriate to simply compare the percentage change of local auto-fuels pump prices with that of international oil prices. In addition, as oil companies offer various kinds of discounts and promotions to consumers, the actual prices paid by consumers are lower than the pump prices listed in petrol filling stations.
In a free market economy, the Hong Kong retail price of auto-fuels, same as the prices of other consumer products, should be determined by the market. We will continue to monitor the trend movement of the oil prices, and urge the oil companies to promptly reduce their retail prices whenever there is room to do so, to lessen the burden of the general public.
(3) In a free market economy, the retail prices of auto-fuels are determined by the market. The Government has been endeavoured to ensure a reliable supply of fuel, maintain an open market and enhance competition by removing barriers to enter into the fuel market. The Government has, since 2003, taken the following series of measures to facilitate new market entrants including:
(a) removing the requirement for bidders of petrol filling station (PFS) sites to hold import licence and supply contract;
(b) re-tendering all existing PFS sites upon expiry of their leases, instead of renewing the leases to the existing operators; and
(c) depending on the land supply situation, tendering PFS sites in batches consisting of two to five sites per batch. The new tendering arrangement facilitates the new entrants in acquiring a critical mass of PFS to achieve economy of scale for an effective competition in the auto-fuel retail market.
Since the introduction of the new tendering arrangements, two new operators have obtained 31 out of the 52 PFS sites put up for tender and successfully entered the market. The share of the three biggest operators in terms of the number of PFS has dropped from over 90 per cent to about 70 per cent. At present, there are five oil companies in Hong Kong; in view of the size of Hong Kong market, competition certainly exists. In fact, consumers can obtain discounts through various means, and the amount of discounts from different oil companies are not the same. This reflects that price competition exists in the market. We therefore consider that these measures have effectively enhanced the competition in the auto-fuel market.
Ends/Wednesday, February 4, 2015
Issued at HKT 13:16
NNNN