LCQ4: Electricity tariffs of two power companies

     Following is a question by the Hon Kam Nai-wai and an oral reply by the Secretary for the Environment, Mr Edward Yau, in the Legislative Council today (December 7):


     Under the Scheme of Control Agreements signed between the Government and CLP Power Hong Kong Limited ("CLP") and The Hongkong Electric Company Limited ("HEC"), the permitted return of the two power companies shall be 9.99% of the total value of the average net fixed assets for the year.  According to CLP, it has to invest in fixed assets in order to develop its electricity supply business in Hong Kong, and the investment costs will be recovered from electricity sales.  Moreover, CLP indicated earlier that due to the rise in worldwide fuel prices, the fuel clause surcharges on tariffs will unavoidably have to be increased.  In this connection, will the Government inform this Council :

(a) of the projected electricity consumption in Hong Kong when the Government approved the respective five-year development plans of the two power companies in September and December 2008 and the actual electricity consumption;

(b) whether it knows the projects completed so far and their expenditures, as well as the projects which have not yet started and their estimated expenditures, under the respective five-year development plans of CLP and HEC involving capital project expenditures amounting to $39.9 billion and $12.3 billion, and whether the two power companies have revised those development plans; if so, of the details; in response to the increased use of natural gas as a fuel for power generation, whether the two power companies need to make extra capital investments on retrofitting generating units, thus causing tariff increases; and

(c) given that the rise in worldwide fuel prices will push up the costs of electricity supply, whether it has assessed the impact of the abolition by the two power companies of the "regressive tariff system" for non-residential high-usage customers on the electricity bills of residential users?



     In the new Scheme of Control Agreements (SCAs) signed by the Government with the power companies in January 2008, the permitted rate of return of the power companies was lowered significantly from 13.5%-15% on the Average Net Fixed Assets to 9.99%.  As a consequence of the reduction in permitted rate of return, the two power companies revised downwards their Basic Tariff rate in the following year (i.e. 2009) by 10% and nearly 20% respectively, equivalent to an annual saving of over $5 billion in electricity bills borne by the community.

     Apart from lowering the permitted rate of return, the scrutiny of the Development Plans submitted by the power companies is the Government's another gate-keeping measure to ensure that electricity tariffs are maintained at a reasonable level.  The capital investment proposals put up by the power companies in the five-year Development Plans would have a direct impact on the "Basic Tariff" component of electricity tariff.  With assistance from independent energy consultants, we have been meticulous in examining the related proposals with a view to avoiding investments that are excessive, premature, unnecessary or unreasonable in the Development Plans of the power companies.  In 2008 and 2009, in examining the capital investments proposed by the power companies in the current Development Plans, we reviewed critically the need, timing and cost effectiveness of the capital projects.  This resulted in the eventual agreement by CLP and HEC to reduce their originally proposed capital expenditure by 30%.  

     Quoting an example, members will recall that, through discussion with the Mainland, we have successfully secured the supply of natural gas to Hong Kong through the West-East Natural Gas Pipeline, obviating the need to construct a Liquefied Natural Gas Terminal in Hong Kong costing about $10.4 billion.  This in turn helps contain the capital investment by power companies, and revise downward the Basic Tariff rate.

     Moreover, through negotiation with power companies over electricity tariff adjustments each year, the Government would critically examine factors such as electricity demand and sales, operating costs, fuel prices, capital investment, measures to control costs and enhance productivity, updated balances in the Fuel Clause Recovery Account and Tariff Stabilisation Fund, permitted return, etc, with a view to further eliminating unnecessary capital expenditure by the power companies, thereby preventing extra profit from expanding capital expenditure.

     The other component of electricity tariff is "Fuel Clause Charge", i.e. the cost of fuels used for electricity generation.  Pursuant to SCAs, fuel costs are passed through on the basis of actual spending.  Following our request in recent years of using cleaner energy to improve air quality, power companies have increased the use of natural gas in electricity generation. As the generation cost of gas-fired electricity is higher than that of coal-fired electricity, it has been the main cause of net tariff increase in the past few years. Tariff levels for 2007 to 2011 are listed in the Annex.

     Regarding questions raised by the Hon Kam Nai-wai -

(a) CLP projected local sales to grow at an average annual rate of 1.9% in its five-year Development Plan submitted in 2008; while HEC projected local sales to grow at an average annual rate of 1.1%.

     According to the information provided by the power companies, local electricity consumption for CLP in 2008, 2009 and 2010 was 30.1, 30.6 and 30.9 billion kWh respectively; while that of HEC was maintained at about 10.9 billion kWh annually.

(b) As I have just mentioned, the Government, in reviewing the Development Plans proposed by the power companies, would examine critically the need, timing and cost effectiveness in order to ensure that the projects are absolutely necessary to meet the increase in electricity demand, maintain the reliability of the electricity supply systems or comply with the environmental and other technical requirements.  At the same time, the Government has always assessed stringently the power companies' capital and operating expenditures in their five-year Development Plans and annual tariff review exercises, with a view to alleviating the pressure for tariff increase.

     To-date, the power companies have basically completed the installation of emission control systems; while other projects to enhance generation systems, transmission and distribution systems, and customer and corporate services are also proceeding as planned.  We have not approved additional gas-fired generators for the power companies within the current Development Plan period.

(c) As regards the electricity tariff structure, we have requested the two power companies to review their tariff structure to identify opportunities for promoting energy conservation and reducing electricity consumption.  We are awaiting the power companies' submissions.  We will give due consideration to the impacts of any tariff structure adjustments on customers of different consumption levels.  

Ends/Wednesday, December 7, 2011
Issued at HKT 18:05