LC Urgent Q4: Electricity tariffs increase of the two power companies

     Following is a question by the Hon Miriam Lau under Rule 24(4) of the Rules of Procedure and the reply by the Secretary for the Environment, Mr Edward Yau, in the Legislative Council today (December 21):


     The new rates of tariff increase announced earlier by CLP Power Hong Kong Limited (CLP) and The Hongkong Electric Company Limited (HEC), which are as high as 9.2% and 6.3% respectively, are very drastic even though HEC has subsequently announced that it will improve the existing progressive block tariff rate mechanism to reduce the impact of the tariff adjustments on the grassroots as well as small and medium enterprises, and members of the public as well as the commercial sector alike have voiced strong opposition.  In this connection, will the Government inform this Council :

(a) given that CLP has introduced a new tariff scheme for business customers under which they will be charged at a flat rate, of the additional operating costs in tariff to be borne by large power tariff business customers; whether the authorities have estimated the extra tariff revenues so generated by CLP; as the scheme is tantamount to doubling the tariff increases to be imposed on these business customers, what measures the authorities will take to avoid imposing an additional burden on them; and

(b) whether the Government has known well in advance that the two power companies will drastically increase the tariffs according to the provisions under the Scheme of Control Agreements (SCAs), and that the rates of tariff increase proposed at the end of next year will be even more drastic than this year's increase; if so, whether there is serious dereliction of duty on the part of the Government in respect of reaching such SCAs; if not, whether it will take remedial measures immediately?



     The electricity tariff structures of the two power companies are all along based on the cost of electricity supply.  The two power companies set different tariff levels and "discounts" for customers of different usage and different categories.  Some of the "discounts" are offered for the purpose of promoting energy conservation, and some due to the lower cost of supplying electricity to consumers with higher level of consumption.  As such, the tariff rates offered to these users are lower.

     In view of the community's increasing demand for energy conservation, there are suggestions that the power companies should make changes to the electricity tariff structure to encourage energy conservation.  In this regard, the Government has requested the power companies to explore how a revamp in their tariff structure can help promote energy conservation and reduce demand for electricity.  We hope that the power companies will carefully consider the impacts on customers with different consumption levels when making the changes.

     Our replies to the specific questions raised by the Hon Miriam Lau are as follows :

(a) In this year's Tariff Review, the two power companies have adjusted the electricity tariffs for customers with different electricity consumption levels.  For example, the tariff increase for domestic customers with higher electricity consumption is relatively larger than those with lower consumption.  The higher the consumption, the higher the unit charge rate would be.  This arrangement will help promote energy conservation, and hence we consider it reasonable and should be acceptable to the public.  For non-domestic customers, the power companies will apply different increase to different consumers.  In general the increase for customers with higher electricity consumption will be larger.  Non-domestic customers involve different types of enterprises, operators and public organisations, such as offices in general, merchants, restaurants, hospitals, schools, sewage treatment plants, railways, etc.  The scale of operation and hence power companies' cost of supplying electricity to these customers are not the same.  We need to carefully consider whether the approach of "higher charge for higher consumption" can achieve the target of promoting energy conservation.  We are examining the data provided by the power companies on their proposals to adjust the electricity tariff structures and are seeking further information from them.

(b) The regulation of electricity market through the Scheme of Control Agreements (SCAs) has been in operation all along since the 1960s.  This mode of regulation has been extended for many times until the latest SCAs signed in 2008 which imposed the most significant changes ever.  These changes mainly include :

(i) lowering the permitted rate of return to reduce profits of the two power companies, hence saving the electricity bills borne by the community;

(ii) shortening the SCA duration to facilitate the introduction of competition when the requisite market conditions are present;

(iii) lowering the cap of the Tariff Stabilisation Fund balance from 12.5% to 8% of annual local sales to keep down the profits that can be reserved by the power companies; and

(iv) linking the permitted rate of return of the power companies to their environmental performance.

     Before signing the SCAs, we had several discussions with Members in the Legislative Council to explore whether our electricity market should be regulated by SCAs continually or by means of legislation if no agreement could be reached between the Government and the two power companies.  At that time, many Members raised their reservation on regulation by legislation, worrying that this would violate the free market principle in Hong Kong.  The Government subsequently reached consensus on the revised SCAs with the power companies, and also briefed the Legislative Council accordingly. The regulatory arrangement under SCA has been adopted since then.

     The regulatory arrangement under SCAs does provide some flexibility for the power companies to proceed with the necessary development and services improvement within the scope of Development Plans approved by the Government.  Under this framework, the Government has diligently delivered its regulatory duties and critically examined tariff adjustment proposals of the two power companies each year. This year's difference in opinions from that of CLP's was also initiated from this work.  As regards the future regulatory regime of the electricity market, we will continue to listen to the views of Members and general public.

Ends/Wednesday, December 21, 2011
Issued at HKT 14:57