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LC Urgent Q3: Tariff increase of two power companies

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


     According to a statement issued by the Energy Advisory Committee, the tariff stabilisation fund of CLP Power Hong Kong Limited (CLP) has a huge surplus, and following an earlier judgment made by the Court of Final Appeal, the two power companies may receive a refund amounting to hundreds of millions of dollars from the Government for the excess rates and government rent charged in the past few years.  Nevertheless, at the meeting of the Panel on Economic Development held on December 13 this year, CLP and The Hongkong Electric Company Limited (HEC) still claimed that as substantial increases in fuel prices had pushed up their operating costs, they needed to increase their respective tariffs drastically, and the rates of the tariff increase of CLP and HEC are 9.2% and 6.3%.  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, the overall rates of the tariff increase of the two power companies are still much higher than the inflation rate.  In this connection, will the Government inform this Council :

(a) how the two power companies work out their rates of tariff increase; given that HEC has indicated that it expects single-digit and double-digit increases in the prices of coal and natural gas respectively in the coming year, whether the Government knows the actual figures; if so, of the respective figures; if not, why it has not asked the two power companies to give a clear account of the figures; and whether it has looked into the actual extent of impact of the rising fuel prices on the overall rates of the tariff increase; if so, of the extent of such impact; if not, the reasons for that;

(b) given that the two power companies have agreed to individually purchase fuels from the same market, whether the Government has looked into the reasons for the huge gap between the rates of the tariff increase calculated by the two power companies; if so, of the findings, and whether the gap is attributable to poor management and operation; if not, the reasons for that; and

(c) given that the two power companies may receive a refund of rates and government rent from the Government and CLP's tariff stabilisation fund has a huge surplus, whether the Government has assessed if these factors have any implication on the rates of the tariff increase for the coming year calculated by the two power companies; if so, of the details; if not, the reasons for that?

Reply :


     Electricity tariff comprises two major components, namely "Basic Tariff" and "Fuel Clause Charge", i.e. the cost of fuels.  Pursuant to the Scheme of Control Agreements (SCAs) between the Government and the two power companies, fuel costs of the power companies are passed through on the basis of actual spending.  Following our request in recent years for implementing various air improvement measures, including tightening the emission caps of the two power companies and requesting them to gradually replace coal by cleaner natural gas as fuel for electricity generation; coupled with the fact that some of the gas contracts signed by the power companies at rather low prices in the past are due for expiry and that the fuel prices under the new contracts will inevitably be higher than the old ones, there is double pressure on a higher fuel cost in the electricity tariff.

     In the annual Tariff Review conducted by the Government with the power companies, our accountants, together with the independent energy consultants appointed externally, will examine fuel cost information submitted by the two power companies from three aspects:

(i) information regarding fuel contracts submitted by power companies, for example, whether the natural gas price in each contract is at a reasonable price in line with the international trend;

(ii) the power companies' projected Fuel Clause Account (FCA) deficit balances by year end.  The relevant forecast depends on a number of dynamic factors, such as fuel consumption caused by electricity consumption.  Hence, the forecast FCA deficits in the tariff adjustment proposals will often differ from the actual year end figures.  As the FCA allows accumulation of deficit balance, it will indeed provide room for power companies to relieve pressure on tariff increases in difficult years, without affecting their profits; and

(iii) whether the company has explored all possible ways to keep the fuel prices and related expenses to a minimum level.  A relevant example is that through our signing of the Memorandum of Understanding on Energy Co-operation with the Mainland in 2008, we are able to make use of the Mainland China's Second West-East Natural Gas and the related pipelines to replace CLP's original investment proposal of $10.4 billion to build a Liquefied Natural Gas Terminal.

     The use of clean energy will create pressure to increase electricity tariff. This is understandable by the government, the public and the community.  However, this cannot be an excuse for us to relax our examination on the fuel expenses.  Our principle is to allow for only those increases that are justifiable, and will not agree to any fuel expenses considered not reasonable in the three vetting focuses above. Our prime objective is to avoid the two companies from using clean energy as an excuse to increase their investment without good justifications, hence earning additional profits.

      Regarding the Hon Ronny Tong's question, our responses are as follows :

(1) The Net Tariff comprises "Basic Tariff" and "Fuel Clause Charge". Through negotiation with power companies over electricity tariff adjustment each year, the Government would critically examine factors such as operating costs, capital investment, fuel prices, measures to control costs and enhance productivity, updated balances of FCA and TSF, permitted return etc, with a view to eliminating unnecessary capital and operating expenditure on one hand; while striving to contain the tariff increase through adjusting the TSF and FCA balances on the other.

     In reviewing the fuel prices of the two power companies, we will engage an independent energy consultant to assist in the review to ensure that the power companies' projections are in line with the trend movement of fuel prices in the international market and are set at a reasonable level. The consultant will also review the two power companies' natural gas price projections in recent years to ensure that the gas price calculations are consistent with the terms of the gas contracts.  Besides, the Government will conduct regular review on the procurement policy of the two power companies, with a view to ensuring that they will apply vigorous and systematic measures to procure their fuels at reasonable prices.   We together with the independent energy consultant would also scrutinise the terms of the contracts to see if they are reasonable before the power companies entered into long term gas contracts.

     In recent years, to improve the air quality, the ratio of natural gas in the fuel mix of electricity generation in Hong Kong has been on the rise gradually. The increased use of natural gas in electricity generation will inevitably push up the generation cost.  This is understood by the Government and the public.  However, in the face of global economic uncertainty and mounting local inflation in the coming year, we have suggested that power companies should bear a larger FCA deficit balance so as to lower the tariff increase. HEC accepted our advice by further increasing the FCA deficit to well over $1 billion, but CLP previously refused to adopt similar measure. Before today's adjustment, CLP forecasts that the FCA deficit will be around $800 million. In view of CLP's scale of operation, we consider that there is room for CLP to further increase the deficit balance so as to reduce the tariff increase. As I said earlier, when CLP lowered its tariff increase this morning, it had increased the FCA deficit to $1.4 billion.

(2) There is difference in the fuel costs of the two power companies because the mode of operation and hence economies of scale between the two companies are not the same.  There is also difference in their fuel mix.  For example, CLP uses comparatively more natural gas in electricity generation, and around 30% of its electricity is nuclear electricity which does not involve any fuel cost; while HEC uses mostly coal.  The gas contracts entered into by the two power companies in different years also give rise to different gas prices.  In view of the above, the fuel costs and Fuel Clause Charge of the two power companies are not the same.

(3) We are of the view that the Government rent and rates paid by the two power companies as operating costs under the SCA, are funded by the electricity consumers through payment of the Basic Tariff.  The amount overpaid and subsequent refunded by the Rating and Valuation Department (RVD) should in substance be returned to consumers.  We have requested power companies to return the related refund to consumers as soon as possible.  

     In respect of the appeal raised by HEC on the dispute with RVD over the calculation of rent and rates payment in the assessment year of 2004-2005, the Court of Final Appeal made the ruling in principle in June 2011.  With this ruling, HEC received refund of overpaid rent and rates for 2004-2005 from RVD of around $141 million, together with interest of $30 million. Following the above ruling, RVD has been discussing with HEC on the valuation and refund amount for assessment years thereafter, and a certain sum has already been returned to HEC.  The litigation between CLP and RVD over the rent and rates assessment of CLP's power supply system is still underway. With reference to the ruling in the case of HKE, it is expected that CLP will also receive the refund of rent and rates accordingly.

     Regarding TSF, CLP forecasts a balance of $300 million by end 2012.  As I have pointed out in my reply to the Hon Fred Li, we consider that there is still some room for CLP, through lowering its TSF balance and accepting a larger FCA deficit balance, to reduce the tariff increase and lessen the burden of consumers. I am aware that it has initiated some adjustments this morning.

Ends/Wednesday, December 21, 2011
Issued at HKT 16:01


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