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LC Urgent Q1: Electricity tariffs increase of the two power companies

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


     CLP Hong Kong Limited (CLP) and The Hongkong Electric Company Limited (HEC) announced that their respective tariffs would increase drastically by 9.2% and 6.3% on  January 1, 2012, and even though subsequently HEC has 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. The Secretary for the Environment mentioned at the meeting of the Panel on Economic Development on 13th of this month that the two power companies had not yet provided sufficient information to justify their tariff increases. In this connection, will the Government inform this Council:

(a) whether the two power companies have provided all the relevant information to the Government in the past week; if they have, of the Government's assessment at present; if not, whether the Government has the power under the existing mechanism to request the two power companies to provide such information;

(b) given that the tariff increases will automatically come into effect on January 1 next year according to the existing Scheme of Control Agreements (SCAs) signed with the two power companies, whether the Government will request the two power companies to temporarily suspend the implementation of the new tariffs on January 1 next year until the two power companies reach consensus with the Government on the rates of the tariff increase for the coming year; and

(c) whether there is any provision under the existing SCAs which restricts the Government from providing to this Council all the information and data furnished by the two power companies to the Government on their tariff increases; if so, whether the Government will put the aforesaid request to the two power companies; if not, whether the Government will undertake to provide the aforesaid information to this Council as soon as possible?

Reply :


     Electricity is an important infrastructure to support the development of a society and necessary services for the public's daily life. Our electricity policy is to strike a balance among the four objectives in electricity supply, which are reliability, environmentally-friendliness, safety and reasonable price. All along we have been adopting the Scheme of Control Agreements (SCAs) signed with the power companies as the regulatory framework while allowing the power companies to make long term investment for the electricity supply to Hong Kong and improvement in services.

     The first SCA signed between the Government and CLP Power Hong Kong Limited (CLP) started in 1964; while that with The Hongkong Electric Company Limited (HEC) started in 1979. Upon the renewal in 2008, significant revisions on the basis of the past SCAs were made. Not only the permitted return was lowered significantly by 50%, the tariff was also reduced through tightening the balance of Tariff Stabilisation Fund (TSF). The cap on TSF balance was also lowered from 12.5% to 8% of annual local sales in response to the public's concern on the over-accumulation of funds.  

     Due to the restriction in disclosing commercial sensitive information classified by the power companies, we cannot give a detailed account of our bargaining effort over the tariff increase in these few years, or the individual items that have been taken out. However, we may take this opportunity to explain to members, in summary, the gate-keeping measures taken by the Government. The measures may be concluded mainly as being implemented at two levels and with five focuses.

     The first level is the scrutiny of the five-year Development Plans of the power companies. With the assistance from independent energy consultants, we have been meticulous in examining the capital investment proposals submitted by the power companies with a view to avoiding investments that are excessive, premature, unnecessary or unreasonable. In 2008 and 2009, in examining the capital investments proposed by the power companies, 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%.  

     The second level is to ensure that electricity tariffs are maintained at a reasonable level through the examination of the data on capital investment and operating costs, etc. submitted by the power companies annually. During the process, the Government accountants and the independent energy consultants would analyse and examine the major data in every aspect and the justifications submitted by the power companies, and strive to exclude the components which are considered inappropriate in the tariff increase proposal submitted by the power companies annually from the forecasts. There are five focuses that we have worked on:

(i) First of all is the scrutiny of the capital expenditure of the power companies. To avoid the power companies from increasing their profits by making excessive, premature or unnecessary investments, our gate-keeping role is to scrutinise the capital investments submitted by the power companies annually.  Quoting an example, a few years ago, we have taken out the Liquefied Natural Gas Terminal project costing $10.4 billion from CLP's Development Plan. The difference in opinion between CLP and us in the preparatory and initial stage of work for increasing generation capacity during this year's examination is also one of the examples.

(ii) Secondly, the operating cost of the power companies is another focus in our gate-keeping job. Operating cost forms part of the Basic Tariff. It is different from capital investment in that it will be fully reflected in the tariff in the year when it is incurred. During the course of gate-keeping, we would ensure that the power companies have worked hard in cost control, with a view to preventing the power companies from passing the unnecessarily high operating costs onto the consumers.

(iii) The third focus is to review the Fuel Clause Recovery Account (FCA) of the power companies. Among the components of electricity tariff, fuel costs are passed through on the basis of actual spending. In the years when the tariff increase pressure is relatively significant, the power companies could lower the tariff increase by increasing the forecast deficit balance in the FCA, with a view to moderating the tariff impact on the livelihood and businesses.

(iv) The fourth is the Tariff Stabilisation Fund (TSF). The purpose of the TSF is to accumulate the excess of net revenue of the power companies over the permitted return, so as to provide funding, when necessary, to ameliorate the impact of tariff increases on the consumers. We scrutinise the power companies' year end TSF balances projection annually, the purpose of which is to prevent the power companies from accumulating excessive TSF balance and reserving it for compensating the shortfall when they are unable to earn the highest permitted return in future.

(v) Lastly, it is the other revenue of the power companies. We would pay attention to whether the power companies will have additional revenue item in the following year, to ensure that the related sum will be recorded in the books without delay, and will benefit the consumers as soon as possible. The refund of rent and rates in this year is one of the examples.

     We put effort in carrying out all gate-keeping measure mentioned above in every of the past few years. Through discussion and negotiation in accordance with the SCAs, the government and the power companies could basically come into consensus on the magnitude of tariff increase every year. However, there are differences between the Government and CLP in the current tariff review.  

     Our replies to the questions raised by the Hon Starry Lee are as follows :

(a) and (b) Regarding the Government's reservation and queries on the tariff increase proposed by the power companies, HEC had responded positively days ago by reducing its tariff increase to 6.3% and subsequently adopting measures to contain the tariff increase for most domestic consumers to below 5%. Unfortunately, CLP has just responded to our views this morning. Chairman, please allow me to deviate from my original reply. As I did not receive a reply from CLP when I submitted my paper to Legco this morning, please let me make an adjustment here. Before today, CLP has not responded to the queries raised by the society on the premature capital investment and excessive increase in operating costs, and also failed to reduce the tariff increase through further adjusting the balances in the TSF and FCA. The Government regrets the actions taken by CLP and urges CLP to lower the tariff increase before January 1 in response to the request made by the Government and the Executive Council. As mentioned, I received a response from CLP this morning about reducing the tariff increase from the initial 9.2% to 7.4%. The Government is examining the details.

(c) In accordance with Schedule 3 to the SCA signed between the Government and the power companies, the power companies will make available to the Government for the purpose of the Tariff Review the relevant information and data, but such will be restricted for the purpose of negotiation with the Government.  The Government has strived to make available to the public as necessary the information within the scope allowed for under the SCA. To cope with the special meeting of the Panel on Economic Development of the Legislative Council to be held this Friday, we have made a written request to the power companies for providing the relevant information directly to the Panel.

Ends/Wednesday, December 21, 2011
Issued at HKT 15:07


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