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LC Urgent Q2: Electricity tariffs increase of the two power companies

     Following is a question by the Hon Fred Li 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):

Question :

     CLP Power Hong Kong Limited ("CLP") and The Hongkong Electric Company Limited ("HEC") announced on December 13 this year the rates of tariff increase for the coming year, and the magnitude of tariff increases of the two power companies is very drastic.  The respective rates of tariff increase of CLP and HEC are 9.2% and 6.3%, 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, it is still believed that such increases will further stimulate inflation as well as aggravate the public's financial burden and increase the operating costs of businesses, causing the serious problem of inflation to worsen.  According to the Government, there were divergent views between the Government and CLP during their discussion on CLP's tariff increase proposal ("the proposal"), including a higher-than-inflation rate of increase of CLP's forecast operating expenditure, and the premature inclusion of capital expenditure in the proposal.  Yet, both the Government and CLP have not explained in detail.  The recent announcements made by the two power companies to substantially increase the tariffs for the coming year have aroused widespread grievances among members of the public, and the Chief Executive has also made a rare move of publicly criticising such drastic increases.  According to the Government, one of the two power companies has at the last stage agreed to lower the rate of increase, while the other one has not given any positive response so far, which is unprecedented.  As this is an issue of urgent importance because the new tariffs will come into effect on January 1, 2012 and time is running short, will the Government inform this Council :

(a) whether it will immediately make public the respective five-year development plans of the two power companies, and whether there is still room for downward adjustment for the proposed rates of tariff increase;

(b) of the justifications for CLP to propose a 6.25% increase in its basic tariff, and whether the authorities agree to such justifications; and

(c) given that the Government has pointed out that CLP had, in calculating its basic tariff, adopted a higher-than-inflation rate of increase of its forecast operating expenditure, and its inclusion of capital expenditure in the calculation was premature, whether the Government can further elaborate this?

Reply :


     The Government's review of the tariff increase proposals submitted by the two power companies each year is always a stringent process. As just mentioned in my main reply to the Hon Starry Li, after receiving the tariff increase proposals from the two power companies, the Government's professional finance team together with the independent energy consultant hired from outside will carry out the gate-keeping duties from two levels and five focuses under the framework of the Scheme of Control Agreements (SCAs).  In vetting the tariff proposals for 2009, 2010 and 2011 since the existing SCAs effective from 2009, the increase in Basic Tariff of the two power companies in the past few years did not reach the upper limit in Basic Tariff allowed for under the Development Plans.

     We agree with the Hon Fred Li that, as stated in his question, the circumstance this year is "unprecedented".  Indeed, in the past few years when the Government negotiated the tariff proposal with the two power companies, both sides, while fighting for the best deal, showed due respect to the SCAs being regulatory framework while allowing the companies to make long term investment for electricity supply and service improvement. The two power companies, while protecting the benefit of their companies, would also accept the reasonable queries raised by the Government relating to the capital investment and other expenditure, and tick out related items accordingly; regarding the balance of Tariff Stabilisation Fund (TSF) and the Fuel Clause Recovery Account (FCA), both parties could also reach consensus after discussion.

     However, the special case in current year is that, one of the two power companies, in facing the queries during the Government review, as well as  subsequent queries from the Executive Council, the Legislative Council as well as the community, still insists on the increase which is considered as excessive after review.

     Our reply to the Hon Fred Li's question is as follows :

(a) In respect of the capital investment of power companies, the cap for the capital investments of CLP and HEC previously approved under their current Development plans were $39.9 billion and $12.3 billion respectively, which include the following major items:

(i) expansion and enhancement of power transmission and distribution network to serve new development areas such as the West Kowloon and new rail lines development , as well as strengthening the quality and reliability of power supply;
(ii) provision of emissions control equipments such as flue gas desulphurisation plants;
(iii) repair and refurbishment of power generating units; and
(iv) enhancement of customer service.

     Regarding the 2012 tariff adjustment of CLP, we consider that there is still room for CLP to reduce its tariff increase, and has requested CLP to respond. As I mentioned earlier, CLP made an adjustment this morning.

(b) and (c) The Government considers that amongst the increase in CLP's Basic Tariff, the increase in CLP's
operating expenditure (OPEX) of 11.2%, as disclosed by the company, is far beyond the rate of inflation.  CLP explained that the return of the rebates on insurance to its consumers in 2011 has caused an unusual reduction in 2011 OPEX and hence an expanded growth of its 2012 OPEX.  However, we have noted that CLP's OPEX in 2011 was in fact not particularly small as claimed.  To the contrary, it is higher that all in all previous years.  The OPEX we referred to has already excluded those less flexible items such as depreciation and cost for purchase of nuclear electricity, and primarily consists staff remuneration, administration expenses, etc.  The Government therefore questioned whether CLP should further reduce its OPEX by improving its cost control measures, hence lowering the tariff increase in next year.

     Regarding CLP's capital investment, those "premature investment items" which we have doubt are mainly the "preparatory" and "initial stage of works" to increase generation capacity.  It is estimated that these items require capital expenditure in hundreds of millions in 2012, and are not purely feasibility study as claimed by CLP.  These projects have yet to be fully vetted or included in the current Development Plan.  Since the maximum demand for CLP's power generation in 2011 was lower than that in 2010, the Government finds no justification to support CLP in increasing its generation capacity.  We have thus requested CLP to remove the relevant expenditure from its forecast capital expenditure in 2012.

     CLP made another point that its increase in basic tariff was mainly attributable to the capital expenditure for emissions control projects. The Government has requested and agreed to the emission reductions of the two power companies, however, we should point out that CLP has already completed the emission control projects for its coal-fire plants by phases in 2010 and 2011. Hence, those emission control projects should have almost no bearing on the increase in basic tariff for 2012.  Although this sum of premature investment being questioned by the Government has little impact on the increase in 2012 basic tariff, the relevant works involves additional generation capacity the continuous investment in which would entail huge sum of capital investments, eventually directing to a larger increase in basic tariff in future.  To the contrary, if the initial stage of works is approved but the relevant additional generation capacity is not accepted eventually, the current preparatory and initial stage of works would be wasted, and the community has to foot the bill.  We therefore have sufficient justifications to request CLP to remove the relevant expenditure from its forecast capital expenditure in 2012, before a need for additional generation capacity is established.

     Moreover, we consider that CLP may narrow the growth in tariff by increasing the deficit balance of its FCA or reduce the balance of its TSF so as to strike a balance.  Taking the FCA as example, CLP is prepared to accept a deficit balance of $800 million, which is far below that adopted by HEC which operates in a much smaller scale.  However, I understand that in further reducing the tariff increase, CLP will raise its deficit balance to $1.4 billion.

     Regarding TSF, CLP projects, in the press conference, a balance of $300 million by end 2012 and claims that this amount would be the lowest in the past 25 years.  In response to this, we would need to provide the following figures:

(i) First, CLP forecast an end 2009 TSF balance of $150 million when the 2009 tariff was determined.  Hence, the current estimate of $300 million by end 2012 is not the lowest forecast figure in the last 25 years;

(ii) CLP underestimated its TSF balances in eight out of the past ten years. Hence, the Government is more conscious on CLP's TSF projections;

(iii) Comparing the two power companies, CLP has always been maintaining the balance of the TSF at a high level.  During 2001-2008 (i.e. the previous SCA period), the average balance of CLP's TSF was close to $3 billion.  The new SCA introduced new control measures to reduce the cap of the Fund from 12.5% of the power companies' local sales revenue to 8%.  CLP's TSF balance has been reduced gradually from $1.65 billion since 2009, but is still higher than that of HEC.  For comparsion, the balance of HEC's TSF was zero in four years out of the past ten years, while the highest was only around $300 million to $500 million in remaining years;

(iv) Another factor which may affect the Fund balance is the sale of electricity to Guangdong.  CLP assumes in its tariff proposal that unlike previous years, it would not sell electricity to Guangdong in 2012.  Since CLP should return to its consumers 80% of the net profits in the relevant electricity sale, it is very likely that the balance of CLP's TSF would increase if CLP is going to sell electricity to the Corporation next year.

     The TSF is established primarily for mitigating the impact of tariff surge on the general public.  It should now play its role when Hong Kong is currently suffering from an uncertain global economic outlook and a local inflation pressure.  This is the time for the TSF to play its role.  Having regard to the abovementioned, we consider that there is clear room for CLP to narrow its tariff increase.

Ends/Wednesday, December 21, 2011
Issued at HKT 18:36


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