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Following is a question by the Hon Tam Yiu-chung and a reply by the Secretary for the Environment, Mr Wong Kam-sing, in the Legislative Council today (July 11):
Question:
Some members of the public have reflected to me the inconsistencies in the retail price movements of domestic liquefied petroleum gas (LPG) and auto LPG on several occasions in the past three years, sending confusing messages to the market. In this connection, will the Government inform this Council:
(a) whether it knows if LPG importers currently adopt the same mechanism in setting the retail prices of domestic LPG and auto LPG; if the same mechanism is adopted, of the details; if not, the reasons for that;
(b) whether the Government will adopt measures to urge LPG suppliers to standardise the retail pricing mechanism for domestic LPG and auto LPG; if it will, of the details; if not, the reasons for that; and
(c) whether the Government will strengthen the regulatory measures and enhance the transparency of the price information on domestic LPG to protect public interests; if it will, of the details; if not, the reasons for that?
Reply:
President,
Hong Kong's energy policy objectives are to ensure reliable and safe energy supplies at reasonable prices, whilst minimising the environmental impact in the production and use of energy.
At present, the retail market of Liquefied Petroleum Gas (LPG) mainly consists of domestic LPG and auto LPG. Amongst these, domestic LPG also comprises piped LPG supplied to housing estates and cylinder LPG distributed to consumers through retail operators.
In accordance with the provisions in the operation contract, a ceiling is set for the prices of auto LPG supplied by dedicated LPG filling stations. In other cases, prices of LPG are determined by individual oil companies with regard to commercial principles and their operating costs. With understanding and concern about the impact of LPG prices on the general public, we encourage the industry to enhance the transparency of price setting mechanism in order to safeguard public interests.
The first part of the question raised by Hon Tam Yiu-chung involves the price setting mechanism of LPG. Regarding domestic LPG, one of the major LPG suppliers in Hong Kong has voluntarily adopted a price adjustment mechanism since 1999 to enhance transparency. Under this mechanism, the price of domestic LPG consists of two main components, that is, LPG import price and operating cost cum profit margin.
The LPG import price is adjusted once every three months (i.e. by the end of January, April, July and October). Specifically, in setting the price for the coming three months, the company concerned forecasts the import prices for the coming three months in light of the latest international LPG price (i.e. contract prices of LPG from Saudi Arabia), and makes positive or negative adjustment for any difference between the actual import prices and the forecast import prices in the last review. The operating costs will be reviewed once every year at the end of January.
The above price adjustment mechanism is applicable to both the retail prices of domestic piped LPG and the wholesale prices of cylinder LPG. After each price review, the company concerned will announce and explain to the public the outcome of the review.
We understand that the domestic LPG prices and adjustments of other oil companies in the market are basically the same as that of the above company.
Regarding auto LPG ceiling prices for dedicated LPG filling stations, they are set in accordance with the formula for the ceiling price and related adjustment mechanism as stipulated in the operation contract signed between the operators and the Government. Similar to domestic LPG, the ceiling price of auto LPG also consists of two components, that is, international LPG price and operating cost. The part on international LPG price is adjusted in accordance with contract prices of LPG from Saudi Arabia in the last month, which movements are directly reflected in the retail price of dedicated filling stations. As for operating cost of LPG, it is based on the operating cost and profit margin put forward by the operators at the time of tender. Apart from the annual adjustment in line with the percentage change in the Composite Consumer Price Index, the LPG operating cost remains the same throughout the 21-year contract period. In addition to issuing a press release, the international LPG prices and the ceiling prices of dedicated filling stations are posted onto the website of the Electrical and Mechanical Services Department.
This shows that price adjustments to the LPG component for both domestic LPG and auto LPG in dedicated LPG filling stations make reference to the contract prices of LPG from Saudi Arabia. However, the adjustment cycle and the timing for making reference to relevant data are not exactly the same. Due to the differences in the market size, mode of operation and cost structure (including capital investment, storage, operation and maintenance cost) of domestic LPG and auto LPG, it is difficult to make direct comparison in the overall price of these two types of LPG.
Analyses of LPG price changes in the past three years show that the annual average international LPG prices and LPG import prices in 2011 increased by 67% and 64% respectively as compared with those in 2009; while domestic piped LPG and auto LPG increased by 28% and 56% respectively over the same period. If we compare the five-month average of January to May 2012 with the annual average of 2009, international LPG prices and LPG import prices increased by 94% and 87% respectively, while domestic piped LPG and auto LPG increased by 35% and 74% respectively.
On the second part of the question, as I have just mentioned, prices of domestic LPG are determined by individual oil companies with regard to commercial principles and their operating costs, whereas the ceiling prices of dedicated filling stations are set in accordance with the formula for the ceiling price and related adjustment mechanism as stipulated in the operation contract signed between the operators and the Government. As both of them make reference to the contract prices of LPG from Saudi Arabia, there is already a certain degree of objectivity. In addition, these two types of LPG have different consumers and modes of operation. We therefore do not see a need to rigidly align their adjustment mechanisms.
On the third part of the question, at present, the prices of domestic LPG are adjusted once every three months, mainly with reference to the contract prices of LPG from Saudi Arabia. The related changes are posted onto the website of the Electrical and Mechanical Services Department on a regular basis. We consider that the existing price adjustment mechanism is transparent, and that there is no phenomenon of price "fast going up and slow coming down".
Besides, as we understand, most oil companies issue a press release every time before domestic LPG prices are adjusted, while at the same time consumers are also informed of the price adjustment through the LPG operators of the housing estates and property management companies. We will continue to liaise with oil companies to explore ways to enhance price transparency.
In monitoring domestic LPG prices, we will continue to make reference to the movement of international LPG prices and local LPG import prices and check whether the oil company's price forecasts are reasonable. We will also follow up with the oil company the price adjustments due to actual and forecast price difference in the last review, and assess if the annual adjustment in operating cost is reasonable.
We will further liaise with oil companies and endeavour to enhance price transparency of domestic LPG to safeguard the interests of consumers.
Ends/Wednesday, July 11, 2012
Issued at HKT 15:23
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