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Maintaining the Current Regulatory Regime is the Best Way Forward for Hong Kong

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Maintaining the Current Regulatory Regime is the Best Way Forward for Hong Kong

29 Jun 2015

HK Electric’s submission

HK Electric submitted today its views on the future development of the electricity market in Hong Kong in response to the Government's public consultation launched earlier. HK Electric's submission is that the proposals contained in the Consultation Paper will only bring about uncertainties, but not benefits.

Mr. Wan Chi-tin, Managing Director of HK Electric said that under the certainty provided by the cost effective Scheme of Control Agreement (SCA), Hong Kong has been enjoying world-class electricity services and has achieved the Government's four energy policy objectives of safety, reliability, affordability and environmental protection.

For HK Electric, it has been providing customers with excellent power supply reliability of 99.999% while maintaining tariff at an affordable level much lower than other world cities'. From 2008 to 2014, HK Electric's tariff only increased by a nominal 5.9%, which is significantly lower than the cumulative inflation of 23% over the same period. Indeed, at end of 2013 the company was able to announce the freezing of tariff for five years from 2014 to end 2018, which is unprecedented in the world. Its tremendous efforts to improve environmental performance have also paid off with significant reduction in the three categories of emissions (sulphur dioxide, nitrogen oxides and respirable suspended particulates) by 40% to 90% from 2008 to 2014, far below the emission caps set by the Government.

Mr. Wan noted that the SCA also provides certainty for investors to make long-term investments necessary to maintain Hong Kong's electricity infrastructure, making it a very effective tool in balancing the interests of consumers and investors. He sees absolutely no case in making any rash changes which will upset the balance or jeopardise the achievements we already have as the stakes are too high to lose with little or nothing to gain. "It remains the company's conviction that the current SCA regime, with its clear and proven track record, continues to be the best way forward for Hong Kong."

Addressing the key issues raised in the consultation paper, HK Electric is of the view that choice and competition are not the goals Hong Kong aspires to but rather the means. Introducing them to Hong Kong may put the Government's energy policy objectives at risk and that experiences from overseas deregulation are lessons to avoid ─ competition may not deliver any tariff reduction, and choices may not entail customer satisfaction.

As for the duration of the agreement, HK Electric believes that the term should be sufficient to attract long-term investment in electricity infrastructure and allow long-term power system planning and fuel procurement. As such, a 15-year duration is most appropriate for regulating the electricity infrastructure in Hong Kong.

The company stressed that electricity infrastructure is characterised by a unique investment profile which has assets that are capital intensive, illiquid, long-lived, and with depreciating value. If the rate of return (RoR) is too low to attract ongoing investments, new and replacement capital investment will be discouraged. "For Hong Kong to continue enjoying high quality electricity supply, the current level of permitted RoR needs to continue to create the right environment for power companies to make long-term investments in electricity infrastructure. This is the best way to balance the interests of consumers and investors," Mr. Wan stressed.

HK Electric dismissed as unfair and against global practice suggestions that power companies should absorb part of the fuel costs. The current tariff approval mechanism has proven to be effective in safeguarding consumer interest and the Fuel Clause Recovery Account provides a cushion to buffer fuel cost impacts on consumers. In fact, HK Electric always strives to minimise its fuel costs through prudent fuel procurement policies and practices and there is no need to introduce any fuel-hedging measures.

On the existing incentive and penalty schemes under the SCA, namely the emissions performance linkage mechanism and customer-related performance incentive and penalty mechanisms, HK Electric agrees that they are effective and appropriate to encourage out-performance in environmental performance and customer service, and that the mechanisms should be maintained.

Regarding the promotion of renewable energy (RE), HK Electric believes that commercial scale RE system, such as the company's proposed off-shore wind farm project, is the only pragmatic strategy for Hong Kong considering that the potential for small-scale REs is heavily constrained.

Mr. Wan concluded that Hong Kong people expect to continue enjoying quality and affordable electricity services with minimal environmental impact. "We cannot afford to give away the success we have already achieved, and there is no room to experiment with change simply for the sake of change. Maintaining the current regulatory regime is the best way forward for Hong Kong."