Paying the price for an outdated scheme
In a fully competitive market, the question of fair price does not exist. But in monopolistic market structures - such as the power market - 'fair price' usually results from regulatory frameworks that try to balance the interests of different stakeholders.
A common means of determining this price for utilities such as electricity is based on household earning power. On the basis of net hourly wages, Hong Kong's two electricity providers - Hongkong Electric and CLP Power - charge some of the highest tariffs in the world. Hong Kong consumers spend a larger portion of their earnings on electricity (slightly over 1.5 per cent) than those in most main cities.
More worryingly, our tariffs have gone up even at times when the consumer price index and housing prices were in decline. While most power providers reduce their tariffs in times of economic slowdown, Hong Kong's seem to have bucked this norm. And, absurdly, Hong Kong Island residents paid 16 per cent more for electricity than those in Kowloon last year.
One of the arguments put forward by the two companies is that Hong Kong enjoys an exceptional level of supply reliability. As such, the argument goes, investments are required for constant maintenance and improvements, to support such a high level of reliability. This is a valid point, given Hong Kong's high population density.
However, over the past decade, the combined fixed assets of Hongkong Electric and CLP have grown by two-thirds, while total demand has risen by only one-third. In other words, because the current scheme of control agreement guarantees an annual profit of at least 13.5 per cent on net average fixed assets, the companies' capital investment has grown twice as fast as actual demand.
Indeed, maximum installed generating capacities at Hongkong Electric and CLP were about 40 per cent last year, making plant utilisation in Hong Kong among the lowest in the world. In spite of this, the companies have enjoyed consistently high returns (18 -22 per cent in 1998-2001), compared with power utilities in Europe (11 per cent), the United States (9 per cent), and Latin America (6.5 per cent).
The original purpose of the scheme of control's guaranteed return was to ensure that the power companies had sufficient incentive to invest in fixed assets, and thus provide for a reliable supply. Instead, it has placed the weight of excessive investment and operating costs on consumers' shoulders, ultimately leading to unreasonable pricing by the power companies.
The scheme of control - which is to remain in effect until 2008 - is clearly outdated and heavily favours the power companies. The appalling increase in pollution this year further highlights the inadequacy of the scheme in keeping pace with societal concerns. Cast in the light of such fundamental considerations, the current proposal by the two power companies to raise prices is simply unreasonable and detrimental to Hong Kong's development.
Ali Farhoomand is a professor of business and director of the Centre for Asian Business Cases at the University of Hong Kong. The full version of the report can be obtained from www.cabc.org.hk