Hong Kong and China Gas

AND THIS IS all we need to go direct to the charts without another word of introduction. The red line in the first one shows you the profit margin of Hong Kong Gas since 1991. The blue line, by way of context, shows you the equivalent for the scheme of control operations of CLP Power.

Yes, you have it. For every dollar that Hong Kong Gas billed its customers in 2003 it kept 42 cents for itself in profits after tax, 52 cents before that tax charge. Now that is what I call looking after shareholders.

And while the company's profit margin may actually have declined from 49.6 per cent in 1999 (56.9 per cent pretax), let me point out that net earnings were still higher in 2003 than in 1999. All that happened was that the dollar value of sales outstripped earnings as the rising cost of fuel for Towngas production was passed direct to customers.

Which brings me to the second point, namely Mr Chan's claim that Towngas tariffs have not been raised since 1998.

Not quite. The consumer price index shows that the average unit price of Towngas has risen 26.6 per cent since mid-1998. This, by the way, is over a period in which prices on the overall CPI declined by 16.1 per cent.

How could this be without a single tariff increase since 1998? The answer lies in that fuel-cost adjustment factor. The official tariffs remain the same but the extra fuel cost is added to the consumer's bill. Hey presto, up goes the price of Towngas without a single tariff increase. And then we get Mr Chan's argument that a tariff increase is justified because of investments the company has made to increase efficiency.

I think it debatable. An investment to increase efficiency is one that is expected to lower unit costs of production. This is how we define efficiency in investment terms and if these investments reduce costs through increased efficiency, then I see an argument for lower Towngas tariffs rather than for higher ones.

Let me set the background for you here. The power utilities are subject to a scheme of profit control to prevent them from taking advantage of their monopoly positions.

No such scheme was ever imposed on Hong Kong Gas, however, as it could always claim that it had no monopoly. Consumers have alternatives for their heating needs in liquefied petroleum gas and electricity. The company is thus free to set its tariffs at whatever level it chooses and, since being taken over by property developer Lee Shau-kee more than 20 years ago, it has rewarded shareholders with a steady increase in annual profit margins to the present high figures.

The second chart shows you the key to its tariff policy. It sets them at a level that, together with fuel-cost adjustments, keeps the price to consumers at about 20 per cent (narrower recently) below the equivalent prices charged by the electric power utilities.

It thus maintains its competitiveness against the power utilities but, because its costs per unit of energy sold are lower than those of the power utilities, it enjoys a much higher profit margin.

This raises the question of whether it is time at last to impose a scheme of profit control on Hong Kong Gas, too. The argument that it has no monopoly because consumers have alternatives is beginning to wear a little thin. It may not have an absolute monopoly but it certainly has the next best thing.

And what particularly induces me to propose it now is that I think Mr Chan has been presumptuous in claiming that Hong Kong Gas is under pressure to raise tariffs while it still enjoys a pretax profit margin of more than 50 per cent.

I see no pressure here at all. I see only a self-interested inducement because there is now room for a tariff increase with a decision by Hongkong Electric to raise its tariffs and CLP to cut its customer rebates.

There is an old saying that may apply to your company, Mr Chan: Don't look a gift horse in the teeth.