Scrap, not renew, scheme of control

Hurrah! The government has negotiated a new scheme of control with Hong Kong's two electricity generators.

Monday's agreement cuts their guaranteed return on assets to 10 per cent, from 13.5 per cent for CLP and from 15 per cent for Hongkong Electric. According to officials, that means we can all expect a 10 per cent cut in our electricity bills at some point over the next year.

Big deal. Considering that CLP just hiked its charges by 4.5 per cent and Hongkong Electric by 6 per cent, the promised cut, if it materialises, will leave consumers only a smidgen better off.

Judging by the elated response to the news, most commentators seem to think that even the smidgen on offer is better than nothing, and that the new agreement is good reason to celebrate. Few have stopped to ask why Hong Kong should operate a scheme of control that guarantees fat profits for electricity companies in the first place.

Way back in 1963, when the scheme was first introduced, it made sense for the government to assure the generators that they would make a fixed return on their investments. Hong Kong's economy was developing fast, and the government wanted to encourage badly-needed investment in electrification in order to support growth.

Hong Kong attained developed economy status long ago, yet we retain a third-world scheme designed to reward power companies for boosting their investments in the electricity system.

As a result, in recent years the scheme of control has encouraged the power companies to over-invest in unnecessarily expensive assets which then allow them to ramp up the tariffs they charge customers.

Today, a householder on Hong Kong Island who uses 1,000 kilowatt hours of power in a month - enough to run a small air-conditioner constantly - can expect to receive a bill from Hongkong Electric for HK$1,257 at the end of the period.

At first that appears comparable to the HK$1,102 bill that a similar householder in Sydney would get. But that does not take into account the 10 per cent goods and services tax Australians pay on their electricity bills, nor that urban power users down under must subsidise a vast and expensive rural distribution network, nor the substantial discounts they get for use at non-peak hours (nor does it allow for the 13 per cent the Australian dollar has appreciated against the Hong Kong currency over the last year).

In short, electricity is expensive in Hong Kong, and the government's scheme of control is to blame. Monday's agreement will do little to change that.

If the government really cared about reducing consumers' bills, it would scrap the scheme of control altogether. Then it should

re-write the rule book completely, breaking up the current twin-monopoly that gives Hongkong Electric and CLP total dominance over electricity generation, transmission and distribution for their respective areas.

Instead it should separate these three different functions. Under this model, power generators, including eager mainland companies, would compete to sell electricity to a single Hong Kong grid, while individual distributors would vie to provide consumers with billing and other customer services.

The result would be healthy competition and lower bills.

The usual official response to this suggestion is to argue that electricity supply is too important to be left to market forces, and that it is necessary for consumers to pay a premium, as under the scheme of control, in order to ensure the reliability of supplies.

This is nonsense. Hong Kong Telecom, the former monopoly telecommunications provider, used to operate under a government scheme of control. When it was abolished we did not suddenly lose our phone services. What happened was that a slew of new competitors entered the market, service improved and prices plunged.

Instead of renewing the scheme of control for CLP and Hongkong Electric companies, the government should be exploring similar deregulation in the power market. Then we could hope to see a meaningful reduction in our electricity bills.