CLP tariff rise cannot be justified

Albert Cheng says the government and legislators should have opposed CLP's bid to raise charges as inflation is hitting residents hard

PUBLISHED : Thursday, 19 December, 2013, 8:33pm
UPDATED : Friday, 20 December, 2013, 4:02am

As we prepare to greet the new year, it is almost certain it will bring financial hardship for many, especially with the imminent tariff increases from CLP Power from January 1.

Hongkong Electric has announced that its net tariffs are expected to remain unchanged over the next five years, including a freeze for next year. This is because a rise in basic tariff of 7.1 cents for the next year will be offset by a corresponding drop in the fuel clause charge.

But CLP Power has announced a tariff hike of 3.9 per cent from next year and said the upward trend will continue for the next five years. This has angered many people because the increase will seriously affect Kowloon and New Territories residents. However, the opposition voice from inside the Legislative Council and from environmental groups has been noticeable by its absence. They seem to have merely gone through the motions without any real protest.

The two power companies can do whatever they want with tariff charges because of the government's ineffective monitoring policy. Under the present Scheme of Control Agreement, the two power companies, in fact, have their profits guaranteed rather than being restricted. Under the agreement, they are guaranteed a 9.9 per cent return on their capital investment.

In order to maximise earnings allowed under the agreement, CLP Power's strategy has been expansion. Expanding the size of its fixed assets will automatically mean it will be expanding profits. The expansion of its infrastructure capacity has allowed it to sell electricity to the mainland.

This time, the two power companies have abused another loophole of the agreement to help them raise tariffs.

Under the agreement, if their earnings exceed the permitted level of 9.9 per cent, the extra earnings could be put into a stabilisation fund that acts as a buffer to prevent future price increases, and can be used for development. But the two power companies have used the lame excuse that the stabilisation funds have insufficient funds.

Hongkong Electric said part of its tariff increase would be used to add to its tariff stabilisation fund, so that its balance can be increased from the current HK$8 million to HK$168 million.

CLP Power is even more blatant. By the end of last year, its tariff stabilisation fund had HK$712 million, but its chief corporate development officer, Quince Chong Wai-yan, said the electricity earnings had failed to offset costs, therefore the outstanding costs had to come from the stabilisation fund, depleting the fund to only HK$8 million.

In order to pump up the stabilisation fund to more than HK$313 million, the company has no choice but increase tariffs for next year. Chong said the fund had to be at HK$300 million to have a stabilising effect on tariffs. It is largely funded by electricity sales to the mainland.

From its application for tariff increases, CLP Power has projected that by 2018, its tariff stabilisation fund will snowball to HK$936 million, of which HK$565 million would be reportedly taken out as profits. All in all, it means CLP Power would have taken more than HK$1.2 billion from the fund as profits. A system set up with the purpose of stabilising tariff charges has been turned into some kind of money-making mechanism for CLP Power to maximise profits.

Both power companies, especially CLP Power, have really twisted logic and manipulated the stabilisation funds in order to fit their vested interests.

The funds are built up with the company's surplus profits. If there are no surplus profits under the 9.9 per cent agreement, there will be no money for the stabilisation fund. For CLP Power to extract HK$700 million from its stabilisation fund in order to offset costs this year was already a breach of the fundamental principles of the fund. The profit shortfall was not due to fuel charges or increased overheads; it's because of the unnecessary expansion of its fixed assets. The stabilisation fund was set up to stabilise tariffs, not to subsidise company earnings.

I can't see a reason for the government and Legco to approve the tariff increase applications from either power company. They must not shirk their responsibilities to block such unreasonable applications.

In fact, both companies were profitable for the first half of this year. Hongkong Electric's parent company, Power Assets, recorded profits of HK$4.8 billion, while CLP Holdings recorded HK$3.4 billion. And yet, with these profits, they still want more?

If it's not greed, what is it? Over the past decade, the average increase by CLP Power has been about 54 per cent compared to Hongkong Electric's 40 per cent.

CLP Power has had its way for so long because it has a very skilful public relations team. That's the power of money.

Albert Cheng King-hon is a political commentator.