Jake's View | CLP not being reasonable in its view about reasonable returns

The government should be careful when considering cutting the return of power utilities because they needed "reasonable" returns to make long-term investments, the chief executive of the city's largest power utility warned yesterday.

Call me lazy if you must for presenting the same chart twice within one month, but it shows you what constitutes reasonable returns in the electricity market and CLP Holdings needs to face the facts here.

Its profits are regulated through a scheme of control that fixes its permitted return to a percentage of its investment in fixed assets. From 1964 to 2008 this figure was set at 13.5 per cent. It was then reduced to 9.9 per cent, and the government is now talking of reducing it further.

Let us put some context into the word "reasonable". For most people a reasonable return would be what others make on similar investments with some adjustment for whether the particular investment under consideration is more or less risky than others.

A return rate of 13.5 per cent was about right at the beginning of the 1980s when the benchmark US 10-year treasury showed even higher yields briefly and when yields on investment property in Hong Kong were over 10 per cent.