Households will still get higher than average bills

PUBLISHED : Friday, 06 January, 2006, 12:00am
UPDATED : Friday, 06 January, 2006, 12:00am

It is hard to ignore an element of opportunism in the timing of Tuesday's announcement by Growth Enterprise Market-listed magazine distributor Vertex Communications & Technology Group that it has formed a joint venture to buy cheap electricity from Guangdong and sell it to consumers in Hong Kong.

The news coincided neatly with the release last week of the government's consultation paper on the power market, which proposed opening the system to new suppliers and cutting the maximum returns CLP Holdings and Hongkong Electric Holdings, the city's two monopolist power companies, are allowed to make.

Nicely primed by the government report, stock market investors yesterday bid up shares in Vertex by 82 per cent; a move that came on top of a 31 per cent surge on Tuesday, just before the stock was suspended ahead of the joint venture announcement.

The company and its Chinese state-owned partners, China Power International Holding and China Southern Power Grid, are proposing to build their own power grid to supply Hong Kong customers in competition with CLP and Hongkong Electric.

This might be possible on a small scale, for example by running a transmission line down from Shenzhen to supply specific large customers such as big property developments in the northern New Territories. Building anything more extensive would be ruinously expensive, enormously time-consuming and would require the whole-hearted backing of the Hong Kong government.

At the moment however, it is doubtful whether the joint venture would find many takers in Hong Kong anyway. Southern China is suffering electricity shortages, which must raise questions in the minds of potential customers about the reliability of any power supply sourced from Guangdong.

In two or three years, it will be a different story. After a massive investment programme, which is set to add about 15,000 megawatts of generating capacity each year for the next three years, Southern China's electricity shortage is expected to turn into a surplus.

Then cherry-picking customers and undercutting Hong Kong's established power companies with cheap electricity from north of the border will look a lot more attractive as a business model.

Even so, it will do little to lower the tariffs paid by the average Hong Kong customer. For more than 40 years now, the city's two generators have benefited from a government scheme of control which promises them a 13.5 per cent return on their assets.

In its early years, the scheme was effective at encouraging much-needed investment in the power system. More recently however, it has encouraged the power companies to over-invest in 'gold-plated' assets, which then allow them to ramp up the tariffs they charge customers.

As a result, CLP customers pay prices almost 50 per cent higher than average tariffs in Guangdong. Hongkong Electric's customers pay nearly twice as much.

In its consultation paper the government proposed tackling this discrepancy by reducing the permitted return on assets to an average 9 to 10 per cent, which will cut tariffs by 10 to 20 per cent.

That will be welcome but it will do little to solve the real problem. As long as CLP and Hongkong Electric control their own distribution and supply networks, the two will fight tooth and nail to deny third-party suppliers access to their grids.

If the government was serious about creating a free market in electricity, it would push the generators into spinning off their distribution systems into a single merged grid which generators in Hong Kong and north of the border would compete to supply.

Instead, it looks as if Hong Kong will get a watered down scheme of control under which opportunists like Vertex pick off the biggest and best clients while average householders will continue to pay higher than average prices for their power.