Hongkong Electric has hardly endeared itself by proposing an electricity tariff rise averaging 5.3 per cent. It earns high returns by international standards while incurring little risk. It has insisted on building new power plants of dubious economic merit while rejecting a sensible interconnection arrangement with CLP Power. At a time of recession and persistent deflation, businesses and households need higher utility bills like a hole in the head. Hongkong Electric argues that its piggy bank of past surpluses is running low and a price rise is the only way to protect its guaranteed return on assets to pay shareholders. Something has to give in this tale of Hong Kong's shrinking economic pie. Legislators argued yesterday that Hongkong Electric should show restraint and suffer a possible profit reduction to reflect the harsh economic realities. Other businesses face reduced pricing power and shrinking demand so why not Hongkong Electric? After all, CLP has announced a one-off $220 rebate to electricity users to be paid in January. However, there is much confusion in such numbers. CLP's rebate is a pay-back of excess funds accrued from what amounts to overcharging customers in the past. It has an incentive to return funds as it pays hefty interest on surpluses in its development fund. Equally, Hongkong Electric's claim that its own surplus is historically low is not reflected in data. Yet both companies have firm long-term contracts that dictate their permitted returns. Last year Hongkong Electric got the nod for a $27 billion expansion centred on its Lamma power plant despite evidence that demand conditions did not justify the project. The companies argue that any backtracking will fundamentally breach principles of contract. Such sanctimonious reasoning needs to be treated with a pinch of salt. Five years ago, Britain imposed a windfall tax on water companies found to have been earning 'excess returns'. Foreign capital did not flee the City of London. The lesson is that Hong Kong's system needs reform to ensure firms earn competitive returns. This needs to be done before contract expiry in 2008. Until then, the contracts should be adhered to, but moral pressure should be put on the power firms.