Controversial tariff plans put forward yesterday by Hongkong Electric (Holdings) and CLP Holdings highlight the need for greater interconnection between the two power firms. On January 1, Hongkong Electric, which supplies electricity to 535,000 customers on Hong Kong and Lamma islands, will raise tariffs by an average of 5.3 per cent. The company will also tap shareholders' pockets for an undisclosed amount to set up a fund that will subsidise electricity supply to the elderly, the unemployed and single-parent families. Meanwhile, CLP will pay HK$560 million from its development fund to offer discounts to two million customers in Kowloon, Lantau and the New Territories. The discounts equate to an effective tariff cut of 2.2 per cent. Justifying the proposed tariff increases before a Legislative Council panel meeting yesterday, Hongkong Electric chairman George Magnus pointed to 'a historical low' in the development fund. He estimated the fund's value would sink to HK$118 million by the end of the year, from HK$249 million last year. He also said a tariff increase was needed to avoid making a possible provisional loss of HK$1.2 billion next year. CLP's decision to cut charges was well received by analysts, who said it was good news for shareholders and customers. Analysts said it was in CLP's interest to cut interest payments on its development fund by reducing the size of the fund. The rebates would be credited to customers' immediately. The development fund is part of the Scheme of Control agreement, which caps the returns electricity utilities can earn at 15 per cent on their assets. This means the more plants they build, the more their asset base expands and the more they can earn and charge customers. CLP's decision to reduce charges and Hongkong Electric's decision to raise them will polarise customers across Hong Kong's Victoria Harbour. It means electricity prices will rise for Hongkong Electric's customers on Hong Kong and Lamma islands, but fall for CLP's customers in Kowloon, Lantau and the New Territories. Federation legislator Lee Cheuk-yan renewed calls for interconnection between Hongkong Electric and CLP. Legislators say a new blueprint is needed for the power sector to force the two utilities to sell excess capacity to each other. However, interconnection can not happen at least until 2008 when the agreement expires. Secretary for Economic Services Sandra Lee said it would take years to resolve the issue. 'We're close to concluding a technical study in the interconnection. By June next year, hopefully we will be able to share with you [a proposal] which includes technical issues and investment scales,' she said. 'The Lamma extension has a transition role to play until the interconnection is implemented,' Ms Lee said. 'And it's important to maintain a reserve margin for an expected increase of demand in the next few years,' she added.