Analysts say the decision to freeze tariffs could jeopardise the permitted return Hongkong Electric Holdings' decision to freeze its tariffs next year puts it at risk of failing to earn a permitted return of between 13.5 per cent and 15 per cent of the value of its fixed assets, analysts have warned. The electricity supplier for Hong Kong and Lamma islands said yesterday next year's average tariff would remain at $1.013 per unit, made possible mainly by deferring the commissioning of its Lamma plant extension for another year to 2006. Managing director Tso Kai-sum said the tariff freeze was 'a difficult decision', given the company's poorer than expected electricity sales this year because of the Sars outbreak. In addition, the company's development fund was drying up. This fund is a portion of the total tariffs set aside to bridge any shortfall between actual earnings and the prescribed return under the scheme of control (SOC) revenue mechanism. 'Whether we will be able to meet the permitted return next year will depend on electricity sales,' Mr Tso said. The company is allowed to earn a return of between 13.5 per cent and 15 per cent of the average net value of its fixed assets in use, according to the SOC governing Hongkong Electric and CLP Holdings. The mechanism, which effectively ties the firms' earnings to their spending on power generation and distribution, will expire in 2008. CLP, which serves Kowloon, Lantau and the New Territories, will also freeze tariffs next year and offer $500 million in one-off customer rebates. Analysts at CLSA, HSBC Securities, ING Financial Markets, JP Morgan, Lehman Brothers and UBS had expected Hongkong Electric to freeze tariffs next year given repeated public calls for tariff cuts. ABN Amro Asia analyst Alvin Tan said: 'The delay of the Lamma extension commissioning and a shrinking development fund have a negative impact. I am reviewing my profit forecast.' However, Rohan Dalziell, the head of utility research Asia at ING Financial Markets, expects Hongkong Electric's power sales next year to grow 2.5 per cent from this year. The company's revenues come from its core power business and other ventures, including overseas projects. A Thomson First Call poll of 21 analysts showed an average net profit growth forecast of 7.78 per cent to $6.92 billion next year.