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Denise Tsang

Profit powerhouse Hong Kong and China Gas (Towngas) is facing renewed pressure to have a limit  placed on its investment returns as the government turns the heat of regulation from the energy utilities to the gas sector.

With the Economic Development and Labour Bureau renewing a soon-to-expire information agreement, sources say the bureau is seeking tighter scrutiny of the gas supplier's services.

They also  say the bureau is considering public calls to put Towngas under regulation in the long term, given its dominance of the gas market and its lucrative investment returns.

The information agreement - the Information and Consultation Agreement (ICA),  was signed three years ago and is due for renewal in March next year.

It requires the gas utility to keep the public informed on price changes, network investment and maintenance   as well as operational efficiency, environmental performance and measures on enhancing safety.

The voluntary agreement leaves Towngas returns and tariffs out of the government's regulatory net, unlike electricity suppliers CLP Power and Hongkong Electric, which have their returns capped and tariffs regulated under a scheme of control.

The two power firms are facing the prospect of a reduced return after 2008 as the bureau is expected to table recommendations next month on the future of  the power sector.

Their mixed fortunes come despite the fact the three utilities have operated in Hong Kong for more than 100 years without  exclusive rights, or franchises.

'The so-called ICA is toothless,' said Democratic legislator Fred Li Wah-ming, who has urged the government repeatedly to put Towngas under regulation.

'I don't understand why the government takes different approaches in handling Towngas and the two electricity suppliers even though they are the three biggest players in the energy market,' he said.

'Towngas returns are much higher than the two power companies, and its market share is growing every day.'

Mr Li called on the government to work  out a unified set of energy policies governing the utilities and  create a future regulatory arrangement for CLP and Hongkong Electric when their scheme of control ends.

A source close to the government said the bureau would not rule out capping the gas utility's returns in the long run, but in the near future, it would pursue increased scrutiny.

'There is a fair amount of monitoring carried out on the company at present,' the source said.

'And its dominance varies depending on how the market is defined.'

According to analysts, Towngas' supply of piped naphtha to almost  1.6 million customers  in Hong Kong gives it a 10 per cent share of the overall energy market  and a 75 per cent share in the gas market.

Deutsche Bank forecast Towngas' return on equity at 30.2 per cent this year compared with CLP's 20.1 per cent. The brokerage also estimated the  return on capital at 28.7 per cent this year, against  CLP's 15.1 per cent.

A Citigroup research report estimates Towngas' return on assets at 21.6 per cent this year against last year's 14.4 per cent and 14.5 per cent in 2003.

CLP and Hongkong Electric, which both link their core earnings to spending on power-related assets, are permitted to earn between 13.5 per cent and 15 per cent return on the average net fixed assets in use.

A Towngas spokeswoman dismissed the argument for regulation, saying the company's  share of energy consumed by domestic households was about 27 per cent and the company was under intense competition from liquefied petroleum gas  and piped LPG.

'The best regulator is free market forces,' she said.

She did not think it was fair to compare investment returns between the company and the electricity utilities because Towngas' earnings were efficiency-driven while CLP and Hongkong Electric's were based on spending on assets.

Lending support to the call for  tightened scrutiny on Towngas, a Consumer Council spokesman said the gas utility could expand easily into the residential market since most  new buildings were fitted with its gas pipelines and equipment.

Mr Li, meanwhile, questioned whether Towngas really did face increased competition considering that most new public housing estates banned LPG cylinders.

denise.tsang@scmp.com



Towngas comes under closer scrutiny