Utility says lower returns and pollution penalties will discourage investment Power utility Hongkong Electric Holdings says government plans to cut its future permitted returns and contract period and impose penalties for poor emissions performance fuelled risk and discouraged investment. Managing director Tso Kai-sum yesterday said the permitted return of 7 to 11 per cent on planned assets was 'too low' and the contract period of 10 years 'too short' for the capital-intensive industry with a long payback duration. He also criticised the government for discouraging investment in emission reduction facilities by fixing the lowest return rate at 7 per cent and penalising power firms for failing to meet emission targets. In addition, emission targets were unrealistically stringent and unilaterally set by the government. 'These changes are done for the sake of changing and are unfair and unreasonable,' Mr Tso said. 'The scheme of control is really the best; [it] has ensured stable supply and competitive tariffs in Hong Kong in the past 40 years.' He pointed out that the proposed changes do not reflect rising political and economic risks, which discourage investment and risk hurting reliability of supply. 'There are more political and economic risks than before the handover of Hong Kong to China,' he said. 'The nature of today's political risk is different in a sense that we don't get what the government wants us to do. And there is potential competition from a new investor [China Hong Kong Power Development].' Following counterpart CLP Holdings' complaint of a deteriorating relationship with the government last month, Mr Tso regretted that Hongkong Electric 'got tense' as the government did not consult both companies ahead of releasing the consultation document. 'We are frustrated at the proposals but won't collapse,' he said. Nevertheless, he said Hongkong Electric would submit a counter proposal to the government by the end of next month when the ongoing three-month public consultation on the future regulatory framework of the power market finished. The framework will have to be in place by 2008 when the scheme of control expires. The scheme, which is renewed every 15 years and allows the city's two power utilities to earn a maximum 15 per cent return annually on net fixed assets in use, is dubbed by critics as an outdated, hazy mechanism encouraging overbuilding and gold-plated power assets. Hongkong Electric executive director Wan Chi-tin said the future regulatory framework should be finalised before determining the rate of return. He complained that the government was complicating the regulatory regime by fixing different return rates on different types of assets. Mr Tso ruled out Hongkong Electric shareholders shouldering the cost of reducing emissions based on a user-pays principle and the firm's role as a power producer.