Hong Kong power utility CLP warns of 'serious consequences' if returns cut

The government should be careful when considering cutting the returns of power utilities because they needed "reasonable" returns to make long-term investments, the chief executive of the city's largest power utility warned on Thursday.

If reform of the regulatory regime was not done right, a scaling back of investments could lead to "serious consequences", CLP Holdings' Richard Lancaster said after the company's annual shareholders meeting.

"We need a reasonable level of return to enable investments to be made over the long term … if we don't get this right, a scale back of investments could lead to serious consequences," he said.

Lancaster cited the experience of Britain - where deregulation and competition in the power sector were introduced in the late 1980s - as proof of the need for caution when proceeding with reform, because its spare generating capacity fell to as low as 2 per cent in some parts of the country last year. That could result in power rationing if demand spiked and supply could not respond accordingly.

Lancaster's comments come after the government launched a public consultation on reforming the market's regulatory regime.

The city's environment chief, Wong Kam-sing, said at the time that while the current regulatory regime had worked well, it could be enhanced in many ways, including cutting the maximum return on power utilities' net fixed assets to between 6 per cent and 8 per cent, from 9.9 per cent currently, and improving performance with improved incentives and penalties.