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.
Hong Kong's spare generating capacity, at 26 per cent, was at the low end of that recommended by the International Energy Agency, Lancaster said.
CLP chairman Michael Kadoorie said the Scheme of Control regulatory regime, which allowed operators to earn a fixed return on assets deployed over a certain period of time in exchange for monopoly rights, had worked well for more than five decades, while regulatory models in other nations had been less effective in delivering reliable, affordable and environmentally friendly energy.
Kadoorie said Hong Kong's power supply was more reliable than in the United States and Britain, but cost 24 per cent less than in Singapore, 42 per cent less than London and 56 per cent less than New York.
Meanwhile, Lancaster said the Australian wholesale market was still facing oversupply in generation capacity due to a fall in power demand in previous years, although demand had stabilised since the middle of last year.
He said competition was still rife in the Australian retail market, where CLP served 1.2 million customers, but CLP was seeing cost savings after completing a new billing and customer service system last year.
CLP had a net profit from Australia of HK$756 million last year, an improvement from a loss of HK$2.46 billion in 2013 due to HK$3.1 billion of asset impairment and other charges, but still short of a profit of HK$1 billion booked in 2012.
