When a monopoly may be the lesser of two evils
There are calls to break up the dual monopoly of the two power companies in Hong Kong. But while liberalisation sounds good on paper, the cure may be worse than the disease
Nobody likes a monopoly, or a dual monopoly in the case of power supply in Hong Kong. The fact that two of the city’s leading business families are behind CLP Power and HK Electric also give them an image problem.
Over the years, there has been periodic debate about liberalising the electricity market. The latest is being sounded by Anna Wu Hung-yuk, chairwoman of the Competition Commission. An obvious route is to open the existing power grids to third-party suppliers.
It’s all academic at this point. The two power companies have just been handed a new 15-year deal under the so-called scheme of control, which will start in a few months. It’s doubtful the government and the two suppliers would be willing to renegotiate again during this period.
Under the new deal, the companies will earn a reduced 8 per cent profit based on the total value of its average net fixed assets. In other words, the more asset investment, the more they can charge. This is down from the previous 9.99 per cent up to this year, and 13.5-15 per cent before 2008.
So, are electricity charges going down? Not quite. Remember the guaranteed profit is pegged to fixed assets; CLP and HK Electric are investing heavily in natural gas and facilities for it.
Is there a way out of this long-standing scheme via liberalisation? As the Consumer Council pointed out in a 2014 study, any arrangement needs to balance affordability, reliability and environmental sustainability, goals which are not necessarily compatible. Cheaper tariffs may be less reliable; renewable energies will be more expensive.
Whatever you think about the scheme of control, it has done a reasonable job of balancing the competing priorities. Our electricity bills are not at all expensive compared to most major cities in developed countries. Reliability is well over 99 per cent, to the extent that we have taken it for granted. As for being green, we are replacing coal with more natural gas, hence the expected rise in charges, without committing to more nuclear power.
The council study observed: “Lessons learnt from overseas markets indicate that the results of liberalisation were commonly disappointing as compared with the theory, due to reconsolidation of market players, imbalance in bargaining power, malpractices in selling and high switching costs for consumers.”
Remember Enron and the California energy crisis of 2000 and 2001?
Liberalisation sounds good on paper, but the cure may be worse than the disease.