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Jake Van Der Kamp

Most Hongkongers who responded to a public consultation on the electricity industry saw no need to break the duopoloy, nor cut the profits the city's two power suppliers can make ... More than half of the respondents favoured keeping return rates at 9.9 per cent to give the power companies an incentive to invest.
SCMP, November 18
Technicalities first. The 9.9 is the percentage of their investment in fixed assets that the power companies are allowed as their maximum permissible profits. If they make less they can raise their tariffs.
It used to be 13.5 per cent but this was reduced to 9.9 in 2009 in a regular government review of the scheme of control that governs the power industry. This return figure is again open to review, hence the public consultation.
And I disagree with the view taken by most respondents. I think 13.5 per cent was too low in the early 1980s and 9.9 per cent is too high now.

Yes, I hear you. How does 9.9 come to be higher than 13.5?
The answer lies in the first chart. It all comes down to returns on other long-term investments.
In 1982 the yield on the 10-year US treasury, a good benchmark, was briefly as high as 14.5 per cent and the yield on Hong Kong investment properties (annual rent as a percentage of price) was more than 10 per cent.
In such an environment a return of 13.5 per cent on a long-term investment in power production was not necessarily an appealing one.
It could still have gone sour in many ways and required massive continuing investment to meet electricity demand growth of 10 per cent a year. Why not just take those high-yield bonds or watch the rent cheques come in as a landlord?
Things are not that way now. What with the befuddled academics now running the world's central banks, the US Treasury yield has come down to barely 2 per cent and you are doing well if you can generate a net yield of 2.5 per cent on investment property.
There is a lot of air between these sorts of yields and the 9.9 per cent that the power companies are now permitted.

The nature of their returns has also changed. Continuing massive new investment is no longer needed
As the second chart shows, electricity demand is now growing at less than 1 per cent. The previous close link with economic growth has been broken through steadily greater efficiency of power use.
Thus it is just not true that the power companies need high returns as an incentive to invest. That pressure to grow has now largely gone.
Their capital spending is now directed mostly at replacing old equipment and reducing their reliance on coal.
It's simple. Relating rates of return to investment in fixed assets is a good idea but these rates of return should not themselves be fixed.
They should be made floating, dependent through an agreed formula on yields on other long-term assets held by the power companies.
And this would get us nearer to 6 per cent than the current figure of 9.9.


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Jake's View

Floating to a new approach on returns for Hong Kong power firms

Hong Kong electric power plant on Lamma island is visible from Pok Fu Lam on Hong Kong Kong island. Photo: Bloomberg

When it comes to profit for the electricity industry, 13.5 per cent was too low in the early 1980s and 9.9 per cent is too high now. Photo: Felix Wong

No need to cut profits of Hong Kong power suppliers CLP Power and HK Electric, consultation finds

HK Electric Investments posts HK$1.2 billion first-half profit

HK Electric Investments provides power on Hong Kong and Lamma islands. Photo: K.Y. Cheng

Hong Kong Electric Investments rings up net profit of HK$1.2 billion in H1

North Point Electric Sub-station and Electric Center, the City Garden in Hong Kong as HK Electric Investments posted a net profit in the first half of the year. Photo: Felix Wong

Reducing electricity consumption doesn’t mean a loss of comfort and convenience

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Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


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.css-1m2rp1p{color:#34b8b5;}Jake's View | Floating to a new approach on returns for Hong Kong power firms

Jake's View | Floating to a new approach on returns for Hong Kong power firms