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Hong Kong economy

Hong Kong must act now to open up electricity market, antitrust chief says

Competition Commission chairwoman Anna Wu Hung-yuk says access to power grids is critical to foster competitors for CLP Power and HK Electric

PUBLISHED : Sunday, 15 July, 2018, 5:22pm
UPDATED : Sunday, 15 July, 2018, 11:35pm

Environmental officials must commit to liberalising Hong Kong’s electricity market and start laying the groundwork for competing suppliers to enter, according to the head of the city’s antitrust watchdog.

Competition Commission chairwoman Anna Wu Hung-yuk said the task would require enhancing connectivity between power grids and providing access rights to third parties, in a similar fashion to how the government broke up the telecommunications market in the 1990s.

But allowing Hong Kong’s two power firms to continue building and expanding their ownership of critical energy infrastructure could make it harder to open up the market to other players, she said.

Wu, a former member of the Executive Council, which advises the city’s leader on policy, was speaking to the Post in a personal capacity.

“If the government builds and owns it, then a third party that happens to enter the market in the future can also utilise it. If you allow the power companies to build, you’ll always be caught in a stranglehold,” she said.

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The former chief of Hong Kong’s consumer rights watchdog cited as an example the two firms’ plans to build an offshore terminal near the Soko Islands receiving liquefied natural gas (LNG). The project will enable the city to source more LNG from international markets but enlarge the fixed asset base of the companies, putting pressure on electricity tariffs.

“Ownership by the two power firms highlights how market liberalisation can be further constrained in the future because an essential asset will be captured by these two power companies,” Wu said.

CLP Power and HK Electric supply Kowloon, the New Territories and Lantau, as well as Hong Kong and Lamma islands, respectively.

The dual monopoly is regulated by a framework – or “scheme of control” – under which they must provide a steady supply of electricity at agreed prices. In exchange, the two suppliers are permitted guaranteed earnings of 9.99 per cent of their average net fixed assets.

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The figure is to be revised down to 8 per cent beginning in October and January under a renewed scheme that will last 15 years.

“Right now, we can never win as a user,” Wu said. “This [set-up] is going to come back to haunt us in years to come, when it is time to renegotiate [the scheme].”

Wu said she personally did not agree with a recent government proposal to use public money to subsidise residential power bills over the next five years at a cost of HK$8.7 billion (US$1.11 billion). She compared the move to “subsidising the companies’ profits”.

Environment minister Wong Kam-sing has said the aim is to offset an expected rise in costs resulting from using more expensive but relatively cleaner natural gas to generate power.

The proposal came despite Wong last year saying the cut in the two companies’ permitted returns could lower tariffs by 5 per cent, albeit if circumstances such as fuel costs remained the same.

But Wu said: “Changing circumstances and rising fuel costs are by definition inherent in a long regulatory term, and in this case, [the use of more gas was] clearly anticipated at the time of extending the regulatory periods.

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“It can only mean your assumption is either wrong or useless.”

Wu renewed her call for the government to study opening up the market when the time was right. But first, she said, greater interconnectivity was needed between the two firms’ networks. Currently they can only be linked in times of emergency.

Competition would also hinge on whether the grid was accessible to a third party.

“With more consumer choice and better technology, costs can be lowered,” Wu said.

During the process in 2008 to renew the regulatory framework, then environment chief Edward Yau Tang-wah said the arrangement “reflected the government’s policy objectives of reducing tariffs and emissions” and “[paving] the way for an open market”.

Current minister Wong has said liberalisation of the market will be pursued when the “requisite conditions are present”.

Echoing earlier recommendations by the Consumer Council and Competition Commission, Wu called for an independent, statutory “energy commission” to help steer the city towards liberalisation.

She believed such a body could even be empowered with the authority to scrutinise tariff proposals and assess the two suppliers’ performances against the terms in the scheme of control.

“First, you need a plan. You need to set aims and objectives for how you want to regulate your future electricity market,” Wu said. “Unless you have the political will to change, nothing will happen.”