Summary of Submission on Consultation Paper on Future Development of the Electricity Market Stage I Consultation

Future Policy Direction - introducing competition

1. Government's broad policy has always been to enhance competition in the economy. Whilst the Scheme of Control Arrangements (SCA) regime has served business and residential consumers well, at least insofar as reliability of service is concerned, the Council notes that the SCA regime is not without drawbacks and criticisms. For example, the permitted rate of return of 13.5% on fixed assets and the additional 1.5% on assets financed by shareholders' funds are considered high in the present-day economic climate.
    
2. The Council believes, therefore, that the opportunity presented by the SCA review should be used to consider introducing some measure of competitive pressure into the electricity sector as a means of ensuring that Hong Kong's overall interest is best served, if not possible in the near term, then on a long term basis.
    
3. Overseas experience has showed that there are benefits in introducing competition into electricity markets. Electricity prices in certain Australia states have reportedly been reduced by 25% to 30% since reform, and in Japan there has been a decrease about 11% from 1997 to 2002. ^[1] Competition in US electricity markets has resulted in new products being offered to end-users, for example, "green" electricity.
    
4. The Council supports introducing competition at the generation level, and the development of policies that would support access by new entrants to the current distribution networks, in order for them to access customers signed up to long term power purchasing agreements. Large commercial customers, may also choose to become generators themselves.
    
5. The two power companies have argued that reliability of supply might be compromised by the introduction of competition into the market. The findings of a government household survey were quoted in support, i.e., that 50% of consumers considered 'reliability of supply' the most important issue as compared to 35% for 'low electricity tariff'.
    
6. Given the low level of competition proposed (at least in the early stages) and that Hong Kong does not suffer the same dispersed political and jurisdictional problems in other countries that have suffered reliability of supply problems, it can be reasonably assumed that oversight of the sector and coordination of effort to ensure there are no disruptions to supply will be easier to achieve than in other countries.
    
7. In any event, the Council noted that 44%of households surveyed indicated they would use less electricity if the tariff rate were increased. This implies that electricity cost is still a major concern to a considerable number of consumers; and should be addressed.
    
8. It has been suggested that the introduction of competition increases the likelihood of additional costs in setting up adequate systems and incentives for reinvestment and maintenance to ensure that reliability of supply is maintained, and to cater for competitors' access to the existing distribution networks. For example, one such cost is increasing the size of the interconnector linking HEC and CLP. In addition, there is also an assumption that the costs of introducing competition will eventually all be borne by consumers (although the Council does not necessarily accept that this should be the case)
    
9. In order to facilitate informed discussion on this aspect, the Council has requested that the Government disclose their risk assessments about different impacts on the reliability of electricity supply in Hong Kong against different scenarios i.e. limited competition between two incumbents; limited competition between third party generators and the incumbents; or open competition between third party generators and the incumbents.

Regulatory Oversight

10. Introduction of competition will take time and regulatory measures must therefore be in place to ensure reasonable residential tariffs. As to whether such measures should be through permitted rates of return, a cap on tariffs or other measures, the Council considers that the disclosure of appropriate financial/cost data on the sector is required for informed comment. For example, information that would assist in an understanding of the investment cycles for generation and distribution facilities, and what the current margin is for back up supply.
     
11. It has been stated that the returns of the incumbents have been much below that of other Hang Sang Indexed companies. This raises the following questions :-
     
    1. Should CLP and HEC be treated merely as commercial concerns, or should they be regarded differently because they provide an essential service that is critical not only for Hong Kong's economy to function, but for the daily well being of its citizens.
        
    2. If the incumbents are to be treated differently to purely commercial concerns, to which utilities should they be compared; either locally or in other jurisdictions.
        
    3. Once their status is established, the government needs to determine whether the current claims and counter claims on returns are justified; on what basis their returns should be measured; and what measures should be introduced to ensure maximum efficiency in providing the service which can in turn maintain downward pressure on costs and retail prices. For example, that the assets identified in calculating allowable returns must be used and useful for supplying into relevant markets.
        

12. Given the extent of useful and appropriate regulatory measures that are currently undertaken in the economy; and the importance of electricity as part of Hong Kong's overall energy sector to the well being of citizens and economy, the Council supports the creation of an appropriate energy regulatory authority to oversee Hong Kong's future energy needs. The functions of the proposed authority would be to set an agenda for the energy sector as a whole (including electricity, gas and petroleum based products) and coordinate the various regulatory and policy activities that affect the way in which energy is supplied, distributed and consumed in Hong Kong.

Notes:

1.      "Overview of Electricity Markets in Other Economies", Reference Materials - Future Development of the Electricity Market in Hong Kong Stage I Consultation, 2005