Power pact: Secretary for the Environment Edward Yau (centre) announces the new Scheme of Control Agreements reached with Hong Kong's two power companies.

A new Scheme of Control Agreements has been reached between the Government and Hong Kong's two power companies. Under it the utilities' permitted rate of return will be cut to below 10% and linked to their environmental performance.

The tenure of the new agreements will be reduced from 15 years to 10 and the Government will take into account the readiness for an open market in deciding whether to extend the tenure for another five years.

Secretary for the Environment Edward Yau today said the new pact will bring a material reduction in tariffs, ease power bills and achieve emission reductions.

"The agreements would enable early preparation for the introduction of competition into the market when the time is ripe," he added.

Agreement details

The companies' permitted rate of return will be reduced to 9.99% from the current 13.5%-to-15%. China Light & Power customers will enjoy basic tariff reductions from October 1 with Hong Kong Electric users following suit from January 1.

Based on the available 2006 figures the extent of the reduction in basic tariffs excluding fuel cost adjustments should reach double digits, Mr Yau said.

"Based on the balance of the Average Net Fixed Assets of the two power companies for 2006, the total reduction in electricity payments for residential and commercial customers can amount to $5 billion annually."

If the power companies exceed the emission cap for any of the pollutants specified in their Specified Process Licences their rate of return will be cut by 0.2 to 0.4 of a percentage point depending on their actual emission levels.

However, if emissions in all the pollutants are below the specified caps the companies will be entitled to an award of 0.05 to 0.1 of a percentage point in permitted return as an incentive.

"The incentive and penalty arrangements are aimed to encourage the power companies to take proactive steps to reduce emissions and sustain strict compliance with environmental requirements. This also strikes a balance between the environmental obligations of the power companies towards our air quality as well as providing them with a stable operating environment."

Renewable energy

The new agreements have also put in place provisions to support the companies in implementing more environmentally-friendly measures.

The companies will enjoy a higher (11%) rate of return for their investment in renewable energy facilities. They will also be offered a bonus in the range of 0.01 to 0.05 of a percentage point in permitted return depending on the extent of renewable energy usage in their electricity generation.

The Government will assess the performance of the companies based on the number of energy audits they perform for customers and the actual energy saved. A maximum award of 0.02 of a percentage point in permitted return will be given.

The companies will also establish two funds to promote energy efficiency and public education on energy conservation. The funds are open to public application.

To pave the way for the possible opening up of the electricity market the Government will make preparations in the next regulatory period, including studies on open market models, the regulatory framework and enhanced interconnection between the companies' grids.

Clear framework

China Light & Power Managing Director Betty Yuen and Hong Kong Electric Group Managing Director KS Tso said the new scheme offers a clear framework for regulating the utilities' future operation.

They agreed the new arrangements will balance customer and shareholder interests, but it is too early to predict the tariff reduction amount.

Mr Yau said reducing the permitted rate of return to 9.99% is reasonable because it allows the companies to operate in a proper environment, ensuring the public can enjoy a reliable, safe and efficient electricity supply at reasonable prices.

In response to the enquiries on the progress of CLP's proposal to build a liquefied natural gas terminal, Mr Yau said the new agreement discussion did not cover the issue, adding the company must meet all requirements before getting approval.