Improvements have been made to the Scheme of Control Agreements with Hong Kong's two power companies and they will take effect from New Year's Day.

The Economic Development & Labour Bureau today said the upgrades are the result of the second interim review of the current Scheme of Control Agreements. The improvements will benefit consumers.

The objective of the agreements is to ensure that electricity is supplied adequately, reliably, efficiently and at reasonable cost to consumers. The current agreements were signed in 1992 and 1993 for China Light & Power (CLP) and Hong Kong Electric (HEC) respectively. They are valid for 15 years and provide for two interim reviews, each of one-year duration.

On financial and administrative issues:

* the depreciation periods for certain CLP assets will be extended; and,

* the excess capacity penalty for HEC's generation projects approved from 2004, will be increased.

For both CLP and HEC:

* there will be a mechanism to keep the Development Fund balance at a reasonable level;

* there will be a mechanism to deal with balances in the Development Fund and Rate Reduction Reserve upon the expiry of the agreements;

* both companies will provide three-year rolling forecasts to the Government at the time of the Annual Tariff Review to facilitate monitoring of the Development Fund, the Fuel Clause Account and Rate Reduction Reserve over a longer timeframe; and,

* both will segregate and present data pertaining to generation, and transmission and distribution in the Financial and Auditing Reviews for the Government's consumption.

On environmental issues:

* both companies recognise the Government's efforts in improving regional air quality and exploring alternative power generation sources, including renewable energy, to supplement conventional power generation from fossil fuels; and,

* both will inform the public of their environmental performance on a regular basis.

The change in the depreciation period for certain fixed assets of CLP will lead to savings of about $650 million (or 0.3 to 0.6 cents per kWh) for their customers between 2004 and 2008.

The deduction for the mechanical and electrical equipment costs from the average net fixed assets for excess capacity, arising from HEC's generation projects approved as from 2004, will be increased from 40% to 50%. As the average net fixed assets is the basis on which Permitted Return is calculated, the new arrangement is an alternative approach to containing the Permitted Return available to the company.

The bureau said there will be a cap, equivalent to 12.5% of the company's annual local sales, on the balance in the Development Fund. Excess above this level will be returned to consumers in the immediate following year in the form of a one-off rebate or tariff reduction.

This trigger mechanism should go some way towards addressing the long-time concern that CLP has been accumulating excessive 'reserves' and keeping to the company monies that belong to the consumers.

There will be an additional provision to the effect that the Government and the company concerned will have specific discussions with regard to arrangements to deal with any balance in the Development Fund, and the related Rate Reduction Reserve, 12 months before the expiry of the current Scheme of Control Agreements.

This additional provision should again go some way towards addressing concerns that consumers' money might be taken up by the power companies when the agreements expire.