Hong Kong Electricity Price Hikes for 2013

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Hong Kong’s duopoly electricity providers have announced their intention to increase electricity prices in the new year. CLP, the non-island provider have attributed the price hike to a projected 15% increase in their cost of supply, stating that new contracts for supply entered into as the overarching factor.

Traditionally CLP has relied on their Hainan Island reserves to maintain a steady supply of gas for power generation. With these reserves running out, CLP are now proceeding with an agreement to obtain gas supplies out of Central Asia, via the Mainland. CLP’s Managing Director Richard Lancaster has said that the new gas contracts at prevailing market rates is as much as three times higher than previous contracted rates. Lancaster also claims that CLP were able to keep prices flat over the past year due to better cost control measures in addition to increased sales.

I fail to understand how a duopoly separated by geographical boundaries can significantly increase their sales to a level that can withhold a price hike. Admittedly I am unfamiliar with their sales and marketing strategy, but their internal financial analysis would more than likely have foreseen this price movement well in advance. Indeed, perhaps they were already aware of this 2 years ago and the past year has been a ‘gift’ of sorts to the public, acted out of their sense of corporate social responsibilities.

However, even that cannot explain the fact that CLP buys their electricity from a power generator, Castle Peak Power Company Limited (CAPCO). The Power generator is the company which takes gas and turns it into electricity. CLP is simply the service provider to end consumers (you and I). It is CAPCO that actually enters into contracts with gas suppliers.

A duopoly is perhaps the simplest form of oligopoly, where a market (the electricity sector in this instance) is dominated by few dominant players (CLP and Hongkong Electric here). Generally speaking, this means there is a lack of competition and the consumer usually loses out. It is more than likely each company is influenced and duly influences the other. It would be fair to assume then, that these two companies can make whatever claims they see fit.

*Admittedly CLP hold a minority share in CAPCO, but that does not detract from the fact that some transparency is required here.

by Cal Wong


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