Powering up an energy tax

SCMP January 9 2006

The expiry of the Scheme of Control for the electric utilities in 2008 provides a rare opportunity to address several important issues at once - including the locally generated pollution that threatens the health of the community.

Before going into the power arrangements, here is a simple suggestion: scrap the goods and services tax (GST) proposal as a way of broadening the tax base, and impose a 20-per-cent tax on energy (electricity and gas) usage.

This year, total electricity and gas sales in Hong Kong will be close to $50 billion. An energy tax would cost almost nothing to collect and raise $10 billion a year. Revenue would increase gradually in line with energy usage and cost.

It would yield almost as much as a 2-per-cent GST, a tax which would be a bureaucratic nightmare to implement and cause endless wrangling over exemptions.

Apart from being easy to collect, an energy tax would help achieve other government objectives: reducing power-station emissions and encouraging investment in energy-saving practices. Best of all, it is a very fair tax.

About 25 per cent of electricity and gas is consumed by households, largely in proportion to household income.

The tax would have little impact on such manufacturing industry as is left in Hong Kong, but would fall heavily on commercial premises - particularly those offices, hotels and malls that keep temperatures at unhealthily low levels at the height of summer. Politically, it should encounter little opposition compared with a GST.

Unfortunately, on the power reform question, a government that claims to be executive-led is taking baby steps to change a system devised decades ago. Its proposals fail to follow what almost every advanced, and some not-so-advanced, countries have done: separate power generation from distribution, and provide a competitive framework for generation. It has steered clear of ending the absurd divide between Hong Kong Island and the rest of Hong Kong, which gives the two suppliers effective monopolies.

Instead of executive-led reform, the Hong Kong public is subjected to the arrogance of Hong Kong Electric's managing director Tso Kai-sum.

His company's website says it will not accept the lowering of the return on assets to the 7 per cent to 11 per cent range, as proposed in the government's consultation paper.

Mr Tso should be told: "Goodbye and good riddance. In 2008, hand your assets over for sale to the highest bidder." Then Hong Kong Electric and its partner, CKI Holdings, can invest even more in Australia and Britain, where the returns are 6 to 9 per cent rather than the 15 per cent under Hong Kong's Scheme of Control.

The 15-per-cent return may have seemed reasonable when borrowing costs were 10 per cent, energy demand growing at 6 per cent and capital relatively scarce. But none of that is now the case.

The huge profits are explained mostly by overinvestment and by the low cost of funds. Its average borrowing cost is about 6 per cent.

If return on assets is to be the criteria, it should be linked both to a limit on the reserve generating capacity - for meeting unanticipated demands for power - and a moving-average cost of borrowed funds. The only argument that the companies put forward to justify their returns is reliability of supply - as though power shortages were common in, say, Australia or France.

The consultation document already shows a government in gradual retreat before the interests of the monopolists. Prepare for more. But don't let the government forget that energy tax proposal. It's fair, simple and beneficial.

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