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Christmas comes at year's end. As well as being a festive season in Hong Kong it is also the time when the two power companies apply for tariff increases. And once again, lawmakers will criticize these companies' demands for tariff rises. They frequently argue that the two power giants ignore the hardships of ordinary people and lack a sense of social responsibility.

The reason for proposed annual tariff increases, in addition to the profit motive of business, stems from deep-rooted institutional problems.

The basic problem lies with Hong Kong's electricity market structure and its regulatory regime. Under the current regime, the profits of the two power companies are regulated by the Scheme of Control Agreement (SoCA). This provides the legal framework within which the two power companies apply for tariff increases.

The tariff increase requests are legitimate because the SoCAs are legally binding contracts. The government only plays the role of gatekeeper to ensure their requests contain no misrepresentations. In other words, as long as the tariff increase requests are in accordance with the contractual provisions of the SoCA, there is little the government can do. It is subject to contractual obligations. Because of this, the two power companies can increase the power tariff each year despite increasing discontent. This is not easy to stop because the SoCA has operated for some 50 years. If the SoCA is to change, it will involve many issues and affect numerous stakeholders. Change is easier said than done. These limitations are something we need to understand. Yet this does not mean we can do nothing. Indeed, we should have a more forward-thinking approach to regulate the electricity market.

This is because new regulations require far-reaching changes. So last week's Consumer Council report on the future of the electricity market was most important. It raised many important issues for consideration.

The report made two interesting suggestions which have already sparked a lot of discussion. First, is the big issue of opening up the market. Many have made the case for liberalizing electricity markets. They argue that this will benefit consumers with greater competition. However, the council's report clearly shows that opening the market at the retail level does not benefit consumers. But opening the market at the source of production would probably benefit them. This runs counter to conventional wisdom. Many people note the opening-up of the telecommunications market and conclude that opening up the electricity market will have similar benefits. However, technological advances in the telecommunications market are the driving force for liberalization. But the electricity market is entirely different. The high costs of transmission, and of establishing a network, dictate that opening the market at retail level is not feasible. It is ultimately not cost-effective.

Opening the market at the source, however, is an interesting idea. But it will inevitably involve the question of purchasing electricity from other places, including the sensitive issue of potentially importing electricity from the mainland.

In reality, this means more than simply purchasing electricity from the mainland. However, from a geographical point of view, the idea of purchasing electricity from the mainland warrants careful analysis.

The idea of having small regional power generating units is also subject to the local environment. That debate will also generate endless arguments.

Second, there is the issue of "power poverty". This refers to whether or not the lowest strata in society can afford to pay electricity bills. The proportion of their income spent on electricity is higher than other groups in society, due to their weak bargaining power and need for electricity.

The council's report also refers specifically to the issue of power poverty. Power poverty grabs the attention. It will be a major consideration in developing the future electricity market. People will definitely be concerned about it. As mentioned above, the development of the electricity market is an ongoing issue. The council's report should stimulate further debate. By definition, the report's proposals have limitations.

The author is the dean of School of Business in Hang Seng Management College.

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(HK Edition 12/11/2014 page9)