Jan 08 - International Herald Tribune

Hong Kong's two electric power companies agreed on Monday to a new regulatory system that sets their rate of return on assets based partly on how much pollution they emit, an approach that could someday be a model for mainland China's giant power sector as well.

The agreement, lasting 10 years between the Hong Kong government and the two power companies, allows the companies to charge electricity tariffs that will give them a 9.99 percent rate of return on assets.

If either company exceeds regulatory limits for any pollutant, then it would be required to charge less for its electricity, reducing its allowed rate of return by between 0.2 percent and 0.4 percent.

If the companies manage to cut their pollution by even more than required, then they raise prices so as to earn bonuses of 0.05 percent to 0.1 percent on their rate of return. A complicated calculation also allows them to charge slightly more for electricity as they make progress in using more renewable energy.

Western regulators increasingly impose complex environmental incentives and penalties on power companies. But regulators in mainland China and in Hong Kong, a former British colony, have tended to rely mainly on fines on companies that fail to meet basic regulatory standards.

Particularly in mainland China, fines are seldom assessed and violations are rampant, according to environmental critics.

Mainland power companies also have little flexibility in choosing anything other than coal to burn. The mainland regulatory scheme has focused on limiting electricity tariffs to the lowest possible level with little regard for the pressures this puts on power companies to choose cheap but polluting coal-fired power plants.

Melissa Brown, a specialist in Hong Kong power regulation who is the executive director of the Association for Sustainable and Responsible Investment in Asia, said that the new system in Hong Kong sets a useful precedent for the mainland, although she cautioned that mainland regulators were unlikely to follow the example soon.

"Anything that is a bonus and penalty scheme is a positive," Brown said.

But she cautioned that the government had released too few details Monday on future allowable levels of specific pollutants to make it possible to calculate the actual effect of the new agreement on Hong Kong air pollution.

Smog has become a chronic problem in the city. CLP and Hong Kong Electric, the two local power companies, have denied that they are the main sources of pollutants, while hinting that nearby factories and power plants on the mainland may be responsible instead. Exxon Mobil owns 60 percent of a power-generation joint venture, while CLP owns the rest and all of the distribution grid serving three quarters of Hong Kong's population.

The State Electricity Regulatory Commission in Beijing could not be reached for comment on Monday evening, following the announcement.

Edward Yau, Hong Kong's secretary for the environment, said that the Hong Kong government set the new regulated rate of return at 9.99 percent after deciding that public opinion strongly favored a rate below 10 percent. The previous rate, under a 15-year agreement expiring at the end of this year, was 13.5 percent to 15 percent, and was widely criticized as excessively generous to the politically influential power companies.

Originally published by The New York Times Media Group.

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