CB(1)435/98-99(03)

1. CLP's long-standing policy is for its tariff to reflect the actual cost of supply to each tariff group of customers (domestic, general service, bulk and large power tariffs) and therefore to avoid cross subsidies. This policy is fully supported by Government.
   
   
2. Before 1994, domestic tariff had a declining block structure (the more you consume, the less you pay per unit). Recognising the need for demand side management to encourage efficient use of energy, the declining block was removed to become a flat rate in 1994. In 1996, CLP introduced an inverted 3-block structure for domestic tariffs whereby higher consumption would be charged at a progressively higher unit rate. At the same time, the lower blocks were used as a way of providing some protection for the smaller domestic customers with lower household incomes.
   
   
3. While Government monitors and approves tariff levels, detailed tariff design of this nature does not require approval by Government. However, the inverted block structure was explained to Government and presented to the LegCo Panel on Economic Services in 1996. It was generally agreed that the principle of an inverted block structure was appropriate. Other modern cities, like Tokyo and San Francisco, also have inverted block structure for their domestic tariffs (as do HEC, with five blocks).
   
   
4. In responding to changing circumstances and feedback from customer groups and others, CLP may amend the structure of its domestic tariff when the tariff level is adjusted annually. For example, the lowest tariff block was extended from 150 to 200 units in 1997.
   
   
5. This year CLP made a further amendment to the structure whereby the second block was divided into two blocks resulting in an overall 4-block structure. The principles of the tariff design remained the same and the change was intended to give some additional protection to smaller customers. This change was made partly in response to further feedback from customers and political parties.
   
   
6. At the same time, CLP made an overall tariff adjustment in 1998 that was intended to produce an average tariff increase of 4.9%. However, with the new block structure, 83.8% of domestic customer bills were expected to see an increase below this level.
   
   
7. The impact of the modified 4-block structure is small compared to the previous 3-block structure, but we believed it would further help energy savings and provide added benefit to smaller consumers. We believe the protection to smaller domestic customers is an appropriate action in the current Hong Kong social environment.
   
   
8. It is important to stress that tariff design of this nature has no effect on the profit to CLP shareholders. Under the terms of the Scheme of Control, return is calculated by reference to net fixed asset value. We strongly disagree with any suggestions that tariff design has been used to manipulate profits.
   
   
9. The average tariff increase for 1998 of 4.9% was agreed with Government and explained to the Provisional LegCo ES Panel. Although the detailed modifications to the blocks were not highlighted, their effect on domestic tariff was included in the presentations made (copy attached). Full details were clearly stated in CLP's tariff announcements made through the media the day after its presentation to LegCo and also in bill inserts to all domestic customers.
   
   
10. Total tariff revenue each year obviously depends on the actual consumption of electricity. Higher temperatures, as was the case in 1998, will lead to higher consumption. However, if the temperatures had been lower than average, consumption and tariff revenue would be correspondingly reduced. In either case, the increase or shortfall in revenue goes to or from the development fund. There is no effect on profit whatsoever.
    
    
11. As in previous years, we are listening carefully to comment and feedback on our tariff structure. We will be considering the position again in our future tariff adjustment, and we will be discussing with Government in due course.
    
    
12. Another change to tariff arrangements made in 1998 was the introduction of bi-monthly billing in January. The block sizes were doubled to reflect the longer billing period. In this exercise, there is a net saving of HK$60 million per year by the reduced need to read meters and reduced paper-work in issuing accounts. This saving has been passed entirely to customers and there is no effect on shareholders' profit.
    
    
13. CLP believes it is important to provide information to its customers on how to reduce their electricity bills by saving energy, and we do so by means such as bill inserts. For example, a saving of up to 10% in energy consumption of air-conditioners can be achieved by setting the thermostat one degree higher. Replacing an old air-conditioner with a modern energy-efficient model could bring further substantial energy savings.
    
    
14. Our efforts in energy conservation will increase further in the near future with the start of a full scale demand side management programme as agreed with Government. In this programme, customers will be offered subsidies to purchase energy-efficient appliances that will reduce their electricity consumption.

Impact on Domestic Customers

Monthly Consumption	Net Tariff Increase	Cumulative Customers
(kWh)	($)	(%)	(%)
100	+1.5	+1.8	16.9
200	+3.0	+1.8	41.6
250	+4.6	+2.2	51.5
400	+9.4	+2.7	73.5
700	+38.2	+6.2	90.9
1,000	+79.9	+8.9	96.8

• Over 40% of domestic customers will experience less than $3 or 2% increase.
  
  
• A typical domestic customer will experience less than $5 increase per month.
  
  
• Over 70% domestic customers will experience less than $10 increase per month.