Financial Monitoring of Electricity Companies, Towngas Company, Retail Prices of Auto-fuel and Prices of Domestic Liquefied Petroleum Gas
The Financial Monitoring Division (FMD) deals with the financial aspects relating to the electricity and towngas companies and monitors retail prices of auto-fuel and prices of domestic liquefied petroleum gas.
The Government has entered into a Scheme of Control Agreement (SCA), one with The Hongkong Electric Company Limited and HK Electric Investments Limited (referred to collectively as "HEC"); and another with CLP Power Hong Kong Limited, Castle Peak Power Company Limited (CAPCO) and ExxonMobil Energy Limited (removed with effect from 12 May 2014) (referred to collectively as "CLP").
The SCAs do not offer the power companies any exclusive rights. They are not franchises, nor do they define a supply area for either company, or exclude newcomers to the market. Rather, they set out their obligations and rights. By signing the SCAs, the power companies undertake to provide sufficient facilities to meet present and future electricity demand of their respective supply areas. In return, they are entitled to receive a permitted rate of return on their fixed assets. The SCAs also provide the framework for the Government to regulate the power companies and monitor their corporate affairs to protect the interests of consumers. Pursuant to the SCAs, the power companies are required to seek the approval of the Executive Council for certain aspects of their development plans, including projected basic tariff levels, and the agreement of Government to their annual tariff adjustments. Meanwhile, technical, environmental and financial performances of the power companies are subject to annual auditing review conducted jointly by the Government and the companies.
Owing to the expiry of the then SCAs in end 2008, the Government conducted a two-stage public consultation on the "Future Development of the Electricity Market in Hong Kong" in 2005 and 2006. Based on the public views received during the two-stage consultation, the Government commenced discussion with CLP and HEC in May 2006. After intensive negotiation with the power companies during the latter half of 2007, the existing SCAs were signed between the Government and each of the two companies in January 2008. The agreements took effect upon the expiry of the previous ones on 30 September 2008 and 31 December 2008 for CLP and HEC respectively.
The existing SCAs fully reflect the Government's policy objectives of reducing tariff and emission, and paving the way for open market. The agreements are of ten-year term, with an option exercisable by the Government to extend for five more years, i.e. until 2023, after review of the prevailing market conditions including whether new supply sources are available. The permitted rate of return of the power companies has been reduced from the previous 13.5-15% on their average net fixed assets down to 9.99%, bringing a material reduction in basic tariffs and easing consumers' spending on their electricity bills. The permitted rate of return is also linked to the emissions performance of the power companies in the interest of better environmental protection.
The current SCAs will continue to meet the objectives of ensuring that the power companies provide a reliable, safe and efficient electricity supply to the consuming public at a reasonable price and that the shareholders of the companies obtain a reasonable return on their investment. Reasonable return means the net return allowed to shareholders each year. This "net return" is calculated by first determining the "permitted return", which is 9.99% of the company's average net fixed assets (save for average renewables net fixed assets to which a 11% permitted rate of return will apply). Deductions/adjustments are then made from the "permitted return" to give the "net return". These deductions include interest on borrowed capital of up to 8% p.a.; a charge on the average balance of the Tariff Stabilisation Fund at short term market interest rates; interest up to a rate of 8% p.a. on the funds from growth in consumers' deposits after 30 September 1998 for CLP and after 31 December 1998 for HEC; and excess capacity adjustment (if any); while there are other incentive/penalty adjustments in respect of emissions performance, supply reliability, operational efficiency, customer services, energy efficiency and renewables (if any).
We will proceed with the preparation for the opening up of our electricity market, including formulation of a new market mechanism and the associated regulatory framework, in the current regulatory period (i.e. from 2008 to 2018).
The FMD performs the following functions :
On 3 April 1997, the Government has entered into a three-year Information and Consultation Agreement (ICA) with The Hong Kong and China Gas Company Ltd. The company supplies towngas to most part of the territory. It is not subject to any price or profit regulation by the Government. The agreement is designed to increase the transparency of the company's tariff-setting mechanism and justification for tariff increases. It also stipulates certain procedures for The Hong Kong and China Gas Company Ltd. to consult the Government in the event of tariff adjustments and major system additions and disclose certain corporate information to the public on an annual basis so as to ensure that consumers' interests are protected. The ICA was extended for three years six times and the current Agreement is effective as of 3 April 2015 and shall continue in effect until 2 April 2018.
The FMD performs the following functions :
Retail prices of auto-fuel in Hong Kong are determined by oil companies having regard to commercial practices and their operating costs. We appreciated the impact of the auto-fuel prices on the local economy. We have been monitoring whether changes in local retail prices of auto-fuel are in line with the trend movements of international oil price (benchmarked against the Singapore free-on-board (FOB) prices for unleaded petrol and motor vehicle diesel). We have been in close contact with oil companies and urged them to promptly adjust prices in tandem with international oil price movements to lessen the burden on the public.
In a free market economy, the retail prices of auto-fuels are determined by the market. The Government will endeavour to maintain a stable fuel supply, encourage transparency and enhance competition by removing barriers to entry into the fuel market. The Government has taken a series of measures to facilitate the new market entrants including -
Since the introduction of the new tendering arrangements in June 2003, two new operators have obtained 35 out of the 61 PFS sites put up for tender and successfully entered the market. The share of the three biggest operators in terms of the number of PFS has dropped from over 93% to about 70%. These figures have demonstrated that the new tendering arrangements have effectively enhanced the competition in auto-fuel retail market.
Regarding the trend movements of retail prices of auto-fuel, we have compared the changes in local retail prices of auto-fuel and the average monthly import prices since January 2003. In view of the import and stock-piling pattern of oil companies, there is a time lag for the adjustment of the auto-fuel import prices to be reflected in local retail prices. Therefore, the comparison has been made between the average import prices of the previous month and the local retail prices in the current month. Result of the comparison shows that, the trend movements and the extent of adjustments in local retail prices have been broadly in line with the average import prices in the previous month.
To improve the transparency of prices of fuel products, we post onto the website, on a weekly basis, the movements in local import prices and retail prices of auto-fuel in comparison with movements in FOB prices of Singapore unleaded petrol and motor vehicle diesel. The objective of publishing the data is to inform public better of the market trend of auto-fuel prices.
A. UNLEADED PETROL - Price Movements
The chart for unleaded petrol indicates the following:
B. MOTOR VEHICLE DIESEL - Price Movements
The chart for motor vehicle diesel indicates the following:
1. The local ex-duty retail prices in the charts above are pump prices net of duty but before taking into account any discounts. In fact, oil companies are offering various types of discounts to consumers (including walk-in discounts, credit card discounts or oil company membership card discounts etc). We have commissioned Consumer Council to post onto its website, starting from November 2008 and on a weekly basis, the local auto-fuel retail prices, including net prices after walk-in discounts and information on various types of cash and non-cash retail discounts and promotional offers by oil companies; and to launch the "Oil Price Calculator" in February 2009 (and its mobile phone version website and smart phone application in April 2009 and July 2012 respectively for drivers' easy reference ), so as to enhance price competition among oil companies and to help consumers to make their own choice among various kinds of discounts and benefits.
2. As auto-fuel sold locally are all imported, mainly from refineries in the Asia Pacific Region, the import prices of local auto-fuel are closely correlated with commodity prices in the Asia Pacific fuel market. The Mean of Platts Singapore (MOPS) is the generally accepted benchmark for Asia Pacific FOB fuel prices.
3. Import prices compiled are based on information given in trade declarations which importers are required by the Import and Export (Registration) Regulations to lodge with Customs and Excise Department. Declarations received by the Customs and Excise Department are then forwarded to the Census and Statistics Department for compilation of trade statistics. All declarations, which are processed in compiling trade statistics, are checked against cargo manifests supplied by carriers to ensure that there are no omissions or duplications.
In a free market economy, the prices of domestic liquefied petroleum gas (LPG) in Hong Kong are determined by LPG suppliers having regard to commercial practices and their operating costs.
There are five domestic LPG suppliers in Hong Kong, with ExxonMobil Hong Kong Limited (ExxonMobil), Shell Hong Kong Limited (Shell) and Sinopec (Hong Kong) Gas Company Limited (Sinopec) providing both cylinder and piped domestic LPG while two other suppliers (viz. New Ocean Energy Holdings Limited and Concord Oil Hong Kong Limited) only provide cylinder domestic LPG. The suppliers review their product prices regularly. In this regard, Shell, once every three months (i.e. at end of January, April, July and October), sets the listed prices of domestic piped LPG and wholesale prices of cylinder domestic LPG for the coming three months by forecasting the import prices for the coming three months in the light of the latest international LPG prices, and making positive or negative adjustment for any difference between the actual import prices and the forecast import prices in the last review. In addition, Shell reviews its operating costs once every twelve months according to this mechanism. Meanwhile, ExxonMobil and Sinopec conduct independent regular reviews on the listed prices of domestic piped LPG and wholesale prices of cylinder LPG according to their respective pricing adjustment mechanisms taking into account various factors, including LPG import prices, operating costs, equipment maintenance, market dynamics, etc.
In monitoring the prices of domestic LPG, the Government makes reference to the movements of international LPG prices (Saudi Arabia monthly exporting Contract Price) and local LPG import prices and assess whether the price adjustments are reasonable. The Government understands and is concerned about the impact of domestic LPG prices on the public and therefore encourages the industry to enhance transparency on price setting.
The retail prices of domestic cylinder LPG are set by individual distributors. The Census and Statistics Department has compiled statistics on average retail prices of cylinder domestic LPG in its monthly submission to the Legislative Council – Panel on Economic Development. The relevant information is accessible at the link below:
For the suppliers (Note 1) providing domestic piped LPG, their historical domestic piped LPG price data since 2016 are summarized in the table below:
1. ExxonMobil explains that it sells piped LPG to the pipeline operators, rather than to the end consumers direct. The actual selling price to the end consumers is in turn determined by the pipeline operators. The piped LPG price is one of the commercial terms with ExxonMobil’s operators, and is therefore confidential and proprietary in nature. ExxonMobil is hence unable to make public the relevant information.
3. The price information of respective LPG suppliers is for reference only and does not represent the actual service charge of individual customer. For the actual service charge of each service area / estate, please contact the respective LPG suppliers / operators directly.
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