1. We welcome the opportunity to be consulted on government policy on the electricity supply sector. Energy is an important part of the infrastructure for any modern economy. Hong Kong has benefited from an efficient and effective energy sector but this does not mean there is no room for further improvement and gains. We thus support the current examination of the regulatory regime for the electricity supply sector. We believe the future development of the energy sector in general will benefit from more informed discussion and we expect the debate will be ongoing. At this stage, our comments are of a more general nature, but we would be happy to be continually involved in the process.
2. It is important first to lay down a perspective. Our view is that the current issue is not about liberalisation, as there are currently no barriers to entry into the energy market; but about regulation. Here we would agree that there is a need for the sector to be subject to some form of minimal regulation, on account of its infrastructural character. Hence the matter is not just one of deregulation but also of re-regulation.
3. Most regulations are, rightly, directed towards consumer protection and quality assurance, and the electricity sector should be no exception. However, we believe the nature of the energy sector requires that an important value be attached also to reliability of supply. For Hong Kong to remain the premier service centre of Asia, a reliable energy sector is of paramount importance. The financial centre of Hong Kong cannot afford to have a blackout of energy.
4. We would add that reliability is not just about having enough capacity. Problems could still occur in places with excess generation capacity. What is important is to ensure that the various levels of the energy sector are properly integrated (although not necessarily fully integrated vertically) so as to provide energy effectively.
5. At the same time, we believe deregulation is a global trend that Hong Kong could ill-afford to resist. While we do not advocate deregulation for its own sake, we believe there is a genuine case for the regulatory regime of Hong Kong's electricity supply sector to be re-examined. While the current scheme of control has been an effective means of profit (and hence price) control, its asset-driven nature, whilst ensuring quality investment, also limits the extent to which competition and diversity can be encouraged. We would, therefore, be inclined to see a deregulation of the scheme of control, probably nearer 2008 rather than 2028 on the time horizon of the study. In fact, subject to devising an effective regulatory regime, 2008 would appear a reasonable target to coincide with the ending of the scheme of control agreement.
6. In seeking to achieve deregulation, however, we would emphasise the principle that contracts and licences must be honoured as it is a fundamental aspect of doing business in Hong Kong. At the same time, businesses and government should always be open to opportunities for improving regulatory and commercial arrangements.
7. Our preliminary view on de-regulation of the electricity supply sector is that the model should be one of open and fair competition in generation and minimum regulation on transmission, distribution and retail.
8. We would be interested to see if and how the regulatory regime could encourage energy to be integrated with other services, for example, allowing the real estate sector to integrate property development with energy products, so as to offer consumers more choices. In the case of telecommunications, a pro-competition regulatory regime has helped engender the sector's diversity and vitality. We recognise that energy is a very different sector and we remain open to the role of the regulatory regime in enabling the energy sector to take advantage of innovations in other industries.
9. Another issue is that of the place of alternative forms of energy such as solar energy to be integrated into mainstream energy supply. Even though the volume may be insignificant, there should be room for such an industry segment and the wider energy infrastructure (the distribution grid, for example) should be a facilitator, rather than a barrier, to entry of such alternative energy sources.
10. In the current review the advantage of linking the distribution systems of Hong Kong Island and Kowloon/New Territories will be examined. In addition, we believe the broader picture of Guangdong should also be considered. Given the proximity and economic interdependence of the two territories, the scope for more integration and coordination between the two, not only in generation but also in transmission and distribution, should be investigated. The market structure would be very different if, for example, the Mainland market were also deregulated.

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