We look at the detail in CLP's 2012 tariff increase and the corresponding court case which HK Electric won. If CLP does not win its case, or if the amount of refund of Government rates and ground rent is smaller than expected, then the rebate will have to be clawed back in future tariffs. In any case, the rebate will be of limited duration as it relates to a lump sum.

CLP's small print: tariff rise is 8.4%, rebate is conditional
4 January 2012

If you live in Kowloon or the New Territories (except Lamma), don't rush out and celebrate the lower-than-proposed increase in CLP's tariff just yet. The company's press release "2012 Tariff Increase Narrowed to 4.9%" is somewhat misleading. This reduction is mainly achieved by means of a "Rent and Rates Special Rebate" of 3.3 cents per unit, equivalent to 3.5% of last year's average net tariff, and as the small print of the 2012 tariff makes clear, the rebate is conditional:

"The actual amount and the eventual time period for this Rent & Rates Special Rebate will be subject to the final resolution of the case."

So although CLP has announced a 3.3 cents per unit rebate, which for 12 months would be worth about HK$1bn, if they lose the case, or the judgment or settlement is less than expected, then they will be entitled to claw it back in future tariffs to achieve their permitted rate of return on average net fixed assets of 9.99% (after tax). In any event, once they have refunded the full amount of the eventual judgment or settlement, then the rebate will end and the tariff will revert to its higher level, which on average is 8.4% more than last year's tariff.

CLP's court case is a claim for overpayment of rent and rates over the past decade. In a similar case, on 21-Jun-2011 the Court of Final Appeal ruled in favour of The Hongkong Electric Co Ltd (HKE), owned by Power Assets Holdings Ltd (0006), reversing the judgment of the Court of Appeal and reinstating the ruling of the Lands Tribunal. Under section 8(b) of the Rating Ordinance, assets which are required for the purpose of manufacturing operations or trade processes are disregarded in ratings. So generators and coal conveyors, switches and transformers are not rateable, but the structures and buildings which support and contain them are rateable, and so adjunct "plant" including transmission cables, conduits and pylons.

The HKE case centred on what is the correct rate of return to be used in calculating the rateable value of the assets using the "Receipts and Expenditure" or R&E method, in which the anticipated profit or "Divisible Balance" (DB) from operating the assets is divided between a hypothetical tenant (HT) and a hypothetical landlord (HL). In other words, what would the HT pay, if he were renting these assets to run his business, in order to generate a profit he finds acceptable? The tribunal ruled that the HT's share is based on the permitted rate of return under the scheme of control, rather than the lower weighted average cost of capital (WACC), as the Commissioner of Ratings contended. The difference between these two rates basically represents the extra returns available to a monopoly provider. As a result of the ruling, the HL's share of the DB, being the rateable value, is lower. Rates are currently charged at 5% of rateable value. Ground rents are 3% of rateable value of the land under applicable leases (not all rateable assets are on land leases). This meant that HKE had been overcharged in rates and rent for several years.

The court case involved a "test year" of 2004/5, but the same logic applies to subsequent years. In the test year, the Commissioner of Rating and Valuation originally assessed the rateable value for rates purposes at $6,294m and for rent purposes at $2605.2m, implying rates of $314.7m and rent of $78.2m, or $392.9m in total. The Lands Tribunal reduced the rateable value for rates purposes to $3,945m and presumably a proportionate reduction for rent purposes. So we are talking about a reduction of around 37%, or about $146.6m for that year. There are 6 subsequent years up to 31-Mar-2011, so there is perhaps about $1bn due in total refund, plus legal costs awarded.

CLP applied to intervene in the HKE case, because its case was similar, but the Court of Final Appeal rejected that request. So CLP's case continues separately, unless the Government and CLP reach an out-of-court settlement. Of course, it is the Commissioner of Ratings, Mrs Mimi Brown, who has to decide on whether to settle and on what terms, having regard to the precedent set in the HKE case. From the power companies' point of view, this battle is somewhat academic, because rates and rent are part of their expenses under the Scheme of Control, so whatever they pay or get rebated ends up being passed through to consumers in the tariff.

© Webb-site.com, 2012

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