CLP's SoC can be reviewed in late 1998, HEC's SoC can be reviewed in early 1999. If actual earnings are more than permitted, the excess goes to a development fund, while in years of earnings below the permitted return, the difference is taken out of the development fund. Therefore, CLP and HEC are guaranteed a minimum level of profits irrespective of the actual demand for electricity in Hong Kong. HEC and CLP can afford to be wrong in their forecast of future demand, since they are not accountable for any over-capacity. The SoC promotes building of new capacity to expand assets to increase permitted earnings.
Capital spending is always recaptured with tariff increases.
With profit margins directly linked to new capacity, both utilities have systematically over-estimated electricity demand growth in their forecasts. The consumer loses, because the companies have no incentive to maximise operating efficiency.