LegCo Paper No. CB(1)769/96-97
(These minutes have been
seen by the Administration)
Ref: CB1/PL/ES/1

LegCo Panel on
Economic Services

Minutes of the Meeting
held on Monday, 9 December 1996
at 2:30 pm in Conference Room A of the Legislative Council Building

Members Present :
    Hon Henry TANG Ying-yen, JP (Chairman)
    Hon Mrs Selina CHOW, OBE, JP
    Dr Hon David K P LI, OBE, LLD (Cantab), JP
    Hon Mrs Miriam LAU Kin-yee, OBE, JP
    Dr Hon HUANG Chen-ya, MBE
    Hon LEE Wing-tat
    Hon Fred LI Wah-ming
    Dr Hon Samuel WONG Ping-wai, MBE, FEng, JP
    Hon Howard YOUNG, JP
    Hon CHAN Kam-lam
    Hon SIN Chung-kai
Members Absent :
    Dr Hon LAW Cheung-kwok (Deputy Chairman)
    Dr Hon Philip WONG Yu-hong
    Dr Hon Anthony CHEUNG Bing-leung
    Hon LAU Chin-shek
    Hon Mrs Elizabeth WONG, CBE, ISO, JP
Public Officers Attending :
    Mr Stephen IP, JP
    Secretary for Economic Services
    Mr KWAN Wing-wah
    Deputy Secretary for Economic Services

    For item IV

    Mr Eric Johnson
    Principal Assistant Secretary for Economic Services
    Mr H B Phillipson, JP
    Director of Electrical & Mechanical Services
    Mr K W TONG
    Acting Regulatory Services Controllor
    Mr Ronald CHIN
    Acting Assistant Director/Energy Efficiency

    For item V

    Mr LIM Poh-chye
    Principal Assistant Secretary for Economic Services (Financial Monitoring)
    Ms Rhoda CHAN
    Senior Treasury Accountant
Attendance by Invitation :

    For item IV

    China Light & Power Company, Limited

    Mr G L Graves
    Chairman, CAPCO
    Mrs Betty YUEN
    Director, CAPCO
    Mr R E Sayers
    Managing Director
    Mr P A Littlewood
    General Manager, Strategic Development and Administration
    Dr Jeff Bateson
    Strategic & Corporate Planning Manager
    Dr Albert POON
    Corporate Planning Manager
    Mrs Sandra MAK
    Public Affairs Manager

    For item V

    Hong Kong Electric Company, Limited

    Mr Ewan YEE
    Managing Director
    Mr Lawrence DO
    General Manager (Finance)
    Mr Gary CHANG
    Chief Engineer (Development, Planning & Information Technology)
    Mr Steve NG
    Deputy Chief Accountant
Clerk in Attendance :
    Ms Estella CHAN
    Chief Assistant Secretary (1)4
Staff in Attendance :
    Mr Daniel HUI
    Senior Assistant Secretary (1)7

I. Confirmation of minutes of previous meeting

(LegCo Paper No. CB(1)390/96-97)

1. The minutes of the meeting held on 25 October 1996 were confirmed.

II Information paper issued since last meeting

(LegCo Papers No. 352, 400 and 454/96-97)

2. Members noted the three information papers issued since the last meeting.

III. Items for discussion for the next meeting

3. At the suggestion of the Chairman, members agreed that discussion on the item, "Review of pricing structure of local telephone services", would be deferred to another meeting. Members also agreed that the following items would be discussed at the meeting scheduled for 13 January 1997:-

  1. Review of pricing structure of local telephone services; and

  2. Post Office Trading Fund progress report and proposed amendments to the Post Office Regulation.

IV.The China Light and Power Company Limited (CLP)'s response to the consultancy study by the Burns and Roe Company of future demand for electricity in Hong Kong to 2005

4. Mr R E Sayers thanked the Panel for the opportunity to address some of the comments made in the Burns and Roe report relating to CLP's demand forecasting methodology, its deferral of the Black Points Units, its tariff position and the feasibility of sale of electricity to Hong Kong Electric Company Limited (HEC). As the issues involved were complicated, the Administration had retained Burns and Roe to provide independent expert advice, while the CLP had employed two USA consultants, the Electric Power Research Institute (EPRI) and the Raytheon Engineers & Constructors (REC) as its advisers. In order to achieve better transparency, the EPRI and REC reports had been made public with the commercially sensitive information removed. CLP had also made clear to the Government that it had no objection to publicizing the Burns and Roe report provided that the commercially sensitive information were removed.

5. Mr P A Littlewood briefed members on the issues as set out in CLP's paper tabled at the meeting.

(Post-meeting note: CLP's paper together with the EPRI and REC reports were circulated to members vide CB(1)489/96-97 dated 10 December 1996)

Scheme of Control Arrangement

6. Members were concerned that under the current provisions of the Scheme of Control Arrangement (SCA), CLP had no incentive to correctly forecast the demand because CLP's profit were guaranteed even if there was an overestimation of demand. Thus, the consumers would suffer by paying higher tariff for the excess capacity. Mr SIN Chung-kai suggested that a fair method to determine the Average Net Fixed Assets (ANFA) on which tariff was based was to include in the ANFA only those assets which were necessary to cater for the maximum electricity demand plus 30% but to exclude those assets related to the excess generation capacity. The 30% reserve capacity allowed was in line with internationally accepted standard. Moreover, such a formula would ensure protection of consumers' interests on the one hand, and allow CLP to have maximum flexibility in scheduling the completion of its power stations on the other. Members asked whether CLP would be prepared to consider this approach.

7. Mr Sayers advised that the SCA between CLP and the Government was to provide a stable environment so that investment decision in power stations which involved multi-billion dollars could be made. With the certainty provided by the SCA, CLP was able to negotiate good prices for its plants and equipment and financing charges, which in turn benefitted the consumers. With the success of the SCA, Hong Kong had been able to enjoy a reliable supply of electricity at reasonable prices for the past 30 years. The formula proposed by Mr SIN was therefore not acceptable. Under the SCA, CLP had prepared demand forecasts based on the information available in 1991. Independent consultants employed by the Government had scrutinized CLP's forecasts, and the parties concerned agreed that the demand forecasts were the best estimates based on all the information available at that time. With Government's approval, CLP proceeded with the Black Point project in 1992. CLP observed that growth in demand was slower than estimated and therefore proposed in 1994 to defer constructing the Black Point units 6-8. Furthermore, CLP's consumers benefitted and had been paying lower tariff than was estimated in the 1992 financing plan. The Economic Services Branch (ESB) had recently requested CLP to submit plans to further defer building the Black Point units 5-8 in order to reduce excess capacity. CLP would carefully consider ESB's request and submit proposals in this respect by February 1997.

8. Members pointed out that the SCA provides for a ceiling for profit but CLP could propose a lower tariff. They asked whether CLP would voluntarily lower its rate of return on the ANFA when it proposed tariff adjustment next year, so that consumers could really benefit in terms of lower electricity tariff. Mr Sayers advised that CLP had already acted responsibly by substantially reducing the capital and operating expenditures since 1994. Consequently, electricity tariff being paid by the consumer was lower than the projected electricity tariff approved by Government in the 1992 financing plan. CLP was not prepared to change the formula for calculation of ANFA under the SCA.

9. In response to the comments that CLP did not have to bear any risk as its profits were guaranteed under the SCA, Mrs Betty YUEN explained that the SCA did not provide any guarantee for CLP's sales income, for example, CLP's actual sales income in the past few years was $18 billion less than the projected income in the 1992 financing plan. As such, CLP had to face a lot of risks, and had to be responsive and adaptive to the changing environment. In fact, CLP had reduced its capital and operating expenditure to ameliorate some of the adverse effects of the reduced sales income.

10. Members disagreed with Mrs YUEN's views on the risks faced by CLP and were of the view that CLP's profits were guranteed and the uncertainty was only in the actual amount of profits.

Deferral of units 5-8 at Black Point

11. Mr SIN observed that CLP had disclosed in its last annual report that its ANFA was $21 billion. However as indicated in Mr Littlewood's presentation, CLP's capital expenditure in the Black Point Power Station was in excess of $15 billion. He wondered why the capital expenditure in 1996 was so great and enquired on the amount of expenditure for the Black Point units 1-8 which had been included in CLP's ANFA.

12. In response, Mr Sayers advised that since the Black Point power station was owned by a joint venture company, the CAPCO, which was 60% owned by Exxon and 40% owned by CLP, only the equity accounting portion of the investment in the Black Point station would be reflected in CLP's account. Mr. Littlewood further advised that total investment in the Black Point power station was about $24 billion and 84% of the capital expenditure had been committed as at September 1996. The forecast expenditure position as at March 1997 would be 93% committed and 78% expended.

13. As regards whether CLP had stopped further commitment on capital expenditure after receiving Government's request on deferral of units 5-8 in Black Point, Mr Littlewood said that construction of units 5 and 6 was at an advanced stage when the Government's request was received, and there would be little advantage in stopping work in these two units because such action would eventually bring additional cost to consumers in the long run. As for units 7 and 8, CLP had discussed with the suppliers and agreed that no new major commitments would be incurred until the issue of deferral of the units were resolved. He also advised that although there were eight separate generating units, a significant amount of equipment was common to all the units and had to be installed at the beginning of the project.

14. Regarding members' request for information on the breakdown of cost of buildings and plant and equipment in the eight units of the Black Point power station, CLP agreed to provide the requisite data in writing.CLP

15. Members expressed concerns about CLP's claim that the long term costs in the deferral of units 5-8 in Black Point would outweigh the short term savings and requested detailed figures to support its claim. In response, Mr Sayers advised that CLP's consultants and Government's consultants arrived at the same conclusion on this specific point. Mr Littlewood added that CLP's experience in estimating the real costs of the deferral in 1994 formed the basis of the current estimates. However the current deferral plan would be less favourable than the 1994 plan as the deferral period was longer and the contract options for deferrals had been fully exercised in 1994.

Sale of electricity from CLP to Hong Kong Electric Company Limited (HEC)

16. Members observed that the Burns and Roe report indicated that the sale of electricity from CLP to HEC would require additional interconnectors between the two systems, which would cost $468 million and could only be used for three years. CLP found, on the other hand, that sale of electricity to HEC would incur no additional transmission costs. Members requested comments from CLP on this divergence of advice. Mr Sayers advised that the divergence might be due to different technical assumptions, such as system stability. CLP found that the existing connector between the systems could handle sale of 350 MW without incurring additional capital expenditure. CLP could not comment on costs which might be incurred after the electricity entered the HEC system. Dr Albert POON added that as CLP only had the part of the Burns and Roe report covering CLP, they could not therefore comment on Burns and Roe's estimated capital costs on sale of electricity to HEC.

17. As regards HEC's reaction to the proposed purchase of electricity from CLP, Mr Sayers advised that CLP had not discussed with HEC on the proposal. It would involve detailed discussions amongst CLP, HEC and the Government regarding the price and other detailed arrangements if the proposal was to be pursued.

18. Mr Sayers reckoned that the sale of electricity from CLP to HEC would only be a short term solution because CLP would have no excess capacity in 2005 and by that time HEC would need new capacity in any case.

19. Mr CHAN Kam-lam opined that since the sale of electricity to HEC was feasible in the short term and would incur no capital expenditure, the parties concerned should therefore enter into serious discussion to work out an implementation plan which would be beneficial to the consumers and the power companies.

Overestimation of demand for electricity

20. Members considered that CLP, the Government and Government's consultants were all responsible for overestimating the demand for electricity leading to the excess capacity of CLP. Mr Sayers remarked that no one should be blamed for the overestimation because the forecasts made in October 1991 were based on the information available at that time. CLP had estimated that the growth in demand in the manufacturing sector would decrease from an historical annual rate of 4.9% to 0.9%. It turned out that there was an annual decrease of 4.8% for 1992-1996. The extent and the speed of the shifting of Hong Kong's manufacturing industries to China were beyond anyone's estimate. This sole factor accounted for almost all of the over-estimated demand. The actual demand in the domestic, commercial, government and other sectors were very close to the forecasts. It was only with the benefit of hindsight that anyone could have correctly forecast the demand for the period concerned. On the other hand, if CLP had under-estimated the demand, it would also have to account for under-supplying the market.

21. On the point regarding the shifting of Hong Kong's manufacturing industry to China, some members felt that this factor had not been given due weighting in the 1992 forecast as the trend of shifting had started well before 1992 and had been gathering momentum since.

22. Regarding whether the decrease in sale of electricity to China was an important factor leading to the excess capacity of CLP, Mr Sayers advised that CLP's sale of electricity to China was beneficial to Hong Kong consumers as 80% of the profit arising from the sales to China went to the Development Fund, which effectively subsidized the tariff to Hong Kong consumers. The Guangdong system had gone from an under-supply situation to an over capacity environment and the prospect of selling more electricity to China was not good. Mrs Sandra MAK further clarified that the sale of electricity to China was not a factor leading to the excess capacity because CLP's investments in additional capacity did not take into account the demand for electricity in China. CLP only used its reserve capacity for generating electricity for sale to China.

23. As regards whether CLP would consider selling the generating equipment for units 7-8 in Black Point to China, Mr Sayers advised that CLP would consider all options for the deferral plans for the Black Point units and submit the proposal to Government.

Discussion with the Administration

24. On the issue of overestimation of demand, the Secretary for Economic Services (SES) explained that it was difficult to foresee in October 1991 the extent of the shift of Hong Kong's manufacturing industry as happened during 1992-1996. The important point was that responsive measures were being taken to reduce the adverse effect of this overestimation in demand. The Administration's recent request for deferral of the Black Point units 5-8 was to protect consumers' interests. As an usual practice, the Administration would carefully examine CLP's proposed tariff adjustment next year to continue to safeguard consumers' interests.

25. As regards the quality of service of the Burns and Roe Company, the Director of Electrical and Mechanical Services (DEMS) advised that Burns and Roe was an internationally acclaimed consultant who had carried out 22 studies for the Government with consistently good quality reports. They had been selected in competition with other reputable international consultants. With a high international reputation it was extremely unlikely that Burns and Roe would, as had been suggested, give improper or unprofessional advice for short term gain.

26. Concerning modifications to the SCA, SES advised that the SCA was an agreement between Government and CLP and the provisions therein could not be changed unilaterally. The Administration would consider all views and issues raised by members and other interested parties in the mid-term review on the SCA in 1998.

27. As regards sale of electricity from CLP to HEC, SES emphasized that this could only be a short term solution under the present situation. Hong Kong's demand for electricity was growing rather than static. As such HEC would need additional capacity in 2003 and CLP would have no excess capacity in 2005. The sale of electricity proposal would only address the problem for the period 2003-2005. Moreover, HEC's agreement had to be secured before the proposal could be taken further. The Administration would examine CLP's comments on this option.Admin

28.In response to members' request for a copy of the Burns and Roe report, SES advised that since CLP had no objection to releasing the report provided that the commercially sensitive data were removed, the Administration would release the part of Burns and Roe report on CLP. The Administration would also seek HEC's agreement in this respect before releasing the part on HEC.Admin

29. Dr HUANG Chen-ya requested that there should be indications in the appropriate parts of the report where sensitive data had been removed. Members requested that the report should be released before the meeting on 6 January 1997 to allow sufficient time to study this report.

V Hong Kong Electric Company Limited's (HEC's) tariff increase proposal

30. The Chairman announced that due to the absence of a quorum, the ensuing discussion would be carried on as an informal meeting. He also reminded members that they were not protected under the Legislative Council (Power and Privileges) Ordinance.

31. Mr Ewan YEE briefed members on HEC's tariff increase proposal as in the HEC's paper tabled at the meeting.

(Post-meeting note: HEC's paper was circulated vide CB(1)489/96-97(04) dated 10 December 1996.)

32. Mr YEE advised that HEC's average net tariff would be increased from 83.5 cents/kWh to 86.4 cents/kWh, an average increase of 3.47%, with effect from 1 January 1997. The proposed increase in tariff was justified by the following:-

  1. The proposed increase of 3.47% was lower than the forecast inflation of 7% per annum;

  2. HEC operated a Demand Side Management scheme and the tariff increase on low consumption consumers would be smaller. HEC's consumers who used less than 300 kWh per month, which accounted for 50% of HEC's consumers, would pay two dollars more per month (i.e. an 0.8% increase). Those used less than 700 kWh per month (i.e. 83% of HEC's consumers) would have a 2% tariff increase;

  3. Hong Kong's Consumer Price Index (A) increased by 180% since 1983 but HEC's tariff only increased by 43% in the same period;

  4. After discounting inflation, HEC's tariff had decreased by 49% in real term since 1983;

  5. Productivity of HEC's employee had improved from 1.5 million units of electricity sold per employee in 1986 to 3.2 million units of electricity sold per employee in 1996; and

  6. HEC's tariff increase since 1983 was one of the lowest compared with other utilities companies.

33. In response to the question on whether the rate of increase for domestic consumers was higher than that for industrial and commercial consumers, Mr YEE replied that in fact the rate of increase to domestic consumers at 2.9% was lower than the 3.6% increase applicable to industrial and commercial consumers. He also advised that 70% of HEC's consumers were in the commercial category, 25% in the domestic category and 5% in the industrial category.

34. As regards the additional sales income in 1997 that would be generated by this tariff increase and the estimated rate of return on ANFA in 1997, Mr YEE advised that he could not give detailed figures in this regard because of the regulations of the Stock Exchange of Hong Kong. Mr Fred LI opined that as HEC was a company regulated by a Scheme of Control Arrangement, there should be more transparency in HEC than the unregulated companies. Mr YEE responded that as 1996 had not yet finished, therefore no exact figures were available for 1996. A rough estimate was that the rate of return on ANFA would be similar to the average for the last five years, i.e. about 12.3%; and the additional sales income would be in the order of $300 million.

35. Having noted that HEC would need additional capacity in 2003, the Chairman asked whether HEC would be prepared to consider purchasing electricity from CLP and whether HEC's cost per unit of electricity was cheaper or more expensive than that of CLP's. In response, Mr YEE advised that HEC's cost should be lower than CLP's as HEC used coal as fuel which was cheaper than gas or atomic energy. HEC could not accept the purchase of electricity at CLP's cost level. Moreover, the demand forecasts by HEC were considered to be very accurate in the Burns and Roe Report, which recommended additional generation capacity to be provided in 2003. HEC had been requested by Government to carry out a site search and environmental impact assessment studies for a new power station for 2003. HEC would submit a detailed proposal to Government after completion of the studies.

36. Members opined that the proposal for construction of a new power station by HEC should be discussed by this Panel before final approval was given.

VI Any other business

37. Regarding Mr SIN's proposed establishment of a subcommittee to review the issue of excess capacity of CLP, members agreed that the Panel would decide on whether a subcommittee would be needed after the special meeting on Monday, 6 January 1997 at 2:30 pm to continue the discussion on CLP's excess capacity.

38. The Chairman reminded members that the Environmental Affairs Panel had taken up the issue of Merchant Shipping (Prevention and Control of Pollution) (Charges for Discharge of Polluting Waste) Regulation 1996 and members of this Panel would be invited to join the discussion at the meeting on Tuesday, 7 January 1997 at 10:45 am.

39. The meeting ended at 5:10 pm.

LegCo Secretariat

24 January 1997

Last Updated on 14 August 1998