LegCo Paper No. CB(1) 1258/96-97
(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,10 March 1997, at 2:30pm in Conference Room A of the Legislative Council Building

Members present :

    Hon Henry TANG Ying-yen, JP (Chairman)
    Dr Hon LAW Cheung-kwok (Deputy Chairman)
    Hon Mrs Selina CHOW, OBE, JP
    Hon LEE Wing-tat
    Hon Fred LI Wah-ming
    Dr Hon Samuel WONG Ping-wai, OBE, FEng, JP
    Dr Hon Philip WONG Yu-hong
    Hon Howard YOUNG, JP
    Hon CHAN Kam-lam
    Hon LAU Chin-shek
    Hon SIN Chung-kai
    Hon Mrs Elizabeth WONG, CBE, ISO, JP

Member attending :

    Hon Ronald Arculli, OBE, JP

Members absent :

    Dr Hon David K P LI, OBE, LLD (Cantab), JP
    Hon Mrs Miriam LAU Kin-yee, OBE, JP
    Dr Hon HUANG Chen-ya, MBE
    Dr Hon Anthony CHEUNG Bing-leung

Public officers attending :

    Mr Stephen IP, JP
    Secretary for Economic Services
    Mr KWAN Wing-wah, JP
    Deputy Secretary for Economic Services
    Mr Eric Johnson
    Principal Assistant Secretary for Economic Services (Economic Services)
    Mr LIM Poh-chye
    Principal Assistant Secretary for Economic Services
    (Financial Monitoring)
    Mr H B Phillipson, JP
    Director of Electrical and Mechanical Services
    Mr LEE Lo-tung
    Assistant Director of Electrical & Mechanical Services (Energy Efficiency)
    Mr K W TONG
    Acting Regulatory Services Controller

Attendance by invitation :

    China Light & Power Company, Limited

    Mr R E Sayers
    Managing Director
    Mr P A Littlewood
    General Manager, Strategic Development and Administration
    Mrs Sandra MAK
    Public Affairs Manager
    Mr Jimmy LUI
    General Manager, Distribution and Customer Services
    Dr Albert POON
    Corporate Planning Manager
    Castle Peak Power Company Limited
    Mr Gerald Graves
    Mrs Betty YUEN
    Mr L Reed

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

(LegCo Paper No. CB(1)936/96-97)

1. The minutes of the meeting held on 13 January 1997 were confirmed.

II.Information paper issued since last meeting

(LegCo Papers No. CB(1)921/96-97, 987/96-97, 997/96-97,1006/96-97, 1011/96-97)

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

III.Items for discussion for the meeting on 14 April 1997

3. Members agreed to discuss the following items at the meeting on 14 April 1997 :

  1. Telecommunications review; and

  2. Establishment of an Economic Development Council.

IV Follow-up on China Light and Power Company Limited (CLP)’s excess generating capacity

(LegCo Paper No. CB(1)1012/96-97(01))

Meeting with CLP

4. With the aid of an overhead projector, Mr P A Littlewood made a presentation summarising CLP’s views on the options to address its excess generating capacity.

(Post-meeting note : A hard copy of CLP’s presentation was circulated to members vide LegCo Paper No. CB(1)1045/96-97(01) on 11 March 1997.)

Deferral of the generating units at Black Point (BP)

5. Mr Littlewood said that one of CLP’s reservations on the proposal for deferral of BP units 5 to 8 was that, if Hong Kong’s population growth at 1.7% per annum was sustainable, CLP’s reserve margin would decrease more rapidly leading to an under-supply situation sooner than that anticipated in the main forecast. Mr R E Sayers supplemented that the 1.7% annual growth in population was an estimate by the Government, and this would mean a population of 8.1 million by the year 2011.

6. Members enquired about the amount of money spent by CLP on the BP units after receipt of the Administration’s request for deferral of the BP units. Mr Littlewood responded that the Administration had asked CLP to avoid entering into new commitments on the BP units and CLP had duly asked its contractor to revert to the company before entering into any new commitments. Since then, the contractor had not notified the company of any new commitments. However, CLP had had to make payment for commitments which were entered into previously. Such payments made since November 1996 amounted to about $400 million.

7. Members were not convinced of CLP’s claim that the long term costs of deferral of the BP units would outweigh the short term benefits and asked CLP for an elaboration on its arguments. Mr Sayers replied that installation work on units 5 and 6 was so advanced that it would be counter-productive to undo what had been done. The framework and infrastructure for units 5 and 6 were almost completed and the equipment was in the final stage of installation in the supplier’s factory before shipping to Hong Kong. The only means for deferral was to delay commissioning of the plant, but in such a case, the equipment would not be under any warranty. Deferral of units 7 and 8 was feasible but CLP’s analysis showed that long term costs would outweigh short term benefits.

8. Members were concerned that if a decision on the deferral option was not made shortly, CLP’s continued expenditure on the BP units would aggravate the problem. They asked whether CLP would share the Administration’s aim of arriving at a decision in two to three weeks’ time and enquired about the amount of expenditure which would be incurred by CLP on the BP units in the coming three weeks. In response, Mr Sayers advised that CLP and the Administration had been cooperating in resolving the issue. All information requested by the Administration had been provided and CLP would try its best to resolve the issue with the Administration as soon as possible. He would provide a written answer to members on the anticipated expenditure in the coming three weeks on the BP units.

(Post-meeting note : The requisite information provided by CLP was circulated to members vide LegCo Paper No. CB(1)1075/96-97 on 13 March 1997.)

9. Members pointed out that under the terms of the existing Scheme of Control Agreement (SCA) regarding permissible returns, CLP’s customers would have to share the cost of the excess generating capacity by way of paying higher tariffs. They asked whether CLP’s shareholders would share any part of the cost. Mr Sayers responded that since CLP had become aware of the excess generating capacity, it had taken prompt action in reducing capital expenditure by $10 billion and operating expenditure by $3 billion. Consequently, CLP’s shareholders would not get any return on the reduced amount of capital expenditure. Customers had also benefitted due to savings in operating expenditure. The net result had been that the tariffs being paid were below the relevant tariffs projected in the Financing Plan approved in 1992.

10. As regards the possibility of requesting CLP’s equipment supplier to resell the BP generating equipment to other clients, Mr Sayers advised that CLP had considered this option but since the industry was in a recession it was not possible to find another buyer to take over CLP’s equipment.

Sale of electricity to Hongkong Electric Company Limited (HEC)

11. Mr Littlewood said that CLP had studied the Administration’s information paper "Interconnection between China Light and Power Company Limited and Hongkong Electric Company Limited" (LegCo Paper No. CB(1)1012/96-97(01)). CLP maintained its view that it was technically feasible to use the existing interconnectors for regular transfer of power to HEC. However, CLP respected the Administration’s views on the issue and would not pursue this option further.

Other issues

12. As regards the proposed decommissioning of some gas turbines in Castle Peak Power Station and Tsing Yi Power Station, Mr Sayers advised that customers would benefit because the net asset value of the decomissioned gas turbines would be written off and CLP’s shareholders would cease to earn a return on the written-off assets. The net present value of the benefits to customers would be about $120 million.

13. As to the prospect of selling more electricity to China as a measure to reduce the excess generating capacity, Mr Sayers advised that the Guangdong system was in an excess capacity situation and there was no prospect of increasing sale to Guangdong in the next two years other than on an emergency basis.

14. In response to members’ request, Mr Sayers agreed to provide written information on the effect of the decommissioning of gas turbines at Tsing Yi and Castle Peak power stations on tariff; and the extent of the effect of CLP’s excess reserve margin (i.e. the portion above the international standard of 30%) on tariff.

(Post-meeting note: CLP’s reply has been circulated to members vide LegCo Paper No. CB(1) 1212/96-97 dated 7 April 1997.)

Meeting with the Administration

15. The Secretary for Economic Services (SES) said that the Administration considered the deferral of units 5 to 8 at BP beneficial to consumers both in the long term and short term. Although the Administration was awaiting more data from CLP for an in-depth analysis of the various options, the Administration’s preliminary view was that deferral of units 7 and 8 at BP, each for only three years, would not be acceptable. In the light of the possible availability of cheaper electricity generating equipment in future, CLP should consider reselling the generating units. The Administration aimed to work out a solution on the deferral options with CLP in the coming two to three weeks. Depending on the substance of the solutions, endorsement from the Executive Council might be required. In the meantime, CLP should proceed with the decommissioning of the gas turbines and should stop incurring new commitments on units 5 to 8 in order to protect consumers’ interest.

16. As regards the proposed sale of electricity to HEC using the existing interconnectors between the two systems, SES advised that the Administration considered this proposal technically not feasible for reasons set out in the Administration’s paper. Moreover, the deferral of generating units at BP and the decommissioning of gas turbines would reduce CLP’s reserve margin to an extent that CLP might not have any spare capacity for sale of electricity to HEC in year 2003.

17. Members noted CLP’s statement that $400 million had been spent on BP units 5 to 8 since receipt of the Administration’s request for deferral of the BP units. They asked the Administration to confirm the accuracy of the figure and whether the amount could be excluded from CLP’s Average Net Fixed Assets (ANFA). The Principal Assistant Secretary for Economic Services (Financial Monitoring) PAS(FM) responded that the Administration did not have the necessary data in hand to confirm the figure. As regards the possibility of excluding the amount from CLP’s ANFA, the Attorney General’s Chambers had advised that the Administration could pursue the matter with CLP in the coming mid-term review on the SCA in October 1997.

18. Members enquired about the action to be taken by the Administration if CLP and the Administration could not come to an agreement on deferral of the BP units. SES replied that since both sides were co-operating smoothly and had the sincerity to work out an amicable solution, he was hopeful that a solution could be worked out. In the unlikely event of not reaching an agreement with CLP, the Administration might have to resort to unilateral action.

19. Members enquired about the proposed changes in the SCA provisions in the coming mid-term review and the action which could be taken by the Administration should CLP resist any change to the SCA. SES replied that the SCA was a 15-year agreement and the mid-term review was designed for modification of the SCA in the light of the experience gained. Any subjects relevant to the SCA could be discussed in the review. It would not be productive to assume that CLP would adopt an uncooperative attitude in the review. Being a responsible company, CLP should be willing to consider reasonable changes to the SCA.

20. SES confirmed that the impact of the Demand Side Management Scheme on reserve margin of CLP had been taken into account when the Burns and Roe Company calculated the benefits of the various deferral options of BP units.

21. As regards the impact of the decomissioning of some gas turbines in Tsing Yi and Castle Peak power station on electricity tariff, PAS(FM) advised that the Administration had already requested more detailed figures from CLP in order to calculate the tariff impact of various proposals made by CLP. Without the specific data, the Administration would not be able to assess the tariff impact of the proposals.

22. As proposed by the Chairman, members agreed that a special meeting of the Panel would be held in about three weeks when the Administration and CLP had agreed on a solution to address CLP’s excess generating capacity. Members also agreed to prepare written questions on the issue which would be forwarded to the Administration or CLP for a response before the special meeting.Admin

(Post-meeting note : Members’ questions were forwarded to the Administration and CLP on 17 March 1997.)

V Tariff increase of China Light and Power Company Limited (CLP)

(LegCo Paper No. CB(1)848/96-97)

23. Mr Jimmy LUI gave a presentation on CLP’s tariff increase with effect from 1 March 1997, as set out in the information paper. The main points were :

  1. The average net tariff would be increased by 2.3 cents per unit, i.e. from 82.55 cents per unit to 84.85 cents per unit;

  2. The tariff adjustment represented an increase of 5.9% over the weighted average unit rate of the past 12 months;

  3. There would be a special rebate of 1.2 cents per unit from the Development Fund to customers for the next 12 months; and

  4. Under the revised tariff structure, about 75% of CLP’s domestic customers, who were using less than 400 units of electricity per month, would not be adversely affected by the tariff increase which had taken effect from 1 March 1997.

24. Members noted that about 75% of CLP’s domestic customers used less than 400 units of electricity per month, and asked whether this consumption rate was recorded in summer or winter. Mr LUI confirmed that the consumption rate was the average of one year’s consumption of electricity by domestic customers.

25. As regards the method in calculating ANFA for a year, Mr Sayers explained that ANFA was the average of the sum of net fixed assets (NFA) in the beginning of a financial year and the NFA at the end of the financial year. CLP’s financial year ended on 30 September.

26. On whether there was cross-subsidy between CLP’s different categories of customers, Mr LUI advised that CLP’s charges on four different categories of customers were based on the cost of supply to the respective categories. There was no cross-subsidy between different categories of customers. Dr Albert POON said that with the tariff increase, CLP’s revenue would be increased by about $300 million for this financial year.

27. In response to members’ request, Mr Sayers agreed to prepare a written explanation on the method of calculating the 5.9% increase over the weighted average of last year’s tariff.

(Post-meeting note: CLP’s reply has been circulated to members vide LegCo Paper No. CB(1) 1212/96-97 dated 7 April 1997.)

28. The meeting ended at 4:35 pm.

Legislative Council Secretariat
10 April 1997

Last Updated on 14 August 1998