Comprehensive study on Marine Activities, Associated Risk Assessment and Development of Future Strategy for the Optimum Usage of Hong Kong Waters (MARAD Study); and
Airport charges at Chek Lap Kok Airport.

(Post-meeting note : Since agenda item VI on Telecommunications Review was deferred to the meeting on 12 May 1997, the Chairman has decided to withdraw the item on MARAD Study from the agenda for the next meeting.)

IV Progress report on proposals to address China Light and Power Company Limited (CLP)s excess generating capacity

Mr Ross Sayers introduced the background to the issue. He said that the Black Point (BP) combined cycle power station was approved by Government in 1992 whereby 2,500 MW of generating capacity would be added to CLPs system when the whole project was completed. Site construction started in 1993 and contracts for the eight generating units were placed at the same time. Whilst the commissioning date for the first four units was fixed, there were options to defer the commissioning of the remaining four units. In 1994, the Administration and CLP reviewed the low growth in actual demand for electricity and agreed to defer the commissioning date of the remaining four units until 2001. The overestimation of demand for electricity was mainly due to the economic restructuring in the 1990s, during which time the relocation of manufacturing industry out of Hong Kong had occurred at a significantly higher rate than expected. This development had affected particularly CLPs supply area. In 1996, the Administration requested CLP to further review the commissioning date of BP units 5-8. After a series of discussions between CLP and the Administration, and reports to the LegCo Panel on Economic Services and the Energy Advisory Committee, an agreement had been reached with the Administration and CLP believed that the action would address CLPs high reserve margin in both the long term and short term. The agreement was as follows :-

Since units 5 and 6 were at an advanced stage of construction, their commissioning date should remain as scheduled;
units 7 and 8 would be deferred by three years with the option of a further deferral for one or two years. The decision on further deferral would be made after a special review by the Administration and CLP in the last quarter of 1999, taking into account the actual demand situation then; and
CLP would decommission 442 MW of gas turbines (GT) in Tsing Yi and Castle Peak power stations. The decommissioned GT would be preserved and subject to the review by the Administration and CLP in the last quarter of 1999, the GT could be recommissioned, disposed of, or preserved.

The Secretary for Economic Services (SES) welcomed the co-operation between CLP and the Administration in addressing CLPs high reserve margin. Since BP units 5 and 6 were at an advance stage of construction, any deferral would be impractical and not be beneficial to consumers, CLP had agreed to defer units 7 and 8 each by up to five years. The special review to be undertaken in the last quarter of 1999 was designed to provide flexibility in the agreement. Taking into account the demand situation up to 1999, a decision would be made then on whether units 7 and 8 should be further deferred by one or two years and whether the decommissioned GT should continue to be preserved.

Decommissioning of gas turbines (GT)

Members queried whether the GT to be decommissioned had already approached their expected life span as a consequence of which their decommissioning would bring no benefits to consumers in terms of tariff. The Assistant Director of Electrical and Mechanical Services (Energy Efficiency) (ADEMS(EE)) advised that the expected life span of GT was 25 years and remaining years of services of those GT in Castle Peak and Tsing Yi to be decommissioned vary from 9 to 16 years. SES further explained that the decommissioning option would benefit consumers as the net book value of the GT would be excluded from CLPs Average Net Fixed Assets (ANFA) and flexibility was also maintained for future recommissioning of the GT if necessary.

As regards the tariff impact of the decommissioning of GT, the Principal Assistant Secretary for Economic Services (Financial Monitoring) (PAS(FM)) advised that there would be an average saving of about 0.05 cents/unit of electricity during 1997 to 2001, 0.16 cents/unit during 2002 to 2006 and 0.01 cents/unit during 2007 to 2011.

Deferral of BP units 7 and 8

Members noted that the Executive Council (ExCo)s decision in November 1996 was to request CLP to make proposals on the deferral of BP units 5 to 8, and enquired whether the agreement on deferral of only units 7 and 8 could meet ExCos requirement. SES responded that subsequent to ExCos decision, CLP had made available a lot of information which was examined in detail by the Administration and its consultants. These data showed that units 5 and 6 at BP were at such an advanced stage of construction that their deferral would be impractical and uneconomical. Deferral of units 7 and 8 would be benefical to consumers and conformed with the spirit of ExCos decision.

Members were concerned about the evaluation criteria to be applied in the review in the last quarter of 1999 when deciding whether units 7 and 8 should be deferred beyond three years, and enquired whether there was a set of criteria acceptable to both parties. SES advised that the Administration had consistently applied a set of criteria in monitoring CLPs reserve margin and the same evaluating criteria would be used in the 1999 review. The Acting Director of Electrical and Mechanical Services (Acting DEMS) further explained that the first criterion used was the loss of load probability. Taking into account the actual demand, the generating capacity and the forecast demand at the time, the Administration would calculate the amount of generating capacity required to meet the forecast demand within a tolerable level of loss of load probability. The secondary criterion was based on the assumption that in case the largest generating unit broke down suddenly while another generating unit was down for maintenance, the generating capacity would be adequate to meet the demand plus the spinning reserve requirement. These criteria would be used in the review in 1999 on the basis of data available at that time.

As regards the acceptable level of reserve margin, SES confirmed that the Administration considered maximum demand plus 30% an acceptable level of reserve margin. Mrs Sandra MAK remarked that as CLPs generating capacity was increased in discrete units e.g. a new power station would add a few hundred MW to CLPs system at one time, its reserve margin could be above the 30% benchmark in the early period following the completion of a new power station. The reserve margin would gradually reduce as demand increased.

Regarding the benefit to consumers as a result of the deferral of BP units 7 and 8, PAS(FM) referred to a graph prepared by the Administration and advised that according to the Administration and the consultants estimates, the deferral for 5 years would bring about benefit to consumers for the whole period up to 2032. The amount of cumulative benefit in year 2019 would be between $387 million to $748 million while that in year 2032 would be between $111 million to $478 million. Mr Peter Littlewood explained with the aid of a graph prepared by CLP that according to CLPs own estimation, the deferral would lead to a tariff reduction of up to 2.5 cents/unit during 1997 to 2005. However the annual net tariff would rise above that of the current schedule from year 2005.

(Post-meeting note: The relevant graphs have been issued to members vide LegCo Paper No. CB(1)1316/96-97 dated 17 April 1997.)

Members asked whether the Administration agreed with CLPs claim that on the whole, the additional costs would outweigh the savings arising from deferral of units 7 and 8 at BP. SES said that according to the Administrations calculation, there would be benefits to consumers up to year 2032. The deferral option would therefore be beneficial to consumers.

As regards whether the asset related to CLPs excess generating capacity could be excluded from the calculation of ANFA, SES remarked that the matter would be considered in the context of the mid-term review of the Scheme of Control Agreement (SCA) in October 1997.

As to the penalty on CLP arising from the deferral of BP units 7 and 8, Mr Sayers advised that CLP was negotiating with the equipment supplier with a view to minimizing the penalty.

At the request of the Chairman, SES agreed to provide an information paper summarising the background, the considerations and the tariff impact of the agreed options in addressing CLPs excess generating capacity.

Admin

V Arrangements for philatelic sale at the Post Office

(LegCo Papers No. CB(1)1241/96-97(01) and 1294/96-97(02-03))

The Postmaster General (PMG) briefed members on arrangements for philatelic sale at post offices as set out in the information paper. In essence, PMG advised that the revenue from philatelic sale had increased by about 10 times to $1,100 million in 1996/97. In order to cope with the increased demand, the Post Office had introduced improved measures such as advance issue of order forms to customers, pre-packaged products to speed up transaction time and increased security guards to maintain order queues. In response to public comments and views of political parties, new arrangements would be implemented for the next issue of new stamps on 27 April 1997. He further advised that there would be some improvements in local postal rate structure in 1997/98 but there was no plan to increase postal rates in 1997/98. The Post Office has also planned to invest $1,200 million in the next five years in order to improve efficiency and productivity.

Members noted that revenue from philatelic sale in 1996/97 amounted to $1,100 million and enquired about the amount of dividend being paid to the Government. They asked whether part of Post Offices surplus in 1996/97 could be retained to form a development fund which could be used to stabilize postage rate in future years. PMG advised that the provisions in the Post Office Trading Fund stipulated that the dividend to be paid to Government would be up to 50% of any surplus after tax. Last years dividend amounted to 40% of the surplus after tax. SES further advised that the provisions in the Post Office Trading Fund agreement resembled the provisions of other trading funds currently in operation. Under the existing provision, part of the surplus from operation in a certain year would be transferred to the General Revenue in the form of dividend. Similarly, if there was any deficit from operation in a particular year, funds could be channelled from General Revenue to subsidize the trading fund. As regards the development fund concept proposed by members, the Economic Services Branch would consider the proposal further with the Finance Branch.

Members pointed out that revenue from philatelic sale might not be a steady source of income for the Post Office and enquired about the percentage of Post Offices revenue from philatelic sales. PMG agreed that philatelic revenue should not be the major source of revenue to be relied on by the Post Office. The Post Office was well aware of this and had been striving to further improve its core postal service and keeping a close watch over the viability of the core business.

Admin

Some members asked whether the new arrangements for sale of new stamps would greatly reduce the revenue from philatelic sale. PMG explained that the main objectives of the new measures were to ensure safety and order at sale of new stamps and to discourage speculative activities. He did not believe that the new measures would destroy the market. The basic policy of issuing a limited number of issues of new stamps each year would remain. The Post Office would continue its efforts in promoting philatelic sale in a safe and orderly way during this special time of Hong Kongs history, when there were a number of commemorative stamp issues. As regards efforts in promoting philately as a hobby, PMG said that the Post Office had close liaison with some 500 local schools whereby philatelic clubs of these schools could make direct orders for new issues. Efforts in promoting philately would continue.

Some members were concerned that the new sale arrangement might curtail demand to such an extent that the supply of new stamps printed was much higher than the demand, leading to a high inventory and additional costs. PMG explained that the Post Office had a system to estimate the demand for new stamps and past experience showed that the system worked well. He believed that the situation mentioned by members should not arise. SES supplemented that the Post Office had encouraged customers to make orders in advance and this should help in estimating the level of demand more accurately.

Regarding the plan to invest $1,200 million in the next five years, PMG advised that the biggest investment would be the new air mail centre at Chek Lap Kok airport which amounted to about $500 million. Other investments would include $250 million in office renovation, $250 million in plant and machinery, $60 million in vehicles and $50 million in various improvement projects. He emphasized that each of the project had to pass a value-for-money test before funding approval would be given.

On details of the plan to improve the local postage rate structure, PMG advised that the Post Office was looking at two new elements. Firstly, the Post Office was considering the introduction of an economy service which would provide a 3-day delivery service at a lower postage rate, as opposed to the existing single service standard of next day delivery. Secondly, there would be an enhanced discount system to bigger customers, as the cost of providing service to these customers on a per unit basis was relatively low.

In response to members enquiry, PMG advised that a scheme would be launched in July 1997 whereby persons could exchange stamps bearing the Queens head, which could not be used after 30 June 1997, for definitive stamps of equal value. The duration of the scheme could be extended if necessary.

VI Any other business

Members agreed to defer the item on "Telecommunications Review" to the next meeting on 12 May 1997.

The meeting ended at 4:30 pm.

Legislative Council Secretariat
9 May 1997

Last Updated on 14 August 1998

LegCo Panel on Economic Services

Minutes of the Meeting held on Monday, 14 April 1997, at 2:30pm in Conference Room A of the Legislative Council Building

I Confirmation of minutes

II Information papers issued since last meeting

III Items for discussion for the meeting on 12 May 1997

IV Progress report on proposals to address China Light and Power Company Limited (CLP)s excess generating capacity

Decommissioning of gas turbines (GT)

Deferral of BP units 7 and 8

V Arrangements for philatelic sale at the Post Office

VI Any other business

Minutes of the Meeting
held on Monday, 14 April 1997, at 2:30pm
in Conference Room A of the Legislative Council Building

IV Progress report on proposals to address China Light and Power Company Limited (CLP)s excess generating capacity