LC Paper No. CB(1)765/98-99
(These minutes have been
seen by the Administration)

Ref: CB1/PL/ES/1

Legislative Council
Panel on Economic Services

Minutes of meeting held on
Tuesday, 10 November 1998, at 2:30 pm
in the Chamber of the Legislative Council Building

Members present :

Hon James TIEN Pei-chun, JP (Chairman)
Hon Fred LI Wah-ming (Deputy Chairman)
Hon David CHU Yu-lin
Hon LEE Wing-tat
Hon Martin LEE Chu-ming, SC, JP
Hon MA Fung-kwok
Hon CHEUNG Man-kwong
Hon HUI Cheung-ching
Hon Christine LOH
Hon Bernard CHAN
Hon CHAN Kam-lam
Hon SIN Chung-kai
Dr Hon Philip WONG Yu-hong
Hon Howard YOUNG, JP
Hon Andrew CHENG Kar-foo
Hon FUNG Chi-kin

Members attending :

Hon Albert HO Chun-yan
Dr Hon Raymond HO Chung-tai, JP
Hon Mrs Selina CHOW LIANG Shuk-yee, JP
Hon Ronald ARCULLI, JP

Members absent :

Hon Kenneth TING Woo-shou, JP
Hon Eric LI Ka-cheung, JP
Dr Hon David LI Kwok-po, JP
Hon Ambrose CHEUNG Wing-sum, JP
Hon CHAN Yuen-han
Hon WONG Yung-kan
Hon LAU Chin-shek, JP
Hon Mrs Miriam LAU Kin-yee, JP

Public officers attending :

For Agenda Items II & III

Mr KWAN Wing-wah
Acting Secretary for Economic Services

Principal Assistant Secretary for Economic Services (Economic Services)

Principal Assistant Secretary for Economic Services (Financial Monitoring)

Deputy Director of Electrical & Mechanical Services (Regulatory Services)

Assistant Director of Electrical & Mechanical Services (Energy Efficiency)

Mr Steve Barclay
Principal Assistant Secretary for Planning, Environment and Lands (Environment)

Mr Elvis AU
Acting Assistant Director of Environmental
Protection (Environmental Assessment & Noise)

Attendance by invitation :

For Agenda Items II & III

Hongkong Electric Co Ltd

Managing Director

Mr Francis LEE
Director & General Manager

Mr Lawrence DO
General Manager (Finance)

General Manager (Development & Planning)

For Agenda item III

China Light and Power Co Ltd

Managing Director

General Manager

Mrs Sandra MAK
Group Public Affairs Manager

Mr Stephen LAU
Economic Planning Manager

Castle Peak Power Co Ltd

Mr Gerald GRAVES

Mrs Betty YUEN

Clerk in attendance :

Mr Andy LAU
Chief Assistant Secretary (1)6

Staff in attendance :

Mr Daniel HUI
Senior Assistant Secretary (1)5

I.Confirmation of minutes and matters for forthcoming meetings

(LC Paper No. CB(1)427/98-99 - Minutes of the meeting held on 28 September 1998; and

Letter from Hon Fred LI Wah-ming dated 6 November 1998 tabled at the meeting and was subsequently circulated to members vide LC Paper No. CB(1)471/98-99))

1 The minutes of the meeting held on 28 September 1998 were confirmed.

2. The Chairman referred members to Mr Fred LI Wah-ming's letter tabled at the meeting and advised that the matter be dealt with prior to other items on the agenda as the issues raised by Mr LI were closely related to those to be discussed at the meeting.

3. The Chairman outlined the content of Mr LI's letter which proposed the establishment of a subcommittee to follow up on the following issues relating to the electricity supply market:

  1. Interim review of Scheme of Control Agreements;

  2. Hongkong Electric Company Limited (HEC)'s proposed financing plan for 1998-2003;

  3. Interconnection between China Light and Power Company Limited (CLP) and HEC;

  4. Competition in the electricity supply industry;

  5. HEC's generation development proposals at Lamma Power Station; and

  6. Installation of CLP Black Point (BP) units 7 and 8.

4. Whilst members were in consensus that the above issues needed to be followed up, they had divergent views on whether a subcommittee should be set up for the purpose. Those who were in favour of the proposal considered that in order to allow a thorough discussion on the subject matters, a series of meetings would need to be held. However in considering the existing size of the Panel, it might be difficult to have sufficient members to form a quorum on each occasion. As such, the establishment of a subcommittee would be more desirable and would save members' time because only those who were interested in the matter would join the subcommittee. In this regard, Ms Christine LOH cited a number of cases to illustrate the merits of having a subcommittee to study specific issues.

5. Those members who had reservation on the proposal pointed out that should a subcommittee be formed, it was likely that the majority of the Panel members, if not all, would choose to join, having regard to the nature and importance of the issues. However, when the subcommittee reported its work to the Panel, another round of discussion on the subject would be initiated at the Panel leading to duplication of efforts. As such, they were more inclined to increase the number of meetings, if required, to follow up on the issues rather than setting up a subcommittee. Mr Philip WONG Yu-hong stressed that the role of the Panel was to monitor Government policies rather than to get directly involved in the monitoring of the performance of the power companies which should be the responsibility of the Administration.

6. After deliberation, members agreed that so long as the normal businesses of the Panel were not affected, it would be acceptable to convene special meetings from time to time to study the issues.

II.Hongkong Electric Company Limited's new generating facility at Lamma Island

(LC Paper No. CB(1)435/98-99 (01) - information paper provided by the Administration)

7. At the invitation of the Chairman, the Secretary for Economic Services (Acting) (SES(Atg)) briefed members on the latest position regarding HEC's proposal to build additional electricity generating capacity at Lamma Island. He pointed out that HEC's proposal was being examined by the Administration and a final decision had yet to be made.

8. Mr K S TSO of HEC informed members that based on their own forecast, additional generating capacity would be required as from 2003 as the forecast reserve margin of HEC would fall to 20.6%. The proposed unit addition would have a capacity of 300MW and would be fuelled by natural gas from a proposed liquefied natural gas plant in Shenzhen.

9. Noting that CLP had a reserve capacity of 52%, some members enquired whether it was technically feasible to use the existing interconnectors for regular transfer of power from CLP to HEC and hence, saved the need for building an additional generating unit at Lamma Island. They urged the Administration to further examine the proposal for the interests of consumers of both power companies. A member also opined that the Administration should assess the long term benefit of the proposal rather than simply focusing on the short term investment cost of the additional interconnectors.

10. Mr TSO informed members that based on the recommendation of its consultant, HEC was of the view that the extended power transfer through the existing interconnector would affect the reliability of electricity supply in their service area and was therefore not acceptable. He further advised that since 1981, there were 20 occasions causing partial loss of supply in the interconnected system due to equipment faults or stability problems; and 6 occasions when the HEC-CLP interconnection was disconnected in order to stop system oscillations triggered by equipment faults in the interconnected system.

11. SES(Atg) advised that the interconnection between HEC and CLP was designed to provide mutual emergency backup. In accordance with the recommendations of a consultancy study commissioned in 1996/97, extended transfer of power from CLP to HEC would require the construction of an additional interconnector at an estimated cost of about HK$ 468 million and was then considered not justified economically. He also added that the buying and selling of power between power companies operating in Hong Kong was indeed a commercial decision between the companies concerned and entailed specific contractual arrangements negotiated between private sector interests.

12. Noting the above response, Mr LEE Wing-tat opined that the Administration should not leave the matter for the decision of the companies. Rather, the Administration should take an active role in formulating an energy policy which would be conducive to the efficient and reliable supplies of energy and to the interests of consumers as a whole. SES(Atg) replied that the buying and selling of electricity between power companies operating in Hong Kong was currently being examined in a broader policy context in the Government's on-going study of interconnection and competition in the electricity supply sector. Whilst the study involved many technical and economic considerations, the Administration would provide a report on the findings to this Panel and consider the views of the public on the subejct. The Administration hoped that a consensus amongst interested parties could be reached after the consultation exercise.

13. Mr SIN Chung-kai urged the Administration to consider providing economic incentives to implement the option of CLP selling electricity to HEC. He suggested that part of CLP's assets for generating electricity for sale to HEC could be treated as HEC's assets for the purpose of calculating permitted returns. Mr SIN and Mr Fred LI Wah-ming also opined that as the decision on increasing the interconnection between CLP and HEC and introducing further competition in the electricity supply sector would have a bearing on HEC's proposed installation of additional generating capacity, the Administration should not make a firm decision on the latter without formulating a policy on the former. SES(Atg) responded that the Administration would certainly take into account the consultant's findings and recommendations on increased interconnection before making a final decision on HEC's proposal. He advised however that findings of the consultancy study on increased interconnection should not have a direct bearing on the Administration's decision on HEC's proposal. The Administration would further examine HEC's forecast demand and other relevant factors before deciding on HEC's proposal.

14. Mr Philip WONG Yu-hong opined that HEC, being a listed company, owed a duty to its shareholders and had to have very strong justifications in convincing its shareholders to accept the proposal of purchasing electricity from CLP. He further pointed out that CLP would not have excess power for sale when demand picked up in future. He therefore doubted whether investments in increasing the interconnecting capacity between the two power companies would be justified economically. SES(Atg) agreed that in assessing HEC's proposed new generating facility the Administration had to strike a fair balance amongst three factors, namely, the consumers' interests, the need to ensure a stable supply of electricity and the need to preserve a fair investment environment. He stressed that Hong Kong would benefit from a fair balance of interests of the parties concerned.

15. Responding to some members' question on how HEC could guarantee that its forecast demand was accurate and that there would be no excessive reserve capacity for HEC after installation of the new generating facility, Mr TSO advised that HEC had good track record in its forecasting exercise as its forecast demand deviated only 2% from actual demand in previous occasions. Moreover, under the new mechanism agreed between the Government and the power companies, the Government would in future approve new generating capacity by the smallest addition unit at one time in order to avoid the situation whereby a large amount of generating capacity was added on at the same time which could easily lead to excessive reserve capacity. Furthermore, under a new provision to be added to the Scheme of Control Agreement (SCA), HEC would be penalised if excessive reserve capacity was found after installation of the new generating facility. In this regard, SES(Atg) supplemented that learning from the exercise on deferral of some of the generating units at BP power station, the Administration had devised a three-pronged mechanism in avoiding excessive reserve capacity in power companies :

  1. In future, approval on new generating capacity would be on a per generating unit basis, i.e. only about 300MW new generating capacity would be approved at one time;

  2. A power company would be required to provide updated forecast demand to the Administration before placing order for any approved new generating unit; and

  3. There would be a new provision in the SCA to exclude investments in the newly added generating unit from attracting permitted returns if excessive reserve capacity was found after installation of the new generating capacity.

He believed that this new mechanism should be able to avoid investments in unnecessary generating capacity.

16. Replying to a member's question on what factors, other than forecast demand and increased interconnection, the Administration would take into account in assessing HEC's proposal, SES(Atg) replied that the Administration would also consider findings of the environmental impact assessment study on HEC's proposed new generating unit and the kind of fuel to be used for the new generating facility. On the fuel to be used, he elaborated that HEC had proposed that the new generating unit would be fuelled by natural gas which was more expensive than coal but had a higher efficiency and was more environmentally friendly. Moreover, the cost of natural gas was on a decreasing trend and that the generating unit fuelled by natural gas would be cheaper. As such, the overall cost of using natural gas for electricity generation would be cheaper than using coal.

17. Mr Bernard CHAN enquired about the impact on the environment if HEC's proposed new generating unit was not approved. Mr TSO advised that if HEC had to purchase CLP's electricity to meet the increased demand in 2003, HEC would be buying electricity generated from CLP's coal fuelled power station. On the other hand, if HEC's proposal was approved, HEC's new generating unit would be fuelled by natural gas which was more environmentally friendly.

18. Mr LEE Wing-tat opined that if the Administration had implemented demand side management (DSM) measures more effectively, the need for new generating capacity could have been deferred. He enquired about DSM initiatives taken by the Administration in reducing maximum demand for electricity during the peak periods. SES(Atg) said that the Administration was aware of the importance of implementing DSM measures and had signed agreements with the power companies on DSM measures. The Administration was discussing with the two power companies on concrete measures to be implemented with a view to reduce maximum demand for electricity during peak periods. An announcement on these measures would be made soon. The Deputy Director for Electrical and Mechanical Services/Regulatory Services (DD(EMS)/RS) further advised that the Administration had proposed to a few major property companies to install an ice-storage air-conditioning system rather than the usual electric chiller system. The proposal was eventually not taken up because the companies wanted to have relaxation of plot ratio as an incentive, though the plant room for the necessary ice-making equipment was not counted in the plot ratio. He said that his Department would continue to explore feasible measures to reduce electricity consumption at peak periods.

19. Mr SIN Chung-kai opined that there might be a conflict of interest if the consultants currently engaged by the Administration to examine HEC's proposal and the feasibility of increased interconnection had provided consultancy services to the two local power companies. DD(EMS)/RS advised that Burns and Roe Company, who was the consultant currently engaged by the Government, had not provided any consulting service to CLP and HEC. As requested by Mr SIN, the Administration agreed to provide a list of consultancy studies carried out by Burns and Roe Company since 1992 and a list of consultancy studies commissioned by HEC and CLP since 1992 and the name of the consultancy company which had undertaken those studies. Admin

20. Ms Christine LOH also requested the Administration to provide further information on the failure of the interconnectors and its implication on HEC and whether the interconnection between CLP and Guangdong's electricity system also served to provide generating capacity support to HEC. SES(Atg) agreed to provide written reply to Ms LOH's questions. Admin

21. In concluding the discussion, the Chairman said that members' further questions on the subject could be sent to the Administration through the Secretariat in writing.

(Post-meeting note : Members' follow-up written questions and the Administration's reply were circulated to members' vide LC Paper No. CB(1)585/98-99 dated 7 December 1998)

III.Review of Scheme of Control Agreement with China Light and Power Company Limited (CLP) and Hongkong Electric Company Limited (HEC)

(LC Paper No. CB(1)435/98-99(02) - Information paper provided by the Administration)

22. Noting that HEC's reserve capacity at 1998 was 42.7%, Ms Christine LOH doubted whether the reserve capacity would fall to 20.7% as estimated by HEC, bearing in mind the prevailing economic condition. In response, Mr TSO explained that HEC had installed a new generating unit in 1998 to cope with forecast increase in demand up to year 2002, the reserve capacity in 1998 had therefore increased to a high level of 42.7%. Based on HEC's forecast demand, the reserved capacity would fall to 20.6% in 2003. He further advised that the forecast demand up to year 2003 were yet to be finalized pending discussions between the Government and HEC.

23. Referring to paragraph 27 of the Administration's information paper, Mr LEE Wing-tat queried why the Administration considered a reserve capacity of 30% not excessive when they set out in the paper that the minimum reserve margin required in order to fulfil the Loss of Load Probability (LOLP) criterion (i.e. the probability of power interruption in terms of hours or days per year) for future capacity additions was only 25%. SES(Atg) advised that under the LOLP criterion, a power company's reserve capacity should not be allowed to fall below 25%, otherwise it would adversely affect the stability of electricity supply. On the other hand, a power company's reserve capacity could increase to between 35% and 40% when a new generating unit was installed. Taking an average of the actual reserve margin over a number of years spanning those before and after capacity additions, the Administration therefore considered that a 30% reserve capacity not excessive.

24. Mr LEE Wing-tat opined that if the two electricity supply systems in Hong Kong were fully interconnected and the electricity supply sector was an open market, the minimum reserve capacity could be pitched at a lower level. SES(Atg) replied that as opening up the electricity supply sector in Hong Kong was a long term objective, the Administration had already made an effort to introduce appropriate provisions in the SCAs during the interim review.

25. Replying to the Chairman's question on the minimum capacity of an electricity generating unit, Mr TSO advised that for generating units fuelled by coal, the minimum capacity was 350MW and that for natural gas fuelled unit was 300MW. He further advised that generating units with capacity below these levels would be less efficient.

26. Mr Andrew CHENG Kar-foo was disappointed that the permitted rate of return of the two power companies was not lowered in the interim review of the SCAs and enquired about proposals made by the Administration in this respect during its discussions with the power companies and the basis of the power companies in refusing a lower rate of permitted return. SES(Atg) reiterated that the SCAs were legal contracts between the Administration and the power companies, and provisions therein could not be amended unilaterally. The interim review had lasted for almost one year and covered many complicated issues. Information on the subjects discussed in the review, the proposal made by Administration and the end results of the review were already set out in the information paper provided by the Administration. He was pleased that the power companies had agreed to amend some of the provisions to the benefits of consumers.

27. On the permitted rate of returns under the SCA, Mr TSO advised that the rate was agreed upon when the SCA was signed in 1991/92. The permitted returns had to be maintained because HEC had arranged financing of its investments on the basis of the permitted returns under the current SCA. Mr Sayers also advised that CLP's return on average net fixed assets (ANFA) was only 11.9% which was at the lower end amongst other utility companies in Hong Kong. He further advised that the SCA was a long term contract straddling different economic cycles. At the peak of an economic cycle, CLP's rate of return would be lower as compared with other companies in Hong Kong. On the other hand, at the time of a recession like the present case, CLP's rate of return would be comparatively good.

28. Mr Fred LI Wah-ming pointed out that CLP's rate of return on shareholders' equity was between 20% to 25% for many years and which was a very high profit margin compared with utility companies in other countries. He was also of the view that CLP had already breached a condition in the SCA in the sense that CLP had failed to generate electricity at the lowest cost as excessive investment in the BP power station was recorded. The Administration could therefore unilaterally amended the permitted rate of return in the SCA. Mr Sayers responded that CLP's return on shareholders' equity was about 23% but he would confirm this in writing after the meeting. He further advised that since 1992 CLP had, on its own initiative, reduced $4 billion in operating expenses and $12 billion in capital costs to ensure that electricity was generated at the lowest cost.CLP

29. Mr CHEUNG Man-kwong questioned the rationale for excluding CLP's seventh and eighth electricity generating units at BP power station from the new provision to be added to the SCA which would exclude excessive generating capacity from attracting permitted returns. SES(Atg) explained that any new provision to the SCA had to be agreed upon mutually. CLP considered that the deferral in installation of the seventh and eighth units at BP power station was already subject to a previous agreement signed between CLP and the Administration.

30. In reply to the question on the type of cost items of a generating unit which would be subject to the arrangements for exclusion from ANFA in case excessive reserve capacity was found, the Principal Assistant Secretary for Economic Services (Financial Monitoring) confirmed that they relate to all relevant costs of the generating unit including cost of equipment, installation and transportation, but excluding land costs.

31. Mr Bernard CHAN was concerned whether the new provision on excluding excessive generating capacity from attracting permitted return to be added to SCAs would affect the power companies' ability to borrow money from financial institutions. Mr TSO said that if the new provision had an adverse effect on the rate of return, the financial charges on HEC's debts would certainly be increased. Mr Sayers further advised that there had to be a stable and predictable regulatory environment in order to attract foreign investment into Hong Kong. He considered that the SCA had succeeded over the last 30 years in providing a stable and predictable regulatory environment which enabled CLP to finance its investments at low costs and this in turn had benefited its customers. A change to the regulatory environment could change the attitude of lending institutions which would adversely affect the interest of electricity consumers in Hong Kong. SES(Atg) remarked that the proposed amendment to the SCA as agreed between the Administration and the two power companies aimed to avoid unnecessary investments by the power companies and should not have any adverse effect on the borrowing ability of the power companies.

32. Ms LOH opined that the Administration had failed to secure a good SCA for Hong Kong as evidenced from the fact that the current SCA failed to include any provisions on DSM. She wondered whether the Administration would learn from experience and start preparing itself for the next round of reviews on the SCA. SES(Atg) advised that the SCAs would have another review in five years' time. He agreed that many factors including technological know how would have impact on the regulatory environment in the next five years and that was the purpose of having SCA reviews in five-year intervals. He said that expert departments such as the Environmental Protection Department and the Electrical and Mechanical Services Department would continue to provide advice to the Bureau in monitoring the performance of the power companies and in reviews of SCAs.

IV.China Light and Power Company Limited's electricity tariff

(LC Paper No. CB(1)435/98-99(03) - Submission from China Light and Power Company Limited)

33. Due to a lack of quorum as the scheduled time for the meeting had elapsed, members agreed to defer the discussion of the item "China Light and Power Company Limited's electricity tariff" to the Panel meeting scheduled for 23 November 1998.

VAny other business

34. There being no other business, the meeting ended at 4:40 pm.

Legislative Council Secretariat
15 January 1999