LegCo Paper No. CB(1) 875/96-97
(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, 6 January 1997 at 2:30 pm
in Conference Room A of the Legislative Council Building

Members present :
    Hon Henry TANG Ying-yen, JP (Chairman)
    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
    Dr Hon Anthony CHEUNG Bing-leung
    Hon LAU Chin-shek
    Hon SIN Chung-kai
    Hon Mrs Elizabeth WONG, CBE, ISO, JP

Member attending:

    Hon Paul CHENG Ming-fun

Members absent:

    Dr Hon LAW Cheung-kwok (Deputy 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
Public officers attending:
    Mr Stephen IP, JP
    Secretary for Economic Services
    Mr KWAN Wing-wah
    Deputy Secretary for Economic Services
    Mr Eric Johnson
    Principal Assistant Secretary for Economic Services (Economis Services)
    Mr LIM Poh-chye
    Principal Assistant Secretary for Economic Services (Financial Monitoring)
    Mr H B Phillipson, JP
    Director of Electrical & Mechanical Services
    Mr LEE Lo-tung
    Assistant Director of Electrical & Mechanical Services (Energy Efficiency)
Attendance by invitation:

China Light & Power Company, Limited

    Mr P A Littlewood
    General Manager, Strategic Development and Administration
    Mrs Betty YUEN
    Director, CAPCO
    Dr Albert POON
    Corporate Planning Manager
    Mrs Sandra MAK
    Public Affairs Manager

Clerk in attendance:

    Ms Estella CHAN
    Chief Assistant Secretary (1)4

Staff in attendance:

    Mr Daniel HUI
    Senior Assistant Secretary (1)7

I.China Light and Power Company Limited (CLP)'s excess power generating capacity

(LegCo Paper No. CB(1)605/96-97 (01), (02), (03) and CB(1)613/96-97)

Meeting with CLP

Deferral of Black Point units 5-8

Members noted that as the natural gas supply contract for the Black Point (BP) units was on a take-or-pay basis, it would not be possible for CLP to reduce the quantity purchased. If BP units 5-8 were to be deferred, the natural gas purchased would need to be used in other plants that utilized natural gas less efficiently. They asked whether this factor had been taken into consideration in the recommendation for the deferral of the BP units. Mr Littlewood confirmed that the deferral of the BP units would lead to less efficient use of the natural gas as more natural gas would be utilized in the less efficient plant. In CLP's view, the Burns and Roe report had underestimated the costs in this respect and also in respect of the likely penalty under the construction contract for the deferral of the BP units. However, CLP considered that the deferral of BP units 5-8 would only lead to short term benefits to consumers, but would increase costs in the long term.

2. Mr Littlewood opined that the divergence in costs of the deferral options estimated by Burns and Roe and CLP was not due to insufficient data provided to Burns and Roe, but rather because of the different assumptions made by CLP and Burns and Roe Company. He believed that CLP's estimates were more appropriate because they were based on CLP's experience in preparing the 1994 deferral plans, details of which had been provided to the Government. He further advised that the natural gas supply contract was a 20-year take-or-pay contract which was highly advantageous to CLP, and a copy of the contract had been made available to the Government. The contract for construction of BP units 1-8 contained deferral options which had been fully exercised in the 1994 deferral plan. Further deferral or termination of the construction contract and any penalty provisions would be subject to negotiation with the contractors.

3. As to the divergence between CLP's forecast demand and actual demand, Mr Littlewood advised that it was essentially because of the substantial decline in the manufacturing load in CLP's supply area in 1992-1996. CLP had forecast that growth in the manufacturing load would decrease from a 10 year historical rate of nearly 5% to less than 1%. In fact, a negative growth of nearly 5% had taken place. This transformation of Hong Kong's economy had particularly affected CLP as most of Hong Kong's manufacturing industries were located in Kowloon and the New Territories where CLP operated. Responding to this change, CLP had proposed and implemented a deferral plan in 1994, resulting in a large scale reduction in capital and operating expenditures. He did not agree that the forecast demand made by CLP was biased as the forecasts were the best estimates that could have been made under the circumstances. It was more appropriate for CLP to focus on the future and respond to Government's request for a deferral plan.

4. Members were concerned that some power generation units in CLP's Hok Un and Tsing Yi plants were retired earlier than the expected life span of the units and this would lead to over investment in fixed assets. Mr Littlewood advised that the years of service of most of the units in Hok Un and Tsing Yi had exceeded the expected life span of 20 years for these machines as allowed under the Scheme of Control Agreement (SCA). The utilization of the Tsing Yi plant had fallen to a low level prior to its decommissioning. However, if the Black Point Station had not been built, the utilization of the Tsing Yi plant would dramatically increase and would have adverse environmental impact. He further advised that in considering investment decision in replacing old power plants, CLP would calculate the total costs of the various possible options to consumers, including the option of modifying old plants. The lowest cost option would be recommended to the Government. In the case of the retirement of the Tsing Yi plant, the options of repairing it and of using natural gas as the alternative fuel had been considered. For both economic and environmental considerations, the approach taken was to go for the Black Point units.

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

5. Members noted that there was a divergence of opinion between the Administration and CLP on the option of sale of electricity from CLP to HEC. Whilst CLP considered that the existing interconnectors between the two systems could be used for transferring 350MW of electricity from CLP to HEC at no extra capital cost, the Administration considered that new interconnectors costing $468 million would need to be installed for that purpose. They asked CLP for an elaboration on its proposal in this respect. In response, Mr Littlewood advised that the three existing interconnectors between the two systems were very reliable and technically feasible for supplying 350MW to the HEC system. CLP was prepared to discuss with the Administration and other concerned parties on the technical details of this option. Dr Albert POON further advised that taking into account all technical factors including system stability and reliability, CLP's calculation showed that using the existing interconnectors for regular transfer of power was still feasible.

Meeting with the Administration

Deferral of Black Point units 5-8

6. As regards whether the costs arising from less efficient utilization of natural gas and the penalties associated with the deferral in the construction of the BP units had been taken into account in the Burns and Roe Report, the Secretary for Economic Services (SES) advised that Burns and Roe did include in its report estimated costs on the less efficient use of natural gas and possible penalties associated with the deferral in construction of the BP units but Burns and Roe's estimation might be different from the estimates prepared by CLP's consultants. If CLP considered that their estimates were more accurate, they should provide more data, which the Administration was hoping to obtain in CLP's proposal on the deferral of the BP units to be submitted by 5 February 1997. The Assistant Director of Electrical and Mechanical Services (Energy Efficiency) (ADEMS/EE) further remarked that the Burns and Roe Company was only able to make very broad estimates on additional costs arising from the deferral of the BP units on the basis of the scanty data provided by CLP.

7. Members expressed the view that if the Administration had been careful enough in monitoring CLP's reserve margin, the Administration should have taken action in the mid 1980s because CLP's reserve margin had been well above the international standard of 35% since mid 1980s. (Note: CLP's reserve margin for 1981-1996 are shown in LegCo Paper No. CB(1)605/96-97 (01)) Furthermore, the 1994 deferral plan prepared by CLP was not rigorous enough as CLP's reserve margin only decreased from 59% in 1994 to 46% in 1995.

8. SES remarked that it would be more constructive to look forward and try to pursue actions to reduce the adverse effect of CLP's excess generating capacity. The Administration did closely monitor the reserve margin of power companies. Having regard to the situation in 1994 the Administration had agreed to CLP's plan to spread out the installation of the later units. The Principal Assistant Secretary for Economic Services (Financial Monitoring) (PASES (FM)) further advised that in the annual auditing review jointly conducted with CLP in 1995, the Administration found that the gap between the forecast demand and the actual demand was still wide, and had requested CLP to address the issue of high reserve margin. At the same time, the Administration also commissioned Burns and Roe Company to undertake a study with a view to addressing the problem. Subsequently, the Burns and Roe report had led to the Administration's decision to request CLP to propose plans for deferral of BP units 5-8.

9. The Chairman expressed that while this Panel did not want to find fault with the reasons leading to CLP's excess generating capacity, members would like all parties concerned to learn from this case and try to avoid similar situations in future. He pointed out that the forecast demand and actual demand in 1991, respectively at 4635MW and 4180MW, were very far apart. The Administration should have noticed this and be more critical in examining CLP's proposal for constructing the Black Point units in 1991. In response, SES emphasized that it was difficult for anyone to forsee in 1991 the extent of the shift of Hong Kong's manufacturing industry to China. He hoped members would focus on the problem and the ways to tackle the problem. The Administration would carefully examine CLP's proposal on deferral of BP units 5-8 which would be available soon.

10. Members were concerned about the action the Administration would take if CLP's proposal for deferral of the BP units could not lead to a reduction of tariff for consumers. SES advised that taking into account CLP's obligations to its contractors of the BP units, the Burns and Roe Company had arrived at the recommendation that the deferral of BP units 5-8 would be beneficial to consumers. As the Government had accepted this recommendation and requested CLP to put up a detailed proposal on deferral of BP units 5-8, the Administration did not want to pre-judge CLP's proposal which was yet to be received. He believed that the CLP also owed a duty to explain to its customers if the proposal was not beneficial to consumers.

Sale of electricity from CLP to Hong Kong Electric Co. Ltd. (HEC)

11. ADEMS (EE) advised that the Administration would have to looked at HEC's spinning reserve situation in deciding whether the existing interconnectors could be used for regular transfer of power from CLP to HEC. The existing interconnectors were being used as a backup in emergency situation. The HEC's system had a relatively small reserve as compared with CLP's. Using the existing interconnectors for regular transfer of power would increase the risk of blackout on Hong Kong island if there was any mishap in the HEC's system, and this would have serious impact in view of the many multi-storey buildings on the Island. The Administration's objective was to achieve high reliability in both HEC's system and CLP's system. He requested CLP to provide its calculations and suggestions in writing so that the Administration could consider CLP's claim that no new interconnector would be necessary for regular transfer of electricity from CLP to HEC. The Deputy Secretary for Economic Services (DSES) further advised that the interconnection between CLP's and HEC's systems, and in fact the interconnection between CLP's and Guangdong's systems were aimed at reducing the generating capacities required in each system and yet maintaining each system's reliability. The existing interconnectors between HEC's and CLP's system were reserved for emergency situation. If the interconnectors were used for regular supply of power, there would be no interconnector for supplying electricity to the HEC system in case of emergency.

12. SES stressed that the sale of electricity from CLP to HEC could only be a short term solution under the present situation because HEC only needed additional capacity in 2003 and CLP would have no excess capacity by 2005. This option could only be useful for the period 2003-2005. The Administration agreed that it would be worthwhile to look into the long term feasibility of this option, and was considering the commission of a study on this subject.

Other issues

13. Members enquired about the latest position on the legal advice on excluding assets relating to the excess generating capacity from the calculation of CLP's Average Net Fixed Assets (ANFA). PASES (FM) advised that there was a paragraph under the SCA referring to the components of ANFA, and those components were among the data to be provided by CLP before 5 February 1997. Based on these facts to be provided by CLP and the provisions of the SCA, the Attorney General's Chambers may then be able to advise on whether members' proposal could be pursued.

14. As regards the control of CLP's investment in additional generating capacity, SES advised that the Administration had carefully examined CLP's investment proposals in additional generating capacity and had not approved unnecessary investments. In response to members' query on the consistent 20-year life span of power generating units despite advances in technology, ADEMS (EE) advised that the 20-year life expectancy for a power generating unit was considered appropriate because the high maintenance costs and low efficiency of old machines would justify their replacement by new machines from an economic point of view. Moreover, the new machines could reduce air pollution.

15. Members observed that quite a lot of data had been taken out from the Burns and Roe report and there was no indication of what type of data was removed and the reason for their removal. This had caused difficulties in reading the report. They also noticed that some of the data taken out were general information such as the forecast of GDP growth which should not be commercially sensitive.

16. In response, SES advised that following the agreement at the last meeting of this Panel, the power companies were asked to identify the commercially sensitive data in the report and such data were taken out at the power companies' requests. He understood that the power companies had to take out the commercially sensitive data because of the regulation of the Stock Exchange of Hong Kong.

17. Members requested that CLP's proposal on the deferral of BP units 5-8 should be made available to members so that there could be a more fruitful discussion on this issue at the next meeting of this Panel in February 1997. SES responded that the Administration had no objection to providing CLP's proposal to members subject to CLP's agreement

18.At the request of members, SES agreed that the Administration would provide:-Admin.
  1. the headings of charts, figures or other information which had been taken out from the Burns and Roe report, and explanations from the two power companies as to why each item of information was considered commercially sensitive;

  2. a summary of the differences in views between the Burns and Roe report and reports of the CLP's consultants;

  3. the results of discussion between the Administration and CLP on the feasibility of using the existing interconnecting system for regular transfer of power between CLP and HEC; and

  4. subject to CLP's agreeing to do so, CLP's proposal for deferral of BP units 5-8, each for five years. The headings of charts, figures or other information were to be retained if commercially sensitive information was removed from the proposal.

II.Any other business

Members agreed that the Panel would continue to discuss CLP's excess generating capacity at the meeting in February 1997. A decision will be made on whether it was necessary to form a sub-committee to study the issue then.

The meeting ended at 4:30 pm.

Legislative Council Secretariat

14 February 1997

Last Updated on 14 August 1998