LegCo Paper No. CB(1) 565/96-97
(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, 11 November 1996 at 2:30 p.m. in the Chamber 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 Mrs Miriam LAU Kin-yee, OBE, JP
    Hon Fred LI Wah-ming
    Dr Hon Samuel WONG Ping-wai, MBE, FEng, JP
    Hon Howard YOUNG, JP
    Hon CHAN Kam-lam
    Hon LAU Chin-shek
    Hon SIN Chung-kai
    Hon Mrs Elizabeth WONG, OBE, ISO, JP
Members absent :
    Dr Hon David K P LI, OBE, LLD (Cantab), JP
    Dr Hon HUANG Chen-ya, MBE
    Hon LEE Wing-tat
    Dr Hon Philip WONG Yu-hong
    Dr Hon Anthony CHEUNG Bing-leung
Member attending :
    Hon James TO Kun-sun
Public officers attending :
    Mr Stephen IP, JP
    Secretary for Economic Services
For Item IV
    Mr Richard YUEN
    Secretary, Port Development Board
    Mr Ian Dale, JP
    Director of Marine
    Mr S Y TSUI
    Deputy Director of Marine
    Mr Raymond TANG
    Assistant Director of Marine
    (Planning & Local Services)
Item V
    Mr KWAN Wing-wah, JP
    Deputy Secretary for Economic Services
    Mr Eric Johnson
    Principal Assistant Secretary for Economic Services
    Mr LIM Poh-chye
    Principal Assistant Secretary for Economic Services
    Mr H B Phillipson, JP
    Director of Electrical and Mechanical Services
    Mr L T LEE
    Assistant Director of Electrical and Mechanical Service (Energy Efficiency)
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) 282/96-97)

1.The minutes of the meeting held on 9 October 1996 were confirmed.

II Items for Discussion for the Next Meeting Scheduled for 9 December 1996

2.Members agreed to discuss the following items at the next meeting:

  1. The China Light & Power Co Ltd's response to the consultancy study by the Burns and Roe Company of future demand for electricity in Hong Kong to 2005; and
  2. Review of pricing structure of local telephone services.

3.Members agreed that the Administration should be requested to provide a progress report on the operation of the Post Office Trading Fund before the next Panel meeting so that members could decide whether or not this subject would be discussed at the meeting in January 1997.Admin

4.Dr LAW Cheung-kwok undertook to prepare a note on the proposed establishment of an Economic Development Council for circulation to members before the next meeting. Members would decide at the next panel meeting whether this issue should be included in the list of outstanding items for discussion by this Panel.Dr LAW

III Information Papers Issued Since Last Meeting

(LegCo Papers No. CB(1) 160, 163, 227 and 241/96-97)

5.Members noted the four information papers issued since the last meeting.

IV Management Reform of Public Cargo Working Areas (PCWAs)

(LegCo Papers No. CB(1) 267/96-97(02) and 272/96-97)

6.Mr Raymond TANG briefed members on the background and details of a proposed tendering arrangement effective from early 1997 for allocation of berthing space in PCWAs.

(Post-meeting note: A copy of Mr TANG's presentation paper was circulated to members vide CB(1) 334/96-97(03) dated 14 November 1996.)

Tendering Arrangement

7.Members questioned the Administration on not adopting the proposal of the existing operators that the berths be allocated to them on an annual-lease- monthly-rental basis, because such a proposal would achieve the same results as under a restricted tendering arrangement, i.e. existing operators of a geographical region had priority in bidding for berths in the same region at a price at or above the reserve price. Mr Richard YUEN explained that the existing operators' proposal was to dispense with any tendering arrangement. They wished to be allocated with berthing spaces for an indefinite period of time and the contracts would be based on annual leases with monthly rentals. This proposal would be totally against the spirit of the Director of Audit's recommendation that the right to use PCWA berths be allocated by an open and competitive bidding process. The Administration was aware of the concerns of existing operators regarding an open bidding system, and had therefore devised, as a first step, a restricted tendering system which aimed to address the concerns of existing operators. The arrangement would be on trial for three years and a review of the result of this arrangement would be conducted one to one and a half years after operation of the new system.

8.Regarding how the system proposed by the Administration could increase the utilization of the PCWA berths, Mr Ian Dale said that the Administration's objective was to put in place a system which would encourage operators to fully utilize the berths that were leased to them. Under the new system, operators granted lease of the berths would be allowed to sublet to third parties if they could not fully utilize the leased berths, whereas subletting was not allowed under the existing system. Moreover, under the proposed system, operators could run a more cost effective operation because it would no longer be necessary to deploy two to three idle lighters to control the use of a berth.

9.Mrs Miriam LAU Kin-yee observed that under the restricted tendering system there were still chances that an existing operator would have to relocate his operation to berths in another location. She queried the Administration for not addressing this concern of the operators. Mr Dale replied that the Administration had considered the operators' concern and tried to minimize the disruption to existing operators. Except for the Hong Kong region, PCWAs in two close locations were grouped into one geographical region for bidding, e.g. PCWAs in Kwun Tong and Cha Kwo Ling were grouped under the Kowloon East Region. The four PCWAs in Hong Kong island, including 2 unpopular PCWAs, were grouped into one geographical region. Hence, an existing operator could only be relocated to a PCWA within the same geographical region under the proposed arrangements.

10.Regarding the rationale for not accepting the proposal that only existing operators in a PCWA be allowed to bid for berths in that PCWA, Mr YUEN advised that an inter-departmental committee of the Government, which included representatives from the Independent Commission Against Corruption, considered that restricting the bidding of a PCWA to existing operators in that PCWA would make the bidding susceptible to abuse and manipulation. As a compromise, berths in two PCWAs were grouped into one geographical region for bidding. This would minimize any disruption to the operators.

11.Some members pointed out the existing operators' concern about what would happen after the three-year trial period of the proposed arrangement. In particular, they were concerned that if the restricted tendering arrangement were to be replaced by an open bidding arrangement, they would be forced out of the market by large consortia. Mr Dale responded that he could not give a definitive reply on what the situation would be in three years as the interim arrangement would be subject to review after one to one and a half years of operation. The long term aim was to have an open tendering system for PCWA berths. However, if that was not achievable in three years, the Administration would be prepared to apply the restricted tendering system in a longer term. He emphasized that the Administration would undertake full consultation with the berth operators before reaching any conclusion. Mr YUEN added that three-year leases were considered an appropriate duration for operators to make investment decisions and mid-stream operators in other areas of the territory were only operating on 2-year Short Term Tenancies.

Reserve Price

12.As regards how the reserve price was calculated and how it compared with existing rent and the estimated free market rent, Mr YUEN explained that existing rents for PCWA berths represented about 4% of the historical development costs of the berths, excluding land premium. Under the Government utilities approach, the lease rental should cover the cost of capital in providing the PCWAs which was determined at 11% on average net fixed assets (ANFA). However, in view that there would be some competition under a restricted tendering system, the Finance Branch was convinced, after prolonged discussions, that the reserve price be fixed at 7.1% on ANFA. As such, if the Government utilities approach was adopted, the rent would be about double the proposed reserve price. If the market price was to be achieved, which would have included the land cost as well, it would be a few times the proposed reserve price.


13.As to how the proposed system would eliminate or reduce manipulation by triad society members, Mr TANG advised that the proposed three-year lease granted through a restricted tendering system would eliminate the opportunity for control by triad society. Under the lease, operators would gain the full right to utilize the berth leased to them, and could seek help from the police if there was any extortion. He stressed that the Marine Department would continue to ensure the smooth operation of the PCWAs under the new system.

Possibility of monopolization by large consortia

14.Some members expressed concern about the possibility of the proposed system giving rise to monopolization by large consortia and asked what measures would be adopted to prevent that from happening after three years. Mr YUEN replied that the proposed system was a restricted tendering system whereby existing operators in the same geographical region would be given priority to bid for berths in that region. For the bidding system yet to be decided after three years, a condition could be specified such that each operator would only be allowed to bid for a specified number of berths, thus reducing the possibility of monopolization by large consortia.

Consultation with existing operator

15.Members generally considered that there were rooms for improvement in the consultation process between the Administration and the operators. According to the list provided by the Administration in response to members' request made at the meeting on 18 September 1996, the Director of Marine had consulted five PCWA trade associations. Members expressed surprise that there were 17 trade associations protesting outside the LegCo Building against the proposed restricted tendering system. They queried about such strong opposition from the trade if the proposed system was developed after full consultation with the operators.

16.In response, Mr Stephen IP advised that the Administration had conducted a series of consultations with the trade in hammering out the present proposal, which in fact represented a compromise between the Director of Audit's recommendation for an open bidding on the one hand and the trade's view of no bidding arrangement on the other. If there had not been consultation, there would not be a compromise. He emphasized that the important point was whether the Administration should follow the Director of Audit's recommendation as supported by the LegCo Public Accounts Committee (PAC). The Administration realized that there would be undue disruptions to the existing operators if the Director of Audit's recommendations were strictly complied with. Hence a restricted tendering arrangement was devised to address the concerns of the trade raised during the consultations. The Administration was prepared to release more details on how the compromised package was worked out, including the actual reserve price, if so requested by members. Mr Dale added that the Marine Department had consulted the trade associations individually as it was difficult to arrive at a consensus when all the trade associations were present at one meeting. The associations did not express objection to the proposed restricted tendering system when they were consulted. However, it was possible that they had a change of mind after the consultation.

17.As to why the trade's main objection to a bidding system could not be entertained, Mr YUEN advised that this would be totally against the spirit of the Director of Audit's recommendation as supported by the PAC. If this objection was accepted, it would mean maintaining the status quo of the present system. This would be unacceptable since all interested parties concerned agreed that there had to be a reform of the management of PCWAs in order to improve efficiency in cargo handling.

18.On the question of whether the restricted tendering system was the final proposal from the Administration and no changes to the proposal would be made, Mr IP remarked that the present proposal was concluded after many rounds of consultation with the trade. The Economic Services Branch (ESB) had also made a lot of effort in convincing the Finance Branch to accept the much reduced reserve price. The Administration considered that the issue had dragged on for far too long and a system had to be put in place to improve the operations in PCWAs. The restricted tendering system was considered to be the most reasonable approach having regard to the interests of the parties concerned. He said that the system would be reviewed and refined in the light of operational experience. He emphasized that the trade would be fully consulted in the review to be conducted.

19.Mrs Miriam LAU Kin-yee, Mr CHAN Kam-lam, and Dr LAW Cheung-kwok expressed that as the trade's objections to the proposed restricted tendering system had not been fully considered by the Administration, they did not support the Administration's management reform proposal as detailed in the information paper CB(1) 267/96-97(02). Mrs Selina CHOW said that she had reservation on the Administration's proposal because full consultation with the trade had not been carried out.

V.Hong Kong Electric Co Ltd's generation development proposals

(including the electricity generating capacity for Hong Kong for the period to 2005)

20.The Chairman recalled that at the meeting on 2 October 1996, members requested that the Chairman of the Energy Advisory Committee (EAC) be invited to this meeting to join the discussion of this item. However, due to another prior commitment, the Chairman of EAC, Professor Charles KAO, was not able to attend the meeting.

21.A LegCo Brief entitled "Electricity generating capacity for the period to 2005" was tabled by the Administration.

(Post-meeting note: The LegCo Brief was circulated to all Members of the Council vide LegCo paper No. CB(1) 310/96-97 dated 12 November 1996.)

22.Mr Eric Johnson briefed members on the electricity generating capacity of the China Light and Power Co Ltd (CLP) and the Hong Kong Electric Co Ltd (HEC) for the period to 2005.

(Post-meeting note: A copy of the presentation material was circulated to members vide LegCo Paper No. CB(1) 334/96-97(02) dated 14 November 1996.)

Deferral of CLP's power generation units 5-8 at Black Point

Impact on electricity tariff

23.Members pointed out that whilst the unnecessarily high reserve capacity of CLP was due to an over estimation of demand for electricity, the consumers had to bear the adverse consequence of having to pay higher tariffs. They asked whether the investments by CLP in the excessive power plants, including work-in-progress, could be excluded from the Average Net Fixed Assets (ANFA) on which the electricity tariff was based. Mr LIM Poh-chye replied that the Administration's position on this matter was bounded by the Scheme of Control Arrangement (SCA) with the CLP. At present, the SCA was silent on this specific point, but according to legal opinion, the Administration was not allowed to write down the amount. There were certain provisions in the SCA which allowed the Administration to raise certain issues with CLP and the Administration was pursuing further in this direction. If these efforts failed, the matter would be pursued in the context of the interim review of the SCA in 1998.

24.Members expressed concern that CLP had already spent about 80% of the investments in these power plants and the deferral of construction would lead to penalty on CLP under its contracts with the suppliers. Members asked what the amount of penalty would be and how the consumers would benefit under the proposed deferral. Mr KWAN Wing-wah advised that the estimated penalty of about $800 million on CLP had been taken into account when the various options were considered by the Administration. As electricity tariff reflected cost and profit, the deferral in CLP's power plant would result in cost reduction leading to a lower tariff for the consumers. Mr L T LEE clarified that according to the consultant's estimates, CLP had so far spent about 60%, not 80%, of its total investments on the Black Point power plant.

25.As to the exact amount of tariff reduction resulting from the deferral, Mr LIM advised that it was not possible to predict the electricity tariff in the next few years. The consultants had adopted a financial modelling approach in assessing various options based on six scenarios. Common costs under the various options would not be taken into consideration; and all differential costs under the various options were calculated and discounted to 1996 values. The lowest cost option was recommended. Since a lower cost would lead to a lower tariff, it was anticipated that electricity tariff would be gradually reduced in the period to 2005. This would not be the case for a situation where there was no deferral of plants. The consultant's estimates were that there would be a reduction of about 2 cents to no more than 5 cents per kilowatt hour.

26.As regards whether it was possible for the Administration to calculate the increase in electricity tariff due to the investments of CLP in creating the excess capacity, Mr LIM replied that the Administration did not have the necessary data to calculate the required figure. The Chairman suggested that the question could be put to the CLP at the next Panel meeting. The response to the question should then be referred to the Administration for comments.

(Post-meeting note: In the letter dated 12 November 1996 inviting CLP to attend the next meeting on 9 December 1996, CLP has been informed of the Panel's request.)

27.Regarding the arrangements to be made to defer the construction of power plants, Mr LEE advised that as the Administration had no details about the contract between CLP and its suppliers, CLP had been requested to put up a detailed proposal for the deferral of Black Point units 5 to 8.

Demand forecasting methodology

28.Members raised that the Administration's approval in 1992 of CLP's 8 units of power plants at Black Point was based on the demand forecast by Burns and Roe, which also recommended in 1996 a deferral of CLP's power plants. They questioned whether there was any negligence on the part of the consultant. Mr KWAN replied that the consultancy study in 1992 focused mainly on the financing plan and the consultant was not asked to review the forecasting methods. As the problem of actual demand deviating substantially from forecast demand became more apparent in 1995, the consultant was asked to review the demand forecasting methodology. The consultant had made certain recommendations for improvements and CLP agreed to fine tune their forecasting methods accordingly.

29.Regarding the discrepancy between the peak demand forecasts made by the consultant appointed by the Administration and the consultant appointed by CLP, Mr IP admitted that the peak demands as estimated in 1992 were very different from the real situation. It was difficult for anyone to foresee that the shift of Hong Kong's manufacturing industry to China could be of such a scale. However, the discrepancy in demand forecast would not affect the Administration's assessment of the various options this time because the Administration had used CLP's own data for calculation of reserve capacity.

30.On the point of the shift of Hong Kong's manufacturing industry to China, members disagreed that it was not possible to foresee this element in forecasting peak demands because the trend of shifting of factories to China had started in the early 1980s and the pace of development had gathered momentum since then. Dr LAW Cheung-kwok remarked that the present case reinforced his proposal for setting up an Economic Development Council to advise the Administration on matters relating to economic development.

Additional electricity generating capacity for HEC in 2003

31.Mr LAU Chin-shek opined that learning from the lesson of CLP's case, the Administration should include a provision in the SCA that any investment by HEC in power plants which proved to be excessive due to an over estimation of demand should be excluded from the ANFA for calculation of tariff. Mr KWAN responded that the approval given to HEC in 1994 to build additional units at the Lamma Power Station included a condition that the year of commissioning could be adjusted in the light of changes in demand forecast. Future approval for HEC's new power stations could include the same provision to prevent a problem similar to the CLP's case.

32.Since the Administration's approval for HEC to commission a new power station in 2003 was based on Burns and Roe's recommendation, which was the same consultant which recommended the construction of the Black Point Station in 1992, members doubted whether the estimates provided by the consultant was reliable. Mr IP advised that the Administration had only invited, on a no-commitment basis, the HEC to undertake a search for a site for additional generating facilities and an environmental impact assessment study. As it would normally require 7 years for planning and constructing a power station, the planning work had to start in 1996. HEC had to submit detailed proposals to the Administration before final approval could be given. As regards demand forecast, the consultant found that HEC's estimates were broadly in line with the real situation and no changes were required in HEC's forecasting method. Dr LAW Cheung-kwok observed that HEC's estimates were more in line with the actual situation because the problem of shifting of factories to China had a smaller impact on the Hong Kong island where there was relatively few factories.

33.As regards whether the existing interconnection system between CLP and HEC could be upgraded to facilitate the sale of electricity from CLP to HEC, and if so, what would be the costs involved, Mr IP advised that the sale of electricity from CLP to HEC could not be a long term solution under the current situation because CLP would have no excessive reserve capacity by 2005 and HEC would require additional generation facility in 2003, which meant that sale of electricity could only solve the problem between 2003-2005. Additional generation facilities would still be needed by HEC after 2005. The installation of an additional interconnector between CLP and HEC was feasible, but it would cost $468 million and would only be used for 3 years. The consultant considered this solution not recommendable from an economic point of view. However, the Administration would commission a further study to see whether transfer of power would be a practical option in the long term. Mr LEE added that the existing interconnector was used for emergency back-up and balancing of the two systems, new interconnectors would have to be installed if there was large scale transfer of power between CLP and HEC.

34. About the overall reserve capacity situation after completion of both HEC's proposed power generation facilities and CLP's deferred units, Mr IP advised that the reserve margin in 2005 was estimated to be about 30% which was a standard accepted internationally.

Disclosure of information

35.As regards whether the Burns and Roe's report could be released to the public, Mr IP advised that the report could not be made public as much data included in the report were provided by CLP and HEC in confidence, and were commercially sensitive. He suggested that members could raise specific questions in writing regarding any information which they would like to know and the Administration would try its best effort to provide the required information.

36.Regarding the consultancy study commissioned by CLP itself, Mr LEE advised that the Administration did not have a copy of CLP's consultancy report. CLP had provided certain information to the Administration on 5 November 1996, which was considered commercially sensitive by CLP. The Administration would have no objection to releasing the information, subject to CLP's agreement.

Additional Information Requested

37.As regards the comparison of electricity prices in Asian Region in 1995 as shown in the Administration's presentation, Mr Johnson agreed to provide, if available, a breakdown of the comparison on electricity prices into domestic and industrial use and forward the necessary data to members.Admin

38.In response to Mr CHAN Kam-lam's request, Mr IP agreed to provide comparison between reserve margins based on the original and revised demand forecasts made by CLP.Admin

39.The meeting ended at 5:30 pm.

Legislative Council Secretariat

19 December 1996

Last Updated on 14 August 1998