LC Paper No. CB(1)161/99-00
(These minutes have been seen by the Administration)

Ref: CB1/PL/ES/1

Legislative Council
Panel on Economic Services

Minutes of meeting held on
Monday, 24 May 1999, at 10:45 am
in Conference Room A 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
Dr Hon David LI Kwok-po, JP
Hon CHEUNG Man-kwong
Hon Ambrose CHEUNG Wing-sum, JP
Hon HUI Cheung-ching
Hon Christine LOH
Hon CHAN Yuen-han
Hon CHAN Kam-lam
Hon SIN Chung-kai
Dr Hon Philip WONG Yu-hong
Hon WONG Yung-kan
Hon Howard YOUNG, JP
Hon LAU Chin-shek, JP
Hon Mrs Miriam LAU Kin-yee, JP
Hon FUNG Chi-kin

Member attending :

Hon Mrs Selina CHOW LIANG Shuk-yee, JP

Members absent :

Hon Kenneth TING Woo-shou, JP
Hon Eric LI Ka-cheung, JP
Hon MA Fung-kwok
Hon Bernard CHAN
Hon Andrew CHENG Kar-foo

Public officers attending:

For Agenda Item IV

Mr Stephen IP, JP
Secretary for Economic Services

Mr Arthur HO
Deputy Secretary for Economic Services

Mr Howard LEE
Principal Assistant Secretary for Economic Services
(New Airport)

Mr Alex AU
Deputy Director of Civil Aviation

For Agenda Item V

Mr Stephen IP, JP
Secretary for Economic Services

Ms Maria KWAN, JP
Deputy Secretary for Economic Services

Principal Assistant Secretary for Economic Services

Principal Assistant Secretary for Economic Services

Assistant Director (Energy Efficiency)
Electrical and Mechanical Services Department

Electrical & Mechanical Engineer
(Utility Monitoring)/EMSD

Attendance by invitation :

For Agenda Item IV

Airport Authority

Mr Billy C L LAM
Acting Chief Executive Officer

Mr Richard A SIEGEL
Management and Operations Adviser

Mr Raymond LAI
Finance & Commercial Director

Miss Kitty TONG
Assistant Manager - Retail Operations

Mr Clarence CHIU
Finance Manager - Revenue Management

Board of Airline Representatives (BAR)

Mr Philip CHEN
Chairman, Board of Airline Representatives

Mr Ronnie CHOI
Chairman, BAR Charges Subcommittee

Secretary General, Association of Asia Pacific Airlines

Regional Manager Hongkong, Macau & South China, Swissair

General Manager Hong Kong, Canadian Airlines International

Mr Rupert BRAY
Executive Assistant to BAR Chairman

Mr Stanley HUI
Chief Executive Officer, Hong Kong Dragon Airlines

Mrs Anita LEUNG
Manager - Hong Kong, China & S E Asia, Air Canada

Mr Simon KOK
Finance & Administration Manager, Alitalia

Mrs Lina CHOW
Executive Assistant Manager, Singapore Airlines

Mr Victor HO
Chairman, Airline Operators Committee HKIA

Mr Thomas LAI
Administration Manager, China Airlines

Area Customer Service Manager East Asia, British Airways

For Agenda Item V

The Hongkong Electric Co. Ltd.

General Manager (Development & Planning)

Mrs LI AU Kam Ping, Minnie
General Manager (Human Resources & Public Affairs)

CLP Power Hong Kong Ltd.

Managing Director

General Manager - Marketing and Customer Services

Mr Dominic TAI
Sales Development & Energy Services Manager

Mr Chris CHAN
Public Affairs Manager

Castle Peak Power Co. Ltd.

Mr Wayne HARMS

Clerk in attendance :

Ms Estella CHAN
Chief Assistant Secretary (1)4

Staff in attendance :

Mr Daniel HUI
Senior Assistant Secretary (1)5

I Confirmation of minutes and matters arising
(LC Paper No. CB(1)1253/98-99 - Minutes of meeting held on 22 March 1999)

The minutes of the meeting held on 22 March 1999 were confirmed.

II Information paper issued since last meeting
(LC Paper No. CB(1)1234/98-99 - A submission from Joint Committee of Hong Kong Fisherman's Organizations

LC Paper No. CB(1)1261/98-99 - Third Party Insurance for Civil Aircraft

LC Paper No. CB(1)1350/98-99 - Import and Retail Prices of Major Fuels from April 1997 to March 1999)

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

III Items for discussion at the meetings scheduled for June and July 1999

3. Members agreed to discuss the following two items at the next regular meeting of the Panel scheduled for 28 June 1999 :

  1. Consultancy study on interconnection between CLP Power Hong Kong Limited and Hongkong Electric Co. Ltd. and competition in the electricity supply industry;

  2. Follow-up on year 2000 compliance in Government, Government-funded and Government-regulated organizations under the purview of the Economic Services Bureau; and

  3. Terminal Handling Charges.

4. Members agreed that a special meeting of the Panel should be held on 19 July 1999 at 10:45 am to discuss the Consultancy Study on Fisheries Resources and Fishing Operations in Hong Kong Waters.

    (Post-meeting note : The agendas for the Panel meetings in June and July were subsequently revised at the request of the Administration and with the concurrence of the Chairman.)

IV Airport charges of the Hong Kong International Airport
(LC Paper No. CB(1)1352/98-99(03) - Information paper provided by the Board of Airline Representatives of Hong Kong

LC Paper No. CB(1)1352/98-99(04) - information paper provided by the Airport Authority)

5. Mrs Selina CHOW LIANG Suk-yee declared interest as a member of the Board of the Airport Authority effective from June 1999. Mr Howard YOUNG declared interest as an airline staff member.

6. Mr Ronnie CHOI of the Board of Airline Representatives and Mr Raymond LAI of the Airport Authority presented to members the main points as set out in their respective information papers.

    (Post-meeting note : Copies of the presentation materials have been circulated to members vide LC Paper No. 1381/98-99(01) and (02)).

Discussion with the Board of Airline Representatives (BAR)

7. Noting BAR's argument that the high airport charges at the Hong Kong International Airport (HKIA) had resulted in flight cancellations and reduced passenger flow, Mr CHAN Kam-lam pointed out that the number of arriving passengers in Hong Kong had been decreasing since 1997 before the opening of the HKIA at Chek Lap Kok. He doubted whether the decreasing trend of arriving passengers was a result of the level of airport charges. He enquired whether BAR considered the services available at the HKIA were value for money and requested BAR to put forward specific proposals for reducing the airport charges and estimate the resulting increase in number of flights. In response, Mr Ronnie CHOI said that although the HKIA was providing a world-class service, its charges had to be competitive. The level of airport charges was too high as compared with those of the Kai Tak Airport. As regards whether reduced airport charges could lead to increased number of flights, he advised that reduced airport charges would be a favourable factor which airlines would take into account in considering addition/cancellation of flights. However, it would not be possible to estimate specifically how many flights could be added after reduction of airport charges. He further advised that BAR proposed that the Terminal Building Charge (TBC) component of the airport charges should be waived and this would amount to an annual cost reduction of HK$500 million to airlines.

8. Mrs Selina CHOW noted that airlines currently collected a security charge of $20 per passenger which partly covered the TBC of $39 per departing passenger charged by AA. She asked whether airlines would waive the $20 security charge if TBC was waived by AA. Mr Ronnie CHOI replied that if TBC was waived, airlines would consider waiving the $20 security charge on passengers.

9. Mr CHAN Kam-lam pointed out that there had been a trend in recent years for airlines forming alliances to provide a joint network whereby additional passengers could be carried by a reduced number of flights. He wondered whether this was a reason for the reduced number of flights in 1998. Mr Philip CHEN, Chairman of BAR, advised that the cancelled flights in 1998 at HKIA were mainly marginal services or short-haul flights which were not affected by the airlines' alliance efforts. High airport charges would discourage connecting flights which were only marginally profitable and reduced connectivity would in turn hinder the development of HKIA as an aviation hub.

10. Mrs Miriam LAU Kin-yee noted that despite the rising number of flight cancellations, there had been a net increase of 32 departures per week from HKIA since airport opening up to March 1999. She requested the airline representatives to explain this anomaly vis-a-vis the high airport charges. Mr Ronnie CHOI explained that in 1997 the Civil Aviation Department had refused more than 300 additional flights proposed by airlines because of the insufficient capacity at Kai Tak Airport. If the airport charges at HKIA were not so high, the additional flights proposed in 1997 could have been accommodated in 1998 resulting in a net increase of more than 32 flights per week.

11. Mr HUI Cheung-ching doubted the rationale of relating the decrease in passenger volume with high airport charges. He queried whether the level of airport charges would be an important consideration for a passenger to visit a city. Mr Richard STIRLAND of BAR advised that high airport charges would discourage marginal services and feeder services operated by carriers. If the intention was to promote Hong Kong as a hub port to attract tourists who would not normally come here, airport charges had to be lowered to make these marginal services profitable. He emphasized that there would be substantial economic benefit to Hong Kong if the city could be developed as a regional aviation hub.

Discussion with the Administration and Airport Authority

12. Explaining the Administration's position on the subject matter, the Secretary for Economic Services (SES) said that under the Airport Authority Ordinance, AA was empowered to determine the scheme of airport charges subject to the approval of the Chief Executive in Council. Under the present arrangement, AA would conduct annual reviews on airport charges and the next review was due in July 1999. He further advised that despite the 82 flight cancellations, there had been a net increase in the number of flights and passengers since the opening of the new airport. Similar to other Asian countries/cities, Hong Kong encountered economic downturn as a result of the recent Asian financial crisis. He emphasized that the Administration was willing to consider views of airlines, AA and Legislative Council Members on the issue. He added that in assessing the case in point, it was necessary to bear in mind Hong Kong's overall economic benefit on the one hand, and AA's statutory obligations on the other.

13. Mr Billy LAM, Acting Chief Executive Officer of AA, supplemented that under the Airport Authority Ordinance, AA was required to, among other things, maintain Hong Kong as a centre of international and regional aviation, conduct its business in accordance with prudent commercial principles and arrange its finances to ensure that its revenue covered its expenditure as far as practicable. Moreover, the current level of airport charges was determined having regard to a target of generating a net rate of return of 5% on the total capital employed by the Authority over the period to 2047. Mr LAM stressed that AA and the airlines shared a common objective of developing Hong Kong into a regional aviation hub. In order to reduce the pressure on the level of airport charges, AA had embarked on measures which aimed at generating additional revenue and reducing operating expenditure. Through various cost cutting measures, including streamlining of the Authority's staffing structure and negotiation with service providers on costs, AA expected some 10-12% savings in its operating expenditure in 1999/2000.

14. Mr SIN Chung-kai supported the residual charging method adopted by AA to determine the amount of airport charges required to balance total expenditure and revenue. He opined that under this method, the pressure on the level of airport charges could be reduced if AA's revenue from other sources increased and/or its operating expenses decreased. In this regard, he enquired about AA's plans in generating more revenue from sources other than airport charges. Mr Billy LAM replied that AA had been considering various measures to increase revenue sources, including the development of logistic centres at Chek Lap Kok Island which would facilitate cargo flows, the development of a marine cargo terminal to service cargo sources from the Pearl River Delta area by enhancing the marine link with ports in the area, construction of an exhibition centre with conference facilities, provision of short term facilities/services such as a driving range for golfers, and exploring the possibility of selling more advertising space in the passenger terminal building and on the airport expressways to and from the terminal building.

15. Responding to BAR's proposal for abolishment of TBC, Mr Richard SIEGEL, Management and Operations Adviser of AA, said that airlines recovered more than 50% of this charge from passengers through the security charge collected when air tickets were issued. As regards whether reduced airport charges would lead to increased flights to Hong Kong, he reiterated the view that airlines' decision on flight schedules was dictated by market demand rather than airport charges.

16. Mrs Selina CHOW pointed out that whilst the Government collected HK$50 air passenger departure tax from each departing passenger, the money collected were not used to finance the operating expenses of AA. Moreover, AA had to pay Government charges for the provision of the aerodrome licence, air traffic control, fire and rescue, and meteorological services which amounted to about 30% of AA's total operating costs. She enquired whether the Administration would consider allowing AA to collect the air passenger departure tax to partly finance AA's operation and reducing Government's charges on AA. In response, SES advised that Government charges on AA for provision of various services at the airport were calculated on a cost-recovery basis. These charges amounted to about 50% of the total operating costs of Kai Tak Airport as compared with 30% of the total operating costs of the new airport. He agreed that AA's main task at the moment was to control its operating costs and remarked that AA could put forward its proposals to the Government for consideration.

17. Referring to paragraph 18 of the information paper provided by AA which stated that airport charges amounted to only 4.3% of total airline operating expenditure, Mr Fred LI Wah-ming pointed out that this statement was at variance with BAR's finding that airport charges represented 15-20% of the total cost of short-haul flights. He enquired about the reasons for the discrepancy. Mr Billy LAM explained that the figures quoted in paragraph 18 of AA's paper were based on statistics published by the International Civil Aviation Organization (ICAO) which covered airport charges levied in different airports and compared with cost data of both short-haul and long-haul flights. Mr Raymond LAI supplemented that as the revenue and cost vary proportionately with the flight distance, it was possible that airport charges represented as much as 15-20% of the total costs of short-haul flights.

18. Mr CHEUNG Man-kwong opined that the construction of the new airport was already financed by public funds, there was no reason for AA's operation to be subsidized by public money. He considered that the key task at hand was to devise measures to ensure AA could achieve a balanced budget. As regards marginal services and feeder services operated by airlines, he enquired whether AA would consider reducing airport charges for these connecting flights as they were seen to be able to enhance Hong Kong's position as a hub port. Mr Billy LAM advised that one of AA's mission was to maintain HKIA as a regional aviation centre and in this regard, AA would be willing to consider measures to promote HKIA's status as an aviation hub. He supplemented that AA would further discuss with the airlines on the hubbing issue. SES said that there had been a 13.4% increase in transfer passengers in the past 12 months. He suggested that the airlines should provide more data to show how the reduction of airport charges could lead to additional marginal services and feeder services operated by airlines.

19. Mr Ambrose CHEUNG Wing-sum opined that in determining the level of airport charges the Administration had to weigh Hong Kong's overall economic benefit against AA's obligation to achieve a balanced budget. He considered that if reduction in airport charges was a stimulus to Hong Kong's tourist industry which could bring substantial benefit to Hong Kong's economy as a whole, the Administration should accord a lower priority to achieving a balanced budget for AA. He asked whether AA would consider abolishment of TBC as proposed by the BAR. In response, SES agreed that the Administration would examine the issue with the objective of maximizing the overall economic benefit for Hong Kong. He and Mr Raymond LAI reiterated that the airlines should provide more data to show the number of additional marginal services that could be generated if the airport charges were lowered.

20. Mr LEE Wing-tat was of the view that the current economic climate in Asia was the main reason for the difficulties experienced by airlines. Referring to Appendix 5 to the information paper provided by the Airport Authority, Mr LEE Wing-tat enquired about the reasons for cancellation of the scheduled flights. Mr Raymond LAI remarked that airlines' decisions on flight cancellations were based on commercial considerations. He observed that in the case of Cathay Pacific, while four flights from Hong Kong to Los Angeles were cancelled, seven flights from Hong Kong to San Francisco were added during the same period. He also said that coalition between airlines in provision of a joint network service was also a reason for cancellation of scheduled flights.

21. Referring to paragraph 20 of the information paper provided by AA, Ms CHAN Yuen-han sought clarification on the statement "50% reduction in airport charges will only generate savings of 1% to 1.5% in the airlines' total operating expenditures". She also suggested that the Administration should consider deferring the requirement on AA to repay its phase 1 debt by year 2001 which would reduce the financial pressure on AA. Mr Billy LAM and Mr Raymond LAI advised that according to statistics published by ICAO, airport charges represented about 4.3% of the total operating costs of airlines. Since airport charges were also levied by overseas airport, the airport charges at HKIA should account for about 2.15% of the total operating costs of airlines. A 50% reduction in HKIA's charges would therefore generate savings of 1% to 1.5% in the airlines' total operating costs. On the other hand, airport charges represented about 50% of AA's revenue, a 50% reduction in the level of airport charges would reduce AA's total revenue by 25%, i.e. about $1.25 billion per year.

22. Mr Howard YOUNG asked whether the Administration would review its policy in relation to Government charges and financial obligations of AA so that AA and the airlines could work out a solution on the issue of airport charges. In response, SES said that the Administration would support proposals which would enhance Hong Kong's overall economic benefit without undermining AA's prudent financial management. He hoped that relevant parties could thoroughly discuss the issue during the next review of the airport charges.

23. Summing up the discussion, the Chairman said that the issue might need to be further discussed by the Panel subject to the outcome of the review of the airport charges.

V Demand Side Management Programmes
(LC Paper No. CB(1)1352/98-99(05) - information paper provided by the Administration)

24. Mr LAU Chin-shek observed that implementation of the demand side management (DSM) programmes as set out in the Administration's information paper could only achieve a target total savings of generating capacity of 33MW by the two power companies in the initial 3-year period, representing about 0.5% of the maximum demand. Moreover, the real benefits to consumers were uncertain as they had to purchase energy-labelled appliances, not to mention the possible tariff impact arising from implementation of the DSM programmes. He enquired whether the Administration had considered measures other than those proposed in the DSM programmes for reducing the maximum demand for electricity. In response, the Deputy Secretary for Economic Services (DS/ES) advised that DSM was a means of encouraging people to contribute to energy efficiency and environmental protection through making more efficient use of electricity. Consumers would benefit immediately from DSM through the rebate scheme when they purchased energy-labelled electrical household appliances. Moreover, participants' own electricity bills would be lowered as energy efficient lights, appliances and equipment would cost less to run. In longer term, electricity savings accumulated through DSM would enable the power companies to defer or avoid installing new generating capacity and transmission and distribution facilities which would eventually lead to money saving for all consumers and less impact on the environment.

25. Noting that the total cost for implementation of the DSM programmes for 3 years would amount to about $300 million, which would have to be recovered by power companies through tariff adjustments, Mr Fred LI was concerned that while some consumers might not have purchased energy-labelled electrical appliances and therefore would not enjoy the benefit of rebates, the ensuing tariff adjustments would impact on all electricity consumers alike. He questioned whether the Administration's proposal to implement the DSM programmes was in the interest of all electricity consumers. In response, DS/ES said that DSM would be beneficial to all electricity consumers in the long run because savings in electricity consumption would defer the need for new electricity stations leading to reduced cost of generating electricity and reduced impact on the environment.

26. As regards the written questions raised by Mr Fred LI (circulated under LC Paper No. CB(1)1365/98-99) concerning various issues relating to the sale of energy-labelled products in retail outlets, the Assistant Director (Energy Efficiency) (AD/EE) advised that the Electrical and Mechanical Services Department had consulted 27 local appliance agents/importers on the supply of energy-labelled products since 1994 and the trade was well aware of the Government's plan of implementating DSM programmes. He undertook to provide written responses to Mr LI's questions in greater detail after the meeting. Admin.

27. Mr CHAN Kam-lam had reservations about the DSM proposals. Referring to paragraphs 15 and 31 of the information paper provided by the Administration, he doubted the rationale of providing "incentive earnings" to the power companies which effectively guaranteed the power companies' profit level despite the implementation of DSM. He was of the view that there were other means to encourage consumers to use energy-labelled appliances which would in turn lower the maximum demand for electricity. SES advised that the purpose of the DSM programmes was to encourage consumers to buy energy-labelled appliances through a rebate scheme. In the long run, DSM would benefit every consumer through tariff savings and environmental improvements.

28. Mrs Selina CHOW echoed Mr CHAN Kam-lam's concerns on the proposed DSM programmes. She said that if suppliers were required, by legislation if necessary, to label the energy-saving capability of electrical appliances, consumers should be willing to choose energy-saving appliances without the rebate scheme. She also advised that her functional constituency had indicated that the Administration had not fully consulted the retailing industry before finalizing the present proposals. Specifically, she enquired whether the Hong Kong and Kowloon Electrical Appliances Merchants Association had been consulted. AD/EE replied that EMSD had consulted the Association in 1994 on sale of energy-labelled appliances. The Association was consulted again in March 1999 on the rebate scheme when details of the scheme had been worked out. DS/ES further advised that the Administration was aware of the retailing industry's concern about the difficulties in selling the existing stock of products that were less energy-efficient than those which qualified for the energy label once the DSM programmes was launched. To address this concern, the Administration had deferred the launch of the DSM programmes by several months to allow more time for depletion of the existing stock. It had also agreed with the power companies that in respect of certain models of electrical appliances which did not bear an energy label at the time of purchase after the start of the DSM programmes but were subsequently awarded one in the three years following the launch date, retrospective claim of the relevant rebate would be allowed.

29. Ms CHAN Yuen-han was concerned that if the supply of energy-labelled electrical appliance was inadequate to meet the sudden increase in demand for these products, the prices could be pushed up substantantially. AD/EE advised that the retailing industry had been fully informed of the launch of the DSM programmes and substantial quantities of energy-labelled products would be available for sale in all retail outlets of electrical appliances.

30. Mr CHEUNG Man-kwong pointed out that the potential benefits of DSM programmes could only be achieved in the long term. Given that CLP Power Hong Kong (CLP) still had excess generating capacity the cost of which was being paid by CLP's customers, he doubted whether consumers would really benefit from the DSM programmes. Moreover if the Scheme of Control Agreements (SCA) between the Administration and the power companies were abolished after their expiry in 2008, removing the link between electricity tariff and asset value of the power companies, consumers might not be able to benefit from the DSM programmes. DS/ES explained that the basic principle of the DSM programmes was to reduce demand for electricity through the use of energy saving appliances, which would result in reduced electricity consumption and hence tariff paid by consumers, and improvements to the environment. She reiterated the benefits of the DSM programmes as set out in detail in Annex B of the information paper by the Administration. SES further said that it was too early to comment on the status of SCAs beyond 2008.

31. Ms Christine LOH commented that despite the DSM programmes, the Administration did not have a comprehensive energy saving policy and should develop one as soon as possible. She pointed out that given that electricity generating units 7 and 8 at CLP's Black Point Power Station were yet to be put into operation because of the excess capacity problem, the Government should not consider Hongkong Electric's proposal to build a new power station in Lamma Island. She also suggested that Government Supplies Department should take the lead to purchase energy-saving equipment for use by other Departments. In response, SES said that the proposed DSM programmes and Hongkong Electric's proposed new power station were two different matters and the Administration would examine whether Hongkong Electric's forecast demand would justify the need for a new power station. As regards the Administration's policy on energy saving, AD/EE advised that EMSD had various measures designed to save energy including the promotion of energy-labelled electrical appliances. He also confirmed that electrical equipment/appliances purchased by the Administration met specific energy saving requirements. As requested by Ms LOH, AD/EE agreed to set out in writing the Administration's policy in this respect in greater details. Admin.

32. Addressing the Chairman's concern about the cumbersome procedures for consumers to claim rebates from the power companies after purchase of energy-labelled electrical appliances, Dr Y M KO of CLP Power Hong Kong advised that the proposed procedures of the rebate scheme had been designed to strike a balance between facilitation of consumers and prevention of abuses. Consumers would be required to retain the receipts for the purchase of energy-labelled appliances in order to claim rebates from the power companies in the form of tariff reduction.

33. Ms CHAN Yuen-han opined that in view of members' divergent views on the proposals, the DSM programmes should be modified and be further discussed by this Panel or the Council before implementation. Mr LEE Wing-tat shared this view. He further pointed out that under the proposed DSM programmes, consumers would benefit very little in terms of tariff savings and the long term benefit was mainly in respect of environmental improvement. However, given that the power companies' electricity generating capacity was pitched to meet the maximum demand which might only occur on a few hottest days of the year, the Government should focus on how to reduce the demand on these hottest days. Government specification of energy-saving measures which had to be incorporated in architectural designs of new buildings might be more effective means to save energy. In response, SES advised that the Administration had an open mind on the subject and was willing to consider views of Members on the proposed DSM programmes. Since some members had raised the option of implementing DSM measures through legislative approach, ESB would also consider this in consultation with relevant bureaux as well as the Consumer Council. In view of members' concerns, he agreed to further consult the Panel on the DSM programmes after ESB had fully considered the views expressed, and to consider deferring the launch date of the DSM programmes further to January 2000. Admin.

VI Any other business

34. There being no other business, the meeting ended at 1:10 pm.

Legislative Council Secretariat
20 September 1999