LegCo Panel on
Economic Services

Attendance by invitation :

China Light & Power Company, Limited

Mr R E Sayers

Managing Director

Mr P A Littlewood

General Manager, Strategic Development and Administration

Mr J W Y LUI

General Manager - DACS

Dr Albert POON

Corporate Planning Manager

Mrs Sandra MAK

Public Affairs Manager Exxon Energy

Mr G L Graves

Chairman, CAPCO

Mr E L Reed

Director, CAPCO

Mrs Betty YUEN

Director, CAPCO

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 meetings and matters arising
II Information paper issued since last meeting
III Items for discussion for the next meeting scheduled for 10 March 1997
IV China Light and Power Company Limited (CLP)’s excess generating capacity
Meeting with CLP
• Deferral of generating units at Black Point (BP)
• Decommissioning of gas turbines at Tsing Yi and Castle Peak power stations
• Sale of electricity to Hong Kong Electric Company Limited (HEC)
• Other issues
Meeting with the Administration
• The Administration’s response to CLP’s proposal
  
• Scheme of Control Agreement
  
• Other issues
V Any other business

I. Confirmation of minutes of previous meetings and matters arising

(LegCo Paper No. CB(1)769/96-97 and CB(1)875 /96-97)

1. The minutes of the meetings held on 9 December 1996 and 6 January 1997 were confirmed.

II.Information paper issued since last meeting

2. Members noted LegCo Paper No. CB(1)830/96-97 on "Special Number Arrangement" issued since the last meeting.

III.Items for discussion for the next meeting scheduled for 10 March 1997

3. Members agreed to defer discussion on "Tariff increase of China Light and Power Company Limited (CLP)" to the next meeting. The three items to be discussed at the meeting on 10 March 1997 would be:

1. CLP’s excess generating capacity;

2. Tariff increase of CLP; and

3. Demand Side Management.

IV. China Light and Power Company Limited (CLP)’s excess generating capacity

(LegCo Papers No. CB(1)846 and 853/96-97)

Meeting with CLP

4. Mr R E Sayers introduced CLP’s stance on the issue as set out in his speech.

(post-meeting note : Copy of Mr Sayers’ speech has been issued to members vide LegCo Paper No. CB(1)899/96-97 dated 19 February 1997)

5. With the assistance of a slide presentation, Mr P A Littlewood briefed members on CLP’s proposal on various options to address CLP’s excess generating capacity.

(post-meeting note : A hard copy of the slide presentation has been issued to members vide LegCo Paper No. CB(1)892/96-97(01) dated 18 February 1997)

Deferral of generating units at Black Point (BP)

6. Members noted that CLP had made an assumption of a 43-year life span for the BP units, which was inconsistent with that of a 20-year life span of generating units in the Hok Un and Tsing Yi power stations, and queried the rationale behind this assumption. In response, Mrs Betty YUEN advised that in the Scheme of Control Agreement (SCA) between the Government and CLP before 1992, the allowed life span of generating units was 20 years. Under the current SCA, the allowed life span for electricity generating unit was 25 years and that for other infrastructures, such as buildings, was 33 years. Assuming a 5-year deferral, the last unit of Black Point would be commissioned in 2006. Adding 33 years would mean the projects’ total life ends in 2039/2040. As such, CLP’s proposal submitted to Government followed the life span provisions in the current SCA. Nonetheless, CLP found that the difference between Net Present Values (NPVs) of costs discounted for 25 years and 33 years was very small. CLP would prepare another set of estimated costs based on a life span of 33 years for plant and equipment in the BP power station. Dr Albert POON further advised that in terms of NPV, it would be more costly to allow depreciation of equipment costs over a shorter period. Hence, reducing the life span of the generating units would increase the costs to consumers.

7. Members pointed out that the main reason for CLP’s overestimation of demand was its inability in anticipating the decrease in its manufacturing load for the period 1991-1996. They asked for the CLP’s estimated growth rate for its manufacturing load included in its proposal submitted to Government on 5 February 1997 and the basis for the estimation. Mr Sayers responded that the annual growth in overall demand for electricity in the next five years would be 3.5 to 5%. This was considered a conservative estimate as compared with the estimated economic growth in Hong Kong. Dr POON also advised that an annual decrease of 3% to 4% in the manufacturing load was estimated in the next eight years. The estimate was made on the basis of results of a survey on the manufacturing industry’s investment intentions jointly conducted by CLP and the Federation of Hong Kong Industries in 1994.

8. As regards the accuracy of CLP’s forecast demand for electricity included in its proposal to Government, Mr Sayers remarked that it would not be possible to guarantee the accuracy of any forecast. CLP could only try to make the best forecast based on available information at a particular point in time. The forecasts were prepared conscientiously and conservatively. CLP’s considered opinion was that the actual demand would be slightly higher than the forecast demand. He also advised that CLP had done its calculations based on terms in the existing SCA as this was the only basis which CLP could work on.

9. As to whether the investments in BP units 7 and 8 would be excluded from CLP’s Average Net Fixed Assets (ANFA) for the purpose of tariff calculation, Mr Sayers said that the deferral of BP units 7 and 8 would delay inclusion in ANFA some of the asset related costs in units 7 and 8. However, the deferral would also create additional costs which would result in higher asset costs, hence higher tariff to consumers. Mrs YUEN added that whilst the unspent investment in BP units 7 and 8 could be deferred, the costs of common facilities had already been spent. These costs would be apportioned to units 7 and 8 and included in the ANFA in accordance with the SCA and general accounting principles.

10. Regarding the proportion of the total project cost of $24 billion which had been committed and spent, Mr Littlewood advised that about 84% of the total project cost had been committed. Details of the committed expenditure in each of the eight units were shown in table 4.1 on page 18 of CLP’s proposal to Government (LegCo Paper No. CB(1)853/96-97(01)). The plant supply costs which made up about half of the total project cost were fully committed when the contracts were signed in 1992 and 1993. The financing costs for the plant supply were also committed at the same time. Site formation and civil work costs were committed in 1993/94. Hitherto, only a small part of the total cost had not yet been committed. Mrs YUEN added that as there was a progressive payment arrangement under the contracts with suppliers and builders, the actual amount spent would tally with the committed amount over time.

11. On whether CLP had ceased expenditure on BP units 7 and 8 after receipt of Government’s request to defer the BP units, Mr Sayers advised that CLP had asked the plant supply contractor to revert to the company before they made any new major capital commitment on units 7 and 8. However, in accordance with contracts previously entered into between CLP and the contractors, CLP was obligated to pay for the equipment and services already delivered.

Decommissioning of gas turbines at Tsing Yi and Castle Peak power stations

12. Mr CHAN Kam-lam observed that CLP had proposed the decommissioning of some gas turbines at Tsing Yi and Castle Peak power stations, and asked how this proposal would benefit consumers. In reply, Mr Sayers said that the decommissioning of the gas turbines would immediately save operating costs. Furthermore, the asset value of the gas turbines would be written off and customers would benefit from not having to pay any future return to CLP’s shareholders on the written-off assets. The option would provide an immediate reduction in CLP’s reserve margin of about 10%.

13. As regards the disposal of the decommissioned gas turbines, Mr Sayers advised that the current proposal was to moth-ball the gas turbines for future use. Scrapping or resale might also be considered and any sales proceeds would benefit customers.

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

14. Members noted CLP’s suggestion that the sale of electricity from CLP to HEC would be beneficial to HEC’s customers and shareholders, and requested CLP to elaborate on the assumptions and reasoning of this proposal. In response, Mr Littlewood advised that the existing interconnectors between the two systems could be used for regular power transfer of up to 350 MW in years 2003 - 2005. With this arrangement, HEC could defer investment in new plants for two or three years and therefore save capital costs, financing costs and operating costs. If there were no actual sale of electricity to HEC, CLP’s capacity could be used as a reserve for HEC’s system. This could result in benefits to the HEC system of up to $1 billion to be shared between HEC customers and shareholders. If HEC actually purchased electricity from CLP, the $1 billion saving would be shared between HEC customers and shareholders and CLP customers.

15. The Chairman opined that HEC’s customers would only benefit if the price of CLP’s electricity sold to HEC was cheaper than the cost of electricity generated by HEC itself. He asked CLP to explain its pricing strategy in relation to this proposal. Mr Littlewood said that the price of electricity to be sold to HEC would be cheaper than the cost of generating electricity at HEC’s future new plant, because electricity to be sold would be generated from CLP’s old plants and the cost of generation there would be cheaper than that of HEC’s new plant. Mr Sayers added that pricing was a complex issue and would need to be negotiated between the two companies before it was reviewed by the Administration.

16. As regards the technical feasibility of using existing interconnectors for regular transfer of power to HEC, Mr Sayers said that CLP had engaged an independent consultant to advise on the issue. The consultant’s report had just been received and CLP would provide the consultant’s findings to the Administration.

Other issues

17. As regards remedial actions initiated by CLP in 1994 after it became aware of the low actual demand, Mr Sayers advised that having noticed the overestimation in demand, CLP had submitted proposals to the Government for deferring the second phase of the BP project. Implementation of the deferral plan had resulted in a reduction of $10 billion in capital expenditure and $3 billlion in operating expenses. Consequently, the tariff currently paid by CLP’s customers was lower than the projected tariff in the 1992 Financing Plan period.

18. As to the expected return on ANFA after the tariff increase in March 1997, Mr Sayers said that the return on ANFA would be maintained at about 12% after the tariff increase.

Meeting with the Administration

The Administration’s response to CLP’s proposal

20. The Secretary for Economic Services (SES) advised that the Administration had had a preliminary review on CLP’s proposal for addressing the excess generating capacity issue. The Administration considered that CLP’s proposal had omitted some important data which were instrumental in assessing the merits of the proposal. CLP’s claim that deferral of BP units would increase the costs to customers in the long term was based on a number of assumptions such as inflation rate, interest rate, penalty to contractors, etc. The Administration had to obtain all the detailed figures from CLP in order to conduct an in-depth study of CLP’s proposal.

21. As regards CLP’s proposed decommissioning of some gas turbines in Tsing Yi and Castle Peak power stations, SES agreed that implementation of this proposal would immediately reduce CLP’s reserve margin. However, this action alone would not be able to solve the problem.

22. On the proposed sale of electricity to HEC, SES said that the technical feasibility of using existing interconnectors for regular transfer of power would need to be carefully assessed. Burns and Roe Company, the Administration’s consultant, advised that new interconnecting system would need to be installed for regular transfer of power, but CLP claimed that new interconnectors would not be needed for the purpose. The Administration had requested CLP to provide more data on its proposal for further consideration and would report to the Panel on progress made. This proposal also involved the complex issue of pricing of electricity to be sold to HEC and HEC’s willingness to buy electricity from CLP. In fact, HEC had made known its objections to the proposal and the parties concerned would need to discuss further. It could be argued that if CLP saw merits for HEC to defer the construction of its new plant, CLP should itself defer the BP units in the first place. SES emphasised that CLP’s proposal to sell electricity to HEC, if feasible, could only be a short term solution for the years 2003 - 2005. The Administration would engage an independent consultant to advise on the long term feasibility of sale of electricity between the two systems.

23. On the technical feasibility of using existing interconnectors for regular transfer of power, the Assistant Director of Electrical and Mechanical Services (Energy Efficiency) advised that based on a modelling analysis, the Administration had found that the risk of electricity supply interruption to HEC’s system would increase to an intolerable level in 2004 if CLP’s proposal were accepted. The Administration hoped that CLP could provide the necessary data for a detailed examination of its proposal. The Administration’s evaluation criteria was that a balance had to be struck between reducing CLP’s excess generating capacity on the one hand and maintaining HEC’s system reliability and stability on the other. CLP’s proposal could not be accepted if it would increase the risk of supply interruption to HEC’s system.

Scheme of Control Agreement

24. Members pointed out that the main weakness of the existing Scheme of Control Agreement (SCA) between the Administration and the power companies was that the Administration had no authority to require the power companies to exclude the assets relating to the excess generating capacity from the ANFA for tariff calculation. They enquired about the legal advice the Administration had sought in this regard. In response, SES remarked that the Attorney General’s Chambers (AGC) had advised that the SCA was a legally binding agreement. Since the provisions in the SCA could not be changed unilaterally, the assets relating to the excess generating capacity could not be excluded from its ANFA without mutual agreement. The current SCA was a 15-year agreement and a mid-term review would be due in October 1997 and another review in 2003. The Administration would collect views from interested parties, including members’ views, and take these into account for the mid-term review. He believed that CLP was a responsible company and would consider reasonable proposed changes to the SCA.

25. Regarding the action which the Administration would take should CLP refuse to change the provision of the SCA during the mid-term review, SES remarked that it could not be assumed that CLP would not co-operate before the negotiation. CLP owed a duty not only to its shareholders, but also to the community.

26. On the tariff review mechanism under the existing SCA, SES advised that in CLP’s 1992 financing plan as approved by the Executive Council, there was a projected basic tariff for each year covered in the financing plan. If CLP’s proposed basic tariff in a year did not exceed the relevant projected basic tariff in the financing plan, there was no need to seek the Executive Council’s approval for tariff adjustment. However, CLP did provide data to and consult the Economic Services Branch (ESB) before proceeding with any tariff adjustments. The ESB would examine the data in detail with CLP. He pointed out that CLP’s recent tariff increases were in fact lower than the inflation rates.

Other issues

27. Ms Christine LOH enquired about the manner through which the Administration could reinforce its regulatory role on the power companies. SES responded that the Administration’s main objective was to protect consumers’ interest. The Administration monitored the power companies through auditing reviews. If any problem was identified, such as CLP’s excess generating capacity, the Administration would discuss with the power company to work out possible solutions. As this case was a complex issue, the Administration had appointed a consultant, the Burns and Roe Company, to provide advice. The Administration’s monitoring work had become more transparent as evidenced by the number of reports published and discussions held by the Panel. In the coming mid-term review on the SCA, the Administration would take into account comments from LegCo Members and other interested parties.

28. As regard the Administration’s action to encourage competition between the two power companies, SES explained that the Administration had not granted any monopoly to the power companies. In the long term, the sale of electricity between the two systems could be viewed from the angle of competition. The Administration was engaging a consultant to study the long term feasibility of sale of electricity between the two systems. When the consultancy report was ready, the Administration would consult the Energy Advisory Committee and also provide a report to the Panel.

29. Referring to the data on maximum demand forecast which were disclosed by HEC but not by CLP, the Principal Assistant Secretary for Economic Services (Economic Services) advised that CLP had decided to take out the information because the data was considered commercially sensitive.

30. Mr LI Wing-tat expressed disappointment that Appendices 2-4 in CLP’s proposal were provided only to the Administration. He asked whether the data in the Appendices were commercially sensitive. SES replied that he agreed that some data included in Appendices 2-4 of CLP’s proposal, which concerned the contractors’ prices and quotations, were commercially sensitive. Nonetheless, even with these appendices, the Administration had found it necessary to obtain more data in order to conduct an in-depth assessment of CLP’s proposal.

V Any other business

32. At the request of members, SES agreed to provide an information paper on the World Trade Organization’s recent agreement on liberalization of the telecommunication market and the impact of this agreement on Hong Kong.

33. The meeting ended at 1:20 pm.

Legislative Council Secretariat
24 March 1997