LegCo Paper No. CB(1) 390/96-97
(These minutes have been seen
by the Administration)
Ref : CB1/PL/ES/1

LegCo Panel on Economic Services

Minutes of the Meeting held on Friday, 25 October 1996 at 10:45 a.m. in Conference Room A of the Legislative Council Building

Members present :

Members absent :

Public officers attending :

Mr Stephen IP, JP: Secretary for Economic Services

For Item IV

Mr KWAN Wing-wah, JP: Deputy Secretary for Economic Services
Mr LIM Poh-chye: Principal Assistant Secretary for Economic Services
Ms Rhoda CHAN: Senior Treasury Accountant

For Item V

Mr Richard YUEN: Secretary, Port Development Board
Mr L K SZETO: Senior Marine Officer, Marine Department
Mr S P CHIU: Senior Engineer, Transport Department
Mr K H CHU: Project Manager (NTW), Territory Development Department
Mr Simon HUI: Officer-in-charge (Assessment & Audit)
Environmental Protection Department

Attendance by invitation :
For Item IV
The Hong Kong and China Gas Co Ltd

Mr Malcom J MATTHEWS: Managing Director
Mrs Grace LAM: Public Relations Manager
Mr Daniel FUNG: Manager - Commercial Sales Development

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

II Items for Discussion for the Next Meeting Scheduled for 11 November 1996

III Information Papers Issued Since Last Meeting

IV Tariff Revision for Hong Kong and China Gas Co Ltd

Justifications for the tariff increase

Monthly Maintenance Charge (MMC)

Regulation and monitoring

Transparency

V. Progress of Development of Container Terminal No. 9 (CT9)

VI Any Other Business

I Confirmation of Minutes of Previous Meeting

(LegCo Paper No. CB(1) 113/96-97)

1. The minutes of the meeting held on 2 October 1996 were confirmed.

II Items for Discussion for the Next Meeting Scheduled for 11 November 1996

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

Hong Kong Electric Co Ltd's generation development proposals; and
Management reform of the Public Cargo Working Areas.

3. Members agreed to put on the outstanding item list the Comprehensive Study on Marine Activities, Associated Risk Assessment & Development of Future Strategy for the Optimum Usage of Hong Kong Waters (MARAD study), which was co-ordinated by the Economic Services Branch.

III Information Papers Issued Since Last Meeting

(LegCo Papers No. CB(1) 30, 45, 68, 72, 99 and 127/96-97)

4. Members noted the six information papers issued since last meeting.

IV Tariff Revision for Hong Kong and China Gas Co Ltd

5. The Hong Kong and China Gas Co Ltd (HKCG) tabled a paper which set out its data in support of a tariff increase with effect from 1 January 1997.

(Post-meeting note: HKCG's paper was subsequently circulated to members vide LegCo Paper No. CB(1) 193/96-97 dated 25 October 1996.)

6. Mr Malcom J Matthews said that HKCG's presence at the panel meeting was a direct outcome of the recommendations in the Consumer Council's Report on "Assessing Competition in the Domestic Water Heating and Cooking Fuel Market" published in August 1995. He further remarked that whilst HKCG had yet to agree with the Government on a formal consultation arrangement with respect to tariff increase, HKCG was pleased to provide information to the Energy Advisory Committee and the LegCo Panel on Economic Services as regards its tariff increase effective from 1 January 1997.

Justifications for the tariff increase

7. Mrs Grace LAM advised that the basic charges for towngas would increase from 18.65 cents/mega joules (MJ) to 19.62 cents/MJ i.e. a 5.2% increase, whereas the monthly maintenance charge (MMC) would increase from $8.5 per month to $9.0 per month, an increase of 5.9%. She said that HKCG's pricing policy was market driven and the increase for 1997 was justified on the following grounds:

HKCG was not operating in a monopolistic market and, as such, the price of towngas had to be pitched at a level to enable it to compete with liquefied potroleum gas (LPG) and electricity;
The rate of increase at 5.2% was below the inflation rate for 1996. In fact, HKCG's price increases in the last 10 years were below inflation rates and consequently the price of towngas, after discounting inflation, was decreasing at an annual rate of 3.2%;
The tariff increase in 1997 would cost 56 % of HKCG's consumers less than $10 per month and 90% of its consumers less than $20 per month. After the price increase, towngas was still 15.4% cheaper than bottled LPG and 25.6% cheaper than electricity;
The productivity of HKCG's employees had been improving over the years, with the number of customers per employee increased from 251 in 1986 to 447 in 1995;
Capital spending by HKCG would continue at the rate needed to assure safety, reliability and continued productivity improvement as demand increases; and
The MMC provided excellent value for money for HKCG's consumers. The accident rate arising from towngas leakage was decreasing as the quality of maintenance services improved. Moreover, additional service in the form of unlimited, on-demand in-home service and regular 18-month inspections were provided. HKCG had in fact incurred a small loss in providing the maintenance service.

8. Hon LI Wah-ming pointed out that HKCG's profit had been increasing by 20% per year, its productivity was also increasing and the price of Naptha had decreased; and it was difficult to understand why HKCG still sought to increase price annually under such circumstances. In reply, Mr Matthews said that HKCG's increase in profit generally reflected the growth in demand and price increases were necessary because of inflationary pressure. He advised that HKCG was one of the companies which had the highest profit reinvestment rate in Hong Kong and consumers, in return, had a safe and reliable gas supply.

9. On how the consumers had benefited from improved productivity and increase profitability of HKCG, Mr Matthews said that the direct benefit was that consumers had a safe gas supply at a reasonable price. He added that consumers also benefited from the cost reduction in Naptha because any reduction in the cost of Naptha would be passed onto the consumers through fuel cost adjustment which was shown on the monthly bill to consumers.

10. Some members pointed out that HKCG's return on equity at 20% was much higher than the single digit return experienced by utility companies in other countries. They opined that the proposed tariff increase of 5.2% was too high and queried what would be the impact on HKCG's estimated profit for 1997 if there was no tariff increase.

11. Mr Matthews replied that in his estimation, HKCG's profit in 1997 without the tariff increase would drop sharply to a level below that normally expected by investors in respect of companies doing similar business in Hong Kong. He remarked that HKCG preferred to have moderate price increases at regular intervals rather than lumpy increases at irregular intervals. He added that if the present increase was delayed, tariff increase in future would be larger and the consumers would be more resistant to a large tariff increase. He further explained that HKCG's return on assets and return on shareholders' funds were in line with companies doing similar business in Hong Kong and it would be difficult to compare HKCG's return with overseas companies which were operating in different types of economy and market environment.

12. Responding to members' query on the consultation made with respect to the 1997 tariff increase, Mr KWAN Wing-wah advised that the Energy Advisory Committee (EAC) had been consulted and it considered the rate of increase acceptable but would require more information in order to advise on justifications.

Monthly Maintenance Charge (MMC)

Some members opined that the fixed rated MMC might not be a fair method in charging the consumers and wondered whether the maintenance charge could be linked to the amount of maintenance service used. Mr Matthews advised that HKCG was conscious that the MMC was currently a compulsory charge and the company had conducted a survey on consumers in order to find an alternative in handling maintenance charges. Mr Stephen IP added that the main consideration in this issue was consumers' safety. He agreed however that the concerned parties should look into the possibility of offering a choice to the consumers regarding the level of maintenance services required, on condition that the safety element would not be compromised. He advised that the Gas Safety Advisory Committee would be consulted on this matter.

13. As regards a more detailed breakdown of costs relating to the provision of maintenance services, Mr Matthews responded that HKCG provided information to the public through its annual report as required by its auditors and the Stock Exchange of Hong Kong. He remarked that detailed cost data were commercially sensitive and could not therefore be disclosed to the public, but such data could be provided to the Government in confidence.

Regulation and monitoring

14. Some members opined that HKCG was operating as a virtual monopoly, as it was revealed in the Administration's statistics that the HKCG had a two third share of the domestic cooking fuel market and its market share was increasing. They expressed concern that the company was not subject to any regulation or monitoring by the Government and its tariff was not subject to any form of control.

15. Mr Matthews replied that HKCG was not in a monopolistic market and it had to compete with electricity and LPG and therefore the price of towngas was market driven. He emphasized that HKCG had been a responsible company exercising prudent pricing policy over 134 years of its operation. As regards the suggestion to use the CPI - X% formula adopted for Hong Kong Telecom for HKCG's tariff adjustment, Mr Mathews advised that HKCG's tariffs were already partially related to the CPI. However, the formula could not be fully applicable as not all costs were related to the CPI and records showed that HKCG's tariff increases were below the CPI. He also remarked that in terms of rate of return, HKCG was not doing better than the regulated companies. However, HKCG was prepared to work out a consultation agreement with the Government to make its price increase mechanism more transparent.

Transparency

16. The Chairman asked the Administration to report progress as regards its undertaking made at the Panel meeting on 12 February 1996 that it would seek mutual agreement with the HKCG on increasing the transparency of the tariff-setting mechanism and the justification for tariff increase. Mr IP replied that the Government supported the principle that there should be more transparency in HKCG's tariff increase mechanism. In fact, HKCG's willingness to provide the LegCo Economic Service Panel with its justification for tariff increase was a big improvement in terms of transparency. He advised that the Government was in the final stage of working out with HKCG a consultation agreement on its tariff increase, and he would report to the Panel regarding the finalised agreement at a later stage.

Admin

V Progress of Development of Container Terminal No. 9 (CT9)

(LegCo Paper No. CB(1) 151/96-97(01))

17. Mr Richard YUEN briefed member on the agreement reached by commercial parties with respect to the development of CT9 as set out in the information paper.

18. Some Members were concerned that if the agreement on CT9 did not specify that the feeder berths could only be used for river trade, the terminal operators could use such additional feeder berths for normal operation and thus would put pressure on the already stretched land transport system. In response, Mr YUEN said that the limited back up land available for the feeder berths (about 3.85 hectares for each berth) would restrict their use to handling feeder service such as intra-Asia vessels and river trade barges for transhipment to ocean-going vessels as it would require at least 15 hectares backup land for operating as a standard berth. He also advised that it would be difficult to enforce an agreement specifying that the two feeder berths should only be used for river trade. Mr IP added that according to prudent commercial principles based on consideration of factors with respect to the use of backup land, the prosperous river trade and the world shipping trend, it would be advantageous to the container terminal operators, in terms of cost effectiveness and efficiency, to use the feeder berths for feeder service.

19. Hon LEE Wing-tat expressed the view that the Administration should have conducted a detailed independent study on the impact on the land transport in the vicinity of CT9 before approving the two additional feeder berths and should not rely on the environmental and traffic impact studies carried out by the consortia. Mr YUEN advised that an independent comprehensive Environmental Impact Assessment (EIA) study had in fact been commissioned for the South East Tsing Yi development including the CT9 project. The two terminal operators had carried out additional environmental and traffic impact studies. Because there were only very minor changes to the design of CT9, the two feeder berths would not create significant impact on the environment. Furthermore, he advised that the consortia would be required to undertake a design review to ensure that the project meet all environmental and traffic requirements for Government's agreement before they were permitted to commence construction work.

20. Hon SIN Chung-kai expressed disappointment that the Administration had neglected the views of residents in Kwai Tsing area in handling the issue of CT9. According to the Administration, significant economic loss would be incurred if CT9 was not completed by 1995. However, he observed that in recent years, container terminal companies had augmented the capacities of existing terminals substantially by means of improving their productivity. He opined that if the Administration had shelved the CT9 project as soon as the negotiation with the Chinese side broke down, and proceeded with building CT10 and CT11 on Lantau Island then, there would be no need to build CT9 and Kwai Tsing residents would not have to bear the adverse effects of the terminal on the environment and road traffic.

21. In response, Mr IP said that he did not agree that the environmental impact on residents of Kwai Tsing area was neglected. He reiterated that the Administration did commission a comprehensive EIA study and it had carefully considered all views and opinions on different aspects of the CT9 development. Mr YUEN further advised that as a result of the world shipping trend, larger vessels and more elaborate equipment were employed in the container business. As the development of CT9 was held up, the container operators had to invest heavily to increase their productivity in order to cope with the demand. The higher fees that container terminal companies needed to charge as a result of their heavy investment would eventually create adverse impacts on their business. Furthermore, in order to maintain its competitiveness, it was necessary for Hong Kong's container terminals to reduce the operating cost and increase its capacity. Hence, Hong Kong could not afford to slip any further in the implementation of the CT9 project.

22. Regarding the concern about the adequary of land for parking of goods and container vehicles, Mr IP agreed to provide a paper on the amount of land reserved for such purposes in the CT9 project under the old and the new designs.

Admin

(Post-meeting note: The paper provided by the Administration was circulated to members vide LegCo Paper No. CB(1) 276/96-97 dated 7 November 1996.)

23. In response to the Chairman's enquiry on the capacity of large ocean-going liners, Mr YUEN advised that the world's largest container liners could carry about 6,500 twenty foot equivalent units (TEUs). He further said that one of such liners was going to call on Hong Kong but it would not carry a full load because of the limitation of the water depth in the Rambler Channel. Mr IP took the opportunity to appeal to Members for their support of the Administration's future request for funding for dredging the harbour as this would be very important to Hong Kong's economic development.

VI Any Other Business

The Chairman reminded members that the next meeting was scheduled for 11 November 1996 at 2:30 pm.

The meeting ended at 12:50 pm.
Legislative Council Secretariat
25 November 1996

Last Updated on 14 August 1998