Panel on Economic Services (Minutes) 26 Oct 98

LC Paper No. CB(1) 593/98-99
(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, 26 October 1998, at 10:45 am
in the Chamber of the Legislative Council Building

Members present :

Hon James TIEN Pei-chun, JP (Chairman)
Hon Fred LI Wah-ming (Deputy Chairman)
Hon Kenneth TING Woo-shou, JP
Hon LEE Wing-tat
Hon Martin LEE Chu-ming, SC, JP
Hon Eric LI Ka-cheung, JP
Hon MA Fung-kwok
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
Hon WONG Yung-kan
Hon Howard YOUNG, JP
Hon LAU Chin-shek, JP
Hon Mrs Miriam LAU Kin-yee, JP
Hon FUNG Chi-kin

Members absent :

Hon David CHU Yu-lin
Dr Hon David LI Kwok-po, JP
Hon Bernard CHAN
Dr Hon Philip WONG Yu-hong
Hon Andrew CHENG Kar-foo

Public officers attending :

For Agenda Item III
Ms Maria KWAN, JP: Deputy Secretary for Economic Services
Mr K T LI: Principal Assistant Secretary for Economic Services; (Financial Monitoring)
Mr Eric JOHNSON: Principal Assistant Secretary for Economic Services; (Economic Services)
Mr L T LEE: Assistant Director of Electrical and Mechanical; Services (Energy Efficiency)
For Agenda Item IV
Ms Maria KWAN, JP: Deputy Secretary for Economic Services
Mr Kim SALKELD, JP: Deputy Secretary for Planning, Environment and Lands (Environment)
Mr K T LI: Principal Assistant Secretary for Economic Services; (Financial Monitoring)
Mr Eric JOHNSON: Principal Assistant Secretary for Economic Services; (Economic Services)
Mr L T LEE: Assistant Director of Electrical and Mechanical Services (Energy Efficiency)
Mr Elvis W K AU: Assistant Director of Environmental Protection; (Environmental Assessment & Noise)
For Agenda Item V
Ms Maria KWAN: Deputy Secretary for Economic Services
Mrs Lessie WEI: Director of Agriculture and Fisheries
Ms Esther LEUNG: Principal Assistant Secretary for Education and Manpower
Miss Dora FU: Principal Assistant Secretary for Economic Services
Mr M K CHEUNG: Assistant Director of Agriculture and Fisheries (Fisheries)
Dr Patsy WONG: Senior Aquaculture Fisheries Officer - Agriculture and Fisheries Department

Attendance by invitation :

For Agenda Item III: China Light & Power Co Ltd
Mr R E Sayers: Managing Director
Mr P A Littlewood: General Manager
Mr Stephen LAU: Economic Planning Manager
Castle Peak Power Co Ltd
Mr G L GLAVES: Chairman
Mrs Betty YUEN: Director
For Agenda Items III and IV: Hongkong Electric Co Ltd
Mr K S TSO: Managing Director
Mr Francis LEE: Director & General Manager - (Engineering)
Mr Lawrence DO: General Manager (Finance)
Mr Gary CHANG: General Manager (Development & Planning)

Clerk in attendance :

Mr Andy LAU: Chief Assistant Secretary (1)6

Staff in attendance :

Mr Daniel HUI: Senior Assistant Secretary (1)5

I.Information papers issued since last meeting

(LC Paper No. CB(1)313/98-99 - Towngas tariff for 1999

LC Paper No. CB(1)343/98-99 - Import and retail prices of major fuels from September 1996 to August 1998

LC Paper No. CB(1)352/98-99 - Proposal to create supernumerary posts to accommodate surplus staff of Public Cargo Working Areas)

1 Members noted the information papers issued since last meeting.

II.Items for discussion at the next meeting scheduled for 23 November 1998

(LC Paper No. CB(1)355/98-99(01) - List of outstanding items for discussion)

2. Members agreed to discuss the following items at the Panel meeting scheduled for 23 November 1998 :

Development and competitiveness of the Hong Kong container port; and
Retail prices of major fuels.

III.Review of Scheme of Control Arrangements with China Light and Power Company Limited and Hong Kong Electric Company Limited

3. The information paper provided by the Administration was tabled at the meeting.

(Post-meeting note : The paper was subsequently circulated to members vide LC Paper No. CB(1)380/98-99(01)).

4. The Chairman stressed that members of the Panel were extremely disappointed that the Administration had repeatedly failed to provide information papers to the Panel well before the meetings. He urged the Administration to submit papers for discussion to the Panel earlier.

5. The Deputy Secretary for Economic Services (DS/ES) apologised for the late submission of papers to the Panel and said that the Administration had indeed made an effort to ensure the timely submission of papers to the Panel. However, in the present case, the Administration was unable to provide the paper earlier due to the time required for the collection and verification of information for the preparation of paper.

6. The Principal Assistant Secretary for Economic Services (Financial Monitoring) (PAS(ES)/FM) briefed members on the progress on the interim review of the Scheme of Control Agreements (SCAs) as set out in the information paper.

7. Noting that the power companies were prepared to accept a new provision under the interim review to give up the return on investment in additional generating units installed in future if these gave rise to excess capacity, Mr LEE Wing-tat expressed grave concern about the level of reserve capacity which would be considered acceptable by the Administration as it would have a significant bearing on the tariff to be charged by the power companies. He therefore asked for the basis for determining the minimum reserve capacity. In response, the Assistant Director of Electrical and Mechanical Services (Energy Efficiency) (AD(EMS)/EE) advised that the generating capacity of an electricity company should be able to meet the forecast maximum demand plus a certain level of reserve capacity. The minimum reserve capacity allowed for electricity companies varied from countries to countries. As for the case of Hong Kong, the Administration considered an average reserve margin of 30% as not excessive. PAS(ES)/FM supplemented that the main criteria for generating capacity planning used by the two power companies was "loss of load probability" (LOLP) i.e. the probability of power interruption in terms of hours or days per year. If the installed capacity of a system could not fulfil the LOLP criterion for a particular year, additional capacity would be needed. He further advised that China Light and Power Company Limited (CLP)&'s reserve capacity at 52% in 1997 was considered excessive and the Administration had indeed reached an agreement with CLP in early 1997 to defer the installation of electricity generating units 7 and 8 at the Black Point (BP) Power Station.

8. In the light of the prevailing economic situation, Mr LAU Chin-shek queried the basis for maintaining the permitted rate of return of 13.5% on average net fixed assets (ANFA) and 15% on shareholders' investments. PAS(ES)/FM responded that the terms of the SCAs were agreed during 1991/92 when the investment climate were different from the prevailing one. Given that substantial investment on a long term basis would be required in connection with the development of generating capacity on a long term basis, it was necessary to provide a stable financial environment for financing these investments. He further advised that the current SCAs were valid for 15 years and any modifications to the SCAs including the permitted return of 13.5% on ANFA and 15% on those financed by shareholders' investments respectively had to be mutually agreed by both parties. DS/ES added that the Administration was aware of the aspirations of the community on the two power companies. She stressed however that SCAs were legal contracts between the Government and the power companies and provisions therein could not be amended unilaterally. She further advised that the power companies were aware of their responsibilities to the communities and had agreed to amend the SCAs to exclude excess generating capacity from attracting permitted returns.

9. Mr LAU Chin-shek appealed to the power companies for freezing electricity tariff at current levels for 1999, having regard to the recent economic downturn. Mr K S TSO replied that when HEC reviewed its electricity tariff, it would certainly take Hong Kong&'s current economic conditions into account. Mr Ross SAYERS gave a similar reply as that of Mr TSO.

10. Mr Fred LI Wah-ming noted that the choice of fuel for electricity generation would have a major impact on electricity tariff and enquired whether the interim review had examined the costs and benefits of using natural gas for electricity generation. PAS(ES)/FM confirmed that natural gas was more expensive than coal as fuels for generating electricity but on the other hand, it was more environmentally friendly. Regarding the related fuel clause charge, he said that this was mainly to cover the actual cost of fuel required for the generation of electricity and fuel cost was directly passed through to customers without involving any profit or loss on the part of the power companies.

11. Given that the permitted returns would be calculated on the basis of the companies' ANFA, Mr Fred LI Wah-ming opined that this would encourage the power companies to borrow money to increase its ANFA for a higher permitted return. PAS(ES)/FM clarified that the permitted return was subject to deduction of actual interest up to 8% on borrowed capital. The power companies were at present earning a net return on ANFA of only about 12%. He further advised that it would not be appropriate to specify in the SCA the permitted ratio of loan to shareholders fund because the power companies needed flexibility in financing their investments. Moreover, the power companies periodically submit to the Economic Services Bureau Financing Plans which provided information on the companies' proposals on financing of their investments and the Administration would consider whether the loan to capital ratio was reasonable in that context.

12. As to the progress of the proposal to increase the interconnection capacity between CLP and Hong Kong Electric Company Limited (HEC) and to promote competition in the electricity supply sector, the Principal Assistant Secretary for Economic Services (Economic Services) (PAS(ES)/ES) advised that the Administration had commissioned a consultancy study on the feasibility of increasing interconnection between CLP and HEC and promoting competition in the electricity supply industry in Hong Kong and the study was approaching completion. He said however that the subject of increased interconnection between CLP and HEC had no bearing on the interim review of the SCAs. DS/ES supplemented that the issue of interconnection was outside the scope of the interim review.

13. Given the importance of the issue and having regard to the fact that the Administration&'s paper was simply tabled at the meeting in which members did not have sufficient time to scrutinise, members agreed that a special meeting should be convened to follow-up on the issue. They also requested the Administration to provide further information on the following:

the issues covered in the interim review of SCAs, the respective stances of the Government and the two power companies on these issues and the final outcomes of the issues under review;
the details and implementation timetable for the proposed modifications to the SCAs;
the basis for determining the minimum reserve capacity of 30% and the permitted return of 13.5%;
the forecast demand and generating capacity of CLP and HEC in the next ten years;
the progress of the proposals to increase the interconnection capacity between CLP and HEC and to promote competition in the electricity supply sector;
the provisions on environmental obligation in the SCAs of both CLP and HEC and how there provisions were actually put into effect; and
the outcome in respect of the proposal to extend the useful life of plant and facilities owned by CLP and HEC and its details.

(Post meeting note : The requisite information was circulated to members vide LegCo Paper CB(1) 435/98-99(02)).

IV.Hong Kong Electric Company Limited&'s generating facility at Lamma Island

(LC Paper No. CB(1)355/98-99(03))

14. PAS(ES)/ES briefed members on the progress on HEC&'s proposal to build additional electricity generating capacity at Lamma Power Station as contained in the information paper. DS/ES stressed that HEC&'s proposal was being examined by the Administration and a final decision had yet to be made.

15. Noting that HEC had scaled down the proposed unit addition in 2003 from 600MW to 300MW, Miss Christine LOH enquired about the possibility of deferring the project if forecast demand did not justify the additional generating capacity. In response, PAS(ES)/ES advised that HEC had recently reviewed their forecast of maximum demand and their generation development proposals in the light of the current economic circumstances. While still concluding that additional generating capacity would be needed in 2003, HEC had scaled down the proposed unit addition in 2003 from 600 MW to 300 MW. The Administration was examining the demand forecast and other details in HEC&'s proposal in consultation with Government Economist and the consultant. Any decision on HEC building new generating capacity would be taken after a careful review of the growth in demand for electricity among other things.

16. Some members asked whether the Administration had considered the option of HEC purchasing electricity from CLP to meet forecast demand in 2003 and hence, saved the need for building an additional generating unit. PAS(ES)/ES advised that the subject of increased interconnection between HEC&'s and CLP&'s systems, which would enable mass transfer of electricity power between the two systems, was a complex one because the two electricity grids were in private ownership. Any changes involving them therefore had to be taken forward in consultation with the owners of these assets. The Administration had engaged a consultant to study the feasibility of increased interconnection between the two systems and the report would be ready by end of the year. The Administration would take into account the findings of the consultant before making a decision on HEC&'s proposal to build additional generating unit. Mr K S TSO supplemented that HEC had identified the following problems on power purchase from CLP:

existing interconnection amongst HEC, CLP and Guangdong Electric Power Holding Company was mainly for the purpose of generating capacity support and emergency backup. HEC was concerned about the possibility of disconnection of interconnectors due to dynamic stability problem in the form of oscillation;
by 2003 CLP&'s generating capacity was only adequate to meet its maximum demand and it was doubtful whether it had spare capacity to sell electricity to HEC. Moreover, HEC was proposing to build an additional generating unit which would use natural gas as fuel and was more environmentally friendly; and
the Government had indicated in 1997 that investments in additional equipment to enable increased interconnection between the systems was not justified economically.

17. Responding to the question on whether HEC would consider purchasing from CLP natural gas which could not be fully utilized, Mr TSO advised that HEC was proposing to use liquefied natural gas supplied by pipes from a plant in Shenzhen instead, and the cost of laying a pipe from Shenzhen would be cheaper than CLP&'s natural gas pipe supplying direct from distant gas fields.

18. In response to the Chairman&'s question, PAS(ES)/FM confirmed that in accordance with the mechanism agreed with the power companies, in future HEC&'s investments in the proposed additional generating unit would be excluded from the ANFA for calculating permitted return if it was subsequently found that HEC&'s reserve capacity was excessive after installation of the additional generating unit.

19. Mr LEE Wing-tat pointed out that Burns and Roe Company was the consultant who failed to identify CLP&'s over-estimation of forecast demand in relation to the BP power station. He queried the basis for re-engaging this consultant to study the HEC&'s generation development proposals. AD(EMS)/EE clarified that the consultancy brief for the study on BP power station did not cover the part on the examination of CLP&'s forecast demand. He further advised that Burns and Roe Company was selected after a public tendering exercise in which qualified consultancy companies over the world were invited to submit tenders. Currently, Burns and Roe Company had a 3-year contract with the Administration.

20. As regards the time schedule in processing HEC&'s proposal, PAS(ES)/ES advised that the proposal would be put forward for Executive Council&'s decision in early 1999. In this regard, Mr LEE Wing-tat requested the Administration to conduct a public consultation, including consultation with the Legislative Council, on HEC&'s proposal before a decision was made by the Executive Council.

21. In view of time constraint, members agreed to discuss the subject matter further at the special meeting mentioned in paragraph 13. As requested by members, the Administration agreed to provide further information on the following:

the feasibility of the following proposals and the respective stances of the Government and the power companies on these proposals :
-selling of natural gas supply already secured by CLP to HEC;
-selling of CLP Black Point Units 7 and 8 to HEC at competitive price;
-buying of electricity by HEC from CLP; and
-buying of electricity by HEC from Guangdong Electric Power Holding Company;
the forecast reserve capacity of HEC at 2003; and
the selection criteria for appointing consultants to examine HEC&'s generation development proposals and whether the Administration was prepared to release the findings of the consultancy study.

V.Development of the mariculture industry and the overall manpower requirement of the fishing industry

(LC Paper No. CB(1)355/98-99(04))

Manpower requirements of the fisheries industry

22. Members generally supported the Mainland Fishermen Deckhands Scheme (MFDS). They opined that since it was difficult to recruit local workers to the fishing industry as the extended absences from Hong Kong and arduous working conditions made fishing a relatively unattractive employment, the Administration should take a flexible approach to assist the fishing industry in obtaining necessary manpower to sustain their operation.

23. Mr WONG Yung-kan enquired the reasons for not allowing P4 sampans made of fibre-glass to apply for Mainland deckhands under MFDS. In response, the Director of Agriculture and Fisheries (DAF) explained that the main eligibility criteria under the MFDS was whether the vessel concerned habitually engaged in fishing outside Hong Kong. As P4 sampans operated solely in Hong Kong waters, they were not therefore eligible for quota under the MFDS. The Agriculture and Fisheries Department (AFD) had also discussed with the fishing sector and they had not raised any labour shortage problem for this category of vessels.

24. As regards the Administration&'s policy in addressing manpower shortage faced by the aquaculture sector, the Principal Assistant Secretary for Education and Manpower (PAS(E&M)) advised that mariculturists were eligible to apply for imported labour under the Supplementary Labour Scheme (SLS). She further advised that the Administration&'s policy in SLS was based on the following main principles :

protection for local workers - in order to ensure priority of employment for local worker, employers had to go through a mandatory local recruitment process through both newspaper advertisements and the Labour Department to prove that they were genuinely unable to recruit the required type and number of local worker; and
protection for imported workers - all local labour laws would apply to both imported workers and local workers. The wages offered to imported workers should not be less than the median wage for local workers engaged in similar industry. Moreover employers would be required to provide proper accommodation to imported workers.

She supplemented that there were flexibility in handling individual applications as long as the basic principles were upheld.

25. Some members pointed out that the Administration had to be realistic in determining the median wage for workers in the aquaculture sector. If the median wage was set too high, employers would not make use of the SLS because of cost considerations. In this regard, Mr WONG Yung-kan said that the median wage for workers in the aquaculture sector was presently drawn up with reference to the salaries of workers in the construction industry and pitched at a relatively high level of $9,370 per month. The industry on the other hand considered a wage of about $3,500 per month plus accommodation and meals reasonable. PAS(E&M) explained that owing to the small number of employees in the aquaculture sector, the median monthly wages of this sector were compiled on the basis of Census and Statistics Department&'s wage data in a comparable industry. She advised that the Labour Department and the Census and Statistics Department would soon consider how best to conduct a survey with a view to obtaining more representative wage data for determining the median wages for workers in aquaculture sector in Hong Kong. She noted members' request that the survey should be conducted as soon as possible.

26. As regards accommodation requirement for imported workers for the aquaculture sector. Mr WONG opined that it was unreasonable to disallow the imported workers to be accommodated in structures on fish rafts. He said that these workers had to be housed in these structures for operational reasons. The Assistant Director of Agriculture and Fisheries advised that the marine fish culture licence stipulated that such structures were not allowed for dwelling purpose and should only be used as shelters for watch keeping or storage purposes.

Red tides

27. Mr CHAN Kam-lam enquired whether AFD would exercise discretion to allow fish farmers to relocate their rafts beyond the fish culture zone in order to get away from red tides. DAF said that in normal circumstances, raft had to be located in specified fish culture zones as provided for under the legislation. However, under special circumstances such as during the occurrence of red tides, AFD would allow fish farmers to relocate their rafts outside fish culture zones in order to get away from red tides. The rafts would have to be relocated back to its original position after the red tides had disappeared. She further advised that the application for relocation of rafts under emergency situation could be as simple as a phone call from the fish farmer concerned to a relevant officer of AFD.

28. As regards the Administration&'s efforts to minimize impacts of red tides on marine fish culture, DAF advised that the current monitoring programme of testing water sample at 13 fish culture zones twice a week was more stringent than measures recommended by the Experts Group on Red Tide which comprised experts from both tertiary institutes and relevant Government Departments. In addition, other Government departments including Marine Department and Hong Kong Flying Service had been requested to report to AFD on any red tides seen during their normal operations. This arrangement served as a warning system to AFD to take remedial action against red tides as soon as possible. Furthermore, AFD had commissioned a consultancy study on monitoring and management of red tides and the consultancy report was due in early 1999.

VI.Any other business

4. Mr Fred LI Wah-ming suggested and members agreed that the item on "China Light and Power Company Limited&'s electricity tariff" be included on the agenda for the special meeting mentioned in paragraph 13.

30. There being no other business, the meeting ended at 1:00 pm.

Legislative Council Secretariat
8 December 1998

Legislative Council Panel on Economic Services

Minutes of meeting held on Monday, 26 October 1998, at 10:45 am in the Chamber of the Legislative Council Building

Legislative Council
Panel on Economic Services

Minutes of meeting held on
Monday, 26 October 1998, at 10:45 am
in the Chamber of the Legislative Council Building