3
XCC(64)111
Interest on Development Fund
7
A rate of 8% is proposed. This is partly to maintain the theory that the Development Fund is a form of borrowing, but its main effect should be to exert a constant downward pressure on the charges made for electricity and so encourage the company to maintain and improve efficiency if it is to maintain its net return. It will also act as an inducement to keep the balance in the Development Fund as low as possible.
Initial Base Tariff
8
To give the proposed return on average net assets and provide $107 million for the Development Fund over the years 1964-68, a base tariff calculated to produce $18 million less than the present tariff in 1965 would be appropriate. This is a reduction of rather less than 10%. It is proposed also to introduce a revised tariff structure at the same time, so that actual reductions will vary from consumer to consumer. The control arrangements should provide further small reductions in charges over the next few years, and more substantial reductions thereafter.
Initial Capital Structure
9
It is proposed that the above arrangements should be deemed to have come into effect from 1 October 1963 (the beginning of China Light's 1964 Financial Year). At 30 September 1963 China Light had accumulated earnings and reserves (the bulk of which have been re-invested) amounting to $149 million (excluding insurance and tax reserves; and after adjusting the company's balance sheet to allow for the difference between the book and the Inland Revenue depreciated values of fixed assets: the balance sheet value is at present $172 million). Of this all but $30 million had accrued since dividend restrictions were introduced in 1960. If the proposed control arrangements had applied during this period, something of the order of $75 million of this would have been shareholders' retained profits, and $74 million would have been in the Development Fund, In the companies' original proposals, it was suggested that the reserves should be allocated in this way. During negotiation the question arose, however, of the status of the Develop- ment Fund in respect of its ownership. It is China Light's view that, as it had accrued and would accrue from the company's operations, it belonged to the shareholders. It is Government's view, however, that the levying of the additional profit from which it accrues can be justified only if it is treated, so far as practicable, as if it were "borrowed" from the consumer, and the Scheme of Control is designed to do this as far as post-1963 additional profits are concerned, The question is, however, only likely to be one of real significance in the event of liquidation or compulsory purchase, and is therefore probably remote. It could be left unresolved, and left for negotiation or judicial decision if the occasion arose. It seems better, however, to re- solve it now if possible, and it is therefore proposed, as a compromise, that the whole $149 million retained earnings and reserves which have accrued up to 30 September 1963 should be recognised as assets of the company, and future accruals to the Development Fund recognised as liabilities.of the company to the consumer (or the public). The scheme of control incorporates this proposition.