but the Government side conceded that there was some force in an argument that the risk element in the permitted return on assets acquired with new shareholders' funds (i. e. retained earnings and new capital issues) was greater because shareholders and future investors believed that the risk had increased (although the Government side maintained that in fact it had not, as argued in paragraph 26 of Annex A). To recognise that shareholders were being asked to make a firm commitment now for a substantial long-term expansion programme, a higher return was considered acceptable in relation to this portion of CLP's assets. A periodic review on the basis of a 13.5% return at this stage, as proposed at paragraph 2€ of Annex A, would not provide sufficient certainty in this regard. Further, the higher return would encourage the retention of funds in the business, and outside investment.
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7
So it is now proposed that the permitted return after taxes of CLF should be the sum of:
(a)
(b)
(c)
13.5% per annum of the average net fixed assets on the books of CLP/PEPCO as on 30th September 1978 (the last day of the present Scheme);
15% per annum of the average net fixed assets purchased by CLP after 30th September 1978 (together with assets acquired for the new generating system on or before that date), to the extent that such purchases have been financed by additional shareholders' funds (i. e. new capital issues and retained earnings);
13.5% on all other fixed assets acquired after 30th September 1978.
The consequence of (b) on tariffs would be marginal because it will mean generally that in practice a slightly higher proportion of the CLP's development will be financed from retained earnings rather than by consumers through the Development Fund. CLP is not expected to change its dividend policy, and thus the cash flow position will not change significantly as a result of the higher permitted return. (At the time of distributing this memorandum CLP had not yet indicated formal agreement to sub-paragraphs (a), (b) and (c). Agreement is expected before 29th November 1977 and early discussion of this memorandum is necessary for CLP to respond to the offer, made by the intended suppliers of the new generating plant and equipment, on time.)
CONFIDENTIAL
機密