TNAG-0635-FCO40-783-Supplies-of-electricity-for-Hong-Kong-1977 — Page 72

A

B

For discussion

on 17 November 1964

MEMORANDUM FOR EXECUTIVE COUNCIL

CONTROL OF ELECTRICITY UNDERTAKINGS - CHINA LIGHT AND POWER COMPANY LIMITED

Annex A

XCC(64)111

Copy.1.9.

On 15 September 1964 Council considered memorandum XCC(64)85, of which a copy is at Annex A, and advised that there was no objection in principle to the proposal that China Light and Esso Standard Eastern Inc should jointly set up an electricity generating company, subject to agreement over control arrangements.

2

In the light of discussions since then the two companies have submitted revised proposals, of which a copy is at Annex B. Special attention is drawn to the Project Summary, Appendix I (Scheme of Control) and Appendix V (Memorandum of Understanding between the Companies).

Scheme of Control

3

The basic considerations involved in a scheme of control are:

(a)

4

(b)

(c)

(d)

흐

the appropriate after-tax rate of profit on the shareholders' investment;

whether or not additional profits over and above (a) should be permitted as a contribution to the finance of expansion;

if (b) is agreed, how to ensure that the benefit of capital investment so financed is appropriately shared between consumer and shareholder;

the provision of adequate incentives towards efficiency and growth,

The growth of demand for electricity is estimated at 20% a year at present. On this basis, capital requirements in the five years 1964-68 are estimated at $778 million of which $351 million will be available from depreciation, leaving $427 million to be found from other sources. It may be reasonably argued that the requirements are so great that a contribution to capital from consumers in the shape of additional profits over and above the shareholders' reasonable return is justified, if it can be appropriately con- trolled. On the other hand the need is aggravated in the case of China Light by their strongly rooted objection of principle to finance by borrowing, a normal source of funds for utilities. On the basis of the Scheme of Control proposed, of the $427 million required $146 million would be derived from re-investment of shareholders' retained profits, $174 million from new capital (out of $250 million to be provided over a rather longer period by the two companies), and $107 million from additional profits. It is not possible to make reliable forecasts beyond 1968, but the likelihood is that capital requirements will remain heavy, and that a higher proportion would be met from additional profits.