TNAG-0638-FCO40-786-Supplies-of-electricity-for-Hong-Kong-1977 — Page 105

C.S. 166

CONFIDENTIAL #

XCC(77)86

Copy No Page 6

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(g) Dividend Restrictions (paragraphs 41-42 of Annex A)

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The Government side concluded (as anticipated in paragraph 42 of Annex A) that there was no justification for continuing to insist on restrictions applicable to the payment of dividends by CLP, when no other public utility companies were so limited. Furthermore, the dividend restrictions in the existing CLP Scheme of Control, though applicable, have never become operative and present indications from the new financial plan are that such restrictions, if imposed again would not become operative either. Nevertheless dividend policy is one of the niajor components of the financial plan that will require to be agreed by the Executive Council following a Financing Review.

(h) Fuel Escalation Charge (paragraph 43 of Annex A)

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After weighing the arguments for and against raising the base price to a more realistic level, the Government side and CLP agreed that it would be difficult to persuade the general public that a transfer of a significant part of the overall unit cost from the fuel element to the base rate was not an attempt to hide an overall increase in tariffs. But it may be necessary to review the fuel clause later to standardise the practice of Hongkong Electric and CLP, or if CLP's new generating plant uses coal.

(i) Duration of Scheme of Control (paragraph 44 of Annex A)

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In accordance with the brief, a fifteen year term for the Scheme of Control from 1st October 1978 has been agreed with CLP as set out in part D of Annex B. During the year ending 30th September 1983 either side may request the re-negotiation of any of the terms which it believes are no longer equitable or appropriate. At the review, the Government side will pay particular attention to the extent to which a permitted return on additional shareholders' funds as high as 15% can still be justified. With regard to the proposed regular review of accounting policies (paragraph 44 of Annex A), it has been agreed that this would take place annually during the auditing reviews.

Summary of the position reached in negotiations with CLP

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To summarise, the draft Scheme of Control at Annex B together with the memoranda at Annexes I and II to Annex B seem to represent a satisfactory outcome of the re-negotiations (subject to the final agreement of CLP to the proposed rate of return). Though not dissimilar to the existing Scheme of Control in many respects, the proposed new Scheme is shorter, clearer, simpler of application (except perhaps in regard to tariff adjustments) and more appropriately cast to cater for conditions throughout the coming decade.

CONFIDENTIAL

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