TNAG-0638-FCO40-786-Supplies-of-electricity-for-Hong-Kong-1977 — Page 116

C.S. 166

CONFIDENTIAL ##

XCS (77)2

- 8 -

(d) the present Development Fund (with its dual role as

described in paragraph 2(c)) be split into a Development Fund for capital expansion and a Balancing Fund related to tariff adjustments arising from changes in the cost of day-to-day operations. The idea is that, on the basis of 5-year forecasts that have allowed for ex- pected growth, inflation and other factors including the availability of capital funds from other sources, the Government and CLF should agree on the appro- priations to the Development Fund to be made by each company (that is CLF and the new generating company) for the financial year in question. Such sums would then be reflected in the charge each company made for electricity sold and would be credited to the Fund. This type of arrangement is a necessary part of CLP's proposals in order

(i)

(ii)

to limit the Development Fund to being a source for financing capital expansion along the lines outlined in paragraphs 11 to 18 above; to be the means of establishing the sums to be related to the permitted return to reflect the efficiency element referred to in (c). In other words, having established the Development Fund element in the charge, any cost savings in the remainder would be to the benefit of the companies up to the additional 1%.

Profits in excess of this upper limit (that is 18% per year), would be transferred to a Balancing Fund and tariffs would immediately be reduced. Conversely, in the event that profits fell below the minimum of the band, that is 14% per year, the deficiency would be made up by a transfer from the Ealancing Fund and a tariff increase would be introduced, following consideration with the Government, to bring future earnings up to the 14%. The Balancing Fund to all intents and purposes would thus operate along the lines of the existing Development Fund and any balance in the Fund would be used in effect to reduce tariffs or to avoid the need to increase them as a result of higher operating costs;

(e) any necessary adjustments to tariffs be applied on a

quarterly basis. Although the CLP proposals at Annex F do not explicitly say that the tariff adjust- ments should be automatic, CLF were certainly seeking automatic adjustments at one stage;

(f)

in view of the increase proposed to the permitted return, the interest rate on the Development Fund be raised from 8% to 9%;

CONFIDENTIAL #≈