Daily Information Bulletin - 1960s - 1964 - NOV - ENG

 HONG KONG GOVERNMENT

NFORMATION SERVICES

147

DAILY INFORMATION BULLETIN

Monday, Hovmbcr 23, 1964

CSXSA LIGHT AND GO. LTD.

Government has approved a project announced today by the China Light and Power Co., Ltd. and Saso Standard Eastern for the formation of a new joint electricity generating conpany. It is initially planneH to hare a capacity of 720 segawatts additional to China Light’s existing installations, at a capital oost of approximately 1500 oillion (excluding capital required for expansion of China Light’s distribution ays tea). The electricity

generated is to be distributed through China Light's systen and the fuel oil requi recent a of China Light and of the now coapany are to bo supplied by Beao at market prices. Government's approval is subject to the acceptance jointly by China Light and the new Conpany of the nonaal statutory nhHgatIrmw of a public utility franchise.

A scheme of financial control to apply to the operations of Chim Light and the new oonpany has been agreed between Govexnaent and the ooapaniee. Ite objects are to Unit the ooapaniee' disposable profits to a reeoonahl a return on their equity capital idille providing adequate incentives towards efficiency and expansion; and in particular to ensure that the benefits free any capital for expansion which is obtained frcn additional profits accrue primarily to the consuner.

The two ooapaniee have undertaken to subscribe B26O oillion of new capital over a period of years, and Governaent has accepted the ooapaniee' that the future capital reqnirenents of the conbinod undertakings at present rates of growth are so groat that sone part may also properly bo provided by way of additional profits. It is estimated that capital

/required .......

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required for expansion during the five years 1964 to 1968 will be '778 Billion; and that of this, $351 million^ill be available from depreciation, <174 Billion froa new capital, $146 aillion from re-investaent of undistributed shareholders' profits, and 3107 aillion froa additional' profits.

Sch^e Of Control

The nain features of the ocheco of control are as follows: -

(1) The fixing of a basic tariff within which the Companies I aunt work, except to the extent of any agreed increase

in consequence of increased costs of fuel etc. The basic tariff will be at a level such as to effect a reduction cf approximately 319 million a year tn revenue (calculated on 1964-65 estimated sales) or rather loss than ton per cent. It will be brought into force as soon as practicable. As it is also intended to introduce a new tariff structure, the reduction enjoyed by individual consuners may vary substantially from this ten per oent.

(2) The recognition of a fixed percentage on net fixed assets os being shareholders’ maxxaum disposable profit; net fixed assets being defined as capital investment leas depreciation at Inland Revenue rates. This is based on the normal practice of Anorican regulatory agencies. The rate of return on net fixed assets is 1>i per oent after tax. This is forecast to produce a return in the range of twelve per cent tc 14 per cent on shareholders’ equity capital on the basis of present plans for financing expansion. Whether this rate of return actually accrues depends on the companies’ ability to earn adequate profits within the basic tariff; it is not guaranteed. The percentage return is subject to review if plans for financing expansion are substantially modified.

(j) Any profits annmtng in excess of the shareholders• percentage return on not fixed assets are to be put to a Development Fund and used for expansion. It is estimated that 3107 aillion will accrue in this way during the years 1964-68. Interest of eight per cent will be charged on the Development Fund against the shareholders’ return cm net fixed assets and applied by way of further reduction

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of charges. The basic idea is to treat such re-invested I surplus profits as funds borrowed by the coapany froo the consuoer. The Fund is therefore to be treated as a | liabilit/vof the coapany and excluded from shareholders' equity. A major effect of this arrangement is to V

maintain a constant downward pressure on charges so long as there is a substantial sun in this Fund; and thus to encourage the companies to operate efficiently in order to continue to earn their permitted return on net fixed assets within the basic tariff structure.

(4) The companies will be permitted to distributees dividends only a proportion of their disposable, profits' so long as the Development Fund exceeds a certain proportion of net fixed onsets. This is to induce the coopanies to sake

(every effort to keep to a minimum their recourse to the Development Fund as a source of Capital.

(5) The scheme of control is to be effective for fifteen years froa 1st October 1963. Negotiations as to its future terns are to begin at the end ef the twelfth year.

Sxistin^ Reserves

China Light’s reserves at September 30, 1963 excluding insurance and tax reserves and after certain adjustments for depreciation, were approximately 3149 oillion. Of this, about 3118 million has accumulated since dividends were frosen in I960. The question arises as to the appropriate status of these reserves and of the proposed Development Fund. It has been agreed that the whole existing reserves will be recognised as belonging to the coapany while future accruals to Development Fund will be a liability of the company to the public.

Connors’ Deposits

Interest on consumers' deposits will be increased. Interest will

be paid annually on deposits of *100 and over at the average rate paid in the previous year by the Hong Kong Savings Bank. The present rate is three per oent.

Legislation

In November, 1963, Government announced its intention of legislating on the control of the electricity undertakings. The new developments

/outlined ......

CO 1030/1558 BF-WMXCCT WITHOUT PESMtSMON Ki.tiKi.y . ................