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Following is the full text of the opening statement by Chief Secretary for Administration, Mrs Anson Chan, at the Legislative Council Public Accounts Committee hearing this (Monday) afternoon:
Chairman and Members of the Public Accounts Committee,
Thank you for giving me the opportunity to address this Committee before taking questions. I would like to highlight a few points to put various issues into perspective.
In monitoring electricity companies, it has always been the Government's policy to ensure that consumers receive a reliable and sufficient supply of electricity at a reasonable price under the Scheme of Control Agreements (SCA). Government assessed China Light and Power's (CLP) 1992 Development Plan and Financial Plan with a view to establishing whether the proposals were justified and consistent with these objectives. With the help of an independent consultant and the Government's Economic Analysis Division (EAD), we considered all relevant factors including not only the overall trend of electricity demand as observed over the past decade, but also the factors that might affect our economic activities, thereby impacting on electricity demand. These factors included the uncertainties in forecasting at that time brought about by the cyclical slow-down in the Hong Kong economy, the macroeconomic adjustment taking place in the Mainland, the outbreak of the Gulf War and the recession in the United States. After detailed analysis of relevant factors, we concluded at the time that CLP's forecast was within reasonable bounds. Moreover, among various options put forward by CLP, we also recommended to the Executive Council to adopt the Modified Gas Option as it was the most economical and environmentally friendly option.
The Government was aware that some manufacturers had gradually relocated their operations to the Mainland and took that into account in making its independent forecast. However, Government did not foresee at the time the future pace and magnitude of this relocation, which intensified markedly after 1992. The Government Economist has provided Members with information which shows that local industrial output continued to increase for most of the period 1980 - 1992 at 5.6% per annum on average, and that the absolute shrinkage of the local manufacturing sector occurred more distinctly only after 1992. We considered CLP's forecast reasonable taking into account all the information available at the time, including the slower pace of growth in the electricity consumption of the manufacturing sector as compared with the commercial sector, and that CLP adjusted downwards their sales forecast for the manufacturing sector from the actual growth rate of 3.6% for 1987 - 1991 to 0.9% per year. The Government Economist has also pointed out that for long-term projections of electricity demand, it would not have been prudent to project electricity demand for eight years after 1991 mostly on the basis of figures for 1989 to 1991.
It turns out that both CLP's forecast and EAD's forecast proved to be higher than actual consumption. However, it must be recognised that there is no guarantee that a forecast would be 100% accurate. The key question is whether Government has made an in-depth analysis and reasonable assessment of all available figures and information at the time. Having done so and in the light of the advice provided by the independent consultant and EAD, we concluded that the CLP 1992 Development Plan was the best option.
Following approval of the CLP 1992 Development Plan and Financial Plan, Government conducted regular reviews on the demand and supply of electricity, and, if necessary, made amendments to the plan, in accordance with the framework laid down in the SCA. Once it became apparent in the course of the 1993 auditing review that demand was not reaching the forecasted level, a number of remedial actions were taken. CLP was requested to study urgently how excess generation capacity could be reduced and contractual options for deferral of some of the units at Black Point Power Station were exercised. Subsequently, Government and CLP agreed that the commissioning of units 7 and 8 at Black Point would be deferred by three years to 2003 and 2004 with the possibility of deferral by a further two years. The Economic Services Bureau is currently reviewing the situation with CLP with a view to deciding the way forward before the end of this year.
For the future, we agree that consumers should have greater protection. To this end, Government has agreed with the power companies during the recent interim review of the SCAs that part of the investment in any generation units approved in future will not provide a return to shareholders if on commissioning, the units prove to be excessive to requirements. Furthermore, to minimise the chance of installing excess capacity in the first place, it was agreed that as a general rule future capacity additions would be approved on an in-principle and unit-by-unit basis rather than as a series of units. In addition, the power companies will only enter into contracts for procurement and installation of the new generation unit after a review of the latest demand forecast in consultation with Government.
Lastly, I note that the Director of Audit was asked by Members to ascertain the additional costs that might have been borne by consumers as a result of the excess capacity which has arisen. Whilst the Director has come up with a figure, it should be noted that in doing so, he used the actual outturn with the benefit of hindsight and qualified the figure produced with many assumptions which he himself acknowledged could be challenged. We found his assumptions and indeed his whole approach to be inconsistent with the reality of practical business operations. Therefore, it would be unfair to Government, CLP and consumers for Members to draw any conclusions on additional costs that might have arisen on that basis. Even the "best-fit line" projection prepared by the Director of Audit using historical data is also higher than the actual outturn, for example, by over 9% for 1997. This illustrates that there is bound to be a certain degree of uncertainties in projecting forecasts.
In conclusion, I would say that in assessing CLP's Development Plan and Financial Plan, we did consider all relevant factors at that point in time. But the forecast turned out to be higher than actual demand. I hope Members will appreciate that no forecasting methodology can ensure 100% accuracy. At the same time, we must not forget that ensuring reliability of supply and adequate capacity to meet future demand are also of paramount importance. Any blackout and brownout arising from inadequate capacity would certainly be unacceptable to Members and the community at large. We must take all these factors into account in considering the issue after the event.
Thank you.
End/Monday, October 4, 1999
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