Legislative Council Brief : CLP Power Hong Kong Limited's Proposal to use its Scheme of Control Assets for Non-Electricity Related Purpose

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INTRODUCTION

At the meeting of the Executive Council on 19 June 2001, the Council ADVISED and the Chief Executive ORDERED that Government should agree to a proposal from CLP Power Hong Kong Limited (CLPP) to make available some of the assets acquired under the Scheme of Control (SOC) Agreement to CLP Telecommunications Limited (CLPT) for telecommunications purpose subject to CLPP and CLPT entering into a tripartite deed with Government along the lines of the draft at Annex with textual amendments if necessary.

BACKGROUND AND ARGUMENT

General Background

2. On 1 February 2000, the Office of the Telecommunications Authority (OFTA) issued Letters of Intent to 13 companies for the issue of a licence for cable-based external Fixed Telecommunications Network Services (FTNS) to each of them. One of these companies was CLPT, which is a wholly owned subsidiary of CLP Holdings. CLP Holdings also owns CLPP, which supplies electricity to Kowloon, New Territories and most of the outlying islands.

3. In CLPT's business proposal submitted to OFTA, the company proposes to introduce new telecommunications capacity between Hong Kong and Shenzhen. It has planned to make use of the electricity supply facilities of CLPP to put in place the necessary optical fibre cables from an exchange to be set up in Shatin to across the border ("the specified routes"). Subsequently, CLPP submitted to Government a proposal (CLPT Fibre-optic Link) to make available some of its facilities and to provide certain services to CLPT for operating telecommunications services.

CLPP's Proposal

4. Under the CLPT Fibre-optic Link proposal, CLPP plans to make available the following facilities to CLPT -

1. overhead power line - CLPT would wrap optical fibre cables on some of CLPP's existing overhead power lines (approximately 27 km);

2. power cable ducts - CLPT would lay optical fibre cables in some of CLPP's underground power cable ducts (approximately 10 km); and

3. accommodation - CLPT would rent some space in CLPP's office and substations to support its operations.

5. CLPP has stated that even though it and CLPT are in the same group and under the same parent (CLP Holdings), they are separate legal entities and they would enter into agreement for the provision of the above facilities at arm's length. The CLPT Fibre-optic Link proposal includes the following commercial arrangements:

(a) Rental of CLPP assets acquired under SOC Agreement

(i) the revenue arising from rental of CLPP's power facilities as set out in para. 4(a) to (b) above would be split between its customers (i.e. treated as SOC revenue) and its shareholders (i.e. treated as non-SOC revenue) based on a ratio of 95/5; and
(ii) the revenue arising from accommodation rental as set out in para. 4(c) above will accrue to the benefits of electricity customers in full.

(b) Services provided by CLPP to CLPT

CLPP would recover the full costs of any services to be provided to CLPT (e.g. staff cost, material and service costs, overheads charge). These services include actual installation of optical fibre cables on/in power supply facilities by CLPP. The cost of the optical fibre cable itself is borne by CLPT. The installation cost will not form part of the fixed assets nor operating expenditure of the SOC and will be recovered by CLPP from CLPT as a lump sum in line with the established cross-charging arrangements among companies of the CLP Group. Any recurrent incremental and maintenance expenditure will be recovered on a periodic basis in a similar manner.

The proposal contemplates that arrangements between CLPP and CLPT would continue up to 2015. CLPP shall not refund any of the market rental (set out in para. 9 below) to CLPT except that a pro rata refund would be made to CLPT if at any time prior to 30 September 2008 (i.e. the date of expiry of the current SOC Agreement) CLPP is unable, other than through its own default, to provide a continued right to use the specified routes for the facilities as set out in para. 4(a) and (b) above.

(d) Reinstatement

Upon termination of the contractual arrangement between CLPP and CLPT, CLPT shall remove its assets. If this is not done within 6 months, CLPP shall be entitled to treat the assets as abandoned and may arrange for removal and disposal of the assets with all costs incurred reimbursed by CLPT to CLPP. CLPP may also take possession of CLPT's assets. No liabilities arising from these assets shall be borne by CLPP's electricity customers.

6. To ensure that electricity users would not be subject to additional contingent liabilities, CLPP would obtain coverage for any increased risk through disclaimer clauses, liability caps and procuring additional insurance covers. CLPP has undertaken that its customers would not bear more costs or contingent liabilities than they would otherwise incur had the proposal not been implemented.

Assessment of CLPP's proposal

7. Any SOC revenue generated from CLPP's proposal would benefit its customers. In addition, the provision of telecommunications services by CLPT would provide additional competition to the external telecommunications market between Hong Kong and the Mainland. The proposal should therefore be worthy of support provided that safety, reliability and operational efficacy of electricity supply are not compromised, the commercial arrangements are acceptable and that CLPP's customers will not bear more costs or contingent liabilities. (a) Implications on safety, reliability and operational efficacy of electricity supply

8. CLPP, as the works agent for installation and maintenance of CLPT's optical fibre cables, has indicated that it would use proven techniques to install additional optical fibre cables in its system and would plan the installation so as to avoid any disruption to electricity supply. Having reviewed information provided by CLPP, OFTA has advised that fibre wrapping is a proven technique and the use of fibre in or along power line cable for telecommunications purpose is common in other countries. The Electrical and Mechanical Services Department (EMSD) is of the view that although the installation of additional optical fibre cables to the power system may induce some risk to electricity supply, such risk could be kept to a minimal and acceptable level with proper design, installation and maintenance. EMSD's technical consultant, Burns and Roe Enterprises, has also not found any incidence involving damages to electric power circuits due to the installation of optical fibre cable, nor information on costs/penalties attributable to reported incidents in the US or elsewhere.

(b) Commercial terms

9. Both CLPP and the Administration agree that CLPT should be charged market rental for the use of the facilities set out in para. 4 above. On this basis, both CLPP and the Administration agree that CLPP should charge CLPT a lump sum of $32 million for the right to put in place one single main cable plus one single backup cable along the specified routes to enable the latter to operate its external services for 15 years. Rental for space in CLPP's premises including CLPP's offices and substations payable by CLPT would be calculated on the basis of market rates for similar buildings in the same area, to be assessed by an independent surveyor. The rental would be reviewed every two years.

10. CLPP agrees to a 95/5 split between its customers and shareholders in case of rental of facilities to CLPT or any associated company of CLPP.

(d) Third-party access

11. Generally speaking, CLPP agrees to provide access to CLPT and other operators of FTNS for use of its facilities on equal footing and on similar commercial terms. However, it considers it inappropriate to make it an obligation for the company to provide open access to its assets for use by other parties. It would be prepared to offer access to other external FTNS providers on terms commensurate with prevailing market conditions and regulations and the specific business arrangement. It would evaluate each application on its own merits having regard to safety and reliability of electricity supply, physical constraints in its own system, the quality of the applicants such as their technical and commercial skills and the interest of CLPP customers and shareholders.

(e) Land issues

12. CLPP currently holds different private treaty grants (PTGs), licences or wayleaves in respect of its overhead power lines, underground cables and related facilities for the purpose of supplying electricity. It may require Lands Department (Lands D)'s approval and/or modification of the relevant PTGs, licences or wayleaves before it could make the facilities available to CLPT for operating non-electricity related services although what amendments will actually be required will depend on the terms of the agreement between CLPP and CLPT.

13. The Telecommunications Authority (TA) is empowered to issue an authorisation to a telecommunications licensee to access unleased government land under section 14 of the Telecommunications Ordinance subject to the consent of the Lands D. After CLPT has obtained the external FTNS licence, the TA intends to issue to CLPT such an authorisation authorizing it to wrap cables on CLPP's overhead power lines and to lay cables in some of CLPP's underground power cable ducts along the specified routes and the Lands D has agreed to this arrangement. The TA does not have the power to mandate access to leased land which is for exclusive occupation under the Telecommunications Ordinance. CLPT will negotiate with the relevant landowners to reach a private agreement, where necessary, and has undertaken to OFTA to compensate, on a reasonable basis, landowners for any physical damage through the installation and/or maintenance of its equipment on affected plot or plots. CLPT also has to obtain a land licence from Lands D in accordance with the Land (Miscellaneous Provision) Ordinance for its occupation of any government land affected by the cable route(s).

(f) Benefits and risks to CLPP's customers

14. Whilst OFTA and EMSD agree that the design and technology for the installation in question are well proven (see para. 8 above), there can be no guarantee that such installation is risk-free. In terms of benefits to CLPP's customers on the basis that the whole amount of $32 million (see para. 9 above) is paid up in 2001, the impact on tariff is minimal.

15. Since risks to CLPP's electricity customers cannot be specifically identified and quantified and financial and economic benefits are relatively small, we consider it essential that electricity consumers do not have to bear more costs or contingent liability as a result of CLPP's proposal. CLPP has provided an undertaking to this effect. The Department of Justice (DoJ) has advised that Government should enter into a legally binding and enforceable agreement with CLPP and CLPT. The draft tripartite deed annexed sets out the respective rights and obligations of CLPP and CLPT with a view to giving effect to the principle that CLPP's electricity customers would not have to bear more costs or contingent liabilities had the CLPT Fibre-optic Link proposal not been implemented.

Conclusion

16. We support CLPP's proposal as it would enable its customers to get some benefits, albeit small, from the rental of a limited amount of its facilities, whilst increasing cross-border telecommunications capacity. The market rental for facility and services should provide a fair deal to both CLPP's electricity customers and potential competitors of CLPT. The tripartite deed to be entered by Government with CLPP and CLPT should safeguard CLPP's customers against additional risk or contingent liabilities.

FINANCIAL AND STAFFING IMPLICATIONS

17. Should Government grant CLPT an authorization over unleased Government land under section 14(1) of the Telecommunications Ordinance, the administrative costs in processing the land matters in paras. 12 and 13 will be recovered through licence fees. CLPT will also have to pay fees for the FTNS licence. This proposal has no staffing implications for Government.

ECONOMIC IMPLICATIONS

18. Additional SOC income of CLPP from rental of facilities should benefit its customers, although the amount involved in the current proposal would be small. The new optical fibre link CLPT will invest between Hong Kong and Mainland will increase Hong Kong's external telecommunications capacity, enhance competition and bring benefits to the economy. It would however be difficult to quantify the exact benefit to the economy since CLPT is one of the successful applicants to obtain a licence to operate external telecommunications facilities since market liberalisation in January 2000.

ENVIRONMENTAL IMPLICATIONS

19. The use of the existing overhead power lines and underground ducts of CLPP for installation or provision of new external telecommunication facilities would minimize the need for construction of new facilities. This would avoid any consequential environmental impact that may arise from such construction works.

PUBLICITY

20. A spokesman will be available to answer public enquiries.

ENQUIRIES

21. Enquiries relating to this brief should be directed to Mr Alex Wong, Principal Assistant Secretary for Economic Services at telephone number 2810 2128.

Economic Services Bureau
June 2001