IASB Exposure Draft ED/2021/1 Regulatory Assets and Regulatory Liabilities

Page 1 of 4Our Ref.: C/FRSCSent electronically through the IASB Website (www.ifrs.org)

30 July 2021Dr Andreas BarckowInternational Accounting Standards BoardColumbus Building7 Westferry CircusCanary WharfLondon E14 4HDUnited KingdomDear Andreas,IASB Exposure Draft ED/2021/1Regulatory Assets and Regulatory LiabilitiesThe Hong Kong Institute of Certified Public Accountants (HKICPA) is the only bodyauthorised by law to set and promulgate standards relating to financial reporting, auditingand ethics for professional accountants in Hong Kong. We are grateful for the opportunityto provide our comments and the comments of our stakeholders on this Exposure Draft(ED).We appreciate the IASB’s initiative to develop a comprehensive accounting model forregulatory agreements. We understand the proposals to be largely an overlay approachto existing IFRS Standards that would generally result in appropriate accounting forvarious timing differences between regulatory income and charges and their accountingcounterparts. Nevertheless, there are certain proposals in the ED which we considerwould not result in useful information.Since this ED is sector specific, the HKICPA has arranged only targeted outreachactivities including discussions among two electricity companies that together comprisethe entirety of the Hong Kong electricity sector and their auditors to share their feedbackto the IASB project team. The feedback we received from these preparers wassubstantive.In particular, our primary concern is on the exception to the general approach as statedin B15 of the ED that regulatory returns on an asset not yet available for use do not formpart of the total allowed compensation (TAC) before the asset is available for use.To put the issue in context, the regulatory agreements between the government and thetwo electricity companies in Hong Kong allow the latter to include a regulatory return onassets under construction in the regulated rate during the construction period (i.e. thesituation described in BC96(b) of the ED). The current practice is to recognise suchregulatory returns in profit or loss as they are charged to the customers.Attached in the appendix of this cover letter is a joint comment letter developed by HongKong’s two electricity companies, with detailed responses to the ED. Notably, thearguments for the above concern and the respective recommendation to the IASB aresummarised in paragraphs 8 to 15 of the appendix. The key points that we consideredare summarised below:

a. What are the goods and services supplied? (BC98(a) of the ED)

Applying the proposals to the electricity sector in Hong Kong implies a narrow viewthat the supply of goods and services refers only to the supply of electricity at thePage 2 of 4point of consumption. However, the Scheme of Control (SoC) arrangement in HongKong, which establishes regulation between the government and electricitycompanies, specifies that the obligation of the electricity companies is to support thecontinuous supply of electricity to meet local demand. The arrangement obliges theelectricity companies to maintain existing infrastructure at a high-quality standard aswell as to invest in new infrastructure and technology on a rolling basis so as toensure an uninterrupted supply of electricity that meets local demands and adheresto environmental and other relevant standards.Such an obligation is duly acknowledged in the approved capital plan by thegovernment and through the entitlement of the electricity companies to receive aregulatory return on the total of net fixed assets (both assets not yet available for useand assets under operation).Hence, when applying the proposed overlay approach, if one were to analogise toIFRS 15 Revenue from Contracts with Customers to identify what the performanceobligation(s) is in order to recognise revenue when that performance obligation issatisfied, we believe that in terms of the SoC in Hong Kong:

the supply of goods and services should be interpreted to include both (i) thesupply of electricity at the point of consumption as well as (ii) the continuousinvestment in new infrastructure and technology to meet public needs; andthe corresponding revenue for these services should be recognised when (i)

electricity is supplied and (ii) as the electricity companies make investmentsin new infrastructure and technology to fulfil its regulatory obligations.Revenue for the latter service should hence be recognised over the courseof construction of the related assets.As a result, excluding returns on assets not yet available for use from TAC until theassets are commissioned does not reflect the ongoing goods and services suppliedby the electricity companies to the customers under the SoC arrangement.We believe that applying the general model proposed in the ED (viz. paragraph B10and BC30) would more appropriately reflect the substance of the SoC arrangementin Hong Kong. This is because the general model requires TAC for goods or servicessupplied to be reflected in the financial performance for the period in which the entitysupplies those goods or services, which given our explanation above, wouldappropriately allow regulatory returns on the asset not yet available for use to formpart of the TAC during the construction period.b. Faithful representation of the economics of the arrangement (BC98(b) of the ED)

Regulatory agreements entered into between regulated entities and the governmentare designed specifically to meet designated objectives and local needs. Someregulatory agreements compensate the regulated entities during the constructionperiod of an asset, while other regulatory agreements compensate the regulatedentities when the asset is available for use.We believe that different regulatory frameworks reflect different economic substance.For example, in terms of the SoC arrangement in Hong Kong, the amount chargedto customers before the assets are available for use (including the regulatory returnthereon) would not be refunded to customers in the event that the capital project isdiscontinued. The electricity companies are also entitled to recover the costs writtenoff on discontinued projects through the rate charged to the customers, as well as torecover stranded costs arising from adverse changes in market structure.Page 3 of 4This indicates that whether the regulatory return is charged during the constructionperiod or only after the asset is commissioned is not merely a timing difference or adifference in payment profile, but instead it has a substantive impact on the rightsand obligations of the companies.We are of the view that applying the proposed uniform accounting treatment toeconomically different agreements would fail to meet the objective of the proposals.c. Analogy to IAS 20 – government grant with conditionsA regulatory agreement between a regulated entity and the government normallyallows the regulated entity to charge a pre-agreed rate for the goods or servicessupplied to its customers. When applying the proposed overlay approach, IAS 20Accounting for Government Grants and Disclosure of Government Assistance couldprovide a reference point in dealing with an arrangement wherein the governmentspecifies the services and attaches certain conditions to the arrangement (i.e. ananalogy to a government grant with prescribed conditions).In the context of the SoC arrangement, the continuous construction of relatedfacilities is one such condition to the companies’ right to charge customers under thearrangement. The regulatory return compensates the entity for its obligation toprovide the public with high-quality and stable electricity, which involves long-termplanning and the continuous investment in related facilities. Given this condition isfulfilled over the periods of construction of the related assets, and not only after theasset is put in use, the related compensation should also be recognised in profit orloss when the condition is complied with (i.e. over the period of construction).d. Inconsistency between paragraph B15 of the ED and performance incentivesParagraph B18 of the ED requires an entity to recognise performance incentivesrelated to construction work in the period in which the performance occurs. Ourrespondents view the regulatory return on assets under construction as similar toperformance incentives. As such, they believe that there should be consistencybetween when such regulatory returns and performance incentives should beincluded in the TAC.Furthermore, if an entity is entitled to a performance incentive for the asset underconstruction and that is recognised in TAC during the construction period while theregulatory return on the same asset is deferred until it is commissioned, we believethat this will not provide clear and meaningful information to the users of the financialstatements.e. Impact to investorsThe current SoC arrangement has been in place for many years. Investors –including major institutional investors and pensioners reliant on dividend payments– and other stakeholders in Hong Kong are familiar with the SoC’s pricingmechanism in terms of which the regulatory returns on assets not yet available foruse form part of the compensation before the assets are available for use. Thisallows the electricity companies and investors to match their investment cashoutflows with dividend returns in the same period.Applying the proposals in the ED, the TAC would decrease significantly comparedto the existing regime due to the material average balance of the assets not yetavailable for use as compared to the total net balance of fixed assets. This woulddirectly reduce the reported profit of these electricity companies, leading to an impactPage 4 of 4on the companies’ ability to distribute dividends. Furthermore, the resulting decreasein compensation could affect investors’ capital allocation decisions.We similarly noted feedback from a user representative that the proposal could affectinvestors, both institutional and retail, who rely heavily on the dividends paid by theseelectricity companies. In addition, changes in the dividends would not only impactinvestors, but also impact how the government monitors these electricity companies.As such, we believe that this is not only an accounting issue but that it has a muchwider impact on distributable profits and in turn investment decisions. The issue isalso likely to impact many jurisdictions given that regulated entities usually haverelatively stable profits and dividend policies.Given the above, we strongly recommend the IASB to remove the proposed exceptionin paragraph B15 of the ED and the related Basis for Conclusions such that regulatoryreturns on an asset not yet available for use would be accounted for under the generalmodel proposed in the ED.In addition, with regard to assessing the sufficiency of the regulatory interest rate, webelieve that a consistent approach should be adopted for both a regulatory asset and aregulatory liability, and suggest that the IASB clarify the rationale provided on this aspectin BC167 to BC170 of the ED.If you have any questions regarding the matters raised in this letter, please contact me(ceciliakwei@hkicpa.org.hk) or Joni Kan (jonkan@hkicpa.org.hk), Associate Director ofthe Standard Setting Department.Sincerely,Cecilia KweiDirector, Standard Setting Department香港背後的動力The Power behind Hong KongCLP⑬中電I 12：years同行望遠of shared vision港燈125^®HKGIecIric26 July 2021Ms Cecilia KweiDirector, Standard SettingHong Kong Institute of Certified Public Accountants37th Floor, Wu Chung House213 Queen’s Road EastWanchai, Hong KongDear Cecilia,

1.On behalf of CLP Power Hong Kong Limited (CLP Power) and The Hongkong ElectricCompany, Limited (HK Electric), which have collectively been supplying electricity to100% of the Hong Kong population since the beginning of the last century, we are writingto offer our comments on IASB Exposure Draft ED/2021/1 Regulatory Assets andRegulatory Liabilities. Note that both CLP Power and HK Electric are the wholly ownedmajor subsidiaries of their parent companies who are publicly listed in The Stock Exchangeof Hong Kong.

2.We acknowledge ED^ objective is to provide relevant information that faithfully representshow regulatory income/expense affect an entity’s financial performance，and how regulatoryassets/ liabilities affect its financial position [BC28]. However, we are of the view that theproposed treatment under ED paragraph B15 of deferring the return on 4asset not yetavailable for use’（which we shall refer to as ‘asset under construction’（6AUC’)）until therelevant assets are commissioned and be allocated over the remaining periods in which theelectricity companies recover the carrying amounts of the assets through the regulated rates('Proposed AUC Return Treatment5) fails to achieve such objective in our case. TheProposed AUC Return Treatment deviates from the regulatory regime in Hong Kong,causing the IFRS financial statements mis-representing the economic and financialsubstance of the electricity companies in Hong Kong and potentially causing adverseimpacts to the electricity sector and thus the Hong Kong community.THE ELECTRICITY SECTOR AND ITS REGULATION IN HONG KONG

3.Hong Kong has a population of 7.5 million that is heavily reliant on a reliable supply ofelectricity. Excluding the transportation sector, electricity accounts for close to 80% of localend-use energy1. The electricity sector in Hong Kong comprises two companies - CLPPower and HK Electric. Both operate a vertically integrated electricity supply networksfrom generation, transmission, distribution to retail in their respective supply areas.

4.Since the 1960?s5 the electricity sector has been regulated by the Scheme of Control (4SoC5)

regime under which each of the two companies separately enters into successive agreementsEMSD, Hong Kong Energy End-use Data 2020Page | 1AppendixCLP®中電12：years同行望遠of shared vision港燈HKGlEcmcwith tenns of 10 or 15 years2. The SoC regime has enabled the electricity companies toinvest, build and maintain an electricity infrastructure to meet the local demand with theworlds highest reliability of over 99.999%. Furthermore, their average tariffto customers is among the lowest among most metropolitan cities. Apart from enabling ahighly reliable supply, the SoC regime has also steered the electricity sector towards agreener fuel mix with carbon neutrality by year 2050 as the ultimate goal set by the HKSARGovernment.

5.In fact, under their respective SoC agreements,a. the electricity companies are obligated to contribute to the development of Hong Kongby:

i. Providing, operating and maintaining sufficient facilitiesii. Supplying electricity to meet the demand andiii. Making continuing efforts to support Government in addressing climate change andimproving regional air quality.b. Recognising the risks involved and the capital invested in and retained in their business,the electricity companies and their shareholders are entitled to earn a return which iscalculated based on the electricity companies’ average net fixed assets value，includingAUC.c. Government thoroughly reviews and approves/disallows the capital investment plans ofthe electricity companies by making reference to the electricity demand of the city andthe city’s long-term strategic objectives (e.g. decarbonisation and smart city)，which aredeveloped thi'ough engagement with the public, while achieving the objective of thelowest reasonable cost of supply.d. Upon the end of the SoC regime and if the electricity companies have incurred strandedcosts (including those on investments made), the electricity companies are entitled torecover from the market such stranded costs.

6.Significantly, allowing the electricity companies to earn return on the average net fixed assetsvalue of their AUC is one of the regime’s key contributors contributing towards the stabilityof the electricity sector in Hong Kong. Under most circumstances, the development andconstruction of electricity facilities involve substantial capital investment，both equity anddebt，with long lead times. It is not uncommon to have electricity infrastructure taking morethan 5-10 years to complete. Nowadays, capital requirement and project development leadtimes are both on an upward trend. This is mainly due to a range of factors including:

a. an increasing diligence over environmental impacts of infrastructure projects along withgreater public scrutiny and more stringent government permitting processes;

b. diminishing number of easily accessible sites available resulting in projects with morechallenging site conditions;

c. scarcity of renewable resources requiring cross-jurisdictions cooperation which introducessignificantly greater complexity and multiple regulatory authorities，etc.2 The relevant agreements can be downloaded atthe website of Environment Bureau, Government of the Hong KongSpecial Administrative Region: Agreement | Environment Bureau (enb.gov.hk)

Page | 2AppendixCLP®中電1么years同行望遠of shared vision零港燈 u--HKEIecItIc香港背後的動力The Power behind Hong KongNot to mention the newly realised risk arisen from a pandemic. All such developments pointto the importance of letting investors be timely compensated through the returns on AUC sothat Hong Kong customers continue to enjoy a highly reliable, increasingly environmentaland economical electricity supply.

7.Currently，the IFRS reporting standards are well aligned with the SoC in terms of therecognition of the SoC returns arisen from AUC as earnings and distributions can be madein the year when the capital expenditures are incurred. Investors are therefore timelycompensated. Such timely compensation of capital cost and risk borne has been consistentlyin place in the past 60 years in the Hong Kong electricity sector. It has also faithfully reportedthe nature of such returns on the financial statements and is well understood and wellaccepted.OUR VIEWS ON THE PROPOSED AUC RETURN TREATMENTDeviate from the principle of the SoC

8.At the centre of the issue is that the Proposed AUC Return Treatment disregards a large partof the electricity companies’ obligations to the Government，who acts in the interests ofHong Kong electricity customers under the regulatory agreements. Under the SoC regime,the electricity companies have an obligation (refer 5a. above) to provide (through investment)

sufficient electricity facilities and infrastructure to support the development of Hong Kong,address climate change and improve air quality. Such obligations are duly recognisedthrough the entitlement of the permitted regulatory return on the totality of net fixed assets，including AUC. It is therefore inappropriate to confine the services to the end-consumer asonly the electricity delivered, and the resulting effect is the distortion or misalignment of thefinancial results reported under IFRS following the Proposed AUC Return Treatment withthe actual results under the SoC regime.

9.Government’s recognition of the electricity companies’ contribution starts not only from thepoint at which assets are commissioned, but rather, from the moment when investment isfirst made and is further reflected in the following characteristics:

-Electricity companies are not required to refund any regulatory return charged tocustomers in case the capital projects are discontinued, while they are allowed to recoverthrough the electricity tariffs the discontinued capital investment cost written off.-The stranded costs provision (5d. above) entitles the electricity companies to recoverfrom the market the stranded costs, which may arise as a result of future changes to themarket structure which adversely impact on the electricity companies5 ability to recoverand to earn returns on existing investments made in good faith in accordance with theregulatory agreements.The Proposed AUC Return Treatment will cause issues to us as follows:

Page | 3AppendixCLP®中電12^ years同行望遠of shared vision胃〃港燈HKEIecmc香港拜後的動力nThe Power behind Hong Kong12SWkAdverse impact to investors and the community

10.The Proposed AUC Return Treatment will defer the recognition of the SoC return fromAUC as earnings on the IFRS financial statements, thereby deferring the distribution of therelevant amounts as dividend. The timing at which investors contribute capital (and incurcost of capital) will no longer be aligned with the timing of the return generated from capitalprojects. This will affect investors9 decision in malcing capital investment in the electricitysector. Even if investors choose to continue to invest in the sector, such defeiTal inregulatory returns from AUC will inevitably adversely impact the risk profile of the sector,making it more costly for the sector to finance their capital projects. As a consequence, theHong Kong community as a whole will be affected in various aspects including enjoymentof clean energy and reliable electricity. Even worse is that Hong Kong^ transition to acarbon neutral community by 2050 will also be impacted.Misleading financial statements that cannot faithfully reflect the underlying business

11.The principle of the SoC is faithfully reflected under the current IFRS that regulatory returnderived from the totality of net fixed assets balance including AUC are reported as earningsof the prevailing period. On the other hand, if the Proposed AUC Return Treatment isapplied, the electricity companies would be forced to report a regulatory liability which,under the SoC regime, is legitimate earnings arisen from the electricity companies5performance of their obligations through investing in government-approved capital projectsin the prevailing period, and does not actually meet the definition of a regulatory liabilityunder the ED. The financial statements would no longer faithfully report and represent, andcould potentially mislead stakeholders with respect to the financial performance of theelectricity companies.

12.In addition, if the Proposed AUC Return Treatment were implemented in our case,misleading information with respect to the permitted rate of return entitled by the companiesunder SoC would be provided to the users of financial statements (please refer to theIllustrative Example in the Appendix).Practical considerations

13.Definition of AUC. Very often in the electricity sector, the machinery parts, cables, facilities,etc. that are being constmcted are integrated with the overall network and such works areconducted on almost an ongoing basis. It may not be possible to demarcate and separatelyidentify the boundary of an AUC; nor it is practical to establish the 'start date9 and the 'enddate’ of a 6capital project’. It will also be an inaccurate picture to exclude AUC on theongoing nature of the activities for fulfilling the required service level. Any attempt toattribute return to a particular 'AUC5 rather than the whole portfolio disregards thespecificity of the industry.

14.It is worth noting that it is usual for regulatory businesses especially those in electricitypower sector to have an extensive assets base and huge volume of capital projects on anongoing basis. If the Proposed AUC Return Treatment were implemented, the electricitycompanies would have to incur undue operational costs and efforts to keep track of thePage I 4AppendixCLP®中電12^ years同行望遠of shared vision港燈HKEIecrricregulatory return during the construction stage for different asset categories (with asset livesranging from 5 years to 100 years) involved in each capital project and recognise regulatoryliability for each category. Also given our regulatory agreements have been in force for over50 years and are renewed for every 10 or 15 years with revisions in the permitted rate ofreturn for each renewal, it will be impracticable to trace the financial implication onimplementation of Proposed AUC Return Treatment. We believe the costs and effortinvolved will far outweigh the relevance and usefulness of the information.Suggestion to the IASB

15.The Proposed AUC Return Treatment disregards the electricity companies’ performanceobligation to the Government through investing and constructing AUC under the SoCagreements. Implementation will only cause mis-representation of the companies5 financialperformance，undermine investors’ return，distort the industry’s risk profile and ultimatelyadversely affect the community in Hong Kong. We strongly recommend the IASB to either:

a. simply remove the Proposed AUC Return Treatment from the ED; ORb. consider the regulated return arisen from AUC as a consideration to the electricitycompanies9 performance of their contractual obligations to the Government, similar tothe IASB’s acceptance of treating performance incentives as a reward to an entityperforming construction work under paragraph B18 of the ED.FEEDBACKS TO OTHER QUESTIONSResponse to Question 1 - Objective and scope

16.We would like to seek clarification on the following relating to the scope and ED application:

(i) For CLP Power, its generation business is owned through a 70% subsidiary known asCAPCO. While both CLP Power and CAPCO are parties to the SoC agreement，betweenCLP Power and CAPCO is a power purchase agreement under which CLP Power isobligated to purchase all output by CAPCO and remunerate CAPCO all operatingexpenses including fuels plus the SoC regulated return calculated based on the averagenet fixed assets value of CAPCO. Note that CAPCO does NOT recover its expendituresand return by charging end electricity users the regulated rates directly.With the above, CAPCO?s financial performance is recognised based on IFRS 16Leases. We would like to seek clarification from the IASB as to whether arrangementssuch as CAPC05s, fall into the scope of the ED and how such arrangements will beaccounted for in the separate financial statements of the regulated entities under the ED.(ii) The SoC regime has a mechanism that captures certain (but not all) timing differencesthi'ough regulatory fund balances which are currently accounted for as financial asset orfinancial liability based on their specific characteristics under existing IFRS Standai'ds.It is unclear, with the implementation of the ED, should such regulatory fund balancescontinue be accounted for as financial assets/liabilities or which standard is applicable.We would like the IASB to provide guidance in this respect.Page | 5AppendixCLP®中電12^ years同行望遠of shared vision港燈HKEIecMcResponse to Question 2 - Resulatory assets and regulatory liabilities

17.We would like to seek clarification in relation to the definition of Regulatory Assets andRegulatory Liabilities as follows:

(i) We understand from Paragraphs 13 to 17 of the ED that regulatory assets/liabilities arisewhen there are differences between the Total Allowed Compensation (as defined underparagraph B2) and the revenue recognised under IFRS 15 Revenue. How should weaccount for the situation in which a regulated rate received is directly offset with therelevant allowable expenses (in accordance with the “Offsetting” under IAS 1) insteadof being recognised as Revenue? It is unclear &om the proposals in the ED whether thattiming difference in recovery of allowable expense should also be accounted for asregulatory assets/income and regulatory liabilities/expense notwithstanding that theregulated rate received is offset to the relevant expenses.(ii) A specific feature of our regulatory agreement (the SoC) is that it requires the regulatedentities to reduce a regulated rate in a future period if the entities have over-recoveriesof allowable expenses in previous years. However, the regulated entities cannot recoverthe under-recoveries of total allowed compensation in a year by adding an amount inthe rate determination for future period - i.e. no enforceability to recover the under­recoveries in a year if there is no outstanding balance in the regulatory liability account.It is unclear whether the specific feature as mentioned above (i.e. where contractuallyonly a regulatory liability can be recognised) would lead to this being out of scope ofthe ED.Response to Question 3 - Total allowed compensation

18.We generally agree with the IASB’s proposed guidance in respect of performance incentivesexcept that regulated entities should make estimates on the 'most likely amount5 or 'expectedvalue9 of those performance incentives that ai*e measured across multiple reporting periodsand then allocate an amount to the prevailing reporting period.Performance incentives which require the entities to meet performance criterion over a timeframe may not relate to supply of goods or services (as opposed to the IASB’s conclusionin BC108). One instance in the SoC regime is that the electricity companies are required tomeet certain energy saving target over a five-year period. The rights to incentives only ariseafter the performance criteria is met upon the end of the five-year period. The umost likelyamount” or ‘‘expected value” method to recognise performance incentives/penalties forfinancial reporting periods before end of the time frame as proposed by ED will create a“right” or “obligation” not provided under the regulatory agreement and is inconsistent withthe definition of regulatory assets or regulatory liabilities of the ED. Also, as the uncertaintyis high, the estimate becomes less relevant to users and it is highly probable a significantreversal may occur.Page | 6AppendixCLP⑪中電Iyears同行望遠of shared vision香港背後的動力The Power behind Hong KongHKGIecmcSuggestion to the IASB

19.We suggest the IASB to consider performance incentives/penalties are recognised only inthe reporting period when the perfomiance criterion are actually met in accordance with theregulatory agreement, or setting a higher recognition threshold for performance incentives.Response to Question 5 - Measurement

20.For the measurement of regulatory assets and regulatory liabilities, we are of the view thatdiscounting of future cash flows for regulatory assets and regulatory liabilities is notnecessary, if the regulatory agreements have already provided regulatory interest on theregulatory assets and liabilities. That means, time value of money has been considered inthe regulatory agreements. Creating a theoretical time value of money would distort the spiritof the regulatory agreement and have no value added to readers.Suggestion to the IASB

21.We suggest the IASB to ignore discounting if regulatory agreements have already providedregulatory interest on the regulatory assets/liabilities balances.Response to Question 6 — Discount rate

22.We consider that in situations where the cash flows arising from regulatory assets andregulatory liabilities are discounted for their measurement, a consistent approach should beadopted i.e. using the regulatory interest rate as specified in the regulatory agreement, as thisrepresents the amounts to be recovered or fulfilled as agreed under the regulatoryarrangement.We would also like to seek clarification on how the discounting should be applied if theregulatory interest rate is a floating interest rate which make references to market interestrate.Response to Question 9 - Disclosure

23.We are concerned with the level of details for the separate items as set out in paragraphs 78,80 and 81 of the ED. It would be misleading to segregate the financial implication of theregulatory agreement into piecemeal information if the disclosure is made in such level ofdetails as required in the ED, and readers may lose focus of the big picture.Response to Question 10 - Effective date and transition

24.As set out in paragraph 14 above, we have great concern on the effort and the practicaldifficulties of the retrospective application of the ED for Proposed AUC Return Treatment.

25.We also have a question on how to apply the ED5 retrospectively to part of the business, butallows an election to apply the business combination exemption to the other part of thebusiness, while the business as a whole is governed by a single regulatory agreement.Page | 7AppendixCLP®中電years同行a遺Iof shared visionHK；SS香粜背後的動力The Power behind Hong Kongi2^ndIn the case of CLP Power, the electricity service is provided by two key companies, whileone of it is greenfield (CLP Power), the other (CAPCO) has a more complicated history ofshareholding. CLP Power was once a joint venture partner of CAPCO, and has acquiredadditional shareholdings and obtained control of CAPCO in 2014. If following the ED’stransitional provisions, it would suggest full retrospective application should be applied toCLP Power, but CAPCO is allowed to elect not to apply in full retrospective. It would resultin different transition applications creating inconsistency and misleading information.We thank you in advance for considering our comments and suggestions on the ED and wouldbe pleased to have the opportunity to discuss our views in further detail with you.Senior Director-Financial Control (Hong Kong)

CLP Power Hong Kong LimitedChief Financial OfficerThe Hongkong Electric Company, LimitedPage | 8AppendixCLP®中電 I 12： of sharedvision港燈HK GlecrricDlustrative ExampleAppendixAssumptions:-

1.Permitted rate of return of the regulatory agreement

8.00%

2.For simplicity sake, there are only two AUC projects, namely "Project A" and "Project B". Project A starts from Year -1 to Year 1 and commissions in Year 2 with totalconstruction costs of $50. Project B starts from Year 3 to Year 5 and commissions in Year 6 with total construction costs of $60. Project A and B will be operating over a five year period.[a]8%8%8%8%8%8%8%8%8%Year-2Year -1Year 0Year 1Year 2Year 3Year 4Year 5Year 6Under Drevailing IFRSs$$$$S$S$$Assets under construction (AUC)

-

20.0

30.0

50.0 |

40.0

50.0

60.0 |■Assets in use (AIU)

200.0

210.0

230.0

280.0

280.0

300.0

330.0

350.0

360.0Total net fixed assets

200.0

230.0

260.0

330.0

280.0

340.0

380.0

410.0

360.0Average net fixed assetsM

215.0

245.0

295.0

305.0

310.0

360.0

395.0

385.0Regulatory return[c] = [a]x[b]

17.2

19.6

23.6

24.4

24.8

28.8

31.6

30.8Calculated rate of regulatory return[c]/[b]

8.00%

8.00%

8.00%

8.00%

8.00%

8.00%

8.00%

8.00%y-o-y change (%)

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%Under ED proposalRegulatory return[c]

17.2

19.6

23.6

24.4

24.8

28.8

31.6

30.8Less: Deferral of regulatory return on AUC as proposed by ED(Notes 1&4)

_(2.〇)

(3.2)

(2.0)

G.6)

(3.6)

(4.4)

(2.4)

Add: Recognising regulatory return on AUC---

1.6

1.6

1.6

1.6

4.0Total regulatory return calculated in according to ED[y]

16.4

17.6

20.4

24.0

24.8

26.8

28.8

32.4Calculated rate of regulatory return[y]/[b]

7.63%

7.18%

6.92%

7.87%

8.00%

7.44%

7.29%

8.42%y-o-y change (%)

-5.8%-3.7%

13.8%

1.7%-6.9%-2.1%

15.4%Note 1Average carrying amount of Project ARegulatory return on Project A

0.8

2.0

3.2

2.0(Deferred to Year 2 to Year 6)

」

8.〇|Average carrying amount of Project BRegulatory return on Project B

1.6

3.6

4.4

2.4(Deferred to Year 6 to Year 10)

_L

12.0Note 2The calculated return as proposed by ED will result in variability in return and also deviation from the regulatory return as illustrated above. This may result in the financial statementsbecome less relevant to the key stakeholders including the regulators and investors.Note 3The calculation of return as proposed by ED will cause undue efforts and costs in keeping track on adjusting and recognising regulatory returns on AUC which are investedon an ongoing basis.Note 4The deferral of return is an accounting construct and not created by the regulatory agreement. This is inconsistent with the definition of ED on regulatory assets and regulatory liabilities.PageAppendix