THE QUESTION IS, will it come from the development fund or will it not? The answer should tell you how to treat the announcement from CLP Holdings last week of a HK$460 million rebate to its electricity customers. Chairman Michael Kadoorie billed it as a measure to give the Hong Kong economy some relief from the outbreak of atypical pneumonia and this was clearly in response to government pleas that corporations help lift the burden from the public. What is more, another senior manager, Betty Yuen, said at the time that the money would come directly from the company rather the development fund. If so it would indeed be a straight gift to customers. Later commentary, however, suggests otherwise. Let us make this more definite. I am sure the source of the money is the development fund and this needs a little explanation. CLP is a company that operates what we call a natural network monopoly and, in order to restrain it from taking undue advantage of that monopoly, the government limits its permissible profits to an annual figure of 13.5 per cent of its average investment in net fixed assets plus an additional 1.5 per cent for anything financed directly by shareholders since 1978. There are other refinements and one that particularly concerns us here. If the company's profits are greater than the permissible figure the excess must go into a special account, the development fund. CLP can use the money to buy plant and equipment but cannot pay it out as dividends to shareholders. In effect, the fund constitutes money borrowed from customers and borrowings carry interest rates, in this case a fixed 8 per cent on the average outstanding balance in the fund. This amount is deducted from permissible profits and is credited to another reserve used for rebates to customers. Now put yourself in the position of CLP's finance director. He has responsibilities to customers, and CLP readily recognises these, but his first responsibility is to shareholders. They want good dividends and a solidly supported share price and they have every right to expect that he will help them get these. He also has to work with a profit control scheme that does not take sufficient account of how much interest rates have gone up and down since it was negotiated many years ago. The key figures are all fixed ones, both in returns and in charges against returns. It is in fact a weakness of this scheme. But a welcome side of it for most of the last 25 years is that he had one cheap source of financing. He paid only 8 per cent on the money he used from the development fund while, as the chart shows, for more than two thirds of that time this rate of interest was lower than HSBC's best lending rate. He was thus quite happy to have large outstanding balances in the fund, even if permissible profits were reduced by 8 per cent of those outstanding balances. It was the same rate of interest that he had to deduct from permissible return on his other borrowings but those borrowings actually cost him more. Now, however, things have changed. The best lending rate is only 5 per cent and has been less than 8 per cent for more than two years. The question for him now is whether things will stay this way long enough to make the 8 per cent interest rate he currently pays on development fund money seem too high. My guess is that he is indeed beginning to think this, in which case he has two options. The first is to tell the board to reduce electricity tariffs. This would bring down the excess profits flowing into the development fund and so reduce that balance on which he has to pay 8 per cent. My guess is also that this option was immediately shunned. What goes down does not go up as easily again in these matters. He therefore turns to the second option - keep the outstanding balance down by rebating the money to customers through reductions in their electricity bills. A total of HK$923 million was already paid out this way at the end of last year and this latest HK$460 million is just an advance payment on the rebate intended for the end of this year. So let me make my position clear in case you think that today's column is an attempt to highlight an instance of corporate skulduggery. Everything about this rebate is entirely above board. CLP is hiding nothing. It is doing exactly what you might expect it to do and what it is entitled to do. Equally, however, you can disabuse yourself of any notion that this is an instance of corporate philanthropy. The timing allowed CLP to make a gesture of being a good corporate citizen but you may be excused for thinking that the real motive was a roundabout way to reduce funding costs.