Luotang Power
Luotang Power
History
Luotang Power Company started in 1994 as an idea for a 600 Mega Watt coal-fired power plant in Central China that would be the least polluting of its size in the area. The bid to develop, finance, and operate the plant was won by an American independent power producer. One very important term was that the Loutang Power Company would be contracted on a build, operate, and transfer (BOT) basis and the factory would be given to the Chinese government after 20 years of operation at no cost. The US company provided $500 million in total financing, negotiated a fixed price for a coal supply with moisture content between 4%-6% with Pingdingshan, and contracted with HPPC for a minimum annual electricity purchase of 3,000,000,000 MWh annually, with excess sales at 65% of normal selling price. In 2002, the US independent power company sold its interest in Luotang to Hua Tong Power or “HT Power”. Commercial operation officially began in 2004.
Situation
Tan Min Yi, General Manager of Luotang Power Company, is preparing to present the 2011 Report of Operations to the Board of Directors of HT Power. This will be an especially difficult task because the financial reports showed poor performance in 2011 compared to the years prior. Tan knows his company improved both plant availability and fuel economy. He hopes to show the Board that certain price and efficiency factors are skewing the numbers and are out of his control. He will have to break down the volume changes by quality variance, price variance, fuel efficiency variance, and fuel cost variance to most accurately explain the losses. Tan would also propose that he formula for fixed costs be revised to help close the large gap between standard and actual costs. Not only should his presentation prove that his team performed well and that he is worthy of a promotion, but it should help guide HT Power on future power plant investments.
Variance Evaluation
The Summary of Recent Operating
History
Luotang Power Company started in 1994 as an idea for a 600 Mega Watt coal-fired power plant in Central China that would be the least polluting of its size in the area. The bid to develop, finance, and operate the plant was won by an American independent power producer. One very important term was that the Loutang Power Company would be contracted on a build, operate, and transfer (BOT) basis and the factory would be given to the Chinese government after 20 years of operation at no cost. The US company provided $500 million in total financing, negotiated a fixed price for a coal supply with moisture content between 4%-6% with Pingdingshan, and contracted with HPPC for a minimum annual electricity purchase of 3,000,000,000 MWh annually, with excess sales at 65% of normal selling price. In 2002, the US independent power company sold its interest in Luotang to Hua Tong Power or “HT Power”. Commercial operation officially began in 2004.
Situation
Tan Min Yi, General Manager of Luotang Power Company, is preparing to present the 2011 Report of Operations to the Board of Directors of HT Power. This will be an especially difficult task because the financial reports showed poor performance in 2011 compared to the years prior. Tan knows his company improved both plant availability and fuel economy. He hopes to show the Board that certain price and efficiency factors are skewing the numbers and are out of his control. He will have to break down the volume changes by quality variance, price variance, fuel efficiency variance, and fuel cost variance to most accurately explain the losses. Tan would also propose that he formula for fixed costs be revised to help close the large gap between standard and actual costs. Not only should his presentation prove that his team performed well and that he is worthy of a promotion, but it should help guide HT Power on future power plant investments.
Variance Evaluation
The Summary of Recent Operating