Yang Bhgia Datuk Che Khalib bin Mohamad Noh,                                                 5 June 2006.

Chief Executive Officer(CEO),

Tenaga Nasional Berhad(TNB)
129 Jalan Bangsar
59200 Kuala Lumpur
Malaysia.                                                                                                                 BY HAND

TNB has a legal, ethical and corporate social responsibility to 27 million Malaysians to get IPPs to take the lead and sacrifice half of their annual RM 3.3 billion in capacity payments first before implementing the 12% tariff hike on 6.2 million consumers. The failure of TNB to fulfill such an onerous responsibility ignores the fact that TNB’s 60 billion in assets and RM 29.8 billion in debt are held and borne by 27 million Malaysians.

Lest TNB forgets, more than 56% of TNB shares are held by government institutions for the people of Malaysia where the 3 largest shareholders as at 31 May 2005 are :-

No       Name Of Shareholders                                                         Percentage(%)

1.         Khazanah Nasional Berhad                                                   36.73

2.         Bank Negara Malaysia                                                          11.00

3.         Employees Provident Fund Board                                           8.54

The RM 1.5 billion in extra revenue flowing form the 12% tariff hike is a temporary stop-gap measure that will not solve cash-flow problems. Even after the 12% tariff hike, TNB cash deficit before debt repayment and after capital expenditure is expected to increase from RM 759 million in 2006 to RM 2.5 billion in 2007, RM 2.76 billion in 2008, RM 2.86 billion in 2009 and a whopping RM 6.18 billion in 2010.

The principal cause is the large capacity payments made to IPPs to maintain the reserve margin of 40%, one of the highest in the world when the international benchmarks is between 15-20%. Under the current structure, TNB pays IPPs a “capacity charge” and an “energy charge”. A capacity charge is payment made for making available a certain level of capacity, while the energy charge is payment for electricity actually supplied to TNB.

This means TNB would have to pay for spare capacity or reserve margins, even if unused. Power purchase from IPPs makes up almost half of TNB's operating costs. For the year ended Aug 31, 2005, TNB paid RM3.3bil in capacity payments and RM3.14bil in energy payments. Such high capacity payments of RM 3.3 billion last year have resulted in the TNB having one of the highest reserve margin in the world of 40% by paying for energy TNB does not need.

The extra cash of RM1.5bil from the higher tariff would be used to to pay RM630mil in capacity payment to Malakoff’s new Tanjung Bin plant, which will rise to RM 1.3billion once the it reaches maximum capacity. And that’s not all. When two other new power plants come on stream between September and early 2009, TNB would have to pay another RM2.13bil in capacity payments.

It is ridiculous that revenue from the tariff hike will not be used to improve service or add shareholder value that benefits Malaysians, who are the shareholders, but to pay IPPs for power that is essentially not needed by TNB. If the reserve margin were reduced from the present 40% to 20%, TNB would save more than RM1.6 billion annually, which is more than sufficient to cover the RM 1.5 billion increase in revenue from the present 12% tariff hike.

Logic suggests that TNB or the government can come up with a triple win solution for consumers, TNB and the country by reducing both the reserve margin and the capacity payments to IPP by half without burdening the people. Consequently there would be no necessity for any tariff hike.

Why should consumers be asked to sacrifice but not the IPPs who are allowed to continue to enjoy high rates of returns and hefty profits unaffected by high fuel prices?

Petronas has subsidised the power sector more than RM25 billion since 1997, of which RM14 billion or 55% went to the IPPs, whilst the remaining RM 11 billion is enjoyed by Tenaga. For Tenaga to seek a tariff hike when it has enjoyed direct subsidies of RM 11 billion and not ask the IPPs who have enjoyed RM 14 billion in direct subsidies to contribute first is unacceptable, unfair and not in the national interest.

Petronas’ subsidies to the IPPs of RM 14 billion since 1997 must be abolished. The RM 14 billion subsidies to the IPPs could be better spent on funding the capital expenditure and maintenance requirements of Tenaga. As the IPPs are private companies enjoying special rates for generating electrical power that Tenaga is forced to purchase, there is no reason for IPPs to enjoy such huge subsidies of RM 14 billion to profit at Tenaga and Malaysian consumers’ expense.

TNB claims that the price of coal has risen by 69%, oil by 250%, ringgit depreciated by up to 34%, inflation by 21% and cost of  other materials by up to 120% since the last increase 9 years ago in 1997. However why are IPPs completely unaffected by the cost increase?

Under the IPP agreements, the IPPs are allowed to pass inflation costs, among others, to Tenaga. It is this clause that makes it a “risk-free” business with guaranteed returns for IPPs. At a time when ordinary Malayians are suffering high fuel and electricity prices, there is neither economic rationale nor socio-economic justice to allow the few rich IPPs to continue to profit from high rates of returns, hefty profits, discounted gas prices and low risks.

The refusal of the government to review such unfair and unconscionable contracts with the IPPs gives TNB an unique opportunity to defend Malaysian consumer interests by refusing to pay all but only half of the RM 3.3 billion in capacity payments that TNB is forced to buy from IPPs. Taking such action is better and more responsible than hounding consumers for allegedly stealing electricity and threatening them with disconnection should they not pay up.

An Energy Tribunal Fair To Consumers To Deal With TNB’s Action Against Power Theft.

TNB hopes to collect RM 800 million to RM 1 billion from those who allegedly tamper with electricity meters or steal power. In their zeal to recover such revenue, TNB has imposed hardships, a heavy financial burden as well as victimised consumers. What guarantees are there that TNB’s investigations are accurate, independent and not a desperate attempt to find new sources of revenue?

There are no guarantees that the electricity meters supplied are not faulty and no independent verification of energy allegedly underpaid. As legal action is expensive, many innocent consumers who can not afford such legal fees, are forced to pay up to prevent disruption of power supply. DAP suggests an Energy Tribunal be set up along the lines of the Consumer Tribunal to arbitrate and deal with all allegations of power theft to  enable onsumers to redress their grievances on an equal basis with TNB where lawyers are not allowed.

Reducing CostsThrough Efficiency Gains

DAP strongly opposes electricity tariff increase when TNB recorded a profit of RM 1.28 billion during its 2005 financial year and its first half 2006 financial year profits rose to RM 993 million from the previous RM 303 million. Tenaga also saved hundreds of millions of ringgit when Lim Keng Yaik failed to perform his duty as a Minister by breaking his promise to make Tenaga pay compensation to the public for losses caused by the 3-hour blackout on 13 January 2005.   

Such an increase in profits proves that TNB can generate revenue from efficiency gains through proper financial planning, funds matching and cutting costs as well as increasing market share, not by increasing electricity tariffs.

Inflationary Impact
Increasing electricity tariffs would only serve to increase inflation and further increase the financial burden of Malaysians. Inflation was the highest in 7 years at 4.8% in March 2006 as a result of the fuel hike resulting in Bank Negara increasing interest rates to 3.5%. BN leaders are so disconnected from the hardships of the people by insisting that the people’s standard of living will be unaffected by the 12% hike in electricity tariff because it will not significantly burden the majority of people in the country.

Many consumers do not believe that the 12% tariff hike affects only 41% of consumers as many would exceed RM 44 in monthly electricity payments. DAP hopes that TNB can provide details of where the 3.72 million consumers  are (out of the total 6.2 million consumers) according to state and region who are unaffected by the price hike because their monthly electricity bills are less than RM 44/-?

The Cement & Concrete Association of Malaysia (C&CA) said the energy-intensive cement industry would face a 14% rise in electricity rates or an additional RM64mil a year in energy costs. The Federation of Malaysian Manufacturers (FMM) said the manufacturing sector would be paying additional energy costs of RM11.4mil a year for a company in the iron and steel sector; and an increase of RM1mil to RM7mil per company annually for other energy-intensive industries, including electrical and electronics.  FMM estimated profit margins could be reduced by up to 3% for highly energy-intensive industries; and at least 0.5% to 1% for other industries.

These percentages are significant because manufacturing companies generally record profit margins of only 3% to 5%. Exporters, which are facing lower proceeds from the stronger ringgit, could also lose their competitive edge, making Malaysia uncompetitive and unattractive to investments. How then can Malaysia enjoy a higher economic growth rate than last year’s 5.3% when all sectors of the economy except the Independent Power Producers(IPPs) who are earning exorbitant profits at public expense.

TNB should join hands with Malaysians in demanding that IPPs bear some of the burden of the price increase by giving back to society what it has profited in billions of ringgit since 1997.

Yours faithfully,

LIM GUAN ENG

SECRETARY-GENERAL